AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 1999
REGISTRATION NO. 333-58055
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
AMENDMENT NO. 2 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
</TABLE>
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Diana Moy Kelly
Beneficiary Trustee
P.O. Box 8699, 2301 Market Street, Philadelphia, PA 19101
(215) 841-4000
---------------------------------------------------------
(Name, address including zip code, and telephone number
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C> <C>
ROBERT C. GERLACH, ESQ. JAMES W. DURHAM, ESQ. GREGORY M. SHAW, ESQ.
Ballard Spahr Andrews & Ingersoll, LLP Senior Vice President and General Counsel Cravath, Swaine & Moore
1735 Market St., 51st Floor P.O. Box 8699 Worldwide Plaza
Philadelphia, PA 19103-7599 2301 Market Street 825 Eighth Ave.
Philadelphia, PA 19101 New York, NY 10019
</TABLE>
----------------------------------------
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Pre-Effective Amendment No. 2 to Form S-3 Registration Statement (file
no. 333-58055) includes, on behalf of PECO Energy Transition Trust (the
"Issuer"), a model prospectus supplement which has been revised to comply with
the "Plain English" Rules (Release No. 33-7497), including Rule 421(b) and Rule
421(d) under the Securities Act of 1933, as amended, and related revisions to
Regulation S-K and Form S-3 adopted by the Securities and Exchange Commission as
applicable to Registration Statements on Form S-3; and a base prospectus, which
has not been so revised.
<PAGE>
SUBJECT TO COMPLETION, DATED ___________, 1999
Prospectus Supplement to Prospectus dated ______________, 1999
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller and Servicer
$_____________[%] [Floating Rate] Transition Bonds, Series 199_
The Issuer will issue:
These securities are highly structured. Before you purchase these securities,
you should carefully consider the Risk Factors beginning on Page 27 in the
accompanying prospectus [and on Page S-9 in this prospectus supplement].
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.
Class __ Bonds Class __ Bonds Class __ Bonds
Principal
amount $____________ $____________ $____________
Price $________(__%) $_______(__%) $________(__%)
Underwriter's
Commission $________(__%) $_______(__%) $________(__%)
Proceeds to
the Issuer $________(__%) $_______(__%) $________(__%)
Bond rate ___________% __________% ___________%
Interest paid [Quarterly] [Quarterly] [Quarterly]
[Optional Redemption]
First Payment Date __________ ___________ ___________
Expected Final
Amortization
Date ______, 200_ ______, 200_ ______, 200_
Final Maturity
Date __________ ___________ ___________
Rated Final
Payment Date ______, 200_ ______, 200_ ______, 200_
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 These securities will be secured only by the Collateral described in this
prospectus supplement and in the accompanying prospectus.
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.
[Underwriters]
<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 ___ BONDS....................................................... S-9
General ......................................................... S-9
Interest .........................................................S-10
[Hedge Transactions][Swap Agreements].............................S-10
Principal.........................................................S-10
Optional Redemption...............................................S-13
Mandatory Redemption..............................................S-13
Overcollateralization.............................................S-14
Monthly Servicing Fee.............................................S-15
Reports to Holders of Series ___ Bonds............................S-15
Other Credit Enhancement..........................................S-16
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY..............................S-17
The Intangible Transition Charges.................................S-17
Adjustments to the Intangible Transition Charges..................S-21
DESCRIPTION OF THE SELLER'S BUSINESS.......................................S-22
General .........................................................S-22
Customers and Collections.........................................S-22
Concentrations....................................................S-25
Delinquency and Write-Off Experience..............................S-26
SERVICING..................................................................S-28
Servicer Advances.................................................S-28
MATERIAL TAX MATTERS.......................................................S-28
ERISA CONSIDERATIONS.......................................................S-29
UNDERWRITING...............................................................S-30
RATINGS ..................................................................S-31
INDEX OF PRINCIPAL DEFINITIONS.............................................S-33
<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 27 of the accompanying prospectus [and on Page
S-9 of this prospectus supplement].
This supplement begins with several sections describing these securities in
abbreviated form:
o Summary of Terms provides important amounts, dates and other terms of
your series;
o The Series ___ Bonds describes the key structural features of these
securities and gives directions for locating further information; 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
detailed descriptions in the accompanying prospectus and elsewhere in this
prospectus supplement. 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
o 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.
o 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-32 of this prospectus supplement,
or if not listed there, to the Index of Principal Definitions on page 120 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 ___ Bonds, you should review the discussion under "Risk Factors,"
which begins on page 27 of the accompanying prospectus [and on page S-9 of this
prospectus supplement].
Securities Offered
Series ___ Bonds
- --------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller: PECO Energy Company ("PECO Energy")
Servicer: PECO Energy
Bond Trustee: The Bank of New York
[Credit Enhancement Provider: ____________, provider of a [liquidity facility]]
Pricing Date: ____________, ______
Series Issuance Date: ____________, ______
Clearance and Settlement: DTC/[Cedel/Euroclear]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Series Structure: Initial Class Principal Balance % of Total Series
[Class _ $_________ __%
Class _ $_________ __%]
Annual Servicing Fee: Class __ Class __ [Other Classes]
Bond Rate: [To be Provided at Issuance]
Anticipated Ratings: [To be Provided at issuance]
(Moody's/S&P/
Fitch IBCA/Duff & Phelps)
Credit Enhancement: [To be Provided at Issuance]
Payment Dates: Each __________ and ___________ or,
if not a Business Day, the
next following Business Day.
First Payment Date: ________________, 19__
Expected Final Amortization Date: [To be Provided at Issuance]
Final Maturity Date: [To be Provided at Issuance]
Rated Final Payment Date: [To be provided at Issuance]
Record Date: [Close of business on the last day of the
calendar month before any Payment Date]
CUSIP Number: [To be Provided at Issuance]
</TABLE>
S-2
<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.
The Competition Act provides for utilities to recover the anticipated loss
in value of their generation-related assets as a result of the transition from a
regulated environment to competition for electric generation services, known as
stranded costs, by placing certain charges on their customers' bills. These
charges are known as "intangible transition charges." Utilities are also
authorized to securitize the recovery of stranded costs through the issuance of
transition bonds, such as these securities described in the prospectus
supplement, secured by "intangible transition property" and collections of
intangible transition 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 "Description of the
Seller's Business--Customers and Collections" in this prospectus supplement) to
recover through the issuance of transition bonds:
o PECO Energy's Stranded Costs; and
o the interest, fees, expenses, credit enhancement 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 Closing Date, PECO Energy will sell Intangible Transition Property
and the right to receive the proceeds of such Intangible Transition Property to
the Issuer which will then pledge this property and certain other property to
the Bond Trustee as the collateral for
S-3
<PAGE>
the Transition Bonds. The other property that makes up the collateral for these
securities is described in this Summary under the subcaption "The Collateral."
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 ___ Bonds will be secured by the collateral
(the "Collateral"), consisting of:
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
Intangible Transition Property Sale Agreement
pursuant to which the Issuer acquires Intangible
Transition Property from PECO Energy (the "Sale
Agreement").
o the Issuer's rights, except for certain provisions
for indemnification of the Issuer, under the
Master Servicing Agreement pursuant to which the
Servicer services the Intangible Transition
Property;
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);
o [any net receipts under the hedge transaction
[swap agreement] between the Issuer and
[_________];] and
o all claims, demands, causes and choses in action
in respect of the foregoing and all payments on
and all proceeds of the foregoing.
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
S-4
<PAGE>
"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 [listed above for such
Class] [calculated as follows: to be provided at
issuance of a floating rate Class/Series.] [Interest
will be calculated on the basis of a 360- day year of
twelve 30-day months.] [Others To Be Provided at
Issuance.]
You should also review the material under the caption
"The Series ___ Bonds--Interest" in this prospectus
supplement.
Principal: On each Payment Date, the Bond Trustee will make
principal payments in the following order:
o [to the holders of the Class ___ Bonds, until the
principal balance of such Class has been reduced
to zero;
o to the holders of the Class ___ Bonds, until the
principal balance of such Class has been reduced
to zero etc., To Be Provided at Issuance].
Please note that 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. The Expected
Amortization Schedule for the Series ___ Bonds is
provided under the caption "The Series ___
Bonds--Principal" in this prospectus supplement.
Credit Enhancement: Overcollateralization. These securities feature credit
enhancement in the form of 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 is $[ ] million.
Additional credit enhancement. In addition, capital of
the Issuer of $[ ] million is available under certain
circumstances described in the accompanying prospectus,
and Intangible Transition Charges will be subject
S-5
<PAGE>
to periodic review and adjustments as described below in
the "ITC Adjustment Process."
Additional credit enhancement in the form of [To Be
Provided at Issuance] will be provided for these
securities.
Hedge Transactions. [Terms of any hedge transaction
entered into by the Issuer to be provided at issuance.]
Swap Agreements. [Terms of any swap agreement entered
into by the Issuer to be provided at issuance.]
You should also review the material under the caption,
["The Series __ Bonds--[Hedge Transactions][Swap
Agreements]" in this prospectus supplement and] "The
Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the accompanying
prospectus.
Optional Redemption: These securities are subject to optional redemption
[Redemption Provisions To Be Provided at Issuance] at a
redemption price equal to the principal amount thereof,
plus interest at the Bond Rate accrued to the redemption
date.
You should also review the material under the caption
"The Series ___ 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 amount of these securities
plus interest at the Bond Rate, accrued to the
redemption date.
PECO Energy, as Seller, will be required to pay
Liquidated Damages if it breaches certain of its
representations relating to the Intangible Transition
Property under the Sale Agreement if such breach
continues beyond a 90-day grace period and has a
material adverse effect on the Transition Bondholders.
In addition, if the full amount of certain
indemnification payments the Seller must make under the
Sale Agreement is reasonably expected to be incurred
beyond a 90-day period immediately following the breach
of the representation giving rise to the obligation to
make these indemnification payments,
S-6
<PAGE>
the Seller will also, subject to certain exceptions, be
required to pay Liquidated Damages to the Bond Trustee.
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 and the material under the caption "The
Series ___ Bonds--Mandatory Redemption" in this
prospectus supplement.
[Others to be Provided at Issuance.]
ITC Adjustment Process: The Servicer is required to seek adjustments to the
Intangible Transition Charges on each May 14, commencing
May 14, 1999 and ending May 14, _____, and on
__________. For these securities, the adjustments are
expected to be implemented on August 12 for each
adjustment request filed on May 14, and on __________
for the adjustment request filed on __________.
For a more detailed description of the ITC adjustment
process, you should review 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 ___ 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"). The OID will accrue on a
constant yield-to-maturity basis. A holder of the
Series ___ 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
S-7
<PAGE>
holder of the Series ___ Bonds will be required to
take into income may exceed the amount of interest
income actually received during the taxable year.
The holder of the Series ___ Bonds will be
entitled to increase the income tax basis in these
securities by the amount of OID on which the
holder is taxed.]
o A holder of the Series ___ Bonds will realize a
gain from the sale of the Series ___ 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 these securities is not a United
States taxpayer, interest income [including OID]
and any gain realized by such holder, generally,
will be 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 ____ 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 2301 Market
Street, 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
[Risk Factors specific to any Series to be provided at time of issuance]
THE SERIES ___ BONDS
The Series ___ Bonds will be issued under and secured pursuant to a base
indenture dated as of __________, 1999 between the Issuer and The Bank of New
York, as bond trustee (the "Bond Trustee") as supplemented by the Series ___
Supplemental Indenture thereto (as so supplemented, the "Indenture"). The
following summary does not purport to be complete and is subject to, and
qualified by reference to, the terms and provisions of the Indenture and by
reference to the terms and provisions of Series ___ Bonds.
General
The Series ___ Bonds will be issued on the Series Issuance Date and will be
comprised of the following Classes:
TABLE 1
<TABLE>
<CAPTION>
Initial Class
Principal Expected Final Final Rated Final
Class Balance Bond Rate* Amortization Date Maturity Date Payment Date
----- ------------- --------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
[__________%] ________, 20__ ________, 20__ ________, 20__
(___ years) (___ years) (___ years)
[__________%] ________, 20__ ________, 20__ ________, 20__
(___ years) (___ years) (___ years)
[__________%] ________, 20__ ________, 20__ ________, 20__
(___ years) (___ years) (___ years)
</TABLE>
* Calculated as described below under "Interest."
Interest and principal relating to the Series ___ Bonds will be paid
through DTC or, if the Series ___ Bonds are no longer in book-entry form, will
be payable at the offices of The Bank of New York at 101 Barclay Street, New
York, New York 10286. 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 ___ 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. A final installment of principal and
premium, if any, payable with respect to the
S-9
<PAGE>
Series ___ Bond will be payable, after prior notice to the holder, only upon
presentation and surrender of the Series ___ Bond at a place specified in such
notice.
Interest
Interest on each Class of the Series ___ Bonds will accrue from the Series
Issuance Date at the respective Bond Rates indicated above. The interest will be
payable on each Payment Date, commencing __________, 199_, to the persons in
whose names the Series ___ Bonds of each Class are registered at the close of
business on the Record Date therefor.
[Interest on the [Class ___] of the Series ___ Bonds will be calculated as
follows: to be provided at Issuance of any Series with a floating rate Bond
Rate.]
The record date with respect to any Payment Date shall be [the close of
business on the last day of the calendar month] preceding such Payment Date (the
"Record Date").
The "Monthly Allocated Interest Balance" for [each Class of] the Series ___
Bonds and each Monthly Allocation Date is shown below.
TABLE 2
Monthly Allocated Interest Balance
----------------------------------
Monthly Allocated
Monthly Allocation Date Interest Balance
----------------------- ----------------
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
[Hedge Transactions][Swap Agreements]
[To Be Provided at Issuance.]
Principal
S-10
<PAGE>
On each Payment Date, each Class of Transition Bonds will be entitled to
receive payments of principal as follows:
(i) to the holders of the Class ___ Bonds, until the Class Principal
Balance thereof has been reduced to zero;
(ii) to the holders of the Class ___ Bonds, until the Class Principal
Balance thereof has been reduced to zero;
[etc. To Be Provided at Issuance.]
provided, however, that in no event shall the principal payment on any Class on
a Payment Date be greater than the amount necessary to reduce the Class
Principal Balance of such Class to the amount specified in the Expected
Amortization Schedule for such Class and Payment Date.
"Class Principal Balance" means the initial principal balance allocable to
such Class, reduced by principal distributed to such Class in accordance with
the terms of the Indenture.
The entire unpaid principal amount of the Series ___ Bonds will be due and
payable on ________, the Final Maturity Date.
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Series ___ Bonds at
each Payment Date (after giving effect to the payments made on such date) from
the Series Issuance Date to the Expected Final Amortization Date for such Class.
S-11
<PAGE>
TABLE 3
Expected Amortization Schedule
Payment Date Outstanding Class Principal Balance
------------ -----------------------------------
Class Class Class
Series Issuance Date
, 199_
, 199_
, 2000
, 2000
, 2001
, 2001
, 2002
[Etc.]
The Class Principal Balance of any Class of the Series ___ Bonds may not be
reduced in the amounts indicated in the foregoing table. The actual reductions
in such Class Principal Balances may be delayed from those indicated in the
table. See "Risk Factors" in the 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 ___ Bonds.
The "Monthly Allocated Principal Balance" for the Series ___ Bonds and each
Monthly Allocation Date is shown below.
S-12
<PAGE>
TABLE 4
Monthly Allocated Principal Balance
Monthly Allocated
Monthly Allocation Date Principal Balance
----------------------- -----------------
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
Optional Redemption
The Series ___ Bonds are subject to optional redemption [Optional
Redemption Provisions To Be Provided at Issuance]. The redemption price will
equal the principal amount thereof plus interest at the Bond Rate accrued to the
redemption date.
Mandatory Redemption
If the Seller is obligated to pay Liquidated Damages under the Sale
Agreement, the Series ___ Bonds will be subject to mandatory redemption in
whole. The redemption price will equal the principal amount thereof plus
interest at the Bond Rate accrued to the redemption date. PECO Energy, as
Seller, will be obligated to pay Liquidated Damages if it breaches certain of
its representations relating to the Intangible Transition Property under the
Sale Agreement if such breach continues beyond a 90-day grace period and has a
material adverse effect on the Transition Bondholders. The Bond Trustee 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.
When making this determination, the Bond Trustee may consult the Servicer and
other third parties.
If the Seller is required to make indemnification payments under the Sale
Agreement because of the breach of certain of its representations and
warranties, the following provisions will govern such payments:
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<PAGE>
o If the full amount of certain indemnification payments 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 twelve-month period.
o 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 then outstanding balance of the Transition Bonds per Monthly
Allocation Date (the "De Minimis Loss Amount"), the Seller shall pay
to the Bond Trustee, as assignee of the Issuer, the aggregate expected
amount of such losses for all Monthly Allocations Dates on which
losses are expected to be incurred. After such payment, 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.
o If the aggregate amount of such losses exceeds the amounts paid by the
Seller to the Bond Trustee, as assignee of the Issuer, the Seller shall
pay to the Bond Trustee, as assignee of the Issuer, on the next Monthly
Allocation Date the amount of such excess for such Monthly Allocation
Date and the expected amount of excess for all subsequent Monthly
Allocation Dates.
See "The Sale Agreement--Seller Representations and Warranties" in the
accompanying prospectus and "The Series ___ Bonds--Mandatory Redemption" in this
prospectus supplement.
Overcollateralization
The Overcollateralization Amount for the Series ___ Bonds is $___ million.
The Intangible Transition Charges related to the Series ___ Bonds will be
calculated at and periodically adjusted to a level that is designed to collect
the Overcollateralization Amount ratably over the life of the Series ___ Bonds.
The Calculated Overcollateralization Level for each Payment Date for all Series
of Transition Bonds and the Monthly Allocated Overcollateralization Balance for
each Monthly Allocation Date, in each case as of the date of this prospectus
supplement, are set forth below.
For a more detailed description of overcollaterization, you should refer to
the material under the captions "The Transition Bonds--Credit Enhancement" and
"The Indenture--Allocations and Payments" in the accompanying prospectus.
S-14
<PAGE>
TABLE 5
Calculated Overcollateralization Level
Payment Date Calculated Overcollateralization Level
------------ --------------------------------------
[To be Provided at the time of Issuance.]
TABLE 5A
Monthly Allocated Overcollateralization Balance
Monthly Allocation Date Monthly Allocated Overcollateralization Balance
----------------------- -----------------------------------------------
September __, 199_
October __, 199_
November __, 199_
December __, 199_
January __, 199_
February __, 199_
March __, 199_
April __, 199_
May __, 199_
June __, 199_
July __, 199_
August __, 199_
Monthly Servicing Fee
The Servicer will receive on each Monthly Allocation Date a fee of ____%
per annum of the balance of the Series ___ Bonds outstanding on the immediately
preceding Payment Date for servicing the Series ___ Bonds.
Reports to Holders of Series _____ Bonds
The Bond Trustee will prepare and provide regular reports to the holders of
record of the Series ___ Bonds. Such reports will be available to the beneficial
owners of the Series ___ Bonds upon request to the Bond Trustee or the Servicer.
The financial
S-15
<PAGE>
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 reports provided to the holders of
record of the Series ___ Bonds, you should review the material under the caption
"The Indenture-Reports to Transition Bondholders" in the accompanying
prospectus.
The Issuer will file with the Securities and Exchange Commission (the
"SEC") such periodic reports as are required by the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and all SEC rules, regulations or orders.
Copies of the Registration Statement and the exhibits may be obtained at
prescribed rates at the locations specified in the accompanying prospectus under
the caption "Available Information." Information filed with the SEC can also be
inspected at the SEC's site on the World Wide Web at http://www.sec.gov. The
Issuer may discontinue filing periodic reports under the Exchange Act at the
beginning of the fiscal year following the issuance of Transition Bonds of any
Series if there are fewer than 300 holders of Transition Bonds.
Other Credit Enhancement
Reserve Subaccount. ITC Collections allocated to the Issuer pursuant to the
Master Servicing Agreement available on any Monthly Allocation Date above the
amount necessary to pay the (i) amounts payable in respect of expenses of the
Issuer Trustee, the Bond Trustee and the Servicer and certain other fees and
expenses, (ii) amounts distributable to Series Subaccounts in respect of
principal of and interest on each Series of Transition Bonds payable on the next
Payment Date therefor and (iii) amounts allocable to the Overcollateralization
Subaccount (all as described under "The Indenture--Allocations and Payments" in
the accompanying 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 Subaccount and pay expenses of the
Issuer, the Bond Trustee, the Servicer and certain other fees and expenses.
Capital Subaccount. Upon the issuance of the Series ___ Bonds, PECO Energy
will deposit the Required Capital Amount of $________ in the Capital Subaccount.
On each Monthly Allocation Date, the Bond Trustee will draw on amounts in the
Capital Subaccount, if any, 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.
[Other To Be Provided at the Time of Issuance.]
S-16
<PAGE>
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
The Intangible Transition Charges
The Qualified Transition Expenses authorized in the QRO are to be recovered
from Customers in each of PECO Energy's separate Rate Classes that have been
assigned stranded cost responsibility based on the allocation of
generation-related charges borne by such Rate Classes through current electric
rates approved by the PUC. All Series and Classes of Transition Bonds will be
secured by the Collateral. The Intangible Transition Charges will be calculated
by determining the total amount of Intangible Transition Charges required to be
billed to each such Rate Class in order to generate ITC Collections sufficient
to ensure timely recovery of Qualified Transition Expenses among affected Rate
Classes. This amount is then expressed as a percentage of total projected
revenue per Rate Class. This percentage is applied to each Customer's total bill
(except in the case of Customers participating in the pilot program for
competition, where the percentage will be applied to the non-generation portion
of the bill) within the applicable Rate Class. The resulting dollar amount on a
Customer's bill after the application of such percentage is the Intangible
Transition Charge payable by such Customer. To the extent that total revenues
are affected by changes in usage, number of Customers, the rate of delinquencies
and write-offs or other factors, ITC Collections will vary. Variations in ITC
Collections will be addressed by recalculating the percentages applied to
Customers' bills on each Calculation Date. See Tables 7, 8, 9 and 10 under
"Description of the Seller's Business" in this prospectus supplement and "The
QRO and the Intangible Transition Charges--The Intangible Transition
Charges--The ITC Adjustment Process" in the 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 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 at the time such Intangible Transition Charges were billed.
"Percentages" means, with respect to the Issuer as well as any other issuer of
transition bonds secured by Intangible Transition Property, the percentage
equivalent of a fraction, the numerator of which is the aggregate Intangible
Transition Charges (as adjusted from time to time) applicable to each Customer
Class and all series of transition bonds secured by Intangible Transition
Property issued by such issuer and the denominator of which is the aggregate
Intangible Transition Charges (as adjusted from time to time) applicable to each
Customer Class and all series of transition bonds secured by Intangible
Transition Property issued by all the issuers.
Initially, the Intangible Transition Charges billed will average to
approximately $_________ per month for Customers, approximately $_________ per
month for Small Commercial and Industrial Customers and approximately $________
per month for Large
S-17
<PAGE>
Commercial and Industrial Customers. The average monthly bill for each Customer
Category of PECO Energy Customers [during 1997] [for the period __________ to
__________] was $______, $____ and $______, respectively. The following
projected average Intangible Transition Charges (expressed as a percentage
applied to each Customer's variable distribution charges and competition
transition charges portion of the bill, as applicable) will be imposed on
Customers in the following Customer Categories beginning on the Series Issuance
Date for the Series ___ Bonds:
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<PAGE>
TABLE 6
Projected Average Intangible Transition Charges for the Period ____ to ____
Residential Customers
Rate Class ITC Percentage
---------- --------------
Rate R %
Rate R-H %
Rate OP %
Small Commercial and Industrial Customers
Rate Class ITC Percentage
---------- --------------
Rate GS %
Rate POL %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(1) %
Large Commercial and Industrial Customers
Rate Class ITC Percentage
---------- --------------
Rate PD %
Rate HT %
Rate EP %
- ---------------
(1) No Intangible Transition Charges will be imposed on Rate BLI Customers.
S-19
<PAGE>
Rate Class Descriptions:
Rate Classes are created by the PUC and are subject to change. Such changes
will be reflected in any Adjustment Request filed with the PUC by the
Servicer. The current Rate Classes (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 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 service is
established hereunder, for the safety and convenience of the public within
the City of Philadelphia.
S-20
<PAGE>
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 Calculation Date as described under "The QRO and the Intangible
Transition Charges" in the accompanying prospectus.
S-21
<PAGE>
[The following table reflects information regarding the adjustments to the
Intangible Transition Charges assessed on each Rate Class within the Customer
Categories that have been implemented since the first Adjustment Date: To Be
Provided at Issuance of Subsequent Series.]
DESCRIPTION OF THE SELLER'S BUSINESS
The following is information which supplements that provided under the
heading "PECO Energy Company" in the accompanying prospectus. For a more
complete 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.
General
PECO Energy reported net income of $________ on earned revenues for retail
electricity of $_________ for the [quarter][year] ended __________, 199_ as
compared with net income of $________ on earned revenues for retail electricity
of $________ for the [quarter][year] ended _________, 199_.
Customers and Collections
The Intangible Transition Charges will be assessed on the bills of each
person (each, a "Customer") that (i) was a customer of PECO Energy located
within PECO Energy's retail electric service territory on January 1, 1997 or
that became a customer of electric services within such territory after January
1, 1997, (ii) is still located within such territory and (iii) is in a Rate
Class that has been assigned Stranded Cost responsibility. The Rate Classes that
have been assigned Stranded Cost recovery are Rate Classes R, R-H, OP, GS, POL,
SL-P, SL-S, SL-E, TL, PD, HT, and EP. For a description of such Rate Classes,
see "Description of Intangible Transition Property--The Intangible Transition
Charges" in this prospectus supplement.
The following tables show the number of retail electric Customers by Rate
Class and the percentage of all retail electric Customers in all Rate Classes
(Table 7), retail electric usage by Rate Class (Table 8), and retail electric
revenues by Rate Class (Table 9) for the periods indicated below. Not all
Customers in all Rate Classes will be billed Intangible Transition Charges.
There can be no assurance that total Customers, the composition of total
Customers by Customer Category and Rate Class, or usage levels or revenues for
each Customer Category and Rate Class will remain at or near the levels
reflected on the following tables.
S-22
<PAGE>
TABLE 7
Retail Electric Customers For the Period Ended __/__/__
Number of
Customers % of Total
--------- ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Total %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Total %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total %
Total 100%
========= ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table 6 in
"Description of Intangible Transition Property" in this prospectus
supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R, R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
[As of _____, _____ electric generation suppliers provide consolidated
billing for ____ Residential Customers (__% of total Customers), ___ electric
generation suppliers provide consolidated billing for __ Small Commercial and
Industrial Customers (__% of total Customers) and _____ electric generation
suppliers provide consolidated billing for _____ Large Commercial and Industrial
Customers (__% of total Customers). Electric generation suppliers are
responsible for __% of PECO Energy's retail electric sales revenues and __% of
Intangible Transition
S-23
<PAGE>
Charges. There can be no assurance that current electric generation suppliers
will remain electric generation suppliers or that they will provide consolidated
billing to the same number of Customers.]
TABLE 8
Retail Electric Usage for the period ended __/__/__
kWh % of Total
--- ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Total %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Total %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total %
Total 100%
===== ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table 6 in
"Description of Intangible Transition Property" in this prospectus
supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R, R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
Actual usage fluctuations are highly dependent on weather conditions.
Please read the materials under the caption "Risk Factors--Servicing--Inaccurate
Projections" in the accompanying prospectus. The total annual usage adjusted for
weather effects has decreased for the past two years.
S-24
<PAGE>
There can be no assurance that future usage growth rates for PECO Energy will be
similar to historical experience.
TABLE 9
Retail Electric Revenues (dollars in thousands) for the Period Ended __/__/__
$ 000's % of Total
------- ----------
Residential
Rate R(1) %
Rate R-H %
Rate OP(2) %
Small Commercial
and Industrial
Rate GS %
Rate POL(3) %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(4) %
Large Commercial
and Industrial
Rate PD %
Rate HT %
Rate EP %
Total $ 100%
======= ====
- ---------------
(1) For description of the meanings of rate class abbreviations, see Table 6 in
"Description of Intangible Transition Property" in this prospectus
supplement.
(2) Rate OP is available in conjunction with Residential Rate Classes R, R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
(3) Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
(4) No Intangible Transition Charges will be imposed on Rate BLI Customers.
Concentrations. For the period ended __________, the largest Customer
represented approximately ____% of PECO Energy's revenues, and the ten largest
Customers represented approximately ____% of PECO Energy's revenues. There can
be no assurance that current
S-25
<PAGE>
Customers will remain Customers or that the levels of Customer concentration in
the future will be similar to those set forth above.
Delinquency and Write-Off Experience. The following table sets forth the
delinquency and write-off experience with respect to payments to PECO Energy by
Customer Category for the period indicated below. Changes in the retail electric
market, including but not limited to the introduction of electric generation
suppliers who provide consolidated billing to PECO Energy's Customers could mean
that historical delinquency and write-off ratios will not be indicative of the
future rates. There can be no assurance that the future delinquency and
write-off experience for PECO Energy or for the Intangible Transition Charges
will be similar to the historical experience set forth below:
S-26
<PAGE>
TABLE 10
Delinquency and Loss
Delinquencies as Percentage of Total Billed Revenues
for the Period Ended __/__/__
Residential %
30+ days
60+ days
90+ days
Small Commercial
and Industrial %
30+ days
60+ days
90+ days
Large Commercial
and Industrial %
30+ days
60+ days
90+ days
Net Write-Offs as Percentage of Total Billed Retail Electric Revenues
for the Period Ended __/__/__
Residential %
Small Commercial
and Industrial %
Large Commercial
and Industrial %
During the last ___ months, the delinquency and write-off expenses for all
Customer Categories has remained relatively constant with no discernable trend
upwards or downwards. PECO Energy does not expect the delinquency or write-off
experience with respect to ITC Collections will differ substantially from the
rates indicated above.
S-27
<PAGE>
SERVICING
Servicer Advances
[To Be Provided at Issuance.]
MATERIAL TAX MATTERS
[In the event a Class of the Series ___ Bonds is issued at a price which is
lower than its stated principal amount by more than a de minimis amount, the
excess of such Series ___ 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 ___ Bondholder. Accordingly, a Series ___
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 ___ Bonds is the first
price at which a substantial amount of the Series ___ 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 (the "de minimis amount"), 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
security 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
S-28
<PAGE>
on the security that are allocable to the accrual period. The adjusted issue
price of a security at the 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 accompanying 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 accompanying 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 accompanying 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.
S-29
<PAGE>
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 ___ 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 ___ 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 ___ 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.]
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 _____________ is acting as representative, has severally agreed to
purchase, the respective principal amounts of the Series ___ Bonds set forth
opposite its name below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Class __ Class __ Class __
- ---- --------- --------- ---------
Total......................
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Series ___ Bonds
offered hereby, if any are taken.
The Underwriters propose to offer the Series ___ Bonds in part directly to
the public at the initial public offering price set forth on the cover page of
this prospectus supplement, and in part to certain securities dealers at such
price less a concession not in excess of ___ percent of the principal amount of
the Class ___ Bonds, ___ percent of the principal amount of the Class ___ Bonds,
___ percent of the principal amount of the Class ___ Bonds [etc., To be Provided
at Issuance]. The
S-30
<PAGE>
Underwriters may allow and such dealers may reallow a concession, not in excess
of ___ percent of the principal amount of the Class ___ Bonds, ___ percent of
the principal amount of the Class ___ Bonds, ___ percent of the principal amount
of the Class ___ Bonds [etc., To be Provided at Issuance]. After the Series ___
Bonds are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Series ___ Bonds are a new issue of securities with no established
trading market. The Series ___ Bonds will not be listed on any securities
exchange. The Issuer has been advised by the Underwriters that they intend to
make a market in the Series ___ Bonds but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Series ___ Bonds.
In connection with the offering, the Underwriters may purchase and sell the
Series ___ 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 ___ Bonds, and
syndicate short positions involve the sale by the Underwriters of a greater
number of Series ___ 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 ____ Bonds sold in the offering for their account may be reclaimed by
the syndicate if such Series ____ 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 ____ 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.
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 [Class]
___ of the Series ___ Bonds that the [Class] ___ of the Series ___ Bonds be
rated " " by ________, " " by __________, " " by __________ and " " by
__________ (each of _________, __________, __________ and __________, a "Rating
Agency") which, in each case, is in one of the four highest rating categories of
such Rating Agency.
S-31
<PAGE>
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any of the Series ___
Bonds, and, accordingly, there can be no assurance that the ratings assigned to
any Class of the Series ___ Bonds upon initial issuance will not be revised or
withdrawn by a Rating Agency at any time thereafter. If a rating of any Class of
the Series ___ Bonds is revised or withdrawn, the liquidity of such Class of the
Series ___ Bonds may be adversely affected. In general, ratings address credit
risk and do not represent any assessment of any particular rate of principal
payments on the Series ___ Bonds other than payment in full of each Class of the
Series ___ Bonds by the applicable Final Maturity Date.
S-32
<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 accompanying prospectus. See "Index of Principal Definitions" on page 120 of
the accompanying prospectus.
TERM PAGE
---- ----
Bond Trustee.................................................................S-9
Class Principal Balance.....................................................S-11
Collateral...................................................................S-4
Competition Act..............................................................S-3
Customer....................................................................S-21
De Minimis Loss Amount......................................................S-14
Exchange Act................................................................S-15
Indenture....................................................................S-9
intangible transition charges................................................S-3
intangible transition property...............................................S-3
Issuer.......................................................................S-2
Master Servicing Agreement...................................................S-4
Monthly Allocated Interest Balance..........................................S-10
Monthly Allocated Principal Balance.........................................S-12
OID..........................................................................S-7
Parties in Interest.........................................................S-28
PECO Energy..................................................................S-2
Percentages.................................................................S-16
Plan Assets.................................................................S-28
Plans.......................................................................S-28
QRO..........................................................................S-3
Rate BLI....................................................................S-20
Rate EP.....................................................................S-20
Rate GS.....................................................................S-19
Rate HT.....................................................................S-20
Rate OP.....................................................................S-19
Rate PD.....................................................................S-20
Rate POL....................................................................S-19
Rate R......................................................................S-19
Rate R-H....................................................................S-19
Rate SL-E...................................................................S-20
Rate SL-P...................................................................S-19
Rate SL-S...................................................................S-19
Rate TL.....................................................................S-20
Rating Agency...............................................................S-30
Record Date.................................................................S-10
S-33
<PAGE>
TERM PAGE
---- ----
Sale Agreement...............................................................S-4
SEC.........................................................................S-15
Seller.......................................................................S-2
Servicer.....................................................................S-2
Underwriters................................................................S-29
Underwriting Agreement......................................................S-29
S-34
<PAGE>
SUBJECT TO COMPLETION, DATED ____________, 1999
Prospectus
PECO Energy Transition Trust, Issuer
Transition Bonds Issuable in Series
PECO Energy Company, Seller and Servicer
PECO Energy Transition Trust (the "Issuer") proposes to offer up to $________ of
transition bonds in one or more series (each, a "Series"), each of which may be
comprised of one or more classes (each, a "Class"), in amounts, at prices and on
terms to be determined at the time of sale and to be set forth in a supplement
to this Prospectus (each, a "Prospectus Supplement"). The transition bonds will
be issued under an indenture and supplemental indentures thereto (collectively,
the "Indenture") between the Issuer and The Bank of New York, as bond trustee
(together with any successor, the "Bond Trustee"). All transition bonds issued
under the Indenture are referred to in this Prospectus and the Prospectus
Supplement as "Transition Bonds." The Transition Bonds of each Series will be
secured by Intangible Transition Property sold to the Issuer (the "Transferred
Intangible Transition Property") and the proceeds thereof, which will be pledged
by the Issuer to the Bond Trustee. The Issuer will also pledge to the Bond
Trustee ITC Collections allocated to the Issuer pursuant to the Master Servicing
Agreement, the Issuer's rights under the Sale Agreement (except for certain
provisions for indemnification of the Issuer) and the Master Servicing Agreement
(except for certain provisions for indemnification of the Issuer), the
Collection Account, and all amounts or investment property on deposit therein or
credited thereto from time to time (other than cash or other property
distributed to the Issuer from the Collection Account in accordance with the
provisions of the Indenture as described in this Prospectus), all 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/or 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 through the issuance of transition bonds (i) a portion
of PECO Energy's Stranded Costs, which are the anticipated loss in value of
generation- related assets as a result of the transition from a regulated
environment to competition for electric generation services and (ii) the
interest, fees, expenses, credit enhancement and premiums, if any, associated
with the transition bonds. These Intangible Transition Charges are nonbypassable
in that applicable customers cannot avoid paying them even if they purchase
electricity from a supplier other than PECO Energy. See "The Competition
Act--Nonbypassability" in this Prospectus. Intangible Transition Property was
created pursuant to the Qualified Rate Order issued on May 14, 1998 (the "QRO")
by the Pennsylvania Public Utility Commission (the "PUC"), in accordance with
the Pennsylvania Electricity Generation Customer Choice and Competition Act (the
"Competition Act"). See "The Competition Act" and "PECO Energy's Restructuring
Plan" in this Prospectus.
The Issuer, a Delaware statutory business trust established by PECO Energy, was
formed for the purpose of purchasing and owning the Transferred Intangible
Transition Property, issuing Transition Bonds from time to time and pledging its
interest in the Collateral to the Bond Trustee under the Indenture in order to
secure the Transition Bonds. On the issuance date for each Series (each, a
"Series Issuance Date"), except in the event of a refunding of outstanding
Transition Bonds, PECO Energy will sell Intangible Transition Property to the
Issuer pursuant to an Intangible Transition Property Sale Agreement (the "Sale
Agreement") between PECO Energy, (in such capacity, the "Seller") and the
Issuer. The Transferred Intangible Transition Property and Intangible Transition
Property, if any, sold by PECO Energy to other issuers (collectively, the
"Serviced Intangible Transition Property") will be serviced by PECO Energy (in
such capacity and along with any successors, the "Servicer") pursuant to a
Master Servicing Agreement (the "Master Servicing Agreement") among the Issuer,
the Servicer and any other such issuers financed with transition bonds 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 27 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. The prospectus and the accompanying prospectus supplement shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of such State.
<PAGE>
PARTIES TO THE TRANSACTION
<TABLE>
<S><C>
PECO ENERGY Applies, as Servicer, for ITC | PUC** |
(Seller, Servicer, Adjustments |(State agency; not |
Grantor and Owner) | affiliated with Issuer|
| or PECO Energy) |
Issued the QRO and
approves adjustments to
Intangible Transition Charges
Sells ITP* for cash pursuant to Sale Services Serviced Intangible
Agreement (such ITP, Transferred Transition Property and Receives
Intangible Transition Property) Monthly Servicing Fee pursuant to
Master Servicing Agreement
ISSUER TRUSTEE ISSUER PROVIDER OF
(manages Issuer with Beneficiary (PECO Energy CREDIT
Trustees pursuant to Trust Transition Trust) ENHANCEMENT
Agreement) OR HEDGE
TRANSACTION
(To be named, if any)
Sale of Transition Bonds for cash,
pursuant to Underwriting Agreement BOND TRUSTEE
(acts for and on behalf of
Transition Bondholders
pursuant to Indenture)
UNDERWRITERS
Sale of Transition
Bonds for cash
TRANSITION
BONDHOLDERS
</TABLE>
* Intangible Transition Property, created by the PUC implementing the
Competition Act through approving PECO Energy's Restructuring Plan and
issuing the Qualified Rate Order. The PUC will also approve periodic
adjustments of Intangible Transition Charges as described in this
Prospectus.
** 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")
3
<PAGE>
upon request to the Bond Trustee or the Servicer. The financial information
provided to Transition Bondholders will not be examined and reported upon, nor
will an opinion thereon be provided, by an independent public accountant. See
"The Indenture--Reports to Transition Bondholders" in this Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Transition Bonds
will be deemed to be incorporated by reference into this Prospectus and to be a
part hereof. Any statement contained in this Prospectus, in a Prospectus
Supplement or in a document incorporated or deemed to be incorporated by
reference in this Prospectus will be deemed to be modified or superseded for
purposes of this Prospectus and any Prospectus Supplement to the extent that a
statement contained in this Prospectus, in a Prospectus Supplement or in any
separately filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute part of this Prospectus or any Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any or all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Issuer, c/o First Union Trust Company, National
Association, One Rodney Square, 920 King Street, 1st Floor, Wilmington, Delaware
19801. Telephone requests for such copies should be directed to the Issuer at
302-888-7532.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Transition Bonds will describe
the following terms of such Series and, if applicable, the Classes thereof: (i)
the designation of the Series and, if applicable, the Classes thereof, (ii) the
aggregate principal amount of the Transition Bonds of the Series and, if
applicable, each Class thereof, (iii) the Bond Rate of the Series or, if
applicable, each Class thereof, or the formula, if any, used to calculate the
applicable Bond Rate or Bond Rates, (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 rated final payment date of the Series (the "Series
Rated Final Payment Date") and, if applicable, each Class thereof (each, a
"Class Rated Final Payment Date"), (viii) the final maturity date for the Series
(the "Series Final Maturity Date") and, if applicable, each Class thereof (each,
a "Class Final Maturity 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 Expected Final Amortization Date for the Series and, if
applicable, each Class thereof, (xv) the Overcollateralization Amount with
respect to the Series and the Monthly Allocated Overcollateralization Balance
for each Monthly Allocation Date, (xvi) the Calculation Dates and Adjustment
Dates for the Series, (xvii) the terms of any credit enhancement applicable to
the Series or Class, (xviii) the terms of any hedge or swap transaction
applicable to the Series or Class and (xix) 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
4
<PAGE>
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.
5
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION..........................................................3
REPORTS TO TRANSITION BONDHOLDERS..............................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................4
PROSPECTUS SUPPLEMENT..........................................................4
PROSPECTUS SUMMARY.............................................................9
RISK FACTORS..................................................................27
Unusual Nature of Intangible Transition Property........................27
Servicing...............................................................32
The Electric Industry Generally.........................................36
Bankruptcy; Creditors' Rights...........................................37
The Transition Bonds....................................................40
PECO ENERGY COMPANY...........................................................42
THE COMPETITION ACT...........................................................42
General ...............................................................42
Recovery of Stranded Costs..............................................43
Securitization of Stranded Costs........................................43
Jurisdiction Over Disputes; Standing....................................45
PECO ENERGY'S RESTRUCTURING PLAN..............................................45
General ...............................................................45
The Settlement..........................................................45
Provider of Last Resort.................................................49
THE QRO AND THE INTANGIBLE TRANSITION CHARGES.................................50
The QRO ...............................................................50
The Intangible Transition Charges.......................................52
Competitive Billing.....................................................54
LITIGATION....................................................................56
THE SELLER AND SERVICER.......................................................57
Retail Electric Service Territory.......................................57
Customers and Operating Revenues........................................57
Forecasting Customers and Usage.........................................63
Billing Process.........................................................68
Limited Information on Customers' Creditworthiness......................68
Electric Generation Suppliers and Other Third Party Billers.............71
6
<PAGE>
Year 2000 Compliance....................................................72
THE ISSUER....................................................................72
USE OF PROCEEDS...............................................................74
THE TRANSITION BONDS..........................................................74
General ...............................................................74
Interest and Principal..................................................76
Floating Rate Transition Bonds..........................................76
Redemption..............................................................77
Credit Enhancement......................................................77
Book-Entry Registration.................................................78
Definitive Transition Bonds.............................................81
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS....................................................82
THE SALE AGREEMENT............................................................83
Sale and Assignment of Intangible Transition Property...................83
Seller Representations and Warranties...................................85
Certain Matters Regarding the Seller....................................90
Governing Law...........................................................90
THE MASTER SERVICING AGREEMENT................................................90
Servicing Procedures....................................................91
Servicer Advances.......................................................92
Servicing Compensation; Releases........................................92
Servicer Duties.........................................................92
Servicer Representations and Warranties.................................93
Servicer Indemnification................................................94
Statements to Issuer and Bond Trustee...................................94
Evidence as to Compliance...............................................95
Certain Matters Regarding the Servicer..................................95
Servicer Defaults.......................................................96
Rights Upon Servicer Default............................................96
Successor Servicer......................................................97
Addition of Other Issuers...............................................97
Governing Law...........................................................97
THE INDENTURE.................................................................98
Security ...............................................................98
Issuance in Series or Classes...........................................98
Collection Account......................................................99
Allocations and Payments...............................................102
Liquidated Damages.....................................................103
Reports to Transition Bondholders......................................104
Modification of Indenture..............................................104
Enforcement of the Sale Agreement and Master Servicing Agreement.......107
7
<PAGE>
Modifications to the Sale Agreement and the Master Servicing Agreement...107
Events of Default; Rights Upon Event of Default..........................107
Certain Covenants........................................................109
List of Transition Bondholders...........................................111
Annual Compliance Statement..............................................111
Bond Trustee's Annual Report.............................................111
Satisfaction and Discharge of Indenture..................................112
Legal Defeasance and Covenant Defeasance.................................112
The Bond Trustee.........................................................113
Governing Law............................................................114
MATERIAL TAX MATTERS.........................................................114
U.S. Federal Income Tax Consequences.....................................114
Tax Status of the Trust and of the Transition Bonds......................115
Taxation of United States Transition Bondholders.........................115
Information Reporting and Backup Withholding.............................116
Taxation of Foreign Transition Bondholders...............................116
Material State Tax Matters...............................................117
ERISA CONSIDERATIONS.........................................................118
PLAN OF DISTRIBUTION.........................................................118
RATINGS......................................................................119
LEGAL MATTERS................................................................119
INDEX OF PRINCIPAL DEFINITIONS...............................................120
8
<PAGE>
PROSPECTUS SUMMARY
Prospective investors should consider the risks associated with an
investment in the Transition Bonds. For a discussion of certain material risks
associated with such an investment, prospective investors should review the
discussion under "Risk Factors," which begins on page 27 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 120 for the location of the definitions of such terms.
Transaction Overview: The Competition Act, enacted in 1996, provides for
the restructuring of the electric industry in
Pennsylvania, including retail competition for
generation beginning in 1999. Deregulation of the
Pennsylvania electric industry under the
Competition Act requires the unbundling of
generation, transmission and distribution
services. While transmission and distribution
services will continue to be provided by electric
utilities ("electric distribution companies"), the
Competition Act authorizes electric generation
suppliers licensed by the PUC ("electric
generation suppliers") to provide generation and
related services, including billing and metering.
The Competition Act provides for the recovery by
electric utilities of the anticipated loss in
value of generation-related assets as a result of
the transition from a regulated environment to
competition for electric generation services
("stranded costs"), as authorized by the PUC.
Examples of generation-related assets include
electric generation facilities (such as nuclear
power plants), power purchase contracts with third
party generators of electricity and amounts
recoverable in electric rates (such as certain
deferred expenses declared by the PUC to be
regulatory assets). The investments in these
assets were recoverable in rates established by
the PUC but may not be recoverable in rates
established by market forces in a competitive
environment. Under the Competition Act, the PUC
may authorize an electric utility or its designee
to issue transition bonds to securitize all or a
portion of the allowed recovery of stranded costs.
Pursuant to the Competition Act, the PUC has
authorized PECO Energy to recover $5.26 billion of
stranded costs (referred to in this Prospectus as
PECO Energy's "Stranded Costs"). The PUC has also
issued the QRO authorizing PECO Energy to
securitize up to $4 billion of such Stranded Cost
recovery through the issuance of transition bonds.
See "PECO Energy's Restructuring Plan--The
Settlement" in this Prospectus. In order to
securitize a portion of its Stranded Cost
recovery, PECO Energy will sell to the Issuer the
Transferred Intangible Transition Property,
comprised of the irrevocable right to receive
Intangible Transition Charges with respect to the
Transferred Intangible Transition Property in an
amount sufficient to recover the aggregate
principal amount of Transition Bonds plus an
amount sufficient to provide for any credit
enhancement, to fund any reserves and to pay
interest, redemption premiums, if any, servicing
fees and other expenses relating to the Transition
Bonds (collectively, the "Qualified Transition
Expenses").
9
<PAGE>
To fund each of its purchases of Intangible
Transition Property, the Issuer will sell
Transition Bonds offered hereby and, under the
Indenture, pledge its interest in the Collateral
to the Bond Trustee to secure the Transition
Bonds. The Issuer may also issue Transition Bonds
to refund outstanding Transition Bonds. See "The
Indenture--Issuance in Series or Classes." Under
the Competition Act, as implemented by the QRO,
the right to collect Intangible Transition Charges
is irrevocable, and these charges are subject to
periodic adjustments designed to increase or
decrease future estimated collections to pay
certain fees 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." Pursuant to the Master Servicing
Agreement, PECO Energy, as Servicer, will service
the Serviced Intangible Transition Property.
10
<PAGE>
Incorporated in Pennsylvania in 1929, PECO Energy
provides retail electric and gas service in
Southeastern Pennsylvania, including the City of
Philadelphia. See "PECO Energy Company" and "The
Seller and Servicer" in this Prospectus.
Risk Factors: Prospective investors should consider, among other
things, the following risks associated with an
investment in the Transition Bonds. Such risks may
cause Transition Bondholders to suffer a loss of
their investment in Transition Bonds or may
adversely affect the timing of payments to
Transition Bondholders.
The existence of Intangible Transition Property
and the adequacy of the Transferred Intangible
Transition Property as a source of payments for
the Transition Bonds are dependent on relevant
provisions of the Competition Act and the QRO. The
ability of the Issuer to receive collections of
the Intangible Transition Charges ("ITC
Collections") and make payments on the Transition
Bonds could be affected adversely by: limitations
on the availability of Liquidated Damages for
breaches of representations and warranties; the
limited rights and remedies available to
Transition Bondholders 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 limitation of adjustments to the
Intangible Transition Charges or the failure of
the PUC to implement timely adjustments to the
Intangible Transition Charges; the resignation or
removal of the Servicer; inaccurate forecasts of
the aggregate electricity usage of Customers or
delinquencies and write-offs relating to ITC
Collections; problems in billing and metering by,
and collections by and from, electric generation
suppliers or other third parties providing
metering and billing services; economic and
technological factors and weather patterns
affecting electricity consumption; the bankruptcy
or insolvency of the Seller or the Servicer; any
alteration by the Servicer or any successor
thereto of its billing and collection practices;
changes in the electricity industry, in
electricity usage or in the Customer base; the
impact of the Year 2000 issue; or any of the
factors described below potentially affecting the
price and liquidity of the Transition Bonds.
The price and liquidity of the Transition Bonds
and the amortization thereof and, accordingly, the
weighted average lives thereof may be affected by
any delay in adjustments to the Intangible
Transition Charges, the limitation of adjustments
to the Intangible Transition Charges, a delay or
failure by the Servicer or an electric generation
supplier or other third parties providing metering
and billing services to remit ITC Collections, or
an incorrect evaluation by the Servicer of the
creditworthiness of a significant number of
Customers.
11
<PAGE>
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 27.
Source of Payment;
Intangible Transition
Charge: The Transition Bonds will be payable solely from
the Collateral, including ITC Collections
allocated to the Issuer pursuant to the Master
Servicing Agreement, whether paid by Customers
directly to the Servicer or indirectly through
electric generation suppliers or other third
parties which may or may not supply generation
services to such Customers. The Intangible
Transition Charges will be nonbypassable charges
and will be payable by designated existing and
future Customers. As described in "Risk Factors,"
the Servicer's receipt of ITC Collections is
dependent on the remittance of such amounts by
third party electric generation suppliers to the
extent applicable Customers are supplied by such
third parties. See "The QRO and the Intangible
Transition Charges--The Intangible Transition
Charges--Calculation of the Intangible Transition
Charges" in this Prospectus and "Description of
Intangible Transition Property--The Intangible
Transition Charges" in the related Prospectus
Supplement.
ITC Adjustment Process: The Master Servicing Agreement requires the
Servicer to seek, and the Competition Act and the
QRO require the PUC to approve, adjustments to the
Intangible Transition Charges charged to each Rate
Class within any Customer Category based on actual
ITC Collections attributable to such Customer
Category and updated assumptions by the Servicer
as to projected future usage of electricity by
Customers within such Customer Category, expected
delinquencies and write-offs within such Customer
Category, and future payments and expenses
relating to the Intangible Transition Property and
the Transition Bonds. Additionally, the QRO
provides that adjustments during the final
calendar year during which any series of
transition bonds secured by Intangible Transition
Property is outstanding may be implemented
quarterly or monthly. With respect to the
Transition Bonds, such adjustments are designed to
result in the outstanding principal balance of
each outstanding Series equaling the amount
provided for in the Expected Amortization Schedule
12
<PAGE>
therefor, and the amount on deposit in the
Overcollateralization Subaccount equaling the
Calculated Overcollateralization Level, by (i) the
Payment Date closest to the next Adjustment Date
or (ii) the Expected Final Amortization 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." 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 such adjustments.
The adjustments to the Intangible Transition
Charges are expected to be implemented on August
12 of each year and, with respect to Transition
Bonds, on the date or dates in the final calendar
year of ITC Collections for a Series of Transition
Bonds specified in the related Prospectus
Supplement (each, an "Adjustment Date"). Such
adjustments will cease with respect to a Series on
the final Adjustment Date specified in the related
Prospectus Supplement for that Series. See "The
QRO and the Intangible Transition Charges--The
Intangible Transition Charges."
Irrevocability of
Intangible
Transition Charges: Intangible Transition Property has been created by
the PUC's issuance of the QRO and the declaration
by the PUC that the relevant paragraphs of the QRO
are irrevocable. See "The Competition
Act--Securitization of Stranded
Costs--Irrevocability of Intangible Transition
Property" in this Prospectus. The Competition Act
provides that, to the extent that the PUC declares
all or a portion of a qualified rate order
irrevocable, the PUC may not, by subsequent
action, reduce, postpone, impair or terminate
either the qualified rate order or the intangible
transition charges authorized therein. The
Intangible Transition Charges are nonbypassable in
that Customers on whom such charges are imposed
cannot avoid paying them, even if they purchase
electricity from a supplier other than PECO
Energy.
Under Section 2812(c)(2) of the Competition Act,
the Commonwealth of Pennsylvania (the
"Commonwealth") "pledges to and agrees with
holders of any transition bonds and with any
assignee or financing party who may enter into
contracts with an electric utility ... that the
Commonwealth of Pennsylvania will not limit or
alter or in any way impair or reduce the value of
the intangible transition property or intangible
transition charges approved by a qualified rate
order until the transition bonds and interest on
the transition bonds are fully paid and discharged
or the contracts are fully performed on the part
of the electric utility ... or adequate
compensation is made by law for the full
protection of the intangible transition charges
collected pursuant to a qualified rate order and
of the
13
<PAGE>
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
1999, 47% of PECO Energy's retail electric
revenues are expected to be collected from
Residential Customers, 24% from Small Commercial
and Industrial Customers and 29% 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 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,
14
<PAGE>
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 Dates: The Payment Dates with respect to any Series of
Transition Bonds will be the days specified in the
related Prospectus Supplement.
Record Dates: With respect to any Payment Date, the record date
shall be the day designated in the Prospectus
Supplement (each, a "Record Date").
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. Principal of a Series or Class
will be due and payable on the Series Final
Maturity Date or, if applicable, the Class Final
Maturity Date therefor. Failure to make a
principal payment in accordance with the Expected
Amortization Schedule (except on the Class or
Series Rated Final Payment 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
15
<PAGE>
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. Each
Prospectus Supplement will set forth the
"Overcollateralization Amount" for the Series of
Transition Bonds offered thereby which amount will
be deposited in the Overcollateralization
Subaccount as described under "--Allocations and
Payments" below after all such payments having a
higher priority have been made and will equal (i)
__% of the initial principal amount of such
Series of Transition Bonds or (ii) such greater
amount as may be specified in the Prospectus
Supplement for such Series of Transition Bonds.
The Intangible Transition Charges will be
calculated at, and periodically adjusted to, a
level that is designed to collect the
Overcollateralization Amount ratably over the life
of the related Transition Bonds. The amount
anticipated to be on deposit in the
Overcollateralization Subaccount for all Series of
Transition Bonds as of each Payment Date is
referred to in this Prospectus as the "Calculated
Overcollateralization Level." The amount on
deposit at any time in the Overcollateralization
Subaccount will be available to pay any shortfalls
in amounts available to pay or make provision for
interest on each Series of Transition Bonds when
due, 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
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.
16
<PAGE>
General Subaccount: ITC Collections remitted by the Servicer to the
Bond Trustee, as well as Liquidated Damages and
Indemnity Amounts remitted by the Seller or the
Servicer or otherwise received by the Bond Trustee
or the Issuer, shall be deposited in the General
Subaccount. "Indemnity Amounts" means any amounts
paid by the Seller or the Servicer to the Bond
Trustee, for itself or on behalf of the Transition
Bondholders, in respect of certain indemnification
obligations pursuant to the Sale Agreement and the
Master Servicing Agreement. Indemnity Amounts
exclude certain Liquidated Damages paid pursuant
to the Sale Agreement. See "The
Indenture--Allocations and Payments" and "The Sale
Agreement" in this Prospectus.
Series Subaccount: Upon issuance of each Series of Transition Bonds,
a Series Subaccount will be established with
respect to such Series. On each Monthly Allocation
Date, deposits will be made to each Series
Subaccount as described under "The
Indenture--Allocations and Payments" in this
Prospectus. Amounts on deposit in the Series
Subaccount for any Series will be applied to make
payments with respect to such Series (including
any payments due to any counterparty to any applicable
swap agreement) as described under "The Transition
Bonds--Interest and Principal" in this Prospectus
and in the applicable Prospectus Supplement.
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 (including expenses related to
any hedge or swap transactions), (ii) amounts
distributable to Series Subaccounts in respect of
principal of and interest on each Series of
Transition Bonds payable on the next Payment Date
therefor and (iii) amounts allocable to the
Overcollateralization Subaccount (all as described
under "The Indenture--Allocations and Payments" in
this Prospectus) will be allocated to the Reserve
Subaccount. 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
__% 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 (including
expenses related to any hedge or swap
transactions), such amounts will be available to
make payments of principal and interest on the
Transition Bonds. Deposits to and
17
<PAGE>
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
Subaccount: If amounts are remitted by the Seller to the Bond
Trustee pursuant to the Sale Agreement in respect
of interest payable in connection with the
Seller's breach of certain of its representations
therein, the Issuer shall establish the Interest
Deposit Subaccount. Deposits to and withdrawals
from the Interest Deposit Subaccount will be made
as described under "The 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 $33,000 in the aggregate for
all Series; (v) an amount equal to Interest with
respect to each Series of Transition Bonds for
such Monthly Allocation Date will be transferred
on a Pro Rata basis to the Series Subaccount for
such Series, including amounts received from the
counterparty to any applicable swap agreement;
(vi) an amount equal to any Principal of any Series
18
<PAGE>
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 Final Maturity Date or
Class Final Maturity Date, as applicable, that
will occur prior to the next Monthly Allocation
Date and any Principal of and premium on a Series
or Class of Transition Bonds payable on a
Redemption Date that will occur prior to the next
Monthly Allocation Date will be transferred to the
Series Subaccount for such Series, taking into
account amounts on deposit therein in respect of
Principal as of such Monthly Allocation Date;
(vii) an amount equal to Principal with respect to
each Series of Transition Bonds for such Monthly
Allocation Date not provided for pursuant to
clause (vi) above will be transferred on a Pro
Rata basis to the Series 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) provided
that no Event of Default has occurred and is
continuing, an amount up to the amount of net
investment earnings on amounts in the General
Subaccount of the Collection Account since the
previous Monthly Allocation Date will be released
to the Issuer, free from the lien of the
Indenture; (xi) the balance, if any, will be
allocated to the Reserve Subaccount; and (xii)
following repayment of all outstanding Series of
Transition Bonds, the balance, if any, will be
released to the Issuer, free from the lien of the
Indenture. See "The Indenture--Allocations and
Payments" in this Prospectus.
The following diagram 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.
19
<PAGE>
<TABLE>
<S><C>
BASIC ALLOCATIONS AND DISTRIBUTIONS
CUSTOMERS PECO ENERGY COLLECTION
AND (SERVICER) ACCOUNT
EGSs*
Monthly payment of Monthly remittance of
Intangible Transition of ITC Collections**
Charges to Servicer allocated to the
Issuer
Application of amounts
in Collection Account
(including net
earnings therein), as
follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5) (6) (7) (8)
Bond Servicer: Issuer: Series Subaccounts: Issuer: Overcollateralization Issuer: Reserve
Trustee/ Monthly Operating o Interest for All unpaid Subaccount: Net earnings on Subaccount:
Issuer Servicing expenses applicable operating Overcollateralization amounts in General All
Trustee: Fee (up to an Monthly expenses, Subaccount of the remaining
Fees and aggregate Allocation Date Indemnity Collection Account amounts
expenses $33,000 o Principal payable Amounts
(including for all as a result of and Loss
Indemnity Series for acceleration or Amounts
Amounts each payable on a Final owed to the
and Loss Monthly Maturity Date or Issuer
Amounts Allocation payable on a
owed to the Date) Redemption Date
Trustees) o Principal for such
Monthly
Allocation Date
not provided for
above
</TABLE>
* electric generation suppliers or other third parties providing
billing and metering services
** collections of Intangible Transition Charges
20
<PAGE>
"Interest" means, with respect to any Monthly
Allocation Date for any Series of Transition
Bonds, the sum of without duplication, (i) an
amount that would cause the amount on deposit in
each Series Subaccount, without regard to
investment income, in respect of interest to equal
the Monthly Allocated Interest Balance for such
Series and such Monthly Allocation Date, (ii) if
the Transition Bonds have been declared due and
payable, all accrued and unpaid interest thereon,
(iii) with respect to a Series to be redeemed
prior to the next Monthly Allocation Date, the
amount of interest that will be payable as
interest on such Series on the Redemption Date
therefor and (iv) any interest due on such Series
on a Payment Date therefor or other date for the
payment of interest and not paid and, to the
extent permitted by law, interest thereon.
"Principal" means, with respect to any Monthly
Allocation Date and any Series of Transition
Bonds, an amount that (i) would cause the amount
on deposit in the Series Subaccount, without
regard to investment income, for such Series in
respect of principal to equal the Monthly
Allocated Principal Balance for such Series and
such Monthly Allocation Date, (ii) would be
payable as principal as a result of the occurrence
and continuance of an Event of Default, (iii) with
respect to a Series that is subject to redemption,
would be payable as principal as a result of a
redemption thereof pursuant to the Indenture or
(iv) any principal thereof due on a Payment Date
or other date for the payment of principal and not
paid.
"Pro Rata" means, with respect to any Series of
Transition Bonds, a ratio, (i) in the case
of clause (v) in the first paragraph in this
subsection, the numerator of which is the Monthly
Allocated Interest Balance with respect to such
Series for such Monthly Allocation Date and the
denominator of which is the sum of Monthly
Interest Balances with respect to all Series for
such Monthly Allocation Date and (ii) in the case
of clause (vii) in the first paragraph of this
subsection, the numerator of which is the Monthly
Allocated Principal Balance with respect to such
Series for such Monthly Allocation Date and the
denominator of which is the sum of Monthly
Allocated Principal Balances with respect to all
Series for such Monthly Allocation Date.
"Overcollateralization" means, with respect to any
Monthly Allocation Date, an amount that would
cause the balance in the Overcollateralization
Subaccount to equal the Monthly Allocated
Overcollateralization Balance for such Monthly
Allocation Date, without regard to investment
earnings.
The "Monthly Allocated Interest Balance" and the
"Monthly Allocated Principal Balance," if
applicable, for each Monthly Allocation Date and
each Series will each be set forth in the related
Prospectus Supplement for such Series and will be
calculated such that amounts scheduled to be paid
on each Payment Date will be expected to be on
deposit in the applicable
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Series Subaccount as of the Monthly Allocation
Date prior to such Payment Date.
The "Monthly Allocated Overcollateralization
Balance" for each Monthly Allocation Date will be
set forth in the first Prospectus Supplement and
adjusted to reflect redemptions or defeasances of
Transition Bonds and issuances of additional
Series of Transition Bonds and will be calculated
such that the Calculated Overcollateralization
Level for each Payment Date will be expected to be
on deposit in the Overcollateralization Subaccount
as of the Monthly Allocation Date prior to such
Payment Date.
If on any Monthly Allocation Date funds on deposit
in the General Subaccount are insufficient to make
the allocations contemplated by clauses (i)
through (viii) above, the Bond Trustee will draw
from amounts on deposit in the following
subaccounts up to the amount of such shortfall, in
order to make such payments and transfers: (i)
from the Interest Deposit Subaccount, with respect
to the payments or transfers contemplated by
clause (v) above only, (ii) then from the Loss
Subaccount, with respect to the payments or
transfers contemplated by clauses (i) through
(vii) above only, and (iii) thereafter, from the
Reserve Subaccount, then from the
Overcollateralization Subaccount and finally from
the Capital Subaccount. See "The
Indenture--Allocations and Payments."
On each Payment Date for any Series, the amounts
on deposit in the applicable Series Subaccount
(other than net income or other gain, which, so
long as no Event of Default has occurred and is
continuing, shall be released to the Issuer free
of the lien of the Indenture) will be applied to
pay the following (in the priority indicated): (i)
interest due and payable on the Transition Bonds
of such Series, together with any overdue interest
and, to the extent permitted by law, interest
thereon, will be paid to the Transition
Bondholders of such Series and (ii) the balance,
if any, up to the principal amount of the
Transition Bonds of such Series that is scheduled
to be paid by such Payment Date in accordance with
the Expected Amortization Schedule for such Series
or, with respect to any Series of Transition Bonds
payable as a result of acceleration pursuant to
the Indenture or to be redeemed pursuant to the
Indenture, the outstanding principal amount of
such Series and premium, if any, will be paid to
the Transition Bondholders of such Series in
respect of principal and premium, if any, on the
Transition Bonds of such Series and (iii) the
balance, if any, will be transferred to the
General Subaccount for allocation on the next
Monthly Allocation Date. See "The
Indenture--Allocations and Payments" in this
Prospectus.
Expected Final
Amortization Dates,
Final Maturity Dates
and Rated Final Payment
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Dates: For each Series or Class of Transition
Bonds, the related Prospectus Supplement will
specify an Expected Final Amortization Date and a
Final Maturity Date. The "Expected Final
Amortization 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 Final Maturity Date and, if applicable,
Class Final Maturity Dates, and all principal
of such Class or Series, as applicable, will be due
and payable on such date or dates. For each Series
of Transition Bonds, the related Prospectus
Supplement will also specify a Series Rated Final
Payment Date and, if applicable, Class Rated Final
Payment Dates, on which date or dates the failure
to pay unpaid principal of the applicable Series
or Class of Transition Bonds in full 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. Failure to make a principal payment
in accordance with the Expected Amortization
Schedule (except on the Rated Final Payment Date
for a Series or Class) will not be an Event of
Default under the Indenture. The Series Final
Maturity Date or, if applicable, Class Final
Maturity Date shall be on or after the related
Series or Class Expected Final Amortization Date,
and the Series Rated Final Payment Date or, if
applicable, Class Rated Final Payment Date shall
be on or after the related Series or Class Final
Maturity Date. See "The Indenture--Events of
Default; Rights Upon Event of Default" and
"Ratings" in this Prospectus.
Redemption: Each Series of Transition Bonds will be subject to
mandatory redemption in whole at a redemption
price equal to the principal amount thereof, plus
interest accrued to the redemption date, if the
Seller is obligated to pay Liquidated Damages
under the Sale Agreement. PECO Energy, as Seller,
will be required to pay an amount sufficient to
pay the principal of the outstanding Transition
Bonds, plus accrued interest thereon to the date
of redemption ("Liquidated Damages") and certain
amounts due to the Bond Trustee, the Issuer
Trustee and the Issuer as a result of a breach by
PECO Energy of certain of its representations
relating to Intangible Transition Property under
the Sale Agreement if such breach continues beyond
a 90-day grace period and has a material adverse
effect on the Transition Bondholders. The Bond
Trustee, which may consult with the Servicer and
other third parties, will 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 certain indemnification payments is
reasonably expected to be incurred beyond a 90-day
period immediately succeeding the breach of the
representation giving rise thereto, the Seller
shall, except as provided below, pay Liquidated
Damages to the Bond Trustee, as assignee of the
Issuer, for deposit into the General Subaccount of
the Collection Account
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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 giving rise
to an event requiring indemnification by the
Seller (the "Initial Loss Calculation Date") shall
pay to the Bond Trustee as assignee of the Issuer,
for deposit in the Loss Subaccount of the
Collection Account, the aggregate expected amount
of such losses for all Monthly 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 aggregate amount of
such losses exceeds the amounts paid by the Seller
to the Bond Trustee as assignee of the Issuer,
with respect thereto, the Seller shall pay to the
Bond Trustee, as assignee of the Issuer, on the
next Monthly Allocation Date the amount of such
excess for such Monthly Allocation Date and the
expected amount of excess for all subsequent
Monthly Allocation Dates. Additional redemption
provisions, if any, for each Series of Transition
Bonds will be specified in the related Prospectus
Supplement. See "The Transition Bonds--Redemption"
and "The Sale Agreement--Seller Representations
and Warranties" in this Prospectus.
Other Credit
Enhancement: The Issuer, at its option, may provide additional
credit enhancement with respect to a Series in the
form of other reserve accounts, a financial
guaranty insurance policy, a letter of credit, a
credit or liquidity facility, a repurchase
obligation, third party payment or other support,
a cash deposit or such other arrangement as is
described in the applicable Prospectus Supplement.
See "The Transition Bonds--Credit Enhancement" in
this Prospectus.
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.
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.
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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") and "P-1"
by Moody's Investor Service ("Moody's") (and for
five Business Days following a reduction in either
such rating) or (ii) the Rating Agency Condition
will have been satisfied 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 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 3rd day of the month to but
excluding the 3rd day of the next month is
referred to in this Prospectus as the "Collection
Period." Pending deposit into the Collection
Account, ITC Collections allocated to the Issuer
pursuant to the Master Servicing Agreement may be
invested by the Servicer at its own risk and for
its own benefit and will not be segregated from
the general funds of the Servicer. See "Risk
Factors--Bankruptcy; Creditors' Rights."
Servicing Compensation: To the extent amounts are available therefor in
accordance with the Indenture, the Servicer will
be entitled to receive a servicing fee on each
Monthly Allocation Date with respect to each
Series of Transition Bonds in an amount equal to
1/12 of the percent specified in the related
Prospectus Supplement of the outstanding principal
amount of the Transition Bonds of such Series as
of such Monthly Allocation Date (the "Monthly
Servicing Fee"). The Monthly Servicing Fee will be
paid prior to the payment of any amounts in
respect of interest on and premium and principal
of the Transition Bonds. See "The Master Servicing
Agreement--Servicing Compensation; Releases" in
this Prospectus.
Servicer Advances: If so specified in the related Prospectus
Supplement, the Servicer will make advances of
interest or principal on the related Series of
Transition Bonds. If no advances are specified in
a particular Prospectus Supplement, the Servicer
will make no advances for the related Series.
ERISA Considerations: A fiduciary of any employee benefit plan or other
plan or arrangement that is subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), should carefully review with its legal
advisers whether the purchase or holding of the
Transition Bonds of any
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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.
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 Rated
Final Payment Date or Class Rated Final Payment
Date. See "Risk Factors--The Transition
Bonds--Uncertain Weighted Average Life" and
"Ratings" in this Prospectus.
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RISK FACTORS
Prospective investors in any Series of Transition Bonds should consider,
among other things, the following factors in connection with the purchase of
Transition Bonds:
Unusual Nature of Intangible Transition Property
Dependence on the Competition Act and the QRO. The existence of Intangible
Transition Property and the adequacy of the Transferred Intangible Transition
Property as a source of payment of principal of and interest on the Transition
Bonds are dependent on the relevant provisions of the Competition Act and the
QRO. If the provisions of the Competition Act or the QRO relating to recovery or
securitization of Stranded Costs were overturned as a result of existing or
future legal challenges, the Issuer's sole remedy would be to seek Liquidated
Damages from the Seller under the Sale Agreement. If the Competition Act were
amended or repealed by the Commonwealth or preempted by federal legislation, the
Seller would not be obligated to pay Liquidated Damages, and Transition
Bondholders would be limited to rights under law. There is no assurance that the
exercise of such rights would result in principal and interest on the Transition
Bonds being paid in full, and as a result Transition Bondholders could suffer a
loss of their investment. Further, the time and expense of pursuing such rights
could result in a loss to Transition Bondholders, or delay the expected payments
on the Transition Bonds.
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").
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 if such breach continues beyond a 90-day grace period and has
a material adverse effect on the Transition Bondholders or if the payment of
certain indemnification amounts by the Seller related to a breach of certain
other representations is reasonably expected to continue beyond a 90-day period
immediately succeeding such breach and such amounts are reasonably expected to
exceed the De Minimis Loss Amount. See "The Sale Agreement--Seller
Representations and Warranties" in this Prospectus. A determination by a court
in an existing or future action (as described below in "--Legal Challenges Which
Could Adversely Affect Transition Bondholders") that, based on laws in effect on
the date any Intangible Transition Property is sold to the Issuer, the
Transferred Intangible Transition Property or the QRO violated any such laws, or
is otherwise invalid or unenforceable, would be considered to be a breach of the
Seller's representation. There is no assurance that the Seller would be
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able to pay such Liquidated Damages. See also "--Dependence on the Competition
Act and the QRO" above and "-Bankruptcy; Creditors' Rights-Challenge to
Liquidated Damages Claims by Bankruptcy Trustee" below.
No Liquidated Damages for Change in Law. The Seller will not be in breach
of any representations and warranties (or be required to pay Liquidated Damages)
for a change in law by legislative enactment or constitutional amendment,
including an enactment or amendment that breaches the pledge and agreement of
the Commonwealth in the Competition Act not to limit, alter or impair Intangible
Transition Property or Intangible Transition Charges. A repeal of the
Competition Act, an amendment to it voiding the existence of Intangible
Transition Property or the adoption of a federal statute prohibiting the
recovery of stranded costs are examples of changes in law.
The Seller will not be in breach of any representations and warranties
under the Sale Agreement or be required to pay Liquidated Damages as a result of
a breach of the pledge and agreement of the Commonwealth. 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 above under "--Possible Commonwealth
Amendment or Repeal of the Competition Act," cause Transition Bondholders to
suffer a loss of their investment.
Legal Challenges Which Could Adversely Affect Transition Bondholders. If
the relevant provisions of the Competition Act and the QRO were challenged in a
lawsuit and determined to be invalid or unenforceable in whole or in part, such
determination could adversely affect the ability of the Issuer to make payments
on the Transition Bonds, and Transition Bondholders could suffer a loss of their
investment. As of the date of this Prospectus, the Competition Act and the QRO
are in full force and effect. The PUC issued its Final Order dated May 14, 1998
(the "Final Order"), of which the QRO is a part, approving the settlement (the
"Settlement") concerning PECO Energy's restructuring plan as modified by
subsequent PUC orders (the "Restructuring Plan"). The period for appealing the
QRO has expired. As of the date of this Prospectus, excluding cases that have
been suspended because of the Settlement, there is one pending court action
challenging the constitutionality of the Competition Act. This action, currently
on a Petition for Writ of Certiorari with the United States Supreme Court,
asserts that the Competition Act's provision allowing Pennsylvania utilities,
including PECO Energy, to recover stranded costs violates the Commerce Clause of
the United States Constitution. See "--Limited Availability of Liquidated
Damages" above and "Litigation" in this Prospectus. If this challenge succeeds,
the Seller would be in breach of its representations and warranties concerning
the Intangible Transition Property and, if such breach continued beyond a 90-day
grace period and had a material adverse effect on the Transition Bondholders,
the Seller would be required to pay the Bond Trustee, as assignee of the Issuer,
Liquidated Damages. The Issuer would then be required by the Indenture to redeem
the Transition Bonds. See "--Limited Availability of Liquidated Damages" above.
If the current challenge is accepted for certiorari by the United States Supreme
Court, the liquidity and value of the Transition Bonds could be adversely
affected while the appeal remains on-going, even if the Court does not
ultimately decide that the stranded costs provisions of the Competition Act
violate the Commerce Clause of the United States Constitution.
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Future court actions, including any resulting from other restructuring
cases in Pennsylvania could challenge the constitutionality of the Competition
Act under the U.S. Constitution or the Pennsylvania Constitution. To the extent
that a future court action successfully challenged the validity of the
Competition Act, such an action would cause a breach of the Seller's
representations concerning the Competition Act and Intangible Transition
Property, and if such breach continued beyond a 90-day grace period and had a
material adverse effect on the Transition Bondholders, the Seller would have to
pay Liquidated Damages pursuant to the Sale Agreement, resulting in the
redemption of the Transition Bonds. See "The Sale Agreement" and "The Indenture"
in this Prospectus.
To the extent, however, that a court action, in Pennsylvania or elsewhere,
leads the legislature to amend or repeal the Competition Act, Transition
Bondholders would not be entitled to Liquidated Damages and would be entitled
only to rights under law. See "--No Liquidated Damages for Change in Law" above.
Possible Federal Preemption of the Competition Act. At least one bill was
introduced in the 105th Congress, First Session, prohibiting the recovery of
stranded costs such as the Qualified Transition Expenses, which could negate the
existence of Intangible Transition Property. That bill, H.R. 1230 (The Consumers
Electric Power Act of 1997, "H.R. 1230"), was introduced on April 8, 1997 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 and/or the QRO by the federal government were considered a "taking," for
which the government had to pay the estimated market value of the Transferred
Intangible Transition Property at the time of the taking, there is no assurance
that such compensation would be sufficient to pay the full amount of principal
of and interest on the Transition Bonds, and Transition Bondholders could suffer
a loss of their investment. See "--Possible Commonwealth Amendment or Repeal of
the Competition Act" below.
Possible Commonwealth Amendment or Repeal of the Competition Act. Under the
Competition Act, the Commonwealth has pledged to and agreed with transition
bondholders that it will not limit or alter or in any way impair or reduce the
value of intangible transition property or intangible transition charges
approved by a qualified rate order, until the transition bonds and interest
thereon are fully paid and discharged. The Competition Act also provides,
however, that subject to the requirements 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
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<PAGE>
Commonwealth could not repeal or amend the Competition Act (by way of
legislative process) or take any other action that substantially impairs the
rights of the Transition Bondholders, unless such action is a reasonable
exercise of the Commonwealth's sovereign powers and of a character appropriate
to the public purpose justifying such action. To date, no cases addressing these
issues in the context of transition bonds have been decided. There have been
cases in which courts have applied the Contract Clause of the United States
Constitution and parallel state constitutional provisions to strike down
legislation, reducing or eliminating taxes or public charges which supported
bonds issued by public instrumentalities, or otherwise reducing or eliminating
the security for such bonds. Based upon such case law, in the opinion of Ballard
Spahr, it would appear unlikely that the Commonwealth could reduce, modify,
alter or take any other action with respect to intangible transition property
which would substantially impair the rights of transition bondholders, unless
the action is reasonable and appropriate to further a legitimate public purpose.
Moreover, under the Taking Clauses of the United States and Pennsylvania
Constitutions, the Commonwealth could not repeal or amend the Competition Act
(by way of legislative process) or take any action in contravention of its
pledge and agreement (described above) without paying just compensation to the
transition bondholders if doing so would constitute a permanent appropriation of
the property interest of transition bondholders in the intangible transition
property and deprive the transition bondholders of their reasonable expectations
arising from their investments in the transition bonds. There is no assurance,
however, that, even if a court were to award such just compensation, it would be
sufficient to pay the full amount of principal of and interest on the transition
bonds. In addition, there can be no assurance that a repeal of or amendment to
the Competition Act will not be sought or adopted or that any action by the
Commonwealth may not occur, any of which might constitute a violation of the
Commonwealth's pledge and agreement with the transition bondholders. In any such
event, costly and time-consuming litigation might ensue. Any such litigation
might adversely affect the price and liquidity of the Transition Bonds and the
dates of payments of principal thereof and, accordingly, the weighted average
lives thereof. Moreover, given the lack of judicial precedent directly on point,
and the novelty of the security for the Transition Bondholders, the outcome of
any such litigation cannot be predicted with certainty, and accordingly,
Transition Bondholders could incur a loss of their investment. See "--Limited
Availability of Liquidated Damages" and "No Liquidated Damages for Change in
Law" above.
Litigation 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
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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.
Payments on Transition Bonds Rely on Adjustments of the Intangible
Transition Charges. The actual rate of ITC Collections may vary from projections
upon which the Intangible Transition Charges were based, primarily as a result
of variations in electricity usage by Customers from projected electricity usage
and delinquencies and write-offs. Under the Master Servicing Agreement, the
Servicer is obligated to submit Adjustment Requests to the PUC on each
Calculation Date to reflect the actual rate of ITC Collections allocated to the
Issuer pursuant to the Master Servicing Agreement and changes in projections
regarding such rate. 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 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. 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 the Payment Date closest to the next Adjustment Date or the Expected
Final Amortization 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." Since the adjustments will be
based on forecasted usage, delinquencies and write-offs, there can be no
assurance that any such adjustments to the Intangible
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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 Schedules therefor. The Competition Act and the QRO require the PUC
to approve 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 in accordance with the QRO or
any litigation challenging the approval thereof could adversely affect the price
and liquidity of the Transition Bonds and the dates of the payment of the
principal thereof and, accordingly, the weighted average lives thereof.
Limitations on the Intangible Transition Charges. After December 31, 2010,
PECO Energy must cease billing Customers the Intangible Transition Charges, and,
after the final Adjustment Date specified for each Series in the related
Prospectus Supplement, there will be no further adjustments of the Intangible
Transition Charges with respect to such Series. Thereafter, any shortfalls in
ITC Collections available to make payments with respect to such Series are
expected to be covered through amounts, if any, on deposit in the Reserve
Subaccount, the Overcollateralization Subaccount and the Capital Subaccount. To
the extent such amounts are insufficient to cover any such shortfalls, the
Transition Bonds may not be paid in full by the applicable Class or Series
Expected Final Amortization Date, Class or Series Final Maturity Date or Class
or Series Rated Final Payment Date, and Transition Bondholders would suffer a
loss of their investments.
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. Certain forms of
credit enhancement, such as interest rate swaps 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). The applicable Prospectus Supplement
will contain the risk factors, if any, associated with any applicable credit
enhancement.
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 under
the Competition Act to fulfill the obligations of PECO Energy as Servicer. In
addition, a transfer of servicing functions will require regulatory cooperation.
A Successor Servicer may also experience difficulties in collecting Intangible
Transition Charges and determining
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appropriate adjustments to Intangible Transition Charges. Further, under current
law, it is possible that the remedy of shutting off service to a Customer for
nonpayment of the Intangible Transition Charges would not be available to a
Successor Servicer. If PECO Energy were to be replaced as Servicer, any of these
factors, and others, could delay the timing of payments on the Intangible
Transition Property, and Transition Bondholders could incur a loss of their
investment. See "The Master Servicing Agreement" in this Prospectus.
Inaccurate Projections. The failure of the Servicer to forecast accurately
the electricity usage of Customers and the delinquency and write-off experience
relating to Intangible Transition Charges could adversely affect the timely
receipt of ITC Collections. Projections are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
changes in political, social and economic conditions, weather, unexpected
demographic trends, catastrophes, regulatory initiatives, compliance with
governmental regulations, litigation and various other events, conditions and
circumstances, all of which are beyond the 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 parties providing consolidated
bills to customers and being responsible for paying amounts owed in respect of
transmission and distribution charges and the intangible transition charges to
electric distribution companies, including PECO Energy, could make past
projections meaningless as a tool in predicting delinquencies and write-offs.
Such changes to the electricity market could also substantially affect the
methodology by which the Servicer produces forecasts and the types of
information used by the Servicer to produce them. There can be no assurance that
the accuracy of past projections will be replicated in any future predictions
made by the Servicer.
While under the Master Servicing Agreement the Servicer is obligated to
make all reasonable efforts to make accurate forecasts of usage, write-offs and
delinquencies and incorporate assumptions relating thereto into its calculation
of the Intangible Transition Charges and adjustments thereto, there can be no
assurance that actual usage, delinquencies and write-offs will not be
significantly different from future forecasts thereof or that the calculation of
Intangible Transition Charges will not result in a shortfall in ITC Collections.
In addition, there can be no assurance that any Successor Servicer will be
successful in making such forecasts. Shortfalls may be recovered through
adjustments to the Intangible Transition Charges, but the frequency of such
adjustments is limited, and, accordingly, delays in payments to Transition
Bondholders or losses might result. See "--Unusual Nature of Intangible
Transition Property--Payments on Transition Bonds Rely on Adjustments of the
Intangible Transition Charges" above. In addition, there can be no assurance
that the PUC will approve any Adjustment Request in accordance with the QRO. Any
failure by the PUC to approve any Adjustment Request in accordance with the QRO
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or any litigation challenging the approval thereof could adversely affect the
price and liquidity of the Transition Bonds and the dates of the payment of the
principal thereof and, accordingly, the weighted average lives thereof.
Delays in Payments Caused by Changes in Payment Terms. The Servicer is
permitted to alter the terms of billing and collection arrangements and modify
amounts due from Customers. Although the Servicer does not have the right to
change the amount of a Customer's individual Intangible Transition Charges, it
does have the right to take actions that in its judgment will maximize actual
collections from Customers with respect to any utility bill. In addition, the
Servicer has the right to write-off outstanding bills that it deems
uncollectible in accordance with its customary and usual billing and collection
practices. Such actions might include, for example, agreeing to an extended
payment schedule or agreeing to write-off the remaining portion of an
outstanding bill in order to recover a portion thereof. While PECO Energy has no
current intention of taking actions that would change the billing and collection
arrangements in a manner that would adversely affect the collection of payments
of the Intangible Transition Charges, there can be no assurance that PECO Energy
will not change its customary and usual billing and collection practices,
including its requirements regarding Customer deposits, in such a manner or that
a Successor Servicer may not make such a change or that such a change may not be
required by the PUC or new legislation. Such changes could delay or reduce ITC
Collections and, accordingly, could adversely affect the payment of interest on
the Transition Bonds on a timely basis or the payment of principal of the
Transition Bonds in accordance with the Expected Amortization Schedules or in
full by the applicable Class or Series Expected Final Amortization Date, Class
or Series Final Maturity Date or Class or Series Rated Final Payment Date. See
"Certain Weighted Average Life and Yield Considerations" in this Prospectus; see
also "The Seller and Servicer--Customers and Operating Revenues," "--Billing
Process" and "--Limited Information on Customers' Creditworthiness" in this
Prospectus.
Limited Information on Customers' Creditworthiness. The Servicer's ability
to collect amounts billed to Customers for the Intangible Transition Charges
will depend in part on the creditworthiness of the Customers. Under Pennsylvania
law, PECO Energy generally is obligated to provide service to new Customers in
its retail electric service territory. Credit investigations of new Customers by
PECO Energy have been limited. PECO Energy's information regarding the
creditworthiness of new Customers is limited to information regarding prior
service, if any, by PECO Energy provided by its customer information system
audits. If the Servicer incorrectly evaluates the creditworthiness of a
significant number of its Customers, significant increases in delinquencies and
write-offs may result, and delays in payments to Transition Bondholders may
occur. See "--Credit Concerns Arising out of Third Party Billing" below.
Credit Concerns Arising Out of Third Party Billing. The Restructuring Plan
and future orders of the PUC will set forth guidelines governing customer
billing and collection by electric generation suppliers and other third parties
providing billing and metering services. Any electric generation supplier or
other third party that provides consolidated billing is required to pay the
Servicer periodic amounts billed by the Servicer to the electric generation
supplier or other third party, including the Intangible Transition Charges,
regardless of the ability of the electric generation supplier or other third
party to collect such amounts from Customers. In such event, the electric
generation supplier or other third party will replace Customers as the obligor
with respect to such Intangible Transition Charges, and the Servicer, on behalf
of the Issuer, will have no right to collect such Intangible Transition Charges
from Customers. See also "--The Electric Industry Generally--Adverse Effects of
Shrinking Base of Customers on ITC Collections" below. There can be no assurance
that any electric generation supplier or other third party will use the same
customer credit standards as the Servicer or that the Servicer will be able to
mitigate credit risks relating to electric generation suppliers or other third
parties in the same manner in, or to the same extent to, which it mitigates such
risks relating to its Customers. The Servicer, on behalf of the Issuer, will
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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 Schedules therefor or in full by the
applicable Class or Series Expected Final Amortization Date, Class or Series
Final Maturity Date or Class or Series Rated Final Payment Date. For a
discussion of the future market share of electric generation suppliers, see
"PECO Energy's Restructuring Plan--The Settlement--Customer Choice" in this
Prospectus. Neither the Seller nor the Servicer will pay any shortfalls
resulting from the failure of any electric generation supplier or other third
party to forward ITC Collections to the Servicer. The adjustment mechanism for
the Intangible Transition Charges, as well as the Overcollateralization Amount
and the amounts on deposit in the Capital Subaccount and the Reserve Subaccount,
are designed to mitigate this risk relating to the timing of collections and
payments. However, delays in payments to Transition Bondholders might occur as a
result of delays in implementation of the adjustment mechanism or any lack of
funds in the Reserve Subaccount, the Overcollateralization Subaccount, and the
Capital Subaccount after the final Adjustment Date. See also "The Electric
Industry Generally--Adverse Effects of Shrinking Base of Customers on ITC
Collections" below.
In addition, to the extent that Customers choose consolidated billing by
electric generation suppliers or other third parties, the Issuer may be relying
on a small number of electric generation suppliers and other third parties
rather than a large number of individual Customers, to remit ITC Collections. In
this circumstance, a default in the payment of Intangible Transition Charges by
a single electric generation supplier or other third party that provides billing
service to a large number of Customers may adversely affect the timing of
payments on the Transition Bonds or could result in a loss of their investment.
Possible Payment Delays Created by the Commingling of ITC Collections with
Servicer's Other Funds. Until ITC Collections are remitted to the Collection
Account on a Remittance Date, the Servicer will not segregate them from its
general funds. A failure or inability of the Servicer to remit the full amount
of the ITC Collections, whether voluntary or involuntary, might result in delays
or reductions in payments to Transition Bondholders. The adjustments to the
Intangible Transition Charges described in this Prospectus as well as the
amounts, if any, on deposit in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount are designed to mitigate this risk.
However, delays in payments to Transition Bondholders may occur as a result of
delays in implementation of the adjustment mechanism or any lack of funds in the
Reserve Subaccount, the Overcollateralization Subaccount and the Capital
Subaccount after the final Adjustment Date.
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Potential Impact of the Year 2000 Issue on Transition Bondholders. PECO
Energy is faced with the task of addressing the Year 2000 issue. See "The Seller
and Servicer--Year 2000 Compliance" in this Prospectus. The Year 2000 issue
could affect, among other things, the ability of PECO Energy as Servicer or any
Successor Servicer and electric generation suppliers or other third parties to
bill and collect the Intangible Transition Charges, both because of problems
with their own systems and that Customers may have in processing bills, and the
ability of the Servicer and electric generation suppliers to meter usage. The
Year 2000 issue could also affect usage if there are problems with the
generation or distribution of electricity. There is no way to predict the impact
of the Year 2000 issue, but if there are significant interruptions of service to
Customers or significant business interruptions in general caused by Year 2000
issues, there could be significant delays in ITC Collections and, therefore, in
payments to Transition Bondholders could be delayed.
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. 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
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adjusted from time to time, required to be paid by remaining Customers may
become burdensome and result in greater delinquencies and write-offs or
petitions to the PUC to reduce Intangible Transition Changes, which could have
an adverse effect on Transition Bondholders. See "--Unusual Nature of Intangible
Transition Property--Payments on Transition Bonds Rely on Adjustments of the
Intangible Transition Charges" above and "--Adverse Effects of Shrinking Base of
Customers on ITC Collections" below.
Adverse Effects of Shrinking Base of Customers on ITC Collections. The
Intangible Transition Charges are a relatively modest amount on an individual
Customer basis when imposed on the Servicer's current base of Customers.
However, if one or more of the risks described under the subsection "--The
Electric Industry Generally" or an unforeseen catastrophe were to occur, the
number of Customers on whom the Intangible Transition Charges would be levied
might be reduced significantly. Although the Issuer believes that the likelihood
of this occurring is remote, its occurrence might cause Transition Bondholders
to fail to receive the full amount to which they are entitled. The Servicer's
current forecasts of future electricity demand do not include any shift by
Customers to self-generation, because self-generation of electricity by
Customers is not expected to be economically viable during the period in which
the Transition Bonds will be outstanding. While the Issuer expects that the
applicable Intangible Transition Charges will be imposed on Customers who only
partially self-generate, the ability of the Servicer to collect such Intangible
Transition Charges may be reduced because the Servicer may not have ready access
to data about which consumers are self-generating and will not be able to
exercise shut-off rights as an enforcement tool against a self-generator. But
see "--Servicing--Credit Concerns Arising Out of Third Party Billing" above.
Bankruptcy; Creditors' Rights
Bankruptcy of Seller. General. The bankruptcy of the Seller could have
several adverse consequences, the most important of which are briefly described
in this subsection.
True Sale or Financing. The Seller will represent and warrant in the Sale
Agreement that the transfer of the Transferred Intangible Transition Property in
accordance with that agreement constitutes a valid sale and assignment by the
Seller to the Issuer of the Transferred Intangible Transition Property. The
Seller will also represent and warrant in the Sale Agreement, and it is a
condition of closing for the sale of Intangible Transition Property, that it
will take the appropriate actions under the Competition Act, including filing an
intangible transition property notice, to perfect this sale. The Competition Act
provides that a transfer of intangible transition property by an electric
utility to an assignee which the parties have in the governing documentation
expressly stated to be a sale or other absolute transfer, in a transaction
approved in a qualified rate order, shall be treated as an absolute transfer of
all the transferor's right, title and interest, as in a true sale, and not as a
pledge or other financing, of such intangible transition property. The Seller
and the Issuer will treat the transactions as a sale under applicable law,
although for financial reporting and federal and Commonwealth income and
franchise tax purposes the Transition Bonds will be treated as a financing and
not a sale. See "The Competition Act--Securitization of Stranded
Costs--Characterization of Transfer of the Transferred Intangible Transition
Property as True Sale" in this Prospectus. If the Seller were to become a debtor
in a bankruptcy case and a bankruptcy trustee of the Seller, the Seller itself
as debtor in possession or another party in interest were to take the position
that the sale of the Transferred Intangible Transition Property to the Issuer
was a financing transaction and not a "true sale," there can be no assurance
that a court would not adopt such a position. If a court adopted this position,
then delays or reductions in payments on the Transition Bonds could result. Even
if a court did not ultimately recharacterize the transaction as a financing
transaction, the mere commencement of a Seller bankruptcy could result in delays
in payments on the Transition Bonds and could have an adverse effect
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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
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continuously for all purposes. Nonetheless, no assurance can be given that if
the Seller were to become adebtor in a bankruptcy case, a bankruptcy trustee of
the Seller, the Seller itself as debtor in possession or another party in
interest would not attempt to take the position that, because the payments based
on the Transferred Intangible Transition Property are indirectly usage-based
charges, the Transferred Intangible Transition Property comes into existence
only as Customers use electricity. If a court were to adopt this position, no
assurance can be given that a security interest in favor of the Transition
Bondholders would attach to Intangible Transition Charges in respect of
electricity consumed after the commencement of a bankruptcy case for the Seller.
If it were determined that the Transferred Intangible Transition Property has
not been sold to the Issuer, and the security interest in favor of the
Transition Bondholders did not attach to Intangible Transition Charges in
respect of electricity consumed after the commencement of a bankruptcy case of
the Seller, then the Issuer would be an unsecured creditor of the Seller, and
delays or reductions in payments on the Transition Bonds could result. Whether
or not a court determined that the Transferred Intangible Transition Property
had been sold to the Issuer, no assurances can be given that a court would not
rule that any Intangible Transition Charges relating to electricity consumed
after the commencement of the Seller's bankruptcy cannot be transferred to the
Issuer or the Bond Trustee, thus resulting in delays or reductions of payments
of the Transition Bonds.
In addition, because the payments based on the Intangible Transition
Charges are indirectly usage-based charges, if the Seller were to become the
debtor in a bankruptcy case, a bankruptcy trustee of the Seller, the Seller
itself as debtor in possession or another party in interest could take the
position that the Issuer should pay a portion of the costs of the Seller
associated with the generation, transmission or distribution by the Seller of
the electricity, consumption of which gave rise to the ITC Collections used to
make payments on the Transition Bonds. If a court were to adopt this position,
the result could be delays or reductions in payments to the Transition
Bondholders.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the argument that the Transferred Intangible Transition
Property comes into existence only as customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transferred Intangible Transition Property came into existence could
have priority over the Issuer's interest in the Transferred Intangible
Transition Property, thereby possibly resulting in a reduction of amounts paid
to the Transition Bondholders. Adjustments to the Intangible Transition Charges
may be available to mitigate this risk, although delays in implementation
thereof may cause a delay in receipt of payments.
Enforcement of Rights by Bond Trustee. Upon an Event of Default under the
Indenture, the Competition Act permits the Bond Trustee to enforce in accordance
with the terms of the Indenture the security interest in the Transferred
Intangible Transition Property and direct the PUC to order the sequestration and
payment to Transition Bondholders of all revenues arising with respect to the
Transferred Intangible Transition Property. The Competition Act provides that
such an order will remain in full force and effect notwithstanding bankruptcy,
reorganization, or other insolvency proceedings with respect to the utility or
its assignee. There can be no assurance, however, that the PUC would issue such
an order in light of the automatic stay provisions of Section 362 of the
Bankruptcy Code or, alternatively, that a bankruptcy court would lift the
automatic stay to permit such action by the PUC. In that event, the Bond Trustee
may under the Indenture seek an order from the bankruptcy court lifting the
automatic stay with respect to such action by the PUC, and an order requiring an
accounting and segregation of the revenues arising from the Transferred
Intangible Transition Property. There can be no assurance that a court would
grant either order.
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<PAGE>
Bankruptcy of Servicer. The Servicer is entitled to commingle ITC
Collections with its own funds until each Remittance Date. The Competition Act
provides that the relative priority of a lien created under the Competition Act
is not defeated or adversely affected by the commingling of funds arising with
respect to Intangible Transition Property with funds of the electric utility.
However, no assurances can be given that in the event of a bankruptcy of the
Servicer, a bankruptcy trustee of the Servicer, the Servicer itself as a debtor
in possession or another party in interest might not assert (or that a court
might not hold) that any ITC Collections held by the Servicer were property of
the Servicer and so included in the bankruptcy estate. This may result in delays
in payments due on the Transition Bonds. In addition, in the event of a Servicer
bankruptcy, the automatic stay may prevent the Issuer from effecting a transfer
of servicing, notwithstanding the contractual provisions in the Master Servicing
Agreement that provide that the Bond Trustee, as assignee of the Issuer,
together with certain other persons, may vote to appoint, or petition the PUC or
a court of competent jurisdiction for the appointment of, a Successor Servicer
which satisfies the Rating Agency Condition. Even if a Successor Servicer may be
appointed, such a successor may be difficult to obtain and may not be capable of
performing all the duties that PECO Energy as Servicer was capable of
performing. See "--Servicing--Issuer's Reliance on Servicer" above.
The Transition Bonds
Limited Liquidity of Transition Bonds. There is no assurance that a
secondary market for any of the Transition Bonds will develop or, if one does
develop, that it will provide the Transition Bondholders with liquidity of
investment or that it will continue for the life of such Transition Bonds. It is
not anticipated that any Transition Bonds will be listed on any securities
exchange.
Limited Sources of Payments for the Transition Bonds. The Transition Bonds
are obligations of the Issuer, a special purpose entity, only and will not
represent an interest in or obligation of the Seller, the Issuer Trustee or the
Bond Trustee or any entity other than the Issuer. The Issuer has no property
other than the Collateral, and the Collateral is the sole source of payment on
the Transition Bonds. The Issuer's organizational documents will restrict its
right to acquire other assets unrelated to the transactions described in this
Prospectus. None of the Transition Bonds will be guaranteed or insured by the
Seller, the Issuer Trustee or the Bond Trustee or any affiliates thereof (other
than the Issuer) or any other entity.
Effect of Additional Series and Other Financings on Outstanding Transition
Bonds. Subject to certain conditions, the Issuer may from time to time issue new
Series of Transition Bonds. The principal terms of any Series will be specified
in a Prospectus Supplement for such Series, but the terms of any additional
Series will not be subject to the prior review by or consent of the Transition
Bondholders of any previously issued Series. Such principal terms may include
methods for allocating collections, provisions creating different or additional
security or other credit enhancement, and any other amendment or supplement to
the Indenture or otherwise which is made applicable only to such Series of
Transition Bonds. While the issuance of other Series must meet the Rating Agency
Condition, there can be no assurance that the issuance of any other Series of
Transition Bonds might not have an impact on the timing or amount of payments
received by Transition Bondholders. See "The Transition Bonds" and "The
Indenture--Issuance in Series or Classes" in this Prospectus. In addition,
various matters relating to the Transition Bonds are subject to a vote of all
Transition Bondholders for all Series of Transition Bonds, even though there may
be differences in the interests or positions among such Series or Classes of
such Series which could result in voting outcomes adverse to the interests of
one or more Series or Classes of Transition Bonds.
The Seller may sell Intangible Transition Property to one or more entities
other than the Issuer to finance Stranded Costs. Neither such sales nor the
terms of any transition bonds issued by such entity or entities will be subject
to the prior review by or consent of the Transition Bondholders of any Series.
ITC
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<PAGE>
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.
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 or Class Rated Final Payment Date. As
a result, any Series or Class of Transition Bonds might be paid later than
scheduled, resulting in a weighted average life of such Transition Bonds which
is longer than expected. A security rating is not a recommendation to buy, sell
or hold securities. There can be no assurance that a rating will remain in
effect for any given period of time or that a rating will not be revised or
withdrawn entirely by a Rating Agency if, in its judgment, circumstances so
warrant.
Uncertain Weighted Average Life. The actual dates on which principal is
paid on each Class of Transition Bonds might be affected by, among other things,
the amount and timing of receipt of ITC Collections. Since the amount of
Intangible Transition Charges collected from each Customer will depend upon each
Customer's usage of electricity, the aggregate amount and timing of ITC
Collections (and the resulting amount and timing of principal amortization on
the Transition Bonds) will depend, in part, on actual usage of electricity and
the rate of delinquencies and write-offs. See "--Servicing--Inaccurate
Projections" above. Although the Intangible Transition Charges will be adjusted
from time to time based in part on the actual rate of ITC Collections during
prior billing periods, no assurances can be given that the Servicer will be able
to forecast accurately actual Customer energy usage and the rate of
delinquencies and write-offs and implement adjustments to the Intangible
Transition Charges that will cause payments to be made at any particular rate.
If ITC Collections are received at a slower rate than expected, payments on the
Transition Bonds may be made later than expected. Because principal will only be
paid at a rate not to exceed that reflected in the Expected Amortization
Schedules, the Transition Bonds are not expected to be retired earlier than
scheduled other than in the event of a redemption or acceleration. A payment on
a date that is later than forecasted will result in a longer weighted average
life.
The Transition Bonds may be subject to optional and mandatory redemptions
as specified herein or in the related Prospectus Supplement. Any such redemption
will cause such Transition Bonds to be retired earlier than would otherwise be
expected and may adversely affect the yield to maturity of such Transition
Bonds. There can be no assurance as to whether the Issuer will redeem any Series
of Transition Bonds or as to whether Transition Bondholders will be able to
receive an equally attractive rate of return upon reinvestment of the proceeds
resulting from any such redemption. See "Certain Weighted Average Life and Yield
Considerations" and "The Transition Bonds--Credit Enhancement" in this
Prospectus.
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PECO ENERGY COMPANY
Incorporated in Pennsylvania in 1929, PECO Energy provides retail electric
and gas service in Southeastern Pennsylvania and, through pilot programs,
natural gas service to areas in Maryland and New Jersey. PECO Energy also
engages in the wholesale marketing of electricity on a national basis and
participates in joint ventures which provide telecommunication services in the
Philadelphia area. See "The Seller and Servicer" in this Prospectus.
The electric and gas utility industries are both undergoing fundamental
restructuring. See "The Competition Act" in this Prospectus. In addition, in
1996, the Federal Energy Regulatory Commission issued Order No. 888 providing
for competition in wholesale generation by requiring that all public utilities
file non-discriminatory, open-access transmission tariffs.
PECO Energy files periodic reports with the SEC as required by the Exchange
Act. Reports filed with the SEC are available for inspection without charge at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of periodic reports and exhibits thereto
may be obtained at the above locations at prescribed rates. Information filed
with the SEC can also be inspected at the SEC site on the World Wide Web at
http://www.sec.gov.
THE COMPETITION ACT
General
The Competition Act was enacted in December 1996 and provides for the
restructuring of the electric utility industry in Pennsylvania. The Competition
Act requires the unbundling of electric services into separate generation,
transmission and distribution services with open retail competition for
generation services. 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.
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<PAGE>
Recovery of Stranded Costs
As a mechanism for utilities (including PECO Energy) to recover their
allowed stranded costs, the Competition Act provides for the imposition and
collection of nonbypassable charges on customer's bills called "competitive
transition charges." Competitive transition charges are assessed to and
collected from all retail customers who have been assigned stranded cost
responsibility and access the utilities' transmission and distribution system,
and may be collected over a maximum period of nine years, except as such period
may be extended by the PUC for good cause shown. As the competitive transition
charges are based on access to the utility's transmission and distribution
system, they will be assessed regardless of whether such customer purchases
electricity from the utility or an independent electric generation supplier. The
Competition Act provides, however, that the utility's right to collect
competitive transition charges is contingent on the continued operation at
reasonable availability levels of the assets for which the stranded costs were
awarded, except where continued operation is no longer cost efficient because of
the transition to a competitive market. See "Risk Factors--Unusual Nature of
Intangible Transition Property--Dependence on the Competition Act" in this
Prospectus.
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
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intangible transition charges. The Competition Act requires that such
adjustments be made on at least an annual basis on each anniversary of the
issuance of the qualified rate order and at additional intervals as specified
therein. The PUC must approve such adjustments within 90 days of each request
for adjustment.
Nonbypassability. The Competition Act provides that the competitive
transition charges and the intangible transition charges will be imposed on
customers accessing the utility's transmission and distribution system even if
those customers elect to purchase electricity from another supplier or if the
customer chooses to operate self-generation equipment in tandem with accessing
the utility's transmission and distribution system. The Competition Act further
provides that to the extent that the utility, or any assignee of intangible
transition property, assigns, sells, transfers or pledges any interest in
intangible transition property, the PUC authorizes the utility to contract with
such assignee for the utility (i) to continue to operate the system to provide
electric services to the utility's customers, (ii) to impose and collect the
applicable intangible transition charges for the benefit and account of the
assignee, (iii) to 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.
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Jurisdiction Over Disputes; Standing
Actions against customers for nonpayment of the intangible transition
charges may only be brought by the utility, its successor or any other entity
providing electric service to the customers. In addition, the Competition Act
grants to the PUC exclusive jurisdiction over all disputes arising out of the
obligations to impose and collect the intangible transition charges by a
utility, its successor or any other entity which provides electric service to a
customer.
PECO ENERGY'S RESTRUCTURING PLAN
General
In accordance with the provisions of the Competition Act, in April 1997,
PECO Energy filed with the PUC a comprehensive restructuring plan detailing its
proposal to implement full customer choice of electric generation suppliers.
PECO Energy's restructuring plan identified $7.5 billion of retail electric
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 $5.26 billion on a book value basis, over 8 1/2 years beginning in
1999.
On January 21, 1998, PECO Energy filed a complaint in the U.S. District
Court for the Eastern District of Pennsylvania (the "Eastern District Court")
seeking injunctive and monetary relief on the grounds that the provisions of the
PUC Restructuring Order relating to transmission rates were preempted by the
Federal Power Act and that implementation of the Competition Act by the PUC in
the Restructuring Order violated several provisions of the U.S. Constitution. On
January 22, 1998, PECO Energy also filed two Petitions for Review in the
Commonwealth Court of Pennsylvania (the "Commonwealth Court") appealing the PUC
Restructuring Order based upon errors of law, an arbitrary and capricious abuse
of administrative discretion and the deprivation of the due process of law. In
addition to PECO Energy's appeals, numerous other parties, including various
intervenors, filed appeals and cross-appeals of the PUC Restructuring Order. See
"Litigation" in this Prospectus.
On April 29, 1998, PECO Energy and all but one of the 25 parties who
challenged PECO Energy's Restructuring Plan filed the Settlement with the PUC.
The Settlement was approved by the PUC in the Final Order. The Final Order was
subsequently appealed by Indianapolis Power & Light Company ("IP&L"). Under the
terms of the Settlement and a stipulation between certain of the parties to the
litigation, all of the appeals and cross-appeals of the Restructuring Order, as
well as the IP&L appeal of the Final Order, will remain pending, but inactive,
until final resolution of a separate suit in which IP&L claims that the
provisions of the Competition Act that allow recovery of stranded costs violate
the Commerce Clause of the United States Constitution. See "Litigation."
The Settlement
Recovery of Stranded Costs. The Settlement authorizes PECO Energy to
recover $5.26 billion of Stranded Costs, together with a return of 10.75%
thereon. For good cause shown, the PUC authorized the recovery of Stranded Costs
over a 12-year transition period beginning January 1, 1999 and ending
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December 31, 2010. Recovery of Stranded Costs and the allowed return are to be
through competitive transition charges (with respect to PECO Energy, the
"Competitive Transition Charges") and, at PECO Energy's election to issue or
cause the issuance of Transition Bonds, Intangible Transition Charges, designed
to recover the $5.26 billion of Stranded Costs. The Competitive Transition
Charges will be established assuming annual growth in sales of 0.8% and will be
reconciled annually to actual sales.
The following table shows the estimated average levels of Competitive
Transition Charges and/or Intangible Transition Charges for the years 1999
through 2010, based on estimated 0.8% annual sales growth assumed in the
Settlement.
TABLE 1
Annual Stranded Cost
Amortization And Return
<TABLE>
<CAPTION>
Annual CTC Revenue Excluding gross receipts tax(3)
Year Sales and/or ITC(2) Total Return @ 10.75% Amortization
---- ---------- ------------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
MWh(1) $/kWh ($000) ($000) ($000)
1999 33,569,358 $0.0172 $551,988 $566,134 $(14,146)
2000 33,837,913 0.0192 621,102 564,222 56,879
2001 34,108,616 0.0251 818,457 547,777 270,680
2002 34,381,485 0.0251 825,004 516,869 308,135
2003 34,656,537 0.0247 818,352 482,401 335,951
2004 34,933,789 0.0243 811,540 444,798 366,742
2005 35,213,260 0.0240 807,933 403,555 404,378
2006 35,494,966 0.0266 902,623 353,070 549,553
2007 35,778,925 0.0266 909,844 290,627 619,217
2008 36,065,157 0.0266 917,123 220,312 696,811
2009 36,353,678 0.0266 924,459 141,229 783,231
2010 36,644,507 0.0266 931,855 52,381 879,474
</TABLE>
- --------------
(1) Subject to reconciliation of actual sales and collections. Under the
Settlement, sales are estimated to increase 0.8 percent per year.
(2) Figures result in the recovery of $5.26 billion of Stranded Costs plus the
allowed return from the estimated number of Customers and at projected
usage levels in the period during which the Competitive Transition Charges
and/or Intangible Transition Charges will be collected, taking into account
the discounts from the current total bundled bill of Customers, based on
the discounts to be provided in accordance with the terms of the
Restructuring Plan. Both the Competitive Transition Charges and the
Intangible Transition Charges are subject to adjustment.
(3) The utilities gross receipts tax is imposed on public utilities (including
electric utilities) organized under the laws of, or doing business in, the
Commonwealth and is currently levied at the rate of 5% on each dollar of
the utility's gross receipts arising from certain sales of energy.
Authorization to Securitize up to $4 Billion. Under the Settlement, PECO
Energy may securitize up to $4 billion of its $5.26 billion of Stranded Cost
recovery through the issuance of transition bonds.
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The Intangible Transition Charges associated with the issuance of transition
bonds must terminate no later than December 31, 2010. The rate reductions and
rate caps described in Table 2 included as part of the Settlement anticipate the
benefits of the securitization, and no adjustment in PECO Energy's base rates
will be made upon issuance of any transition bonds. After January 1, 1999,
Competitive Transition Charges (or PECO Energy's distribution rates) will be
reduced by the amount of Intangible Transition Charges. As part of its approval
of the Settlement, the PUC issued the QRO providing for securitization. See "The
QRO and the Intangible Transition Charges" in this Prospectus.
Unbundling of Rates and Rate Reductions and Rate Caps. The Settlement
requires PECO Energy to unbundle its retail electric rates on January 1, 1999
into the following components: (i) distribution and transmission charges, (ii)
Competitive Transition Charges and, if applicable, Intangible Transition Charges
and (iii) a shopping credit for generation, which is the maximum amount PECO
Energy can charge Customers who do not or cannot choose to purchase electricity
from alternate electric generation suppliers (referred to as serving as the
"provider of last resort").
The Settlement requires PECO Energy to reduce rates during 1999 and 2000 by
8% and 6%, respectively, from rates in existence on December 31, 1996. The
Settlement also extends the rate caps on generation rates at higher levels than
required by the Competition Act, until December 1, 2010 and extends rate caps on
transmission and distribution rates until June 30, 2005. PECO Energy's unbundled
rates, rate reductions and rate caps are reflected in the schedule of
system-wide average rates included in the Settlement and shown in Table 2 below.
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TABLE 2
Schedule of System-Wide Average Rates (per kilowatt-hour ("kWh"))(1)
<TABLE>
<CAPTION>
T&D CTC Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) and/or ITC(4) Credit Rate Cap
- -------------- --------------- ------------ ----------- ------------- ---------- ----------
(1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5)
<S> <C> <C> <C> <C> <C> <C>
$/kWh $/kWh $/kWh $/kWh $/kWh $/kWh
January 1, 1999 $0.0045 $0.0253 $0.0298 $0.0172 $0.0446 $0.0618
January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638
January 1, 2001 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698
January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698
January 1, 2005 0.0045(5) 0.0253(5) 0.0298(5) 0.0240 0.0458 0.0698
January 1, 2006 N/A N/A N/A 0.0266 0.0485 0.0751
January 1, 2007 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2008 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2009 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2010 N/A N/A N/A 0.0266 0.0535 0.0801
</TABLE>
(1) All prices reflect average retail billing for all Rate Classes (including
gross receipts tax). The average prices as presented in this table reflect
the profile of service contained in PECO Energy's proof of revenue set
forth in the Restructuring Plan.
(2) The transmission prices listed are for unbundled rates only. The PUC does
not regulate the rates for transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of the
Competition Act will be extended until June 30, 2005.
(4) Figures result in the recovery of $5.26 billion of Stranded Costs plus the
allowed return on such costs from the estimated number of Customers and at
projected usage levels in the period during which the Competitive
Transition Charges and/or Intangible Transition Charges will be collected,
taking into account the discounts from the current total bundled bill of
Customers, based on the discounts to be provided in accordance with the
terms of the Restructuring Plan. Both the Competitive Transition Charges
and the Intangible Transition Charges are subject to adjustment.
(5) Effective until June 30, 2005.
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The Competition Act authorizes electric distribution companies to recover
changes in their state tax liability resulting from the introduction of
competition in the electric market through adjustments in the rates charged to
customers, which in certain circumstances set forth in the regulations adopted
by the PUC may result in rates exceeding the applicable rate cap. PECO Energy
may apply for such recovery of state tax liability changes in accordance with
the procedures outlined in the PUC's regulations if PECO Energy in fact
experiences adverse consequences to its state tax liability as contemplated in
the Competition Act.
Competitive Metering and Billing. As provided in the Restructuring Plan,
the Settlement and the Final Order of the PUC, on January 1, 1999, PECO Energy
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--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 residential and commercial
customers on the basis of the number of customers and for large commercial
customers on the basis of peak load. Customers assigned to a provider of last
resort, other than PECO Energy, will be counted as customers receiving service
from an alternate electric generation supplier.
Provider of Last Resort
Under the Restructuring Plan, PECO Energy will act as a provider of last
resort for all retail electric customers in its retail electric service
territory who do not choose or cannot choose to purchase power from alternative
suppliers through December 31, 2010, subject to certain terms, conditions and
qualifications. On January 1, 2001, 20% of all of PECO Energy's residential
customers, determined by random selection, including low-income and
inability-to-pay customers, and without regard to whether such customers are
obtaining generation service from an electric generation supplier, will be
assigned to a provider of last resort other than PECO Energy (the service
provided by 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
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Competitive Default Service will be rebid annually, unless an alternative
bidding term is approved by the PUC. If, 30 days prior to the annual bid, the
number of residential customers served by Competitive Default Service has fallen
below 17%, a further random selection of customers will be assigned to
Competitive Default Service to restore the number of customers to the 20% level.
The further random selection will be made from the customers not already
assigned to Competitive Default Service and customers served by electric
generation suppliers other than PECO Energy. The PUC is in the process of
developing qualifications for an electric generation supplier to bid on
Competitive Default Service, including creditworthiness and an increased bond
amount. These issues are being handled through a PUC- sponsored collaborative
process, that includes PECO Energy, customer advocates and electric generation
suppliers. This collaborative effort is currently scheduled to result in
proposed Competitive Default Service rules by the end of February, 1999. The
proposed rules will then be submitted to the PUC for its approval.
Other Provisions. The Settlement also provides for flexible generation
service pricing for residential customers served by Competitive Default Service,
authorization of PECO Energy to transfer its generation assets to a separate
subsidiary, inclusion under the capped transmission and distribution rates of
.01 cent per kilowatt-hour for a sustainable energy and economic development
fund and expansion of PECO Energy's program for low-income customers.
THE QRO AND THE INTANGIBLE TRANSITION CHARGES
The QRO
As part of its approval of the Settlement, the PUC issued the QRO on May
14, 1998. In the QRO, the PUC determined that PECO Energy's recovery of Stranded
Costs as set forth in the Settlement is just and reasonable and in the public
interest and that securitization of up to $4 billion of its $5.26 billion of
Stranded Costs as set forth in the Settlement is just and reasonable and in the
public interest.
The QRO provides that, to the extent that PECO Energy, or any assignee,
assigns, sells, transfers, or pledges any interest in Intangible Transition
Property created by the QRO, the PUC authorizes PECO Energy to contract, for a
specified fee, with such assignee for PECO Energy to continue to operate the
system to provide electric services to PECO Energy's customers, to impose and
collect the applicable Intangible Transition Charges for the benefit and account
of the assignee, to make periodic adjustments of Intangible Transition Charges
contemplated under the QRO, and to account for and remit the applicable
Intangible Transition Charges to or for the account of the assignee free of any
charge, deduction or surcharge of any kind (other than the specified contractual
fee referred to above). The QRO also authorizes PECO Energy to contract with the
issuers of transition bonds and an alternative party, which may be a trustee,
that the alternative party will replace PECO Energy under its contract with such
issuers and perform the obligations of PECO Energy contemplated in the QRO. The
obligations of PECO Energy (i) shall be binding upon PECO Energy, its successors
and assigns and (ii) shall be required by the PUC to be undertaken and performed
by PECO Energy and any other entity which provides transmission and distribution
services to a person who was a Customer of PECO Energy located within PECO
Energy's certificated territory on January 1, 1997, or who became a Customer of
electric services within such territory after January 1, 1997, and is still
located within such territory, as a condition to providing service to such
Customer or municipal entity providing such services in place of PECO Energy by
PECO Energy or other entity.
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Authorization of Issuance of Transition Bonds. In the QRO, the PUC
authorized the issuance of transition bonds in an aggregate principal amount not
to exceed $4 billion. PECO Energy, or any assignee of PECO Energy to whom
Intangible Transition Property is sold, may issue and sell, in reliance on the
QRO, one or more series of transition bonds, each series in one or more classes,
secured by Intangible Transition Property, provided that the final maturity of
any series of transition bonds may not be later than ten years from the date of
issuance and in no event after December 31, 2010. PECO Energy, or its assignee,
is also authorized to refinance transition bonds in a face amount not to exceed
the unamortized principal thereof.
The QRO provides that PECO Energy retains the sole discretion whether to
issue or cause the issuance of transition bonds. Within 120 days after each
issuance of transition bonds, PECO Energy is required to file with the PUC a
description of the financing structure of the transition bonds, including the
principal amount, the price at which each series or class of transition bonds
was sold, payment schedules, interest rate and other financing costs and the
final plans for PECO Energy's use of the proceeds of such offering.
Notwithstanding such filing, the final structure of each issuance of transition
bonds is not subject to change or revision by the PUC after the date of such
issuance.
Authorization to Impose Intangible Transition Charges. Pursuant to the QRO,
the PUC determined that it was just and reasonable and in the public interest
for PECO Energy to recover from its customers, through Intangible Transition
Charges, $4 billion of its $5.26 billion of Stranded Costs. Under the QRO, the
PUC authorized PECO Energy to impose on and collect from Customers, either
directly or through bills rendered by electric generation suppliers, Intangible
Transition Charges in an amount sufficient to recover Qualified Transition
Expenses. In accordance with the Competition Act, the PUC found that good cause
had been shown to extend the payment period for imposing Intangible Transition
Charges beyond the ten-year period specified in the Competition Act to December
31, 2010.
In accordance with the Settlement, the rate reductions included as part of
the Settlement anticipated the benefits of securitization, and no rate
adjustment will be made upon issuance of any transition bonds. After January 1,
1999, Competitive Transition Charges (or PECO Energy's distribution rates) will
be reduced by the amount of Intangible Transition Charges associated with the
issuance of Transition Bonds and transition bonds issued by Other Issuers, if
any.
In the QRO, the PUC approves the allocation and methodology for imposing
Competitive Transition Charges and Intangible Transition Charges on Customers.
The QRO also authorizes PECO Energy to make annual adjustments to Intangible
Transition Charges if collections of such Intangible Transition Charges fall
below or exceed the amount necessary to ensure the receipt by the transition
bond trustee of revenues sufficient to fully recover the Qualified Transition
Expenses, provided, however, that such adjustments during the final calendar
year during which any series of transition bonds are outstanding may be
quarterly or monthly if necessary to ensure full recovery of Intangible
Transition Charges. The QRO states that the revenues received by the transition
bond trustee through Intangible Transition Charges shall be determined to be
sufficient for the foregoing purpose if, and only if, the ITC Collections so
received are sufficient to amortize the transition bonds, fund any reserves and
to pay premiums, if any, thereon (after payment of accrued interest, redemption
premiums, if any, related credit enhancement, servicing fees and other related
costs and expenses) in accordance with the terms thereof. For each annual
adjustment, the QRO directs PECO Energy to file with the PUC (i) an accounting
of Intangible Transition Charges received by the transition bond trustee for the
previous annual period; (ii) a statement of any over-or-under receipts; and
(iii) the charge or credit to be added to Intangible Transition Charges to
ensure that the Intangible Transition Charges received by the transition bond
trustee will be sufficient to amortize the Qualified Transition Expenses in
accordance with the amortization schedule for the transition bonds
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and the corresponding reduction or increase in Competitive Transition Charges or
PECO Energy's distribution rates, as the case may be. The QRO provides that, in
accordance with the Competition Act, the PUC shall approve all annual
adjustments within 90 days of PECO Energy's annual adjustment filing.
Authorization to Sell Intangible Transition Property. Under the QRO, the
PUC concluded that it is in the public interest, and authorized PECO Energy and
any assignee of PECO Energy, to assign, sell, transfer or pledge Intangible
Transition Property in an amount sufficient to recover all of PECO Energy's
Qualified Transition Expenses and all revenues, collections, claims, payments or
money or proceeds arising from Intangible Transition Charges. The PUC directed
PECO Energy to use the proceeds from the sale of Intangible Transition Property
to reduce Stranded Costs and related capitalization.
To the extent PECO Energy or its assignee assigns, sells, transfers or
pledges an interest in the Intangible Transition Property, the PUC authorized
PECO Energy to contract, for a specified fee, with such assignee for PECO Energy
to continue to operate its transmission and distribution system, to provide
electric service to Customers, to impose and collect Intangible Transition
Charges for the benefit and account of the assignee, to make periodic
adjustments of Intangible Transition Charges and to account for and remit the
Intangible Transition Charges to or for the account of the assignee free of any
charge, deduction or surcharge or any kind (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
generation-related charges borne by each Rate Classes through current electric
rates approved by the PUC. The Intangible Transition Charges will be calculated
by determining the total amount of Intangible Transition Charges required to be
billed to each Rate Class in order to generate ITC Collections sufficient to
ensure timely recovery of Qualified Transition Expenses among affected Rate
Classes. This amount is then expressed as a percentage of total projected
revenue per Rate Class. This percentage is applied to each Customer's total bill
(except in the case of Customers participating in the pilot program for
competition, where the percentage will be applied to the non-generation portion
of the bill) within the applicable Rate Class. The resulting dollar amount on a
Customer's bill after the application of such percentage is the Intangible
Transition Charge payable by such Customer. To the extent that total revenues
are affected by changes in usage, number of Customers, rate of delinquencies and
write-offs or
52
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other factors, ITC Collections will vary. Variations in ITC Collections will be
addressed by recalculating the percentages applied to Customers' bills on each
Calculation Date. See Tables 7, 8, 9 and 10 under "Description of the Seller's
Business" in the related Prospectus Supplement and "--The ITC Adjustment
Process" below. Once Customer bills are unbundled beginning January 1, 1999 and
charges for generation, transmission and distribution and other services are
separately identified, the Intangible Transition Charge percentage will be
applied to total projected revenue per Rate Class, exclusive of transmission,
energy and capacity and fixed distribution charges. This will be reflected in
the calculation of the Intangible Transition Charge percentage.
Initial Billing and Termination of ITC Collections. Intangible Transition
Charges for each Series of Transition Bonds will be assessed on all Customer
bills where all current charges are for services provided after the relevant
Series Issuance Date. For instance, if a particular Series Issuance Date is
August 15, bills that include current charges for services provided before
August 15 (i.e. for a billing periodbeginning prior to August 15) will not be
assessed Intangible Transition Charges with respect to that Series. Upon each
adjustment of Intangible Transition Charges or issuance of additional Series of
Transition Bonds, the adjusted Intangible Transition Charges will be assessed in
the same manner. The imposition of Intangible Transition Charges as a result of
the issuance of Transition Bonds will result in a reduction in any Competitive
Transition Charges then in effect in an amount equal to such Intangible
Transition Charges, such that the total amount billed to Customers with respect
to PECO Energy's Stranded Costs will remain unchanged.
The Servicer (or electric generation supplier or other third party biller)
will continue to bill the Intangible Transition Charges, and the Servicer will
make ITC Collections from Customers and electric generation suppliers and other
third parties with respect to each outstanding Series of Transition Bonds until
the Series Rated Final Payment Date or Class Rated Final Payment 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 Rated Final Payment Date or
Class Rated Final Payment Date, as applicable, relating to the Series or Class,
as applicable, of Transition Bonds having the latest Series Rated Final Payment
Date or Class Rated Final Payment Date, as applicable, the Servicer will cease
assessing the Intangible Transition Charges. However, the Servicer (or electric
generation supplier or other third party biller) will continue to collect the
Intangible Transition Charges previously billed to Customers. To the extent that
ITC Collections exceed the amount necessary to amortize fully all Transition
Bonds and pay interest thereon and certain fees and expenses, such ITC
Collections will be retained by the Issuer.
The ITC Adjustment Process. In order to enhance the likelihood that the
actual ITC Collections allocated to the Issuer pursuant to the Master Servicing
Agreement are neither more nor less than the amount necessary to amortize the
Transition Bonds of each Series in accordance with the Expected Amortization
Schedule therefor and to fund the Overcollateralization Subaccount to the
Calculated Overcollateralization Level, the Master Servicing Agreement requires
the Servicer to seek, and the Competition Act and the QRO require the PUC to
approve, annual adjustments to the Intangible Transition Charges based on actual
ITC Collections so allocated to the Issuer and updated assumptions by the
Servicer as to projected future usage of electricity by Customers, expected
delinquencies and write-offs, and future expenses relating to Intangible
Transition Property and the Transition Bonds. 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
53
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herein. In addition, the QRO provides that adjustments during the final calendar
year of ITC Collections for any Series of Transition Bonds may be made quarterly
or monthly. If at the time of issuance of a Series, the Servicer determines such
additional adjustments are required, the dates for such adjustments will be
specified in the Prospectus Supplement for such Series. Such adjustments will
cease with respect to a Series on the final Adjustment Date specified in the
related Prospectus Supplement for such Series.
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 the Payment
Date closest to the next Adjustment Date or the Expected Final Amortization
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." The Competition Act and the QRO require
the PUC to approve such adjustments within 90 days of the Calculation Date. The
adjustments to the Intangible Transition Charges are expected to be implemented
on each Adjustment Date.
Competitive Billing
The Restructuring Plan and subsequent orders of the PUC give customers who
purchase electric generation from electric generation suppliers the opportunity
to choose from several billing source options as of January 1, 1999:
consolidated billing from the utility, consolidated billing from the electric
generation supplier, or 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."
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
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<PAGE>
requirements at any time in the future. Further, the parties to the Settlement
agreed to review and, as appropriate, to recommend changes to PUC regulations
and procedures in order to facilitate the efficient and full recovery of
revenues from Customers, while at the same time protecting Customers. On July
17, 1998, PECO Energy filed a Petition for Reconsideration requesting that the
PUC reconsider and reverse its decision to allow third parties (other than a
customer's electric distribution company or electric generation supplier) to
provide metering and billing services and, if the PUC rejected that request, to
give PECO Energy more time to develop standards, including operational
standards, for third party entities. On August 27, 1998, a public meeting was
held regarding this matter. At a public meeting held 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 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 demanddata 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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LITIGATION
IP&L filed an action 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. Whether the United States Supreme Court will grant
review and whether, if it does, it will invalidate the Competition Act under the
Commerce Clause cannot be predicted with certainty.
During the period from January 1998 through March 1998, appeals and
cross-appeals were filed at the Commonwealth Court against the Restructuring
Order by PECO Energy, IP&L and numerous other parties. On April 29, 1998, PECO
Energy and all of the parties who had filed appeals and cross-appeals, with the
exception of IP&L, filed the Settlement with the PUC. The Settlement was
approved by the PUC through the Final Order. Under the terms of the Settlement,
PECO Energy and all signatories to the Settlement requested, and were granted, a
general continuance of their appeals and cross-appeals of the Restructuring
Order until such time as the Final Order is no longer subject to administrative
or judicial challenge. In June, 1998, IP&L withdrew its appeal to the
Restructuring Order and filed an appeal at the Commonwealth Court challenging
the Final Order. The IP&L appeal of the Final Order is identical in scope to its
Commerce Clause arguments described above. The IP&L appeal constitutes a
judicial challenge to the Final Order and, under the terms of the Settlement,
the appeals of PECO Energy and the other signatories to the Settlement will
remain pending, but inactive, until resolution of the IP&L appeal. PECO Energy
and IP&L entered into a stipulation that the final outcome of the IP&L Commerce
Clause case will be controlling for the IP&L appeal of the Final Order. As a
result, all appeals and cross-appeals to the PUC Restructuring Order and Final
Order will remain pending, but inactive, until final resolution of the IP&L
action challenging the Competition Act described above.
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.
Subject to the limitations described in "The Sale Agreement--Seller
Representations and Warranties," the Seller will be obligated to pay Liquidated
Damages and the Issuer will be required to redeem the Transition Bonds in the
event the U.S. Supreme Court grants certiorari in the IP&L case and determines,
in the IP&L case or in any other cases that the United States Supreme Court or
any other court accepts and decides, that, based on laws in effect on the date
any Intangible Transition Property is sold, the Competition Act, the QRO, the
Final Order, the Intangible Transition Property or the Intangible Transition
Charges were invalid or unenforceable, in whole or in part, and this decision
results
56
<PAGE>
in a material breach of the Seller's representations in the Sale Agreement. See
"Risk Factors--Unusual Nature of Intangible Transition Property--Limited
Availability of Liquidated Damages" and "The Sale Agreement" in this Prospectus.
THE SELLER AND SERVICER
PECO Energy Company
Retail Electric Service Territory
PECO Energy's retail electric service territory covers 1,972 square miles
with a population of approximately 3.6 million, including approximately 1.6
million in the City of Philadelphia. Approximately 94% of the retail service
area and 64% of retail kilowatt-hour electricity sales are in the suburbs around
Philadelphia, and 6% of the retail service area and 36% of such sales are in the
City of Philadelphia. This retail electric service territory includes all of the
City of Philadelphia and Delaware County, substantially all of Chester and
Montgomery Counties and the southern portion of Bucks County. This territory is
primarily urban and suburban, with a service-based economy.
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. The board of directors of the holding company may
determine, in its discretion, how PECO Energy's business will be disaggregated.
Such disaggregation, if it occurs, may involve the formation of additional
subsidiaries and the transfer of certain of PECO Energy's assets and liabilities
to such subsidiaries.
Customers and Operating Revenues
PECO Energy's Customer base is divided into three categories: Residential,
Small Commercial and Industrial, and Large Commercial and Industrial. Rate
Classes are created by the PUC and are subject to change. Such changes will be
reflected in any Adjustment Request filed with the PUC by the Servicer. The
current Rate Classes have remained unchanged for eight years. The current Rate
Classes are:
Residential Rate Classes:
Rate R - Residential Service: Residential Service is available in the
entire 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.
57
<PAGE>
Small Commercial and Industrial Rate Classes:
Rate GS - General Service: Electric delivery service available through a
single metering installation for offices, professional, commercial or
industrial establishments, governmental agencies, and other applications
outside the scope of the Residential Service rate schedules.
Rate POL - Private Outdoor Lighting: Available in conjunction with Rate GS
for the outdoor lighting of sidewalks, driveways, yards, lots and similar
places, outside the scope of service under Rate SL-P, SL-S and SL-E.
Rate SL-P - Street Lighting in the City of Philadelphia: Available only to
a governmental agency, municipal, state or federal, for outside lighting of
streets, highways, bridges, parks or similar places, including directional
highway signs at locations where other outdoor lighting service is
established hereunder, for the safety and convenience of the public within
the City of Philadelphia.
Rate SL-S - Street Lighting - Suburban Divisions: Available for the outdoor
lighting of streets, highways, bridges, parks and similar places for the
safety and convenience of the public in Suburban Divisions.
Rate SL-E - Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor
lighting of streets, highways, bridges, parks or similar places, including
directional highway signs at locations where outdoor lighting service is
established hereunder for the safety and convenience of the public where
all of the utilization facilities are installed, owned and maintained by a
governmental agency.
Rate TL - Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI - Borderline Interchange: Available under reciprocal agreements to
neighboring electric utilities for resale in their adjacent territory. No
Intangible Transition Charges will be imposed on Rate BLI Customers.
Large Commercial and Industrial Rate Classes:
Rate PD - Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's
distribution system where the Customer installs, owns and maintains any
transforming, switching and other receiving equipment required.
Rate HT - High-Tension Power: Untransformed electric delivery service from
PECO Energy's standard high-tension lines, where the Customer installs,
owns and maintains, any transforming, switching and other receiving
equipment required. Excludes certain special contracts.
Rate EP - Electric Propulsion: This rate is available only to the National
Rail Passenger Corporation and to the Southeastern Pennsylvania
Transportation Authority for untransformed electric delivery service from
PECO Energy's standard high-tension lines, where the Customer 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.
58
<PAGE>
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
-----------------------------------------------------------------------------------------------------------
Average Average Average Average
Number of % of Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1) 1,164,470 79.7% 1,167,866 79.6% 1,169,654 79.5% 1,177,996 79.4%
R-H 152,393 10.4% 153,513 10.4% 154,794 10.5% 155,865 10.5%
OP(2) 99,258 6.8% 98,923 6.7% 98,781 6.7% 98,417 6.6%
Total (Excludes OP) 1,316,863 90.1% 1,321,379 90.0% 1,324,448 90.0% 1,333,861 89.9%
Small Commercial
and Industrial
GS 140,241 9.6% 141,653 9.7% 142,431 9.7% 144,142 9.7%
POL(3) 3,313 .2% 3,291 .2% 3,173 .2% 3,067 .2%
SL-P 9 .0006% 9 .0006% 10 .0006% 10 .0006%
SL-S 395 .03% 391 .03% 442 .03% 408 .03%
SL-E 285 .02% 325 .02% 319 .02% 396 .03%
TL 215 .01% 215 .01% 216 .01% 171 .01%
BLI(4) 3 .0002% 12 .0008% 12 .0008% 12 .0008%
Total (Excludes POL) 141,148 9.66% 142,605 9.72% 143,430 9.75% 145,139 9.79%
Large Commercial
and Industrial
PD 1,213 .08% 1,130 .08% 1,047 .07% 1,231 .08%
HT 2,314 .2% 2,264 .2% 2,252 .2% 2,077 .2%
EP 3 .0002% 3 .0002% 3 .0002% 3 .0002%
Total 3,530 .3% 3,397 .3% 3,302 .3% 3,311 .3%
Total (Excludes OP and
POL) 1,461,541 100% 1,467,381 100% 1,471,180 100% 1,482,311 100%
<CAPTION>
-----------------------
12/31/98
-----------------------
Average
Number of % of
Customers Total
--------- -----
<S> <C> <C>
Residential
R(1) 1,182,305 79.5%
R-H 156,424 10.5%
OP(2) 97,891 6.6%
Total (Excludes OP) 1,338,729 90.0%
Small Commercial
and Industrial
GS 144,726 9.7%
POL(3) 3,082 .2%
SL-P 10 .0007%
SL-S 677 .05%
SL-E 69 .005%
TL 216 .01%
BLI(4) 12 .0008%
Total (Excludes POL) 145,710 9.77%
Large Commercial
and Industrial
PD 1,210 .09%
HT 2,055 .14%
EP 3 .0002%
Total 3,268 .23%
Total (Excludes OP and
POL) 1,487,707 100%
</TABLE>
- --------------------
1 For a description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
2 Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use Residence Electric Delivery Service.
3 Rate POL is available in conjunction with Small Commercial and Industrial
Rate Class GS.
4 No Intangible Transition Charges will be imposed on Rate BLI Customers.
59
<PAGE>
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 22.5% 7,669,938 22.8% 7,474,224 22.7% 7,548,861 22.8%
R-H 2,653,978 8.1% 2,625,621 7.8% 2,807,279 8.5% 2,600,231 7.9%
OP(2) 378,298 1.2% 364,856 1.1% 375,823 1.1% 365,605 1.1%
Total 10,412,403 31.8% 10,660,415 31.7% 10,657,327 32.3% 10,514,697 31.8%
Small Commercial
and Industrial
GS 5,945,233 18.1% 6,213,330 18.4% 6,400,620 19.4% 6,680,070 20.2%
POL(3) 9,050 .03% 9,160 .03% 9,002 .03% 8,721 .03%
SL-P 90,717 .3% 91,689 .3% 88,820 .3% 81,474 .2%
SL-S 20,965 .06% 1,938 .006% 16,908 .05% 15,700 .05%
SL-E 42,430 .1% 44,644 .1% 47,017 .1% 44,367 .1%
TL 38,457 .1% 39,336 .1% 39,681 .1% 39,461 .1%
BLI(4) 70 .0002% 155 .0005% 243 .0007% 236 .0007%
Total 6,146,922 18.8% 6,400,252 19.1% 6,602,289 20.1% 6,870,029 20.9%
Large Commercial
and Industrial
PD 1,298,117 3.7% 1,213,554 3.6% 1,130,530 3.4% 1,069,260 3.2%
HT 14,324,131 43.7% 14,655,439 43.6% 13,845,485 42.0% 13,922,827 42.1%
EP 521,951 1.6% 594,543 1.8% 638,800 1.9% 594,319 1.8%
Total 16,144,199 49.3% 16,463,535 49.0% 15,614,815 47.4% 15,586,407 47.2%
Total 32,703,524 100% 33,524,202 100% 32,874,431 100% 32,971,133 100%
<CAPTION>
-----------------------
12/31/98
-----------------------
% of
MWh Total
--- -----
<S> <C> <C>
Residential
R(1) 7,862,151 23.2%
R-H 2,408,645 7.1%
OP(2) 352,107 1.0%
Total 10,622,903 31.3%
Small Commercial
and Industrial
GS 6,879,100 20.3%
POL(3) 8,398 .03%
SL-P 86,998 .3%
SL-S 52,643 .15%
SL-E 13,953 .04%
TL 36,657 .1%
BLI(4) 215 .0006%
Total 7,077,964 20.9%
Large Commercial
and Industrial
PD 1,034,516 3.0%
HT 14,643,800 43.2%
EP 549,539 1.6%
Total 16,227,855 47.8%
Total 33,928,722 100%
</TABLE>
- --------------------
1 For description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
2 Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use 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.
60
<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 32.1% 1,066,437 32.4% 1,066,519 32.3% 1,066,245 32.3%
R-H 265,904 8.2% 264,027 8.0% 277,760 8.4% 265,781 8.1%
OP(2) 25,321 .8% 25,134 .8% 25,879 .8% 25,425 .8%
Total 1,328,634 41.1% 1,355,598 41.2% 1,370,158 41.5% 1,357,451 41.2%
Small Commercial
and Industrial
GS 690,802 21.4% 719,759 21.9% 746,706 22.6% 776,938 23.6%
POL(3) 1,841 .1% 1,887 .1% 1,855 .1% 1,805 .1%
SL-P 14,407 .4% 14,596 .4% 13,685 .4% 12,916 .4%
SL-S 6,648 .2% 6,148 .2% 5,116 .2% 4,236 .1%
SL-E 8,512 .3% 9,032 .3% 9,494 .3% 8,777 .3%
TL 4,327 .1% 4,480 .1% 4,520 .1% 4,375 .1%
BLI(4) 10 .0003% 26 .0008% 37 .0011% 36 .0011%
Total 726,547 22.5% 755,930 23.0% 781,413 23.7% 809,084 24.6%
Large Commercial
and Industrial
PD 122,102 3.8% 115,491 3.5% 108,056 3.3% 101,513 3.1%
HT 1,009,882 31.2% 1,012,462 30.8% 990,251 30.0% 975,862 29.6%
EP 41,919 1.3% 45,234 1.4% 46,979 1.4% 46,994 1.4%
Total 1,173,903 36.3% 1,173,187 35.7% 1,145,286 34.7% 1,124,369 34.1%
Total 3,229,084 100% 3,284,715 100% 3,296,857 100% 3,290,904 100%
<CAPTION>
----------------------
12/31/98
----------------------
% of
$(000s) Total
--------- -----
<S> <C> <C>
Residential
R(1) 1,097,242 33.2%
R-H 255,891 7.7%
OP(2) 24,064 .7%
Total 1,377,197 41.6%
Small Commercial
and Industrial
GS 781,936 23.6%
POL(3) 1,725 .1%
SL-P 13,622 .4%
SL-S 11,312 .3%
SL-E 2,677 .1%
TL 4,026 .1%
BLI(4) 33 .001%
Total 815,330 24.7%
Large Commercial
and Industrial
PD 96,466 2.9%
HT 970,432 29.3%
EP 45,118 1.4%
Total 1,112,016 33.6%
Total 3,304,543 100%
</TABLE>
- --------------------
1 For description of the meanings of Rate Class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this Prospectus.
2 Rate OP is available in conjunction with Residential Rate Classes R and R-H
and with Small Commercial and Industrial Rate Class GS for those Customers
in Rate Class GS who use 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
Customer represented approximately 9% of PECO Energy's retail electric revenues,
and the 10 largest Customers represented approximately 12.2% 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.
61
<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>
62
<PAGE>
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 1.97% 2.10% 2.09% 2.18% 2.27%
Category)
</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 improved during 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.
Forecasting Customers and Usage
Accurate projections of the number of Customers, usage and retail electric
revenue are important in setting and maintaining the Intangible Transition
Charges or any adjusted Intangible Transition Charges at levels sufficient to
recover interest on and principal of the Transition Bonds, to maintain the
Calculated Overcollateralization Level, and to pay the Bond Trustee's fee, the
Issuer Trustee'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.
63
<PAGE>
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. 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. Regional Financial
Associates, 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 increase/decrease in output,
hours worked, space and potential cogeneration. The data is converted into
kilowatt-hours, and the net increment is added to the previous year's data to
derive the forecast. 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.
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, and weather (temperature and rainfall) and
billing day data.
64
<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 .09% because of a statistical rounding error. 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 (by Customer Category) 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.
65
<PAGE>
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%) .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%) .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>
66
<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 2.0% 2.7% 0.7% (0.1%) 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 (0.7%) (7.8%) 1.5% (6.4%) (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 4.5% (1.7%) 1.8% (1.3%) .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 (5.1%) (4.6%) (2.3%) (8.6%) (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 (1.2%) (0.2%) (3.8%) (3.6%) 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 (28.7%) (13.6%) (2.9%) (11.0%) (12.26%)
1998 TOTALS:
Forecasted 33,485,914
Actual 33,928,509
Variance 1.32%
</TABLE>
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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 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
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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-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
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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;
(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;
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(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
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 and Independent Trustee are the same
entity) or five trustees (if the Delaware Trustee and Independent Trustee are
different entities) appointed from time to time by PECO Energy or, in the event
PECO Energy transfers its interest in the Trust, by the new owner or owners. The
Issuer will at all times have at least one trustee, which, in the case of a
natural person, will be a person who is a resident of the State of Delaware, or
in all other cases, has its principal place of business in the State of Delaware
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(the "Delaware Trustee"). In addition, the Issuer will always have at least one
trustee (the "Independent Trustee") that is not and has not been for at least
three years from the date of his or her or its appointment (i) a direct or
indirect legal or beneficial owner of the Issuer or PECO Energy or any of their
respective affiliates, (ii) a relative, supplier, employee, officer, director,
manager, contractor or material creditor of the Issuer or PECO Energy or any of
their respective affiliates, or (iii) a person who controls PECO
Energy or its affiliates. The Delaware Trustee and the Independent Trustee may,
and will initially, be the same person or entity and is referred to in this
Prospectus as the "Issuer Trustee." First Union Trust Company, National
Association of Wilmington, Delaware will serve as the initial Issuer Trustee and
as the Delaware Trustee and the Independent Trustee. The remaining trustees are
representatives of PECO Energy and are referred to as the "Beneficiary
Trustees." The Issuer Trustee and the Beneficiary Trustees are collectively
referred to as the "Trustees."
The Issuer Trustee and the Beneficiary Trustees have served since the
establishment of the Issuer. The Trustees will devote such time as is necessary
to the affairs of the Issuer. The following two people are Beneficiary Trustees
as of the date of this Prospectus:
Name Age Title
---- --- -----
Diana Moy Kelly 44 Beneficiary Trustee
George R. Shicora 51 Beneficiary Trustee
Diana Moy Kelly is a Beneficiary Trustee of the Issuer. Ms. Moy Kelly has
served as Assistant Treasurer of PECO Energy since she joined PECO Energy in
1995. From 1984 to 1994, she served as Vice President - Treasurer of Tokai
Financial Services, Inc.
George R. Shicora is a Beneficiary Trustee of the Issuer. Mr. Shicora has
served as Assistant Treasurer of PECO Energy since 1995 and has held various
positions at PECO Energy since 1968.
The Issuer has not paid any compensation to any 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
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date of its creation or sooner, at the option and expense, and upon written
instruction, of PECO Energy, but in no event before payment in full of all
Series of Transition Bonds.
The Issuer has no intent to file, and PECO Energy has advised the Issuer
that it has no intent to cause the filing of, a voluntary petition for relief
under the Bankruptcy Code with respect to the Issuer so long as the Issuer is
solvent and does not reasonably foresee becoming insolvent.
The Trust Agreement requires the Issuer to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of PECO Energy, other affiliates of PECO Energy, the Trustees or any other
person, and that, except for federal income tax purposes, it is not a division
of PECO Energy or any of its affiliated entities or any other person.
The principal place of business of the Issuer is c/o First Union Trust
Company, National Association, One Rodney Square, 920 King Street, 1st Floor,
Wilmington, Delaware 19801 and its telephone number is 302-888-7532.
USE OF PROCEEDS
The Issuer will use the proceeds of the issuance of the Transition Bonds to
pay certain expenses of issuance and to purchase the Transferred Intangible
Transition Property from PECO Energy. PECO Energy proposes using the proceeds it
receives from the sale of the Transferred Intangible Transition Property to
reduce Stranded Costs and related capitalization.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by a base indenture
between the Issuer and the Bond Trustee substantially in the form filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
terms of each Series of Transition Bonds will be provided in a separate
supplement to the base indenture (each such supplement, a "Supplemental
Indenture" and together with the base Indenture, the "Indenture"). The following
summary describes certain general terms and provisions of the Transition Bonds.
The particular terms of the Transition Bonds of any Series offered by any
Prospectus Supplement will be described in such Prospectus Supplement. This
summary does not purport to be complete and is subject to, and is qualified by
reference to, the terms and provisions of the Transition Bonds and the
Indenture.
General
The Transition Bonds may be issued in one or more Series, each comprised of
one or more Classes. The terms of all Transition Bonds of the same Series will
be identical in all respects, unless such Series is comprised of more than one
Class, in which case the terms of all Transition Bonds of the same Class will be
identical in all respects.
The Supplemental Indenture will specify the following terms of the related
Series of Transition Bonds and, if applicable, the Classes thereof:
(i) the designation of the Series and, if applicable, the Classes
thereof;
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(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 Series Rated Final Payment Date of the Series and, if
applicable, the Class Rated Final Payment Date for each Class
thereof;
(viii) the Series Final Maturity Date for the Series and, if
applicable, the Class Final Maturity Date 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 Expected Final Amortization Date for the Series and, if
applicable, each Class thereof;
(xv) the Overcollateralization Amount with respect to the Series;
(xvi) the Calculation Dates and Adjustment Dates for the Series;
(xvii) the terms of any credit enhancement applicable to the Series or
Class;
(xviii) the terms of any hedge or swap transaction applicable to the
Series or Class; and
(xix) 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
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this Prospectus to actions by Transition Bondholders will refer to actions
taken by DTC upon instructions from the Participants and all references in this
Prospectus to payments, notices, reports and statements to Transition
Bondholders will refer to payments, notices, reports and statements to DTC or
Cede, as the registered holder of each Series of Transition Bonds, for
distribution to Transition Bondholders in accordance with DTC's procedures with
respect thereto. See "--Book Entry Registration" and "--Definitive Transition
Bonds" below.
Interest and Principal
Interest will accrue on the principal balance of Transition Bonds of a
Series or Class at the Bond Rate specified in or determined in the manner
specified in the applicable Prospectus Supplement and will be payable to the
Transition Bondholders of such Series or Class on each Payment Date, commencing
on the Payment Date specified in the related Prospectus Supplement.
On any Payment Date with respect to any Series, the Issuer will make
principal payments on such Series only until the outstanding principal balance
thereof has been reduced to the principal balance specified for such Payment
Date in the Expected Amortization Schedule for such Series on such Payment Date
but only to the extent funds are available therefor as described in this
Prospectus. Accordingly, principal of such Series or Class of Transition Bonds
may be paid later than reflected in the Expected Amortization Schedule therefor.
See "Risk Factors--Unusual Nature of Intangible Transition Property," "--The
Transition Bonds--Uncertain Weighted Average Life" and "Certain Weighted Average
Life and Yield Considerations" in this Prospectus.
The failure to make a scheduled payment of principal on the Transition
Bonds, other than upon redemption or on the Series Rated Final Payment Date or,
if applicable, Class Rated Final Payment 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 interest rate payable on the Class or Classes of
floating rate Transition Bonds in the event of a termination of such
transaction.
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Redemption
Each Series of Transition Bonds will be subject to mandatory redemption in
whole at a redemption price equal to the principal amount thereof, plus interest
accrued to the redemption date, if PECO Energy is obligated to pay Liquidated
Damages. PECO Energy, as Seller, will be required to pay Liquidated Damages as a
result of a breach by PECO Energy of certain of its representations relating to
Intangible Transition Property under the Sale Agreement if such breach continues
beyond a 90-day grace period and has a material adverse effect on the Transition
Bondholders or if the payment of certain indemnification amounts by the Seller
related to a breach of certain other representations is reasonably expected to
be incurred beyond the 90-day period immediately succeeding such breach and such
amounts are reasonably expected to exceed the De Minimis Loss Amount. The Bond
Trustee, which may consult with the Servicer and other third parties, will 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 amount thereof, plus interest at the 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 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.
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If any such additional credit enhancement is provided with respect to a
Series offered hereby, the applicable Prospectus Supplement will include a
description of (i) the amount payable under such credit enhancement, (ii) any
conditions to payment thereunder not otherwise described in this Prospectus,
(iii) the conditions (if any) under which the amount payable under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced and (iv) any material provisions of any applicable
agreement relating to such credit enhancement. Additionally, in certain cases,
the applicable Prospectus Supplement may describe certain information with
respect to the provider of any third-party credit enhancement, including (i) a
brief description of its principal business activities, (ii) its principal place
of business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies which exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' equity or
policyholders' surplus, if applicable, as of a date specified in the applicable
Prospectus Supplement.
Book-Entry Registration
All Classes of Transition Bonds will be book-entry Transition Bonds, which
are initially represented by one or more bonds registered in the name of Cede,
as nominee of DTC, or another securities depository and are available only in
the form of book-entries ("Book-Entry Transition Bonds"); provided, however, the
applicable Prospectus Supplement relating to a Series of Transition Bonds may
provide that the Transition Bonds of such Series or a Class thereof will be
issued as definitive Transition Bonds. Transition Bondholders may also hold
Transition Bonds of a Class through Cedel, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear") (in Europe), if they are participants in such
systems or indirectly through organizations that are participants in such
systems ("Participants").
Cede, as nominee for DTC, will hold the global bond or bonds representing
the Transition Bonds. CEDEL and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for CEDEL and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear
(in such capacities, the "Depositaries").
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange 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
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its Depositary. Cross-market transactions will require delivery of instructions
to the relevant European international clearing system by the counterparty in
such system in accordance with its rules and procedures and within its
established deadlines (European time). The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final settlement
on its behalf by delivering or receiving Transition Bonds in DTC, and making or
receiving payments in accordance with normal procedures for same-day funds
settlement applicable to DTC. CEDEL Participants and Euroclear Participants may
not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Business Day following the DTC
settlement date. Such credits or any transactions in such Transition Bonds
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participant on such Business Day. Cash received in CEDEL or Euroclear as a
result of sales of Transition Bonds by or through a CEDEL Participant or a
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the Business Day following settlement in DTC.
Transition Bondholders that are not direct or indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Transition Bonds may do so only through direct or indirect Participants. In
addition, Transition Bondholders will receive all payments of principal and
interest on the Transition Bonds, through the Participants who in turn will
receive them from DTC. Under a book-entry format, Transition Bondholders will
receive payments after the related Payment Date, because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants, which thereafter will be
required to forward them to indirect Participants or holders of beneficial
interests in the Transition Bonds. The Issuer and the Bond Trustee, and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Transition Bond is registered (expected to be Cede) as the
absolute owner thereof (whether or not such Transition Bond is overdue and
notwithstanding any notice of ownership or writing thereon or any notice to the
contrary) for the purpose of making payments and for all other purposes.
Unless and until definitive Transition Bonds are issued, it is anticipated
that the only "holder" of Transition Bonds of any Series will be Cede, as
nominee of DTC. Transition Bondholders will only be permitted to exercise their
rights as Transition Bondholders indirectly through Participants and DTC. All
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,
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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.
DTC has advised the Bond Trustee that it will take any action permitted to
be taken by a Transition Bondholder under the Indenture only at the direction of
one or more Participants to whose account with DTC the Transition Bonds are
credited.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilities the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any Underwriters, agents or dealers with respect
to a Series of Transition Bonds offered hereby. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 29 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, out of its Brussels, Belgium office (the
"Euroclear Operator"), under contract with Euroclear Clearance System S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Payments with respect to Transition Bonds held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Tax Matters" in this Prospectus. CEDEL or the Euroclear Operator,
as the case may be, will take any other action permitted to be taken by a
Transition Bondholder under the Indenture on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Transition Bonds among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Definitive Transition Bonds
Unless otherwise specified in the applicable Prospectus Supplement, each
Class of Transition Bonds will be issued in fully registered, certificated form
to Transition Bondholders or their nominees, rather than to DTC or its nominee,
only if (i) the Issuer advises the Bond Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to such Class of Transition Bonds and the Issuer is unable to locate a
qualified successor, (ii) the Issuer, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default under the Indenture, Transition Bondholders representing at least a
majority of the outstanding principal amount of the Transition Bonds of all
Series advise the Bond Trustee through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the
Transition Bondholders' best interest.
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
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on any Transition Bond, however, will be made only upon presentation and
surrender of such Transition Bond at the office or agency specified in the
notice of final payment to Transition Bondholders.
Definitive Transition Bonds will be transferable and exchangeable at the
offices of the transfer agent and registrar, which will initially be the Bond
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the transfer agent and registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
CERTAIN WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS
The rate of principal payments on each Series or Class of Transition Bonds,
the aggregate amount of each interest payment on each Series or Class of
Transition Bonds and the actual final Payment Date of each Series or Class of
Transition Bonds will be dependent on the rate and timing of receipt of ITC
Collections. Accelerated receipts of ITC Collections will not, however, result
in payment of principal on the Transition Bonds earlier than the related
Expected Final Amortization Dates since receipts in excess of the amounts
necessary to amortize the Transition Bonds in accordance with the applicable
Expected Amortization Schedules will be deposited in the Overcollateralization
Subaccount or Reserve Subaccount. However, delayed receipts of ITC Collections
may result in principal payments on the Transition Bonds occurring more slowly
than as reflected in the Expected Amortization Schedules or later than the
related Expected Final Amortization 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 Amortization Dates.
The actual payments on each Payment Date for each Series or Class of
Transition Bonds and the weighted average life thereof will be affected
primarily by the rate of ITC Collections and the timing of receipt of ITC
Collections, as well as amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount. Because the
Intangible Transition Charges will be calculated based on estimates of usage and
revenue, the aggregate amount of ITC Collections and the rate of principal
amortization on the Transition Bonds will depend, in part, on actual energy
usage by Customers and the rate of delinquencies and write-offs. Although the
Intangible Transition Charges will be adjusted from time to time based in part
on the actual rate of ITC Collections, no assurances are given that the Servicer
will be able to forecast accurately actual electricity usage and the rate of
delinquencies and write-offs or implement adjustments to the Intangible
Transition Charges that will cause ITC Collections to be received at any
particular rate. See "Risk Factors--Unusual Nature of Intangible Transition
Property" and "The QRO and the Intangible Transition Charges--The Intangible
Transition Charges--The ITC Adjustment Process" in this Prospectus. 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 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, 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 the denominator of which is the aggregate
Intangible Transition Charges (as adjusted from time to time) applicable to all
series of transition bonds issued by 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."
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
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connection with the issuance of the initial Series of Transition Bonds.
"Subsequent Intangible Transition Property" means Intangible Transition
Property, as identified in the related bill of sale, sold to the Issuer on any
Subsequent Transfer Date pursuant to the Sale Agreement in connection with the
subsequent issuance of a Series of Transition Bonds.
The Seller's accounting records and computer systems will reflect the sale
and assignment of Intangible Transition Property to the Issuer, and the Seller
shall treat the Transition Bonds as debt of the Seller for federal income tax
purposes so long as any of the Transition Bonds are outstanding.
Each sale of Intangible Transition Property under the Sale Agreement is
subject to the satisfaction or waiver of each of the following conditions:
(i) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, the Seller shall have delivered to the Issuer a duly
executed bill of sale identifying the Intangible Transition Property to be
conveyed on that date, in the form required by the Sale Agreement;
(ii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Seller was not insolvent and will not have been made
insolvent by such sale, and the Seller is not aware of any pending
insolvency with respect to itself;
(iii) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, no breach by the Seller of its representations, warranties
or covenants in the Sale Agreement shall exist, and no Servicer Default
shall have occurred and be continuing;
(iv) as of the Initial Transfer Date or the Subsequent Transfer Date,
as applicable, the Issuer shall have sufficient funds available to pay the
purchase price for the Transferred Intangible Transition Property to be
conveyed on such date, and all conditions to the issuance of one or more
Series of Transition Bonds intended to provide such funds set forth in the
Indenture shall have been satisfied or waived;
(v) on or prior to the Initial Transfer Date or Subsequent Transfer
Date, as applicable, the Seller shall have taken all action required to
transfer to the Issuer ownership of the Transferred Intangible Transition
Property to be conveyed on such date, free and clear of all liens other
than liens created by the Issuer pursuant to the Indenture, and the Issuer
shall have taken, or the Servicer shall have taken on behalf of the Issuer,
any action required for the Issuer to grant the Bond Trustee a first
priority perfected security interest in the Collateral and maintain such
security interest;
(vi) in the case of a sale of Subsequent Intangible Transition
Property only, the Seller shall have provided the Issuer and the Rating
Agencies with a timely addition notice specifying the Subsequent Transfer
Date for such Subsequent Intangible Transition Property not later than 10
days prior to such Subsequent Transfer Date;
(vii) the Seller shall have delivered to the Rating Agencies and the
Issuer the opinion of counsel specified in the Sale Agreement and certain
other opinions of counsel to the Issuer Trustee and Bond Trustee; and
(viii) the Seller shall have delivered to the Bond Trustee and the
Issuer an officers' certificate confirming the satisfaction of each
condition precedent specified above.
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Seller Representations and Warranties
In the Sale Agreement, the Seller will make representations and warranties
to the Issuer as of the Initial Transfer Date and any Subsequent Transfer Date
to the effect, among other things, that:
(i) all information provided by the Seller to the Issuer with respect
to the Transferred Intangible Transition Property is correct in all
material respects;
(ii) the transfers and assignments contemplated by the Sale Agreement
constitute sales of the Initial Intangible Transition Property or the
Subsequent Intangible Transition Property, as the case may be, from the
Seller to the Issuer, and the beneficial interest in and title to the
Transferred Intangible Transition Property would not be part of the
debtor's estate in the event of the filing of a bankruptcy petition by or
against the Seller under any bankruptcy law;
(iii) the Seller is the sole owner of the Intangible Transition
Property being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable, the Transferred Intangible
Transition Property has been validly transferred and sold to the Issuer
free and clear of all liens other than liens created by the Issuer pursuant
to the Indenture and all filings (including filings with the PUC under the
Competition Act) necessary in any jurisdiction to give the Issuer a valid
ownership interest in Transferred Intangible Transition Property free and
clear of all liens of the Seller or anyone claiming through the Seller and
to give the Bond Trustee a first priority perfected security interest in
Transferred Intangible Transition Property have been made, other than any
such filings (except for filings with the PUC under the Competition Act and
filings under the Uniform Commercial Code with the Secretary of State of
the State of Delaware) the absence of which would not have an adverse
impact on (x) the ability of the Servicer to collect Intangible Transition
Charges with respect to the Serviced Intangible Transition Property or (y)
the rights of the Issuer or the Bond Trustee with respect to the
Transferred Intangible Transition;
(iv) the QRO has been issued by the PUC in accordance with the
Competition Act, the QRO and the process by which it was issued comply with
all applicable laws, rules and regulations and the QRO is in full force and
effect;
(v) as of the date of issuance of any Series of Transition Bonds, such
Transition Bonds are entitled to the protections provided by the
Competition Act and, accordingly, the provisions of the QRO relating to the
Intangible Transition Property and Intangible Transition Charges are not
revocable by the PUC;
(vi) (x) under the Competition Act, neither the Commonwealth of
Pennsylvania nor the PUC may limit, alter or in any way impair or
reduce the value of Intangible Transition Property or Intangible
Transition Charges approved by the QRO or any rights thereunder,
except such a limitation or alteration may be made by the Commonwealth
of Pennsylvania or the PUC if adequate compensation is made by law for
the full protection of the Intangible Transition Charges and of
Transition Bondholders;
(y) under the Contract Clauses of the Constitutions of the
Commonwealth of Pennsylvania and the United States, the Commonwealth
of Pennsylvania and the PUC cannot take any action that substantially
impairs the rights of the Transition Bondholders unless such action is
a reasonable exercise of the Commonwealth of Pennsylvania's sovereign
powers and appropriate to further a legitimate public purpose, and,
under the
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Takings Clauses of the Pennsylvania and United States Constitutions,
in the event such action constitutes a permanent appropriation of the
property interest of Transition Bondholders in the Intangible
Transition Property and deprives the Transition Bondholders of their
reasonable expectations arising from their investments in Transition
Bonds, unless just compensation, as determined by a court of competent
jurisdiction, is provided to Transition Bondholders.
(vii) there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition Act, QRO,
Intangible Transition Property or the Intangible Transition Charges or any
rights arising under any of them or which seeks to enjoin the performance
of any obligations under the QRO;
(viii) no other approval, authorization, consent, order or other
action of, or filing with any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is required in
connection with the creation of Intangible Transition Property, except
those that have been obtained or made;
(ix) except as disclosed by the Seller to the Issuer there are no
proceedings or investigations pending or, to the best of the Seller's
knowledge, threatened before any court, federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Seller or its properties challenging the QRO or the
Competition Act;
(x) no failure on the Initial Transfer Date or any Subsequent Transfer
Date or any time thereafter to satisfy any condition imposed by the
Competition Act with respect to the recovery of stranded costs will
adversely affect the creation or sale under the Sale Agreement of the
Intangible Transition Property or the right to collect Intangible
Transition Charges;
(xi) the assumptions used in calculating Intangible Transition Charges
are reasonable and made in good faith;
(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
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(z) paragraphs 4 through 19 of the QRO, including the right to
collect Intangible Transition Charges, have been declared to be
irrevocable by the PUC;
(xiii) the Seller is a corporation duly organized and in good standing
under the laws of the Commonwealth of Pennsylvania, with corporate power
and authority to own its properties and conduct its business as currently
owned or conducted;
(xiv) the Seller has the corporate power and authority to execute and
deliver the Sale Agreement and to carry out its terms, the Seller has full
corporate power and authority to own the Intangible Transition Property and
sell and assign the Initial Intangible Transition Property, in the case of
the Initial Transfer Date, and the Subsequent Intangible Transition
Property, in the case of each Subsequent Transfer Date, as applicable, and
the Seller has duly authorized such sale and assignment to the Issuer by
all necessary corporate action and the execution, delivery and performance
of the Sale Agreement have been duly authorized by the Seller by all
necessary corporate action;
(xv) the Sale Agreement constitutes a legal, valid and binding
obligation of the Seller, enforceable against the Seller in accordance with
its terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
(xvi) the consummation of the transactions contemplated by the Sale
Agreement and the fulfillment of the terms thereof do not conflict with,
result in any breach of any of the terms and provisions of, nor constitute
(with or without notice or lapse of time) a default under, the articles of
incorporation or by-laws of the Seller, or any indenture, agreement or
other instrument to which the Seller is a party or by which it shall be
bound; nor result in the creation or imposition of any lien upon any of its
properties (other than the lien of the PECO Energy mortgage indenture on
the Seller's interest in the Sale Agreement) pursuant to the terms of any
such indenture, agreement or other instrument; nor violate any law or any
order, rule or regulation applicable to the Seller of any court or of any
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the Seller or its
properties;
(xvii) except for 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
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expected to materially and adversely affect the performance by the Seller
of its obligations under, or the validity or enforceability of, the Basic
Documents or the Transition Bonds;
(xix) after giving effect to the sale of any Transferred Intangible
Transition Property under the Sale Agreement, the Seller (x) is solvent and
expects to remain solvent, (y) is adequately capitalized to conduct its
business and affairs considering its size and the nature of its business
and intended purposes, (z) is not engaged nor does it expect to engage in a
business for which its remaining property represents an unreasonably small
capital, (xx) believes that it will be able to pay its debts as they become
due and that such belief is reasonable and (yy) is able to pay its debts as
they mature and does not intend to incur, or believe that it will incur,
indebtedness that it will not be able to repay at its maturity; and
(xx) the Seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary licenses and
approvals, in all jurisdictions in which the ownership or lease of property
or the conduct of its business shall require such qualifications, licenses
or approvals (except where the failure to so qualify would not be
reasonably likely to have a material adverse effect on the Seller's
business, operations, assets, revenues, properties or prospects).
In the event of a breach by the Seller of any representation and warranty
specified in (ii), (iii), (iv), (v), (vii) and (xii) above that has a material
adverse effect on the Transition Bondholders, the Seller shall pay to the Bond
Trustee, as assignee of the Issuer, for deposit into the General Subaccount of
the Collection Account the Liquidated Damages on the Liquidated Damages Payment
Date; provided, however, that the Seller shall not be obligated to pay
Liquidated Damages if (i) within 90 days after the date of occurrence thereof
such breach is cured or the Seller takes remedial action such that there is not
and will not be a material adverse effect on the Transition Bondholders as a
result of such breach and (ii) either (x) if the Seller had, immediately prior
to the breach, a long term debt rating of at least "A3" by Moody's and "BBB" by
S&P and the equivalent of "BBB" by any other Rating Agency, the Seller enters
into a binding agreement with the Issuer to pay any amounts necessary so that
all interest payments due on the Transition Bonds during such 90-day period will
be paid in full or (y) if the Seller does not have such long term debt ratings,
the Seller deposits, within two Business Days after such breach, an amount in
escrow with the Bond Trustee sufficient, taking into account amounts on deposit
in the Collection Account which will be available for such purpose, to pay all
interest payments which will become due on the Transition Bonds during such
90-day period. In the event that within such 90-day period, such breach is cured
or the Seller takes the remedial action described in subsection (i) in the
preceding sentence, any amounts paid by the Seller to the Bond Trustee, as
assignee of the Issuer, which have not been distributed pursuant to the
Indenture shall be returned to the Seller at the end of such 90-day period.
The "Liquidated Damages Payment Date" means the date that is:
(i) 90 days after the date of a breach of a representation or warranty
specified in (ii), (iii), (iv), (v), (vii) or (xii) above if the Seller (x)
has the long term debt ratings specified by, and enters into the binding
agreement described in, subsection (ii)(x) of the preceding paragraph or
(y) does not have such long term debt ratings but makes the deposit
required in subsection (ii)(y) of the preceding paragraph; or
(ii) in all other cases, two Business Days after the date of such
breach.
If the full amount of losses attributable to the breach of representations
described in (vi), (viii), (ix), (xiii), (xiv), (xv) and (xvi) above is
reasonably expected to be incurred beyond a 90-day period
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immediately succeeding such breach, the Seller shall, except as provided below,
pay Liquidated Damages to the Bond Trustee, as assignee of the Issuer, for
deposit into the General Subaccount of the Collection Account on the first
Monthly Allocation Date following the expiration of such 90-day period. With
respect to any losses described in the previous sentence the full amount of
which is reasonably expected not to exceed the De Minimis Loss Amount, the
Seller on the Monthly Allocation Date immediately following the Initial Loss
Calculation Date shall pay to the Bond Trustee as assignee of the Issuer, for
deposit in the Loss Subaccount of the Collection Account, the aggregate expected
amount of such losses for all Monthly Allocations Dates on which losses are
expected to be incurred, following which the Seller's obligation to pay
indemnification or Liquidated Damages, as applicable, as a result of such losses
shall be waived so long as actual losses incurred on any Monthly Allocation Date
do not exceed the De Minimis Loss Amount. If the aggregate amount of such losses
exceeds the amounts paid by the Seller to the Bond Trustee as assignee of the
Issuer, with respect thereto, the Seller shall pay to the Bond Trustee, as
assignee of the Issuer, on the next Monthly Allocation Date the amount of such
excess for such Monthly Allocation Date and the expected amount of excess for
all subsequent Monthly Allocation Dates.
The Seller shall also indemnify the Issuer and the Bond Trustee and certain
other related parties, against (i) all taxes (other than any taxes imposed on
Transition Bondholders solely as a result of their ownership of Transition
Bonds) resulting from the acquisition or holding of Transferred Intangible
Transition Property by the Issuer or the issuance and sale by the Issuer of
Transition Bonds and (ii) any liabilities, obligations, losses, damages,
payments or expenses which result from (x) the Seller's willful misconduct, bad
faith or gross negligence in the performance of its duties under the Sale
Agreement, (y) the Seller's reckless disregard of its obligations and duties
under the Sale Agreement, or (z) the Seller's breach of any representations or
warranties set forth above, other than (ii), (iii), (iv), (v), (vii) and (xii)
above; provided, that the amount of such losses for which the Seller 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 Changes 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 Amendments 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 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.
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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.
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
Sale Agreement. Because the Master Servicing Agreement relates to all Serviced
Intangible Transition Property (as opposed to just the Transferred Intangible
Transition Property owned by the Issuer), the rights and obligations set forth
in such agreement will involve other bond trustees to the extent that the
purchasers of Intangible Transition Property from the Seller (other than the
Issuer) do not select the same Bond Trustee as the Issuer.
The Master Servicing Agreement may be amended by the parties thereto with
the consent of the Bond Trustee under the Indenture and all bond trustees of any
Other Issuer, if any. The form of the Master Servicing Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
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Servicing Procedures
General. The Servicer, as agent for the Issuer and the Other Issuers, will
manage, service and administer, and make collections in respect of Intangible
Transition Property. The Servicer's duties will include (i) calculating and
billing the Intangible Transition Charges and collecting (from Customers,
electric generation suppliers and other third parties, as applicable) and
posting all ITC Collections, (ii) responding to inquiries by Customers, electric
generation suppliers and other third parties, the PUC, or any federal, local or
other state governmental authority with respect to the Intangible Transition
Property and Intangible Transition Charges, (iii) accounting for ITC Collections
and furnishing periodic reports to the Issuer, any Other Issuers, the Bond
Trustee (and any bond trustees of any Other Issuers), and the Rating Agencies,
(iv) selling, as agent for the Issuer and any Other Issuers, as their respective
interests may appear, defaulted or written-off accounts in accordance with the
Servicer's usual and customary practices and (v) taking action in connection
with adjustments to the Intangible Transition Charges as described below. See
also "The QRO and the Intangible Transition Charges--Competitive Billing." The
Servicer shall notify the Issuer, any Other Issuers, the Bond Trustee (and any
bond trustees of any Other Issuers) and the Rating Agencies in writing of any
laws or PUC regulations promulgated after the execution of the Master Servicing
Agreement that have a material adverse effect on the Servicer's ability to
perform its duties under the Master Servicing Agreement.
Any ITC Collections received by the Servicer shall be allocated between the
Issuer and any Other Issuers based on their respective Percentages at the time
such Intangible Transition Charges were billed.
The Servicer shall institute any action or proceeding necessary to compel
performance by the PUC or the Commonwealth of any of their obligations or duties
under the Competition Act or the QRO with respect to the Intangible Transition
Property. The cost of any such action reasonably allocated by the Servicer to
the Serviced Intangible Transition Property shall be payable from ITC
Collections as an operating expense and shall be allocated among the Issuer and
any Other Issuers based on their respective Percentages at the time such costs
are incurred.
ITC Adjustment Process. Among other things, the Master Servicing Agreement
requires the Servicer to file, and the Competition Act and the QRO require the
PUC to approve, Adjustment Requests on each Calculation Date based on actual ITC
Collections and updated assumptions by the Servicer as to projected future usage
of electricity by Customers, expected delinquencies and write-offs and future
payments and expenses relating to Intangible Transition Property and the
Transition Bonds. In addition, the QRO provides that adjustments during the
final calendar year during which any Series of Transition Bonds is outstanding
may be implemented quarterly or monthly. The Servicer agrees to calculate such
adjustments to result in the 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 the Payment Date closest to the next
Adjustment Date or the Expected Final Amortization 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." The Servicer
will file Adjustment Requests on each Calculation Date for the Issuer as
specified in the Master Servicing Agreement. In accordance with the Competition
Act and the QRO, the PUC has 90 days to approve such adjustments. The
adjustments to the Intangible Transition Charges are expected to occur on each
Adjustment Date. Such adjustments to the Intangible Transition Charges will
cease with respect to each Series on the final Adjustment Date specified in the
Prospectus Supplement for that Series.
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ITC Collections. The Servicer is required to remit all ITC Collections
(from whatever source) allocated to the Issuer or Other Issuers, if any, and all
proceeds of other Collateral, if any, of the Issuer or Other Issuers, if any,
received by the Servicer (i) in the case of the Issuer, to the Bond Trustee for
deposit pursuant to the Indenture or (ii) in the case of Other Issuers, to the
bond trustees of such Other Issuers under the indenture to which each such Other
Issuer is a party on each Remittance Date. Until ITC Collections are remitted to
the Collection Account, the Servicer will not segregate them from its general
funds. Remittances of ITC Collections will not include interest thereon prior to
the Remittance Date or late fees from customers, which the Servicer will be
entitled to retain.
Servicer Advances
If specified in the related annex to the Master Servicing Agreement, the
Servicer will make advances of interest or principal on the related Series of
Transition Bonds in the manner and to the extent specified in such annex.
Servicing Compensation; Releases
The Issuer and each Other Issuer, severally and not jointly, agrees to pay
the Servicer the Monthly Servicing Fees with respect to their respective series
of transition bonds. The Monthly Servicing Fee for each Series (together with
any portion of such Monthly Servicing Fee that remains unpaid from prior Monthly
Allocation Dates) will be paid solely to the extent funds are available therefor
as described under "The Indenture--Allocations and Payments" in this Prospectus.
The Monthly Servicing Fee will be paid prior to the payment of or provision for
any amounts in respect of interest on and principal of the Transition Bonds.
In the Master Servicing Agreement, the Servicer releases the Issuer, every
Other Issuer, the Bond Trustee and any bond trustees of any Other Issuers from
any and all claims, whenever relating to Intangible Transition Property or the
Servicer's servicing activities with respect thereto.
Servicer Duties
In the Master Servicing Agreement, the Servicer has agreed, among other
things, that, in servicing Intangible Transition Property:
(i) except where the failure to comply with any of the following would
not adversely affect the Issuer's, any Other Issuer's, the Bond Trustee's
or any Other Issuer's bond trustee's respective interests in Intangible
Transition Property,
(x) it will manage, service, administer and make collections in
respect of Intangible Transition Property with reasonable care and in
material compliance with applicable law, including all applicable PUC
regulations and guidelines, using the same degree of care and
diligence that the Servicer exercises with respect to billing and
collection activities that the Servicer conducts for itself and
others;
(y) it will follow standards, policies and procedures in
performing its duties as Servicer that are customary in the Servicer's
industry;
(z) it will use all reasonable efforts, consistent with its
customary servicing procedures, to enforce and maintain rights in
respect of Intangible Transition Property;
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(xx) it will calculate Intangible Transition Charges in
compliance with the Competition Act, the QRO and any applicable
tariffs;
(ii) it will keep on file, in accordance with customary procedures,
all documents related to Intangible Transition Property and will maintain
accurate and complete accounts, records and computer systems pertaining to
Intangible Transition Property; and
(iii) it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of Intangible
Transition Property as they become due.
The duties of the Servicer set forth in the Master Servicing Agreement are
qualified by any PUC regulations or orders in effect at the time such duties are
to be performed.
Servicer Representations and Warranties
In the Master Servicing Agreement, the Servicer will make representations
and warranties as of each date the Seller sells or otherwise transfers any
Intangible Transition Property to 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
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
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(vii) no proceeding or investigation is pending or, to the Servicer's
best knowledge, threatened before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties (x) except as disclosed by
the Servicer to the Issuer and any Other Issuers, seeking any determination
or ruling that might materially and adversely affect the performance by the
Servicer of its obligations under, or the validity or enforceability
against the Servicer of, the Master Servicing Agreement or (y) relating to
the Servicer and which might adversely affect the federal or state income
tax attributes of the Transition Bonds.
Servicer Indemnification
Under the Master Servicing Agreement, the Servicer agrees to indemnify the
Issuer, any Other Issuers, the Bond Trustee, on behalf of the Transition
Bondholders, the bond trustees of any Other Issuers, on behalf of the holders of
transition bonds issued by such Other Issuers, and certain other related
parties, against any costs, expenses, losses, damages, claims and liabilities
that may be imposed upon, incurred by or asserted against such person as a
result of (i) the Servicer's willful misfeasance, bad faith or gross negligence
in the performance of its duties or observance of its covenants under the Master
Servicing Agreement or the Servicer's reckless disregard of its obligations and
duties under the Master Servicing Agreement and (ii) the Servicer's breach of
any of its representations or warranties under the Master Servicing Agreement.
Statements to Issuer and Bond Trustee
For each Calculation Date, the Servicer will provide to the Issuer and the
Bond Trustee a statement indicating, with respect to the Transferred Intangible
Transition Property (i) the 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
the next Payment Date and the Servicer's projection of the aggregate principal
amount of all Series as of the next Payment Date and (iv) the Calculated
Overcollateralization Level Payment Date and the Servicer's projection of the
amount on deposit in the Overcollateralization Subaccount as of the next Payment
Date. Moreover, on or before each Remittance Date, the Servicer will prepare and
furnish to the Issuer and the Bond Trustee a statement setting forth the
aggregate amount remitted or to be remitted by the Servicer to the Bond Trustee
for deposit on such Remittance Date pursuant to the Indenture.
In addition, on or before each Monthly Allocation Date, the Servicer will
prepare and furnish to the Issuer and the Bond Trustee a statement setting forth
the transfers and payments to be made on such Monthly Allocation Date and the
amounts thereof. Further, on or before each Payment Date for each Series of
Transition Bonds, the Servicer will prepare and furnish to the Issuer and the
Bond Trustee a statement setting forth the amounts to be paid to the holders of
Transition Bonds of such Series. On the basis of this information, the Bond
Trustee will furnish to the Transition Bondholders on each Payment Date the
report described under "The Indenture--Reports to Transition Bondholders" in
this Prospectus.
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Evidence as to Compliance
The Master Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Issuer, any Other Issuer, the Bond
Trustee, the bond trustees of any Other Issuers and the Rating Agencies, on or
before March 31 of each year, a statement as to compliance by the Servicer
during the preceding calendar year (or the relevant portion thereof) with
certain standards relating to the servicing of Intangible Transition Property.
This report (the "Annual Accountant's Report") will state that such firm has
performed certain procedures in connection with the Servicer's compliance with
the servicing procedures of the Master Servicing Agreement, identifying the
results of such procedures and including any exceptions noted. The Annual
Accountant's Report will also indicate that the accounting firm providing such
report is independent of the Servicer within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public Accountants.
The Master Servicing Agreement will also provide for delivery to the
Issuer, any Other Issuer, the Bond Trustee and the bond trustees of such Other
Issuer on or before March 31 of each year, a certificate signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
the Master Servicing Agreement for the preceding calendar year (or the relevant
portion thereof) or, if there has been a default in the fulfillment of any such
obligation, describing each such default. The Servicer has agreed to give the
Issuer, any Other Issuer, each Rating Agency, the Bond Trustee or the bond
trustee of such Other Issuer, as the case may be, notice of any Servicer Default
under the Master Servicing Agreement.
Certain Matters Regarding the Servicer
Pursuant to the QRO, PECO Energy may assign its obligations under the
Master Servicing Agreement to any electric distribution company, as such term is
defined in the Competition Act, which succeeds to the major part of PECO
Energy's electric distribution business. Under the Master Servicing Agreement,
certain persons which succeed to the major part of the electric distribution
business of the Servicer, which persons assume the obligations of the Servicer,
will be the successor of the Servicer under the Master Servicing Agreement. The
Master Servicing Agreement further requires that (i) immediately after giving
effect to such transaction, no representation or warranty made by the Servicer
in the Master Servicing Agreement shall have been breached and no Servicer
Default, and no event which, after notice or lapse of time, or both, would
become a Servicer Default shall have occurred and be continuing; (ii) certain
officers' certificates and opinions of counsel shall have been delivered to the
Issuer, any Other Issuers, the Bond Trustee (and any other bond trustees of any
Other Issuers), as the case may be, and the Rating Agencies; and (iii) prior
written notice shall have been received by the Ratings Agencies.
The Master Servicing Agreement provides that, subject to the foregoing
provisions, PECO Energy shall not resign from the obligations and duties imposed
on it as Servicer except upon a determination, communicated to the Issuer, any
Other Issuers, the Bond Trustee (and any bond trustees of any Other Issuers),
and each Rating Agency and evidenced by an opinion of counsel, that the
performance of its duties under the Master Servicing Agreement are no longer
permissible under applicable law. No such resignation shall become effective
until a successor servicer has assumed the servicing obligations and duties of
PECO Energy under the Master Servicing Agreement.
In addition, the QRO and the Competition Act require that the Servicer's
responsibility to collect the applicable Intangible Transition Charges and other
obligations under the Master Servicing Agreement must be undertaken and
performed by any other entity that provides transmission and distribution
service to the customers.
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Except as expressly provided in the Master Servicing Agreement, the
Servicer will not be liable to the Issuer or any Other Issuer for any action
taken or for refraining from taking any action pursuant to the Master Servicing
Agreement or for errors in judgment, except to the extent such liability is
imposed by reason of the Servicer's wilful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the Master Servicing Agreement.
Servicer Defaults
"Servicer Defaults" under the Master Servicing Agreement will include,
among other things:
(i) any failure by the Servicer to deliver to the Bond Trustee, on
behalf of the Issuer, or to the bond trustee of any Other Issuer, on behalf
of such Other Issuer, any required remittance that shall continue
unremedied for a period of three Business Days after written notice of such
failure is received by the Servicer;
(ii) any failure by the Servicer, duly to observe or perform in any
material respect any other covenant or agreement in the Master Servicing
Agreement or any other Basic Document to which it is a party, which failure
materially and adversely affects Intangible Transition Property and which
continues unremedied for 30 days after notice of such failure has been
given to the Servicer, by the Issuer, any Other Issuer or the Bond Trustee
(or bond trustees of any Other Issuer), as the case may be, or after
discovery of such failure by an officer of the Seller, as the case may be;
(iii) any representation or warranty made by the Servicer in the
Master Servicing Agreement shall prove to have been incorrect when made,
which has a material adverse effect on any of the Transition Bondholders,
the holders of transition bonds issued by any Other Issuer, the Issuer or
any Other Issuer and which continues unremedied for 60 days after notice of
such failure has been given to the Servicer by the Issuer, any Other
Issuer, the Bond Trustee or any bond trustee of any Other Issuer, as the
case may be; and
(iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings with respect to the
Servicer and certain actions by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations.
The Bond Trustee, together with all bond trustees of any Other Issuers, if
any, may waive any default by the Servicer, except a default in making any
required remittances to the Bond Trustee, or any bond trustee of any Other
Issuer, if any.
Rights Upon Servicer Default
As long as a Servicer Default under the Master Servicing Agreement remains
unremedied, the Bond Trustee or, if transition bonds issued by Other Issuers are
outstanding, one or more of the bond trustees of such Other Issuers and the Bond
Trustee, representing a majority of the outstanding principal amount of all
transition bonds issued by such Other Issuers and the Issuer, as assignees of
such Other Issuers and the Issuer, as applicable, may terminate all the rights
and obligations of the Servicer under the Master Servicing Agreement (other than
the Servicer's indemnification obligation and obligation to continue performing
its functions as Servicer until a successor servicer is appointed), whereupon a
Successor Servicer appointed by the Bond Trustee or, if there are more than one,
by the bond trustees
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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) certain rights under any hedge or swap transaction entered into
with respect to floating rate Transition Bonds or other credit enhancements,
(vii) all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing and (viii) all payments on or under, and
all proceeds of every kind and nature whatsoever in respect of, any or all of
the foregoing, provided that cash or other property distributed to the Issuer
from the Collection Account in accordance with the provisions of the Indenture
will not be subject to the lien of the Indenture. See "--Allocation and
Payments" below.
Issuance in Series or Classes
Transition Bonds may be issued under the Indenture from time to time to
finance the purchase by the Issuer of Intangible Transition Property (a
"Financing Issuance") or to pay the cost of refunding, through redemption or
payment, all or part of the Transition Bonds (a "Refunding Issuance"). The
aggregate principal amount of Transition Bonds that may be authenticated and
delivered under the Indenture may not exceed $4 billion plus the amount of any
Refunding Issuance. Any Series of Transition Bonds may include one or more
Classes which differ, among other things, as to interest rate and amortization
of principal. The terms of all Transition Bonds of the same Series will be
identical, unless such Series is comprised of more than one Class, in which case
the terms of all Transition Bonds of the same Class will be identical. The
particular terms of the Transition Bonds of any Series and, if applicable,
Classes thereof, will be set forth in the Supplemental Indenture for that
Series. The terms of such Series and any Classes thereof will not be subject to
prior review by, or consent of, the Transition Bondholders of any previously
issued Series. See "Risk Factors--The Transition Bonds--Effect of Additional
Series and Other Financings on Outstanding Transition Bonds," "The Transition
Bonds" and "PECO Energy Company" in this Prospectus.
Under the Indenture, the Bond Trustee will authenticate and deliver an
additional Series of Transition Bonds only upon receipt by the Bond Trustee of,
among other things, a certificate of the Issuer that no Event of Default has
occurred and is continuing, an opinion of counsel to the Issuer and evidence of
satisfaction of the Rating Agency Condition.
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In addition, in connection with the issuance of the each new Series, the
Bond Trustee will have to provide a certificate or opinion of a firm of
independent certified public accountants of recognized national reputation to
the effect that, based on the assumptions used in calculating the initial
Intangible Transition Charges with respect to the Transferred Intangible
Tangible Property or, if applicable, the most recent revised Intangible
Transition Charges with respect to the Transferred Intangible Tangible Property,
after giving effect to the issuance of such Series and the application of the
proceeds therefrom, such Intangible Transition Charges will be sufficient to pay
all fees and expenses of servicing the Transition Bonds, interest on each Series
of Transition Bonds when due and principal of each Series of Transition Bonds in
accordance with the Expected Amortization Schedule therefor and to fund the
Calculated Overcollateralization Level as of each Payment Date.
If the issuance is a Refunding Issuance, the amount of money necessary to
pay premiums, if any, and the outstanding principal balance of and interest on
the Transition Bonds being refunded shall be deposited into a separate account
with the Bond Trustee.
Collection Account
Under the Indenture, the Issuer will establish one or more segregated trust
accounts in the Bond Trustee's name, which collectively comprise the Collection
Account, with the Bond Trustee or at another Eligible Institution. The
Collection Account will be divided into subaccounts, which need not be separate
bank accounts: the General Subaccount, one or more Series Subaccounts, the
Overcollateralization Subaccount, the Capital Subaccount, the Reserve Subaccount
and, if required by the Indenture, one or more Defeasance Subaccounts, a Loss
Subaccount and an Interest Deposit Subaccount. All amounts in the Collection
Account not allocated to any other subaccount will be allocated to the General
Subaccount. Unless the context indicates otherwise, references in this
Prospectus to the Collection Account include all of the subaccounts contained
therein. All monies deposited from time to time in the Collection Account, all
deposits therein pursuant to the Indenture, and all investments made in Eligible
Investments with such monies, shall be held by the Bond Trustee in the
Collection Account as part of the Collateral.
"Eligible Institution" means (i) the corporate trust department of the Bond
Trustee or (ii) a depository institution organized under the laws of the United
States of America or any state (or any domestic branch of a foreign bank), which
(x) has either (A) a long-term unsecured debt rating of "AAA" by S&P and "A1" by
Moody's 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 (B) 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 from which a rating is available, (iv) money market funds
which have the highest rating from each Rating Agency from which a rating is
available, (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, entered into with certain
depository institutions or trust companies, or (vi) any other investment
permitted by each Rating Agency (collectively, the "Eligible Investments"), in
each case which mature on or before the Business Day preceding the next
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Payment Date. 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 not later
than the second Business Day after receipt thereof. In addition, the Bond
Trustee will deposit all Indemnity Amounts remitted to the Bond Trustee by the
Seller or the Servicer or otherwise received by the Bond Trustee, and Liquidated
Damages remitted by the Seller into the General Subaccount of the Collection
Account. Loss Amounts remitted by the Seller to the Bond Trustee shall be
deposited in the Loss Subaccount and Interest Deposit Amounts remitted by the
Seller to the Bond Trustee shall be deposited in the Interest Deposit
Subaccount. "Interest Deposit Amounts" means any amounts remitted by the Seller
to the Bond Trustee in respect of interest payments pursuant to (i) a binding
agreement with the Issuer entered into by the Seller or an escrow arrangement
pursuant to the Sale Agreement. "Loss Amounts" means any amounts remitted by the
Seller to the Bond Trustee pursuant to the Sale Agreement in respect of losses
as a result of certain willful misconduct, bad faith, gross negligence, or
reckless disregard of its obligations therein or the breach of certain
representations and warranties therein by the Seller. See "The Sale Agreement"
and the "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 (including expenses related to any hedge or swap transactions), (ii)
amounts distributable to Series Subaccounts in respect of principal of and
interest on each Series of Transition Bonds payable on the next Payment Date
therefor and (iii) amounts allocable to the Overcollateralization Subaccount
(all as described under "--Allocations and Payments" below), 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 (vii) in "--Allocations and Payments" below) are insufficient to make
scheduled distributions to the Series Subaccounts and pay expenses of the
Issuer, the Bond Trustee, the Servicer and certain other fees and expenses.
Overcollateralization Subaccount. ITC Collections to the extent available
as described under "--Allocation and Payments" will be deposited in the
Overcollateralization Subaccount on each Monthly Allocation Date up to the
Monthly Allocated Overcollateralization Balances for all Series. Amounts in the
Overcollateralization Subaccount will be invested in Eligible Investments and
the Issuer will be entitled to earnings thereon, subject to the limitations
described under "--Allocations and Payments" below. On each Monthly Allocation
Date, the Bond Trustee will draw on amounts in the Overcollateralization
Subaccount to the extent amounts on deposit in the General Subaccount, the
Interest Deposit Subaccount (with respect to payments of Interest), the Loss
Subaccount (with respect to payments contemplated by (i) through (vii)
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in "--Allocations and Payments" below) and the Reserve Subaccount are
insufficient to make scheduled distributions to the Series Subaccounts and to
pay expenses of the Issuer, the Bond Trustee and the Servicer and certain other
fees and expenses. If any Series or Class of Transition Bonds has been retired
as of any Monthly Allocation Date, the amount by which amounts on deposit in the
Overcollateralization Subaccount exceed the Monthly Allocated
Overcollateralization Balances for all Series will be released to the Issuer,
free of the lien of the Indenture.
Capital Subaccount. Upon the issuance of each Series of Transition Bonds,
the Seller will make a capital contribution in the amount of the Required
Capital Amount to the Issuer, and the Issuer will pay such amount to the Bond
Trustee for deposit into the Capital Subaccount which will be invested in
Eligible Investments, and the Issuer will be entitled to earnings thereon
subject to the limitations described under "--Allocations and Payments" below.
The Bond Trustee will draw on amounts in the Capital Subaccount, if any, to the
extent amounts available in the General Subaccount, Interest Deposit Subaccount
(with respect to payments of Interest), the Loss Subaccount (with respect to
payments contemplated by (i) through (vii) in "Allocations and Payments" below),
the Reserve Subaccount and the Overcollateralization Subaccount are insufficient
to make scheduled distributions to the Series Subaccounts and to pay expenses of
the Issuer, the Bond Trustee and the Servicer and certain other fees and
expenses. If any Series or Class of Transition Bonds has been retired as of any
Monthly Allocation Date, the amount by which amounts on deposit in the Capital
Subaccount exceed the Required Capital Amount will be released to the Issuer,
free of the lien of the Indenture.
Series Subaccount. Upon the issuance of each Series of Transition Bonds, a
Series Subaccount will be established with respect to such Series. On each
Monthly Allocation Date, deposits will be made to each Series Subaccount as
described under "--Allocations and Payments" below. On each Payment Date, the
Bond Trustee will withdraw funds from the Series Subaccount to make payments on
the related Series of Transition Bonds including any payments due to any
provider of any applicable swap agreement, 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 and to any applicable swap counterparty will be transferred to
the General Subaccount for allocation on the next Monthly Allocation Date.
Loss Subaccount. Prior to the deposit of any Loss Amounts in the Collection
Account, the Issuer shall establish the Loss Subaccount, and any Loss Amounts
remitted by the Seller to the Bond Trustee shall be deposited in such
subaccount. The Bond Trustee will draw on amounts in the Loss Subaccount, if
any, as described under "Allocations and Payments" below.
Interest Deposit Subaccount. Prior to the deposit of any Interest Deposit
Amounts in the Collection Account, the Issuer shall establish the Interest
Deposit Subaccount and any Interest Deposit Amounts remitted by the Seller to
the Bond Trustee shall be deposited in such subaccount. The Bond Trustee will
draw on amounts in the Interest Deposit Subaccount, if any, as described under
"--Allocations and Payments" below.
Defeasance Subaccount. In the event funds are remitted to the Bond Trustee
in connection with the exercise of the Legal Defeasance Option or the Covenant
Defeasance Option, the Issuer shall establish a Defeasance Subaccount for each
Series into which such funds shall be deposited. All amounts in the Defeasance
Subaccount will be applied by the Bond Trustee, in accordance with the
provisions of the Transition Bonds and the Indenture, to the payment to the
holders of the particular Transition Bonds for the payment or redemption of
which such amounts were deposited with the Bond Trustee, including all sums due
for principal, premium, if any, and interest. See "--Legal Defeasance and
Covenant Defeasance" below.
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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 $33,000 in the
aggregate for all Series;
(v) an amount equal to Interest with respect to each Series of
Transition Bonds for such Monthly Allocation Date will be transferred on a
Pro Rata basis to the Series Subaccount for such Series, including amounts
received from the counterparty to any applicable swap agreement;
(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 Final Maturity Date or Class Final Maturity Date, as
applicable, that will occur prior to the next Monthly Allocation Date and
any Principal of and premium on a Series or Class of Transition Bonds
payable on a Redemption Date that will occur prior to the next Monthly
Allocation Date will be transferred to the Series Subaccount for such
Series, taking into account amounts on deposit therein in respect of
Principal as of such Monthly Allocation Date;
(vii) an amount equal to Principal with respect to each Series of
Transition Bonds for such Monthly Allocation Date not provided for pursuant
to clause (vi) above will be transferred on a Pro Rata basis to the Series
Subaccount for such Series;
(viii) all unpaid operating expenses, Indemnity Amounts and Loss
Amounts will be paid to the Persons entitled thereto;
(ix) Overcollateralization with respect to all Series of Transition
Bonds for such Monthly Allocation Date will be transferred to the
Overcollateralization Subaccount;
(x) provided that no Event of Default has occurred and is continuing,
an amount up to the amount of net investment earnings on amounts in the
General Subaccount of the Collection Account since the previous Monthly
Allocation Date will be released to the Issuer free from the lien of the
Indenture;
(xi) the balance, if any, will be allocated to the Reserve Subaccount;
and
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(xii) following repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the Issuer free from the
lien of the Indenture.
If on any Monthly Allocation Date funds on deposit in the General
Subaccount are insufficient to make the allocations contemplated by clauses (i)
through (viii) above, the Bond Trustee will draw from amounts on deposit in the
following subaccounts up to the amount of such shortfall, in order to make such
payments and transfers: (i) from the Interest Deposit Subaccount, with respect
to the payments or transfers contemplated by clause (v) above only, (ii) then
from the Loss Subaccount, with respect to the payments or transfers contemplated
by clauses (i) through (vii) above only, (iii) thereafter from the Reserve
Subaccount, then from the Overcollateralization Subaccount and finally from the
Capital Subaccount.
On each Payment Date for any Series, the amounts on deposit in the Series
Subaccount for that Series (other than net income or other gain thereon, which,
so long as no Event of Default has occurred and is continuing, shall be released
to the Issuer free of the lien of the Indenture) will be applied as follows (in
the priority indicated): (i) interest due and payable on the Transition Bonds of
such Series, together with any overdue interest and, to the extent permitted by
law, interest thereon, will be paid to the holders of Transition Bonds of such
Series and any payments to be made to a counterparty to any swap agreement will
be paid to such counterparty, (ii) the balance, if any, up to the principal
amount of the Transition Bonds of such Series that is scheduled to be paid by
such Payment Date in accordance with the Expected Amortization Schedule therefor
or, with respect to any Series of Transition Bonds payable as a result of
acceleration triggered by an Event of Default or to be redeemed pursuant to the
Indenture, the outstanding principal amount of such Series and premium, if any,
will be paid to the holders of Transition Bonds of such Series and (iii) the
balance, if any, will be transferred to the General Subaccount for allocation on
the next Monthly Allocation Date.
All payments to Transition Bondholders of a Series pursuant to clauses (i)
and (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Series held by such
Transition Bondholders, unless, in the case of a Series comprised of two or more
Classes, the applicable Supplemental Indenture for such Series specifies
otherwise. All payments to Transition Bondholders of a Class pursuant to clause
(i) or (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Class held by such
Transition Bondholders.
Liquidated Damages
Liquidated Damages will be deposited into the General Subaccount of the
Collection Account as provided in the Sale Agreement and applied on the date
specified by the Issuer for the redemption of the Transition Bonds as a result
of receiving such Liquidated Damages (the "Liquidated Damages Redemption Date"),
which date may not be more than 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;
(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;
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(iii) all other operating expenses shall be paid to the Persons
entitled thereto;
(iv) the redemption price and accrued interest for each Series of
Transition Bonds shall be paid to Transition Bondholders of such Series;
and
(v) the balance, if any, will be released to the Issuer, free from the
lien of the Indenture.
Reports to Transition Bondholders
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Bond Trustee will deliver a statement prepared by the Bond
Trustee to each Transition Bondholder of that Series which will include (to the
extent applicable) the following information (and any other information so
specified in the applicable Supplemental Indenture) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(i) the amount paid to such Transition Bondholders in respect of
principal;
(ii) the amount paid to such Transition Bondholders in respect of
interest;
(iii) the outstanding principal balance and the amount provided in the
Expected Amortization Schedule, in such case for such Series and as of the
most recent Payment Date;
(iv) the amount on deposit in the Overcollateralization Subaccount and
the Calculated Overcollateralization Level, in each case for all Series and
as of the most recent Payment Date;
(v) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(vi) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
Modification of Indenture
Without the consent of any of the holders of the outstanding Transition
Bonds but with prior notice to the Rating Agencies, the Issuer and the Bond
Trustee may execute a Supplemental Indenture for any of the following purposes:
(i) to correct or amplify the description of the Collateral, or better
to assure, convey and confirm unto the Bond Trustee the Collateral, or to
subject to the lien of the Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions of the Indenture, of another person to the Issuer, and the
assumption by any such successor of the covenants of the Issuer contained
in the Indenture and in the Transition Bonds;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Transition Bonds, or to surrender any right or power therein
conferred upon the Issuer;
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(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Bond Trustee;
(v) to cure any ambiguity, to correct or supplement any provision of
the Indenture or in any Supplemental Indenture which may be inconsistent
with any other provision of the Indenture or in any Supplemental Indenture
or to make any other provisions with respect to matters or questions
arising under the Indenture or in any Supplemental Indenture; provided,
however, that (i) such action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of any
Transition Bondholder and (ii) the Rating Agency Condition shall have been
satisfied with respect thereto;
(vi) to evidence and provide for the acceptance of the appointment
under the Indenture by a successor bond trustee with respect to the
Transition Bonds and to add to or change any of the provisions of the
Indenture as shall be necessary to facilitate the administration of the
trusts under the Indenture by more than one bond trustee, pursuant to
certain requirements of the Indenture;
(vii) to modify, eliminate or add to the provisions of the Indenture
to such extent as shall be necessary to effect the qualification of the
Indenture under the Trust Indenture Act or under any similar federal
statute hereafter enacted and to add to the Indenture such other provisions
as may be expressly required by the Trust Indenture Act;
(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 (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).
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:
(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
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provisions of the Indenture and the related applicable Supplemental
Indenture relating to the application of collections on, or the proceeds of
the sale of, the Collateral to payment of principal of or premium, if any,
or interest on the Transition Bonds, or change any place of payment where,
or the coin or currency in which, any Transition Bond or any interest
thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment;
(iii) reduce the percentage of the aggregate amount of the outstanding
Transition Bonds, or of a Series or Class thereof, the consent of the
holders of which is required for any such Supplemental Indenture, or the
consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder
and their consequences provided for in the Indenture;
(iv) reduce the percentage of the outstanding amount of the Transition
Bonds required to direct the Bond Trustee to direct the Issuer to sell or
liquidate the Collateral;
(v) modify any provision of the section of the Indenture relating to
the consent of Transition Bondholders with respect to Supplemental
Indentures, except to increase any percentage specified therein or to
provide that certain additional provisions of the Indenture or the Basic
Documents cannot be modified or waived without the consent of the Holder of
each Outstanding Transition Bond affected thereby.
(vi) modify any of the provisions of the Indenture in such a manner as
to affect the amount of any payment of interest, principal or premium, if
any, payable on any Transition Bond on any Payment Date or to affect the
rights of Transition Bondholders to the benefit of any provisions for the
mandatory redemption of the Transition Bonds contained in the Indenture or
change the redemption dates, Expected Amortization Schedules or Series or
Class Final Maturity Date or Series or Class Rated Final Payment Date of
any Transition Bonds;
(vii) decrease the Required Capital Amount with respect to any Series,
the Overcollateralization Amount or the Calculated Overcollateralization
Level with respect to any Payment Date;
(viii) modify or alter the provisions of the Indenture regarding the
voting of Transition Bonds held by the Issuer, the Seller, an affiliate of
either of them or any obligor on the Transition Bonds; or
(ix) decrease the percentage of the aggregate principal amount of the
Transition Bonds required to amend the sections of the Indenture which
specify the applicable percentage of the aggregate principal amount of the
Transition Bonds necessary to amend the Indenture or certain other related
agreements; or
(x) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the Collateral for
the Transition Bonds or, except as otherwise permitted or contemplated in
the Indenture, terminate the lien of the Indenture on any property at any
time subject thereto or deprive the holder of any Transition Bond of the
security provided by the lien of the Indenture.
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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.
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 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 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 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.
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;
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(ii) a default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Series Rated Final Payment Date for
such Series or, if applicable, any Class on the Class Rated Final Payment
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 following an Event of Default other than a default in the
payment of any principal, a default for five days or more in the payment of any
interest on any Transition Bond of any Series or a default on the payment of the
price set for redemption in the related Supplemental Indenture for any
Transition Bond on the date for redemption therefor set in the related
Supplemental Indenture unless:
(i) the holders of 100% of the principal amount of all Series of
Transition Bonds consent thereto;
(ii) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and premium, if any, and accrued interest on the
outstanding Transition Bonds; or
(iii) the Bond Trustee determines that funds provided by the
Collateral would not be sufficient on an ongoing basis to make all payments
on the Transition Bonds of all Series as such payments would have become
due if the Transition Bonds had not been declared due and payable, and the
Bond Trustee obtains the consent of the holders of 66 2/3% of the aggregate
outstanding amount of the Transition Bonds of all Series.
Subject to the provisions of the Indenture relating to the duties of the
Bond Trustee, in case an Event of Default occurs and is continuing, the Bond
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of
Transition Bonds of any Series if the Bond Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Transition Bonds of all Series will have the right to direct
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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 all Series have made written request of the
Bond Trustee to institute such proceeding in its own name as Bond Trustee;
(iii) such holder or holders have offered the Bond Trustee security or
indemnity reasonably satisfactory to the Bond Trustee against the costs,
expenses, and liabilities to be incurred in complying with such request;
(iv) the Bond Trustee for 60 days after its receipt of such notice,
request and offer has failed to institute such proceeding; and
(v) no direction inconsistent with such written request has been given
to the Bond Trustee during such 60-day period by the holders of a majority
in principal amount of the outstanding Transition Bonds of all Series.
Certain Covenants
The Issuer will keep in effect its existence, rights and franchises as a
statutory business trust under Delaware law, provided that the Issuer may
consolidate with or merge into another entity or sell substantially all of its
assets to another entity and dissolve if:
(i) the entity formed by or surviving such consolidation or merger or
to whom substantially all of such assets are sold is organized under the
laws of the United States or any state thereof and shall expressly assume
by a Supplemental Indenture the due and punctual payment of
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the principal of and premium, if any, and interest on all Transition Bonds
and the performance of the Issuer's obligations under the Indenture;
(ii) such entity expressly assumes all obligations and succeeds to all
rights of the Issuer under the Sale Agreement and the Master Servicing
Agreement pursuant to an assignment and assumption agreement executed and
delivered to the Bond Trustee;
(iii) no default or Event of Default will have occurred and be
continuing immediately after giving effect such merger, consolidation or
sale;
(iv) the Rating Agency Condition will have been satisfied with respect
to such consolidation or merger or sale;
(v) the Issuer has received an opinion of counsel to the effect that
such consolidation or merger or sale of assets would have no material
adverse tax consequence to the Issuer or any Transition Bondholder, such
consolidation or merger or sale complies with the Indenture and all
conditions precedent therein provided relating to such consolidation or
merger or sale and will result in the Bond Trustee maintaining a continuing
valid first priority security interest in the Collateral;
(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.
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The Issuer may not engage in any business other than purchasing and owning
the Transferred Intangible Transition Property, issuing Transition Bonds from
time to time, pledging its interest in the Collateral to the Bond Trustee under
the Indenture in order to secure the Transition Bonds, and performing activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto.
The Issuer may not issue, incur, assume or guarantee any indebtedness
except for the Transition Bonds or guarantee or otherwise become contingently
liable in connection with the obligations, stocks or dividends of, or own,
purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other person. The Issuer may not, except as
contemplated by the Indenture, the Sale Agreement, the Master Servicing
Agreement and certain related documents, including the Trust Agreement, make any
loan or advance or credit to any person. The Issuer will not make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty) other than Intangible Transition Property
purchased from the Seller pursuant to, and in accordance with, the Sale
Agreement. The Issuer may not make any payments, distributions or dividends to
any holder of beneficial interests in the Issuer in respect of such beneficial
interest, except in accordance with the Indenture.
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.
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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 Final Maturity Date or the date of
redemption therefor, provided that the Issuer has deposited funds sufficient for
the payment in full of all of the Transition Bonds of such Series with the Bond
Trustee and the Issuer has delivered to the Bond Trustee the officer's
certificate and opinion of counsel specified in the Indenture. Such deposited
funds will be segregated and held apart solely for paying such Transition Bonds,
and such Transition Bonds shall not be entitled to any amounts on deposit in the
Collection Account other than amounts on deposit in the Defeasance Subaccount
for such Transition Bonds.
Legal Defeasance and Covenant Defeasance
The Issuer may, at any time, terminate (i) all of its obligations under the
Indenture with respect to the Transition Bonds of any Series ("Legal Defeasance
Option") or (ii) its obligations to comply with certain covenants, including
certain of the covenants described under "The Indenture--Certain Covenants" (the
"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 Final Maturity 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 Final Maturity 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 Final Maturity 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;
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(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 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,
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a receiver or other public officer takes charge of the Bond Trustee or its
property or the Bond Trustee becomes incapable of acting. If the Bond Trustee
resigns or is removed or a vacancy exists in the office of bond trustee for any
reason, the Issuer will be obligated to appoint a successor bond trustee
eligible under the Indenture. Any resignation or removal of the Bond Trustee and
appointment of a successor bond trustee will not become effective until
acceptance of the appointment by a successor bond trustee.
The Bond Trustee shall at all times satisfy the requirements of the Trust
Indenture Act and have a combined capital and surplus of at least $50 million
and a long term debt rating of "Baa3" or better by Moody's. If the Bond Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business or assets to, another entity, the resulting,
surviving or transferee entity shall without any further action be the successor
Bond Trustee.
Governing Law
The Indenture will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
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
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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 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 maximum United States federal income tax
rate of (i) 39.6% if the United States Person held the Transition Bond for not
more than one year before sale or (ii) 20% if the United States Person held the
Transition Bond for more than one year.
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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, 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
116
<PAGE>
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.
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.
117
<PAGE>
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.
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.
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<PAGE>
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 Rated Final Payment Date
or Class Rated Final Payment 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.
119
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of defined terms used in this Prospectus and defined
herein and the pages on which the definitions may be found.
TERM PAGE
---- ----
Adjustment Date......................................................13
Adjustment Request...................................................13
Annual Accountant's Report...........................................94
Basic Documents......................................................87
Beneficiary Trustees.................................................73
Bond Rate............................................................15
Bond Trustee..........................................................1
Book-Entry Transition Bonds..........................................78
Business Day.........................................................16
Calculated Overcollateralization Level...............................16
Calculation Date.....................................................13
CAP Program..........................................................63
Capital Subaccount...................................................16
Cede..................................................................3
CEDEL................................................................78
CEDEL Participants...................................................80
Class.................................................................1
Class Final Maturity Date.............................................4
Class Rated Final Payment Date........................................4
Code.................................................................25
Collateral............................................................1
Collection Account...................................................16
Collection Period....................................................25
Commonwealth.........................................................13
Commonwealth Court...................................................45
Competition Act.......................................................1
Competitive Default Service..........................................49
Competitive Default Supplier.........................................49
Competitive Transition Charges.......................................46
Cooperative..........................................................80
Covenant Defeasance Option..........................................112
Customer.............................................................14
Customer Category....................................................14
De Minimis Loss Amount...............................................23
Defeasance Subaccount................................................16
Delaware Trustee.....................................................72
Depositaries.........................................................78
DTC...................................................................3
Eastern District Court...............................................45
120
<PAGE>
electric distribution companies.......................................9
electric generation suppliers.........................................9
Eligible Institution.................................................99
Eligible Investments.................................................99
ERISA................................................................25
Euroclear............................................................78
Euroclear Operator...................................................80
Euroclear Participants...............................................80
Event of Default....................................................107
Exchange Act..........................................................3
Expected Amortization Schedule.......................................15
Expected Final Amortization Date.....................................22
Final Order..........................................................28
Financial Institution...............................................116
Financing Issuance...................................................98
Foreign Person......................................................114
General Subaccount...................................................16
H.R. 1230............................................................29
Indemnity Amounts....................................................17
Indenture.............................................................1
Independent Trustee..................................................72
Initial Intangible Transition Property...............................83
Initial Loss Calculation Date........................................24
Initial Transfer Date................................................83
Insolvency Laws......................................................96
Intangible Transition Charges.........................................1
Intangible Transition Property........................................1
Interest.............................................................21
Interest Deposit Amounts............................................100
Interest Deposit Subaccount..........................................16
IP&L.................................................................45
Issuer................................................................1
Issuer Trustee.......................................................10
ITC Collections......................................................11
Joint Petition.......................................................45
Legal Defeasance Option.............................................112
Liquidated Damages...................................................23
Liquidated Damages Payment Date......................................88
Liquidated Damages Redemption Date..................................103
Loss Amounts........................................................100
Loss Subaccount......................................................16
Master Servicing Agreement............................................1
Monthly Allocated Interest Balance...................................21
Monthly Allocated Overcollateralization Balance......................22
Monthly Allocated Principal Balance..................................21
Monthly Allocation Date..............................................16
Monthly Servicing Fee................................................25
Moody's..............................................................25
OID.................................................................115
121
<PAGE>
Other Issuer.........................................................83
Overcollateralization................................................21
Overcollateralization Amount.........................................16
Overcollateralization Subaccount.....................................16
Participants.........................................................78
Parties in Interest.................................................118
Payment Date..........................................................4
PECO Energy...........................................................1
Percentage...........................................................83
Plan Assets.........................................................117
Plans...............................................................117
Principal............................................................21
Prior Trust Agreement................................................72
Pro Rata.............................................................21
Prospectus Supplement.................................................1
PUC...................................................................1
PUC Restructuring Order..............................................45
QRO...................................................................1
Qualified Transition Expenses.........................................9
Rate BLI.............................................................58
Rate Class...........................................................14
Rate EP..............................................................58
Rate GS..............................................................57
Rate HT..............................................................58
Rate OP..............................................................57
Rate PD..............................................................58
Rate POL.............................................................58
Rate R...............................................................57
Rate R-H.............................................................57
Rate SL-E............................................................58
Rate SL-P............................................................58
Rate SL-S............................................................58
Rate TL..............................................................58
Rating Agency.........................................................5
Rating Agency Condition...............................................5
Record Date..........................................................15
Refunding Issuance...................................................98
Registration Statement................................................3
Remittance Date......................................................24
Required Capital Amount..............................................17
Reserve Subaccount...................................................16
Restructuring Plan...................................................28
Rules................................................................79
S&P..................................................................25
Sale Agreement........................................................1
SEC...................................................................3
Securities Act........................................................3
Seller................................................................1
Series................................................................1
122
<PAGE>
Series Final Maturity Date............................................4
Series Issuance Date..................................................1
Series Rated Final Payment Date.......................................4
Series Subaccount....................................................16
Serviced Intangible Transition Property...............................1
Servicer..............................................................1
Servicer Defaults....................................................96
Settlement...........................................................28
Stranded Costs........................................................9
Subsequent Intangible Transition Property............................83
Subsequent Sale......................................................83
Subsequent Transfer Date.............................................83
Successor Servicer...................................................97
Supplemental Indenture...............................................74
Tax Counsel.........................................................115
Terms and Conditions.................................................80
Transferred Intangible Transition Property............................1
Transition Bondholder.................................................3
Transition Bonds......................................................1
Trust Agreement......................................................72
Trustees.............................................................73
U.S. Government Obligations.........................................113
Underwriters........................................................118
United States Person................................................114
United States related person........................................117
Winter Moratorium....................................................69
123
<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 Changes in 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.
Income Taxes
PETT is a wholly owned subsidiary of PECO Energy which has not elected to
be taxed as a corporation for federal income tax purposes. PETT will be treated
as a division of PECO Energy and will not be treated as a separate taxable
entity.
F-5
<PAGE>
Notes to Financial Statements, Continued
3. The Bonds
The purpose of PETT is to issue Bonds pursuant to authority granted by the
PUC in the QRO. PETT intends to issue 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>
Prospectus Supplement
PECO ENERGY
TRANSITION TRUST
Issuer
SERIES 199_ -
$
Transition Bonds
$_____ Class _____
$_____ Class _____
PECO Energy Company,
Seller and Servicer
Bank of New York,
Trustee
Underwriters
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 ________, _____.
---------------
<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).
* Previously filed.
II-1
<PAGE>
4.3.2 Form of Series Supplement.
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. 1 to the Issuer's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission
on September 18, 1998).
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 Exhibits 5.2 and 8.1).
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.*
* 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
II-2
<PAGE>
in the effective Registration Statement; and (iii) to include any material
information with respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change in such information in the
Registration Statement; provided, however, that (a)(1)(i) and (a)(1)(ii) will
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934, as amended) with respect to the Trust that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will; unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by its is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(i) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of this Registration Statement as of the time it was
declared effective.
(e) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as
amended, in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act of 1939, as
amended.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this Amendment No. 2 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 February 22, 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. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
* Beneficiary Trustee February 22, 1999
- --------------
* By: /s/ Diana Moy Kelly
------------------------------------------------
Diana Moy Kelly, Beneficiary Trustee
Pursuant to a power of attorney previously held
<PAGE>
INDEX TO EXHIBITS
1.1 Form of Underwriting Agreement.
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.
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. 1 to the Issuer's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on September 18,
1998).
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).
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in its
opinions filed as Exhibits 5.2 and 8.1).
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.).
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.
PECO ENERGY TRANSITION TRUST
PECO ENERGY COMPANY
UNDERWRITING AGREEMENT
[ ], 1999
To the Representatives
named in Schedule I
hereto of the Underwriters
named in Schedule II hereto
Ladies and Gentlemen:
PECO Energy Transition Trust, a statutory business trust created under the
laws of the State of Delaware (the "Issuer") and PECO Energy Company, a
Pennsylvania corporation (the "Company") as grantor and owner of all beneficial
interest in the Issuer, propose, subject to the terms and conditions stated
herein, that the Issuer issue and sell to the underwriters named in Schedule II
hereto (the "Underwriters"), for whom you (the "Representatives") are acting as
representatives, the principal amount of its securities identified in Schedule I
hereto (the "Securities"). If the firm or firms listed in Schedule II hereto
include only the firm or firms listed in Schedule I hereto, then the terms
"Underwriters" and "Representatives", as used herein, shall each be deemed to
refer to such firm or firms.
Each of the capitalized terms used and not otherwise defined herein shall
have the meaning given to it in the Sale Agreement, dated as of [ ], 1999 (the
"Sale Agreement"), between the Company, as seller, and the Issuer or, if not
defined therein, in the Master Servicing Agreement, dated as of [ ], 1999 (the
"Servicing Agreement") between the Company, as servicer, and the Issuer or, if
not defined therein, in the Indenture, dated as of [ ], 1999 (as amended and
supplemented from time to time, including by the supplemental indenture for the
Securities, the "Indenture"), between the Issuer and The Bank of New York (the
"Bond Trustee") or, if not defined therein, in the amended and restated Trust
Agreement, dated as of [ ], 1999 (the "Trust Agreement"), among the Company,
First Union Trust Company, National
<PAGE>
Association, as issuer trustee (the "Issuer Trustee"), and George R. Shicora and
Diana Moy Kelly, as beneficiary trustees (each a "Beneficiary Trustee").
1. As of the date hereof, each of the Company and the Issuer represents and
warrants to each of the Underwriters that:
(a) The Issuer and the Securities meet the requirements for the use of
Form S-3 under the Securities Act of 1933, as amended (the "Act") and a
registration statement on Form S-3 (File No. 333-58055) in respect of the
Securities has been filed with the Securities and Exchange Commission (the
"Commission"); such registration statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto but including all documents incorporated by reference in
the prospectus included therein, have been declared effective by the
Commission in such form; no other document with respect to such
registration statement or document incorporated by reference therein has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of such registration statement has been issued and no
proceeding for that purpose has been initiated or to the knowledge of the
Company or the Issuer threatened by the Commission (any preliminary
prospectus included in such registration statement or filed with the
Commission pursuant to Rule 424(b) of the rules and regulations of the
Commission under the Act, being hereinafter called a "Preliminary
Prospectus"; the various parts of such registration statement, including
all exhibits thereto and the documents incorporated by reference in the
prospectus contained in the registration statement at the time such part of
the registration statement became effective, each as amended at the time
such part of the registration statement became effective, being hereinafter
called the "Registration Statement"; such final prospectus, in the form
first filed pursuant to Rule 424(b) under the Act, being hereinafter called
the "Prospectus"; any reference herein to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under the
Act, as of the date of such Preliminary Prospectus or Prospectus, as the
case may be; and any reference to any amendment or supplement to the
Registration Statement, any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include any documents filed after the effective
date of the Registration
2
<PAGE>
Statement or the date of such Preliminary Prospectus or Prospectus, as
the case may be, under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), and incorporated by reference in such Registration
Statement, Preliminary Prospectus or Prospectus, as the case may be);
(b) Each Preliminary Prospectus, at the time of circulation thereof by
the Underwriters, conformed in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder, and as
of the date thereof did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, provided, however, that this
representation and warranty shall not apply to any statement or omission
made in reliance upon and in conformity with information regarding any
Underwriter or the arrangements with respect to the underwriting of the
offering of the Securities contemplated hereby furnished in writing to the
Issuer or the Company by an Underwriter through you expressly for use
therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects, to the requirements of
the Act, the Exchange Act, the Trust Indenture Act of 1939 (the "Trust
Indenture Act") and the respective rules and regulations of the Commission
thereunder; the Registration Statement does not and will not, as of the
applicable effective date as to the Registration Statement and any
amendment thereto, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; the Indenture complies in all
material respects with the requirements of the Trust Indenture Act and the
rules thereunder; and the Prospectus does not and will not, as of the
applicable filing date as to the Prospectus and any amendment or supplement
thereto, contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information regarding any Underwriter or the
3
<PAGE>
arrangements with respect to the underwriting of the offering of the
Securities contemplated hereby furnished in writing to the Issuer or the
Company by an Underwriter through you expressly for use therein;
(d) The documents incorporated by reference in the Registration
Statement and the Prospectus, when they became effective or were filed (or,
if an amendment with respect to any such document was filed or became
effective, when such amendment was filed or became effective) with the
Commission, as the case may be, conformed in all material respects to the
requirements of the Act, the Exchange Act, the Trust Indenture Act and the
rules and regulations thereunder, and any further documents so filed and
incorporated by reference will, when they become effective or are filed
with the Commission, as the case may be, conform in all material respects
to the requirements of the Act, the Exchange Act, the Trust Indenture Act
and the rules and regulations thereunder; none of such documents, when it
became effective or was filed (or, if an amendment with respect to any such
documents was filed or became effective, when such amendment was filed or
became effective) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(e) PricewaterhouseCoopers LLP are independent certified public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(f) The Issuer has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act, has the
trust power and authority to conduct its business as presently conducted
and as described in the Prospectus, will not be required to be authorized
to do business in any other jurisdiction; and the Issuer has all requisite
business trust power and authority to issue the Securities and purchase the
Intangible Transition Property as described in the Prospectus;
(g) The Company is a validly existing and subsisting corporation under
the laws of the Commonwealth of Pennsylvania; each of the Company's
subsidiaries ("Subsidiaries") which constitutes a "gas utility company" or
an "electric utility company," as defined in the Public Utility Holding
Company Act of 1935, as amended (a "Utility Subsidiary"), is a validly
4
<PAGE>
existing corporation under the laws of its jurisdiction of incorporation;
the Company and each Utility Subsidiary have all requisite power
and authority to own and occupy their respective properties and carry
on their respective businesses as presently conducted and as described in
the Prospectus and are duly qualified as foreign corporations to do
business and in good standing in every jurisdiction in which the nature of
the business conducted or property owned by them makes such qualification
necessary and in which the failure to so qualify would have a materially
adverse effect on the Company; and the Company has all requisite power and
authority to sell the Intangible Transition Property to the Issuer as
described in the Prospectus;
(h) Each of the Basic Documents to which the Company or the Issuer is
a party has been duly authorized by the Company or the Issuer, as
applicable, and when executed and delivered by the Issuer or the Company,
as applicable, will constitute a legal, valid and binding obligation of the
Company or the Issuer, as applicable, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditor's rights and to general equity
principles;
(i) The Securities have been duly authorized by the Issuer and will
conform to the description thereof in the Prospectus; and when the
Securities are authenticated by the Bond Trustee and executed and delivered
to the Underwriters and are paid for by the Underwriters in accordance with
the terms of this Agreement, the Securities will constitute the legal,
valid and binding obligations of the Issuer, enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditor's rights and to general equity
principles;
(j) The issue and sale of the Securities by the Issuer, the sale of
the Intangible Transition Property by the Company to the Issuer, the
execution, delivery and compliance by the Company and the Issuer with all
of the provisions of each of this Agreement and the Basic Documents to
which the Company or the Issuer, as applicable, is a party, and the
consummation of the transactions herein and therein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default
5
<PAGE>
under, any trust agreement, indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Issuer or the
Company is a party or by which the Issuer or the Company is bound or to
which any of the property or assets of the Issuer or the Company is
subject, which conflict, breach, violation or default would be material to
the issue and sale of the Securities or would have a material adverse
effect on the general affairs, management, prospects, financial position or
results of operations of the Issuer or the Company or on the stockholders'
equity of the Company, nor will such action result in any violation of the
provisions of the Articles of Incorporation or Bylaws of the Company or the
Issuer's Certificate of Trust or the Trust Agreement or any statute, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Issuer or the Company or any of their properties;
(k) Except (i) for the order of the Commission making the Registration
Statement effective, (ii) for permits and similar authorizations required
under the securities or "Blue Sky" laws of any jurisdiction, and to the
extent, if any, required pursuant to the undertakings set forth under Item
17 of Part II of the Registration Statement, and (iii) the Qualified Rate
Order, no consent, approval, authorization or other order of any
governmental authority is legally required for the execution, delivery and
performance of this Agreement by the Issuer and the Company and the
consummation of the transactions contemplated hereby; and
(l) This Agreement has been duly authorized, executed and delivered by
the Company and the Issuer.
2. Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Issuer agrees to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Issuer, at the purchase price set forth in
Schedule I hereto the principal amount of the Securities set forth opposite the
name of such Underwriter in Schedule II hereto.
3. Upon the authorization by you of the release of the Securities, the
several Underwriters propose to offer the Securities for sale upon the terms and
conditions set forth in the Prospectus.
6
<PAGE>
4. The Securities, on original issuance, will be issued in the form of one
or more global bonds registered in the name of The Depository Trust Company or
its nominee for the accounts of the Underwriters representing the Securities.
The time and date of delivery and payment for the Securities shall be 9:30 a.m.,
New York City time on [ ], 1999, or at such other time and date as you and the
Issuer may agree upon in writing. The time and date for such delivery is herein
called the "Time of Delivery." The Securities shall be delivered by or on behalf
of the Issuer to The Depository Trust Company for the account of each
Underwriter, against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer of immediately available funds to an
account specified by the [Issuer]. The Securities will be made available to the
Representatives for checking and packaging at least twenty-four hours prior to
the Time of Delivery at the office of The Depository Trust Company, 55 Water
Street, New York, New York, 10004.
5. The Issuer agrees with each of the Underwriters, and the Company agrees
with each of the Underwriters to cause the Issuer:
(a) To use its best efforts to cause the Registration Statement, if
not effective at the Execution Time, and any amendment thereto, to become
effective; to complete the Prospectus in a form approved by you, to file
the Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement and to provide evidence
satisfactory to you of such timely filing; and to furnish you, without
charge, three signed copies of the Registration Statement (or copies
thereof), including exhibits, and, during the period mentioned in paragraph
(d) below, as many copies of the Prospectus and any supplements and
amendments thereto as you may reasonably request and to furnish to the
Representatives copies of all reports on Form SR required by Rule 463 under
the Act.
(b) Other than pursuant to filings under the Exchange Act incorporated
in the Registration Statement and the Prospectus by reference, before
amending or supplementing the Registration Statement or the Prospectus, to
furnish to you a copy of each such proposed amendment or supplement prior
to filing and not to file any such proposed amendment or supplement to
which you reasonably object.
7
<PAGE>
(c) As soon as the Company or the Issuer is advised thereof, to
promptly advise you orally, and (if requested by you) to confirm such
advice in writing, (i) when the Registration Statement, if not effective at
the Execution Time, and any amendment thereto, has become effective, (ii)
when the Prospectus, and any Supplement thereto, has been filed with the
Commission pursuant to Rule 424(b), (iii) when any amendment to the
Registration Statement has been filed or become effective, (iv) of any
request by the Commission for any amendment of the Registration Statement
or supplement to the Prospectus or for any additional information, (v) when
any stop order has been issued under the Act with respect to the
Registration Statement or any proceedings therefor have been instituted or
are threatened; and to make every reasonable effort to secure the prompt
removal of any stop order, if issued, (vi) of the receipt by the Company or
the Issuer of any notification with respect to the suspension of the
qualification of the Securities for offering or sale in any jurisdiction,
or the initiation or threatening of any proceeding for that purpose and
(vii) of the happening of any event during the period mentioned in
subparagraph (d) below which in the judgment of the Company or the Issuer
makes any statement made in the Registration Statement or the Prospectus
untrue and which requires the making of any changes in the Registration
Statement or the Prospectus in order to make the statements therein not
misleading.
(d) If, at any time when a prospectus is required to be delivered
under the Act, any event shall occur as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with law, forthwith to prepare and duly
file with the Commission an appropriate supplement or amendment thereto,
and furnish, at its own expense, to you such reasonable number of copies
thereof as you shall reasonably request.
(e) To cooperate with you and counsel for the Underwriters to qualify
the Securities for offer and sale under the securities or Blue Sky laws of
such jurisdictions as you shall reasonably request, to maintain such
qualifications in effect so long as required for the distribution of the
Securities and to
8
<PAGE>
arrange for the determination of the legality of the Securities for
purchase by institutional investors; provided that neither the Company nor
the Issuer shall be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would subject
it to general service of process in any jurisdiction where it is not now so
subject, other than in suits arising out of the offering or sale of the
Securities, and to pay all expenses (including fees and disbursements of
counsel) in connection therewith.
(f) As soon as practicable, to make generally available to holders of
the Securities and to the Representatives an earnings statement or
statements of the Issuer which will satisfy the provisions of Section 11(a)
of the Act and Rule 158 under the Act.
(g) During the period beginning from the date hereof and continuing to
and including the earlier of (i) the date, after the last Time of Delivery,
on which the distribution of the Securities ceases, as determined by the
Representatives or (ii) the date which is 30 days after the last Time of
Delivery, not to offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce the offering of, any "transition bonds"
(as defined in the Statute) issued by a trust or other special purpose
vehicle without the prior written consent of the Representatives.
(h) During a period from the date of this Agreement until the
retirement of the Securities, or until such time as the Underwriters shall
cease to maintain a secondary market in the Securities, whichever occurs
first, to deliver to the Representatives the annual statements of
compliance and the annual independent auditor's servicing reports of the
Company or the Servicer furnished to the Issuer or the Bond Trustee
pursuant to the Sale and Servicing Agreement or the Indenture, as
applicable, as soon as such statements and reports are furnished to the
Issuer or the Bond Trustee.
(i) So long as any of the Securities are outstanding, to furnish to
the Representatives (i) as soon as available, a copy of each report of the
Issuer filed with the Commission under the Exchange Act, or mailed to
holders of the Securities, (ii) a copy of any filings of the Company or the
Servicer with the Pennsylvania Public Utility Commission pursuant to the
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Qualified Rate Order, including, but not limited to, any Adjustment
Requests and (iii) from time to time, any information concerning the
Company or the Issuer as the Representatives may reasonably request.
(j) To the extent, if any, that any rating necessary to satisfy the
condition set forth in Section 6(i) of this Agreement is conditioned upon
the furnishing of documents or the taking of other actions by the Company
or the Issuer on or after the Time of Delivery, to furnish such documents
and take such other actions.
6. The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Issuer's and the Company's counsel and accountants in
connection with the registration of the Securities under the Act and other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among the Underwriters, this Agreement, the Blue Sky and Legal
Investment Memoranda, if any, and any other documents in connection with the
offering, purchase, sale and delivery of the Securities; (iii) all expenses in
connection with the qualification of the Securities for offering and sale under
state securities and insurance securities laws as provided in Section 5(e)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky and Legal
Investment Memoranda; (iv) any fees charged by securities rating services for
rating the Securities; (v) the cost of preparing certificates for the
Securities; (vi) the cost and charges of any transfer agent or registrar; (vii)
the cost of qualifying the Securities with The Depository Trust Company; (viii)
all other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section; and
(ix) all fees, costs and expenses of the Underwriters, including the reasonable
fees and disbursements of their counsel and transfer taxes on resale of any of
the Securities by them.
7. The several obligations of the Underwriters hereunder are subject to the
accuracy of the representations and warranties on the part of each of the
Company and the Issuer contained herein as of the Execution Time and the
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Time of Delivery, in the latter case, on and as of the Time of Delivery with the
same effect as if made at the Time of Delivery, and in the Sale and Servicing
Agreement as of the Time of Delivery, to the accuracy of the statements of each
of the Company and the Issuer made in any certificates pursuant to the
provisions hereof, to the performance by each of the Company and the Issuer of
its obligations hereunder and to the following conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date, or (ii) 9:30 AM on the business day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Prospectus, or any supplement thereto, is required pursuant
to Rule 424(b), the Prospectus, and any such supplement, shall have been
filed in the manner and within the time period required by Rule 424(b); and
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Representatives and the Issuer shall have received opinions of
counsel for the Company, portions of which may be delivered by (i) [ ],
in-house counsel for the Company, (ii) Ballard Spahr Andrews & Ingersoll,
LLP, outside counsel for the Company and (iii) Richards, Layton & Finger,
P.A., special Delaware counsel for the Company, each dated the Time of
Delivery, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) the Company (a) has been duly incorporated and is validly
existing and subsisting as a corporation under the laws of the
jurisdiction in which it is chartered or organized, (b) has all
requisite corporate power and authority to own its properties, conduct
its business as presently conducted and execute, deliver and perform
its obligations under this Agreement, the Trust Agreement, the Sale
Agreement and the Servicing Agreement, and (c) is duly qualified to do
business in all jurisdictions (and is in good standing under the laws
of all such
11
<PAGE>
jurisdictions) to the extent that such qualification and good
standing is or shall be necessary to protect the validity and
enforceability of this Agreement, the Basic Documents to which the
Company is a party and each other instrument or agreement necessary or
appropriate to the proper administration of this Agreement and the
transactions contemplated hereby;
(ii) the Trust Agreement, the Sale Agreement and the Servicing
Agreement have been duly authorized, executed and delivered by the
Company, and constitute legal, valid and binding agreements
enforceable against the Company in accordance with their terms
(subject to applicable bankruptcy, reorganization, fraudulent
transfer, insolvency, moratorium or other similar laws or equitable
principles affecting creditors' rights generally from time to time in
effect);
(iii) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or
any of its subsidiaries of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in the
Prospectus, and there is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit, which is not described or
filed as required;
(iv) this Agreement has been duly authorized, executed and
delivered by the Company;
(v) no consent, approval, authorization, filing with or order of
any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Statute and the Qualified Rate Order and such as
may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters and such other approvals (specified in such opinion) as
have been obtained;
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(vi) neither the execution and delivery of this Agreement, the
Trust Agreement, the Sale Agreement or the Servicing Agreement, nor
the issue and sale of the Securities, nor the consummation of the
transactions contemplated by this Agreement, the Trust Agreement, the
Sale Agreement or the Servicing Agreement, nor the fulfillment of the
terms of this Agreement, the Trust Agreement, the Sale Agreement or
the Servicing Agreement by the Company, will (A) conflict with, result
in any breach of any of the terms or provisions of, or constitute
(with or without notice or lapse of time) a default under the articles
of incorporation, bylaws or other organizational documents of the
Company, or conflict with or breach any of the material terms or
provisions of, or constitute (with or without notice or lapse of time)
a default under, any indenture, agreement or other instrument known to
such counsel after reasonable inquiry to which the Company or the
Issuer is a party or by which the Company or the Issuer is bound, (B)
result in the creation or imposition of any lien upon any properties
of the Company or the Issuer, pursuant to the terms of any such
indenture, agreement or other instrument (other than as contemplated
by the Basic Documents), or (C) violate any law, rule or regulation
or, to the knowledge of such counsel, any order, promulgated by the
United States, the State of Delaware or the Commonwealth of
Pennsylvania applicable to the Company or the Issuer, of any court or
of any federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the
Company or the Issuer or any of their respective properties; and
(vii) (A) the Qualified Rate Order has been duly authorized and
adopted by the Pennsylvania Public Utility Commission and is in full
force and effect, (B) the Securities constitute "transition bonds"
under Section 2812 of the Statute, and (C) upon the issuance of the
Securities, the Securities are entitled to the protections provided in
the first sentence of Section 2812(c)(2) of the Statute.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the States
of Pennsylvania, New York and Delaware or the United States, to the extent
13
<PAGE>
deemed proper and specified in such opinion, upon the opinion of other
counsel of good standing believed to be reliable and who are satisfactory
to counsel for the Underwriters and (B) as to matters of fact, to the
extent deemed proper, on certificates of responsible officers of the
Company, the Issuer Trustee and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Time of Delivery.
(c) The Representatives shall have received the opinions of counsel
for the Issuer, portions of which may be delivered by (i) Ballard Spahr
Andrews & Ingersoll, LLP, outside counsel for the Issuer and (ii) Richards,
Layton & Finger, P.A., special Delaware counsel for the Issuer, each dated
as of the Time of Delivery, in form and substance reasonably satisfactory
to the Representatives, to the effect that:
(i) the Securities, the Indenture, the Sale Agreement, the
Servicing Agreement and the Trust Agreement conform to the
descriptions thereof contained in the Prospectus;
(ii) the Issuer has been duly formed and is validly existing as a
statutory business Trust and is in good standing under the laws of the
State of Delaware, with full power and authority to execute, deliver
and perform its obligations under this Agreement and the Securities;
(iii) the Indenture, the Sale Agreement and the Servicing
Agreement have been duly authorized, executed and delivered, and
constitute legal, valid and binding agreements enforceable against the
Issuer in accordance with their terms (subject to applicable
bankruptcy, reorganization, insolvency, fraudulent transfer,
moratorium or other similar laws or equitable principles affecting
creditors' rights generally from time to time in effect); and the
Securities have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Underwriters pursuant to this
Agreement will constitute legal, valid and binding obligations of the
Issuer entitled to the benefits of the Indenture and any related
Series Supplement (subject to applicable bankruptcy, reorganization,
insolvency, fraudulent transfer, moratorium or other similar laws or
14
<PAGE>
equitable principles affecting creditors' rights generally from
time to time in effect);
(iv) the Sale Agreement, the Servicing Agreement and the Trust
Agreement are not required to be qualified under the Trust Indenture
Act;
(v) the Indenture has been duly qualified under the Trust
Indenture Act;
(vi) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Issuer or
relating to the Securities, the Qualified Rate Order or the collection
of Intangible Transition Charges or the use and enjoyment of
Intangible Transition Property under the Statute, of a character
required to be disclosed in the Registration Statement which is not
adequately disclosed in the Prospectus, and there is no franchise,
contract or other document of a character required to be described in
the Registration Statement or Prospectus, or to be filed as an
exhibit, which is not described or filed as required; and the
statements included or incorporated in the Prospectus under the
headings "The Competition Act," "The QRO And The Intangible Transition
Charge," "The Indenture," "The Sale Agreement," "The Master Servicing
Agreement," "The Transition Bonds," "Certain Tax Matters" and "ERISA
Considerations" fairly summarize the matters described therein;
(vii) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, any Preliminary
Prospectus, and any supplements thereto, pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued, no
proceedings for that purpose have been instituted or threatened, and
the Registration Statement and the Prospectus (other than the
financial statements and the notes and schedules thereto and other
financial and statistical information contained therein and the Form
T-1 as to which such counsel need express no opinion) comply as to
form in all material respects with
15
<PAGE>
the applicable requirements of the Act, the Exchange Act and the
Trust Indenture Act and the respective rules thereunder; and such
counsel has no reason to believe that at the Effective Date the
Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading or that
the Prospectus as of its date and at the Time of Delivery included or
includes any untrue statement of a material fact or omitted or omits
to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading (in each case, other than the financial statements and the
notes and schedules thereto and other financial and statistical
information contained therein as to which such counsel need express no
opinion);
(viii) this Agreement has been duly authorized, executed and
delivered by the Issuer;
(ix) no consent, approval, authorization, filing with or order of
any court or governmental agency or body is required for the issuance
of the Securities except such as have been obtained under the Statute
and the Qualified Rate Order and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained;
(x) neither the execution and delivery of this Agreement, the
Sale Agreement, the Servicing Agreement or the Indenture, nor the
issue and sale of the Securities, nor the consummation of the
transactions contemplated by this Agreement, the Sale Agreement, the
Servicing Agreement or the Indenture, nor the fulfillment of the terms
of this Agreement, the Sale Agreement, the Servicing Agreement or the
Indenture, by the Issuer will (A) conflict with, result in any breach
of any of the terms or provisions of, or constitute (with or without
notice or lapse of time) a default under the Trust Agreement, or
conflict with or breach any of the material terms or provisions of, or
constitute (with or without notice or lapse of time) a default under,
any indenture, agreement or
16
<PAGE>
other instrument known to such counsel and to which the Issuer is
a party or by which the Issuer, is bound, (B) result in the creation
or imposition of any lien upon any properties of the Issuer, pursuant
to the terms of any such indenture, agreement or other instrument
(other than as contemplated by the Basic Documents), or (C) violate
any law or any order, rule or regulation promulgated by the United
States, the State of Delaware or the Commonwealth of Pennsylvania
applicable to the Issuer, of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Issuer or any of its
properties;
(xi) (A) to the extent that the provisions of Section 2812 of the
Statute apply to the grant of a security interest by the Issuer in the
Collateral pursuant to the Indenture, then upon the giving of value by
the Bond Trustee to the Issuer with respect to the Collateral, (I) the
Indenture creates in favor of the Bond Trustee a security interest in
the rights of the Issuer in the Collateral, (II) such security
interest is valid and enforceable against the Issuer and third parties
(subject to the rights of any third parties holding security interests
in such Collateral perfected in the manner described in Section 2812
of the Statute), and has attached, (III) such security interest is
perfected, and (IV) such perfected security interest ranks prior to
any other security interest created under Section 2812 of the Statute.
(B) To the extent that the provisions of Section 2812 of the Statute
do not apply to the grant of a security interest by the Issuer in the
Collateral pursuant to the Indenture, then upon the giving of value by
the Bond Trustee to the Issuer with respect to the Collateral, (I) the
Indenture creates in favor of the Bond Trustee a security interest in
the rights of the Issuer in the Collateral, and such security interest
is enforceable against the Issuer with respect to such Collateral,
(II) insofar as perfection of such security interest can be
accomplished only by filing financing statements under the Uniform
Commercial Code in [list filing offices and jurisdictions], upon the
filing of such financing statements in such filing offices, the Bond
Trustee will have a perfected security interest in such Collateral,
and (III) when so
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<PAGE>
perfected, the Bond Trustee's security interest in such
Collateral as to which perfection of such security interest can be
accomplished only by filing a financing statement will have priority
over any other security interest in such Collateral if such other
security interest, in order to achieve priority over the Bond
Trustee's security interest by the filing of one or more financing
statements, was required by law to have been perfected by making such
filings in the filing offices prior to the effective date of [describe
search reports and effective date]; and
(xii) the Issuer is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" or
under the "control" of an "investment company" as such terms are
defined under the Investment Company Act of 1940, as amended.
(d) The Representatives shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated the
Time of Delivery, with respect to the issuance and sale of the Securities,
the Indenture, the Registration Statement, the Prospectus (together with
any supplement thereto) and other related matters as the Representatives
may reasonably require, and each of the Company and the Issuer shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(e) The Representatives shall have received a certificate of the
Company, signed by any Vice President of the Company, dated the Time of
Delivery, in form and substance reasonably satisfactory to the
Representatives, to the effect that the signer of such certificate has
reviewed the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company and the
Issuer in this Agreement, the Sale Agreement and the Servicing
Agreement are true and correct in all material respects on and as of
the Time of Delivery with the same effect as if made at the Time of
Delivery, and the Company and the Issuer have complied with all the
agreements and satisfied all the conditions on their respective
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<PAGE>
parts to be performed or satisfied at or prior to the Time of
Delivery;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the dates as of which information is given in the
Prospectus (exclusive of any supplement thereto), there has been no
material adverse change in the condition (financial or other),
earnings, business or properties of the Company and its Subsidiaries
taken as a whole (if such a change would impair the investment quality
of the Securities or make it impractical or inadvisable to market the
Securities) or the Issuer, whether or not arising from transactions in
the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(f) At the Time of Delivery, the Representatives shall have received
from PricewaterhouseCoopers LLP (i) a letter or letters (which may refer to
letters previously delivered to one or more of the Representatives), dated
as of the Time of Delivery, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Act and the Exchange Act and the respective applicable
published rules and regulations thereunder and stating in effect that they
have performed certain specified procedures as a result of which they
determined that certain information of an accounting, financial or
statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company and its Subsidiaries) set forth in the Registration Statement and
the Prospectus, including information specified by the Underwriters and set
forth under the captions "Prospectus Summary," "PECO Energy's Restructuring
Plan," "The QRO And The Intangible Transition Charges," "The Seller and
Servicer," and "The Transition Bonds" in the Prospectus, agrees with the
accounting records of the Company and its Subsidiaries, excluding any
questions of legal interpretation, and (ii) the opinion or certificate,
dated as of the Time of Delivery, in form and substance satisfactory to the
Representatives, satisfying the requirements of Section 2.10(7) of the
Indenture.
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References to the Prospectus in this clause (f) include any supplement
thereto at the date of the letter.
In addition, except as provided in Schedule I hereto, at the Execution
Time, the Representatives shall have received from PricewaterhouseCoopers
LLP a letter or letters, dated as of the Execution Time, in form and
substance satisfactory to the Representatives, to the effect set forth
above.
(g) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), and at or prior to the Time of Delivery, there shall not have
been any change, or any development involving a prospective change, in or
affecting either (i) the business or properties or financial condition of
the Company or the Issuer, or (ii) the Intangible Transition Property, the
Securities, the Qualified Rate Order or the Statute, the effect of which
is, in the judgment of the Representatives, so material and adverse as to
make it impractical or inadvisable to proceed with the offering or delivery
of the Securities as contemplated by the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
(h) The Representatives, the Company and the Issuer shall have
received on the Closing Date an opinion letter or letters of Ballard Spahr
Andrews & Ingersoll, counsel to the Company and the Issuer, dated the Time
of Delivery, in form and substance reasonably satisfactory to the
Representatives, (i) with respect to the characterization of the transfer
of the Intangible Transition Property by the Company to the Issuer as a
"true sale" for bankruptcy purposes, (ii) to the effect that a court would
not order the substantive consolidation of the assets and liabilities of
the Issuer with those of the Company in the event of a bankruptcy,
reorganization or other insolvency proceeding involving the Company and
(iii) to the effect that upon the delivery of the fully executed Sale
Agreement to the Issuer and the payment of the purchase price of the
Intangible Transition Property by the Issuer to the Seller pursuant to the
Sale Agreement, then (A) the transfer of the Intangible Transition Property
by the Seller to the Issuer pursuant to the Sale Agreement conveys the
Seller's
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right, title and interest in the Intangible Transition Property to the
Issuer and will be treated as an absolute transfer of all the Seller's
right, title and interest in the Intangible Transition Property, other than
for federal and state tax purposes, (B) such transfer of the Intangible
Transition Property is perfected, (C) such transfer has priority over any
other assignment of the Intangible Transition Property, and (D) the
Intangible Transition Property is free and clear of all liens created prior
to its transfer to the Issuer pursuant to the Sale Agreement.
(i) At or prior to the Time of Delivery, the Representatives shall
have received evidence, in form and substance reasonably satisfactory to
the Representatives, that the Company has obtained a release of the
Intangible Transition Property from the lien of that certain mortgage,
dated May 1, 1923, as supplemented and amended to the date hereof, between
the Company and First Union Trust Company, National Association (as
successor to Fidelity Trust Company), as trustee.
(j) The Securities shall have been rated in the highest long-term
rating category by each of the Rating Agencies or in such other rating
category as was specified in the Preliminary Prospectus.
(k) At or prior to the Time of Delivery, the Representatives shall
have received evidence, in form and substance reasonably satisfactory to
the Representatives, that appropriate filings have been or are being made
in accordance with the Statute and other applicable law reflecting the
grant of a security interest by the Issuer in the Collateral to the Bond
Trustee.
(l) At or prior to the Time of Delivery, the Representatives shall
have received evidence of the Pennsylvania Public Utility Commission's
approval of the Qualified Rate Order.
(m) Prior to the Time of Delivery, each of the Company and the Issuer
shall have furnished to the Representatives such further information,
certificates, opinions and documents as the Representatives may reasonably
request and as are customary for transactions of this type.
(n) The Representatives shall have received an opinion of counsel to
the Bond Trustee, dated the Time
21
<PAGE>
of Delivery, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) the Bond Trustee is a national banking association in good
standing under the federal laws of the United States of America;
(ii) the Indenture has been duly authorized, executed and
delivered, and constitutes a legal, valid and binding instrument
enforceable against the Bond Trustee in accordance with its terms
(subject, as to enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws or
equitable principles affecting creditors' rights generally from time
to time in effect); and
(iii) the Securities have been duly authenticated by the Bond
Trustee.
(o) The Representatives shall have received an opinion of counsel to
the Issuer Trustee, dated the Time of Delivery, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) the Issuer Trustee has been duly incorporated and is validly
existing as a banking corporation in good standing under the laws of
the State of Delaware, with full corporate trust power and authority
to enter into and perform its obligations under the Trust Agreement;
and
(ii) the Trust Agreement has been duly authorized, executed and
delivered by the Issuer, and constitutes a legal, valid and binding
instrument enforceable against the Issuer in accordance with its terms
(subject, as to enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally from time to time in effect).
(p) The Representatives shall have received an opinion of Ballard
Spahr Andrews & Ingersoll, LLP, counsel for the Issuer, dated as of the
Time of Delivery, in form and substance reasonably satisfactory to the
Representatives, to the effect that the Issuer will not be subject to
Commonwealth of Pennsylvania taxes.
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(q) The Representatives shall have received a letter from Ballard
Spahr Andrews & Ingersoll, LLP, counsel for the Issuer, dated as of the
Time of Delivery, in form and substance reasonably satisfactory to the
Representatives, to the effect that the Representatives may rely on the
opinion of Ballard Spahr Andrews & Ingersoll, LLP, of even date therewith,
addressed to PricewaterhouseCoopers LLP, to the effect that the likelihood
of any outcome of the Petition to the Supreme Court of the United States
for Writ of Certiorari filed by Indianapolis Power & Light Company having a
material adverse effect on the payment of principal and interest on the
Securities on the dates and in the amounts set forth in the Prospectus is
remote, as if such opinion were addressed to the Representatives.
This Agreement and all obligations of the Underwriters hereunder may be
canceled at, or at any time prior to, the Time of Delivery by the
Representatives if any of the conditions specified in this Section 7 shall not
have been fulfilled in all material respects when and as provided in this
Agreement. Notice of such cancelation shall be given to the Company in writing
or by telephone or telegraph confirmed in writing.
The documents required to be delivered by this Section 7 shall be delivered
at the office of Ballard Spahr Andrews & Ingersoll, LLP, counsel for the
Company, at 1735 Market Street, 51st Floor, Philadelphia, PA 19103-7599, at the
Time of Delivery.
8. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter within
the meaning of either Section 15 of the Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages, liabilities and expenses,
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (including the Prospectus contained
therein and including any amendment or supplement to any thereof) or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the Company will not be liable in any such case to the extent that any such
losses, claims, damages, liabilities or expenses are caused by (i) any such
untrue statement or alleged untrue statement or omission or alleged omission
23
<PAGE>
made therein in reliance upon and in conformity with written information
furnished to the Company or the Issuer by or on behalf of any Underwriter
through the Representatives specifically for inclusion therein, or (ii) the
failure of any Underwriter to send to any purchaser to whom it had sent a
Preliminary Prospectus an amended Prospectus as shall have been furnished by the
Company within the time periods required by the Act and in such quantities are
required by each Underwriter for such purpose (excluding documents incorporated
therein by reference), if required by the Act, to the extent that the amended
prospectus would have cured the defect in the Preliminary Prospectus giving rise
to such losses, claims, damages or liabilities, or (iii) any use of the
Prospectus by any Underwriter after the expiration of that period, if any,
during which the Underwriter is required by law to deliver a prospectus, unless
the Company shall have been advised in writing of such intended use. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, the Issuer and each of its
controlling persons and trustees to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only with reference to written
information relating to such Underwriter furnished to the Company by or on
behalf of such Underwriter through the Representatives specifically for
inclusion in the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any Underwriter
may otherwise have. The Company acknowledges that the statements set forth in
the last paragraph of the cover page of the Prospectus Supplement and the
Prospectus and the information set forth under the heading "Underwriting" in the
Prospectus Supplement and "Plan of Distribution" in the Prospectus constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in the documents referred to in the foregoing
indemnity.
(c) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the
24
<PAGE>
right to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the Company has agreed in writing to any such fees and expenses, (ii) the
Company has failed, within 30 days after the Company has been so notified, to
assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the Company and such Underwriter or
such controlling person shall have been advised by its counsel that
representation of such indemnified party and the Company by the same counsel
would be inappropriate under applicable standards of professional conduct
(whether or not such representation by the same counsel has been proposed) due
to actual or potential differing interests or defenses among them (in which case
the Company shall not have the right to assume the defense of such action, suit
or proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the Company shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests or defenses with you or among
themselves, which firm shall be designated in writing by the Representatives,
and that all such fees and expenses shall be reimbursed as they become due. The
Company shall not be liable for any settlement of any such action, suit or
proceeding effected without their written consent, but if settled with such
written consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, the Company agrees to indemnify and hold harmless
any Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 is for any reason
held to be unenforceable by an indemnified party although applicable in
accordance with its terms (including the terms of subsection (b) of this Section
8), an indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is equitable and as shall reflect both the
25
<PAGE>
relative benefit received by the Issuer and the Company on the one hand and the
Underwriter or Underwriters, as the case may be, on the other hand, from the
offering of the Securities, and the relative fault, if any, of the Issuer and
the Company on the one hand and of the Underwriter or Underwriters, as the case
may be, on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations. The relative benefit received by
the Issuer and the Company on the one hand and the Underwriters or Underwriters,
as the case may be, on the other hand, in connection with the offering of the
Securities shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses)
received by the Issuer and the Company bear to the total commissions,
concessions and discounts received by the Underwriter or Underwriters, as the
case may be. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Issuer and the Company on the one hand, or the Underwriter or
Underwriters, as the case may be, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses, liabilities,
claims, damages and expenses referred to above shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price of the Securities underwritten by it and
distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8 are several in proportion to the respective
26
<PAGE>
principal amounts of Securities set forth opposite their names in Schedule I
hereto and not joint.
(e) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses become due. A successor to
any Underwriter or any person controlling any Underwriter, or to the Issuer or
the Company, their directors or officers, or any person controlling the Issuer
or the Company, shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 8.
9. If any one or more Underwriters shall fail to purchase and pay for any
of the Securities agreed to be purchased by such Underwriter or Underwriters
hereunder and such failure to purchase shall constitute a default in the
performance of its or their obligations under this Agreement, the nondefaulting
Underwriters shall be obligated severally to take up and pay for (in the
respective proportions which the amount of Securities set forth opposite their
names in Schedule II hereto bears to the aggregate amount of Securities set
forth opposite the names of all the remaining Underwriters) the Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that in the event that the aggregate amount of Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Securities set forth in Schedule II
hereto, the nondefaulting Underwriters shall have the right to purchase all, but
shall not be under any obligation to purchase any, of the Securities, and if
such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Issuer or the Company. In the event of a default by any Underwriter as set forth
in this Section 9, the Time of Delivery shall be postponed for such period, not
exceeding seven days, as the Representatives shall determine in order that the
required
27
<PAGE>
changes in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Underwriter of its liability, if any, to the
Company, the Issuer and any nondefaulting Underwriter for damages occasioned by
its default hereunder.
10. This Agreement shall be subject to termination in the absolute
discretion of the Representatives, by notice given to the Company prior to
delivery of and payment for the Securities, if at any time prior to such time
(i) there shall have occurred any change, or any development involving a
prospective change, in or affecting either (A) the business, properties or
financial condition of the Company (if such a change or development would, in
the judgment of the Representatives, impair the investment quality of the
Securities or make it impractical or inadvisable to market the Securities) or
the Issuer or (B) the Intangible Transition Property, the Securities, the
Qualified Rate Order or the Statute, the effect of which, in the judgment of the
Representatives, materially impairs the investment quality of the Securities or
makes it impractical or inadvisable to market the Securities, (ii) trading in
the Company's Common Stock shall have been suspended by the Commission or the
New York Stock Exchange (if such a suspension would, in the judgment of the
Representatives, impair the investment quality of the Securities or make it
impractical or inadvisable to market the Securities) or trading in securities
generally on the New York Stock Exchange shall have been suspended or limited or
minimum prices shall have been established on such Exchange, (iii) a banking
moratorium shall have been declared by Federal, New York State or Pennsylvania
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities, declaration by the United States of a national emergency or war
or other calamity or crisis the effect of which on financial markets is such as
to make it, in the judgment of the Representatives, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Final Prospectus (exclusive of any supplement thereto).
11. If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 hereof is not satisfied, because of any termination pursuant to
Section 10 hereof or because of any refusal, inability or failure on the part of
the Company to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for
28
<PAGE>
all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Securities.
12. The respective agreements, representations, warranties, indemnities and
other statements of the Company, the Issuer and the several Underwriters set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter or the Company
or any officer, director or controlling person of the Company, and shall survive
delivery of and payment for the Securities. The provisions of Sections 8 and 12
hereof shall survive the termination or cancelation of this Agreement.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely on any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you on behalf of the Underwriters.
All communications hereunder will be in writing and effective only on
receipt, and, if sent to the Representatives, will be mailed, delivered or
telegraphed and confirmed to them, at the address specified in Schedule I
hereto; and if sent to the Company or the Issuer, will be mailed, delivered or
telegraphed and confirmed to the address of the Company set forth in the
Registration Statement, Attention: Secretary.
14. This Agreement shall be binding on and inure solely to the benefit of
the Underwriters, the Issuer, the Company and, to the extent provided in Section
8 and Section 12 hereof, the officers and directors of the Company and each
person who controls the Issuer, the Company or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Securities from any Underwriter shall be
deemed a successor or assign merely by reason of such purchase.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business and the term "Execution Time"
29
<PAGE>
shall mean the date and time that this Agreement is executed and delivered by
the parties hereto.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such respective counterparties shall together constitute one and the
same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us [5] counterparts hereof, whereupon this letter and your acceptance
shall constitute a binding agreement between each of the Underwriters, on the
one hand, and the Company and the Issuer on the other. It is understood that
your acceptance of this letter on behalf of each of the Underwriters is pursuant
to the authority set forth in a form of Agreement among Underwriters, the form
of which shall be submitted to the Company for examination upon request, but
without warranty on your part as to the authority of the signers thereof.
Very truly yours,
PECO Energy Company
By:
--------------------------------
Name:
Title:
PECO Energy Transition Trust
By:
-------------------------------
Name:
Title:
30
<PAGE>
Accepted, [ ], 1999
Salomon Smith Barney Inc
[name of comanager, if any]
By: Salomon Smith Barney Inc
By:
---------------------------------
Name:
Title:
For themselves and the other several
Underwriters, if any, named in Schedule II
to the foregoing Agreement.
or
Salomon Smith Barney Inc
By:
---------------------------------
Name:
Title:
For itself and the other several
Underwriters, if any, named in
Schedule II to the foregoing
Agreement.
31
================================================================================
PECO ENERGY TRANSITION TRUST,
Issuer
and
THE BANK OF NEW YORK,
Bond Trustee
------------------------------
INDENTURE
Dated as of [ ] , 1999
------------------------------
Securing Transition Bonds
Issuable in Series
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
Definitions and Incorporation by Reference
<S> <C>
SECTION 1.01. Definitions...........................................................2
SECTION 1.02. Incorporation by Reference of Trust Indenture Act....................13
SECTION 1.03. Rules of Construction................................................13
ARTICLE II
The Transition Bonds
SECTION 2.01. Form.................................................................14
SECTION 2.02. Execution, Authentication and Delivery...............................14
SECTION 2.03. Denominations; Transition Bonds Issuable in Series...................15
SECTION 2.04. Temporary Transition Bonds...........................................16
SECTION 2.05. Registration; Registration of Transfer and Exchange..................16
SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Transition Bonds................18
SECTION 2.07. Persons Deemed Owner.................................................18
SECTION 2.08. Payment of Principal, Premium, if any, and Interest; Interest on
Overdue Principal and Premium, if any; Principal, Premium and
Interest Rights Preserved..........................................19
SECTION 2.09. Cancelation..........................................................20
SECTION 2.10. Amount; Authentication and Delivery of Transition Bonds..............20
SECTION 2.11. Book-Entry Transition Bonds..........................................24
SECTION 2.12. Notices to Clearing Agency...........................................25
SECTION 2.13. Definitive Transition Bonds..........................................25
ARTICLE III
Covenants
SECTION 3.01. Payment of Principal, Premium, if any, and Interest..................26
SECTION 3.02. Maintenance of Office or Agency......................................26
SECTION 3.03. Money for Payments To Be Held in Trust...............................26
SECTION 3.04. Existence............................................................27
SECTION 3.05. Protection of Collateral.............................................28
SECTION 3.06. Opinions as to Collateral............................................28
SECTION 3.07. Performance of Obligations...........................................29
SECTION 3.08. Negative Covenants...................................................29
SECTION 3.09. Annual Statement as to Compliance....................................30
SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms..................30
SECTION 3.11. Successor or Transferee..............................................31
SECTION 3.12. No Other Business....................................................31
SECTION 3.13. No Borrowing.........................................................31
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities....................31
SECTION 3.15. Capital Expenditures.................................................32
SECTION 3.16. Restricted Payments..................................................32
SECTION 3.17. Notice of Events of Default..........................................32
SECTION 3.18. Inspection...........................................................32
SECTION 3.19. Adjusted Overcollateralization Schedules.............................32
ARTICLE IV
Satisfaction and Discharge; Defeasance
SECTION 4.01. Satisfaction and Discharge of Indenture; Defeasance..................35
SECTION 4.02. Conditions to Defeasance.............................................37
SECTION 4.03. Application of Trust Money...........................................38
SECTION 4.04. Repayment of Moneys Held by Paying Agent.............................38
ARTICLE V
Remedies
SECTION 5.01. Events of Default....................................................38
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment...................39
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Bond
Trustee............................................................40
SECTION 5.04. Remedies; Priorities.................................................42
SECTION 5.05. Optional Preservation of the Collateral..............................43
SECTION 5.06. Limitation of Proceedings............................................43
SECTION 5.07. Unconditional Rights of Transition Bondholders To Receive
Principal, Premium, if any, and Interest...........................44
SECTION 5.08. Restoration of Rights and Remedies...................................44
SECTION 5.09. Rights and Remedies Cumulative.......................................44
SECTION 5.10. Delay or Omission Not a Waiver.......................................45
SECTION 5.11. Control by Transition Bondholders....................................45
SECTION 5.12. Waiver of Past Defaults..............................................45
SECTION 5.13. Undertaking for Costs................................................46
SECTION 5.14. Waiver of Stay or Extension Laws.....................................46
SECTION 5.15. Action on Transition Bonds...........................................46
ARTICLE VI
The Bond Trustee
SECTION 6.01. Duties and Liabilities of Bond Trustee...............................46
SECTION 6.02. Rights of Bond Trustee...............................................48
SECTION 6.03. Individual Rights of Bond Trustee....................................48
SECTION 6.04. Bond Trustee's Disclaimer............................................48
SECTION 6.05. Notice of Defaults...................................................49
SECTION 6.06. Reports by Bond Trustee to Holders...................................49
SECTION 6.07. Compensation and Indemnity...........................................49
SECTION 6.08. Replacement of Bond Trustee..........................................50
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 6.09. Successor Bond Trustee by Merger.....................................51
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee........................51
SECTION 6.11. Eligibility; Disqualification........................................52
SECTION 6.12. Preferential Collection of Claims Against Issuer.....................52
ARTICLE VII
Transition Bondholders' Lists and Reports
SECTION 7.01. Issuer To Furnish Bond Trustee Names and Addresses of Transition
Bondholders........................................................52
SECTION 7.02. Preservation of Information; Communications to Transition
Bondholders........................................................53
SECTION 7.03. Reports by Issuer....................................................53
SECTION 7.04. Reports by Bond Trustee..............................................53
SECTION 7.05. Provision of Servicer Reports........................................54
ARTICLE VIII
Accounts, Disbursements and Releases
SECTION 8.01. Collection of Money..................................................54
SECTION 8.02. Collection Account...................................................54
SECTION 8.04. Opinion of Counsel...................................................59
SECTION 8.05. Reports by Independent Accountants...................................59
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Transition
Bondholders........................................................60
SECTION 9.02. Supplemental Indentures with Consent of Transition Bondholders.......61
SECTION 9.03. Execution of Supplemental Indentures.................................63
SECTION 9.04. Effect of Supplemental Indenture.....................................63
SECTION 9.05. Conformity with Trust Indenture Act..................................63
SECTION 9.06. Reference in Transition Bonds to Supplemental Indentures.............63
ARTICLE X
Redemption of Transition Bonds;
SECTION 10.01. Optional Redemption by Issuer.......................................63
SECTION 10.03. Form of Redemption Notice...........................................64
SECTION 10.04. Payment of Redemption Price.........................................65
ARTICLE XI
Miscellaneous
SECTION 11.01. Compliance Certificates and Opinions, etc...........................65
SECTION 11.02. Form of Documents Delivered to Bond Trustee.........................66
SECTION 11.03. Acts of Transition Bondholders......................................66
SECTION 11.04. Notices, etc., to Bond Trustee, Issuer and Rating Agencies..........67
SECTION 11.05. Notices to Transition Bondholders; Waiver...........................67
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 11.06. Alternate Payment and Notice Provisions.............................68
SECTION 11.07. Conflict with Trust Indenture Act...................................68
SECTION 11.08. Effect of Headings and Table of Contents............................68
SECTION 11.09. Successors and Assigns..............................................69
SECTION 11.10. Separability........................................................69
SECTION 11.11. Benefits of Indenture...............................................69
SECTION 11.12. Legal Holidays......................................................69
SECTION 11.13. GOVERNING LAW.......................................................69
SECTION 11.14. Counterparts........................................................69
SECTION 11.15. Issuer Obligation...................................................69
SECTION 11.16. No Petition.........................................................69
</TABLE>
Exhibit A Form of Transition Bonds
Exhibit B Form of Series Supplement
Exhibit C Form of DTC Agreement
Schedule 1 Overcollateralization
<PAGE>
INDENTURE dated as of [ ], 1999, between PECO ENERGY TRANSITION TRUST,
a Delaware statutory business trust (the "Issuer"), and THE BANK OF NEW
YORK, a New York banking corporation, as trustee (the "Bond Trustee").
The Issuer has duly authorized the execution and delivery of this Indenture
to provide for one or more Series of Transition Bonds, issuable as provided in
this Indenture. Each such Series of Transition Bonds will be issued only under a
separate Series Supplement to this Indenture duly executed and delivered by the
Issuer and the Bond Trustee. The Issuer is entering into this Indenture, and the
Bond Trustee is accepting the trusts created hereby, each for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged and
each intending to be legally bound hereby.
GRANTING CLAUSE
The Issuer hereby Grants to the Bond Trustee as trustee for the benefit of
the Holders of the Transition Bonds from time to time issued and outstanding,
all of the Issuer's right, title and interest in and to (a) the Intangible
Transition Property transferred by the Seller to the Issuer from time to time
pursuant to the Sale Agreement and all proceeds thereof, (b) the Sale Agreement
except for Section 5.01 thereof solely to the extent such Section provides for
indemnification of the Issuer, (c) all Bills of Sale delivered by the Seller
pursuant to the Sale Agreement, (d) the Servicing Agreement except for Section
5.02(b) thereof solely to the extent such Section provides for indemnification
of the Issuer, (e) the Collection Account and all amounts on deposit therein
from time to time, (f) all other property of whatever kind owned from time to
time by the Issuer, (g) all present and future claims, demands, causes and
choses in action in respect of any or all of the foregoing and (h) all payments
on or under and all proceeds of every kind and nature whatsoever in respect of
any or all of the foregoing, including all proceeds of the conversion, voluntary
or involuntary, into cash or other liquid property, all cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, insurance proceeds, condemnation awards, rights to payment of any and
every kind, and other forms of obligations and receivables, instruments and
other property which at any time constitute all or part of or are included in
the proceeds of any of the foregoing (collectively, the "Collateral").
To have and to hold in trust to secure the payment of principal of and
premium, if any, and interest on, and any other amounts (including all fees,
expenses, counsel fees and other amounts due and owing to the Bond Trustee)
owing in respect of, the Transition Bonds equally and ratably without prejudice,
preference, priority or distinction, except as expressly provided in this
Indenture and to secure performance by
<PAGE>
the Issuer of all of the Issuer's obligations under this Indenture with respect
to the Transition Bonds, all as provided in this Indenture.
The Bond Trustee, as trustee on behalf of the Holders of the Transition
Bonds, acknowledges such Grant, accepts the trusts hereunder in accordance with
the provisions hereof and agrees to perform its duties herein required.
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. Definitions. (a) Except as otherwise specified herein or as
the context may otherwise require, each of the following terms has the
respective meaning set forth below for all purposes of this Indenture.
"Act" has the meaning specified in Section 11.03(a).
"Adjustment Date" means, with respect to any Series of Transition Bonds,
the date or dates specified as such in the Series Supplement therefor.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authorized Initial Denominations" means, with respect to any Series of
Transition Bonds, $1,000 and integral multiples thereof, or such other
denominations as may be specified in the Series Supplement therefor.
"Authorized Officer" means, with respect to the Issuer, any trustee of the
Issuer and, with respect to the Issuer Trustee or other corporate trustee of the
Issuer, any officer who is authorized to act for such trustee in matters
relating to the Issuer and who is identified on the list of Authorized Officers
delivered by such trustee to the Bond Trustee as of the date hereof (as such
list may be modified or supplemented from time to time thereafter).
"Basic Documents" means the Certificate of Trust, the Trust Agreement, the
Sale Agreement, the Servicing Agreement and any Bills of Sale.
"Bond Rate" means, with respect to any Series or Class, the rate at which
interest accrues on the principal balance of Transition Bonds of such Series or
Class, as specified in the Series Supplement therefor.
2
<PAGE>
"Bond Trustee" means The Bank of New York, a New York banking corporation
or any successor Bond Trustee under this Indenture, not in its individual
capacity but solely as Bond Trustee.
"Book-Entry Transition Bonds" means beneficial interests in the Transition
Bonds, ownership and transfers of which shall be made through book entries by a
Clearing Agency as described in Section 2.11.
"Business Day" has the meaning specified in the Servicing Agreement.
"Calculated Overcollateralization Level" means, with respect to any Payment
Date, the amount set forth as such in Schedule 1 hereto, as such Schedule has
been adjusted in accordance with Section 3.19.
"Calculation Date" means, with respect to any Series of Transition Bonds,
such date or dates specified as such in the Series Supplement therefor.
"Capital Subaccount" has the meaning specified in Section 8.02(a).
"Certificate of Trust" means the certificate of trust of the Issuer
substantially in the form of Exhibit 2 to the Trust Agreement.
"Class" means, with respect to any Series, any one of the classes of
Transition Bonds of that Series.
"Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Exchange Act.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and Treasury Regulations promulgated thereunder.
"Collateral" has the meaning specified in the granting clause of this
Indenture.
"Collection Account" has the meaning specified in Section 8.02(a).
"Collection Period" has the meaning specified in the Servicing Agreement.
"Corporate Trust Office" means the principal office of the Bond Trustee at
which at any particular time its corporate trust business shall be administered,
which
3
<PAGE>
office at date of the execution of this Indenture is located at 101 Barclay
Street, Floor 12 East, New York, NY 10019, Attention: Asset Backed Finance Unit
or at such other address as the Bond Trustee may designate from time to time by
notice to the Transition Bondholders and the Issuer, or the principal corporate
trust office of any successor Bond Trustee (the address of which the successor
Bond Trustee will notify the Transition Bondholders and the Issuer).
"Covenant Defeasance Option" has the meaning specified in Section 4.01(b).
"Default" means any occurrence that is, or with notice or the lapse of time
or both would become, an Event of Default.
"Defeasance Subaccount" has the meaning specified in Section 8.02(a).
"Definitive Transition Bonds" has the meaning specified in Section 2.11.
"DTC Agreement" means the agreement between the Issuer, the Bond Trustee
and The Depository Trust Company, as the initial Clearing Agency, dated as of
the Closing Date, relating to the Transition Bonds, substantially in the form of
Exhibit C hereto, as the same may be amended and supplemented from time to time.
"Duff" has the meaning specified in the Servicing Agreement.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any State (or any domestic branch of a foreign bank),
having corporate trust powers and acting as trustee for funds deposited in such
account, so long as any of the securities of such depository institution shall
have a credit rating from each Rating Agency in one of its generic rating
categories which signifies investment grade.
"Eligible Guarantor Institution" means a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as "an eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a securities transfer association.
"Eligible Institution" means (a) the corporate trust department of the Bond
Trustee or (b) a depository institution organized under the laws of the United
States of America or any State (or any domestic branch of a foreign bank), which
(i) has either (A) a long-term unsecured debt rating of "AAA" by Standard &
Poor's and "A1" by
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Moody's or (B) a certificate of deposit rating of "A-1+" by Standard & Poor's
and "P-1" by Moody's, or any other long-term, short-term or certificate of
deposit rating acceptable to the Rating Agencies and (ii) whose deposits are
insured by the FDIC.
"Eligible Investments" mean book-entry securities, negotiable instruments
or securities represented by instruments in bearer or registered form which
evidence:
(a) direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
(b) demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any State (or any domestic branch of a foreign
bank) and subject to supervision and examination by Federal or State
banking or depository institution authorities; provided, however, that at
the time of the investment or contractual commitment to invest therein, the
commercial paper or other short-term unsecured debt obligations (other than
such obligations the rating of which is based on the credit of the Person
other than such depository institution or trust company) thereof shall have
a credit rating from each of the Rating Agencies in the highest rating
category granted thereby;
(c) commercial paper (other than commercial paper of the Seller or the
Servicer) having, at the time of the investment or contractual commitment
to invest therein, a rating from each of the Rating Agencies in the highest
rating category granted thereby;
(d) investments in money market funds having a rating from each of the
Rating Agencies in the highest rating category granted thereby (including
funds for which the Bond Trustee or any of its Affiliates is investment
manager or advisor);
(e) demand deposits, time deposits and certificates of deposit which
are fully insured by the FDIC;
(f) bankers' acceptances issued by any depository institution or trust
company referred to in clause (b) above;
(g) repurchase obligations with respect to any security that is a
direct obligation of, or fully guaranteed by, the United States of America
or any agency or instrumentality thereof the obligations of which are
backed by the full faith and credit of the United States of America, in
either case entered into with (i) a depository institution or trust company
(acting as principal) described in clause (b)
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above or (ii) a depository institution or trust company the deposits of
which are insured by FDIC; and
(h) any other investment permitted by each of the Rating Agencies;
provided, however, that (i) any book-entry security, instrument or security
having a maturity of one month or less that would be an Eligible Investment but
for its failure (or the failure of the obligor thereon) to have the rating
specified above shall be an Eligible Investment if such book-entry security,
instrument or security (or the obligor thereon) has a long-term unsecured debt
rating of at least "A2" by Moody's (or the equivalent thereof by the other
Rating Agencies) or a short-term rating of at least "P-1" by Moody's (or the
equivalent thereof by the other Rating Agencies), and (ii) any book-entry
security, instrument or security having a maturity of greater than one month
that would be an Eligible Investment but for its failure (or the failure of the
obligor thereon) to have the rating specified above shall be an Eligible
Investment if such book-entry security, instrument or security (or the obligor
thereon) has a long-term unsecured debt rating of at least "A1" by Moody's (or
the equivalent thereof by the other Rating Agencies) and a short-term rating of
at least "P-1" by Moody's (or the equivalent thereof by the other Rating
Agencies).
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Officer" means, with respect to any corporation, the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President,
Executive Vice President, any Vice President, the Secretary or the Treasurer of
such corporation; and with respect to any partnership, any general partner
thereof.
"Expected Amortization Schedule" means, with respect to any Series of
Transition Bonds, the expected amortization schedule for principal thereof, as
specified in the Series Supplement therefor.
"Expected Final Amortization Date" means, with respect to any Series or
Class of Transition Bonds, the expected final amortization date therefor, as
specified in the Series Supplement therefor.
"FDIC" means the Federal Deposit Insurance Corporation or any successor.
"Final Maturity Date" means, with respect to any Series or Class of
Transition Bonds, the final maturity date therefor, as specified in the Series
Supplement therefor.
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"Financing Issuance" means an issuance of a new Series of Transition Bonds
hereunder to provide funds to finance the purchase by the Issuer of Intangible
Transition Property.
"Fitch" has the meaning specified in the Servicing Agreement.
"General Subaccount" has the meaning specified in Section 8.02(a).
"Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise,
release, convey, assign, transfer, create, and grant a lien upon and a security
interest in and right of set-off against, deposit, set over and confirm pursuant
to this Indenture. A Grant of the Collateral or of any other agreement or
instrument shall include all rights, powers and options (but none of the
obligations) of the Granting party thereunder, including the immediate and
continuing right to claim for, collect, receive and give receipt for principal,
interest and other payments in respect of the Collateral and all other moneys
payable thereunder, to give and receive notices and other communications, to
make waivers or other agreements, to exercise all rights and options, to bring
Proceedings in the name of the Granting party or otherwise and generally to do
and receive anything that the Granting party is or may be entitled to do or
receive thereunder or with respect thereto.
"Holder" or "Transition Bondholder" means the Person in whose name a
Transition Bond is registered on the Transition Bond Register.
"Indemnity Amounts" means any amounts paid by the Seller or the Servicer to
the Bond Trustee, for itself or on behalf of the Transition Bondholders,
pursuant to Section 5.01(b), 5.0l(c)(ii) and 5.01(e) of the Sale Agreement or
Section 5.02(b) of the Servicing Agreement or by the Issuer to the Bond Trustee
pursuant to Section 5.07 of this Indenture; provided, however, that Indemnity
Amounts shall exclude Liquidated Damages paid pursuant to Section 5.01(c)(ii) of
the Sale Agreement.
"Indenture" or "this Indenture" means this instrument as originally
executed and, as from time to time supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, as so supplemented or amended, or both, and shall include the
forms and terms of the Transition Bonds established hereunder.
"Independent" means, when used with respect to any specified Person, that
the Person (a) is in fact independent of the Issuer, any other obligor upon the
Transition Bonds, the Seller and any Affiliate of any of the foregoing Persons,
(b) does not have any direct financial interest or any material indirect
financial interest in the Issuer, any such other obligor, the Seller or any
Affiliate of any of the foregoing Persons and (c) is not
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connected with the Issuer, any such other obligor, the Seller or any Affiliate
of any of the foregoing Persons as an officer, employee, promoter, underwriter,
trustee, partner, director or person performing similar functions.
"Independent Certificate" means a certificate or opinion to be delivered to
the Bond Trustee under the circumstances described in, and otherwise complying
with, the applicable requirements of Section 11.01, made by an Independent
appraiser or other expert appointed by an Issuer Order and approved by the Bond
Trustee in the exercise of reasonable care, and such opinion or certificate
shall state that the signer has read the definition of "Independent" in this
Indenture and that the signer is Independent within the meaning thereof.
"Intangible Transition Charges Adjustment Process" means the process by
which Intangible Transition Charges are adjusted pursuant to the Servicing
Agreement and the Statute.
"Interest" means, with respect to any Monthly Allocation Date for any
Series of Transition Bonds, the sum of, without duplication, (i) an amount that
if deposited to the Series Subaccount therefor would cause the amount on deposit
in such Series Subaccount, without regard to investment income, in respect of
interest to equal the Monthly Allocated Interest Balance for such Series and
such Monthly Allocation Date, (ii) if the maturities of the Transition Bonds
have been accelerated in accordance with Section 5.02, the accrued and unpaid
interest on such Series through the date of acceleration, (iii) with respect to
a Series to be redeemed prior to the next Monthly Allocation Date, the amount of
interest that will be payable as interest on such Series on the Redemption Date
therefor and (iv) any interest due on such Series on a Payment Date therefor or
other date for the payment of interest thereon and not paid and, to the extent
permitted by law, interest thereon.
"Interest Deposit Amounts" means any amounts remitted by the Seller to the
Bond Trustee in respect of interest payments pursuant to (i) a binding agreement
with the Issuer entered into by the Seller pursuant to Section 5.01(d)(i)(B)(i)
of the Sale Agreement or (ii) an escrow arrangement pursuant to Section
5.01(d)(i)(B)(ii) of the Sale Agreement .
"Interest Deposit Subaccount" has the meaning specified in Section 8.02(a).
"Issuer" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision contained herein and required by the TIA, each other obligor on the
Transition Bonds.
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"Issuer Order" and "Issuer Request" means a written order or request signed
in the name of the Issuer by any one of its Authorized Officers and delivered to
the Bond Trustee.
"Issuer Trustee" means First Union Trust Company, National Association, not
in its individual capacity but solely as Issuer Trustee under the Trust
Agreement, or any successor Issuer Trustee under the Trust Agreement.
"Legal Defeasance Option" has the meaning specified in Section 4.01(b).
"Lien" has the meaning specified in the Servicing Agreement.
"Liquidated Damages" means the Liquidated Damages Amount paid by the Seller
to the Bond Trustee, on behalf of the Transition Bondholders, pursuant to
Section 5.01(c)(ii) or 5.01(d)(i) of the Sale Agreement.
"Liquidated Damages Redemption Date" means the date, not more than 5 days
after receipt of Liquidated Damages by the Issuer, specified by the Issuer for
the redemption of the Transition Bonds as a result of receiving Liquidated
Damages.
"Loss Amounts" means any amounts remitted by the Seller to the Bond Trustee
pursuant to Section 5.01(c)(iii) of the Sale Agreement.
"Loss Subaccount" has the meaning specified in Section 8.02(a).
"Monthly Allocated Interest Balance" means, for any Monthly Allocation Date
for a Series, the balance set forth as such for such Monthly Allocation Date in
Schedule B to the Series Supplement for such Series.
"Monthly Allocated Overcollateralization Balance" means, for any Monthly
Allocation Date, the balance set forth as such in Schedule 1 hereto , as such
Schedule has been adjusted in accordance with Section 3.19.
"Monthly Allocated Principal Balance" means, for any Monthly Allocation
Date for a Series, the balance set forth as such for such Monthly Allocation
Date in Schedule B to the Series Supplement for such Series.
"Monthly Allocation Date" has the meaning specified in the Servicing
Agreement.
"Monthly Servicing Fee" means, with respect to any Series of Transition
Bonds, the fee payable to the Servicer on each Monthly Allocation Date for
services rendered, determined pursuant to Section 5.07 of the Servicing
Agreement.
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"Moody's" has the meaning specified in the Servicing Agreement.
"Officer's Certificate" means a certificate signed by any Authorized
Officer of the Issuer, under the circumstances described in, and otherwise
complying with, the applicable requirements of Section 11.01, and delivered to
the Bond Trustee. Unless otherwise specified, any reference in this Indenture to
an Officer's Certificate shall be to an Officer's Certificate of any Authorized
Officer of the Issuer.
"Operating Expenses" means all fees, costs, expenses and indemnity payments
owed by the Issuer, including all amounts owed by the Issuer to the Bond
Trustee, the Monthly Servicing Fee, and legal and accounting fees, costs and
expenses of the Issuer and the Issuer Trustee.
"Opinion of Counsel" means one or more written opinions of counsel who may,
except as otherwise expressly provided in this Indenture, be employees of or
counsel to the Issuer and who shall be reasonably satisfactory to the Bond
Trustee, and which opinion or opinions shall be addressed to the Bond Trustee,
as Bond Trustee, and shall comply with any applicable requirements of Section
11.01, and shall be in a form reasonably satisfactory to the Bond Trustee.
"Outstanding" means, as of the date of determination, all Transition Bonds
theretofore authenticated and delivered under this Indenture except:
(i) Transition Bonds theretofore canceled by the Transition Bond
Registrar or delivered to the Transition Bond Registrar for cancelation;
(ii) Transition Bonds or portions thereof the payment for which money
in the necessary amount has been theretofore deposited with the Bond
Trustee or any Paying Agent in trust for the Holders of such Transition
Bonds; (provided, however, that if such Transition Bonds are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor, satisfactory to the Bond Trustee, made);
and
(iii) Transition Bonds in exchange for or in lieu of other Transition
Bonds which have been authenticated and delivered pursuant to this
Indenture unless proof satisfactory to the Bond Trustee is presented that
any such Transition Bonds are held by a bona fide purchaser;
provided that in determining whether the Holders of the requisite Outstanding
Amount of the Transition Bonds or any Series or Class thereof have given any
request, demand, authorization, direction, notice, consent or waiver hereunder
or under any Basic Document, Transition Bonds owned by the Issuer, any other
obligor upon the Transition Bonds, the Seller or any Affiliate of any of the
foregoing Persons shall be disregarded and
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deemed not to be Outstanding, except that, in determining whether the Bond
Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Transition Bonds that
the Bond Trustee knows to be so owned shall be so disregarded. Transition Bonds
so owned that have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Bond Trustee the pledgee's
right so to act with respect to such Transition Bonds and that the pledgee is
not the Issuer, any other obligor upon the Transition Bonds, the Seller or any
Affiliate of any of the foregoing Persons.
"Outstanding Amount" means the aggregate principal amount of all Transition
Bonds or, if the context requires, all Transition Bonds of a Series or Class
Outstanding at the date of determination.
"Overcollateralization" means, with respect to any Monthly Allocation Date,
an amount that, if deposited to the Overcollateralization Subaccount, would
cause the balance in such subaccount to equal the Monthly Allocated
Overcollateralization Balance for such Monthly Allocation Date, without regard
to investment earnings.
"Overcollateralization Amount" means, with respect to any Series of
Transition Bonds, the amount specified as such in the Series Supplement
therefor.
"Overcollateralization Subaccount" has the meaning specified in Section
8.02(a).
"Paying Agent" means the Bond Trustee or any other Person that meets the
eligibility standards for the Bond Trustee specified in Section 6.11 and is
authorized by the Issuer to make the payments of principal of or premium, if
any, or interest on the Transition Bonds on behalf of the Issuer.
"Payment Date" means, with respect to any Series or Class, each date or
dates specified as Payment Dates for such Series or Class in the Series
Supplement therefor.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), business trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Predecessor Transition Bond" means, with respect to any particular
Transition Bond, every previous Transition Bond evidencing all or a portion of
the same debt as that evidenced by such particular Transition Bond; and, for the
purpose of this definition, any Transition Bond authenticated and delivered
under Section 2.06 in lieu of a mutilated, lost, destroyed or stolen Transition
Bond shall be deemed to evidence the same debt as the mutilated, lost, destroyed
or stolen Transition Bond.
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"Principal" means, with respect to any Monthly Allocation Date for any
Series of Transition Bonds, the sum of, without duplication, (i) an amount that,
if deposited to the Series Subaccount therefor, would cause the amount on
deposit in such Series Subaccount, without regard to investment income, in
respect of principal to equal the Monthly Allocated Principal Balance for such
Series and such Monthly Allocation Date, (ii) if the maturities of the
Transition Bonds have been accelerated in accordance with Section 5.02, the
aggregate outstanding principal amount of such Series of Transition Bonds, (iii)
with respect to a Series to be redeemed prior to the next Monthly Allocation
Date, the amount of principal that will be payable as principal on the
Redemption Date therefor and (iv) any principal due on a Series on a Payment
Date therefor or other date for the payment of principal thereof and not paid.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Projected Transition Bond Balance" means, as of any date, the sum of the
amounts provided for in the Expected Amortization Schedules for each outstanding
Series of Transition Bonds and such date.
"Pro Rata" has the meaning specified in Section 8.02(d).
"Rated Final Payment Date" means, with respect to any Series or Class of
Transition Bonds, the rated final payment date therefor, as specified in the
Series Supplement therefor.
"Rating Agency" means any rating agency rating the Transition Bonds of any
Class or Series at the time of issuance thereof at the request of the Issuer .
If no such organization or successor is any longer in existence, "Rating Agency"
shall be a nationally recognized statistical rating organization or other
comparable Person designated by the Issuer, notice of which designation shall be
given to the Bond Trustee, the Issuer Trustee and the Servicer.
"Rating Agency Condition" means, with respect to any action, the
notification in writing by each Rating Agency to the Seller, the Servicer, the
Bond Trustee and the Issuer that such action will not result in a reduction or
withdrawal of the then current rating by such Rating Agency of any outstanding
Series or Class of Transition Bonds.
"Record Date" means, with respect to any Payment Date for a Series, the
date set forth as such in the Series Supplement therefor.
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"Redemption Date" means, with respect to any Series or Class, the date for
the redemption of the Transition Bonds of such Series or Class pursuant to
Sections 10.01 or 10.02 or the Series Supplement for such Series or Class,
including the Liquidated Damages Redemption Date.
"Redemption Price" has the meaning specified in Section 10.01.
"Refunding Issuance" means issuance of a new Series of Transition Bonds
hereunder to pay the cost of refunding, through redemption or payment on the
Expected Final Amortization Date for a Series or Class of Transition Bonds, all
or part of the Transition Bonds of such Series or Class to the extent permitted
by the terms thereof.
"Registered Holder" means, as of any date, the Person in whose name a
Transition Bond is registered on the Transition Bond Register on such date.
"Required Capital Amount" means the sum of, for each Outstanding Series of
Transition Bonds, 0.50% of the initial principal amount thereof.
"Reserve Subaccount" has the meaning specified in Section 8.02(a).
"Responsible Officer" means, with respect to the Bond Trustee, any officer
within the Corporate Trust Office of the Bond Trustee, including any Vice
President, Assistant Vice President, Secretary, Assistant Secretary, or any
other officer of the Bond Trustee customarily performing functions similar to
those performed by any of the above designated officers and also, with respect
to a particular matter, any other officer to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
"Retiring Bond Trustee" has the meaning specified in Section 6.08.
"Sale Agreement" means the Intangible Transition Property Sale Agreement
dated as of [ ], 1999, between the Issuer and the Seller, as amended and
supplemented from time to time.
"Schedule Revision Date" means (i) the date on which a new Series of
Transition Bonds is issued or any outstanding Series of Transition Bonds is
redeemed or defeased, (ii) any Calculation Date on which the Intangible
Transition Charges are changed or revised and (iii) the Monthly Allocation Date
immediately following any Payment Date on which (a) payments are not made in the
amount contemplated in the Expected Amortization Schedule for any Series of
Transition Bonds, (b) any Interest due and payable is not paid or (c) the amount
on deposit in the Overcollateralization Subaccount is less than the Calculated
Overcollateralization Level specified for such Payment Date.
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"Series" means any series of Transition Bonds issued and authenticated
pursuant to this Indenture.
"Series Issuance Date" means, with respect to any Series, the date on which
the Transition Bonds of such Series are to be originally issued in accordance
with Section 2.10 and the Series Supplement for such Series.
"Series Subaccount" has the meaning specified in Section 8.02(a).
"Series Supplement" means an indenture supplemental to this Indenture that
authorizes a particular Series of Transition Bonds.
"Servicing Agreement" means the Master Servicing Agreement dated as of
[ ], 1999, between the Issuer, the Servicer and such other Persons as may
become parties thereto, as amended and supplemented from time to time.
"Standard & Poor's" has the meaning specified in the Servicing Agreement.
"State" means any one of the 50 states of the United States of America or
the District of Columbia.
"Successor Servicer" has the meaning specified in Section 3.20(h).
"Transition Bond" means any of the transition bonds (as defined in the
Statute) issued and authenticated pursuant to this Indenture.
"Transition Bond Balance" means, as of any date, the aggregate outstanding
principal amount of all Series of Transition Bonds on such date.
"Transition Bond Owner" means, with respect to a Book-Entry Transition
Bond, the Person who is the beneficial owner of such Book-Entry Transition Bond,
as reflected on the books of the Clearing Agency, or on the books of a Person
maintaining an account with such Clearing Agency (directly as a Clearing Agency
Participant or as an indirect participant, in each case in accordance with the
rules of such Clearing Agency).
"Transition Bond Register" and "Transition Bond Registrar" have the
respective meanings specified in Section 2.05.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force on the date hereof, unless otherwise specifically provided.
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"UCC" has the meaning specified in the Servicing Agreement.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
(b) Except as otherwise specified herein or as the context may otherwise
require, each of the following terms has the meaning set forth in the Sale
Agreement for all purposes of this Indenture, and the definitions of such terms
are equally applicable both to the singular and plural forms of such terms:
Term Section of Sale Agreement
---- -------------------------
Bill of Sale.......................................... Section 1.01(a)
Initial Intangible Transition Property................ Section 1.01(a)
Intangible Transition Charges......................... Section 1.01(a)
Intangible Transition Property........................ Section 1.01(a)
ITC Collections....................................... Section 1.01(a)
Liquidated Damages Amount ............................ Section 1.01(a)
PUC .................................................. Section 1.01(a)
Qualified Rate Order ................................. Section 1.01(a)
Seller ............................................... Section 1.01(a)
Servicer ............................................. Section 1.01(a)
Servicer Default ..................................... Section 1.01(a)
Statute .............................................. Section 1.01(a)
Subsequent Intangible Transition Property............. Section 1.01(a)
Transferred Intangible Transition Property............ Section 1.01(a)
Trust Agreement....................................... Section 1.01(a)
SECTION 1.02. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. Each of the
following TIA terms used in this Indenture has the following meaning:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Transition Bonds.
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"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Bond Trustee.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule have
the meaning assigned to them by such definitions.
SECTION 1.03. Rules of Construction. Unless the context otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the
plural include the singular; and
(vi) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
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ARTICLE II
The Transition Bonds
SECTION 2.01. Form. The Transition Bonds and the Bond Trustee's certificate
of authentication shall be in substantially the forms set forth in Exhibit A
hereto, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture or by the related
Series Supplement and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may,
consistently herewith, be determined by the Authorized Officers of the Issuer
Trustee executing such Transition Bonds, as evidenced by their execution of such
Transition Bonds. Any portion of the text of any Transition Bond may be set
forth on the reverse thereof, with an appropriate reference thereto on the face
of the Transition Bond. Each Transition Bond shall be dated the date of its
authentication.
The Transition Bonds shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods (with or without steel
engraved borders), all as determined by the Authorized Officers of the Issuer
Trustee executing such Transition Bonds, as evidenced by their execution of such
Transition Bonds.
Each Transition Bond shall bear upon its face the designation so selected
for the Series or Class to which it belongs. The terms of all Transition Bonds
of the same Series shall be the same, unless such Series is comprised of one or
more Classes, in which case the terms of all Transition Bonds of the same Class
shall be the same.
All Definitive Transition Bonds shall bear the legend set forth in Exhibit
A hereto.
SECTION 2.02. Execution, Authentication and Delivery. The Transition Bonds
shall be executed on behalf of the Issuer by an Authorized Officer of the Issuer
Trustee. The signature of any such Authorized Officer on the Transition Bonds
may be manual or facsimile.
Transition Bonds bearing the manual or facsimile signature of individuals
who were at any time Authorized Officers of the Issuer Trustee shall bind the
Issuer, notwithstanding that such individuals or any of them have ceased to hold
such offices prior to the authentication and delivery of such Transition Bonds
or did not hold such offices at the date of such Transition Bonds.
At any time and from time to time after the execution and delivery of this
Indenture, the Issuer may deliver Transition Bonds executed on behalf of the
Issuer to the
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Bond Trustee pursuant to an Issuer Order for authentication; and the Bond
Trustee shall authenticate and deliver such Transition Bond as in this Indenture
provided and not otherwise.
No Transition Bond shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose, unless there appears on such Transition
Bond a certificate of authentication substantially in the form provided for
herein executed by the Bond Trustee by the manual signature of one of its
authorized signatories, and such certificate upon any Transition Bond shall be
conclusive evidence, and the only evidence, that such Transition Bond has been
duly authenticated and delivered hereunder.
SECTION 2.03. Denominations; Transition Bonds Issuable in Series. The
Transition Bonds of each Series shall be issuable as registered Transition Bonds
in the Authorized Initial Denominations specified in the Series Supplement
therefor.
The Transition Bonds may, at the election of and as authorized by an
Authorized Officer of the Issuer, and set forth in a Series Supplement, be
issued in one or more Series (each comprised of one or more Classes), and shall
be designated generally as the "Transition Bonds" of the Issuer, with such
further particular designations added or incorporated in such title for the
Transition Bonds of any particular Series or Class as an Authorized Officer of
the Issuer may determine and be set forth in the Series Supplement therefor.
Each Series of Transition Bonds shall be created by a Series Supplement
authorized by an Authorized Officer of the Issuer and establishing the terms and
provisions of such Series. The several Series and Classes thereof may differ as
between Series and Classes, in respect of any of the following matters:
(i) designation of the Series and, if applicable, the Classes
thereof;
(ii) the aggregate principal amount of the Transition Bonds of
the Series and, if appli cable, each Class thereof;
(iii) the Bond Rate of the Series and, if applicable, each Class
thereof or the formula, if any, used to calculate the applicable Bond
Rate or Bond Rates for the Series;
(iv) the Payment Dates for the Series;
(v) the Monthly Allocated Interest Balances for the Series;
(vi) the Monthly Allocated Principal Balances for the Series;
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(vii) the Expected Final Amortization Date of the Series, and, if
applicable, each Class thereof;
(viii) the Final Maturity Date of the Series and, if applicable,
each Class thereof;
(ix) the Rated Final Payment Date of the Series and, if
applicable, each Class thereof;
(x) the Series Issuance Date for the Series;
(xi) the place or places for payments with respect to the Series;
(xii) the Authorized Initial Denominations for the Series;
(xiii) the provisions, if any, for redemption of the Series by
the Issuer;
(xiv) the Expected Amortization Schedule for the Series;
(xv) the Overcollateralization Amount with respect to the Series;
(xvi) the Calculation Dates and Adjustment Dates for the Series;
(xvii) the credit enhancement applicable to the Series; and
(xviii) any other terms of the Series or Class that are not
inconsistent with the provisions of this Indenture.
SECTION 2.04. Temporary Transition Bonds. Pending the preparation of
definitive Transition Bonds, or by agreement of the purchasers of all Transition
Bonds or, in the case of Transition Bonds held in a book-entry only system by a
Clearing Agency, the Issuer Trustee on behalf of the Issuer may execute, and
upon receipt of an Issuer Order the Bond Trustee shall authenticate and deliver,
temporary Transition Bonds which are printed, lithographed, typewritten,
mimeographed or otherwise produced, of the tenor of the definitive Transition
Bonds in lieu of which they are issued and with such variations not inconsistent
with the terms of this Indenture as the Authorized Officers of the Issuer
Trustee executing such Transition Bonds may determine, as evidenced by their
execution of such Transition Bonds.
If temporary Transition Bonds are issued, the Issuer will cause definitive
Transition Bonds to be prepared without unreasonable delay except where
temporary Transition Bonds are held by a Clearing Agency . After the preparation
of definitive Transition Bonds, the temporary Transition Bonds shall be
exchangeable for definitive
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Transition Bonds upon surrender of the temporary Transition Bonds at the office
or agency of the Issuer to be maintained as provided in Section 3.02, without
charge to the Holder. Upon surrender for cancelation of any one or more
temporary Transition Bonds, the Issuer Trustee on behalf of the Issuer shall
execute and the Bond Trustee shall authenticate and deliver in exchange therefor
a like initial principal amount of definitive Transition Bonds in Authorized
Initial Denominations. Until so exchanged, the temporary Transition Bonds shall
in all respects be entitled to the same benefits under this Indenture as
definitive Transition Bonds.
SECTION 2.05. Registration; Registration of Transfer and Exchange. The
Issuer shall cause to be kept a register (the "Transition Bond Register") in
which, subject to such reasonable regulations as it may prescribe, the Issuer
shall provide for the registration of Transition Bonds and the registration of
transfers of Transition Bonds. The Bond Trustee shall be "Transition Bond
Registrar" for the purpose of registering Transition Bonds and transfers of
Transition Bonds as herein provided. Upon any resignation of any Transition Bond
Registrar, the Issuer shall promptly appoint a successor or, if it elects not to
make such an appointment, assume the duties of Transition Bond Registrar.
If a Person other than the Bond Trustee is appointed by the Issuer as
Transition Bond Registrar, the Issuer will give the Bond Trustee prompt written
notice of the appointment of such Transition Bond Registrar and of the location,
and any change in the location, of the Transition Bond Register, and the Bond
Trustee shall have the right to inspect the Transition Bond Register at all
reasonable times and to obtain copies thereof, and the Bond Trustee shall have
the right to rely upon a certificate executed on behalf of the Transition Bond
Registrar by an Authorized Officer thereof as to the names and addresses of the
Holders of the Transition Bonds and the principal amounts and number of such
Transition Bonds.
Upon surrender for registration of transfer of any Transition Bond at the
office or agency of the Issuer to be maintained as provided in Section 3.02, the
Issuer Trustee on behalf of the Issuer shall execute, and the Bond Trustee shall
authenticate and the Transition Bondholder shall obtain from the Bond Trustee,
in the name of the designated transferee or transferees, one or more new
Transition Bonds in any Authorized Initial Denominations, of a like Series (and,
if applicable, Class) and aggregate initial principal amount.
At the option of the Holder, Transition Bonds may be exchanged for other
Transition Bonds of a like Series (and, if applicable, Class) and aggregate
initial principal amount in Authorized Initial Denominations, upon surrender of
the Transition Bonds to be exchanged at such office or agency. Whenever any
Transition Bonds are so surrendered for exchange, the Issuer Trustee on behalf
of the Issuer shall execute, and the Bond Trustee shall authenticate and the
Transition Bondholder shall obtain from the
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Bond Trustee, the Transition Bonds which the Transition Bondholder making the
exchange is entitled to receive.
All Transition Bonds issued upon any registration of transfer or exchange
of Transition Bonds shall be the valid obligations of the Issuer, evidencing the
same debt, and entitled to the same benefits under this Indenture, as the
Transition Bonds surrendered upon such registration of transfer or exchange.
Every Transition Bond presented or surrendered for registration of transfer
or exchange shall be duly endorsed by, or be accompanied by a written instrument
of transfer in the form set forth in Exhibit A hereto or such other form as is
satisfactory to the Bond Trustee duly executed by, the Holder thereof or such
Holder's attorney duly authorized in writing, with such signature guaranteed by
an Eligible Guarantor Institution in the form set forth in such Transition Bond.
No service charge shall be made to a Holder for any registration of
transfer or exchange of Transition Bonds, but, other than in respect of
exchanges pursuant to Section 2.04 or 9.06 not involving any transfer, the
Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Transition Bonds.
The preceding provisions of this Section notwithstanding, the Issuer shall
not be required to make, and the Transition Bond Registrar need not register,
transfers or exchanges of Transition Bonds selected for redemption or transfers
or exchanges of any Transition Bond for a period of 15 days preceding the date
on which final payment of principal is to be made with respect to such
Transition Bond.
SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Transition Bonds. If (i)
any mutilated Transition Bond is surrendered to the Bond Trustee, or the Bond
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Transition Bond, and (ii) there is delivered to the Bond Trustee such
security or indemnity as may be required by it to hold the Issuer and the Bond
Trustee harmless, then, in the absence of notice to the Issuer, the Transition
Bond Registrar or the Bond Trustee that such Transition Bond has been acquired
by a bona fide purchaser, the Issuer Trustee on behalf of the Issuer shall
execute, and upon the Issuer Trustee's request the Bond Trustee shall
authenticate and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Transition Bond, a replacement Transition Bond of like
Series (and, if applicable, Class), tenor and initial principal amount in
Authorized Initial Denominations, bearing a number not contemporaneously
outstanding; provided, however, that if any such destroyed, lost or stolen
Transition Bond, but not a mutilated Transition Bond, shall have become or
within seven days shall be due and payable, or shall have been called for
redemption, instead of issuing a replacement Transition Bond, the Issuer may pay
such destroyed, lost or stolen Transition Bond when so due or payable
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or upon the Redemption Date without surrender thereof. If, after the delivery of
such replacement Transition Bond or payment of a destroyed, lost or stolen
Transition Bond pursuant to the proviso to the preceding sentence, a bona fide
purchaser of the original Transition Bond in lieu of which such replacement
Transition Bond was issued presents for payment such original Transition Bond,
the Issuer and the Bond Trustee shall be entitled to recover such replacement
Transition Bond (or such payment) from the Person to whom it was delivered or
any Person taking such replacement Transition Bond from such Person to whom such
replacement Transition Bond was delivered or any assignee of such Person, except
a bona fide purchaser, and shall be entitled to recover upon the security or
indemnity provided therefor to the extent of any loss, damage, cost or expense
incurred by the Issuer or the Bond Trustee in connection therewith.
Upon the issuance of any replacement Transition Bond under this Section,
the Issuer may require the payment by the Holder of such Transition Bond of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other reasonable expenses (including the fees and
expenses of the Bond Trustee) connected therewith.
Every replacement Transition Bond issued pursuant to this Section in
replacement of any mutilated, destroyed, lost or stolen Transition Bond shall
constitute an original additional contractual obligation of the Issuer, whether
or not the mutilated, destroyed, lost or stolen Transition Bond shall be at any
time enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Transition Bonds
duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Transition Bonds.
SECTION 2.07. Persons Deemed Owner. Prior to due presentment for
registration of transfer of any Transition Bond, the Issuer, the Bond Trustee
and any agent of the Issuer or the Bond Trustee may treat the Person in whose
name any Transition Bond is registered (as of the day of determination) as the
owner of such Transition Bond for the purpose of receiving payments of principal
of and premium, if any, and interest on such Transition Bond and for all other
purposes whatsoever, whether or not such Transition Bond be overdue, and neither
the Issuer, the Bond Trustee nor any agent of the Issuer or the Bond Trustee
shall be affected by notice to the contrary.
SECTION 2.08. Payment of Principal, Premium, if any, and Interest; Interest
on Overdue Principal and Premium, if any; Principal, Premium and Interest Rights
Preserved. (a) The Transition Bonds shall accrue interest as provided in the
form of Transition Bond attached to the Series Supplement for such Transition
Bonds, at the applicable Bond Rate specified therein, and such interest shall be
payable on each
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Payment Date as specified therein. Any instalment of interest, principal or
premium, if any, payable on any Transition Bond which is punctually paid or duly
provided for by the Issuer on the applicable Payment Date shall be paid to the
Person in whose name such Transition Bond (or one or more Predecessor Transition
Bonds) is registered on the Record Date for such Payment Date, by check mailed
first-class, postage prepaid to such Person's address as it appears on the
Transition Bond Register on such Record Date or in such other manner as may be
provided in the related Series Supplement, except that with respect to
Transition Bonds registered on a Record Date in the name of the nominee of the
Clearing Agency (initially, such nominee to be Cede & Co.), payments will be
made by wire transfer in immediately available funds to the account designated
by such nominee and except for the final instalment of principal and premium, if
any, payable with respect to such Transition Bond on a Payment Date which shall
be payable as provided in clause (b) below. The funds represented by any such
checks returned undelivered shall be held in accordance with Section 3.03
hereof.
(b) The principal of each Transition Bond of each Series (and, if
applicable, Class) shall be payable in instalments on each Payment Date
specified in the Expected Amortization Schedule included in the form of
Transition Bond attached to the Series Supplement for such Transition Bonds, but
only to the extent that moneys are available for such payment pursuant to
Section 8.02. Failure to pay in accordance with such Expected Amortization
Schedule because moneys are not so available pursuant to Section 8.02 to make
such payments shall not constitute a Default or Event of Default under this
Indenture. Notwithstanding the foregoing, the entire unpaid principal amount of
the Transition Bonds of any Series or Class shall be due and payable, if not
previously paid (i) on the Final Maturity Date for such Series (or, if
applicable, Class), (ii) on the date on which the Transition Bonds of all Series
have been declared immediately due and payable in accordance with Section 5.02
or (iii) on the Redemption Date, if any, therefor. The Bond Trustee shall notify
the Person in whose name a Transition Bond is registered at the close of
business on the Record Date preceding the Payment Date on which the Issuer
expects that the final instalment of principal of and premium, if any, and
interest on such Transition Bond will be paid. Such notice shall be mailed no
later than five days prior to such final Payment Date and shall specify that
such final instalment of principal and premium, if any, will be payable only
upon presentation and surrender of such Transition Bond and shall specify the
place where such Transition Bond may be presented and surrendered for payment of
such instalment. Notices in connection with redemptions of Transition Bonds
shall be mailed to Transition Bondholders as provided in Section 10.03.
(c) If the Issuer defaults in a payment of interest on the Transition Bonds
of any Series, the Issuer shall pay defaulted interest (plus interest on such
defaulted interest at the applicable Bond Rate to the extent lawful) in any
lawful manner. The Issuer may pay such defaulted interest to the Persons who are
Transition Bondholders on a subsequent special record date, which date shall be
at least five Business Days prior to
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the payment date. The Issuer shall fix or cause to be fixed any such special
record date and payment date, and, at least 15 days before any such special
record date, the Issuer shall mail to each affected Transition Bondholder a
notice that states the special record date, the payment date and the amount of
defaulted interest to be paid.
SECTION 2.09. Cancelation. All Transition Bonds surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Bond Trustee, be delivered to the Bond Trustee and shall
be promptly canceled by the Bond Trustee. The Issuer may at any time deliver to
the Bond Trustee for cancelation any Transition Bonds previously authenticated
and delivered hereunder which the Issuer may have acquired in any manner
whatsoever, and all Transition Bonds so delivered shall be promptly canceled by
the Bond Trustee. No Transition Bonds shall be authenticated in lieu of or in
exchange for any Transition Bonds canceled as provided in this Section, except
as expressly permitted by this Indenture. All canceled Transition Bonds may be
held or disposed of by the Bond Trustee in accordance with its standard
retention or disposal policy as in effect at the time unless the Issuer shall
direct by an Issuer Order that they be destroyed or returned to it; provided
that such Issuer Order is timely and the Transition Bonds have not been
previously disposed of by the Bond Trustee.
SECTION 2.10. Amount; Authentication and Delivery of Transition Bonds. The
aggregate principal amount of Transition Bonds that may be authenticated and
delivered under this Indenture shall not exceed $4 billion plus the amount of
any Refunding Issuance. The Issuer may issue Transition Bonds of a new Series as
a Financing Issuance or a Refunding Issuance.
Transition Bonds of a new Series may from time to time be executed by the
Issuer Trustee on behalf of the Issuer and delivered to the Bond Trustee for
authentication and thereupon the same shall be authenticated and delivered by
the Bond Trustee upon Issuer Request and upon delivery by the Issuer, at the
Issuer's expense, to the Bond Trustee of the following:
(1) Trust Action. An Issuer Order authorizing and directing the
execution, authentication and delivery of the Transition Bonds by the Bond
Trustee and specifying the principal amount of Transition Bonds to be
authenticated.
(2) Authorizations. Either (i) a certificate of authentication or
other official document evidencing the due authorization, approval or
consent of any governmental body or bodies at the time having jurisdiction,
together with an Opinion of Counsel that the Bond Trustee is entitled to
rely on that the authorization, approval, or consent of no other
governmental body is required for the valid issuance, authentication and
delivery of such Transition Bonds, or (ii) an Opinion of Counsel that no
such authorization, approval, or consent of any
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governmental body is required, except for, in the case of (i) and (ii),
such registrations as are required under the Blue Sky and securities laws
of any State.
(3) Authorizing Certificate. A certified resolution of the Issuer
Trustee on behalf of the Issuer authorizing the execution and delivery of
the Series Supplement for the Transition Bonds applied for and the
execution, authentication and delivery of such Transition Bonds.
(4) A Series Supplement for the Series of Transition Bonds applied
for, which shall set forth the provisions and form of the Transition Bonds
of such Series (and, if applicable, each Class thereof).
(5) Certificates of the Issuer. (a) An Officer's Certificate from the
Issuer, dated as of the Series Issuance Date, stating: (i) that no Default
has occurred and is continuing under this Indenture and that the issuance
of the Transition Bonds applied for will not result in any Default; (ii)
that the Issuer has appointed the firm of independent certified public
accountants as contemplated in Section 8.05; (iii) that attached thereto
are duly executed, true and complete copies of the Sale Agreement and the
Servicing Agreement; (iv) that all filings with the PUC pursuant to the
Statute and all UCC financing statements with respect to the Collateral
which are required to be filed by the terms of the Sale Agreement, the
Servicing Agreement or this Indenture have been filed as required; and (v)
that all conditions precedent provided in the Indenture relating to the
authentication and delivery of the Transition Bonds have been complied
with.
(b) An Officer's Certificate from the Seller, dated as of the Series
Issuance Date, to the effect that, in the case of the Intangible Transition
Property to be transferred to the Issuer on such date immediately prior to
the conveyance thereof to the Issuer pursuant to the Sale Agreement:
(i) the Seller is the sole owner of such Intangible Transition
Property; such Intangible Transition Property has been validly
transferred and sold to the Issuer free and clear of all Liens (other
than Liens created by the Issuer pursuant to this Indenture); the
Seller has the corporate power and authority to own, sell and assign
such Intangible Transition Property to the Issuer; and the Seller has
duly authorized such sale and assignment to the Issuer by all
necessary corporate action; and
(ii) the attached copy of the Qualified Rate Order creating such
Intangible Transition Property is true and correct and is in full
force and effect.
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(6) Opinion of Counsel. An Opinion of Counsel, portions of which may
be delivered by counsel for the Issuer and portions of which may be
delivered by counsel for the Seller and the Servicer, dated as of the
Series Issuance Date, to the collective effect that:
(a) the Issuer has the power and authority to execute and deliver
the Series Supplement and this Indenture and to issue the Transition
Bonds applied for, each of the Series Supplement and this Indenture,
and the Transition Bonds applied for have been duly authorized and
executed, and the Issuer is duly organized and in good standing under
the laws of the jurisdiction of its organization;
(b) the Transition Bonds applied for, when authenticated in
accordance with the provisions of the Indenture and delivered, will
constitute valid and binding obligations of the Issuer entitled to the
benefits of the Indenture and the related Series Supplement;
(c) the Indenture (including the related Series Supplement), the
Sale Agreement and the Servicing Agreement are valid and binding
agreements of the Issuer, enforceable in accordance with their
respective terms except as such enforceability may be subject to
bankruptcy, insolvency, reorganization and other similar laws
affecting the rights of creditors generally and general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law);
(d) the Sale Agreement is a valid and binding agreement of the
Seller, enforceable against the Seller in accordance with its terms
except as such enforceability may be subject to bankruptcy,
insolvency, reorganization and other similar laws affecting the rights
of creditors generally and general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law);
(e) the Servicing Agreement is a valid and binding agreement of
the Servicer, enforceable against the Servicer in accordance with its
terms except as such enforceability may be subject to bankruptcy,
insolvency, reorganization and other similar laws affecting the rights
of creditors generally and general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at
law);
(f) upon the delivery of a fully executed Bill of Sale delivered
to the Issuer pursuant to Section 2.03(i) of the Sale Agreement in
connection with the issuance of Transition Bonds applied for and the
payment of the purchase price of the related Intangible Transition
Property by the Issuer to
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the Seller pursuant to such Bill of Sale and the Sale Agreement, then
(I) the transfer of the Intangible Transition Property purported to be
conveyed thereby by the Seller to the Issuer pursuant to such Bill of
Sale and the Sale Agreement conveys all of the Seller's right, title
and interest in such Intangible Transition Property to the Issuer and
will be treated under state law as an absolute transfer of all of the
Seller's right, title, and interest in such Intangible Transition
Property, other than for federal and state income tax purposes, (II)
such transfer of such Intangible Transition Property is perfected,
(III) such transfer has a priority over any other assignment or
transfer of such Intangible Transition Property, and (IV) such
Intangible Transition Property is free and clear of all liens created
prior to its transfer to the Issuer pursuant to such Bill of Sale and
the Sale Agreement;
(g)(I) to the extent that the provisions of Section 2812 of the
Statute apply to the grant of a security interest by the Issuer in the
Collateral pursuant to this Indenture, then upon the giving of value
by the Bond Trustee to the Issuer with respect to the Collateral, (A)
this Indenture creates in favor of the Bond Trustee a security
interest in the rights of the Issuer in the Collateral, (B) such
security interest is valid and enforceable against the Issuer and
third parties (subject to the rights of any third parties holding
security interests in such Collateral perfected in the manner
described in Section 2812 of the Statute), and has attached, (C) such
security interest is perfected, and (D) such perfected security
interest is of first priority; and (II) to the extent that the
provisions of Section 2812 of the Statute do not apply to the grant of
a security interest by the Issuer in the Collateral pursuant to this
Indenture, then upon the giving of value by the Bond Trustee to the
Issuer with respect to the Collateral, (A) this Indenture creates in
favor of the Bond Trustee a security interest in the rights of the
Issuer in the Collateral, (B) such security interest is enforceable
against the Issuer and third parties with respect to such Collateral,
(C) such security interest is perfected, and (D) such perfected
security interest is of first priority;
(h) the Indenture has been duly qualified under the Trust
Indenture Act and either the Series Supplement for the Transition
Bonds applied for has been duly qualified under the Trust Indenture
Act or no such qualification of such Series Supplement is necessary;
(i) all instruments furnished to the Bond Trustee conform to the
requirements of this Indenture and constitute all the documents
required to be delivered hereunder for the Bond Trustee to
authenticate and deliver the Transition Bonds applied for, and all
conditions precedent provided for in
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this Indenture relating to the authentication and delivery of the
Transition Bonds have been complied with;
(j) either (A) the registration statement covering the Transition
Bonds is effective under the Securities Act of 1933 and, to the best
of such counsel's knowledge and information, no stop order suspending
the effectiveness of such registration statement has been issued under
the Securities Act of 1933 nor have proceedings therefor been
instituted or threatened by the Commission or (B) the Transition Bonds
are exempt from the registration requirements under the Securities Act
of 1933;
(k) the Indenture (including the related Series Supplement) has
been duly authorized, executed and delivered by the Issuer; and
(l) the Sale Agreement and the Servicing Agreement have been duly
authorized, executed and delivered by the Issuer, the Seller and the
Servicer as applicable.
(7) Accountant's Certificate or Opinion. A certificate or opinion,
addressed to the Issuer and the Bond Trustee complying with the
requirements of Section 11.01 hereof, of a firm of Independent certified
public accountants of recognized national reputation to the effect that (a)
such accountants are Independent with respect to the Issuer within the
meaning of the Indenture, and are independent public accountants within the
meaning of the standards of The American Institute of Certified Public
Accountants, and (b) with respect to the Collateral, they have made such
calculations as they deemed necessary for the purpose and determined that,
based on the assumptions used in calculating the initial Intangible
Transition Charges with respect to the Transferred Intangible Transition
Property or, if applicable, the most recent revised Intangible Transition
Charges with respect to the Transferred Intangible Transition Property, and
taking into account amounts on deposit in the Reserve Subaccount, as of the
Series Issuance Date for such Series (after giving effect to the issuance
of such Series and the application of the proceeds therefrom) such
Intangible Transition Charges are sufficient to (a) pay Operating Expenses
when incurred, (b) pay interest on each Series of Transition Bonds at their
respective Bond Rates when due, (c) pay principal of the Transition Bonds
of all Series in accordance with their respective Expected Amortization
Schedules and (d) fund the Calculated Overcollateralization Level as of
each Payment Date.
(8) Rating Agency Condition. The Bond Trustee shall receive written
notice from each Rating Agency that the Rating Agency Condition will be
satisfied with respect to the issuance of such new Series.
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(9) Bill of Sale. If the issuance of an additional Series of
Transition Bonds is a Financing Issuance, the Bill of Sale delivered to the
Issuer under the Sale Agreement with respect to the Intangible Transition
Property being purchased with the proceeds of such Financing Issuance.
(10) Moneys for Refunding. If the issuance of a Series of Transition
Bonds is a Refunding Issuance, the amount of money necessary to pay the
outstanding principal balance of, and premium and interest on, the
Transition Bonds being refunded to either the Redemption Date for
Transition Bonds being refunded upon redemption, such money to be deposited
into a separate account with the Bond Trustee.
SECTION 2.11. Book-Entry Transition Bonds. Unless otherwise specified in
the related Series Supplement, each Series of Transition Bonds, upon original
issuance, will be issued in the form of a typewritten Transition Bond or
Transition Bonds representing the Book-Entry Transition Bonds, to be delivered
to The Depository Trust Company, the initial Clearing Agency, by, or on behalf
of, the Issuer. Such Transition Bond shall initially be registered on the
Transition Bond Register in the name of Cede & Co., the nominee of the initial
Clearing Agency, and no Transition Bond Owner will receive a definitive
Transition Bond representing such Transition Bond Owner's interest in such
Transition Bond, except as provided in Section 2.13. Unless and until
definitive, fully registered Transition Bonds (the "Definitive Transition
Bonds") have been issued to Transition Bond Owners pursuant to Section 2.13:
(i) the provisions of this Section shall be in full force and effect;
(ii) the Transition Bond Registrar and the Bond Trustee shall be
entitled to deal with the Clearing Agency for all purposes of this
Indenture (including the payment of principal of and premium, if any, and
interest on the Transition Bonds and the giving of instructions or
directions hereunder) as the sole holder of the Transition Bonds, and shall
have no obligation to the Transition Bond Owners;
(iii) to the extent that the provisions of this Section conflict with
any other provisions of this Indenture, the provisions of this Section
shall control;
(iv) the rights of Transition Bond Owners shall be exercised only
through the Clearing Agency and shall be limited to those established by
law and agreements between such Transition Bond Owners and the Clearing
Agency or the Clearing Agency Participants. Pursuant to the DTC Agreement,
unless and until Definitive Transition Bonds are issued pursuant to Section
2.13, the initial Clearing Agency will make book-entry transfers among the
Clearing Agency Participants and receive and transmit payments of principal
of and premium, if
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any, and interest on the Transition Bonds to such Clearing Agency
Participants; and
(v) whenever this Indenture requires or permits actions to be taken
based upon instructions or directions of Holders of Transition Bonds
evidencing a specified percentage of the Outstanding Amount of the
Transition Bonds or a Series or Class thereof, the Clearing Agency shall be
deemed to represent such percentage only to the extent that it has received
instructions to such effect from Transition Bond Owners or Clearing Agency
Participants owning or representing, respectively, such required percentage
of the beneficial interest in the Transition Bonds or such Series or Class
and has delivered such instructions to the Bond Trustee.
SECTION 2.12. Notices to Clearing Agency. Whenever a notice or other
communication to the Transition Bondholders is required under this Indenture,
unless and until Definitive Transition Bonds shall have been issued to
Transition Bond Owners pursuant to Section 2.13, the Bond Trustee shall give all
such notices and communications specified herein to be given to Transition
Bondholders to the Clearing Agency, and shall have no obligation to the
Transition Bond Owners.
SECTION 2.13. Definitive Transition Bonds. If (i) the Issuer advises the
Bond Trustee in writing that the Clearing Agency is no longer willing or able to
properly discharge its responsibilities as depository with respect to any Series
or Class of Transition Bonds and the Issuer is unable to locate a qualified
successor, (ii) the Issuer, at its option, advises the Bond Trustee in writing
that it elects to terminate the book-entry system through the Clearing Agency
with respect to any Series or Class of Transition Bonds or (iii) after the
occurrence of an Event of Default, Transition Bond Owners representing
beneficial interests aggregating at least a majority of the Outstanding Amount
of the Transition Bonds of all Series advise the Bond Trustee through the
Clearing Agency in writing that the continuation of a book-entry system through
the Clearing Agency is no longer in the best interests of the Transition Bond
Owners, then the Clearing Agency shall notify all affected Transition Bond
Owners and the Bond Trustee of the occurrence of any such event and of the
availability of Definitive Transition Bonds to affected Transition Bond Owners
requesting the same. Upon surrender to the Bond Trustee of the typewritten
Transition Bond or Transition Bonds representing the Book-Entry Transition Bonds
by the Clearing Agency, accompanied by registration instructions, the Issuer
Trustee on behalf of the Issuer shall execute and the Bond Trustee shall
authenticate the Definitive Transition Bonds in accordance with the instructions
of the Clearing Agency. None of the Issuer, the Transition Bond Registrar or the
Bond Trustee shall be liable for any delay in delivery of such instructions and
may conclusively rely on, and shall be protected in relying on, such
instructions. Upon the issuance of Definitive Transition Bonds, the Bond Trustee
shall recognize the Holders of the Definitive Transition Bonds as Transition
Bondholders.
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ARTICLE III
Covenants
SECTION 3.01. Payment of Principal, Premium, if any, and Interest. The
Issuer will duly and punctually pay the principal of and premium, if any, and
interest on the Transition Bonds in accordance with the terms of the Transition
Bonds and this Indenture; provided that except on the Final Maturity Date, or
the Redemption Date for a Series or Class of Transition Bonds or upon the
acceleration of the Transition Bonds following the occurrence of an Event of
Default, the Issuer shall only be obligated to pay the principal of such
Transition Bonds on each Payment Date therefor to the extent moneys are
available for such payment pursuant to Section 8.02. Amounts properly withheld
under the Code by any Person from a payment to any Transition Bondholder of
interest or principal or premium, if any, shall be considered as having been
paid by the Issuer to such Transition Bondholder for all purposes of this
Indenture.
SECTION 3.02. Maintenance of Office or Agency. The Issuer will maintain in
the Borough of Manhattan, the City of New York, an office or agency where
Transition Bonds may be surrendered for registration of transfer or exchange,
and where notices and demands to or upon the Issuer in respect of the Transition
Bonds and this Indenture may be served. The Issuer hereby initially appoints the
Bond Trustee to serve as its agent for the foregoing purposes. The Issuer will
give prompt written notice to the Bond Trustee of the location, and of any
change in the location, of any such office or agency. If at any time the Issuer
shall fail to maintain any such office or agency or shall fail to furnish the
Bond Trustee with the address thereof, such surrenders, notices and demands may
be made or served at the Corporate Trust Office, and the Issuer hereby appoints
the Bond Trustee as its agent to receive all such surrenders, notices and
demands.
SECTION 3.03. Money for Payments To Be Held in Trust. As provided in
Section 8.02(a), all payments of principal of, or premium and interest on, the
Transition Bonds that are to be made from amounts withdrawn from the Collection
Account pursuant to Section 8.02(d), (e) or (f) or Section 4.03 shall be made on
behalf of the Issuer by the Bond Trustee or by another Paying Agent, and no
amounts so withdrawn from the Collection Account for payments of Transition
Bonds shall be paid over to the Issuer except as provided in this Section and in
Section 8.02.
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The Issuer will cause each Paying Agent other than the Bond Trustee to
execute and deliver to the Bond Trustee an instrument in which such Paying Agent
shall agree with the Bond Trustee (and if the Bond Trustee acts as Paying Agent,
it hereby so agrees), subject to the provisions of this Section, that such
Paying Agent will:
(i) hold all sums held by it for the payment of principal of, or
premium or interest on, the Transition Bonds in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(ii) give the Bond Trustee notice of any Default by the Issuer (or any
other obligor upon the Transition Bonds) of which the Paying Agent has
actual knowledge in the making of any payment required to be made with
respect to the Transition Bonds;
(iii) at any time during the continuance of any such Default, upon the
written request of the Bond Trustee, forthwith pay to the Bond Trustee all
sums so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith pay to the
Bond Trustee all sums held by the Paying Agent in trust for the payment of
Transition Bonds if at any time the Paying Agent ceases to meet the
standards required to be met by a Paying Agent at the time of its
appointment; and
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Transition Bonds of any
applicable withholding taxes imposed thereon and with respect to any
applicable reporting requirements in connection therewith.
The Issuer may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, by Issuer Order direct
any Paying Agent to pay to the Bond Trustee all sums held in trust by such
Paying Agent, such sums to be held by the Bond Trustee upon the same trusts as
those upon which the sums were held by such Paying Agent; and upon such payment
by any Paying Agent to the Bond Trustee, such Paying Agent shall be released
from all further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money held
by the Bond Trustee or any Paying Agent in trust for the payment of any amount
of principal of, premium on, if any, or interest on any Transition Bond and
remaining unclaimed for two years after such amount has become due and payable
shall be discharged from such trust and be paid to the Issuer; and the Holder of
such Transition Bond shall thereafter, as an unsecured general creditor, look
only to the Issuer for
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payment thereof (but only to the extent of the amounts so paid to the Issuer),
and all liability of the Bond Trustee or such Paying Agent with respect to such
trust money shall thereupon cease; provided, however, that the Bond Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Issuer cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the City of New York, notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such publication, any unclaimed balance of such money then
remaining will be repaid to the Issuer. The Bond Trustee may also adopt and
employ, at the expense of the Issuer, any other reasonable means of notification
of such repayment (including mailing notice of such repayment to Holders whose
Transition Bonds have been called but have not been surrendered for redemption
or whose right to or interest in moneys due and payable but not claimed is
determinable from the records of the Bond Trustee or of any Paying Agent, at the
last address of record for each such Holder).
SECTION 3.04. Existence. Subject to Section 3.10, the Issuer will keep in
full effect its existence, rights and franchises as a statutory business trust
under the laws of the State of Delaware (unless it becomes, or any successor
Issuer hereunder is or becomes, organized under the laws of any other State or
of the United States of America, in which case the Issuer will keep in full
effect its existence, rights and franchises under the laws of such other
jurisdiction) and will obtain and preserve its qualification to do business in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Indenture, the Transition Bonds,
the Collateral and each other instrument or agreement included therein.
SECTION 3.05. Protection of Collateral. The Issuer will from time to time
execute and deliver all such supplements and amendments hereto and all such
filings (including filings with the PUC pursuant to the Statute), financing
statements, continuation statements, instruments of further assurance and other
instruments, and will take such other action necessary or advisable to:
(i) maintain and preserve the lien and security interest (and the
priority thereof) of this Indenture or carry out more effectively the
purposes hereof;
(ii) perfect, publish notice of or protect the validity of any Grant
made or to be made by this Indenture;
(iii) enforce any of the Collateral;
(iv) preserve and defend title to the Collateral and the rights of the
Bond Trustee and the Transition Bondholders in the Collateral against the
claims of all Persons and parties; or
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(v) pay any and all taxes levied or assessed up on all or any part of
the Collateral.
The Issuer hereby designates the Bond Trustee its agent and attorney-in-fact to
execute any filing with the PUC, financing statement, continuation statement or
other instrument required by the Bond Trustee pursuant to this Section.
SECTION 3.06. Opinions as to Collateral. (a) On or before [ ] in each
calendar year, beginning at least 3 months after the issuance of the first
Series of the Transition Bonds while any Series is outstanding, the Issuer shall
furnish to the Bond Trustee an Opinion of Counsel either stating that, in the
opinion of such counsel, such action has been taken with respect to the
recording, filing, re-recording and refiling of this Indenture, any indentures
supplemental hereto and any other requisite documents and, with respect to the
execution and filing of any filings with the PUC pursuant to the Statute,
financing statements and continuation statements as is necessary to maintain the
lien and security interest, and the first priority thereof, created by this
Indenture and reciting the details of such action or stating that in the opinion
of such counsel no such action is necessary to maintain such lien and security
interest, and the first priority thereof. Such Opinion of Counsel shall also
describe the recording, filing, re-recording and refiling of this Indenture, any
indentures supplemental hereto and any other requisite documents, and the
execution and filing of any filings with the PUC, financing statements and
continuation statements that will, in the opinion of such counsel, be required
to maintain the lien and security interest of this Indenture until [ ] in the
following calendar year.
(b) Prior to the effectiveness of any amendment to the Sale Agreement or
the Servicing Agreement, the Issuer shall furnish to the Bond Trustee an Opinion
of Counsel either (A) stating that, in the opinion of such counsel, all filings,
including filings with the PUC pursuant to the Statute, have been executed and
filed that are necessary fully to preserve and protect the interest of the
Issuer and the Bond Trustee in the Transferred Intangible Transition Property
and the proceeds thereof, and reciting the details of such filings or referring
to prior Opinions of Counsel in which such details are given, or (B) stating
that, in the opinion of such counsel, no such action shall be necessary to
preserve and protect such interest.
SECTION 3.07. Performance of Obligations. (a) The Issuer (i) will
diligently pursue any and all actions to enforce its rights under each
instrument or agreement included in the Collateral and (ii) will not take any
action and will use its best efforts not to permit any action to be taken by
others that would release any Person from any of such Person's covenants or
obligations under any such instrument or agreement or that would result in the
amendment, hypothecation, subordination, termination or discharge of, or impair
the validity or effectiveness of, any such instrument or agreement,
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except, in each case, as expressly provided in this Indenture, the Sale
Agreement or the Servicing Agreement or such other instrument or agreement.
(b) The Issuer may contract with other Persons to assist it in performing
its duties under this Indenture, and any performance of such duties by a Person
identified to the Bond Trustee in an Officer's Certificate of the Issuer shall
be deemed to be action taken by the Issuer. Initially, the Issuer has contracted
with the Servicer to assist the Issuer in performing its duties under this
Indenture.
(c) The Issuer will punctually perform and observe all of its obligations
and agreements contained in the Sale Agreement, the Servicing Agreement and in
all other instruments and agreements included in the Collateral.
(d) Without derogating from the absolute nature of the assignment granted
to the Bond Trustee under this Indenture or the rights of the Bond Trustee
hereunder, but subject to Section 3.20, the Issuer agrees that it will not,
without the prior written consent of the Bond Trustee or the Holders of at least
a majority in Outstanding Amount of the Transition Bonds of all Series, amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the terms of any
Collateral or the Basic Documents. If any such amendment, modification,
supplement or waiver shall be so consented to by the Bond Trustee or such
Holders, the Issuer agrees to execute and deliver, in its own name and at its
own expense, such agreements, instruments, consents and other documents as shall
be necessary or appropriate in the circumstances. The Issuer agrees that no such
amendment, modification, supplement or waiver shall adversely affect the rights
of the Holders of the Transition Bonds outstanding at the time of any such
amendment, modification, supplement or waiver.
SECTION 3.08. Negative Covenants. The Issuer shall not:
(i) except as expressly permitted by this Indenture or the Sale
Agreement or the Servicing Agreement, sell, transfer, exchange or otherwise
dispose of any of the Collateral, unless directed to do so by the Bond
Trustee in accordance with Article V;
(ii) claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the Transition Bonds
(other than amounts properly withheld from such payments under the Code) or
assert any claim against any present or former Transition Bondholder by
reason of the payment of taxes levied or assessed upon the Issuer or any
part of the Collateral;
(iii) (A) permit the validity or effectiveness of this Indenture to be
impaired, or permit the lien of this Indenture to be amended, hypothecated,
subordinated,
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terminated or discharged, or permit any Person to be released from any
covenants or obligations with respect to the Transition Bonds under this
Indenture except as may be expressly permitted hereby, (B) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance
(other than the lien and security interest created by this Indenture) to be
created on or extend to or otherwise arise upon or burden the Collateral or
any part thereof or any interest therein or the proceeds thereof or (C)
permit the lien of this Indenture not to constitute a continuing valid
first priority security interest in the Collateral.
SECTION 3.09. Annual Statement as to Compliance. The Issuer will deliver to
the Bond Trustee, within 120 days after the end of each fiscal year of the
Issuer (commencing with the fiscal year 1999), an Officer's Certificate stating,
as to the Authorized Officer signing such Officer's Certificate, that
(i) a review of the activities of the Issuer during such year (or
relevant portion thereof) and of performance under this Indenture has been
made under such Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on such
review, the Issuer has complied with all conditions and covenants under
this Indenture throughout such calendar year (or relevant portion thereof),
or, if there has been a default in complying with any such condition or
covenant, describing each such default and the nature and status thereof.
SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms. The
Issuer shall not consolidate or merge with or into any other Person or sell
substantially all of its assets to any other Person, unless:
(i) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger or to whom substantially all of such assets are
sold shall be a Person organized and existing under the laws of the United
States of America or any State and shall expressly assume by an indenture
supplemental hereto, executed and delivered to the Bond Trustee, in form
satisfactory to the Bond Trustee, the due and punctual payment of the
principal of and premium, if any, and interest on all Transition Bonds and
the performance or observance of every agreement and covenant of this
Indenture on the part of the Issuer to be performed or observed, all as
provided herein and in the applicable Series Supplement or Series
Supplements;
(ii) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger or to whom substantially all of such assets are
sold shall expressly assume all obligations and succeed to all rights of
the Issuer under the Sale Agreement and the Servicing Agreement pursuant to
an assignment and
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assumption agreement executed and delivered to the Bond Trustee, in form
satisfactory to the Bond Trustee;
(iii) immediately after giving effect to such consolidation or merger
or sale, no Default or Event of Default shall have occurred and be
continuing;
(iv) the Rating Agency Condition shall have been satisfied with
respect to such consolidation or merger or sale;
(v) the Issuer shall have received an Opinion of Counsel (and shall
have delivered copies thereof to the Bond Trustee) to the effect that such
consolidation or merger or sale (a) will not have any material adverse tax
consequence to the Issuer or any Transition Bondholder, (b) complies with
this Indenture and all of the conditions precedent herein relating to such
transaction and (c) will result in the Bond Trustee maintaining a
continuing valid first priority security interest in the Collateral;
(vi) none of the Intangible Transition Property, the Qualified Rate
Order, the Seller's, the Servicer's or the Issuer's rights under the
Statute or the Qualified Rate Order are impaired thereby; and
(vii) any action as is necessary to maintain the lien and security
interest created by this Indenture shall have been taken.
SECTION 3.11. Successor or Transferee. (a) Upon any consolidation or merger
of the Issuer in accordance with Section 3.10, the Person formed by or surviving
such consolidation or merger (if other than the Issuer) shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under
this Indenture with the same effect as if such Person had been named as the
Issuer herein.
(b) Upon any sale by the Issuer of substantially all of its assets in a
sale which complies with Section 3.10, PECO Energy Transition Trust will be
released from every covenant and agreement of this Indenture to be observed or
performed on the part of the Issuer with respect to the Transition Bonds and
from every covenant and agreement of the Sale Agreement and the Servicing
Agreement to be observed or performed on the part of the Issuer.
SECTION 3.12. No Other Business. The Issuer shall not engage in any
business other than purchasing and owning Intangible Transition Property,
issuing Transition Bonds from time to time, pledging its interest in the
Collateral to the Bond Trustee under this Indenture in order to secure the
Transition Bonds and performing activities that are necessary, suitable or
convenient to accomplish these purposes or are incidental thereto.
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SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
indebtedness except for the Transition Bonds.
SECTION 3.14. Guarantees, Loans, Advances and Other Liabilities. Except as
contemplated by the Sale Agreement, the Servicing Agreement, this Indenture or
the Trust Agreement, the Issuer shall not make any loan or advance or credit to,
or guarantee (directly or indirectly or by an instrument having the effect of
assuring another's payment or performance on any obligation or capability of so
doing or otherwise), endorse or otherwise become contingently liable, directly
or indirectly, in connection with the obligations, stocks or dividends of, or
own, purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other Person.
SECTION 3.15. Capital Expenditures. The Issuer shall not make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty) other than Intangible Transition Property
purchased from the Seller pursuant to, and in accordance with, the Sale
Agreement.
SECTION 3.16. Restricted Payments. The Issuer shall not, directly or
indirectly, (i) pay any dividend or make any distribution (by reduction of
capital or otherwise), whether in cash, property, securities or a combination
thereof, to any owner of a beneficial interest in the Issuer or otherwise with
respect to any ownership or equity interest in, or ownership security of, the
Issuer, (ii) redeem, purchase, retire or otherwise acquire for value any such
ownership or equity interest or security or (iii) set aside or otherwise
segregate any amounts for any such purpose; provided, however, that if no Event
of Default shall have occurred and be continuing, the Issuer may make, or cause
to be made, any such distributions to any owner of a beneficial interest in the
Issuer or otherwise with respect to any ownership or equity interest or security
in or of the Issuer using funds distributed to the Issuer pursuant to Section
8.02(d) or (e) to the extent that such distributions would not cause the book
value of the remaining equity in the Issuer to decline below 0.5% of the
original principal amount of all Series of Transition Bonds which remain
outstanding. The Issuer will not, directly or indirectly, make payments to or
distributions from the Collection Account except in accordance with this
Indenture and the Basic Documents.
SECTION 3.17. Notice of Events of Default. The Issuer agrees to deliver to
the Bond Trustee and the Rating Agencies written notice in the form of an
Officer's Certificate of any Default or Event of Default hereunder, its status
and what action the Issuer is taking or proposes to take with respect thereto
within five days after the occurrence thereof.
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SECTION 3.18. Inspection. The Issuer agrees that, on reasonable prior
notice, it will permit any representative of the Bond Trustee, during the
Issuer's normal business hours, to examine all the books of account, records,
reports, and other papers of the Issuer, to make copies and extracts therefrom,
to cause such books to be audited annually by Independent certified public
accountants, and to discuss the Issuer's affairs, finances and accounts with the
Issuer's officers, employees, and Independent certified public accountants, all
at such reasonable times and as often as may be reasonably requested. The Bond
Trustee shall and shall cause its representatives to hold in confidence all such
information except to the extent disclosure may be required by law (and all
reasonable applications for confidential treatment are unavailing) and except to
the extent that the Bond Trustee may reasonably determine that such disclosure
is consistent with its obligations hereunder.
SECTION 3.19. Adjusted Overcollateralization Schedules. Not later than each
Schedule Revision Date, the Issuer shall deliver to the Bond Trustee a
replacement Schedule 1 hereto, adjusted to reflect the event giving rise to such
Schedule Revision Date and setting forth the Calculated Overcollateralization
Level for each Payment Date and the Monthly Allocated Overcollateralization
Balance for each Monthly Allocation Date.
SECTION 3.20. Sale Agreement and Servicing Agreement Covenants. (a) The
Issuer agrees to take all such lawful actions to enforce its rights under the
Sale Agreement and the Servicing Agreement and to compel or secure the
performance and observance by the Seller and the Servicer, of each of their
obligations to the Issuer under or in connection with the Sale Agreement and the
Servicing Agreement, respectively, in accordance with the terms thereof. So long
as no Event of Default occurs and is continuing, but subject to Section 3.20(f
), the Issuer may exercise any and all rights, remedies, powers and privileges
lawfully available to the Issuer under or in connection with the Sale Agreement
and the Servicing Agreement.
(b) If an Event of Default occurs and is continuing, the Bond Trustee may,
and, at the direction (which direction shall be in writing or by telephone
(confirmed in writing promptly thereafter)) of the Holders of a majority of the
Outstanding Amount of the Transition Bonds of all Series shall, exercise all
right, remedies, powers, privileges and claims of the Issuer against the Seller
or the Servicer under or in connection with the Sale Agreement and the Servicing
Agreement, respectively, including the right or power to take any action to
compel or secure performance or observance by the Seller or the Servicer of each
of their obligations to the Issuer thereunder and to give any consent, request,
notice, direction, approval, extension or waiver under the Sale Agreement and
the Servicing Agreement, and any right of the Issuer to take such action shall
be suspended.
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(c) With the consent of the Bond Trustee, the Sale Agreement and the
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 Intangible Transition Charges Adjustment
Process. The Bond Trustee shall not withhold its consent to such amendment so
long as the Rating Agency Condition is satisfied in connection therewith and
the foregoing officer's certificate is provided.
(d) No amendment, modification, supplement, termination, waiver or
surrender of, the terms of the Sale Agreement or the Servicing Agreement, or
waiver of timely performance or observance by the Servicer or the Seller under
the Sale Agreement or the Servicing Agreement, respectively, in each case in
such a way as would adversely affect the interests of Transition Bondholders 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, supplement,
termination, waiver or surrender of the terms of the Sale Agreement or the
Servicing Agreement or waive timely performance or observance by the Seller or
the Servicer under the Sale Agreement or 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 to such proposed
amendment, modification, supplement or waiver only with the consent of the
Holders of at least a majority of the Outstanding Amount of the Transition Bonds
of each Series or Class. If any such amendment, modification, supplement or
waiver shall be so consented to by the Bond Trustee or such Holders, the Issuer
agrees to execute and deliver, in its own name and at its own expense, such
agreements, instruments, consents and other documents as shall be necessary or
appropriate in the circumstances.
(e) If the Issuer and the Seller or Servicer propose to amend, modify,
waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the Intangible
Transition Charges Adjustment Process, the Issuer shall notify the Bond Trustee
and the Bond Trustee shall notify Transition Bondholders of such proposal and
the Bond Trustee shall consent thereto only with the consent of the Holder of
each Outstanding Transition Bond of each Series or Class affected thereby.
(f) Promptly following a default by either the Seller or Servicer under the
Sale Agreement or the Servicing Agreement, respectively, and at the Issuer's
expense, the Issuer agrees to take all such lawful actions as the Bond Trustee
may request to compel or secure the performance and observance by the Seller or
the Servicer, as applicable, of each of their obligations to the Issuer under or
in connection with the Sale Agreement or the Servicing Agreement in accordance
with the terms thereof, and to exercise any and all rights, remedies, powers and
privileges lawfully available to the Issuer under or in connection with the Sale
Agreement or the Servicing Agreement to the extent and in the manner directed by
the Bond Trustee, including the transmission of notices of default on the part
of the Seller or the Servicer thereunder and the institution of legal or
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administrative actions or proceedings to compel or secure performance by the
Seller or the Servicer of each of their obligations under the Sale Agreement and
the Servicing Agreement.
(g) If the Issuer shall have knowledge of the occurrence of a Servicer
Default under the Servicing Agreement, the Issuer shall promptly give written
notice thereof to the Bond Trustee and the Rating Agencies, and shall specify in
such notice the action, if any, the Issuer is taking with respect to such
default. If a Servicer Default shall arise from the failure of the Servicer to
perform any of its duties or obligations under the Servicing Agreement with
respect to the Intangible Transition Property or the Intangible Transition
Charges, the Issuer shall take all reasonable steps available to it to remedy
such failure. The Issuer shall not take any action to terminate the Servicer's
rights and powers under the Servicing Agreement following a Servicer Default
without the prior written consent of the Bond Trustee or of the Holders of
Transition Bonds evidencing not less than 25% of the Outstanding Amount of the
Transition Bonds of all Series.
(h) As promptly as possible after the giving of notice of termination to
the Servicer and the Rating Agencies of the Servicer's rights and powers
pursuant to Section 6.01 of the Servicing Agreement, the Bond Trustee shall,
together with such other Persons, if any, as are specified in Section 6.01 of
the Servicing Agreement, appoint a successor Servicer (the "Successor
Servicer"), and such Successor Servicer shall accept its appointment by a
written assumption in a form acceptable to the Issuer and the Bond Trustee. A
person shall qualify as a Successor Servicer only if such Person satisfies the
requirements of Section 6.04 of the Servicing Agreement. If within 30 days after
the delivery of the notice referred to above, a Successor Servicer shall not
have been appointed and accepted its appointment as such, the Bond Trustee may
petition the PUC or a court of competent jurisdiction to appoint a Successor
Servicer. In connection with any such appointment, the Issuer may make such
arrangements for the compensation of such Successor Servicer as it and such
Successor Servicer shall agree, subject to the limitations set forth below and
in the Servicing Agreement, and in accordance with Section 6.04 of the Servicing
Agreement, the Issuer shall enter into an agreement with such Successor Servicer
for the servicing of the Intangible Transition Property (such agreement to be in
form and substance satisfactory to the Bond Trustee).
(i) Upon termination of the Servicer's rights and powers pursuant to the
Servicing Agreement, the Bond Trustee shall promptly notify the Issuer, the
Transition Bondholders and the Rating Agencies. As soon as a Successor Servicer
is appointed, the Issuer shall notify the Bond Trustee, the Transition
Bondholders and the Rating Agencies of such appointment, specifying in such
notice the name and address of such Successor Servicer.
SECTION 3.21. Taxes. So long as any of the Transition Bonds are
outstanding, the Issuer shall pay all material taxes, including gross receipts
taxes,
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assessments and governmental charges imposed upon it or any of
its properties or assets or with respect to any of its franchises, business,
income or property before any penalty accrues thereon if the failure to pay any
such taxes, assessments and governmental charges would, after any applicable
grace periods, notices or other similar requirements, result in a Lien on the
Collateral.
ARTICLE IV
Satisfaction and Discharge; Defeasance
SECTION 4.01. Satisfaction and Discharge of Indenture; Defeasance. (a) The
Transition Bonds of any Series, all moneys payable with respect thereto and this
Indenture as it applies to such Series shall cease to be of further effect and
the lien hereunder shall be released with respect to such Series, interest shall
cease to accrue on the Transition Bonds of such Series and the Bond Trustee, on
demand of and at the expense of the Issuer, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture with respect to the
Transition Bonds of such Series, when
(A) either
(1) all Transition Bonds of such Series theretofore authenticated and
delivered (other than (i) Transition Bonds that have been destroyed, lost
or stolen and that have been replaced or paid as provided in Section 2.06
and (ii) Transition Bonds for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Issuer and
thereafter repaid to the Issuer or discharged from such trust, as provided
in Section 3.03) have been delivered to the Bond Trustee for cancelation;
or
(2) the Final Maturity Date or Redemption Date has occurred with
respect to all Transition Bonds of such Series not theretofore delivered to
the Bond Trustee for cancelation, and the Issuer has irrevocably deposited
or caused to be irrevocably deposited with the Bond Trustee cash, in trust
for such purpose, in an amount sufficient to pay and discharge the entire
indebtedness on such Transition Bonds not theretofore delivered to the Bond
Trustee on the Final Maturity Date or Redemption Date, as applicable,
therefor;
(B) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer with respect to such Series; and
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(C) the Issuer has delivered to the Bond Trustee an Officer's Certificate,
an Opinion of Counsel and (if required by the TIA or the Bond Trustee) an
Independent Certificate from a firm of certified public accountants, each
meeting the applicable requirements of Section 11.01 and each stating that all
conditions precedent herein provided for relating to the satisfaction and
discharge of this Indenture with respect to Transition Bonds of such Series have
been complied with.
(b) Subject to Sections 4.01(c) and 4.02, the Issuer at any time may
terminate (i) all its obligations under this Indenture with respect to the
Transition Bonds of any Series ("Legal Defeasance Option") or (ii) its
obligations under Sections 3.04, 3.05, 3.06, 3.07, 3.08, 3.09, 3.10, 3.12, 3.13,
3.14, 3.15, 3.16, 3.17, 3.18, 3.19 and 3.20 and the operation of Section
5.01(iv) ("Covenant Defeasance Option") with respect to any Series of Transition
Bonds. The Issuer may exercise the Legal Defeasance Option with respect to any
Series of Transition Bonds notwithstanding its prior exercise of the Covenant
Defeasance Option with respect to such Series.
If the Issuer exercises the Legal Defeasance Option with respect to any
Series, the maturity of the Transition Bonds of such Series may not be (a)
accelerated because of an Event of Default or (b) except as provided in Section
4.02, redeemed. If the Issuer exercises the Covenant Defeasance Option with
respect to any Series, the maturity of the Transition Bonds of such Series may
not be accelerated because of an Event of Default specified in Section 5.01(iv).
Upon satisfaction of the conditions set forth herein to the exercise of the
Legal Defeasance Option or the Covenant Defeasance Option with respect to any
Series of Transition Bonds, the Bond Trustee, on demand of and at the expense of
the Issuer, shall execute proper instruments acknowledging satisfaction and
discharge of the obligations that are terminated pursuant to such exercise.
(c) Notwithstanding Sections 4.01(a) and 4.01(b) above, (i) rights of
registration of transfer and exchange, (ii) rights of substitution of mutilated,
destroyed, lost or stolen Transition Bonds, (iii) rights of Transition
Bondholders to receive payments of principal, premium, if any, and interest, but
only from the amounts deposited with the Bond Trustee for such payments, (iv)
Sections 4.03 and 4.04, (v) the rights, obligations and immunities of the Bond
Trustee hereunder (including the rights of the Bond Trustee under Section 6.07
and the obligations of the Bond Trustee under Section 4.03) and (vi) the rights
of Transition Bondholders under this Indenture with respect to the property
deposited with the Bond Trustee payable to all or any of them, shall survive
until the Transition Bonds of the Series as to which this Indenture or certain
obligations hereunder have be satisfied and discharged pursuant to Section
4.01(a) or 4.01(b) and have been paid in full. Thereafter, the obligations in
Sections 6.07 and 4.04 with respect to such Series shall survive.
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SECTION 4.02. Conditions to Defeasance. The Issuer may exercise the Legal
Defeasance Option or the Covenant Defeasance Option with respect to any Series
of Transition Bonds only if:
(a) the Issuer irrevocably deposits or causes to be deposited in trust
with the Bond Trustee cash or U.S. Government Obligations for the payment
of principal of and premium, if any, and interest on such Transition Bonds
to the Expected Payment Date or Redemption Date therefor, as applicable,
such deposit to be made in the Defeasance Subaccount for such Series of
Transition Bonds;
(b) the Issuer delivers to the Bond Trustee a certificate from a
nationally recognized firm of Independent accountants expressing its
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited cash without investment will provide cash at such times and in
such amounts (but, in the case of the Legal Defeasance Option only, not
more than such amounts) as will be sufficient to pay in respect of the
Transition Bonds of such Series (i) subject to clause (ii), principal in
accordance with the Expected Amortization Schedule therefor, (ii) if such
Series is to be redeemed, the Redemption Price therefor on the Redemption
Date therefor and (iii) interest when due;
(c) in the case of the Legal Defeasance Option, 95 days pass after the
deposit is made and during the 95-day period no Default specified in
Section 5.01(v) or (vi) occurs which is continuing at the end of the
period;
(d) no Default has occurred and is continuing on the day of such
deposit and after giving effect thereto;
(e) in the case of the Legal Defeasance Option, the Issuer delivers to
the Bond Trustee an Opinion of Counsel stating that (i) the Issuer has
received from, or there has been published by, the Internal Revenue Service
a ruling, or (ii) since the date of execution of this Indenture, there has
been a change in the applicable Federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the
Holders of the Transition Bonds of such Series will not recognize income,
gain or loss for Federal income tax purposes as a result of the exercise of
such Legal Defeasance Option and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(f) in the case of the Covenant Defeasance Option, the Issuer delivers
to the Bond Trustee an Opinion of Counsel to the effect that the Holders of
the Transition Bonds of such Series will not recognize income, gain or loss
for
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Federal income tax purposes as a result of the exercise of such
Covenant Defeasance Option and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; and
(g) the Issuer delivers to the Bond Trustee an Officer's Certificate
and an Opinion of Counsel, each stating that all conditions precedent to
the satisfaction and discharge of the Transition Bonds of such Series to
the extent contemplated by this Article IV have been complied with.
Notwithstanding any other provision of this Section 4.02 to the contrary,
no delivery of cash or U.S. Government Obligations to the Bond Trustee under
this Section shall terminate any obligations of the Issuer under this Indenture
with respect of any Transition Bonds which are to be redeemed prior to the Final
Maturity Date therefor until such Transition Bonds shall have been irrevocably
called or designated for redemption on a date thereafter on which such
Transition Bonds may be redeemed in accordance with the provisions of this
Indenture and proper notice of such redemption shall have been given in
accordance with the provisions of this Indenture or the Issuer shall have given
the Bond Trustee, in form satisfactory to the Bond Trustee, irrevocable
instructions to give, in the manner and at the times prescribed herein, notice
of redemption of such Series.
SECTION 4.03. Application of Trust Money. All moneys or U.S. Government
Obligations deposited with the Bond Trustee pursuant to Section 4.01 or 4.02
hereof with respect to any Series of Transition Bonds shall be held in trust in
the Defeasance Subaccount for such Series and applied by it, in accordance with
the provisions of the Transition Bonds and this Indenture, to the payment,
either directly or through any Paying Agent, as the Bond Trustee may determine,
to the Holders of the particular Transition Bonds for the payment or redemption
of which such moneys have been deposited with the Bond Trustee, of all sums due
and to become due thereon for principal, premium, if any, and interest. Such
moneys will be segregated and held apart solely for paying such Transition Bonds
and such Transition Bonds shall not entitled to any amounts on deposit in the
Collection Account other than amounts on deposit in the Defeasance Subaccount
for such Transition Bonds.
SECTION 4.04. Repayment of Moneys Held by Paying Agent. In connection with
the satisfaction and discharge of this Indenture or the Covenant Defeasance
Option or Legal Defeasance Option with respect to the Transition Bonds of any
Series, all moneys then held by any Paying Agent other than the Bond Trustee
under the provisions of this Indenture with respect to such Transition Bonds
shall, upon demand of the Issuer, be paid to the Bond Trustee to be held and
applied according to Section 3.03 and thereupon such Paying Agent shall be
released from all further liability with respect to such moneys.
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ARTICLE V
Remedies
SECTION 5.01. Events of Default. "Event of Default" wherever used herein,
means any one of the following events (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) default in the payment of any interest on any Transition Bond when
the same becomes due and payable, and such default shall continue for a
period of five days;
(ii) default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Rated Final Payment Date for such
Series or, if applicable, any Class on the Rated Final Payment Date for
such Class;
(iii) default in the payment of the Redemption Price for any
Transition Bond on the Redemption Date therefor;
(iv) default in the observance or performance of any covenant or
agreement of the Issuer made in this Indenture (other than a covenant or
agreement, a default in the observance or performance of which is
specifically dealt with in clause (i), (ii) or (iii) above), and such
default shall continue or not be cured, for a period of 30 days after there
shall have been given, by registered or certified mail, to the Issuer by
the Bond Trustee or to the Issuer and the Bond Trustee by the Holders of at
least 25% of the Outstanding Amount of the Transition Bonds of any Series,
a written notice specifying such default or incorrect representation or
warranty and requiring it to be remedied and stating that such notice is a
"Notice of Default" hereunder;
(v) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial
part of the Collateral in an involuntary case under any applicable Federal
or state bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial part
of the Collateral, or ordering the winding-up or liquidation of the
Issuer's affairs, and such decree or order shall remain unstayed and in
effect for a period of 90 consecutive days; or
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(vi) the commencement by the Issuer of a voluntary case under any
applicable Federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, or the consent by the Issuer to the entry of an
order for relief in an involuntary case under any such law, or the consent
by the Issuer to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of the Issuer or for any substantial part of the Collateral, or the making
by the Issuer of any general assignment for the benefit of creditors, or
the failure by the Issuer generally to pay its debts as such debts become
due, or the taking of action by the Issuer in furtherance of any of the
foregoing.
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case either
the Bond Trustee or the Holders of Transition Bonds representing not less than a
majority of the Outstanding Amount of the Transition Bonds of all Series may,
but need not, declare all the Transition Bonds to be immediately due and
payable, by a notice in writing to the Issuer (and to the Bond Trustee if given
by Transition Bondholders), and upon any such declaration the unpaid principal
amount of the Transition Bonds of all Series, together with accrued and unpaid
interest thereon through the date of acceleration, shall become immediately due
and payable.
At any time after such declaration of acceleration of maturity has been
made and before a judgment or decree for payment of the money due has been
obtained by the Bond Trustee as hereinafter in this Article V provided, the
Holders of Transition Bonds representing a majority of the Outstanding Amount of
the Transition Bonds of all Series, by written notice to the Issuer and the Bond
Trustee, may rescind and annul such declaration and its consequences if:
(i) the Issuer has paid or deposited with the Bond Trustee, for
deposit in the General Subaccount of the Collection Account, a sum
sufficient to pay
(A) all payments of principal of and premium, if any, and
interest on all Transition Bonds of all Series and all other amounts
that would then be due hereunder or upon such Transition Bonds if the
Event of Default giving rise to such acceleration had not occurred;
and
(B) all sums paid or advanced by the Bond Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of
the Bond Trustee and its agents and counsel; and
(ii) all Events of Default, other than the nonpayment of the principal
of the Transition Bonds of all Series that has become due solely by such
acceleration, have been cured or waived as provided in Section 5.12.
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No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Bond
Trustee. (a) The Issuer covenants that if (i) Default is made in the payment of
any interest on any Transition Bond when such interest becomes due and payable
and such Default continues for a period of five days, (ii) Default is made in
the payment of the then unpaid principal of any Transition Bond of any Series on
the Rated Final Payment Date for such Series or, if applicable, any Class on the
Rated Final Payment Date for such Class or (iii) Default is made in the payment
of the Redemption Price or for any Transition Bond on the Redemption Date
therefor, the Issuer will, upon demand of the Bond Trustee, pay to it, for the
benefit of the Holders of the Transition Bonds of such Series, such amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Bond
Trustee and its agents and counsel and the whole amount then due and payable on
such Transition Bonds for principal, premium, if any, and interest, with
interest upon the overdue principal and premium, if any, and, to the extent
payment at such rate of interest shall be legally enforceable, upon overdue
instalments of interest, at the respective Bond Rate of such Series or the
applicable Class of such Series.
(b) In case the Issuer shall fail forthwith to pay the amounts specified in
clause (a) above upon such demand, the Bond Trustee, in its own name and as
trustee of an express trust, may institute a Proceeding for the collection of
the sums so due and unpaid, and may prosecute such Proceeding to judgment or
final decree, and may enforce the same against the Issuer or other obligor upon
such Transition Bonds and collect in the manner provided by law out of the
property of the Issuer or other obligor upon such Transition Bonds, wherever
situated, the moneys adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the Bond Trustee may,
as more particularly provided in Section 5.04, in its discretion, proceed to
protect and enforce its rights and the rights of the Transition Bondholders, by
such appropriate Proceedings as the Bond Trustee shall deem most effective to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy or legal or equitable
right vested in the Bond Trustee by this Indenture or by law including
foreclosing or otherwise enforcing the lien on the Intangible Transition
Property securing the Transition Bonds or applying to the PUC for sequestration
of revenues arising with respect to such Intangible Transition Property.
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(d) In case there shall be pending, relative to the Issuer or any other
obligor upon the Transition Bonds or any Person having or claiming an ownership
interest in the Collateral, Proceedings under Title 11 of the United States Code
or any other applicable Federal or state bankruptcy, insolvency or other similar
law, or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor or Person,
or in case of any other comparable judicial Proceedings relative to the Issuer
or other obligor upon the Transition Bonds, or to the creditors or property of
the Issuer or such other obligor, the Bond Trustee, irrespective of whether the
principal of any Transition Bonds shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Bond
Trustee shall have made any demand pursuant to the provisions of this Section,
shall be entitled and empowered, by intervention in such Proceedings or
otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect of the
Transition Bonds and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Bond Trustee
(including any claim for reasonable compensation to the Bond Trustee and
each predecessor Bond Trustee, and their respective agents, attorneys and
counsel, and for reimbursement of all expenses and liabilities incurred,
and all advances made, by the Bond Trustee and each predecessor Bond
Trustee, except as a result of negligence or bad faith) and of the
Transition Bondholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote on
behalf of the Holders of Transition Bonds in any election of a trustee, a
standby trustee or Person performing similar functions in any such
Proceedings;
(iii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute all amounts received with
respect to the claims of the Transition Bondholders and of the Bond Trustee
on their behalf; and
(iv) to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Bond Trustee
or the Holders of Transition Bonds allowed in any judicial proceedings
relative to the Issuer, its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Transition Bondholders
to make payments to the Bond Trustee, and, in the event that the Bond Trustee
shall consent to the making of payments directly to such Transition Bondholders,
to pay to the Bond Trustee such amounts as shall be sufficient to cover
reasonable compensation to the Bond
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Trustee, each predecessor Bond Trustee and their respective agents, attorneys
and counsel, and all other expenses and liabilities incurred, and all advances
made, by the Bond Trustee and each predecessor Bond Trustee except as a result
of negligence or bad faith.
(e) Nothing herein contained shall be deemed to authorize the Bond Trustee
to authorize or consent to or vote for or accept or adopt on behalf of any
Transition Bondholder any plan of reorganization, arrangement, adjustment or
composition affecting the Transition Bonds or the rights of any Holder thereof
or to authorize the Bond Trustee to vote in respect of the claim of any
Transition Bondholder in any such proceeding except, as aforesaid, to vote for
the election of a trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this Indenture, or
under any of the Transition Bonds, may be enforced by the Bond Trustee without
the possession of any of the Transition Bonds or the production thereof in any
trial or other Proceedings relative thereto, and any such action or proceedings
instituted by the Bond Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements and compensation of the Bond Trustee, each predecessor
Bond Trustee and their respective agents and attorneys, shall be for the ratable
benefit of the Holders of the Transition Bonds.
(g) In any Proceedings brought by the Bond Trustee (and also any
Proceedings involving the interpretation of any provision of this Indenture to
which the Bond Trustee shall be a party), the Bond Trustee shall be held to
represent all the Holders of the Transition Bonds, and it shall not be necessary
to make any Transition Bondholder a party to any such Proceedings.
SECTION 5.04. Remedies; Priorities. If an Event of Default occurs and is
continuing, the Bond Trustee may do one or more of the following (subject to
Section 5.05):
(i) institute Proceedings in its own name and as trustee of an express
trust for the collection of all amounts then payable on the Transition
Bonds or under this Indenture with respect thereto, whether by declaration
or otherwise, enforce any judgment obtained, and collect from the Issuer
and any other obligor upon such Transition Bonds moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Collateral;
(iii) exercise any remedies of a secured party under the UCC or the
Statute or any other applicable law and take any other appropriate action
to protect and
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enforce the rights and remedies of the Bond Trustee and the Holders of
the Transition Bonds of such Series;
(iv) sell the Collateral or any portion thereof or rights or interest
therein, at one or more public or private sales called and conducted in any
manner permitted by law; and
(v) exercise all rights, remedies, powers, privileges and claims of
the Issuer against the Seller or the Servicer under or in connection with
the Sale Agreement or the Servicing Agreement as provided in Section
3.20(b);
provided, however, that the Bond Trustee may not sell or otherwise liquidate any
portion of the Collateral following an Event of Default, other than an Event of
Default described in Section 5.01(i), (ii) or (iii), with respect to any Series
unless (A) the Holders of 100% of the Outstanding Amount of the Transition Bonds
of all Series consent thereto, (B) the proceeds of such sale or liquidation
distributable to the Transition Bondholders of all Series are sufficient to
discharge in full all amounts then due and unpaid upon such Transition Bonds for
principal, premium, if any, and interest or (C) the Bond Trustee determines that
the Collateral will not continue to provide sufficient funds for all payments on
the Transition Bonds of all Series as they would have become due if the
Transition Bonds had not been declared due and payable, and the Bond Trustee
obtains the consent of Holders of 66-2/3% of the Outstanding Amount of the
Transition Bonds of all Series. In determining such sufficiency or insufficiency
with respect to clause (B) and (C), the Bond Trustee may, but need not, obtain
and rely upon an opinion of an Independent investment banking or accounting firm
of national reputation as to the feasibility of such proposed action and as to
the sufficiency of the Collateral for such purpose.
SECTION 5.05. Optional Preservation of the Collateral. If the Transition
Bonds have been declared to be due and payable under Section 5.02 following an
Event of Default and such declaration and its consequences have not been
rescinded and annulled, the Bond Trustee may, but need not, elect, as provided
in Section 5.11(iii), to maintain possession of the Collateral and not sell or
liquidate the same. It is the desire of the parties hereto and the Transition
Bondholders that there be at all times sufficient funds for the payment of
principal of and premium, if any, and interest on the Transition Bonds, and the
Bond Trustee shall take such desire into account when determining whether or not
to maintain possession of the Collateral or sell or liquidate the same. In
determining whether to maintain possession of the Collateral or sell or
liquidate the same, the Bond Trustee may, but need not, obtain and rely upon an
opinion of an Independent investment banking or accounting firm of national
reputation as to the feasibility of such proposed action and as to the
sufficiency of the Collateral for such purpose.
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SECTION 5.06. Limitation of Proceedings. No Holder of any Transition Bond
of any Series shall have any right to institute any Proceeding, judicial or
otherwise, or to avail itself of the remedies provided in Section 2812(d)(3)(v)
of the Statute, with respect to this Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless:
(i) such Holder has previously given written notice to the Bond
Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Outstanding Amount of the
Transition Bonds of all Series have made written request to the Bond
Trustee to institute such Proceeding in respect of such Event of Default in
its own name as Bond Trustee hereunder;
(iii) such Holder or Holders have offered to the Bond Trustee security
or indemnity reasonably satisfactory to the Bond Trustee against the costs,
expenses and liabilities to be incurred in complying with such request;
(iv) the Bond Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute such Proceedings;
and
(v) no direction inconsistent with such written request has been given
to the Bond Trustee during such 60-day period by the Holders of a majority
of the Outstanding Amount of the Transition Bonds of all Series; it being
understood and intended that no one or more Holders of Transition Bonds
shall have any right in any manner whatever by virtue of, or by availing
of, any provision of this Indenture to affect, disturb or prejudice the
rights of any other Holders of Transition Bonds or to obtain or to seek to
obtain priority or preference over any other Holders or to enforce any
right under this Indenture, except in the manner herein provided.
In the event the Bond Trustee shall receive conflicting or inconsistent
requests and indemnity from two or more groups of Holders of Transition Bonds,
each representing less than a majority of the Outstanding Amount of the
Transition Bonds of all Series, the Bond Trustee in its sole discretion may
determine what action, if any, shall be taken, notwithstanding any other
provisions of this Indenture.
SECTION 5.07. Unconditional Rights of Transition Bondholders To Receive
Principal, Premium, if any, and Interest. Notwithstanding any other provisions
in this Indenture, the Holder of any Transition Bond shall have the right, which
is absolute and unconditional, (a) to receive payment of (i) the interest, if
any, on such Transition Bond on or after the due dates thereof expressed in such
Transition Bond or in this Indenture, (ii) the unpaid principal, if any, of such
Transition Bonds on or after the Final Maturity Date therefor or (iii) in the
case of redemption, receive payment of the unpaid
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principal, if any, of and premium, if any, and interest, if any, on such
Transition Bond on or after the Redemption Date therefor and (b) to institute
suit for the enforcement of any such payment, and such right shall not be
impaired without the consent of such Holder.
SECTION 5.08. Restoration of Rights and Remedies. If the Bond Trustee or
any Transition Bondholder has instituted any Proceeding to enforce any right or
remedy under this Indenture and such Proceeding has been discontinued or
abandoned for any reason or has been determined adversely to the Bond Trustee or
to such Transition Bondholder, then and in every such case the Issuer, the Bond
Trustee and the Transition Bondholders shall, subject to any determination in
such Proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Bond Trustee
and the Transition Bondholders shall continue as though no such Proceeding had
been instituted.
SECTION 5.09. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Bond Trustee or to the Transition Bondholders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of the
Bond Trustee or any Transition Bondholder to exercise any right or remedy
accruing upon any Default or Event of Default shall impair any such right or
remedy or constitute a waiver of any such Default or Event of Default or an
acquiescence therein. Every right and remedy given by this Article V or by law
to the Bond Trustee or to the Transition Bondholders may be exercised from time
to time, and as often as may be deemed expedient, by the Bond Trustee or by the
Transition Bondholders, as the case may be.
SECTION 5.11. Control by Transition Bondholders. The Holders of a majority
of the Outstanding Amount of the Transition Bonds of all Series (or, if less
than all Series or Classes are affected, the affected Series or Class or
Classes) shall have the right to direct the time, method and place of conducting
any Proceeding for any remedy available to the Bond Trustee with respect to the
Transition Bonds of such Series or Class or Classes or exercising any trust or
power conferred on the Bond Trustee with respect to such Series or Class or
Classes; provided that
(i) such direction shall not be in conflict with any rule of law or
with this Indenture;
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(ii) subject to the express terms of Section 5.04, any direction to
the Bond Trustee to sell or liquidate the Collateral shall be by the
Holders of Transition Bonds representing not less than 100% of the
Outstanding Amount of the Transition Bonds of all Series;
(iii) if the conditions set forth in Section 5.05 have been satisfied
and the Bond Trustee elects to retain the Collateral pursuant to such
Section and not sell or liquidate the same, then any direction to the Bond
Trustee by Holders of Transition Bonds representing less than 100% of the
Outstanding Amount of the Transition Bonds of all Series to sell or
liquidate the Collateral shall be of no force and effect; and
(iv) the Bond Trustee may take any other action deemed proper by the
Bond Trustee that is not inconsistent with such direction;
provided, however, that, subject to Section 6.01, the Bond Trustee need not take
any action that it determines might involve it in liability or might materially
adversely affect the rights of any Transition Bondholders not consenting to such
action.
SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the
acceleration of the maturity of the Transition Bonds of all Series as provided
in Section 5.02, the Holders of not less than a majority of the Outstanding
Amount of the Transition Bonds of all Series may waive any past Default or Event
of Default and its consequences except a Default (i) in payment of principal of
or premium, if any, or interest on any of the Transition Bonds or (ii) in
respect of a covenant or provision hereof which cannot be modified or amended
without the consent of the Holder of each Transition Bond of all Series or
Classes affected. In the case of any such waiver, the Issuer, the Bond Trustee
and the Holders of the Transition Bonds shall be restored to their former
positions and rights hereunder, respectively; but no such waiver shall extend to
any subsequent or other Default or impair any right consequent thereto.
Upon any such waiver, such Default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured and not to have occurred, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereto.
SECTION 5.13. Undertaking for Costs. All parties to this Indenture agree,
and each Holder of any Transition Bond by such Holder's acceptance thereof shall
be deemed to have agreed, that any court may in its discretion require, in any
suit for the enforcement of any right or remedy under this Indenture, or in any
suit against the Bond Trustee for any action taken, suffered or omitted by it as
Bond Trustee, the filing by any party litigant in such suit of an undertaking to
pay the costs of such suit, and that such
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court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to (a) any suit instituted by
the Bond Trustee, (b) any suit instituted by any Transition Bondholder, or group
of Transition Bondholders, in each case holding in the aggregate more than 10%
of the Outstanding Amount of the Transition Bonds of a Series or (c) any suit
instituted by any Transition Bondholder for the enforcement of the payment of
(i) interest on any Transition Bond on or after the due dates expressed in such
Transition Bond and in this Indenture, (ii) the unpaid principal, if any, of any
Transition Bond on or after the Final Maturity Date therefor or (iii) in the
case of redemption, the unpaid principal of and premium, if any, and interest on
any Transition Bond on or after the Redemption Date therefor.
SECTION 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead or in any manner whatsoever, claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuer (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Bond Trustee,
but will suffer and permit the execution of every such power as though no such
law had been enacted.
SECTION 5.15. Action on Transition Bonds. The Bond Trustee's right to seek
and recover judgment on the Transition Bonds or under this Indenture shall not
be affected by the seeking, obtaining or application of any other relief under
or with respect to this Indenture. Neither the lien of this Indenture nor any
rights or remedies of the Bond Trustee or the Transition Bondholders shall be
impaired by the recovery of any judgment by the Bond Trustee against the Issuer
or by the levy of any execution under such judgment upon any portion of the
Collateral or upon any of the assets of the Issuer.
ARTICLE VI
The Bond Trustee
SECTION 6.01. Duties and Liabilities of Bond Trustee. (a) If an Event of
Default has occurred and is continuing, the Bond Trustee shall exercise the
rights and powers vested in it by this Indenture and use the same degree of care
and skill in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
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(b) Except during the continuance of an Event of Default:
(i) the Bond Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the Bond
Trustee; and
(ii) in the absence of bad faith on its part, the Bond Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Bond Trustee and conforming to the requirements of this Indenture.
(c) The Bond Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Bond Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer unless it is proved that the
Bond Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Bond Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 5.11.
(d) Every provision of this Indenture that in any way relates to the Bond
Trustee is subject to paragraphs (a), (b) and (c) of this Section 6.01.
(e) The Bond Trustee shall not be liable for interest on any money received
by it except as the Bond Trustee may agree in writing with the Issuer.
(f) Money held in trust by the Bond Trustee need not be segregated from
other funds except to the extent required by law or the terms of this Indenture
or the Sale Agreement or the Servicing Agreement.
(g) No provision of this Indenture shall require the Bond Trustee to expend
or risk its own funds or otherwise incur financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers, if it shall have reasonable grounds to believe that repayments of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
(h) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Bond Trustee shall be subject to
the provisions of this Section and to the provisions of the TIA.
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(i) Under no circumstances shall the Bond Trustee be liable for any
indebtedness evidenced by or arising under the Transition Bonds or any Basic
Document.
SECTION 6.02. Rights of Bond Trustee. (a) The Bond Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper Person. The Bond Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Bond Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel. The Bond Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on an
Officer's Certificate or an Opinion of Counsel.
(c) The Bond Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys or a custodian or nominee, and the Bond Trustee shall not be
responsible for any misconduct or negligence on the part of, or for the
supervision of, any such agent, attorney, custodian or nominee appointed with
due care by it hereunder.
(d) The Bond Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Bond Trustee's conduct does not constitute
wilful misconduct, negligence or bad faith.
(e) The Bond Trustee may consult with counsel, and the advice or opinion of
counsel with respect to legal matters relating to this Indenture and the
Transition Bonds shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
SECTION 6.03. Individual Rights of Bond Trustee. The Bond Trustee in its
individual or any other capacity may become the owner or pledgee of Transition
Bonds and may otherwise deal with the Issuer or its affiliates with the same
rights it would have if it were not Bond Trustee. Any Paying Agent, Transition
Bond Registrar, co-registrar or co-paying agent may do the same with like
rights. However, the Bond Trustee must comply with Sections 6.11 and 6.12.
SECTION 6.04. Bond Trustee's Disclaimer. The Bond Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Transition Bonds. The Bond Trustee shall not be
accountable for the Issuer's use of the proceeds from the Transition Bonds, and
the Bond Trustee shall not be responsible for any statement of the Issuer in the
Indenture or in any document issued in
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connection with the sale of the Transition Bonds or in the Transition Bonds
other than the Bond Trustee's certificate of authentication. The Bond Trustee
shall not be responsible for the form, character, genuineness, sufficiency,
value or validity of any of the Collateral, or for or in respect of the validity
or sufficiency of the Transition Bonds (other than the certificate of
authentication for the Transition Bonds) or the Basic Documents and the Bond
Trustee shall in no event assume or incur any liability, duty or obligation to
any Holder of a Transition Bond, other than is expressly provided for in this
Indenture. The Bond Trustee shall not be liable for the default or misconduct of
the Issuer, the Seller, the Servicer or the Issuer Trustee under any Basic
Document or otherwise and the Bond Trustee shall have no obligation or liability
to perform the obligations of the Issuer.
SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing
with respect to any Series and if it is known to a Responsible Officer of the
Bond Trustee, the Bond Trustee shall mail to each Holder of Transition Bonds of
all Series notice of the Default within 90 days after it occurs. Except in the
case of a Default in payment of principal of or premium, if any, or interest on
any Transition Bond, the Bond Trustee may withhold the notice if and so long as
a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of Transition Bondholders.
SECTION 6.06. Reports by Bond Trustee to Holders. (a) The Bond Trustee
shall deliver to each Holder of Transition Bonds such information as may be
required to enable such Holder to prepare its Federal and state income tax
returns.
(b) With respect to each Series of Transition Bonds, on or prior to each
Payment Date therefor, the Bond Trustee will deliver a statement prepared by the
Bond Trustee to each Holder of Transition Bonds which will include (to the
extent applicable) the following information (and any other information so
specified in the Series Supplement for such Series) as to the Transition Bonds
of such Series with respect to such Payment Date or the period since the
previous Payment Date, as applicable:
(i) the amount paid to Holders of such Transition Bonds in respect of
principal, such amount to be expressed as a dollar amount per thousand;
(ii) the amount paid to Holders of such Transition Bonds in respect of
interest, such amount to be expressed as a dollar amount per thousand;
(iii) the Transition Bond Balance and the Projected Transition Bond
Balance, in each case for such Series and as of the most recent Payment
Date;
(iv) the amount on deposit in the Overcollateralization Subaccount and
the Calculated Overcollateralization Level, in each case for all Series and
as of the most recent Payment Date;
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(v) the amount on deposit in the Capital Subaccount as of the most
recent Payment Date; and
(vi) the amount, if any, on deposit in the Reserve Subaccount as of
the most recent Payment Date.
(c) The Bond Trustee's responsibility for disbursing the information
described in subsection (b) above to Holders of Transition Bonds is limited to
the availability, timeliness and accuracy of the information provided by the
Servicer pursuant to Section 3.04 and Annex 1 of the Servicing Agreement.
SECTION 6.07. Compensation and Indemnity. The Issuer shall pay to the Bond
Trustee from time to time reasonable compensation for its services. The Bond
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuer shall reimburse the Bond Trustee for all
reasonable out-of-pocket expenses, disbursements and advances incurred or made
by it, including costs of collection, in addition to the compensation for its
services. Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Bond Trustee's agents, counsel, accountants
and experts. The Issuer shall indemnify and hold harmless the Bond Trustee from
and against any and all costs, damages, expenses, losses, liabilities or other
amounts whatsoever (including counsel fees) incurred by the Bond Trustee in
connection with the administration of this trust, the enforcement of this trust
and all of the Bond Trustee's rights, powers and duties under this Indenture and
the performance by the Bond Trustee of the duties and obligations of the Bond
Trustee under or pursuant to this Indenture. The Bond Trustee shall notify the
Issuer promptly of any claim for which it may seek indemnity. Failure by the
Bond Trustee to so notify the Issuer shall not relieve the Issuer of its
obligations hereunder. The Issuer shall defend the claim and the Bond Trustee
may have separate counsel and the Issuer shall pay the fees and expenses of such
counsel. The Issuer need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Bond Trustee (i) through the Bond
Trustee's own wilful misconduct, negligence or bad faith or (ii) to the extent
the Bond Trustee was reimbursed for or indemnified against any such loss,
liability or expense by the Seller pursuant to the Sale Agreement or by the
Servicer pursuant to the Servicing Agreement.
When the Bond Trustee incurs expenses after the occurrence of a Default
specified in Section 5.01(v) or (vi) with respect to the Issuer, the expenses
are intended to constitute expenses of administration under Title 11 of the
United States Code or any other applicable Federal or state bankruptcy,
insolvency or similar law.
SECTION 6.08. Replacement of Bond Trustee. The Bond Trustee may resign at
any time by so notifying the Issuer. The Holders of a majority in Outstanding
Amount of the Transition Bonds of all Series may remove the Bond Trustee by so
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notifying the Issuer and the Bond Trustee and may appoint a successor Bond
Trustee. The Issuer shall remove the Bond Trustee if:
(i) the Bond Trustee fails to comply with Section 6.11;
(ii) the Bond Trustee is adjudged a bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the Bond
Trustee or its property; or
(iv) the Bond Trustee otherwise becomes incapable of acting.
If the Bond Trustee resigns or is removed or if a vacancy exists in the
office of Bond Trustee for any reason (the Bond Trustee in such event being
referred to herein as the "Retiring Bond Trustee"), the Issuer shall promptly
appoint a successor Bond Trustee.
A successor Bond Trustee shall deliver a written acceptance of its
appointment to the Retiring Bond Trustee and to the Issuer. Thereupon the
resignation or removal of the Retiring Bond Trustee shall become effective, and
the successor Bond Trustee shall have all the rights, powers and duties of the
Bond Trustee under this Indenture. The successor Bond Trustee shall mail a
notice of its succession to Transition Bondholders. The Retiring Bond Trustee
shall promptly transfer all property held by it as Bond Trustee to the successor
Bond Trustee.
If a successor Bond Trustee does not take office within 60 days after the
Retiring Bond Trustee resigns or is removed, the Retiring Bond Trustee, the
Issuer or the Holders of a majority in Outstanding Amount of the Transition
Bonds of all Series may petition any court of competent jurisdiction for the
appointment of a successor Bond Trustee.
If the Bond Trustee fails to comply with Section 6.11, any Transition
Bondholder may petition any court of competent jurisdiction for the removal of
the Bond Trustee and the appointment of a successor Bond Trustee.
Notwithstanding the replacement of the Bond Trustee pursuant to this
Section 6.08, the Issuer's obligations under Section 6.07 shall continue for the
benefit of the Retiring Bond Trustee.
SECTION 6.09. Successor Bond Trustee by Merger. If the Bond Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting,
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surviving or transferee corporation or banking association shall, without any
further act be the successor Bond Trustee.
In case at the time such successor or successors by merger, conversion
consolidation or transfer shall succeed to the trusts created by this Indenture
any of the Transition Bonds shall have been authenticated but not delivered, any
such successor to the Bond Trustee may adopt the certificate of authentication
of any Retiring Bond Trustee, and deliver such Transition Bonds so
authenticated; and in case at that time any of the Transition Bonds shall not
have been authenticated, any successor to the Bond Trustee may authenticate such
Transition Bonds either in the name of any Retiring Bond Trustee hereunder or in
the name of the successor to the Bond Trustee; and in all such cases such
certificates shall have the full force which it is anywhere in the Transition
Bonds or in this Indenture provided that the certificate of the Bond Trustee
shall have.
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee. (a)
Notwithstanding any other provisions of this Indenture, at any time, for the
purpose of meeting any legal requirement of any jurisdiction in which any part
of the Collateral may at the time be located, the Bond Trustee shall have the
power and may execute and deliver all instruments to appoint one or more Persons
to act as a co-trustee or co-trustees, or separate trustee or separate trustees,
of all or any part of the Collateral, and to vest in such Person or Persons, in
such capacity and for the benefit of the Transition Bondholders, such title to
the Collateral, or any part hereof, and, subject to the other provisions of this
Section, such powers, duties, obligations, rights and trusts as the Bond Trustee
may consider necessary or desirable. No co-trustee or separate trustee hereunder
shall be required to meet the terms of eligibility as a successor trustee under
Section 6.11 and no notice to Transition Bondholders of the appointment of any
co-trustee or separate trustee shall be required under Section 6.08 hereof.
(b) Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or imposed
upon the Bond Trustee shall be conferred or imposed upon and exercised or
performed by the Bond Trustee and such separate trustee or co-trustee
jointly (it being understood that such separate trustee or co-trustee is
not authorized to act separately without the Bond Trustee joining in such
act), except to the extent that under any law of any jurisdiction in which
any particular act or acts are to be performed the Bond Trustee shall be
incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of title to
the Collateral or any portion thereof in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or co-trustee, but
solely at the direction of the Bond Trustee;
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(ii) no trustee hereunder shall be personally liable by reason of any
act or omission of any other trustee hereunder; and
(iii) the Bond Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Bond Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Indenture and the conditions
of this Article VI. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Bond Trustee or
separately, as may be provided therein, subject to all the provisions of this
Indenture, specifically including every provision of this Indenture relating to
the conduct of, affecting the liability of, or affording protection to, the Bond
Trustee. Every such instrument shall be filed with the Bond Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the Bond
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Bond Trustee, to the extent permitted by law, without the appointment of a new
or successor trustee.
SECTION 6.11. Eligibility; Disqualification. The Bond Trustee shall at all
times satisfy the requirements of TIA ss. 310(a). The Bond Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition and it shall have a long term debt
rating of "Baa3" or better by Moody's. The Bond Trustee shall comply with TIA
ss. 310(b), including the optional provision permitted by the second sentence of
TIA ss. 310(b)(9); provided, however, that there shall be excluded from the
operation of TIA ss. 310(b)(1) any indenture or indentures under which other
securities of the Issuer are outstanding if the requirements for such exclusion
set forth in TIA ss. 310(b)(1) are met.
SECTION 6.12. Preferential Collection of Claims Against Issuer. The Bond
Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship
listed in TIA ss. 311(b). A Bond Trustee who has resigned or been removed shall
be subject to TIA ss. 311(a) to the extent indicated.
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ARTICLE VII
Transition Bondholders' Lists and Reports
SECTION 7.01. Issuer To Furnish Bond Trustee Names and Addresses of
Transition Bondholders. The Issuer will furnish or cause to be furnished to the
Bond Trustee (a) not more than five days after the earlier of (i) each Record
Date with respect to each Series and (ii) three months after the last Record
Date with respect to each Series, a list, in such form as the Bond Trustee may
reasonably require, of the names and addresses of the Holders of Transition
Bonds of such Series as of such Record Date, (b) at such other times as the Bond
Trustee may request in writing, within 30 days after receipt by the Issuer of
any such request, a list of similar form and content as of a date not more than
10 days prior to the time such list is furnished; provided, however, that so
long as the Bond Trustee is the Transition Bond Registrar, no such list shall be
required to be furnished.
SECTION 7.02. Preservation of Information; Communications to Transition
Bondholders. (a) The Bond Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of the Holders of Transition
Bonds contained in the most recent list furnished to the Bond Trustee as
provided in Section 7.01 and the names and addresses of Holders of Transition
Bonds received by the Bond Trustee in its capacity as Transition Bond Registrar.
The Bond Trustee may destroy any list furnished to it as provided in such
Section 7.01 upon receipt of a new list so furnished.
(b) Transition Bondholders may communicate pursuant to TIA ss. 312(b) with
other Transition Bondholders with respect to their rights under this Indenture
or under the Transition Bonds.
(c) The Issuer, the Bond Trustee and the Transition Bond Registrar shall
have the protection of TIA ss. 312(c).
SECTION 7.03. Reports by Issuer. (a) The Issuer shall:
(i) file with the Bond Trustee, within 15 days after the Issuer is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) which the Issuer may be required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) file with the Bond Trustee and the Commission in accordance with
rules and regulations prescribed from time to time by the Commission such
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additional information, documents and reports with respect to compliance by
the Issuer with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(iii) supply to the Bond Trustee (and the Bond Trustee shall transmit
by mail to all Transition Bondholders described in TIA ss. 313(c)) such
summaries of any information, documents and reports required to be filed by
the Issuer pursuant to clauses (i) and (ii) of this Section 7.03(a) as may
be required by rules and regulations prescribed from time to time by the
Commission.
(b) Unless the Issuer otherwise determines, the fiscal year of the Issuer
shall end on December 31 of each year.
SECTION 7.04. Reports by Bond Trustee. If required by TIA ss. 313(a),
within 60 days after [ ] of each year, commencing with the year after the
issuance of the Transition Bonds of any Series, the Bond Trustee shall mail to
each Holder of Transition Bonds of such Series as required by TIA ss. 313(c) a
brief report dated as of such date that complies with TIA ss. 313(a). The Bond
Trustee also shall comply with TIA ss. 313(b); provided, however, that the
initial report so issued shall be delivered not more than 12 months after the
initial issuance of each Series.
A copy of each report at the time of its mailing to Transition Bondholders
shall be filed by the Bond Trustee with the Commission and each stock exchange,
if any, on which the Transition Bonds are listed. The Issuer shall notify the
Bond Trustee if and when the Transition Bonds are listed on any stock exchange.
SECTION 7.05. Provision of Servicer Reports. Upon the written request of
any Transition Bondholder to the Bond Trustee addressed to the Corporate Trust
Office, the Bond Trustee shall provide such Transition Bondholder with a copy of
the Officer's Certificate referred to in Section 3.05 of the Servicing Agreement
and the Annual Accountant's Report referred to in Section 3.06 of the Servicing
Agreement.
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ARTICLE VIII
Accounts, Disbursements and Releases
SECTION 8.01. Collection of Money. Except as otherwise expressly provided
herein, the Bond Trustee may demand payment or delivery of, and shall receive
and collect, directly and without intervention or assistance of any fiscal agent
or other intermediary, all money and other property payable to or receivable by
the Bond Trustee pursuant to this Indenture. The Bond Trustee shall apply all
such money received by it as provided in this Indenture. Except as otherwise
expressly provided in this Indenture, if any default occurs in the making of any
payment or performance under any agreement or instrument that is part of the
Collateral, the Bond Trustee may take such action as may be appropriate to
enforce such payment or performance, including the institution and prosecution
of appropriate Proceedings. Any such action shall be without prejudice to any
right to claim a Default or Event of Default under this Indenture and any right
to proceed thereafter as provided in Article V.
SECTION 8.02. Collection Account. (a) On or prior to the Series Issuance
Date for the first Series issued hereunder, the Issuer shall open, at the Bond
Trustee's Corporate Trust Office, or at another Eligible Institution, one or
more segregated trust accounts in the Bond Trustee's name (collectively, the
"Collection Account"). The Collection Account will initially be divided into
subaccounts, which need not be separate bank accounts: a general subaccount (the
"General Subaccount"), an Overcollateralization subaccount (the
"Overcollateralization Subaccount"), a capital subaccount (the "Capital
Subaccount"), a reserve subaccount (the "Reserve Subaccount"), and a series
subaccount for each Series of Transition Bonds issued on such date (each a
"Series Subaccount"). On or prior to the Series Issuance Date for each Series
issued after the Series Issuance Date for the first Series issued hereunder, the
Issuer shall establish a Series Subaccount therefor as a subaccount of the
Collection Account. Prior to depositing funds or U.S. Government Obligations in
the Collection Account pursuant to Sections 4.01 or 4.02, the Issuer shall
establish defeasance subaccounts (each a "Defeasance Subaccount") for each
Series for which funds shall be deposited, as subaccounts of the Collection
Account. Prior to any Loss Amounts or Interest Deposit Amounts being deposited
in the Collection Account, the Issuer shall establish a loss subaccount (the
"Loss Subaccount") or an interest deposit subaccount (the "Interest Deposit
Subaccount"), as applicable, as a subaccount of the Collection Account. All
amounts in the Collection Account not allocated to any other subaccount shall be
allocated to the General Subaccount. Prior to the initial Monthly Allocation
Date, all amounts in the Collection Account (other than funds deposited into the
Capital Subaccount, up to the Required Capital Amount) shall be allocated to the
General Subaccount. All references to the Collection Account shall be deemed to
include reference to all subaccounts contained therein. Withdrawals from and
deposits to each of the foregoing subaccounts of the Collection Account shall be
made as set forth in
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Sections 4.01, 4.02, 4.03 and 8.02(d), (e) and (f). The Collection Account shall
at all times be maintained in an Eligible Deposit Account and only the Bond
Trustee shall have access to the Collection Account for the purpose of making
deposits in and withdrawals from the Collection Account in accordance with this
Indenture. Funds in the Collection Account shall not be commingled with any
other moneys. All moneys deposited from time to time in the Collection Account,
all deposits therein pursuant to this Indenture, and all investments made in
Eligible Investments with such moneys, including all income or other gain from
such investments, shall be held by the Bond Trustee in the Collection Account as
part of the Collateral as herein provided.
(b) So long as no Default or Event of Default has occurred and is
continuing, all or a portion of the funds in the Collection Account shall be
invested in Eligible Investments and reinvested by the Bond Trustee upon Issuer
Order; provided, however, that (i) such Eligible Investments shall not mature
later than the Business Day prior to (x) with respect to funds in the General
Subaccount, the Overcollateralization Subaccount, the Capital Subaccount, the
Reserve Subaccount, the Loss Subaccount and the Interest Deposit Subaccount, the
next Monthly Allocation Date or (y) with respect to funds in the Series
Subaccount for any Series of Transition Bonds, the next Payment Date for such
Series, (ii) such Eligible Investments shall not be sold, liquidated or
otherwise disposed of at a loss prior to the maturity thereof, and (iii) no
funds in the Defeasance Subaccount for any Series of Transition Bonds shall be
invested in Eligible Investments or otherwise, except that U.S. Government
Obligations deposited by the Issuer with the Bond Trustee pursuant to Sections
4.01 or 4.02 shall remain as such. All income or other gain from investments of
moneys deposited in the Collection Account shall be deposited by the Bond
Trustee in the Collection Account, and any loss resulting from such investments
shall be charged to the Collection Account. The Issuer will not direct the Bond
Trustee to make any investment of any funds or to sell any investment held in
the Collection Account unless the security interest granted and perfected in
such account will continue to be perfected in such investment or the proceeds of
such sale, in either case without any further action by any Person, and, in
connection with any direction to the Bond Trustee to make any such investment or
sale, if requested by the Bond Trustee, the Issuer shall deliver to the Bond
Trustee an Opinion of Counsel, acceptable to the Bond Trustee, to such effect.
Subject to Section 6.01(c), the Bond Trustee shall not in any way be held liable
for the selection of Eligible Investments or for investment losses incurred
thereon except for losses attributable to the Bond Trustee's failure to make
payments on such Eligible Investments issued by the Bond Trustee, in its
commercial capacity as principal obligor and not as Bond Trustee, in accordance
with their terms. The Bond Trustee shall have no liability in respect of losses
incurred as a result of the liquidation of any Eligible Investment prior to its
stated maturity or the failure of the Issuer to provide timely written
investment direction. The Bond Trustee shall have no obligation to invest or
reinvest any amounts held hereunder in the absence of written investment
direction pursuant to an Issuer Order, however, if (i) the Issuer shall have
failed to give investment directions for any funds on deposit in the Collection
Account to the Bond Trustee by
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11:00 a.m. Eastern Time (or such other time as may be agreed by the Issuer and
Bond Trustee) on any Business Day; or (ii) a Default or Event of Default shall
have occurred and be continuing but the Transition Bonds shall not have been
declared due and payable pursuant to Section 5.02; then the Bond Trustee shall,
to the fullest extent practicable, invest and reinvest funds in the Collection
Account in one or more Eligible Investments.
(c) ITC Collections remitted by the Servicer to the Bond Trustee,
Liquidated Damages remitted by the Seller to the Bond Trustee and Indemnity
Amounts remitted to the Bond Trustee by the Seller or the Servicer or otherwise
received by the Bond Trustee or the Issuer shall be deposited in the General
Subaccount. Loss Amounts remitted by the Seller to the Bond Trustee shall be
deposited in the Loss Subaccount and Interest Deposit Amounts remitted by the
Seller to the Bond Trustee shall be deposited in the Interest Deposit
Subaccount.
(d) On each Monthly Allocation Date, the Bond Trustee shall by 12:00 noon
(New York City time) apply all amounts on deposit in the General Subaccount of
the Collection Account and any investment earnings thereon in the following
priority:
(i) all amounts owed to the Bond Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) shall be paid to the Bond
Trustee;
(ii) all amounts owed to the Issuer Trustee (including legal fees and
expenses, Indemnity Amounts and Loss Amounts) shall be paid to the Issuer
Trustee;
(iii) the Monthly Servicing Fee and all unpaid Monthly Servicing Fees
from prior Monthly Allocation Dates shall be paid to the Servicer;
(iv) so long as no Event of Default has occurred and is continuing or
would be caused by such payment, all Operating Expenses other than (i),
(ii) and (iii) above shall be paid to the Persons entitled thereto,
provided that the amount paid on any Monthly Allocation Date pursuant to
this clause (iv) may not exceed $33,000 in the aggregate for all Series;
(v) an amount equal to Interest with respect to each Series of
Transition Bonds for such Monthly Allocation Date shall be transferred on a
Pro Rata basis to the Series Subaccount for such Series;
(vi) an amount equal to any Principal of any Series or Class of
Transition Bonds payable as a result of acceleration pursuant to Section
5.02, any Principal of any Series or Class of Transition Bonds payable on a
Final Maturity Date for
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such Series or Class, as applicable, that will occur prior to the next
Monthly Allocation Date and any Principal of and premium on a Series or
Class of Transition Bonds payable on a Redemption Date that will occur
prior to the next Monthly Allocation Date shall be transferred to the
Series Subaccount for such Series, taking into account amounts on deposit
therein in respect of Principal as of such Monthly Allocation Date;
(vii) an amount equal to Principal with respect to each Series of
Transition Bonds for such Monthly Allocation Date not provided for pursuant
to clause (vi) above shall be transferred on a Pro Rata basis to the Series
Subaccount for such Series;
(viii) all unpaid Operating Expenses, Indemnity Amounts and Loss
Amounts shall be paid to the Persons entitled thereto;
(ix) Overcollateralization with respect to all Series of Transition
Bonds for such Monthly Allocation Date shall be transferred to the
Overcollateralization Subaccount;
(x) provided no Event of Default has occurred and is continuing, an
amount up to the amount of net investment earnings on amounts in the
Collection Account since the previous Monthly Allocation Date will be
released to the Issuer, free from the lien of this Indenture;
(xi) the balance, if any, will be allocated to the Reserve Subaccount;
and
(xii) following repayment of all outstanding Series of Transition
Bonds, the balance, if any, will be released to the Issuer, free from the
lien of this Indenture.
"Pro Rata" means with respect to any Series of Transition Bonds a ratio,
(i) in the case of clause (v) above, the numerator of which is the Monthly
Allocated Interest Balance with respect to such Series for such Monthly
Allocation Date and the denominator of which is the sum of Monthly Allocated
Interest Balances with respect to all Series for such Monthly Allocation Date
and (ii) in the case of clause (vii) above, the numerator of which is the
Monthly Allocated Principal Balance with respect to such Series for such Monthly
Allocation Date and the denominator of which is the sum of Monthly Allocated
Principal Balances with respect to all Series for such Monthly Allocation Date.
If, on any Monthly Allocation Date funds on deposit in the General
Subaccount are insufficient to make the payments or transfers contemplated by
clauses (i) through (viii) above, the Bond Trustee will draw from amounts on
deposit in the
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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.
(e) On each Payment Date for any Series, the amounts on deposit in the
Series Subaccount (other than net income or other gain thereon, which, so long
as no Event of Default has occurred and is continuing, shall be released to the
Issuer free of the lien of the Indenture) for that Series will be applied as
follows (in the priority indicated): (i) interest due and payable on the
Transition Bonds of such Series, together with any overdue interest and, to the
extent permitted by law, interest thereon, will be paid to the Holders of
Transition Bonds of such Series, (ii) the balance, if any, up to the principal
amount of the Transition Bonds of such Series that is scheduled to be paid by
such Payment Date in accordance with the Expected Amortization Schedule therefor
or, with respect to any Series of Transition Bonds payable as a result of
acceleration pursuant to Section 5.02 or to be redeemed pursuant to the
Indenture, the outstanding principal amount of such Series and premium, if any,
will be paid to the Holders of Transition Bonds of such Series in respect of
principal of and premium, if any, on the Transition Bonds of such Series and
(iii) the balance, if any, will be transferred to the General Subaccount for
allocation on the next Monthly Allocation Date.
All payments to the Transition Bondholders of a Series pursuant to clauses
(i) and (ii) of the preceding paragraph shall be made pro rata based on the
respective principal amounts of Transition Bonds of such Series held by such
Holders, unless, in the case of a Series comprised of two or more Classes, the
Series Supplement for such Series provides otherwise. All payments to Transition
Bondholders of a Class pursuant to clause (i) or (ii) of the preceding paragraph
shall be made pro rata based on the respective principal amounts of Transition
Bonds of such Class held by such Holders.
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(f) On the Liquidated Damages Redemption Date, the Bond Trustee shall by
12:00 noon (New York City time) apply all amounts on deposit in the Collection
Account and any investment earnings thereon since the immediately preceding
Monthly Allocation Date to pay the following amounts in the following priority:
(i) all amounts owed by the Issuer to the Bond Trustee and the Issuer
Trustee (including legal fees and expenses) shall be paid to the Bond
Trustee and the Issuer Trustee, respectively;
(ii) the Monthly Servicing Fee or the portion thereof accrued from and
including the immediately preceding Monthly Allocation Date to but
excluding the Liquidated Damages Redemption Date and all unpaid Monthly
Servicing Fees from prior Monthly Allocation Dates shall be paid to the
Servicer;
(iii) all other Operating Expenses shall be paid to the Persons
entitled thereto;
(iv) the Redemption Price and accrued interest for each Series of
Transition Bonds shall be paid to Transition Bondholders of such Series;
and
(v) the balance, if any, will be released to the Issuer, free from the
lien of this Indenture.
SECTION 8.03. Release of Collateral. (a) All money and other property
withdrawn from the Collection Account by the Bond Trustee for payment to the
Issuer as provided in this Indenture in accordance with Section 8.02 hereof
shall be deemed released from the Indenture when so withdrawn and applied in
accordance with the provisions of Article VIII, without further notice to, or
release or consent by, the Bond Trustee.
(b) So long as the Issuer is not in default hereunder, the Issuer, through
the Servicer, may collect, liquidate, sell or otherwise dispose of the
Transferred Intangible Transition Property, at any time and from time to time,
without any notice to, or release or consent by, the Bond Trustee, but only as
and to the extent permitted by the Basic Documents; provided, however, that any
and all proceeds of such dispositions shall become Collateral and be deposited
to the General Subaccount immediately upon receipt thereof by the Issuer or any
other Person, including the Servicer.
(c) Other than as provided for in clauses (a) and (b) above, the Bond
Trustee shall release property from the lien of this Indenture only upon receipt
of an Issuer Request accompanied by an Officer's Certificate, an Opinion of
Counsel and Independent Certificates in accordance with TIA ss.ss. 314(c) and
314(d)(1) meeting the applicable requirements of Section 11.01 or an Opinion of
Counsel in lieu of such
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Independent Certificates to the effect that the TIA does not require any such
Independent Certificate.
(d) Subject to the payment of its fees and expenses pursuant to Section
6.07, the Bond Trustee may, and when required by the provisions of this
Indenture shall, execute instruments to release property from the lien of this
Indenture, or convey the Bond Trustee's interest in the same, in a manner and
under circumstances that are not inconsistent with the provisions of this
Indenture. No party relying upon an instrument executed by the Bond Trustee as
provided in this Article VIII shall be bound to ascertain the Bond Trustee's
authority, inquire into the satisfaction of any conditions precedent or see to
the application of any moneys.
(e) Subject to Section 8.03(c), the Bond Trustee shall, at such time as
there are no Transition Bonds Outstanding and all sums due the Bond Trustee
pursuant to Section 6.07 have been paid, release any remaining portion of the
Collateral that secured the Transition Bonds from the lien of this Indenture and
release to the Issuer or any other Person entitled thereto any funds then on
deposit in the Collection Account.
SECTION 8.04. Opinion of Counsel. The Bond Trustee shall receive at least
five Business Days notice when requested by the Issuer to take any action
pursuant to Section 8.03, accompanied by copies of any instruments involved, and
the Bond Trustee shall also require, as a condition to such action, an Opinion
of Counsel, in form and substance satisfactory to the Bond Trustee, stating the
legal effect of any such action, outlining the steps required to complete the
same, and concluding that all conditions precedent to the taking of such action
have been complied with and such action will not materially and adversely impair
the security for the Transition Bonds or the rights of the Transition
Bondholders in contravention of the provisions of this Indenture; provided,
however, that such Opinion of Counsel shall not be required to express an
opinion as to the fair value of the Collateral. Counsel rendering any such
opinion may rely, without independent investigation, on the accuracy and
validity of any certificate or other instrument delivered to the Bond Trustee in
connection with any such action.
SECTION 8.05. Reports by Independent Accountants. The Issuer shall appoint
a firm of Independent certified public accountants of recognized national
reputation for purposes of preparing and delivering the reports or certificates
of such accountants required by this Indenture and the related Series
Supplements. Upon any resignation by such firm the Issuer shall promptly appoint
a successor thereto that shall also be a firm of Independent certified public
accountants of recognized national reputation. If the Issuer shall fail to
appoint a successor to a firm of Independent certified public accountants that
has resigned within 15 days after such resignation, the Bond Trustee shall
promptly notify the Issuer of such failure in writing. If the Issuer shall not
have appointed a successor within 10 days thereafter the Bond Trustee shall
promptly appoint a successor firm of Independent certified public accountants of
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recognized national reputation. The fees of such firm of Independent certified
public accountants and its successor shall be payable by the Issuer.
ARTICLE IX
Supplemental Indentures
SECTION 9.01. Supplemental Indentures Without Consent of Transition
Bondholders. (a) Without the consent of the Holders of any Transition Bonds but
with prior notice to the Rating Agencies, the Issuer and the Bond Trustee, when
authorized by an Issuer Order, at any time and from time to time, may enter into
one or more indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act as in force at the date of the execution
thereof), in form satisfactory to the Bond Trustee, for any of the following
purposes:
(i) to correct or amplify the description of the Collateral, or better
to assure, convey and confirm unto the Bond Trustee the Collateral, or to
subject to the lien of this Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions hereof, of another person to the Issuer, and the assumption by
any such successor of the covenants of the Issuer herein and in the
Transition Bonds contained;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Transition Bonds, or to surrender any right or power herein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Bond Trustee;
(v) to cure any ambiguity, to correct or supplement any provision
herein or in any supplemental indenture which may be inconsistent with any
other provision herein or in any supplemental indenture or to make any
other provisions with respect to matters or questions arising under this
Indenture or in any supplemental indenture; provided, however, that (i)
such action shall not, as evidenced by an Opinion of Counsel, adversely
affect in any material respect the interests of any Transition Bondholder
and (ii) the Rating Agency Condition shall have been satisfied with respect
thereto;
(vi) to evidence and provide for the acceptance of the appointment
hereunder by a successor bond trustee with respect to the Transition Bonds
and to
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add to or change any of the provisions of this Indenture as shall be
necessary to facilitate the administration of the trusts hereunder by more
than one bond trustee, pursuant to the requirements of Article VI;
(vii) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the TIA or under any similar Federal statute hereafter
enacted and to add to this Indenture such other provisions as may be
expressly required by the TIA;
(viii) to set forth the terms of any Series that has not theretofore
been authorized by a Series Supplement; 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 (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 Bond Trustee is hereby authorized to join in the execution of any such
supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained.
(b) The Issuer and the Bond Trustee, when authorized by an Issuer Order,
may, also without the consent of any of the Holders of the Transition Bonds,
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, this Indenture or of modifying in any manner the rights of the
Holders of the Transition Bonds under this Indenture; provided, however, that
(i) such action shall not, as evidenced by an Opinion of Counsel, adversely
affect in any material respect the interests of any Transition Bondholder and
(ii) the Rating Agency Condition shall have been satisfied with respect thereto.
SECTION 9.02. Supplemental Indentures with Consent of Transition
Bondholders. The Issuer and the Bond Trustee, when authorized by an Issuer
Order, also may, with prior notice to the Rating Agencies and with the consent
of the Holders of not less than a majority of the Outstanding Amount of the
Transition Bonds of each Series or Class to be affected, by Act of such Holders
delivered to the Issuer and the Bond Trustee, enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, this Indenture
or of modifying in any manner the rights of the Holders of the Transition Bonds
under this Indenture; provided, however, that no such supplemental indenture
shall, without the consent of the Holder of each Outstanding Transition Bond of
each Series or Class affected thereby:
(i) change the date of payment of any instalment of principal of or
premium, if any, or interest on any Transition Bond, or reduce the
principal amount thereof, the interest rate thereon or the redemption price
or the premium, if any, with respect thereto, change the provisions of this
Indenture and the related applicable Series Supplement relating to the
application of collections on, or the proceeds of the sale of, the
Collateral to payment of principal of or premium, if
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any, or interest on the Transition Bonds, or change any place of
payment where, or the coin or currency in which, any Transition Bond or the
interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of the
provisions of this Indenture requiring the application of funds available
therefor, as provided in Article V, to the payment of any such amount due
on the Transition Bonds on or after the respective due dates thereof (or,
in the case of redemption, on or after the Redemption Date);
(iii) reduce the percentage of the Outstanding Amount of the
Transition Bonds or of a Series or Class thereof, the consent of the
Holders of which is required for any such supplemental indenture, or the
consent of the Holders of which is required for any waiver of compliance
with certain provisions of this Indenture or certain defaults hereunder and
their consequences provided for in this Indenture or modify or alter the
provisions of the proviso to the definition of the term "Outstanding";
(iv) reduce the percentage of the Outstanding Amount of the Transition
Bonds required to direct the Bond Trustee to direct the Issuer to sell or
liquidate the Collateral pursuant to Section 5.04;
(v) modify any provision of this Section except to increase any
percentage specified herein or to provide that certain additional
provisions of this Indenture or the Basic Documents cannot be modified or
waived without the consent of the Holder of each Outstanding Transition
Bond affected thereby;
(vi) modify any of the provisions of this Indenture in such manner as
to affect the amount of any payment of interest, principal or premium, if
any, payable on any Transition Bond on any Payment Date or to affect the
rights of the Holders of Transition Bonds to the benefit of any provisions
for the mandatory redemption of the Transition Bonds contained herein or
change the Redemption Dates, Expected Amortization Schedules, Rated Final
Payment Dates or Final Maturity Dates (Class or Series) of any Transition
Bonds;
(vii) decrease the Overcollateralization Amount or Required Capital
Amount with respect to any Series or the Calculated Overcollateralization
Level with respect to any Payment Date;
(viii) modify or alter the provisions of this Indenture regarding the
voting of Transition Bonds held by the Issuer, the Seller, an Affiliate of
either of them or any obligor on the Transition Bonds;
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(ix) decrease the percentage of the aggregate principal amount of
Transition Bonds required to amend the sections of this Indenture which
specify the applicable percentage of the aggregate principal amount of the
Transition Bonds necessary to amend this Indenture or certain other related
agreements; or
(x) permit the creation of any lien ranking prior to or on a parity
with the lien of this Indenture with respect to any part of the Collateral
or, except as otherwise permitted or contemplated herein, terminate the
lien of this Indenture on any property at any time subject hereto or
deprive the Holder of any Transition Bond of the security provided by the
lien of this Indenture.
It shall not be necessary for any Act of Transition Bondholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Bond Trustee of any
supplemental indenture pursuant to this Section, the Bond Trustee shall mail to
the Holders of the Transition Bonds to which such amendment or supplemental
indenture relates a notice setting forth in general terms the substance of such
supplemental indenture. Any failure of the Bond Trustee to mail such notice, or
any defect therein, shall not, however, in any way impair or affect the validity
of any such supplemental indenture.
SECTION 9.03. Execution of Supplemental Indentures. In executing, or
permitting the additional trusts created by, any supplemental indenture
permitted by this Article IX or the modifications thereby of the trusts created
by this Indenture, the Bond Trustee shall be entitled to receive, and subject to
Sections 6.01 and 6.02, shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture. The Bond Trustee may, but shall not be obligated
to, enter into any such supplemental indenture that affects the Bond Trustee's
own rights, duties, liabilities or immunities under this Indenture or otherwise.
SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and be deemed to be modified and amended in accordance therewith with respect
to each Series or Class of Transition Bonds affected thereby, and the respective
rights, limitations of rights, obligations, duties, liabilities and immunities
under this Indenture of the Bond Trustee, the Issuer and the Holders of the
Transition Bonds shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modifications and amendments, and all
the terms and conditions of any such supplemental indenture shall be and be
deemed to be part of the terms and conditions of this Indenture for any and all
purposes.
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SECTION 9.05. Conformity with Trust Indenture Act. Every amendment of this
Indenture and every supplemental indenture executed pursuant to this Article IX
shall conform to the requirements of the TIA as then in effect so long as this
Indenture shall then be qualified under the TIA.
SECTION 9.06. Reference in Transition Bonds to Supplemental Indentures.
Transition Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article IX may, and if required by the
Bond Trustee shall, bear a notation in form approved by the Bond Trustee as to
any matter provided for in such supplemental indenture. If the Issuer or the
Bond Trustee shall so determine, new Transition Bonds so modified as to conform,
in the opinion of the Bond Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Bond Trustee in exchange for Outstanding Transition Bonds.
ARTICLE X
Redemption of Transition Bonds;
SECTION 10.01. Optional Redemption by Issuer. The Issuer may, at its
option, redeem the Transition Bonds of a Series, in whole or from time to time
in part, as permitted by the related Series Supplement on any Redemption Date at
a price specified in such Series Supplement (such price being called the
"Redemption Price") plus interest accrued on the Transition Bonds to be redeemed
to such Redemption Date. If the Issuer shall elect to redeem the Transition
Bonds of a Series pursuant to this Section 10.01, it shall furnish notice of
such election to the Bond Trustee not later than 25 days prior to the Redemption
Date for such redemption and shall deposit with the Bond Trustee the Redemption
Price of the Transition Bonds to be redeemed plus interest accrued thereon to
such Redemption Date on or prior to such Redemption Date whereupon all such
Transition Bonds shall be due and payable on such Redemption Date upon the
furnishing of a notice complying with Section 10.03 hereof to each Holder of the
Transition Bonds of such Series pursuant to this Section 10.01.
SECTION 10.02. Mandatory Redemption by Issuer. The Issuer shall redeem (i)
the Transition Bonds of a Series on the Redemption Date or Dates, if any, in the
amounts required, if any, and at the Redemption Price specified in the Series
Supplement for such Series plus accrued interest thereon to such Redemption Date
and (ii) the Transition Bonds of all Series if the Issuer receives Liquidated
Damages on the Liquidated Damages Redemption Date at a Redemption Price that
shall be equal to the then outstanding principal amount of the Transition Bonds
as of the Liquidated Damages Redemption Date plus accrued interest to such
Redemption Date. If the Issuer is required
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to redeem the Transition Bonds of a Series pursuant to this Section 10.02, it
shall furnish notice of such requirement to the Bond Trustee not later than 25
days prior to the Redemption Date for such redemption and shall deposit with the
Bond Trustee the Redemption Price of the Transition Bonds to be redeemed
whereupon all such Transition Bonds shall be due and payable on the Redemption
Date upon the furnishing of a notice complying with Section 10.03 hereof to each
Holder of the Transition Bonds of such Series pursuant to this Section 10.02.
SECTION 10.03. Form of Redemption Notice. Unless otherwise specified in the
Series Supplement relating to a Series of Transition Bonds, notice of redemption
under Section 10.01 or 10.02 hereof shall be given by the Bond Trustee by
first-class mail, postage prepaid, mailed not less than five days nor more than
45 days prior to the applicable Redemption Date to each Holder of Transition
Bonds to be redeemed, as of the close of business on the Record Date preceding
the applicable Redemption Date at such Holder's address appearing in the
Transition Bond Register.
All notices of redemption shall state:
(1) the Redemption Date;
(2) the amount of such Transition Bonds to be redeemed;
(3) the Redemption Price; and
(4) the place where such Transition Bonds are to be surrendered for
payment of the Redemption Price and accrued interest (which shall be the
office or agency of the Issuer to be maintained as provided in Section 3.02
hereof).
Notice of redemption of the Transition Bonds to be redeemed shall be given
by the Bond Trustee in the name and at the expense of the Issuer. Failure to
give notice of redemption, or any defect therein, to any Holder of any
Transition Bond selected for redemption shall not impair or affect the validity
of the redemption of any other Transition Bond. Any notice of optional
redemption may be conditioned upon the deposit of sufficient moneys to pay the
Redemption Price and accrued interest with the Bond Trustee before the date
fixed for redemption and such notice shall be of no effect unless such moneys
are so deposited.
SECTION 10.04. Payment of Redemption Price. If (a) unconditional notice of
redemption has been duly mailed or duly waived by the Holders of all Transition
Bonds called for redemption or (b) conditional notice of redemption has been so
mailed or waived and the redemption moneys have been duly deposited with the
Bond Trustee, then in either case the Transition Bonds called for redemption
shall be payable on the applicable Redemption Date at the applicable Redemption
Price. No further interest will
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accrue on the principal amount of any Transition Bonds called for redemption
after the Redemption Date for such redemption if payment of the Redemption Price
thereof has been duly provided for, and the Holder of such Transition Bonds will
have no rights with respect thereto, except to receive payment of the Redemption
Price thereof and unpaid interest accrued to the Redemption Date. Payment of the
Redemption Price together with accrued interest shall be made by the Bond
Trustee to or upon the order of the Holders of the Transition Bonds called for
redemption upon surrender of such Transition Bonds, and the Transition Bonds so
redeemed shall cease to be of further effect and the Lien hereunder shall be
released with respect to such Transition Bonds.
ARTICLE XI
Miscellaneous
SECTION 11.01. Compliance Certificates and Opinions, etc. Upon any
application or request by the Issuer to the Bond Trustee to take any action
under any provision of this Indenture, the Issuer shall furnish to the Bond
Trustee (i) an Officer's Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with, (ii) an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with and (iii)
(if required by the TIA) an Independent Certificate from a firm of certified
public accountants meeting the applicable requirements of this Section, except
that, in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture,
no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(a) statement that each signatory of such certificate or opinion has
read or has caused to be read such covenant or condition and the
definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such signatory, such
signatory has made such examination or investigation as is necessary to
enable such signatory to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
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(d) a statement as to whether, in the opinion of each such signatory,
such condition or covenant has been complied with.
SECTION 11.02. Form of Documents Delivered to Bond Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Servicer, the
Seller or the Issuer, stating that the information with respect to such factual
matters is in the possession of the Servicer, the Seller or the Issuer, unless
such Authorized Officer or counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Whenever in this Indenture, in connection with any application or
certificate or report to the Bond Trustee, it is provided that the Issuer shall
deliver any document as a condition of the granting of such application, or as
evidence of the Issuer's compliance with any term hereof, it is intended that
the truth and accuracy, at the time of the granting of such application or at
the effective date of such certificate or report (as the case may be), of the
facts and opinions stated in such document shall in such case be conditions
precedent to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not, however, be
construed to affect the Bond Trustee's right to rely upon the truth and accuracy
of any statement or opinion contained in any such document as provided in
Article VI.
SECTION 11.03. Acts of Transition Bondholders. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Transition Bondholders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such
79
<PAGE>
Transition Bondholders in person or by agents duly appointed in writing; and
except as herein otherwise expressly provided such action shall become effective
when such instrument or instruments are delivered to the Bond Trustee, and,
where it is hereby expressly required, to the Issuer. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Transition Bondholders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Bond Trustee
and the Issuer, if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such instrument
or writing may be proved in any manner that the Bond Trustee deems sufficient.
(c) The ownership of Transition Bonds shall be proved by the Transition
Bond Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Transition Bonds shall bind the Holder of
every Transition Bond issued upon the registration thereof or in exchange
therefor or in lieu thereof, in respect of anything done, omitted or suffered to
be done by the Bond Trustee or the Issuer in reliance thereon, whether or not
notation of such action is made upon such Transition Bond.
SECTION 11.04. Notices, etc., to Bond Trustee, Issuer and Rating Agencies.
Any request, demand, authorization, direction, notice, consent, waiver or Act of
Transition Bondholders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to or filed with:
(a) the Bond Trustee by any Transition Bondholder or by the
Issuer shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing, delivered personally, via facsimile
transmission, by reputable overnight courier or by first-class mail,
postage prepaid, to the Bond Trustee at its Corporate Trust Office, or
(b) the Issuer by the Bond Trustee or by any Transition
Bondholder shall be sufficient for every purpose hereunder if in
writing, delivered personally, via facsimile transmission, by
reputable overnight courier or by first-class mail, postage prepaid,
to the Issuer addressed to: [ ], [ ], Attention:
Corporate Trustee Administration Department, or at any other
address previously furnished in writing to the Bond Trustee by the
Issuer. The Issuer shall promptly transmit any notice received by it
from the Transition Bondholders to the Bond Trustee.
80
<PAGE>
Notices required to be given to the Rating Agencies by the Issuer, the Bond
Trustee or the Issuer Trustee shall be in writing, delivered personally, via
facsimile transmission, by reputable overnight courier or by first-class mail,
postage prepaid, to (i) in the case of Duff, at the following address: [ ], (ii)
in the case of Fitch, at the following address: Fitch Investors Service, L.P.,
Attention: Commercial Asset-Backed Securities, One State Street Plaza, New York,
New York 10004, (iii) in the case of Moody's, at the following address: Moody's
Investors Service, Inc., Attention: ABS Monitoring Department, 99 Church Street,
New York, New York 10007 and (iv) in the case of Standard & Poor's, at the
following address: Standard & Poor's Corporation, 26 Broadway (15th Floor), New
York, New York 10004, Attention: Asset Backed Surveillance Department.
SECTION 11.05. Notices to Transition Bondholders; Waiver. Where this
Indenture provides for notice to Transition Bondholders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and delivered by first-class mail, postage prepaid, to each
Transition Bondholder affected by such event, at their address as it appears on
the Transition Bond Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. In any case
where notice to Transition Bondholders is given by mail, neither the failure to
mail such notice nor any defect in any notice so mailed to any particular
Transition Bondholder shall affect the sufficiency of such notice with respect
to other Transition Bondholders, and any notice that is mailed in the manner
herein provided shall conclusively be presumed to have been duly given.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by any Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Transition Bondholders shall be filed with the Bond Trustee
but such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such a waiver.
In case it shall be impractical to deliver notice in accordance with the
first paragraph of this Section 11.05 to the Holders of Transition Bonds when
such notice is required to be given pursuant to any provision of this Indenture,
then any manner of giving such notice as shall be satisfactory to the Bond
Trustee shall be deemed to be a sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure to
give such notice shall not affect any other rights or obligations created
hereunder, and shall not under any circumstance constitute a Default or Event of
Default.
SECTION 11.06. Alternate Payment and Notice Provisions. Notwithstanding any
provision of this Indenture or any of the Transition Bonds to the
81
<PAGE>
contrary, the Issuer may enter into any agreement with any Holder of a
Transition Bond providing for a method of payment, or notice by the Bond Trustee
or any Paying Agent to such Holder, that is different from the methods provided
for in this Indenture for such payments or notices. The Issuer will furnish to
the Bond Trustee a copy of each such agreement and the Bond Trustee will cause
payments to be made and notices to be given in accordance with such agreements.
SECTION 11.07. Conflict with Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof that is required to
be included in this Indenture by any of the provisions of the TIA, such required
provision shall control.
The provisions of TIA ss.ss. 310 through 317 that impose duties on any
person (including the provisions automatically deemed included herein unless
expressly excluded by this Indenture) are a part of and govern this Indenture,
whether or not physically contained herein.
SECTION 11.08. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 11.09. Successors and Assigns. All covenants and agreements in this
Indenture and the Transition Bonds by the Issuer shall bind its successors and
permitted assigns, whether so expressed or not.
All agreements of the Bond Trustee in this Indenture shall bind its
successors.
SECTION 11.10. Separability. In case any provision in this Indenture or in
the Transition Bonds shall be invalid, illegal or unenforceable, the validity,
legality, and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 11.11. Benefits of Indenture. Nothing in this Indenture or in the
Transition Bonds, express or implied, shall give to any Person, other than the
parties hereto and their successors hereunder, and the Transition Bondholders,
and any other party secured hereunder, and any other Person with an ownership
interest in any part of the Collateral, any benefit or any legal or equitable
right, remedy or claim under this Indenture.
SECTION 11.12. Legal Holidays. In any case where the date on which any
payment is due shall not be a Business Day, then (notwithstanding any other
provision of the Transition Bonds or this Indenture) payment need not be made on
such
82
<PAGE>
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the date on which nominally due, and no interest shall
accrue for the period from and after any such nominal date.
SECTION 11.13. GOVERNING LAW. THIS INDENTURE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
SECTION 11.14. Counterparts. This Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
SECTION 11.15. Issuer Obligation. No recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer or the Bond Trustee on
the Transition Bonds or under this Indenture or any certificate or other writing
delivered in connection herewith or therewith, against (i) any owner of a
beneficial interest in the Issuer or (ii) any partner, owner, beneficiary,
agent, officer, director, employee or agent of the Bond Trustee, any holder of a
beneficial interest in the Issuer or the Bond Trustee or of any successor or
assign of the Bond Trustee, except as any such Person may have expressly agreed
(it being understood that all of the Bond Trustee's obligations are in its
individual capacity).
SECTION 11.16. No Petition. The Bond Trustee, by entering into this
Indenture, and each Transition Bondholder, by accepting a Transition Bond,
hereby covenant and agree that they will not at any time institute against the
Issuer, or join in any institution against the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any United States Federal or state bankruptcy or similar law
in connection with any obligations relating to the Transition Bonds, this
Indenture or any of the Basic Documents.
83
<PAGE>
IN WITNESS WHEREOF, the Issuer and the Bond Trustee have caused this
Indenture to be duly executed by their respective officers, thereunto duly
authorized and duly attested, all as of the day and year first above written.
[ ],
by First Union Trust Company,
National Association,
not in its individual capacity but
solely as Issuer Trustee,
by
-------------------------------------
Name:
Title:
THE BANK OF NEW YORK,
not in its individual capacity but
solely as Bond Trustee,
by
--------------------------------------
Name:
Title:
84
EXHIBIT B
================================================================================
PECO ENERGY TRANSITION TRUST,
Issuer
and
THE BANK OF NEW YORK,
Bond Trustee
------------------------------
SERIES SUPPLEMENT
Dated as of [ ], 1999
------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions...................................................... 2
SECTION 2. Designation; Series Issuance Dates............................... 3
SECTION 3. Initial Principal Amount; Bond Rate; Expected
Final Amortization Dates; Final Maturity Dates;
Rated Final Payment Dates........................................ 4
SECTION 4. Payment Dates; Expected Amortization Schedule
for Principal; Interest; Overcollateralization
Amount; Monthly Allocated Balances............................... 4
SECTION 5. Authorized Initial Denominations................................. 6
SECTION 6. Redemption....................................................... 6
SECTION 7. Credit Enhancement............................................... 6
SECTION 8. Delivery and Payment for the Series [ ]
Transition Bonds; Form of the Series [ ]
Transition Bonds................................................. 6
SECTION 9. Confirmation of Indenture........................................ 7
SECTION 10. Counterparts..................................................... 7
SECTION 11. Governing Law.................................................... 7
SECTION 12. Issuer Obligation................................................ 7
Schedule A Expected Amortization Schedule
Schedule B Monthly Allocated Balances
Exhibit A Form of Transition Bond
<PAGE>
SERIES SUPPLEMENT dated as of [ ], 1999 (this "Supplement"), by and
between PECO ENERGY TRANSITION TRUST, a Delaware statutory business trust (the
"Issuer"), and THE BANK OF NEW YORK, a New York banking corporation (the "Bond
Trustee"), as Bond Trustee under the Indenture dated as of [ ], 1999,
between the Issuer and the Bond Trustee (the "Indenture").
PRELIMINARY STATEMENT
Section 9.01 of the Indenture provides, among other things, that the Issuer
and the Bond Trustee may at any time and from time to time enter into one or
more indentures supplemental to the Indenture for the purposes of authorizing
the issuance by the Issuer of a Series of Transition Bonds and specifying the
terms thereof. The Issuer has duly authorized the execution and delivery of this
Supplement and the creation of a Series of Transition Bonds with an initial
aggregate principal amount of $[ ] to be known as the Issuer's Transition
Bonds, Series [ ] (the "Series [ ] Transition Bonds"). All acts and all
things necessary to make the Series [ ] Transition Bonds, when duly executed
by the Issuer and authenticated by the Bond Trustee as provided in the Indenture
and this Supplement and issued by the Issuer, the valid, binding and legal
obligations of the Issuer and to make this Supplement a valid and enforceable
supplement to the Indenture have been done, performed and fulfilled and the
execution and delivery hereof have been in all respects duly and lawfully
authorized. The Issuer and the Bond Trustee are executing and delivering this
Supplement in order to provide for the Series [ ] Transition Bonds.
In order to secure the payment of principal of and interest on the Series
[ ] Transition Bonds issued and to be issued under the Indenture and/or any
Series Supplement, the Issuer hereby Grants to the Bond Trustee as trustee for
the benefit of the Holders of the Transition Bonds from time to time issued and
outstanding, all of the Issuer's right, title and interest in and to (a) the
Intangible Transition Property transferred by the Seller to the Issuer from time
to time pursuant to the Sale Agreement and all proceeds thereof, (b) the Sale
Agreement except for Section 5.01
<PAGE>
thereof solely to the extent such Section provides for indemnification of the
Issuer, (c) all Bills of Sale delivered by the Seller pursuant to the Sale
Agreement, (d) the Servicing Agreement except for Section 5.02(b) thereof solely
to the extent such Section provides for indemnification of the Issuer, (e) the
Collection Account and all amounts on deposit therein from time to time, (f) all
other property of whatever kind owned from time to time by the Issuer, (g) all
present and future claims, demands, causes and choses in action in respect of
any or all of the foregoing and (h) all payments on or under and all proceeds of
every kind and nature whatsoever in respect of any or all of the foregoing,
including all proceeds of the conversion, voluntary or involuntary, into cash or
other liquid property, all cash proceeds, accounts, accounts receivable, notes,
drafts, acceptances, chattel paper, checks, deposit accounts, insurance
proceeds, condemnation awards, rights to payment of any and every kind, and
other forms of obligations and receivables, instruments and other property which
at any time constitute all or part of or are included in the proceeds of any of
the foregoing (collectively, the "Collateral").
To have and to hold in trust to secure the payment of principal of and
premium, if any, and interest on, and any other amounts (including all fees,
expenses, counsel fees and other amounts due and owing to the Bond Trustee)
owing in respect of, the Transition Bonds equally and ratably without prejudice,
preference, priority or distinction, except as expressly provided in the
Indenture and to secure performance by the Issuer of all of the Issuer's
obligations under the Indenture and all Series Supplements with respect to the
Transition Bonds, all as provided in the Indenture.
The Bond Trustee, as trustee on behalf of the Holders of the Transition
Bonds, acknowledges such Grant, accepts the trusts hereunder in accordance with
the provisions hereof and agrees to perform its duties required in the Indenture
and this Supplement.
SECTION 1. Definitions. (a) Article One of the Indenture provides that the
meanings of certain defined terms used in the Indenture shall, when applied to
the Transition Bonds of a particular Series, be as defined in Article One but
with such additional provisions as are specified in the related Series
Supplement. With respect to
2
<PAGE>
the Series [ ] Transition Bonds, the following definitions shall apply:
"Adjustment Date" shall mean [ ].
"Authorized Initial Denominations" shall mean $1,000 and integral multiples
thereof.
"Bond Rate" has the meaning set forth in Section 3 of this Supplement.
"Calculation Date" shall mean [ ].
"Expected Amortization Schedule" shall mean Schedule A to this Supplement.
"Expected Final Amortization Date" means, with respect to the Series [ ]
Transition Bonds, or any Class thereof, the expected final amortization date
therefor, as specified in Section 3 of this Supplement.
"Final Maturity Date" means, with respect to the Series [ ] Transition
Bonds, or any Class thereof, the final maturity date therefor, as specified in
Section 3 of this Supplement.
"Monthly Allocated Interest Balance" has the meaning set forth in Section
4(e) of this Supplement.
"Monthly Allocated Principal Balance" has the meaning set forth in Section
4(e) of this Supplement.
"Overcollateralization Amount" has the meaning set forth in Section 4(e) of
this Supplement.
"Payment Date" has the meaning set forth in Section 4(a) of this
Supplement.
"Rated Final Payment Date" means, with respect to the Series [ ]
Transition Bonds, or any Class thereof, the rated final payment date therefor,
as specified in Section 3 of this Supplement.
"Record Date" shall mean [ ].
"Series Issuance Date" has the meaning set forth in Section 2(b) of this
Supplement.
3
<PAGE>
(b) All terms used in this Supplement that are defined in the Indenture,
either directly or by reference therein, have the meanings assigned to them
therein, except to the extent such terms are defined or modified in this
Supplement or the context clearly requires otherwise.
SECTION 2. Designation; Series Issuance Dates. (a) Designation. The Series
[ ] Transition Bonds shall be designated generally as the Issuer's
Transition Bonds, Series [ ] and further denominated as Classes [ ]
through [ ].
(b) Series Issuance Date. The Series [ ] Transition Bonds that are
authenticated and delivered by the Bond Trustee to or upon the order of the
Issuer on [ ], 199[ ] (the "Series Issuance Date") shall have as their date of
authentication [ ], 199[ ]. Each other Series [ ] Transition Bond
shall be dated the date of its authentication.
SECTION 3. Initial Principal Amount; Bond Rate; Expected Final Amortization
Dates; Final Maturity Dates; Rated Final Payment Dates. The Transition Bonds of
each Class of the Series [ ] Transition Bonds shall have the initial
principal amounts, bear interest at the rates per annum and shall have Expected
Final Amortization Dates, Final Maturity Dates and Rated Final Payment Dates as
set forth below:
<TABLE>
<CAPTION>
Initial
Principal Bond Expected Final Final Rated Final
Class Amount Rate Amortization Date Maturity Date Payment Date
- ----- --------- ---- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
[The Bond Rate shall be computed on the basis of a 360- day year of twelve
30-day months.] The Expected Final Amortization Date for the Series [ ]
Transition Bonds shall be [ ]. The Final Maturity Date for the Series
[ ] Transition Bonds shall be [ ]. The Rated Final Payment Date for
the Series [ ] Transition Bonds shall be [ ].
SECTION 4. Payment Dates; Expected Amortization Schedule for Principal;
Interest; Overcollateralization Amount; Monthly Allocated Balances. (a) Payment
Dates. The Payment Dates for the Series [ ] Transition Bonds are [[ ]
and [ ]] of each year or, if any such date is not a Business Day, the next
succeeding Business Day, commencing on [ ], 199[ ] and continuing until the
earlier of repayment of the Series [ ] Transition Bonds in full and the
Rated Final Payment Date for the Series [ ] Transition Bonds. The place [or
places] for payments with respect to the Series [ ] Transition Bonds shall
be [ ].
(b) Expected Amortization Schedule for Principal. Unless an Event of
Default shall have occurred and be continuing and the unpaid principal amount of
all Series of Transition Bonds has been declared to be due and payable together
with accrued and unpaid interest thereon, on each Payment Date, the Bond Trustee
shall distribute to the Series [ ] Transition Bondholders of record as of
the related Record Date amounts payable in respect of the Series [ ]
Transition Bonds pursuant to Section 8.02(e) of the Indenture as principal, in
the following order and priority: (1) to the Holders of the Class [ ]
Transition Bonds, until the Outstanding Amount of such Class of Transition Bonds
thereof has been reduced to zero; (2) to the Holders of the Class [ ]
Transition Bonds, until the Outstanding Amount of such Class of Transition Bonds
thereof has been reduced to zero; and (3) to the Holders of the Class [ ]
Transition Bonds until the Outstanding Amount of such Class of Transition Bonds
thereof has been reduced to zero; provided, however, that in no event shall a
principal payment pursuant to this Section 4(b) on any Class on a Payment Date
be greater than the amount that reduces the Outstanding Amount of such Class of
Transition Bonds to the amount specified in the Expected Amortization Schedule
which is attached as Schedule A hereto for such Class and Payment Date.
5
<PAGE>
(c) Interest. Interest will be payable on each Class of the Series [ ]
Transition Bonds on each Payment Date in an amount equal to [[one-half]
[one-fourth][other] of the product of (i) the applicable Bond Rate and (ii) the
Outstanding Amount of the related Class of Transition Bonds as of the close of
business on the preceding Payment Date after giving effect to all payments of
principal made to the holders of the related Class of Series [ ] Transition
Bonds on such preceding Payment Date; provided, however, that with respect to
the initial Payment Date or, if no payment has yet been made, interest on the
outstanding principal balance will accrue from and including the Series Issuance
Date to, but excluding, the following Payment Date].
(d) Overcollateralization Amount. The Overcollateralization Amount for the
Series [ ] Transition Bonds shall be $[ ].
(e) Monthly Allocated Balances. The Monthly Allocated Interest Balance and
Monthly Allocated Principal Balance for any Monthly Allocation Date and the
Series [ ] Transition Bonds shall be as set forth in Schedule B hereto.
Not later than each Schedule Revision Date, the Issuer shall deliver to the
Bond Trustee replacement Schedules A and B hereto, adjusted to reflect the event
giving rise to such Schedule Revision Date and setting forth the Expected
Amortization Schedule for each Payment Date and the Monthly Allocated Interest
Balance and Monthly Allocated Principal Balance for each Monthly Allocation
Date; provided, however, that no such replacement schedules shall be required if
the event giving rise to such Schedule Revision Date is a redemption of the
Series [ ] Transition Bonds in whole.
SECTION 5. Authorized Initial Denominations. The Series [ ] Transition
Bonds shall be issuable in the Authorized Initial Denominations.
SECTION 6. Redemption. (a) Mandatory Redemption. [The Issuer shall redeem
the Series [ ] Transition Bonds [describe circumstances and Redemption
Date] at a Redemption Price of $[ ] [(including a premium of $[ ])]
pursuant to Section 10.02 of the Indenture.] [The Series [ ] Transition
Bonds shall not be subject to mandatory redemption except as provided in
6
<PAGE>
Section 10.02 of the Indenture in the event that the Issuer receives Liquidated
Damages.]
(b) Optional Redemption. [The Issuer may, at its option, redeem the Series
[ ] Transition Bonds in whole or from time to time in part [describe
circumstances and Redemption Date] at a Redemption Price of $[ ] [(including
a premium of $[ ])] pursuant to Section 10.01 of the Indenture.] [The
Series [ ] Transition Bonds shall not be subject to optional redemption by
the Issuer.]
SECTION 7. Credit Enhancement. [details to be provided at issuance] [No
credit enhancement (other than the Overcollateralization Amount) is provided for
the Series [ ] Transition Bonds.]
SECTION 8. Delivery and Payment for the Series [ ] Transition Bonds;
Form of the Series [ ] Transition Bonds. The Bond Trustee shall deliver the
Series [ ] Transition Bonds to the Issuer when authenticated in accordance
with Section 2.02 of the Indenture. The Series [ ] Transition Bonds of each
Class shall be in the form of Exhibits [ ] through [ ] hereto.
SECTION 9. Confirmation of Indenture. As supplemented by this Supplement,
the Indenture is in all respects ratified and confirmed and the Indenture, as so
supplemented by this Supplement, shall be read, taken, and construed as one and
the same instrument.
SECTION 10. Counterparts. This Supplement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all of such counterparts shall together constitute but one and the same
instrument.
SECTION 11. Governing Law. This Supplement shall be construed in accordance
with the laws of the Commonwealth of Pennsylvania, without reference to its
conflict of law provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
7
<PAGE>
SECTION 12. Issuer Obligation. No recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer or the Bond Trustee on
the Transition Bonds or under this Supplement or any certificate or other
writing delivered in connection herewith or therewith, against (i) any owner of
a beneficial interest in the Issuer or (ii) any partner, owner, beneficiary,
agent, officer, director or employee of the Bond Trustee, any holder of a
beneficial interest in the Issuer or the Bond Trustee or of any successor or
assign of the Bond Trustee, except as any such Person may have expressly agreed
(it being understood that all of the Bond Trustee's obligations are in its
individual capacity).
IN WITNESS WHEREOF, the Issuer and the Bond Trustee have caused this
Supplement to be duly executed by their respective officers thereunto duly
authorized as of the first day of the month and year first above written.
PECO ENERGY TRANSITION TRUST,
by First Union Trust Company,
National Association, not in
its individual capacity but
solely as Issuer Trustee,
by
--------------------------------
Name:
Title:
THE BANK OF NEW YORK,
by
--------------------------------
Name:
Title:
8
<PAGE>
SCHEDULE A
Expected Amortization Schedule
Outstanding Principal Balance
<TABLE>
<CAPTION>
Payment Date Class [ ] Class [ ] Class [ ] Class [ ] Class [ ] Class [ ] Class [ ] Series [ ]
- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series Issuance
Date
</TABLE>
<PAGE>
SCHEDULE B
Monthly Allocated Balances
Monthly Allocation Monthly Allocated Monthly Allocated
Date Interest Balance Principal Balance
<PAGE>
EXHIBIT A
Form of Transition Bond
[To be provided]
REGISTERED $[ ]
No. ______
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP NO.
THE PRINCIPAL OF THIS CLASS [ ] TRANSITION BOND WILL BE PAID IN
INSTALMENTS AS SET FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT
OF THIS CLASS [ ] TRANSITION BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN
ON THE FACE HEREOF.
PECO ENERGY TRANSITION TRUST
TRANSITION BONDS, SERIES [ ], Class [ ].
Bond Original Principal Expected Final
Rate Amount Amortization Date
- ---- ------ -----------------
[ ]% $[ ] [ ], [ ]
PECO Energy Transition Trust, a statutory business trust organized and
existing under the laws of the State of Delaware (herein referred to as the
"Issuer"), for value received, hereby promises to pay to the Registered Holder
hereof, or registered assigns, the Original Principal Amount shown above in
[monthly][quarterly][semi-annual] instalments on the Payment Dates and in the
amounts specified on the reverse hereof or, if less, the amounts determined
pursuant to Section 8.02(e) of the Indenture, in each year, commencing on the
date determined as provided on the reverse hereof and ending on or before the
Class Rated Final Payment Date, to pay the entire unpaid principal hereof on the
Class Final Maturity Date and to pay interest, at [the Bond Rate shown above][a
floating rate calculated as follows [insert formula]], on each [ ] or if any
such day is not a Business Day, the next succeeding Business Day, commencing on
[ ], 1999 and continuing until the earlier of the payment of the principal
hereof and the Class Termination Date (each a "Payment Date"), on the principal
amount of this Class [ ] Transition Bond outstanding from time to time. Interest
on this Class [ ] Transition Bond will accrue for each Payment Date from the
most recent
<PAGE>
2
Payment Date on which interest has been paid to but excluding such Payment Date
or, if no interest has yet been paid, from [ ], 1998. Interest will be computed
on the basis of [a 360-day year of twelve 30-day months]. Such principal of and
interest on this Class [ ] Transition Bond shall be paid in the manner specified
on the reverse hereof.
The principal of and interest on this Class [ ] Transition Bond are
payable in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts. All payments
made by the Issuer with respect to this Class [ ] Transition Bond shall be
applied first to interest due and payable on this Class [ ] Transition Bond as
provided above and then to the unpaid principal of and premium, if any, on this
Class [ ] Transition Bond, all in the manner set forth in Section 8.02(e) of the
Indenture.
Reference is made to the further provisions of this Class [ ]
Transition Bond set forth on the reverse hereof, which shall have the same
effect as though fully set forth on the face of this Class [ ] Transition Bond.
Unless the certificate of authentication hereon has been executed by
the Bond Trustee whose name appears below by manual signature, this Class [ ]
Transition Bond shall not be entitled to any benefit under the Indenture
referred to on the reverse hereof, or be valid or obligatory for any purpose.
<PAGE>
3
IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed,
manually or in facsimile, by an Authorized Officer of the Issuer Trustee.
Date:
PECO ENERGY TRANSITION TRUST,
by First Union Trust Company,
National Association, not in
its individual capacity but
solely as Issuer Trustee,
by
---------------------------
Name:
Title:
<PAGE>
4
BOND TRUSTEE'S CERTIFICATE OF AUTHENTICATION
Dated: , 199[ ]
-----------------
This is one of the Class [ ] Transition Bonds of the Series [ ]
Transition Bonds, designated above and referred to in the within-mentioned
Indenture.
THE BANK OF NEW YORK,
by
--------------------------
Authorized Signatory
<PAGE>
5
[REVERSE OF TRANSITION BOND]
This Series [ ], Class [ ] Transition Bond is one of a duly authorized
issue of Transition Bonds of the Issuer, designated as its Transition Bonds
(herein called the "Transition Bonds"), issued and to be issued in one or more
Series, which Series are issuable in one or more Classes, and this Series [ ]
Transition Bond, in which this Class [ ] Transition Bond represents an interest,
consists of [ ] Classes, including the Class [ ] Transition Bonds (herein called
the "Class [ ] Transition Bonds"), all issued and to be issued under an
indenture dated as of [ ], 1999, and a series supplement thereto dated as of
[ ], [1999] (such series supplement, as supplemented or amended, the
"Supplement" and, collectively with such indenture, as supplemented or amended,
the "Indenture"), each between the Issuer and The Bank of New York, as Bond
Trustee (the "Bond Trustee", which term includes any successor bond trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the Collateral property pledged, the
nature and extent of the security, the respective rights, obligations and
immunities thereunder of the Issuer, the Bond Trustee and the Holders of the
Transition Bonds and the terms and conditions under which additional Transition
Bonds may be issued. All terms used in this Class [ ] Transition Bond that are
defined in the Indenture, as supplemented or amended, shall have the meanings
assigned to them in the Indenture.
The Class [ ] Transition Bonds, the other Classes of Series [ ]
Transition Bonds and any other Series of Transition Bonds issued by the Issuer
are and will be equally and ratably secured by the Collateral pledged as
security therefor as provided in the Indenture.
The principal of this Class [ ] Transition Bond shall be payable on
each Payment Date only to the extent that amounts in the Collection Account are
available therefor, and only until the outstanding principal balance thereof on
such Payment Date (after giving effect to all payments of principal, if any,
made on such Payment Date) has been reduced to the principal balance specified
in the Expected Amortization Schedule which is attached to the Supplement as
Schedule A, unless payable earlier either because (i) an Event of Default shall
have occurred and be continuing and the Bond Trustee or the Holders of
Transition
<PAGE>
6
Bonds representing not less than a majority of the Outstanding Amount of the
Transition Bonds of all Series have declared the Transition Bonds to be
immediately due and payable in accordance with Section 5.02 of the Indenture,
(ii) the Issuer, at its option, shall have called for the redemption of the
Series [ ] Transition Bonds in whole or from time to time in part pursuant to
Section 10.01 of the Indenture [or][,] (iii) the Issuer shall have called for
the redemption of the Series [ ] Transition Bonds pursuant to Section 10.02 of
the Indenture if the Seller is required to pay Liquidated Damages pursuant to
Section 5.01(c) or (d) of the Sale Agreement [or (iv) the Issuer shall have
called for the redemption of the Series [ ] Transition Bond in whole or from
time to time in part pursuant to Section 6(a) or 6(b) of the Supplement].
However, actual principal payments may be made in lesser than expected amounts
and at later than expected times as determined pursuant to Section 8.02(e) of
the Indenture. The entire unpaid principal amount of this Class [ ] Transition
Bond shall be due and payable on the earlier of the Class Final Maturity Date
hereof and the Redemption Date, if any, herefor. Notwithstanding the foregoing,
the entire unpaid principal amount of the Transition Bonds shall be due and
payable, if not then previously paid, on the date on which an Event of Default
shall have occurred and be continuing and the Bond Trustee or the Holders of the
Transition Bonds representing not less than a majority of the Outstanding Amount
of the Transition Bonds have declared the Transition Bonds to be immediately due
and payable in the manner provided in Section 5.02 of the Indenture. All
principal payments on the Class [ ] Transition Bonds shall be made pro rata to
the Class [ ] Transition Bondholders entitled thereto based on the respective
principal amounts of the Class [ ] Transition Bonds held by them.
Payments of interest on this Class [ ] Transition Bond due and payable
on each Payment Date, together with the instalment of principal or premium, if
any, due on this Class [ ] Transition Bond on such Payment Date shall be made by
check mailed first-class, postage prepaid, to the Person whose name appears as
the Registered Holder of this Class [ ] Transition Bond (or one or more
Predecessor Transition Bonds) in the Transition Bond Register as of the close of
business on the Record Date or in such other manner as may be provided in the
Supplement, except that with respect to Class [ ] Transition Bonds registered on
the Record Date in the name of a Clearing Agency, payments will be made by wire
transfer in immediately available funds to
<PAGE>
7
the account designated by such Clearing Agency and except for the final
instalment of principal and premium, if any, payable with respect to this Class
[ ] Transition Bond on a Payment Date which shall be payable as provided below.
Such checks shall be mailed to the Person entitled thereto at the address of
such Person as it appears in the Transition Bond Register as of the applicable
Record Date without requiring that this Class [ ] Transition Bond be submitted
for notation of payment. Any reduction in the principal amount of this Class [ ]
Transition Bond (or any one or more Predecessor Transition Bonds) effected by
any payments made on any Payment Date shall be binding upon all future Holders
of this Class [ ] Transition Bond and of any Class [ ] Transition Bond issued
upon the registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not noted hereon. If funds are expected to be available, as
provided in the Indenture, for payment in full of the then remaining unpaid
principal amount of this Class [ ] Transition Bond on a Payment Date, then the
Bond Trustee, in the name of and on behalf of the Issuer, will notify the Person
who was the Registered Holder hereof as of the Record Date preceding such
Payment Date by notice mailed no later than five days prior to such final
Payment Date and shall specify that such final instalment will be payable only
upon presentation and surrender of this Class [ ] Transition Bond and shall
specify the place where this Class [ ] Transition Bond may be presented and
surrendered for payment of such instalment.
The Issuer shall pay interest on overdue instalments of interest on
this Class [ ] Transition Bond at the Class [ ] Bond Rate to the extent lawful.
As provided in the Indenture, the Class [ ] Transition Bonds may be
redeemed, in whole or from time to time in part, at the option of the Issuer on
any Redemption Date at the Redemption Price. In addition, as provided in the
Indenture, if the Seller is required to pay Liquidated Damages pursuant to
Section 5.01(c) or (d) of the Sale Agreement, the Issuer will be required to
redeem all outstanding Series of Transition Bonds, including the Class [ ]
Transition Bonds, on the Liquidated Damages Redemption Date. [The Issuer will
also be required to redeem the Class [ ] Transition Bonds in certain
circumstances as provided in Sections 6(a) and 6(b) of the Supplement.]
<PAGE>
8
As provided in the Indenture and subject to certain limitations set
forth therein, the transfer of this Class [ ] Transition Bond may be registered
in the Transition Bond Register upon surrender of this Class [ ] Transition Bond
for registration of transfer at the office or agency designated by the Issuer
pursuant to the Indenture, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Bond Trustee duly executed by
the Holder hereof or his attorney duly authorized in writing, with such
signature guaranteed by an Eligible Guarantor Institution, and thereupon one or
more new Class [ ] Transition Bonds of any Authorized Initial Denominations and
in the same aggregate initial principal amount will be issued to the designated
transferee or transferees. No service charge will be charged for any
registration of transfer or exchange of this Class [ ] Transition Bond, but the
transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange.
Each Class [ ] Transition Bondholder, by acceptance of a Class [ ]
Transition Bond, covenants and agrees that no recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer or the Bond Trustee on
the Class [ ] Transition Bonds or under the Indenture or any certificate or
other writing delivered in connection herewith or therewith, against (i) any
owner of a beneficial interest in the Issuer or (ii) any partner, owner,
beneficiary, agent, officer, director or employee of the Bond Trustee, any
holder of a beneficial interest in the Issuer or the Bond Trustee or of any
successor or assign of the Bond Trustee, except as any such Person may have
expressly agreed (it being understood that all of the Bond Trustee's obligations
are in its individual capacity).
Prior to the due presentment for registration of transfer of this Class
[ ] Transition Bond, the Issuer, the Bond Trustee and any agent of the Issuer or
the Bond Trustee may treat the Person in whose name this Class [ ] Transition
Bond is registered (as of the day of determination) as the owner hereof for the
purpose of receiving payments of principal of and premium, if any, and interest
on this Class [ ] Transition Bond and for all other purposes whatsoever, whether
or not this Class [ ] Transition Bond be overdue, and neither the Issuer, the
Bond
<PAGE>
9
Trustee nor any such agent shall be affected by notice to the contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Transition Bonds under the Indenture
at any time by the Issuer with the consent of the Holders of Transition Bonds
representing a majority of the Outstanding Amount of all Transition Bonds at the
time Outstanding of each Series or Class to be affected. The Indenture also
contains provisions permitting the Holders of Transition Bonds representing
specified percentages of the Outstanding Amount of the Transition Bonds of all
Series, on behalf of the Holders of all the Transition Bonds, to waive
compliance by the Issuer with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Class [ ] Transition Bond (or any one of more
Predecessor Transition Bonds) shall be conclusive and binding upon such Holder
and upon all future Holders of this Class [ ] Transition Bond and of any Class [
] Transition Bond issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof whether or not notation of such consent or waiver is
made upon this Class [ ] Transition Bond. The Indenture also permits the Bond
Trustee to amend or waive certain terms and conditions set forth in the
Indenture without the consent of Holders of the Transition Bonds issued
thereunder.
The term "Issuer" as used in this Class [ ] Transition Bond includes
any successor to the Issuer under the Indenture.
The Issuer is permitted by the Indenture, under certain circumstances,
to merge or consolidate, subject to the rights of the Bond Trustee and the
Holders of Transition Bonds under the Indenture.
The Class [ ] Transition Bonds are issuable only in registered form in
Authorized Initial Denominations as provided in the Indenture and the
Supplement, subject to certain limitations therein set forth.
This Class [ ] Transition Bond, the Indenture and the Supplement shall
be construed in accordance with the laws of the Commonwealth of Pennsylvania,
without reference to its conflict of law provisions, and the obligations,
<PAGE>
10
rights and remedies of the parties hereunder and thereunder shall be determined
in accordance with such laws.
No reference herein to the Indenture and no provision of this Class [ ]
Transition Bond or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and
interest on this Class [ ] Transition Bond at the times, place, and rate, and in
the coin or currency herein prescribed.
<PAGE>
11
ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number
of assignee
_____________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________________________________________
_______________________________________________________________________________
(name and address of assignee)
the within Class [ ] Transition Bond and all rights
thereunder, and hereby irrevocably constitutes and appoints
_____________________________________________________________________________,
attorney, to transfer said Class [ ] Transition Bond on the books kept for
registration thereof, with full power of substitution in the premises.
Dated: ______________ _____________________________*
Signature Guaranteed:
_____________________ ______________________________
___________
* NOTE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Class [ ]
Transition Bond in every particular, without alteration, enlargement or any
change whatsoever.
[Letterhead of Richards, Layton & Finger, P.A.]
February 19, 1999
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street, First Floor
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
Ladies and Gentlemen:
We have acted as special Delaware counsel for PECO Energy Company, a
Pennsylvania corporation (the "Company"), and PECO Energy Transition Trust, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust, dated as June 23, 1998 (the
"Certificate"), as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on June 23, 1998;
(b) The Trust Agreement of the Trust, dated as of June 23, 1998, among the
Company and the trustees of the Trust named therein;
(c) The Registration Statement on Form S-3, relating to the Transition
Bonds (as defined below), as filed by the Trust with the Securities and Exchange
Commission on June 29, 1998;
<PAGE>
PECO Energy Transition Trust
February 19, 1999
Page 2
(d) Amendment No. 1 to the Registration Statement on Form S-3, relating to
the Transition Bonds, as filed by the Trust with the Securities and Exchange
Commission on September 18, 1998;
(e) Amendment No. 2 to the Registration Statement on Form S-3, including a
preliminary prospectus (the "Prospectus") and prospectus supplement, relating to
the Transition Bonds of the Trust (the "Transition Bonds"), as proposed to be
filed by the Trust with the Securities and Exchange Commission on or about
February 19, 1999 (the documents listed in paragraphs (c) through (e) above
being hereinafter collectively referred to as the "Registration Statement");
(f) A form of Amended and Restated Trust Agreement of the Trust, to be
entered into among the Company, as grantor and owner, and the trustees of the
Trust named therein (including Exhibits 1 and 2 thereto) (the "Trust
Agreement"), attached as an exhibit to the Registration Statement;
(g) A form of Indenture, to be entered into between the Trust and the
trustee to be named therein, attached as an exhibit to the Registration
Statement pursuant to which the Transition Bonds are to be issued; and
(h) A Certificate of Good Standing for the Trust, dated February 19, 1999,
obtained from the Secretary of State.
Capitalized terms used herein and not otherwise defined are used as defined
in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed in paragraphs (a) through (h) above, which we believe are
all of the documents necessary or appropriate for us to have considered for the
purposes of the opinions stated herein. We have not reviewed any document (other
than the documents listed in paragraphs (a) through (h) above) that is referred
to in or incorporated by reference into the documents reviewed by us. We have
conducted no independent factual investigation of our own but rather have relied
solely upon the foregoing documents, the statements and information set forth
therein and the additional matters recited or assumed herein, all of which we
have assumed to be true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
<PAGE>
PECO Energy Transition Trust
February 19, 1999
Page 3
For purposes of this opinion, we have assumed (i) that the Trust Agreement
and the Certificate are in full force and effect and have not been amended, (ii)
that there are no proceedings pending or contemplated for the merger,
consolidation, conversion, dissolution or termination of the Trust, (iii) except
to the extent provided in paragraph 1 below, that each party to documents
examined by us has been duly created, organized or formed, as the case may be,
and is validly existing in good standing under the laws of the jurisdiction
governing its creation, organization or formation, (iv) the legal capacity of
natural persons who are parties to the documents examined by us, (v) except to
the extent provided in paragraph 2 below, that each of the parties to the
documents examined by us has the power and authority to execute and deliver, and
to perform its obligations under, such documents, and (vi) except to the extent
provided in paragraph 3 below, that each of the documents examined by us has
been duly authorized, executed and delivered by all parties thereto. We have not
participated in the preparation of the Registration Statement (other than
Exhibits 5.1 and 23.2 thereto) and assume no responsibility for its contents
(other than Exhibits 5.1 and 23.2 thereto).
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder that are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good standing
as a business trust under the Business Trust Act.
2. Under the Business Trust Act and the Trust Agreement, the Trust has all
necessary trust power and authority to execute and deliver the Indenture and to
issue the Transition Bonds, and to perform its obligations under the Indenture
and the Transition Bonds.
3. Under the Business Trust Act and the Trust Agreement, the execution and
delivery by the Trust of the Indenture and the Transition Bonds, and the
performance by the Trust of its obligations under the Indenture and the
Transition Bonds, have been duly authorized by all necessary trust action on the
part of the Trust.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. In addition, we hereby
consent to the use of our name under the heading "Legal Matters" in the
Prospectus. We also consent to
<PAGE>
PECO Energy Transition Trust
February 19, 1999
Page 4
Ballard Spahr Andrews & Ingersoll's relying as to matters of Delaware law upon
this opinion in connection with its rendering of an opinion to be attached as an
exhibit to the Registration Statement. In giving the foregoing consents, we do
not thereby admit that we come within the category of Persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
BJK/RRM/jj
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP]
February 19, 1999
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
----------------------------
Ladies and Gentlemen:
We have acted as special counsel to PECO Energy Transition Trust, a
Delaware statutory business trust (the "Trust"), in connection with the
preparation of the Registration Statement, as amended to the date hereof, filed
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") in connection with the registration under the
Securities Act of 1933, as amended, of Transition Bonds (the "Transition Bonds")
of the Trust to be offered from time to time as described in the form of the
prospectus (the "Prospectus") included as part of the Registration Statement.
Each capitalized term used in this letter and not defined has the meaning given
to such term in the Prospectus.
We are familiar with the proceedings taken and proposed to be taken by the
Trust in connection with the proposed authorization, issuance and sale of the
Transition Bonds. In this connection, we have examined and relied upon such
trust records and other documents, instruments and certificates and have made
such other investigation as we deemed appropriate as the basis for the opinion
set forth below. In our examination, we have assumed legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
We have relied on the opinion of Richards, Layton & Finger filed
contemporaneously herewith for all matters of Delaware law.
<PAGE>
PECO Energy Transition Trust
February 19, 1999
Page 2
The opinions expressed below are based on the following assumptions:
(a) The Registration Statement on Form S-3 filed by the Trust as registrant
with the Securities and Exchange Commission with respect to the Transition Bonds
(the "Registration Statement") will become effective;
(b) The proposed transactions are carried out on the basis set forth in the
Registration Statement;
(c) Prior to the issuance of any Series or Class of Transition Bonds:
(i) all necessary orders, approvals and authorizations for the
Trust's purchase from time to time of Intangible Transition
Property from PECO Energy Company, a Pennsylvania corporation,
in exchange for the proceeds from the issuance of Transition
Bonds will have been obtained by the Trust;
(ii) the Indenture will have been executed and delivered by the
Trust's authorized representative and The Bank of New York, as
trustee;
(iii) the Amended and Restated Trust Agreement will have been
executed and delivered by George Shicora and Diana Moy Kelly,
as Beneficiary Trustees, and The Bank of New York, as Issuer
Trustee, Delaware Trustee and Independent Trustee;
(iv) the maturity dates, the bond rates, the redemption provisions
and the other terms of the Transition Bonds being offered will
be fixed in accordance with the terms of the Indenture;
(v) the Sale Agreement between the Trust and PECO Energy Company,
as Seller, will have been executed and delivered; and
(vi) the Master Servicing Agreement between the Trust and PECO
Energy Company, as Servicer, will have been executed and
delivered.
(d) The Indenture will be qualified in accordance with the provisions of
the Trust Indenture Act of 1939, as amended.
Based on the foregoing, we are of the opinion that, when properly executed,
authenticated, delivered and paid for as provided in the Indenture and upon
satisfaction of all conditions contained on the Indenture and the Underwriting
Agreement (a form of which is filed as
<PAGE>
PECO Energy Transition Trust
February 19, 1999
Page 3
Exhibit 1.1 to the Registration Statement), the Transition Bonds will be legally
issued, valid and binding obligations of the Trust.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the references to this firm under the headings "Legal Matters"
and "Litigation" in the Prospectus included in the Registration Statement.
Very truly yours,
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP]
February 19, 1999
PECO Energy Transition Trust
c/o First Union Trust Company, National Association
One Rodney Square
920 King Street
Wilmington, Delaware 19801
Re: PECO Energy Transition Trust
----------------------------
Ladies and Gentlemen:
We have acted as special counsel to PECO Energy Transition Trust, a
Delaware statutory business trust (the "Trust"), in connection with the
preparation of the Registration Statement, as amended to the date hereof, filed
on Form S-3 (the "Registration Statement") with the Securities and Exchange
Commission in connection with the registration under the Securities Act of 1933,
as amended, of Transition Bonds of the Trust to be offered from time to time as
described in the prospectus (the "Prospectus") included as part of the
Registration Statement.
We hereby adopt and confirm to you our opinion as set forth under the
headings "Summary--Tax Status" and "Material Tax Matters" in the Prospectus, and
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and the references to this firm under the headings "Summary--Tax
Status" and "Material Tax Matters" in the Prospectus.
Very truly yours,
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.2 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
Philadelphia, Pennsylvania
February 22, 1999
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
-------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
-------------------
PECO ENERGY TRANSITION TRUST
(Exact name of obligor as specified in its charter)
Delaware 51-0382130
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
c/o First Union Trust Company National Association
One Rodney Square, 920 King Street
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip code)
-------------------
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to Rule
7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed
with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1
filed with Registration Statement No. 33-21672 and Exhibit 1 to Form
T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 12th day of February, 1999.
THE BANK OF NEW YORK
By: /s/ VAN K. BROWN
---------------------------------
Name: VAN K. BROWN
Title: ASSISTANT VICE PRESIDENT
<PAGE>
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System,
at the close of business September 30, 1998, published in accordance with a call
made by the Federal Reserve Bank of this District pursuant to the provisions of
the Federal Reserve Act.
<TABLE>
<CAPTION>
ASSETS Dollar Amounts
in Thousands
--------------
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin............................................ $7,654,174
Interest-bearing balances..................................................................... 2,182,604
Securities:
Held-to-maturity securities................................................................... 965,979
Available-for-sale securities................................................................. 3,894,193
Federal funds sold and Securities purchased under agreements to resell........................ 1,001,780
Loans and lease financing receivables:
Loans and leases, net of unearned income...................................................... 8,117,615
LESS: Allowance for loan and lease losses..................................................... 625,317
LESS: Allocated transfer risk reserve......................................................... 0
Loans and leases, net of unearned income, allowance, and reserve.............................. 37,492,298
Assets held in trading accounts............................................................... 2,240,241
Premises and fixed assets (including capitalized leases)...................................... 678,458
Other real estate owned....................................................................... 13,628
Investments in unconsolidated subsidiaries and associated companies........................... 195,594
Customers' liability to this bank on acceptances outstanding.................................. 1,077,122
Intangible assets............................................................................. 1,114,091
Other assets.................................................................................. 1,955,491
Total assets.................................................................................. $60,465,653
LIABILITIES
Deposits:
In domestic offices........................................................................... $26,473,392
Noninterest-bearing........................................................................... 11,052,078
Interest-bearing.............................................................................. 15,421,314
In foreign offices, Edge and Agreement subsidiaries, and IBFs................................. 17,657,483
Noninterest-bearing........................................................................... 118,775
Interest-bearing.............................................................................. 17,538,708
Federal funds purchased and Securities sold under agreements to 2,102,186
repurchase....................................................................................
Demand notes issued to the U.S.Treasury....................................................... 245,825
Trading liabilities........................................................................... 1,641,447
Other borrowed money:
With remaining maturity of one year or less................................................... 2,063,359
</TABLE>
- 1 -
<PAGE>
<TABLE>
<S> <C>
With remaining maturity of more than one year through three years............................. 0
With remaining maturity of more than three years.............................................. 31,639
Bank's liability on acceptances executed and outstanding...................................... 1,088,142
Subordinated notes and debentures............................................................. 1,314,000
Other liabilities............................................................................. 2,468,849
Total liabilities............................................................................. 55,086,322
EQUITY CAPITAL
Common stock.................................................................................. 1,135,284
Surplus....................................................................................... 731,319
Undivided profits and capital reserves........................................................ 3,448,813
Net unrealized holding gains (losses) on available-for-sale securities........................ 100,784
Cumulative foreign currency translation adjustments........................................... (36,869)
Total equity capital.......................................................................... 5,379,331
Total liabilities and equity capital.......................................................... $60,465,653
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Gerald L. Hassell Directors
Deno D. Papageorge
Thomas A. Renyi
- 2 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,063,476<FN>
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,063,476
<CURRENT-LIABILITIES> 2,058,476
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,000<FN>
<TOTAL-LIABILITY-AND-EQUITY> 2,063,476<FN>
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
* The cash entry includes $5,000 in cash as well as $2,058,476 in unamortized
debt issuance costs.
** Other Stockholders' Equity in this case represents net assets available for
Trust activities.
*** Total Liabilities and Stockholders' Equity in this case represents total
liabilities and net assets available for Trust activities.
</FN>
</TABLE>
