As filed with the Securities and Exchange Commission on April 17, 2000
Registration No. 333-31646
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PECO Energy Transition Trust
(Issuer of 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:
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ROBERT C. GERLACH, ESQ. JAMES W. DURHAM, ESQ. GREGORY M. SHAW, ESQ.
LISA M. SLOAN, ESQ. SENIOR VICE PRESIDENT AND CRAVATH, SWAINE & MOORE
BALLARD SPAHR ANDREWS & INGERSOLL, LLP GENERAL COUNSEL WORLDWIDE PLAZA
1735 MARKET STREET, 51ST FLOOR P.O. BOX 8699 825 EIGHTH AVENUE
PHILADELPHIA, PA 19103-7599 2301 MARKET STREET NEW YORK, NY 10019
PHILADELPHIA, PA 19101
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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. |_|
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CALCULATION OF REGISTRATION FEE
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**
---------------- ---------- --------------- ------ ----------------
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Transition Bonds.......... $1,000,000,000 100% $1,000,000,000 $264,000.00***
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* Estimated solely for the purposes of calculating the registration fee.
** Calculated pursuant to Rule 457(o) of the Securities Act.
*** Of this amount, $264.00 was paid in connection with the original
Registration Statement filed on March 3, 2000.
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 where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 17, 2000
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 2000)
PECO ENERGY TRANSITION TRUST
ISSUER
PECO ENERGY COMPANY
SELLER AND SERVICER
SERIES 2000-A
$ Transition Bonds
THE ISSUER WILL ISSUE:
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Class A-1 Class A-2 Class A-3 Class A-4
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Principal Amount......................... $ $ $ $
Price ................................... $ $ $ $
( %) ( %) ( %) ( %)
Underwriters' Discounts and Commissions.. $ $ $ $
( %) ( %) ( %) ( %)
Proceeds to the Issuer................... $ $ $ $
Bond Rate................................
Interest Paid............................ Semi-Annual Semi-Annual Semi-Annual Semi-Annual
First Payment Date.......................
Optional Redemption...................... No No No No
All Series 2000-A Bonds are subject to optional redemption in whole once
the outstanding principal balance has been reduced to less than 5% of the
initial principal balance
Expected Final Payment Date..............
Class Termination Date...................
</TABLE>
Before you purchase these securities, you should carefully
consider the Risk Factors beginning on page 24
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 2000-A Bonds, and there is
no assurance that one will develop.
Salomon Smith Barney
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Banc One Capital Markets, Inc. First Union Securities, Inc.
Banc of America Securities LLC Credit Suisse First Boston
Goldman, Sachs & Co. Janney Montgomery Scott LLC
Barclays Capital BNY Capital Markets, Inc. Mellon Financial Markets, LLC
Prudential Securities Pryor, Counts & Co., Inc. TD Securities
</TABLE>
The date of this prospectus supplement is , 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
WHERE TO FIND INFORMATION IN THESE DOCUMENTS................................S-1
SUMMARY OF TERMS............................................................S-2
Securities Offered.................................................S-2
Introduction.......................................................S-5
The Collateral.....................................................S-6
Interest...........................................................S-7
Principal..........................................................S-8
Collection Account and Subaccounts.................................S-8
Credit Enhancement.................................................S-9
Optional Redemption................................................S-9
Mandatory Redemption...............................................S-9
Intangible Transition Charge Adjustment Process...................S-10
Tax Status........................................................S-11
ERISA Considerations..............................................S-12
Servicer's and Issuer's Address and Telephone Number
of Principal Executive Office...................................S-12
RISK FACTORS...............................................................S-13
THE SERIES 2000-A BONDS....................................................S-13
General...........................................................S-13
Distributions to the Series 2000-A Subaccount.....................S-13
Distributions from the Series 2000-A Subaccount...................S-14
Interest..........................................................S-14
Principal.........................................................S-15
Optional Redemption...............................................S-17
Mandatory Redemption..............................................S-18
Overcollateralization.............................................S-18
Other Credit Enhancement..........................................S-21
Reports to Holders of Series 2000-A Bonds.........................S-21
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY..............................S-22
The Intangible Transition Charges.................................S-22
Adjustments to the Intangible Transition Charges..................S-26
DESCRIPTION OF PECO ENERGY'S BUSINESS......................................S-27
SERVICING..................................................................S-27
Monthly Servicing Fee.............................................S-27
Servicer Advances.................................................S-28
MATERIAL TAX MATTERS.......................................................S-28
UNDERWRITING THE SERIES 2000-A BONDS.......................................S-30
RATINGS....................................................................S-33
GLOSSARY OF DEFINED TERMS..................................................S-34
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
We provide information to you about the transition bonds in two separate
documents that progressively provide more detail:
(a) the accompanying prospectus, which provides general information, some
of which may not apply to your series of transition bonds, and
(b) this prospectus supplement, which describes the specific terms of your
series of transition bonds.
This prospectus supplement and the accompanying prospectus together contain
complete information about the offering of your series of transition bonds. You
are urged to read both documents. In particular, you should read the information
under the heading "Risk Factors" beginning on page 24 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 2000-A 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 of your 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
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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.
SECURITIES OFFERED
Series 2000-A Transition Bonds
$
ISSUER: PECO ENERGY TRANSITION TRUST
SELLER AND SERVICER: PECO ENERGY COMPANY
BOND TRUSTEE: THE BANK OF NEW YORK
PRICING DATE: , 2000
SERIES ISSUANCE DATE: , 2000
CLEARANCE AND SETTLEMENT: DTC/CLEARSTREAM/EUROCLEAR
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Initial Class Principal Balance Bond Rate % of Total Series Principal
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Class A-1 $ % %
Class A-2 $ % %
Class A-3 $ % %
Class A-4 $ % %
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Monthly Servicing Fee: Either 1/12 of 0.25% of the outstanding principal balance of the
Series 2000-A Bonds so 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: o Intangible transition charge adjustments,
o Overcollateralization for all series of transition bonds, funded over the life of the
Series 2000-A Bonds and expected to reach 2% of the initial principal balance of all
series of transition bonds by the
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expected final payment date of the Class A-4 Bonds, and
o Capital of the issuer, with an additional amount funded upon the issuance of this
series equal to $5 million, for a total of approximately $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:
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
--------- --------- --------- ---------
Expected Final
Payment Date:*
* The expected final payment date is the date upon which the issuer expects to make the
final payment on your Series 2000-A Bond. However, the final payment on your Series
2000-A Bond may be made after that date. Your Series 2000-A Bond will not be in default
unless it is not paid in full by its termination date set forth below.
Termination Date:
Optional Redemption: 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
or equal to 5% of the initial principal balance.
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.
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S-3
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Record Date: Close of business on the business day prior to any payment date.
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
--------- --------- --------- ---------
CUSIP Numbers:
</TABLE>
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 pospectus), 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 fit within the applicable rate caps.
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 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 will sell to PECO Energy
Transition Trust in connection with the issuance of the Series 2000-A 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
S-5
<PAGE>
2000-A Bonds and the Series 1999-A Bonds. 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.
On the series issuance date, PECO Energy will sell the intangible
transition property authorized by the 2000 QRO and the right to receive the
proceeds of that intangible transition property to PECO Energy Transition Trust.
PECO Energy Transition Trust has pledged all its property, including that
intangible transition property, to the bond trustee as the collateral for the
Series 2000-A Bonds under the indenture. PECO Energy Transition Trust's other
property that makes up the collateral for these securities is described in this
summary under the subcaption "The Collateral."
For more information on the 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 Restructuring Plan" and "The Qualified Rate
Orders and the Intangible Transition Charges" in the accompanying prospectus.
The following is a summary of other specific matters related to these
securities:
The Collateral The Series 2000-A 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 other
issuers of transition bonds that
meet specified criteria,
S-6
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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 and any other issuer
(which includes the Series 2000-A Bonds and
the Series 1999-A Bonds) on a Pro Rata basis,
as described under the caption "The Series
2000-A Bonds--General."
For a more detailed description of the
collateral for 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 2000-A 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 2000-A 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 2000-A Bonds--Interest"
in this prospectus supplement.
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S-7
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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 2000-A Bonds--Principal" in this prospectus supplement.
The actual amount of principal paid on any payment date on your
Series 2000-A 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.
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 1999-A Bonds and the Series 2000-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,
o a class subaccount, for each class that bears a floating
interest rate, 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 for the Series 2000-A Bonds, and
subaccounts for the deposit of certain loss amounts and interest
may also be established, if necessary.
Withdrawals from and deposits to these subaccounts will be made
as described under "The Indenture--Allocations and Payments" in
the accompanying prospectus.
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S-8
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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 2000-A Bonds and is expected
to reach 2% of the initial principal balance of all series of
transition by the expected maturity date of the Class A-4
Bonds.
Additional Credit Enhancement. In addition, capital of the issuer
(equal to .50% of the initial principal balance of all series of
transition bonds) 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."
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 2000-A Bonds may be redeemed in whole once the
outstanding principal balance of the Series 2000-A 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
2000-A 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 2000-A
Bonds will be subject to mandatory redemption in whole at a
redemption price equal to the principal balance of the Series
2000-A 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
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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.
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.
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S-10
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The following table summarizes the adjustment frequency of the
intangible transition charges:
ADJUSTMENT DATE
Annual Adjustments...................................5/14/00 - [ ]
Monthly Adjustments
of Series 2000-A Bonds............................[ ]-Termination Date
The annual adjustments through [ ] 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.
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.
Tax Status In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special
tax counsel to the issuer and PECO Energy:
o Interest received by a holder of these transition bonds who is
a United States taxpayer will be subject to federal income tax.
o A holder of the Series 2000-A Bonds will realize a gain from
the sale of the Series 2000-A 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.
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S-11
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o If the holder of the Series 2000-A 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 2000-A Bonds in
light of their particular circumstances, as well as the effect of
any foreign, state, local or other laws.
For further information regarding the application of U.S. federal
and state income tax laws, you should see the sections captioned
["Material Tax Matters" in this prospectus supplement and]
"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.
Servicer's and Issuer's
Mailing Address and
Telephone Number of
Principal Executive Office The mailing address of PECO Energy is P.O. Box 8699,
Philadelphia, Pennsylvania 19101, and its telephone number is
(215) 841-4000. The mailing address of the issuer is c/o First
Union Trust Company, National Association, One Rodney Square, 920
King Street, Wilmington, Delaware 19801, and its telephone number
is (302) 888-7532.
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S-12
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RISK FACTORS
For a discussion of the material risks associated with an investment in the
Series 2000-A Bonds, you should review the discussion under "Risk Factors,"
which begins on page 24 of the accompanying prospectus.
THE SERIES 2000-A BONDS
GENERAL
The Series 2000-A Bonds 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 2000-A 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-34 of this prospectus supplement or in the
glossary of defined terms located on page 169 of the accompanying prospectus.
The Series 2000-A 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 2000-A Bonds will be paid
through The Depository Trust Company or, if the Series 2000-A Bonds are no
longer in book-entry form, will be payable at the offices of The Bank of New
York at 101 Barclay Street, New York, New York 10286. Generally, payment will be
made by check mailed first-class, postage prepaid to a holder's address as it
appears on the transition bond register on each record date. For Series 2000-A
Bonds registered on a record date in the name of the nominee of Cede & Co.,
payments will be made by wire transfer in immediately available funds to the
account designated by that nominee. The final installment of principal and
premium, if any, payable with respect to any Series 2000-A Bond will be payable,
after prior notice to the holder, only upon presentation and surrender of the
Series 2000-A Bond at a place specified in that notice.
DISTRIBUTIONS TO THE SERIES 2000-A SUBACCOUNT
The issuer has already issued one series of transition bonds, the
Series 1999-A Bonds, and may issue additional series in the future, as discussed
under "The Transition Bonds" in the accompanying prospectus.
S-13
<PAGE>
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 (as
defined in the glossary in the accompanying prospectus). 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
(as defined in the glossary in the accompanying prospectus) 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 2000-A 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 2000-A Bonds on each payment date as
follows:
(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 2000-A Bonds will accrue from the
series issuance date at the respective bond rates indicated in the section at
the beginning of this prospectus supplement entitled "Summary of
Terms--Securities Offered." The interest will be payable on each payment date,
commencing , 2000, to the persons in whose names the Series
2000-A Bonds of each class are registered at the close of business on the
applicable record date.
Interest on the Series 2000-A 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.
S-14
<PAGE>
The allocated interest balance on the series issuance date and on each
monthly allocation date for the Series 1999-A Bonds and the Series 2000-A 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
Monthly Allocated Monthly Allocated
Monthly Allocation Date Interest Balance Interest Balance
<S> <C> <C>
</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 2000-A subaccount, make
principal payments on each class of Series 2000-A Bonds in accordance with the
expected amortization schedule.
Available funds in the Series 2000-A subaccount will be allocated in a
sequential manner, to the extent funds are available, as follows:
(1) To the holders of the Series 2000-A Bonds, Class A-1, until this class
is retired in full,
(2) To the holders of the Series 2000-A Bonds, Class A-2, until this class
is retired in full,
(3) To the holders of the Series 2000-A Bonds, Class A-3, until this class
is retired in full, and
(4) To the holders of the Series 2000-A Bonds, Class A-4, until this class
is retired in full.
S-15
<PAGE>
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 2000-A 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.
The following expected amortization schedule sets forth the scheduled
outstanding class principal balance for each class of the Series 2000-A Bonds at
each payment date, after giving effect to the payments made on that date, from
the series issuance date to the expected final payment date for that class.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING CLASS PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ISSUANCE OR PAYMENT DATE CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 SERIES 2000-A
- ------------------------ --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
series issuance date
</TABLE>
S-16
<PAGE>
For various reasons, the actual class principal balance of any class of the
Series 2000-A 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 2000-A Bonds.
The allocated principal balance as of the series issuance date and on each
monthly allocation date for the Series 1999-A Bonds and the Series 2000-A 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
Monthly Allocated Monthly Allocated
Monthly Allocation Date Principal Balance Principal Balance
<S> <C> <C>
</TABLE>
OPTIONAL REDEMPTION
The Series 2000-A Bonds may be redeemed in whole on any payment date
commencing with the payment date on which the outstanding principal balance of
the Series 2000-A 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 2000-A 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 IBCA, 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
2000-A Bonds.
S-17
<PAGE>
MANDATORY REDEMPTION
Except as provided below, if the seller, PECO Energy, is obligated to pay
liquidated damages under the sale agreement, the Series 2000-A Bonds will be
subject to mandatory redemption in whole. The redemption price will equal the
principal balance thereof plus interest at the applicable bond rate, accrued to
the redemption date.
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.
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 2000-A Bonds and is expected to reach 2%
of the initial principal balance of all series of transition bonds by the
expected maturity date of the Class A-4 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.
S-18
<PAGE>
The calculated overcollateralization level for each payment date related to
the Series 1999-A Bonds and the Series 2000-A 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-19
<PAGE>
TABLE 4
CALCULATED OVERCOLLATERALIZATION LEVEL
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A
Calculated Calculated
Issuance or Overcollateralization Overcollateralization
Payment Date Level Level
<S> <C> <C>
</TABLE>
TABLE 4A
MONTHLY ALLOCATED OVERCOLLATERALIZATION BALANCE
<TABLE>
<CAPTION>
Series 1999-A Series 2000-A
Monthly Allocated Monthly Allocated
Monthly Allocation Date Overcollateralization Balance Overcollateralization Balance
<S> <C> <C>
</TABLE>
S-20
<PAGE>
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 March 31, 2000, the balance
in the reserve subaccount was $9,893,502.
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. Upon the issuance of the Series 2000-A Bonds, the
issuer will deposit the required capital amount of $5 million in the capital
subaccount. As of March 31, 2000, the balance in the capital subaccount was
$20,015,965. 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.
REPORTS TO HOLDERS OF SERIES 2000-A 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 2000-A Bonds.
These statements will be available to the beneficial owners of the Series 2000-A
Bonds upon request to the bond trustee or the servicer. The financial
information provided will not be examined or reported upon by any independent
public accountant and no independent public accountant will give an opinion on
this financial information.
S-21
<PAGE>
For a more detailed description of the statements provided to the holders
of record of the Series 2000-A Bonds, you should review the material under the
caption "The Indenture--Reports to Transition Bondholders" in the accompanying
prospectus.
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
THE INTANGIBLE TRANSITION CHARGES
PECO Energy's customers currently belong to one of three customer
categories for purposes of adjusting intangible transition charges. These
categories are: residential, small commercial and industrial and large
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, will first
reduce competitive transition charges, then to the extent intangible transition
charges exceed those amounts, will reduce 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 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 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 will be
allocated among the transferred intangible transition property held by the
issuer and intangible transition property held by other issuers of transition
bonds to which intangible transition property is sold, based on their respective
Percentages at the time these intangible transition charges were billed.
S-22
<PAGE>
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 calendar year 1999 and upon issuance of the
Series 2000-A Bonds for each rate category.
TABLE 5
AVERAGE INTANGIBLE TRANSITION CHARGES
<TABLE>
<CAPTION>
Projected Monthly
Calendar Year 1999 Intangible Charges
Average Monthly Initially Billed After
Calendar Year 1999 Intangible Transition Issuance of
Customer Category Average Monthly Bill Charges Series 2000-A Bonds
- ----------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C>
Residential
Customers $ $ $
---------------- ---------------- --------------------
Small Commercial
and Industrial
Customers $ $ $
---------------- ---------------- --------------------
Large Commercial
and Industrial
Customers $ $ $
---------------- ---------------- --------------------
</TABLE>
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 2000-A
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.
S-23
<PAGE>
TABLE 6
Projected Average Intangible Transition Charges for the Period ____ to
August 14, 2000
RESIDENTIAL CUSTOMERS
Rate Class ITC Percentage
Rate R %
Rate R-H %
Rate OP %
SMALL COMMERCIAL AND INDUSTRIAL CUSTOMERS
Rate Class ITC Percentage
Rate GS %
Rate POL %
Rate SL-P %
Rate SL-S %
Rate SL-E %
Rate TL %
Rate BLI(1) %
LARGE COMMERCIAL AND INDUSTRIAL CUSTOMERS
Rate Class ITC Percentage
Rate PD %
Rate HT %
Rate EP %
- ---------------
(1) No intangible transition charges are or will be imposed on Rate BLI
customers.
S-24
<PAGE>
Rate Class Descriptions:
- -----------------------
PECO Energy's customer base is currently divided into three categories
for purposes of adjusting intangible transition charges: residential,
small commercial and industrial, and large commercial and industrial.
Rate categories and classes within those categories are created 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. 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.
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.
Small Commercial and Industrial Rate Classes:
Rate GS - General Service: Electric delivery service available through
a single metering installation for offices, professional, commercial or
industrial establishments, governmental agencies, and other
applications outside the scope of the residential service rate
schedules.
Rate POL - Private Outdoor Lighting: Available in conjunction with Rate
GS for the outdoor lighting of sidewalks, driveways, yards, lots and
similar places, outside the scope of service under Rate SL-P, SL-S and
SL-E.
Rate SL-P - Street Lighting in the City of Philadelphia: Available only
to a governmental agency, municipal, state or federal, for outside
lighting of streets, highways, bridges, parks or similar places,
including directional highway signs at locations where other outdoor
lighting service is established hereunder, for the safety and
convenience of the public within the City of Philadelphia.
S-25
<PAGE>
Rate SL-S - Street Lighting - Suburban Divisions: Available for the
outdoor lighting of streets, highways, bridges, parks and similar
places for the safety and convenience of the public in Suburban
Divisions.
Rate SL-E - Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor
lighting of streets, highways, bridges, parks or similar places,
including directional highway signs at locations where outdoor lighting
service is established for the safety and convenience of the public
where all of the utilization facilities are installed, owned and
maintained by a governmental agency.
Rate TL - Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI - Borderline Interchange: Available under reciprocal
agreements to neighboring electric utilities for resale in their
adjacent territory. No intangible transition charges will be imposed on
Rate BLI customers.
Large Commercial and Industrial Rate Classes:
Rate PD - Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's
distribution system where the customer installs, owns and maintains any
transforming, switching and other receiving equipment required.
Rate HT - High-Tension Power: Untransformed electric delivery service
from PECO Energy's standard high-tension lines, where the customer
installs, owns and maintains, any transforming, switching and other
receiving equipment required. Excludes certain special contracts.
Rate EP - Electric Propulsion: This rate is available only to the
National Rail Passenger Corporation and to the Southeastern
Pennsylvania Transportation Authority for untransformed electric
delivery service from PECO Energy's standard high-tension lines, where
the customer installs, owns and maintains any transforming, switching
and other receiving equipment required and where the service is
supplied for the operation of electrified transit and railroad systems
and appurtenances.
ADJUSTMENTS TO THE INTANGIBLE TRANSITION CHARGES
The 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
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
S-26
<PAGE>
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
<TABLE>
<CAPTION>
INTANGIBLE TRANSITION CHARGES
Series 1999-A MAY 14, 1999 Series 2000-A
Rate Class Issuance Date (first adjustment date) Issuance Date
---------- ------------- ----------------------- -------------
<S> <C> <C> <C>
</TABLE>
DESCRIPTION OF PECO ENERGY'S BUSINESS
For a discussion of PECO Energy, you should review the material under the
caption "The Seller and Servicer" 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:
S-27
<PAGE>
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 otherwise sent to
customers, 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 electric bills otherwise sent to customers but
instead, are billed separately to customers.
The monthly servicing fee, together with any portion of the monthly servicing
fee that remains unpaid from prior monthly allocation dates, will be paid solely
to the extent funds are available for this purpose as described under "The
Indenture--Allocations and Payments" in the accompanying prospectus. The monthly
servicing fee will be paid prior to the distribution of any amounts of interest
on and principal of any series of transition bonds. The servicer will be
entitled to retain as additional compensation net investment income on
intangible transition charges received by the servicer prior to remittance 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 2000-A Bonds.
[MATERIAL TAX MATTERS
If a class of the Series 2000-A Bonds is issued at a price which is
lower than its stated principal amount by more than a de minimis amount, the
excess of the Series 2000-A Bond's stated redemption price at expected maturity
over its issue price will give rise to original issue discount -- known as OID
- -- which will be treated as additional interest income to the holder of the
Series 2000-A Bonds. Accordingly, a holder of the Series 2000-A Bonds will be
subject to the following tax consequences in addition to the tax consequences
described in the accompanying prospectus.
In general, the issue price of a class of Series 2000-A Bonds is the
first price at which a substantial amount of the Series 2000-A Bonds of that
class is sold to the public. In general, if the principal amount of a Series
2000-A Bond exceeds its issue price by an amount that is less than:
O 0.25% of the Series 2000-A Bond's principal amount payable at
expected maturity
multiplied by
O the number of complete years to maturity,
S-28
<PAGE>
then the excess is treated as de minimis OID and the Series 2000-A Bond is not
treated as having been issued with OID. Unless a holder of Series 2000-A Bonds
makes an election to accrue all interest on a constant-yield basis, that holder
must include de minimis OID in income proportionately as stated principal
payments on the Series 2000-A Bonds are made.
A holder of the Series 2000-A Bonds that is a U.S. Holder, as defined in
the accompanying prospectus in the section captioned "United States Taxation
- --General --Tax Consequences to U.S. Holders," will be required to include in
taxable income any OID income as it accrues on a constant-yield method based on
the compounding of interest before the receipt of cash payments attributable to
that income. A holder of these bonds must take that OID income into account
currently, regardless of the holder's general method of accounting for other
items.
In general, a holder of these bonds will be required to include in gross
income the sum of the daily portions of OID with respect to the Series 2000-A
Bond for each day during the taxable year in which the holder holds the Series
2000-A Bond. The daily portion is determined by allocating to each day in any
"accrual period" a pro rata portion of the OID allocable to that accrual period.
Accrual periods with respect to a Series 2000-A Bond may be of any length
selected by the holder and may vary in length over the term of the Series 2000-A
Bonds, so long as:
O no accrual period is longer than one year and
O each scheduled payment of interest or principal on the Series
2000-A Bonds occurs on either the final day or the first day of
the accrual period.
The amount of OID on the Series 2000-A Bonds that is allocable to the
accrual period is equal to the excess of:
O the product of the adjusted issue price of the Series 2000-A
Bonds at the beginning of the accrual period and the yield to
maturity of the Series 2000-A Bonds (determined on the basis of
compounding at the close of each accrual period and properly
adjusted for the length of the accrual period)
over
O the sum of the payments of interest on the Series 2000-A Bonds
that are allocable to the accrual period.
The adjusted issue price of the Series 2000-A Bonds at the beginning of any
accrual period is the issue price of the Series 2000-A Bonds, increased by the
amount of accrued OID for each prior accrual period and decreased by the amount
of any payments of principal previously made on the Series 2000-A Bonds. A
holder of the Series 2000-A
S-29
<PAGE>
Bonds that is a U.S. Holder will have a tax basis in the Series 2000-A Bonds
equal to that holder's purchase price -- exclusive of any portion of that price
representing accrued but unpaid interest -- decreased by any principal
repayments and increased by the amount of any OID previously taken into income.
A holder that is not a U.S. Holder will be subject to a United States
withholding tax of 30% upon the actual payment of OID income, except in the
context of:
O a non-U.S. Holder that:
O does not own directly or constructively 10% or more of the
total combined voting power of all classes of stock of PECO
Energy entitled to vote,
O is not a controlled foreign corporation that is related to
PECO Energy through stock ownership, and
O meets the withholding documentation requirements discussed
in the accompanying prospectus, and
O where an applicable tax treaty provides for the reduction or
elimination of that withholding tax.
In the context of backup withholding and information reporting
requirements, the discussion in the accompanying prospectus regarding interest
income would be similarly applicable to OID income. A holder of the Series
2000-A Bonds that is a non-U.S. Holder generally will be taxable in the same
manner as a United States corporation or resident with respect to OID income if
that income is effectively connected with the conduct of a trade or business in
the United States.]
UNDERWRITING THE SERIES 2000-A 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 Salomon
Smith Barney Inc. 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 2000-A Bonds set forth opposite each
underwriter's name below:
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<TABLE>
<CAPTION>
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
- ---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Salomon Smith Barney Inc. $ $ $ $
Banc One Capital Markets, Inc.
First Union Securities, Inc.
Banc of America Securities LLC
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Janney Montgomery Scott LLC
Barclays Capital
BNY Capital Markets, Inc.
Mellon Financial Markets, LLC
Prudential Securities Incorporated
Pryor, Counts & Co., Inc.
TD Securities (USA) Inc.
Total
</TABLE>
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and to pay for all of the Series 2000-A Bonds
offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 2000-A Bonds. The underwriters
propose to offer the Series 2000-A 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:
o __________ percent of the principal amount of the Series 2000-A
Class A-1 Bonds,
o __________ percent of the principal amount of the Series 2000-A
Class A-2 Bonds,
o __________ percent of the principal amount of the Series 2000-A
Class A-3 Bonds and
o __________ percent of the principal amount of the Series 2000-A
Class A-4 Bonds
The underwriters may allow and the dealers may reallow a concession to some
brokers and dealers not in excess of:
o __________ percent of the principal amount of the Series 2000-A
Class A-1 Bonds,
o __________ percent of the principal amount of the Series 2000-A
Class A-2 Bonds,
S-31
<PAGE>
o __________ percent of the principal amount of the Series 2000-A
Class A-3 Bonds and
o __________ percent of the principal amount of the Series 2000-A
Class A-4 Bonds
After the Series 2000-A 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 2000-A
Bonds. The Series 2000-A 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 2000-A 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 2000-A Bonds but are not obligated to do
so and may discontinue market making at any time without notice. No assurance
can be given as to the liquidity of the trading market for the Series 2000-A
Bonds.
Various Types of Underwriter Transactions Which May Affect the Price of
the Series 2000-A Bonds. The underwriters may engage in overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids with respect to the Series 2000-A Bonds in accordance with
Regulation M under the Securities Exchange Act of 1934. 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 2000-A Bonds so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Series 2000-A 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 2000-A 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 2000-A 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
2000-A Bonds.
The issuer and PECO Energy have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933.
S-32
<PAGE>
RATINGS
It is a condition of any underwriter's obligation to purchase that the
Series 2000-A Bonds be rated "AAA" by Standard & Poor's, "AAA" by Fitch IBCA 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
2000-A Bonds, and, accordingly, there can be no assurance that the ratings
assigned to any class of the Series 2000-A Bonds upon initial issuance will not
be revised or withdrawn by a rating agency at any time thereafter. If a rating
of any class of the Series 2000-A Bonds is revised or withdrawn, the liquidity
of that class of the Series 2000-A Bonds may be adversely affected. In general,
ratings address credit risk and do not represent any assessment of any
particular rate of principal payments on the Series 2000-A Bonds other than
payment in full of each class of the Series 2000-A Bonds by the applicable class
termination date and the ability to make timely interest payments.
S-33
<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.
"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.
"QUALIFIED RATE ORDERS" means the qualified rate order issued by the
Pennsylvania Public Utility Commission to PECO Energy Company on May 14, 1998,
the qualified rate order issued by the Pennsylvania Public Utility Commission 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 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 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-34
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. The issuer is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED APRIL 17, 2000
PROSPECTUS
PECO Energy Transition Trust
Issuer
PECO Energy Company
Seller and Servicer
UP TO $1,000,000,000 OF TRANSITION BONDS ISSUABLE IN SERIES
THE ISSUER o has issued transition bonds-- the Series 1999-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 order issued by the Pennsylvania Public
Utility Commission for the Series 1999-A Bonds, to
collect intangible transition charges in amounts
designed to be sufficient to repay the 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, and
o will own intangible transition property created by the
qualified rate order issued by the Pennsylvania Public
Utility Commission on March 16, 2000, and collections of
intangible transition charges related to that qualified rate
order.
THE TRANSITION
BONDS OFFERED
BY THIS
PROSPECTUS o will be payable only from assets of the issuer,
o will be supported by trust accounts held by the trustee 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 24 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.
<PAGE>
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 , 2000.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY...................................................................... 2
RISK FACTORS............................................................................ 24
Unusual Nature of Intangible Transition Property..................................... 24
Servicing............................................................................ 34
Bankruptcy; Creditors' Rights........................................................ 40
The Transition Bonds................................................................. 45
GLOSSARY OF DEFINED TERMS............................................................... 50
AVAILABLE INFORMATION................................................................... 50
INCORPORATION OF DOCUMENTS BY REFERENCE................................................. 50
THE PENNSYLVANIA COMPETITION ACT........................................................ 52
The Pennsylvania Competition Act's General Effect on the
Electric Utility Industry in Pennsylvania.......................................... 52
Recovery of Stranded Costs........................................................... 52
Securitization of Stranded Costs..................................................... 53
Jurisdiction Over Disputes; Standing................................................. 55
Possible Federal Preemption of the Pennsylvania Competition Act...................... 56
Possible Commonwealth Amendment or Repeal of the Pennsylvania Competition Act........ 56
PECO ENERGY'S RESTRUCTURING PLAN........................................................ 57
General.............................................................................. 57
Provider of Last Resort.............................................................. 65
Prior Litigation..................................................................... 66
THE QUALIFIED RATE ORDERS AND THE
INTANGIBLE TRANSITION CHARGES......................................................... 67
The Intangible Transition Charges.................................................... 71
Competitive Billing.................................................................. 74
THE SELLER AND SERVICER................................................................. 77
Retail Electric Service Territory.................................................... 77
Merger with Unicom................................................................... 78
Customers and Operating Revenues..................................................... 79
Forecasting Customers and Usage...................................................... 87
Billing Process...................................................................... 91
Limited Information on Customers' Creditworthiness................................... 91
Electric Generation Suppliers and Other Third Party Billers.......................... 95
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THE ISSUER.............................................................................. 96
USE OF PROCEEDS......................................................................... 99
THE TRANSITION BONDS.................................................................... 99
General.............................................................................. 99
Interest and Principal............................................................... 101
Floating Rate Transition Bonds....................................................... 102
Redemption........................................................................... 102
Credit Enhancement................................................................... 103
Book-Entry Registration.............................................................. 104
Definitive Transition Bonds.......................................................... 108
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS.......................................... 109
THE SALE AGREEMENT...................................................................... 111
Sale and Assignment of Intangible Transition Property................................ 111
Representations and Warranties of the Seller......................................... 113
Matters Regarding the Seller......................................................... 122
Governing Law........................................................................ 122
THE MASTER SERVICING AGREEMENT.......................................................... 122
Servicing Procedures................................................................. 123
Servicer Advances.................................................................... 126
Servicing Compensation; Releases..................................................... 126
Servicer Duties...................................................................... 126
Servicer Representations and Warranties.............................................. 127
Servicer Indemnification............................................................. 129
Statements to Issuer and Bond Trustee................................................ 129
Evidence as to Compliance............................................................ 130
Matters Regarding the Servicer....................................................... 130
Servicer Defaults.................................................................... 131
Rights Upon Servicer Default......................................................... 132
Successor Servicer................................................................... 133
Addition of Other Issuers............................................................ 133
Governing Law........................................................................ 133
THE INDENTURE........................................................................... 134
Security............................................................................. 134
Issuance in Series or Classes........................................................ 135
Collection Account................................................................... 136
Allocations and Payments............................................................. 141
</TABLE>
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<S> <C>
Liquidated Damages................................................................... 144
Reports to Transition Bondholders.................................................... 145
Modification of Indenture............................................................ 146
Enforcement of the Sale Agreement and the Master Servicing Agreement................. 149
Modifications to the Sale Agreement and the Master Servicing Agreement............... 150
Events of Default; Rights Upon Event of Default...................................... 151
Covenants............................................................................ 153
List of Transition Bondholders....................................................... 156
Annual Compliance Statement.......................................................... 156
Bond Trustee's Annual Report......................................................... 156
Satisfaction and Discharge of Indenture.............................................. 156
Legal Defeasance and Covenant Defeasance............................................. 157
The Bond Trustee..................................................................... 159
Governing Law........................................................................ 159
UNITED STATES TAXATION.................................................................. 160
General.............................................................................. 160
Taxation of the Issuer and of the Transition Bonds................................... 160
Tax Consequences to U.S. Holders..................................................... 161
Tax Consequences to Non-U.S. Holders................................................. 163
MATERIAL COMMONWEALTH OF PENNSYLVANIA TAX MATTERS....................................... 165
ERISA CONSIDERATIONS.................................................................... 166
PLAN OF DISTRIBUTION.................................................................... 167
RATINGS................................................................................. 168
LEGAL MATTERS........................................................................... 168
EXPERTS................................................................................. 168
GLOSSARY OF DEFINED TERMS............................................................... 169
INDEX TO FINANCIAL STATEMENTS........................................................... F-1
ANNEX A................................................................................. A-1
</TABLE>
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<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.
1
<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 24 of this prospectus.
<TABLE>
<S> <C>
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 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 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
</TABLE>
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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.
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 the issuance date for each series of transition bonds authorized by the 2000 QRO,
PECO Energy Company will sell the related intangible transition property to the issuer
under a sale agreement. The issuer has pledged substantially all of its property to the
bond trustee. This property includes:
o the intangible transition property it previously pledged to the bond
trustee for the Series 1999-A Bonds,
o its rights under the sale agreement and the master servicing agreement, and
o the collection account and the amounts contained in that account
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3
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<TABLE>
<S> <C>
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 23 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
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 bonds. On March 25, 1999, the issuer
issued $4 billion of Series 1999-A Bonds. 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 have been
appointed by PECO Energy Company. See "The Issuer" in this prospectus.
Issuer Trustee's Address: One Rodney Square, 920 King Street, Wilmington, Delaware 19801.
</TABLE>
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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 property 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 PECO Energy will sell under the sale agreement
to the issuer on the series issuance dates for series of transition bonds issued under
this prospectus.
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 is primarily a vertically integrated
utility that historically has provided regulated retail electric and natural gas service
to customers in its franchised territory in Southeastern Pennsylvania. Pursuant to the
Pennsylvania Competition Act, 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. Since the commencement of deregulation in 1999, PECO Energy serves as the
local distribution company providing electric distribution services in Southeastern
Pennsylvania and bundled electric
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<S> <C>
service to customers who do not choose an alternate electric generation supplier. PECO
Energy engages in wholesale marketing of electricity on a national basis and through a
subsidiary is a competitive generation supplier offering competitive energy supply to
customers throughout Pennsylvania. Through another subsidiary, PECO Energy provides
utility infrastructure services to customers in several regions of the United States.
PECO Energy has also formed a joint venture with British Energy plc to acquire and
operate nuclear generating facilities. PECO Energy also participates in joint ventures
which provide telecommunications services in the Philadelphia metropolitan region. In
the future, those generation facilities, which will continue to serve those customers
and others in the competitive generation market, may be transferred to an affiliated or
non-affiliated entity.
PECO Energy has agreed to merge with an unrelated third party. If this merger is
completed as currently proposed, PECO Energy will become a wholly-owned subsidiary,
along with Commonwealth Edison Company, of a holding company and will cease to engage in
electric generation. See "The Seller and Servicer--Merger with Unicom" in this
prospectus.
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, PECO
Energy customers have the opportunity to choose from several billing source options as
of September 1, 2000.
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
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<TABLE>
<S> <C>
Factors--Servicing--It May Be More Difficult to Collect Intangible Transition Charges
Due to Billing by Third Parties" in this prospectus.
The Assets of the Issuer: The issuer owns:
o the intangible transition property transferred by PECO Energy to
the issuer,
o collections of intangible transition charges,
o its rights under the sale agreement and the master servicing agreement, and
o trust accounts held by the bond trustee.
The issuer will own:
o the intangible transition property transferred to it by PECO Energy, which will secure
all the transition bonds outstanding under the indenture, and related collections of
intangible transition charges, 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.
Customers: PECO Energy's customers belong to one of three customer categories for purposes of adjusting
intangible transition charges. These categories are: residential, small commercial and
industrial and large 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--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:
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7
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<S> <C>
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 will be 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.
However, the Commonwealth of Pennsylvania may 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.
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,
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(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,
(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
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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 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.
</TABLE>
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<TABLE>
<CAPTION>
BASIC ALLOCATIONS AND DISTRIBUTIONS
<S> <C> <C> <C> <C> <C>
- --------------- ----------------------- --------------- ----------------------- -------------- --------------------------
Customers Monthly payment of PECO Energy Monthly remittance Collection Application of amounts
AND intangible transition (SERVICER) of collections of Account in collection account
EGSs* charges to services --------------- intangible transition -------------- (including net
- --------------- ----------------------- charges allocated to earnings), as follows:
the issuer --------------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8
- ---------- --------- ---------- ----------------------- ----------- --------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bond Servicer: Issuer: Series Subaccounts: Issuer: Overcollateralization Issuer: Reserve
Trustee/ Monthly Operating o Interest for All unpaid Subaccount: Net earnings on Subaccount:
Issuer servicing expenses applicable monthly operating Overcollateralization amounts in general All remaining
Trustee: fee (up to an allocation date expenses, --------------------- subaccount of the amounts
Fees and --------- aggregate o Principal payable as indemnity collection account
expenses $12,500 a result of acceleration amounts ------------------ -------------
(including for all or payable on a series and loss
indemnity series for or class termination amounts
amounts each date or payable on a owed to the
and loss monthly redemption date issuer
amounts allocation o Principal for that -----------
owed to the date) monthly allocation
trustees) ---------- date not provided for
- ----------- above
---------------------
</TABLE>
* electric generation suppliers or other third parties providing and metering
services
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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
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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.
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. 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--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.
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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 a series
subaccount for the Series 1999-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.
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
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bonds through the imposition of intangible transition charges.
o Capital Subaccount-- The amount of capital required to be held by the issuer for a
series of transition bonds, which is the amount specified in the related prospectus
supplement, will be deposited into the capital subaccount by the issuer on the date
of issuance of that series. A deposit of $20 million was made into the capital
subaccount upon the issuance of the Series 1999-A Bonds.
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.
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. Further, if the seller is required to remit loss amounts
under the terms of the sale agreement, a loss subaccount will be established. Also,
if the seller is required to pay regular fixed payments to a counterparty to a hedge
or swap agreement, an interest deposit subaccount will be established for those
payments.
Each of the overcollateralization subaccount, the capital subaccount, the reserve
subaccount and, if established, the loss
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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 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
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<S> <C>
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 below under 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,
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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 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
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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 on
or 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 unless such failure occurs on the series
termination date or class termination date for the class or series. 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 bonds, prospective investors should review the discussion under "Risk
Factors" which begins on page 24 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
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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 have floating interest rates. 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.
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.
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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 the opinion of
Ballard Spahr Andrews & Ingersoll, LLP, special tax counsel to the issuer and PECO
Energy, for U.S. federal income tax purposes:
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.
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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--Bondholders May Receive Principal Payments
Later than Expected" and "Ratings" in this prospectus.
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PARTIES TO THE TRANSACTION
<TABLE>
<S> <C> <C> <C> <C>
Applies, as servicer, for
---------------------- intangible transition charges --------------------------
PECO ENERGY adjustments Pennsylvania Public
(seller, servicer, Utility Comission*
grantor and owner) (State agency; not
---------------------- Issued the two qualified rate affiliated with issuer
orders and approves adjustments or PECO Energy)
to intangible transition charges --------------------------
Sells intangible transition property Services intangible transition
for cash pursuant to sale agreement property of the issuer and receives
monthly servicing fee pursuant to
master servicing agreement
- ---------------------------------- ---------------------- -----------------------
ISSUER TRUSTEE ISSUER PROVIDER OF
(with beneficiary trustees manages (PECO Energy CREDIT
issuer pursuant Transition Trust) ENHANCEMENT
to trust agreement) OR HEDGE
TRANSACTION
(To be named, if any)
- ---------------------------------- ---------------------- -----------------------
Sale of transition bonds for cash,
pursuant to underwriting agreement
-----------------------------
BOND TRUSTEE
(acts for an on behalf of
transaction bondholders
----------------------------- pursuant to indenture)
UNDERWRITERS
----------------------------- -----------------------------
Sale of transaction
bonds for cash
-----------------------------
TRANSITION
BONDHOLDERS
-----------------------------
</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.
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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
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.
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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. 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 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
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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.
However, just compensation awarded by a court
may not be sufficient to pay the full amount of
principal of and interest on the transition
bonds or
26
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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.
FEDERAL LEGISLATION MAY
RESULT IN LOSSES TO
TRANSITION BONDHOLDERS Congress or a federal agency may pass a law or
adopt a rule or regulation prohibiting or
limiting the collection of intangible transition
charges. In 1997, Congress considered at least
one bill prohibiting the recovery of stranded
costs, but the bill was not enacted. In
addition, in 1999 one bill was introduced to
several committees which pertains to retail
stranded costs and related issues. It is unclear
at this time what impact this bill might have on
transition bonds if it is enacted.
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. 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.
27
<PAGE>
THE PENNSYLVANIA PUBLIC
UTILITY COMMISSION MAY TAKE
ACTIONS THAT ADVERSELY AFFECT
TRANSITION BONDHOLDERS The Pennsylvania Public Utility Commission will
continue 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 will:
o regulate electric distribution companies,
o set financial and other requirements for
electric generation suppliers and other third
parties, and
o set 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.
28
<PAGE>
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.
29
<PAGE>
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 may 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.
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.
30
<PAGE>
The Pennsylvania Competition Act and 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 associated
with the issuance of transition bonds 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
31
<PAGE>
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.
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 PECO Energy's restructuring
plan settlement, these rate classes were grouped
among three customer categories. Intangible
transition charges are assessed by rate class
within each customer
32
<PAGE>
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" above.
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
33
<PAGE>
supplement will contain the risk factors, if
any, associated with any applicable credit
enhancement.
SERVICING
MERGER MAY CAUSE DISRUPTION OF
BILLING AND COLLECTION SYSTEMS
AND RESULT IN LOSSES TO
TRANSITION BONDHOLDERS As part of the proposed merger agreed to by
PECO Energy and Unicom Corporation, PECO Energy
is planning 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. In addition, PECO Energy and Unicom,
upon completion of the merger, may combine their
transmission, distribution and billing systems.
This combination of systems, if it occurs, could
cause these systems to have problems affecting
billing and collections of intangible transition
charges and may result in losses to transition
bondholders. See "The Seller and Servicer--
Merger with Unicom."
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.
34
<PAGE>
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.
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
35
<PAGE>
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--
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.
36
<PAGE>
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,
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
37
<PAGE>
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
38
<PAGE>
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
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.
39
<PAGE>
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 represents in the sale
agreement that the sale of the intangible
transition property is a sale.
PECO Energy will also represent that for the
First QRO it took, and for the 2000 QRO it will
take, 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
40
<PAGE>
transition bonds, including the liquidity and
market value of the transition bonds.
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. However, if 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
41
<PAGE>
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.
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.
42
<PAGE>
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
43
<PAGE>
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.
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
44
<PAGE>
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.
THE TRANSITION BONDS
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 a
secondary market for the Series 1999-A Bonds has
developed, a secondary market for the other
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
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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
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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.
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 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 "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
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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.
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.
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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.
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GLOSSARY OF DEFINED TERMS
You can find a glossary of defined terms used in this prospectus beginning
on page 169 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
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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.
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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.
The Pennsylvania Competition Act requires utilities to submit restructuring
plans, including their stranded costs which will result from retail competition
for generation services. Stranded costs include regulatory assets 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 December 31, 2005 which provides that total 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.
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
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a competitive market. See "Risk Factors--Legal, Legislative or Regulatory
Actions Could Adversely Affect Transition Bondholders--Legal Challenges Could
Adversely Affect Transition Bondholders" and "Risk Factors--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.
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--Legal, Legislative or Regulatory Actions Could Adversely Affect
Transition Bondholders" 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
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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:
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(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.
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POSSIBLE FEDERAL PREEMPTION OF THE PENNSYLVANIA COMPETITION ACT
At least one bill was introduced in the 105th Congress, First Session,
prohibiting the recovery of stranded costs such as PECO Energy's stranded costs
described in this prospectus, which could negate the existence of PECO Energy's
intangible transition property. That bill, H.R. 1230 (The Consumers Electric
Power Act of 1997), was introduced on April 8, 1997 but died at the end of that
Congressional session after having been referred to the House Commerce Committee
and the Subcommittee on Energy and Power. Additionally, on September 24, 1999
H.R. 2944 (Electricity Competition and Reliability Act) was introduced to
several committees in the U.S. House of Representatives. While H.R. 2944
contained provisions deferring to the states on certain key issues such as
retail stranded costs and public benefit, the issuer cannot predict what final
form this bill will take or whether this bill, 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--Legal, Legislative or Regulatory Actions Could Adversely Affect
Transition Bondholders--Federal Legislation May Result in Losses to Transition
Bondholders" in this prospectus and "--Possible Commonwealth Amendment or Repeal
of the Pennsylvania Competition Act" below.
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--Legal, Legislative or
Regulatory Actions Could Adversely Affect Transition Bondholders--Changes in Law
May Result in Losses to Transition Bondholders" in this prospectus.
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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.
PECO ENERGY'S 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 restructuring plan detailing its proposal to implement full
customer choice of electric generation
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suppliers. PECO Energy's restructuring plan identified $7.5 billion of retail
electric generation-related stranded costs. In August 1997, PECO Energy and
various intervenors in PECO Energy's restructuring proceeding filed with the
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 restructuring plan filed a settlement with the
Pennsylvania Public Utility Commission. That settlement -- referred to as the
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 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 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.
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On February 7, 2000, the Mid-Atlantic Power Supply Association filed an
intervention to the Pennsylvania Public Utility Commission's proceedings on PECO
Energy's application for 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, 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.
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 settlement, which was filed with the Pennsylvania Public Utility
Commission on March 8, 2000. The settlement states that, beginning January 1,
2001, PECO Energy will provide its retail customers with rate reductions in the
Total amount of $60 million and, subject to a different agreement in the
Pennsylvania Public Utility Commission's proceeding concerning PECO Energy's
merger with Unicom, will use the savings created by the securitization of its
stranded costs, as authorized in the 2000 QRO, to reduce competitive transition
charges. The rate reductions specified in this settlement are not contingent on
the issuance of any transition bonds under the 2000 QRO. Furthermore, this
settlement does not restrict the rights of any of its signatories from proposing
or arguing in favor of rate decreases associated with the merger in the merger
proceeding.
PECO Energy also agreed in this settlement that it will not use those
securitization savings to reduce the shopping credit or use those 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.
All terms of the restructuring plan settlement described in this prospectus
have been specifically made to apply to the issuance of transition bonds under
the 2000 QRO, 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 2000
through 2010, based on estimated 0.8%
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annual sales growth assumed in the restructuring settlement. For the calendar
year 1999, annual retail electric revenues were $2,630,991,000 and combined
competitive transition charges and intangible transition charges (billed from
February through December) were $0.0172 per kilowatt hour for a total of
approximately $539,000,000.
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TABLE 1
ANNUAL STRANDED COST
AMORTIZATION AND RETURN
<TABLE>
<CAPTION>
Annual CTC Revenue Excluding gross receipts tax(3)
Year Sales and/or ITC(2) Total Return @ 10.7% Amortization
---- ----- ---------- ----- -------------- ------------
MWh(1) $/kWh ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C> <C>
2000 33,837,913 0.0192 621,102 564,222 56,879
2001 34,108,616 0.0233(4) 761,097 490,417 270,680
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.
AUTHORIZATION TO SECURITIZE. Under the restructuring plan settlement,
PECO Energy securitized $4 billion of its $5.26 billion of stranded cost
recovery through the issuance of 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 restructuring plan settlement and
the additional securitization settlement anticipate the benefits of the
securitization, and no adjustment in PECO Energy's base rates will be made upon
issuance of any transition bonds. After the issuance of any transition bonds,
competitive transition charges (or PECO Energy's distribution rates) will be
reduced by the amount of intangible transition
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charges imposed to pay the applicable qualified transition expenses. As part of
its approval of the additional securitization settlement, the Pennsylvania
Public Utility Commission issued the 2000 QRO providing for securitization of up
to an additional $1 billion of stranded costs.
Unbundling of Rates and Rate Reductions and Rate Caps. The 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) competitive transition charges and, if applicable, intangible
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 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 restructuring plan settlement provided for
one-time additional discounts in 2000 if there was an overcollection of
intangible transition charges and competitive transition charges in 1999. An
overcollection for the residential and small commercial and industrial rate
categories did occur in that year. Consequently, the rates for those rate
categories were reduced by 7% and 8.3%, respectively, for 2000.
The 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 additional securitization settlement
required an additional one-time rate cut of $60 million during the year 2001.
PECO Energy's unbundled rates, rate reductions (from the restructuring plan
settlement and the additional securitization settlement) and rate caps are
reflected in the schedule of system-wide average rates included in the
restructuring plan settlement and the additional securitization settlement and
are shown in Table 2 below. See also "The Qualified Rate Orders and The
Intangible Transition Charges" and "PECO Energy Company--Merger with Unicom."
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TABLE 2
SCHEDULE OF SYSTEM-WIDE AVERAGE RATES (PER KILOWATT-HOUR ("KWH"))(1)
<TABLE>
<CAPTION>
T&D CTC Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap(3) and/or ITC(4) Credit Rate Cap
- -------------- --------------- ------------ ------------- ------------- -------- -------------
(1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5)
$/kWh $/kWh $/kWh $/kWh $/kWh $/kWh
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999 $0.0045 $0.0253 $0.0298 $0.0172 $0.0446 $0.0618
January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638
January 1, 2001 0.0045 0.0253 0.0298 0.0233(5) 0.0447 0.0680
January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698
January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698
January 1, 2005 0.0045(6) 0.0253(6) 0.0298(6) 0.0240 0.0458 0.0698
January 1, 2006 N/A N/A N/A 0.0266 0.0485 0.0751
January 1, 2007 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2008 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2009 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2010 N/A N/A N/A 0.0266 0.0535 0.0801
</TABLE>
- --------------------
(1) All prices reflect average retail billing for all rate classes
(including gross receipts tax). The average prices as presented in this
table reflect the profile of service contained in PECO Energy's proof
of revenue set forth in PECO Energy's 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 will be extended until June 30, 2005.
(4) Figures result in the recovery of $5.26 billion of stranded costs plus
the allowed return on 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 restructuring plan and
the additional securitization settlement. Both the competitive
transition charges and the intangible transition charges are subject to
adjustment.
(5) Reflects the rate reductions required by the 2000 QRO.
(6) Effective until June 30, 2005.
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The Pennsylvania Competition Act authorizes electric distribution companies
to recover changes in their state tax liability resulting from the introduction
of competition in the electric market through adjustments in the rates charged
to customers, which in specified circumstances set forth in the regulations
adopted by the Pennsylvania Public Utility Commission may result in rates
exceeding the applicable rate cap. PECO Energy may apply for this recovery of
state tax liability changes in accordance with the procedures outlined in the
Pennsylvania Public Utility Commission's regulations if PECO Energy in fact
experiences adverse consequences to its state tax liability as contemplated in
the Pennsylvania Competition Act.
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.
CUSTOMER CHOICE. Under the restructuring plan settlement, customer choice
of electric generation suppliers was phased in between January 1, 1999 and
January 2, 2000. If on January 1, 2001 and January 1, 2003 less than 35% and
50%, respectively, of all of PECO Energy's residential and commercial customers
by rate class are obtaining generation service from alternate electric
generation suppliers, non-shopping customers will be randomly assigned to
electric generation suppliers, including those affiliated with PECO Energy, to
meet those thresholds. Assignment of non-shopping customers shall be through a
Pennsylvania Public Utility Commission-approved process. No assignment will be
made until all customers have been notified in advance of the process and have
been given the option to remain with PECO Energy as the provider of last resort
or to select an electric generation supplier of their choice. The 35% and 50%
threshold amounts will be determined for residential and small commercial and
industrial customers on the basis of the number of customers and for large
commercial and industrial customers on the basis of peak load. Customers
assigned to a provider of last resort, other than PECO Energy, will be counted
as customers receiving service from an alternate electric generation supplier.
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PROVIDER OF LAST RESORT
Under PECO Energy's 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. On January 1, 2001, 20% of all of PECO Energy's residential
customers, determined by random selection, including low-income and
inability-to-pay customers, and without regard to whether those customers are
obtaining generation service from an electric generation supplier, will be
assigned to a provider of last resort other than PECO Energy (the service
provided by that supplier, "competitive default service"). That alternative
supplier (the "competitive default supplier") will be selected on the basis of
an energy and capacity market price bidding process approved, established and
maintained by the Pennsylvania Public Utility Commission among electric
generation suppliers who meet specified qualifications. By order entered April
30, 1999, The Pennsylvania Public Utility Commission decided that the right to
provide competitive default service will be rebid every three years. If in any
year, the number of residential customers served by competitive default service
has fallen below 17%, a further random selection of customers will be assigned
to competitive default service to restore the number of customers to the 20%
level for the next annual period. The further random selection will be made from
the customers not already assigned to competitive default service and customers
served by electric generation suppliers other than PECO Energy.
By the order entered April 30, 1999, the Pennsylvania Public Utility
Commission adopted procedures for choosing a competitive default supplier .
Under those suggested procedures, entities that desire to act as a competitive
default supplier have until May 1, 2000 to submit both their qualifications to
act as a competitive default supplier and their bid for providing that service.
Competitive default service is designed to begin on January 1, 2001 for 20% of
PECO Energy's residential customers based on the results of the bidding process.
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 bonding as necessary.
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The April 30, 1999 order also provided that the supplier of competitive default
service will be required to provide billing, including its payment of intangible
transition charges and other revenues, to PECO Energy on the terms and
conditions set forth in PECO Energy's tariff for those entities who currently
provide competitive billing services to customers.
In the settlement agreement filed with the Pennsylvania Public Utility
Commission on March 23, 2000 that settled issues raised in the original filing
concerning the merger with Unicom, several parties who intervened in the
original merger filing proposed that the bidding process will be only for
electric supply and capacity and will exclude the billing, collection and other
customer care functions that were envisioned by the Pennsylvania Public Utility
Commission's April 30, 1999 order. if no winning bidder is selected through the
process described above, then PECO Energy has agreed to engage in negotiations
with qualified suppliers to enter into bilateral agreements for competitive
default service between PECO Energy and one or more default suppliers for
provision of electric generation supply and capacity to the 20% of PECO Energy's
residential customers included in the auction. see "PECO Energy Company--Merger
With Unicom." The provisions of the merger settlement will not take effect until
the merger with Unicom has reached financial closing, currently expected to
occur sometime in the third or fourth quarter of 2000.
OTHER PROVISIONS. The restructuring plan settlement also provides for
flexible generation service pricing for residential customers served by
competitive default service, authorization of PECO Energy to transfer its
generation assets to a separate subsidiary, inclusion under the capped
transmission and distribution rates of .01 cent per kilowatt-hour for a
sustainable energy and economic development fund and expansion of PECO Energy's
program for low-income customers.
PRIOR LITIGATION
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
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issued the 2000 QRO, authorizing the securitization of up to $1 billion of the
remaining stranded costs. The 2000 QRO became final and non-appealable on
April 17, 2000.
The First QRO and the 2000 QRO 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
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 will be passed on to customers over a one-year period commencing with
billing cycles beginning after December 31, 2000. These reductions will be
implemented regardless of whether or not any series of transition bonds
authorized by the 2000 QRO are issued.
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AUTHORIZATION OF ISSUANCE 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
thereof.
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 accordance with the new settlement, the rate reductions included as part
of the new settlement anticipated the benefits of securitization, and no rate
adjustment will be made upon issuance of any transition bonds. Approximately ten
days after issuance of transition bonds offered by this prospectus, competitive
transition charges (or PECO Energy's distribution rates) will be reduced by the
amount of intangible transition charges associated with the issuance of those
transition bonds and transition bonds issued by other issuers, if any.
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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:
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.
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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.
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
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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. For instance, if a particular series issuance date is
March 15 and the rates for intangible transition charges are effective March 26,
bills rendered on or after March 26 will be assessed intangible transition
charges for that series. Upon each adjustment of intangible transition charges
or issuance of additional series of transition bonds, the adjusted intangible
transition charges will be assessed in the same manner. The imposition of
intangible transition charges as a result of the issuance of transition bonds
will result in a reduction in any competitive transition charges then in effect
in an amount equal to 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. In order 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
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that series and to fund the overcollateralization subaccount to the calculated
overcollateralization level, 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, annual
adjustments to the intangible transition charges based on actual collections of
intangible transition charges allocated to the issuer and updated assumptions by
the servicer as to projected future usage of electricity by customers, expected
delinquencies and write-offs, and future expenses relating to intangible
transition property and the transition bonds. Adjustments will be made to the
intangible transition charges imposed upon customers to reflect shortfalls in or
excesses of 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 settlement agreement filed with the Pennsylvania Public Utility
Commission on March 23, 2000 settling issues raised in the filing concerning the
merger with Unicom, several parties who intervened in the original filing on the
merger with the Pennsylvania Public Utility Commission proposed that for the
purposes of adjustments of competitive transition charges and intangible
transition charges, the large commercial and industrial customer category and
the small commercial and industrial customer category be combined into one
commercial and industrial category in order to reduce the number and size of any
adjustments to the charges for these customer categories. If these rate
categories are combined for these purposes, PECO Energy does not expect the
combination to have any adverse effect on the amount of intangible transition
charges that can ultimately be recovered from customers. In general, the
provisions of the merger settlement will not take effect until the merger with
Unicom has reached financial closing, currently expected to occur sometime in
the third or fourth quarter of 2000.
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 and the amount on
deposit in the overcollateralization subaccount equalling the
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calculated overcollateralization level, 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--Limited Information on
Customers' Creditworthiness--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,
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 to PECO Energy customers. See "Risk
Factors--
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Servicing--It May Be More Difficult to Collect Intangible Transition Charges Due
to Third Party Billing" 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--Legal, Legislative or Regulatory Actions
Could Adversely Affect Transition Bondholders--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 specified 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. Electric sales revenue attributable to customers who are
eligible to exercise this option was 23.5% of total sales revenue for 1999. No
customer has elected to exercise this option to date.
The recovery of both competitive transition charges and intangible
transition charges from industrial and commercial customers that significantly
reduce their purchases of electricity generation from PECO Energy through the
installation of on-site generation equipment
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<PAGE>
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.
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 in 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 January 1, 2000, 241,554 customers (approximately 16.07% of PECO
Energy's transmission and distribution business) had chosen alternate suppliers
of generation. See "The Seller and Servicer--Customers and Operating Revenues"
below.
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<PAGE>
THE SELLER AND SERVICER
PECO Energy Company
RETAIL ELECTRIC SERVICE TERRITORY
Incorporated in Pennsylvania in 1929, PECO Energy is primarily a vertically
integrated public utility that provides retail electric and natural gas service
to customers in its franchised territory in Southeastern Pennsylvania. Pursuant
to the Pennsylvania Competition Act, 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. Since the commencement of deregulation in
1999, PECO Energy serves as the local distribution company providing electric
distribution services in Southeastern Pennsylvania and re-bundled electric
service to customers who do not choose an alternate electric generation
supplier. PECO Energy engages in wholesale marketing of electricity on a
national basis and through a subsidiary is a competitive generation supplier
offering competitive energy supply to customers throughout Pennsylvania. Through
another subsidiary, PECO energy provides utility infrastructure services to
customers in several regions of the United States. PECO Energy has also formed a
joint venture with British Energy plc to acquire and operate nuclear generating
facilities. PECO Energy also participates in joint ventures which provide
telecommunications services in the Philadelphia metropolitan region.
The electric and gas utility industries in Pennsylvania are both undergoing
fundamental restructuring. See "The Pennsylvania Competition Act" in this
prospectus. In addition, in 1996, the Federal Energy Regulatory Commission
issued Order No. 888 providing for competition in wholesale generation by
requiring that all public utilities file non-discriminatory, open-access
transmission tariffs.
PECO Energy'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.
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Merger with Unicom
On September 22, 1999, PECO Energy agreed to merge with Unicom Corporation,
creating a new holding company. The new holding company will be headquartered in
Chicago and all generation and marketing operations of the new holding company
will have their headquarters in the Philadelphia region. PECO Energy's and
Unicom Corporation's electric and gas utilities will remain separate
subsidiaries of the holding company and will continue to operate under the names
PECO Energy and Commonwealth Edison Company. Their individual headquarters will
be in Philadelphia and Chicago, respectively.
The merger is conditioned, among other things, upon the approval by the
shareholders of both companies and the completion of regulatory procedures
before the Pennsylvania Public Utility Commission, the Illinois Commerce
Commission, the Nuclear Regulatory Commission and the SEC. The companies have
filed an application with the SEC to register the holding company under the
Public Utility Holding Company Act of 1935. The companies anticipate that the
regulatory process can be completed in approximately 12 months from the date of
this prospectus.
On November 22, 1999, PECO Energy filed an application for approval of the
merger 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. This merger settlement requires PECO Energy to
provide certain benefits, primarily only after its merger with Unicom has
reached financial closing, currently expected to occur sometime in the third or
fourth quarter of 2000. The benefits include 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 also extends the distribution and transmission rate
cap provision of the Restructuring Settlement from June 30, 2005 to December 31,
2006.
In addition, the merger settlement:
(1) imposes restrictions on PECO Energy's right to request recovery of
nuclear decommissioning costs,
(2) establishes benchmarks and measurement criteria for reliability and
customer service,
(3) provides for enhancements in PECO Energy's electric and gas
universal service programs,
(4) commits PECO Energy to implement various initiatives to foster and
promote renewable energy and related economic development,
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(5) promotes increased retail electric competition in PECO Energy's
service area,
(6) adopts various corporate structure protections to insulate retail
customers from the risk of unregulated ventures and avoid the
potential for improper cross-subsidization between PECO Energy and
its unregulated affiliates,
(7) provides for PECO Energy to maintain a strong corporate presence in
Southeastern Pennsylvania through specific commitments regarding
its corporate headquarters, employment and staffing levels and
charitable and civic giving, and
(8) enhances PECO Energy's customer relationship with the City of
Philadelphia.
The merger settlement also 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. 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.
The merger settlement has been submitted to an administrative law judge who
will recommend action to the Pennsylvania Public Utility Commission. The
Pennsylvania Public Utility Commission can approve the settlement or reject it
or approve it with modifications.
The board of directors of the holding company may determine, in its
discretion, how PECO Energy's business will be disaggregated. This
disaggregation will involve the formation of additional subsidiaries and the
transfer of PECO Energy's generation assets and liabilities to those
subsidiaries. PECO Energy will remain a transmission and distribution company
and a utility regulated by the Pennsylvania Public Utility Commission.
CUSTOMERS AND OPERATING REVENUES
PECO Energy's customer base is currently divided into three categories for
purposes of adjusting intangible transition charges: residential, small
commercial and industrial, and large commercial and industrial. Rate categories
and classes within those categories are created 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
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the servicer. 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.
Small Commercial and Industrial Rate Classes:
Rate GS - General Service: Electric delivery service available through
a single metering installation for offices, professional, commercial or
industrial establishments, governmental agencies, and other
applications outside the scope of the Residential Service rate
schedules.
Rate POL - Private Outdoor Lighting: Available in conjunction with Rate
GS for the outdoor lighting of sidewalks, driveways, yards, lots and
similar places, outside the scope of service under Rate SL-P, SL-S and
SL-E.
Rate SL-P - Street Lighting in the City of Philadelphia: Available only
to a governmental agency, municipal, state or federal, for outside
lighting of streets, highways, bridges, parks or similar places,
including directional highway signs at locations where other outdoor
lighting service is established hereunder, for the safety and
convenience of the public within the City of Philadelphia.
Rate SL-S - Street Lighting - Suburban Divisions: Available for the
outdoor lighting of streets, highways, bridges, parks and similar
places for the safety and convenience of the public in Suburban
Divisions.
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Rate SL-E - Street Lighting Customer-Owned Facilities: Available to any
governmental agency outside of the City of Philadelphia for outdoor
lighting of streets, highways, bridges, parks or similar places,
including directional highway signs at locations where outdoor lighting
service is established hereunder for the safety and convenience of the
public where all of the utilization facilities are installed, owned and
maintained by a governmental agency.
Rate TL - Traffic Lighting: Available to any municipality using PECO
Energy's standard delivery service for electric traffic signal lights
installed, owned and maintained by the municipality.
Rate BLI - Borderline Interchange: Available under reciprocal
agreements to neighboring electric utilities for resale in their
adjacent territory. No intangible transition charges are or will be
imposed on Rate BLI customers.
Large Commercial and Industrial Rate Classes:
Rate PD - Primary-Distribution Power: Untransformed electric delivery
service available from the primary supply lines of PECO Energy's
distribution system where the customer installs, owns and maintains any
transforming, switching and other receiving equipment required.
Rate HT - High-Tension Power: Untransformed electric delivery service
from PECO Energy's standard high-tension lines, where the customer
installs, owns and maintains, any transforming, switching and other
receiving equipment required. Excludes certain special contracts.
Rate EP - Electric Propulsion: This rate is available only to the
National Rail Passenger Corporation and to the Southeastern
Pennsylvania Transportation Authority for untransformed electric
delivery service from PECO Energy's standard high-tension lines, where
the customer installs, owns and maintains any transforming, switching
and other receiving equipment required and where the service is
supplied for the operation of electrified transit and railroad systems
and appurtenances.
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 December 31, 1999,
201,874 customers in the residential customer category (representing 14.93% of
the total number of customers),
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37,789 customers in the small commercial and industrial customer category
(representing 25.56% of the total number of customers) and 1,891 customers in
the large commercial and industrial category (representing 58.22% of the total
number of customers) have chosen to purchase their generation from electric
generation suppliers other than PECO Energy.
TABLE 3
RETAIL ELECTRIC CUSTOMERS FOR THE YEAR ENDED
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
---------------------------------------------------------------------------------------------------------------
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
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Residential
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
R(1) and OP(2) 1,167,866 79.60% 1,169,654 79.51% 1,177,996 79.47% 1,186,864 79.49% 1,194,370 79.47%
R-H 153,513 10.46 154,794 10.52 155,865 10.52 156,927 10.51 157,489 10.48
Total 1,321,379 90.06 1,324,448 90.03 1,333,861 89.99 1,343,791 90.00 1,351,859 89.95
Small Commercial
and Industrial
GS and POL(3) 141,653 9.65% 142,431 9.68% 144,142 9.72% 145,055 9.71% 146,771 9.77%
SL-P, SL-S, SL-E
and TL 940 0.06 987 0.07 985 0.07 1,050 0.07 1,076 0.07
Total (Excludes POL) 142,593 9.71 143,418 9.75 145,127 9.79 146,105 9.78 147,847 9.84
Large Commercial
and Industrial
PD and HT 3,394 0.23% 3,299 0.22% 3,308 0.22% 3,248 0.22% 3,245 0.22%
EP 3 0.00 3 0.00 3 0.00 3 0.00 3 0.00
Total 3,397 0.23 3,302 0.22 3,311 0.22 3,251 0.22 3,248 0.22
Total (Excludes OP
and POL) 1,467,369 100.00% 1,471,168 100.00% 1,482,299 100.00% 1,493,147 100.00% 1,502,954 100.00%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
- ----------
1 For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this prospectus.
2 Rate OP is available in conjunction with residential rate classes R and R-H
and with small commercial and industrial rate class GS for those customers
in rate class GS who use residence electric delivery service.
3 Rate POL is available in conjunction with small commercial and industrial
rate class GS.
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TABLE 4
ACTUAL RETAIL ELECTRIC USAGE (PER MEGAWATT-HOUR ("MWH")) FOR THE YEAR ENDED
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
------------------------------------------------------------------------------------------------------
% 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(1) and OP(2) 8,130,607 23.97% 7,906,048 23.81% 7,858,466 23.87% 8,214,347 24.21% 8,571,927 24.82%
R-H 2,728,472 8.04 2,765,279 8.33 2,548,231 7.75 2,408,645 7.10 2,560,223 7.41%
Total 10,859,079 32.01 10,671,327 32.14 10,406,697 31.62 10,622,992 31.31 11,132,150 32.24%
Small Commercial
and Industrial
GS and POL(3) 6,299,521 18.57% 6,490,621 19.55% 6,684,791 20.32% 6,887,794 20.30% 7,153,896 20.72%
SL-P, SL-S, SL-E
and TL 195,507 0.58 192,425 0.58 181,002 0.55 190,251 0.56 188,463 0.55%
Total 6,495,028 19.15 6,683,046 20.13 6,865,793 20.87 7,078,045 20.86 7,342,359 21.26%
Large Commercial
and Industrial
PD and HT 15,975,731 47.09% 15,208,015 45.81% 15,034,087 45.70% 15,678,316 46.21% 15,476,999 44.82%
EP 594,543 1.75 638,800 1.92 594,319 1.81 549,539 1.62 579,069 1.68%
Total 16,570,274 48.84 15,846,815 47.73 15,628,406 47.51 16,227,855 47.83 16,056,068 46.50%
Total 33,924,381 100.00% 33,201,188 100.00% 32,900,896 100.00% 33,928,892 100.00% 34,530,577 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
- --------------------
1 For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this prospectus.
2 Rate OP is available in conjunction with residential rate classes R and R-H
and with small commercial and industrial rate class GS for those customers in
rate class GS who use residential electric delivery service.
3 Rate POL is available in conjunction with small commercial and industrial
rate class GS.
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<PAGE>
TABLE 5
RETAIL ELECTRIC REVENUES (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
--------------------------------------------------------------------------------------------------------
% 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) 1,122,068 33.33% 1,092,398 33.13% 1,091,669 33.17% 1,121,346 33.93% 1,053,738 40.05%
R-H 279,228 8.29 277,760 8.43 265,781 8.08 255,891 7.74 236,020 8.97%
Total 1,401,296 41.62 1,370,158 41.56 1,357,450 41.25 1,377,237 41.67 1,289,758 49.02%
Small Commercial
and Industrial
GS and POL(3) 738,910 21.95% 748,561 22.71% 778,743 23.66% 783,682 23.72% 609,566 23.17%
SL-P, SL-S, SL-E
and TL 34,404 1.02 32,815 1.00 30,305 0.92 31,636 0.96 28,480 1.08%
Total 773,314 22.97 781,376 23.71 809,048 24.58 815,318 24.68 638,046 24.25%
Large Commercial
and Industrial
PD and HT 1,147,190 34.07% 1,098,307 33.31% 1,077,375 32.74% 1,066,868 32.28% 665,456 25.29%
EP 45,234 1.34 46,979 1.42 46,994 1.43 45,118 1.37 37,731 1.43%
Total 1,192,424 35.41 1,145,286 34.73 1,124,369 34.17 1,111,986 33.65 703,187 26.73%
Total 3,367,034 100.00% 3,296,820 100.00% 3,290,867 100.00% 3,304,541 100.00% 2,630,991 100.00%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
- --------------------
1 For a description of the meanings of rate class abbreviations, see "The
Seller and Servicer--Customers and Operating Revenues" in this prospectus.
2 Rate OP is available in conjunction with residential rate classes R and R-H
and with small commercial and industrial rate class GS for those customers in
rate class GS who use residential electric delivery service.
3 Rate POL is available in conjunction with small commercial and industrial
rate class GS.
For 75% of customers who were enrolled in customer choice as of December
31, 1999, 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
December 31, 1999, PECO Energy billed $352.3 million or 11.8% of known retail
electric revenues 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 period ended December 31, 1999, the largest 10
customers represented approximately 10.7% of PECO Energy's retail electric
revenues, and the largest 10
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customers represented approximately 14.7% 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:
TABLE 6
DELINQUENCIES AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<CAPTION>
------------------------------------------------------------------
FOR THE YEAR ENDED
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
30+ days 7.87% 9.37% 9.51% 9.64% 9.21%
60+ days 6.73 8.09 8.21 8.51 8.22
90+ days 5.79 7.08 7.18 7.67 7.52
SMALL COMMERCIAL
AND INDUSTRIAL
30+ days 0.71% 1.08% 1.29% 1.23% 1.67%
60+ days 0.48 0.76 0.92 0.96 1.25
90+ days 0.35 0.59 0.70 0.79 1.01
LARGE COMMERCIAL
AND INDUSTRIAL
30+ days 0.23% 0.18% 0.17% 0.16% 0.34%
60+ days 0.15 0.10 0.07 0.07 0.16
90+ days 0.12 0.07 0.04 0.04 0.09
</TABLE>
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<PAGE>
TABLE 7
NET WRITE-OFFS AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential 4.37% 4.56% 4.79% 4.66% 4.54%
Small Commercial
and Industrial 0.88 0.72 0.65 0.91 0.85
Large Commercial
and Industrial 0.11 0.09 0.14 0.31 0.00
Total 2.05 2.09 2.18 2.27 2.43
(Weighted by
Customer
Category)
</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 and 1999. 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. See
"--Limited Information on Customers"
During the past five years, delinquencies for small 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. Although reductions in
write-offs were experienced during 1999 for all customer categories, net
write-offs for small 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. It is
anticipated that new collection policies implemented during 2000 will assist in
reducing small commercial and industrial delinquency and write-off totals.
Delinquencies for large commercial and industrial accounts increased during
1999 as a result of the introduction of competition in the electric generation
market. Net write-offs for the large commercial and industrial category
experienced a substantial increase during 1998 as the
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<PAGE>
result of a single customer. In comparison, write-offs were virtually eliminated
during 1999 because PECO Energy recovered amounts that were written-off in a
previous year which provided a benefit in 1999. In addition, credit and
collection operations in 1999 required only minimal write-off activity.
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.
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 an employee of PECO Energy and are
reviewed internally by senior management executives.
Customer projections are determined by PECO Energy based on demographic and
economic information obtained from various sources. There are different
methodologies used for various customer categories. The residential customer
forecasting process begins with a review of regional household growth,
population 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 small commercial and industrial customer forecasting process 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 small
commercial and industrial usage within its service area.
PECO Energy does not forecast customer usage or retail electric revenues
for Rate Class BLI. Customers subject to Rate BLI are located outside PECO
Energy's retail electric service territory yet receive electricity from PECO
Energy through a reciprocal agreement with the customer's utility. PECO Energy
is reimbursed for any service provided to customers subject to Rate BLI by the
utility in whose retail electric service territory such customer belongs. At
December 31, 1999, there were 12 customers subject to Rate BLI (see Table 3).
These customers are not being, and will not be, charged intangible transition
charges.
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<PAGE>
The usage of customers in the large 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
customers in the large 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 the large commercial and
industrial customer 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.
For calendar year 1999, PECO Energy underestimated the number of customers
by .24%. For calendar year 1999, actual usage exceeded forecasted usage by 3.24%
because of the extremely hot summer weather. Summaries of the total annual
forecasted and actual number of PECO Energy's customers and their usage (by
customer category) since 1995 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 generator 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.
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<PAGE>
TABLE 8
FORECASTED NUMBER OF CUSTOMERS VARIANCE FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted 1,172,193 1,174,208 1,174,037 1,185,818 1,190,500
Actual 1,167,866 1,169,654 1,177,996 1,186,864 1,194,370
Variance (0.37%) (0.39%) 0.34% 0.09% 0.33%
R-H
Forecasted 156,765 157,336 157,045 156,739 157,700
Actual 153,513 154,794 155,865 156,927 157,489
Variance (2.07%) (1.62%) (0.75%) 0.12% (0.13%)
Small Commercial
and Industrial
GS and POL
Forecasted 142,207 142,441 143,445 145,019 146,914
Actual 141,653 142,431 144,142 145,055 146,771
Variance (0.39%) (0.01%) 0.49% 0.02% (0.10%)
SL-P, SL-S, SL-E
and TL
Forecasted 904 940 987 987 1,054
Actual 940 987 985 1,050 1,076
Variance 3.98% (5.00%) (0.20%) 6.38% 2.09%
Large Commercial
and Industrial
PD and HT
Forecasted 3,485 3,363 3,264 3,241 3,250
Actual 3,394 3,299 3,308 3,248 3,245
Variance (2.61%) (1.90%) 1.35% 0.22% (0.15%)
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>
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<PAGE>
TABLE 9
FORECASTED CUSTOMER USAGE (IN KWH) VARIANCE FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
R and OP
Forecasted 7,913,998 7,852,000 7,867,001 8,111,000 8,122,193
Actual 8,130,607 7,906,048 7,858,466 8,214,347 8,571,927
Variance 2.74% 0.69% (0.11%) 1.27% 5.54%
R-H
Forecasted 2,959,381 2,724,000 2,722,000 2,703,352 2,760,846
Actual 2,728,472 2,765,279 2,548,231 2,408,645 2,560,223
Variance (7.80%) 1.52% (6.38%) (10.90%) (7.27%)
Small Commercial
and Industrial
GS and POL
Forecasted 6,405,882 6,377,000 6,775,999 6,954,617 6,861,596
Actual 6,299,521 6,490,621 6,684,791 6,887,497 7,153,896
Variance (1.66%) 1.78% (1.35%) (0.97%) 4.26%
SL-P, SL-S, SL-E
and TL
Forecasted 204,998 197,000 198,003 192,469 192,753
Actual 195,507 192,425 181,002 190,251 188,463
Variance (4.63%) (2.32%) (8.59%) (1.15%) (2.23%)
Large Commercial
and Industrial
PD and HT
Forecasted 16,009,377 15,804,000 15,597,482 14,980,154 14,891,098
Actual 15,975,731 15,208,015 15,034,087 15,678,316 15,476,999
Variance (0.21%) (3.77%) (3.61%) 4.66% 3.93%
EP
Forecasted 688,000 658,000 668,000 626,291 618,447
Actual 594,543 638,800 594,319 549,539 579,069
Variance (13.58%) (2.92%) (11.03%) (12.26%) (6.37%)
</TABLE>
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<PAGE>
BILLING PROCESS
PECO Energy operates on a continuous billing cycle, with an approximately
equal number of bills being distributed each business day. For the year ended
December 31, 1999, 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.
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
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<PAGE>
Customer Assistance Program costs do not exceed $50 million and all eligible
customers are able to participate. As of December 31, 1999, there were more than
83,000 customers enrolled in the Customer Assistance Program accounting for
approximately $46.6 million of billed revenues for the twelve months ended
December 31. 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.
In 1999, approximately 80% of total bill payments were received by PECO
Energy via the U.S. mail. During the same period, approximately 10% of total
payments were paid in person at either PECO Energy's local business office or at
approximately 144 pay stations (which are located in unaffiliated businesses or
organizations, such as supermarkets and convenience stores) throughout the
service territory. A total of 29 pay stations are free of charge to the
customers. Customers making payments at the remaining 115 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
10% of bill payments collected in 1999.
COLLECTION PROCESS FOR THE RESIDENTIAL AND SMALL COMMERCIAL AND INDUSTRIAL
CUSTOMER CATEGORIES. Customer bills are due approximately 22 days after mailing.
If the customer does not pay the bill by the due date, the customer will not be
considered for termination until the next bill is rendered, which is
approximately 30 days from the last mailing date.
PECO Energy's residential and small commercial and industrial customer
category collection process is based on a recovery score assigned to each
delinquent account. Each delinquent customer is scored for approximate risk
based on outstanding balance, payment habits, length of time as a customer, time
since last payment and previous termination history. The score has been used
since early 1998 to segment customers into four specific collection strategies:
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.
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.
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<PAGE>
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 which 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. In 1999,
98,119 accounts, totaling $46 million, were referred to the collection agency;
$4.5 million was recovered by the collection agency from accounts previously
referred to it. Further, $2.1 million in additional recoveries of delinquencies
were received through litigation. During 1999, PECO Energy received total
recoveries from all collection initiatives of $203 million which was achieved
through a total of 3,943,645 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 THE LARGE COMMERCIAL AND INDUSTRIAL CUSTOMER
CATEGORY. PECO Energy's large commercial and industrial customer category
collection process is based on providing special handling of accounts and
attention to detail because of the importance of each customer as a source of
revenue. The delinquency of individual customers may result from differing
circumstances, and it is the operational policy of PECO Energy in serving these
93
<PAGE>
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 2000 with the large 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.
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 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),
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<PAGE>
(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.
PECO Energy's 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 small commercial
and industrial and large commercial and industrial customer
categories after the charges are communicated to the electric
generation supplier or other third party, then the servicer may
provide notice of breach to the electric generation
95
<PAGE>
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
Third Party Billing" in this prospectus.
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 between PECO Energy, as grantor and sole owner of all beneficial
interests in the issuer, the issuer trustee and the other trustees identified
below. The trust agreement was subsequently superseded in its entirety by an
Amended and Restated Trust Agreement dated as of February 19, 1999 executed by
the parties to the original trust agreement, which was in turn superseded in its
entirety by a Second Amended and Restated Trust Agreement which will be executed
on the closing date for the issuance of the first series of transition bonds
under the 2000 QRO. The Second Amended and Restated Trust Agreement is referred
to in this prospectus as the trust agreement. The assets of the issuer will
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. 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,
o issuing transition bonds from time to time,
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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> <C>
George R. Shicora 52 Beneficiary Trustee
(principal executive officer)
Thomas R. Miller 39 Beneficiary Trustee
(principal financial and
accounting officer)
</TABLE>
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George R. Shicora has been a beneficiary trustee of the issuer since its
establishment. Mr. Shicora has served as Assistant Treasurer of PECO Energy
since 1995 and has held various positions at PECO Energy since 1968.
Mr. Miller has served as Manager of Finance of PECO Energy since he joined
PECO Energy in 1999. 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 a total of $10,583.30.
The trust agreement provides that the trustees shall not be personally
liable under any circumstances except for:
o liabilities arising from their own wilful 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
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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 pay specified expenses of issuance and to purchase
the transferred intangible transition property from PECO Energy. PECO Energy
proposes using the proceeds it receives from the sale of the transferred
intangible transition property principally to reduce stranded costs and related
capitalization.
THE TRANSITION BONDS
The transition bonds 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 Series 1999-A
Bonds have already been issued under the base indenture as supplemented by the
Series 1999-A series supplement. 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
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(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.
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--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.
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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.
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
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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, 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 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
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specified in the applicable prospectus supplement, credit enhancement for a
series of transition bonds may cover one or more other series of transition
bonds.
If any 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 otherwise
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.
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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.
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
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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.
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.
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DTC has advised the bond trustee that it will take any action permitted to
be taken by a transition bondholder under the indenture only at the direction of
one or more participants to whose account with DTC the transition bonds are
credited.
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
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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.
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:
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(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.
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.
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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--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
On the closing date of the issuance of the first series of transition bonds
authorized by the 2000 QRO, the sale agreement that was executed by the seller
and issuer on the closing date of the Series 1999-A Bonds will be amended and
restated to add provisions for the sale of intangible transition property
created by the 2000 QRO.
The following summary describes all material terms and provisions of the
sale agreement as it will be amended and restated as of the closing date. The
sale agreement, as amended and restated on the closing date, is referred to in
this prospectus and all related prospectus supplements as the sale agreement.
The indenture provides that the sale agreement may be further 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.
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.
SALE AND ASSIGNMENT OF INTANGIBLE TRANSITION PROPERTY
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
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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 is 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 will be 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 and each series issuance date
after that, pursuant to the sale agreement, the seller will sell to the issuer,
without recourse, except as provided in the sale agreement, the subsequent
intangible transition property authorized by the 2000 QRO which represents the
irrevocable right to receive through intangible transition charges amounts
sufficient to recover qualified transition expenses with respect to the
subsequent 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 will also be perfected against all third persons, including judicial lien
creditors.
The seller's accounting records and computer systems reflect the sale of
intangible transition property to the issuer. The seller treats the Series
1999-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
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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 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,
(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
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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 it 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
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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,
(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,
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(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,
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(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,
(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.
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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, 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, however, for a breach in the first
circumstance (i.e., a breach of the representations or warranties in (2), (3),
(4), (5), (7) and (12) above) 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
(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
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(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) and (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, 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 indemnification 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 also shall 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.
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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.
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--Legal, Legislative or
Regulatory Actions Could Adversely Affect Transition Bondholders--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
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(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.
GOVERNING LAW
The sale agreement will be governed by and construed under the laws of the
Commonwealth of Pennsylvania.
THE MASTER SERVICING AGREEMENT
On the closing date for the issuance of the first series of transition
bonds under the 2000 QRO, the master servicing agreement that was executed by
the seller and the issuer on the closing date of the Series 1999-A Bonds will be
amended and restated to add provisions allowing for the intangible transition
property created by the 2000 QRO to be serviced by the servicer in the same
manner and subject to the same standards and conditions that it is servicing the
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intangible transition property created by the First QRO. Therefore, the
following description should be read to apply equally to all intangible
transition property, whether it is currently being serviced by the servicer or
will be serviced once that intangible transition property is transferred to the
issuer.
The following summary describes all material terms and provisions of the
master servicing agreement as amended and restated under which the servicer is
undertaking to service all transferred intangible transition property. The
master servicing agreement as amended and restated on the closing date will be
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 further 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 further 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 will manage, service and administer, and make
collections in respect of, the serviced intangible transition property. The
servicer's duties will 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
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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.
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
shall be allocated between the issuer and any other issuers based on their
respective Percentages of intangible transition property 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
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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.
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 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 IBCA, "F-2" by Fitch IBCA -- and for five business days
following a reduction in, any such rating, or
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(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 related annex to the master servicing agreement, the
servicer will make advances of interest or principal on the related series of
transition bonds in the manner and to the extent specified in 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, will be paid solely
to the extent funds are available for payment as described under "The
Indenture--Allocations and Payments" in this prospectus. The servicing fee will
be 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
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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,
(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,
(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 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,
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(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
(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.
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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.
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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.
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,
persons which succeed to the major part of the electric distribution business of
the
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servicer, which persons assume the obligations of the servicer, will be the
successor of the servicer under the master servicing agreement. The master
servicing agreement further requires that:
(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.
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
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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 issuer) 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 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 issuer, 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 and will be governed by and construed
under the laws of the Commonwealth of Pennsylvania.
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THE INDENTURE
The following summary describes all material terms and provisions of the
indenture under which the Series 1999-A Bonds were issued and the transition
bonds offered by this prospectus will be issued. The indenture and a
supplemental indenture were originally executed in connection with the issuance
of the Series 1999-A Bonds.
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:
(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,
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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.
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.
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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.
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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,
(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.
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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. Interest deposit
amounts refer to the regular fixed payments to a counterparty to a hedge or swap
agreement, if any, in the case of any series or class of floating rate
transition bonds, but not payments in respect of breakage or termination of that
agreement. These payments 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.
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
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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. Upon or prior to the issuance of each series of
transition bonds, PECO Energy must make a capital contribution in the amount of
the required capital amount to the issuer, and the issuer is required to pay
that amount 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:
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(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.
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,
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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,
(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
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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,
(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
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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,
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
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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
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.
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,
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(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 any 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
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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 will have been satisfied with
respect to that action other than Moody's (however, notice
of that action will be 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,
(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 will have been satisfied with
respect thereto by all rating agencies other than Moody's
(however, notice of that action will be 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:
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(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
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cannot be modified or waived without the consent of the holder of
each outstanding transition bond affected by that modification or
waiver,
(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,
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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.
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 will otherwise propose to
amend, modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, waiver, supplement, termination or surrender of the
terms of the sale agreement or the master servicing agreement or waive timely
performance or observance by the seller or the servicer under the sale agreement
or master servicing agreement, respectively, the issuer 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.
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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
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(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.
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
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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.
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.
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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.
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LIST OF TRANSITION BONDHOLDERS
Any transition bondholder or group of transition bondholders -- each of
whom has owned a transition bond for at least six months -- may, by written
request to the bond trustee, obtain access to the list of all transition
bondholders maintained by the bond trustee for the purpose of communicating with
other transition bondholders with respect to their rights under the indenture or
the transition bonds. The bond trustee may elect not to afford the requesting
transition bondholders access to the list of transition bondholders if it agrees
to mail the desired communication or proxy, on behalf and at the expense of the
requesting transition bondholders, to all transition bondholders.
ANNUAL COMPLIANCE STATEMENT
The issuer 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.
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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, interest will cease to accrue on that series of transition bonds.
Further, 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.
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
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(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 based on that ruling that
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 and will be the bond trustee under the indenture.
The bond trustee may resign at any time by so notifying the issuer. The holders
of a majority in principal amount of the transition bonds of all series then
outstanding may remove the bond trustee by so notifying the 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 IBCA (if currently rated by Fitch IBCA). If the bond trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business or assets to, another entity, the resulting,
surviving or transferee entity shall without any further action be the successor
bond trustee.
GOVERNING LAW
The indenture is and will be governed by and construed under the laws of
the Commonwealth of Pennsylvania.
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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.
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 is the opinion of our special tax
counsel, Ballard Spahr Andrews & Ingersoll, LLP, that the principles set forth
in the Internal Revenue Service ruling will be equally applicable to the 2000
QRO and the related series of transition bonds. As a consequence, our tax
counsel is of the opinion that:
(1) the issuance of the 2000 QRO by the Pennsylvania Public Utility
Commission will not result in the recognition of gross income by
PECO Energy,
(2) the issuance of the transition bonds offered by this prospectus
will not result in the recognition of gross income by PECO
Energy, and
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(3) the transition bonds offered by this prospectus will be
classified as obligations of PECO Energy.
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. In the opinion of
our tax counsel, Ballard Spahr Andrews & Ingersoll, LLP, based on the foregoing,
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 a similar entity holds transition bonds, the tax treatment
of a partner will generally depend upon the status of the partner and upon the
activities of the partnership. 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.
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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.
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.
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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-8 or Form
W-8BEN.
o You or your agent claim an exemption from withholding tax under
an applicable tax treaty. This claim is generally made on Form
1001 or Form W-8BEN.
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 4224 or Form W-8ECI.
We suggest that you consult your tax advisor about the specific methods to
satisfy these requirements. These procedures will change on January 1, 2001. In
addition, 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.
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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 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
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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.
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 pendency of 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 imposed on Pittsburgh residents by the School
District of Pittsburgh and the City of Pittsburgh.
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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.
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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.
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. 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.
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.
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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 balance sheet of the issuer as of December 31, 1999, included in this
prospectus has been audited by PricewaterhouseCoopers LLP, independent public
accountants, as stated in their report included in this prospectus.
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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.
"ADDITIONAL SECURITIZATION SETTLEMENT" means the settlement agreement dated
March 8, 2000 among PECO Energy and some of the parties from its restructuring
proceeding filed with the Pennsylvania Public Utility Commission.
"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.
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"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.
"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 IBCA" means Fitch IBCA, 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.
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"INTEREST" means, for any monthly allocation date for any series of
transition bonds, the sum of, without duplication:
o an amount that would cause the amount on deposit for interest in
each series subaccount, without regard to investment income, to
equal the monthly allocated interest balance for that series and
that monthly allocation date,
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.
"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.
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"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
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.
"PERCENTAGE" means, for the issuer or any other issuer of transition bonds,
the percentage equivalent of a fraction:
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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 would be payable as principal as a result of the occurrence and
continuance of an event of default,
o for a series that is subject to redemption, would be payable as
principal as a result of a redemption of that series pursuant to
the indenture, or
o any principal due on a 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 (item (5) on page 141 of this prospectus), 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
subaccount as a result of designated events (item 6 on page 141
of this prospectus), the numerator of which is the amount
allocable under that item for that series and the denominator of
which is the amount allocable to all series under that item, and
o in the case of the amount of Principal allocated to the series
subaccounts not provided for in this previous item (item (7) on
page 142 of this prospectus), 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.
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"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.
"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 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 may be further amended and
supplemented from time to time.
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"SEC" means the Securities and Exchange Commission.
"SERIES OF TRANSITION BONDS" means the Series 1999-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.
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PECO ENERGY TRANSITION TRUST
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants............................................F-2
Statement of Net Assets Available for Trust Activities.......................F-3
Statement of Changes in Net Assets Available for Trust Activities............F-4
Notes to Financial Statements........................................F-5 to F-11
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
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<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.
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<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
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<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
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<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
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<PAGE>
interest in the collateral.
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
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<PAGE>
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-11
<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 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 Counterpaty 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 the Series 1999-A Bonds
which was $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.
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class A-7
------------- ------------- ------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Expected Final
Payment Date: March 1, 2001 March 1, 2003 March 1, 2004 March 1, 2005 September 1, 2007 March 1, 2007 September 1, 2008
Termination Date: March 1, 2003 March 1, 2005 March 1, 2006 March 1, 2007 March 1, 2009 March 1, 2009 March 1, 2009
Optional
Redemption No No On or After No On or After No No
March 1, 2001 March 1, 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-1
<PAGE>
$
PECO ENERGY TRANSITION TRUST
Issuer
PECO ENERGY COMPANY
Seller and Servicer
SERIES 2000-A
TRANSITION BONDS
__________________
PROSPECTUS SUPPLEMENT
[ ], 2000
__________________
SALOMON SMITH BARNEY
BANC ONE CAPITAL MARKETS, INC.
FIRST UNION SECURITIES, INC.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
JANNEY MONTGOMERY SCOTT LLC
BARCLAYS CAPITAL
BNY CAPITAL MARKETS, INC.
MELLON FINANCIAL MARKETS, LLC
PRUDENTIAL SECURITIES
PRYOR, COUNTS & CO., INC.
TD SECURITIES
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 , 2000.
<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........................................ $ 264,000
Printing and Engraving Expenses......................... 150,000
Trustees' Fees and Expenses............................. 11,000
Legal Fees and Expenses................................. 850,000
Blue Sky Fees and Expenses.............................. 1,500
Accountants' Fees and Expenses.......................... 140,000
Rating Agency Fees...................................... 450,000
Miscellaneous Fees and Expenses......................... 25,000
----------
Total................................................ $1,891,500
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 3817 of the Delaware Business Trust Act (the "Delaware Trust Act")
provides that subject to such standards and restrictions, if any, as are set
forth in the governing instrument of a business trust, a business trust shall
have the power to indemnify and hold harmless any trustee or beneficial owner or
other person from and against any and all claims and demands whatsoever. The
Delaware Trust Act also provides that the absence of a provision for indemnity
in the governing instrument of a business trust shall not be construed to
deprive any trustee or beneficial owner or other person of any right to
indemnify which is otherwise available to such person under the laws of the
State of Delaware.
The Amended and Restated Trust Agreement (the "Trust Agreement") of PECO
Energy Transition Trust (the "Trust") provides that, to the fullest extent
permitted by law, the Trust shall indemnify its trustees against any liability
incurred in connection with any proceeding in which the trustees may be involved
as a party or otherwise by reason of the fact that such trustee is or was
serving in its capacity as a trustee, unless such liability is based on or
arises in connection with the trustee's own willful misconduct or gross
negligence, the failure to perform the obligations set forth in the Trust
Agreement, or taxes, fees or other charges on, based on or measured by any fees,
commissions or compensation received by the trustees in connection with any of
the transactions contemplated by the Trust Agreement and related agreements.
ITEM 16. EXHIBITS
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.**
4.1 Form of Second Amended and Restated Trust Agreement for PECO
Energy Transition Trust.**
II-1
<PAGE>
4.2 Certificate of Trust for PECO Energy Transition Trust.**
4.3.1 Indenture dated as of March 1, 1999.**
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 Form of Amended and Restated Intangible Transition Property
Sale Agreement.**
10.2 Form of Amended and Restated Master Servicing Agreement.**
10.3 Joint Petition for Full Settlement of PECO Energy Company's
Restructuring Plan and Related Appeals and Application for a
Qualified Rate Order and Application for Transfer of
Generation Assets dated April 29, 1998.**
10.4 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.
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 the signature page of this
Registration Statement).
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as bond trustee
under the Indenture.**
27.1 Financial Data Schedule.
99.1 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on May 14, 1998.**
99.2 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on March 16, 2000.
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.**
- --------------------
** Previously filed.
ITEM 17. Undertakings
Each Registrant hereby undertakes as follows:
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<PAGE>
(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.
(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 PECO Energy Transition Trust's (the
"Trust") 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 a Registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrants have 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 a Registrant of expenses incurred or paid
by a
II-3
<PAGE>
director, officer of controlling person of a 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, such
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(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 Registrants hereby undertake 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-4
<PAGE>
INDEX TO EXHIBITS
1.1 Form of Underwriting Agreement.**
4.1 Form of Second Amended and Restated Trust Agreement for PECO Energy
Transition Trust.**
4.2 Certificate of Trust for PECO Energy Transition Trust.**
4.3.1 Indenture dated as of March 1, 1999.**
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 Form of Amended and Restated Intangible Transition Property Sale
Agreement.**
10.2 Form of Amended and Restated Master Servicing Agreement.**
10.3 Joint Petition for Full Settlement of PECO Energy Company's
Restructuring Plan and Related Appeals and Application for a Qualified
Rate Order and Application for Transfer of Generation Assets dated
April 29, 1998.**
10.4 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.
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 the signature page of this Registration
Statement).
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as bond trustee under the
Indenture.**
27.1 Financial Data Schedule.
99.1 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on May 14, 1998.**
99.2 Qualified Rate Order issued by the Pennsylvania Public Utility
Commission to PECO Energy on March 16, 2000.
99.3 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.**
- --------------------
** Previously filed.
<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 April 17, 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)
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.
Chairman of the Board, President and Chief
Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, 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. Chairman of the Board, April 17, 2000
- --------------------- President and Chief Executive
C.A. McNeill, Jr. Officer of PECO Energy Company
(principal executive officer)
/s/ M.J. Egan Senior Vice President, Finance and April 17, 2000
- --------------------- Chief Financial Officer of PECO
M.J. Egan Energy Company (principal
financial and accounting officer)
</TABLE>
This Registration Statement has also been signed by C.A. McNeill, Jr.,
attorney-in-fact, on behalf of the following directors of PECO Energy Company,
which is signing this Registration Statement in its capacity as grantor of PECO
Energy Transition Trust and as servicer, on the date indicated:
Susan W. Catherwood Rosemarie B. Greco
Daniel L. Cooper John M. Palms
M. Walter D'Alessio Joseph F. Paquette, Jr.
G. Fred DiBona, Jr. Ronald Rubin
Richard H. Glanton Robert Subin
<TABLE>
<S> <C>
By: /s/ C.A. McNeill, Jr. April 17, 2000
---------------------
C.A. McNeill, Jr.
Attorney-in-Fact
</TABLE>
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
APPLICATION OF PECO ENERGY :
COMPANY FOR ISSUANCE OF A :
QUALIFIED RATE ORDER UNDER : APPLICATION
SECTION 2812 OF THE : DOCKET NO. R-00005030
PUBLIC UTILITY CODE :
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
PECO Energy Company ("PECO" or the "Company"); the Office of Consumer
Advocate ("OCA"), the Office of Small Business Advocate (the "OSBA"), the
Philadelphia Area Industrial Energy Users Group ("PAIEUG"), the Consumers
Education and Protective Association, the Tenants' Action Group, and the
Association of Community Organizations for Reform Now ("CEPA, TAG and ACORN"),
the Commission's Office of Trial Staff ("OTS"), and the Mid-Atlantic Power
Supply Association ("MAPSA") (all such parties referred to collectively as the
"Joint Petitioners"), by their counsel, respectfully submit this Joint Petition
for Full Settlement of PECO Energy's Application for Issuance of a Qualified
Rate Order Under Section 2812 of the Public Utility Code (the "Joint Petition").
The terms and conditions of the Joint Petition represent a comprehensive
settlement of all issues presented in PECO's Application. The Joint Petitioners
aver that this comprehensive settlement is in the public interest and,
therefore, request that the Commission: (1) approve without modification the
proposed settlement as set forth in the Joint Petition; and (2) issue a
<PAGE>
Qualified Rate Order authorizing PECO to securitize up to an additional $1.0
billion of its authorized stranded costs and assets as agreed to herein.
I. SUMMARY OF SETTLEMENT
The Joint Petitioners have agreed to the proposed settlement terms and
conditions as set forth in this document and its appendices as a means to
resolve, finally and equitably, all issues arising from PECO's Application to
securitize up to an additional $1.0 billion of its authorized stranded costs and
assets, in lieu of litigation before the Commission and the courts.
The Joint Petitioners submit that the terms and conditions of this
settlement fairly balance the interests of parties affected by PECO's
Application. All PECO customers will have guaranteed rate reductions in 2001. In
addition, once the Commission's order has become final and nonappeallable, PECO
will take on all market and other issuance risks associated with the
securitization. The marketers' concerns that the securitization should not be
implemented in a manner that harms competition have been addressed.
Consistent with the Commission's goal of negotiated settlement in major
cases, the Joint Petitioners engaged in extensive settlement negotiations in
this matter early in the litigation process. By engaging in those early
discussions, the Joint Petitioners other than MAPSA were able to present the
Commission at the time of filing the Application with a settlement proposal(1)
that formed the framework for a formal agreement once all issues were known.
After notice of the Application was issued, one
- -------------
1 MAPSA and PECO engaged in early settlement discussions, but MAPSA was not a
signatory to the initial settlement proposal.
2
<PAGE>
additional party - MAPSA - intervened raising additional issues. PECO and the
other Joint Petitioners met with MAPSA and reached agreement on the issues
raised by MAPSA, as discussed below. The Joint Petitioners, including MAPSA, are
now able to present a proposal for full settlement of this matter without
litigation and the attendant use of resources by the Commission and the parties.
II. BACKGROUND
1. On December 3, 1996, Governor Ridge signed into law the Electricity
Generation Customer Choice and Competition Act (66 Pa. C.S. ss.ss.2801 et seq.)
(the "Electric Competition Act"). The Electric Competition Act fundamentally
restructures the provision of electric service in Pennsylvania by mandating the
introduction of customer choice of generation supplier commencing January 1,
1999.
2. On April 1, 1997, PECO submitted a comprehensive Restructuring Plan in
which it requested the Commission to approve (1) the use of unbundled rates for
electric service, (2) the recovery of transition and stranded costs and assets,
(3) a plan to meet its public service obligations, and (4) a proposed Consumer
Education Program.
3. On April 29, 1998, after full litigation of PECO's electric
restructuring case, including the filing of numerous appeals and cross-appeals
at the Commonwealth Court and in the federal courts, PECO and virtually all
intervenor parties to that case submitted to the Commission a Joint Petition
3
<PAGE>
for Full Settlement of PECO Energy's Restructuring Plan and Related Appeals And
Application for a Qualified Rate Order and Application for Transfer of
Generation Assets in Docket Nos. R-00973953 and P-00971265 (the "Restructuring
Settlement"). The Restructuring Settlement was a comprehensive settlement of
PECO's electric restructuring case. It included numerous terms and conditions,
including provisions that PECO would be allowed to recover $5.26 billion of
stranded costs and assets from its customers, and that PECO would be allowed to
securitize $4.0 billion of those stranded costs and assets.
4. On May 14, 1998, the Commission issued a Final Order in Docket Nos.
R-00973953 and P-00971265 (the "Final Restructuring Order"), approving the Joint
Petition for Full Settlement. To allow PECO to securitize its authorized
stranded costs and assets by issuing Transition Bonds pursuant to 66 Pa.
C.S. ss.2812, the Final Restructuring Order adopted a Qualified Rate Order that
had been proposed in the Restructuring Settlement.
5. In March, 1999, PECO issued $4.0 billion of Transition Bonds pursuant to
the Final Restructuring Order.
6. On January 7, 2000, PECO submitted the instant Application to the
Commission, requesting approval to securitize an additional $1.0 billion of its
authorized stranded costs and assets and provide a $60 million rate reduction to
its customers. PECO served a copy of its Application, or provided notice of
filing its Application, to all entities or individuals that had been parties to
its restructuring proceeding.
4
<PAGE>
7. Prior to submitting the instant Application, PECO engaged in settlement
discussions with the other Joint Petitioners. Based on those discussions, the
Joint Petitioners other than MAPSA prepared and signed an Agreement to Prepare
and Present a Joint Petition for Full Settlement of PECO Energy's Application
for a Qualified Rate Order (the "Settlement Proposal"). In the Settlement
Proposal, which was attached to PECO's Application and is attached to this Joint
Petition as Exhibit A, the Joint Petitioners other than MAPSA agreed that, after
public notice of this proceeding had been provided and any additional parties
had the opportunity to intervene in this proceeding, the Joint Petitioners other
than MAPSA would prepare a Joint Petition for Settlement with all interested
parties and request that the Commission approve the terms and conditions of the
Settlement Proposal (and such additional settlement terms as might be reached
with any additional intervenors).
8. PECO provided public notice of the instant Application to all of its
customers by mailed postcard notice. (A copy of the postcard notice is attached
as Exhibit B.) Postcard notice to all customers was placed in the United States
mail on or before January 21, 2000. The postcard notice informed customers,
among other things, that they had 15 days to file written comments or
interventions with the Commission.
9. The Commission provided public notice of the instant Application by
publication in the Pennsylvania Bulletin on January 22, 2000. (A copy of the
Pennsylvania Bulletin notice is attached as Exhibit C.) The Pennsylvania
Bulletin notice informed customers, among other things, that they had 15 days to
file written comments or interventions with the Commission.
5
<PAGE>
10. On February 7, 2000, MAPSA filed a Petition to Intervene in this
proceeding. In that Petition, MAPSA generally stated that it wishes to ensure
that the securitization does not have an adverse effect on competition in the
retail services market in Pennsylvania. MAPSA's concerns have been addressed by
this settlement.
11. The Joint Petitioners therefore request that the Commission issue an
order approving the terms and conditions of the Joint Petition and issuing a
Qualified Rate Order.
III. TERMS AND CONDITIONS
The Settlement Proposal between the Joint Petitioners other than MAPSA was
provided as an exhibit to PECO's Application in this proceeding. (It is also
attached to this Joint Petition as Exhibit A). Based on the Settlement Proposal
and the subsequent settlement negotiations with MAPSA, the terms and conditions
of settlement are:
A. RATE REDUCTIONS
12. Beginning on January 1, 2001, PECO will provide its retail customers in
its service territory in Southeast Pennsylvania with rate reductions in the
total amount of $60 million.
6
<PAGE>
13. The rate reductions shall be flowed to customers over a one-year period
commencing with regular billing cycles beginning after December 31, 2000. PECO
agrees the application of the securitization savings will not reduce the
shopping credit. Subject to a different agreement in the PECO-Unicom merger
case(2), if any, PECO agrees that it will apply the securitization savings to
reductions to the Competitive Transition Charge ("CTC") as set forth in the
attached pro forma (Exhibit D).
B. SECURITIZATION
14. The rate reductions described in this Joint Petition are contingent
upon the Commission issuing a Qualified Rate Order, which Qualified Rate Order
shall have become final and nonappealable, that authorizes PECO to issue
Transition Bonds to securitize up to $1 billion of its stranded costs. However,
the rate reductions described in this Joint Petition are not contingent upon
PECO issuing Transition Bonds pursuant to such Qualified Rate Order. PECO
assumes the risk that securitization may not be accomplished and such fact shall
not be grounds for adjustment of the reduction in rates described in paragraph
12.
15. The rate reductions described in this Joint Petition include the
anticipated benefits of securitization of $1.0 billion of stranded costs. The
savings from securitization are incorporated to fund the rate reductions
provided for, and no further adjustment upon sale of transition bonds is
required other than establishment of an Intangible Transition Charge to replace
an equal amount of Competitive Transition
- -----------
2 PECO has publicly announced a merger with Unicom Corporation, which merger is
the subject of a docketed proceeding before the Pennsylvania Public Utility
Commission.
7
<PAGE>
Charge. The effectiveness of this Joint Petition is contingent upon the issuance
by the Commission, simultaneous with approval of the Joint Petition, of an
irrevocable Qualified Rate Order pursuant to Section 2812 of the Electric
Competition Act (66 Pa. C.S. ss. 2812), which Qualified Rate Order shall have
become final and nonappealable. To satisfy this condition, the Qualified Rate
Order approved by the Commission must authorize the issuance of Transition Bonds
to securitize up to $1.0 billion of PECO's remaining authorized stranded and
transition costs at any time after the issuance of such Qualified Rate Order,
provided that the Intangible Transition Charges ("ITC") to customers terminate
no later than December 31, 2010. The Qualified Rate Order for which approval is
sought is attached to this Joint Petition as Exhibit E.
16. PECO agrees that it will use the proceeds of the securitization
principally to reduce its stranded costs and related capitalization, in
compliance with Section 2812 (b)(2) of the Electric Competition Act and the
terms of the proposed Qualified Rate Order.
17. Pursuant to Section 2812(b)(4) of the Electric Competition Act, each
Commission order approving a Qualified Rate Order must contain a provision for
periodic adjustments to the intangible transition charges that are approved in
that Qualified Rate Order. All such periodic adjustments for Transition Bonds
issued pursuant to this settlement shall be consistent with Paragraph 24 (titled
"Reconciliation and Projected Sales") of the Joint Petition For Full Settlement
Of PECO Energy Company's Restructuring Plan And Related Appeals And Application
For A Qualified
8
<PAGE>
Rate Order And Application For Transfer Of Generation Assets, as approved by the
Commission in its May 14, 1998 order in Docket Nos. R-00973953 and
P-00971265.(3)
18. PECO has publicly announced a merger with Unicom Corporation, which
merger is the subject of a docketed proceeding before the Pennsylvania Public
Utility Commission. The instant agreement does not impair or restrict the rights
of any of the signatories to propose or argue in favor of rate decreases in the
merger proceeding. PECO is precluded from arguing that its rates (other than the
ITC revenue stream) cannot be adjusted in the merger proceeding as a result of
this securitization.
- ----------
3 The Qualified Rate Order attached to this Joint Petition has some minor
changes from the draft Qualified Rate Order that was attached to PECO's
Application. For example, the final proposed Qualified Rate Order states that
the annual reconciliation for the additional transition bonds will occur on
the same date each year as the annual reconciliation for the first $4.0
billion of bonds, a step which will avoid the need for a separate
reconciliation proceeding and true-up. The Joint Petitioners request that the
Commission utilize the Qualified Rate Order attached as Exhibit E to this
Joint Petition, without modification.
9
<PAGE>
C. ADVERTISING AND PROMOTION
19. PECO is prohibited from using the securitization savings or CTC
reductions authorized in the settlement to promote its Provider of Last Resort
("PLR") service. Unless required by law, PECO may not refer to the
securitization savings or CTC reductions in any public advertising, promotion or
communication. PECO agrees that it will neither directly nor indirectly state,
suggest or imply in any public advertisement, promotion or communication that:
o PECO or any affiliate is responsible for obtaining for customers the
securitization savings or CTC reductions included in this settlement.
o Customers may better obtain the benefit of such securitization savings
or CTC reductions by remaining with PECO's PLR service.
o Customers who are provided service by suppliers other than PECO or its
affiliates will not receive the same benefit of such securitization
savings or CTC reductions as customers of PECO or its affiliates.
PECO will provide MAPSA with five business days advance notice and
opportunity to review any communications required by law concerning the subject
matter of securitization savings or CTC reductions resulting from this
settlement. Any such communication will prominently state "Additional savings
may be obtained by shopping for an energy supplier."
In the event of a dispute between MAPSA and PECO concerning a communication
required by law, PECO agrees that it will not issue the communication until the
dispute has been resolved. If MAPSA and PECO are unable to resolve a dispute
concerning the subject matter of this Agreement in a communication required by
law, the proposed communication shall be submitted to the Consumer Advocate with
10
<PAGE>
a copy to the Commission's Bureau of Consumer Services, for consideration and
resolution within five business days. The Consumer Advocate, in cooperation and
consultation with the Bureau of Consumer Services, shall have the power to
resolve the dispute and disapprove, approve or approve with revisions the
proposed communication.
In the event that MAPSA believes that PECO has issued a public advertising,
promotion or communication that violates this agreement, PECO agrees that the
dispute shall be submitted to a single arbitrator of the American Arbitration
Association (the "Neutral") for consideration and resolution within five
business days. The Neutral shall have the power to determine whether the public
advertising, promotion, or communication violates this agreement. If the Neutral
determines that the public advertising, promotion or communication violates this
agreement, PECO shall cease the offending public advertising, promotion, or
communication and the Neutral shall determine the steps necessary, if any, to
remedy the violation and shall order such remediation.
PECO agrees that the Neutral shall have the power to impose additional
monetary sanctions on it in an amount not to exceed three times the cost of the
remedy ordered pursuant to the above paragraph. All monetary sanctions ordered
to be paid by the Neutral shall be paid to such third party as jointly
designated at the time by MAPSA and PECO, with such monies to be used for
consumer education regarding consumer options in the competitive electric
marketplace.
IV. PUBLIC INTEREST CONSIDERATIONS
11
<PAGE>
The Joint Petitioners submit that this settlement is in the public interest
and should be approved in full for the following reasons:
20. Customers Will Receive Rate Reductions. The Joint Petition enables all
customers to receive significant guaranteed rate reductions for 2001.
21. The Securitization Of Stranded Assets Will Be Facilitated. The Joint
Petition provides for the Commission to issue a Qualified Rate Order authorizing
PECO to securitize up to $1.0 billion of its authorized recoverable stranded
assets and costs.
22. Market Risks And Risks Of Issuance Are Shifted Away From Customers.
Once the Commission's order has become final and nonappealable, an obligation
will vest in PECO at that time to provide the customer rate discounts described
in the Joint Petition. This obligation will exist whether or not PECO issues
Transition Bonds, and regardless of the interest rate that it is required to pay
on those bonds. In the current environment of rising interest rates, and given
the inherent uncertainty of any future action that involves third parties
(including, in this case, rating agencies and bond market participants), there
is risk that Transition Bonds may not be issueable, or may not be issueable on
favorable terms. The Joint Petition shifts those market and issuance risks to
PECO by creating a current obligation to provide rate discounts (once the
Commission's order is final and nonappealable), regardless of whether Transition
Bonds are ever issued, or the terms of those Transition Bonds.
23. The Issue Of An Adverse Effect On Competition Has Been Addressed. MAPSA
has participated in these proceedings to protect against the marketer concern
12
<PAGE>
that the securitization could be implemented in a manner adverse to competition.
The settlement contains constraints on PECO so that the securitization will not
have an effect on the shopping credit and so that PECO will not use the
securitization discounts to advertise or otherwise promote its Provider of Last
Resort service.
24. Substantial Litigation And Associated Costs Will Be Avoided. The Joint
Petition amicably resolves a number of important and potentially contentious
issues. The administrative and appellate burden and costs to litigate these
matters to conclusion would be substantial.
25. The Joint Petition Is Consistent With Commission Policies Promoting
Negotiated Settlements. The Joint Petitioners arrived at the Joint Petition
terms and conditions after extensive discussions and exchange of information.
Moreover, the Joint Petitioners drew on the evidence,experience, and
Commission's Final Restructuring Order in PECO's restructuring proceeding. The
Joint Petition's terms and conditions constitute a carefully crafted package
representing negotiated compromises on the issues addressed herein. Thus, this
Joint Petition is consistent with the Commission's rules and practices
encouraging negotiated settlement (see 52 Pa. Code ss.ss.5.231, 69.391,
69.401).
13
<PAGE>
V. CONCLUSION
WHEREFORE, the Joint Petitioners, intending to be legally bound,
respectfully request that the Commission: (1) approve without modification the
proposed settlement as set forth in the Joint Petition; and (2) issue without
modification the Qualified Rate Order set forth in Exhibit E hereto.
14
<PAGE>
- ---------------------------------------- -----------------
For PECO Energy Company Date
- ---------------------------------------- -----------------
For the Office of Consumer Advocate Date
- ---------------------------------------- -----------------
For the Office of Small Business Advocate Date
- ---------------------------------------- -----------------
For the Philadelphia Area Industrial Energy Date
Users Group
- --------------------------------------- -----------------
For the Consumers Education and Protective Date
Association, Tenants' Action Group,
and Association of Community Organizations
for Reform Now
- ---------------------------------------- -----------------
For the Office of Trial Staff Date
- ----------------------------------- ----------------
For Mid-Atlantic Power Supply Association Date
15
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3
(No. 333-31646) of our report dated March 16, 2000, relating to the financial
statements of PECO Energy Transition Trust, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
--------------------------
PricewaterhouseCoopers LLP
Philadelphia, PA
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001064414
<NAME> PECO ENERGY TRANSITION TRUST
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 174
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 351
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,233<F1>
<CURRENT-LIABILITIES> 203<F2>
<BONDS> 3,833
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,146
<SALES> 0
<TOTAL-REVENUES> 352
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
(1) Includes Intangible Transition Property of $3,985.
(2) Current Portion of Long-term Debt of $120 and Accrued Expenses of $83.
</FN>
</TABLE>
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA. 17105-3265
Commissioners Present: Public Meeting held March 16, 2000
Robert K. Bloom, Vice Chairman
Nora Mead Brownell
Aaron Wilson, Jr.
Terrance J. Fitzpatrick
Application of PECO Energy Company for Docket Number:
issuance of a Qualified Rate Order Under Section R-00005030
2812 of the Public Utility Code
ORDER
BY THE COMMISSION:
On January 7, 2000, PECO Energy Company (PECO) filed the above-docketed
application for the issuance of a Qualified Rate Order (QRO) pursuant to Section
2812 of the Public Utility Code (66 Pa. C.S. ss.2812).
PECO served a copy or notice of the instant application to the Office of
Consumer Advocate (OCA), the Office of Small Business Advocate (OSBA),
Philadelphia Area Industrial Energy Users Group (PAIEUG), the Consumers
Education and Protective Association (CEPA), the Tenants' Action Group (TAG),
the Association of Community Organizations for Reform Now (ACORN), the Office of
Trial Staff (OTS), and all entities or individuals that had been parties to its
restructuring proceeding at R-00973953 and P-00971265.
<PAGE>
PECO provided public notice of the instant application to its customers by
mailed postcard notice. The Commission provided public notice by publication in
the Pennsylvania Bulletin on January 22, 2000. On February 7, 2000, Mid-Atlantic
Power Supply Association (MAPSA) filed a Petition to Intervene in the
proceeding. MAPSA wanted to ensure that the proposed securitization would not
have an adverse effect on competition in the retail services market in
Pennsylvania.
By a Final Order entered on May 14, 1998, at docket nos. R-00973953 and
P-00971265 (Final Restructuring Order), PECO was authorized to recover $5.26
billion of stranded costs and assets from its customers and to securitize up to
$4.0 billion of those stranded costs and assets. In March, 1999, PECO issued
$4.0 billion of Transition Bonds (Initial Transition Bonds) pursuant to the
Final Restructuring Order.
Now through the instant application, PECO is requesting the Commission to
issue a QRO authorizing the issuance of Transition Bonds for up to an additional
$1 billion of its authorized stranded cost recovery (Additional Transition
Bonds). The Additional Transition Bonds will be issued by an entity created by
PECO and will be secured by the intangible transition property. The intangible
transition property represents the irrevocable right to collect intangible
transition charges (ITC) from customers. The ITC will recover the portion of
PECO's stranded costs financed through the issuance of Additional Transition
Bonds and the interest, fees, expenses, credit enhancement and premiums, if any,
associated with the Additional Transition Bonds. The instant application also
provides for a $60 million rate reduction to PECO's retail customers in
Southeastern Pennsylvania, and seeks approval for the imposition of the ITC,
along with a corresponding decrease in competitive transition charges (CTC).
2
<PAGE>
Prior to the filing of the instant application, PECO engaged in settlement
discussions with the OCA, OSBA, Energy Users Group, CEPA, TAG, ACORN, and OTS,
and other parties, concerning PECO's desire to securitize this additional
portion of its authorized stranded cost recovery. The purpose of these
discussions was to establish a consensus as to what terms and conditions would
be required in connection with the additional securitization.
On March 8, 2000, PECO, OCA, OSBA, PAIEUG, CEPA, TAG, ACORN, OTS, and MAPSA
(the Joint Petitioners) submitted for the Commission's approval, a 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 (Joint
Petition). MAPSA's concerns have been addressed in the Joint Petition. The Joint
Petitioners have agreed that the terms and conditions of the Joint Petition
represent a comprehensive settlement of all issues presented in the instant
Application. They request that the Commission approve, without modification, the
proposed settlement (Proposed Settlement), as set forth in the Joint Petition,
and issue a QRO authorizing PECO to securitize up to an additional $1.0 billion
of its authorized stranded costs and assets.
The Proposed Settlement sets forth that beginning on January 1, 2001, PECO
will provide to its retail customers in Southeast Pennsylvania rate reductions
in the total amount of $60 million. These rate reductions will be flowed to
customers over a one-year period starting with regular billing cycles beginning
after December 31, 2000. The application of the securitization savings will not
reduce the shopping credit. Subject to a different agreement in the pending
merger of PECO with Unicom Corporation the securitization savings, if any, will
be applied pursuant to the guidelines as approved by the Final Restructuring
Order.
3
<PAGE>
The Proposed Settlement further states that the proposed rate reductions of
$60 million are contingent upon the Commission issuing an irrevocable QRO that
authorizes PECO to issue additional Transition Bonds to securitize up to $1
billion of its authorized stranded and transition costs at any time after the
issuance of the QRO. It also provides that the ITC to customers terminate no
later than December 31, 2010. However, the proposed rate reductions described in
the Joint Petition are not contingent upon PECO issuing the Additional
Transition Bonds pursuant to the requested QRO.
The proposed rate reductions include the anticipated benefits of
securitization of $1.0 billion of stranded costs. The savings from
securitization are incorporated to fund the rate reductions provided for, and no
further adjustment upon sale of the Additional Transition Bonds is required
other than establishment of an ITC to replace an equal amount of CTC. The ITC
imposed on customers as a result of the proposed securitization of S I billion
of stranded cost recovery will be subject to the adjustment procedures approved
in the Final Restructuring Order, and thus, will be adjusted in the same manner
as the ITC collected with respect to the Initial Transition Bonds.
The proceeds from the securitization principally will be used to reduce its
stranded costs and related capitalization, in compliance with Section 2812(b)(2)
of the Electric Competition Act.
The Joint Petitioners submit that the Proposed Settlement is in the public
interest in that customers will receive rate reductions, the securitization of
stranded assets will be
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facilitated, market risks and risks of issuance are shifted away from customers,
the issue of an adverse effect on competition has been addressed, substantial
litigation and associated costs will be avoided, and the Joint Petition is
consistent with Commission policies promoting negotiated settlements.
Upon consideration of the application and based upon the numerous benefits
of the Proposed Settlement described by the Joint Petitioners, we find them to
be in the public interest; THEREFORE,
IT IS ORDERED:
1. That in consideration of and reliance upon the representations,
mutual promises and undertakings of the parties to the Joint Petition for
Full Settlement, filed with this Commission on March 8, 2000 (the
"Additional Joint Petition"), including the express agreement of each
signatory to be legally bound by its terms and the certification of each
signatory that he or she has full authority to enter into the settlement
and to act on behalf of their respective parties, the terms of the
proposed full settlement set forth in the Joint Petition shall be and arc
hereby approved as to each and every one of its terms and conditions.
2. That the Application of PECO Energy Company for Issuance of a
Qualified Rate Order under Section 2812 of the Public Utility Code, 66 Pa.
C.S. ss.2812 filed on January 7, 2000, be, and hereby is, granted,
consistent with this Qualified Rate Order. We hereby grant and issue all
approvals and certificates of public convenience required under the Public
Utility Code, including but not limited to approvals under Chapters 5, 11,
19, 21 and 28 of the Public Utility Code.
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3. That, to the extent specified in this Qualified Rate Order, the
provisions of: (i) the Additional Joint Petition, (ii) PECO Energy
Company's ("PECO Energy" or the "Company") January 22, 1997 Application for
a Qualified Rate Order (Docket No. R-00973877) (the "1997 QRO Filing"),
(iii) the Company's Proposed Restructuring Plan (Docket No. R-00973953)
(the "Restructuring Filing"), (iv) the April 28, 1998 Joint Petition for
Full Settlement Of PECO Energy Company's Proposed Restructuring Plan (the
"1998 Joint Petition"), and (v) the Commission's Final Order issued on May
14, 1998 (Docket Nos. R00973953 and P-00971265) (the "First Stranded Cost
Order") are hereby incorporated herein by reference.
4. That this Commission authorizes the issuance of transition bonds
(the transition bonds authorized in this Qualified Rate Order shall
hereinafter be referred to as the "Additional Transition Bonds") in an
aggregate principal amount not to exceed $1 billion and finds that the
issuance of such amount of Additional Transition Bonds is in the public
interest. This authorization of Additional Transition Bonds shall be in
addition to, and not in lieu of, the $4 billion aggregate principal amount
of transition bonds authorized by the Commission in the First Stranded Cost
Order (such transition bonds, the "Initial Transition Bonds"). Provided
that the rate reductions specified in the Additional Joint Petition are
implemented as provided in paragraph 6 of this Qualified Rate Order, this
Commission hereby determines that all savings that may be accomplished
through securitization will be passed on to customers through the rate
reductions in paragraph 6, and PECO Energy is not required to pass on
additional savings to customers at the time of issuance of the Additional
Transition Bonds authorized by this Qualified Rate Order or the refinancing
thereof
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5. That this Commission authorizes PECO Energy to impose on, and
collect from its customers, either directly or through bills rendered by
electric generation suppliers or any subsequently selected providers of
last resort, through non-bypassable charges applied to the bill of every
customer of electric services within the geographic area that comprised the
Company's certificated service territory on the effective date of the
Electricity Generation Customer Choice and Competition Act (the "Act"),
whether such customer was a customer on the effective date of the Act or
became a customer after that effective date, Intangible Transition Charges
in an amount sufficient to recover the aggregate principal amount of the
Additional 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
Additional Transition Bonds (the Transition or Stranded Costs, which
includes principal of or interest on. the Additional Transition Bonds,
costs for credit enhancement, servicing fees and other related costs and
expenses permitted to be recovered through the Intangible Transition
Charges collectively, the "Qualified Transition Expenses"). The Commission
finds that such recovery and the imposition of such Intangible Transition
Charges is in the public interest and is just and reasonable. The
Commission hereby affirms that the payment period for imposing the
Competitive Transition Charges authorized in the First Stranded Cost Order
and the Intangible Transition Charges authorized in both the First Stranded
Cost Order and in this Qualified Rate Order will extend to December 31,
2010. The Intangible Transition Charges authorized herein shall be
collected over periods of time and in such amounts as are necessary to
amortize each series of Additional Transition Bonds in accordance with the
terms thereof, but in no event shall be charged to customers after December
31, 2010. Notwithstanding anything else in this Qualified Rate Order, the
Intangible Transition Charges
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shall be collected from customers in an amount sufficient to discharge the
Additional Transition Bonds in accordance with their terms.
6. That, once this Order has become final and nonappealable, PECO
Energy is directed to provide its retail customers in its service territory
in Southeastern Pennsylvania with rate reductions with a total value of $60
million, which reductions will be flowed to customers over a one-year
period commencing with the regular billing cycles beginning after December
31, 2000. Such reductions will be implemented regardless of whether or not
the Company successfully issues all or any series of the Additional
Transition Bonds and will be applicable to the year 2001. Upon the
successful issuance of the Additional Transition Bonds and the imposition
of Intangible Transition Charges related thereto, PECO Energy is further
directed to implement the following adjustments to its rates: (A) if the
Transition or Stranded Costs for which Additional Transition Bonds are
issued are then recovered through the Competitive Transition Charges
authorized under the First Stranded Cost Order, the Company shall reduce
the Competitive Transition Charges imposed on its customers by an amount
equal to the Intangible Transition Charges associated with such Additional
Transition Bond issuance; (B) if the Transition or Stranded Costs for which
Additional Transition Bonds are issued are not then being recovered through
the Competitive Transition Charges, (i) the Company shall reduce its base
rates by an amount equal to the Intangible Transition Charges associated
with such Additional Transition Bond issuance and (ii) the aggregate amount
of Competitive Transition Charges authorized in the First Stranded Cost
Order that the Company may in the future impose on its customers shall be
reduced by an amount equal to the Intangible Transition Charges associated
with such Additional Transition Bond issuance. The reductions specified in
(A) and
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(B) above shall be implemented on the following terms: (a) if the
Additional Transition Bonds are issued in one or more series, a
corresponding reduction shall be calculated and implemented corresponding
to each such series; (b) the rate reduction shall be applied to bills using
the method and allocation set forth in the 1998 QRO and the Restructuring
Filing, as adjusted by the 1998 Joint Petition; and (c) the Intangible
Transition Charges associated with the Additional Transition Bonds issued
on that date shall be applied to bills simultaneously with the rate
reduction or reduction of the Competitive Transition Charges.
7. That the Competitive Transition Charges and the Intangible
Transition Charges shall be applied to customer bills using the methodology
and allocation set forth in the 1997 QRO Filing and Restructuring Filing,
as adjusted by the 1998 Joint Petition and the Additional Joint Petition.
Pursuant to 66 Pa. C.S. ss.2808(f) and ss.2812(b)(4), this Commission
authorizes the Company to make annual adjustments (each, an "Annual
Adjustment") to the Intangible Transition Charges with respect to the
Additional Transition Bonds if collections of such Intangible Transition
Charges fall below the amount necessary to ensure the receipt by the
Additional Transition Bond trustee of revenues sufficient to recover fully
the Qualified Transition Expenses consistent with this Commission's
Qualified Rate Order; provided, however, that adjustments during the final
calendar year of collections of Intangible Transition Charges for any
series of Additional Transition Bonds will be done quarterly or, if
necessary, monthly in order to ensure full recovery of such Intangible
Transition Charges. Annual adjustments of Intangible Transition Charges
with respect to the Additional Transition Bonds will be made at the same
time as Annual Adjustments for the Initial Transition Bonds. Further, when
monthly adjustments of the Intangible Transition Charges are filed with
respect to the Initial Transition
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Bonds, the total Intangible Transition Charge will be adjusted, including
that related to the Additional Transition Bonds. The revenues received by
the Additional Transition Bond trustee through the related Intangible
Transition Charges shall be determined to be sufficient for this purpose if
and only if the revenues so received through such Intangible Transition
Charges are sufficient to amortize the Additional Transition Bonds, fund
any reserves and to pay premiums, if any, thereon (after payment of accrued
interest, redemption premiums, if any, related credit enhancement,
servicing fees and other related costs and expenses) in accordance with the
terms thereof and as consistent with the terms of this Qualified Rate Order
and the Additional Joint Petition. For each Annual Adjustment, the Company
shall file with this Commission at the same time that it files for annual
adjustments with respect to the Initial Transition Bonds: (a) an accounting
of Intangible Transition Charges received by the Additional Transition Bond
trustee for the previous annual period; (b) a statement of any over- or
under-receipts; (c) the charge or credit to be added to Intangible
Transition Charges to ensure that the Intangible Transition Charges revenue
received by the Additional Transition Bond trustee will be sufficient to
amortize the Qualified Transition Expenses in accordance with the
amortization schedule for the Additional Transition Bonds to be determined
at the time of issuance of each series of Additional Transition Bonds, and
the corresponding reduction or increase in the Competitive Transition
Charges or, if Competitive Transition Charges have not been imposed, the
Company's other regulated revenues; and (d) any proposal by the Company to
modify the reconciliation methodology. Pursuant to 66 Pa. C.S.
ss.2812(b)(4), this Commission shall approve all Annual Adjustments within
90 days of the Company's Annual Adjustment filing. The adjustments
described in this paragraph 7 shall not affect or otherwise alter, impair
or reduce the Company's
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ability to seek and obtain adjustments to the Intangible Transition Charges
with respect to the Initial Transition Bonds, as provided in the First
Stranded Cost Order.
8. That this Commission determines that the methodology under which
the Company will recover the Intangible Transition Charges authorized by
this Qualified Rate Order satisfies the provisions of 66 Pa. C.S.
ss.2812(g), which require that the methodology not shift inter-class or
intra-class and that the methodology maintain consistency with the
allocation methodology for utility production plant used by the Commission
in the Company's last base rate proceeding.
9. That this Commission concludes that it is in the public interest
to, and authorizes the Company and any Assignee to (a) assign, sell,
transfer or pledge Intangible Transition Property in an amount sufficient
to recover all its Qualified Transition Expenses (such term includes all
right, title and interest of the Company or any Assignee in this Qualified
Rate Order) and in all revenues, collections, claims, payments, money or
proceeds arising from Intangible Transition Charges pursuant to this
Qualified Rate Order to the extent this Qualified Rate Order and the rates
and other charges authorized hereunder are declared irrevocable and (b)
issue, sell and refinance, in reliance on this Qualified Rate Order, one or
more series of Additional Transition Bonds, each series in one or more
classes secured by the Intangible Transition Property created by this
Qualified Rate Order; provided that the final maturity of any series of
Additional Transition Bonds shall not exceed ten years from the date of
issuance and in no event shall any Additional Transition Bond have a final
maturity after December 31, 2010. Notwithstanding the foregoing, the
Company retains sole discretion regarding whether to assign, sell or
otherwise transfer Intangible Transition Property created hereby or to
issue or cause the Additional Transition Bonds to be issued or refinanced.
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10. That the Company or any Assignee may refinance the Additional
Transition Bonds in a face amount not to exceed the unamortized principal
thereof. That, if the Company or any Assignee refinances the Additional
Transition Bonds, the Intangible Transition Charges authorized in this
Qualified Rate Order shall be adjusted in accordance with the true-up
mechanism described in paragraph 7 of this Qualified Rate Order to ensure
the receipt by the Additional Transition Bond trustee of revenues
sufficient to pay all principal, interest, redemption premiums, if any,
credit enhancement, reserves, servicing fees, and other costs and expenses
with respect to Additional Transition Bonds issued in that refinancing. The
revenues received by the Additional Transition Bond trustee through the
Intangible Transition Charges shall be determined to be sufficient for this
purpose if and only if the revenues so received through the Intangible
Transition Charges provide for the amortization of Additional Transition
Bonds in accordance with any amortization schedule set forth in any
prospectus or other offering document provided to the holders of the
refinanced bonds after payment of interest, reserves, fees and expenses.
11. That this Commission directs that PECO Energy use the proceeds
from the assignment, sale, transfer or pledge of Intangible Transition
Property and the issuance and sale of Additional Transition Bonds
principally to reduce the Company's Transition or Stranded Costs set forth
in paragraph 6 of the First Stranded Cost Order and in the l998 Joint
Petition and to reduce related capitalization. The Commission authorizes
the Company to reduce the Company's existing capitalization through
retirement of outstanding debt and preferred stock and through stock
buybacks, dividends and market purchases of common stock in such
proportions as the Company determines.
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12. That PECO Energy shall file with this Commission, no later than
120 days after the issuance or refinancing of Additional Transition Bonds,
a description of the final structure of each issuance or refinancing of
such Additional Transition Bonds, including the principal amount, the price
at which each such series and/or class of Additional Transition Bonds were
sold, payment schedules, the interest rate and other financing costs, and
the final plans for the Company's use of the proceeds of such offering.
Notwithstanding such filing, the final structure of each such issuance or
refinancing shall not be subject to change or revision by this Commission
after the date of such issuance or refinancing.
13. That, to the extent that the Company, or any Assignee, assigns,
sells, transfers, or pledges any interest in the Intangible Transition
Property created hereby, this Commission authorizes the Company to
contract, for a specified fee, with such Assignee for the Company to
continue to operate the system to provide transmission and distribution
services to the Company's customers, to impose and collect the applicable
Intangible Transition Charges for the benefit and account of the Assignee,
to make periodic adjustments of Intangible Transition Charges contemplated
under paragraph 7 of this Qualified Rate Order, and to account for and
remit the applicable Intangible Transition Charges to or for the account of
the Assignee free of any charge, deduction or surcharge of any kind (other
than the specified contractual fee referred to above). This Commission also
authorizes the Company to contract with the Assignee and an alternative
party, which may be a trustee, that the alternative party will replace the
Company
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under its contract with the Assignee and perform the obligations of the
Company contemplated in this Qualified Rate Order. The obligations of the
Company (a) shall be binding upon the Company, its successors and assigns
and (b) shall be required by this Commission to be undertaken and performed
by the Company and any other entity which provides transmission and
distribution services to a person that was a customer of the Company
located within the Company's certificated territory on January 1, 1997, or
that became a customer of electric services within such territory after
January 1, 1997, and is still located within such territory, as a condition
to providing service to such customer or municipal entity providing such
services in place of the Company by the Company or other entity.
14. That this Commission hereby declares that this Qualified Rate
Order shall be irrevocable for purposes of Section 2812 of the Public
Utility Code, 66 Pa. C.S. ss.2812, and accordingly agrees that it will not
directly or indirectly, by any subsequent action, reduce, postpone, impair
or terminate this Qualified Rate Order or the Intangible Transition Charges
authorized to be imposed or collected under this Qualified Rate Order. This
Commission further declares that the right, title and interest of the
Company and any Assignee in this Qualified Rate Order and the Intangible
Transition Charges, the rates and other charges authorized hereby and all
revenues, collections, claims, payments, money or proceeds of or arising
from the same constitutes Intangible Transition Property. PECO Energy shall
have the irrevocable right to issue Additional Transition Bonds in
accordance with this Qualified Rate Order until December 31, 2010.
15. That PECO Energy may apply to the Commission for supplements to
this Qualified Rate Order, not inconsistent with the terms and provisions
hereof and the Additional
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Joint Petition, as PECO Energy deems necessary to enable the issuance of
Additional Transition Bonds authorized hereunder.
16. That during some or all of the period during which the Intangible
Transition Charges and the Competitive Transition Charges approved by this
Qualified Rate Order and the First Stranded Cost Order are being collected,
the generation component of the Company's charges to customers will be
limited by the provisions of 66 Pa. C.S. ss.2804(4) (pertaining to rate
caps), the 1998 Joint Petition and the Additional Joint Petition. For
purposes of 66 Pa. C.S. ss.2804(4)(ii), the generation component of the
Company's charges includes Competitive Transition Charges, Intangible
Transition Charges, and other generation charges. If the combined total of
these elements would cause the generation component of the Company's
charges to exceed the rate cap specified in 66 Pa. C.S. ss.2804(4), the
1998 Joint Petition and the Additional Joint Petition, the Company shall
retain whatever right it may have under the existing provisions of the
statute to request relief from the rate cap, but if it does not seek such
relief or that relief is denied, the Company shall adjust the
non-securitized elements of its generation charges, rather than the
Intangible Transition Charges approved by this Qualified Rate Order and the
First Stranded Cost Order, to bring the charges into compliance with the
rate cap provisions of 66 Pa. C.S. ss.2804(4), the 1998 Joint Petition and
the Additional Joint Petition.
17. That pursuant to 52 Pa. Code ss.1.2(c), this Commission hereby
waives the requirements of its regulations at 52 Pa. Code as necessary and
appropriate to implement the Additional Joint Petition and this final
order.
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18. Except to the extent that this Qualified Rate Order causes a
reduction in Competitive Transition Charges in excess of that contemplated
in the First Stranded Cost Order, nothing contained in this Qualified Rate
Order shall be deemed to alter, amend or otherwise impair the rights,
duties and obligations of the Company, on the one hand, or this Commission,
on the other, that are specified in the First Stranded Cost Order or in any
way alter, impair or reduce the value of the Intangible Transition Property
or Intangible Transition Charges authorized in the First Stranded Cost
Order.
BY THE COMMISSION,
_________________________________
James J. McNulty
Secretary
(SEAL)
ORDER ADOPTED: March 16, 2000
ORDER ENTERED:
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