UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
ACT OF 1934
Commission file number: 333-58055
PECO Energy Transition Trust
(Exact name of registrant as specified in its charter)
Delaware 51-0382130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o First Union Trust Company, N. A.
One Rodney Square, 920 King Street
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
(302) 888-7532
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
-- --
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY TRANSITION TRUST
STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(in Millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------
(Unaudited)
ASSETS
<S> <C> <C>
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.
2
<PAGE>
<TABLE>
<CAPTION>
PECO ENERGY TRANSITION TRUST
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR TRUST ACTIVITIES
(Unaudited)
(in Millions)
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.
3
<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
<FN>
(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.
</FN>
</TABLE>
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.
4
<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
5
<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.
6
<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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
activities of PECO Energy Transition Trust (PETT) is in an abbreviated format
pursuant to Instruction H of Form 10-Q. Such analysis should be read in
conjunction with the Financial Statements and Notes to Financial Statements
included in Item 1 above, and the Note Issuer's Annual Financial Statements and
the Notes to Financial Statements included in its Registration Statement dated
April 27, 2000.
PETT was formed under the laws of Delaware pursuant to a trust
agreement between PETT, PECO Energy Company (PECO Energy), First Union Trust
Company, N.A., acting thereunder not in its individual capacity but solely as
issuer trustee of PETT, and two beneficiary trustees appointed by PECO Energy.
PETT is currently governed by an amended and restated trust agreement among the
same parties.
Excluding the effects of the purchase of ITP and contributions from
PECO Energy, additions for the three and nine months ended September 30, 2000
were $167.1 million and $365.1 million, respectively. These additions primarily
represent the recovery of ITC. Excluding the effects of the issuance of the
Series 1999-A Transition Bonds on March 25, 1999 and the Series 2000-A
Transition Bonds on May 2, 2000 (collectively, Transition Bonds), deductions for
the three and nine months ended September 30, 2000 were $126.5 million and
$327.5 million, respectively, and included: $81.0 million and $214.5 million,
respectively, of interest charges associated with the Transition Bonds;
amortization charges related to the ITC of $41.1 million and $101.0 million,
respectively, and servicing fees of $3.0 million and $8.4 million, respectively.
On May 2, 2000, PETT issued $110.0 million aggregate principal amount
of 7.18% Series 2000-A Transition Bonds, Class A-1, $140.0 million aggregate
principal amount of 7.30% Series 2000-A Transition Bonds, Class A-2, $398.8
million aggregate principal amount of 7.63% Series 2000-A Transition Bonds,
Class A-3, $351.2 million aggregate principal amount of 7.65% Series 2000-A
Transition Bonds, Class A-4.
PETT relies on the computer systems of PECO Energy in its capacity as
servicer under the Amended and Restated Master Servicing Agreement. During 1999,
PECO Energy successfully addressed, through its Year 2000 Project (Y2K Project),
the issue resulting from computer programs using two digits rather than four to
define the applicable year and other programming techniques that constrain date
calculations or assign special meanings to certain dates.
PECO Energy's systems experienced no Y2K difficulties on December 31,
1999 or since that date. PECO Energy's operations have not, to date, been
adversely affected by any Y2K difficulties that suppliers or customers may have
experienced. PECO Energy will continue to monitor its systems for potential Y2K
difficulties through the remainder of 2000.
For additional information on PECO Energy's Y2K project, see PECO
Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted with respect to PETT pursuant to Instruction H of Form 10-Q.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
--------------- ---------------
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the reporting period:
None
9
<PAGE>
PECO ENERGY TRANSITION TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000 By: /s/ George R. Shicora
----------------------------
George R. Shicora
Beneficiary Trustee
