<PAGE>
As filed with the Securities and Exchange Commission on December 13, 2000
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PECO Energy Transition Trust
(Issuer of the Transition Bonds)
PECO Energy Company
(Grantor of Issuer and Servicer of Transition Bonds)
Delaware 51-0382130
-------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
c/o First Union Trust Company, National Association
One Rodney Square, 920 King Street
Wilmington, DE 19801
(302) 888-7532
-------------------------------------------------------------------
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Thomas R. Miller
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. RANDALL E. MEHRBERG GREGORY M. SHAW, ESQ.
LISA M. SLOAN, ESQ. PECO Energy Company Cravath, Swaine & Moore
Ballard Spahr Andrews & Ingersoll, LLP Senior Vice President Worldwide Plaza
1735 Market Street, 51st Floor General Counsel 825 Eighth Avenue
Philadelphia, PA 19103-7599 P.O. Box 8699 New York, NY 10019
2301 Market Street
Philadelphia, PA 19101
</TABLE>
Approximate date of commencement of proposed sale to public: From time to time
after this Registration Statement becomes effective as determined by market
conditions.
<PAGE>
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, please check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum
Title of securities Amount to be aggregate offering aggregate offering Amount of
Being registered registered price per unit* price* registration fee
---------- --------------- ------ ----------------
<S> <C> <C> <C> <C>
Transition Bonds................ $725,000,000 100% $725,000,000 $191,400**
</TABLE>
* Estimated solely for the purposes of calculating the registration fee.
** Calculated pursuant to Rule 457(o) of the Securities Act.
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>
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.
SUBJECT TO COMPLETION DATED _______________, 2001
P R O S P E C T U S S U P P L E M E N T
(TO PROSPECTUS DATED ____________, 2001)
PECO ENERGY TRANSITION TRUST
ISSUER
PECO ENERGY COMPANY
SELLER AND SERVICER
SERIES ________
$_____________ TRANSITION BONDS
ISSUED TO REFINANCE SERIES 1999-A BONDS
CLASS A-3 AND CLASS A-5 [IN WHOLE] [IN PART]
THE ISSUER WILL ISSUE:
<TABLE>
<CAPTION>
Class A-1 Class A-2
<S> <C> <C>
Principal Amount............................ $__________ $________
Price....................................... $__________ $________
(________%) (______%)
Underwriter's Discounts and Commissions..... $_____ $____
(___%) (____%)
Proceeds to the Issuer...................... $___________ $___________
Bond Rate................................... _____% _____%
Interest Paid............................... Semi-Annual Semi-Annual
Optional Redemption*........................ No No
First Payment Date.......................... September 1, 2001
Special Payment Date........................ December 10, 2010
Expected Final Payment Date.................
Class Termination Date......................
</TABLE>
* All Series ______ Bonds are subject to optional redemption in whole once the
outstanding principal balance has been reduced to less than or equal to 5%
of the initial principal balance.
BEFORE YOU PURCHASE THESE SECURITIES, YOU SHOULD CAREFULLY CONSIDER THE RISK
FACTORS BEGINNING ON PAGE 18 IN THE ACCOMPANYING PROSPECTUS.
o THESE SECURITIES ARE OBLIGATIONS OF PECO ENERGY TRANSITION TRUST ONLY AND
ARE SECURED ONLY BY THE ASSETS OF PECO ENERGY TRANSITION TRUST.
o PECO ENERGY TRANSITION TRUST IS A SPECIAL PURPOSE ENTITY.
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.
There currently is no secondary market for the Series ______ Bonds, and there is
no assurance that one will develop.
[UNDERWRITERS]
The date of this prospectus supplement is ________, 2001.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS....................................................................... S-1
SUMMARY OF TERMS................................................................................................... S-2
Securities Offered.............................................................................................. S-3
Introduction.................................................................................................... S-5
The Collateral.................................................................................................. S-6
Interest........................................................................................................ S-6
Principal....................................................................................................... S-6
Collection Account and Subaccounts.............................................................................. S-7
Credit Enhancement.............................................................................................. S-7
Optional Redemption............................................................................................. S-7
Mandatory Redemption............................................................................................ S-7
Intangible Transition Charge Adjustment Process................................................................. S-8
Tax Status...................................................................................................... S-8
ERISA Considerations............................................................................................ S-9
Issuer's and Servicer's Address and Telephone Number of Principal Executive Office.............................. S-9
RISK FACTORS....................................................................................................... S-10
THE SERIES ________ BONDS.......................................................................................... S-10
General......................................................................................................... S-10
Distributions to the Series ________ Subaccount................................................................. S-10
Distributions from the Series ________ Subaccount............................................................... S-10
Interest........................................................................................................ S-11
Principal....................................................................................................... S-13
Optional Redemption............................................................................................. S-16
Mandatory Redemption............................................................................................ S-17
Overcollateralization........................................................................................... S-17
Other Credit Enhancement........................................................................................ S-20
Reports to Holders of Series ________ Bonds..................................................................... S-21
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY...................................................................... S-22
The Intangible Transition Charges............................................................................... S-22
Rate Class Descriptions......................................................................................... S-23
Adjustments to the Intangible Transition Charges................................................................ S-24
DESCRIPTION OF PECO ENERGY'S BUSINESS.............................................................................. S-26
SERVICING.......................................................................................................... S-26
Monthly Servicing Fee........................................................................................... S-26
Servicer Advances............................................................................................... S-26
REFINANCING OF THE SERIES 1999-A CLASS A-3 AND CLASS A-5 TRANSITION BONDS.......................................... S-26
UNDERWRITING THE SERIES _______ BONDS.............................................................................. S-27
RATINGS............................................................................................................ S-28
GLOSSARY OF DEFINED TERMS.......................................................................................... S-29
</TABLE>
<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 18 of the
accompanying prospectus.
This supplement begins with several sections describing these
securities:
o Summary of Terms provides important amounts, dates and other terms
of your series of transition bonds,
o The Series _______ Bonds describes the key structural features of
your series of transition bonds, and
o Description of Intangible Transition Property describes the
intangible transition charges that provide the source for payment
for all series of transition bonds and refers you to the sections in
the accompanying prospectus where you can find further information
about the intangible transition charges and other collateral for the
transition bonds.
As you read through these sections, cross-references will direct you to
more information in the accompanying prospectus. You can also directly reference
key topics by looking at the table of contents in this prospectus supplement and
the accompanying prospectus.
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 your series of transition bonds. The underwriters may act as
principal or agent in those transactions. Those sales will be made at prices
related to prevailing market prices at the time of sale.
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.
--------------------------------------------------------------------------------
TO UNDERSTAND THE STRUCTURE AND PAYMENT TERMS OF THESE SECURITIES, YOU MUST
CAREFULLY READ THE ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN
THEIR ENTIRETY.
--------------------------------------------------------------------------------
S-1
<PAGE>
SUMMARY OF TERMS
The following section is only a summary of selected information 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.
S-2
<PAGE>
Securities Offered
Series________ Transition Bonds
$______________
Issued to Refinance Series 1999-A Bonds
Class A-3 and Class A-5 [in Whole] [in Part]
---------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller and Servicer: PECO Energy Company
Bond Trustee: The Bank of New York
Pricing Date: __________________
Series Issuance Date __________________
Clearance and Settlement: DTC/Clearstream/Euroclear
---------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Class Principal Balance Bond Rate % of Total Series Principal
------------------------------- --------- ---------------------------
<S> <C> <C> <C>
Class A-1 $___________ _____% _____%
Class A-2 $___________ _____% _____%
</TABLE>
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal
balance of the Series _________ Bonds as long as
intangible transition charges are included in
electric bills sent to customers by the servicer or
1/12 of 1.50% of the outstanding principal balance of
the Series ______ Bonds if intangible transition
charges are not included in such electric bills.
Anticipated Ratings: S&P/Fitch, Inc. AAA
Moody's Aaa
Credit Enhancement: o Intangible transition charge adjustments,
o Overcollateralization for all series of
transition bonds, funded over the life of the
Series _____ Bonds and all other transition bonds
issued by the issuer and expected to reach 2% of
the initial principal balance of the Series
1999-A Bonds and the Series 2000-A Bonds by the
expected final payment date of the Class A-2
Bonds, and
o Capital of the issuer of approximately $25
million available to all series of transition
bonds.
Payment Dates: If not a special payment date, March 1 and September
1 of each year or, if not a business day, the next
business day.
First Payment Date: September 1, 2001
Special Payment Date: December 31, 2010
S-3
<PAGE>
Class A-1 Class A-2
--------- ---------
Expected Final
Payment Date:*
Termination Date: December 31, 2010
Optional Redemption: All Series _____ Bonds are subject to optional
redemption in whole once the outstanding principal
balance of the Series _____ Bonds has been reduced to
less than or equal to 5% of the initial principal
balance.
Mandatory Redemption: All Series _____ Bonds are subject to mandatory
redemption in whole if the seller is obligated to pay
liquidated damages for the breach of specified
representations and warranties under the sale
agreement.
Record Date: Close of business on the day prior to any payment
date.
Class A-1 Class A-2
--------- ---------
CUSIP Numbers:
* The expected final payment date is the date upon which the issuer expects to
make the final payment on your Series ______ Bond. However, the final payment on
your Series _____ Bond may be made after that date. Your Series ______ Bond
will not be in default unless it is not paid in full by its termination date set
forth above.
S-4
<PAGE>
Introduction
The Pennsylvania Electricity Generation Customer Choice and Competition
Act was enacted in 1996, and provides for the restructuring of the electric
industry in Pennsylvania, including retail competition for generation services.
Prior to enactment of the Pennsylvania Competition Act, electric utilities, such
as PECO Energy Company (referred to as PECO Energy throughout this prospectus
supplement and the accompanying prospectus), 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 meet their duties to serve the public as regulated
utilities. The electric utilities recovered these investments by charging their
customers the regulated rates approved by the Pennsylvania Public Utility
Commission.
One of the effects of the deregulation of electricity generation is
that rates are determined by market forces. These market rates may not be high
enough to allow the utilities to recover their investments in generation-related
assets. Accordingly, the utilities may incur a loss in value of their
generation-related assets as a result of the transition from a regulated
environment to competition for electric generation services.
The Pennsylvania Competition Act provides for utilities to recover the
anticipated loss in value of their generation-related assets, known as stranded
costs, by including a new type of charge in their customers' bills. These new
charges are known as competitive transition charges. Utilities are authorized to
securitize the right to recover all or a portion of these charges through the
issuance of transition bonds, such as the securities described in this
prospectus supplement. This right is known as intangible transition property.
Once intangible transition property is securitized, the utility's right to
recover its stranded costs through the competitive transition charges is
replaced by the intangible transition property holder's right to recover the
costs associated with the issuance, credit enhancing and servicing of the
transition bonds through intangible transition charges included in customers'
electric bills. Intangible transition charges reduce the amount of competitive
transition charges and, if necessary, PECO Energy's variable distribution rates,
in order that all charges to customers do not exceed rate caps agreed to by PECO
Energy, which extend to December 31, 2006.
Intangible transition property was created by the Pennsylvania
Competition Act and qualified rate orders issued by the Pennsylvania Public
Utility Commission on May 14, 1998 and March 16, 2000. The first order, referred
to in this prospectus supplement and the accompanying prospectus as the First
QRO, authorized $4 billion of intangible transition property which PECO Energy
sold to PECO Energy Transition Trust in connection with the issuance of the
Series 1999-A Bonds on March 25, 1999. The second order, referred to in this
prospectus supplement and the accompanying prospectus as the 2000 QRO,
authorized an additional $1 billion of intangible transition property, which
PECO Energy sold to PECO Energy Transition Trust in connection with the issuance
of the Series 2000-A Bonds on May 2, 2000. There will be no sale of intangible
transition property in connection with the issuance of the Series ___ Bonds. All
of the intangible transition property held by PECO Energy Transition Trust,
together with other assets, will serve as collateral for all transition bonds
issued under the indenture, including the Series _____ Bonds, the Series 2000-A
Bonds and the Series 1999-A Bonds. The First QRO authorized the refinancing of
transition bonds issued in accordance with that order. The proceeds of the
issuance of the Series ____ Bonds are being used to refinance [$_____ of] the
Series 1999-A Class A-3 Bonds and [$________ of] the Series 1999-A Class A-5
Bonds that were issued on March 25, 1999.
Intangible transition property represents the irrevocable right to
collect intangible transition charges from customers to recover:
o a portion of PECO Energy's stranded costs, and
o an amount sufficient to provide for any credit enhancement, to fund
any reserves, and to pay interest, premiums, if any, costs of
defeasance, servicing fees and other fees, costs and charges
relating to transition bonds.
Intangible transition charges are nonbypassable. Customers cannot avoid paying
them even if they purchase electricity generation services from a supplier other
than PECO Energy. PECO Energy Transition Trust's other property that makes up
the collateral for these securities is described under the subcaption "The
Collateral."
S-5
<PAGE>
For more information on the Pennsylvania Competition Act, intangible
transition property and intangible transition charges, you should review the
material under the captions entitled "Risk Factors," "The Pennsylvania
Competition Act," "PECO Energy's Electric Restructuring Plan" and "The Qualified
Rate Orders and the Intangible Transition Charges" in the accompanying
prospectus.
The Collateral
The Series ______ Bonds as well as all other transition bonds issued under the
indenture will be secured by the collateral, primarily consisting of:
o all the issuer's right, title and interest in and to the intangible
transition property authorized by the qualified rate orders and sold by
PECO Energy to the issuer under the intangible transition property sale
agreement,
o collections of intangible transition charges arising from the
intangible transition property authorized by the qualified rate orders
that are remitted to the issuer under the master servicing agreement
among the issuer, the servicer and any other issuers of transition
bonds that meet specified criteria,
o the issuer's rights under the intangible transition property sale
agreement, except for specified provisions for indemnification of the
issuer,
o the issuer's rights under the master servicing agreement, except for
specified provisions for indemnification of the issuer, and
o specified bank accounts of the issuer and all amounts or investment
property in these accounts, other than cash amounts payable to the
issuer or the servicer described in the accompanying prospectus.
The intangible transition charges collected by the servicer will be allocated
among all series of transition bonds issued by PECO Energy Transition Trust
(which includes the Series ____ Bonds, the Series 2000-A Bonds and the Series
1999-A Bonds) and any other issuer on a Pro Rata basis, as described under the
caption "The Series ______ Bonds--General."
<PAGE>
For a more detailed description of the collateral securing the transition bonds,
you should review the material under the captions "The Qualified Rate Orders and
the Intangible Transition Charges" and "The Indenture--Security" in the
accompanying prospectus. For a summary of the terms of the intangible transition
property 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. For a more
detailed description of the allocation of intangible transition charges among
series of transition bonds, see "The Series ______ Bonds--General" in this
prospectus supplement.
Interest
Holders of each class of this series are expected to receive interest at the
bond rate for that class as set forth on the cover of this prospectus
supplement.
Interest on the Series ______ Bonds will be calculated on the basis of a 360-day
year of twelve 30-day months. For the first payment date, interest will accrue
from the issuance date.
You should also review the material under the caption "The Series ______
Bonds--Interest" in this prospectus supplement.
Principal
On each payment date, to the extent of available funds, the bond trustee will
make principal payments in accordance with the expected amortization schedule
set forth under the caption "The Series ______ Bonds--Principal" in this
prospectus supplement. The actual amount of principal paid on any payment date
on your Series ______ Bond may be less than the amount set forth in the expected
amortization schedule for that payment date.
Other than in the event of a redemption or acceleration upon an event of
default, in no event will the principal paid to any class on any payment date be
greater than the amount necessary to reduce the principal balance of that class
to the amount specified in the expected amortization schedule for that class and
that payment date.
S-6
<PAGE>
Collection Account and Subaccounts
PECO Energy Transition Trust has established a collection account in the bond
trustee's name to hold amounts remitted by the servicer of the collateral
securing all series of transition bonds, including the Series ____ Bonds, the
Series 2000-A Bonds and the Series 1999-A Bonds. The collection account is
comprised of the following subaccounts:
o a general subaccount,
o an overcollateralization subaccount,
o a reserve subaccount,
o a capital subaccount, and
o a series subaccount for each series of transition bonds.
In addition, there will be one or more defeasance subaccounts if required by the
indenture, and subaccounts for the deposit of certain loss amounts and interest
may also be established, if necessary. Amounts in any defeasance account, will
be held for the benefit of the related transition bonds.
Withdrawals from and deposits to these subaccounts will be made as described
under "The Indenture--Allocations and Payments" in the accompanying prospectus.
Credit Enhancement
Overcollateralization. Overcollateralization is the pledge by the issuer of
collateral, in this case intangible transition property, in excess of what is
expected to be needed to cover the repayment of all series of transition bonds.
The overcollateralization for all series of transition bonds will be funded over
the life of the Series ______ Bonds and all other transition bonds issued by the
issuer and is expected to reach 2% of the initial principal balance of the
Series 1999-A Bonds and the Series 2000-A Bonds by the expected final payment
date of the Class A-2 Bonds.
Additional Credit Enhancement. In addition, capital of the issuer of
approximately $25,000,000 is available to make payments on any series of
transition bonds as described in the accompanying prospectus.
Furthermore, intangible transition charges will be subject to periodic review
and adjustment, as described below under "Adjustments to the Intangible
Transition Charges."
<PAGE>
You should also review the material under the captions "The Transition
Bonds--Credit Enhancement" and "The Indenture--Allocations and Payments" in the
accompanying prospectus.
Optional Redemption
The Series ______ Bonds may be redeemed in whole once the outstanding principal
balance of the Series ______ Bonds has been reduced to less than or equal to 5%
of the initial principal balance.
You should also review the material under the caption "The Series ______
Bonds--Optional Redemption" in this prospectus supplement.
Mandatory Redemption
Except as provided below, if the seller is obligated to pay liquidated damages
under the sale agreement, the Series ______ Bonds will be subject to mandatory
redemption in whole at a redemption price equal to the principal balance of the
Series ______ Bonds plus interest at the applicable bond rate accrued to the
redemption date.
If the seller is obligated to pay liquidated damages for a breach of a
representation and warranty which relates to one or more of the qualified rate
orders, but not all of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of the
redemption date, plus accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to mandatory
redemption.
For more information about mandatory redemption, liquidated damages and
indemnification payments by the seller, you should refer to the material under
the caption "The Sale Agreement--Representations and Warranties of the Seller"
in the accompanying prospectus.
S-7
<PAGE>
Intangible Transition Charge Adjustment Process
PECO Energy, as servicer of the intangible transition property on behalf of the
issuer, will make adjustments to the intangible transition charges it bills to
customers, upon approval by the Pennsylvania Public Utility Commission, if PECO
Energy:
(1) collects insufficient intangible transition charges, or
(2) collects excess amounts of intangible transition charges,
in order:
(1) to make timely payments on all series of transition bonds,
(2) to pay fees, costs and charges associated with the transition bonds, and
(3) to fund the overcollateralization subaccount to its required level.
The following table summarizes the adjustment frequency of the intangible
transition charges:
Adjustment Date
Annual Adjustments........................5/14/01 - 5/14/09
Monthly Adjustments of
Series ______ Bonds.................1/1/10 - Termination Date
The annual adjustments through May 14, 2009 are expected to be implemented on or
prior to August 12 of the same year. The monthly adjustments are expected to be
implemented 30 days after a request for the adjustments is filed with the
Pennsylvania Public Utility Commission. See Table 7 in this prospectus
supplement for information regarding the adjustments to intangible transition
changes that have been implemented since the first adjustment date for the
Series 1999-A Bonds on May 14, 1999.
For a more detailed description of the intangible transition charge adjustment
process, you should review the material under the caption "Description of
Intangible Transition Property--Adjustments to the Intangible Transition
Charges" in this prospectus supplement and the material under the caption "The
Qualified Rate Orders and the Intangible Transition Charges--The Intangible
Transition Charges--The Intangible Transition Charge Adjustment Process" in the
accompanying prospectus.
<PAGE>
Tax Status
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax counsel to
PECO Energy and the issuer:
o Interest received by a holder of these transition bonds who 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" referred to herein as "OID".
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 holder of the Series _____ Bonds will be required to include as
income may exceed the amount of interest income actually received
during the taxable year.]
o A holder of the Series _____ 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 transition bonds. If the holder
is a United States taxpayer, then:
(1) the gain will be fully taxable, and
(2) the gain may qualify as long-term capital gain if such holder held
the securities for more than one year.
o If the holder of the Series _____ Bonds is not a United States
taxpayer, interest income 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 advisors
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.
S-8
<PAGE>
For further information regarding the application of U.S. federal and state
income tax laws, you should see the sections captioned "United States Taxation"
and "Material Commonwealth of Pennsylvania Tax Matters" in the accompanying
prospectus.
ERISA Considerations
Employee benefit plans are permitted to purchase transition bonds.
You should also review the material under the caption "ERISA Considerations" in
the accompanying prospectus.
Issuer's and Servicer's Mailing Address and Telephone Number of Principal
Executive Office
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. The mailing address of PECO Energy is
P.O. Box 8699, Philadelphia, Pennsylvania 19101, and its telephone number is
(215) 841-4000.
S-9
<PAGE>
RISK FACTORS
For a discussion of the material risks associated with an investment in
the Series _____ Bonds, you should review the discussion under "Risk Factors,"
which begins on page 18 of the accompanying prospectus.
THE SERIES _____ BONDS
General
The Series ______ Bonds are being issued to refinance all or a part of
the Series 1999-A Bonds Class A-3 and Class A-5, and will be issued and secured
under a base indenture dated as of March 1, 1999 between the issuer and The Bank
of New York, as bond trustee, as supplemented by the Series ______ supplemental
indenture to that base indenture.
Some terms used in this prospectus supplement are defined in the
glossary of defined terms located on page S-29 of this prospectus supplement or
in the glossary of defined terms located on page 116 of the accompanying
prospectus.
The Series ______ Bonds will be issued on the series issuance date in
denominations of $1,000 and integral multiples of $1,000, and will be comprised
of the classes listed above under "Summary of Terms --Securities Offered."
Interest and principal relating to the Series ______ Bonds will be paid
through The Depository Trust Company 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. 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 that nominee. 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 if the Series ___ Bonds are no
longer in book-entry form. The final installment of principal and premium, if
any, payable with respect to any 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 that notice.
Distributions to the Series ______ Subaccount
The issuer has already issued two series of transition bonds, the
Series 1999-A Bonds and the Series 2000-A Bonds, and may issue additional series
in the future, as discussed under "The Transition Bonds" in the accompanying
prospectus.
On each date the servicer is required to remit collections of
intangible transition charges, it will allocate those collections between the
issuer and any other issuer that issues transition bonds secured by intangible
transition property sold by the seller in accordance with their respective
Percentages. On each monthly allocation date for each series of transition bonds
issued under the indenture, after the payment of specified fees and expenses,
the bond trustee will allocate amounts on deposit in the general subaccount of
the collection account Pro Rata based on each series' proportion of the total
allocated principal and interest of all series to each series subaccount for the
payment of interest on and principal of each series of transition bonds issued
under the indenture. Monthly allocation dates fall on the 6th day of each
calendar month, or if that day is not a business day, the following business
day.
For a more detailed description of the allocation of intangible
transition charges among series of transition bonds issued under the indenture,
see "The Indenture--Allocations and Payments" in the accompanying prospectus.
Distributions From the Series ______ Subaccount
Amounts distributed from the series subaccount as described in "The
Indenture--Allocations and Payments" in the accompanying prospectus will be
applied among the classes of the Series ______ Bonds on each payment date as
follows:
S-10
<PAGE>
(1) interest, to each class on a pro rata basis based on the
amount of interest payable to that class as described under
"--Interest" in this section, and
(2) principal, to each class as described under "--Principal"
in this section.
Interest
Interest on each class of the Series _____ Bonds will accrue from the
series issuance date at the respective bond rates indicated in the section at
the beginning of this prospectus supplement entitled "Summary of
Terms--Securities Offered." The interest will be payable on each payment date,
commencing September 1, 2001, to the persons in whose names the Series ______
Bonds of each class are registered at the close of business on the applicable
record date.
Interest on the Series _____ Bonds will be calculated on the basis of a
360-day year of twelve 30-day months.
The interest accrual period for any payment date shall be the period
from and including the preceding payment date--or, in the case of the first
payment date, from and including the series issuance date--to and excluding that
payment date.
The record date for any payment date shall be the close of business on
the business day prior to that payment date.
The allocated interest balance on the series issuance date and on each
monthly allocation date for the Series 1999-A Bonds, the Series 2000-A Bonds and
the Series _____ Bonds is shown below. These balances are used for the
allocation of funds from the general subaccount to the series subaccounts on
each monthly allocation date. There are no consequences if the full amount of
these allocations is not made on any monthly allocation date. In addition, these
balances may change from time to time with the issuance of each new series, the
redemption or refunding of a class or series and each periodic adjustment to the
intangible transition charges.
TABLE 1
Monthly Allocated Interest Balance
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A Series _____
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance Interest Balance Interest Balance
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
April 1, 2001........................
May 1, 2001..........................
June 1, 2001.........................
July 1, 2001.........................
August 1, 2001.......................
September 1, 2001....................
October 1, 2001......................
November 1, 2001.....................
December 1, 2001.....................
January 1, 2002......................
February 1, 2002.....................
March 1, 2002........................
April 1, 2002........................
May 1, 2002..........................
June 1, 2002.........................
July 1, 2002.........................
August 1, 2002.......................
September 1, 2002....................
October 1, 2002......................
November 1, 2002.....................
December 1, 2002.....................
January 1, 2003......................
February 1, 2003.....................
March 1, 2003........................
April 1, 2003........................
</TABLE>
S-11
<PAGE>
Monthly Allocated Interest Balance
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A Series _____
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance Interest Balance Interest Balance
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
May 1, 2003..........................
June 1, 2003.........................
July 1, 2003.........................
August 1, 2003.......................
September 1, 2003....................
October 1, 2003......................
November 1, 2003.....................
December 1, 2003.....................
January 1, 2004......................
February 1, 2004.....................
March 1, 2004........................
April 1, 2004........................
May 1, 2004.........................
June 1, 2004........................
July 1, 2004........................
August 1, 2004......................
September 1, 2004...................
October 1, 2004.....................
November 1, 2004....................
December 1, 2004....................
January 1, 2005.....................
February 1, 2005....................
March 1, 2005.......................
April 1, 2005.......................
May 1, 2005.........................
June 1, 2005........................
July 1, 2005........................
August 1, 2005......................
September 1, 2005...................
October 1, 2005.....................
November 1, 2005....................
December 1, 2005....................
January 1, 2006.....................
February 1, 2006....................
March 1, 2006.......................
April 1, 2006.......................
May 1, 2006.........................
June 1, 2006........................
July 1, 2006........................
August 1, 2006......................
September 1, 2006...................
October 1, 2006.....................
November 1, 2006....................
December 1, 2006....................
January 1, 2007.....................
February 1, 2007....................
March 1, 2007.......................
April 1, 2007.......................
May 1, 2007.........................
June 1, 2007........................
July 1, 2007........................
August 1, 2007......................
September 1, 2007...................
October 1, 2007.....................
November 1, 2007....................
December 1, 2007....................
January 1, 2008.....................
February 1, 2008....................
March 1, 2008.......................
April 1, 2008.......................
May 1, 2008.........................
June 1, 2008........................
July 1, 2008........................
August 1, 2008......................
September 1, 2008...................
</TABLE>
S-12
<PAGE>
Monthly Allocated Interest Balance
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A Series _____
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance Interest Balance Interest Balance
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
October 1, 2008.....................
November 1, 2008....................
December 1, 2008....................
January 1, 2009.....................
February 1, 2009....................
March 1, 2009.......................
April 1, 2009.......................
May 1, 2009.........................
June 1, 2009........................
July 1, 2009........................
August 1, 2009......................
September 1, 2009...................
October 1, 2009.....................
November 1, 2009....................
December 1, 2009....................
January 1, 2010.....................
February 1, 2010....................
March 1, 2010.......................
April 1, 2010.......................
May 1, 2010.........................
June 1, 2010........................
July 1, 2010........................
August 1, 2010......................
September 1, 2010...................
</TABLE>
Principal
On each payment date, the bond trustee shall, as of the related record
date and subject to the availability of funds in the Series ______ subaccount,
make principal payments on each class of Series ______ Bonds in accordance with
the expected amortization schedule.
Available funds in the Series ______ subaccount will be allocated in a
sequential manner, to the extent funds are available, as follows:
(1) To the holders of the Series _____ Bonds, Class A-1, until
this class is retired in full, and
(2) To the holders of the Series _____ Bonds, Class A-2, until
this class is retired in full.
The principal payment on any class on a payment date will not be
greater than the amount necessary to reduce the class principal balance of that
class to the amount specified in the expected amortization schedule for that
class and payment date unless an acceleration of payments following an event of
default or a redemption occurs.
Class principal balance means the initial principal balance of a class,
reduced by principal previously distributed to that class in accordance with the
terms of the indenture.
The entire unpaid principal amount for any class of the Series _____
Bonds will be due and payable on the applicable class termination date.
Upon acceleration of payments following a default under the indenture,
principal payments on each class of each series of transition bonds will be made
on a pro rata basis based on the respective outstanding principal balance for
each class and each series of transition bonds as of the prior payment date.
S-13
<PAGE>
TABLE 2
Expected Amortization Schedule
Outstanding Class Principal Balances
<TABLE>
<CAPTION>
Issuance or Payment Date Class A-1 Class A-2 Series _____
------------------------ --------- --------- ------------
<S> <C> <C> <C>
Series Issuance Date.............
September 1, 2001................
March 1, 2002....................
September 1, 2002................
March 1, 2003....................
September 1, 2003................
March 1, 2004....................
September 1, 2004................
March 1, 2005....................
September 1, 2005................
March 1, 2006....................
September 1, 2006................
March 1, 2007....................
September 1, 2007................
March 1, 2008....................
September 1, 2008................
March 1, 2009....................
September 1, 2009................
March 1, 2010....................
September 1, 2010................
</TABLE>
For various reasons, the actual class principal balance of any class of
the Series _____ Bonds may not be reduced to the amounts indicated in the
foregoing table on any payment date. Accordingly, the actual reductions in 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.
S-14
<PAGE>
The allocated principal balance as of the series issuance date and on
each monthly allocation date for the Series 1999-A Bonds, the Series 2000-A
Bonds and the Series _____ Bonds is shown below. These balances are used for the
allocation of funds from the general subaccount to the series subaccounts on
each monthly allocation date. There are no consequences if the full amount of
the allocations is not made on any monthly allocation date. In addition, these
balances may change from time to time with the issuance of each new series, the
redemption or refunding of a class or series and each adjustment to the
intangible transition charges.
TABLE 3
Monthly Allocated Principal Balance
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A Series _____
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance Principal Balance Principal Balance
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
April 1, 2001.......................
May 1, 2001.........................
June 1, 2001........................
July 1, 2001........................
August 1, 2001......................
September 1, 2001...................
October 1, 2001.....................
November 1, 2001....................
December 1, 2001....................
January 1, 2002.....................
February 1, 2002....................
March 1, 2002.......................
April 1, 2002.......................
May 1, 2002.........................
June 1, 2002........................
July 1, 2002........................
August 1, 2002......................
September 1, 2002...................
October 1, 2002.....................
November 1, 2002....................
December 1, 2002....................
January 1, 2003.....................
February 1, 2003....................
March 1, 2003.......................
April 1, 2003.......................
May 1, 2003.........................
June 1, 2003........................
July 1, 2003........................
August 1, 2003......................
September 1, 2003...................
October 1, 2003.....................
November 1, 2003....................
December 1, 2003....................
January 1, 2004.....................
February 1, 2004....................
March 1, 2004.......................
April 1, 2004.......................
May 1, 2004.........................
June 1, 2004........................
July 1, 2004........................
August 1, 2004......................
September 1, 2004...................
October 1, 2004.....................
November 1, 2004....................
December 1, 2004....................
January 1, 2005.....................
February 1, 2005....................
March 1, 2005.......................
April 1, 2005.......................
May 1, 2005........................
June 1, 2005.......................
July 1, 2005.......................
August 1, 2005.....................
September 1, 2005..................
October 1, 2005....................
November 1, 2005...................
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A Series _____
Monthly Allocated Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance Principal Balance Principal Balance
----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
December 1, 2005...................
January 1, 2006....................
February 1, 2006...................
March 1, 2006......................
April 1, 2006......................
May 1, 2006........................
June 1, 2006.......................
July 1, 2006.......................
August 1, 2006.....................
September 1, 2006..................
October 1, 2006....................
November 1, 2006...................
December 1, 2006...................
January 1, 2007....................
February 1, 2007...................
March 1, 2007......................
April 1, 2007......................
May 1, 2007........................
June 1, 2007.......................
July 1, 2007.......................
August 1, 2007.....................
September 1, 2007..................
October 1, 2007....................
November 1, 2007...................
December 1, 2007...................
January 1, 2008....................
February 1, 2008...................
March 1, 2008......................
April 1, 2008......................
May 1, 2008........................
June 1, 2008.......................
July 1, 2008.......................
August 1, 2008.....................
September 1, 2008..................
October 1, 2008....................
November 1, 2008...................
December 1, 2008...................
January 1, 2009....................
February 1, 2009...................
March 1, 2009......................
April 1, 2009......................
May 1, 2009........................
June 1, 2009.......................
July 1, 2009.......................
August 1, 2009.....................
September 1, 2009..................
October 1, 2009....................
November 1, 2009...................
December 1, 2009...................
January 1, 2010....................
February 1, 2010...................
March 1, 2010......................
April 1, 2010......................
May 1, 2010........................
June 1, 2010.......................
July 1, 2010.......................
August 1, 2010.....................
September 1, 2010..................
</TABLE>
Optional Redemption
The Series ______ Bonds may be redeemed in whole on any payment date
commencing with the payment date on which the outstanding principal balance of
the Series _____ Bonds, after giving effect to payments that would otherwise be
made on that date, has been reduced to less than or equal to 5% of the initial
principal balance of the Series _____ Bonds. Notice of redemption will be given
by the issuer to the bond trustee and Standard & Poor's Rating Services, Moody's
Investors Service Inc. and Fitch, Inc. On or prior to the date notice of
redemption is given, the issuer will deposit with the bond trustee the
redemption price, plus accrued interest to the redemption date, for the Series
_____ Bonds.
S-16
<PAGE>
Mandatory Redemption
Except as provided below, if the seller, PECO Energy, 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 balance thereof plus interest at the applicable bond rate, accrued to
the redemption date.
If the seller is obligated to pay liquidated damages for a breach of a
representation and warranty which relates to one or more of the qualified rate
orders, but not all of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of the
redemption date, plus accrued interest to the redemption date, and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to mandatory
redemption.
o The seller will be obligated to pay liquidated damages as described in
"The Sale Agreement--Representations and Warranties of the Seller" in
the accompanying prospectus.
Overcollateralization
The amount of overcollateralization for all series of transition bonds
will be funded over the life of the Series _____ Bonds and all other transition
bonds issued by the issuer and is expected to reach 2% of the initial principal
balance of the Series 1999-A Bonds and the Series 2000-A Bonds by the expected
final payment date of the Class A-2 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 expected life of each
series of transition bonds. Amounts of intangible transition charges collected
in any period in order to fund overcollateralization amounts will be available
for all series of transition bonds on a pro rata basis without any preference.
The calculated overcollateralization level for each payment date
related to the Series 1999-A Bonds, the Series 2000-A Bonds and the Series _____
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. The balances in Table 4A below are for the allocation of funds
from the general subaccount on each monthly allocation date. There are no
consequences if the full amount of these allocations is not made on any monthly
allocation date. In addition, these balances may change from time to time with
the issuance of each new series, the redemption or refunding of a class or
series and each periodic adjustment to the intangible transition charges. If
amounts on deposit in the general subaccount, the interest deposit subaccount
(for the payment of Interest), the loss subaccount and the reserve subaccount
are insufficient to make scheduled distributions to the series subaccounts and
to pay expenses of the issuer, the bond trustee and the servicer and other
related fees and expenses, the bond trustee will draw on amounts in the
overcollateralization subaccount on each monthly allocation date.
For a more detailed description of overcollateralization, see the
material under the captions "The Transition Bonds--Credit Enhancement" and "The
Indenture--Allocations and Payments" in the accompanying prospectus.
S-17
<PAGE>
TABLE 4
Calculated Overcollateralization Level
<TABLE>
<CAPTION>
Series 1999-A,
Series 2000-A and
Series _____ Calculated
Issuance Or Payment Date Overcollateralization Level
------------------------ ---------------------------
<S> <C>
Series Issuance Date.................................
September 1, 2001....................................
March 1, 2002........................................
September 1, 2002....................................
March 1, 2003........................................
September 1, 2003....................................
March 1, 2004........................................
September 1, 2004....................................
March 1, 2005........................................
September 1, 2005....................................
March 1, 2006........................................
September 1, 2006....................................
March 1, 2007........................................
September 1, 2007....................................
March 1, 2008........................................
September 1, 2008....................................
March 1, 2009........................................
September 1, 2009....................................
March 1, 2010........................................
September 1, 2010....................................
</TABLE>
TABLE 4A
Monthly Allocated Overcollateralization Balance
<TABLE>
<CAPTION>
Series 1999-A,
Series 2000-A
and Series _____
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
----------------------- -----------------------------
<S> <C>
April 1, 2001........................................
May 1, 2001..........................................
June 1, 2001.........................................
July 1, 2001.........................................
August 1, 2001.......................................
September 1, 2001....................................
October 1, 2001......................................
November 1, 2001.....................................
December 1, 2001.....................................
January 1, 2002......................................
February 1, 2002.....................................
March 1, 2002........................................
April 1, 2002........................................
May 1, 2002..........................................
June 1, 2002.........................................
July 1, 2002.........................................
August 1, 2002.......................................
September 1, 2002....................................
October 1, 2002......................................
November 1, 2002.....................................
December 1, 2002.....................................
January 1, 2003......................................
February 1, 2003.....................................
March 1, 2003........................................
April 1, 2003........................................
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
Series 1999-A,
Series 2000-A
and Series _____
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
----------------------- ------------------------------
<S> <C>
May 1, 2003...........................................
June 1, 2003.........................................
July 1, 2003.........................................
August 1, 2003.......................................
September 1, 2003....................................
October 1, 2003......................................
November 1, 2003.....................................
December 1, 2003.....................................
January 1, 2004......................................
February 1, 2004.....................................
March 1, 2004........................................
April 1, 2004........................................
May 1, 2004..........................................
June 1, 2004.........................................
July 1, 2004.........................................
August 1, 2004.......................................
September 1, 2004....................................
October 1, 2004......................................
November 1, 2004.....................................
December 1, 2004.....................................
January 1, 2005......................................
February 1, 2005.....................................
March 1, 2005........................................
April 1, 2005........................................
May 1, 2005..........................................
June 1, 2005.........................................
July 1, 2005.........................................
August 1, 2005.......................................
September 1, 2005....................................
October 1, 2005......................................
November 1, 2005.....................................
December 1, 2005.....................................
January 1, 2006......................................
February 1, 2006.....................................
March 1, 2006........................................
April 1, 2006........................................
May 1, 2006..........................................
June 1, 2006.........................................
July 1, 2006.........................................
August 1, 2006.......................................
September 1, 2006....................................
October 1, 2006......................................
November 1, 2006.....................................
December 1, 2006.....................................
January 1, 2007......................................
February 1, 2007.....................................
March 1, 2007........................................
April 1, 2007........................................
May 1, 2007..........................................
June 1, 2007.........................................
July 1, 2007.........................................
August 1, 2007.......................................
September 1, 2007....................................
October 1, 2007......................................
November 1, 2007.....................................
December 1, 2007.....................................
January 1, 2008......................................
February 1, 2008.....................................
March 1, 2008........................................
April 1, 2008........................................
May 1, 2008..........................................
June 1, 2008.........................................
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
Series 1999-A,
Series 2000-A
and Series _____
Monthly Allocated
Monthly Allocation Date Overcollateralization Balance
----------------------- ------------------------------
<S> <C>
July 1, 2008.........................................
November 1, 2008.....................................
December 1, 2008.....................................
January 1, 2009......................................
February 1, 2009.....................................
March 1, 2009........................................
April 1, 2009........................................
May 1, 2009..........................................
June 1, 2009.........................................
July 1, 2009.........................................
August 1, 2009.......................................
September 1, 2009....................................
October 1, 2009......................................
November 1, 2009.....................................
December 1, 2009.....................................
January 1, 2010......................................
February 1, 2010.....................................
March 1, 2010........................................
April 1, 2010........................................
May 1, 2010..........................................
June 1, 2010.........................................
July 1, 2010.........................................
August 1, 2010.......................................
September 1, 2010....................................
</TABLE>
Other Credit Enhancement
Reserve Subaccount. Collections of intangible transition charges
available on any payment date above that amount necessary to pay the:
(1) amounts payable for expenses of the bond trustee, the issuer
trustee and the servicer and other fees and expenses,
(2) amounts distributable to the transition bondholders of all series
for principal and interest on the next payment date, and
(3) amounts allocable to the overcollateralization subaccount
will be allocated to the reserve subaccount. As of September 30, 2000, the
balance in the reserve subaccount was $15,210,321.
On each monthly allocation date, the bond trustee is required to draw
on amounts in the reserve subaccount, if any, to the extent amounts available in
the general subaccount, the interest deposit account (for the payment of
Interest) and the loss subaccount are insufficient to make scheduled payments to
the transition bondholders of all series, meet credit enhancement funding
requirements and pay expenses of the issuer, the bond trustee, the issuer
trustee, the servicer and other specified fees and expenses. See "The
Indenture--Allocations and Payments" in the accompanying prospectus.
Capital Subaccount. As of September 30, 2000, the balance in the
capital subaccount was $25,000,000. On each monthly allocation date, the bond
trustee is required to draw on amounts in the capital subaccount, if any, to the
extent amounts available in the general subaccount, the interest deposit
subaccount (for the payment of Interest), the loss subaccount, the reserve
subaccount and the overcollateralization subaccount are insufficient to make
scheduled payments to the transition bondholders of all series of transition
bonds, meet credit enhancement funding requirements and pay expenses of the
issuer, the bond trustee, the issuer trustee and the servicer and other
specified fees and expenses.
S-20
<PAGE>
Reports to Holders of Series _____ Bonds
On or prior to each payment date, the bond trustee is required to
prepare and provide statements to the holders of record of the Series _____
Bonds. These statements will be available to the beneficial owners of the Series
_____ Bonds upon request to the bond trustee or the servicer. The financial
information provided will not be examined or reported upon by any independent
public accountant and no independent public accountant will give an opinion on
this financial information.
For a more detailed description of the statements 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.
S-21
<PAGE>
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
The Intangible Transition Charges
PECO Energy's customers currently belong to one of two customer
categories for purposes of adjusting intangible transition charges. These
categories are (a) residential and (b) commercial and industrial. Each customer
category is further divided into rate classes. The qualified transition expenses
authorized in PECO Energy's two qualified rate orders issued by the Pennsylvania
Public Utility Commission are to be recovered from customers in each of PECO
Energy's separate rate classes. The intangible transition charges are calculated
by determining the total amount of intangible transition charges required to be
billed to each customer rate class, based on current estimates of usage and
payment patterns, in order to generate collections of intangible transition
charges sufficient to ensure timely recovery of qualified transition expenses in
accordance with the expected amortization schedules. 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 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 that customer.
The intangible transition charges, as periodically adjusted first
reduces competitive transition charges, then to the extent intangible transition
charges exceed those amounts, reduces variable distribution charges. 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,
collections of intangible transition charges vary. Variations in collections of
intangible transition charges are addressed by recalculating the percentages
applied to customers' bills on each calculation date. See Tables 5 and 6 and
"--Adjustments to Intangible Transition Changes" in this section and "The
Qualified Rate Orders and the Intangible Transition Charges--The Intangible
Transition Charges--The Intangible Transition Charge Adjustment Process" in the
accompanying prospectus.
The unbundled customer bills that were sent out with billing cycles
beginning January 1, 1999 separately identified charges for generation,
transmission and distribution and other services. When intangible transition
charges are billed to customers, those charges are applied to total projected
revenue per rate class, exclusive of transmission, energy, capacity and fixed
distribution charges. This is reflected in the calculation of intangible
transition charges. The cash flow from intangible transition charges are
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 these intangible transition charges are billed.
See "The Qualified Rate Orders and the Intangible Transition
Charges--The Intangible Transition Charges--The Intangible Transition Charge
Adjustment Process" in the accompanying prospectus.
The following table sets forth the average monthly bill, including
gross receipts tax, and the average monthly intangible transition charges,
including gross receipts tax, billed for the nine month period ended September
30, 2000 and upon issuance of the Series _____ Bonds for each rate category.
TABLE 5
Average Intangible Transition Charges
<TABLE>
<CAPTION>
Nine Month Period Ended Projected Monthly Intangible
Nine Month Period Ended September 30, 2000 Transition Charges Billed
September 30, 2000 Average Monthly After Initial Issuance of
Customer Category Average Monthly Bill Intangible Transition Charges Series __________ Bonds
----------------- -------------------- ----------------------------- -----------------------
<S> <C> <C> <C>
Residential.
Commercial and Industrial.
</TABLE>
S-22
<PAGE>
The following are estimates of projected average intangible transition
charges--expressed as a percentage of variable distribution charges and
competitive transition charges applicable to each rate class--that will be
imposed on customers in each customer category beginning with the bill rendered
approximately ten days after the series issuance date of the Series _____ Bonds.
These percentages, as well as the dollar amounts in the prior sentences, include
the intangible transition charges imposed in connection with the Series 1999-A
Bonds and the Series 2000-A Bonds.
TABLE 6
Projected Average Intangible Transition Charges
for the Period March __, 2001 to August 14, 2001
Residential Customers
ITC
Rate Class Percentage
---------- ----------
Rate R............................................... _____%
Rate R-H............................................. _____%
Rate OP.............................................. _____%
Commercial and Industrial Customers
ITC
Rate Class Percentage
---------- ----------
Rate GS.............................................. _____%
Rate POL............................................. _____%
Rate SL-P............................................ _____%
Rate SL-S............................................ _____%
Rate SL-E............................................ _____%
Rate TL.............................................. _____%
Rate BLI(1).......................................... _____%
Rate PD.............................................. _____%
Rate HT.............................................. _____%
Rate EP.............................................. _____%
--------------------
(1) No intangible transition charges are or will be imposed on Rate BLI
customers.
Rate Class Descriptions
PECO Energy's customer base is currently divided into two categories
for purposes of adjusting intangible transition charges (a) residential and (b)
commercial and industrial. Rate categories and classes within those categories
are approved by the Pennsylvania Public Utility Commission and are subject to
change. These changes will be reflected in any adjustment request filed with the
Pennsylvania Public Utility Commission by the servicer. Although in the
settlement of merger between PECO Energy and Unicom Corporation, PECO Energy
agreed to reduce its customer categories from three to two (see "PECO Energy's
Electric Restructuring Plan -Subsequent Events" in the accompanying prospectus),
the current rate classes (indicated above) have remained unchanged since April
20, 1990. 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 (and Rate R-H) also includes payment-troubled low income
customers receiving discounted rates under the Customer Assistance 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.
S-23
<PAGE>
Rate OP--Off-Peak Service: Available in conjunction with other
residential service rates, Rates R and R-H and, in specified cases, Rate GS, for
a customer receiving delivery at certain voltage levels during off-peak periods.
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. Accounts in this rate class will be transferred to Rate SL-E on
July 1, 2001, under the terms of the settlement order concerning the merger of
PECO Energy and Unicom Corporation and PECO Energy's proposed corporate
restructuring. See "The Seller and Servicer PECO Energy Company -PECO Energy's
Corporate Restructuring Plan" in the accompanying prospectus.
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 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.
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 actual collections of intangible transition charges are intended to
be neither more nor less than the amount necessary to pay the principal of the
transition bonds of each series in accordance with the expected amortization
S-24
<PAGE>
schedule, to pay interest on each series and to fund the related expenses and
reserves. In order to enhance the likelihood that the appropriate amount of
intangible transition charges will be collected, the master servicing agreement
requires the servicer to seek, and the Pennsylvania Competition Act and PECO
Energy's two qualified rate orders require the Pennsylvania Public Utility
Commission to approve, annual adjustments to the intangible transition charges
within 90 days of the request and does not set forth any procedure for approval
in a shorter time period. There can be no assurance that the Pennsylvania Public
Utility Commission will approve adjustments any more frequently.
These adjustments will be based on actual collections of intangible
transition charges 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 all series of transition bonds. In addition,
PECO Energy's qualified rate orders provide that, commencing in the final
calendar year of collections of intangible transition charges for any series of
transition bonds, adjustments may be made quarterly or, if necessary, monthly.
See "The Master Servicing Agreement--Servicing Procedures--Intangible Transition
Charge Adjustment Process" in the accompanying prospectus.
The following table reflects information regarding the adjustments to
the intangible transition charges assessed on each rate class within the
customer categories that have been implemented since the first adjustment date
for the Series 1999-A Bonds on May 14, 1999:
TABLE 7
ADJUSTMENTS TO INTANGIBLE TRANSITION CHARGES
Intangible Transition Charges
<TABLE>
<CAPTION>
May 15, 2000
May 14, 1999 (Second Series ____
--------
Series 1999-A (First Adjustment Series Adjustment Issuance
------------------ 2000-A ----------- --------
Issuance Date Date) Issuance Date Date) Date
------------- ----- ------------- ----- ----
<S> <C> <C> <C> <C> <C>
Residential Customers
Rate Class
Rate R...................................... 26.52% 19.06% 19.81%
Rate R-H.................................... 27.94% 20.03% 25.24%
Rate OP..................................... 0.00% 0.00% 0.00%
Commercial and Industrial Customers
Rate Class
Rate GS..................................... 51.93% 36.30% 45.31%
Rate POL.................................... 0.00% 0.00% 0.00%
Rate SL-P................................... 0.00% 0.00% 0.00%
Rate SL-S................................... 0.00% 0.00% 0.00%
Rate SL-E................................... 0.00% 0.00% 0.00%
Rate TL..................................... 46.37% 33.08% 43.29%
Rate BLI(1)................................. 0.00% 0.00% 0.00%
Rate PD..................................... 53.68% 37.94% 48.61%
Rate HT..................................... 61.95% 43.38% 59.22%
Rate EP..................................... 51.17% 36.88% 47.90%
</TABLE>
---------------
(1) No intangible transition charges are or will be imposed on Rate BLI
customers.
S-25
<PAGE>
DESCRIPTION OF PECO ENERGY'S BUSINESS
For a discussion of PECO Energy, you should review the material under
the caption "The Seller and Servicer PECO Energy Company" in the accompanying
prospectus.
SERVICING
Monthly Servicing Fee
On each monthly allocation date, the servicer is entitled to receive
the monthly servicing fee in an amount equal to:
o one-twelfth of 0.25% of the outstanding principal balance of all
series of transition bonds for so long as intangible transition
charges are included in electric bills sent to customers by the
servicer, and
o one-twelfth of 1.50% of the outstanding principal balance of all
series of transition bonds if intangible transition charges are
not included in such electric bills.
The monthly servicing fee, together with any portion of the monthly
servicing fee that remains unpaid from prior monthly allocation dates, is paid
solely to the extent funds are available for this purpose as described under
"The Indenture--Allocations and Payments" in the accompanying prospectus. The
monthly servicing fee is paid prior to the distribution of any amounts of
interest on and principal of any series of transition bonds. The servicer is
entitled to retain as additional compensation net investment income on
intangible transition charges received by the servicer prior to remittance of
the intangible transition charges to the collection account and the portion of
late fees, if any, paid by customers relating to the intangible transition
charges.
Servicer Advances
The servicer will not make any advances of interest or principal on the
Series ______ Bonds.
REFINANCING OF THE SERIES 1999-A
CLASS A-3 AND CLASS A-5
TRANSITION BONDS
The issuer will refinance $______ principal amount of the Series 1999-A
Class A-3 Bonds and $______ principal amount of the Series 1999-A Class A-5
Bonds in accordance with their terms. The remaining $______ principal amount of
the Series 1999-A Class A-3 Bonds and $______ principal amount of the Series
1999-A Class A-5 Bonds will remain outstanding. The collateral, described above
under "Summary of Terms--The Collateral", secures all transition bonds issued
under the indenture, including the Series 1999-A Bonds remaining outstanding,
the Series 2000-A Bonds and the Series ____ Bonds. No additional intangible
transition property will be purchased in connection with the issuance of the
Series ____ Bonds, rather the proceeds of the issuance of the Series ____ Bonds
will be deposited with the trustee in accordance with the terms of the indenture
and used to effect the refinancings described above. Amounts on deposit with the
trustee for this purpose will not be pledged as collateral for the Series ____
Bonds and will not be available for the purpose of paying principal or interest
on the Series ____ Bonds.
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<PAGE>
UNDERWRITING THE SERIES ____________ BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among PECO Energy, the issuer and the underwriters named below, for
whom ________________________, is acting as the representative, the issuer has
agreed to sell to the underwriters, and the underwriters have severally agreed
to purchase, the principal amounts of the Series ________ Bonds set forth
opposite each underwriter's name below:
Name Class A-1 Class A-2
---- --------- ---------
Total...................
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' Sales Price for the Series ______ Bonds. The
underwriters propose to offer the Series ______ Bonds in part directly to retail
purchasers at the initial public offering prices set forth on the cover page of
this prospectus supplement, and in part to some securities dealers at a price
less a concession not in excess of: [to be provided at issuance]
The underwriters may allow and the dealers may reallow a concession to
some brokers and dealers not in excess of:
[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.
No Assurance as to Resale Price or Resale Liquidity for the Series
______ Bonds. The Series ______ Bonds are a new issue of securities with no
established trading market. No series of transition bonds is currently listed on
a securities exchange, and the Series ______ Bonds also 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.
S-27
<PAGE>
Various Types of Underwriter Transactions Which May Affect the Price of
the Series ______ Bonds. The underwriters may engage in overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids with respect to the Series ______ Bonds in accordance with
Regulation M under the Securities Exchange Act of 1934, as amended.
Overallotment transactions involve syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the Series ______ Bonds so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
the Series ______ Bonds in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
Series ______ Bonds originally sold by the syndicate member are purchased in a
syndicate covering transaction. These overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
prices of the Series ______ Bonds to be higher than they would otherwise be in
the absence of these transactions. None of PECO Energy, the issuer, the issuer
trustee or the bond trustee or any of the underwriters represent that the
underwriters will engage in any of these transactions or that these
transactions, once commenced, will not be discontinued without notice at any
time.
In the ordinary course of business, each underwriter and its affiliates
have engaged and may engage in investment banking and commercial banking
transactions with the issuer and its affiliates, including PECO Energy. In
addition, each underwriter may from time to time take positions in the Series
______ Bonds.
The issuer and PECO Energy have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933, as amended.
RATINGS
It is a condition of any underwriter's obligation to purchase that the
Series ______ Bonds be rated "AAA" by Standard & Poor's, "AAA" by Fitch, Inc.
and "Aaa" by Moody's, which, in each case, is in one of the four highest rating
categories of that 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 ratings 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 that 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 class
termination date and the ability to make timely interest payments.
S-28
<PAGE>
GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus
supplement.
"2000 QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on March 16, 2000.
"First QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on May 14, 1998.
"Interest" means, for any monthly allocation date for any series of
transition bonds, the sum of, without duplication:
o in the case of any series or class not described in the next
subparagraph, an amount that would cause the amount on deposit for
interest in the series subaccount, without regard to investment
income, for that series to equal the monthly allocated interest
balance for that series and that monthly allocation date,
o in the case of any series or class subject to a swap agreement
pursuant to which the issuer is receiving payments due thereunder
from the applicable counterparty, the regular fixed payment to a
related counterparty without netting, but not payment in respect
of breakage or termination of the related swap agreement,
o if the transition bonds have been declared due and payable, all
accrued and unpaid interest,
o for a series to be redeemed prior to the next monthly allocation
date, the amount of interest that will be payable as interest on
that series on the redemption date, and
o any interest due on that series on a payment date or other date
for the payment of interest and not paid and, to the extent
permitted by law, interest on that amount.
"Percentage" means, for the issuer or any other issuer of transition
bonds, the percentage equivalent of a fraction:
o 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 any other issuer, as
applicable, and
o 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 other issuers.
"Principal" means, for any monthly allocation date and any series of
transition bonds, an amount that:
o would cause the amount on deposit for principal in the series
subaccount, without regard to investment income, for that series
to equal the monthly allocated principal balance for that series
and that monthly allocation date,
o if the transition bonds have been declared due and payable, the
principal amount of that series,
o for a series to be redeemed prior to the next monthly allocation
date, the amount that will be payable as principal of that series
on the redemption date, or
o any principal due on that series on a payment date or other date
for the payment of principal and not paid.
S-29
<PAGE>
"Pro Rata" means, for any series of transition bonds, a ratio,
o in the case of the amount of Interest allocated to the series
subaccounts, the numerator of which is the monthly allocated
interest balance for that series for that monthly allocation date
and the denominator of which is the sum of monthly interest
balances for all series for that monthly allocation date,
o in the case of the amount of Principal allocated to the series
subaccounts as a result of an acceleration or redemption, the
numerator of which is the amount allocable for that series as a
result of that event and the denominator of which is the amount
allocable to all series as a result of acceleration or redemption,
and
o in the case of the amount of Principal otherwise allocated to the
series subaccounts, the numerator of which is the monthly
allocated principal balance for that series for that monthly
allocation date and the denominator of which is the sum of monthly
allocated principal balances for all series for that monthly
allocation date.
"qualified rate orders" means the qualified rate order issued by the
Pennsylvania Public Utility Commission to PECO Energy on May 14, 1998, the
qualified rate order issued by the Pennsylvania Public Utility Commission to
PECO Energy on March 16, 2000 and any subsequent order of the Pennsylvania
Public Utility Commission, adopted in accordance with the Pennsylvania
Competition Act, which creates intangible transition property and authorizes the
imposition and collection of intangible transition charges by PECO Energy or its
assignee. This term also includes any order that is supplemental to any of the
foregoing.
"qualified transition expenses," as set forth in PECO Energy's
qualified rate orders, means, collectively, the aggregate principal amount of
the transition bonds and an amount sufficient to provide for any credit
enhancement, to fund any reserves, and to pay interest, premiums, if any, costs
of defeasance, servicing fees and other fees, costs and charges relating to all
series of transition bonds.
"series of transition bonds" means any of the Series ______ Bonds, the
Series 2000-A Bonds, the Series 1999-A Bonds and any other series of transition
bonds which are issued under and are subject to the terms of the indenture.
S-30
<PAGE>
Prospectus
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller And Servicer
UP TO $___________ OF TRANSITION BONDS ISSUABLE IN SERIES
The Issuer o has issued transition bonds--the Series
1999-A Bonds and the Series 2000-A
Bonds--and may periodically issue
additional transition bonds in one or
more series with one or more classes,
o owns:
o intangible transition property,
which is the right, created by
Pennsylvania's Competition Act and
the qualified rate orders issued by
the Pennsylvania Public Utility
Commission for the Series 1999-A
Bonds and the Series 2000-A Bonds,
respectively, to collect intangible
transition charges in amounts
designed to be sufficient to repay
the related series of transition
bonds, to pay other expenses
specified in the indenture and to
fund the trust accounts,
o collections of intangible transition
charges,
o its rights under the sale agreement
and master servicing agreement,
o trust accounts held by the bond
trustee, and
o if so stated in the applicable
prospectus supplement, other credit
enhancement.
The Transition
Bonds Offered by
This Prospectus o will be issued to refinance Series
1999-A Bonds Class A-3 and Class A-5,
in whole or in part,
o will be payable only from assets of the
issuer,
o will be supported by trust accounts held
by the trustee as security for the
transition bonds, and, if so stated in
the applicable prospectus supplement,
other credit enhancement,
o will be secured equally with all other
transition bonds issued under the
indenture, and
o will be issued in series, each of which
the issuer may issue without the consent
of existing transition bondholders.
This prospectus applies only to transition bonds offered by this
prospectus.
Consider carefully the risk factors beginning on page 18 of this
prospectus.
This prospectus may be used to offer and sell a series of transition
bonds only if accompanied by the prospectus supplement for that series
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2001.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.........................................................................................2
RISK FACTORS..............................................................................................18
Unusual Nature Of Intangible Transition Property.......................................................18
Servicing..............................................................................................24
Bankruptcy; Creditors' Rights..........................................................................27
The Transition Bonds...................................................................................31
GLOSSARY OF DEFINED TERMS.................................................................................34
AVAILABLE INFORMATION.....................................................................................34
INCORPORATION OF DOCUMENTS BY REFERENCE...................................................................34
THE PENNSYLVANIA COMPETITION ACT..........................................................................35
The Pennsylvania Competition Act's General Effect on the Electric Utility Industry in Pennsylvania.....35
Recovery of Stranded Costs.............................................................................35
Securitization of Stranded Costs.......................................................................35
Jurisdiction Over Disputes; Standing...................................................................37
Possible Federal Preemption of the Pennsylvania Competition Act........................................37
Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition Act..........................38
PECO ENERGY'S ELECTRIC RESTRUCTURING PLAN.................................................................39
General................................................................................................39
Subsequent Events .....................................................................................42
Prior Litigation.......................................................................................44
THE QUALIFIED RATE ORDERS AND THE INTANGIBLE TRANSITION CHARGES...........................................45
The Intangible Transition Charges......................................................................48
Competitive Billing....................................................................................49
THE SELLER AND SERVICER PECO ENERGY COMPANY...............................................................52
Retail Electric Service Territory......................................................................52
PECO Energy's Corporate Restructuring Plan.............................................................52
Customers and Operating Revenues.......................................................................53
Forecasting Customers and Usage........................................................................59
Billing Process........................................................................................62
Limited Information on Customers' Creditworthiness.....................................................63
Electric Generation Suppliers and Other Third Party Billers............................................66
THE ISSUER................................................................................................66
USE OF PROCEEDS...........................................................................................68
THE TRANSITION BONDS......................................................................................68
General................................................................................................68
Interest and Principal.................................................................................70
Floating Rate Transition Bonds.........................................................................70
Redemption.............................................................................................70
Credit Enhancement.....................................................................................71
Book-Entry Registration................................................................................72
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Definitive Transition Bonds............................................................................75
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS............................................................76
THE SALE AGREEMENT........................................................................................77
Sale and Assignment of Intangible Transition Property..................................................77
Representations and Warranties of the Seller...........................................................78
Matters Regarding the Seller...........................................................................84
Governing Law..........................................................................................85
THE MASTER SERVICING AGREEMENT............................................................................85
Servicing Procedures...................................................................................85
Servicer Advances......................................................................................87
Servicing Compensation; Releases.......................................................................87
Servicer Duties........................................................................................87
Servicer Representations and Warranties................................................................88
Servicer Indemnification...............................................................................89
Statements to Issuer and Bond Trustee..................................................................89
Evidence as to Compliance..............................................................................90
Matters Regarding the Servicer.........................................................................90
Servicer Defaults......................................................................................91
Rights Upon Servicer Default...........................................................................91
Successor Servicer.....................................................................................92
Addition of Other Issuers..............................................................................92
Governing Law..........................................................................................92
THE INDENTURE.............................................................................................92
Security...............................................................................................92
Issuance in Series or Classes..........................................................................93
Collection Account.....................................................................................94
Allocations and Payments...............................................................................97
Liquidated Damages....................................................................................100
Reports to Transition Bondholders.....................................................................100
Modification of Indenture.............................................................................101
Enforcement of the Sale Agreement and the Master Servicing Agreement..................................103
Modifications to the Sale Agreement and the Master Servicing Agreement................................103
Events of Default; Rights Upon Event of Default.......................................................104
Covenants.............................................................................................106
List of Transition Bondholders........................................................................107
Annual Compliance Statement...........................................................................108
Bond Trustee's Annual Report..........................................................................108
Satisfaction and Discharge of Indenture...............................................................108
Legal Defeasance and Covenant Defeasance..............................................................108
The Bond Trustee......................................................................................110
Governing Law.........................................................................................110
UNITED STATES TAXATION...................................................................................110
General...............................................................................................110
Taxation of the Issuer and of the Transition Bonds....................................................110
Tax Consequences to U.S. Holders......................................................................111
Tax Consequences to Non-U.S. Holders.................................................................112
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS........................................................114
ERISA CONSIDERATIONS.....................................................................................114
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
PLAN OF DISTRIBUTION.....................................................................................114
RATINGS..................................................................................................115
LEGAL MATTERS............................................................................................115
EXPERTS..................................................................................................115
GLOSSARY OF DEFINED TERMS................................................................................116
INDEX TO FINANCIAL STATEMENTS............................................................................F-1
ANNEX A..................................................................................................A-1
</TABLE>
iii
<PAGE>
IMPORTANT NOTICE
ABOUT INFORMATION IN THIS PROSPECTUS
You should rely only on information about the transition bonds provided
in this prospectus and in the related prospectus supplement. The issuer has not
authorized anyone to provide you with different information.
This prospectus and the related prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any security in any
jurisdiction where it is not lawful to do so.
References to the "issuer" refer to PECO Energy Transition Trust unless
the context indicates otherwise.
References to the "seller" refer to PECO Energy Company and any
successor seller under the sale agreement described in this prospectus.
References to the "servicer" refer to PECO Energy Company and any
successor servicer under the master servicing agreement described in this
prospectus.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
<PAGE>
PROSPECTUS SUMMARY
This summary contains a brief description of the transition bonds that
applies to all series of transition bonds offered by this prospectus.
Information that relates to a specific series of transition bonds can be found
in the prospectus supplement related to that series. Consider carefully the risk
factors beginning on page 18 of this prospectus.
Transaction Overview: The Pennsylvania Electricity Generation
Customer Choice and Competition Act was
enacted in 1996 and provides for the
restructuring of the electric industry in
Pennsylvania, including retail competition
for generation services. Prior to enactment
of the Pennsylvania Competition Act,
electric utilities, such as PECO Energy
Company, 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 meet their duties to serve the
public as regulated utilities. The electric
utilities recovered these investments by
charging their customers the regulated rates
approved by the Pennsylvania Public Utility
Commission.
One of the effects of the deregulation of
electricity generation is that prices are
determined by market forces, not through
rate regulation by the Pennsylvania Public
Utility Commission. These market prices may
not be high enough to allow the utilities to
recover their investments in
generation-related assets. Accordingly, the
utilities may incur a loss in value of these
generation-related assets as a result of the
transition from a regulated environment to
competition for electric generation
services.
The Pennsylvania Competition Act provides
for utilities to recover the anticipated
loss in value of their generation-related
assets, known as stranded costs, by
including a charge in their customers' bills
known as competitive transition charges.
Utilities are authorized to securitize the
right to recover all or a portion of these
charges through the issuance of transition
bonds, such as the securities described in
this prospectus and any related prospectus
supplement. This right is known as
intangible transition property. Once
intangible transition property is
securitized, the utility's right to recover
its stranded costs through the competitive
transition charges is replaced by the
intangible transition property holder's
right to recover the costs associated with
the issuance, credit enhancing and servicing
of the transition bonds through intangible
transition charges included in customers'
electric bills. Intangible transition
charges reduce the amount of competitive
transition charges and, if necessary, will
reduce PECO Energy's variable distribution
rates in order that all charges to customers
fit within the rate caps of the Pennsylvania
Competition Act.
Intangible transition property was created
by the Pennsylvania Competition Act and two
qualified rate orders issued by the
Pennsylvania Public Utility Commission to
PECO Energy Company on May 14, 1998 and on
March 16, 2000. Intangible transition
property represents the irrevocable right to
collect intangible transition charges from
customers to recover:
o a portion of PECO Energy Company's
stranded costs, and
o an amount sufficient to provide for any
credit enhancement, to fund any
reserves, and to pay interest, premiums,
if any, costs of defeasance, servicing
fees and other fees, costs and charges
relating to transition bonds.
2
<PAGE>
Intangible transition charges are
nonbypassable. Customers cannot avoid paying
them even if they purchase electricity from
a supplier other than PECO Energy Company.
On March 25, 1999, PECO Energy Company sold
intangible transition property created by
its first qualified rate order, which is
referred to in this prospectus as the First
QRO, to the issuer and the issuer issued $4
billion of Series 1999-A Bonds in accordance
with that order. On March 16, 2000, the
Pennsylvania Public Utility Commission
issued a second qualified rate order, which
is referred to in this prospectus as the
2000 QRO. On May 2, 2000, PECO Energy
Company sold intangible transition property
created by the 2000 QRO to the issuer and
the issuer issued $1 billion of Series
2000-A Bonds in accordance with the 2000
QRO. The First QRO authorized the
refinancing of the bonds covered by it. The
bonds described in this prospectus and the
related prospectus supplement will be used
to refinance the Series 1999-A Bonds Class
A-3 and Class A-5 in whole or in part.
The issuer has pledged substantially all of
its property to the bond trustee as
collateral for all the transition bonds
issued under the indenture, including the
Series 1999-A Bonds, the Series 2000-A Bonds
and the bonds described in this prospectus
and the related prospectus supplement. This
property includes:
o intangible transition property created
by the qualified rate orders,
o its rights under the sale agreement and
the master servicing agreement, and
o the collection account and the amounts
contained in that account
and will serve as collateral for all series
of transition bonds issued under the
indenture.
The portion of the collection account
related to principal of and interest on your
series of transition bonds will be
segregated in a separate series subaccount
as discussed under the caption "The
Indenture--Collection Account" and
"--Allocations and Payments" in this
prospectus.
For a diagram depicting the parties to this
transaction, refer to page 17 of this
prospectus.
For more information on the Pennsylvania
Competition Act, intangible transition
property and intangible transition charges,
you should review the material under the
captions entitled "Risk Factors," "The
Pennsylvania Competition Act," "PECO
Energy's Electric Restructuring Plan" and
"The Qualified Rate Orders and the
Intangible Transition Charges" in this
prospectus.
Issuer: PECO Energy Transition Trust, a Delaware
statutory business trust and a wholly-owned
subsidiary of PECO Energy Company.
The issuer was formed on June 23, 1998 for
the purpose of purchasing and owning
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
the collateral for all series of transition
bonds issued by it and whose only revenues
are collections of the intangible transition
charges. The collateral is the sole source
of payment for all series of transition
3
<PAGE>
bonds. On March 25, 1999, the issuer issued
$4 billion of Series 1999-A Bonds, and on
May 2, 2000, the issuer issued $1 billion of
Series 2000-A Bonds. The bonds described in
this prospectus and the related prospectus
supplement are being issued to refinance all
or a part of the Series 1999-A Bonds Class
A-3 and Class A-5. See "The Issuer" in
this prospectus.
Issuer's Address: c/o First Union Trust Company, National
Association, One Rodney Square, 920 King
Street, Wilmington, Delaware 19801.
Issuer's Telephone
Number: (302) 888-7532
Issuer Trustee: First Union Trust Company, National
Association. Two additional trustees were
appointed by PECO Energy Company. See
"The Issuer" in this prospectus.
Issuer Trustee's Address: One Rodney Square, 920 King Street,
Wilmington, Delaware 19801.
Issuer Trustee's Telephone
Number: (302) 888-7532
Bond Trustee: The Bank of New York.
Bond Trustee's Address: 101 Barclay Street, Floor 12 East, New York,
New York 10286.
Bond Trustee's Telephone
Number: (800) 524-4458
Seller and Servicer of the
Transferred Intangible
Transition Property: PECO Energy Company.
PECO Energy Company is referred to as PECO
Energy throughout this prospectus.
The intangible transition property was
authorized by the qualified rate orders
issued by the Pennsylvania Public Utility
Commission to PECO Energy on May 14, 1998
and March 16, 2000. The first order, the
First QRO, authorized intangible transition
property of $4 billion, which was sold to
the issuer concurrently with the issuance of
the Series 1999-A Bonds. A summary of the
terms of the Series 1999-A Bonds can be
found in Annex A to this prospectus. The
second order, the 2000 QRO, authorized
intangible transition property of $1 billion
which was sold to the issuer concurrently
with the issuance of the Series 2000-A
Bonds. A summary of the terms of the Series
2000-A Bonds can be found in Annex A to this
prospectus. There will be no sale of
intangible transition property in connection
with the issuance of the transition bonds
described in this prospectus and the related
prospectus supplement.
PECO Energy services the transferred
intangible transition property under the
master servicing agreement between PECO
Energy, as servicer, and the issuer.
Incorporated in Pennsylvania in 1929, PECO
Energy, a wholly owned subsidiary of Exelon
Corporation, is engaged principally in the
production, purchase, transmission,
distribution and sale of electricity to
residential, commercial, industrial and
wholesale customers in its franchised
service territory in southeastern
Pennsylvania. Since 1999, the Commonwealth
of Pennsylvania has required the unbundling
of retail electric services in Pennsylvania
into separate generation, transmission and
distribution services with open retail
competition for generation services. With
the commencement of deregulation, PECO
Energy serves as the local distribution
company providing electric distribution
4
<PAGE>
services in southeastern Pennsylvania and
bundled electric service to customers who
cannot or do not choose an alternate
electric generation supplier. Through its
Exelon Energy division, PECO Energy
is a competitive generation supplier
offering competitive energy supply to
customers throughout Pennsylvania. At
September 30, 2000, approximately 17% of
PECO Energy's residential load, 46% of its
commercial load and 41% of its industrial
load were purchasing generation service from
an alternative electric generation supplier.
PECO Energy's Exelon Infrastructure Services
subsidiary provides utility infrastructure
services to customers in several regions of
the United States. PECO Energy has also
formed AmerGen Energy Company, a joint
venture with British Energy plc, to acquire
and operate nuclear generating facilities.
PECO Energy also engages in the wholesale
marketing of electricity on a national
basis. PECO Energy also participates in
joint ventures which provide
telecommunication services in the
Philadelphia metropolitan region.
PECO Energy, as servicer of the transferred
intangible transition property, collects the
intangible transition charges from customers
within its service territory on behalf of
the issuer for a fee specified in any
related prospectus supplement. Due to
provisions of the Pennsylvania Competition
Act and the settlement of restructuring
issues, as of September 1, 2000 PECO Energy
customers have the opportunity to choose
from several billing source options. As of
the date of this prospectus, only one
electric generation supplier is providing
billing for its own services.
One of these options is consolidated billing
from third parties providing billing or
metering services, including electric
generation suppliers. Any third party that
provides consolidated billing is required to
pay the servicer amounts billed by the third
party on behalf of the servicer, including
the intangible transition charges,
regardless of the third party's ability to
collect those amounts from its customers.
The third party biller effectively replaces
the customer as the obligor on those
intangible transition charges. The servicer
will have no right to collect those
intangible transition charges from the
customers, except following payment defaults
by a third party biller and the expiration
of the applicable grace period. See "The
Qualified Rate Orders and the Intangible
Transition Charges--Competitive Billing" and
"Risk Factors--Servicing--It May Be More
Difficult to Collect Intangible Transition
Charges Due to Billing by Third Parties" in
this prospectus.
<PAGE>
The Assets of the Issuer: The issuer owns:
o the intangible transition property
transferred by PECO Energy to the
issuer, which secures all the transition
bonds outstanding under the indenture,
o related collections of intangible
transition charges,
o its rights under the sale agreement and
the master servicing agreement,
o trust accounts held by the bond trustee,
and
o other credit enhancement acquired or
held to ensure payment of a particular
series of transition bonds as specified
in the related prospectus supplement.
The intangible transition property is
described in more detail under "The Sale
Agreement--Sale and Assignment of Intangible
Transition Property" in this prospectus. The
trust accounts are described in more detail
under "The Indenture--Collection Account" in
this prospectus.
5
<PAGE>
Customers: PECO Energy's customers are divided into two
customer categories for purposes of
adjusting intangible transition charges.
These categories are (a) residential and
(b) commercial and industrial. Each customer
category is further divided into rate
classes. The customer categories and rate
classes are described in greater detail in
"The Seller and Servicer PECO Energy
Company--Customers and Operating Revenues"
in this prospectus.
Payment Sources: On each payment date as specified in the
related prospectus supplement, the bond
trustee is required to pay amounts owed on
all outstanding series of transition bonds
from:
o amounts collected by the servicer--or
any third party electric generation
suppliers or other third parties
providing billing or metering
services--for the issuer with respect to
intangible transition charges and
remitted to the bond trustee after the
payment of specific fees and expenses,
and
o any other amounts available for
withdrawal from trust accounts held by
the bond trustee, including specified
investment earnings on amounts in the
trust accounts, or paid under contracts,
such as the sale agreement, the bills of
sale or the master servicing agreement,
pledged to secure one or more series of
transition bonds. All accounts referred
to in this prospectus are held by the
bond trustee in trust, and are described
in greater detail under "The
Indenture--Collection Account" in this
prospectus.
State Pledge: The Commonwealth of Pennsylvania has
pledged in the Pennsylvania Competition Act
that it will not limit, alter, impair or
reduce the value of intangible transition
property or the intangible transition
charges which are approved by an order of
the Pennsylvania Public Utility Commission
until the transition bonds are fully repaid
or discharged. The Commonwealth of
Pennsylvania may, however, limit or alter
the value of intangible transition charges
or intangible transition property if
adequate compensation is made for the full
protection of the beneficial owners of the
transition bonds. The Pennsylvania
Competition Act does not define adequate
compensation. Thus, the amount of this
compensation may not be sufficient to pay
the full amount of outstanding principal of
and interest on the transition bonds or
compensate transition bondholders for any
reinvestment risk.
<PAGE>
Priority of Distributions: On each monthly allocation date (which is
the 6th day of each calendar month or if
such day is not a business day, the next
business day), the bond trustee applies all
amounts on deposit in the general subaccount
of the collection account and any investment
earnings on these amounts in the following
priority:
(1) payment of the bond trustee's fee,
expenses and indemnities, if any,
(2) payment of the issuer trustee's fee,
expenses and indemnities, if any,
(3) payment of the monthly servicing fee
and all unpaid monthly servicing
fees from prior monthly allocation
dates,
(4) so long as no event of default under
the indenture has occurred and is
continuing or would be caused by
that payment, payment of all
operating expenses other than those
referred to in the first, second and
third items above--up to an
aggregate for all series of
transition bonds of $12,500 on any
monthly allocation date,
6
<PAGE>
(5) Interest on each series of
transition bonds for that monthly
allocation date will be transferred
to the series subaccounts for each
series Pro Rata, which is defined in
the glossary to this prospectus,
(6) any Principal then payable on the
transition bonds:
(a) as a result of acceleration
triggered by an event of
default,
(b) on a series termination date
or class termination date, as
applicable, or
(c) on a redemption date, that
will occur prior to the
next monthly allocation
date will be transferred
Pro Rata to the series
subaccount for that series,
(7) the Principal not accounted for in
(6) will be transferred Pro Rata to
the series subaccounts,
(8) payment of any remaining unpaid
operating expenses, indemnity
amounts and loss amounts
then owed by the issuer,
(9) allocation of any required amount to
the overcollateralization
subaccount, which account is
described in detail under
"--Accounts" in this prospectus
summary and "The
Indenture--Collection Account" in
this prospectus,
(10) payment of any termination or
breakage amounts owed to any
counterparty to a hedge or swap
transaction,
(11) so long as no event of default has
occurred and is continuing, payment
of net investment earnings on
amounts in the general subaccount of
the collection account since the
previous monthly allocation date to
the issuer, free from the lien of
the indenture,
(12) allocation of the remainder, if any,
to the reserve subaccount, which
account is described in detail under
"--Accounts" in this prospectus
summary and "The
Indenture--Collection Account" in
this prospectus, and
(13) following repayment of all
outstanding series of transition
bonds, the balance will be released
to the issuer, free from the lien of
the indenture.
The payment of the bond trustee's and issuer
trustee's indemnities specified in items (1)
and (2) above will be made only if:
o those indemnity payments would not
result in an event of default under the
indenture and
o the issuer provides notice to the rating
agencies of the indemnity amount and, if
reasonably required by the rating
agencies, an officer's certificate
7
<PAGE>
and other documentation that certifies
that those payments are not reasonably
expected to result in an event of
default.
The following diagram generally depicts the
basic flow of the collection of intangible
transition charges from customers or
electric generation suppliers or other third
parties to the servicer and, subsequently,
to the various accounts listed above.
8
<PAGE>
BASIC ALLOCATIONS AND DISTRIBUTIONS
--------------
CUSTOMERS
AND
EGSs*
--------------
Monthly payment of
intangible transition
charges to servicer
--------------
PECO ENERGY
(SERVICER)
--------------
Monthly remittance of
collections of intangible
transition charges
allocated to the issuer
--------------
COLLECTION
ACCOUNT
--------------
Application of amounts
in collection account
(including net earnings),
as follows
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
o o o o o o o o
---------- --------- ------------- ------------------------- ----------- --------------------- ------------ ---------------
Bond Servicer: Issuer: Series Subaccounts: Issuer: Overcollateralization Issuer Reserve
Trustee/ Monthly Operating o Interest for All unpaid Subaccount: Net earnings Subaccount
Issuer servicing expenses applicable monthly operating Overcollateralization on amounts All
Trustee: fee (up to an allocation date expenses, ---------------------- in general remaining
Fees and --------- aggregate o Principal payable indemnity subaccount amounts
expenses $12,500 as a result of amounts of the -------------
(including for all acceleration or and loss collection
indemnity series for payable on a series amounts account
amounts each or class owned to -------------
and loss monthly termination date or the issuer
amounts allocation payable on a ------------
owned to date) redemption date
the ------------- o Principal for that
trustees) monthly allocation
--------- date not provided
for above
------------------------
</TABLE>
* electric generation suppliers or other third parties providing billing and
metering services.
9
<PAGE>
If on any monthly allocation date, available
collections of intangible transition
charges, together with amounts available in
the subaccounts, are insufficient to make
the allocations contemplated by the first
through the ninth items 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 those
payments and transfers:
(1) from the interest deposit subaccount,
for the payments or transfers
contemplated by the fifth item above
only,
(2) then from the loss subaccount, for the
payments or transfers contemplated by
the first through the eighth items
above only, and
(3) thereafter, from the reserve
subaccount, then from the
overcollateralization subaccount and
finally from the capital subaccount.
See "The Indenture--Allocations and
Payments" in this prospectus.
On each payment date for any series, the
amounts on deposit in the applicable series
subaccount (other than net income or other
gain, which, so long as no event of default
has occurred and is continuing, are released
to the issuer free of the lien of the
indenture) are applied to pay the following
(in the priority indicated):
(1) interest due and payable on the
transition bonds of that series,
together with any overdue interest
and, to the extent permitted by law,
interest on that amount, are paid to
the transition bondholders of that
series (in the case of classes with
swap or hedge transactions, that
interest is payable to the
applicable counterparty to those
transactions),
(2) the balance, if any, up to the
principal amount of the transition
bonds of that series that is scheduled
to be paid by that payment date in
accordance with the expected
amortization schedule for that series
or, for any series of transition bonds
payable as a result of acceleration
under the indenture or to be redeemed
under the indenture, the outstanding
principal amount of that series and
premium, if any, is paid to the
transition bondholders of that series
for principal and premium, if any, on
the transition bonds of that series,
and
(3) the balance, if any, is transferred
to the general subaccount for
allocation on the next monthly
allocation date. See "The
Indenture--Allocations and Payments"
in this prospectus.
<PAGE>
Credit Enhancement: Credit enhancement for the transition bonds
is as follows:
o The servicer of the intangible
transition property on behalf of the
issuer makes periodic adjustments to the
intangible transition charges it bills
to customers, once the Pennsylvania
Public Utility Commission approves these
adjustments. PECO Energy will make these
adjustments if it determines that
collections of intangible transition
charges are either greater or lesser
than the amount necessary to make timely
payments on all series of transition
bonds, to fund subaccounts to required
levels and to pay applicable fees and
expenses. The servicer can make these
changes, with the approval of the
Pennsylvania Public Utility Commission,
once a year.
10
<PAGE>
In addition, during the final calendar
year of collections of intangible
transition charges for any series of
transition bonds, the servicer can make
these adjustments as frequently as
monthly. See "The Qualified Rate Orders
and the Intangible Transition
Charges--The Intangible Transition
Charges--The Intangible Transition
Charge Adjustment Process."
o The amounts in the reserve subaccount,
the overcollateralization subaccount and
the capital subaccount also provide
credit enhancement for all series of
transition bonds.
o Additional credit enhancement for any
series may include surety bonds, letters
of credit, maturity guarantees, a
financial guaranty insurance policy, a
credit or liquidity facility, a
repurchase obligation, a third party
payment or cash deposit, each as
specified in the related prospectus
supplement.
The credit enhancement for the transition
bonds is intended to protect you against
losses or delays in scheduled payments on
your transition bonds.
Accounts: The bond trustee holds the following trust
accounts:
o Collection Account--Under the indenture,
the issuer established a single
collection account for all series of
transition bonds which is held by the
bond trustee. The collection account has
been divided into subaccounts which
allocate the funds deposited in the
collection account to specific uses.
o General Subaccount--Funds received from
collections of the intangible transition
charges are initially allocated to the
general subaccount of the collection
account.
o Series Subaccount--Under the indenture,
the issuer has established series
subaccounts for the Series 1999-A Bonds
and the Series 2000-A Bonds and will
establish a series subaccount for each
series of transition bonds offered by
this prospectus. On each monthly
allocation date, the bond trustee is
required to transfer to this account
amounts accruing for principal and
interest for each series on a Pro Rata
basis. On each payment date, the bond
trustee withdraws funds from these
subaccounts to make payments on the
related series.
o Class Subaccounts--These subaccounts
have been and will be established for
any class of transition bonds that bears
a floating rate of interest.
<PAGE>
o Overcollateralization Subaccount--Each
prospectus supplement will set a funding
level for the overcollateralization
subaccount that takes into account the
issuance of any previous series of
transition bonds. The
overcollateralization amount required to
be funded for each series of transition
bonds will be equal to the percentage of
the initial principal amount of that
series stated in the related prospectus
supplement. The overcollateralization
amount will be funded over the expected
term of that series of transition bonds
through the imposition of intangible
transition charges.
o Capital Subaccount--Capital of the
issuer of approximately $25 million
available to all series of transition
bonds will be held in the capital
subaccount.
11
<PAGE>
o Reserve Subaccount--If the issuer collects
intangible transition charges in excess
of:
(1) amounts payable for expenses
of the bond trustee, the
issuer trustee and the
servicer and other fees and
expenses,
(2) amounts allocable to the
applicable series and class
subaccounts for Principal
and Interest on the next
payment date, and
(3) amounts allocable to the
overcollateralization
subaccount, the excess is
held in the reserve
subaccount.
As of September 30, 2000, the balance in
the reserve subaccount was $15,210,321.
o Other Accounts--If funds are remitted to
the bond trustee in connection with a
legal defeasance or covenant defeasance
under the indenture, a defeasance
subaccount will be established and such
funds will be held for the benefit of
the related transition bondholders.
If the seller is required to remit loss
amounts under the terms of the sale
agreement, a loss subaccount will be
established. Additionally, if the seller
is required to remit interest payments
under the sale agreement, an interest
deposit subaccount will be established.
Each of the overcollateralization
subaccount, the capital subaccount, the
reserve subaccount and, if established, one
or more defeasance subaccounts, the loss
subaccount and interest deposit subaccount
will be available to make payments on the
transition bonds on each payment date as
described in "The Indenture--Allocations and
Payments" in this prospectus.
Interest and Principal: Interest will accrue on the outstanding
principal balance of transition bonds of a
series or class offered by this prospectus
at the applicable rate of interest specified
in or determined in the manner specified in
the applicable prospectus supplement.
On any payment date for any series offered
by this prospectus, unless principal is
payable:
o as a result of acceleration triggered by
an event of default,
o on a series termination date or class
termination date, as applicable, or
o on a redemption date,
the issuer will make principal payments on
that series in the amount necessary to
reduce the outstanding principal balance of
that series to the amount specified for that
payment date in the expected amortization
schedule set forth in the prospectus
supplement for that series, and only to the
extent funds are available for that payment
as described in this prospectus. Principal
of that series or class of transition bonds
may be paid later than reflected in the
expected amortization schedule for that
series or class.
See "Risk Factors--The Transition
Bonds--Transition Bondholders May Receive
Principal Payments Later than Expected" and
"--Transition Bondholders May Have to
Reinvest the Principal of Their Investments
at a Lower Rate of Return Because of
Optional and Mandatory Redemption of
12
<PAGE>
Transition Bonds" and "Weighted Average Life
and Yield Considerations" in this
prospectus.
The entire unpaid principal amount of all of
the transition bonds outstanding under the
indenture 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.
Optional Redemption: Provisions for redemption of a series of
transition bonds offered by this prospectus
at the option of the issuer will be
specified in the related prospectus
supplement.
Mandatory Redemption: Except as described in the third paragraph
of this section, each series of transition
bonds offered by this prospectus will be
subject to mandatory redemption in whole at
a redemption price equal to the principal
amount of the bonds, plus interest accrued
to the redemption date, if the seller is
obligated to pay liquidated damages under
the sale agreement. PECO Energy will be
required to pay 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 specified
representations relating to intangible
transition property under the sale agreement
if that breach continues beyond a 90-day
grace period, assuming the seller meets
specified rating criteria or makes an escrow
deposit, and has a material adverse effect
on the transition bondholders. If the
specified rating criteria are not met or the
requisite escrow deposit is not made, the
seller must pay liquidated damages within 2
days of the breach. The bond trustee, which
may consult with the servicer and other
third parties, will have sole responsibility
to determine whether a breach by PECO Energy
of any of these specified representations
has a material adverse effect on the
transition bondholders.
If the full amount of indemnification
payments resulting from PECO Energy's breach
of its representations relating to:
o the Commonwealth's and the Pennsylvania
Public Utility Commission's ability to
adversely affect intangible transition
property or transition bondholders,
o governmental approvals,
o pending or threatened litigation,
o PECO Energy's due incorporation and
corporate authority to fulfill its
obligations under the sale agreement,
o the enforceability of the sale agreement
against PECO Energy and the absence of
any breach of its charter documents, or
o creation of a lien or violation of
applicable law in connection with the
sale agreement
is reasonably expected to be incurred beyond
a 90-day period immediately following the
breach of the representation giving rise to
the damages, the seller
13
<PAGE>
shall, except as provided below, pay
liquidated damages to the bond trustee, as
assignee of the issuer, on the first monthly
allocation date following the expiration of
such 90-day period.
If PECO Energy is obligated to pay
liquidated damages for a breach of a
representation and warranty which relates to
one or more of the qualified rate orders,
but not all of the qualified rate orders,
then:
o the amount of liquidated damages will
include the then outstanding principal
amount of only the series of transition
bonds issued in connection with the
affected qualified rate order or orders
as of the redemption date, plus accrued
interest to the redemption date, and
o only the series of transition bonds
issued in connection with the affected
qualified rate order or orders will be
subject to mandatory redemption.
If the losses incurred as a result of a
breach of one of the foregoing
representations is reasonably expected not
to exceed a de minimis loss amount, on the
monthly allocation date immediately
following the initial loss allocation date,
the seller may deposit in the loss
subaccount the aggregate expected amount of
losses, in lieu of paying indemnification or
liquidated damages. In this case, the seller
may be required to make additional deposits
to the loss subaccount from time to time if
actual losses exceed the amount already
deposited.
Additional redemption provisions, if any,
for each series of transition bonds offered
by this prospectus will be specified in the
related prospectus supplement. See "The
Transition Bonds--Redemption" and "The Sale
Agreement--Representations and Warranties of
the Seller" in this prospectus.
Payment and Record Dates: The payment dates and record dates for
each series of transition bonds will be
specified in the related prospectus
supplement.
Expected Final Payment
Dates, Series Termination
Dates and Class
Termination Dates: The expected final payment date for each
series or class of transition bonds offered
by this prospectus will be the date when all
interest on and principal of that series or
class is expected to be paid in full. The
series termination date for a series or, if
applicable, the class termination date for a
class of transition bonds will be a date
after the expected final payment date.
Failure to pay the entire outstanding amount
of any class or series by the expected final
payment date will not result in an event of
default under the indenture. Failure to pay
the entire outstanding amount of any class
or series on the series termination date or
class termination date for the class or
series will result in an event of default
under the indenture. The expected final
payment date and the series termination date
or class termination date of each series and
class of transition bonds will be specified
in the corresponding prospectus supplement.
Risk Factors: Prospective investors should consider the
risks associated with an investment in the
transition bonds offered by this prospectus.
These 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. For a detailed discussion of
the material risks associated with an
investment in transition
14
<PAGE>
bonds, prospective investors should review
the discussion under "Risk Factors" which
begins on page 18 of this prospectus.
The Transition Bonds;
Issuance of New Series: The issuer may issue transition bonds
offered by this prospectus in one or more
series, each comprised of one or more
classes. Each series of transition bonds
will be issued under the indenture. As
mentioned previously under "--Issuer" in
this prospectus summary, the issuer issued
the Series 1999-A Bonds on March 25, 1999.
The Series 1999-A Bonds, totaling $4 billion
in principal amount, were issued in seven
classes as described in the related
prospectus supplement dated March 18, 1999
and summarized in Annex A to this
prospectus. Two of the classes of the Series
1999-A Bonds have floating interest rates.
Also mentioned previously under "--Issuer"
in this prospectus summary, on May 2, 2000
the issuer issued the Series 2000-A Bonds,
totaling $1 billion in principal amount, in
five classes as described in the related
prospectus supplement dated April 27, 2000
and summarized in Annex A to this
Prospectus. See also "The Indenture" in this
prospectus.
Any series of transition bonds may include
one or more classes which differ as to the
bond rate and amortization of principal. The
terms of all transition bonds of the same
series will be identical, unless that 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 of
that series, will be described in the
related prospectus supplement.
The terms of any series and any classes of
that series 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 under 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--Issuance of Additional Series May
Adversely Affect Outstanding Transition
Bonds" and "The Transition Bonds" in this
prospectus. For instance, one of the
conditions to the issuance of additional
transition bonds under the indenture is that
each rating agency must confirm to the
seller, the servicer, the bond trustee and
the issuer that the issuance of those
additional transition bonds will not result
in a reduction or a withdrawal of the
current rating by that rating agency of any
outstanding series or class of transition
bonds.
<PAGE>
Denominations: Each class of transition bonds offered by
this prospectus 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
offered by this prospectus will initially be
issued either only in book-entry form
through The Depository Trust Company or in
another form as specified in the applicable
prospectus supplement. See "The Transition
Bonds--Book-Entry Registration" in this
prospectus.
Tax Status: In connection with the sale of intangible
transition property for the Series 1999-A
Bonds, PECO Energy received a ruling from
the Internal Revenue Service that the
transition bonds will be classified as
obligations of PECO Energy. In connection
with the issuance of the Series __ Bonds,
PECO Energy has filed a request for a new
ruling from the Internal Revenue Service
that the Series __ Bonds will be obligations
of PECO Energy. In the opinion of Ballard
Spahr Andrews & Ingersoll, LLP, special tax
counsel to the issuer and PECO Energy, for
U.S. federal income tax purposes:
15
<PAGE>
o the transition bonds offered by this
prospectus will be treated as debt of
PECO Energy secured by a pledge of the
collateral, and
o the issuer will be treated as a division
of PECO Energy and will not be treated
as a separate taxable entity.
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 "United States Taxation" in this
prospectus.
In addition, in the opinion of Ballard Spahr
Andrews & Ingersoll, LLP, interest from the
transition bonds offered by this prospectus
received by a person who is not otherwise
subject to corporate or personal income tax
in Pennsylvania will not be subject to these
taxes. Transition bonds held by deceased
Pennsylvania residents may be subject to
inheritance and estate taxes. Neither
residents nor nonresidents of Pennsylvania
will be subject at the present time to an
intangible personal property tax with
respect to the transition bonds. See
"Material Commonwealth of Pennsylvania Tax
Matters" in this prospectus.
ERISA Considerations: Employee benefit plans are permitted to
purchase transition bonds. 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, or Section 4975 of the Internal
Revenue Code of 1986, as amended, should
carefully review with its legal advisers
whether the purchase or holding of the
transition bonds of any class or series
could give rise to a transaction prohibited
or not otherwise permissible under ERISA or
the Internal Revenue Code. See "ERISA
Considerations" in this prospectus.
Ratings: It is a condition of any underwriter's
obligation to purchase each series or class
of transition bonds offered by this
prospectus that, at the time of issuance,
that 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 which have rated the transition
bonds specified in that prospectus
supplement.
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 of
that series or class will not be revised or
withdrawn by a rating agency at any time
thereafter without prior notification.
If a rating of any series or class of
transition bonds is revised downward or
withdrawn, the liquidity and the price of
that series or class of transition bonds may
be adversely affected. In general, the
ratings address credit risk, the ability of
the issuer to make timely interest payments,
and do not represent any assessment of any
particular rate of principal payments on the
transition bonds other than the payment in
full of each series or class of transition
bonds by the applicable series termination
date or class termination date.
See "Risk Factors--The Transition
Bonds--Transition Bondholders May Receive
Principal Payments Later than Expected" and
"Ratings" in this prospectus.
16
<PAGE>
PARTIES TO THE TRANSACTION
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------ Applies, as servicer, for -------------------------
PECO ENERGY intangible transition charge Pennsylvania Public
(seller, servicer, adjustments Utility Commission*
grantor and owner) ----------------------------> (State agency; not
------------------ <---------------------------- affiliated with issuer
| or PECO Energy)
| -------------------------
|
| Issued the two qualified rate
| orders and approves
| adjustments to intangible
| transition charges
Sold intangible transition |
property for cash pursuant to |
sale agreement in connection with | Services intangible transition
the issuance of the Series 1999-A | property of the issuer and
Bonds and the Series 2000-A Bonds | receives monthly servicing
| fee pursuant to master
| servicing agreement
|
-------------------------- \/ --------------------------
ISSUER TRUSTEE ------------------ PROVIDER OF
(with beneficiary trustee ISSUER CREDIT
manages issuer pursuant ----> (PECO Energy <------------------------------- ENHANCEMENT
to trust agreement) Transition Trust) OR HEDGE
-------------------------- ------------------ TRANSACTION
| (to be named, if any)
| --------------------------
| |
Sale of refinancing transition bonds | \/
for cash, pursuant to underwriting | --------------------------
agreement \/ BOND TRUSTEE
------------------ (acts for and on behalf of
UNDERWRITERS transition bondholders
------------------ pursuant to indenture)
| --------------------------
| Sale of refinancing /\ |
| transition bonds | | Redemption
| | | price
\/ Proceeds of refinancing | \/
------------------ transition bond sale | -----------------------
TRANSITION | SERIES 1999-A
BONDHOLDERS ------------------------------------------------ TRANSITION BONDHOLDERS
------------------ (subject to redemption)
-----------------------
</TABLE>
-------------
* The Pennsylvania Public Utility Commission also supervises the
implementation of the Pennsylvania Competition Act and is authorized to
issue regulations under the Pennsylvania Competition Act.
17
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding to purchase
transition bonds offered by this prospectus:
Unusual Nature of Intangible Transition Property
<TABLE>
<S> <C>
Legal Challenges Could Adversely
Affect Transition Bondholders Intangible transition property and its adequacy to pay principal of and interest on
the series of transition bonds offered by this prospectus depends on the Pennsylvania
Competition Act and the qualified rate orders. If the Pennsylvania Competition Act or
any of the qualified rate orders were challenged in a lawsuit and a court decided that
the Pennsylvania Competition Act or any of the qualified rate orders, or all of them,
were invalid or unenforceable, PECO Energy will have breached a representation in the
sale agreement. In that case, PECO Energy may have to pay liquidated damages to the
issuer and the bond trustee for the losses resulting from that breach.
If PECO Energy is obligated to pay liquidated damages for a breach of a representation
and warranty which relates to one or more of the qualified rate orders, but not all
qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding principal
amount of only the series of transition bonds authorized by the affected qualified
rate order or orders as of the redemption date, plus accrued interest to the
redemption date, and
o only the series of transition bonds authorized by the affected qualified rate
order or orders will be subject to mandatory redemption.
See "The Sale Agreement--Representations and Warranties of the Seller" in this
prospectus.
PECO Energy may not be able to meet its obligations to pay liquidated damages. As a
result, if the Pennsylvania Competition Act or any of the qualified rate orders were
overturned, transition bondholders could suffer a loss of their investment. Also, the
time and expense of enforcing rights against PECO Energy could result in a loss to
transition bondholders or delay expected payments on the transition bonds offered by
this prospectus.
Lack of Continued Operation of Existing
Generation Facilities May Result in
Losses to Transition Bondholders Under the Pennsylvania Competition Act, recovery of stranded costs associated with
existing generating facilities depends on continued operation of these facilities.
There is an exception if that operation is uneconomic because of the transition to a
competitive market. Following the restructuring of PECO Energy and the transfer of its
generation assets to a new subsidiary, there may be no way for PECO Energy to ensure
the continued operation of all of those generation assets. Although the parts of the
First QRO and the 2000 QRO providing for the collection of intangible transition
charges are stated in the Pennsylvania Competition Act and those qualified rate orders
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
themselves to be irrevocable, the collection of intangible transition charges could be
challenged if some of PECO Energy's generating facilities ceased to operate at
reasonable levels. If the challenge were successful, PECO Energy would not be required
to pay liquidated damages and the issuer may not have funds to make payments on the
transition bonds. As a result, transition bondholders could suffer a loss of their
investment.
Changes in Law May Result in Losses
to Transition Bondholders A change in law by legislative enactment or constitutional amendment, including an
enactment or amendment that breaches the Commonwealth of Pennsylvania's pledge not to
limit, alter or impair intangible transition property or intangible transition
charges, will not be a breach by PECO Energy of its representations under the sale
agreement and will not require PECO Energy to pay liquidated damages. Examples of a
change in law are a repeal of the Pennsylvania 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.
Under the Pennsylvania Competition Act, the Commonwealth of Pennsylvania may limit or
alter the value of intangible transition property or intangible transition charges if
"adequate compensation is made by law" for the protection of the intangible transition
charges and of transition bondholders. It is unclear if "adequate compensation . . .
by law" would be sufficient to pay the full amount of the outstanding principal of and
interest on the transition bonds or would compensate transition bondholders for any
reinvestment risk.
Under the United States and Pennsylvania Constitutions, the Commonwealth of
Pennsylvania could not repeal or amend the Pennsylvania Competition Act--by way of
legislative process--or take any action that violates its pledge and agreement
described in the first paragraph of this subheading without paying just compensation
to the transition bondholders if doing so would:
o constitute a permanent taking of the property interest of transition bondholders
in the intangible transition property, and
o deprive the transition bondholders of their reasonable expectations arising from
their investments in the transition bonds.
Just compensation awarded by a court, however, may not be sufficient to pay the full
amount of principal of and interest on the transition bonds or compensate transition
bondholders for any reinvestment risk.
Also, if there were a change in law, there might be costly and time-consuming
litigation. There is no judicial precedent directly on point, and the security for the
transition bondholders is a new type of asset. As a result, the outcome of any of this
litigation cannot be predicted with certainty.
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
Federal Legislation May Result in
Losses to Transition Bondholders On February 24, 2000, S. 2098 (Electric Power Market Competition and Reliability Act)
was introduced in the U.S. Senate and referred to the Senate Energy and Natural
Resources Committee. Several other bills dealing in varying detail with retail
competition, stranded cost recovery, electricity reliability standards and consumer
protections were introduced in 1999 and 2000 and referred to various Congressional
committees. While S. 2098 contains provisions allowing recovery of retail stranded
costs and deferring to the states on certain key issues such as public benefit, the
issuer cannot predict if 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.
Further, 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. If the Pennsylvania Competition Act or the qualified rate
orders were preempted by federal law, a court may decide that it is not a taking for
which the government would have to pay the estimated market value of the transferred
intangible transition property. Even if any federal preemption were considered a
taking, for which the government had to pay this value, that compensation may not be
sufficient to pay the full amount of principal of and interest on the transition
bonds. In that case, transition bondholders could suffer a loss of their investment.
In that event, PECO Energy would not be required to pay liquidated damages. See
"--Changes in Law May Result in Losses to Transition Bondholders" above.
The Pennsylvania Public Utility
Commission May Take Actions that
Adversely Affect Transition
Bondholders The Pennsylvania Public Utility Commission continues to regulate some aspects of the
electric industry in Pennsylvania and may take actions that adversely affect
transition bondholders. For example, the Pennsylvania Public Utility Commission:
o regulates electric distribution companies,
o sets financial and other requirements for electric generation suppliers and other
third parties, and
o sets customer billing guidelines and collection, metering and disclosure
requirements for electric generation suppliers and other third parties.
Furthermore, when PECO Energy entered into a settlement with certain parties to its
restructuring plan submitted in compliance with the Pennsylvania Competition Act,
these parties 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 issuer
cannot predict what effect that review and recommendations will have.
Also, subject to the Commonwealth of Pennsylvania's pledge not to limit or alter the
value of intangible transition charges or intangible transition property unless
adequate compensation is made for the full protection of the transition bondholders,
the Pennsylvania Public Utility Commission could revise or rescind any of its
regulations. PECO Energy cannot predict whether the Pennsylvania Public Utility
Commission will make new regulations or the timing or content of any new Pennsylvania
Public Utility Commission regulations.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PECO Energy agrees to take legal or administrative actions, including bringing
lawsuits, as may be reasonably necessary to block or overturn:
o any government attempt to repeal or change the Pennsylvania Competition Act, the
qualified rate orders, or the intangible transition property in a way that is
materially adverse to the holders of transition bonds, or
o lawsuits by third parties which, if successful, would result in a breach by PECO
Energy of its representations in the sale agreement concerning the intangible
transition property, the qualified rate orders, or the Pennsylvania Competition
Act.
PECO Energy, however, may not be able to take those actions and any action PECO Energy
is able to take may not be successful.
Future Pennsylvania Public Utility Commission regulations may affect the ratings of
the transition bonds or their price. Those actions may also affect the rate of
collections of intangible transition charges and, as a result, the amortization of
transition bonds and their weighted average lives. As a result, transition bondholders
could suffer a loss of their investment.
Judicial Decisions or Legal Actions in
Other Jurisdictions Could Adversely
Affect Transition Bondholders A court decision based on the U.S. Constitution or other federal law overturning a
state statute like the Pennsylvania Competition Act adopted by another state could
give rise to a challenge to the Pennsylvania Competition Act. That decision would not
automatically invalidate the Pennsylvania Competition Act. It could, however, set a
legal precedent for a successful challenge to the Pennsylvania Competition Act that
could adversely affect transition bondholders. As a result, the market value of the
transition bonds could be reduced.
Also, legal 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
based on state laws other than Pennsylvania would not, however, directly affect the
Pennsylvania Competition Act or the interests of the transition bondholders. These
actions, however, could increase awareness of the political and other risks associated
with these types of securities and limit the liquidity of the transition bonds and
impair their value.
Failure to Make Adequate Adjustments
to the Intangible Transition Charges
May Result in Losses to Transition
Bondholders The actual rate of collections of intangible transition charges have in the past, and
may continue, to vary from projections used to set the intangible transition charges
due to a number of factors. These factors include variations in electricity usage by
customers from projected electricity usage and variations in delinquencies and
write-offs. The servicer must seek an adjustment to the intangible transition charges
from the Pennsylvania Public Utility Commission on each calculation date to reflect
shortfalls in or excesses of collections of intangible transition charges for prior
periods, including shortfalls or excesses resulting from inaccurate servicer
forecasts. The adjustments are intended to take into account any projected trends in
customers or usage impacting billed revenue from which intangible transition charges
are allocated to prevent shortfalls or excesses of collections of intangible
transition charges in future periods.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
If those forecasts or projections are not accurate, adjustments to the intangible
transition charges may result in the issuer collecting insufficient funds to pay
interest on the transition bonds when due and principal of the transition bonds in
accordance with the expected amortization schedule.
The Pennsylvania Competition Act, the First QRO and the 2000 QRO require the
Pennsylvania Public Utility Commission to approve annual adjustment requests within 90
days of the applicable date on which the servicer calculates the required adjustment
and files that adjustment request with the Pennsylvania Public Utility Commission.
Also, the First QRO and the 2000 QRO provide that, during the final calendar year of
collections of intangible transition charges for any series of transition bonds,
monthly or quarterly adjustments may be made. If the Pennsylvania Public Utility
Commission fails to approve these adjustments on a timely basis or there is any
litigation challenging the approval of these adjustments or methodology in calculating
these adjustments, the price and liquidity of the transition bonds could be adversely
affected.
Any of these factors could result in a delay in payment of principal from the expected
amortization schedule of the transition bonds offered by this prospectus. As a result,
the weighted average lives of the transition bonds could be adversely affected or
transition bondholders could suffer a loss of their investment.
Limited Time Period for Imposition or
Adjustment of Intangible Transition
Charges May Result in Losses to
Transition Bondholders The intangible transition charges may not be imposed for service periods after
December 31, 2010. Also, after the final adjustment date specified for each series,
the intangible transition charges may no longer be adjusted for that series. After
that date, any shortfalls in collections of intangible transition charges available to
make payments on the series are expected to be covered through amounts, if any, on
deposit in the reserve subaccount, the overcollateralization subaccount or the capital
subaccount. If those amounts are not enough to cover the shortfalls, the transition
bonds may not be paid in full by the applicable expected final payment date or class
or series termination date, and transition bondholders would suffer a loss of their
investments.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Lack of Historical Information About,
and Limited Experience Administering,
Intangible Transition Property May
Result in Losses to Transition
Bondholders The servicer has only limited historical information for intangible transition
property for the period beginning after the issuance of the Series 1999-A Bonds.
Further, because retail electric competition has only recently been introduced in
Pennsylvania, the servicer's customer and energy usage records may not accurately
reflect customers' long-term payment patterns or energy usage. This historical
information also does not reflect consolidated billing by electric generation
suppliers or other third parties. As a result, these records may not be useful in
predicting payments of intangible transition charges.
The servicer has limited experience administering this type of asset.
In the event of a foreclosure, there is likely to be a limited market, if any, for the
transferred intangible transition property. Therefore, foreclosure may not be a
realistic or practical remedy. See "--Bankruptcy; Creditors' Rights" below.
These factors may result in delays or shortfalls in scheduled payments on the
transition bonds.
Adjustments to Intangible Transition
Charges by Rate Classes May Result in
Insufficient Collections The customers responsible for paying intangible transition charges are currently
divided into 12 rate classes. In the settlement concerning PECO Energy's merger with
Unicom Corporation, PECO Energy agreed to reconcile all competitive transition charges
and intangible transition charge revenues on an annual basis in two categories:
(a) residential and (b) commercial and industrial (encompassing all commercial
and industrial accounts). Intangible transition charges are assessed by rate
class within each customer category. Adjustments to the intangible transition
charges will also be made to each rate class within each customer category. A
shortfall in collection in one rate class must be made up by adjustments to that
rate class as well as the other rate classes within that customer category. The
Pennsylvania Competition Act and the First QRO and the 2000 QRO provide, however,
that, shortfalls in a customer category may not be corrected by making
adjustments to rate classes in any other customer category.
Some rate classes in a particular category have a significantly smaller number of
customers than other rate classes in that customer category. If customers in a rate
class fail to pay intangible transition charges, the servicer may have to
substantially increase the intangible transition charges for the remaining customers
in that rate class and to a lesser extent the other rate classes in that customer
category. The servicer may also have to take this action if consumers representing a
significant percentage of a rate class cease to be customers. These increases could
lead to further failures by the remaining customers in that customer category to pay
intangible transition charges, thereby increasing the risk of a shortfall in funds to
pay the transition bonds. See also "--The Transition Bonds-- Issuance of Additional
Series of Transition Bonds May Increase Delinquencies of Intangible Transition
Charges" below.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Risks Associated with the Use of Credit
Enhancements May Result in Losses to
Transition Bondholders Some forms of credit enhancement, such as interest rate swaps entered into by the
issuer for a series or class of floating rate transition bonds, entail 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
PECO Energy Ceasing to Act as
Servicer May Result in Losses to
Transition Bondholders The servicer is responsible for calculating adjustments to the intangible transition
charges, submitting adjustment requests to the Pennsylvania Public Utility Commission
and billing and collecting the intangible transition charges. PECO Energy may resign
as servicer only in specified limited circumstances. If, however, PECO Energy ceased
servicing intangible transition property, it may be hard to obtain a successor
servicer. Also, a transfer of servicing functions will require cooperation by the
Pennsylvania Public Utility Commission. A successor servicer may have difficulties in
collecting intangible transition charges and determining appropriate adjustments to
intangible transition charges. Also, under current law, a successor servicer may not
be able to shut off service to a customer that fails to pay intangible transition
charges.
If PECO Energy were replaced as servicer, any of those factors and others could delay
the timing of payments on the intangible transition property. As a result, transition
bondholders could incur a loss of their investment. See "The Master Servicing
Agreement" in this prospectus.
Inaccurate Projections by Servicer May
Result in Losses to Transition
Bondholders If the servicer incorrectly forecasts the billed revenue from which intangible
transition charges are allocated and the delinquency and write-off experience relating
to intangible transition charges proves to be unreliable, the timely receipt of
collections of intangible transition charges could be adversely affected. A variety of
risks and uncertainties could cause actual results to differ materially from those
projected. They include changes in political, social and economic conditions, weather,
unexpected demographic trends, catastrophes, regulatory initiatives, compliance with
governmental regulations and litigation. All of these events and circumstances are
beyond the control of the servicer. Adjustments to the intangible transition charges
are required to be made under the Pennsylvania Competition Act if actual results
differ from projections. However, until the adjustments are made and result in
sufficient collections of intangible transition charges, payments on the transition
bonds could be delayed, and the market value of the transition bonds could be reduced.
There can be no assurance that, when made, adjustments will be sufficient.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Delays in Payments on Transition Bonds
May Be 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. The servicer cannot change the amount of a
customer's individual intangible transition charges, but it can take actions that it
believes will increase collections from a customer. These actions might include, for
example, agreeing to an extended payment schedule or agreeing to write-off the
remaining portion of an outstanding bill. The servicer can also write-off outstanding
bills that it deems uncollectible in accordance with its usual billing and collection
practices. Additionally, PECO Energy or a successor to PECO Energy as servicer may
change its billing and collection practices, or the Pennsylvania Public Utility
Commission may require changes to these practices.
These changes could delay or reduce collections of intangible transition charges and,
as a result, adversely affect the payment of interest on the transition bonds on a
timely basis or the payment of principal of the transition bonds in accordance with
the expected amortization schedule. See "The Seller and Servicer PECO Energy
Company--Customers and Operating Revenues," "--Billing Process" and "--Limited
Information on Customers' Creditworthiness" in this prospectus.
PECO Energy's Limited Information on
Customers' Creditworthiness May
Result in Increased Delinquencies and
Write-Offs The servicer's ability to collect intangible transition charges depends in part on the
creditworthiness of its customers. Under Pennsylvania law, PECO Energy generally must
provide service to new customers in its service area. 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 determines the creditworthiness of a large number of its
customers, there may be significant increases in delinquencies and write-offs. This
could result in delays in payments to transition bondholders. See "--It May Be More
Difficult to Collect Intangible Transition Charges Due To Billing by Third Parties"
below.
It May Be More Difficult to Collect
Intangible Transition Charges Due
to Billing by Third Parties Under the Pennsylvania Competition Act, after July 15, 2000, intangible transition
charges may be collected by third parties providing billing or metering services,
including electric generation suppliers. Any third party that provides consolidated
billing must pay the servicer amounts billed by the servicer to the third party,
including the intangible transition charges. Third party billing parties are required
to make these payments even if the third party fails to collect amounts due from
customers.
Billing by third parties could adversely affect the timely payment of interest on the
transition bonds or the payment of principal of the transition bonds in accordance
with the expected amortization schedule because:
o any third party that collects intangible transition charges may not use the same
customer credit standards as the servicer,
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
o problems may arise from new and untested systems or any lack of experience on the
part of third parties with customer billing and collections,
o the servicer may not be able to reduce credit risks relating to third parties in
the same manner in, or to the same extent to which, it reduces those risks
relating to its customers,
o the servicer generally will not have the right to pursue customers of a third
party which provides consolidated billing who defaults in the payment of
intangible transition charges,
o 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 pay collections of intangible transition charges. As a
result, a default in the payment of intangible transition charges by a single
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, and
o a new billing system could cause customer confusion.
Neither PECO Energy nor any successor servicer will pay any shortfalls resulting from
the failure of any third party to forward collections of intangible transition charges
to the servicer. The adjustment mechanism for the intangible transition charges, as
well as the amounts on deposit in the reserve subaccount, the overcollateralization
subaccount and the capital subaccount are intended to address delays in the timing of
collections and payments. However, delays in payments to transition bondholders might
occur as a result of delays in obtaining adjustments, limitations on rate adjustments
or insufficient funds in the reserve subaccount, the overcollateralization subaccount
and the capital subaccount after the final adjustment date.
Customers Within PECO Energy's
Service Area May Stop or Delay Making
Intangible Transition Charge Payments Customers within PECO Energy's service area may stop or delay paying intangible
transition charges because:
o they may misdirect their payments as they may owe amounts to several different
parties which may include both PECO Energy and an electric generation supplier or
other third party,
o if a large number of customers self-generate electricity, move out of PECO
Energy's service territory, significantly reduce their electricity consumption or
cease consuming electricity altogether, the intangible transition charges, as
periodically adjusted, required to be paid by remaining customers may become
burdensome. Greater delinquencies and write-offs or petitions to the Pennsylvania
Public Utility Commission to reduce intangible transition charges might result,
and
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
o the servicer may not be able to collect intangible transition charges from
customers who partially self-generate electricity because the servicer may not
know which consumers are self-generating electricity and will not be able to
exercise full shut-off rights against a self-generator.
Any of these factors could result in delays or shortfalls in scheduled payments on the
transition bonds.
The Commingling of Collections of
Intangible Transition Charges with
Servicer's Other Funds May Result in
Payment Delays Until collections of intangible transition charges are deposited with the bond
trustee, the servicer will not segregate them from its general funds. If the servicer
does not or cannot remit the full amount of the collections of intangible transition
charges there may be delays or reductions in payments to transition bondholders. The
adjustments to the intangible transition charges and amounts, if any, on deposit in
the reserve subaccount, the overcollateralization subaccount and the capital
subaccount are designed to reduce this risk. However, there may be delays in payments
to transition bondholders if there are delays in implementation of the adjustment
mechanism or a lack of funds in the reserve subaccount, the overcollateralization
subaccount and the capital subaccount after the final adjustment date.
Bankruptcy; Creditors' Rights
Bankruptcy of PECO Energy May
Result in Losses to Transition
Bondholders General. The bankruptcy of PECO Energy could have several adverse consequences for
transition bondholders, the most important of which are briefly described below.
Sale of Intangible Transition Property May Be Recharacterized as a Financing Rather
than a True Sale. The Pennsylvania Competition Act provides that a transfer of
intangible transition property by an electric utility to an assignee that is expressly
stated to be a sale or other absolute transfer in a transaction approved in a
qualified rate order will be treated as a sale, rather than a pledge or other
financing, of the intangible transition property. PECO Energy has represented in the
sale agreement that the sales of the intangible transition property in connection with
the issuance of the Series 1999-A Bonds and the Series 2000-A Bonds were sales.
PECO Energy has also represented that it took the appropriate actions under the
Pennsylvania Competition Act, including filing an intangible transition property
notice, to perfect the sale.
However, if PECO Energy became a debtor in a bankruptcy case, the bankruptcy trustee,
PECO Energy or another party could take the position that the sale of the transferred
intangible transition property to the issuer was a financing transaction and not a
sale. If a court agreed with this position, delays or reductions in payments on the
transition bonds could result. Regardless of a court's final decision on the character
of the transaction, the bankruptcy of PECO Energy could result in delays in payments
on the transition bonds. A bankruptcy also could have an adverse effect on the
secondary market for the transition bonds, including the liquidity and market value of
the transition bonds.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
To reduce the impact of the possible recharacterization of a sale or other absolute
transfer of intangible transition property as a financing transaction, the
Pennsylvania Competition Act and related regulations provide that if an intangible
transition property notice is filed and the transfer is later held to be a financing
transaction, that notice will be deemed to constitute a filing with respect to a
security interest. The Pennsylvania Competition Act also provides that any such filing
in respect of transition bonds takes precedence over any other filings.
As a result of these filings, the issuer would be a secured creditor of PECO Energy,
entitled to recover against the collateral. If, however, intangible transition
property notices were not or are not filed for any reason, the issuer failed or fails
to otherwise perfect its interest in the transferred intangible transition property
and the transfer is thereafter deemed not to constitute a true sale or other absolute
transfer, the issuer would be an unsecured creditor of PECO Energy.
Court May Order Consolidation of the Issuer and PECO Energy. If PECO Energy became a
debtor in a bankruptcy case, the bankruptcy trustee, PECO Energy or another party may
attempt to substantively consolidate the assets of the issuer and PECO Energy. PECO
Energy and the issuer have taken steps to attempt to reduce this risk. If, however, a
court ordered that the assets and liabilities of the issuer be consolidated with those
of PECO Energy, delays or reductions in payments on the transition bonds would result.
Court May Make Low Estimation of Contingent Claims; Enforceability of Remedy
Provisions May Be Challenged. If PECO Energy became a debtor in a bankruptcy case,
claims, including claims for liquidated damages, by the issuer against PECO Energy
under the sale agreement and the related documents would be unsecured claims and could
be discharged. Also, the bankruptcy trustee, PECO Energy or another party may request
that the bankruptcy court estimate any contingent claims, including for PECO Energy's
liquidated damages, of the issuer against PECO Energy and take the position that the
claims should be estimated at zero or at a low amount because the contingency giving
rise to the claims is unlikely to occur.
If PECO Energy became a debtor in a bankruptcy case and PECO Energy were obligated
under the sale agreement to pay liquidated damages, the bankruptcy trustee, PECO
Energy or another party might challenge the enforceability of the liquidated damages
provisions. If a court decided that the liquidated damages provisions were
unenforceable, the issuer should have a claim against PECO Energy for actual damages
based on breach of contract principles. The amount of those actual damages would be
subject to estimation or calculation by the court.
As a result of any of the above-described actions or claims, transition bondholders
could suffer delays in payment, reduction in the investment value of their transition
bonds or a loss of their investment.
</TABLE>
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<CAPTION>
<S> <C>
Intangible Transition Property May Not Be Held To Be Current Property, Resulting in
Unsecured Debt. The Pennsylvania Competition Act provides that the transferred
intangible transition property constitutes a current property right on and after the
date that a qualified rate order becomes effective. PECO Energy has also made a
representation to that effect. However, if PECO Energy became a debtor in a bankruptcy
case, the bankruptcy trustee, PECO Energy or another party could argue 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 adopted this position, a security interest in favor of the transition
bondholders may not attach to intangible transition charges in respect of electricity
used after the beginning of a bankruptcy case for PECO Energy. If a court took this
position and also determined that the transferred intangible transition property has
not been sold or transferred absolutely to PECO Energy or the issuer, the issuer would
be an unsecured creditor of PECO Energy and delays or reductions in payments on the
transition bonds could result.
Also, a court could rule that any intangible transition charges relating to
electricity consumed after the bankruptcy of PECO Energy cannot be transferred to the
issuer or the bond trustee. This could result in delays or reductions of payments of
the transition bonds.
Payments based on the intangible transition charges are indirectly usage-based
charges. Therefore, if PECO Energy became a debtor in a bankruptcy case, the
bankruptcy trustee, PECO Energy or another party could argue that the issuer should
pay a portion of the costs of PECO Energy associated with generating, transmitting or
distributing the electricity which gave rise to the collections of intangible
transition charges related to the transition bonds. If a court adopted this position,
there could be delays or reductions in payments to the transition bondholders.
Whether or not PECO Energy is the debtor in a bankruptcy case, if a court decided 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
PECO Energy arising before the transferred intangible transition property came into
existence could have priority over the issuer's interest in the transferred intangible
transition property. This could result in a reduction of amounts paid to the
transition bondholders. Adjustments to the intangible transition charges may be
available to reduce this risk, although delays in implementation or challenges to
those adjustments may cause a delay in receipt of payments.
Automatic Stay May Prevent or Delay Enforcement of Rights by Bond Trustee. If there is
an event of default under the indenture, the Pennsylvania Competition Act permits the
Pennsylvania Public Utility Commission to order the segregation and payment of all
intangible transition charges to transition bondholders. The Pennsylvania Competition
Act provides that the order will be effective notwithstanding bankruptcy or other
insolvency proceedings with respect to the utility or its assignee. The Pennsylvania
Public Utility Commission, however, may not be able to issue this order because of the
automatic stay provisions of the Bankruptcy Code. Also, a bankruptcy court may not
lift the stay to permit this action by the Pennsylvania Public Utility Commission. In
that event, the bond trustee may under the indenture seek an order from the bankruptcy
court lifting the automatic stay with respect to the Pennsylvania Public Utility
Commission action and an order requiring segregation of the revenues arising from the
transferred intangible transition property. However, a court may not grant either
order.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Bankruptcy of Servicer May Result in
Losses to Transition Bondholders The servicer can commingle collections of intangible transition charges with its own
funds until they are deposited with the bond trustee. The Pennsylvania Competition Act
provides that the priority of a lien created under the Pennsylvania Competition Act is
not adversely affected by the commingling of funds arising with respect to intangible
transition property with funds of the electric utility. However, in the event of a
bankruptcy of the servicer, the bankruptcy trustee, the servicer or another party
might argue that collections of intangible transition charges held by the servicer
were property of the servicer included in its bankruptcy estate. If a court adopted
this position, there may be delays in payments due on the transition bonds.
If the servicer became a debtor in a bankruptcy case, the automatic stay may prevent
the issuer from effecting a transfer of servicing, even though the master servicing
agreement provides that the bond trustee appoint, or petition the Pennsylvania Public
Utility Commission or a court to appoint, a successor servicer.
Even if a successor servicer may be appointed, it may be difficult to find an entity
willing to act as a successor servicer.
</TABLE>
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<PAGE>
The Transition Bonds
<TABLE>
<CAPTION>
<S> <C>
Absence of Secondary Market for
Transition Bonds Could Limit Ability
to Resell Transition Bonds The underwriters for the various series of transition bonds may assist in resales of
the transition bonds offered by this prospectus, but they are not required to do so.
Although secondary markets for the Series 1999-A Bonds and the Series 2000-A Bonds
have developed, a secondary market for the transition bonds offered by this prospectus
may not develop. If a secondary market for those transition bonds does develop, it may
not continue or it may not be sufficiently liquid to allow holders to resell any of
the transition bonds. See "Plan of Distribution" in this prospectus.
Limited Sources of Payments for the
Transition Bonds May Result in Losses
to Transition Bondholders The transition bonds are obligations only of the issuer, a special purpose entity. The
transition bonds will not represent an interest in or obligation of PECO Energy, the
issuer trustee, the bond trustee or any entity other than the issuer. The issuer has
no property other than the collateral and its organizational documents restrict its
rights to acquire assets not related to the transactions described in this prospectus.
The collateral is the sole source of payment on the transition bonds. None of the
transition bonds will be guaranteed or insured by PECO Energy, the issuer trustee, the
bond trustee or any affiliates of those entities, other than the issuer, or any other
entity.
Issuance of Additional Series May
Adversely Affect Outstanding
Transition Bonds The issuer may from time to time issue additional series of transition bonds without
the prior review by or consent of the transition bondholders of any previously issued
series. Additional series of transition bonds may not be issued if it would result in
the credit ratings on any outstanding series of transition bonds being reduced or
withdrawn, but the issuance of any other series of transition bonds might 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 require a vote of all
transition bondholders of all series, even though there may be differences in the
interests or positions among those series or classes of those series. This could
result in voting outcomes adverse to your interests.
Issuance of Transition Bonds by
Another Issuer May Adversely Affect
Outstanding Transition Bonds The seller may sell intangible transition property to one or more parties other than
the issuer to securitize stranded costs without the prior review by or consent of the
transition bondholders of any previously issued series. In the event of such sale,
collections of intangible transition property will be pro rated among the issuer and
such other parties based on their respective Percentages. Intangible transition
property may not be sold to another issuer if it would result in the credit ratings of
any outstanding series of transition bonds being reduced or withdrawn. The sale of
intangible transition property to another issuer may have an impact on the timing or
amount of payments received by transition bondholders. In addition, various matters
relating to the transition bonds under the master servicing agreement 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 these other issuers and the transition
bonds issued by the issuer which could result in voting outcomes adverse to your
interests.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Issuance of Additional Series of
Transition Bonds May Increase
Delinquencies of Intangible Transition
Charges With the issuance of each additional series of transition bonds, the intangible
transition charges will change and may increase. Although this should not affect the
overall rates paid by customers because of adjustments of other rates at the time of
issuance, future adjustments may cause intangible transition charges to increase for
certain customers. These increases may lead to increased failures to pay intangible
transition charges, and may reduce collections of intangible transition charges. See
also "Unusual Nature of Intangible Transition Property--Adjustments to Intangible
Transition Charges by Rate Classes May Result in Insufficient Collections" above.
Securities Ratings Are Limited and Do
Not Assess Timing of Principal
Payments The transition bonds offered by this prospectus will be rated by one or more
established rating agencies. The ratings merely analyze the probability that the
issuer will repay the total principal amount of the transition bonds at final
maturity--the series or class termination date, as applicable--and will make timely
interest payments. The ratings do not assess whether the issuer will repay the
principal of the transition bonds in accordance with the expected amortization
schedule. As a result, any series or class of transition bonds might be paid later
than expected, resulting in a weighted average life of those 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.
Transition Bondholders May Receive
Principal Payments Later Than
Expected The actual dates on which principal is paid on each class of transition bonds might be
affected by the amount and timing of receipt of collections of intangible transition
charges. Since the amount of intangible transition charges collected from each
customer will depend upon the customer's usage of electricity, the aggregate amount
and timing of collections of intangible transition charges--and the resulting amount
and timing of principal payments 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 by Servicer May Result in Losses to Transition
Bondholders" above.
</TABLE>
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<CAPTION>
<S> <C>
Although the intangible transition charges will be adjusted from time to time based in
part on the actual rate of collections of intangible transition charges during prior
billing periods, the servicer may not be able to forecast accurately actual customer
energy usage and the rate of delinquencies and write-offs or implement adjustments to
the intangible transition charges. If collections of intangible transition charges are
received at a slower rate than expected, payments on the transition bonds may be made
later than expected, resulting in a longer weighted average life. Because principal
will generally be paid at a rate not to exceed that reflected in the expected
amortization schedule, the transition bonds are not expected to be retired earlier
than scheduled other than in the event of a redemption or acceleration.
Transition Bondholders May Have To
Reinvest the Principal of Their
Investment at a Lower Rate of Return
Because of Optional and Mandatory
Redemption of the Transition Bonds If so provided in a prospectus supplement, there may be optional redemption of the
transition bonds. There will be mandatory redemptions if PECO Energy must pay
liquidated damages. Future market conditions may require transition bondholders to
reinvest the proceeds of a redemption at a rate lower than the rate received on the
transition bonds. The issuer cannot predict whether it will redeem any series of
transition bonds. See "Weighted Average Life and Yield Considerations" and "The
Transition Bonds--Credit Enhancement" in this prospectus.
PECO Energy's Obligation to Pay
Liquidated Damages for a Breach of a
Representation or Warranty May Not Be
Sufficient to Protect Your Investment The obligations of PECO Energy under the sale agreement have been assigned to the bond
trustee under the indenture as security for all of the transition bonds issued under
the indenture. If PECO Energy breaches specified representations or warranties in the
sale agreement, PECO Energy may be obligated to pay the bond trustee, as assignee of
the issuer, liquidated damages if that breach continues beyond a 90-day grace period
and has a material adverse effect on transition bondholders or if the losses
attributable to that breach continue beyond a 90-day grace period and the full amount
of these losses are expected to exceed the de minimis loss amount. The amount of any
liquidated damages paid by PECO Energy, however, may not be sufficient for you to
recover your transition bond investment. If PECO Energy becomes obligated to pay
liquidated damages, the ratings on the transition bonds will likely be downgraded
since the bond trustee, on behalf of the transition bondholders, will be an unsecured
creditor of PECO Energy with respect to any of these amounts. See "The Sale
Agreement--Representations and Warranties of the Seller" in this prospectus.
</TABLE>
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<PAGE>
GLOSSARY OF DEFINED TERMS
You can find a glossary of defined terms used in this prospectus
beginning on page 116 in this prospectus.
AVAILABLE INFORMATION
The issuer has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, 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 some of the 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 the document so filed. For further information, reference is
made to the registration statement and the exhibits to the registration
statement, 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 to the registration statement 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 has filed and will continue to file with the SEC the
periodic reports as are required by the Exchange Act and the rules, regulations
or orders of the SEC under the Exchange Act. 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.
INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents filed by the issuer under 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 of this registration statement. 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 in this prospectus modifies or supersedes that
statement. Any of these statements 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 in this prospectus by
reference, except the exhibits to those documents--unless those exhibits are
specifically incorporated by reference in those documents. Written requests for
those 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 those copies should be directed to the
issuer at 302-888-7532.
34
<PAGE>
THE PENNSYLVANIA COMPETITION ACT
The Pennsylvania Competition Act's General Effect on the Electric Utility
Industry in Pennsylvania
The Pennsylvania Electricity Generation Customer Choice and Competition
Act was enacted in December 1996 and provides for the restructuring of the
electric utility industry in Pennsylvania. The Pennsylvania 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 Pennsylvania Public Utility Commission. Under the
Pennsylvania Competition Act, electric generation suppliers are subject to
certain limited financial and disclosure requirements but are otherwise
unregulated by the Pennsylvania Public Utility Commission. Electric distribution
and transmission services remain regulated by the Pennsylvania Public Utility
Commission.
The Pennsylvania Competition Act requires utilities to submit
restructuring plans, including their stranded costs resulting from retail
competition for generation services. Stranded costs include regulatory assets
and long-term purchase power commitments for which full recovery is allowed and
other costs, including investment in generating plants, retirement costs and
reorganization costs, for which an opportunity for recovery is allowed in an
amount determined by the Pennsylvania Public Utility Commission as just and
reasonable. Under the Pennsylvania Competition Act, utilities are subject to a
generation rate cap through the later of December 31, 2005 or until stranded
cost recovery ends. This rate cap provides that total generation charges to
customers cannot exceed rates in place at December 31, 1996, subject to certain
exceptions. The Pennsylvania Competition Act also caps transmission and
distribution rates from December 31, 1996 through June 30, 2005, subject to
specified exceptions. The period was subsequently extended to December 31, 2006.
See "PECO Energy's Electric Restructuring Plan--Subsequent Events."
Recovery of Stranded Costs
As a mechanism for utilities, including PECO Energy, to recover their
allowed stranded costs, the Pennsylvania Competition Act provides for the
imposition and collection of nonbypassable charges on customers' bills called
competitive transition charges. Competitive transition charges are assessed to
and collected from all retail customers who have been assigned stranded cost
responsibility and access the utilities' transmission and distribution systems
and may be collected over a maximum period of ten years, except as that period
may be extended by the Pennsylvania Public Utility Commission for good cause
shown. As the competitive transition charges are based on access to the
utility's transmission and distribution system, they are assessed regardless of
whether that customer purchases electricity from the utility or an independent
electric generation supplier. The Pennsylvania 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--Legal Challenges Could Adversely Affect Transition Bondholders" and
"Risk Factors--Unusual Nature of Intangible Transition Property--Lack of
Continued Operation of Existing Generation Facilities May Result in Losses to
Transition Bondholders" in this prospectus.
Securitization of Stranded Costs
The Pennsylvania Competition Act authorizes the Pennsylvania Public
Utility Commission 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 Pennsylvania 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 Pennsylvania Competition Act contains a number of provisions
designed to facilitate the securitization of stranded costs.
35
<PAGE>
Irrevocability of Intangible Transition Property. Under the
Pennsylvania Competition Act, intangible transition property is created by the
issuance by the Pennsylvania Public Utility Commission of a qualified rate order
and the declaration by the Pennsylvania Public Utility Commission that the
relevant paragraphs of a qualified rate order are irrevocable. The Pennsylvania
Public Utility Commission is granted the power under the Pennsylvania
Competition Act to specify that all or a portion of that qualified rate order
will be irrevocable. The Pennsylvania Competition Act provides that to the
extent that the Pennsylvania Public Utility Commission declares all or a portion
of a qualified rate order irrevocable, the Pennsylvania Public Utility
Commission may not, by any subsequent action, reduce, postpone, impair or
terminate either the order or the intangible transition charge authorized in
that order. In addition, under the Pennsylvania Competition Act, the
Commonwealth of Pennsylvania 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 Pennsylvania Competition Act provides, however, that nothing
precludes the Commonwealth of Pennsylvania 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 under 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" in this prospectus.
Adjustments of the Intangible Transition Charges. The Pennsylvania
Competition Act requires the Pennsylvania Public Utility Commission to provide
in all qualified rate orders a procedure for expeditiously approving periodic
adjustments to the intangible transition charges. The Pennsylvania Competition
Act requires that these adjustments be made on at least an annual basis on each
anniversary of the issuance of the qualified rate order or at additional
intervals as specified in that order. The Pennsylvania Public Utility Commission
must approve these annual adjustments within 90 days of each request for
adjustment.
Nonbypassability. The Pennsylvania 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
Pennsylvania 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
Pennsylvania Public Utility Commission authorizes the utility to contract with
that assignee for the utility:
(1) to continue to operate the system to provide electric services
to the utility's customers,
(2) to impose and collect the applicable intangible transition
charges for the benefit and account of the assignee,
(3) to make periodic adjustments of the intangible transition
charges, and
(4) 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 of these contracts:
(1) will be binding upon the utility, its successors and assigns,
and
(2) will be required by the Pennsylvania Public Utility Commission
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 that customer or the municipal entity providing those
services in place of the utility.
Creation of a Statutory Lien on Intangible Transition Property. The
Pennsylvania 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:
36
<PAGE>
(1) value is given by purchasers of the transition bonds, and
(2) a filing is made with the Pennsylvania Public Utility Commission
to perfect the security interest within 10 days from issuance of
the transition bonds.
The Pennsylvania 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 Pennsylvania Public Utility Commission in accordance
with the provisions of the Pennsylvania 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 Pennsylvania Competition Act provides that this 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 Pennsylvania Competition
Act. The Pennsylvania Competition Act provides that priority of security
interests in intangible transition property will not be defeated or adversely
affected by:
(1) commingling of revenues with other funds of the utility, or
(2) changes to the qualified rate order or the intangible transition
charges.
Characterization of Transfer of Transferred Intangible Transition
Property as True Sale. The Pennsylvania 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:
(1) the parties expressly state in governing documents that a
transfer is to be a sale or other absolute transfer, and
(2) the transaction is approved in a qualified rate order.
See "Risk Factors--Bankruptcy; Creditors' Rights" in this prospectus.
Jurisdiction Over Disputes; Standing
Actions against customers for nonpayment of the intangible transition
charges may only be brought by the utility, its successor or any other entity
providing electric service to the customers. In addition, the Pennsylvania
Competition Act grants to the Pennsylvania Public Utility Commission 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.
Possible Federal Preemption of the Pennsylvania Competition Act
On February 24, 2000, S. 2098 (Electric Power Market Competition and Reliability
Act) was introduced in the U.S. Senate and referred to the Senate Energy and
Natural Resources Committee. Several other bills dealing in varying detail with
retail competition, stranded cost recovery, electricity reliability standards
and consumer protections were introduced in 1999 and 2000 and referred to
various Congressional committees. While S. 2098 contains provisions allowing
recovery of retail stranded costs and deferring to the states on certain key
issues such as public benefit, the issuer cannot predict what final form this
bill or any of the other bills will take or whether these bills, or any future
bills will become law or, if they become law, what their final form or effect
will be. Further, 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 a federal preemption a taking. Moreover, even if a preemption of
the Pennsylvania Competition Act or any qualified rate order 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 this 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
"Risk Factors--Unusual Nature of Intangible Transition Property--Federal
Legislation May Result in Losses to Transition Bondholders" in this prospectus
and "--Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition
Act" below.
37
<PAGE>
Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition Act
Under the Pennsylvania Competition Act, the Commonwealth of
Pennsylvania 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 Pennsylvania Competition Act also provides, however, that
subject to the requirements of law, nothing contained in the Pennsylvania
Competition Act precludes this limitation or alteration by the Commonwealth if
"adequate compensation is made by law" for the full protection of the intangible
transition charges collected under 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 of Pennsylvania if it
attempts to limit or alter intangible transition property or intangible
transition charges. Accordingly, no assurance can be given that this 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 "Risk Factors--Unusual Nature of
Intangible Transition Property--Changes in Law May Result in Losses to
Transition Bondholders" in this prospectus.
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, counsel to
PECO Energy, under the Contract Clause of the United States Constitution, the
Commonwealth of Pennsylvania could not repeal or amend the Pennsylvania
Competition Act--by way of legislative process--or take any other action that
substantially impairs the rights of the transition bondholders, unless that
action is a reasonable exercise of the Commonwealth's sovereign powers and of a
character appropriate to the public purpose justifying that 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 those bonds. Based upon this case law, in the
opinion of Ballard Spahr Andrews & Ingersoll, LLP, it would appear unlikely that
the Commonwealth of Pennsylvania 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 Clause of the United States Constitution,
the Commonwealth of Pennsylvania could not repeal or amend the Pennsylvania
Competition Act--by way of legislative process--or take any action that violates
its pledge and agreement described in the first paragraph of this subheading
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 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 Pennsylvania Competition Act will not be sought or adopted or that any
action by the Commonwealth of Pennsylvania may not occur, any of which might
constitute a violation of the Commonwealth's pledge and agreement with the
transition bondholders. If this occurs, costly and time-consuming litigation
might ensue. That litigation might adversely affect the price and liquidity of
the transition bonds and the dates of payments of principal of the transition
bonds and, accordingly, the weighted average lives of the transition bonds.
Moreover, given the lack of judicial precedent directly on point, and the
novelty of the security for the transition bondholders, the outcome of that
litigation cannot be predicted with certainty, and accordingly, transition
bondholders could incur a loss of their investment.
38
<PAGE>
PECO ENERGY'S ELECTRIC RESTRUCTURING PLAN
General
In accordance with the provisions of the Pennsylvania Competition Act,
in April 1997, PECO Energy filed with the Pennsylvania Public Utility Commission
a comprehensive electric restructuring plan detailing its proposal to implement
full customer choice of electric generation suppliers. PECO Energy's electric
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 electric restructuring proceeding filed with the Pennsylvania Public
Utility Commission a Joint Petition for Partial Settlement. In December 1997,
the Pennsylvania Public Utility Commission rejected the Joint Petition for
Partial Settlement and entered an Opinion and Order, revised in January and
February 1998, the Restructuring Order, which deregulated PECO Energy's electric
generation operations. The Restructuring Order authorized PECO Energy to recover
stranded costs of $4.9 billion on a discounted basis, or $5.3 billion on a book
value basis, over 8 1/2 years beginning in 1999.
On January 21, 1998, PECO Energy filed a complaint in the U.S. District
Court for the Eastern District of Pennsylvania seeking injunctive and monetary
relief on the grounds that the provisions of the Restructuring Order relating to
transmission rates were preempted by the Federal Power Act and that
implementation of the Pennsylvania Competition Act by the Pennsylvania Public
Utility Commission 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 appealing the 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 Restructuring Order. See
"--Prior Litigation" in this section of this prospectus.
On April 29, 1998, PECO Energy and all but one of the 25 parties who
challenged PECO Energy's electric restructuring plan filed a settlement with the
Pennsylvania Public Utility Commission. That settlement--referred to as the
electric restructuring plan settlement--was approved by the Pennsylvania Public
Utility Commission in the Final Order. The Final Order was subsequently appealed
by IP&L. Under the terms of the electric restructuring plan 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, were resolved when the U.S. Supreme Court denied certiorari of a
separate suit in which IP&L claimed that the provisions of the Pennsylvania
Competition Act that allow recovery of stranded costs violate the Commerce
Clause of the United States Constitution. See "--Prior Litigation" in this
section of this prospectus.
The electric restructuring plan settlement authorized PECO Energy to
recover $5.26 billion of stranded costs, together with a return of 10.75% on
these stranded costs. For good cause shown, the Pennsylvania Public Utility
Commission authorized the recovery of stranded costs over a 12-year transition
period beginning January 1, 1999 and ending December 31, 2010. Recovery of
stranded costs and the allowed return are through 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 were established assuming
annual growth in sales of 0.8% and are reconciled annually to actual sales.
All terms of the electric restructuring plan settlement described in
this prospectus were specifically made to apply to the issuance of the Series
2000-A Bonds, including the termination of intangible transition charges no
later than December 31, 2010, generation rate caps and rate cap extensions.
The following table shows the estimated average levels of competitive
transition charges and/or intangible transition charges for the years 2001
through 2010, based on estimated 0.8% annual sales growth assumed in the
restructuring settlement. For the nine month period ended September 30, 2000,
annual retail electric revenues were $1,996,194,000, including combined
competitive transition charges and intangible transition charges of
approximately $479,000,000.
The projected amounts included within the Annual Stranded Cost
Amortization and Return disclosure in this "PECO Energy's Electric Restructuring
Plan" section were not prepared with a view toward compliance with published
guidelines of the SEC, the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections or generally accepted accounting principles. Additionally,
PricewaterhouseCoopers LLP, as described in the "Experts" section, has neither
examined nor compiled these projected amounts.
39
<PAGE>
TABLE 1
Annual Stranded Cost
Amortization And Return
<TABLE>
<CAPTION>
Revenue Excluding
Gross Receipts Tax(3)
--------------------------------------------------------
Annual CTC Return @
Year Sales(1) And/or ITC(2) Total 10.75% Amortization
---- ----- ------------- ----- ------ ------------
<S> <C> <C> <C> <C> <C>
MWh $/kWh ($000) ($000) ($000)
2001 34,108,616 0.0231(4) 753,241(4) 482,561(4) 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
restructuring plan 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 reflected in PECO Energy's revenue at the
rate of 4.4% on each dollar of the utility's gross receipts arising from
certain sales of energy.
(4) Reflects the rate reductions required by the 2000 QRO and the merger
settlement described under "Subsequent Events" in this section.
Authorization to Securitize. Under the electric restructuring plan
settlement, PECO Energy securitized $4 billion of its $5.26 billion of stranded
cost recovery through the issuance of transition bonds, the Series 1999-A Bonds.
The intangible transition charges associated with the issuance of all 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 electric restructuring
plan settlement and the settlement of the 2000 QRO anticipate the benefits of
the securitization. Under the electric restructuring plan settlement, after the
issuance of any transition bonds, competitive transition charges (or PECO
Energy's distribution rates) are reduced by the amount of intangible transition
charges imposed to pay the applicable qualified transition expenses. As part of
its approval of the 200 QRO, the Pennsylvania Public Utility Commission
authorized the securitization of up to an additional $1 billion of stranded
costs.
The First QRO also authorized PECO Energy and any assignee, namely the
issuer, to refinance, in reliance on that First QRO, one or more series of
transition bonds, each series in one or more classes secured by intangible
transition property created by that order, provided that the final maturity of
any series not exceed 10 years from the date of issuance and in no event have a
final maturity after December 31, 2010. PECO Energy and the issuer may only
refinance transition bonds in a face amount not to exceed the unamortized
principal of the outstanding transition bonds being refinanced.
40
<PAGE>
Unbundling of Rates and Rate Reductions and Rate Caps. The electric
restructuring plan settlement required PECO Energy to unbundle its retail
electric rates for billing cycles beginning on January 1, 1999 into the
following components:
(1) distribution and transmission charges,
(2) if applicable, intangible transition charges and competitive
transition charges, and
(3) a shopping credit for generation.
The sum of the competitive transition charges and the shopping credit equals 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 electric restructuring plan settlement required PECO Energy to
reduce rates during 1999 and 2000 by 8% and 6%, respectively, from rates in
existence on December 31, 1996. Further, the electric restructuring plan
settlement provided for one-time additional discounts in 2000 since there was an
overcollection of intangible transition charges and competitive transition
charges in 1999, resulting in the rates for (a) residential and (b) commercial
and industrial rate categories being reduced by 8.3% and 7%, respectively, for
2000.
The electric restructuring plan settlement also extended the rate caps
on generation rates at higher levels than required by the Pennsylvania
Competition Act, until December 1, 2010, and extended rate caps on transmission
and distribution rates until June 30, 2005. The transmission and distribution
rate cap period was subsequently extended to December 31, 2006.
The Pennsylvania Competition Act authorizes electric distribution
companies to recover increases in state taxes resulting from the introduction of
competition through adjustments in the rates charged to customers. In
circumstances set forth in the regulations adopted by the Pennsylvania Public
Utility Commission, adjustments to rates for increases in state taxes may result
in rates exceeding the applicable rate cap. PECO Energy applied to the
Pennsylvania Public Utility Commission for, and was granted, the right to defer
state tax liabilities for future recovery if rates increase or as offsets for
future state tax decreases.
Competitive Metering and Billing. 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. Pennsylvania Public Utility
Commission-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 Pennsylvania Public Utility Commission-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
Pennsylvania Public Utility Commission, 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--including transition charges--or provider of last resort service. See
also "The Qualified Rate Orders and the Intangible Transition Charges--The
Intangible Transition Charges" in this prospectus.
Provider of Last Resort. Under PECO Energy's electric restructuring
plan, PECO Energy acts 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 specified terms, conditions and qualifications.
41
<PAGE>
Customer Choice, Market Share Thresholds, and Competitive Default
Service. Under the electric restructuring plan settlement, customer choice of
electric generation suppliers was phased in between January 1, 1999 and January
2, 2000. In the electric restructuring plan settlement, PECO Energy agreed to
two market share threshold tests to measure and adjust the amount of customer
migration that occurs under customer choice. On January 1, 2001, if 35% of PECO
Energy's residential and commercial customers are not obtaining generation
service from alternative electric generation suppliers (measured by number of
customers for the residential class, and by percentage of load for the
commercial class), then non-shopping customers will be assigned to alternative
generation suppliers until that level is reached. The second market share
threshold is on January 1, 2003. If, on that date, 50% of PECO Energy's
residential and commercial customers are not obtaining generation services from
alternative electric generation suppliers, then non-shopping customers will be
assigned to alternative generation suppliers to reach that level. The procedures
for accomplishing this have not yet been developed, and will be subject to
Pennsylvania Public Utility Commission approval.
To satisfy the requirements that 35% of PECO Energy's residential and
commercial customers obtain generation service from an alternate electric
generation supplier, on November 29, 2000, the Pennsylvania Public Utility
Commission approved PECO Energy's bilateral contract with New Power Company to
move 22% of PECO Energy's non-shopping residential customers to New Power for
generation service. This arrangement implements the competitive default service
provisions of the electric restructuring plan settlement. Under this contract,
New Power has agreed that, for the three-year term of the contract, it will
provide generation services, at specified discounted rates, to nearly 300,000
residential customers of PECO Energy who are currently taking their generation
service from PECO Energy. Throughout the three-year term, those customers will
continue to have the right to switch to an alternative generation supplier other
than New Power, as well as the right to return as customers of PECO Energy,
without penalty or charge. At the end of 2002, if the number of competitive
default service customers then served by New Power has dropped below 20% of PECO
Energy's residential customer base, there will be an additional allocation of
residential customers to New Power to bring its competitive default service
levels back up to 20% of the residential customer base. No additional assignment
is anticipated as of January 1, 2001.
By order entered April 30, 1999, the Pennsylvania Public Utility
Commission adopted procedures for qualifying to provide competitive default
service. The procedures require an electric generation supplier to provide:
o proof that it has received the requisite licenses from the state
and federal governments
o proof that it meets certain creditworthiness standards, and
o assurances that it can acquire additional surety bonds as
necessary.
New Power was required to meet these standards before it was allowed to
contract to provide competitive default service to PECO Energy's customers. In
addition, New Power contractually agreed to provide additional credit assurances
that will provide liquidated damages to PECO Energy in the event that New Power
materially defaults on its obligations under the contract.
The April 30, 1999 order also provided that the supplier of competitive
default service will be required to provide billing, including payment of
intangible transition charges and other revenues, to PECO Energy on the terms
and conditions set forth in PECO Energy's tariff. Under New Power's contract
with PECO Energy, however, PECO Energy will continue to provide billing services
for the New Power Competitive Default Service customers. Billing for those
customers will therefore be conducted using PECO Energy's normal practices and
terms.
Other Provisions. The electric restructuring plan settlement also
provided 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.
Subsequent Events
On February 7, 2000, the Mid-Atlantic Power Supply Association filed an
intervention to the Pennsylvania Pubic Utility Commission's proceedings on PECO
Energy's application for the 2000 QRO to ensure that the then-proposed
securitization would not have an adverse effect on competition in the retail
electrical services market in Pennsylvania. Specifically, that association
expressed concern that the 2000 QRO would cause a reduction in the shopping
credit established in the First QRO and would enable PECO Energy to use the
proposed rate reduction in 2001 to promote its provider of last resort service.
42
<PAGE>
The Mid-Atlantic Power Supply Association subsequently agreed to join
with several of the parties who participated in PECO Energy's electric
restructuring proceedings in a settlement, which was filed with the Pennsylvania
Public Utility Commission on March 8, 2000. The settlement stated that,
beginning January 1, 2001, PECO Energy will provide its retail customers with
additional rate reductions in the total amount of $60 million.
PECO Energy also agreed in the settlement of the 2000 QRO that it would
not use the related securitization savings or the 2001 rate reductions to
promote its provider of last resort service. Consequently, unless required by
law, PECO Energy may not refer to savings from securitization or rate reductions
in any public advertising, promotion or communication without following
procedures to review the content with the Mid-Atlantic Power Supply Association.
PECO Energy's unbundled rates, rate reductions (from the electric restructuring
plan settlement and the settlement of the 2000 QRO) and rate caps are reflected
in the schedule of system-wide average rates included in the electric
restructuring plan settlement, the settlement of the 2000 QRO and the merger
settlement (described below) and are shown in Table 2 below. See also "The
Qualified Rate Orders and The Intangible Transition Charges" and "The Seller and
Servicer PECO Energy Company."
On November 22, 1999, PECO Energy filed an application for approval of
its merger with Unicom Corporation (whereby PECO Energy became a wholly owned
subsidiary of Exelon Corporation) with the Pennsylvania Public Utility
Commission. Twenty-five parties filed protests or petitions to intervene in the
application. On March 23, 2000, PECO Energy filed a joint petition for
settlement of the issues raised in the application for the merger. The
Pennsylvania Public Utility Commission approved the settlement on June 22, 2000
without modification. On October 20, 2000, PECO Energy merged with Unicom
Corporation creating a new holding company, Exelon Corporation. PECO Energy and
Commonwealth Edison (formerly a subsidiary of Unicom Corporation and a regulated
utility in Illinois) continue as subsidiaries of Exelon Corporation.
Under the merger settlement, PECO Energy agreed to $200 million in rate
reductions for all customers over the period January 1, 2002 through 2005 and
extended rate caps on PECO Energy's retail electric distribution charges (in
addition to the rate reduction implemented in connection with the settlement of
the 2000 QRO) through December 31, 2006. The merger settlement agreement also
provided for electric reliability and customer service standards, mechanisms to
enhance competition and customers choice, expanded assistance to low-income
customers, extensive funding for wind and solar energy and community education,
nuclear safety research funds, customer protection against nuclear costs outside
of Pennsylvania and maintenance of charitable and civic contributions and
employment for PECO Energy's headquarters in Philadelphia. The merger settlement
also requires PECO Energy to provide certain benefits after completion of the
merger with Unicom Corporation including a requirement that, effective January
1, 2002, PECO Energy reduce its retail electric rates by $60 million annually
until January 1, 2004, and then by $40 million through December 31, 2005. The
merger settlement extends the retail distribution and transmission rate cap
provision of the electric restructuring settlement from June 30, 2005 to
December 31, 2006. PECO Energy also agreed not to seek recovery, through
Pennsylvania electric distribution rates, of the costs associated with the
ownership and operation of any nuclear generating plants PECO Energy did not own
on December 31, 1999.
The merger settlement provides options for AMTRAK, to whom PECO Energy
provides service in rate class EP, to prepay its transition charge
responsibility to PECO Energy in fixed amounts ranging from $46,561,000 to
$41,619,000 on certain dates from October 1, 2000 to July 1, 2002. AMTRAK is
under no obligation to exercise any of the options. AMTRAK did not exercise its
option on October 1, 2000. If and when AMTRAK decides to exercise its option,
the PECO Energy generation rate applicable for AMTRAK service under Rate EP will
be the fixed shopping credit set forth in the restructuring plan settlement,
which will no longer be subject to yearly adjustment through the adjustments of
competitive transition charges and intangible transition charges.
PECO Energy also agreed in the merger settlement to reconcile all
competitive transition changes and intangible transition charge revenues on an
annual basis in two categories: (a) residential; and (b) commercial and
industrial (encompassing all commercial and industrial accounts), effective for
rate-setting cases for the year 2001. The parties to the merger settlement
anticipate that this modification of the reconciliation process will minimize
changes to the shopping credits on commercial and industrial rate classes by
expanding the customer base on which the charges are reconciled. PECO Energy
will notify customers by bill insert of any changes to the shopping credits that
result from the annual reconciliation process, whenever possible in advance of
any change becoming effective.
43
<PAGE>
TABLE 2
Schedule of System-Wide Average Rates (per kilowatt-hour ("kWh"))(1)
<TABLE>
<CAPTION>
CTC
T&D and/or Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) ITC(4) Credit Rate Cap
-------------- --------------- ------------ ----------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
(1) (2) (3)=(1)+(2) (4) ((1)5) (6)=(4)+(5)
$/kWh $/kWh $/kWh $/kWh $/kWh $/kWh
January 1, 2001 0.0045 0.0253 0.0298 0.0231(5) 0.0450 0.0681
January 1, 2002 0.0045 0.0235 0.0280 0.0251 0.0447 0.0698
January 1, 2003 0.0045 0.0235 0.0280 0.0247 0.0451 0.0698
January 1, 2004 0.0045 0.0241 0.0286 0.0243 0.0455 0.0698
January 1, 2005 0.0045 0.0241 0.0286 0.0240 0.0458 0.0698
January 1, 2006 0.0045 0.0241 0.0286 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 PECO Energy's electric restructuring plan.
(2) The transmission prices listed are for unbundled rates only. The
Pennsylvania Public Utility Commission does not regulate the rates for
transmission service.
(3) The T&D (Transmission & Distribution) Rate Cap under Section 2804(4) of the
Pennsylvania Competition Act was extended until June 30, 2005, and
subsequently extended to December 31, 2006 by the merger settlement.
(4) Figures result in the recovery of $5.26 billion of stranded costs plus the
allowed return on these 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 PECO
Energy's electric restructuring plan and the settlement of the 2000 QRO.
Both the competitive transition charges and the intangible transition
charges are subject to adjustment.
(5) Reflects the rate reductions required by the 2000 QRO and the merger
settlement.
Prior Litigation
In May, 1997, IP&L appealed the First QRO by filing an action in the
Commonwealth Court of Pennsylvania challenging the Pennsylvania Competition Act,
alleging that the Pennsylvania Competition Act's provision allowing PECO Energy
to recover stranded costs discriminates against interstate commerce in violation
of the Commerce Clause of the United States Constitution. In an opinion dated
May 7, 1998, the Commonwealth Court dismissed IP&L's action, holding, as a
matter of law, that the Pennsylvania Competition Act does not violate the
Commerce Clause. Following that dismissal, IP&L petitioned the Pennsylvania
Supreme Court for allowance of appeal. In the petition, IP&L claimed that the
payment of stranded costs to PECO Energy discriminates against interstate
commerce by favoring in-state electricity producers over out-of-state
electricity producers. On September 29, 1998, the Pennsylvania Supreme Court
denied IP&L's petition for allowance of appeal. On December 28, 1998, IP&L filed
a petition for a writ of certiorari with the United States Supreme Court to
appeal the Commonwealth Court's decision on the claim described above. On March
8, 1999, the United States Supreme Court denied the petition.
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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 restructuring plan settlement with the Pennsylvania
Public Utility Commission. The restructuring plan settlement was approved by the
Pennsylvania Public Utility Commission through the Final Order. Under the terms
of the restructuring plan settlement, PECO Energy and all signatories to the
restructuring plan settlement requested, and were granted, a general continuance
of their appeals and cross-appeals of the Restructuring Order until the time as
the Final Order was no longer subject to administrative or judicial challenge.
In June, 1998, IP&L withdrew its appeal to the Restructuring Order and filed an
appeal at the Commonwealth Court challenging the Final Order. The IP&L appeal of
the Final Order was identical in scope to its Commerce Clause arguments
described above. The IP&L appeal constituted a judicial challenge to the Final
Order and, under the terms of the restructuring plan settlement, the appeals of
PECO Energy and the other signatories to the restructuring plan settlement
remained pending, but inactive, until resolution of the IP&L appeal. PECO Energy
and IP&L entered into a stipulation that the final outcome of the IP&L Commerce
Clause case would be controlling for the IP&L appeal of the Final Order. With
the denial of the IP&L petition for certiorari by the United States Supreme
Court, all appeals and cross-appeals of the Final Order were withdrawn with
prejudice from the Commonwealth Court and from the United States District Court
in accordance with the terms of the restructuring plan settlement and the
stipulation with IP&L.
Two additional actions, one filed by the Utility Workers Union of
America and one filed by a group of plaintiffs including State Senator Vincent
J. Fumo alleged that the adoption of the Pennsylvania Competition Act violated
certain provisions of the Pennsylvania Constitution governing legislative
procedure. The Pennsylvania Public Utility Commission filed preliminary
objections seeking dismissal of these actions at the pleading stage, on the
ground that enactment of the Pennsylvania Competition Act did not violate those
Pennsylvania constitutional provisions as a matter of law. The Commonwealth
Court of Pennsylvania upheld the Pennsylvania Public Utility Commission's
preliminary objections and dismissed both actions with prejudice. The appeal
period expired without appeals being filed and the dismissal of these actions is
final and non-appealable.
THE QUALIFIED RATE ORDERS AND THE INTANGIBLE TRANSITION CHARGES
As part of its approval of the restructuring plan settlement, the
Pennsylvania Public Utility Commission issued the First QRO on May 14, 1998. In
this order, the Pennsylvania Public Utility Commission determined that PECO
Energy's recovery of stranded costs as set forth in the restructuring plan
settlement was 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 restructuring plan settlement was just and reasonable and in the
public interest. On March 16, 2000, the Pennsylvania Public Utility Commission
issued the 2000 QRO, authorizing the securitization of up to $1 billion of the
remaining stranded costs.
The qualified rate orders provide that, to the extent that PECO Energy,
or any assignee, assigns, sells, transfers, or pledges any interest in
intangible transition property created by those qualified rate orders, the
Pennsylvania Public Utility Commission authorizes PECO Energy to contract, for a
specified fee, with any assignee for PECO Energy:
o to continue to operate the system to provide electric services to
PECO Energy's customers,
o to impose and collect the applicable intangible transition charges
for the benefit and account of the assignee,
o to make periodic adjustments of intangible transition charges
contemplated under the qualified rate orders, and
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o 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 First QRO and the 2000 QRO also authorize 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 the issuers and perform the obligations of PECO Energy contemplated in
those qualified rate orders. The obligations of PECO Energy:
o are binding upon PECO Energy, its successors and assigns, and
o are required by the Pennsylvania Public Utility Commission 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 that customer or municipal entity providing these services in
place of PECO Energy by PECO Energy or other entity.
The rate reductions in the total amount of $60 million required by the
2000 QRO were passed on to customers over a one-year period commencing with
billing cycles beginning after December 31, 2000.
Authorization of Issuance and Refinancing of Transition Bonds. In the
First QRO, the Pennsylvania Public Utility Commission authorized the issuance of
transition bonds in an aggregate principal amount not to exceed a combined total
of $4 billion. In the 2000 QRO, the Pennsylvania Public Utility Commission
authorized an additional $1 billion of transition bonds. PECO Energy, or any
assignee of PECO Energy to whom intangible transition property is sold, may
issue and sell, in reliance on the First QRO and the 2000 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 of the transition bonds being refinanced.
The First QRO and the 2000 QRO provide 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 Pennsylvania Public Utility Commission 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 any offering. Notwithstanding this filing, the
final structure of each issuance of transition bonds is not subject to change or
revision by the Pennsylvania Public Utility Commission after the date of that
issuance.
Authorization to Impose Intangible Transition Charges. In the First QRO
and the 2000 QRO, the Pennsylvania Public Utility Commission 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 and $1
billion, respectively, of its $5.26 billion of stranded costs. The Pennsylvania
Public Utility Commission 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 connection with the permitted securitization of
PECO Energy's stranded costs. In accordance with the Pennsylvania Competition
Act, the Pennsylvania Public Utility Commission 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 Pennsylvania Competition Act to
December 31, 2010.
In the First QRO and the 2000 QRO, the Pennsylvania Public Utility
Commission approved the allocation and methodology for imposing competitive
transition charges and intangible transition charges on customers. The First QRO
and the 2000 QRO also authorize PECO Energy to make annual adjustments to
intangible transition charges if collections of 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 adjustments during the final
calendar year during which any series of bonds are outstanding may be quarterly
or monthly if necessary to ensure full recovery of intangible transition
charges. The First QRO and the 2000 QRO state that the revenues received by the
transition bond trustee through intangible transition charges shall be
determined to be sufficient only if the collections of intangible transition
charges so received are sufficient to amortize the transition bonds, fund any
reserves and to pay premiums, if any, on the transition bonds (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 of the transition bonds. For each annual adjustment, the First QRO and the
2000 QRO direct PECO Energy to file with the Pennsylvania Public Utility
Commission:
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o an accounting of intangible transition charges received by the
transition bond trustee for the previous annual period,
o a statement of any over-or-under receipts,
o the charge or credit to be added to intangible transition charges
to ensure that the intangible transition charges received by the
transition bond trustee will be sufficient to amortize the
qualified transition expenses in accordance with the amortization
schedule for the transition bonds, and
o the corresponding reduction or increase in competitive transition
charges or PECO Energy's distribution rates, as the case may be.
The First QRO and the 2000 QRO provide that, in accordance with the
Pennsylvania Competition Act, the Pennsylvania Public Utility Commission shall
approve all annual adjustments within 90 days of PECO Energy's annual adjustment
filing.
Authorization to Sell Intangible Transition Property. Under the First
QRO and the 2000 QRO, the Pennsylvania Public Utility Commission 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 in connection with the securitization of its stranded costs and all
revenues, collections, claims, payments or money or proceeds arising from
intangible transition charges. The Pennsylvania Public Utility Commission
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 Pennsylvania
Public Utility Commission authorized PECO Energy to contract, for a specified
fee, with that assignee for PECO Energy to:
o continue to operate its transmission and distribution system,
o provide electric service to customers,
o impose and collect intangible transition charges for the benefit
and account of the assignee,
o make periodic adjustments of intangible transition charges, and
o 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 First QRO and the 2000 QRO also authorize the assignee to contract
with an alternate party to replace PECO Energy as servicer of the intangible
transition property. The First QRO and the 2000 QRO provide that the obligations
of PECO Energy in servicing the intangible transition property shall be required
by the Pennsylvania Public Utility Commission to be undertaken and performed by
PECO Energy and any other entity which provides transmission or distribution
services to customers.
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Irrevocability of the Qualified Rate Orders. The First QRO and the 2000
QRO declare that the respective paragraphs concerning the recovery 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 in connection with the securitization of stranded
costs, the methodology and allocation and timing of adjustments to the
intangible transition charges and the sale of intangible transition property are
irrevocable for purposes of the Pennsylvania Competition Act, and the
Pennsylvania Public Utility Commission accordingly agrees that it will not,
directly or indirectly, by any subsequent action, reduce, postpone, impair or
terminate those qualified rate orders or the related intangible transition
charges. In the First QRO and the 2000 QRO, the Pennsylvania Public Utility
Commission further declared that the right, title and interest of PECO Energy
and any assignee in those qualified rate orders and the intangible transition
charges, the rates and other charges authorized by those qualified rate orders,
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 First QRO and the 2000 QRO are recovered
from customers in each of PECO Energy's separate rate classes based on the
allocation of stranded cost recovery borne by each rate class through current
electric rates approved by the Pennsylvania Public Utility Commission. The
intangible transition charges are calculated by determining the total amount of
intangible transition charges required to be billed to each rate class in order
to generate collections of intangible transition charges sufficient to ensure
timely recovery of qualified transition expenses related to each series of
transition bonds among affected rate classes. The intangible transition charge
percentage is applied to total projected revenue per rate class, exclusive of
transmission, energy and capacity and fixed distribution charges. The resulting
dollar amount on a customer's bill after the application of that percentage is
the intangible transition charge payable by that customer. To the extent that
total revenues are affected by changes in usage, number of customers, rate of
delinquencies and write-offs or other factors, collections of intangible
transition charges will vary. Variations in collections of intangible transition
charges will be addressed by recalculating the percentages applied to customers'
bills on each calculation date. See "--The Intangible Transition Charge
Adjustment Process" below.
Initial Billing and Termination of Intangible Transition Charge
Collections. Intangible transition charges for each series of transition bonds
are or will be assessed on all customer bills rendered on or after the effective
date of the rates for intangible transition charges associated with the relevant
series issuance date. 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 those intangible transition charges, so that the total
amount billed to customers will remain unchanged.
The servicer (or electric generation supplier or other third party
biller) will continue to bill the intangible transition charges, and the
servicer will continue to make collections of intangible transition charges from
customers and electric generation suppliers and other third parties with respect
to each outstanding series of transition bonds until the series termination date
or class termination date, if applicable, for each series or class, as
applicable, but in no event later than December 31, 2010. Upon the series
termination date or class termination date relating to the series or class of
transition bonds having the latest series termination date or class termination
date, 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 collections of intangible transition
charges exceed the amount necessary to amortize fully all transition bonds and
pay interest on these bonds and specified fees and expenses, those excesses will
be retained by the issuer.
The Intangible Transition Charge Adjustment Process. The master
servicing agreement, the Pennsylvania Competition Act, the First QRO and the
2000 QRO require the servicer to seek and the Pennsylvania Public Utility
Commission to approve annual adjustments to the intangible transition charges.
The annual adjustments are required to enhance the likelihood that the actual
collections of intangible transition charges allocated to the issuer under 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 for that series and to fund the overcollateralization
subaccount to the calculated overcollateralization level. The annual adjustments
are based on actual collections of intangible transition charges allocated to
the issuer and updated assumptions by
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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 collections of intangible transition charges for the period since
the last adjustment, including 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 collections of intangible transition charges, the
servicer would be required to seek an adjustment from the Pennsylvania Public
Utility Commission to the intangible transition charges imposed after that to
compensate for that shortfall. In addition, the adjustments will take into
account any projected trends in customers or usage in order to prevent
shortfalls or excesses of collections of intangible transition charges from
arising in future periods so that if, for example, usage is declining at an
accelerating pace, this trend will be taken in account in the calculation of the
current adjustment.
The First QRO and the 2000 QRO also provide that adjustments during the
final calendar year of collections of intangible transition charges for any
series of transition bonds may be made quarterly or monthly. If at the time of
issuance of a series, the servicer determines additional adjustments are
required, the dates for these adjustments will be specified in the prospectus
supplement for that series. Adjustments will cease for a series on the final
adjustment date specified in the related prospectus supplement for that series.
In the merger settlement filed with the Pennsylvania Public Utility
Commission on March 23, 2000 settling issues concerning the merger of PECO
Energy with Unicom, PECO Energy agreed to reconcile all competitive transition
charges and intangible transition charge revenues on an annual basis in two
categories: (a) residential; and (b) commercial and industrial (encompassing all
commercial and industrial accounts), effective for rate-setting cases for the
year 2001 and thereafter. The parties to the merger settlement anticipate that
any modification of the reconciliation process will minimize changes to the
shopping credits on commercial and industrial rate classes by expanding the
customer base on which the charges are reconciled. PECO Energy will notify
customers by bill insert of any changes to the shopping credits that result from
the annual reconciliation process whenever possible in advance of any change
becoming effective.
The servicer will file an adjustment request on each calculation date,
requesting modifications to the intangible transition charges which are designed
to result in the outstanding principal balance of each series equaling the
amount provided for in its expected amortization schedule. Each adjustment
request is also designed to result in the amount on deposit in the
overcollateralization subaccount equaling the calculated overcollateralization
level. The equalizing of these amounts is designed to be achieved by the
payment date closest to the next adjustment date or the expected final payment
date, as applicable, for each series, taking into account any amounts on deposit
in the reserve subaccount other than certain customer prepayments of intangible
transition charges, if any, not allocable to the period covered by the
applicable adjustment request. As provided for in the First QRO and the 2000
QRO, any adjustment request filed with the Pennsylvania Public Utility
Commission will include any proposal by PECO Energy to modify the recalculation
methodology. For a discussion of customer prepayments, see "The Seller and
Servicer PECO Energy Company--Limited Information on Customers'
Creditworthiness--Application of Customer Payments" in this prospectus. The
Pennsylvania Competition Act and the First QRO and the 2000 QRO require the
Pennsylvania Public Utility Commission to approve annual 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
PECO Energy's restructuring plan and subsequent orders of the
Pennsylvania Public Utility Commission give customers who purchase electric
generation from electric generation suppliers the opportunity to choose from the
following billing source options:
o consolidated billing from the utility,
o consolidated billing from the electric generation supplier,
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o separate billing from the utility and from the electric generation
supplier providing billing services, or
o third party 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 these amounts from its customers. In
that case, the electric generation supplier or other third party will replace
the customer as the obligor on these intangible transition charges, and the
servicer, on behalf of the issuer, will generally have no right to collect these
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 specified
payment defaults by an electric generation supplier or other third party and the
expiration of the applicable grace period. As of the date of this prospectus,
there are no third parties providing billing of PECO Energy charges to its
customers. See "Risk Factors--Servicing--It May Be More Difficult to Collect
Intangible Transition Charges Due to Billing by Third Parties" in this
prospectus.
PECO Energy's restructuring plan sets forth and future orders of the
Pennsylvania Public Utility Commission will set forth guidelines governing
metering, billing and other activities by electric generation suppliers and
other third parties. The Pennsylvania Public Utility Commission 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:
o demonstrating that it has an investment grade rating for its own
long-term debt, or
o depositing with the Pennsylvania Public Utility Commission 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 Pennsylvania Public Utility Commission
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 Pennsylvania
Public Utility Commission may waive any of those requirements at any time in the
future. Further, the parties to the restructuring plan settlement agreed to
review and, as appropriate, to recommend changes to Pennsylvania Public Utility
Commission regulations and procedures in order to facilitate the efficient and
full recovery of revenues from customers, while at the same time protecting
customers. See also "Risk Factors--Unusual Nature of Intangible Transition
Property--The Pennsylvania Public Utility Commission May Take Actions That
Adversely Affect Transition Bondholders" in this prospectus.
Discounts, Special Charges, Termination Fees. Under its restructuring
plan, PECO Energy provides discounts to specified classes of customers, for
instance commercial and industrial customers who have demonstrated competitive
alternatives (such as self-generation) and customers in specified low-income
assistance programs, among others. These discounts in the competitive transition
charges, including the intangible transition charges, are accounted for in the
average rates to be charged to all other customers. In addition, the
restructuring plan requires PECO Energy to allow specified customers to pay
competitive transition charges, including intangible transition charges, in a
lump sum, based on a calculation that takes into account each of these
customer's last 12 months of demand and PECO Energy's after-tax weighted average
cost of capital. For the nine month period ended September 30, 2000, revenue
from residential customers participating in the low income assistance program
and commercial special contracts were 1.9% and 9.6% of retail revenue
respectively. As of the date of this prospectus, one customer, representing 2.5%
of total sales revenue for the nine month period ended September 30, 2000, has
elected to exercise this option.
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 is 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 determines annually, after the
end of each calendar year in which competitive transition charges or intangible
transition charges are assessed, whether that 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.
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If the ratio between
o the amount of usage difference caused by the on-site generation and
o the base year usage
is 10% or more, the servicer bills the customer separately an amount equal to
the difference between
o the total competitive transition charges and intangible transition
charges that the customer would have paid using usage and demand
data for the base year (as adjusted for any portion not related to
self- generation) and
o 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 or planning to self-generate 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 that
calculation and the servicer's projection with respect to future
self-generation.
As of September 30, 2000, 264,608 customers (approximately 17.59% of
PECO Energy's transmission and distribution business) had chosen alternate
suppliers of generation. See "The Seller and Servicer PECO Energy
Company--Customers and Operating Revenues" below.
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THE SELLER AND SERVICER
PECO ENERGY COMPANY
Retail Electric Service Territory
Incorporated in Pennsylvania in 1929, PECO Energy Company, a
wholly owned subsidiary of Exelon Corporation, is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to
residential, commercial, industrial and wholesale customers in its franchised
service territory in southeastern Pennsylvania. Since 1999, the Commonwealth of
Pennsylvania has required the unbundling of retail electric services in
Pennsylvania into separate generation, transmission and distribution services
with open retail competition for generation services. With the commencement of
deregulation, PECO Energy serves as the local distribution company providing
electric distribution services in southeastern Pennsylvania and bundled electric
service to customers who cannot or do not choose an alternate electric
generation supplier. Through its Exelon Energy division, PECO Energy is a
competitive generation supplier offering competitive energy supply to customers
throughout Pennsylvania. At September 30, 2000, approximately 17% of PECO
Energy's residential load, 46% of its commercial load and 41% of its industrial
load were purchasing generation service from an alternative electric generation
supplier. As of that date, Exelon Energy was providing electric generation
service to approximately 99,000 business and residential customers located
throughout Pennsylvania. PECO Energy's Exelon Infrastructure Services subsidiary
provides utility infrastructure services to customers in several regions of the
United States. PECO Energy has also formed AmerGen Energy Company, a joint
venture with British Energy plc, to acquire and operate nuclear generating
facilities. PECO Energy also engages in the wholesale marketing of electricity
on a national basis. PECO Energy also participates in joint ventures which
provide telecommunication services in the Philadelphia metropolitan region. In
connection with the merger of PECO Energy and Unicom Corporation, Exelon
Corporation plans to reorganize so that PECO Energy will provide transmission
and distribution services and will purchase generation from affiliates for its
provider of last resort services.
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 those 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.
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 to these reports 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.
PECO Energy Corporate Restructuring Plan
Exelon Corporation intends to restructure in order to disaggregate its
corporate organization, including PECO Energy's business. This disaggregation
will involve the formation of additional subsidiaries and the transfer of PECO
Energy's generation assets and liabilities, and those of its affiliate
corporation, Commonwealth Edison, to one or more of those subsidiaries. PECO
Energy will remain a transmission and distribution company and a utility
regulated by the Pennsylvania Public Utility Commission. There is currently no
plan to merge the customer billing or collection systems of PECO Energy and
Commonwealth Edison.
The board of directors of Exelon Corporation may determine, in its
discretion, how PECO Energy's business will be restructured and the timing of
the restructuring.
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Customers and Operating Revenues
PECO Energy's customer base is currently divided into two categories
for purposes of adjusting intangible transition charges (a) residential and (b)
commercial and industrial. Rate categories and classes within those categories
are approved by the Pennsylvania Public Utility Commission and are subject to
change. Those changes will be reflected in any adjustment request filed with the
Pennsylvania Public Utility Commission by the servicer. Although in the
settlement of the merger between PECO Energy and Unicom Corporation, PECO Energy
agreed to reduce its customer categories from three to two (see "PECO Energy's
Electric Restructuring Plan--Subsequent Events" in this prospectus), the current
rate classes have remained unchanged since April 20, 1990. 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 (and Rate R-H) also includes payment-troubled
low income customers receiving discounted rates under PECO Energy's
low-income Customer Assistance 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 and R-H and, in specified cases, Rate GS, for a
customer receiving delivery at certain voltage levels during off-peak
periods.
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. Accounts in this rate class will be transferred
to Rate SL-E on July 1, 2001, under the terms of the settlement order
concerning the merger of PECO Energy and Unicom Corporation and PECO
Energy's proposed corporate restructuring.
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.
53
<PAGE>
Rate BLI--Borderline Interchange: Available under reciprocal agreements to
neighboring electric utilities for resale in their adjacent territory. No
intangible transition charges are or will be imposed on Rate BLI customers.
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.
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 are 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. As of September 30, 2000,
214,418 customers in the residential customer category (representing 15.74% of
the total number of customers) and 50,190 customers in the commercial and
industrial customer category (representing 32.82% of the total number of
customers) have chosen to purchase their generation from electric generation
suppliers other than PECO Energy.
54
<PAGE>
TABLE 3
Retail Electric Customers(1)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
For the Nine
For the Year Ended For the Year Ended For the Year Ended For the Year Ended Month Period
12/31/96 12/31/97 12/31/98 12/31/99 Ended 9/30/00
------------------------------------------------------------------------------------------------------
Number of % of Number of % of Number of % of Number of % of Number of % of
Customers Total Customers Total Customers Total Customers Total Customers Total
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(2) and OP(3) ........... 1,169,654 79.51% 1,177,996 79.47% 1,186,864 79.49% 1,194,370 79.47% 1,204,021 79.48%
R-H ...................... 154,794 10.52 155,865 10.52 156,927 10.51 157,489 10.48 157,901 10.42
Total .................... 1,324,448 90.03 1,333,861 89.99 1,343,791 90.00 1,351,859 89.95 1,361,922 89.91
Commercial and
Industrial
GS and POL(4) ............ 142,431 9.68% 144,142 9.72% 145,055 9.71% 146,771 9.77% 148,733 9.82%
SL-P, SL-S, SL-E and TL .. 987 0.07 985 0.07 1,050 0.07 1,076 0.07 969 .06
PD and HT ................ 3,299 0.22 3,308 0.22 3,248 0.22 3,245 0.22 3,216 .21
EP ....................... 3 0.00 3 0.00 3 0.00 3 0.00 3 0.00
Total .................... 146,720 9.97 148,438 10.01 149,356 10.00 151,095 10.05 152,921 10.09
Total .................... 1,471,168 100.00% 1,482,299 100.00% 1,493,147 100.00% 1,502,954 100.00% 1,514,843 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
-----------------
(1) Represents transmission and distribution customers who purchase their
generation from electric generation suppliers other than PECO Energy, but
including its affiliate that supplies electric generation.
(2) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(3) Rate OP is available in conjunction with residential rate classes R and R-H
and with commercial and industrial rate class GS for those customers in
rate class GS who use residence electric delivery service.
(4) Rate POL is available in conjunction with commercial and industrial rate
class GS.
55
<PAGE>
TABLE 4
Actual Retail Electric Usage (per megawatt-hour ("MWh"))(1)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
For the
Nine Month
For the Year Ended For the Year Ended For the Year Ended For the Year Ended Period
12/31/96 12/31/97 12/31/98 12/31/99 Ended 9/30/00
--------------------------------------------------------------------------------------------------------
% of % of % of % of % of
MWh Total MWh Total MWh Total MWh Total MWh Total
--- ----- --- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(2) and OP(3)............ 7,906,048 23.81% 7,858,466 23.89% 8,214,347 24.21% 8,571,927 24.82% 6,702,634 24.72%
R-H....................... 2,765,279 8.33 2,548,231 7.75 2,408,645 7.10 2,560,223 7.41 2,025,465 7.47
Total..................... 10,671,327 32.14 10,406,697 31.63 10,622,992 31.31 11,132,150 32.24 8,728,099 32.19
Commercial and
Industrial
GS and POL(4)............. 6,490,621 19.55% 6,684,791 20.32% 6,887,794 20.30% 7,153,896 20.72% 5,701,734 21.03%
SL-P, SL-S, SL-E and TL .. 192,425 0.58 181,002 0.55 190,251 0.56 188,463 0.55 138,941 .51
PD and HT................. 15,208,015 45.81% 15,034,087 45.70% 15,678,316 46.21% 15,476,999 44.82% 12,089,613 44.59
EP........................ 638,800 1.92 594,319 1.81 549,539 1.62 579,069 1.68 452,461 1.67
Total..................... 22,529,861 67.86 22,494,199 68.37 23,305,900 68.69 23,398,427 67.76 18,382,749 67.81
Total..................... 33,201,188 100.00% 32,900,896 100.00% 33,928,892 100.00% 34,530,577 100.00% 27,110,848 100.00%
========== ======= ========== ======= ========== ======= ========== ======= ========== =======
</TABLE>
-----------------
(1) Represents usage of transmission and distribution customers who purchase
their generation from electric generation suppliers other than PECO Energy,
but including usage of customers who purchase generation from PECO Energy's
affiliate that supplies electric generation.
(2) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(3) Rate OP is available in conjunction with residential rate classes R and R-H
and with commercial and industrial rate class GS for those customers in
rate class GS who use residential electric delivery service.
(4) Rate POL is available in conjunction with commercial and industrial rate
class GS.
56
<PAGE>
TABLE 5
Retail Electric Revenues (dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended For the Year Ended For the Nine Month
12/31/96 12/31/97 12/31/98 12/31/99 Period Ended 9/30/00
----------------------------------------------------------------------------------------------------------
% of % of % of % of % of
$(000s) Total $(000s) Total $(000s) Total $(000s) Total $(000s) Total
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
R(1) and OP(2)........ 1,092,398 33.13% 1,091,669 33.17% 1,121,346 33.93% 1,012,285 39.09% 789,021 39.51%
R-H................... 277,760 8.43 265,781 8.08 255,891 7.74 236,020 9.11 185,990 9.31
Total................. 1,370,158 41.56 1,357,450 41.25 1,377,237 41.68 1,248,305 48.21 975,011 48.83
Commercial and
Industrial
GS and POL(3)......... 748,561 22.71% 778,743 23.66% 783,682 23.72% 609,566 23.54% 449,783 22.52%
SL-P, SL-S, SL-E and
TL ................... 32,815 1.00 30,305 0.92 31,636 0.96 28,480 1.10 20,650 1.03
PD and HT............. 1,098,307 33.31 1,077,375 32.74 1,066,868 32.28 665,456 25.70 530,909 26.59
EP.................... 46,979 1.42 46,994 1.43 45,118 1.37 37,731 1.46 20,561 1.03
Total................. 1,926,662 58.44 1,933,417 58.75 1,927,304 58.32 1,341,233 51.79 1,021,903 51.17
Total................. 3,296,820 100.00% 3,290,867 100.00% 3,304,541 100.00% 2,589,538 100.00% 1,996,914 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
---------------
(1) For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer PECO Energy Company--Customers and Operating Revenues"
in this prospectus.
(2) Rate OP is available in conjunction with residential rate classes R and R-H
and with 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 commercial and industrial rate
class GS.
For 97.8% of customers who were enrolled in customer choice as of
September 30, 2000, PECO Energy provides a single or consolidated bill for both
PECO Energy's distribution charges and the generation charges of the electric
generation suppliers servicing those customers. The remaining customers who are
not using PECO Energy's own generation supplier subsidiary have chosen to
receive dual bills: one bill encompasses PECO Energy's charges for transmission
and distribution and a separate bill contains the generation charges. For
customers choosing the consolidated bill option from PECO Energy, PECO Energy
pays the relevant electric generation supplier in full for generation charges
and is responsible for collecting those amounts from the customer. As of
September 30, 2000, PECO Energy billed $349 million on behalf of electric
generation suppliers. The electric generation suppliers who provide customers
with separate bills for generation are not required to provide revenue
information to PECO Energy.
Concentrations. For the nine month period ended September 30, 2000, the
largest 10 customers represented approximately 9.5% of PECO Energy's retail
electric revenues, and the largest 10 customers represented approximately 13.3%
of PECO Energy's retail electric sales. There can be no assurance that current
customers will remain customers or that the levels of customer concentration in
the future will be similar to those set forth above. See "Risk
Factors--Servicing-- Inaccurate Projections by Servicer May Result in Losses to
Transition Bondholders" in this prospectus.
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. The delinquency
and net write-off experience with respect to payments to PECO Energy by electric
generation suppliers is included in the information provided on the tables
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:
57
<PAGE>
TABLE 6
Delinquencies as a Percentage of Billed Retail Electric Revenues
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
For the Year For the Year For the Year For the Year For the Nine
Ended Ended Ended Ended Month Period
12/31/96 12/31/97 12/31/98 12/31/99 Ended 9/30/00
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
30+ days......................... 9.37% 9.51% 9.64% 9.51% 11.30%
60+ days......................... 8.09 8.21 8.51 8.49 10.02
90+ days......................... 7.08 7.18 7.67 7.77 9.13
Commercial and Industrial
30+ days......................... 0.55% 0.64% 0.61% 0.98% 1.35%
60+ days......................... 0.37 0.43 0.45 0.68 0.95
90+ days......................... 0.29 0.32 0.36 0.52 0.74
</TABLE>
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
For the Year For the Year For the Year For the Year For the Nine
Ended Ended Ended Ended Month Period
12/31/96 12/31/97 12/31/98 12/31/99 Ended 9/30/00
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential............................. 4.56% 4.79% 4.66% 4.68% 3.07%
Commercial and Industrial............... 0.35 0.36 0.57 0.41 0.39
Total (Weighted by Customer Category).... 2.09 2.18 2.27 2.47 1.69
</TABLE>
Through 1998, the residential customer category experienced increases
in delinquencies which were reduced during 1999. In addition, through 1997, the
residential customer category experienced an increase in net write-offs, which
has subsequently been reduced during 1998, 1999 and the nine month period ended
September 30, 2000. These reductions in delinquencies and net write-offs are due
to the implementation of credit and collection programs intended to reduce
overall delinquencies that resulted in reductions to residential past due
account balances of high-risk customers. As of September 30, 2000 delinquencies
were temporarily elevated because of seasonal fluctuations in customer payment
rates. See "--Limited Information on Customers Creditworthiness."
During the past five years, delinquencies for commercial and industrial
customers have increased. The variance in delinquencies for the most recent year
was primarily due to the volume of receivables associated with customer choice
as well as problems terminating the electric service of delinquent customers.
Net write-offs for that customer category over the last five years have not
shown any discernible trend. Net write-offs in 1999 for commercial and
industrial customers remained above 1996 and 1997 totals, primarily due to
problems experienced with the collection agent responsible for terminating
electric service for these customers. New collection policies implemented during
2000 assisted in reducing commercial and industrial write-off totals.
PECO Energy does not expect the delinquency or write-off experience
with respect to collections of intangible transition charges to differ
substantially from the experience that it will have with its other receivables.
58
<PAGE>
Forecasting Customers and Usage
Accurate projections of the number of customers, usage and retail
electric revenue are important in setting and maintaining the intangible
transition charges or any adjusted intangible transition charges. See "The
Qualified Rate Orders and the Intangible Transition Charges--The Intangible
Transition Charges" and "Risk Factors--Servicing--Inaccurate Projections by
Servicer May Result in Losses to Transition Bondholders" in this prospectus.
PECO Energy's forecasts are produced by employees 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 and residential construction trends within PECO Energy's retail
electric service territory and the surrounding counties. PECO Energy uses this
data to develop internal household forecasts for the 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 other
factors as PECO Energy deems relevant, to develop a projection of customers in
the residential customer category within its service area.
The forecasting process for smaller customers in the commercial and
industrial customer category begins with a review of economic trends and an
overview of economic prospects in the Philadelphia metropolitan area. These
external data are obtained from independent sources and local businesses. 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 develop
a projection of usage by these customers 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 September 30, 2000, there were 12 customers subject to Rate BLI. These
customers are not being, and will not be, charged intangible transition charges.
The usage of large customers in the commercial and industrial customer
category is estimated in two stages. Usage for these customers with the highest
energy usage is projected separately. This is added to estimates of other large
customers in the commercial and industrial customer category to obtain the
aggregate forecast. The usage of the largest customers is derived with input
from the appropriate account executives for these customers. The account
executives provide data on these 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 this category, usage forecast is
derived through statistical analyses using historical data corrected for unusual
weather and billing-corrected usage patterns.
Actual sales can deviate from forecasted sales for many reasons,
including:
o the general economic climate in PECO Energy's retail electric
service territory as it impacts net migration of customers,
o weather as it impacts air conditioning and heating usage,
o levels of business activity, and
o the availability of more energy efficient appliances and new
energy conservation technologies.
59
<PAGE>
For the nine months ended September 30, 2000, PECO Energy
underestimated the number of customers by 0.41%. For the nine months ended
September 30, 2000, actual usage exceeded forecasted usage by 3.7% because of
the weather and economic conditions in the PECO Energy service area. Summaries
of the total annual forecasted and actual number of PECO Energy's customers and
their usage (by customer category) since 1996 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.
Assumptions about the retention of customers can bear a major impact on
revenue forecasts. The choice by a customer to have an alternative supplier
means that generation revenue may not be paid to PECO Energy. In order to
develop the retention estimates, PECO Energy factors in historical trends,
program impacts and the restructuring plan settlement. The appropriate changes
to revenues are then reflected in the forecast.
60
<PAGE>
TABLE 8
Forecasted Number Of Customers Variance
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
For the Nine
For the Year For the Year For the Year For the Year Month Period
Ended 12/31/96 Ended 12/31/97 Ended 12/31/98 Ended 12/31/99 Ended 9/30/00
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted .................... 1,174,208 1,174,037 1,185,818 1,190,500 1,198,700
Actual ........................ 1,169,654 1,177,996 1,186,864 1,194,370 1,204,021
Variance ...................... (0.39%) 0.34% 0.09% 0.33% 0.44%
R-H
Forecasted .................... 157,336 157,045 156,739 157,700 158,500
Actual ........................ 154,794 155,865 156,927 157,489 157,901
Variance ...................... (1.62%) (0.75%) 0.12% (0.13%) (0.38%)
Commercial and Industrial
GS and POL
Forecasted .................... 142,441 143,445 145,019 146,914 147,000
Actual ........................ 142,431 144,142 145,055 146,771 148,733
Variance ...................... (0.01%) 0.49% 0.02% (0.10%) 1.18%
SL-P, SL-S, SL-E and TL
Forecasted .................... 940 987 987 1,054 1,076
Actual ........................ 987 985 1,050 1,076 969
Variance ...................... (5.00%) (0.20%) 6.38% 2.09% (9.94%)
PD and HT
Forecasted .................... 3,363 3,264 3,241 3,250 3,250
Actual ........................ 3,299 3,308 3,248 3,245 3,216
Variance ...................... (1.90%) 1.35% 0.22% (0.15%) (1.05%)
EP
Forecasted .................... 3 3 3 3 3
Actual ........................ 3 3 3 3 3
Variance ...................... 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
61
<PAGE>
TABLE 9
Forecasted Customer Usage (In MWh) Variance
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
For the Nine Month
For the Year For the Year For the Year For the Year Period Ended
Ended 12/31/96 Ended 12/31/97 Ended 12/31/98 Ended 12/31/99 9/30/00
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted..................... 7,852,000 7,867,001 8,111,000 8,122,193 6,381,919
Actual......................... 7,906,048 7,858,466 8,214,347 8,571,927 6,702,634
Variance....................... 0.69% (0.11%) 1.27% 5.54% 5.03%
R-H
Forecasted..................... 2,724,000 2,722,000 2,703,352 2,760,846 2,146,925
Actual......................... 2,765,279 2,548,231 2,408,645 2,560,223 2,025,465
Variance........................ 1.52% (6.38%) (10.90%) (7.27%) (5.66%)
Commercial and Industrial
GS and POL
Forecasted..................... 6,377,000 6,775,999 6,954,617 6,861,596 5,289,773
Actual......................... 6,490,621 6,684,791 6,887,497 7,153,896 5,701,734
Variance....................... 1.78% (1.35%) (0.97%) 4.26% 7.79%
SL-P, SL-S, SL-E and TL
Forecasted..................... 197,000 198,003 192,469 192,753 146,948
Actual......................... 192,425 181,002 190,251 188,463 138,941
Variance....................... (2.32%) (8.59%) (1.15%) (2.23%) (5.45%)
PD and HT
Forecasted...................... 15,804,000 15,597,482 14,980,154 14,891,098 11,666,939
Actual......................... 15,208,015 15,034,087 15,678,316 15,476,999 12,089,613
Variance....................... (3.77%) (3.61%) 4.66% 3.93% 3.62%
EP
Forecasted..................... 658,000 668,000 626,291 618,447 488,535
Actual......................... 638,800 594,319 549,539 579,069 452,461
Variance........................ (2.92%) (11.03%) (12.26%) (6.37%) (7.38%)
</TABLE>
Billing Process
PECO Energy operates on a continuous billing cycle, with an
approximately equal number of bills being distributed each business day. For the
nine month period ended September 30, 2000, 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 changes would be designed to enhance
PECO Energy's ability to make timely recovery of amounts billed to customers.
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.
62
<PAGE>
Limited Information on Customers' Creditworthiness
Under Pennsylvania law, PECO Energy is obligated to provide service to
new customers in the residential customer category. Credit bureau investigations
are performed on new customers through a social security number investigation.
PECO Energy is also starting to use other fraud detection measures so that
actions can be taken at the earliest stages to reduce the costs associated with
delinquent accounts. PECO Energy relies on the information provided by the
customer and its customer information system audits to indicate whether the
customer has been previously served by PECO Energy.
PECO Energy has initiated a program to require deposits from new
residential customers who pose a high degree of credit risk. PECO Energy
reserves the right to transfer deposit amounts to offset delinquencies which
develop and to terminate services for the failure to provide additional deposits
to offset what has been transferred to reduce outstanding arrearages.
As part of its obligation to provide universal service, PECO Energy has
developed a special rate program, the Customer Assistance 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 Customer Assistance 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 Customer Assistance 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 Customer Assistance Program at $50 million, which it recovers through
adjustments to the distribution rates applicable to all customers. Pursuant to
the restructuring plan settlement, the initial maximum participation for the
Customer Assistance Program is 100,000 customers, subject to review by the
participants in the restructuring plan settlement, to ensure that total annual
Customer Assistance Program costs do not exceed $50 million and all eligible
customers are able to participate. There were more than 88,700 customers
enrolled in the Customer Assistance Program accounting for approximately $38
million of billed revenues for the nine month period ended September 30, 2000.
Pursuant to the provisions of the Pennsylvania Competition Act, the Pennsylvania
Public Utility Commission has adopted regulations that establish reporting
requirements for universal service programs, such as the Customer Assistance
Program, that are applicable to all electric distribution companies including
PECO Energy.
For the nine month period September 30, 2000, approximately 86% of
total bill payments were received by PECO Energy via the U.S. mail. During the
same period, approximately 6% of total payments were paid in person at either
PECO Energy's local business office or at approximately 330 pay stations
(which are located in unaffiliated businesses or organizations, such as
supermarkets and convenience stores) throughout the service territory. A total
of 30 pay stations are free of charge to the customers. Customers making
payments at the remaining 300 locations may be assessed a processing fee of up
to $1.00 by the payment agent. This has not had any material effect on the
timing or amount of collections. Other payment methods include pay-by-phone and
direct debits of customer accounts (including through the Internet) through a
local bank, which accounted for approximately 8% of bill payments collected
for the nine month period ended September 30, 2000.
Collection Process for the Residential Customer Category and Small
Customers in the Commercial and Industrial Category. 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.
For customers in PECO Energy's residential customer category and small
customers within the commercial industrial category, the 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:
o 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.
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o 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.
o Customers in the third segment are moved into a portfolio
management program where each customer's account is referred to a
collection agency that follows up on the account for 60 days using
letters and collection calls.
o 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 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 Pennsylvania Public Utility Commission-mandated winter
moratorium that requires special approval from the Pennsylvania Public Utility
Commission prior to the disconnection of electricity to residential customers
from December 1 through March 31 of each year. Currently, these accounts are
managed during the winter moratorium through a combination of letters and
proactive phone contacts. Delinquencies that 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 over 60 days. Continued efforts are made by
the collection agency for written-off accounts to increase collections. During
the period from January 1, 2000 to September 30, 2000, 76,176 accounts, totaling
$36.2 million, were referred to the collection agency; $3.3 million was
recovered by the collection agency from accounts previously referred to it.
Further, $2.2 million in additional recoveries of delinquencies were received
through litigation. During the period from January 1, 2000 to September 30,
2000, PECO Energy received total recoveries from all collection initiatives of
$150 million which was achieved through a total of 3,820,887 customer
collection contacts. Collection recovery rates are monitored monthly. Once
written off, the uncollected account is monitored for six years and may be
collected or sold at any point during that time.
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 written-off
and efforts are initiated to submit claims in the bankruptcy of these customers.
Deposits are required for delinquent bankrupt customers for which PECO Energy is
required to continue services. Although deposits are not otherwise mandated from
residential customers (except as noted above as part of the turn-on process for
those identified as having a high risk of becoming delinquent), they are
required as a condition of providing service to all new commercial and
industrial customers. These deposits are maintained for a minimum of three
years.
Collection Process for Large Customers in the Commercial and Industrial
Customer Category. For large customers within PECO Energy's commercial and
industrial customer category, the 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 for 2001 for the large customers in the
commercial and industrial customer category is for delinquencies to be no
greater than .72% 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 to disconnection and litigation.
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Application of Customer Payments. The Pennsylvania Competition Act
provides that the Pennsylvania Public Utility Commission 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 is 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 Pennsylvania Public
Utility Commission in its electric 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 is
applied as follows:
(1) 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,
(2) To the balance due for state tax charges,
(3) To the balance due or the installment amount for a payment
agreement for intangible transition charges,
(4) To the balance due or the installment amount for a payment
agreement for competitive transition charges,
(5) To the balance due or the installment amount for a payment
agreement for fixed and variable utility distribution service
charges,
(6) To the current state tax charges,
(7) To the current intangible transition charges,
(8) To the current competitive transition charges,
(9) To the current fixed and variable utility distribution service
charges,
(10) To the balance due for prior charges for energy and capacity
(if PECO Energy is the provider of last resort),
(11) To the current charges for energy and capacity charges (if
PECO Energy is the provider of last resort), and
(12) 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:
o first to state tax charges,
o then to intangible transition charges,
o then to competitive transition charges, then to transmission and
distribution charges, and
o finally to electric generation charges.
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PECO Energy's electric restructuring plan requires PECO Energy to allow
specified customers to prepay their bills, including intangible transition
charges, in a lump sum, based on a calculation that takes into account that
customer's last 12 months of demand and PECO Energy's weighted average cost of
capital. Prepayments, if any, are 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 those
prepayments ratably over the remaining life of the outstanding transition bonds.
Only the portion of those customer prepayments allocable to the period covered
by any adjustment request is used to calculate the adjustments to the intangible
transition charges for the period covered by that adjustment request.
Electric Generation Suppliers and Other Third Party Billers
The servicer, on behalf of the issuer, pursues 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 pursues any
failure by a customer to remit intangible transition charges. The servicer has
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:
o 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 commercial and
industrial customer category 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.
o Upon notice of a breach, the electric generation supplier or other
third party has 20 calendar days to cure that breach.
o If the electric generation supplier or other third party has not
cured that 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.
o In no event will these procedures result in a customer being sent
two bills covering the same service.
o 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 collections of intangible
transition charges to the servicer. See "Risk
Factors--Servicing--It May Be More Difficult to Collect Intangible
Transition Charges Due to Billing by Third Parties" in this
prospectus.
To date no electric generation supplier has chosen to provide billing
and collection services to PECO Energy's customers.
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, amended and restated on May 2, 2000, between PECO Energy, as
grantor and sole owner of all beneficial interests in the issuer, the issuer
trustee and the other parties to the trust agreement. The amended and restated
trust agreement is referred to in this prospectus as the trust agreement. The
assets of the issuer consist of all transferred intangible transition property,
the other collateral and any money distributed to the issuer from the collection
account in accordance with the indenture. On March 25, 1999, the issuer issued
$4 billion of Series 1999-A Bonds pursuant to the First QRO and on May 2, 2000,
the issuer $1 billion of Series 2000-A Bonds pursuant to the 2000 QRO. Both
audited and non-audited financial statements of the issuer are included in this
prospectus.
The issuer has been created for the purpose of:
o purchasing and owning the transferred intangible transition
property,
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o issuing transition bonds from time to time,
o 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
o 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 may be managed by no fewer than one and no more
than five trustees appointed from time to time by PECO Energy or, in the event
PECO Energy transfers its interest in PECO Energy Transition 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. 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:
o a direct or indirect legal or beneficial owner of the issuer or
PECO Energy or any of their respective affiliates,
o a relative, supplier, employee, officer, director, manager,
contractor or material creditor of the issuer or PECO Energy or
any of their respective affiliates, or
o a person who controls PECO Energy or its affiliates.
The Delaware trustee and the independent trustee may 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 currently
serves as the issuer trustee, the Delaware trustee and the independent trustee.
Currently there are two other trustees who are representatives of PECO Energy
and are referred to as the "beneficiary trustees." The issuer trustee and the
beneficiary trustees are collectively referred to in this prospectus as the
"trustees."
The issuer trustee and one of the beneficiary trustees has served since
the establishment of the issuer. The trustees devote such time as is necessary
to the affairs of the issuer. The following two people are beneficiary trustees
as of the date of this prospectus:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
George R. Shicora............................................ 54 Beneficiary Trustee
(principal executive officer)
Thomas R. Miller............................................. 40 Beneficiary Trustee
(principal financial and
accounting officer)
</TABLE>
George R. Shicora is the Manager of Investment at Exelon Corporation
and has been an Assistant Treasurer at Exelon Corporation since the merger of
PECO Energy with Unicom Corp. Mr. Shicora has been a beneficiary trustee of the
issuer since its establishment. Mr. Shicora has served as Assistant Treasurer of
PECO Energy from 1995 to the present and has held various positions at PECO
Energy since 1968.
Mr. Miller has served as Director of Finance of Exelon Corporation
since the merger of PECO Energy with Unicom Corporation. He held a similar
position at PECO Energy from 1999 until the merger. From 1987 to 1999, he held a
variety of financial positions with Conoco, Inc., most recently as Director,
Financial Strategy. Conoco, Inc. is involved in exploring for and developing,
producing and selling crude oil, natural gas and other related products. Conoco,
Inc. is also engaged in developing and operating power facilities.
The beneficiary trustees are not compensated by the issuer for their
services on behalf of the issuer. The issuer trustee is paid an annual retainer
from the assets of the issuer and is reimbursed for its reasonable expenses,
including, without limitation, the reasonable compensation, expenses and
disbursements of any agents, representatives, experts and counsel 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. As of the date of this prospectus, the issuer has
paid the issuer trustee approximately $17,500.
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The trust agreement provides that the trustees shall not be personally
liable under any circumstances except for:
o liabilities arising from their own willful misconduct or gross
negligence,
o liabilities arising from the failure by any of the trustees to
perform obligations expressly undertaken in the trust agreement or
o 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 will indemnify the trustees against any liability
incurred in connection with their services as trustees for the issuer, unless
that liability is based on or arises in connection with the circumstances
described above.
The trust agreement provides that the trust created under the trust
agreement 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, that other
owner, thirty years from the date of its creation or sooner, at the option and
expense, and upon written instruction, of PECO Energy, but in no event before
payment in full of all series of transition bonds.
The issuer has no intent to file, and PECO Energy has advised the
issuer that it has no intent to cause the filing of, a voluntary petition for
relief under the Bankruptcy Code with respect to the issuer so long as the
issuer is solvent and does not reasonably foresee becoming insolvent.
The trust agreement requires the issuer to take all reasonable steps to
continue its identity as a separate legal entity and to make it apparent to
third persons that it is an entity with assets and liabilities distinct from
those of PECO Energy, other affiliates of PECO Energy, the trustees or any other
person, and that, except for 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 offered by this prospectus to redeem the principal amount of Series 1999-A
Class A-3 and Class A-5 Bonds described in the affiliated prospectus supplement.
THE TRANSITION BONDS
The transition bonds offered by this prospectus will be issued as
additional bonds under and secured by a base indenture between the issuer and
the bond trustee dated as of March 1, 1999 which is filed as an exhibit to the
registration statement of which this prospectus forms a part. The terms of each
series of transition bonds offered by this prospectus will be provided in a
separate supplement to the base indenture. The following summary describes the
material terms and provisions of the transition bonds being offered by this
prospectus. The particular terms of the transition bonds of any series offered
by any prospectus supplement will be described in that prospectus supplement.
Please see the forms of indenture and transition bonds and the related
prospectus supplement for a complete description of all terms and provisions of
the transition bonds being offered by this prospectus, portions of which are
summarized in this section.
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 the 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.
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The supplemental indenture will specify the following terms of the
related series of transition bonds and, if applicable, the classes of that
series:
(1) the designation of the series and, if applicable, the
classes of that series,
(2) the aggregate principal amount of the transition bonds of the
series and, if applicable, each class of that series,
(3) the bond rate of the series and, if applicable, each class of
that series or the formula, if any, used to calculate the
applicable bond rate or bond rates,
(4) the payment dates for the series,
(5) the monthly allocated interest balances for the series,
(6) the monthly allocated principal balances for the series,
(7) the expected final payment date of the series and, if
applicable, each class of that series,
(8) the series termination date for the series and, if applicable,
the class termination dates for each class of that series,
(9) the series issuance date for the series,
(10) the place or places for payments with respect to the series,
(11) the authorized initial denominations for the series,
(12) the provisions, if any, for redemption of the series by the
issuer,
(13) the expected amortization schedule for the series,
(14) the overcollateralization amount with respect to the series,
the pro forma calculated overcollateralization level for each
payment date and the monthly allocated overcollateralization
balance for each monthly allocation date,
(15) the calculation dates and adjustment dates for the series or
class,
(16) the terms of any credit enhancement applicable to the series
or class,
(17) the terms of any hedge or swap transaction applicable to the
series or class, and
(18) 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 offered by
this prospectus. Generally, each series of transition bonds will initially be
represented by one or more transition bonds registered in the name of Cede &
Co., as the nominee of The Depository Trust Company. The transition bonds will
be available for purchase in initial denominations specified in the applicable
prospectus supplement (which denominations will be not less than $1,000). Unless
and until definitive transition bonds are issued under the limited circumstances
described in this prospectus, no transition bondholder will be entitled to
receive a physical bond representing a transition bond. All references in this
prospectus to actions by transition bondholders will refer to actions taken by
The Depository Trust Company 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 The Depository Trust Company or Cede & Co., as the registered holder of each
series of transition bonds, for distribution to transition bondholders in
accordance with The Depository Trust Company's procedures with respect to these
payments, notices, reports and statements. See "--Book-Entry Registration" and
"--Definitive Transition Bonds" below.
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Interest and Principal
Interest will accrue on the principal balance of transition bonds of a
series or class offered by this prospectus 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 that 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 that series only until the outstanding principal balance
of that series has been reduced to the principal balance specified for that
payment date in the expected amortization schedule for that series on that
payment date and only to the extent funds are available for the payment as
described in this prospectus. Accordingly, principal of that series or class of
transition bonds may be paid later than reflected in the expected amortization
schedule for that series. See "Risk Factors--Unusual Nature of Intangible
Transition Property" and "Weighted Average Life and Yield Considerations" in
this prospectus.
The failure to make a scheduled payment of principal on the transition
bonds, other than upon redemption or on the series termination date or, if
applicable, class termination date, does not constitute an event of default
under the indenture. The entire unpaid principal amount of the transition bonds
will be due and payable if an event of default under the indenture occurs and is
continuing and the bond trustee or the holders of a majority in principal amount
of the transition bonds of all series then outstanding have declared the
transition bonds to be immediately due and payable. See "The Indenture--Events
of Default; Rights Upon Event of Default" and "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:
(1) the material terms of that transaction,
(2) the identity of the counterparty or counterparties,
(3) any payments under that hedge or swap transaction to be made
by or to the issuer or the bond trustee, as assignee of the
issuer,
(4) deposits in and withdrawals from any subaccount of the
collection account with respect to that class or classes of
floating rate transition bonds and that transaction,
(5) the formula for calculating the floating rate of interest of
that class or classes prior to termination of that
transaction, and
(6) the rights of transition bondholders with respect to the
termination of or specified other events related to that
transaction.
Redemption
Redemption provisions, if any, for any series of transition bonds
offered by this prospectus will be specified in the related prospectus
supplement, including the premiums, if any, payable upon redemption. The
redemption price in any event will not be less than the principal balance of
that series, plus interest at the applicable bond rate accrued to the redemption
date. Unless the context requires otherwise, all references in this prospectus
to principal of the transition bonds of a series being redeemed includes any
resulting premium that might be payable on those transition bonds, as described
in the applicable prospectus supplement.
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Except as described below, each series of transition bonds offered by
this prospectus 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 will be required to pay liquidated damages as a result of a breach by
PECO Energy of specified representations relating to intangible transition
property under the sale agreement if that 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
specified other representations is reasonably expected to be incurred beyond the
90-day period immediately following the breach and these amounts are reasonably
expected to exceed the de minimis loss amount. However, if PECO Energy is
obligated to pay liquidated damages for a breach of a representation and
warranty which relates to one or more of the qualified rate orders, but not all
of the qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of
the redemption date, plus accrued interest to the redemption date,
and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to
mandatory redemption.
The bond trustee, who may consult with the servicer and other third
parties, will have sole responsibility to determine whether a breach by PECO
Energy of any of these representations has a material adverse effect on the
transition bondholders. See "The Sale Agreement--Representations and Warranties
of the Seller" in this prospectus.
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 any other manner or at any
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 that notice shall be of no effect unless
those 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 those
transition bonds will have no further rights with respect to those transition
bonds, except to receive payment of the redemption price of those transition
bonds and unpaid interest accrued to the date fixed for redemption, from the
bond trustee.
Credit Enhancement
Credit enhancement with respect to all series of transition bonds is
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 of that series, additional credit enhancement may be provided. The
amounts and types of credit enhancement, and the provider of credit enhancement,
if any, for each series of transition bonds offered by this prospectus or one or
more classes of that series 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, maturity guaranty,
repurchase obligation, third-party payment or cash deposit, 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 additional credit enhancement is provided, the applicable
prospectus supplement will include a description of:
(1) the amount payable under that credit enhancement,
(2) any conditions to payment under that credit enhancement not
therwise described in this prospectus,
(3) the conditions, if any, under which the amount payable under
that credit enhancement may be reduced and under which that
credit enhancement may be terminated or replaced, and
(4) any material provisions of any applicable agreement relating
to that credit enhancement.
Additionally, the applicable prospectus supplement may describe
material information with respect to the provider of any third-party credit
enhancement, including:
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed
to do business,
(3) if applicable, the identity of regulatory agencies which
exercise primary jurisdiction over the conduct of its
business, and
(4) its total assets and stockholders' equity or policyholders'
surplus, if applicable, as of a date specified in the
applicable prospectus supplement.
Book-Entry Registration
All classes of transition bonds offered by this prospectus will be
book-entry transition bonds, which are initially represented by one or more
bonds registered in the name of Cede & Co. (referred to as Cede throughout this
prospectus), as nominee of The Depository Trust Company (referred to as DTC
throughout this prospectus), or another securities depository and are available
only in the form of book-entries; provided, however, the applicable prospectus
supplement relating to a series of transition bonds may provide that the
transition bonds of that series or a class of that series will be issued as
definitive transition bonds. Transition bondholders may also hold transition
bonds of a class through Clearstream, Luxembourg or Euroclear (in Europe), if
they are participants in those systems or indirectly through organizations that
are participants in those systems.
Cede, as nominee for DTC, will hold the global bond or bonds
representing the transition bonds. Clearstream, Luxembourg and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's names on the
books of their respective depositories which in turn will hold those positions
in customers' securities accounts in the depositories' names on the books of
DTC. Citibank, N.A. will act as depositary for Clearstream, Luxembourg and
Morgan Guaranty Trust Company of New York will act as depositary for Euroclear.
In these capacities, Citibank, N.A. and Morgan Guaranty Trust Company of New
York are referred to as the depositories.
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 under 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 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.
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Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg 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 Clearstream,
Luxembourg or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary. Cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in that 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. Clearstream, Luxembourg
participants and Euroclear participants may not deliver instructions directly to
the depositories.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg 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. These credits or any
transactions in those transition bonds settled during that processing will be
reported to the relevant Euroclear or Clearstream, Luxembourg participant on
that business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of transition bonds by or through a Clearstream, Luxembourg
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
Clearstream, Luxembourg 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 of those dates,
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 of that transition bond, whether or not that transition bond is
overdue and notwithstanding any notice of ownership or writing on that
transition bond 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 in this prospectus to actions by transition bondholders
thus refer to actions taken by DTC upon instructions from its participants, and
all references in this prospectus 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, 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 those payments on behalf of their respective
transition bondholders. Accordingly, although transition bondholders will not
possess physical bonds, the governing rules of DTC provide a mechanism by which
transition bondholders will receive payments and will be able to transfer their
interests.
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Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and specified 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 those 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.
Clearstream, Luxembourg (formerly known as Cedelbank) holds securities
for its customers and facilitates the clearance and settlement of securities
transactions between its customers through electronic book-entry changes in
their accounts thereby eliminating the need for physical movement of
certificates. Transactions may be settled by Clearstream, Luxembourg in any of
36 currencies, including United States Dollars. Clearstream, Luxembourg provides
to its customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission De
Surveillance Du Secteur Financier, `CSSF', which supervises Luxembourg Banks.
Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the operator of the Euroclear
System in Brussels to facilitate settlement of trades between their respective
participants. Clearstream, Luxembourg and Morgan Guaranty Trust Company of New
York each hold securities for their customers and facilitate the clearance and
settlement of securities transactions by electronic book-entry transfer between
their respective account holders. Clearstream, Luxembourg and Morgan Guaranty
Trust Company of New York provide various services including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg and Morgan
Guaranty Trust Company of New York also deal with domestic securities markets in
several countries through established depository and custodial relationships.
Clearstream, Luxembourg and Morgan Guaranty Trust Company of New York
customers are world-wide financial institutions, including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to Clearstream, Luxembourg and Morgan Guaranty
Trust Company of New York is available to other institutions that clear through
or maintain a custodial relationship with an account holder of either system.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear System 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 crossmarket
transfers with DTC described in the fifth paragraph of this subheading. The
Euroclear System is operated by Morgan Guaranty Trust Company of New York, out
of its Brussels, Belgium office, under contract with Euroclear Clearance System
S.C., a Belgian cooperative corporation. All operations are conducted by Morgan
Guaranty Trust Company of New York, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with Morgan Guaranty Trust
Company of New York, not Euroclear Clearance System S.C. Euroclear Clearance
System S.C. 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 operator of the Euroclear System 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 operator of
the Euroclear System are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of Euroclear and applicable
Belgian law. These governing 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 operator of the
Euroclear System acts under these governing 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 Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants in accordance with the
relevant systems' rules and procedures, to the extent received by its
Depositary. These payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "United States Taxation" in
this prospectus.
Clearstream, Luxembourg or Morgan Guaranty Trust Company of New York,
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 Clearstream, Luxembourg
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to its depositary's ability to effect those actions
on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of transition bonds among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Definitive Transition Bonds
Each series or class of transition bonds offered by this prospectus
will be issued in fully registered, certificated form to transition bondholders
or their nominees, rather than to DTC or its nominee, only if:
(1) 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 that series or
class of transition bonds and the issuer is unable to locate a
qualified successor,
(2) the issuer, at its option, elects to terminate the book-entry
system through DTC, or
(3) 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 to DTC, 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 these 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. These payments
will be made by check mailed to the address of that holder as it appears on the
register maintained by the bond trustee. The final payment on any transition
bond, however, will be made only upon presentation and surrender of that
transition bond at the office or agency specified in the notice of final payment
to transition bondholders.
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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
with that registration of transfer or exchange.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal payments on each series or class of transition
bonds offered by this prospectus, 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 collections of intangible transition charges. Accelerated
receipts of collections of intangible transition charges will generally not,
however, result in payment of principal on the transition bonds earlier than the
related expected final payment dates since receipts in excess of the amounts
necessary to amortize the transition bonds in accordance with the applicable
expected amortization schedule will be deposited in the overcollateralization
subaccount or reserve subaccount. However, delayed receipts of collections of
intangible transition charges may result in principal payments on the transition
bonds occurring more slowly than as reflected in the expected amortization
schedule or later than the related expected final payment dates. Redemption or
acceleration of any class or series of transition bonds in accordance with the
terms of that series or class will result in payment of principal earlier than
the related expected final payment dates.
The actual payments on each payment date for each series or class of
transition bonds and the weighted average life of that series or class will be
affected primarily by the rate of collections of intangible transition charges
and the timing of receipt of collections of intangible transition charges, 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 collections of intangible transition charges 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 collections of intangible transition
charges, no assurances are given that the servicer will be able to forecast
accurately actual electricity usage impacting billed revenue from which
intangible transition charges are allocated and the rate of delinquencies and
write-offs or implement adjustments to the intangible transition charges that
will cause collections of intangible transition charges to be received at any
particular rate. See "Risk Factors--Unusual Nature of Intangible Transition
Property" and "The Qualified Rate Orders and the Intangible Transition
Charges--The Intangible Transition Charges--The Intangible Transition Charge
Adjustment Process" in this prospectus.
If collections of intangible transition charges 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 is 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 amended and restated sale agreement. The amended and restated sale
agreement, is referred to in this prospectus and all related prospectus
supplements as the sale agreement. The indenture provides that the sale
agreement may be amended with the consent of the bond trustee but without the
consent of the transition bondholders or the counterparty to any hedge or swap
transaction, subject to the conditions described under the caption "The
Indenture--Modifications to the Sale Agreement and the Master Servicing
Agreement" below.
The form of the sale agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part. Please see that
form of sale agreement for a complete description of all its terms and
provisions.
Sale and Assignment of Intangible Transition Property
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 these sales nor the terms of any
transition bonds issued to finance these sales will be subject to the prior
review by or consent of the bondholders of transition bonds issued under the
indenture. All collections of intangible transition charges received by the
servicer will be allocated among the issuer and any other issuers based on their
respective Percentages. Intangible transition property may not be sold to
another issuer if the sale would result in the credit rating of any outstanding
series of transition bonds being reduced or withdrawn. In addition, the
purchaser of that intangible transition property must become a party to the
master servicing agreement. See "The Master Servicing Agreement--Addition of
Other Issuers" in this prospectus.
The sale agreement and a related bill of sale were executed by the
seller and the issuer when the Series 1999-A Bonds were issued. At that time,
the seller sold and assigned to the issuer, without recourse, except as provided
in the sale agreement, the intangible transition property authorized by the
First QRO representing the irrevocable right to receive through intangible
transition charges amounts sufficient to recover qualified transition expenses
related to the Series 1999-A Bonds. The date that this intangible transition
property, referred to in this prospectus as the initial intangible transition
property, was sold by the seller is referred to in this prospectus as the
initial transfer date.
Under the sale agreement, the seller may sell additional intangible
transition property to the issuer, subject to the satisfaction of several
conditions including the execution of a subsequent bill of sale and the delivery
of notice of the transfer to the rating agencies and the issuer. The sale of the
intangible transition property authorized by the 2000 QRO was a sale of
additional intangible transition property and is referred to in this prospectus
as a sale of subsequent intangible transition property. The sale of subsequent
intangible transition property was effective on a date, to be referred to as a
subsequent transfer date, specified in the written notice provided by the seller
to the rating agencies and the issuer. On the series issuance date for the first
series of transition bonds authorized under the 2000 QRO, the seller sold to the
issuer, without recourse, except as provided in the sale agreement, the
subsequent intangible transition property authorized by the 2000 QRO which
represented the irrevocable right to receive through intangible transition
charges amounts sufficient to recover qualified transition expenses with respect
to the related transition bonds.
In accordance with the Pennsylvania Competition Act, upon the execution
and delivery of the original sale agreement and the related bill of sale, the
sale of the initial intangible transition property was perfected as against all
third persons, including judicial lien creditors, and upon the execution of the
amended and restated sale agreement and a subsequent bill of sale and the
delivery of written notice to the rating agencies and the issuer, the sale of
subsequent intangible transition property described in that notice and bill of
sale was also perfected against all third persons, including judicial lien
creditors. No sale of intangible transition property will be made in connection
with the issuance of the transition bonds offered pursuant to this prospectus
because such issuances are to be refunding issuances. Rather, all the existing
collateral will secure all of the transition bonds outstanding, including the
remaining Series 1999-A Bonds, the Series 2000-A Bonds and any transition bonds
offered pursuant to this prospectus.
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The seller's accounting records and computer systems reflect the sales
of intangible transition property to the issuer. The seller treats the Series
1999-A Bonds and the Series 2000-A Bonds and will treat all transition bonds as
its debt for federal income tax purposes as long as 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:
(1) on or prior to each transfer date, 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,
(2) as of the transfer date, the seller was not insolvent and will
not have been made insolvent by that sale, and the seller is
not aware of any pending insolvency with respect to itself,
(3) as of the transfer date, no breach by the seller of its
representations, warranties or covenants in the sale agreement
shall exist, and no servicer default under the master
servicing agreement shall have occurred and be continuing,
(4) as of the transfer date, the issuer shall have sufficient
funds available to pay the purchase price for the transferred
intangible transition property to be conveyed on that date
under the sale agreement, and all conditions to the issuance
of one or more series of transition bonds intended to provide
those funds set forth in the indenture shall have been
satisfied or waived,
(5) on or prior to the transfer date, the seller shall have taken
all action required to transfer to the issuer ownership of the
transferred intangible transition property to be conveyed on
that date, free and clear of all liens other than liens
created by the issuer under 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 that security interest as of that
date,
(6) 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 written notice specifying
the subsequent transfer date for that subsequent intangible
transition property, on or prior to that subsequent transfer
date,
(7) the seller shall have delivered to the rating agencies and the
issuer the opinion of counsel specified in the sale agreement
and other opinions of counsel to the issuer trustee and the
bond trustee, and
(8) the seller shall have delivered to the bond trustee and the
issuer an officers' certificate confirming the satisfaction of
each condition precedent specified above.
Representations and Warranties of the Seller
In the sale agreement, the seller makes representations and warranties
to the issuer and the bond trustee, as collateral assignee of the issuer, as of
each transfer date with respect to the intangible transition property being sold
on that date and as of each date on which the issuer issues any series of
transition bonds to the effect, that:
(1) all information provided by the seller to the issuer with
respect to the transferred intangible transition property is
correct in all material respects,
(2) the transfers and assignments contemplated by the sale
agreement, when completed, constitute outright sales of the
intangible transition property from the seller to the issuer,
and the beneficial interest in and title to the transferred
intangible transition property would not be part of the
debtor's estate in the event of the filing of a bankruptcy
petition by or against the seller under any bankruptcy law,
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(3) the seller is the sole owner of the intangible transition
property being sold to the issuer on the relevant transfer
date, 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 under the
indenture and all filings, including filings with the
Pennsylvania Public Utility Commission under the Pennsylvania
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 issuer a
first priority perfected security interest in transferred
intangible transition property have been made, other than any
of those filings--except for filings with the Pennsylvania
Public Utility Commission under the Pennsylvania 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 transferred
intangible transition property, or
(y) the rights of the issuer with respect to the transferred
intangible transition property,
(4) each of the qualified rate orders has been issued by the
Pennsylvania Public Utility Commission in accordance with the
Pennsylvania Competition Act, each of the qualified rate
orders and the process by which each was issued comply with
all applicable laws, rules and regulations and the qualified
rate orders are in full force and effect,
(5) as of the date of issuance of any series of transition bonds
issued under this prospectus, those transition bonds are
entitled to the protections provided by the Pennsylvania
Competition Act and, accordingly, the provisions of each of
the qualified rate orders relating to the intangible
transition property and intangible transition charges are not
revocable by the Pennsylvania Public Utility Commission,
(6) (x) under the Pennsylvania Competition Act, neither the
Commonwealth of Pennsylvania nor the Pennsylvania
Public Utility Commission may limit, alter or in any
way impair or reduce the value of intangible transition
property or intangible transition charges approved by
the qualified rate orders or any rights under the
qualified rate orders, except such a limitation or
alteration may be made by the Commonwealth of
Pennsylvania or the Pennsylvania Public Utility
Commission if adequate compensation is made by law for
the full protection of the intangible transition
charges and of transition bondholders,
(y) under the Contract Clauses of the Constitutions of
the Commonwealth of Pennsylvania and the United States,
neither the Commonwealth of Pennsylvania nor the
Pennsylvania Public Utility Commission can take any
action that substantially impairs the rights of the
transition bondholders unless that action is a
reasonable exercise of the Commonwealth of
Pennsylvania's sovereign powers and appropriate to
further a legitimate public purpose, and
(z) under the Takings Clauses of the Constitutions of
the Commonwealth of Pennsylvania and the United States,
if that action constitutes a permanent appropriation of
the property interest of transition bondholders in the
intangible transition property and deprives the
transition bondholders of their reasonable expectations
arising from their investments in transition bonds,
just compensation, as determined by a court of
competent jurisdiction, must be provided to transition
bondholders,
(7) there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Pennsylvania
Competition Act, the First QRO, the 2000 QRO, the 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 First QRO or the
2000 QRO,
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(8) 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,
(9) 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 First QRO, the 2000
QRO or the Pennsylvania Competition Act,
(10) no failure on any subsequent transfer date or any time after
those dates to satisfy any condition imposed by the
Pennsylvania 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,
(11) the assumptions used in calculating intangible transition
charges are reasonable and made in good faith,
(12) (x) intangible transition property, other than
intangible transition property, if any, retained by the
seller, constitutes a current property right,
(y) intangible transition property includes (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
qualified rate orders in an amount equal to the
aggregate principal amount of transition bonds 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 (B) all right, title and interest
of the seller or its assignee applicable to the
transition bonds in the qualified rate orders and in
all revenues, collections, claims, payments, money, or
proceeds of or arising from the intangible transition
charges applicable to the transition bonds set forth in
the qualified rate orders to the extent that in
accordance with the Pennsylvania Competition Act, the
qualified rate orders and the rates and charges
authorized under the qualified rate orders are declared
to be irrevocable, and
(z) designated parts of the qualified rate orders,
including those covering the right to collect
intangible transition charges, have been declared to be
irrevocable by the Pennsylvania Public Utility
Commission,
(13) 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,
(14) 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 the subsequent
intangible transition property, on the applicable subsequent
transfer date; the seller has duly authorized that transfer 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,
(15) 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,
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(16) the consummation of the transactions contemplated by the sale
agreement and the fulfillment of the terms of that agreement
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 seller's
mortgage on seller's monthly servicing fee under the master
servicing agreement and any rights under the sale
agreement--under the terms of any 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,
(17) 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,
(18) 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 issuer's trust
agreement, or the certificate of trust filed with the
State of Delaware to form the issuer, collectively
referred to in this prospectus as the basic documents,
or the transition bonds,
(y) seeking to prevent the issuance of transition bonds
or the consummation of the transactions contemplated by
the basic documents or the transition bonds, or
(z) except as disclosed by the seller to the issuer,
seeking any determination or ruling that could be
reasonably expected to materially and adversely affect
the performance by the seller of its obligations under,
or the validity or enforceability of, the basic
documents or the transition bonds,
(19) after giving effect to the sale of any transferred intangible
transition property under the sale agreement, the seller:
(v) is solvent and expects to remain solvent,
(w) is adequately capitalized to conduct its business
and affairs considering its size and the nature of its
business and intended purposes,
(x) is not engaged nor does it expect to engage in a
business for which its remaining property represents
unreasonably small capital,
(y) believes that it will be able to pay its debts as
they become due and that such belief is reasonable,
(z) 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,
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(20) 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 those 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, and
(21) fixed amounts payable by the issuer to any swap counterparty
under any swap or hedge transaction with the issuer are
properly includable in intangible transition charges.
Subject to the conditions set forth below, the seller will be required
to pay liquidated damages in the following two circumstances:
o first, if the seller breaches any representation or warranty
specified in (2), (3), (4), (5), (7) and (12) above that has a
material adverse effect on the transition bondholders of any
series, or
o second, if the seller breaches any representation or warranty
specified in (6), (8), (9), (13), (14), (15) and (16) above and
the full amount of losses attributable to that breach are
reasonably expected to be incurred beyond a 90-day period
immediately following that breach.
However, if the seller is obligated to pay liquidated damages for a
breach of one of the representations and warranties specified above and that
breach relates to one or more of the qualified rate orders, but not all of the
qualified rate orders, then:
o the amount of liquidated damages will include the then outstanding
principal amount of only the series of transition bonds issued in
connection with the affected qualified rate order or orders as of
the redemption date, plus accrued interest to the redemption date,
and
o only the series of transition bonds issued in connection with the
affected qualified rate order or orders will be subject to
mandatory redemption.
In both circumstances, the seller will pay the liquidated damages to
the bond trustee, as assignee of the issuer, for deposit into the general
subaccount of the collection account for application to the relevant series
subaccounts.
In the first circumstance (i.e., a breach of the representations or
warranties in (2), (3), (4), (5), (7) or (12) above) the liquidated damages will
be payable 90 days after the breach if the seller had, immediately prior to the
breach, a long term debt rating of at least "A3" by Moody's and "BBB" by
Standard & Poor's and the equivalent of "BBB" by any other rating agency and the
seller enters into a binding agreement with the issuer to pay any amounts
necessary so that all interest payments which will become due on the transition
bonds during that 90-day period will be paid in full. If the seller does not
have those long term debt ratings, the seller may still pay liquidated damages
90 days after that breach so long as it deposits an amount in escrow with the
bond trustee sufficient, taking into account amounts on deposit in the
collection account which will be available for that purpose, to pay all interest
payments which will become due on the transition bonds during that 90-day
period. This deposit must occur within two business days after that breach. If
the seller does not have those long term debt ratings and does not make that
deposit, liquidated damages will be payable two business days after the date of
the breach.
The seller will not be obligated to pay liquidated damages, however,
for a breach in such first circumstance if:
(i) within 90 days after the date of the occurrence of the breach,
that 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 that breach, and
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(ii) either:
(x) if the seller had, immediately prior to the breach,
the long term debt ratings specified in the preceding
paragraph, the seller enters into the binding agreement
also specified in the preceding paragraph, or
(y) if the seller does not have those long term debt
ratings, the seller makes the escrow deposit specified
in the preceding paragraph.
In the event that within that 90-day period, the breach is cured or the
seller takes the remedial action described in subsection (i) above, any amounts
paid by the seller to the bond trustee, as assignee of the issuer, which have
not been distributed pursuant to the indenture will be returned to the seller at
the end of that 90-day period.
In the second circumstance (i.e., a breach of the representations or
warranties in (6), (8), (9), (13), (14), (15) or (16) above), liquidated damages
will be payable on the first monthly allocation date following the expiration of
the 90-day period which follows that breach.
The seller need not pay the liquidated damages in such second
circumstances however, if the full amount of losses attributable to the breach
is reasonably expected not to exceed the de minimis loss amount. In that case,
on the monthly allocation date immediately following the initial loss
calculation date, the seller shall pay to the bond trustee, as assignee of the
issuer, for deposit in the loss subaccount of the collection account, the
aggregate expected amount of those losses for all monthly allocation dates on
which losses are expected to be incurred. Following this deposit, the seller's
obligation to pay loss amounts or liquidated damages, as applicable, as a result
of those 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 those losses exceeds the amounts paid by the seller, on the next
monthly allocation date, the seller shall pay to the bond trustee, as assignee
of the issuer, the amount of that excess for that monthly allocation date and
the expected amount of excess for all subsequent monthly allocation dates.
The seller will also indemnify the issuer and the bond trustee and
specified related parties, against:
(1) 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
(2) losses, damages, payments or expenses which result from:
(x) the seller's willful misconduct, bad faith or gross
negligence in the performance of its duties under the
sale agreement,
(y) the seller's reckless disregard of its obligations
and duties under the sale agreement, or
(z) the seller's breach of any representations or
warranties in (1), (6), (8), (9), (10), (11), (13),
(14), (15), (16), (17), (18), (19), (20) and (21)
above.
The indemnity amounts will not exceed liquidated damages.
The obligation to pay liquidated damages and the indemnities described
above will survive the termination of the sale agreement and include reasonable
fees and expenses of investigation and litigation, including reasonable
attorneys' fees and expenses. If the seller receives written notice of a breach
described in (x), (y) or (z) above from the issuer or bond trustee, the seller
will notify the servicer of the occurrence of the breach so that the servicer
may calculate the amount of indemnification in accordance with the provisions of
the master servicing agreement. Amounts on deposit in the reserve subaccount,
the overcollateralization subaccount and the capital subaccount shall not be
available to satisfy any indemnification amounts owed by the seller under the
sale agreement.
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In addition, if the seller breaches its representation and warranty in
(21) above, the seller will indemnify the applicable swap counterparty in
accordance with the provisions of the preceding paragraph and any
indemnification payments will be paid to the applicable swap counterparty as
provided in "The Indenture-- Allocations and Payments" in this prospectus.
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 Pennsylvania Competition Act or a change in law
by legislative enactment or constitutional amendment or the Commonwealth's
limitation, alteration, impairment or reduction of the value of intangible
transition property or intangible transition charges after the issuance date of
any series of transition bonds in breach of the pledge of the Commonwealth under
the Pennsylvania Competition Act. See "Risk Factors--Unusual Nature of
Intangible Transition Property--Legal Challenges Could Adversely Affect
Transition Bondholders" and "--Changes in Law May Result in Losses to Transition
Bondholders" in this prospectus.
In addition to the foregoing representations and warranties, the seller
has also covenanted that it will deliver all collections of intangible
transition charges it receives or the proceeds of collections of intangible
transition charges, other than collections of intangible transition charges
relating to intangible transition property retained by the seller, to the
servicer and will promptly notify 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, or in the case of intangible transition
property retained by the seller, the lien of seller's mortgage.
The seller is also be obligated to take those 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:
(1) 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
(2) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Pennsylvania Competition
Act, the qualified rate orders 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 those filings,
including filings with the Pennsylvania Public Utility Commission under the
Pennsylvania 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 in the previous paragraph, the seller is not
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its obligations under the sale agreement and that in its
opinion may involve it in any expense or liability.
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 those persons execute an agreement of assumption to
perform every obligation of the seller under the sale agreement. The sale
agreement further requires that:
(1) immediately after giving effect to that 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,
(2) the rating agencies shall have received prior written notice
of that transaction, and
(3) specified officers' certificates and opinions of counsel shall
have been delivered to the issuer and the bond trustee.
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Governing Law
The sale agreement is 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 amended and restated master servicing agreement under which the servicer
services all transferred intangible transition property. The amended and
restated master servicing agreement is referred to in this prospectus and all
related prospectus supplements as the master servicing agreement.
The form of the master servicing agreement has been filed as an exhibit
to the registration statement of which this prospectus forms a part. Please see
that form of master servicing agreement for a complete description of all its
terms and provisions.
The master servicing agreement may be amended by the parties to that
agreement with the consent of the bond trustee under the indenture and all bond
trustees of any other issuer, if any. The indenture provides that the master
servicing agreement may be amended with the consent of the bond trustee but
without the consent of the transition bondholders or the counterparty to any
hedge or swap transaction, subject to the conditions described under the caption
"The Indenture--Modification to the Sale Agreement and the Master Servicing
Agreement" below.
Because the master servicing agreement relates to all serviced
intangible transition property (as opposed to just the serviced intangible
transition property owned by the issuer), the rights and obligations set forth
in that 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.
Servicing Procedures
General. The servicer manages, services and administers, and makes
collections in respect of, the serviced intangible transition property. The
servicer's duties include:
(1) calculating and billing the intangible transition charges and
collecting, from customers, electric generation suppliers and
other third parties, as applicable, all collections of
intangible transition charges,
(2) responding to inquiries by customers, electric generation
suppliers and other third parties, the Pennsylvania Public
Utility Commission, or any federal, local or other state
governmental authority with respect to the serviced intangible
transition property and intangible transition charges,
(3) accounting for collections of intangible transition charges,
investigating delinquencies, processing and depositing
collections and making periodic remittances, furnishing
periodic reports to the issuer, the bond trustee and the
rating agencies,
(4) selling, as agent for the issuer and any other issuers,
defaulted or written-off accounts in accordance with the
servicer's usual and customary practices, and
(5) taking action in connection with adjustments to the intangible
transition charges as described below under "--Intangible
Transition Charge Adjustment Process."
See also "The Qualified Rate Orders and the Intangible Transition
Charges--Competitive Billing" in this prospectus.
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The servicer will notify the issuer, the bond trustees and the rating
agencies in writing of any laws or Pennsylvania Public Utility Commission
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.
Any collections of intangible transition charges received by the
servicer are allocated between the issuer and any other issuers based on their
respective Percentages during the calendar month the charges are expected to be
collected.
The servicer will institute any action or proceeding necessary to
compel performance by the Pennsylvania Public Utility Commission or the
Commonwealth of Pennsylvania of any of their obligations or duties under the
Pennsylvania Competition Act or any of the qualified rate orders. The cost of
this kind of action reasonably allocated by the servicer to the serviced
intangible transition property, based on the ratio that property bears to all
intangible transition property, will be payable from collections of intangible
transition charges as an operating expense at the time those costs are incurred.
Intangible Transition Charge Adjustment Process. The master servicing
agreement requires the servicer to seek, and the Pennsylvania Competition Act
and the First QRO and the 2000 QRO require the Pennsylvania Public Utility
Commission to approve, adjustments to the intangible transition charges charged
to each rate class within any customer category based on actual collections of
intangible transition charges and updated assumptions by the servicer as to
projected future sales from which intangible transition charges are allocated,
expected delinquencies and write-offs and future payments and expenses relating
to the intangible transition property and the transition bonds. The servicer is
required to file requests with the Pennsylvania Public Utility Commission for
those adjustments on May 14th of each year and on the additional date or dates
specified in the prospectus supplement for any series of transition bonds. In
accordance with the Pennsylvania Competition Act and the First QRO and the 2000
QRO, the Pennsylvania Public Utility Commission has 90 days to approve annual
adjustments. In addition, those qualified rate orders provide that adjustments
during the final calendar year of collections of intangible transition charges
for any series of transition bonds may be implemented quarterly or monthly.
The servicer agrees to calculate these adjustments to result in:
(1) the outstanding principal balance of each series equaling the
amount provided for in the expected amortization schedule for
that series, and
(2) the amount on deposit in the overcollateralization subaccount
equaling the calculated overcollateralization level,
by
(1) the next adjustment date or the payment date closest to the
next adjustment date, or
(2) the expected final payment date, as applicable, for each
series,
taking into account any amounts on deposit in the reserve subaccount other than
specified customer prepayments.
The annual adjustments to the intangible transition charges are
expected to be implemented on or prior to August 12th of each year, and, for
each series of transition bonds, during the period commencing 12 months prior to
the last scheduled payment date for the payment of principal on the last class
of each series of transition bonds on the date or dates specified in the related
prospectus supplement. Those adjustments to the intangible transition charges
will cease for each series on the final adjustment date specified in the
prospectus supplement for that series.
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Intangible Transition Charge Collections. The servicer is required to
remit all collections of intangible transition charges, from whatever source,
and all proceeds of other collateral, if any, of the issuer received by the
servicer, to the bond trustee and other issuers' bond trustees for deposit under
the indenture and the indenture to which any other issuers are party on 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
following business day) --provided that:
(1) no servicer default has occurred and is continuing under the
master servicing agreement, and
(2) (x) PECO Energy or its successor maintains a short-term
rating of at least "A-1" by Standard & Poor's, "P-1" by
Moody's and, if rated by Fitch, Inc., "F-2" by Fitch,
Inc.--and for five business days following a reduction
in, any such rating, or
(y) the rating agency condition will have been
satisfied for each of the rating agencies other than
Moody's, to which notice will be sent, and any
conditions or limitations imposed by those rating
agencies in connection with that satisfaction of the
rating agency condition are complied with.
Otherwise, the remittance date is two business days after any
collections of intangible transition charges or proceeds of other collateral are
received by the servicer. The monthly period represented by each calendar month
is referred to in this prospectus as the collection period. Until collections of
intangible transition charges are remitted to the collection account, the
servicer will not segregate them from its general funds. Remittances of
collections of intangible transition charges will not include interest on these
collections prior to the remittance date or late fees from customers, which the
servicer will be entitled to retain.
Servicer Advances
If specified in the annex to the master servicing agreement relating to
any series of transition bonds, the servicer makes advances of interest or
principal on that series of transition bonds in the manner and to the extent
specified in that annex.
Servicing Compensation; Releases
The issuer and each other issuer, individually and not jointly, agrees
to pay the servicer the servicing fees for their respective series of transition
bonds. The servicing fee for each series, together with any portion of that
servicing fee that remains unpaid from prior payment dates, is paid solely to
the extent funds are available for payment as described under "The
Indenture--Allocations and Payments" in this prospectus. The servicing fee is
paid prior to the payment of or provision for any amounts 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 all other bond trustees from any and
all claims, subject to exceptions relating to the serviced intangible transition
property or the servicer's servicing activities with respect to the serviced
intangible transition property.
Servicer Duties
In the master servicing agreement, the servicer has agreed that, in
servicing the serviced intangible transition property:
(1) 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 another issuer's bond trustee's
interests in intangible transition property,
(w) it will manage, service, administer and make
collections in respect of the serviced intangible
transition property with reasonable care and in
material compliance with applicable law, including all
applicable Pennsylvania Public Utility Commission
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,
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(x) it will follow standards, policies and procedures
in performing its duties as servicer that are
customary in the servicer's industry,
(y) it will use all reasonable efforts, consistent with
its customary servicing procedures, to enforce and
maintain rights in respect of the serviced intangible
transition property, and
(z) it will calculate the intangible transition charges
in compliance with the Pennsylvania Competition Act,
any applicable qualified rate orders and any applicable
tariffs,
(2) it will keep on file, in accordance with customary procedures,
all documents related to intangible transition property and
will maintain accurate and complete accounts, records and
computer systems pertaining to the intangible transition
property, and
(3) 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 Pennsylvania Public Utility Commission regulations or
orders in effect at the time those duties are to be performed.
Servicer Representations and Warranties
In the master servicing agreement, the servicer makes representations
and warranties as of each date that the seller sells or otherwise transfers any
intangible transition property to the issuer and any other issuer and as of each
date on which the issuer or any other issuer issues any series of transition
bonds to the effect that:
(1) 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 those properties are currently
owned and that business is presently conducted and to execute,
deliver and carry out the terms of the master servicing
agreement and has the power, authority and legal right to
service the serviced intangible transition property,
(2) 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,
(3) the servicer's execution, delivery and performance of the
master servicing agreement have been duly authorized by the
servicer by all necessary corporate action,
(4) 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,
(5) 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
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,
(6) except for filings with the Pennsylvania Public Utility
Commission 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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(7) 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, any bond trustees of any other issuers on behalf of any holders of
transition bonds issued by other issuers, and certain other specified parties,
against any costs, expenses, losses, damages, claims and liabilities that may be
imposed upon, incurred by or asserted against that person as a result of:
(1) 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
(2) the servicer's breach of any of its representations or
warranties under the master servicing agreement.
Statements to Issuer and Bond Trustee
For each date on which adjustments to intangible transition charges are
calculated, the servicer provides to the issuer, the bond trustee and each of
the rating agencies a statement indicating, with respect to the serviced
intangible transition property:
(1) 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,
(2) the amount on deposit in the overcollateralization subaccount
and the calculated overcollateralization level as of the
immediately preceding payment date,
(3) the sum of the amounts provided in the expected amortization
schedule for each outstanding series for each payment date
prior to the next adjustment date and the servicer's
projection of the aggregate principal amount of all series as
of each payment date prior to the next adjustment date,
(4) the calculated overcollateralization level for each payment
date prior to the next adjustment date and the servicer's
projection of the amount on deposit in the
overcollateralization subaccount as of each payment date prior
to the next adjustment date, and
(5) the projected collections of intangible transition charges for
the payment date immediately before the next adjustment date
through that adjustment date.
On or before each remittance date, the servicer prepares and furnishes
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 that remittance date under the indenture.
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Moreover, at least three business days before each monthly allocation
date, the servicer prepares and furnishes to the issuer, the bond trustee, each
counterparty to a hedge or swap transaction and the rating agencies a statement
setting forth the transfers and payments to be made on each monthly allocation
date and the relevant amounts. Further, at least three business days before each
payment date for each series of transition bonds, the servicer prepares and
furnishes to the issuer and the bond trustee a statement of the amounts to be
paid to the holders of transition bonds of each series. On the basis of this
information, the bond trustee will furnish to transition bondholders the payment
date report described under "The Indenture--Reports to Transition Bondholders"
in this prospectus.
Evidence as to Compliance
The master servicing agreement provides that a firm of independent
public accountants will furnish to the issuer, any other issuers, the bond
trustee and any bond trustees of any other issuers and the rating agencies, on
or before March 31 of each year, beginning March 31, 2001, a statement as to
compliance by the servicer during the preceding calendar year, or the relevant
portion of that year, with standards relating to the servicing of intangible
transition property. This annual accountant's report will state that the firm
has performed specified procedures in connection with the servicer's compliance
with the servicing procedures of the master servicing agreement, identifying the
results of those procedures and including any exceptions noted. The annual
accountant's report will also indicate that the accounting firm providing that
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 also provides for delivery to the
issuer, any other issuers, the bond trustee and any bond trustees of any other
issuers and the rating agencies, 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 of that year, or, if there has
been a default in the fulfillment of any such obligation, describing each
default. The servicer has agreed to give the issuer, any other issuers, the bond
trustee and any bond trustees of any other issuers and the rating agencies
notice of any servicer default under the master servicing agreement.
Matters Regarding the Servicer
Under the First QRO and the 2000 QRO, PECO Energy may assign its
obligations under the master servicing agreement to any electric distribution
company, as that term is defined in the Pennsylvania Competition Act, which
succeeds to the major part of PECO Energy's electric distribution business.
Prior to any assignment, the servicer shall provide written notice of that
assignment to each of the rating agencies. Under the master servicing agreement,
a person which succeeds to the major part of the electric distribution business
of the servicer, which person assumes the obligations of the servicer, will be
the successor of the servicer under the master servicing agreement. The master
servicing agreement further requires that:
(1) immediately after giving effect to that 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,
(2) specified officers' certificates and opinions of counsel
shall have been delivered to the issuer, any other issuer,
the bond trustee (and any bond trustees of other issuers)
and the rating agencies, and
(3) prior written notice shall have been received by the rating
agencies.
The master servicing agreement provides that, subject to the foregoing
provisions, PECO Energy shall not resign from the obligations and duties imposed
on it as servicer except upon a determination, communicated to the issuer, any
other issuer, the bond trustee (and any bond trustee of 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.
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In addition, the First QRO and the 2000 QRO and the Pennsylvania
Competition Act require that the servicer's responsibility to collect the
applicable intangible transition charges and other obligations under the master
servicing agreement must be undertaken and performed by any other entity that
provides transmission and distribution service to the customers.
Except as expressly provided in the master servicing agreement, the
servicer will not be liable to the issuer or any other issuer for any action
taken or for refraining from taking any action under the master servicing
agreement or for errors in judgment, except to the extent that liability is
imposed by reason of the servicer's willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the master servicing agreement.
Servicer Defaults
Servicer defaults under the master servicing agreement include:
(1) 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 any other issuer) any required
remittance that shall continue unremedied for a period of
three business days after written notice of that failure is
received by the servicer,
(2) 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 that failure has been
given to the servicer, by the issuer, any other issuer or
the bond trustee (or any bond trustee of any other issuer)
or after discovery of that failure by an officer of the
servicer, as the case may be,
(3) 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 issuer or any other
issuer and which continues unremedied for 60 days after
notice of that failure has been given to the servicer by the
issuer or any other issuer or the bond trustee (or any bond
trustee of any other issuer), and
(4) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings
of the servicer and actions by the servicer indicating its
insolvency, reorganization under bankruptcy proceedings or
inability to pay its obligations.
The bond trustee, together with the 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 these other issuers
and the bond trustee representing a majority of the outstanding principal amount
of all transition bonds issued, 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. After that, a successor
servicer appointed by the bond trustee (or if there is more than one, the bond
trustees representing a majority of all the transition bondholders of the issuer
and any 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 bond trustees and the issuers may be prevented from
effecting a transfer of servicing. See "Risk Factors--Bankruptcy; Creditors'
Rights" in this prospectus.
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The bond trustee and any bond trustee of any other issuer 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.
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 Pennsylvania Public Utility
Commission for sequestration and payment of revenues arising from the intangible
transition property.
Successor Servicer
In accordance with the provisions of the First QRO and the 2000 QRO and
under 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, the master servicing agreement requires the servicer to
cooperate with the issuer, any other issuers, the bond trustee, any bond
trustees of any other issuers 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 provides that the servicer will 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 that purchaser as a
party, that purchaser will become a party to the master servicing agreement, as
if originally named in it. The addition of any such purchaser will not require
the consent of the issuer or any other issuer under the master servicing
agreement.
Governing Law
The master servicing agreement is governed by and construed under the
laws of the Commonwealth of Pennsylvania.
THE INDENTURE
The following summary describes all material terms and provisions of
the indenture under which transition bonds offered by this prospectus will be
issued.
The indenture, including the form of the supplemental indenture under
which subsequent series of transition bonds will be issued, has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
Please see the indenture, including the form of supplemental indenture, for a
complete description of all terms and provisions of the indenture and
supplemental indenture, portions of which are summarized in this section.
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 issued under
the indenture, the issuer grants 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:
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(1) the serviced intangible transition property sold by the
seller to the issuer from time to time under the sale
agreement and all proceeds of that property,
(2) the sale agreement (except for specific provisions related
to the indemnification of the issuer),
(3) all bills of sale delivered by the seller under the sale
agreement,
(4) the master servicing agreement (except for specific
provisions related to the indemnification of the issuer),
(5) the collection account and all amounts on deposit in that
account from time to time,
(6) any hedge or swap agreements to which the issuer is a party,
(7) all other property of whatever kind owned from time to time
by the issuer, including all accounts, accounts receivable
and chattel paper,
(8) all present and future claims, demands, causes and choses in
action in respect of any or all of the foregoing, and
(9) 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 issued under the indenture (a
"refunding issuance"). Any series of transition bonds may include one or more
classes which differ as to interest rate and amortization of principal. The
terms of all transition bonds of the same series are to be identical, unless
that 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 of that series,
will be set forth in the related prospectus supplement for that series. The
terms of that series and any classes of that series are not subject to prior
review by, or consent of, the transition bondholders of any previously issued
series. See "Risk Factors--The Transition Bonds--Issuance of Additional Series
May Adversely Affect Outstanding Transition Bonds" and "The Transition Bonds" 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 that the issuance of that additional series of
transition bonds will not result in any rating agency reducing or withdrawing
its then-current rating of any outstanding series or class of transition bonds.
The notification in writing by each rating agency to PECO Energy, 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.
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In addition, in connection with the issuance of each new series, the
issuer will have to provide a certificate or opinion of a firm of independent
certified public accountants of recognized national reputation to the effect
that, based on the assumptions used in calculating the initial intangible
transition charges with respect to the transferred intangible transition
property or, if applicable, the most recent revised intangible transition
charges with respect to the transferred intangible transition property, after
giving effect to the issuance of that series and the application of the proceeds
from that issuance, those 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 for that series and
to fund the calculated overcollateralization level and to replenish the capital
subaccount 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 has established 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 is divided into subaccounts, which need not be separate
bank accounts:
o the general subaccount,
o one or more series subaccounts,
o one or more class subaccounts,
o the overcollateralization subaccount,
o the capital subaccount,
o the reserve subaccount, and
o 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 in the collection account. The
indenture requires that all monies deposited from time to time in the collection
account, all deposits in the collection account under the indenture and all
investments made in eligible investments with those monies be held by the bond
trustee in the collection account as part of the collateral.
"Eligible institution" means:
(1) the corporate trust department of the bond trustee, or
(2) a depository institution organized under the laws of the
United States of America or any state (or any domestic
branch of a foreign bank), which
(x) has (A) a long-term unsecured debt rating of "AAA" by
Standard & Poor's and "Aa3" by Moody's and (B) a
short-term 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
(y) whose deposits are insured by the Federal Deposit
Insurance Corporation.
So long as no default or event of default under the indenture has occurred and
is continuing, all funds in the collection account may be invested in any of the
following eligible investments:
(1) direct obligations of, or obligations fully and
unconditionally guaranteed as to timely payment by, the
United States of America,
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(2) demand deposits, time deposits, certificates of deposit, or
bankers' acceptances of eligible institutions which are
described in clause (x) of the preceding paragraph,
(3) commercial paper, other than commercial paper issued by PECO
Energy 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,
(4) money market funds which have the highest rating from each
rating agency,
(5) repurchase obligations with respect to any security that is
a direct obligation of, or fully guaranteed by, the United
States of America or agencies or instrumentalities of the
United States of America the obligations of which are backed
by the full faith and credit of the United States of
America, entered into with an eligible institution, or
(6) any other investment permitted by each rating agency
in each case which mature no later than the business day prior to the next
payment date for the applicable series or class.
The bond trustee has access to the collection account for the purpose
of making deposits in and withdrawals from the collection account in accordance
with the indenture. Eligible investments, however, may not be sold, liquidated
or disposed of at a loss prior to their respective maturities.
On each remittance date, the servicer remits all collections of
intangible transition charges, from whatever source, allocated to the issuer
under the master servicing agreement and all proceeds of other collateral
received by the servicer to the bond trustee under the indenture for deposit
pursuant to the indenture. In addition, amounts remitted by any counterparty to
any hedge or swap transaction are required to be deposited in the class
subaccount for the class to which these amounts relate. Further, the bond
trustee will deposit all indemnity amounts remitted to the bond trustee by the
seller or 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 will 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. The seller will be required in specified circumstances to pay loss
amounts and interest deposit amounts in connection with certain breaches under
the sale agreement. Payments of interest deposit amounts, if any, must be made
under a binding agreement with the issuer entered into by the seller or an
escrow agreement pursuant to the sale agreement.
General Subaccount. Collections of intangible transition charges
remitted by the servicer to the bond trustee, as well as any liquidated damages
and indemnity amounts remitted by PECO Energy or the servicer or otherwise
received by the bond trustee or the issuer, are deposited in the general
subaccount. On each monthly allocation date, the bond trustee draws on available
amounts in the general subaccount to make the allocations and payments described
in "--Allocations and Payments" below.
Reserve Subaccount. Collections of intangible transition charges
available on any monthly allocation date above that necessary to pay:
(1) amounts payable in respect of fees and expenses of the bond
trustee and the servicer and other fees and expenses,
(2) amounts distributable to series subaccounts for principal of
and interest paid on the next payment date and to class
subaccounts, if any, for principal of and interest paid on
the day before the next payment date, and
(3) amounts allocable to the overcollateralization subaccount
are deposited in the reserve subaccount.
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Amounts in the reserve subaccount are invested in eligible investments,
and the issuer is entitled to earnings on those amounts, subject to the
limitations described under "--Allocations and Payments" below. On each monthly
allocation date, the bond trustee draws on amounts in the reserve subaccount, if
any, to the extent amounts available in the general subaccount, the interest
deposit subaccount (with respect to the payment of Interest) and the loss
subaccount (for payments contemplated by (1) through (8) in "--Allocations and
Payments" below) are insufficient to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee, the servicer
and other specified fees and expenses.
See "--Allocations and Payments" below.
Overcollateralization Subaccount. Collections of intangible transition
charges to the extent available, as described under "--Allocation and Payments"
below, are 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 are invested in
eligible investments, and the issuer is entitled to earnings on those amounts,
subject to the limitations described under "--Allocations and Payments" below.
On each monthly allocation date, the bond trustee draws on amounts in the
overcollateralization subaccount to the extent amounts on deposit in the general
subaccount, the interest deposit subaccount (with respect to the payment of
Interest), the loss subaccount (for payments contemplated by (1) through (8) in
"--Allocations and Payments" below) and the reserve subaccount are insufficient
to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee and the servicer
and other specified fees and expenses.
If any series or class of transition bonds is redeemed or any series is
fully amortized as of any monthly allocation date, the amount by which amounts
on deposit in the overcollateralization subaccount exceed the monthly allocated
overcollateralization balances for all series will be released to the issuer,
free of the lien of the indenture.
Capital Subaccount. In connection with the issuance of the Series
1999-A Bonds and the Series 2000-A Bonds, PECO Energy made capital contributions
to the issuer, and the issuer paid such amounts to the bond trustee for deposit
into the capital subaccount which is invested in eligible investments. The
issuer is entitled to earnings on those amounts 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, the interest deposit subaccount (with respect to the
payment of Interest), the loss subaccount (for payments contemplated by (1)
through (8) in "--Allocations and Payments" below), the reserve subaccount and
the overcollateralization subaccount are insufficient to:
(1) make scheduled distributions to the series subaccounts, and
(2) pay expenses of the issuer, the bond trustee and the
servicer and other specified fees and expenses.
If any series or class of transition bonds is redeemed or any series is
fully amortized as of any monthly allocation date, the amount by which amounts
on deposit in the capital subaccount exceed the required capital amount will be
released to the issuer, free of the lien of the indenture.
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Series Subaccount. Upon the issuance of each series of transition
bonds, a series subaccount must be established with respect to that series. On
each monthly allocation date, deposits are made to each series subaccount as
described under "--Allocations and Payments" below. On each payment date, the
bond trustee withdraws 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.
Class Subaccount. If specified in the related prospectus supplement, a
class subaccount will be established with respect to the designated class or
classes. Payments to and from any counterparty to a hedge or swap transaction
are made from or deposited to, as applicable, the applicable class subaccounts
as described in the related prospectus supplement. On each payment date, amounts
on deposit in the class subaccount are applied to make payments with respect to
the related class, as specified in the related prospectus supplement. Any
balance remaining in any class subaccount on any payment date after payments
have been made to transition bondholders of the related class is 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 that
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 that subaccount. The bond
trustee will draw on amounts in the interest deposit subaccount, if any, as
described under "--Allocations and Payments" below.
Defeasance Subaccount. In the event funds are remitted to the bond
trustee in connection with the exercise of the legal defeasance option or the
covenant defeasance option, the issuer shall establish a defeasance subaccount
for each series to be defeased into which those 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 those amounts were deposited with the bond trustee,
including all sums due for principal, premium, if any, and interest. The
indenture requires that no funds in the defeasance subaccount for any series of
transition bonds be invested in eligible investments or otherwise. U.S.
government obligations deposited by the issuer with the bond trustee for a
covenant or legal defeasance may, however, remain as such. See "--Legal
Defeasance and Covenant Defeasance" below.
Allocations and Payments
On each monthly allocation date, the bond trustee applies all amounts
on deposit in the general subaccount of the collection account and any
investment earnings on those amounts in the following priority:
(1) all amounts owed to the bond trustee (including legal fees
and expenses, indemnity amounts and loss amounts) are paid
to the bond trustee,
(2) all amounts owed to the issuer trustee (including legal fees
and expenses, indemnity amounts and loss amounts) are paid
to the issuer trustee,
(3) the monthly servicing fee and all unpaid monthly servicing
fees from prior monthly allocation dates are paid to the
servicer,
(4) so long as no event of default has occurred and is
continuing or would be caused by that payment, all operating
expenses other than those referred to in clauses (1), (2)
and (3) above are paid to the persons entitled to that
payment, provided that the amount paid on any monthly
allocation date pursuant to this clause (4) may not exceed
$12,500 in the aggregate for all series,
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(5) an amount equal to Interest--which means in the case of any
series or class for which a hedge or swap agreement is in
effect and the issuer receives payments due from the
applicable swap counterparty, the regular fixed payment to
the counterparty without regard to netting, but not payment
for the breakage or termination of the related hedge or swap
agreement--on each series of transition bonds for that
monthly allocation date are transferred on a Pro Rata basis
to the series subaccount for that series,
(6) an amount equal to any Principal of any series or class of
the transition bonds payable as a result of acceleration
triggered by an event of default, any Principal of any
series or class of transition bonds payable on a series
termination date or class termination date, as applicable,
that will occur prior to the next monthly allocation date
and any Principal of and premium on a series or class of
transition bonds payable on a redemption date that will
occur prior to the next monthly allocation date are
transferred on a Pro Rata basis to the series subaccount for
that series, taking into account amounts on deposit in that
subaccount in respect of Principal as of that monthly
allocation date,
(7) an amount equal to Principal with respect to each series of
transition bonds for that monthly allocation date not
provided for pursuant to clause (6) above is transferred on
a Pro Rata basis to the series subaccount for that series,
(8) all unpaid operating expenses, indemnity amounts and loss
amounts are paid to the persons entitled to that payment,
(9) overcollateralization with respect to all series of
transition bonds for that monthly allocation date is
transferred to the overcollateralization subaccount,
(10) any termination or breakage amounts owed to any counterparty
to a swap or hedge transaction under any hedge or swap
agreement is paid to that counterparty,
(11) 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,
(12) the balance, if any, is allocated to the reserve subaccount,
and
(13) 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.
The payment of the bond trustee's and issuer trustee's indemnities specified in
items (1) and (2) above will be made only if:
o those indemnity payments would not result in an event of
default under the indenture and
o the issuer provides notice to the rating agencies of the
indemnity amount and, if reasonably required by the rating
agencies, an officer's certificate and other documentation
that certifies that those payments are not reasonably expected
to result in an event of default.
If on any monthly allocation date funds on deposit in the general
subaccount are insufficient to make the allocations contemplated by clauses (1)
through (9) above, the bond trustee will draw from amounts on deposit in the
following subaccounts up to the amount of that shortfall, in order to make those
payments and transfers:
o first, from the interest deposit subaccount, with respect to
the payments or transfers contemplated by clause (5) above
only,
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o then from the loss subaccount, with respect to the payments or
transfers contemplated by clauses (1) through (8) above only,
and
o 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 remaining after the allocations, if any,
described in the next paragraph (other than net income or other gain thereon,
which, so long as no event of default has occurred and is continuing, are
released to the issuer free of the lien of the indenture) are applied as follows
(in the priority indicated):
o interest due and payable on the transition bonds of that
series, together with any overdue interest and, to the extent
permitted by law, interest thereon, are paid to the holders of
transition bonds of that series (in the case of classes with
hedge or swap transactions, only amounts on deposit in the
applicable class subaccount will be so applied),
o the balance, if any, up to the principal amount of the
transition bonds of that series that is scheduled to be paid
by that payment date in accordance with the expected
amortization schedule for that series 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 that series
and premium, if any, is paid to the holders of transition
bonds of that series, and
o the balance, if any, is transferred to the general subaccount
for allocation on the next monthly allocation date.
On the business day preceding each payment date, the amounts on deposit
in any series subaccount for classes of that series for which one or more class
subaccounts have been established (other than net income or other gain, which,
so long as no event of default has occurred and is continuing, is released to
the issuer free of the lien of the indenture) is allocated to the applicable
class subaccount in accordance with the related prospectus supplement, up to the
gross amount, if any, owed to the applicable counterparty to any hedge or swap
transaction entered into by the issuer in respect of regular fixed payments in
accordance with the related hedge or swap agreement but not breakage or
termination of that agreement. On that day, net amounts owed to that
counterparty are paid from, or net amounts paid by that counterparty are
deposited into, that class subaccount. See "The Indenture--Allocations and
Payments" in this prospectus.
All payments to transition bondholders of a series pursuant to the
first and second bullet points of the second preceding paragraph are made pro
rata based on the respective principal amounts of transition bonds of that
series held by those transition bondholders, unless, in the case of a series
comprised of two or more classes, the applicable supplemental indenture for that
series specifies otherwise. All payments to transition bondholders of a class
pursuant to the first or second bullet points of the second preceding paragraph
are made pro rata based on the respective principal amounts of transition bonds
of that class held by those transition bondholders. If on any payment date a
counterparty to any hedge or swap transaction entered into by the issuer has
failed to fully pay amounts due to the issuer under the applicable hedge or swap
agreement related to a class of transition bonds for which a class subaccount
has been established, after all series subaccounts have accessed the reserve
subaccount as provided for in the indenture, the bond trustee will transfer to
such class subaccount amounts on deposit in the reserve subaccount up to the
amount of any applicable shortfall; provided, that the bond trustee shall have
received from the servicer a certificate to the effect that, based on the
servicer's best assumptions and projections at the time, those amounts will not
be needed to cover shortfalls on any other class or series on any monthly
allocation date prior to the next adjustment date.
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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 (referred to in this prospectus as 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:
(1) 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,
(2) the monthly servicing fee or the portion of the servicing
fee 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,
(3) all other operating expenses shall be paid to the persons
entitled to that payment; provided that if PECO Energy is
the servicer, all amounts owed to the servicer will be paid
per clause (5) below; if PECO Energy is not the servicer,
then payments to the servicer under this clause may not
exceed $150,000,
(4) the redemption price and accrued interest for each series of
transition bonds shall be paid to transition bondholders of
that series and any amounts due to any counterparty under a
hedge or swap agreement shall be paid to that counterparty;
provided, that if the issuer receives liquidated damages
from the seller as a result of a breach of a representation
and warranty which relates to one or more of the qualified
rate orders, but not all of the qualified rate orders:
(x) only the series of transition bonds issued in connection
with the affected qualified rate order or orders will be
redeemed, and
(y) only the redemption price and accrued interest for the
series of transition bonds being redeemed shall be paid to
transition bondholders of that series and only amounts due
to any counterparty under a hedge or swap agreement entered
into in connection with the issuance of the affected
transition bonds shall be paid to that counterparty,
(5) any other operating expenses owed to the servicer not yet
paid shall be paid to the servicer, and
(6) the balance, if any, will be released to the issuer, free
from the lien of the indenture; provided that if the issuer
receives liquidated damages from the seller as a result of a
breach of a representation and warranty which relates to one
of the qualified rate orders, but not both qualified rate
orders, then the balance, if any, will remain in the general
subaccount of the collection account.
Reports to Transition Bondholders
With respect to each series of transition bonds, on or prior to each
payment date, the bond trustee delivers a statement prepared by the bond trustee
to each transition bondholder of that series which includes, to the extent
applicable, the following information, and any other information so specified in
the applicable supplemental indenture, as to the transition bonds of that series
with respect to that payment date or the period since the previous payment date,
as applicable:
(1) the amount paid to those transition bondholders in respect
of principal,
(2) the amount paid to those transition bondholders in respect
of interest,
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(3) the outstanding principal balance and the amount provided in
the expected amortization schedule, in each case for that
series and as of the most recent payment date,
(4) 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,
(5) the amount on deposit in the capital subaccount as of the
most recent payment date and the required capital amount,
and
(6) the amount, if any, on deposit in the reserve subaccount as
of the most recent payment date.
The bond trustee's responsibility to provide this information is limited to the
availability, timeliness and accuracy of the information provided to it by the
servicer, as required by the master servicing agreement.
Modification of Indenture
Without the consent of any of the holders of the outstanding transition
bonds or the counterparty to any hedge or swap transaction 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:
(1) to correct or amplify the description of the collateral, or
to better assure, convey and confirm unto the bond trustee
the collateral, or to subject to the lien of the indenture
additional property,
(2) 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,
(3) 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 in the indenture conferred upon the issuer,
(4) to convey, transfer, assign, mortgage or pledge any property
to or with the bond trustee,
(5) 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:
(x) that action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any transition bondholder or any swap or hedge
counterparty; and
(y) the rating agency condition (other than with respect to
Moody's) will have been satisfied with respect to that
action and notice of that action will have been provided to
Moody's,
(6) 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, under requirements
of the indenture,
(7) to modify, eliminate or add to the provisions of the
indenture to the extent as shall be necessary to effect the
qualification of the indenture under the Trust Indenture Act
of 1939, as amended, or under any similar federal statute
hereafter enacted and to add to the indenture the other
provisions as may be expressly required by the Trust
Indenture Act of 1939, as amended,
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(8) to set forth the terms of any series that has not previously
been authorized by a supplemental indenture, or
(9) to provide for any hedge or swap transactions with respect
to any floating rate series or class of transition bonds or
any series or class specific credit enhancement, provided,
however, that:
(x) that action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any transition bondholder, and
(y) the rating agency condition (other than with respect to
Moody's) will have been satisfied with respect thereto and
notice of that action will have been provided to Moody's.
Additionally, without the consent of any of the transition bondholders
or the counterparty to any hedge or swap transaction, 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:
(1) that action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of
any transition bondholder, and
(2) that the rating agency condition will have been satisfied
with respect to that action.
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 any of the provisions
of, the indenture or modifying in any manner the rights of the transition
bondholders under the indenture; provided, however, that no such supplemental
indenture will, without the consent of the holder of each outstanding transition
bond of each series or class affected by that supplemental indenture:
(1) 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 of any transition bond, the
interest rate specified on any transition bond or the
redemption price or the premium, if any, with respect to any
transition bond, change the provisions of the indenture and
the related applicable supplemental indenture relating to
the application of collections on, or the proceeds of the
sale of, the collateral to payment of principal of or
premium, if any, or interest on the transition bonds, or
change any place of payment where, or the coin or currency
in which, any transition bond or any interest on a
transition bond is payable,
(2) impair the right to institute suit for the enforcement of
provisions of the indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the
outstanding transition bonds, or of a series or class of
transition bonds, the consent of the holders of which is
required for any supplemental indenture, or the consent of
the holders of which is required for any waiver of
compliance with specified provisions of the indenture or of
specified defaults under the indenture and their
consequences provided for in the indenture,
(4) 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,
(5) 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 in the indenture or to provide that
specified 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 by that modification or waiver,
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(6) modify any of the provisions of the indenture in a manner as
to affect the amount of any payment of interest, principal
or premium, if any, payable on any transition bond on any
payment date or to affect the rights of transition
bondholders to the benefit of any provisions for the
mandatory redemption of the transition bonds contained in
the indenture or change the redemption dates, expected
amortization schedule or series termination dates or class
termination dates of any transition bonds,
(7) decrease the required capital amount or the
overcollateralization amount with respect to any series, or
the calculated overcollateralization level with respect to
any payment date,
(8) 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,
(9) 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 related agreements, or
(10) 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 to the lien of the indenture or deprive the
holder of any transition bond of the security provided by
the lien of the indenture.
Enforcement of the Sale Agreement and the Master Servicing Agreement
The indenture provides 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 PECO Energy 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 or servicer proposes 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 will notify the bond trustee and each
counterparty to a hedge or swap transaction, the bond trustee will notify
transition bondholders of that proposal and the bond trustee will consent to
that amendment, modification, supplement, termination, waiver or surrender only
with the consent of the holder of each outstanding transition bond of each
series or class affected by that amendment, modification, supplement,
termination, waiver or surrender.
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 principal
amount of the transition bonds of all series will, 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 that action will 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 or the counterparty to any hedge or
swap transaction, provided that the amendment will not, as evidenced by an
officer's certificate, adversely affect the interest of any transition
bondholder or the counterparty to any hedge or swap transaction (except, in the
case of a swap counterparty, with the consent of that counterparty, which
consent may not be unreasonably withheld) or change the adjustment process for
the intangible transition charges. The bond trustee will not withhold its
consent to that amendment so long as the rating agency condition is satisfied in
connection with that amendment by each rating agency other than Moody's--and the
issuer will have furnished Moody's with written notice of that amendment prior
to the effectiveness of that amendment--and the foregoing officer's certificate
is provided.
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No amendment, modification, waiver, supplement, termination or
surrender of the terms of the sale agreement or master servicing agreement, or
waiver of timely performance or observance by the seller or the servicer under
the sale agreement or master servicing agreement, respectively, in each case in
a way as would adversely affect the interests of transition bondholders or the
counterparty to any hedge or swap transaction (except, in the case of a swap
counterparty, with the consent of that counterparty, which consent may not be
unreasonably withheld) is permitted nor will the bond trustee consent to any of
these amendments, modifications, waivers, supplements, terminations or
surrenders. If the issuer, the seller or the servicer otherwise proposes 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 will notify the bond
trustee and any applicable hedge or swap counterparty and the bond trustee will
notify the transition bondholders. The bond trustee will consent to any of these
amendments, modifications, waivers, supplements, terminations or surrenders only
with the consent of the holders of at least a majority of the outstanding
principal amount of the transition bonds of each series or class.
The issuer will furnish to each of the rating agencies:
(1) prior to the execution of any such amendment or consent,
written notification of the substance of that amendment or
consent, and
(2) promptly after the execution of any such amendment or
consent, a copy of that amendment or consent.
Events of Default; Rights Upon Event of Default
An event of default is defined in the indenture as being:
(1) a default for five days or more in the payment of any
interest on any transition bond,
(2) a default in the payment of the then unpaid principal of any
transition bond of any series on the series termination date
for that series or, if applicable, any class on the class
termination date for that class,
(3) a default in the payment of the redemption price for any
transition bond on the redemption date for that transition
bond,
(4) 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 (1), (2) or (3) above, and
the continuation of any of these defaults for a period of
thirty days after notice of that default 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 outstanding
principal amount of the transition bonds of any series, and
(5) events of bankruptcy, insolvency, receivership or
liquidation of the issuer.
If an event of default occurs and is continuing and is known to the
bond trustee, the bond trustee is required to mail notice of the event of
default to each holder of transition bonds within 90 days after the event of
default occurs. The bond trustee may withhold notice of an event of default if:
(1) the event of default does not relate to a default in payment
of principal or interest on any transition bond and
(2) a committee of responsible officers of the bond trustee
determines in good faith that it is in the interest of the
holders of transition bonds to withhold notice.
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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. That declaration may, under specified
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 for that transition bond set in the
related supplemental indenture unless:
(1) the holders of 100% of the principal amount of all series of
transition bonds consent to that sale,
(2) the proceeds of that 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
(3) 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
those payments would have become due if the transition bonds
had not been declared due and payable, and the bond trustee
obtains the consent of the holders of 66 2/3% of the
aggregate outstanding amount of the transition bonds of each
series.
Subject to the provisions of the indenture relating to the duties of
the bond trustee, in case an event of default occurs and is continuing, the bond
trustee will be under no obligation to exercise any of the rights or powers
under the indenture at the request or direction of any of the holders of
transition bonds of any series if the bond trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with that request. Subject to those
provisions for indemnification and limitations contained in the indenture, the
holders of a majority in principal amount of the outstanding transition bonds of
all series will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the bond trustee; provided
that:
(1) that direction shall not conflict with any rule of law or
with the indenture,
(2) subject to 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
(3) the bond trustee may take any other action deemed proper by
the bond trustee that is not inconsistent with that
direction.
If the bond trustee elects to retain the collateral in accordance with
the indenture, 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 will be of no force and
effect.
The holders of a majority in principal amount of the transition bonds
of all series then outstanding may, in some cases, waive any default with
respect to the transition bonds, 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.
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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 Pennsylvania Competition Act, with
respect to the indenture, unless:
(1) that holder previously has given to the bond trustee written
notice of a continuing event of default,
(2) the holders of not less than 25% in principal amount of the
outstanding transition bonds of each series have made
written request of the bond trustee to institute that
proceeding in its own name as bond trustee,
(3) that 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 that request,
(4) the bond trustee for 60 days after its receipt of that
notice, request and offer has failed to institute that
proceeding, and
(5) no direction inconsistent with that written request has been
given to the bond trustee during that 60-day period by the
holders of a majority in principal amount of the outstanding
transition bonds of all series.
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:
(1) the entity formed by or surviving that consolidation or
merger or to whom substantially all of those assets are sold
is organized under the laws of the United States or any
state of the United States and shall expressly assume by a
supplemental indenture the due and punctual payment of the
principal of and premium, if any, and interest on all
transition bonds and the performance of the issuer's
obligations under the indenture,
(2) that entity expressly assumes all obligations and succeeds
to all rights of the issuer under the sale agreement and the
master servicing agreement under an assignment and
assumption agreement executed and delivered to the bond
trustee,
(3) no default or event of default will have occurred and be
continuing immediately after giving effect to that merger,
consolidation or sale,
(4) the rating agency condition will have been satisfied with
respect to that consolidation or merger or sale by each
rating agency, except Moody's--and the issuer shall have
furnished Moody's with prior written notice of that
consolidation, merger or sale,
(5) the issuer has received an opinion of counsel to the effect
that the consolidation, merger or sale of assets would have
no material adverse tax consequence to the issuer or any
transition bondholder, that consolidation, merger or sale
complies with the indenture and all conditions precedent in
the indenture relating to that transaction and will result
in the bond trustee maintaining a continuing valid first
priority security interest in the collateral,
(6) none of the intangible transition property, the qualified
rate orders or PECO Energy's, the seller's, the servicer's
or the issuer's rights under the Pennsylvania Competition
Act or the qualified rate orders are impaired by that
consolidation, merger or sale, and
(7) any action that is necessary to maintain the lien and
security interest created by the indenture will have been
taken.
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The issuer will from time to time execute and deliver those documents,
make all filings and take any other action necessary or advisable to maintain
and preserve the lien and security interest--and priority of that lien and
security interest--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 of the collateral or any interest in the collateral or the proceeds
of the collateral, or permit the lien of the indenture not to constitute a
continuing valid first priority security interest in the collateral.
The issuer may not:
(1) 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
(2) 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 Internal Revenue Code, or assert any
claim against any present or former transition bondholder
because of the payment of taxes levied or assessed upon the
issuer.
The issuer may not engage in any business other than purchasing and
owning the transferred intangible transition property, issuing transition bonds
from time to time, pledging its interest in the 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 to the foregoing.
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, except that the issuer may invest
funds in eligible investments. The issuer may not, except as contemplated by the
indenture, the sale agreement, the master servicing agreement and 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 under, 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 that beneficial interest, except in accordance with the indenture.
The issuer is also obligated to duly and punctually perform all of its
obligations pursuant to any hedge or swap agreement to which it is a party.
Further, the issuer may not terminate or amend any hedge or swap agreement to
which it is a party while any related floating rate transition bonds of a class
remain outstanding except pursuant to the terms of that hedge or swap agreement
and then only with the consent of holders of two-thirds of the aggregate
outstanding amount of the related class.
The issuer will cause the servicer to deliver to the bond trustee the
annual accountant's report, compliance certificates and monthly reports
regarding distributions and other statements required by the master servicing
agreement. See "The Master Servicing Agreement" in this prospectus.
List of Transition Bondholders
Any transition bondholder or group of transition bondholders--each of
whom has owned a transition bond for at least six months--may, by written
request to the bond trustee, obtain access to the list of all transition
bondholders maintained by the bond trustee for the purpose of communicating with
other transition bondholders with respect to their rights under the indenture or
the transition bonds. The bond trustee may elect not to afford the requesting
transition bondholders access to the list of transition bondholders if it agrees
to mail the desired communication or proxy, on behalf and at the expense of the
requesting transition bondholders, to all transition bondholders.
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Annual Compliance Statement
The issuer is 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 must 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 indebtedness
owing by the issuer to it in the bond trustee's individual capacity, the
property and funds physically held by the bond trustee as such, any additional
issue of a series of transition bonds not previously reported and any action
taken by it that materially affects the transition bonds of any series and that
has not been previously reported.
Satisfaction and Discharge of Indenture
The indenture will be discharged with respect to the transition bonds
of any series upon the delivery to the bond trustee for cancellation of all the
transition bonds of that series or upon the expected final payment date or the
date of redemption for that series, provided that the issuer has deposited funds
sufficient for the payment in full of all of the transition bonds of that 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. Those
deposited funds will be segregated and held apart solely for paying those
transition bonds, and those 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 those transition bonds.
Legal Defeasance and Covenant Defeasance
The issuer may, at any time, terminate:
(1) all of its obligations under the indenture with respect to
the transition bonds of any series ("legal defeasance
option"), or
(2) its obligations to comply with specified covenants,
including some of the covenants described under "The
Indenture--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 that series.
If the issuer exercises the legal defeasance option with respect to any
series, that series shall be entitled to payment only from the funds or other
obligations set aside under the indenture for payment of that amount on the
expected final payment date or redemption date for that series as described
below. That series of transition bonds shall not be subject to payment through
redemption or acceleration prior to that expected final payment date or
redemption date, as applicable. If the issuer exercises the covenant defeasance
option with respect to any series, the transition bonds of that 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.
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The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
(1) 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 those transition bonds to the expected
final payment date or redemption date for those transition
bonds, as applicable, that deposit to be made in the
defeasance subaccount for that series of transition bonds,
(2) 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 the times and in the amounts as will be sufficient to pay
in respect of the transition bonds of that series:
(x) principal in accordance with the expected amortization
schedule for that series, or if that series is to be
redeemed, the redemption price of that redemption on the
redemption date for that series, and
(y) interest when due,
(3) 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,
(4) no default has occurred and is continuing on the day of that
deposit and after giving effect to that deposit,
(5) 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 the opinion shall confirm
that, the holders of the transition bonds of that series will not
recognize income, gain or loss for federal income tax purposes as a
result of the exercise of that 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 that
legal defeasance had not occurred,
(6) 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 that
series will not recognize income, gain or loss for federal
income tax purposes as a result of the exercise of that
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 that covenant
defeasance had not occurred, and
(7) 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 that
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.
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The Bond Trustee
The Bank of New York is 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 issuer and the bond
trustee and may appoint a successor bond trustee. The issuer will remove the
bond trustee if the bond trustee ceases to be eligible to continue as such under
the indenture, the bond trustee becomes insolvent, a receiver or other public
officer takes charge of the bond trustee or its property or the bond trustee
becomes incapable of acting. If the bond trustee resigns or is removed or a
vacancy exists in the office of bond trustee for any reason, the issuer will be
obligated to appoint a successor bond trustee eligible under the indenture. Any
resignation or removal of the bond trustee and appointment of a successor bond
trustee will not become effective until acceptance of the appointment by a
successor bond trustee. The issuer is required under the indenture to provide
the rating agencies with written notice of any successor bond trustee.
The bond trustee will at all times satisfy the requirements of the
Trust Indenture Act of 1939, as amended, and have a combined capital and surplus
of at least $50 million and a long term debt rating of "Baa3" or better by
Moody's and "BBB-" by Fitch, Inc. (if currently rated by Fitch, Inc.). 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 is governed by and construed under the laws of the
Commonwealth of Pennsylvania.
UNITED STATES TAXATION
General
This section summarizes the material U.S. tax consequences to holders
of transition bonds offered by this prospectus. However, the discussion is
limited in the following ways:
o The discussion only covers you if you buy your transition bonds in
the initial offering.
o The discussion only covers you if you hold your transition bonds
as a capital asset--that is, for investment purposes--and if you
do not have a special tax status.
o The discussion does not cover tax consequences that depend upon
your particular situation in addition to your ownership of
transition bonds. We suggest that you consult your tax advisor
about the consequences of holding transition bonds in your
particular situation.
o The discussion is based on current law. Changes in the law may
change the tax treatment of the transition bonds, possibly on a
retroactive basis.
o The discussion generally does not cover state, local or foreign
law.
o The discussion does not apply to you if you are a non-U.S. holder
of transition bonds and if you (a) own 10% or more of the voting
stock of PECO Energy, (b) are a "controlled foreign corporation"
with respect to PECO Energy, or (c) are a bank making a loan in
the ordinary course of its business.
Taxation of the Issuer and of the Transition Bonds
In connection with the issuance of the First QRO and the Series 1999-A
Bonds, PECO Energy obtained a ruling from the Internal Revenue Service regarding
certain aspects of those transactions. It was the opinion of our special tax
counsel, Ballard Spahr Andrews & Ingersoll, LLP, at the time of the issuance of
the Series 2000-A Bonds that the principles set forth in the Internal Revenue
Service ruling were equally applicable to the 2000 QRO and the related series of
transition bonds. A ruling is being obtained from the Internal Revenue Service
regarding certain aspects of the issuance of the transition bonds offered by
this prospectus. As a consequence, our special tax counsel is of the opinion
that:
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(1) the issuance of the transition bonds offered by this
prospectus will not result in the recognition of gross
income by PECO Energy or by the issuer, and
(2) the transition bonds offered by this prospectus will be
classified as obligations of PECO Energy for U.S. federal
income tax purposes.
The issuer is a wholly-owned subsidiary of PECO Energy and has not
elected to be taxed as a corporation for federal income tax purposes.
Consequently, our special tax counsel is of the opinion that for U.S. federal
income tax purposes:
(1) the issuer will be treated as a division of PECO Energy and
will not be treated as a separate taxable entity, and
(2) the transition bonds offered by this prospectus will be
treated as debt of PECO Energy secured by a pledge of the
collateral.
We have relied on the ruling and the opinion in preparing this section.
IF YOU ARE CONSIDERING BUYING TRANSITION BONDS OFFERED BY THIS
PROSPECTUS, WE SUGGEST THAT YOU CONSULT YOUR TAX ADVISORS ABOUT THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF HOLDING THE TRANSITION BONDS IN
YOUR PARTICULAR SITUATION.
Tax Consequences to U.S. Holders
This section applies to you if you are a "U.S. Holder." A "U.S. Holder"
is:
o an individual U.S. citizen or resident alien,
o a corporation, or entity taxable as a corporation, that was
created under U.S. law (federal or state), or
o an estate or trust whose worldwide income is subject to U.S.
federal income tax.
If a partnership or other similar pass-through entity holds transition bonds,
the tax treatment of a partner or other member will generally depend upon the
status of the member and upon the activities of the pass-through entity. We
suggest that partners of partnerships or similar entities holding transition
bonds consult their tax advisors.
Interest
o If you are a cash method taxpayer, including most individual
holders, you must report interest paid on the transition bonds
offered by this prospectus in your income when you receive it.
o If you are an accrual method taxpayer, you must report interest
paid on the transition bonds offered by this prospectus in your
income as it accrues.
Sale or Retirement of Transition Bonds
On a sale or retirement of a transition bond:
o You will have taxable gain or loss equal to the difference between
the amount received by you and your tax basis in the transition
bond. Your tax basis in the transition bond is your cost, subject
to adjustments.
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o Your gain or loss will generally be capital gain or loss, and will
be long-term capital gain or loss if you held the transition bond
for more than one year. Generally, with minor exceptions,
taxpayers are not permitted to offset capital losses against
ordinary income.
o If you sell the transition bond between interest payment dates, a
portion of the amount you receive reflects interest that has
accrued on the transition bond but has not yet been paid by the
sale date. That amount is treated as ordinary interest income and
not as sale proceeds.
Information Reporting and Backup Withholding
Under the tax rules concerning information reporting to the Internal
Revenue Service:
o Assuming you hold your transition bonds through a broker or other
securities intermediary, the intermediary is required to provide
information to the Internal Revenue Service concerning interest
and retirement proceeds we pay on transition bonds you own, unless
an exemption applies.
o Similarly, unless an exemption applies, you must provide the
intermediary with your Taxpayer Identification Number for its use
in reporting information to the Internal Revenue Service. If you
are an individual, this is your social security number. You are
also required to comply with other Internal Revenue Service
requirements concerning information reporting.
o If you are subject to these requirements but do not comply, the
intermediary is required to withhold 31% of all amounts payable to
you on the transition bonds, including principal payments. If the
intermediary withholds payments, you may use the withheld amount
as a credit against your federal income tax liability.
o All U.S. Holders that are individuals are subject to these
requirements. Some U.S. Holders, including all corporations,
tax-exempt organizations and individual retirement accounts, are
exempt from these requirements.
Tax Consequences to Non-U.S. Holders
This section applies to you if you are a "Non-U.S. Holder." A
"Non-U.S. Holder" is:
o an individual that is a nonresident alien,
o a corporation organized or created under non-U.S. law, or
o an estate or trust that is not taxable in the U.S. on its
worldwide income.
Withholding Taxes
Generally, payments of principal and interest on the transition bonds
will not be subject to U.S. withholding taxes.
However, in order for the exemption from withholding taxes to apply to
you, you must meet one of the following requirements:
o You provide your name, address, and a signed statement that you
are the beneficial owner of the transition bond and are not a U.S.
Holder. This statement is generally made on Form W-8BEN.
o You hold transition bonds directly through a "qualified
intermediary" and the qualified intermediary has sufficient
information in its files indicating that you are not a U.S.
Holder. A qualified intermediary is a bank, broker or other
intermediary that (1) is either a U.S. or non-U.S. entity, (2) is
acting out of a non-U.S. branch or office and (3) has signed an
agreement with the IRS providing that it will administer all or a
part of the U.S. tax withholding rules under specified procedures.
o You or your agent claim an exemption from withholding tax under an
applicable tax treaty. This claim is generally made on Form
W-8BEN.
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o You or your agent claim an exemption from withholding tax on the
ground that the income is effectively connected with the conduct
of a trade or business in the U.S. This claim is generally made on
Form W-8ECI.
We suggest that you consult your tax advisor about the specific methods to
satisfy these requirements. A claim for exemption will not be valid if the
person receiving the claim has actual knowledge that the statements on the
applicable form are false.
Sale or Retirement of Transition Bonds
If you sell a transition bond or it is redeemed, you will not be
subject to federal income tax on any gain unless one of the following applies:
o The gain is connected with a trade or business that you conduct in
the U.S.
o You are an individual, you are present in the U.S. for at least
183 days during the year in which you dispose of the transition
bond, and other conditions are satisfied.
o The gain represents accrued interest, in which case the rules for
interest would apply.
U.S. Trade or Business
If you hold a transition bond in connection with a trade or business
that you are conducting in the U.S.:
o Any interest on the transition bond, and any gain from disposing
of the transition bond, generally will be subject to income tax as
if you were a U.S. Holder.
o If you are a corporation, you may be subject to the "branch
profits tax" on your earnings that are connected with your U.S.
trade or business, including earnings from the transition bond.
This tax is 30%, but may be reduced or eliminated by an applicable
income tax treaty.
Estate Taxes
If you are an individual, the transition bonds will not be subject to
U.S. estate tax when you die. However, this rule only applies if, at the time of
your death, payments on the transition bond would not have been connected to a
trade or business that you were conducting in the U.S.
Information Reporting and Backup Withholding
U.S. rules concerning information reporting and backup withholding are
described above under "Tax Consequences to U.S. Holders--Information Reporting
and Backup Withholding." Under these rules:
o Principal and interest payments received by you will be
automatically exempt from the usual rules if you provide the tax
certifications needed to avoid withholding tax on interest, as
described above under "--Tax Consequences to Non-U.S.
Holders--Withholding Taxes." The exemption does not apply if the
recipient of the applicable form knows or has reason to know that
the form is false. However, interest payments made to you will be
reported to the Internal Revenue Service on Form 1042-S.
o Sale proceeds you receive on a sale of your transition bonds
through a broker may be subject to information reporting or backup
withholding if you are not eligible for an exemption. In
particular, information reporting and backup reporting may apply
if you use the U.S. office of a broker, and information
reporting--but not backup withholding--may apply if you use the
foreign office of a broker if the broker has specified connections
to the U.S. We suggest that you consult your tax advisor
concerning information reporting and backup withholding on a sale.
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MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, interest from
the transition bonds received by a person who is not otherwise subject to
corporate or personal income tax in Pennsylvania will not be subject to these
taxes. Transition bonds held by deceased Pennsylvania residents may be subject
to Pennsylvania inheritance and estate taxes.
Due to the litigation involving the constitutionality of personal
property taxes heretofore in effect, none are currently imposed in Pennsylvania.
In the event enforcement of the personal property tax is resumed, residents of
Pennsylvania, other than corporations and specified other exempt persons holding
transition bonds, would be subject to these taxes. Nonresidents would be exempt.
The taxes referred to include the County Personal Property Tax and the
additional property taxes formerly imposed on Pittsburgh residents by the School
District of Pittsburgh and the City of Pittsburgh.
ERISA CONSIDERATIONS
Employee benefit plans are permitted to purchase transition bonds
offered by this prospectus.
ERISA and Section 4975 of the Internal Revenue Code impose specified
requirements on employee benefit plans and some other plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and some
collective investment funds or insurance company general or separate accounts in
which those plans, accounts or arrangements are invested (collectively,
"Plans"), and on persons who are fiduciaries with respect to Plans. ERISA
imposes on Plan fiduciaries certain general fiduciary requirements including the
obligation to discharge their duties solely in the interest of, and for the
exclusive purpose of providing benefits to, a Plan's participants and
beneficiaries and with the skill and diligence of a prudent person acting in a
like capacity. In addition, Section 406 of ERISA and Section 4975 of the
Internal Revenue Code prohibit a broad range of "prohibited transactions"
involving assets of a Plan ("Plan Assets") and persons who have certain
specified relationships to the Plan ("parties in interest" under ERISA and
"disqualified persons" under the Internal Revenue Code), unless a statutory or
administrative exemption is available.
There is a greater likelihood that prohibited transactions may arise if
the assets of the issuer were considered to be Plan Assets with respect to any
Plan that acquired transition bonds. Under certain circumstances currently
effective Department of Labor regulations apply a "look through" rule under
which the assets of any entity in which a Plan makes an equity investment may
constitute Plan Assets. However, the transition bonds are debt for state law
purposes and should not be considered to have "substantial equity features." As
a result, a Plan's acquisition of transition bonds should not cause assets of
the issuer to be considered to be Plan Assets.
If you are considering whether to purchase transition bonds with Plan
Assets, we suggest that you consult with your legal advisor and refer to the
related prospectus supplement for further guidance.
PLAN OF DISTRIBUTION
The transition bonds of each series offered by this prospectus may be
sold to or through underwriters named in the related prospectus supplement by a
negotiated firm commitment underwriting and public reoffering by the
underwriters or any 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 intends that transition bonds will be offered through
various methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of transition bonds may be made through a combination of these methods.
The distribution of transition bonds may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
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The transition bonds may be offered through one or more different
methods, including offerings through underwriters. It is not anticipated that
any of the transition bonds will be listed on any securities exchange.
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 particular dealers at
prices less a concession. Underwriters may allow, and these dealers may reallow,
a concession to 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 of 1933, as
amended. These underwriters or agents will be identified, and any compensation
received from the issuer will be described, in the related prospectus
supplement.
Under agreements which may be entered into by PECO Energy, the issuer,
underwriters and agents who participate in the distribution of the transition
bonds may be entitled to indemnification by PECO Energy and the issuer against
liabilities specified in those agreements, including under the Securities Act of
1933, as amended.
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 after that initial issuance.
If a rating of any class of transition bonds is revised or withdrawn, the
liquidity of that 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 transition bonds by the applicable
series termination date or class termination date.
LEGAL MATTERS
Some 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. Some 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.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for the
year ended December 31, 1999 and the period from June 23, 1998 (date of
inception) to December 31, 1998, included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The projected amounts included within the Annual Stranded Cost
Amortization and Return disclosure in the "PECO Energy's Electric Restructuring
Plan" section were not prepared with a view toward compliance with published
guidelines of the SEC, the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections, or generally accepted accounting principles. These projected
amounts included in this prospectus have been prepared by, and are the
responsibility of, the issuer's management. PricewaterhouseCoopers LLP, the
issuer's accountants, has neither examined nor compiled these projections and
accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other
form of assurance with respect thereto. The PricewaterhouseCoopers LLP report
included in this prospectus relates to the issuer's historical financial
information. It does not extend to the projections and should not be read to do
so.
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GLOSSARY OF DEFINED TERMS
Set forth below is a glossary of defined terms used in this prospectus.
"2000 QRO" means the qualified rate order issued by the Pennsylvania
Public Utility Commission to PECO Energy on March 16, 2000.
"adjustment request" means each request filed by the servicer with the
Pennsylvania Public Utility Commission for adjustments to the intangible
transition charges assessed to each rate class within any customer category
based on actual collections of intangible transition charges and updated
assumptions by the servicer as to the projected future usage of electricity by
customers on which intangible transition charges are assessed, expected
delinquencies and write-offs and future payments and expenses relating to the
intangible transition property and the transition bonds.
"Bankruptcy Code" means Title 11 of the United States Code, as the same
may be amended, modified or supplemented from time to time.
"basic documents" means, collectively, the sale agreement, the master
servicing agreement, any bills of sale for intangible transition property, the
indenture, the trust agreement, and the certificate of trust filed with the
State of Delaware to form the issuer.
"business day" means 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.
"calculated overcollateralization level" means the amount anticipated
to be on deposit in the overcollateralization subaccount for all series of
transition bonds as of each payment date, as specified in each prospectus
supplement.
"calculation date" means, with respect to any series of transition
bonds, each date on which the servicer is required to file an adjustment
request, as specified in the related prospectus supplement.
"capital subaccount" means a subaccount of the collection account in
which the amount of capital required to be held by the issuer for a series of
transition bonds will be deposited by the issuer on the date of issuance of that
series.
"Clearstream, Luxembourg" means Clearstream Bank Societe Anonyme,
Luxembourg.
"collection account" means the single collection account for all series
of transition bonds established by the issuer and held by the bond trustee under
the indenture.
"covenant defeasance option" means the right of the issuer to, at any
time, terminate its obligations to comply with specified covenants as described
in "The Indenture--Legal Defeasance and Covenant Defeasance."
"de minimis loss amount" means 1/12 of 1% of the annual outstanding
balance of the transition bonds per monthly allocation date.
"DTC" means The Depository Trust Company.
"Euroclear" means the Euroclear System.
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"event of default" means an event specified as an event of default
under the indenture for the transition bonds described in this prospectus and
the related prospectus supplements.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"expected amortization schedule" means, with respect to any series or
class of transition bonds, the expected amortization schedule for the principal
balance of that series or class, as set forth in the related prospectus
supplement.
"Final Order" means the Pennsylvania Public Utility Commission's order
dated May 14, 1998, of which the First QRO is a part, approving the
restructuring plan settlement.
"First QRO" means the qualified rate order dated May 14, 1998 issued by
the Pennsylvania Public Utility Commission to PECO Energy.
"Fitch, Inc." means Fitch, Inc., or its successor.
"general subaccount" means a subaccount of the collection account into
which funds received from collections of intangible transition charges,
indemnity amounts and investment earnings will initially be allocated.
"indemnity amounts" means any amounts paid by the seller or servicer to
the bond trustee, for itself or on behalf of all transition bondholders, related
to specified indemnification obligations under the sale agreement and the master
servicing agreement described in this prospectus and the related prospectus
supplement.
"initial loss calculation date" means the monthly allocation date
immediately following the day which is 90 days after the seller receives a
notice from the issuer or the bond trustee, that the seller is required to
indemnify the bond trustee under the sale agreement.
"Interest" means, for any monthly allocation date for any series of
transition bonds, the sum of, without duplication:
o in the case of any series or class not described in the next
subparagraph, an amount that would cause the amount on deposit for
interest in the series subaccount, without regard to investment
income for that series, to equal the monthly allocated interest
balance for that series and that monthly allocation date,
o in the case of any series or class subject to a swap agreement
pursuant to which the issuer is receiving payments due thereunder
from the applicable counterparty, the regular fixed payment to a
related counterparty without netting, but not payment in
respect of breakage or termination of the related swap agreement,
o if the transition bonds have been declared due and payable, all
accrued and unpaid interest,
o for a series to be redeemed prior to the next monthly allocation
date, the amount of interest that will be payable as interest on
that series on the redemption date, and
o any interest due on that series on a payment date or other date
for the payment of interest and not paid and, to the extent
permitted by law, interest on that amount.
"interest deposit subaccount" means a subaccount of the collection
account into which designated interest payments remitted by seller to the bond
trustee will be deposited.
"IP&L" stands for Indianapolis Power & Light Company.
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"legal defeasance option" means the right of the issuer to, at any
time, terminate all of its obligations under the indenture with respect to the
transition bonds of any series as described in "The Indenture--Legal Defeasance
and Covenant Defeasance."
"liquidated damages" means an amount sufficient to pay all expenses and
indemnity payments due to the bond trustee, the issuer trustee or the issuer and
the principal of all outstanding transition bonds adversely affected by the
breach of specified representations and warranties, plus accrued interest to the
date of redemption and breakage costs or termination fees, if any, due to any
counterparty to any hedge or swap transaction applicable to the applicable
transition bonds entered into by the issuer payable by PECO Energy for the
breach of designated representations concerning intangible transition property
under the sale agreement as described in this prospectus and the related
prospectus supplement.
"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
willful misconduct, bad faith, gross negligence or reckless disregard of its
obligations under the sale agreement or the breach of designated representations
and warranties in the sale agreement by the seller as described in this
prospectus and the related prospectus supplement.
"loss subaccount" means a subaccount of the collection account into
which loss amounts remitted by the seller to the bond trustee will be deposited.
"master servicing agreement" means the Amended and Restated Master
Servicing Agreement between PECO Energy, as servicer, and the issuer, dated as
of March 25, 1999, as amended and restated as of the closing date for the
issuance of the first series of transition bonds under the 2000 QRO, as the same
has been or may be further amended and supplemented from time to time.
"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 that
series and will be calculated such that amounts scheduled to be paid on each
payment date for Interest and Principal, respectively, for that series and that
monthly allocation date will be expected to be on deposit in the applicable
series subaccount as of the monthly allocation date prior to that payment date,
whether from collections of intangible transition charges or payments made by
any counterparty to a swap or hedge transaction entered into by the issuer.
"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 that payment date.
"monthly allocation date" means the 6th day of each calendar month, or
if that day is not a business day, the following business day. On this date, the
bond trustee allocates amounts on deposit in the general subaccount as described
in "The Indenture--Allocations and Payments" in this prospectus.
"Moody's" means Moody's Investors Service, Inc., or its successor.
"overcollateralization" means, for any monthly allocation date, an
amount that would cause the balance in the overcollateralization subaccount to
equal the monthly allocated overcollateralization balance for that monthly
allocation date, without regard to investment earnings.
"overcollateralization subaccount" means a subaccount of the collection
account into which the overcollateralization amount will be deposited over the
expected life of a series of transition bonds.
"PECO Energy" means PECO Energy Company, a Pennsylvania corporation.
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"Percentage" means, for the issuer or any other issuer of transition
bonds, the percentage equivalent of a fraction:
o 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 any other issuer, as
applicable, and
o 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 other issuers.
"Principal" means, for any monthly allocation date and any series of
transition bonds, an amount that:
o would cause the amount on deposit for principal in the series
subaccount, without regard to investment income, for that series
to equal the monthly allocated principal balance for that series
and that monthly allocation date,
o if the transition bonds have been declared due and payable, the
principal amount of that series,
o for a series to be redeemed prior to the next monthly allocation
date, the amount that will be payable as principal of that series
on the redemption date, or
o any principal due on that series on a payment date or other date
for the payment of principal and not paid.
"Pro Rata" means, for any series of transition bonds, a ratio,
o in the case of the amount of Interest allocated to the series
subaccounts, the numerator of which is the monthly allocated
interest balance for that series for that monthly allocation date
and the denominator of which is the sum of monthly interest
balances for all series for that monthly allocation date,
o in the case of the amount of Principal allocated to the series
subaccounts as a result of an acceleration or redemption, the
numerator of which is the amount allocable for that series as a
result of that event and the denominator of which is the amount
allocable to all series as a result of acceleration or redemption,
and
o in the case of the amount of Principal otherwise allocated to the
series subaccounts, the numerator of which is the monthly
allocated principal balance for that series for that monthly
allocation date and the denominator of which is the sum of monthly
allocated principal balances for all series for that monthly
allocation date.
"qualified rate orders" means the first qualified rate order issued by
the Pennsylvania Public Utility Commission to PECO Energy Company on May 14,
1998, the second qualified rate order issued to PECO Energy Company on March 16,
2000 and any subsequent order of the Pennsylvania Public Utility Commission,
adopted in accordance with the Pennsylvania Competition Act, which creates
intangible transition property and authorizes the imposition and collection of
intangible transition charges by PECO Energy or its assignee. This term also
includes any order that is supplemental to any of the foregoing.
"qualified transition expenses," as set forth in the qualified rate
orders, means, collectively, the aggregate principal amount of the transition
bonds and an amount sufficient to provide for any credit enhancement, to fund
any reserves, and to pay interest, premiums, if any, costs of defeasance,
servicing fees and other fees, costs and charges relating to transition bonds.
"rating agency" means any rating agency rating the transition bonds of
any class or series at the time of issuance of that class or series at the
request of the issuer.
119
<PAGE>
"rating agency condition" means, with respect to any action, the
notification in writing by each rating agency to PECO Energy, the servicer, the
bond trustee and the issuer that any such action will not result in a reduction
or withdrawal of the then current rating by that rating agency of any
outstanding series or class of transition bonds.
"required capital amount" means the amount of capital required to be
deposited by the issuer into the capital subaccount upon the issuance of a
series of transition bonds, which represents a capital contribution from PECO
Energy.
"reserve subaccount" means a subaccount of the collection account into
which will be deposited the excess, if any, of collections of intangible
transition charges over amounts then scheduled to be paid or due on a series of
transition bonds, plus related expenses, plus amounts needed to make required
deposits to the overcollateralization subaccount.
"Restructuring Order" means the Opinion and Order issued by the
Pennsylvania Public Utility Commission, revised in January and February 1998,
which deregulated PECO Energy's electric generation operations as described in
"PECO Energy's Electric Restructuring Plan."
"restructuring plan settlement" means the settlement filed by PECO
Energy and other parties with the Pennsylvania Public Utility Commission on
April 29, 1998 and approved by the Pennsylvania Public Utility Commission In the
final order.
"sale agreement" means the Intangible Transition Property Sale
Agreement between the issuer and PECO Energy dated as of March 25, 1999, as
amended and restated as of the closing date for the issuance of the first series
of transition bonds under the 2000 QRO, as the same has been or may be further
amended and supplemented from time to time.
"SEC" means the Securities and Exchange Commission.
"series of transition bonds" means the Series 1999-A Bonds, the Series
2000-A Bonds, each series of transition bonds offered by this prospectus and any
other series of transition bonds which are issued under and are subject to the
terms of the indenture.
"series subaccount" means a subaccount of the collection account for
each series of transition bonds. On each monthly allocation date, the bond
trustee will deposit amounts to this account accruing for principal and interest
for each series, based on each series' percentage of the total allocated
principal and interest of all series.
"servicer default" means a default of the servicer under the master
servicing agreement, including the defaults described under the "The Master
Servicing Agreement--Servicer Defaults."
"Standard & Poor's" means Standard & Poor's Rating Services, or its
successor.
"transferred intangible transition property" means intangible
transition property which is transferred from PECO Energy to the issuer under
the sale agreement and the related bills of sale.
"U.S. Government Obligations" means direct obligations, or certificates
representing an ownership interest in those obligations, of the United States of
America, including any agency or instrumentality of the United States of
America, 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.
120
<PAGE>
PECO ENERGY TRANSITION TRUST
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants
Statement of Net Assets Available for Trust Activities
Statement of Changes in Net Assets Available for Trust Activities
Notes to Financial Statements
F-1
<PAGE>
Report of Independent Accountants
To the Trustees
PECO Energy Transition Trust
Wilmington, DE:
In our opinion, the accompanying statements of net assets available for trust
activities and the related statements of changes in net assets available for
trust activities present fairly, in all material respects, the net assets
available for trust activities of the PECO Energy Transition Trust (the "Trust")
as of December 31, 1999 and 1998, and the changes in net assets available for
trust activities for the year ended December 31, 1999 and for the period from
June 23, 1998 (date of Inception) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Trust's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2000
F-2
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 173.5 $ --
Interest Receivable 0.9 --
Due from Related Party 42.1 --
Current portion of Intangible Transition Property 134.7 --
-------- ----
Total Current Assets 351.2 --
======== ====
Noncurrent Assets:
Debt Issuance Costs, net of amortization 22.7 2.1
Intangible Transition Property, net of amortization 3,858.7 --
-------- ----
TOTAL ASSETS 4,232.6 2.1
======== ====
LIABILITIES
Current Liabilities:
Accrued Interest Expense 82.8 --
Current portion of Transition Bonds 120.0 --
-------- ----
Total Current Liabilities 202.8 --
======== ====
Due to Related Party 110.7 2.1
Long-Term Debt - Transition Bonds 3,832.6 --
-------- ----
TOTAL LIABILITIES 4,146.1 2.1
======== ====
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 86.5 $ --
======== ====
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
<TABLE>
<CAPTION>
For the Period
From Inception
For the (June 23, 1998)
Year Ended Through
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ADDITIONS
Contributions by Trust Grantor $ 20.0 $ --
ITC Collections 310.4 --
Debt Issuance Costs 22.9 2.1
Intangible Transition Property 4,080.2 --
Interest Income 3.9 --
-------- ----
TOTAL ADDITIONS 4,437.4 2.1
======== ====
DEDUCTIONS
Due to Related Party 66.5 2.1
Transition Bonds 3,994.6 --
Interest Expense 192.6 --
Amortization of Debt Issuance Costs 2.3 --
Amortization of Intangible Transition Property 86.8 --
Amortization of Debt Discount 0.6 --
Service Fee Expense 7.5 --
-------- ----
TOTAL DEDUCTIONS 4,350.9 2.1
-------- ----
CHANGES IN NET ASSETS AVAILABLE FOR
TRUST ACTIVITIES 86.5 --
-------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT BEGINNING OF PERIOD -- --
-------- ----
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT END OF PERIOD $ 86.5 $ --
======== ====
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
PECO ENERGY TRANSITION TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
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 and
a wholly owned subsidiary of PECO Energy, 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 principally engaged in the production, purchase, transmission,
distribution, and sale of electricity to residential, commercial, industrial and
wholesale customers in its franchised services territory in southeastern
Pennsylvania. PETT was organized by PECO Energy as a special purpose,
bankruptcy-remote entity to issue bonds to securitize a portion of PECO Energy's
stranded cost recovery authorized by the Pennsylvania Public Utility Commission
(PUC) pursuant to the Pennsylvania Electric Generation Customer Choice and
Competition Act (Pennsylvania Competition Act).
The Pennsylvania Competition Act, enacted in December 1996, allows
utilities to recover the anticipated loss in value of their generation-related
assets caused by the transition from regulated rates for generation to market
pricing.
Under its trust agreement, PETT is authorized to purchase and own
Intangible Transition Property (ITP), issue transition bonds, pledge its
interest in ITP and other collateral to the bond trustee to secure the
transition bonds, and perform activities that are necessary and suitable to
accomplish these purposes. ITP represents the irrevocable right of PECO Energy,
or its successor or assignee, to collect a non-bypassable Intangible Transition
Charge (ITC) from customers. The Pennsylvania Public Utility Commission (PUC)
authorized PETT to collect ITC in the PUC's Qualified Rate Order issued on May
14, 1998 (1998 QRO). The 1998 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 Series 1999-A Transition Bonds
(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 which
are solely debt obligations of PETT. PETT used the proceeds of the Transition
Bonds to purchase ITP from PECO Energy for $4.080 billion which represented an
amount sufficient to recover the aggregate principal amount of the Transition
Bonds and related expenses including interest and servicing fees.
PECO Energy, as servicer, deposits ITC collections into a general
subaccount maintained by the bond trustee under the indenture. Each month, such
monies are used to make principal and interest payments on the Transition Bonds,
and to pay fees, costs, and charges specified in the indenture. The indenture
also includes a reserve subaccount that is
F-5
<PAGE>
maintained for the purpose of retaining any ITC collections and investment
earnings that are in excess of specific fees and expenses and amounts allocable
to the payment of principal of and interest on the Transition Bonds and to the
overcollateralization subaccount. The indenture also provides for an
overcollateralization subaccount, which will be funded ratably, to a balance of
$80 million, over the life of the Transition Bonds. The balances of the reserve
and overcollateralization subaccounts as of December 31, 1999 were $15.0 million
and $7.1 million, respectively. Additionally, an amount of $20 million,
representing PECO Energy's initial capitalization of PETT, was deposited into
the capital subaccount under the indenture on the date of issuance. If amounts
available in the general, reserve, and overcollateralization subaccounts are not
sufficient on any payment date to make scheduled payments, the bond trustee will
draw on accounts in the capital subaccount. Any remaining amounts
collateralizing the Transition Bonds will be released to PETT upon payment of
the Transition Bonds.
PETT's organizational documents require it to operate in such a manner that
it should not be consolidated in the bankruptcy estate of PECO Energy in the
event PECO Energy becomes subject to such a proceeding, and both PECO Energy and
PETT have treated the transfer of ITP to PETT as a sale under the Pennsylvania
Competition Act.
On or before May 14th of each year, the anniversary date of the 1998 QRO, a
report to determine the adequacy of ITC collections for the annual period is
submitted to the PUC by PECO Energy. If adjustments are needed, the PUC is
required to adjust collection rates on a prospective basis within 90 days of May
14th.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
changes therein. Actual results could differ from those estimates.
Cash and Cash Equivalents
PETT considers all cash investments purchased with an original maturity of
three months or less to be cash equivalents. Financial instruments which
potentially subject PETT to concentrations of credit risk consist principally of
cash equivalents. PETT places its cash equivalents with high-credit quality
financial institutions. Generally, such investments are in excess of the Federal
Deposit Insurance Corporation limit.
Intangible Transition Property
The ITP is being amortized in conjunction with the reduction of Transition
Bond principal on an accrual basis. As of December 31, 1999, accumulated ITP
amortization was $86.8 million.
F-6
<PAGE>
Unamortized Debt Issuance Costs
The costs associated with the issuance of the Transition Bonds have been
capitalized and are being amortized on a straight line basis over the life of
the Transition Bonds. As of December 31, 1999, accumulated amortization of debt
issuance cost was $2.3 million.
Income Taxes
PETT is a wholly owned subsidiary of PECO Energy and has elected not to be
taxed as a corporation for federal income tax purposes. PETT is a special
purpose entity that is treated as a division of PECO Energy for federal income
tax purposes and has no separate income tax liability.
Derivative Financial Instruments
Hedge accounting is applied only if the derivative reduces the risk of the
underlying hedged item and is designed at inception as a hedge, with respect to
the hedged item. If a derivative instrument ceased to meet the criteria for
deferral, any gains or losses, would be currently recognized in income. PETT
does not hold or issue derivative financial instruments for trading purposes.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
No. 133) to establish accounting and reporting standards for derivatives. The
new standard requires recognizing all derivatives as either assets or
liabilities on the balance sheet at their fair value and specifies the
accounting for changes in fair value depending upon the intended use of the
derivative. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," (SFAS No. 137) which delayed the effective date for
SFAS No. 133 until fiscal years beginning after June 15, 2000. PETT expects to
adopt SFAS No. 133 in the first quarter of 2001. PETT is in the process of
evaluating the impact of SFAS No. 133 on its financial statements.
2. TRANSITION BONDS
On March 25, 1999, PETT issued $4 billion aggregate principal amount of
Transition Bonds to securitize a portion of PECO Energy's authorized stranded
cost recovery. The Transition Bonds are solely obligations of PETT, secured by
ITP sold by PECO Energy to
F-7
<PAGE>
PETT concurrently with the issuance of the Transition Bonds and certain other
collateral related thereto. The following table summarizes the outstanding
principal balances of the Transition Bonds at December 31:
Expected
Final Payment Termination
Classes Rate Date(a) Date(a) 1999 1998
-------------------------------------------------------------------------------
In Millions
A-1 5.48% 2001 2003 $ 202 $ --
A-2 5.63% 2003 2005 275 --
A-3 6.06%(b) 2004 2006 667 --
A-4 5.80% 2005 2007 459 --
A-5 6.14%(b) 2007 2009 465 --
A-6 6.05% 2007 2009 993 --
A-7 6.13% 2008 2009 897 --
-------------------------------------------------------------------------------
Unamortized debt discount (5) --
------ ----
Total Long Term Debt 3,953 --
Due within one year 120 --
------ ----
Long Term Debt $3,833 $ --
====== ====
(a) The Expected Final Payment Date is the date when all principal and interest
of the related class of Transition Bonds is expected to be paid in full in
accordance with the expected amortization schedule for the applicable
class. The Termination Date is the date when all principal and interest of
the related class of Transition Bond must be paid in full. The current
portion of the Transition Bonds is based upon the expected maturity date.
(b) Floating rate, as of December 31, 1999, based upon the London Interbank
Offering Rate (LIBOR) plus 0.125% for the A-3 class and LIBOR plus 0.20%
for the A-5 class.
PETT makes semi-annual principal payments pursuant to an amortization
schedule in the Transition Bond indenture dated March 1, 1999. On September 1,
1999, the first principal payment was made in the amount of $42.5 million which
reduced the outstanding principal balance of the class A-1 Transition Bonds.
Long-term debt maturities, in the period 2000-2004 are as follows (in millions):
2000 - $120; 2001 - $188; 2002 - $277; 2003 - $470; 2004 - $518 and $2,380
thereafter.
Fair values of the Transition Bonds are estimated based on quoted market
prices. The carrying amounts and fair values of the Transition Bonds as of
December 31, 1999 were $3.953 billion and $3.700 billion, respectively.
PETT has entered into interest rate swaps to manage interest rate exposure
associated with the issuance of two floating rate classes of Transition Bonds.
The aggregate notional amount of these swaps was equal to the face values of
those two floating rate classes. At December 31, 1999, the fair value of these
instruments was $35.8 million based
F-8
<PAGE>
on the present value difference between the contracted rate and the market rates
at that date. The fixed interest rates of classes A-3 and A-5 are 6.58% and
6.94%, respectively. A hypothetical 50 basis point increase or decrease in the
spot yield at December 31, 1999 would have resulted in an aggregate fair value
of these interest rate swaps of $52.0 million or $21.9 million, respectively. If
the derivative instruments had been terminated at December 31, 1999, these
estimated fair values represent the amount to be paid by the counterparties to
PETT.
PETT would be exposed to credit-related losses in the event of
non-performance by the counterparties that issued the derivative instruments.
PETT does not expect that the counterparties to the interest rate swaps will
fail to meet these obligations, given their high credit ratings. The credit
exposure of derivatives contracts is represented by the fair value of the
contracts at the reporting date. PETT interest rate swaps are documented under
master agreements. Among other things, these agreements provide for a maximum
credit exposure for both parties. Payments are required by the appropriate party
when the maximum limit is reached.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
PETT purchased ITP from PECO Energy pursuant to the Intangible Transition
Property Sale Agreement dated March 25, 1999 (Sale Agreement). Under the Sale
Agreement, PECO Energy makes certain representations and warranties about the
ITP and indemnifies PETT for losses caused by the breach of such representations
and warranties. To the extent a breach concerns the existence of the ITP or the
ability to charge ITC in the amounts sufficient to meet a pre-set amortization
schedule, PECO Energy must pay liquidated damages equal to the lost principal
and interest of the amortization schedule.
For financial reporting purposes 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 a sale.
Transition Bonds were issued pursuant to the Indenture dated as of March 1,
1999 (Indenture). Under the Indenture, PETT has pledged all of its property,
including the ITP to secure the Transition Bonds. The Indenture prohibits PETT
from selling, transferring, exchanging, or otherwise disposing of any of the
collateral unless directed to do so by the Trustee; from claiming any credit or
making any deduction from the principal, premium, if any, or interest on
Transition Bonds or against any Transition Bond holder; permitting the validity
of effectiveness of the Indenture to be impaired or permitting the lien of the
Indenture to be amended, hypothecated, subordinated, terminated, of discharged;
permitting any person to be released from any of the covenants or obligations
with respect to Transition Bonds as expressly permitted by the Indenture;
permitting any liens, charges, or claims, security interest or mortgage (other
than the lien created by the Indenture) to be created in or extend to or
otherwise arise upon or burden the collateral or any part thereof; or permitting
the lien of the Indenture not to constitute a valid, first priority security
interest in the collateral.
F-9
<PAGE>
Under the Master Servicing Agreement entered into by PETT and PECO Energy
dated as of March 25, 1999, PECO Energy, as servicer, manages and administers
the ITP sold to PETT and collects the ITC related thereto on behalf of PETT.
In 1999, PETT recorded $353.3 million of ITC collections, of which $42.9
million have not yet been remitted from PECO Energy to PETT, and $7.5 million in
servicing fees based upon the outstanding principal amount of the Transition
Bonds, of which $0.8 million have not yet been remitted from PETT to PECO
Energy.
As of December 31, 1999, the Due to Related Party balance represents an
advance of $110.7 million for initial working capital requirements and operating
expenses and is not considered to be currently due by PECO Energy. As of
December 31, 1998, the Due to Related Party balance primarily represents legal
costs.
4. LITIGATION
Indianapolis Power and Light Company (IPL) filed an action which sought to
invalidate the Competition Act and thereby preclude PECO Energy from recovering
and securitizing stranded costs. IPL asserted that the Pennsylvania Competition
Act discriminates against interstate commerce in violation of the Commerce
Clause of the United States Constitution. The Commonwealth Court of Pennsylvania
dismissed this action. IPL sought review of this dismissal by the United States
Supreme Court which denied certiorari on March 8, 1999. All appeals of the PUC's
Final Order dated May 14, 1998 that were being pursued have been resolved and
all other appeals that were being held in abeyance have been withdrawn with
prejudice from the Commonwealth Court of Pennsylvania and the United States
District Court.
On February 7, 2000, the Mid-Atlantic Power Supply Association filed an
intervention to the PUC's proceedings on PECO Energy's January 7, 2000
application for a QRO (the 2000 QRO) to ensure that the proposed securitization
does not have an adverse effect on competition in the retail electrical services
market in Pennsylvania. Specifically, this association expressed concern that
the 2000 QRO would cause a reduction in the shopping credit established in the
1998 QRO and would enable PECO Energy to use the proposed rate reduction in 2001
to promote its provider of last resort service.
The Mid-Atlantic Power Supply Association subsequently agreed to join with
several of the parties who participated in PECO Energy's restructuring
proceeding in a second settlement, which was filed with the PUC on March 8,
2000. On March 16, 2000, the PUC issued an order approving a Joint Petition for
Full Settlement of PECO Energy Company's Application for Issuance of a QRO
authorizing PECO Energy to securitize up to an additional $1.0 billion of its
authorized recoverable stranded costs. In accordance with the terms of the Joint
Petition for Full Settlement, when the 2000 QRO becomes final and
non-appealable, PECO Energy, through its distribution business unit, will
provide its retail customers with rate reductions in the total amount of $60
million beginning on January 1, 2001. This rate reduction will be effective for
calendar year 2001 only and will not be contingent upon the issuance of
additional transition bonds pursuant to the 2000 QRO.
F-10
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 110.8 $ 173.5
Interest Receivable -- 0.9
Due from Related Party 79.8 42.1
Current portion of Intangible Transition Property 315.6 134.7
---------- ----------
Total Current Assets 506.2 351.2
Noncurrent Assets:
Debt Issuance Costs, net of amortization 27.0 22.7
Intangible Transition Property, net of amortization 4,585.7 3,858.7
---------- ----------
TOTAL ASSETS 5,118.9 4,232.6
---------- ----------
LIABILITIES
Current Liabilities:
Accrued Interest Expense 29.7 82.8
Current portion of Transition Bonds 297.2 120.0
---------- ----------
Total Current Liabilities 326.9 202.8
Noncurrent Liabilities:
Due to Related Party 128.9 110.7
Long-Term Debt - Transition Bonds 4,534.0 3,832.6
---------- ----------
TOTAL LIABILITIES 4,989.8 4,146.1
---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES $ 129.1 $ 86.5
========== ==========
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
PECO ENERGY TRANSITION TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(Unaudited)
(in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
ADDITIONS
Contributions by Trust Grantor $ -- $ -- $ 5.0 $ 20.0
ITC Collections 140.9 145.9 318.0 222.2
Due From Related Party 22.2 11.9 37.7 53.0
Deferred Debt Issuance Costs -- -- 7.4 23.1
Intangible Transition Property -- -- 1,008.9 4,080.2
Interest Income 4.0 1.7 9.4 1.7
Other -- -- -- 0.3
-------- -------- ---------- ----------
TOTAL ADDITIONS 167.1 159.5 1,386.4 4,400.5
-------- -------- ---------- ----------
DEDUCTIONS
Due to Related Party -- -- 18.2 111.4
Transition Bonds -- -- 998.1 3,994.6
Interest Expense 81.0 66.1 214.5 130.0
Amortization of Debt Issuance Costs 1.2 0.8 3.1 1.6
Amortization of Intangible Transition Property 41.1 41.0 101.0 62.3
Amortization of Debt Discount 0.2 0.1 0.5 0.7
Service Fee Expense 3.0 3.0 8.4 6.0
-------- -------- ---------- ----------
TOTAL DEDUCTIONS 126.5 111.0 1,343.8 4,306.6
-------- -------- ---------- ----------
CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES 40.6 48.5 42.6 93.9
-------- -------- ---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITES
AT BEGINNING OF PERIOD 88.5 45.4 86.5 --
-------- -------- ---------- ----------
NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
AT END OF PERIOD $ 129.1 $ 93.9 $ 129.1 $ 93.9
======== ======== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE>
PECO ENERGY TRANSITION TRUST
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements as of September 30, 2000 and for
the three and nine months then ended are unaudited, but include all adjustments
that PECO Energy Transition Trust (PETT) considers necessary for a fair
presentation of such financial statements. All adjustments are of a normal,
recurring nature. Certain prior year amounts have been reclassified for
comparative purposes.
2. SERIES 2000-A TRANSITION BONDS
The Pennsylvania Public Utility Commission (PUC) authorized PETT to
collect an Intangible Transition Charge (ITC) in the PUC's Qualified Rate Order
issued on March 16, 2000 (2000 QRO). The 2000 QRO authorizes the ITC to be
sufficient to recover up to $1 billion of PECO Energy Company's (PECO Energy)
stranded costs and an amount sufficient to recover the aggregate principal
amount of the Series 2000-A Transition Bonds (Series 2000-A 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 Series 2000-A Transition Bonds.
On May 2, 2000, PETT issued $1 billion aggregate principal amount of
Series 2000-A Transition Bonds to securitize a portion of PECO Energy's
authorized stranded cost recovery. The Series 2000-A Transition Bonds are solely
obligations of PETT, secured by Intangible Transition Property (ITP) sold by
PECO Energy to PETT concurrently with the issuance of the 2000-A Transition
Bonds and certain other collateral related thereto. The following table
summarizes the terms of the Series 2000-A Transition Bonds at September 30,
2000:
<TABLE>
<CAPTION>
Approximate Expected
Series 2000-A Face Interest Final Payment Termination
Classes Amount Rate Date(a) Date(a)
--------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C>
A-1 $110.0 7.18 % September 1, 2001 September 1, 2003
A-2 $140.0 7.30 % September 1, 2002 September 1, 2004
A-3 $398.8 7.63 % March 1, 2009 March 1, 2010
A-4 $351.2 7.65 % September 1, 2009 March 1, 2010
</TABLE>
(a) The Expected Final Payment Date is the date when all principal and interest
of the related class of the Series 2000-A Transition Bonds is expected to
be paid in full in accordance with the expected amortization schedule for
the applicable class. The Termination Date is the date when all principal
and interest of the related class of the Series 2000-A Transition Bonds
must be paid in full. The current portion of the Series 2000-A Transition
Bonds is based upon the expected maturity date.
PETT used the proceeds of the Series 2000-A Transition Bonds to
purchase $1.009 billion of ITP from PECO Energy which represented an amount
sufficient to recover the aggregate principal amount of the Series 2000-A
Transition Bonds and related expenses including interest and servicing fees.
F-13
<PAGE>
PETT makes semi-annual principal payments pursuant to an amortization
schedule in the Series 2000-A Supplemental Indenture dated May 2, 2000. On March
1, 2000 and September 1, 2000, principal payments were made for $63.9 million
and $56.1 million, respectively, which reduced the outstanding principal balance
of the previously issued Series 1999-A Transition Bonds (Series 1999-A
Transition Bonds).
PETT has entered into interest rate swaps to manage interest rate
exposure associated with the issuance in March 1999, of two floating rate
classes of Series 1999-A Transition Bonds. The aggregate notional amount of
these swaps was equal to the face values of those two floating rate classes. At
September 30, 2000, the fair value of these instruments was $25.8 million based
on the present value difference between the contracted rates and the market
rates at that date. The fixed interest rates of Series 1999-A Transition Bonds,
Classes A-3 and A-5 are 6.58% and 6.94%, respectively. A hypothetical 50 basis
point increase or decrease in the spot yield at September 30, 2000 would have
resulted in an aggregate fair value of these interest rate swaps of $37.3
million or $18.9 million, respectively. If the derivative instruments had been
terminated at September 30, 2000, these estimated fair values represent the
amount to be paid by the counterparties to PETT.
PETT would be exposed to credit-related losses in the event of
non-performance by the counterparties that issued the derivative instruments.
PETT does not expect that the counterparties to the interest rate swaps will
fail to meet these obligations, given their high credit ratings. The credit
exposure of derivatives contracts is represented by the fair value of the
contracts at the reporting date. PETT interest rate swaps are documented under
master agreements. Among other things, these agreements provide for a maximum
credit exposure for both parties. Payments are required by the appropriate party
when the maximum limit is reached.
3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
PETT purchased ITP from PECO Energy pursuant to the Amended and
Restated Intangible Transition Property Sale Agreement, dated May 2, 2000 (Sale
Agreement). Under the Sale Agreement, PECO Energy makes certain representations
and warranties about the ITP and indemnifies PETT for losses caused by the
breach of such representations and warranties. To the extent a breach concerns
the existence of the ITP or the ability to charge ITC in the amounts sufficient
to meet a pre-set amortization schedule, PECO Energy must pay liquidated damages
equal to the lost principal and interest of the amortization schedule.
For financial reporting purposes 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 a sale.
The Series 2000-A Transition Bonds were issued pursuant to the
Indenture dated March 1, 1999 (Indenture) and the Series 2000-A Indenture
Supplement dated May 2, 2000. Under the Indenture, PETT has pledged all of its
property, including the ITP, to secure the Transition Bonds. The Indenture
prohibits PETT from selling, transferring, exchanging, or otherwise disposing of
any of the collateral unless directed to do so by the Trustee; from claiming any
credit or making any deduction from the principal, premium, if any, or interest
on Transition Bonds or against any Transition Bond holder; permitting the
validity of effectiveness of the Indenture to be impaired or permitting the lien
of the Indenture to be amended, hypothecated, subordinated, terminated, or
discharged; permitting any person to be released from any of the covenants or
obligations with respect to Transition Bonds as expressly permitted by the
F-14
<PAGE>
Indenture; permitting any liens, charges, or claims, security interest or
mortgage (other than the lien created by the Indenture) to be created in or
extended to or otherwise arise upon or burden the collateral or any part
thereof; or permitting the lien of the Indenture not to constitute a valid,
first priority security interest in the collateral.
Under the Amended and Restated Master Servicing Agreement entered into
by PETT and PECO Energy dated May 2, 2000, PECO Energy, as servicer, manages and
administers the ITP sold to PETT and collects the ITC related thereto on behalf
of PETT.
In the nine months ended September 30, 2000 and 1999, PETT recorded
$318.0 million and $222.2 million, respectively, of ITC collections. In the nine
months ended September 30, 2000 and 1999, PETT recorded $8.4 million and $6.0
million, respectively, in servicing fees based upon the outstanding principal
amount of the Transition Bonds.
As of September 30, 2000, the Due from Related Party balance represents
ITC billings by PECO Energy that have not yet been collected (ITC billings) of
$75.7 million and ITC collections by PECO Energy that have not yet been remitted
to PETT (ITC collections) of $5.1 million, partially offset by servicing fees
that have not been paid by PETT (servicing fees) of $1.0 million. As of December
31, 1999, the Due from Related Party balance represents ITC billings of $40.3
million and ITC collections of $2.6 million, partially offset by servicing fees
of $0.8 million.
As of September 30, 2000 and December 31, 1999, the Due to Related
Party balance of $128.9 million and $110.7 million, respectively, represents
cumulative advances from PECO Energy for initial working capital requirements
and operating expenses that are not considered to be currently due and payable
by PECO Energy.
4. LITIGATION
On February 7, 2000, the Mid-Atlantic Power Supply Association (the
Association) filed an intervention to the PUC's proceedings on PECO Energy's
January 7, 2000 application for a QRO to ensure that the proposed securitization
does not have an adverse effect on competition in the retail electrical services
market in Pennsylvania. Specifically, the Association expressed concern that the
2000 QRO would cause a reduction in the shopping credit established in the 1998
QRO and would enable PECO Energy to use the proposed rate reduction in 2001 to
promote its provider of last resort service.
The Association subsequently agreed to join with several of the parties
who participated in PECO Energy's restructuring proceeding in a second
settlement, which was filed with the PUC on March 8, 2000. On March 16, 2000,
the PUC issued an order approving the Joint Petition for Full Settlement of PECO
Energy's Application for Issuance of a QRO authorizing PECO Energy to securitize
up to an additional $1.0 billion of its authorized recoverable stranded costs.
In accordance with the terms of the Joint Petition for Full Settlement, when the
2000 QRO became final and non-appealable, PECO Energy provided its retail
customers with rate reductions in the total amount of $60 million beginning on
January 1, 2001. This rate reduction will be effective for calendar year 2001
only and will not be contingent upon the issuance of additional transition bonds
pursuant to the 2000 QRO.
F-15
<PAGE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish
accounting and reporting standards for derivatives. The new standard requires
recognizing all derivatives as either assets or liabilities on the balance sheet
at their fair value and specifies the accounting for changes in fair value
depending upon the intended use of the derivative.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. PETT expects to adopt SFAS No. 133 and SFAS
No. 138 on January 1, 2001. PETT initiated a process to implement SFAS No. 133
and SFAS No. 138 by evaluating all of the derivatives of PETT for SFAS No. 133
and SFAS No. 138 implications. This phase of implementation has been completed
and PETT is in the process of evaluating the impact of SFAS No. 133 and SFAS No.
138 on its financial statements.
6. SUBSEQUENT EVENTS
On October 20, 2000, pursuant to a Second Amended and Restated
Agreement and Plan of Exchange and Merger dated as of September 22, 1999 as
amended and restated as of October 10, 2000, among PECO Energy, a Pennsylvania
corporation, Exelon Corporation, a Pennsylvania corporation (Exelon) and Unicom
Corporation, an Illinois corporation (Unicom), PECO Energy, Exelon and Unicom
consummated the merger and exchange. Pursuant to the merger, PECO Energy became
a wholly owned subsidiary of Exelon.
F-16
<PAGE>
ANNEX A
The following summary is provided only for your information. The prospectus to
which this annex is attached applies only to bonds issued under that prospectus
and not to the Series 1999-A Bonds.
SERIES 1999-A TRANSITION BONDS
$4,000,000,000
--------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller: PECO Energy Company
Servicer: PECO Energy Company
Swap Counterparty for the
Class A-3 Bonds: Goldman Sachs Mitsui Marine Derivative Products, L.P.
Swap Counterparty for the
Class A-5 Bonds: Citibank, N.A., New York
Bond Trustee: The Bank of New York
Pricing Date: March 18, 1999
Series Issuance Date: March 25, 1999
Clearance And Settlement: DTC/Cedel/Euroclear
--------------------------------------------------------------------------------
Initial Class % of Total
Principal Balance Bond Rate Series Principal
----------------- --------- ----------------
Class A-1 $244,470,272 5.48% 6.11%
Class A-2 $275,371,325 5.63% 6.88%
Class A-3 $667,000,000 LIBOR+0.125%* 16.68%
Class A-4 $458,518,647 5.80% 11.46%
Class A-5 $464,600,000 LIBOR+0.200%* 11.62%
Class A-6 $993,386,331 6.05% 24.83%
Class A-7 $896,653,425 6.13% 22.42%
* Calculated as described under "The Series 1999-A Bonds--Interest" in the
prospectus supplement for the Series 1999-A Bonds.
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal
balance of the Series 1999-A Bonds as long as
Intangible Transition Charges are included in
electric bills sent to Customers or 1/12 of 1.50%
of the outstanding principal balance of the
Series 1999-A Bonds if Intangible Transition
Charges are not included in electric bills sent
to Customers.
Anticipated Ratings: S&P/Fitch IBCA/Duff & Phelps AAA
Moody's Aaa
Credit Enhancement: ITC adjustments; overcollateralization, funded
over the life of the Series 1999-A Bonds and
expected to be $80 million by the Expected Final
Payment Date of the Class A-7 Bonds; capital of
the Issuer, funded upon the issuance of each
Series and expected to be $20 million.
Payment Dates: March 1 and September 1 of each year or, if not
a business day, the next business day.
First Payment Date: September 1, 1999.
A-1
<PAGE>
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 ClassA-5 Class A-6 Class A-7
--------- --------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Expected Final
Payment Date............... March 1, March 1, March 1, March 1, September March 1, September 1,
2001 2003 2004 2005 1, 2007 2008
2007
Termination Date:.......... March 1, March 1, March 1, March 1, March 1, March 1, March 1,
2003 2005 2006 2007 2009 2009 2009
Optional Redemption:*...... No No On or No On or After No No
After March 1,
March 1, 2001
2001
*All Series 1999-A Bonds are subject to optional
redemption in whole once the outstanding
principal balance of the Series 1999-A Bonds has
been reduced to less than 5% of the initial
principal balance.
Record Date: Close of business on the day prior to any Payment
Date.
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class A-7
CUSIP Numbers: 705220 AA9 705220 AB7 705220 AC5 705220 AD3 705220 AE1 705220 AF8 705220 AG6
</TABLE>
A-2
<PAGE>
SERIES 2000-A BONDS
$1,000,000,000
--------------------------------------------------------------------------------
Issuer: PECO Energy Transition Trust
Seller: PECO Energy Company
Servicer: PECO Energy Company
Bond Trustee: The Bank of New York
Pricing Date: April 27, 2000
Series Issuance Date: May 2, 2000
Clearance And Settlement: DTC/Cede/Euroclear
--------------------------------------------------------------------------------
Initial Class Bond Rate % of Total Series
Principal Balance --------- Principal
----------------- -----------------
Class A-1 $110,000,000 7.180% 11.00%
Class A-2 $140,000,000 7.300% 14.00%
Class A-3 $398,838,452 7.625 39.88%
Class A-4 $351,161,548 7.650% 35.12%
* Calculated as described under "The Series 2000-A Bonds--Interest" in the
prospectus supplement for the Series 2000-A Bonds.
Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal
balance of the Series 2000-A Bonds as long as
intangible transition charges are included in
electric bills sent to customers or 1/12 of 1.50%
of the outstanding principal balance of the
Series 2000-A Bonds if intangible transition
charges are not included in electric bills sent
to customers.
Anticipated Ratings: S&P/Fitch IBCA AAA
Moody's Aaa
Credit Enhancement: ITC adjustments; overcollateralization, funded
over the life of the Series 2000-A Bonds and
expected to be 2% of the initial principal
balance of all series of transition bonds by the
expected final payment date of the Class A-4
Bonds; capital of the issuer, with an additional
amount funded upon the issuance of this series
equal to $5 million, for a total of $25 million
available to all series of transition bonds.
Payment Dates: March 1 and September 1 of each year or, if not
a business day, the next business day.
First Payment Date: September 1, 2000.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Expected Final
Payment Date:.............. September 1, September 1, March 1, 2009 September 1, 2009
2001 2002
Termination Date:.......... September 1, September 1, March 1, 2010 March 1, 2010
2003 2004
Optional Redemption:*...... No No No No
</TABLE>
*All Series 2000-A Bonds are subject to optional redemption in whole
once the outstanding principal balance of the Series 2000-A Bonds has been
reduced to less than 5% of the initial principal balance.
A-3
<PAGE>
Mandatory Redemption: All Series 2000-A Bonds are subject to mandatory
redemption in whole if the seller is obligated to
pay liquidated damages for the breach of
specified representations and warranties under
the sale agreement.
Record Date: Close of business on the day prior to any
Payment Date.
Class A-1 Class A-2 Class A-3 Class A-4
CUSIP Numbers: 705220 AH4 705220 AJ0 705220 AK7 705220 AL5
A-4
<PAGE>
The date of this prospectus supplement is _______________, 2001.
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 90 days after the date of this
prospectus supplement.
<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......................................... $ 191,400
Printing and Engraving Expenses.......................... 100,000
Trustees' Fees and Expenses.............................. 25,000
Legal Fees and Expenses.................................. 250,000
Blue Sky Fees and Expenses............................... 50,000
Accountants' Fees and Expenses........................... 140,000
Rating Agency Fees....................................... 500,000
Miscellaneous Fees and Expenses.......................... 25,000
----------
Total........................................... $1,281,400
==========
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 Second 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 Second Amended and Restated Trust Agreement for PECO Energy
Transition Trust (incorporated by reference to the Registrant's
Report on Form 8-K filed on May 11, 2000, File No. 333-58055).
4.2 Certificate of Trust for PECO Energy Transition Trust (incorporated
by reference to the Registrant's Registration Statement on Form S-3
filed on March 3, 2000, File No. 333-31646).
4.3.1 Indenture dated as of March 1, 1999 (incorporated by reference to
the Registrant's Registration Statement on Form S-3 filed on March
3, 2000, File No. 333-31646).
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.
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP, relating to
legality of the Transition Bonds.
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
material federal and state tax matters.
II-1
<PAGE>
10.1 Intangible Transition Property Sale Agreement dated as of March 25,
1999, as amended and restated as of May 2, 2000 (incorporated by
reference to the Registrant's Report on Form 8-K filed on May 11,
2000, File No. 333-58055).
10.2 Form of Amendment No. 1 to Intangible Transition Property Sale
Agreement dated as of March 25, 1999, as amended and restated as of
May 2, 2000.
10.3 Master Servicing Agreement dated as of March 25, 1999, as amended
and restated as of May 2, 2000 (incorporated by reference to the
Registrant's Report on Form 8-K Filed on May 11, 2000, File No.
333-58055).
10.4 Form of Amendment No. 1 to Master Servicing Agreement dated as of
March 25, 1999, as amended and restated as of May 2, 2000.
10.5 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 (incorporated by
reference to the Registrant's Registration Statement on Form
S-3 filed on March 3, 2000, File No. 333-31646).
10.6 Joint Petition for Full Settlement of PECO Energy Company's
Application for Issuance of a Qualified Rate Order Under Section
2812 of the Public Utility Code dated March 8, 2000 (incorporated
by reference to Amendment No. 1 to the Registrant's Registration
Statement on Form S-3 filed on April 17, 2000, File No. 333-31646).
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in its
opinions filed as Exhibit 5.2 and Exhibit 8.1).
23.2 Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.1).
23.3 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on pages II-4 - II-5 of the
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.
99.1 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on May 14, 1998(incorporated by reference
to the Registrant's Registration Statement on Form S-3 filed on
March 3, 2000, File No. 333-31646).
99.2 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on March 16, 2000 (incorporated by
reference to Amendment No. 1 to the Registrant's Registration
Statement on Form S-3 filed on April 17, 2000, File No. 333-31646).
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
------------------
* To be filed by amendment.
Item 17. Undertakings
The undersigned Registrant on behalf of the PECO Energy Transition
Trust (the "Trust") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act of 1933,
as amended, if, in the aggregate, the changes in volume and price represent no
more than a twenty percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change in such information in the Registration
Statement; provided, however, that (a)(1)(i) and (a)(1)(ii) will not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in this Registration Statement.
II-2
<PAGE>
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934, as amended) with respect to the Trust that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, 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 Registrants certify that they have reasonable grounds to believe that they
meet 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 have duly caused
this Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Philadelphia, Commonwealth of
Pennsylvania, on December 13, 2000.
PECO ENERGY TRANSITION TRUST,
(Issuer of the Transition Bonds)
By: /s/ George Shicora
------------------------------------
George Shicora, Beneficiary Trustee
(principal executive officer)
By: /s/ Thomas R. Miller
------------------------------------
Thomas R. Miller, Beneficiary Trustee
(principal financial and accounting
officer)
KNOWN ALL MEN BY THESE PRESENT, that each person whose signature
appears above constitutes and appoints Thomas R. Miller as their true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for and in each of their names, place and stead, in any and all capacities to
sign any or all amendments (including post-effective amendments) to this
Registration Statement and any or all other documents in connection therewith
and to file the same, with all exhibits thereto, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intent and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
PECO ENERGY COMPANY,
(Grantor of PECO Energy Transition Trust
and Servicer of the Transition Bonds)
By: /s/ C.A. McNeill, Jr.
-------------------------------------
C.A. McNeill, Jr.
Co-Chief Executive Officer, Director
By: /s/ John W. Rowe
-------------------------------------
John W. Rowe
Co-Chief Executive Officer, Director
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C.A. McNeill, Jr.
--------------------------- Co-Chief Executive, Director December 13, 2000
C.A. McNeill, Jr. Officer of PECO Energy Company
(principal executive officer)
/s/ John W. Rowe
-------------------------- Co-Chief Executive, Director December 13, 2000
John W. Rowe Officer of PECO Energy Company
(principal executive officer)
/s/ Thomas P. Hill, Jr.
-------------------------- Vice President and Chief December 13, 2000
Thomas P. Hill, Jr. Financial Officer of PECO
Energy Company (principal
financial and accounting officer)
</TABLE>
KNOWN ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints C.A. McNeill, Jr. and John W. Rowe as their true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in each of their names, place and stead, in any and all
capacities to sign any or all amendments (including post-effective amendments)
to this Registration Statement and any or all other documents in connection
therewith and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intent and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Pamela B. Stroebel
-------------------------- Director December 13, 2000
Pamela B. Stroebel
/s/ Kenneth G. Lawrence
-------------------------- Director December 13, 2000
Kenneth G. Lawrence
/s/ Ruth Ann M. Gillis
-------------------------- Director December 13, 2000
Ruth Ann M. Gillis
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
1.1 Form of Underwriting Agreement.
4.1 Second Amended and Restated Trust Agreement for PECO Energy
Transition Trust (incorporated by reference to the Registrant's
Report on Form 8-K filed on May 11, 2000, File No. 333-58055).
4.2 Certificate of Trust for PECO Energy Transition Trust (incorporated
by reference to the Registrant's Registration Statement on Form S-3
filed on March 3, 2000, File No. 333-31646).
4.3.1 Indenture dated as of March 1, 1999 (incorporated by reference to
the Registrant's Registration Statement on Form S-3 filed on March
3, 2000, File No. 333-31646).
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.
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP, relating to
legality of the Transition Bonds.
8.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to
material federal and state tax matters.
10.1 Intangible Transition Property Sale Agreement dated as of March 25,
1999, as amended and restated as of May 2, 2000 (incorporated by
reference to the Registrant's Report on Form 8-K filed on May 11,
2000, File No. 333-58055).
10.2 Form of Amendment No. 1 to Intangible Transition Property Sale
Agreement dated as of March 25, 1999, as amended and restated as of
May 2, 2000.
10.3 Master Servicing Agreement dated as of March 25, 1999, as amended
and restated as of May 2, 2000 (incorporated by reference to the
Registrant's Report on Form 8-K filed on May 11, 2000, File No.
333-58055).
10.4 Form of Amendment No. 1 to Master Servicing Agreement dated as of
March 25, 1999, as amended and restated as of May 2, 2000.
10.5 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 (incorporated by
reference to the Registrant's Registration Statement on Form
S-3 filed on March 3, 2000, File No. 333-31646).
10.6 Joint Petition for Full Settlement of PECO Energy Company's
Application for Issuance of a Qualified Rate Order Under Section
2812 of the Public Utility Code dated March 8, 2000 (incorporated by
reference to Amendment No. 1 to the Registrant's Registration
Statement on Form S-3 filed on April 17, 2000, File No. 333-31646).
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in its
opinions filed as Exhibit 5.2 and Exhibit 8.1).
23.2 Consent of Richards, Layton & Finger, P.A. (included in its opinion
filed as Exhibit 5.1).
23.3 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on pages II-4 - II-5 of the 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.
99.1 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on May 14, 1998(incorporated by reference
to the Registrant's Registration Statement on Form S-3 filed on
March 3, 2000, File No. 333-31646).
99.2 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on March 16, 2000 (incorporated by
reference to Amendment No. 1 to the Registrant's Registration
Statement on Form S-3 filed on April 17, 2000, File No. 333-31646).
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
--------------------
* To be filed by amendment.
