<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-60907
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 4, 1998
$3,400,000,000
COMED TRANSITIONAL FUNDING TRUST
$424,967,313 CLASS A-1 5.38% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$425,032,687 CLASS A-2 5.29% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$258,860,915 CLASS A-3 5.34% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$421,139,085 CLASS A-4 5.39% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$598,510,714 CLASS A-5 5.44% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$761,489,286 CLASS A-6 5.63% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$510,000,000 CLASS A-7 5.74% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
COMMONWEALTH EDISON COMPANY
SERVICER
The ComEd Transitional Funding Trust Transitional Funding Trust Notes,
Series 1998 (the "Offered Notes") offered hereby will consist of the seven
Classes listed above. Each Offered Note will be secured primarily by, and
payable from, the Intangible Transition Property owned by the Trust, as
described under "Description of the Intangible Transition Property" herein and
in the Prospectus and by the other Note Collateral described under "Security for
the Notes" in the Prospectus.
------------------
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED NOTES, AND THERE IS
NO ASSURANCE THAT ONE WILL DEVELOP. PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG
OTHER THINGS, THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH
BEGINS ON PAGE 28 IN THE PROSPECTUS.
------------------
THE OFFERED NOTES OFFERED HEREBY DO NOT CONSTITUTE A DEBT, LIABILITY OR
OTHER OBLIGATION OF THE STATE OF ILLINOIS OR OF ANY POLITICAL SUBDIVISION,
AGENCY OR INSTRUMENTALITY THEREOF AND DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF COMMONWEALTH EDISON COMPANY OR ANY OF ITS AFFILIATES. NONE OF THE
OFFERED NOTES OR THE UNDERLYING INTANGIBLE TRANSITION PROPERTY WILL BE
GUARANTEED OR INSURED BY COMMONWEALTH EDISON COMPANY OR ITS AFFILIATES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING
PUBLIC(1) DISCOUNTS(2) PROCEEDS TO TRUST(1)(3)
----------------- ------------- -----------------------
<S> <C> <C> <C>
Per Class A-1 Note.................................... 99.97653% 0.25085% 99.72568%
Per Class A-2 Note.................................... 99.97842% 0.35000% 99.62842%
Per Class A-3 Note.................................... 99.97625% 0.40000% 99.57625%
Per Class A-4 Note.................................... 99.94876% 0.45000% 99.49876%
Per Class A-5 Note.................................... 99.93238% 0.50000% 99.43238%
Per Class A-6 Note.................................... 99.95144% 0.55000% 99.40144%
Per Class A-7 Note.................................... 99.97110% 0.65000% 99.32110%
Total................................................. $ 3,398,609,385 $15,979,959 $ 3,382,629,426
</TABLE>
- ------------------
(1) Plus accrued interest, if any, at the applicable Note Interest Rate from
December 16, 1998.
(2) The Grantee and ComEd have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $5,849,392 payable by the Trust.
------------------
The Offered Notes are offered severally by the Underwriters when, as and if
issued by the Trust and subject to receipt and acceptance by the Underwriters
and subject to their rights to reject orders in whole or in part. It is expected
that the Offered Notes will be delivered on or about December 16, 1998, in
book-entry form through the facilities of The Depository Trust Company, Cedel
Bank, societe anonyme, and the Euroclear System.
------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
CHASE SECURITIES INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
BNY CAPITAL MARKETS,
INC.
GARDNER RICH & COMPANY LOOP CAPITAL MARKETS, LLC MESIROW FINANCIAL, INC.
<TABLE>
<S> <C> <C>
RAMIREZ & CO., INC. SIEBERT BRANDFORD SHANK & CO., LLC
(A DIVISION OF MURIEL SIEBERT & CO., INC.)
</TABLE>
--------------
The date of this Prospectus Supplement is December 7, 1998.
<PAGE>
Interest on each Class of Offered Notes at the applicable Note Interest Rate
will be distributable quarterly on March 25th, June 25th, September 25th and
December 25th or, if any such day is not a Business Day, the next succeeding
Business Day (each, a "Payment Date") commencing June 25, 1999. See "Description
of the Offered Notes" herein.
The Offered Notes are part of a separate Series of ComEd Transitional
Funding Trust Transitional Funding Trust Notes being offered by the Trust from
time to time pursuant to a Prospectus dated December 4, 1998 (the "Prospectus"),
of which this Prospectus Supplement is a part and which accompanies this
Prospectus Supplement.
THE INTANGIBLE TRANSITION PROPERTY ASSIGNED TO THE TRUST BY THE GRANTEE AND
CERTAIN OTHER ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE OFFERED
NOTES. NONE OF COMMONWEALTH EDISON COMPANY OR ITS AFFILIATES WILL HAVE ANY
OBLIGATIONS IN RESPECT OF THE OFFERED NOTES OR THE INTANGIBLE TRANSITION
PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN AND IN THE PROSPECTUS.
THE TRANSITIONAL FUNDING ORDER AUTHORIZING THE ISSUANCE OF THE OFFERED NOTES
DOES NOT CONSTITUTE A PLEDGE OF THE FULL FAITH AND CREDIT OF THE STATE OF
ILLINOIS OR OF ANY OF ITS POLITICAL SUBDIVISIONS. THE ISSUANCE OF THE OFFERED
NOTES UNDER THE FUNDING LAW SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY
OBLIGATE THE STATE OF ILLINOIS OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR
TO PLEDGE ANY FORM OF TAXATION THEREFOR OR TO MAKE ANY APPROPRIATION FOR THEIR
PAYMENT.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE OFFERED NOTES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
OFFERED NOTES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page S-24 herein and which begins on page 128 in the Prospectus
for the location of the definitions of capitalized terms that appear in the
Prospectus and this Prospectus Supplement.
S-2
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Notes are no longer issued in book-entry form,
the Servicer indirectly will provide to Cede & Co., as nominee of The Depository
Trust Company ("DTC") and registered holder of the Offered Notes, and, upon
request, to Participants of DTC, periodic reports concerning the Offered Notes.
See "Servicing--Statements by Servicer" in the Prospectus. Such reports may be
made available to the holders of interests in the Offered Notes (the
"Noteholders") upon request to their Participants. Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The financial information provided to Noteholders will
not be examined and reported upon, nor will an opinion thereon be provided, by
any independent public accountant.
The Grantee, on behalf of the Trust, will file with the Securities and
Exchange Commission (the "Commission") such periodic reports as are required by
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules, regulations or orders of the Commission thereunder. Copies of the
Registration Statement and exhibits thereto may be obtained at the locations
specified in the Prospectus under "Available Information" at prescribed rates.
Information filed with the Commission can also be inspected at the Commission's
site on the World Wide Web at http://www.sec.gov. The Grantee may discontinue
filing periodic reports under the Exchange Act at the beginning of any fiscal
year following the issuance of the Offered Notes if there are fewer than 300
holders of such Offered Notes.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING PROSPECTUS SUPPLEMENT SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE
PROSPECTUS. CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS PROSPECTUS
SUPPLEMENT SUMMARY HAVE THE MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT OR, TO THE EXTENT NOT DEFINED HEREIN, HAVE THE MEANINGS
ASCRIBED TO SUCH TERMS IN THE PROSPECTUS. THE INDEX OF PRINCIPAL DEFINITIONS
INCLUDED IN THIS PROSPECTUS SUPPLEMENT WHICH BEGINS ON PAGE S-24 SETS FORTH THE
PAGES ON WHICH THE DEFINITIONS OF CERTAIN PRINCIPAL TERMS APPEAR.
<TABLE>
<S> <C>
Summary of Offered Notes.......... The ComEd Transitional Funding Trust Transitional
Funding Trust Notes, Series 1998 (the "Offered Notes").
On the date of initial issuance of the Offered Notes
(the "Series Issuance Date"), the Offered Notes will be
issued as described below.
</TABLE>
<TABLE>
<CAPTION>
NOTE
INITIAL SCHEDULED MATURITY INTEREST
CLASS PRINCIPAL AMOUNT DATE FINAL MATURITY DATE RATE
- ---------------------- ----------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
A-1................... $ 424,967,313 March 25, 2000 March 25, 2002 5.38%
A-2................... 425,032,687 June 25, 2001 June 25, 2003 5.29%
A-3................... 258,860,915 March 25, 2002 March 25, 2004 5.34%
A-4................... 421,139,085 June 25, 2003 June 25, 2005 5.39%
A-5................... 598,510,714 March 25, 2005 March 25, 2007 5.44%
A-6................... 761,489,286 June 25, 2007 June 25, 2009 5.63%
A-7................... 510,000,000 December 25, 2008 December 25, 2010 5.74%
</TABLE>
<TABLE>
<S> <C>
Transaction Overview.............. For a brief summary of the statutes and proceedings
which form the basis for the issuance and sale of the
Offered Notes by the Trust, and a diagram of the parties
to the transaction, their roles and their various
relationships to the other parties, investors are
directed to the discussion under the heading "Prospectus
Summary--Transaction Overview" in the Prospectus.
The Trust, whose primary asset will be Intangible
Transition Property transferred to the Trust pursuant to
the Sale Agreements, will issue the Offered Notes, which
will be sold to the Underwriters. The Offered Notes will
be secured primarily by, and payable from, all of the
Intangible Transition Property (whether created by the
Transitional Funding Order issued by the ICC on July 21,
1998 (the "1998 TFO") or any other Transitional Funding
Order) which has been transferred to the Trust pursuant
to a Sale Agreement. The Offered Notes also will be
secured by the Grant Agreements, the Sale Agreements and
the Servicing Agreement; the Collection Account and all
amounts of cash or investment property on deposit
therein or credited thereto from time to time; all
rights to compel ComEd, as Servicer (or any successor),
to file for and obtain adjustments to the IFC Charges in
accordance with Section 18-104(d) of the Act, the
Transitional Funding Orders, including the 1998 TFO and
all IFC Tariffs, including the 1998 IFC Tariff (as
hereinafter defined) filed with the ICC in connection
therewith; all present and future claims, demands,
causes and choses in action in respect of any or all of
the foregoing; and all
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
payments on or under and all proceeds in respect of any
or all of the foregoing.
The IFC Charges are calculated to be sufficient over
time to (a) pay interest and make Scheduled Payments on
the Offered Notes, (b) pay all related fees and expenses
of the Trust, including the Servicing Fee and any
Quarterly Administration Fee, (c) replenish the Capital
Subaccount up to the Required Capital Level, and (d)
fund and maintain the Overcollateralization Subaccount
up to the Required Overcollateralization Level. These
payments are collectively referred to herein as the
"Specified Payments". The IFC Charges will be increased
in connection with the issuance of any additional Notes
pursuant to any subsequent Transitional Funding Order,
to a level calculated to be sufficient over time to make
the Specified Payments in respect of all outstanding
Notes.
To enhance the likelihood of timely recovery of the
amounts necessary to make the Specified Payments, the
IFC Charges may be increased from time to time through
both Reconciliation Adjustments and True-Up Adjustments,
as described in the Prospectus over the life of the
Notes (including the Offered Notes). See "Description of
the Intangible Transition Property--Adjustments to the
IFC Charges" in the Prospectus.
Risk Factors...................... Investors should consider the risks associated with an
investment in the Offered Notes. For a discussion of
certain material risks associated therewith, investors
should review the discussion under "Risk Factors" which
begins on page 28 of the Prospectus.
The Offered Notes................. The Offered Notes are the ComEd Transitional Funding
Trust Transitional Funding Trust Notes, Series 1998. The
Offered Notes are comprised of the seven classes listed
on the cover page hereof (each, a "Class"). As of the
Series Issuance Date, the aggregate principal balance of
the Offered Notes (the "Original Note Principal
Balance") will be $3,400,000,000. Each Class of Offered
Notes will have a principal balance (the "Class
Principal Balance") equal to the initial amount of
principal allocable to such Class, reduced by principal
paid to such Class in accordance with the terms of the
Indenture. See "Description of the Offered Notes" herein
and "Description of the Notes" in the Prospectus.
None of the Offered Notes or the underlying Intangible
Transition Property will be guaranteed or insured by
ComEd or any of its affiliates. The 1998 TFO authorizing
the issuance of the Offered Notes does not constitute a
pledge of the full faith and credit of the State of
Illinois or of any of its political subdivisions. The
issuance of the Offered Notes under the Funding Law
shall not directly, indirectly or contingently obligate
the State of Illinois or any political subdivision,
agency
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
or instrumentality thereof to levy or to pledge any form
of taxation therefor or to make any appropriation for
their payment. The Offered Notes will be payable solely
by application of the proceeds of the Intangible
Transition Property and the other Note Collateral held
by the Indenture Trustee under the Indenture. If
additional Notes (other than the Offered Notes) are
subsequently issued under the Indenture, the Offered
Notes will be at least PARI PASSU with such other Notes
as to all of the Intangible Transition Property and the
other Note Collateral. Any and all funds or property
released by the Indenture Trustee pursuant to the
Indenture will cease to be Note Collateral and will no
longer be available for payment of the Offered Notes.
Servicer/Administrator............ Commonwealth Edison Company, an Illinois corporation
("ComEd") and a subsidiary of Unicom Corporation, an
Illinois corporation, will act as the initial servicer
(in such capacity, and together with any successor
servicer, the "Servicer") of the Intangible Transition
Property pursuant to the terms of the Servicing
Agreement, and as the initial administrator (in such
capacity, and together with any successor administrator,
the "Administrator") of the Trust and the Grantee
pursuant to the terms of an Administration Agreement
among the Trust, the Grantee and the Administrator (the
"Administration Agreement"). For a more complete
discussion of ComEd and its role as Servicer, see "The
Servicer" herein and in the Prospectus.
Grantee........................... The grantee of the Intangible Transition Property will
be ComEd Funding, LLC, a special purpose Delaware
limited liability company (the "Grantee"), whose sole
member is ComEd. Pursuant to the Sale Agreement entered
into with respect to the issuance by the Trust of the
Offered Notes, the Grantee will assign all of its right,
title and interest in the Intangible Transition Property
created by the 1998 TFO (the "1998 ITP"), the Servicing
Agreement and certain other related assets to the Trust.
For a more complete discussion of the Grantee, see "The
Grantee" in the Prospectus.
Trust............................. The issuer of the Offered Notes will be the ComEd
Transitional Funding Trust (the "Trust"), a Delaware
business trust created under a Declaration of Trust (the
"Trust Agreement") by the Delaware Trustee and the
Beneficiary Trustees. For a more complete discussion of
the Trust, see "The Trust" in the Prospectus.
Delaware Trustee.................. First Union Trust Company, National Association, acting
not in its individual capacity, but solely as trustee
under the Trust Agreement (the "Delaware Trustee").
Beneficiary Trustees.............. Ruth Ann M. Gillis and David R. Zahakaylo.
Indenture......................... The Offered Notes will be issued pursuant to the terms
of the Indenture through the execution and delivery of a
trustee's issuance certificate or a supplement to the
Indenture. The 1998
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
ITP, any other subsequent Intangible Transition Property
created by subsequent Transitional Funding Orders and
the other Note Collateral will be pledged under the
Indenture for the benefit of the Noteholders. The
Indenture will be qualified under the Trust Indenture
Act of 1939.
Indenture Trustee................. Harris Trust and Savings Bank, an Illinois banking
corporation, (the "Indenture Trustee").
Intangible Transition Property.... As more fully described under "Description of the
Intangible Transition Property" herein and in the
Prospectus, the Intangible Transition Property,
including the 1998 ITP, is the separate property right
as set forth in the Funding Law and created under the
Transitional Funding Orders, including the 1998 TFO,
including, without limitation, the right, title and
interest to impose and receive the IFC Charges
authorized thereby and all related revenues,
collections, claims, payment, money, or proceeds
thereof, including all right, title, and interest under
and pursuant to such Transitional Funding Orders.
IFC Charges....................... As more fully described under "Description of the
Intangible Transition Property" and "Electric Industry
Restructuring in Illinois--Instrument Funding Charges"
in the Prospectus, IFC Charges are nonbypassable,
usage-based, per kilowatt-hour charges to be imposed on
each existing and future retail customer or class of
retail customers in ComEd's service area in Illinois, or
other person or group of persons obligated from time to
time to pay to ComEd or any successor Applicable Rates,
including any customers who enter into competitive
contracts with ComEd to take non-tariffed services but
would otherwise have been obligated to pay Applicable
Rates (collectively, the "Customers").
The IFC Charges authorized in the 1998 TFO (the "1998
Authorized IFC Charges"), which ComEd believes are
higher than will actually be required to make all
payments on the Offered Notes based on certain
assumptions contained in the 1998 TFO, are set forth in
"Description of the Intangible Transition Property"
herein.
As required by the Funding Law, any increase in the
amount of the IFC Charges for any of the IFC Customer
Classes above the level of the 1998 Authorized IFC
Charges for such IFC Customer Classes shall require
ComEd or any successor Utility thereto to file an
amendatory tariff adjusting the amounts otherwise
billable by ComEd or such successor Utility for
Applicable Rates to offset the amount of such excess
(or, if ComEd or such successor Utility shall have
previously filed any such amendatory tariffs, the
incremental amount of such excess). However, the failure
of such amendatory tariff to become effective for any
reason shall not delay or impair the effectiveness of
the increase in the IFC Charges.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
In connection with the issuance and pricing of the
Offered Notes, ComEd filed an IFC Tariff with the ICC
(the "1998 IFC Tariff") which provides for, among other
things, certain revisions to the IFC Charges. The actual
initial cents per kilowatt-hour IFC Charge payable by
each of the thirteen (13) IFC Customer Classes beginning
on the Series Issuance Date is as follows:
</TABLE>
<TABLE>
<CAPTION>
IFC CHARGES
IFC CUSTOMER CLASS (CENTS PER KWH)
- ---------------------------------------------------------- -----------------
<S> <C>
Residential--No Space Heat................................ 1.067
Residential--Space Heat................................... 0.687
Standby Service........................................... 0.432
Interruptible Service..................................... 0.343
Street Lighting--Fixture Based Rates...................... 1.460
Street Lighting--Dusk to Dawn and Traffic Signal.......... 0.455
Railroads................................................. 0.620
Water-Supply and Sewage Pumping Service................... 0.584
In Lieu of Demand......................................... 1.034
0 to and including 100 kW Demand.......................... 0.812
Over 100 to and including 1,000 kW Demand................. 0.658
Over 1,000 to and including 10,000 kW Demand.............. 0.595
Over 10,000 kW Demand..................................... 0.465
</TABLE>
<TABLE>
<S> <C>
Adjustments to the IFC Charges.... The Servicing Agreement and the 1998 TFO require the
Servicer to calculate and implement two different kinds
of adjustments to the IFC Charges: Reconciliation
Adjustments and True-Up Adjustments, which are
collectively referred to as the "Adjustments." The
Adjustments to the IFC Charges will continue until all
interest and principal on all the Offered Notes have
been paid in full, subject only to the limitation of the
maximum amount of Intangible Transition Property
authorized by the ICC in the related Transitional
Funding Order or Orders. In addition, the IFC Charges
will be increased in connection with the issuance of
additional Notes pursuant to any subsequent Transitional
Funding Order, to a level calculated to be sufficient
over time to provide for, among other things, payment of
all interest and principal in respect of all outstanding
Notes. For a detailed discussion of Adjustments to IFC
Charges, see "Description of the Intangible Transition
Property--Adjustments to the IFC Charges" in the
Prospectus and "Description of the Intangible Transition
Property-- Adjustments to the IFC Charges" herein.
Payment Dates..................... Payments will be made to holders of the Offered Notes on
each March 25th, June 25th, September 25th and December
25th or, if any such date is not a Business Day, the
next succeeding Business Day), commencing June 25, 1999
(each, a "Payment Date").
Record Dates...................... With respect to any Payment Date or date of any
redemption, the Business Day preceding such Payment Date
or other date if the Offered Notes are Book-Entry Notes
or, if Definitive Notes
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
are issued, the last day of the preceding calendar month
(each, a "Record Date").
Scheduled Maturity and Final
Maturity Dates.................. The "Scheduled Maturity Date" for any Class will be the
date when all principal and interest on such Class of
Offered Notes is expected to be paid in full by the
Trust. The "Final Maturity Date" for any Class
corresponds to the date on which such Class of Offered
Notes may be accelerated for failure to pay outstanding
principal thereon. The Scheduled Maturity Date and the
Final Maturity Date for each Class of Offered Notes are
specified herein under "Description of the Offered
Notes."
Failure to pay principal on any Class of Offered Notes
in full by the Final Maturity Date shall constitute an
Event of Default, and the Indenture Trustee may and,
upon the written direction of the holders of not less
than a majority in principal amount of all Notes of all
Series then outstanding, shall declare the unpaid
principal amount of all the Notes of all Series then
outstanding to be due and payable. See "Description of
the Notes--Events of Default" and "Ratings" in the
Prospectus.
Issuance of Additional Series..... The Trust may issue additional Series of Notes from time
to time. An additional Series may be issued only upon
satisfaction of the conditions described under
"Description of the Notes-- Conditions of Issuance of
Additional Series" in the Prospectus.
Interest.......................... On each Payment Date, the Indenture Trustee shall pay
pro rata to the Noteholders of each Class as of the
related Record Date any unpaid interest payable on any
prior Payment Dates (together with, to the extent
permitted by applicable law, interest on such unpaid
interest at the applicable Note Interest Rate), and
interest in an amount equal to one-fourth of the product
of (a) the applicable Note Interest Rate and (b) the
applicable Class Principal Balance as of the close of
business on the preceding Payment Date after giving
effect to all payments of principal made to the
Noteholders on such preceding Payment Date; provided,
however, that with respect to the initial Payment Date,
interest on each outstanding Class Principal Balance
will accrue from and including the Series Issuance Date
to, but excluding, such initial Payment Date. Interest
will be calculated on the basis of a 360-day year of
twelve 30-day months. Interest on the Offered Notes will
be distributed prior to any distribution of principal on
the Offered Notes. See "Description of the Offered
Notes--Payments of Interest" herein and "Description of
the Notes--Interest and Principal" in the Prospectus.
Principal......................... Unless an Event of Default has occurred and is
continuing and the Offered Notes have been declared due
and payable, on each Payment Date, the Indenture Trustee
shall, as of the related Record Date and subject to
availability of funds in the Collection Account, make
principal payments on the Offered Notes in the following
order and priority: (1) to the holders of
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
the Class A-1 Notes, until the Class Principal Balance
thereof has been reduced to zero; (2) to the holders of
the Class A-2 Notes, until the Class Principal Balance
thereof has been reduced to zero; (3) to the holders of
the Class A-3 Notes, until the Class Principal Balance
thereof has been reduced to zero; (4) to the holders of
the Class A-4 Notes, until the Class Principal Balance
thereof has been reduced to zero; (5) to the holders of
the Class A-5 Notes, until the Class Principal Balance
thereof has been reduced to zero; (6) to the holders of
the Class A-6 Notes, until the Class Principal Balance
thereof has been reduced to zero; (7) to the holders of
the Class A-7 Notes, until the Class Principal Balance
thereof has been reduced to zero; provided, however,
that, unless an Event of Default has occurred and is
continuing and the Offered Notes have been declared due
and payable, in no event shall the principal payment on
any Class on a Payment Date be greater than the
Scheduled Payment for such Class and Payment Date. See
"Description of the Offered Notes--Payments of
Principal" herein and "Description of the
Notes--Interest and Principal" in the Prospectus.
Optional Redemption............... Pursuant to the terms of the Indenture, the Offered
Notes may be redeemed on any Payment Date if, after
giving effect to payments that would otherwise be made
on such date, the outstanding principal balance of the
Offered Notes has been reduced to less than five percent
(5%) of the initial principal balance thereof. The Notes
may be so redeemed upon payment of the outstanding
principal amount of the Notes and accrued but unpaid
interest thereon as of the date of redemption. See
"Description of the Offered Notes--Optional Redemption"
herein.
Collection Account and
Subaccounts..................... Upon issuance of the Offered Notes, a Collection Account
will be established and held by the Indenture Trustee
for the benefit of the Noteholders of all outstanding
Series of Notes. The Collection Account will consist of
four subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the Overcollateralization
Amount (the "Overcollateralization Subaccount"), and a
capital subaccount (the "Capital Subaccount"). Unless
the context indicates otherwise, references herein to
the Collection Account include each of the subaccounts
contained therein. Withdrawals from and deposits to
these subaccounts will be made as described under
"Security for the Notes--Allocations; Payments" in the
Prospectus.
Credit Enhancement................ The Offered Notes will benefit from the following forms
of credit enhancement:
OVERCOLLATERALIZATION. The Overcollateralization Amount
established in connection with the issuance of the
Offered
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Notes will be $17,000,000, which is 0.50 percent of the
initial aggregate Class Principal Balance for all of the
Offered Notes. The IFC Charges will be set and adjusted
at a rate that is intended to recover, among other
things, the Overcollateralization Amount over the life
of the Offered Notes according to the schedule set forth
under "Description of the Offered
Notes--Overcollateralization Amount" herein. Collections
allocated to the Overcollateralization Amount for all
Series of Notes, including the Offered Notes, will be
held in the Overcollateralization Subaccount, as
described further under "Security for the
Notes--Description of Indenture Accounts--
Overcollateralization Subaccount" in the Prospectus and
any such amounts will be available to pay interest and
make Scheduled Payments on all Series of Notes,
including the Offered Notes, to the extent of any
shortfalls in current IFC Collections and the Reserve
Subaccount available for such payment. The amount
required to be on deposit in the Overcollateralization
Subaccount with respect to the Offered Notes as of any
Payment Date, as specified in the schedule set forth
under "Description of the Offered Notes--
Overcollateralization Amount" herein, is referred to
herein as the "Required Overcollateralization Level."
RESERVE SUBACCOUNT. IFC Collections available with
respect to any Payment Date in excess of amounts
necessary to make the Specified Payments (all as
described under "Security for the Notes--Allocations;
Payments" in the Prospectus), will be allocated to the
Reserve Subaccount. On each Payment Date, the Indenture
Trustee will draw on amounts in the Reserve Subaccount
to the extent amounts available in the General
Subaccount are insufficient to pay expenses of the Trust
and to pay interest and make Scheduled Payments on the
Notes and to make other payments and transfers in
accordance with the terms of the Indenture.
CAPITAL SUBACCOUNT. Prior to or upon the issuance of
the Offered Notes, the Grantee will transfer capital to
the Trust in the amount of $17,000,000, which is 0.50
percent of the initial aggregate Class Principal Balance
for all of the Offered Notes. Such amount is the
Required Capital Level with respect to the Offered Notes
and, together with the Required Capital Level with
respect to any other Series of Notes, will be deposited
into the Capital Subaccount. Withdrawals from and
deposits to the Capital Subaccount will be made as
described under "Security for the Notes--Allocations;
Payments" in the Prospectus.
Allocations and Payment........... On each Payment Date, amounts on deposit in the
Collection Account will be applied in the manner
described under "Security for the Notes--Allocations;
Payments" in the Prospectus.
Servicing Compensation............ The Servicer will be entitled to receive a servicing fee
on each Payment Date (the "Servicing Fee"), in an amount
equal to (a) $750,000, for so long as IFC Charges are
billed
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
concurrently with charges otherwise billed by the
Servicer to Customers (which ComEd and any successor
thereto are required to do) and (b) $5,000,000, if IFC
Charges are not billed concurrently with charges
otherwise billed by the Servicer to Customers. The
Servicing Fee in clause (b) will only be payable if the
Servicer is not ComEd or a successor thereto. The
Servicing Fee will be paid prior to the payment of any
amounts in respect of interest on and principal of the
Offered Notes. The Servicer will be entitled to retain
as additional compensation net investment income on IFC
Payments received by the Servicer prior to remittance
thereof to the Collection Account and the portion of
late fees, if any, paid by Customers relating to the IFC
Payments. See "Servicing--Servicing Compensation" herein
and in the Prospectus.
No Servicer Advances.............. The Servicer will not be obligated to make any advances
of interest or principal on the Offered Notes.
Maturity, Weighted Average Life
and Yield Considerations........ The actual Payment Dates on which principal is paid on
each Class of Offered Notes and, therefore, the weighted
average life and yield to maturity on the Offered Notes
may be affected by various factors. See "Certain
Payment, Weighted Average Life and Yield Considerations"
and "Description of the Intangible Transition
Property--Adjustments to the IFC Charges" in the
Prospectus.
Denominations..................... Each Class of Offered Notes will be issued in minimum
initial denominations of $1,000 and in integral
multiples thereof.
Book-Entry Notes.................. The Offered Notes will initially be represented by one
or more certificates registered in the name of Cede &
Co. ("Cede") (each, a "Book-Entry Note"), the nominee of
The Depository Trust Company ("DTC"), and available only
in the form of book-entries on the records of DTC, its
Participants and its Indirect Participants. Holders may
also hold Book-Entry Notes of a Series through CEDEL or
Euroclear (in Europe), if they are participants in such
systems or indirectly through organizations that are
participants in such systems. For a more complete
discussion of the Book-Entry Notes, see "Risk Factors"
and "Description of the Notes--Book-Entry Registration"
in the Prospectus.
Ratings........................... It is a condition of issuance of the Offered Notes that
the Offered Notes be rated AAA by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., Aaa by
Moody's Investors Service, Inc., AAA by Duff & Phelps
Credit Rating Co. and AAA by Fitch IBCA, Inc. (each of
such rating agencies, a "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. No person is obligated to
maintain any rating on any Offered Note and,
accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Notes upon initial
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
issuance thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a rating of any
Series or Class of Offered Notes is revised or
withdrawn, the liquidity of such Series or Class of
Offered Notes may be adversely affected. In general, the
ratings address credit risk and do not represent any
assessment of the rate of principal payments on the
Offered Notes. See "Risk Factors--Nature of the Notes--
Uncertain Payment Amounts and Weighted Average Life" in
the Prospectus, "Certain Payment, Weighted Average Life
and Yield Considerations" herein and in the Prospectus
and "Ratings" herein and in the Prospectus.
Taxation of the Notes............. ComEd has received a ruling from the IRS holding that,
among other things, the Offered Notes will be
obligations of ComEd for federal income tax purposes. In
the opinion of Sidley & Austin, interest paid on the
Offered Notes generally will be taxable to a United
States Noteholder as ordinary interest income at the
time it accrues or is received in accordance with such
United States Noteholder's method of accounting for
United States federal income tax purposes. Such opinion
assumes, based on the ruling from the IRS described
above, that the Notes will constitute indebtedness of
ComEd for federal income tax purposes. See "Material
United States Federal Tax Consequences" herein and in
the Prospectus.
ERISA Considerations.............. The Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code") impose
various requirements on employee benefit plans and
certain other plans and arrangements subject to ERISA,
and on persons who are fiduciaries with respect to such
plans and arrangements, in connection with the
investment of assets which are deemed to be "plan
assets" for purposes of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is
available. A fiduciary of any employee benefit plan or
other plan or arrangement that is subject to ERISA or
Section 4975 of the Code, before purchasing the Notes,
should therefore determine that an investment in the
Notes is consistent with the fiduciary duties of ERISA
and does not violate the prohibited transaction
provisions of ERISA or the Code.
</TABLE>
S-13
<PAGE>
DESCRIPTION OF THE OFFERED NOTES
GENERAL
The Offered Notes, together with any Notes of any other Series which may
hereafter be issued by the Trust (collectively, the "Notes"), will be issued by
the Trust pursuant to the Indenture and the trustee's issuance certificate or
series supplement, if any, thereto. Pursuant to the Indenture, further trustee's
issuance certificates or series supplements may be executed in order for the
Trust to issue additional Series of Notes. In connection with the issuance of
any additional Series of Notes pursuant to a subsequent Transitional Funding
Order, the IFC Charges will be increased to a level calculated to be sufficient
over time to provide for, among other things, payment of all interest and
principal in respect of all outstanding Notes. This summary should be read
together with the material under the heading "Description of the Notes" in the
Prospectus.
The Offered Notes will be comprised of the following seven Classes:
<TABLE>
<CAPTION>
INITIAL NOTE
PRINCIPAL SCHEDULED INTEREST
CLASS AMOUNT MATURITY DATE FINAL MATURITY DATE RATE
- ----------- ------------- ------------------ ------------------- ------------
<S> <C> <C> <C> <C>
A-1........ $ 424,967,313 March 25, 2000 March 25, 2002 5.38%
A-2........ 425,032,687 June 25, 2001 June 25, 2003 5.29%
A-3........ 258,860,915 March 25, 2002 March 25, 2004 5.34%
A-4........ 421,139,085 June 25, 2003 June 25, 2005 5.39%
A-5........ 598,510,714 March 25, 2005 March 25, 2007 5.44%
A-6........ 761,489,286 June 25, 2007 June 25, 2009 5.63%
A-7........ 510,000,000 December 25, 2008 December 25, 2010 5.74%
</TABLE>
SECURITY
To secure the payment of principal of and interest on the Offered Notes, the
Trust has granted to the Indenture Trustee, for the benefit of the holders of
the Notes (the "Noteholders"), a security interest in all of the Trust's right,
title and interest in and to the 1998 ITP, any subsequent Intangible Transition
Property created under any subsequent Transitional Funding Order and the other
Note Collateral. If additional Notes (other than the Offered Notes) are
subsequently issued, the Offered Notes will be at least PARI PASSU with such
other Notes as to all of the Intangible Transition Property and the other Note
Collateral. The Note Collateral is described more specifically under "Security
for the Notes--Pledge of Note Collateral" in the Prospectus.
PAYMENTS OF INTEREST
Interest on each Class of the Offered Notes will accrue from the Series
Issuance Date at the rates set forth on the cover page and above (each, a "Note
Interest Rate"), in each case payable quarterly on each Payment Date of each
year, commencing June 25, 1999.
On each Payment Date, Noteholders of each Class of Offered Notes will be
entitled to receive pro rata any unpaid interest payable on any prior Payment
Dates (together with, to the extent permitted by applicable law, interest on
such unpaid interest at the applicable Note Interest Rate), and interest in an
amount equal to one-fourth of the product of (a) the applicable Note Interest
Rate and (b) the applicable Class Principal Balance as of the close of business
on the preceding Payment Date after giving effect to all payments of principal
made to the Noteholders on such preceding Payment Date; provided, however, that
with respect to the initial Payment Date, interest on each outstanding Class
Principal Balance will accrue from and including the Series Issuance Date to but
excluding such first Payment Date. Interest will be calculated on the basis of a
360-day year of twelve 30-day months. See "Description of the Notes--Interest
and Principal" in the Prospectus.
S-14
<PAGE>
PAYMENTS OF PRINCIPAL
Unless an Event of Default has occurred and is continuing and the Offered
Notes have been declared due and payable, on each Payment Date, each Class of
the Offered Notes will be entitled to receive payments of principal as follows:
(1) to the holders of the Class A-1 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(2) to the holders of the Class A-2 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(3) to the holders of the Class A-3 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(4) to the holders of the Class A-4 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(5) to the holders of the Class A-5 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(6) to the holders of the Class A-6 Notes, until the Class Principal
Balance thereof has been reduced to zero;
(7) to the holders of the Class A-7 Notes, until the Class Principal
Balance thereof has been reduced to zero;
provided, however, that, unless an Event of Default has occurred and is
continuing and the Offered Notes have been declared due and payable, in no event
shall the principal payment on any Class on a Payment Date be greater than the
Scheduled Payment for such Class and Payment Date.
Principal will be payable at the Corporate Trust Office of the Indenture
Trustee in the City of Chicago, Illinois, or at the office or agency of the
Indenture Trustee maintained for such purposes in the Borough of Manhattan, the
City of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Offered Notes at each
Payment Date from the Series Issuance Date to the Scheduled Maturity Date for
such Class. In preparing the following table, it has been assumed, among other
things, that (a) the Offered Notes are issued on December 16, 1998, (b) payments
on the Offered Notes are made on each Payment Date, commencing June 25, 1999,
(c) the Servicing Fee equals $750,000 per Payment Date, (d) there are no net
earnings on amounts on deposit in the Collection Account, (e) Operating
Expenses, Quarterly Administration Fees, and amounts owed to the Delaware
Trustee and the Indenture Trustee are in the aggregate $135,000 on each Payment
Date, and all such amounts are payable in arrears, and (f) all IFC Collections
are deposited in the Collection Account in accordance with ComEd's forecasts.
S-15
<PAGE>
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PAYMENT DATE 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>
Series Issuance Date..... $ 424,967,313 $ 425,032,687 $ 258,860,915 $ 421,139,085 $ 598,510,714 $ 761,489,286 $ 510,000,000
June 25, 1999............ 284,967,313 425,032,687 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
September 25, 1999....... 187,921,918 425,032,687 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
December 25, 1999........ 94,967,313 425,032,687 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
March 25, 2000........... 0 425,032,687 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
June 25, 2000............ 0 340,000,000 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
September 25, 2000....... 0 254,541,398 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
December 25, 2000........ 0 170,000,000 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
March 25, 2001........... 0 81,515,431 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
June 25, 2001............ 0 0 258,860,915 421,139,085 598,510,714 761,489,286 510,000,000
September 25, 2001....... 0 0 174,657,533 421,139,085 598,510,714 761,489,286 510,000,000
December 25, 2001........ 0 0 88,860,915 421,139,085 598,510,714 761,489,286 510,000,000
March 25, 2002........... 0 0 0 421,139,085 598,510,714 761,489,286 510,000,000
June 25, 2002............ 0 0 0 340,000,000 598,510,714 761,489,286 510,000,000
September 25, 2002....... 0 0 0 255,965,598 598,510,714 761,489,286 510,000,000
December 25, 2002........ 0 0 0 170,000,000 598,510,714 761,489,286 510,000,000
March 25, 2003........... 0 0 0 81,204,132 598,510,714 761,489,286 510,000,000
June 25, 2003............ 0 0 0 0 598,510,714 761,489,286 510,000,000
September 25, 2003....... 0 0 0 0 514,475,567 761,489,286 510,000,000
December 25, 2003........ 0 0 0 0 428,510,714 761,489,286 510,000,000
March 25, 2004........... 0 0 0 0 339,850,103 761,489,286 510,000,000
June 25, 2004............ 0 0 0 0 258,510,714 761,489,286 510,000,000
September 25, 2004....... 0 0 0 0 174,439,914 761,489,286 510,000,000
December 25, 2004........ 0 0 0 0 88,510,714 761,489,286 510,000,000
March 25, 2005........... 0 0 0 0 0 761,489,286 510,000,000
June 25, 2005............ 0 0 0 0 0 680,000,000 510,000,000
September 25, 2005....... 0 0 0 0 0 595,890,076 510,000,000
December 25, 2005........ 0 0 0 0 0 510,000,000 510,000,000
March 25, 2006........... 0 0 0 0 0 421,643,811 510,000,000
June 25, 2006............ 0 0 0 0 0 340,000,000 510,000,000
September 25, 2006....... 0 0 0 0 0 255,850,516 510,000,000
December 25, 2006........ 0 0 0 0 0 170,000,000 510,000,000
March 25, 2007........... 0 0 0 0 0 81,803,853 510,000,000
June 25, 2007............ 0 0 0 0 0 0 510,000,000
September 25, 2007....... 0 0 0 0 0 0 425,816,557
December 25, 2007........ 0 0 0 0 0 0 340,000,000
March 25, 2008........... 0 0 0 0 0 0 251,959,273
June 25 ,2008............ 0 0 0 0 0 0 170,000,000
September 25, 2008....... 0 0 0 0 0 0 85,769,907
December 25, 2008........ 0 0 0 0 0 0 0
<CAPTION>
PAYMENT DATE SERIES 1998
- ------------------------- --------------
<S> <C>
Series Issuance Date..... $3,400,000,000
June 25, 1999............ 3,260,000,000
September 25, 1999....... 3,162,954,605
December 25, 1999........ 3,070,000,000
March 25, 2000........... 2,975,032,687
June 25, 2000............ 2,890,000,000
September 25, 2000....... 2,804,541,398
December 25, 2000........ 2,720,000,000
March 25, 2001........... 2,631,515,431
June 25, 2001............ 2,550,000,000
September 25, 2001....... 2,465,796,618
December 25, 2001........ 2,380,000,000
March 25, 2002........... 2,291,139,085
June 25, 2002............ 2,210,000,000
September 25, 2002....... 2,125,965,598
December 25, 2002........ 2,040,000,000
March 25, 2003........... 1,951,204,132
June 25, 2003............ 1,870,000,000
September 25, 2003....... 1,785,964,853
December 25, 2003........ 1,700,000,000
March 25, 2004........... 1,611,339,389
June 25, 2004............ 1,530,000,000
September 25, 2004....... 1,445,929,200
December 25, 2004........ 1,360,000,000
March 25, 2005........... 1,271,489,286
June 25, 2005............ 1,190,000,000
September 25, 2005....... 1,105,890,076
December 25, 2005........ 1,020,000,000
March 25, 2006........... 931,643,811
June 25, 2006............ 850,000,000
September 25, 2006....... 765,850,516
December 25, 2006........ 680,000,000
March 25, 2007........... 591,803,853
June 25, 2007............ 510,000,000
September 25, 2007....... 425,816,557
December 25, 2007........ 340,000,000
March 25, 2008........... 251,959,273
June 25 ,2008............ 170,000,000
September 25, 2008....... 85,769,907
December 25, 2008........ 0
</TABLE>
There can be no assurance that the Class Principal Balances of the Offered
Notes will be reduced as indicated in the foregoing table, and the actual
reductions in such Class Principal Balances may be slower (or, if an Event of
Default occurs and is continuing and the Offered Notes have been declared due
and payable, faster) than those indicated in the chart. See "Risk Factors" in
the Prospectus for a discussion of various factors which may, individually or in
the aggregate, affect the rate of reductions of the Class Principal Balances of
the Offered Notes.
The entire unpaid principal amount of the Offered Notes will be due and
payable on the date on which an Event of Default has occurred and is continuing,
if the Indenture Trustee or holders of not less than a majority in principal
amount of the Notes of all Series then outstanding have declared the Offered
Notes to be immediately due and payable. See "Security for the Notes--Events of
Default; Rights Upon Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Offered Notes may be redeemed on any Payment Date commencing with the
Payment Date on which the outstanding principal balance of the Offered Notes
(after giving effect to payments that would otherwise be made on such date) has
been reduced to less than five percent of the initial principal balance of the
Offered Notes. Notice of such redemption will be given by the Trust to the
Indenture Trustee and the Rating Agencies not less than 25 days nor more than 50
days prior to the date of
S-16
<PAGE>
redemption, and written notice shall also be given to each holder of Offered
Notes to be redeemed by first-class mail, postage prepaid, mailed not less than
five days nor more than 25 days prior to the applicable date of redemption.
OVERCOLLATERALIZATION AMOUNT
The 1998 TFO provides that the Trust, as the assignee of the Intangible
Transition Property, is entitled to collect an additional amount (for the
Offered Notes, the "Overcollateralization Amount"), which is intended to enhance
the likelihood that payments on the Offered Notes will be made in accordance
with their respective Expected Amortization Schedules. The Overcollateralization
Amount established in connection with the issuance of the Offered Notes will be
$17,000,000, which is 0.50 percent of the initial aggregate principal amount of
the Offered Notes. The Overcollateralization Amount is scheduled to be collected
over the life of the Offered Notes in accordance with the Schedule set forth
hereinbelow. The Required Overcollateralization Level for the Offered Notes on
each Payment Date is as follows:
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
<TABLE>
<CAPTION>
REQUIRED REQUIRED
OVERCOLLATERALIZATION OVERCOLLATERALIZATION
PAYMENT DATE LEVEL PAYMENT DATE LEVEL
- -------------- -------------------- -------------- --------------------
<S> <C> <C> <C>
Jun. 1999 $ 850,000 Jun. 2004 $ 9,350,000
Sep. 1999 1,275,000 Sep. 2004 9,775,000
Dec. 1999 1,700,000 Dec. 2004 10,200,000
Mar. 2000 2,125,000 Mar. 2005 10,625,000
Jun. 2000 2,550,000 Jun. 2005 11,050,000
Sep. 2000 2,975,000 Sep. 2005 11,475,000
Dec. 2000 3,400,000 Dec. 2005 11,900,000
Mar. 2001 3,825,000 Mar. 2006 12,325,000
Jun. 2001 4,250,000 Jun. 2006 12,750,000
Sep. 2001 4,675,000 Sep. 2006 13,175,000
Dec. 2001 5,100,000 Dec. 2006 13,600,000
Mar. 2002 5,525,000 Mar. 2007 14,025,000
Jun. 2002 5,950,000 Jun. 2007 14,450,000
Sep. 2002 6,375,000 Sep. 2007 14,875,000
Dec. 2002 6,800,000 Dec. 2007 15,300,000
Mar. 2003 7,225,000 Mar. 2008 15,725,000
Jun. 2003 7,650,000 Jun. 2008 16,150,000
Sep. 2003 8,075,000 Sep. 2008 16,575,000
Dec. 2003 8,500,000 Dec. 2008 17,000,000
Mar. 2004 8,925,000
</TABLE>
OTHER CREDIT ENHANCEMENT
RESERVE SUBACCOUNT. IFC Collections available with respect to any Payment
Date in excess of amounts necessary to make the Specified Payments (all as
described under "Security for the Notes-- Allocations; Payments" in the
Prospectus) will be allocated to the Reserve Subaccount. On each Payment Date,
the Indenture Trustee will draw on amounts in the Reserve Subaccount, to the
extent amounts available in the General Subaccount are insufficient to pay
expenses of the Trust and to pay interest and make Scheduled Payments on the
Notes and to make other payments and transfers in accordance with the terms of
the Indenture.
CAPITAL SUBACCOUNT. Prior to or upon the issuance of the Offered Notes, the
Grantee will transfer capital to the Trust in the amount of $17,000,000, which
is 0.50 percent of the initial aggregate Class
S-17
<PAGE>
Principal Balance for all of the Offered Notes. Such amount is the Required
Capital Level with respect to the Offered Notes and, together with the Required
Capital Level with respect to any other Series of Notes, will be deposited into
the Capital Subaccount. Withdrawals from and deposits to the Capital Subaccount
will be made as described under "Security for the Notes--Allocations; Payments"
in the Prospectus.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Indenture Trustee will, at the direction of the
Servicer, apply all amounts on deposit in the Collection Account in the manner
described under "Security for the Notes--Allocations; Payments" in the
Prospectus.
DESCRIPTION OF THE INTANGIBLE TRANSITION PROPERTY
1998 TFO
The Funding Law authorizes the ICC to issue the 1998 TFO in favor of the
Grantee at the request of ComEd to create and establish the 1998 ITP and to
permit the Trust to finance the 1998 ITP through the issuance of the Offered
Notes. The total dollar amount of 1998 ITP authorized by the 1998 TFO is $6.323
billion, which represents the maximum dollar amount of IFC Charges which may be
applied and invoiced over time by the Servicer on behalf of the Trust without
further action by the ICC. In its application for the 1998 TFO based on certain
assumptions set forth therein, ComEd estimated $4.931 billion as the amount of
IFC Charges which would be necessary to be billed through the Scheduled Maturity
Date of all Classes of Offered Notes in order to pay interest and principal on
the Offered Notes. The 1998 TFO also permits the sale of the Offered Notes in an
aggregate principal amount not to exceed $3.4 billion. The 1998 TFO is final and
is no longer subject to appeal.
The 1998 TFO creates and establishes, among other things, the 1998 ITP and
authorizes the imposition and collection of the IFC Charges, which constitute
separate nonbypassable usage-based charges expressed in cents per kilowatt-hour
payable by Customers in an aggregate amount sufficient to repay in full the
Offered Notes, fund the Overcollateralization Subaccount and pay all related
fees and expenses. The 1998 TFO entitles the Trust, as the assignee of the 1998
ITP from the Grantee, to receive the payments made pursuant to the IFC Charges,
from all Customers through December 31, 2008 or, if later, until the Trust has
received IFC Collections sufficient to retire all the outstanding Offered Notes
and cover related fees and expenses. Subsequent Transitional Funding Orders may
authorize and create additional Intangible Transition Property and additions to
the IFC Charges in order to pay interest and principal on other Series of Notes
to be issued in connection therewith, together with related fees, expenses and
the Required Overcollateralization Level and Required Capital Level established
with respect to such Series of Notes.
The 1998 Authorized IFC Charges set forth in the 1998 TFO (which may be
increased by the ICC in connection with the issuance of a subsequent
Transitional Funding Order) which ComEd believes are
S-18
<PAGE>
higher than will actually be required to make all payments on the Offered Notes,
based on certain assumptions contained in the 1998 TFO, are as follows:
<TABLE>
<CAPTION>
IFC CHARGE
IFC CUSTOMER CLASS (CENTS PER KWH)
- ---------------------------------------------------------- -------------------
<S> <C>
Residential--No Space Heat................................ 1.476
Residential--Space Heat................................... 0.950
Standby Service........................................... 0.701
Interruptible Service..................................... 0.464
Street Lighting--Fixture Based Rates...................... 2.375
Street Lighting--Dusk to Dawn and Traffic Signal.......... 0.740
Railroads................................................. 1.047
Water-Supply and Sewage Pumping Service................... 0.963
In Lieu of Demand......................................... 1.399
0 to and including 100 kW Demand.......................... 1.099
Over 100 to and including 1,000 kW Demand................. 0.869
Over 1,000 to and including 10,000 kW Demand.............. 0.805
Over 10,000 kW Demand..................................... 0.623
</TABLE>
As required by the Funding Law, any increase in the amount of the IFC
Charges for any of the IFC Customer Classes above the level of the 1998
Authorized IFC Charges for such IFC Customer Class set forth in the immediately
preceding table shall require ComEd or any successor Utility thereto to file an
amendatory tariff adjusting the amounts otherwise billable by ComEd or such
successor Utility for Applicable Rates to offset the amount of such excess (or,
if ComEd or such successor Utility shall have previously filed any such
amendatory tariffs, the incremental amount of such excess).
In connection with the issuance and pricing of the Offered Notes, ComEd
filed the 1998 IFC Tariff with the ICC which provides for, among other things,
certain revisions to the IFC Charges. The actual initial cents per kilowatt-hour
IFC Charge payable by each of the thirteen (13) IFC Customer Classes beginning
on the Series Issuance Date is as follows:
<TABLE>
<CAPTION>
IFC CHARGE
IFC CUSTOMER CLASS (CENTS PER KWH)
- ---------------------------------------------------------- -------------------
<S> <C>
Residential--No Space Heat................................ 1.067
Residential--Space Heat................................... 0.687
Standby Service........................................... 0.432
Interruptible Service..................................... 0.343
Street Lighting--Fixture Based Rates...................... 1.460
Street Lighting--Dusk to Dawn and Traffic Signal.......... 0.455
Railroads................................................. 0.620
Water-Supply and Sewage Pumping Service................... 0.584
In Lieu of Demand......................................... 1.034
0 to and including 100 kW Demand.......................... 0.812
Over 100 to and including 1,000 kW Demand................. 0.658
Over 1,000 to and including 10,000 kW Demand.............. 0.595
Over 10,000 kW Demand..................................... 0.465
</TABLE>
ADJUSTMENTS TO THE IFC CHARGES
The Servicing Agreement and the 1998 TFO require the Servicer to calculate
and implement Adjustments to the IFC Charges which are designed to enhance the
likelihood that the IFC Collections which are remitted to the Collection Account
will be sufficient to make the Specified Payments. In
S-19
<PAGE>
addition, the IFC Charges will be increased in connection with the issuance of
additional Notes pursuant to any subsequent Transitional Funding Order, to a
level calculated to be sufficient over time to provide for, among other things,
payment of all interest and principal in respect of all outstanding Notes.
The first kind of adjustment, a "Reconciliation Adjustment," will be
calculated by the Servicer within the two-week period preceding every other
Payment Date, commencing on June 25, 1999 (each such Payment Date, a
"Reconciliation Payment Date").
The second kind of adjustment to the IFC Charges, a "True-Up Adjustment,"
will be calculated by the Servicer within the two-week period preceding every
Payment Date which is not a Reconciliation Payment Date, commencing on September
25, 1999 (each such Payment Date, a "True-Up Payment Date") only if, as of the
True-Up Payment Date, the aggregate outstanding principal balance of the Notes
exceeds the scheduled aggregate outstanding principal balance of the Notes set
forth on the Expected Amortization Schedule by the greater of 5% and $1.
The changes in IFC Charges, if any, resulting from a Reconciliation
Adjustment and any True-Up Adjustment will take effect on the first billing day
of the month following the applicable Reconciliation Payment Date or True-Up
Payment Date.
See "Description of the Intangible Transition Property--Adjustments to the
IFC Charges" in the Prospectus.
THE SERVICER
For a discussion of the Servicer, see "The Servicer" in the Prospectus.
SERVICING
GENERAL
The Servicer will manage, service and administer, and make collections in
respect of, the Intangible Transition Property pursuant to the Servicing
Agreement between the Servicer and the Grantee. The Servicer may not resign from
its obligations and duties under the Servicing Agreement unless certain
requirements are met. The 1998 TFO does not require approval by the ICC of such
resignation. For a detailed discussion of the Servicer's procedures, the manner
in which payments from Customers are remitted to the Collection Account, and
related matters, see "Servicing" in the Prospectus.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Offered Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive a servicing fee on each Payment
Date in an amount equal to (a) $750,000, for so long as IFC Charges are billed
concurrently with charges otherwise billed by the Servicer to Customers (which
ComEd and any successor thereto are required to do) and (b) $5,000,000, if IFC
Charges are not billed concurrently with charges otherwise billed by the
Servicer to Customers. The Servicing Fee in clause (b) will only be payable if
the Servicer is not ComEd or a successor thereto. The Servicing Fee (together
with any portion of the Servicing Fee that remains unpaid from prior Payment
Dates) will be paid solely to the extent funds are available therefor as
described under "Security for the Notes--Allocations; Payments" in the
Prospectus. The Servicing Fee will be paid prior to the payment of any amounts
in respect of interest on and principal of the Offered Notes. The Servicer will
be entitled to retain as additional compensation net investment income on IFC
Payments received by the Servicer prior to remittance thereof to the Collection
Account and the portion of late fees, if any, paid by Customers relating to the
IFC Payments.
S-20
<PAGE>
STATEMENTS BY SERVICER
For each Remittance Date and each Payment Date, the Servicer will provide
the statements and reports described under "Servicing--Statements by Servicer"
in the Prospectus.
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
ComEd has received a ruling from the IRS holding that, among other things,
(a) the Trust's issuance of the Offered Notes will not result in gross income to
ComEd and (b) the Offered Notes will be obligations of ComEd. See "Material
United States Federal Tax Consequences" in the Prospectus.
The Indenture provides that a Noteholder and any persons holding a
beneficial interest in an Offered Note, by acquiring any Offered Note or
interest therein, agrees to treat the Offered Note as indebtedness of ComEd
secured by the Note Collateral for purposes of federal, state and local income
and franchise taxes, and any other taxes imposed upon, measured by, or based
upon gross or net income, unless otherwise required by appropriate taxing
authorities.
For a discussion of material United States federal income and estate tax
consequences relevant to the purchase, ownership and disposition of the Notes by
the initial beneficial owners thereof, see "Material United States Federal Tax
Consequences" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Trust has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, for whom Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc.
are acting as representatives, has severally agreed to purchase, the respective
principal amounts of the Offered Notes set forth opposite its name below.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
NAME OF UNDERWRITER NOTES NOTES NOTES NOTES NOTES NOTES
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Goldman, Sachs & Co......... $ 267,729,407 $ 267,770,593 $ 163,082,376 $ 265,317,624 $ 377,061,750 $ 479,738,250
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated.............. 38,247,058 38,252,942 23,297,482 37,902,518 53,865,964 68,534,036
Salomon Smith Barney Inc.... 38,247,058 38,252,942 23,297,482 37,902,518 53,865,964 68,534,036
Chase Securities Inc........ 16,998,693 17,001,307 10,354,437 16,845,563 23,940,429 30,459,571
First Chicago Capital
Markets, Inc.............. 16,998,693 17,001,307 10,354,437 16,845,563 23,940,429 30,459,571
NationsBanc Montgomery
Securities LLC............ 16,998,693 17,001,307 10,354,437 16,845,563 23,940,429 30,459,571
BNY Capital Markets, Inc.... 8,499,346 8,500,654 5,177,219 8,422,781 11,970,214 15,229,786
Gardner Rich & Company...... 4,249,673 4,250,327 2,588,609 4,211,391 5,985,107 7,614,893
Loop Capital Markets, LLC... 4,249,673 4,250,327 2,588,609 4,211,391 5,985,107 7,614,893
Mesirow Financial, Inc...... 4,249,673 4,250,327 2,588,609 4,211,391 5,985,107 7,614,893
Ramirez & Co., Inc.......... 4,249,673 4,250,327 2,588,609 4,211,391 5,985,107 7,614,893
Siebert Brandford Shank &
Co., LLC
(A Division of
Muriel Siebert & Co.,
Inc.)..................... 4,249,673 4,250,327 2,588,609 4,211,391 5,985,107 7,614,893
------------- ------------- ------------- ------------- ------------- -------------
TOTAL..................... $ 424,967,313 $ 425,032,687 $ 258,860,915 $ 421,139,085 $ 598,510,714 $ 761,489,286
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
CLASS A-7 SERIES 1998
NAME OF UNDERWRITER NOTES TOTAL
- ---------------------------- ------------- --------------
<S> <C> <C>
Goldman, Sachs & Co......... $ 321,300,000 $2,142,000,000
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated.............. 45,900,000 306,000,000
Salomon Smith Barney Inc.... 45,900,000 306,000,000
Chase Securities Inc........ 20,400,000 136,000,000
First Chicago Capital
Markets, Inc.............. 20,400,000 136,000,000
NationsBanc Montgomery
Securities LLC............ 20,400,000 136,000,000
BNY Capital Markets, Inc.... 10,200,000 68,000,000
Gardner Rich & Company...... 5,100,000 34,000,000
Loop Capital Markets, LLC... 5,100,000 34,000,000
Mesirow Financial, Inc...... 5,100,000 34,000,000
Ramirez & Co., Inc.......... 5,100,000 34,000,000
Siebert Brandford Shank &
Co., LLC
(A Division of
Muriel Siebert & Co.,
Inc.)..................... 5,100,000 34,000,000
------------- --------------
TOTAL..................... $ 510,000,000 $3,400,000,000
------------- --------------
------------- --------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered Notes
offered hereby, if any are taken.
S-21
<PAGE>
The Underwriters propose to offer the Offered Notes in part directly to
retail purchasers at the initial public offering price set forth on the cover
page of this Prospectus Supplement, and in part to certain securities dealers at
such price less a concession not in excess of 0.150 percent of the principal
amount of the Class A-1 Notes, 0.210 percent of the principal amount of the
Class A-2 Notes, 0.240 percent of the principal amount of the Class A-3 Notes,
0.270 percent of the principal amount of the Class A-4 Notes, 0.300 percent of
the principal amount of the Class A-5 Notes, 0.330 percent of the principal
amount of the Class A-6 Notes and 0.390 percent of the principal amount of the
Class A-7 Notes. The Underwriters may allow and such dealers may reallow a
concession, not in excess of 0.100 percent of the principal amount of the Class
A-1 Notes, 0.125 percent of the principal amount of the Class A-2 Notes, 0.150
percent of the principal amount of the Class A-3 Notes, 0.175 percent of the
principal amount of the Class A-4 Notes, 0.200 percent of the principal amount
of the Class A-5 Notes, 0.225 percent of the principal amount of the Class A-6
Notes and 0.250 percent of the principal amount of the Class A-7 Notes. After
the Offered Notes are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Underwriters.
The Offered Notes are a new issue of securities with no established trading
market. The Offered Notes will not be listed on any securities exchange. The
Trust has been advised by the Underwriters that they intend to make a market in
the Offered Notes 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 Offered Notes.
In connection with the offering, the Underwriters may purchase and sell the
Offered Notes in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Offered Notes; and syndicate short positions involve
the sale by the Underwriters of a greater number of Offered Notes than they are
required to purchase from the Trust in the offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the Offered Notes sold in the offering for
their account may be reclaimed by the syndicate if such Offered Notes are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Offered Notes, which may be higher than the price that might otherwise prevail
in the open market; and these activities, if commenced, may be discontinued at
any time.
Under the terms of the Underwriting Agreement, the Trust has agreed to
reimburse the Underwriters for certain expenses.
The Grantee and ComEd have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
RATINGS
It is a condition of issuance of the Offered Notes that the Offered Notes be
rated AAA by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
Aaa by Moody's Investors Service, Inc., AAA by Duff & Phelps Credit Rating Co.
and AAA by Fitch IBCA, Inc.
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 Offered Note, and,
accordingly, there can be no assurance that the ratings assigned to any Class of
Offered Notes upon initial issuance will not be revised or withdrawn by a Rating
Agency at any time thereafter. If a rating of any Class of Offered Notes is
revised or withdrawn, the liquidity of such Class of Offered Notes may be
adversely affected. In general, ratings address credit risk and do not represent
any assessment of the rate of principal payments.
S-22
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the issuance of the Offered Notes and
certain legal matters relating to the United States federal income tax
consequences of the issuance of the Offered Notes will be passed upon for the
Trust by Sidley & Austin, Chicago, Illinois, counsel to ComEd. Certain legal
matters relating to the Trust and the issuance of the Offered Notes will be
passed upon for the Trust by Foley & Lardner, Chicago, Illinois, counsel to
ComEd, and for the Underwriters by Winston & Strawn, Chicago, Illinois. Winston
& Strawn acts from time to time as counsel to ComEd and its affiliates in
certain matters unrelated to the offering of the Offered Notes.
S-23
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM ON PAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
1998 Authorized IFC Charges...................................................... S-7
1998 IFC Tariff.................................................................. S-8
1998 ITP......................................................................... S-6
1998 TFO......................................................................... S-4
Adjustments...................................................................... S-8
Administration Agreement......................................................... S-6
Administrator.................................................................... S-6
Book-Entry Note.................................................................. S-12
Capital Subaccount............................................................... S-10
Cede............................................................................. S-12
Class............................................................................ S-5
Class Principal Balance.......................................................... S-5
Code............................................................................. S-13
ComEd............................................................................ S-6
Customers........................................................................ S-7
Delaware Trustee................................................................. S-6
DTC.............................................................................. S-12
ERISA............................................................................ S-13
Final Maturity Date.............................................................. S-9
General Subaccount............................................................... S-10
Grantee.......................................................................... S-6
Indenture Trustee................................................................ S-7
Note Interest Rate............................................................... S-14
Noteholders...................................................................... S-14
Notes............................................................................ S-14
Offered Notes.................................................................... S-4
Original Note Principal Balance.................................................. S-5
Overcollateralization Amount..................................................... S-17
Overcollateralization Subaccount................................................. S-10
Payment Date..................................................................... S-8
Rating Agency.................................................................... S-12
Reconciliation Adjustment........................................................ S-20
Reconciliation Payment Date...................................................... S-20
Record Date...................................................................... S-9
Required Overcollateralization Level............................................. S-11
Reserve Subaccount............................................................... S-10
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM ON PAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
Scheduled Maturity Date.......................................................... S-9
Series Issuance Date............................................................. S-4
Servicer......................................................................... S-6
Servicing Fee.................................................................... S-11
Specified Payments............................................................... S-5
True-Up Adjustment............................................................... S-20
True-Up Payment Date............................................................. S-20
Trust............................................................................ S-6
Trust Agreement.................................................................. S-6
Underwriters..................................................................... S-21
</TABLE>
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
S-25
<PAGE>
PROSPECTUS
COMED TRANSITIONAL FUNDING TRUST
TRANSITIONAL FUNDING TRUST NOTES
ISSUABLE IN SERIES
-----------
COMMONWEALTH EDISON COMPANY
SERVICER
The ComEd Transitional Funding Trust Transitional Funding Trust Notes (the
"Notes") offered hereby in an aggregate principal amount of up to $4,000,000,000
may be sold from time to time in series (each, a "Series"), each of which may be
comprised of one or more classes (each, a "Class"), as described in the related
Prospectus Supplement. Each Series of Notes will be issued by the ComEd
Transitional Funding Trust (the "Trust"), a Delaware business trust to be
created under a Declaration of Trust (the "Trust Agreement") by a Delaware
trustee to be named in the related Prospectus Supplement (the "Delaware
Trustee").
(CONTINUED ON FOLLOWING PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 28 HEREIN.
THE NOTES OFFERED HEREBY DO NOT CONSTITUTE A DEBT, LIABILITY OR OTHER
OBLIGATION OF THE STATE OF ILLINOIS OR OF ANY POLITICAL SUBDIVISION, AGENCY OR
INSTRUMENTALITY THEREOF AND DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
COMMONWEALTH EDISON COMPANY OR ANY OF ITS AFFILIATES. NONE OF THE NOTES OR THE
UNDERLYING INTANGIBLE TRANSITION PROPERTY WILL BE GUARANTEED OR INSURED BY
COMMONWEALTH EDISON COMPANY OR ITS AFFILIATES.
THE INTANGIBLE TRANSITION PROPERTY ASSIGNED TO THE TRUST BY THE GRANTEE,
CERTAIN OTHER ASSETS OF THE TRUST AND PAYMENTS ON ANY RELATED SWAP AGREEMENT
WILL BE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. NEITHER COMMONWEALTH EDISON
COMPANY NOR ANY OF ITS AFFILIATES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE
NOTES OR THE INTANGIBLE TRANSITION PROPERTY, EXCEPT AS EXPRESSLY SET FORTH
HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT.
TRANSITIONAL FUNDING ORDERS AUTHORIZING THE ISSUANCE OF THE NOTES DO NOT
CONSTITUTE A PLEDGE OF THE FULL FAITH AND CREDIT OF THE STATE OF ILLINOIS OR OF
ANY OF ITS POLITICAL SUBDIVISIONS. THE ISSUANCE OF THE NOTES UNDER THE FUNDING
LAW SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF
ILLINOIS OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF
TAXATION THEREFOR OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED
HEREBY UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
--------------
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page 128 herein for the location of the definitions of
capitalized terms that appear in this Prospectus.
December 4, 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Notes will be secured primarily by the Intangible Transition Property,
as described under "Prospectus Summary--Intangible Transition Property" and
"Description of the Intangible Transition Property." The Intangible Transition
Property, among other things, will represent a current right to receive certain
nonbypassable usage-based per kilowatt-hour charges to be imposed against
certain customers of Commonwealth Edison Company. Collection of these charges
will be the primary source of payment of principal and interest on the Notes.
The Trust will issue to investors separate Series of Notes from time to time
upon terms determined at the time of sale and described in the related
Prospectus Supplement. Each Series of Notes may be issuable in one or more
Classes. A Series may include Classes which differ as to the interest rate,
timing, sequential order and amount of distributions of principal or interest,
or both, or otherwise. As more specifically described under "Security for the
Notes--Allocations; Payments," the Trust will use all payments made with respect
to Intangible Transition Property (including investment earnings thereon) to pay
certain expenses described herein, interest due on the Notes and principal
payable on the Notes, allocated among the Series and Classes of Notes based on
the priorities described herein and in the related Prospectus Supplement, except
that investment earnings on amounts on deposit in the Collection Account shall,
to the extent such amounts are not otherwise required to make other payments
described herein, or in the related Prospectus Supplement, be paid to the Trust
or as it directs. All principal not previously paid, if any, on any Note will be
due and payable on the Final Maturity Date of such Note. While the specific
terms of any Series of Notes (and the Classes, if any, thereof) will be
described in the related Prospectus Supplement, the terms of such Series and any
Classes thereof will not be subject to prior review by, or consent of, the
Noteholders of any previously issued Series.
Offers of the Notes of a Series may be made through one or more different
methods, including offerings through underwriters, as described under "Plan of
Distribution" herein and "Underwriting" in the related Prospectus Supplement.
There will have been no secondary market for the Notes of any Series prior to
the offering thereof. There can be no assurance that a secondary market for any
Series of Notes will develop or, if one does develop, that it will continue. It
is not anticipated that any of the Notes will be listed on any securities
exchange.
No dealer, salesperson, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by ComEd, the Trust, the Grantee or any dealer, salesperson or any other person.
Neither the delivery of this Prospectus or the related Prospectus Supplement nor
any sale made hereunder or thereunder shall under any circumstances create an
implication that there has been no change in the information herein or therein
since the date hereof. This Prospectus and the related Prospectus Supplement do
not constitute an offer to sell or a solicitation of an offer to buy any
security in any jurisdiction in which it is unlawful to make such offer or
solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2
<PAGE>
AVAILABLE INFORMATION
The Grantee, as depositor of the Trust, has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (as amended, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Notes. This Prospectus, which forms a
part of the Registration Statement, and any Prospectus Supplement describe all
material terms of each document filed as an exhibit to the Registration
Statement; however, this Prospectus and any Prospectus Supplement do not contain
all of the information contained in the Registration Statement and the exhibits
thereto. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance reference
is made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference. For further information, reference is made to
the Registration Statement and the exhibits thereto, which are available for
inspection without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices located as follows: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of the Registration Statement and exhibits thereto may be obtained at the
above locations at prescribed rates. Information filed with the Commission can
also be inspected at the Commission's site on the World Wide Web at
http://www.sec.gov.
The Grantee will file with the Commission such periodic reports with respect
to each Series of Notes as are required by the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules, regulations or orders of the
Commission thereunder. The Grantee may discontinue filing periodic reports under
the Exchange Act at the beginning of any fiscal year following the issuance of
the Notes of any Series if there are fewer than 300 holders of such Notes.
REPORTS TO HOLDERS
Unless and until the Notes are no longer issued in book-entry form, the
Servicer will provide to Cede & Co., as nominee of The Depository Trust Company
("DTC") and registered holder of the Notes, and, upon request, to Participants
of DTC, periodic reports concerning the Notes. See "Security For the
Notes--Reports to Noteholders." Such reports may be made available to the
holders of interests in the Notes (the "Noteholders") upon request to their
Participants. Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. The financial
information provided to Noteholders will not be examined and reported upon, nor
will an opinion thereon be provided, by any independent public accountant.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Grantee, on behalf of the
Trust, pursuant to Sections 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 made hereby shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof. Any statement contained herein or in a
Prospectus Supplement, or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified or
superseded for purposes of this Prospectus and any Prospectus Supplement to the
extent that a statement contained herein, in any Prospectus Supplement or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or any Prospectus Supplement.
The Grantee 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 of or all the documents incorporated herein by reference (other
than exhibits to such documents). Requests for such copies
3
<PAGE>
should be directed to the Grantee, at ComEd Funding, LLC at Ten South Dearborn
Street, 37th Floor, Chicago, Illinois 60603, or by telephone at (312) 394-7937,
Attention: David Zahakaylo.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Notes will describe the following
terms of such Series and, if applicable, the Classes thereof: (a) the
designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues, or if the Trust
has entered into a Swap Agreement with respect to such Series, the index on
which a variable rate of interest will be based, (d) the dates on which payments
of interest and principal are scheduled to occur, (e) the Scheduled Maturity
Date and the Final Maturity Date of such Series, (f) the initial Reconciliation
Payment Date and initial True-Up Payment Date of such Series, (g) the issuance
date of the Series, (h) the place or places for the payment of principal and
interest, (i) the authorized denominations, (j) the provisions for optional
redemption of such Series, (k) the Expected Amortization Schedule for principal
of such Series and, if applicable, the Classes thereof, (l) the IFC Charges as
of the date of issuance of such Series of Notes and the portion of total IFC
Charges authorized and initially imposed in connection with such issuance, (m)
the total dollar amount of Intangible Transition Property authorized by the
related Transitional Funding Order, (n) any other material terms of such Series
and any Class thereof that are not inconsistent with the provisions of the Notes
and that will not result in any Rating Agency reducing or withdrawing its then
current rating of any outstanding Series or Class of Notes, (o) the identity of
the Indenture Trustee and the Delaware Trustee, and (p) the terms of any Swap
Agreement executed solely to permit the issuance of Floating Rate Notes and the
identity of any swap counterparty related thereto.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AVAILABLE INFORMATION................................................................ 3
REPORTS TO HOLDERS................................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................... 3
PROSPECTUS SUPPLEMENT................................................................ 4
TABLE OF CONTENTS.................................................................... 5
PROSPECTUS SUMMARY................................................................... 8
RISK FACTORS......................................................................... 28
Uncertainties Associated with Unusual Asset Type................................... 28
Legal Challenges which Could Adversely Affect Noteholders.......................... 28
Possible Payment Delays or Losses as a Result of Amendment or Repeal of Amendatory
Act or Breach of State Pledge.................................................... 29
Limit on Amount of Intangible Transition Property Available to Pay Notes........... 30
Potential Servicing Issues......................................................... 31
Uncertainties Related to the Electric Industry Generally........................... 33
Uncertainties Caused by Changing Regulatory and Legislative Environment............ 36
Reduction in Amount of Revenue From Applicable Rates............................... 36
Bankruptcy and Creditors' Rights Issues............................................ 39
Nature of the Notes................................................................ 42
ELECTRIC INDUSTRY RESTRUCTURING IN ILLINOIS.......................................... 45
General............................................................................ 45
Amendatory Act Overview............................................................ 45
Transition Charges................................................................. 46
Transition Period.................................................................. 47
Alternative Retail Electric Suppliers.............................................. 48
Competitive Services............................................................... 49
Instrument Funding Charges; Private Contracts...................................... 49
Federal Initiatives; Increased Competition......................................... 50
DESCRIPTION OF THE INTANGIBLE TRANSITION PROPERTY.................................... 51
Creation of Intangible Transition Property Under the Funding Law................... 51
Limitations on the Amounts of Transitional Funding Instruments, Intangible
Transition Property and Instrument Funding Charges Which Can Be Authorized;
Permitted Use of Proceeds........................................................ 52
Imposition and Collection of Instrument Funding Charges; Adjustments Thereto....... 54
Transitional Funding Order Issued at the Request of ComEd.......................... 55
Transactions Pursuant to the Transitional Funding Orders........................... 56
Nonbypassable IFC Charges.......................................................... 57
Adjustments to the IFC Charges..................................................... 57
Sale and Assignment of Intangible Transition Property.............................. 59
Grant Agreement.................................................................... 60
Representations and Warranties of ComEd............................................ 61
Covenants of ComEd................................................................. 63
Amendment of Grant Agreements...................................................... 64
Indemnification Obligations of ComEd............................................... 65
Sale Agreement..................................................................... 65
Representations And Warranties of Grantee.......................................... 66
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Covenants of the Grantee........................................................... 67
Amendment of Sale Agreements....................................................... 69
Indemnification Obligations of the Grantee......................................... 70
CERTAIN PAYMENT, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS...................... 71
THE TRUST............................................................................ 72
THE GRANTEE.......................................................................... 73
Managers........................................................................... 74
THE SERVICER......................................................................... 75
General............................................................................ 75
ComEd Customer Base, Electric Energy Consumption and Base Rates.................... 75
Forecasting Electricity Consumption................................................ 79
Forecast Variance.................................................................. 79
Credit Policy; Billing; Collections; Restoration of Service........................ 81
Loss and Delinquency Experience.................................................... 83
Delinquencies...................................................................... 85
Year 2000 Issues................................................................... 85
SERVICING............................................................................ 89
Servicing Procedures............................................................... 89
Servicing Standards and Covenants.................................................. 90
Remittances to Collection Account.................................................. 91
No Servicer Advances............................................................... 92
Servicing Compensation............................................................. 92
Alternative Retail Electric Suppliers and Other Third-Party Collectors............. 92
Servicer Representations and Warranties............................................ 94
Statements by Servicer............................................................. 94
Evidence as to Compliance.......................................................... 94
Certain Matters Regarding the Servicer............................................. 95
Servicer Defaults.................................................................. 95
Rights upon Servicer Default....................................................... 96
Waiver of Past Defaults............................................................ 96
Successor Servicer................................................................. 96
Amendment.......................................................................... 97
Termination........................................................................ 97
DESCRIPTION OF THE NOTES............................................................. 98
General............................................................................ 98
Interest and Principal............................................................. 99
Payments on the Notes.............................................................. 99
Floating Rate Notes................................................................ 100
No Third-Party Credit Enhancement.................................................. 101
Registration and Transfer of the Notes............................................. 101
Book-Entry Registration............................................................ 101
Definitive Notes................................................................... 104
Optional Redemption................................................................ 105
Conditions of Issuance of Additional Series and Acquisition of Subsequent
Intangible Transition Property................................................... 105
List of Noteholders................................................................ 106
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SECURITY FOR THE NOTES............................................................... 107
General............................................................................ 107
Pledge of Note Collateral.......................................................... 107
Security Interest in Note Collateral............................................... 107
Description of Indenture Accounts.................................................. 109
Allocations; Payments.............................................................. 111
State Pledge....................................................................... 112
Reports to Noteholders............................................................. 113
Supplemental Indentures............................................................ 113
Certain Covenants of the Delaware Trustee and the Trust............................ 114
Events of Default; Rights Upon Event of Default.................................... 115
Actions by Noteholders............................................................. 117
Annual Compliance Statement........................................................ 117
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES...................................... 118
Tax Consequences to United States Noteholders...................................... 118
Tax Consequences to Non-United States Noteholders.................................. 119
Backup Withholding and Information Reporting....................................... 122
ERISA CONSIDERATIONS................................................................. 124
USE OF PROCEEDS...................................................................... 125
PLAN OF DISTRIBUTION................................................................. 126
RATINGS.............................................................................. 126
LEGAL MATTERS........................................................................ 126
EXPERTS.............................................................................. 127
INDEX OF PRINCIPAL DEFINITIONS....................................................... 128
INDEX OF FINANCIAL STATEMENTS........................................................ F-1
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PROSPECTUS SUMMARY
THE FOLLOWING PROSPECTUS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY
REFERENCE TO THE INFORMATION WITH RESPECT TO EACH SERIES OF NOTES CONTAINED IN
THE RELATED PROSPECTUS SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS PROSPECTUS SUMMARY HAVE THE MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN
THIS PROSPECTUS. THE INDEX OF PRINCIPAL DEFINITIONS WHICH BEGINS ON PAGE 128
SETS FORTH THE PAGES ON WHICH THE DEFINITIONS OF CERTAIN PRINCIPAL TERMS APPEAR.
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Transaction Overview.............. The Illinois Electric Utility Transitional Funding Law
of 1997 (the "Funding Law") permits Illinois electric
utilities (collectively, the "Utilities"), including
Commonwealth Edison Company, an Illinois corporation
("ComEd"), and other permitted issuers, including the
Trust, to issue transitional funding instruments, such
as the Transitional Funding Trust Notes (the "Notes").
The Funding Law was one portion of Public Act 90-561
(the "Amendatory Act") which amended the Illinois Public
Utilities Act (as so amended, the "Act") and became law
on December 16, 1997.
Pursuant to the Funding Law, the Illinois Commerce
Commission (the "ICC") has issued and may hereafter
issue one or more Transitional Funding Orders in favor
of the Grantee at the request of ComEd each of which
provides, or will provide, among other things, for the
creation of Intangible Transition Property and the
vesting thereof in the Grantee. The Intangible
Transition Property created by each Transitional Funding
Order, among other things, represents the right to
impose and receive certain nonbypassable usage-based
charges (expressed in cents per kilowatt-hour) from
Customers, and all related revenues, collections,
claims, payments, money or proceeds thereof. These
charges are nonbypassable in that Customers cannot avoid
paying them regardless of from whom their electricity is
purchased; provided, however, that such charges must be
deducted from amounts which could otherwise be billed by
ComEd (or its successor) or other provider of electric
service to such Customers on account of its tariffed
rates (or, in the case of Customers not taking tariffed
services on account of private contracts, from the
charges and rates for the equivalent services provided
by ComEd).
ComEd will enter into one or more Agreements Relating to
Grant of Intangible Transition Property (each, a "Grant
Agreement" and collectively, the "Grant Agreements")
relating to the grant by the ICC to the Grantee of all
of the rights in and to the Intangible Transition
Property created by the related Transitional Funding
Order and containing certain representations, warranties
and covenants with respect to such Intangible Transition
Property.
Pursuant to one or more Intangible Transition Property
Sale Agreements between the Grantee and the Trust (each,
a "Sale
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Agreement" and collectively, the "Sale Agreements"), the
Grantee has assigned or may further assign its rights
in, to and under the Intangible Transition Property
created by the related Transitional Funding Order, the
Servicing Agreement and certain other related assets to
the Trust. The Trust, whose primary asset will be all of
the Intangible Transition Property transferred to the
Trust pursuant to the Sale Agreements, will issue the
Notes, which will be sold to the underwriters named in
each Prospectus Supplement.
The Notes will be secured primarily by all of the
Intangible Transition Property. The Notes also will be
secured by the Grant Agreements, the Sale Agreements and
the Intangible Transition Property Servicing Agreement
between the Servicer and the Grantee (the "Servicing
Agreement"); the Collection Account and all amounts of
cash or investment property on deposit therein or
credited thereto from time to time; with respect to
Floating Rate Notes only, any interest rate exchange
agreements (each, a "Swap Agreement") entered into with
respect to the issuance of such Floating Rate Notes; all
rights to compel ComEd, as Servicer (or any successor),
to file for and obtain adjustments to the IFC Charges in
accordance with Section 18-104(d) of the Act, the
Transitional Funding Orders and all tariffs filed with
the ICC in connection therewith (each an "IFC Tariff");
all present and future claims, demands, causes and
choses in action in respect of any or all of the
foregoing; and all payments on or under and all proceeds
in respect of any or all of the foregoing. See "Security
for the Notes."
The IFC Charges will be calculated and adjusted from
time to time to generate projected revenues expected to
be sufficient over time to (a) pay interest and make
Scheduled Payments on the Notes, (b) pay all related
fees and expenses of the Trust, including the Servicing
Fee and any Quarterly Administration Fee, (c) replenish
the Capital Subaccount up to the Required Capital Level,
and (d) fund and maintain the Overcollateralization
Subaccount up to the Required Overcollateralization
Level. These payments are collectively referred to
herein as the "Specified Payments."
To enhance the likelihood of timely recovery of the
amounts necessary to make the Specified Payments, the
IFC Charges may be adjusted from time to time through
Reconciliation Adjustments and True-Up Adjustments, as
described under "Description of the Intangible
Transition Property-- Adjustments to the IFC Charges"
over the term of each Series of Notes.
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The following diagram represents a general summary of
the parties to the transactions contemplated hereby,
their roles and their various relationships to the other
parties.
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Risk Factors...................... Investors should consider the risks associated with an
investment in the Notes. For a discussion of certain
material risks associated therewith, investors should
review the discussion under "Risk Factors," which begins
on page 28.
Servicer/Administrator............ ComEd, a subsidiary of Unicom Corporation, an Illinois
corporation ("Unicom"), will act as the initial servicer
(in such capacity, and together with any successor
servicer, the "Servicer") of the Intangible Transition
Property pursuant to the terms of the Servicing
Agreement, and as the initial administrator (in such
capacity, and together with any successor administrator,
the "Administrator") of the Trust and the Grantee
pursuant to the terms of an Administration Agreement
among the Trust, the Grantee and the Administrator (the
"Administration Agreement").
ComEd is a public utility primarily engaged in the
business of generating, transmitting and distributing
electric energy to customers in Northern Illinois,
including the Chicago metropolitan area. See "The
Servicer."
Grantee........................... The grantee of the Intangible Transition Property will
be ComEd Funding, LLC, a special purpose Delaware
limited liability
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company (the "Grantee"), whose sole member is ComEd. In
accordance with the Funding Law and each Transitional
Funding Order, the Grantee shall be a grantee of the
Intangible Transition Property, authorized to assign
such Intangible Transition Property to the Trust as an
assignee. Pursuant to a Sale Agreement, the Grantee will
sell and assign to the Trust all of its right, title and
interest in such Intangible Transition Property, the
Servicing Agreement and certain other related assets.
Trust............................. The issuer of the Notes will be the ComEd Transitional
Funding Trust (the "Trust"), a Delaware business trust.
In accordance with the Funding Law and the related
Transitional Funding Order, the Trust shall be entitled
to receive the Intangible Transition Property created by
such Transitional Funding Order as assignee of the
Grantee, and shall be authorized to issue Notes as
transitional funding instruments.
Trust Assets...................... The assets of the Trust will consist of the Intangible
Transition Property and the other Note Collateral,
including capital transferred by the Grantee in an
amount specified in each Prospectus Supplement which
will be sufficient to meet certain requirements of the
Indenture (the "Indenture") between the Trust and the
Indenture Trustee.
Delaware Trustee.................. A Delaware entity (the "Delaware Trustee") shall be
named as trustee under the Declaration of Trust (the
"Trust Agreement"), as set forth in each Prospectus
Supplement. The Delaware Trustee will manage the Trust
pursuant to the Trust Agreement.
Beneficiary Trustees.............. The individuals named in the related Prospectus
Supplement as Beneficiary Trustees shall serve as
Beneficiary Trustees (each, a "Beneficiary Trustee") of
the Trust. The Beneficiary Trustees will execute and
file the Registration Statement and certain related
documents, register the Notes with the applicable state
securities commissions and take other necessary or
appropriate related actions.
The Notes......................... The Notes will be issued in series (each, a "Series")
and each Series of Notes may be issued in one or more
classes (each, a "Class"). Each Series and Class of
Notes will be in an initial aggregate principal amount,
and will bear interest at a rate described in the
related Prospectus Supplement and will be at least PARI
PASSU in right of payment with any subsequent Series and
Class of Notes. The Notes will be issued under the
Indenture.
The Indenture provides that collections received with
respect to the Intangible Transition Property ("IFC
Collections") will be used, among other things, to pay
(a) fees payable to the Delaware Trustee, the Indenture
Trustee, the Servicer and the Administrator; (b) all
other fees, costs, expenses and indemnities of the Trust
("Operating Expenses"); and (c) interest (including
amounts, if any, payable with respect to
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any Swap Agreement entered into with respect to the
issuance of any Floating Rate Notes) due on the Notes
and principal payable on the Notes, allocated among the
Series and Classes of Notes based on the priorities
described herein and in the related Prospectus
Supplement, until each outstanding Series and Class of
Notes is retired. However, as described under
"Description of the Notes--Interest and Principal,"
unless an Event of Default has occurred and is
continuing and the Notes have been declared due and
payable, principal on the Notes on any Payment Date will
only be paid until the outstanding principal balance of
the Notes has been reduced to the principal balance
specified in the Expected Amortization Schedule for such
Payment Date.
To the extent that, with respect to any Payment Date,
amounts on deposit in certain subaccounts of the
Collection Account are insufficient to reduce the
principal balance of the Notes to the amount required
pursuant to the Expected Amortization Schedule on such
Payment Date, the amount of such deficiency will be
deferred to a subsequent Payment Date without a default
occurring under the Indenture. All principal not
previously paid, if any, on a Note is due and payable on
the Final Maturity Date of such Note.
Each Series of Notes is non-recourse, and will be
secured only by, and payable solely out of the proceeds
of, Intangible Transition Property, together with the
other Note Collateral. If additional Notes are
subsequently issued, the previously issued and
outstanding Notes will be at least PARI PASSU with such
subsequently issued Notes as to all of the Intangible
Transition Property and the other Note Collateral. Any
and all funds or property released by the Indenture
Trustee pursuant to the Indenture will cease to be Note
Collateral and will no longer be available for payment
of the Notes. See "Description of the Notes" and
"Security for the Notes."
A Series of Notes may include two or more Classes of
Notes which differ as to the interest rate and the
timing, sequential order and amount of payments of
principal or interest or both or otherwise.
In addition, a Series of Notes may include one or more
Classes of Notes that accrue interest at a variable rate
based on the index described in the related Prospectus
Supplement (the "Floating Rate Notes"). See "Description
of the Notes-- Floating Rate Notes."
While the specific terms of any Series of Notes (and the
Classes thereof, if any) will be described in the
related Prospectus Supplement, the terms of such Series
and any Classes thereof will not be subject to prior
review by, or consent of, the Noteholders of any
previously issued Series of Notes.
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All Notes of the same Series will be identical in all
respects except for the denominations thereof, unless
such Series is comprised of two or more Classes, in
which case all Notes of the same Class will be identical
in all respects except for the denominations thereof.
No additional Notes will be issued or shall be secured,
directly or indirectly, by the Intangible Transition
Property and the other Note Collateral unless, among
other things, each Rating Agency with respect to any
outstanding Notes shall have affirmed the then current
rating of all such outstanding Notes in connection with
the issuance of such additional Notes.
So long as any Notes are outstanding, the Noteholders
will direct the Indenture Trustee as to matters in which
the Noteholders are permitted or required to take
action; provided, however, that the Indenture Trustee
will be permitted to take certain actions specified in
the Indenture without the direction of the Noteholders.
See "Security for the Notes--Actions by Noteholders."
None of the Notes or the underlying Intangible
Transition Property will be guaranteed or insured by
ComEd or any of its affiliates. Transitional Funding
Orders authorizing the issuance of the Notes do not
constitute a pledge of the full faith and credit of the
State of Illinois or of any of its political
subdivisions. The issuance of the Notes under the
Funding Law shall not directly, indirectly or
contingently obligate the State of Illinois or any
political subdivision thereof to levy or to pledge any
form of taxation therefor or to make any appropriation
for their payment.
See "Description of the Notes."
Indenture......................... The Notes will be issued pursuant to the terms of the
Indenture, and the Intangible Transition Property and
the other Note Collateral will be pledged under the
Indenture for the benefit of the Noteholders.
Indenture Trustee................. The entity named as trustee under the Indenture, as set
forth in each Prospectus Supplement (the "Indenture
Trustee"). The Indenture Trustee acts for and on behalf
of the Noteholders pursuant to the Indenture.
Rating Agency..................... Each nationally recognized statistical rating
organization which rates any Series of Notes upon
request of the Trust (each, a "Rating Agency") as set
forth in the Prospectus Supplement related thereto.
Transitional Funding Orders....... The ICC has issued and may hereafter issue one or more
financing orders in favor of the Grantee at the request
of ComEd (each, a "Transitional Funding Order"). Each
Transitional Funding Order will provide for, among other
things, the creation of Intangible Transition Property
and the vesting thereof in the Grantee. Although it is
anticipated that all
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Transitional Funding Orders will be identical in all
material respects, since the issuance thereof is subject
to the discretion of the ICC, there may be variations
between Transitional Funding Orders. If the findings in
any subsequent Transitional Funding Order differ
materially from the findings in the Transitional Funding
Order disclosed in this Prospectus, all of such
differences will be disclosed in the related Prospectus
Supplement.
Intangible Transition Property.... Each Transitional Funding Order obtained by ComEd from
the ICC will create and establish a certain dollar
amount of Intangible Transition Property. The Prospectus
Supplement related to an issuance of Notes will identify
the Transitional Funding Order and the total dollar
amount of Intangible Transition Property authorized
thereby, which will represent the maximum dollar amount
of IFC Charges which may be applied and invoiced under
such Transitional Funding Order over time by the
Servicer on behalf of the Trust without further action
by the ICC.
The right to impose, and collect payments of, the IFC
Charges from the Customers (such payments, whether
collected directly from Customers or through third-party
collection agents, including ARES, being the "IFC
Payments") gives rise to a separate property right as
set forth in the Funding Law. This property is created,
and vested in the Grantee, by a Transitional Funding
Order and, together with the related items described in
this paragraph, is referred to herein generally as the
"Intangible Transition Property." The Intangible
Transition Property includes the right, title and
interest to impose and receive IFC Charges, and all
related revenues, collections, claims, payments, money,
or proceeds thereof, including all right, title, and
interest under and pursuant to the Transitional Funding
Order which created such Intangible Transition Property.
IFC Charges....................... Under the Act, each Transitional Funding Order will
provide for the establishment, imposition and collection
of nonbypassable, usage-based, per kilowatt-hour charges
on designated consumers of electricity (the "IFC
Charges"). Specifically, each such order will provide
that IFC Charges will be imposed on each existing and
future retail customer or class of retail customers in
ComEd's service area (I.E., ComEd's geographic service
area as of January 1, 1998 and any other locations in
which it was then providing electric utility services to
Customers) in Illinois, or other person or group of
persons obligated, from time to time, to pay to ComEd or
any successor Applicable Rates (including any customers
who enter into contracts with ComEd to take non-tariffed
services but would otherwise have been obligated to pay
Applicable Rates) (collectively, the "Customers"). Of
amounts collected from the Customers, only the portion
of amounts collected that
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comprise the IFC Charges, as adjusted from time to time,
will be available to make payments on the Notes. IFC
Charges will be deducted and stated separately from
Applicable Rates.
"Applicable Rates" means all charges for tariffed
services owed to ComEd (I.E., charges owed under any
tariffs now or hereafter filed with the ICC), including,
without limitation, charges for "base rates," "delivery
services" and "transition charges" (including lump-sum
payments of such charges) as each such term is defined
in the Act. Applicable Rates do not include late charges
or charges set forth in those tariffs which are filed
specifically and primarily to collect amounts related to
decommissioning expense, taxes, franchise fees or other
franchise cost additions, costs imposed by local
governmental units which are allocated and charged to
customers within the boundaries of such governmental
units' jurisdictions, renewable energy resources and
coal technology development assistance charges, energy
assistance charges for the Supplemental Low-Income
Energy Assistance Fund, reimbursement for the costs of
optional or non-standard facilities and reimbursement
for the costs of optional or non-standard meters, or
monies that will be paid to third parties (after
deduction of allowable administrative, servicing or
similar fees) (collectively, "Excluded Amounts").
Payments owed to the Grantee or the Trust in respect of
IFC Charges do not constitute Excluded Amounts.
To the extent any Applicable Rates reflect compensation
owed by ComEd for power or energy generated by a person
or entity other than ComEd, the IFC Charges will be
deducted and stated separately from such Applicable
Rates without giving effect to such compensation.
Administrative, servicing and similar fees referred to
in the parenthetical above means fees which ComEd is
expressly authorized under its current agreements with
third parties or by statute, tariff or otherwise to
deduct from monies owed to such parties to cover its
cost of processing such third-party payments. Charges
associated with Excluded Amounts are generally the
subject of separate riders to ComEd's rates, such that
increases in such charges are collected through an
increase in the amount permitted to be collected under
such rider, rather than through an increased share of
the Applicable Rates. As a result, any increase in
Excluded Amounts should not result in a material
decrease in the amount of Applicable Rates available to
cover the amount of IFC Charges.
Each Transitional Funding Order will provide that
neither ComEd nor any successor Utility may enter into
any contract with any Customer obligated (or who would,
but for such contract, be obligated) to pay IFC Charges
if, as a result thereof, such Customer would not receive
services subject to Applicable Rates, unless the
contract provides that the
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Customer will pay an amount to the Grantee or its
assigns, as applicable, equal to the amount of IFC
Charges that would have been billed if the services
provided under such contract were services subject to
Applicable Rates. Each Transitional Funding Order will
further provide that any revenues received by ComEd or a
successor Utility from such contracts entered into with
Customers paying IFC Charges shall, to the extent of the
authorized amount of the IFC Charges included therein,
be deemed to be proceeds of, and included in, the
Intangible Transition Property created by the related
Transitional Funding Order. See "Electric Industry
Restructuring in Illinois-- Instrument Funding Charges;
Private Contracts."
The IFC Charges will be calculated and adjusted from
time to time to generate projected revenues expected to
be sufficient to make the Specified Payments. In each
case, the IFC Charges will be assessed for the benefit
of the Trust as assignee of all of the Grantee's right,
title and interest in the Intangible Transition
Property. Such IFC Charges will be collected by the
Servicer, either directly from Customers or from an ARES
or other third-party collection agent that collects such
amounts from Customers, as part of its normal collection
activities and will be deposited into the Collection
Account under the terms of the Indenture and the
Servicing Agreement on each Monthly Remittance Date or
Daily Remittance Date, as the case may be.
The Funding Law provides that, notwithstanding any other
provision of law, once a Transitional Funding Order has
become final and nonappealable, none of such
Transitional Funding Order, the Intangible Transition
Property created and established thereby or the IFC
Charges authorized to be imposed and collected
thereunder shall be subject to any reduction,
postponement, impairment or termination by any
subsequent action of the ICC.
Adjustments to IFC Charges........ The Servicing Agreement and each Transitional Funding
Order will require the Servicer to calculate and
implement adjustments to the IFC Charges which are
designed to enhance the likelihood that the IFC
Collections which are remitted to the Collection Account
will be sufficient to make the Specified Payments.
Each Transitional Funding Order will provide for a
"Reconciliation Adjustment" to the IFC Charges which
will be calculated by the Servicer within the two-week
period preceding every other Payment Date, commencing on
the Payment Date indicated in the related Prospectus
Supplement (each such Payment Date, a "Reconciliation
Payment Date").
Each Transitional Funding Order will also provide for a
"True-Up Adjustment" to the IFC Charges which will be
calculated by the Servicer within the two-week period
preceding every
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Payment Date which is not a Reconciliation Payment Date
commencing on the Payment Date indicated in the related
Prospectus Supplement (each such Payment Date, a
"True-Up Payment Date") only if, as of the True-Up
Payment Date, the aggregate outstanding principal
balance of the Notes exceeds the scheduled aggregate
outstanding principal balance of the Notes set forth on
the Expected Amortization Schedule by 5%, or such
greater amount as may be set forth in the related
Prospectus Supplement.
Changes in IFC Charges, if any, resulting from a
Reconciliation Adjustment and any True-Up Adjustment
(collectively, the "Adjustments") will take effect on
the first billing day of the month following the
applicable Reconciliation Payment Date or True-Up
Payment Date.
The IFC Charges will, subject to Adjustment as provided
herein, continue to be imposed and collected until all
interest on and principal of all Series of the Notes
have been paid in full, subject only to the limitation
of the maximum amount of Intangible Transition Property
authorized by the ICC in the related Transitional
Funding Order or Orders, and will be based on expected
IFC Collections which are calculated in accordance with
the Servicer's normal servicing procedures using data
available through the end of the prior monthly period.
All Adjustments shall be implemented pursuant to the IFC
Tariff filed by ComEd in connection with the related
Transitional Funding Order. As required by the Funding
Law, if, as a result of any Adjustment, the IFC Charge,
as so adjusted, will exceed the amount per kilowatt-hour
of the IFC Charge authorized by the ICC in any
Transitional Funding Order, then ComEd shall be
obligated to file amendatory tariffs (each, an
"Amendatory Tariff") adjusting the amounts otherwise
billable by ComEd for Applicable Rates, to offset the
amount of such excess (or, if ComEd shall have
previously filed any such Amendatory Tariffs, the
incremental amount of such excess). However, the failure
of such Amendatory Tariff to become effective for any
reason shall not delay or impair the effectiveness of
any such Adjustments.
See "Description of the Intangible Transition Property--
Adjustments to the IFC Charges."
State Pledge...................... Pursuant to the Funding Law, the State of Illinois
pledges to and agrees with the Noteholders that the
State of Illinois will not in any way limit, alter,
impair or reduce the value of the Intangible Transition
Property created by, or the IFC Charges approved by, any
Transitional Funding Order so as to impair the terms of
any contract made by ComEd, the Grantee or the Trust
with the Noteholders or in any way impair their rights
and remedies, until the Notes, together with the
interest, premium
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and other fees, costs and charges related thereto, are
fully paid and discharged (the "State Pledge"). The
Funding Law authorizes issuers, such as the Trust, to
include these pledges and agreements of the State in any
contract with the holders of the transitional funding
instruments, and the pledges and agreements shall be so
included in the Indenture and the Notes for the benefit
of the Noteholders. See "Security for the Notes--State
Pledge."
Payment Dates..................... The payment dates on Notes of each Series will be the
quarterly dates specified in the related Prospectus
Supplement (each, a "Payment Date"). If such specified
date is not a Business Day, then the Payment Date shall
be the next succeeding Business Day.
Record Dates...................... With respect to any Payment Date or date of any
redemption, the Business Day preceding such Payment Date
or other date if the Notes are Book-Entry Notes or, if
Definitive Notes are issued, the last day of the
preceding calendar month (each, a "Record Date").
Scheduled Maturity and Final
Maturity Dates.................. For each Series or Class of Notes, the related
Prospectus Supplement will specify a Scheduled Maturity
Date and a Final Maturity Date. The "Scheduled Maturity
Date" will be the date when all principal and interest
on such Series or Class of Notes is expected to be paid
in full by the Trust. The "Final Maturity Date"
corresponds to the date on which such Series or Class of
Notes may be accelerated for failure to pay outstanding
principal thereon, which may be up to two years after
the Scheduled Maturity Date for such Series or Class.
The Funding Law provides that the authority of the Trust
to impose and collect IFC Charges shall continue until
such time as all Notes have been paid in full.
Issuance of Additional Series..... The Trust may issue additional Series of Notes from time
to time; provided, however, the Trust may not issue in
excess of $3.4 billion in aggregate principal amount of
Notes prior to August 1, 1999, and thereafter may not
issue in excess of $6.8 billion of Notes (less the
initial amount of any previously issued Notes). A
subsequent Transitional Funding Order would authorize
additional Intangible Transition Property and an
increase in the authorized amount of IFC Charges in
connection with such issuance. See "Description of the
Intangible Transition Property--Transitional Funding
Order Issued to ComEd." An additional Series may be
issued only upon satisfaction of the conditions
described under "Description of the Notes--Conditions of
Issuance of Additional Series." Each Series of Notes
will be secured solely by the Intangible Transition
Property and the other Note Collateral. An Event of
Default with respect to one Series of Notes (or one or
more Classes thereof) may adversely affect
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other outstanding Classes and Series of Notes since such
event will be considered an Event of Default with
respect to all Series of Notes and each such Class or
Series will be entitled only to its ratable portion of
the Intangible Transition Property and the other Note
Collateral as determined under the Indenture. In
addition, all Intangible Transition Property owned by
the Trust will secure all Series of Notes and any
remedial action taken by Noteholders of one Series will
affect the other Series.
Interest.......................... Unless otherwise specified in the related Prospectus
Supplement, interest on each Series of Notes (and, if
applicable, each Class thereof) will accrue and be
payable in arrears at the interest rate for such Series
(or Class), or calculated in the manner, specified in
the related Prospectus Supplement.
Principal......................... Principal of each Series of Notes (and, if applicable,
each Class thereof) will be paid to the Noteholders of
such Series (or Class) in the amounts and on the Payment
Dates specified in the related Prospectus Supplement,
but only to the extent that amounts in the Collection
Account are available therefor, and subject to the other
limitations described herein. See "Security for the
Notes--Allocations; Payments." The related Prospectus
Supplement will set forth a schedule of the expected
amortization of principal of such Series of Notes and,
if applicable, the Classes thereof (for any Series or
Class, the "Expected Amortization Schedule"). Unless an
Event of Default has occurred and is continuing and the
Notes have been declared due and payable, on any Payment
Date, subject to availability of funds in the Collection
Account, the Trust will make principal payments on the
Notes only until the outstanding principal balances
thereof have been reduced to the principal balances
specified in the applicable Expected Amortization
Schedules for such Payment Date (each, a "Scheduled
Payment"). However, if insufficient IFC Collections are
received with respect to any Payment Date, and amounts
in the Collection Account are not sufficient to make up
the shortfall, principal of any Series or Class of Notes
may be paid later than reflected in the related Expected
Amortization Schedule, as described herein and in the
related Prospectus Supplement. See "Risk Factors--Nature
of the Notes-- Uncertain Payment Amounts and Weighted
Average Life" and "Certain Payment, Weighted Average
Life and Yield Considerations."
Events of Default................. The Indenture provides that any of the following events
will constitute an "Event of Default" with respect to
any Series of Notes: (a) a default for five days in the
payment of any interest on any Note; (b) a default in
the payment of the then unpaid principal of any Note on
the Final Maturity Date for such Note; (c) a default in
the payment of the optional redemption price for
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any Note on the optional redemption date therefor; (d) a
default in the observance or performance in any material
respect of any covenant or agreement of the Trust made
in the Indenture and the continuation of any such
default for a period of 30 days after notice thereof is
given to the Trust by the Indenture Trustee or to the
Trust and the Indenture Trustee by the holders of at
least 25 percent in principal amount of the Notes of
such Series then outstanding; (e) any representation or
warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as
of the time made, and such breach not having been cured
within 30 days after notice thereof is given to the
Trust by the Indenture Trustee or to the Trust and the
Indenture Trustee by the holders of at least 25 percent
in principal amount of the Notes of such Series then
outstanding; (f) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust;
(g) a breach by the State of Illinois or any of its
agencies (including the ICC), officers or employees of
the State Pledge; and (h) any other event designated as
such in the trustee's issuance certificate or series
supplement relating to such Series.
If an Event of Default (other than as specified in
clause (g) above) has occurred and is continuing with
respect to the Notes, the Indenture Trustee may and,
upon the written direction of the holders of not less
than a majority in principal amount of the Notes then
outstanding shall, declare the unpaid principal amount
of all the Notes of all Series then outstanding to be
immediately due and payable. If an Event of Default as
specified in clause (g) above has occurred, the Servicer
shall be obligated to institute (and the Indenture
Trustee, for the benefit of the Noteholders, shall be
entitled and empowered to institute) any suits, actions
or proceedings at law, in equity or otherwise, to
enforce the State Pledge and to collect any monetary
damages as a result of a breach thereof, and each of the
Servicer and the Indenture Trustee may prosecute any
such suit, action or proceeding to final judgment or
decree.
See "Security for the Notes--Events of Default; Rights
Upon Event of Default" and "Ratings."
Optional Redemption............... Pursuant to the terms of the Indenture, any Series of
Notes may be redeemed on any Payment Date if, after
giving effect to payments that would otherwise be made
on such date, the outstanding principal balance of such
Series of Notes has been reduced to less than five
percent (5%) of the initial principal balance thereof.
If specified in the Prospectus Supplement related to any
Series or Class of Notes, the Indenture may also permit
the redemption of any such Series or Class of Notes in
full on any Payment Date on or prior to December 31,
2004 using proceeds received from the issuance of any
additional Series
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or Class of Notes (the "New Notes"). The New Notes will
be payable solely out of the Intangible Transition
Property and the other Note Collateral and will have no
more than a PARI PASSU lien thereon VIS-A-VIS all
existing Series of Notes.
In addition, a Series of Notes shall be subject to
redemption if and to the extent provided in the related
Prospectus Supplement.
No redemption shall be permitted under the Indenture
unless each Rating Agency with respect to any Notes that
will remain outstanding after such redemption shall have
affirmed the then current rating of all such outstanding
Notes. Upon any redemption of any Series or Class of
Notes, the Trust will have no further obligations under
the Indenture with respect thereto.
The Notes may be so redeemed upon payment of the
outstanding principal amount of the Notes and accrued
but unpaid interest thereon as of the date of
redemption.
See "Description of the Notes--Optional Redemption."
Establishment of Collection
Account and Subaccounts......... Pursuant to the Indenture, a Collection Account will be
established and held by the Indenture Trustee for the
benefit of the Noteholders. The Collection Account will
consist of four subaccounts: a general subaccount (the
"General Subaccount"), a reserve subaccount (the
"Reserve Subaccount"), a subaccount for the
Overcollateralization Amount (the "Overcollateralization
Subaccount"), and a capital subaccount (the "Capital
Subaccount"). Unless the context indicates otherwise,
references herein to the Collection Account include each
of the subaccounts contained therein. Withdrawals from
and deposits to these subaccounts will be made as
described under "Security for the Notes--Allocations;
Payments."
General Subaccount................ The General Subaccount will hold all funds held in the
Collection Account that are not held in the other three
subaccounts. The Servicer will remit all IFC Collections
to the General Subaccount on each Monthly Remittance
Date or Daily Remittance Date, as required under the
Servicing Agreement. On each Payment Date, the Indenture
Trustee will draw on amounts in the General Subaccount
to pay expenses of the Trust and to pay interest and
make Scheduled Payments on the Notes and to make other
payments and transfers in accordance with the terms of
the Indenture.
Reserve Subaccount................ IFC Collections available with respect to any Payment
Date in excess of amounts necessary to make the
Specified Payments will be allocated to the Reserve
Subaccount. On each Payment Date, the Indenture Trustee
will draw on amounts in the Reserve Subaccount, to the
extent amounts available in the General Subaccount are
insufficient to pay expenses of the
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Trust and to pay interest and make Scheduled Payments on
the Notes and to make other payments and transfers in
accordance with the terms of the Indenture.
Overcollateralization
Subaccount...................... In order to enhance the likelihood that payments on the
Notes will be made in accordance with their Expected
Amortization Schedules, each Transitional Funding Order
will permit the Servicer to set the IFC Charges at
levels that are expected to produce IFC Collections in
amounts that exceed the amounts expected to be required
to pay interest and make Scheduled Payments on the Notes
and to pay all related fees and expenses of the Trust,
including the Servicing Fee and any Quarterly
Administration Fee, in order to collect an additional
amount (for any Series, the "Overcollateralization
Amount") specified in the related Prospectus Supplement.
The Overcollateralization Amount established in
connection with each Series of Notes will not be less
than 0.50 percent of the initial principal balance of
such Series of Notes, collected over the expected life
of the Notes of such Series according to a schedule set
forth in the related Prospectus Supplement. The
Overcollateralization Amount for all Series of Notes
will be held in the Overcollateralization Subaccount, as
described further under "Security for the
Notes--Description of Indenture
Accounts--Overcollateralization Subaccount." The amount
required to be on deposit in the Overcollateralization
Subaccount as of any Payment Date with respect to each
Series, as specified in the schedule set forth in the
related Prospectus Supplement, is referred to herein as
the "Required Overcollateralization Level." On each
Payment Date, the Indenture Trustee will draw on amounts
in the Overcollateralization Subaccount, if any, to the
extent amounts available in the General Subaccount and
the Reserve Subaccount are insufficient to pay expenses
of the Trust and to pay interest and make Scheduled
Payments on the Notes. If amounts on deposit in the
Overcollateralization Subaccount are used to pay such
expenses and make such payments, the
Overcollateralization Subaccount will be replenished on
subsequent Payment Dates to the extent IFC Collections
exceed amounts required to make payments or transfers
having a higher priority of payment, as more fully
described under "Security for the Notes--Allocations;
Payments."
Capital Subaccount................ Prior to or upon the issuance of each Series of Notes,
the Grantee will transfer capital to the Trust which
will equal 0.50 percent of the initial principal amount
of such Series of Notes. Such amount in the aggregate
for all Series of Notes (with respect to each Series,
the "Required Capital Level") will be deposited into the
Capital Subaccount. On each Payment Date, the Indenture
Trustee will draw on amounts in the Capital Subaccount,
if any, to the extent amounts available in the General
Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to pay
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expenses of the Trust and to pay interest and make
Scheduled Payments on the Notes and to make other
payments and transfers in accordance with the terms of
the Indenture. If amounts on deposit in the Capital
Subaccount are used to make such payments and transfers,
the Capital Subaccount will be replenished on subsequent
Payment Dates to the extent IFC Collections exceed
amounts required to make such payments and transfers
having a higher priority of payment, as more fully
described under "Security for the Notes-- Allocations;
Payments."
Collections....................... The IFC Tariffs allow the Trust to begin to impose and
collect the IFC Charges concurrently with the issuance
of the Notes of any Series (each, a "Series Issuance
Date"). The IFC Charges shall be imposed and collected
based upon the entire electricity consumption of
Customers included in bills issued to Customers on and
after such Series Issuance Date, including that portion
of the applicable Billing Period during which electric
service was provided prior to such Series Issuance Date.
The Servicing Agreement provides, among other things,
that the Servicer will collect the IFC Payments on
behalf of the Trust, as assignee of the Grantee. The
Servicer will remit all IFC Payments to the Collection
Account within two Servicer Business Days of receipt
unless the Monthly Remittance Conditions are met, in
which case the Servicer will remit to the Collection
Account on the Servicer Business Day immediately
preceding the tenth day of each month, all IFC Payments
received by the Servicer during the immediately
preceding Billing Period. See "Servicing--Remittances to
Collection Account."
Because the Servicer does not track cash collections on
bills rendered within a particular Billing Period,
amounts remitted to the Collection Account with respect
to IFC Charges included in bills issued to Customers
during each Billing Period will be based upon the actual
amounts billed for each class of Customers and the
Servicer's estimation of write-offs and delinquencies
for each class of Customers, all in accordance with the
Servicing Standard.
The Servicer also will be required pursuant to the
Servicing Agreement to periodically reconcile the amount
of IFC Payments actually received against the IFC
Payments remitted by the Servicer to the Collection
Account. See "Servicing-- Remittances to Collection
Account."
The "Servicing Standard" will be set forth in the
Servicing Agreement and shall require the Servicer to
calculate, collect, apply, remit and reconcile proceeds
of the Intangible Transition Property, including IFC
Payments, and other Note Collateral for the benefit of
the Trust and the Noteholders (a) with the same
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degree of care and diligence as the Servicer applies
with respect to payments owed to it for its own account,
(b) in accordance with procedures and requirements
established by the ICC for collection of electric
utility tariffs, and (c) in accordance with the other
terms of the Servicing Agreement.
Allocations and Payments.......... On each Payment Date, amounts in the Collection Account,
including net earnings thereon, will be allocated as
shown in the following diagram, which provides a general
summary of the flow of funds from the Customers through
the Servicer to the Collection Account, and the various
allocations therefrom. For a more detailed discussion,
see "Security for the Notes-- Allocations; Payments."
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Servicing......................... The Servicer is responsible for servicing, managing and
receiving IFC Payments in accordance with the Servicing
Standard. Pending deposit into the Collection Account,
all IFC Payments received by the Servicer may be
invested by the Servicer at its own risk and for its own
benefit, and need not be segregated from other funds of
the Servicer. See "Servicing-- Remittances to Collection
Account."
It is possible that certain third-party collection
agents may collect payments (including IFC Charges) from
Customers and that certain ARES may also bill charges
for such payments. In the latter case, the Servicer will
bill each such ARES for the full amount of IFC Charges,
and other charges owed to the Servicer in its individual
capacity. In order to enhance the likelihood that the
collection of IFC Charges by the Servicer will not be
adversely affected as a result of the collection of the
IFC
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Charges by ARES and other third-party collection agents,
the ICC will approve certain procedures in each
Transitional Funding Order regarding the remittance
obligations of such third parties. See
"Servicing--Alternative Retail Electric Suppliers and
Other Third-Party Collectors."
To the extent that there is a shortfall in the amount
received by the Servicer from (a) Customers it bills
directly or (b) a third-party collection agent,
including an ARES, such shortfall will be allocated by
the Servicer FIRST, to the Trust and ComEd pro rata,
based on the amount of Customers' bills constituting IFC
Charges, and the amount constituting other fees and
charges not constituting IFC Charges owed to ComEd or
any successor, respectively, until all kilowatt-hour
charges, other than late charges, are paid, and SECOND,
such amount of late charges shall be allocated to ComEd.
In the event that an ARES or another Utility provides
consolidated billing to Customers for both the services
provided by such ARES or other Utility and services
provided by ComEd, partial payments made to an ARES by
such Customers are required by the Act to be credited
first to amounts due to ComEd's tariffed services
(including IFC Charges collected on behalf of
Noteholders), and the Servicer will allocate such
payments as otherwise described above.
Servicing Compensation............ The Servicer will be entitled to receive a servicing fee
on each Payment Date (the "Servicing Fee"), in the
amount specified in the related Prospectus Supplement.
The Servicing Fee will be paid prior to the payment of
any amounts in respect of interest on and principal of
the Notes. The Servicer will be entitled to retain as
additional compensation net investment income on IFC
Payments received by the Servicer prior to remittance
thereof to the Collection Account and the portion of
late fees, if any, paid by Customers relating to the IFC
Payments. See "Servicing--Servicing Compensation."
No Servicer Advances.............. The Servicer will not be obligated to make any advances
of interest or principal on the Notes.
Denominations..................... Each Series of Notes (and, if applicable, each Class
thereof) will be issued in the minimum initial
denominations set forth in the related Prospectus
Supplement and in integral multiples thereof.
Book-Entry Notes.................. Each Series of Notes (and, if applicable, each Class
thereof) may be issued in definitive form or may be
represented by one or more notes registered in the name
of Cede & Co. ("Cede") (each, a "Book-Entry Note" and
collectively, the "Book-Entry Notes"), the nominee of
The Depository Trust Company ("DTC"), and available only
in the form of book-entries on the records of DTC,
participating members thereof ("Participants") and other
entities, such as banks, brokers, dealers and trust
companies, that clear through or maintain custodial
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relationships with a Participant, either directly or
indirectly ("Indirect Participant"). If so indicated in
the applicable Prospectus Supplement, Noteholders may
also hold Book-Entry Notes of a Series through CEDEL or
Euroclear (in Europe), if they are participants in such
systems or indirectly through organizations that are
participants in such systems. Notes representing
Book-Entry Notes will be issued in definitive form only
under the limited circumstances described herein and in
the related Prospectus Supplement. With respect to the
Book-Entry Notes, all references herein to "Noteholders"
reflect the rights of owners of the Book-Entry Notes as
they may indirectly exercise such rights through DTC and
Participants, except as otherwise specified herein. See
"Risk Factors" and "Description of the Notes--Book-Entry
Registration."
Ratings........................... It is a condition of issuance of each Series of Notes
(and, if applicable, each Class thereof) that at the
time of issuance such Series (or Class) receive the
rating indicated in the related Prospectus Supplement,
which will be in one of the four highest categories,
from one or more of the Rating Agencies specified
therein. See "Ratings" in the related 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 Note and, accordingly, there
can be no assurance that the ratings assigned to any
Series (or Class) of Notes upon initial issuance thereof
will not be revised or withdrawn by a Rating Agency at
any time thereafter. If a rating of any Series (or
Class) of Notes is revised or withdrawn, the liquidity
of such Series (or Class) of Notes may be adversely
affected. In general, the ratings address credit risk
and do not represent any assessment of the rate of
principal payments on the Notes. See "Risk Factors--
Nature of the Notes--Uncertain Payment Amounts and
Weighted Average Life," "Certain Payment, Weighted
Average Life and Yield Considerations" and "Ratings."
Taxation of the Notes............. In the opinion of Sidley & Austin, interest paid on the
Notes generally will be taxable to a United States
Noteholder (as hereinafter defined) as ordinary interest
income at the time it accrues or is received in
accordance with such United States Noteholder's method
of accounting for United States federal income tax
purposes. Such opinion assumes that, based on a ruling
or tax opinion described under "Material United States
Federal Tax Consequences," the Notes will constitute
indebtedness of ComEd for federal income tax purposes.
See "Material United States Federal Tax Consequences"
herein and in the related Prospectus Supplement.
ERISA Considerations.............. The Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Internal
Revenue
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Code of 1986, as amended (the "Code") impose various
requirements on employee benefit plans and certain other
plans and arrangements subject to ERISA, and on persons
who are fiduciaries with respect to such plans and
arrangements, in connection with the investment of
assets which are deemed to be "plan assets" for purposes
of ERISA or Section 4975 of the Code, unless a statutory
or administrative exemption is available. A fiduciary of
any employee benefit plan or other plan or arrangement
that is subject to ERISA or Section 4975 of the Code,
before purchasing the Notes, should therefore determine
that an investment in the Notes is consistent with the
fiduciary duties of ERISA and does not violate the
prohibited transaction provisions of ERISA or the Code.
See "ERISA Considerations" herein and in the related
Prospectus Supplement.
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RISK FACTORS
THE RISK FACTOR DISCLOSURE IN THIS PROSPECTUS AND IN ANY PROSPECTUS
SUPPLEMENT, TO THE EXTENT DISCLOSURE IS INCLUDED THEREIN, SUMMARIZES ALL
MATERIAL RISK FACTORS. INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS DISCLOSED
IN THIS PROSPECTUS, THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE
NOTES.
UNCERTAINTIES ASSOCIATED WITH UNUSUAL ASSET TYPE
There is no historical performance data for an asset type such as the
Intangible Transition Property in the State of Illinois and the Servicer does
not have any historical experience administering this specific type of asset.
Although energy usage records are available, such records have limited
predictive value with respect to the cash flows expected to be available for
payment of the Notes because of the significant changes to electricity markets
in Illinois that are likely to result from the Amendatory Act. In addition,
although the Funding Law provides that the Noteholders or the Indenture Trustee
may foreclose or otherwise enforce the lien on the Intangible Transition
Property securing the Notes, in the event of a foreclosure, there is likely to
be a limited market, if any, for Intangible Transition Property and, therefore,
foreclosure upon the Intangible Transition Property may not be a realistic or
practical remedy for the Noteholders.
LEGAL CHALLENGES WHICH COULD ADVERSELY AFFECT NOTEHOLDERS
The existence and grant of Intangible Transition Property, the status of
such Intangible Transition Property as a separate property right and the
regulatory authorization for ComEd's entering into the transactions under the
Basic Documents are generally dependent on relevant provisions of the Funding
Law and the related Transitional Funding Order. The Amendatory Act (of which the
Funding Law is a part) provides that if any of its provisions are held invalid,
all of its provisions shall be deemed invalid. Thus, a judicial determination
that any provision of the Amendatory Act is invalid would, absent legislative
intervention at that time, result in the entirety of the Amendatory Act
(including the Funding Law) being deemed invalid. It is therefore possible that,
although a Transitional Funding Order has become final and no longer subject to
appeal, a legal challenge to the Amendatory Act could result in payment delays
or losses to Noteholders. However, the Amendatory Act also provides that no
presumption as to the validity or invalidity of any contracts, transactions,
orders, billings or payments pursuant to the Funding Law (such as the contracts,
transactions, orders, billings or payments related to the Transitional Funding
Orders) shall result from a determination of the invalidity of the Amendatory
Act.
ComEd will represent and warrant in each Grant Agreement that the related
Transitional Funding Order is valid, binding and irrevocable. There can be no
assurances, however, that a claim by a person that a provision of the Amendatory
Act is invalid would not result in the invalidation of the entire Amendatory Act
(including the Funding Law). If the Amendatory Act were invalidated, a person
could attempt to challenge such Transitional Funding Order by arguing that such
invalidation should be applied retroactively with the result that there is no
regulatory authorization for the associated transactions. If such an argument
were successful, such Transitional Funding Order, the Intangible Transition
Property created thereby and the transactions entered into pursuant to its
authorization, could all be deemed invalid for lack of authorization, and
Noteholders could suffer a loss of their investment in the Notes.
The issuance of Notes is conditioned upon the rendering of an opinion by
Sidley & Austin, counsel to ComEd, to the effect that such Transitional Funding
Order would remain in effect and the rights thereunder, including the rights of
the Trust to impose and collect the portion of Customers' bills represented by
the IFC Charges, would remain enforceable against ComEd and its assigns
(including a trustee in bankruptcy) in the event of a judicial invalidation of
the Amendatory Act unless a specific order
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or ruling were obtained from a court or the ICC invalidating, amending or
otherwise modifying such Transitional Funding Order.
The issuance of Notes is further conditioned upon the rendering of an
opinion by Sidley & Austin to the effect that a judicial determination that one
or more provisions of the Amendatory Act is invalid should not be applied so as
to result in the Noteholders losing their rights created pursuant to such
Transitional Funding Order. Such opinion will be based on a reasoned application
of judicial decisions involving similar or analogous circumstances (inasmuch as
there are no reported controlling precedents) which have recognized that
judicial decisions should not be applied retroactively where to do so would
produce inequitable results, reopen final judgments or impair vested rights,
such as the rights created pursuant to such Transitional Funding Order. Any
judicial determination would also involve the application of equitable
principles. Although ComEd has agreed in the Grant Agreement that any impairment
of Noteholders' rights to payments on the Notes arising from a judicial
invalidation of the Amendatory Act is inequitable, such statement is not binding
on any court and any application of equitable principles would be subject to the
discretion of the court which is asked to apply them and the
court's evaluation of the facts and equities before it. In that connection, a
declaration of invalidity of the Funding Law itself, as opposed to an
invalidation solely as the result of an invalidation of another provision of the
Amendatory Act, would be a factor tending to reduce the strength of the
equitable principles and related considerations that otherwise would support the
continuing validity of the rights of the Noteholders. Accordingly, the issuance
of the Notes is further conditioned on the inclusion of a statement in the
opinion to be delivered by Sidley & Austin that nothing in their research
conducted in connection with such opinion revealed any judicial decisions which
such firm believes would provide a basis on which a court would declare the
Funding Law to be invalid.
In light of the foregoing discussion, there can be no assurance that a
judicial invalidation of one or more provisions of the Amendatory Act will not
also result in the invalidation of a Transitional Funding Order or Noteholders'
rights with respect thereto. In this regard, investors should be aware that a
successful challenge under federal law of another state's utility deregulation
statute that is similar to the Amendatory Act could be invoked as legal
precedent for invalidating the Amendatory Act.
POSSIBLE PAYMENT DELAYS OR LOSSES AS A RESULT OF AMENDMENT OR REPEAL OF
AMENDATORY ACT OR BREACH OF STATE PLEDGE
The Illinois Legislature could amend or repeal the Funding Law or other
provisions of the Amendatory Act or take actions in contravention of the State
Pledge which could impair the rights of the Noteholders and affect the
collection of IFC Charges and payments on the Notes. Such actions would be
subject to challenge under the United States and Illinois Constitutions, and as
a condition to the issuance of Notes, Sidley & Austin will render an opinion to
the effect that, absent a demonstration by the State of Illinois that an
impairment is necessary to further a significant and legitimate public purpose,
the Noteholders could challenge successfully under the Contract Clause of such
Constitutions the constitutionality of any law subsequently enacted by the
Illinois Legislature that purports to limit, alter, impair or reduce the value
of the rights of the Noteholders or the IFC Charges so as to impair
substantially the Indenture or the Notes or the rights and remedies of the
Noteholders until such time as the Notes are fully paid and discharged. In
addition, ComEd will represent and warrant in the Grant Agreement that the State
of Illinois may not limit, alter, impair or reduce the value of the Intangible
Transition Property in a manner substantially impairing the Indenture or the
rights and remedies of the Noteholders (and, consequently, may not revoke,
reduce, postpone or terminate the related Transitional Funding Order or the
rights of the Noteholders to receive IFC Payments and all other proceeds of the
Intangible Transition Property), until the Notes, together with interest
thereon, are fully paid and discharged (except to the extent of a temporary
impairment that the State of Illinois is able to demonstrate is necessary to
advance a significant and legitimate public purpose).
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Illinois law does not permit citizens to initiate substantive legislation
through referendums. The Illinois Constitution does permit citizen-initiative
amendments; however, those amendments are constitutionally limited to addressing
"structural and procedural subjects" governing the structure, composition and
operation of the Illinois Legislature. The Illinois Supreme Court has held
attempts to use those provisions to enact substantive legislation to be outside
the scope of the provisions. As a condition to the issuance of Notes, Sidley &
Austin will render an opinion to the effect that, based on such court decisions,
an attempt by citizens of Illinois to use the initiative power to enact
legislation causing an impairment of the rights of Noteholders would be held
invalid.
Because the IFC Charges are to be deducted from Applicable Rates and the
right of ComEd to collect such Applicable Rates is not dependent on the
provisions of the Amendatory Act, an amendment or repeal of the Amendatory Act
would not eliminate (although it could reduce) the sources of cash flow from
which the Notes are to be repaid. ComEd will covenant in the Servicing Agreement
that it will continue to impose and collect all IFC Charges (as adjusted from
time to time) or equivalent amounts, deduct IFC Charges or equivalent amounts
from Applicable Rates and remit such amounts to the Trust (in each such case,
unless otherwise prohibited by applicable law or judicial or regulatory order in
effect at such time) notwithstanding any such repeal or any amendment of the
Amendatory Act. Nonetheless, no assurance can be given that a repeal or
amendment of provisions of the Amendatory Act might not impair the rights of the
Noteholders. If the Illinois Legislature were to repeal or amend the Funding Law
in a manner adverse to Noteholders in violation of the State Pledge, the
Servicer would be obligated to institute (and the Indenture Trustee, for the
benefit of the Noteholders, shall be entitled and empowered to institute) any
necessary proceedings to seek to overturn such change in law, to enforce the
State Pledge and to collect any monetary damages which may result therefrom; and
each of the Servicer and the Indenture Trustee may prosecute such proceedings to
final judgment or decree. The Servicer would be required to advance its own
funds to cover the costs of prosecuting any such proceedings, but would be
entitled to reimbursement for such costs as an Operating Expense under the
Indenture. Any such proceedings might adversely affect the price and liquidity
of the Notes and the rate of repayment thereof, and, accordingly, the weighted
average lives thereof. Moreover, given the lack of judicial precedent directly
on point, and the novelty of the security for the Notes, the outcome of any such
proceedings cannot be predicted with certainty; and, accordingly, Noteholders
may suffer a loss of their investment in the Notes.
LIMIT ON AMOUNT OF INTANGIBLE TRANSITION PROPERTY AVAILABLE TO PAY NOTES
The Funding Law requires that each Transitional Funding Order authorize a
specific dollar amount of Intangible Transition Property, which represents the
maximum dollar amount of IFC Charges which may be imposed and collected over
time without further action by the ICC. If for any reason the amount of IFC
Charges necessary to amortize the Notes in full were to exceed the maximum
authorized dollar amount of IFC Charges which may be imposed by more than the
amount in the Capital Subaccount, then ComEd, as Servicer, would be obligated,
in good faith, to request the ICC to increase the previously authorized dollar
amount of Intangible Transition Property. The ICC is not required under the
Funding Law to approve any such increase, however, except in connection with an
issuance of additional Notes, and the Noteholders could, accordingly, suffer a
loss in such event. The Prospectus Supplement related to each Series of Notes
will set forth the maximum aggregate dollar amount of IFC Charges which may be
imposed. In its application for the initial Transitional Funding Order, ComEd
estimated the amount of IFC Charges which would be necessary to be billed
through the Scheduled Maturity Date of all Classes of Notes described in the
related Prospectus Supplement in order to pay interest and principal on the
Notes.
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POTENTIAL SERVICING ISSUES
RELIANCE ON COMED AS SERVICER
The Trust will rely on the Servicer for the determination of any adjustments
to the IFC Charges and for the Customer billing and collection services that are
necessary to recover the IFC Payments and, ultimately, to make payments on the
Notes. If, as a result of its insolvency or liquidation or otherwise, ComEd were
to cease performing its functions as Servicer, it may be difficult to find a
substitute servicer and there can be no assurance that a substitute servicer
will be engaged. In such an event, the timing of recovery of IFC Payments could
be delayed. Any successor servicer may have less experience than ComEd and less
capable systems than those employed by ComEd, and, given the complexity of the
tasks to be performed by the servicer and the expertise required, a successor
servicer may experience difficulties in collecting IFC Payments and determining
appropriate adjustments to IFC Charges. Further, any successor servicer who is
not a provider of electric service may not be able to invoke a remedy of
shutting off service to a Customer for nonpayment of the IFC Charge. See
"Servicing."
POSSIBLE PAYMENT DELAYS CAUSED BY INACCURATE USAGE AND CREDIT PROJECTIONS
If the Servicer is unable to forecast accurately the electricity usage of
Customers, the related revenues from Applicable Rates, and the delinquency and
write-off experience relating to IFC Payments, the timing and amount of IFC
Collections may be significantly affected and therefore Noteholders may fail to
receive timely payments on the Notes. Actual energy usage may differ from
projections as a result of weather during the relevant period that is warmer or
cooler than expected. In addition, actual energy usage, delinquencies and
write-offs may differ from projections as a result of general economic
conditions, trends in demographics that are not precisely as predicted, changes
in technology, unexpected catastrophes, and other causes. Past accuracy of the
Servicer's historical forecasts is not necessarily indicative of the accuracy of
the Servicer's future forecasts and there can be no assurances that actual
usage, delinquencies and write-offs will not be significantly different from
future forecasts thereof. See "The Servicer--Forecast Variance."
POSSIBLE PAYMENT DELAYS CAUSED BY CHANGES IN PAYMENT TERMS OF CUSTOMERS
Because the Servicer is permitted (in accordance with the Servicing
Standard) to alter the terms of billing and collection arrangements and modify
amounts due from Customers, such alterations and modifications could delay
collections from Customers or result in lower collections, and accordingly could
adversely affect the timely payment of interest on the Notes or the payment of
the principal of the Notes pursuant to the Expected Amortization Schedule
therefor or in full by the applicable Scheduled or Final Maturity Date.
Although the Servicer does not have the right to change the amount of an
individual Customer's IFC Charge, it does have the right to take actions that in
its judgment will maximize actual collections from Customers with respect to any
utility bill. In addition, the Servicer has the right to write off outstanding
bills that it deems uncollectible in accordance with its customary practices.
Such actions might include, for example, agreeing to an extended payment
schedule or agreeing to write off a portion of an outstanding bill in order to
recover a portion thereof. In certain circumstances, ComEd is required by
provisions of the Act or regulations of the ICC to take such actions or to
refrain from normal collection actions. While ComEd has no current intention of
taking actions that would change the billing and collection arrangements in a
manner which would affect adversely the collection of IFC Payments, there can be
no assurance that changes in ComEd's customary and usual practices for
comparable assets it services for itself might not result in a determination to
do so or that a successor servicer may not make such a determination. ComEd
could also be required to modify its billing and collection arrangements due to
changes in ICC regulations governing such arrangements. See "The
Servicer--Credit Policy; Billing; Collections; Restoration of Service."
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LIMITED INFORMATION REGARDING CUSTOMERS
The ability of the Servicer to collect amounts billed to Customers,
including the IFC Charges, will depend in part on the creditworthiness of the
Customers. If ComEd evaluates the creditworthiness of a significant number of
its Customers incorrectly, resulting in significant increases in delinquencies
and write-offs, delays in payments to Noteholders may occur. As a general
matter, ComEd is obligated to provide service to new Customers under Illinois
law and performs no outside credit investigations on new Customers. ComEd's
information regarding the credit status of new Customers is limited to
information arising as a result of any prior service from ComEd to such
Customers.
An important element of ComEd's policies and procedures relating to credit
and collections is its right to disconnect service on account of nonpayment.
Each Transitional Funding Order will expressly provide that ComEd may disconnect
service for nonpayment of IFC Charges to the same extent as ComEd would be
entitled to take such action because of nonpayment of any other charge for
tariffed services. Nonetheless, ComEd's rights to disconnect service are subject
to and, to a material extent, controlled by Illinois statutory requirements and
the rules and regulations of the ICC which may change from time to time. See
"The Servicer--Credit Policy; Billing; Collections; Restoration of Service."
POSSIBLE PAYMENT DELAYS CAUSED BY RELIANCE ON ALTERNATIVE RETAIL ELECTRIC
SUPPLIERS AND OTHER THIRD-PARTY COLLECTORS
As part of the restructuring of the Illinois electric industry, certain
Customers will be allowed, beginning October 1, 1999, and all Customers will be
allowed as of May 1, 2002, to purchase electricity and related services from
ARES and from other Utilities rather than from ComEd. See "Electric Industry
Restructuring in Illinois--Alternative Retail Electric Suppliers." The
Amendatory Act requires ComEd to allow such ARES and other Utilities, pursuant
to a tariff to be filed by ComEd with, and approved by, the ICC, to issue a
single bill (which would include the applicable IFC Charges) to any retail
customer purchasing electricity or related services from the ARES or other
Utility and delivery services from ComEd for both the services provided by the
ARES or other Utility and the delivery services provided by ComEd. The
applicable IFC Charges included in a single bill to a Customer are required to
be remitted to the Servicer by such ARES. If a substantial number of Customers
elect to purchase their electricity from ARES that elect to provide a single
bill, the Servicer may be relying on a small number of ARES, each of whom is
responsible for a substantial portion of the Servicer's total billings, to
collect IFC Charges, rather than the Servicer collecting IFC Charges directly
from Customers. In this circumstance, a default in the collection and remittance
of IFC Charges to the Servicer by a single ARES that provides electricity to a
large number of Customers may adversely affect the Servicer's ability to make
timely remittance of IFC Collections to the Collection Account, resulting in
shortfalls thereof. Such IFC Collection shortfalls could adversely affect the
timely payment of interest on the Notes or the payment of principal of the Notes
in accordance with the Expected Amortization Schedule therefor or in full by the
applicable Scheduled or Final Maturity Date.
In addition there can be no assurance that any ARES will use the same
customer credit standards as the Servicer or that the Servicer will be able to
mitigate credit risks relating to ARES in the same manner in, or to the same
extent to, which it mitigates such risks relating to its Customers, both of
which may have the effect of causing shortfalls in IFC Collections. Changes in
Customer billing and payment practices caused by ARES billing may result in
misdirected or delayed payments due to customer confusion, which could also have
the effect of causing shortfalls in IFC Collections. Furthermore, the Servicer
will have no meaningful ability to control the collection procedures of ARES or
other third-party collection agents who simply forward payments on behalf of
Customers and not pursuant to contractual arrangements with ComEd or pursuant to
consolidated billing procedures. Finally, any problems arising from new and
untested systems or any lack of experience on the part of any ARES or other
third parties with Customer billings and collections could cause delays in
billing and collecting the IFC Charges resulting in shortfalls in IFC
Collections. Such IFC Collection shortfalls could adversely affect the timely
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payment of interest on the Notes or the payment of principal of the Notes in
accordance with the Expected Amortization Schedule therefor or in full by the
applicable Scheduled or Final Maturity Date.
POSSIBLE PAYMENT DELAYS CAUSED BY COMMINGLING OF IFC PAYMENTS WITH SERVICER'S
OTHER FUNDS
If the Monthly Remittance Conditions are met, on each Monthly Remittance
Date the Servicer will remit to the Collection Account IFC Payments received
during the preceding Billing Period. Accordingly, IFC Payments received by the
Servicer would not be segregated from the Servicer's general funds until they
are remitted to the Collection Account. A failure or inability of the Servicer
to remit the full amount of the estimated IFC Payments on any Monthly Remittance
Date, whether voluntary or involuntary, might result in delays in payments to
Noteholders. Such retention of funds could also have adverse consequences to
Noteholders in the event of a bankruptcy of the Servicer. See "--Bankruptcy and
Creditors' Rights Issues--Possible Adverse Effect on Noteholders as a Result of
the Bankruptcy of Servicer."
POSSIBLE PAYMENT DELAYS AS A RESULT OF YEAR 2000 ISSUES
ComEd uses various software applications and embedded systems throughout its
businesses that will be affected by so-called "Year 2000 issues." These issues
may prevent an application or system from correctly processing dates up to the
year 2000 and beyond. Based on ComEd's current schedule for completion of Year
2000 tasks, ComEd believes that its planning is adequate to secure Year 2000
readiness of its critical systems. Nevertheless, achieving Year 2000 readiness
is subject to various risks and uncertainties, and ComEd is not able to predict
all the factors that could cause actual results to differ materially from its
current expectations as to its Year 2000 readiness.
A failure to correct any critical Year 2000 processing problems prior to
January 1, 2000 could have material adverse operational and financial
consequences if the affected systems either cease to function or produce
erroneous data. For example, the Year 2000 issues could affect, among other
things, the ability of ComEd, as Servicer, and any ARES to bill and collect the
IFC Charges, both because of problems with their own systems and problems that
Customers may have in processing bills, and the ability of the Servicer and ARES
to meter usage. This could result in significant delays in IFC Collections and,
therefore, in payments to Noteholders. The Year 2000 issues could also affect
usage by Customers if there are problems with the generation or distribution of
electricity which could cause the amount of Applicable Rates from which IFC
Charges will be deducted to be materially decreased or delayed. See "--Reduction
in Amount of Revenues From Applicable Rates." For a more thorough discussion of
the Year 2000 issues, see "The Servicer--Year 2000 Issues."
UNCERTAINTIES RELATED TO THE ELECTRIC INDUSTRY GENERALLY
UNTRIED NEW ILLINOIS MARKET STRUCTURE
The Illinois electric industry is expected to change dramatically in the
near future as a result of enactment of the Amendatory Act. See "Electric
Industry Restructuring in Illinois." If difficulties are experienced in
implementing the various aspects of the new market structure in Illinois,
electricity generation, transmission and distribution may be adversely affected,
IFC Payments may not be made as expected, ComEd's business may be adversely
affected, and Noteholders may fail to receive payments of principal and
interest.
Beginning October 1, 1999, under the new market structure, certain retail
customers will be eligible to purchase electricity from suppliers other than the
local Utility, and by May 2002, all retail customers of investor-owned Utilities
will be eligible to purchase electricity from other suppliers. Each local
Utility, such as ComEd, will be required to deliver the electricity sold by
other suppliers to customers in such Utility's service area. In addition, as a
result of both the Amendatory Act and federal initiatives, Utilities may be
required to turn over control of their transmission systems to an independent
operating entity.
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Further, under the Amendatory Act, Utilities, such as ComEd, are entitled to
enter into contracts with customers which are not subject to regulation by the
ICC as to prices, terms and conditions. The new electric market structure has
neither been tested nor implemented on a scale represented by the State of
Illinois. Recent attempts to initiate operations under a similar market
structure in California, as mandated by statute, resulted in a series of delays
in implementation due to difficulties in bringing the necessary new systems and
procedures to an acceptable state of readiness and reliability. In addition, the
impacts of the implementation of the new market structure on the pricing of
electricity services, customer usage of electricity, and the tariffed and other
revenues received by the Servicer, cannot be predicted with certainty.
ComEd is in the process of examining its existing investments and operations
in relation to the changing regulatory environment, with a view to rationalizing
ComEd's investment in, and operating costs of, particular assets against their
ability to contribute to ComEd's profits and revenues. As a result of such
examination, ComEd recently announced plans to sell its coal-fired generating
plants, and other asset sales or other transactions could occur in the future.
Such sales could have the effect of separating the generation component of
ComEd's business from the transmission and distribution component with the
result, for example, that ComEd would substitute open-market purchases of
electricity for lost generation capacity and resell the electricity so purchased
to its retail customers under tariffs or contracts for fully bundled services.
ComEd does not believe that such transactions will have a material adverse
effect on the revenues it receives from Customers and therefore that such
transactions will not materially adversely affect the timing or amounts of IFC
Collections. Nonetheless, there can be no assurance that such transactions will
not reduce the amount of Applicable Rates available to ComEd from which the IFC
Charges must be deducted. See "--Uncertainties Related to the Electric Industry
Generally--Reduction in Amount of Revenue from Applicable Rates."
SHRINKING CUSTOMER BASE AS A RESULT OF TECHNOLOGICAL CHANGE
The continuous processes of technological development may result in
introduction of economically-attractive alternatives to the purchase of
electricity from Utilities, such as ComEd, for increasing numbers of customers.
Since the IFC Charges are based on electricity usage by the Customers of ComEd,
reductions in the amount of electricity sold or delivered by ComEd to its
Customers will result in higher IFC Charges than would otherwise exist and could
negatively impact the timing of IFC Payments and may result in delays in
payments on the Notes. For example, a Customer which obtains its electricity
from its own cogeneration or self-generation facilities and does not purchase
any electricity or take delivery services or any other tariffed services from
ComEd will not pay transition charges or other tariffed charges on the
electricity it obtains from such facilities and thus will not be obligated to
pay IFC Charges with respect to that electricity. Even if such a Customer were
to continue purchasing some but not all of its electricity from ComEd, the
amount of electricity which the Customer purchases from ComEd, and therefore the
amount of IFC Charges the Customer is obligated to pay, would be less than if
the Customer were purchasing all of its electricity from ComEd.
Previously, only the largest industrial and institutional users with large
process steam requirements in the Servicer's service area were considered
candidates for cost-effective cogeneration or self-generation installations.
However, manufacturers of self-generation facilities continue to develop
smaller-scale, more fuel-efficient generating units which can be cost-effective
options for customers with smaller electric energy requirements. For example,
Unicom Energy Services Inc., an affiliate of ComEd, is engaged in a joint
venture with a major electrical equipment manufacturer to market smaller
electric generating units that may be suitable and cost-effective for
installation in smaller commercial establishments. Eventually, such units may be
produced in sizes, at prices and with operating efficiencies that make them
cost-effective for installation in residences. Other types of distributed
generation which could be purchased by customers in order to bypass the local
Utility include fuel cells. In addition, continuing advances in the operating
efficiencies of electricity-consuming devices are a factor reducing the amount
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of electricity purchased by consumers from Utilities. Within the time period
between issuance and maturity of the Notes, there can be no assurances that
technological developments such as those described in this paragraph will not
result in material reductions in the amount of electricity sold or delivered by
ComEd to its Customers.
SHRINKING CUSTOMER BASE AS A RESULT OF MUNICIPALIZATION
The Amendatory Act expressly preserves the rights of a municipality under
certain circumstances to form a municipal utility which can purchase electric
power and energy on a wholesale basis for resale to customers within the
geographic areas it is lawfully entitled to serve and also allows
municipalities, subject to certain conditions, to become ARES. In either the
event of municipalization or upon a municipality becoming an ARES, the number of
ComEd's Customers receiving power and energy from ComEd would decline, resulting
in the reduction in the amount of electricity sold or delivered by ComEd to its
Customers. Since the IFC Charges are based on electricity usage by the Customers
of ComEd, such reductions will result in higher IFC Charges than would otherwise
exist and could negatively impact the timing of IFC Payments and may result in
delays in payments on the Notes.
A municipality within ComEd's service area which wanted to operate a
municipal utility would have to form its own distribution system, either by
building one or acquiring (through negotiated purchase or appropriate
condemnation proceedings) the portion of ComEd's distribution system related to
such municipality's service area. Under Order 888 of the Federal Energy
Regulatory Commission ("FERC"), ComEd would have the right to seek recovery of
its legitimate, prudent and verifiable stranded costs resulting from a
municipalization, with the amount of such recovery to be determined through
appropriate proceedings before FERC. If a municipalization were to occur, a
portion of any such condemnation awards or other recoveries that was made in
respect of lost tariffed revenues would be allocable, in accordance with the
Servicing Agreement, to the IFC Charges and ComEd would be required to pay such
portion to the Trust as proceeds of the Intangible Transition Property.
Nonetheless, in the event of a municipalization, the Customers within such
municipal utility's service area would thereafter cease to be Customers of ComEd
obligated to pay IFC Charges and the loss of such Customers could result in a
material reduction in the amount of electricity sold or delivered by ComEd.
Moreover, unless the municipality, in its capacity as a retail customer under
the Act, elected to take tariffed or contract services from ComEd, the
municipality itself would not be a Customer and would also not be obligated to
pay IFC Charges. Reductions in the amount of electricity sold or delivered by
ComEd will result in increased IFC Charges and could negatively impact the
timing of IFC Payments and may result in delays in payments on the Notes.
As of September 1, 1998, there were only seven municipal utilities operating
within ComEd's service area, the last of which was created several decades ago.
Two other municipalities have approved the formation of municipal utilities, but
only one such municipal utility has been formed and its electricity operations
are currently limited to supplying electricity for the municipality's wastewater
plant. In addition, one other suburban municipality recently voted to not renew
its franchise agreement with ComEd and is reported to be exploring its options
in connection therewith, including municipalization. Although there can be no
assurance that other municipalities in ComEd's service area might not seek,
prior to the time the Notes are paid in full, to form a municipal utility, ComEd
does not believe there is any material risk of future municipalizations having
an adverse impact on the Noteholders.
In the event that a municipality becomes an ARES, the Customers receiving
power and energy from such municipality (or the municipality on their behalf)
would remain obligated to pay IFC Charges in connection with ComEd's provisions
of delivery services to such Customers and in connection with any payments of
transition charges owed by such Customers. The loss of such Customers could
nonetheless result in a material reduction in the amount of electricity
generated by ComEd and, therefore, in the amount of revenues supporting payment
of the IFC Charges.
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POSSIBLE PAYMENT DELAYS CAUSED BY CHANGES IN GENERAL ECONOMIC CONDITIONS AND
ELECTRICITY USAGE
General economic conditions and technological changes that would
significantly alter power consumption or reduce the Customer base in ComEd's
service area may affect payments on the Notes. Changes in business cycles,
departures of Customers from ComEd's service area, other demographic changes,
changes in weather, occurrence of natural disasters such as earthquakes and
floods and implementation of energy conservation efforts all affect energy
usage. If a sufficient number of Customers reduce significantly their
electricity consumption or cease consuming electricity altogether, the revenues
supporting payment of the IFC Charges could decrease, and such decreases could
negatively impact the timing of the IFC Payments.
UNCERTAINTIES CAUSED BY CHANGING REGULATORY AND LEGISLATIVE ENVIRONMENT
Although the Amendatory Act provides for comprehensive changes in the legal
and regulatory framework governing Utilities such as ComEd, in Illinois, there
can be no assurances that, during the term to maturity of the Notes, the
Illinois Legislature will not pass additional laws materially changing the legal
and regulatory framework to which ComEd is subject. Any changes in the existing
legal structure regulating the electric industry might have an impact on the
manner in which electricity is distributed and payments therefor are collected,
or on ComEd and its business, and thus the likelihood that Noteholders will
receive payments in the amounts and at the times scheduled.
In addition to actions taken by the Illinois Legislature and regulation by
the ICC, the electric industry is also subject to federal law and regulation by
the FERC. The National Energy Policy Act of 1992 was designed to increase
competition in the wholesale electric generation market by easing regulatory
restrictions on producers of wholesale power and by authorizing the FERC to
mandate access to electric transmission systems by wholesale power generators.
In addition, at least eight bills (none of which has passed in committee) have
been introduced in the 105th Congress, First Session, mandating the deregulation
of the electric utility industry on the state level. In their current forms,
most but not all of the bills contain provisions recognizing the validity of
prior state actions relating to deregulation. At least two of the bills, H.R.
1230 and H.R. 4798, however, would prohibit the recovery of stranded costs
through charges such as the transition charges provided for in the Amendatory
Act. Although the IFC Charges do not constitute recoveries for stranded costs,
any prohibition on the imposition of transition charges under the Amendatory Act
could have a material adverse impact on the amount of Applicable Rates from
which the IFC Charges are deducted and on the timing of IFC Charges. In any
event, no prediction can be made as to whether any of these bills, or any future
proposed bills to deregulate the electric industry, will become law or, if they
become law, what their final form or effect will be.
REDUCTION IN AMOUNT OF REVENUE FROM APPLICABLE RATES
Each Transitional Funding Order will include determinations, with which
ComEd will concur, to the effect that (a) the imposition of IFC Charges will not
increase the total charges to ComEd's Customers over those that the Customers
would pay absent the imposition of IFC Charges and (b) the IFC Charges will be
deducted from and stated separately from the Applicable Rates charged on each
Customer's bill. Therefore, a decline in revenues from Applicable Rates may have
a negative impact on the timing and amount of IFC Charges and may adversely
affect ComEd's financial condition and thereby its ability to provide electric
service or to perform its obligations as Servicer.
Under the Funding Law, the ICC is required to authorize in each Transitional
Funding Order and in each IFC Tariff, and ComEd is entitled to implement, a
procedure for periodic prospective adjustments to the IFC Charges in respect of
any over-collection or shortfall in collections of IFC Charges during prior
periods. See "Description of the Intangible Transition Property Adjustments to
the IFC Charges." The Funding Law provides that if, as a result of any such
adjustment, the IFC Charge, as so adjusted, will exceed the amount per
kilowatt-hour of the IFC Charge authorized by the ICC in any Transitional
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Funding Order, then ComEd shall be obligated to file Amendatory Tariffs
adjusting the amounts otherwise billable by ComEd for Applicable Rates, to
offset the amount of such excess (or, if ComEd shall have previously filed any
such Amendatory Tariffs, the incremental amount of such excess). However,
although the Funding Law specifically preserves the right of ComEd's Customers
to bring actions against ComEd for failure to file such Amendatory Tariff, the
failure of such Amendatory Tariff to become effective for any reason shall not
delay or impair the effectiveness of any such adjustments and the obligation of
Customers to pay the IFC Charges, as adjusted, shall not be subject to any
defense, counterclaim or right of set-off arising as a result of either (a) the
failure of ComEd to file such Amendatory Tariff or (b) ComEd's failure to
perform or provide past, future or present services.
There are several provisions of the Amendatory Act (including the provision
requiring the filing of Amendatory Tariffs) which will result in reductions to
the amounts of Applicable Rates which ComEd will be allowed to bill to and
collect from Customers and from which ComEd is required to deduct IFC Charges.
The Amendatory Act required ComEd to implement a 15% reduction in base rates
to its residential customers on August 1, 1998, and requires an additional 5%
reduction in base rates to its residential customers on May 1, 2002, based on
ComEd's rates in effect immediately prior to January 1, 1998. The Amendatory Act
also provides that, with one exception, ComEd may not request an increase in the
base rates that it charges its retail customers until January 1, 2005.
Commencing January 1, 2005, the ICC may, pursuant to appropriate proceedings,
modify ComEd's base rates in accordance with cost of service, and may set the
components of any such rates that are intended to recover power supply costs at
the lower of cost of service or 110% of market price (which modifications could
act to reduce such base rates). In addition, under the Amendatory Act, the ICC,
at ComEd's request and subject to satisfaction of statutory criteria, may
declare tariffed services offered by ComEd to be "competitive." If a tariffed
service is declared competitive, ComEd is obligated to continue to offer the
service as a tariffed service for three years to those customers who were served
on the tariff on the date the service is declared competitive, but is relieved
of the obligation to offer or provide the service as a tariffed service to any
new customers who otherwise would have been eligible for it. In addition, the
Amendatory Act allows ComEd to self-declare a tariffed service (other than
delivery service or the provision of electric power and energy) "competitive,"
but only with respect to those customers not then taking the tariffed service,
subject to the authority of the ICC to thereafter review and revoke such
declaration. Charges for a competitive service are not included in Applicable
Rates, thereby reducing the amount of Applicable Rates from which the IFC
Charges must be deducted and available to ComEd to offset against any increase
in the IFC Charges as a result of any Amendatory Tariff.
The Amendatory Act allows certain non-residential customers of ComEd to
purchase their electricity from other suppliers commencing October 1, 1999,
allows all other non-residential customers to purchase their electricity from
other suppliers commencing December 31, 2000, and allows all of ComEd's
residential customers to purchase their electricity from other suppliers
commencing May 1, 2002. It is anticipated that most Customers electing to
purchase electricity from other suppliers will find it necessary to purchase
delivery services, which will be a tariffed service, from ComEd, and may be
required to pay a transition charge to ComEd until December 31, 2006. The
transition charge is calculated according to a formula which is designed to
allow ComEd to recover a portion, but not all, of the revenue requirement
associated with its generation and power supply costs that are above market
prices. The market prices used in the calculation of the transition charge are
redetermined from year to year and it is possible that the transition charge for
some Customers may be zero, in which event the amount of Applicable Rates from
which the IFC Charges must be deducted and which are available to ComEd to
offset against any increase in the IFC Charges would be limited by the remaining
tariffed charges imposed on such Customers. Moreover, the transition charge
revenues are designed to decrease over time, and such reductions may further
reduce the amount of such Applicable Rates. See "Electric Industry Restructuring
in Illinois--Transition Charges."
The ICC, on petition by a Utility and based on application of statutory
criteria set forth in the Amendatory Act, is authorized to extend the period
during which transition charges may be collected
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until no later than December 31, 2008. There can be no assurances that the ICC
will grant any such request for extension of this right to collect transition
charges. Based on the manner in which transition charges must be established, as
provided in the Amendatory Act, ComEd, until at least December 31, 2004, expects
to receive less revenue from a retail customer who elects to purchase
electricity from another supplier than ComEd would receive if the customer
continued to purchase electricity from ComEd at base rates. Prior to December
31, 2006, some customers who have elected to purchase electricity from other
suppliers, and after December 31, 2006, all such customers (unless the ICC
grants a ComEd request for an extension of the authority to collect transition
charges) will no longer pay ComEd transition charges, and may pay ComEd only
delivery service charges as a rate for tariffed services. It has not been
determined at this time whether delivery service charges will be calculated on a
cents per kilowatt-hour basis. In any event, the delivery service charges are
expected to be, on a per kilowatt-hour basis and in the aggregate, materially
lower than ComEd's current bundled charges for tariffed services.
In addition, under the Amendatory Act, Utilities (including ComEd) will be
required to offer, as a tariffed service, (a) to their non-residential delivery
service customers, certain power purchase options pursuant to which such
customers may purchase electric power and energy from the Utility at the
market-based prices used in the calculation of transition charges and (b) to all
customers, real-time pricing whereby charges for delivered electric power and
energy may vary on an hour-to-hour basis for non-residential retail customers
and that vary on a periodic basis during the day for residential retail
customers. See "Electric Industry Restructuring in Illinois--Amendatory Act
Overview." Such pricing options have generally not existed in the past and,
accordingly, there can be no assurance as to how the offering of such options
might affect the amount of Applicable Rates from which the IFC Charges must be
deducted and which are available to ComEd to offset against any increase in the
IFC Charges as a result of an Amendatory Tariff.
A Customer which obtains its electricity from its own cogeneration or
self-generation facilities and does not purchase any electricity or take
delivery services or any other tariffed services from ComEd will not pay
transition charges or other tariffed charges on the electricity it obtains from
such facilities and thus will not be obligated to pay IFC Charges with respect
to that electricity. Even if such a Customer were to continue purchasing some
but not all of its electricity from ComEd, the amount of electricity which the
Customer purchases from ComEd, and therefore the amount of IFC Charges the
Customer is obligated to pay, would be less than if the Customer were purchasing
all of its electricity from ComEd. Certain electricity consumers in the State of
Illinois and certain entities involved in the sale, installation, operation and
sale of fuel for cogeneration and self-generation facilities have taken the
position that the phrase "customer's own cogeneration or self-generation
facilities" for purposes of the Amendatory Act should be interpreted to include,
among other things (i) facilities which are not located on the customer's
premises, (ii) facilities which are owned by a third party and leased to the
customer, (iii) facilities which are operated for the customer by a third party,
(iv) a customer's ownership or leasehold interest in a portion of a facility
which, in its entirety, is larger than required to serve the electrical needs of
the customer, and the remaining portion of which is used to serve other
customers or to make wholesale or retail sales of electricity to other customers
or third parties, and (v) facilities from which sales of electricity not needed
to serve the electricity requirements of the particular customer are made to
other customers or third parties. ComEd and certain other entities have
disagreed with this interpretation as overbroad and contrary to the terms of the
Amendatory Act. Nonetheless, if the Illinois Legislature, a court, or the ICC
were to agree with such an interpretation, in whole or in part, and adopt a
conforming amendment to the Act or enter a binding decision to such effect, then
the number and extent of installation of cogeneration or self-generation
facilities (as so defined) may increase, and the amount of electricity usage by
Customers installing such facilities and the amount of Applicable Rates from
which IFC Charges must be deducted and which are available for ComEd to offset
against an increase in IFC Charges as a result of an Amendatory Tariff, may be
reduced. However, any electricity delivered to a retail customer by ComEd from a
privately-owned generation facility, using ComEd's transmission or distribution
system, would be subject to delivery charges and transition charges and
therefore to IFC Charges.
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As a result of the statutory provisions and the events described in the
preceding five paragraphs, the total amount of Applicable Rates which ComEd will
be entitled, and can expect, to collect from its Customers may decline
materially over the period between issuance and maturity of the Notes. To the
extent any decline in tariffed revenues is supplanted by revenues from contracts
between ComEd and Customers who would otherwise have been obligated to pay
tariffed revenues and, therefore, would have been obligated to pay IFC Charges,
however, the Transitional Funding Orders prohibit ComEd from entering into such
contracts unless the Customers expressly agree to pay to the Trust an amount
equal to the amount of IFC Charges that would have been billed if the services
taken by such Customers under such contracts had continued to be taken under
tariff. In addition, each Transitional Funding Order and the Servicing Agreement
will provide that, if the IFC Charges to be imposed on any IFC Customer Class in
an Applicable Period exceed the total projected revenues for such class in such
Applicable Period, the deficiency shall be allocated among all remaining IFC
Customer Classes. There can nonetheless be no assurance that any decline in
revenues from Applicable Rates would not have a negative impact on the timing
and amount of IFC Charges and on the ability of ComEd to offset against any
increase in the IFC Charges as a result of an Amendatory Tariff, nor can there
be any assurance that any decline in overall revenues would not adversely affect
ComEd's financial condition and thereby its ability to provide electric service
or to perform its obligations as Servicer.
In addition, if the amount of ComEd's Applicable Rates has been reduced to
such a low level that ComEd cannot offset adjusted IFC Charges against such
Applicable Rates and fails to file an Amendatory Tariff, ComEd may become
subject to actions by Customers, as described in the second paragraph in this
section, and no assurance can be given that such actions may not adversely
affect the Noteholders. Furthermore, under ComEd's proposed servicing
procedures, in the event that total IFC Charges for a particular Customer during
a particular Billing Period were to exceed otherwise Applicable Rates for such
Customer, the Customer would only be billed IFC Charges for the amount of
Applicable Rates against which such IFC Charges could then be offset. If the
above-described circumstances occur, such a limitation on amounts billed to
individual Customers could result in payment delays on the Notes,
notwithstanding the ability of the Servicer to allocate any deficiency in IFC
Charges with respect to one IFC Customer Class to the remaining IFC Customer
Classes, as discussed above. See "Servicing."
ComEd does not expect, taking into consideration the current authorized
levels of IFC Charges and anticipated future issuances of Notes, that any
decline in revenues from Applicable Rates would result in a limitation on the
timing or the overall amount of IFC Charges payable by Customers. See "The
Servicer--ComEd Customer Base, Electric Energy Consumption and Base Rates."
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
POSSIBLE ADVERSE EFFECT ON NOTEHOLDERS AS A RESULT OF THE BANKRUPTCY OF COMED,
THE GRANTEE OR THE TRUST
If ComEd were to become a debtor in a bankruptcy case, and a creditor or
bankruptcy trustee of ComEd or ComEd itself as debtor-in-possession were to take
the position that the Intangible Transition Property constituted property of
ComEd's bankruptcy estate, and a court were to adopt such position, then delays
or reductions in payments on the Notes could result. Regardless of any specific
adverse determinations in a ComEd, Grantee or Trust bankruptcy proceeding, the
mere fact of a ComEd, Grantee or Trust bankruptcy proceeding could have an
adverse effect on the secondary market of the Notes, including an adverse effect
on the liquidity and market value of the Notes.
ComEd, the Grantee and the Trust have taken steps to minimize the risk that
a creditor or bankruptcy trustee of ComEd or ComEd itself would succeed on such
a claim. For example, the Grantee will represent and warrant in each Sale
Agreement that the transfer of the related Intangible Transition Property by the
Grantee to the Trust pursuant to such Sale Agreement is a valid sale and
assignment of such Intangible Transition Property, including amounts deemed to
be Intangible Transition Property
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pursuant to the related Transitional Funding Order, from the Grantee to the
Trust. ComEd will also represent and warrant in the Basic Documents that the
vesting of the Intangible Transition Property in the Grantee shall be
irrevocable and enforceable against ComEd and that it has no right, title and/or
interest in the Intangible Transition Property nor in the portion of the
Applicable Rates otherwise to have been received by ComEd to the extent such
portion has become IFC Charges in accordance with the terms and provisions of
the related Transitional Funding Order. ComEd, the Grantee and the Trust will
also covenant in the other Basic Documents that they will each take all
appropriate actions to perfect the Indenture Trustee's security interest in the
Intangible Transition Property and the other Note Collateral. Further, the
Funding Law provides that a sale, assignment or other transfer of intangible
transition property in a transaction approved by a transitional funding order,
which is expressly stated in the documents governing the transaction to be a
sale or other absolute transfer, shall be treated as an absolute transfer of all
the transferor's right, title and interest in, to and under such intangible
transition property which places such transferred property beyond the reach of
the transferor or its creditors. ComEd, the Grantee and the Trust will,
therefore, treat the transactions as an absolute transfer under applicable law,
although for financial reporting and federal income tax purposes the
transactions will be treated as debt of ComEd. See "--Potential Servicing
Issues--Possible Payment Delays Caused by Commingling of IFC Payments with
Servicer's Other Funds."
If ComEd were to become a debtor in a bankruptcy case and a court were to
order that the assets and liabilities of the Trust or the Grantee should be
consolidated with those of ComEd, delays or reductions in payments on the Notes
would likely result. ComEd, the Grantee and the Trust have taken steps to
minimize the risk of such a consolidation. The major step is that, instead of
the Intangible Transition Property being transferred directly from ComEd to the
Grantee, the Funding Law permits, and each Transitional Funding Order will
provide, that the Intangible Transition Property created by such Transitional
Funding Order is vested directly in the Grantee and is not subject to defense,
counterclaim or right of setoff as a result of ComEd's failure to perform or
provide past, present or future services. Additional steps include the fact that
the Grantee is a separate, special purpose limited liability company, subject to
the direction of a management committee, at least two of whose members must be
independent from ComEd, and the organizational documents of which provide that
it shall not commence a voluntary bankruptcy case without the unanimous
affirmative vote of all of its managers, and that the Trust is a distinct entity
managed by the Delaware Trustee. Nonetheless, these steps may not be completely
effective.
Should any transfer of Intangible Transition Property to the Trust be
recharacterized in a bankruptcy proceeding as a borrowing by ComEd or the
Grantee, the Funding Law provides that, subject to certain required filings with
the ICC which ComEd must make at the time the Notes are issued, there is a
perfected first priority statutory lien on such Intangible Transition Property
that secures all obligations to the holders of the Notes.
Pursuant to the Funding Law and each Transitional Funding Order, upon any
issuance of Notes, the Intangible Transition Property identified in such
Transitional Funding Order constitutes a current property right and thereafter
continuously exists as property for all purposes. Nonetheless, no assurances can
be given that if ComEd, the Grantee or the Trust were to become the debtor in a
bankruptcy case, a creditor of, or a bankruptcy trustee for, ComEd, the Grantee
or the Trust, or ComEd, the Grantee or the Trust itself as debtor-in-possession
would not attempt to take the position that, because the payments based on the
IFC Charges are usage-based charges, Intangible Transition Property comes into
existence only as Customers use electricity or, in the case of Customers
agreeing to pay IFC Charges under contracts, as such Customers enter into such
contracts or use electricity. Any such party might similarly argue, to the
extent that any condemnation or FERC stranded cost recoveries which include
amounts for lost tariffed revenues are awarded from and after commencement of a
bankruptcy by or against ComEd, that such amounts came into existence only as
such recoveries were awarded, notwithstanding the provisions of the Servicing
Agreement which provide that a portion of such awards should be allocable to the
Trust as
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proceeds of Intangible Transition Property. If a court were to adopt any of the
foregoing positions, no assurances can be given that the statutory lien created
by the Funding Law would attach to collections of IFC Payments in respect of
electricity consumed after the commencement of a bankruptcy case by or against
ComEd, the Grantee or the Trust or in respect of IFC Payments received under
contracts entered into after the commencement of such case. If it were
determined that any Intangible Transition Property has not been sold to the
Trust, and that the statutory lien created by the Funding Law does not attach to
collections of IFC Payments in respect of electricity consumed after the
commencement of a bankruptcy case for ComEd, the Grantee or the Trust, then the
Indenture Trustee, as trustee for the Noteholders, would be an unsecured
creditor of ComEd, the Grantee or the Trust, as the case may be, and delays or
reductions in payments on the Notes could result. Whether or not the court
determined that any Intangible Transition Property had been sold to the Trust,
no assurances can be given that the court would not rule that any IFC Payments
relating to electricity consumed after the commencement of ComEd's, the
Grantee's or the Trust's bankruptcy cannot be transferred to the Indenture
Trustee, thus resulting in delays or reductions of payments on the Notes.
Because the IFC Charges are usage-based charges, if ComEd or the Grantee
were to become the debtor in a bankruptcy case, a creditor of, or a bankruptcy
trustee for, ComEd or the Grantee, or ComEd or the Grantee itself as
debtor-in-possession could take the position that the Trust should pay a portion
of the costs of ComEd associated with the generation, transmission, or
distribution by ComEd of the electricity whose consumption gave rise to the IFC
Collections that are used to make payments on the Notes. If a court were to
adopt this position, the result could initially be a reduction in the amounts
paid to the Trust, and thus to the Noteholders. Although the IFC Charges may be
adjusted by the Servicer, delays in implementation thereof may cause a delay in
receipt of IFC Collections sufficient to pay interest and make Scheduled
Payments on the Notes.
In addition, if ComEd were to become the debtor in a bankruptcy case, a
bankruptcy trustee for ComEd, or ComEd itself as debtor-in-possession, could
take the position that it is not bound prospectively by the provisions of a
Transitional Funding Order requiring that ComEd will not enter into any
contracts with any Customer obligated (or who would but for such contract, be
obligated) to pay IFC Charges if, as a result thereof, the Customer would not
receive services subject to Applicable Rates, unless such contract provides that
the Customer will pay an amount to the Grantee or its assigns, or to ComEd, as
Servicer, as applicable, equal to the amount of IFC Charges that would have been
billed if the services provided under such contract were subject to Applicable
Rates. If a court were to adopt this position, the result could be a further
reduction in the amounts available to be paid to the Trust, and thus to the
holders of the Notes.
Regardless of whether ComEd, the Grantee or the Trust is the debtor in a
bankruptcy case, if a court were to accept the arguments of a creditor of ComEd,
the Grantee or the Trust that Intangible Transition Property and/or related
assets come into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of ComEd arising before
such Intangible Transition Property and/or related assets came into existence
may have priority over the Trust's or the Noteholders' interest in such
Intangible Transition Property or related assets, thereby possibly initially
resulting in a reduction of amounts paid to the Noteholders. Although the IFC
Charges may be adjusted by the Servicer, any delays in implementation thereof
may cause a delay in receipt of IFC Collections sufficient to pay interest and
make Scheduled Payments on the Notes.
POSSIBLE ADVERSE EFFECT ON NOTEHOLDERS AS A RESULT OF THE BANKRUPTCY OF
SERVICER
The bankruptcy or insolvency of the Servicer could result in delays or
reductions in the payments due on the Notes.
If the Servicer (a) maintains a short-term debt rating of at least "A-1" by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), "P-1"
by Moody's Investors Service, Inc. ("Moody's"), if
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rated by Duff & Phelps Credit Rating Co., "D-1" by Duff & Phelps and, if rated
by Fitch IBCA, Inc. "F-1" by Fitch, and (b) meets certain other conditions
(collectively, the "Monthly Remittance Conditions"), the Servicer will be
entitled to commingle IFC Payments with its own funds until the relevant Monthly
Remittance Date. In the event of a bankruptcy of the Servicer, under normal
principles of the Uniform Commercial Code in effect in the State of Illinois
(the "UCC"), the Indenture Trustee likely would not have a perfected interest in
such commingled funds and the inclusion thereof in the bankruptcy estate of the
Servicer may result in delays or reductions in payments due on the Notes.
Although (a) the Funding Law provides that both the property interest of the
Trust in the Intangible Transition Property and the security interest of the
Indenture Trustee in such Intangible Transition Property shall not be defeated
by the commingling of revenues arising from such Intangible Transition Property
with funds of ComEd or the Grantee and (b) each Transitional Funding Order will
provide that, in the case of any such commingled revenues, collections, claims,
payments, money or proceeds, the portion allocable to the IFC Charges may be
determined by such reasonable methods of estimation as are set forth in the
Servicing Agreement, if ComEd were unable to trace or otherwise identify the IFC
Collections held by it and were subsequently to become a debtor in a bankruptcy
case, a creditor or bankruptcy trustee of ComEd or ComEd itself as
debtor-in-possession could take the position that the Noteholders' property
interest in such commingled and no longer identifiable IFC Collections had been
lost and that the Noteholders' sole claim in respect of such unidentifiable
property would be an unsecured claim against ComEd.
In addition, if there has been a Remittance Shortfall (I.E., Redetermined
IFC Payments exceed Remitted IFC Payments), the Servicer is required to increase
the amount that it otherwise would remit on the Monthly Remittance Date
following the calculation of the Remittance Shortfall, with such increased
amount coming from its own funds. In the event of the insolvency of the
Servicer, payments of the Remittance Shortfall by the Servicer may be delayed
significantly, which may result in delays or reductions in payments due on the
Notes.
Furthermore, if the Servicer is in bankruptcy, it may stop performing its
functions as Servicer and it may be difficult to find a third party to act as
successor servicer.
See "Potential Servicing Issues--Reliance on ComEd as Servicer; Possible
Payment Delays Caused by Commingling of IFC Payments with Servicer's Other
Funds."
NATURE OF THE NOTES
LIMITED LIQUIDITY
There is no assurance that a secondary market for any of the Notes will
develop or, if one does develop, that it will provide the Noteholders with
liquidity of investment or that it will continue for the life of such Notes. It
is not anticipated that any Notes will be listed on any securities exchange.
RESTRICTIONS ON BOOK-ENTRY REGISTRATION
The Notes will be initially represented by one or more Notes registered in
Cede's name, as nominee for DTC, and will not be registered in the names of the
Noteholders or their nominees. Therefore, unless and until Definitive Notes are
issued, Noteholders will not be recognized by the Indenture Trustee as
Noteholders. Hence, until such time, Noteholders will only be able to receive
payments from, and exercise the rights of Noteholders indirectly through, DTC
and participating organizations, and, unless a Noteholder requests a copy of any
such report from the Indenture Trustee or the Servicer, will receive reports and
other information provided for under the Servicing Agreement only if, when and
to the extent provided to Noteholders by DTC and its participating
organizations. In addition, the ability of Noteholders to pledge Notes to
persons or entities that do not participate in the DTC system, or otherwise take
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actions in respect of such Notes, may be limited due to the lack of physical
notes for such Notes. See "Description of the Notes--Book-Entry Registration."
LIMITED SOURCES OF PAYMENT FOR THE NOTES AND LIMITED CREDIT ENHANCEMENT
The Notes are limited-recourse obligations, and the sole source of payments
thereon is the payments made with respect to the Intangible Transition Property
and the other Note Collateral (which is expected to be relatively small) and,
for Floating Rate Notes, the proceeds of any Swap Agreement. It is anticipated
that the Note Collateral, which is described under "Security for the
Notes--Security Interest in Note Collateral," will, with the limited exceptions
specified therein, constitute the Trust's only assets and there will be no forms
of credit enhancement for the Notes except for amounts held in the
Overcollateralization Account and the Capital Subaccount and the right of the
Trust to compel ComEd, as Servicer, to make Adjustments to the IFC Charges. It
is not currently anticipated that the Notes will have the benefit of any
third-party credit enhancement, such as guarantees, letters of credit, insurance
or the like. If, however, any Series of Notes is to be issued with any
third-party credit enhancement, it will be set forth in the related Prospectus
Supplement. The Trust's organizational documents will restrict its right to
acquire other assets unrelated to the transactions described herein.
The Notes will not constitute a debt, liability or other obligation of the
State of Illinois or of any political subdivision, agency or instrumentality
thereof and will not represent an interest in or obligation of ComEd or its
affiliates. None of the Notes or the underlying Intangible Transition Property
will be guaranteed or insured by ComEd or its affiliates. Transitional Funding
Orders authorizing issuance of the Notes do not constitute a pledge of the full
faith and credit of the State of Illinois or of any of its political
subdivisions. The issuance of the Notes under the Funding Law shall not
directly, indirectly or contingently obligate the State of Illinois or any
political subdivision thereof to levy or to pledge any form of taxation therefor
or to make any appropriation for their payment.
EFFECT OF ADDITIONAL SERIES OF NOTES OR OTHER TRANSITIONAL FUNDING ORDERS ON
OUTSTANDING NOTES
The issuance of additional Series of Notes may have an adverse effect on the
timing or amount of payments received by a Noteholder of outstanding Notes.
Under the Basic Documents, the Trust will have the right, subject to ComEd's
seeking and obtaining one or more subsequent Transitional Funding Orders from
the ICC, to issue one or more subsequent Series of Notes on or after August 1,
1999 in an additional amount of up to approximately $6.8 billion in aggregate
principal amount, less the initial principal amount of previously issued Notes.
Any such subsequent Series of Notes which increases the cumulative amount of
issued Notes above $3.4 billion would be issued in connection with the creation
of additional Intangible Transition Property under such subsequent Transitional
Funding Order and such subsequent Notes will have no more than a PARI PASSU lien
on the Note Collateral, including all additional Intangible Transition Property,
VIS-A-VIS all previously issued and outstanding Series of Notes. The terms of
any such Series of Notes will be specified in a supplement to the Indenture or a
trustee's issuance certificate and described in the related Prospectus
Supplement. The provisions of the supplement to the Indenture or trustee's
issuance certificate and the terms of any additional Series of Notes will not be
subject to the prior review or consent of the Noteholders of any previously
issued Series. The terms of an additional Series of Notes may include, without
limitation, the matters described under "Description of the Notes--General." The
ability of the Trust to issue any additional Series of Notes is subject to the
condition, among others, that such issuance will not result in any Rating Agency
reducing or withdrawing its then existing rating of the Notes of any outstanding
Class. There can be no assurance, however, that the issuance of any other Series
of Notes, including any Series issued from time to time hereafter, might not
have an impact on the timing or amount of payments received by a Noteholder. See
"Description of the Notes--Conditions of Issuance of Additional Series." In
addition, various matters relating to the Notes are subject to a vote of all
Noteholders for all Series and Classes of Notes, even though there
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may be differences in the interests or positions among such Series or Classes
which could result in voting outcomes adverse to the interests of one or more
Series or Classes of Notes. Moreover, the Basic Documents do not prohibit ComEd
from seeking transitional funding orders under the Funding Law which would
create intangible transition property in favor of a party other than the
Grantee.
Issuance of an additional Series of Notes and/or the creation of additional
intangible transition property will require the imposition and collection of
additional instrument funding charges from Customers. This may increase the
risks to Noteholders as described above, in particular those risks described
under "--Reduction in Amount of Revenue From Applicable Rates" "--Limit on
Amount of Intangible Transition Property Available to Pay Notes," "--Potential
Servicing Issues," "--Uncertainties Related to the Electric Industry Generally,"
and "--Bankruptcy and Creditors' Rights Issues."
LIMITED NATURE OF RATINGS
It is a condition of issuance of each Class of Notes that they receive from
the Rating Agencies the respective ratings set forth in the applicable
Prospectus Supplement. The ratings of the Notes address the likelihood of the
ultimate payment of principal and the timely payment of interest on the Notes.
The ratings do not represent an assessment of the likelihood that the rate of
IFC Collections might differ from that originally anticipated; as a result of
such differences, any Series or Class of Notes might mature later than
scheduled, resulting in a weighted average life of such Notes which is more than
expected. A security rating is not a recommendation to buy, sell or hold
securities. There can be no assurance that a rating will remain in effect for
any given period of time or that a rating will not be revised or withdrawn
entirely by a Rating Agency if, in its judgment, circumstances so warrant.
UNCERTAIN PAYMENT AMOUNTS AND WEIGHTED AVERAGE LIFE
The actual dates on which principal is paid on each Class of Notes might be
affected by, among other things, the amount and timing of receipt of IFC
Collections. Since each IFC Charge will consist of a charge per kilowatt-hour
allocated to the applicable class of Customers, the aggregate amount and timing
of receipt of IFC Collections (and the resulting amount and timing of principal
amortization on the Notes) will depend, in part, on actual usage of electricity
by Customers and the rate of delinquencies and write-offs. See "--Potential
Servicing Issues--Possible Payment Delays Caused by Inaccurate Usage and Credit
Projections." Although the amount of the IFC Charges will be subject to
adjustment from time to time based in part on the actual rate of IFC
Collections, no assurances can be given that the Servicer will be able to
forecast accurately actual Customer energy usage and the rate of delinquencies
and write-offs and implement adjustments to the IFC Charges that will cause IFC
Payments to be made at any particular rate. If IFC Collections are received at a
slower rate than expected, payments on a Note may be made later than expected.
Because principal will only be paid at a rate not to exceed that set forth in
the Expected Amortization Schedules, except if an Event of Default occurs and
the Notes are declared due and payable or in the event of an early optional
redemption, the Notes are not expected to be retired 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. See "Certain Payment, Weighted
Average Life and Yield Considerations" and "Description of the Intangible
Transition Property--Adjustments to the IFC Charges."
EFFECT OF OPTIONAL REDEMPTION ON WEIGHTED AVERAGE LIFE AND YIELD
As described more fully under "Description of the Notes--Optional
Redemption," any Series of Notes may be redeemed on any Payment Date if, after
giving effect to payments that would otherwise be made on such date, the
outstanding principal balance of such Series of Notes has been reduced to less
than five percent of the initial outstanding principal balance thereof. In
addition, if specified in the Prospectus Supplement related to any Series or
Class of Notes, such Series or Class of Notes may be redeemed in full on any
Payment Date on or prior to December 31, 2004 using proceeds received from
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the refinancing of any other Series or Class of Notes through the issuance of an
additional Series of Notes. Finally, a Series of Notes shall be subject to
redemption if and to the extent provided in the related Prospectus Supplement.
Redemption will cause such Notes to be retired earlier than would otherwise be
expected, and if the payment schedule otherwise does not differ from that
originally anticipated, will result in a shorter than expected weighted average
life for such Notes. Such a redemption may also adversely affect the yield to
maturity of the Notes. There can be no assurance as to whether any Series of
Notes will be redeemed, or as to whether Noteholders will be able to receive an
equally attractive rate of return upon reinvestment of the proceeds resulting
from any such redemption.
ADDITIONAL RISKS OF FLOATING RATE NOTES
The liquidity and the market value of any Floating Rate Notes may be
adversely affected by a termination event under the related Swap Agreement. As
described under "Description of the Notes-- Floating Rate Notes," in the event
that Floating Rate Notes are issued, upon the occurrence of an event of default
or termination event under the Swap Agreement, the Swap Agreement pursuant to
which interest will be paid on any Floating Rate Notes will terminate or may be
terminated. In particular, the Swap Agreement will be terminated if the swap
counterparty's rating by either Moody's or S&P falls below "AAA" (or the
equivalent rating) (a "Downgrade Event") and the Swap Agreement is not assigned
to a replacement swap counterparty satisfying such ratings criteria or such
lower ratings criteria as may be permitted by the Swap Agreement within the time
period specified in the related Prospectus Supplement. In no event will any
successor swap counterparty be rated below "A" (or the equivalent rating) by
either of the above-referenced Rating Agencies. Upon the occurrence of a
Downgrade Event and the failure to assign the Swap Agreement, a termination
event will have occurred under the Swap Agreement and, in such event or upon any
other swap termination, the interest rate payable with respect to the Floating
Rate Notes will convert permanently to the fixed swap rate payable to the swap
counterparty, which may be substantially less than the rate otherwise payable on
the Floating Rate Notes. In the event of such conversion to a fixed interest
rate, both the liquidity and the market value of the Floating Rate Notes may be
adversely affected.
ELECTRIC INDUSTRY RESTRUCTURING IN ILLINOIS
GENERAL
The electric industry is experiencing intensifying competitive pressures in
both the wholesale generation market and, in many states, including Illinois, in
the retail market. Historically, electric utilities have operated as regulated
monopolies in their service territories and were the primary suppliers of
electricity. In Illinois, Utilities' rates were set by the ICC based upon the
Utilities' cost of providing services and a reasonable return on their prudent
capital investments. Changes to the traditional legal and regulatory framework
and market structure are occurring at both the federal and state levels.
AMENDATORY ACT OVERVIEW
In Illinois, dramatic changes in the retail electricity market are expected
to occur over the next ten years as a result of enactment of the Amendatory Act,
which became law on December 16, 1997 after being approved by a vote of 108-7 in
the Illinois House of Representatives and 57-2 in the Illinois Senate.
Utilities, such as ComEd, will be required to provide to customers in their
service areas, on a regulated basis, delivery services through which a customer
can purchase electricity from other suppliers and have it delivered by the local
Utility to the customer's premises. Beginning October 1, 1999, Utilities will be
required to offer delivery services to (a) all customers in a Utility's service
area with electric loads at a single site of 4 megawatts or greater, (b)
commercial customers in the Utility's service area with at least 10 sites under
common ownership whose electric loads total at least 9.5 megawatts, up to 3.5%
of the Utility's peak load, and (c) customers in non-residential service classes
whose usage constitutes one-third of the Utilities' remaining (I.E., excluding
customers in groups (a) and (b)) kilowatt-hour sales in
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each such class, with the customers in groups (b) and (c) to be selected by
lottery or other random non-discriminatory process. As of December 31, 2000, all
non-residential customers in a Utility's service area will be entitled to
delivery services. All residential customers in a Utility's service area will be
entitled to delivery services beginning May 1, 2002. The local Utility will be
required to provide delivery services to eligible customers on a
non-discriminatory basis regardless of the customer's choice of electricity
provider. The Utility will be compensated for providing delivery services
through rates set by the ICC to recover the costs of owning, operating and
maintaining the Utility's transmission and distribution facilities. Under the
Amendatory Act, Utilities also will be required to offer as a tariffed service
to their non-residential delivery service customers certain power purchase
options pursuant to which such customers may purchase electric power and energy
from the Utility at market-based rates determined by formulas set forth in the
Amendatory Act. In addition, the Amendatory Act requires Utilities, including
ComEd, to offer, as a tariffed service, real-time pricing to non-residential
customers beginning October 1, 1998, and to residential customers beginning
October 1, 2000 pursuant to which tariff kilowatt-hour charges for delivered
electric power and energy may vary on an hour-to-hour basis for non-residential
retail customers and on a periodic basis during the day for residential retail
customers.
TRANSITION CHARGES
Another change involves the ability of a Utility to collect "transition
charges" from those customers in its service area who obtain electricity from an
alternate provider. Until December 31, 2006, the Utility will be entitled,
pursuant to tariff, to collect these transition charges from delivery services
customers and include such transition charges in its bills to such customers.
These periodic transition charges are only applicable to delivery services
customers obtaining electricity from an alternate provider, and are not
applicable to customers taking traditional tariffed service from the Utility, or
to a customer to the extent it obtains its electricity from its own cogeneration
or self-generation facility. Transition charges are to be calculated annually
for each customer class and, for larger customers, on an individual customer
basis. The per kilowatt-hour transition charge applicable to a customer class or
an individual customer is calculated as follows using the class' or customer's
usage during a three-year period prior to the date the customer became eligible
for delivery service: (1) the revenues the Utility would receive based on the
applicable tariffed base rate (adjusted for specific changes set forth in the
Act including, in the case of residential customers, for the mandated rate
reductions described below) or contract rate, less (2) the revenues the Utility
would receive for delivering the same amount of usage, based on its currently
applicable delivery service rates, less (3) the market value of the capacity and
energy of the Utility that it would have used to supply customers' electric
power and energy requirements, with the "market value" determined through an
ICC-approved tariff using market-based data as determined through a market index
or by a neutral fact-finder retained annually by the ICC, less (4) a further
specific deduction, referred to as the "mitigation factor," which is set forth
in the Amendatory Act for each year in the relevant period and which increases
over that period. If the foregoing calculation results in a negative number, the
transition charge will be zero. The product of the foregoing calculation is
divided by the class' or customer's kilowatt-hour usage during the three-year
base period to yield a transition charge expressed in cents per kilowatt-hour,
which is charged on every kilowatt-hour delivered by the Utility for the
delivery services customer until December 31, 2006. A Utility may petition the
ICC to allow it to collect transition charges for an additional period not to
extend beyond December 31, 2008. The ICC must apply criteria specified in the
Amendatory Act to the Utility's request, and may deny the request, may authorize
the Utility to collect transition charges for some or all of the additional
two-year period, in which case the mitigation factor deductions are increased
over those applicable for the year 2006, or may, in granting such authority,
impose additional reductions on the allowable transition charges.
In addition to the periodic transition charge from delivery services
customers who obtain electricity from an alternate provider described above, a
Utility shall also be entitled, pursuant to a tariff, to collect transition
charges from customers in such Utility's service area who obtain electricity
from an alternate provider and do not take delivery services from such Utility.
As with the periodic transition charges
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described above, these transition charges are only applicable to customers in
its service area obtaining electricity from an alternate provider and not to
customers who obtain their electricity from their own cogeneration or
self-generation facility. These transition charges shall be calculated in the
same manner set forth above for the entire period of time that the customer
would be obligated to pay transition charges if it were taking delivery
services, except that no deduction for delivery services shall be made in such
calculation, and usage data from such customer's class shall be used where
historical usage data is not available for such customer. These customers are
obligated to pay such transition charges on a lump-sum basis on or before the
date such customer begins to take electricity from an alternate provider;
provided, however, that the Utility is to offer such customer the option of
paying such transition charges to such Utility ratably over the period in which
the transition charges would otherwise have applied pursuant to a contract
between such customer and such Utility, in which case the IFC Charges would be
deducted and stated separately from the transition charges.
The transition charge formula is designed to allow the Utility to recover a
portion, but not all, of the revenue requirement associated with its generation
and power supply costs that are above market prices. Transition charges for any
customer or group of customers will be recalculated annually based on changes in
market prices, changes in delivery service rates and changes in the "mitigation
factor" specified in the Amendatory Act, and there will be no retroactive
adjustments to compensate the Utility if transition charge revenues during any
prior period were less than expected. In order to realize the same overall
revenue stream from a customer who switches to another electricity supplier as
it would have realized if the customer had not switched, the Utility must
successfully remarket the electrical capacity and energy that is no longer
needed to serve the customer, at a price at least as high as the "market price"
used to calculate the customer's transition charges; and must otherwise reduce
its costs by, or develop other revenue sources equal to, an amount at least as
high as the amount of the "mitigation factor" used in calculating the customer's
transition charge. Otherwise, the revenue received by the Utility from delivery
charges and transition charges, both of which are tariffed revenues from which
instrument funding charges can be deducted, will be less than the revenue the
Utility would have received from the customer at existing tariffed rates for
traditional tariffed services. On and after the date that the Utility is no
longer able to collect transition charges from delivery services customers, and
may only collect delivery service charges, the Utility's tariffed revenues from
customers previously paying such transition charges will decline. In addition,
beginning in 1999, the ICC is authorized under the Amendatory Act to require a
Utility to unbundle components of its delivery service, such as metering
services and billing services, and offer the unbundled components to customers
separately, thereby enabling the customer to purchase the unbundled service from
an alternate provider. If alternative providers enter the service area to
compete for the provision of unbundled delivery service components, it is likely
that the Utility will be able to obtain an ICC declaration that the unbundled
service is "competitive" through the process described below. Unbundling of
delivery service components and the declaration of such components as
"competitive" may result in further declines in the Utility's tariffed revenues.
TRANSITION PERIOD
While Utilities are required under the Amendatory Act to offer delivery
services in accordance with the schedule and requirements described above, they
are also required to continue to offer each of their existing, tariffed bundled
services to customers in the Utility's service area until the service is
declared competitive by the ICC. A Utility may petition the ICC to declare a
service "competitive," but may not do so with respect to the provision of power
and energy for residential and small commercial (defined as a nonresidential
using less than 15,000 kilowatt-hours per year) customers until such customers
are no longer paying transition charges, and may not do so for any other
customer class or segment until after such customers are eligible for delivery
services. The ICC is to evaluate the Utility's request based on criteria,
specified in the Amendatory Act, which are tied to the existence of other
providers of the service. If the ICC declares the provision of power and energy
to residential or small commercial customers
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"competitive," the Utility must continue to offer tariffed, fully-bundled
service to such customers, but may provide the power and energy component of the
fully-bundled service on the basis of market prices determined in a manner
specified in the Amendatory Act. If the ICC declares the provision of a tariffed
service provided to any other customer class or segment "competitive," the
Utility (a) is no longer required to offer the service on a tariffed basis to
new customers, (b) must continue to provide the service on a tariffed basis for
three more years to those customers who were taking the tariffed service on the
date it was declared competitive, and (c) after the three-year period, is no
longer required to offer the service on a tariffed basis to any customers.
Accordingly, any such declaration may diminish the amount of the Utility's
tariffed revenues. See "Risk Factors--Reduction in Amount of Revenue From
Applicable Rates."
During the period that non-residential delivery service customers are paying
transition charges, a Utility is required to offer, by tariff, to sell
electricity to those customers at the same market prices that were used in
determining the customers' transition charges. This service must also be
offered, with some modifications, after payment of transition charges has
stopped, until the sale of electricity to these customers is declared
competitive. This service is a tariffed service; therefore, instrument funding
charges may be deducted from the charges for this service.
During the "mandatory transition period" provided by the Amendatory Act
(which lasts until December 31, 2004), Utilities are precluded, with one
exception, from requesting authority from the ICC to increase their base rates;
and the ICC is precluded from ordering on its own motion a Utility to reduce its
base rates. These prohibitions do not apply to delivery service rates. However,
Utilities are required to reduce their base rates to residential customers by
specified amounts on specified dates. For ComEd, the required reduction in
residential base rates is 15% effective August 1, 1998, and an additional 5%
effective May 1, 2002, based on ComEd's rates in effect immediately prior to
January 1, 1998. Further, during the mandatory transition period, a Utility is
allowed to reduce any rate for tariffed service by giving seven days' notice to
the ICC. In addition, during the mandatory transition period, if a Utility's
two-year average rate of return on common equity exceeds the two-year average of
the yields on 30-year U.S. Treasury bonds plus, for the years 1998-1999, 550
basis points and for the years 2000-2004, 650 basis points, the Utility must
refund 50% of the dollar amount of such excess earnings during the ensuing year
through cents-per-kilowatt-hour credits on the bills of both its bundled tariff
service customers and its delivery services customers.
After December 31, 2004, a Utility may again request increases in its base
rates for bundled tariffed services, and the ICC is again authorized to
investigate and order reductions in the Utility's base rates, in each case based
on cost of service principles. However, if the ICC finds that the rates for the
generation component of a bundled tariffed service of a Utility exceed market
price by more than 10%, the ICC may order such rates reduced to no less than
110% of market price, even if the Utility's cost of service exceeds that level.
ALTERNATIVE RETAIL ELECTRIC SUPPLIERS
The Amendatory Act allows alternative retail electric suppliers, referred to
as ARES, to provide electricity to customers eligible for delivery services, and
other services to customers, in the Utility's service area, thereby terminating
the Utility's historical status as the sole electric service provider. An ARES
may be an electric utility from another state, an affiliate of an out-of-state
utility, an affiliate of a Utility, a non-utility generator, or a power
marketer, broker, reseller or aggregator unaffiliated with any electric utility.
An ARES must obtain a certificate of service authority from the ICC based on
satisfaction of statutory criteria. The prices which an ARES charges to
customers for electricity and other services are not regulated by the ICC, but
various other aspects of the ARES' relationships with incumbent Utilities and
with customers, including certain marketing and billing practices, are
regulated. In addition, the Amendatory Act allows other Utilities to sell
electricity to customers eligible for delivery services, and to sell other
services to customers, in each other's service areas. For these purposes,
Utilities are not
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required to obtain certificates of service authority as are ARES, but are
subject to many of the same requirements as are ARES with respect to marketing
and billing practices and other aspects of their relationships with customers.
COMPETITIVE SERVICES
The Amendatory Act allows a Utility to provide on a competitive basis
services that were formerly regulated in three respects. First, with one
exception, a Utility and a customer in its service area may at any time enter
into a contract for the provision of services, at prices, terms and conditions
agreed to between the Utility and the customer. The exception is that a Utility
may not enter into a contract to provide delivery services until such services
have been declared competitive by the ICC. Second, a Utility may provide to
customers in its service area, as a competitive service (and may cease to offer
as a tariffed service), a service which has been declared competitive by the ICC
through the procedure described earlier in this section, and may self-declare a
tariffed service (other than delivery services or the provision of electric
power and energy) to be competitive for new customers only (subject to the
authority of the ICC to revoke such declaration). Third, the provision of
electric power and energy services by a Utility to customers in the service area
of another Utility is a competitive service.
In addition, the Amendatory Act classifies as competitive services those
services, other than tariffed services, which are related to, but not necessary
for, the provision of electric power and energy or delivery services. Under the
Amendatory Act, competitive services are not tariffed services and are provided
at the rates, terms and conditions agreed to between the Utility and the
customer. The contracts or terms agreed to between the Utility and the customer
for competitive services do not have to be filed with or approved by the ICC;
and the ICC is precluded from altering the rates, terms or conditions in such
contracts.
As a result of the changes imposed on the Illinois retail electric markets
by the Amendatory Act, it is highly possible that by 2007, if not earlier, a
significant portion of electricity purchased by customers in ComEd's service
area, whether obtained from ComEd, another electric utility or an ARES, will be
purchased on a competitive basis and not pursuant to a tariff. It is ComEd's
belief that by 2008, ComEd will still be the primary provider of delivery
services in its service area, even if its tariffed revenues from provision of
such services may have declined.
INSTRUMENT FUNDING CHARGES; PRIVATE CONTRACTS
The Funding Law authorizes the ICC, in a transitional funding order, to
authorize imposition of instrument funding charges on retail customers, groups
of retail customers and certain other persons obligated to pay base rates,
transition charges and other rates for tariffed services from which such
instrument funding charges have been deducted and separately stated. The ICC is
further authorized to specify the manner in which the instrument funding charges
shall be collected, and to authorize the levying of general tariffs on retail
customers of a Utility for the collection of instrument funding charges.
Pursuant to this authority, each Transitional Funding Order will authorize and
require ComEd, as Servicer, to impose and collect IFC Charges on any retail
customer, class of retail customers or other person or group of persons
obligated to pay any Applicable Rates, from which IFC Charges have been
deducted.
Customers who enter into private contracts with a Utility may no longer be
paying rates for tariffed services from which instrument funding charges are to
be deducted and therefore may not be subject to the imposition of such charges
under the Funding Law. To address this situation, each Transitional Funding
Order will provide that neither ComEd nor any successor Utility may enter into
any contract with any Customer obligated (or who would, but for such contract,
be obligated) to pay IFC Charges if, as a result thereof, such Customer would
not receive tariffed services (I.E., services subject to Applicable Rates),
unless the contract provides that the Customer will pay an amount to the Grantee
or its assigns,
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as applicable, equal to the amount of IFC Charges that would have been billed if
the services provided under such contract were tariffed services. Each
Transitional Funding Order will further provide that any revenues received by
ComEd or a successor Utility from such contracts entered into with Customers
paying IFC Charges, shall, to the extent of the authorized amount of the IFC
Charges included therein, be deemed to be proceeds of, and included in, the
Intangible Transition Property created by the related Transitional Funding
Order. Between the effective date of the Amendatory Act and the issuance of the
initial Transitional Funding Order, ComEd entered into three private contracts
with customers, the aggregate expected total annual revenues from which
currently approximate $3.3 million, representing approximately 0.05% of ComEd's
net total of billed revenue for the fiscal year ending December 31, 1997. Each
of these contracts provides that, except as expressly modified by the provisions
specified in such contract, the applicable customer will receive and pay for
electric service in accordance with the terms of all tariffs on file with the
ICC (which would include the IFC Tariffs). Although, in accordance with the
Transitional Funding Order and the Servicing Agreement, ComEd will deduct and
state separately the IFC Charges from the amounts otherwise payable under these
contracts, these contracts do not expressly provide for the payment of IFC
Charges to the Trust.
FEDERAL INITIATIVES; INCREASED COMPETITION
In addition to the changes which are occurring at the Illinois level
discussed throughout this section, federal legislative efforts may also
significantly alter the national market for electricity. See "Risk Factors
Changing Regulatory and Legislative Environment." The changes at both the
Illinois and federal level will have a significant impact on ComEd and the other
Utilities, as well as other entities in the industry. ComEd faces increased
competition for resources and for customers, and there can be no assurance that
such competition will not adversely affect ComEd's financial condition and its
ability to perform its obligations as Servicer. Competitors include other
electric utilities; privately owned independent power producers; exempt
wholesale generators; power marketers, brokers, resellers and aggregators;
customers with their own source of generation and developers, equipment
manufacturers, lenders and investment bankers in the business of promoting such
generation sources; suppliers of natural gas and other fuels; and electric
cooperatives and municipally-owned utility systems.
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DESCRIPTION OF THE INTANGIBLE TRANSITION PROPERTY
CREATION OF INTANGIBLE TRANSITION PROPERTY UNDER THE FUNDING LAW
The Funding Law provides the basis and authority for the creation of the
Intangible Transition Property and the issuance of the Notes issued hereunder.
Under the Funding Law, "intangible transition property" is defined as the right,
title and interest of a Utility, grantee or assignee, arising pursuant to a
transitional funding order, to impose and receive instrument funding charges and
all related revenues, collections, claims, payments, money or proceeds thereof,
including all right, title and interest of a Utility, grantee or assignee in,
to, under and pursuant to such transitional funding order. A "grantee" is
defined as any party, other than a Utility or an assignee which acquires its
interest from a Utility, to whom or for whose benefit the ICC creates,
establishes and grants rights in, to and under intangible transition property.
The Funding Law defines "instrument funding charge" as a nonbypassable charge
expressed in cents per kilowatt-hour authorized in a transitional funding order
to be applied and invoiced to each retail customer, class of retail customers of
a Utility or other persons or group of persons obligated to pay any base rates,
transition charges or other rates for tariffed services from which the
instrument funding charges have been deducted and separately stated. Upon the
effectiveness of tariffs filed with the ICC to provide for the deduction and
separate statement and collection of instrument funding charges, instrument
funding charges become intangible transition property as specified in the
transitional funding order.
The Funding Law authorizes the ICC, pursuant to an application filed by a
Utility and in accordance with specific limitations and restrictions which are
described in this section, to issue a transitional funding order or orders
establishing, creating and granting rights in and to a specific amount of
intangible transition property to or for the benefit of the Utility, a grantee
or an assignee. The Funding Law also empowers the ICC, in the transitional
funding order, to authorize the sale, pledge, assignment or other transfer of
the Utility's, grantee's or assignee's rights in and to the intangible
transition property; the issuance of a specific dollar amount of grantee
instruments and/or transitional funding instruments by or on behalf of the
grantee, an assignee or an issuer; and the imposition and collection of
instrument funding charges. The total amount of intangible transition property
which may be created by, and instrument funding charges which may be imposed
pursuant to, the related transitional funding order is projected to be
sufficient to pay when due principal and interest on the transitional funding
instruments, and to provide for servicing costs and related fees and expenses
and the funding or maintenance of debt service and other reserves as security to
the holders of the transitional funding instruments. The amount of transitional
funding instruments which may be authorized for issuance is subject to certain
limitations and restrictions, and the total dollar amount of intangible
transition property which may be created may not exceed specified limits, as
described below. See "--Limitations on the Amounts of Transitional Funding
Instruments, Intangible Transition Property and Instrument Funding Charges Which
Can Be Authorized; Permitted Use of Proceeds."
The Funding Law provides that the creation, establishment and granting of
rights in, to and under intangible transition property in and to any grantee,
Utility, issuer or assignee shall include a grant of the power to levy general
tariffs on retail customers of a Utility or other persons required to pay
instrument funding charges in order to collect the instrument funding charges
relating to the intangible transition property in which such party has been
granted rights and in order to facilitate the issuance of transitional funding
instruments by or on behalf of the Utility, grantee, issuer or assignee. The
Funding Law empowers the ICC to authorize the Utility to contract with the
grantee, issuer, assignee or holders to collect the applicable instrument
funding charges for the benefit and account of the grantee, issuer, assignee or
holder, and provides that the Utility will, except as otherwise specified in the
related transitional funding order, account for and remit the applicable
instrument funding charges, without the obligation to remit any investment
earnings thereon, to or for the account of the grantee, issuer, assignee or
holder. The Funding Law further provides that the obligation of the Utility to
collect and remit the applicable instrument funding charges shall continue
irrespective of whether such Utility is providing
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electric power and/or other services to the retail customers and other persons
obligated to pay the instrument funding charges. In addition, the Funding Law
states that if the documents creating the transitional funding instruments so
provide, the Utility's obligations, in the event of a default by the Utility in
performing them, shall be undertaken and performed by any other entity selected
by the assignee or any holder, group of holders or trustee or agent on behalf of
such holder or holders, (i) which provides electric power or services to a
person who was a retail customer of the Utility, and (ii) from whom such Utility
is entitled to recover transition charges under the Amendatory Act.
The Funding Law provides that the interest of a Utility, assignee, issuer or
grantee in intangible transition property may be assigned, sold or otherwise
transferred, in whole or in part, and may, in whole or in part, be pledged or
assigned as security to or for the benefit of a holder or holders. A "holder" is
defined in the Funding Law as any holder of a transitional funding instrument,
including a trustee, collateral agent, nominee or other such party acting for
the benefit of such a holder. The Funding Law specifies that neither intangible
transition property nor any right, title or interest therein shall constitute
property in which a security interest may be created under the UCC, that such
rights shall not be deemed proceeds of any property which is not intangible
transition property, and that the terms "account" and "general intangible" as
defined under Section 9-106 of the UCC and the term "instrument" as defined
under Section 9-105 of the UCC shall, as used in the UCC, be deemed to exclude
any intangible transition property or any right, title or interest therein. The
Funding Law provides that the granting, perfection and enforcement of security
interests in intangible transition property are governed by the provisions of
the Funding Law rather than by Article 9 of the UCC. The Funding Law further
provides that a sale, assignment or other transfer of intangible transition
property which is expressly stated in the documents governing the transaction to
be a sale or other absolute transfer, in a transaction approved in a
transitional funding order, shall be treated as an absolute transfer of all of
the transferor's right, title and interest in, to and under such intangible
transition property which places the transferred property beyond the reach of
the transferor or its creditors, as in a true sale, and not as a pledge or other
financing of such intangible transition property. The Funding Law states that
the characterization of any such transfer as an absolute transfer and the
corresponding characterization of the transferee's property interest shall not
be defeated or adversely affected by, among other things: (a) the commingling of
revenues arising with respect to intangible transition property with funds of
the Utility or other funds of the assignee, issuer or grantee; (b) granting to
holders of transitional funding instruments a preferred right to the intangible
transition property, whether direct or indirect; (c) the provision by the
Utility, grantee, assignee or issuer of any recourse, collateral or credit
enhancement with respect to transitional funding instruments; (d) the retention
by the assigning party of a partial interest in any intangible transition
property, whether direct or indirect, or whether subordinate or otherwise; or
(e) the Utility's responsibilities for collecting instrument funding charges and
any retention of bare legal title for the purpose of such collection activities.
The Funding Law further states that a sale, assignment or other such transfer of
intangible transition property shall be deemed perfected as against third
persons, including any judicial lien creditors, when (a) the ICC has issued the
transitional funding order creating the intangible transition property, and (b)
a sale, assignment or transfer of the intangible transition property has been
executed and delivered in writing. See "Security for the Notes--Security
Interest in Note Collateral."
LIMITATIONS ON THE AMOUNTS OF TRANSITIONAL FUNDING INSTRUMENTS, INTANGIBLE
TRANSITION PROPERTY AND INSTRUMENT FUNDING CHARGES WHICH CAN BE AUTHORIZED;
PERMITTED USE OF PROCEEDS
The Funding Law imposes several limitations and restrictions on the power of
the ICC to create intangible transition property and to authorize the issuance
of transitional funding instruments and the imposition and collection of
instrument funding charges.
Under the Funding Law, the ICC, in a transitional funding order, can only
create and establish intangible transition property in an amount (which, absent
further ICC action, is the total dollar amount of
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instrument funding charges which may be applied and invoiced over time) not to
exceed the sum of: (a) the rate base established by the ICC in the Utility's
last rate case prior to December 16, 1997, PLUS (b) any expenditures required to
be undertaken by the Utility by the provisions of Section 16-128 of the Act,
including labor severance costs and employee retraining costs, PLUS (c) amounts
necessary to fund debt service and other reserves, commercially reasonable costs
and fees necessary in connection with the marketing of the transitional funding
instruments, PLUS (d) commercially reasonable costs incurred from and after
December 16, 1997 or to be incurred which are associated with the issuance and
collateralization of the transitional funding instruments, PLUS (e) commercially
reasonable costs incurred from and after December 16, 1997 or to be incurred
which are associated with the issuance of the transitional funding instruments,
including costs incurred on and after such date, or to be incurred in connection
with transactions to recapitalize, refinance or retire stock and/or debt, any
associated taxes and the costs incurred to obtain, collateralize, issue, service
and/or administer transitional funding instruments, including interest and other
related fees, costs and charges, MINUS (f) the amount of any intangible
transition property previously created and established at the request of and for
the benefit of the Utility in a prior transitional funding order.
The Funding Law provides that transitional funding instruments may not be
issued prior to August 1, 1998 or after December 31, 2004. The aggregate dollar
amount of transitional funding instruments which may be authorized, in a
transitional funding order, for issuance, together with the amounts authorized
for issuance in any prior transitional funding order, may not exceed (a) between
August 1, 1998 and July 31, 1999, the Utility's total capitalization at December
31, 1996, times a percentage equal to 25% multiplied by the ratio of the
Utility's revenues from Illinois retail electric customers during the year ended
December 31, 1996 to its total retail electric revenues for such year, and (b)
subsequent to August 1, 1999, the Utility's total capitalization at December 31,
1996, times a percentage equal to 50% multiplied by the ratio of the Utility's
revenues from Illinois retail electric customers during the year ended December
31, 1996 to its total retail electric revenues for such year.
The Funding Law requires as a condition to the issuance of any Transitional
Funding Order that the final date on which the Utility, grantee or assignee
shall be entitled to charge and collect instrument funding charges related to
the intangible transition property shall be set to occur no later than December
31, 2008 (or December 31, 2010, if requested and approved by the ICC as being in
the public interest); provided, that the authority to impose and collect
instrument funding charges shall continue beyond such date until such time as
the related transitional funding instruments have been paid in full.
Transitional funding instruments may only be authorized for issuance if the
ICC finds, in the related transitional funding order, that the Utility seeking
the transitional funding order will use the proceeds from the sale and issuance
of the transitional funding instruments for one or more of the following
purposes: (a) to refinance debt or equity, or both, in a manner which the
Utility reasonably demonstrates will result in an overall reduction in its cost
of capital, taking into account the costs of financing, and provided that any
proceeds transferred to a parent company through a common stock repurchase
transaction shall be used to retire publicly-traded common stock of the parent
company or to pay commercially reasonable transaction costs associated with such
retirement; (b) to fund debt service and other reserves, commercially reasonable
costs and fees necessary or desirable in connection with the marketing of the
transitional funding instruments; (c) to pay for commercially reasonable costs
associated with issuance and collateralization of the transitional funding
instruments; (d) to pay for the commercially reasonable costs associated with
the issuance of the transitional funding instruments, including the costs
incurred since December 16, 1997, or to be incurred, in connection with
transactions to recapitalize, refinance or retire stock and/or debt, any
associated taxes, and the costs incurred or to be incurred to obtain,
collateralize, issue, service and administer the transitional funding
instruments, including interest and other related fees, costs and charges; and
(e) to repay or retire fuel contracts or obligations related to nuclear spent
fuel incurred by the Utility in providing electric power or energy services
prior to December 16, 1997 and to pay any expenditures required to be undertaken
by the Utility by the provisions of Section 16-128 of
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the Act, including labor severance costs and employee retraining costs.
Moreover, the transitional funding order must require the Utility to use at
least 80% of the proceeds from issuance of the transitional funding instruments
for the purposes specified in (a) and (e) above, and to use no more than 20% of
the maximum amount of such proceeds permitted for purposes other than those
specified in (a) above. The Funding Law prohibits a Utility from using the
proceeds from issuance of transitional funding instruments for the purpose of
refinancing debt or equity to such an extent that as of the date of application
of such proceeds, the common equity component of the Utility's capital
structure, exclusive of the portion that consists of obligations representing
transitional funding instruments, is reduced below the lesser of (1) 40% or (2)
the common equity percentage as of December 31, 1996, adjusted to reflect any
write-off of assets or common equity implemented or required to be implemented
as a result of the Amendatory Act. The Funding Law also prohibits the Utility
from using the proceeds from issuance of transitional funding instruments to
repay or retire obligations incurred by an affiliate of the Utility, other than
in connection with any refinancing of transitional funding instruments issued by
such affiliate, without consent of the ICC. Finally, the Funding Law provides
that any use of the proceeds from issuance of transitional funding instruments,
other than in accordance with the purposes specified in the related transitional
funding order, shall be void.
The Funding Law provides that the instrument funding charges imposed on a
customer or class of customers may not cause such customer's or class of
customers' rates for tariffed services, including delivery charges or transition
charges, to exceed the amounts which the customer otherwise would have paid, and
that the Utility may not, as the result of issuance of transitional funding
instruments, increase any of its rates for tariffed services, including delivery
charges, or its transition charges above the levels which the Utility would have
been authorized to charge if the Utility were not authorized to impose and
collect instrument funding charges.
IMPOSITION AND COLLECTION OF INSTRUMENT FUNDING CHARGES; ADJUSTMENTS THERETO
The Funding Law empowers the ICC, in a transitional funding order, to
authorize the imposition and collection of a specific amount of instrument
funding charges projected to be sufficient to pay when due the principal of and
interest on the corresponding transitional funding instruments, together with
premium, servicing fees and other fees, costs and charges related thereto, and
to maintain any required reserves.
The Funding Law provides that concurrently with the issuance of a
transitional funding order and with the sale, pledge, assignment or other
transfer of, or the establishment, creation and granting of, a Utility's,
assignee's or grantee's rights in and to intangible transition property and the
issuance of transitional funding instruments, the Utility shall begin to impose
and collect the specified instrument funding charges from retail customers,
classes of retail customers, and any other person or group of persons as set
forth in the transitional funding order. However, as a precondition to the
imposition of any instrument funding charges authorized in such transitional
funding order, the Utility shall file tariffs directing that the amount of the
instrument funding charges be deducted, stated and collected separately from the
amounts otherwise billable by the Utility for base rates, transition charges and
other rates for tariffed services as set forth in the related transitional
funding order. The total amount of instrument funding charges authorized by the
transitional funding order is to be allocated among the customer classes of the
Utility on the basis of the ratio of each class' base rate revenues for the year
ended December 31, 1996 to the Utility's total base rate revenues for that year,
and are then to be expressed in a cents per kilowatt-hour charge which is to be
deducted and stated separately from the base rates, transition charges and other
rates for tariffed services paid by the customers in each class. The Funding Law
specifies that upon the effectiveness of such tariffs, the amounts of instrument
funding charges thereby deducted and to be deducted shall become intangible
transition property as specified in the related transitional funding order. The
Funding Law expressly provides that the ICC has no authority to review the
tariffs filed by the Utility, except to confirm that the instrument funding
charges authorized in
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the transitional funding order have been deducted, stated and collected
separately from base rates, transition charges and other rates for tariffed
services otherwise in effect at that time; and that the ICC may not suspend such
tariffs for any other reason.
The Funding Law requires the ICC to provide in any transitional funding
order for a procedure for periodic adjustments to the instrument funding charges
authorized in such transitional funding order in order to ensure the repayment
in accordance with projections set forth in such transitional funding order of
all transitional funding instruments authorized therein and to reconcile the
revenues received from instrument funding charges during the applicable
adjustment period with the revenues projected to be received from such charges
as set forth in such transitional funding order. Unless the transitional funding
order provides otherwise, the Funding Law requires such adjustments whenever the
instrument funding charges actually collected during an adjustment period are
greater or less than the instrument funding charges projected in the related
transitional funding order to be collected during that period. The Funding Law
states that the Utility is to determine, within 90 days (or such shorter period
as may be specified in the documents relating to the transitional funding
instruments) of the end of each adjustment period, whether any such adjustments
are required. If adjustments are required, they are to be implemented by the
Utility, grantee, issuer or assignee, as applicable, with written notice to the
ICC, within such 90-day (or shorter) period after the end of the adjustment
period. The Funding Law provides that any adjustment is to be calculated to
include amounts necessary for recovery of any additional costs incurred by the
grantee, Utility, assignee or issuer as a result of the delay in collections of
instrument funding charges. If, as a result of an adjustment, the amount of the
instrument funding charges per kilowatt-hour will exceed the amount per
kilowatt-hour initially authorized by the ICC in the related transitional
funding order, the Utility shall file amendatory tariffs with the ICC
correspondingly reducing, by the amount of such excess, the amounts otherwise
billable by the Utility for base rates, transition charges and other rates for
tariffed services. The Funding Law provides that the ICC has no authority to
review any such amendatory tariffs except to confirm that the instrument funding
charges have been deducted, stated and collected separately from base rates,
transition charges and other rates for tariffed services otherwise in effect at
that time; and that the ICC may not suspend such amendatory tariffs for any
other reason. The Funding Law further specifies that the failure of such
amendatory tariff to become effective for any reason shall not delay or impair
the effectiveness of the adjustments otherwise required as described above.
TRANSITIONAL FUNDING ORDER ISSUED AT THE REQUEST OF COMED
The Funding Law authorizes the ICC to issue one or more transitional funding
orders in favor of the Grantee at the request of ComEd (each, a "Transitional
Funding Order"), in order to create and establish the Intangible Transition
Property which may be financed through the issuance of transitional funding
instruments, such as the Notes. The ICC issued a Transitional Funding Order (the
"Initial TFO") on July 21, 1998. The Initial TFO also permits the sale of Notes
in an aggregate principal amount not to exceed $3.4 billion.
Each Transitional Funding Order will create and establish, among other
things, the related Intangible Transition Property and authorizes the imposition
and collection of the related IFC Charges, which constitute separate
nonbypassable usage-based charges expressed in cents per kilowatt-hour payable
by Customers in an aggregate amount calculated to be sufficient to make the
Specified Payments. The Funding Law provides that the right to collect payments
based on the IFC Charges is a property right which may be pledged, assigned or
sold.
Each Transitional Funding Order will entitle the Trust, as the assignee of
the Intangible Transition Property from the Grantee, to receive the payments
made pursuant to the IFC Charges, from all Customers through December 31, 2008
or, if later, until the Trust has received IFC Collections sufficient to retire
all outstanding Series of Notes and cover related fees and expenses. Such
payments from the Customers are referred to herein as the "IFC Payments." The
Funding Law requires ComEd to submit a
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statement of the final terms of any Series of Notes to the ICC within 90 days of
the receipt of proceeds from such issuance and at twelve-month intervals
thereafter until all such proceeds are accounted for. Each Transitional Funding
Order will permit the Servicer to calculate and implement adjustment of the IFC
Charges from time to time, in order to enhance the likelihood of retirement of
each Series and Class of Notes on a timely basis. See "--Adjustments to the IFC
Charges."
The IFC Charges authorized in any Transitional Funding Order (which may be
increased by the ICC in connection with the issuance of any subsequent
Transitional Funding Order) will be based on certain assumptions contained
therein and will be set forth in the related Prospectus Supplement. In
connection with the issuance and pricing of any Series of Notes, ComEd will file
an IFC Tariff with the ICC to provide for, among other things, certain revisions
to the IFC Charges authorized in the related Transitional Funding Order, based
on the final terms of such Series, which will also be set forth in the related
Prospectus Supplement. Each Transitional Funding Order will provide that as each
Series of Notes is issued, ComEd shall file a tariff deducting and separately
stating from other rates for tariffed services the sum of the cents per
kilowatt-hour charges relating to that Series (plus, in connection with any
subsequent Transitional Funding Order increasing the IFC Charges, the cents per
kilowatt-hour charges relating to previously-issued Series), which shall be
calculated using projected kilowatt-hour sales and deliveries for the succeeding
calendar year, from ComEd's Applicable Rates.
"Applicable Rates" means all charges for tariffed services owed to ComEd
(I.E., charges owed under any tariffs now or hereafter filed with the ICC),
including, without limitation, charges for "base rates," "delivery services" and
"transition charges" (including lump-sum payments of such charges) as each such
term is defined in the Act. Applicable Rates do not include late charges or
charges set forth in those tariffs which are filed specifically and primarily to
collect amounts related to decommissioning expense, taxes, franchise fees or
other franchise cost additions, costs imposed by local governmental units which
are allocated and charged to customers within the boundaries of such
governmental units' jurisdictions, renewable energy resources and coal
technology development assistance charges, energy assistance charges for the
Supplemental Low-Income Energy Assistance Fund, reimbursement for the costs of
optional or non-standard facilities and reimbursement for the costs of optional
or non-standard meters, or monies that will be paid to third parties (after
deduction of allowable administrative, servicing or similar fees) (collectively,
"Excluded Amounts"). Payments owed to the Grantee or the Trust in respect of IFC
Charges do not constitute Excluded Amounts. To the extent any Applicable Rates
reflect compensation owed by ComEd for power or energy generated by a person or
entity other than ComEd, the IFC Charges will be deducted and stated separately
from such Applicable Rates without giving effect to such compensation.
Administrative, servicing and similar fees referred to in the parenthetical
above means fees which ComEd is expressly authorized under its current
agreements with third parties or by statute, tariff or otherwise to deduct from
monies owed to such parties to cover its cost of processing such third-party
payments. Charges associated with Excluded Amounts are generally the subject of
separate riders to ComEd's rates, such that increases in such charges are
collected through an increase in the amount permitted to be collected under such
rider, rather than through an increased share of the Applicable Rates. As a
result, any increase in Excluded Amounts should not result in a material
decrease in the amount of Applicable Rates available to cover the amount of IFC
Charges.
TRANSACTIONS PURSUANT TO THE TRANSITIONAL FUNDING ORDERS
Pursuant to the authority granted by the Transitional Funding Orders, the
Grantee will assign its rights in the Intangible Transition Property to the
Trust. The Trust will thereafter, at the times and in the amounts permitted by
the Funding Law and authorized by each Transitional Funding Order, issue the
Notes, which shall be secured by the Intangible Transition Property and the
other Note Collateral, to the public. The Trust will remit the proceeds from the
issuance of the Notes, less the expenses of issuance, and such amounts of the
proceeds necessary to fund the Capital Subaccount, to the Grantee as
consideration for the assignment to the Trust of the Grantee's rights in the
Intangible Transition Property.
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The Grantee will distribute the amount of the proceeds received from the Trust
to the Grantee's sole member, ComEd, in consideration for ComEd's actions
requesting that the Intangible Transition Property be created and vested in the
Grantee.
The Grantee will also enter into the Servicing Agreement with ComEd, as
Servicer, pursuant to which the Servicer, in connection with and upon the
issuance of each Series of Notes, will impose the IFC Charges on Customers, and
will thereafter collect and remit the IFC Charges to the Trust, as assignee of
the Grantee's ownership interest in the Intangible Transition Property. See
"Servicing." The Servicing Agreement provides that the Servicer will file
tariffs with the ICC in connection with each Series of Notes providing for the
deduction of the related IFC Charges.
NONBYPASSABLE IFC CHARGES
Each Transitional Funding Order will provide that the IFC Charges are
nonbypassable, meaning that Customers will still be required to make payments
with respect to the applicable IFC Charges even if a Customer elects to purchase
electricity from another supplier or another entity takes over a portion of
ComEd's existing service; provided, however, that the IFC Charges must be
deducted from Applicable Rates which could otherwise be charged by ComEd to such
Customers. If a Customer ceases to take any tariffed services from ComEd or any
successor Utility within ComEd's service area, for example, by generating its
own electricity or by moving outside of ComEd's service area, then such Customer
will not owe any IFC Charges except that, if such Customer takes electric power
or energy from an ARES or another Utility, then such Customer may be obligated
to pay transition charges under the Act from which the IFC Charges would
continue to be deducted and stated separately.
ADJUSTMENTS TO THE IFC CHARGES
The Servicing Agreement and each Transitional Funding Order will require the
Servicer to calculate and implement adjustments to the IFC Charges which are
designed to enhance the likelihood that the IFC Collections which are remitted
to the Collection Account will be sufficient to make the Specified Payments.
Each Transitional Funding Order will provide for a "Reconciliation
Adjustment" to the IFC Charges which will be calculated by the Servicer within
the two-week period preceding every other Payment Date, commencing on the
Payment Date indicated in the related Prospectus Supplement (each such Payment
Date, a "Reconciliation Payment Date").
Each Transitional Funding Order will also provide for a "True-Up Adjustment"
to the IFC Charges which will be calculated by the Servicer within the two-week
period preceding every Payment Date which is not a Reconciliation Payment Date
commencing on the Payment Date indicated in the related Prospectus Supplement
(each such Payment Date, a "True-Up Payment Date") only if, as of the True-Up
Payment Date, the aggregate outstanding principal balance of the Notes exceeds
the scheduled aggregate outstanding principal balance of the Notes set forth on
the Expected Amortization Schedule by 5%, or such greater amount as may be set
forth in the related Prospectus Supplement.
Each Transitional Funding Order will provide that the changes in IFC
Charges, if any, resulting from a Reconciliation Adjustment and any True-Up
Adjustment (collectively, the "Adjustments") will take effect on the first
billing day of the month following the applicable Reconciliation Payment Date or
True-Up Payment Date. The Servicing Agreement and each Transitional Funding
Order require the Servicer to provide the ICC staff with (a) in the case of a
Reconciliation Adjustment, at least three business days' prior written notice of
such Reconciliation or True-Up Adjustment and (b) in the case of a True-Up
Adjustment, must also provide at least seven business days' prior telephonic and
facsimile notice whether there will be a True-Up Adjustment.
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The IFC Charges will, subject to Adjustment as provided herein, continue to
be imposed and collected until all interest on and principal of all Series of
the Notes have been paid in full (subject only to the limitation on the maximum
amount of Intangible Transition Property authorized by the ICC in the related
Transitional Funding Order or Orders), and will be based on expected IFC
Collections which will be calculated in accordance with the Servicer's normal
servicing procedures using data available through the end of the prior monthly
period. The period included in determining the under-recovery of billed IFC
Charges for purposes of performing any True-Up Adjustment will include the
quarterly period commencing on the first billing date of the month during which
the immediately preceding Reconciliation Payment Date occurs and ending on the
last billing date of the month immediately preceding the date on which such
True-Up Adjustment is calculated. The period included in determining the over-or
under-recovery of billed IFC Charges for purposes of performing any
Reconciliation Adjustment will include the semiannual period commencing on the
first billing date of the month during which the immediately preceding
Reconciliation Payment Date occurs (or if a True-Up Adjustment was required with
respect to the True-Up Payment Date immediately following such Reconciliation
Payment Date, the quarterly period commencing on the first billing date of the
month during which the immediately preceding True-Up Payment Date occurs) and
ending on the last billing date of the month immediately preceding the date on
which such Reconciliation Adjustment is calculated. The data used in all of such
calculations will take into account to the extent available, among other things,
(a) updated assumptions by the Servicer as to projected future usage of
electricity by Customers, (b) future fees and expenses relating to the
Intangible Transition Property and the Notes, (c) amounts available in the
General Subaccount and Reserve Subaccount, (d) amounts necessary to fund and
replenish the Overcollateralization Subaccount and Capital Subaccount to
required levels, (e) amounts payable on the Notes, and (f) expected
delinquencies and write-offs, including amounts necessary for recovery of any
additional costs incurred by the Trust as a result of the relevant delay in
collections of IFC Charges, all assuming that there will be no net earnings on
any amounts in the Collection Account.
The Servicing Agreement and each Transitional Funding Order also require the
Servicer to calculate the "Debt Service Requirement" and the "Debt Service
Billing Requirement" for each applicable period as described below. The "Debt
Service Requirement" for any period means the total dollar amount of IFC
Payments which the Servicer calculates as to be needed to be collected in such
period to make the Specified Payments (after taking into account any prior
shortfalls in such payments and amounts available in the Reserve Subaccount for
payment of the Debt Service Requirement and assuming no net earnings on any
amounts in the Collection Account). The "Debt Service Billing Requirement" for
any period means the total dollar amount of IFC Charges, taking into account
delays in collections and write-offs, which the Servicer calculates will need to
be billed during such period in order to generate IFC Collections in the full
amount of the Debt Service Requirement for such period.
The Debt Service Requirement and the Debt Service Billing Requirement will
be calculated by the Servicer within the two-week period preceding each
Reconciliation Payment Date and will be calculated for the next semiannual
period commencing on the first billing date of the month during which such
Reconciliation Payment Date occurs and ending on the last billing date of the
month immediately preceding the date on which the following Reconciliation
Payment Date occurs. If a True-Up Adjustment is required, the Debt Service
Billing Requirement shall be calculated by the Servicer within the two-week
period preceding the related True-Up Payment Date and will be calculated for the
quarterly period commencing on the first billing date of the month during which
such True-Up Payment Date occurs and ending on the last billing date of the
month immediately preceding the date on which the following Reconciliation
Payment Date occurs.
The Debt Service Billing Requirement for each semiannual or quarterly period
will be allocated among the IFC Customer Classes on the basis of their
respective 1996 base rate revenues as set forth in "The Servicer--ComEd Customer
Base, Electric Energy Consumption and Base Rates." The amount so allocated to
each IFC Customer Class will be divided by the number of kilowatt-hours
projected to be
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sold and delivered to Customers in the class by ComEd during such semiannual or
quarterly period. If, in connection with the foregoing allocations, the
forecasted revenues from Applicable Rates for any IFC Customer Class during a
semiannual or quarterly period is projected to be less than the IFC Charges
allocated to that class for the same period, the deficiency shall be ratably
allocated among the remaining IFC Customer Classes based on their percentages of
the 1996 base rate revenues, recalculated to exclude such IFC Customer Class.
All Adjustments shall be implemented pursuant to the IFC Tariff filed by
ComEd in connection with the related Transitional Funding Order. As required by
the Funding Law, if, as a result of any Adjustment, the IFC Charge, as so
adjusted, will exceed the amount per kilowatt-hour of the IFC Charge initially
authorized by the ICC in such Transitional Funding Order, then ComEd shall be
obligated to file Amendatory Tariffs adjusting the amounts otherwise billable by
ComEd for Applicable Rates, to offset the amount of such excess (or, if ComEd
shall have previously filed any such Amendatory Tariffs, the incremental amount
of such excess). However, the failure of such Amendatory Tariff to become
effective for any reason shall not delay or impair the effectiveness of any such
Adjustments.
The Servicing Agreement will require the Servicer to deliver promptly a
written copy of all filings made with the ICC in connection with any Adjustment,
together with a copy of all material supporting documents, to the Trust and the
Indenture Trustee.
SALE AND ASSIGNMENT OF INTANGIBLE TRANSITION PROPERTY
On the initial Series Issuance Date, in accordance with the requirements of
the Funding Law and the terms of the Initial TFO and pursuant to the initial
Sale Agreement, the Grantee will sell, transfer and assign to the Trust, without
recourse, its entire right in, to and under the Intangible Transition Property
that is created by the Initial TFO (the "Initial Intangible Transition
Property") and in, to and under the related Basic Documents (such sale, transfer
and assignment to include all revenues, collections, claims, rights, payments,
money or proceeds, including, without limitation, any revenues derived from
lump-sum payments of transition charges, condemnation proceedings or FERC
stranded cost recoveries which are allocable to the IFC Charges under the
Servicing Agreement). The net proceeds received by the Trust from the sale of
the Notes will be applied to the purchase of the Initial Intangible Transition
Property and related assets. Thereafter, the Grantee may agree with the Trust to
sell additional Intangible Transition Property ("Subsequent Intangible
Transition Property") to the Trust, subject to the satisfaction of certain
conditions, including the establishment and creation of such Subsequent
Intangible Transition Property (and the vesting thereof in the Grantee) pursuant
to a subsequent Transitional Funding Order. Such Subsequent Intangible
Transition Property will be sold to the Trust effective on a date (a "Subsequent
Transfer Date") specified in a subsequent Sale Agreement between the Grantee and
the Trust. The Trust will issue and sell additional Notes in connection
therewith.
The Grantee's entire right in, to and under the Initial Intangible
Transition Property was granted to the Grantee by the ICC in accordance with the
Initial TFO. The Grantee's rights in, to and under any Subsequent Intangible
Transition Property will, subject to the satisfaction of certain conditions, be
granted to the Grantee by the ICC in accordance with a subsequent Transitional
Funding Order related thereto.
The Trust will appoint the Servicer as custodian of the documentation
relating to the Intangible Transition Property. ComEd's data systems will
reflect the sale and assignment of the Intangible Transition Property from the
Grantee to the Trust. ComEd's financial statements will indicate that the
Intangible Transition Property has been sold by the Grantee to the Trust and
will not be available to creditors of ComEd, although, unless otherwise
specified in the related Prospectus Supplement, for financial reporting and
federal income tax purposes ComEd intends to treat the Notes as representing
debt of ComEd.
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Subsequent Intangible Transition Property may be sold by the Grantee to the
Trust from time to time, solely in connection with the issuance and sale of
additional Notes by the Trust. Any such conveyance of Subsequent Intangible
Transition Property is subject to the following conditions, among others:
(a) the Grantee shall have entered into a written sale agreement with
the Trust;
(b) ComEd shall have received a subsequent Transitional Funding Order
issued by the ICC relating to such Subsequent Intangible Transition
Property;
(c) as of the applicable Subsequent Transfer Date, the Grantee shall not
be insolvent and shall not be made insolvent by such conveyance;
(d) the Rating Agency Condition shall have been satisfied with respect
to such conveyance;
(e) ComEd shall have delivered to the Grantee, the Trust, the Delaware
Trustee and the Indenture Trustee an opinion of independent tax counsel
and/or a ruling from the IRS (as selected by, and in form and substance
reasonably satisfactory to, ComEd) to the effect that, for federal income
tax purposes, (i) the ICC's issuance of the Transitional Funding Order
creating and establishing the Subsequent Intangible Transition Property in
the Grantee and the assignment pursuant to such conveyance of such
Subsequent Intangible Transition Property will not result in gross income to
the Grantee, the Trust or ComEd, and the future revenues relating to the
Subsequent Intangible Transition Property, and the assessment of the IFC
Charges (except for revenue related to certain lump-sum payments) will be
included in ComEd's gross income in the year in which the related electrical
service is provided to consumers and (ii) such conveyance will not adversely
affect the characterization of the then outstanding Notes as obligations of
ComEd;
(f) as of the applicable Subsequent Transfer Date, no breach by the
Grantee of its representations, warranties or covenants in the applicable
Sale Agreement and no Servicer Default shall exist;
(g) as of the applicable Subsequent Transfer Date, the Trust shall have
sufficient funds available to pay the purchase price for the Subsequent
Intangible Transition Property to be transferred on such date and all
conditions to the issuance of new series of Notes shall have been satisfied;
and
(h) the Grantee and the Trust shall have taken any action required to
perfect the ownership interest or security interest (as the case may be) of
the Trust in the Subsequent Intangible Transition Property and the proceeds
thereof, free and clear of any liens.
GRANT AGREEMENT
Under each Grant Agreement, the Grantee will agree, in consideration of
ComEd filing an application with the ICC requesting a Transitional Funding Order
creating and vesting in the Grantee the related Intangible Transition Property,
to remit to ComEd the net proceeds remitted to it by the Trust from the sale of
the Notes. To the extent that, notwithstanding the Funding Law and the related
Transitional Funding Order, applicable law provides that ComEd has any interest
in the Intangible Transition Property or any part thereof, ComEd will agree to
sell, transfer, assign, set over and otherwise convey to the Grantee without
recourse all of ComEd's right, title and interest, if any, in, to and under the
Intangible Transition Property (such sale, transfer and assignment to include
all revenues, collections, claims, rights, payments, money or proceeds,
including, without limitation, any revenues derived from lump-sum payments of
transition charges, condemnation proceedings or FERC stranded cost recoveries
which are allocable to the IFC Charges under the Servicing Agreement). Such
sale, transfer, assignment, set over and conveyance by ComEd contemplated under
each Grant Agreement will be expressly stated to be an absolute transfer
pursuant to Section 18-108 of the Funding Law.
In each Grant Agreement, ComEd will also acknowledge and consent to any
transfer, pledge, assignment or grant of a security interest by the Grantee to
the Trust pursuant to the related Sale Agreement, and by the Trust to the
Indenture Trustee for the benefit of the Noteholders pursuant to the
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Indenture, of all right, title and interest of the Grantee in, to and under the
Intangible Transition Property and the proceeds thereof, and the assignment of
any or all of the Grantee's rights and obligations under such Grant Agreement to
the Trust and the Indenture Trustee.
REPRESENTATIONS AND WARRANTIES OF COMED
In each Grant Agreement, ComEd will make representations and warranties to
the Grantee to the effect, among other things, that:
(a) the information provided by ComEd to the Grantee with respect to the
applicable Intangible Transition Property is correct in all material
respects;
(b) immediately prior to the transactions contemplated by the Grant
Agreement, ComEd's right, title and interest in and to all of its rights to
payment under Applicable Rates is free and clear of all encumbrances and is
not subject to any defenses or counterclaims nor have any such encumbrances,
defenses or counterclaims been asserted with respect thereto;
(c) the applicable Intangible Transition Property has been validly
granted to and vested in the Grantee, and the Grantee owns all right, title
and interest to such Intangible Transition Property free and clear of all
liens and rights of any other person (other than liens created pursuant to
the related Sale Agreement and the Indenture), and all filings to be made by
ComEd (including filings with the ICC under the Funding Law) necessary in
any jurisdiction to give the Grantee a first priority perfected ownership
interest in such Intangible Transition Property will have been made and no
further action is required under Illinois law to maintain such ownership
interest in such Intangible Transition Property;
(d) (i) ComEd was authorized to apply for each Transitional Funding
Order;
(ii) ComEd filed each such application in proper form with the ICC;
(iii) each Transitional Funding Order pursuant to which any
Intangible Transition Property has been created and each related IFC
Tariff has established, created and granted rights in and to the related
Intangible Transition Property and are valid, binding and irrevocable and
such Intangible Transition Property (including the right to impose and
collect the related IFC Charges) constitutes a current property right
vested in the Grantee;
(iv) each Transitional Funding Order pursuant to which any
Intangible Transition Property has been created has been duly entered by
the ICC, is final and non-appealable and is in full force and effect;
(v) no Transitional Funding Order nor any Intangible Transition
Property created and established thereby nor the related IFC Charges
shall be subject to reduction, postponement, impairment or termination by
any subsequent action of the ICC;
(vi) the State of Illinois may not limit, alter, impair or reduce
the value of the Intangible Transition Property in a manner substantially
impairing the Indenture or the rights and remedies of the Noteholders
(and, consequently, may not revoke, reduce, postpone or terminate the
related Transitional Funding Order or the rights of the Noteholders to
receive IFC Payments and all other proceeds of the Intangible Transition
Property), until the Notes, together with interest thereon, are fully
paid and discharged (except to the extent of a temporary impairment that
the State of Illinois is able to demonstrate is necessary to advance a
significant and legitimate public purpose);
(vii) the process by which the related Transitional Funding Order was
adopted and approved and the related IFC Tariff was filed, and such
Transitional Funding Order and IFC Tariff themselves, comply with all
applicable laws, rules and regulations; and
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(viii) no other approval or filing with any other governmental body
is required in connection with the grant of the related Intangible
Transition Property, except those that have been obtained or made;
(e) the assumptions used in calculating the related IFC Charges are
reasonable and made in good faith;
(f) upon the effectiveness of the applicable IFC Tariff:
(i) all of the related Intangible Transition Property constitutes a
current property right vested in the Grantee;
(ii) the related Intangible Transition Property includes, without
limitation, (A) the right, title and interest in the related IFC Charges
authorized under the related Transitional Funding Order, as adjusted from
time to time, (B) the right, title and interest in all revenues,
collections, claims, payments, money or proceeds of or arising from the
related IFC Charges set forth in such IFC Tariff, and (C) all rights to
obtain adjustments to the related IFC Charges pursuant to the related
Transitional Funding Order; and
(iii) the Grantee is entitled to impose and collect the related IFC
Charges in an aggregate amount equal to the principal amount of the
Notes, all interest on the Notes, all amounts required to be deposited in
the Reserve Subaccount, the Overcollateralization Subaccount and (to the
extent payable from the proceeds of the related IFC Charges) the Capital
Subaccount, and all related fees, costs and expenses in respect of the
Notes until they have been paid in full subject only to the limitation
set forth in the Transitional Funding Orders as to the aggregate maximum
dollar amount of Intangible Transition Property;
(g) ComEd is a corporation duly organized, validly existing and in good
standing under the laws of the State of Illinois, with power and authority
to own its properties and conduct its business as currently owned or
conducted and to execute, deliver and perform the terms of such Grant
Agreement and has (and has had at all relevant times) the requisite power,
authority and legal right to request that the ICC issue the related
Transitional Funding Order;
(h) the execution, delivery and performance of such Grant Agreement have
been duly authorized by ComEd by all necessary corporate action;
(i) such Grant Agreement constitutes a legal, valid and binding
obligation of ComEd, enforceable against ComEd in accordance with its terms,
subject to customary exceptions relating to bankruptcy and equitable
principles;
(j) the consummation of the transactions contemplated by such Grant
Agreement does not conflict with, or result in a default under, ComEd's
Articles of Incorporation, bylaws or any agreement to which ComEd is a party
or bound, result in the creation or imposition of any lien upon ComEd's
properties pursuant to any agreement or violate any law or any order, rule
or regulation applicable to ComEd;
(k) no governmental approvals, authorizations or filings are required
for ComEd to execute, deliver and perform its obligations under such Grant
Agreement except those which have been previously obtained or made (it being
understood that ComEd nonetheless has ongoing legal obligations to make
future filings with the ICC relating to ComEd's use of proceeds from and the
final terms of the transactions contemplated by such Grant Agreement); and
(l) except as disclosed in such Grant Agreement, no court or
administrative proceeding or investigation is pending or, to ComEd's
knowledge, threatened (i) asserting the invalidity of the Funding Law, such
Grant Agreement, any of the other related Basic Documents or the related
Notes, (ii) seeking to prevent the grant of the related Intangible
Transition Property to the Grantee or
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the consummation of any of the transactions contemplated by such Grant
Agreement or any of the other related Basic Documents, (iii) seeking any
determination or ruling that could reasonably be expected to materially and
adversely affect the performance by ComEd of its obligations under, or the
validity or enforceability of, such Grant Agreement, any of the other
related Basic Documents or the related Notes, or (iv) which could reasonably
be expected to adversely affect the federal or state income tax attributes
of the related Notes.
COVENANTS OF COMED
In each Grant Agreement, ComEd will covenant, among other things, that:
(a) so long as any of the Notes are outstanding, it will keep in full
force and effect its existence, rights and franchises as a corporation under
the laws of its jurisdiction of incorporation and its qualification to do
business to the extent necessary to protect the validity of the Basic
Documents;
(b) it will not sell, pledge, assign or transfer to any other person, or
grant, create, incur, assume, suffer to exist or otherwise assert any lien
on or seek to limit, alter, impair, reduce or terminate any of the related
Intangible Transition Property or any interest therein;
(c) it shall defend the right, title and interest of the Grantee or the
Trust in, to and under the related Intangible Transition Property against
all claims of third parties claiming through or under ComEd;
(d) it will pay to the Servicer all payments received by it in respect
of the IFC Charges or the proceeds thereof no later than two Business Days
after such receipt by ComEd;
(e) it shall notify the Grantee, the Trust and the Indenture Trustee
promptly after becoming aware of any lien on any of the related Intangible
Transition Property other than the conveyances under the Grant Agreement,
the Sale Agreement and the Indenture;
(f) it shall comply with its organizational documents and all
applicable laws to the extent that failure to so comply would materially
adversely affect the Trust's or the Indenture Trustee's interests in the
Intangible Transition Property;
(g) it shall indicate in its financial statements that it is not the
owner of the Intangible Transition Property and it shall not own or purchase
any Notes;
(h) upon the creation and grant of the Intangible Transition Property
and, for so long as the Notes are outstanding, except with respect to taxes,
it will not make any statement or reference in respect of the Intangible
Transition Property that is inconsistent with the ownership interest of the
Grantee;
(i) it shall execute and file such filings, and cause to be executed
and filed such filings as may be required by law to fully preserve,
maintain, and protect the interests of the Grantee or the Trust in the
related Intangible Transition Property, including all filings required under
the Funding Law relating to the grant of the related Intangible Transition
Property to the Grantee;
(j) it shall institute any action or proceeding necessary to compel
performance by the ICC or the State of Illinois of any of their obligations
or duties under the Funding Law, the related Transitional Funding Order and
related Tariff, and will take such legal or administrative actions as may be
reasonably necessary to protect the Grantee or the Trust from claims, state
actions or other actions or proceedings of third parties which, if
successfully pursued, would result in a breach of any representation set
forth in such Grant Agreement;
(k) it shall not, prior to the date which is one year and one day after
the termination of the Indenture, acquiesce, petition or otherwise invoke or
cause any other Person to invoke the process of any court or governmental
authority for the purpose of commencing or sustaining a case against,
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or appointment of a receiver for, the Grantee or the Trust under any federal
or state bankruptcy, insolvency or similar law;
(l) it shall pay all material taxes, assessments and governmental
charges imposed upon it or any of its properties or assets if the failure to
pay any such taxes, assessments and governmental charges would, after any
applicable grace periods, result in a lien on the Intangible Transition
Property;
(m) neither ComEd nor any successor will cause or permit the Grantee or
the Trust to elect to be classified as an association taxable as a
corporation for federal income tax purposes;
(n) neither ComEd nor any successor thereto will enter into any contract
with any Customer obligated (or who would, but for such contract, be
obligated) to pay IFC Charges if, as a result thereof, such Customer would
not receive tariffed services, unless the contract provides that the
Customer will pay an amount to the Grantee or its assigns, as applicable,
equal to the amount such Customer would pay in IFC Charges;
(o) it will not, except as required by applicable law, initiate any
material changes to its policies and procedures which are likely to
adversely affect its timely recovery of amounts billed to Customers;
(p) if ComEd determines that the aggregate dollar amount of IFC Charges
to be imposed and collected is reasonably likely to exceed the maximum
dollar amount of Intangible Transition Property authorized by the
Transitional Funding Orders and any Notes remain outstanding, ComEd shall
make a good faith effort to take any and all subsequent regulatory action
with the ICC reasonably necessary to obtain an order permitting the creation
of additional Intangible Transition Property in an amount sufficient to pay
such Notes in full; and
(q) ComEd will take any and all actions reasonably necessary to preserve
the Noteholders' rights with respect to payments on the Notes out of amounts
represented by the IFC Charges or their equivalent, including, but not
limited to, (i) making appropriate filings with the State of Illinois, the
ICC or other regulatory bodies to defend, preserve and create on behalf of
Noteholders the right to receive payments as provided in the Notes, (ii)
defending against or instituting and pursuing legal actions and appearing or
testifying in hearings or similar proceedings, as may be necessary to block
or overturn any attempts to cause a repeal, modification of, supplement to
or judicial invalidation of, the Amendatory Act or the Transitional Funding
Order or the rights of holders of Intangible Transition Property by
legislative enactment or otherwise that would be adverse to the Grantee, the
Trust or any Noteholders, and (iii) unless otherwise prohibited by
applicable law or judicial or regulatory order in effect at such time,
continuing to deduct and pay over to the Servicer for the benefit of the
Trust all IFC Payments or equivalent revenues received by ComEd
notwithstanding any declaration of invalidity of the Amendatory Act and/or
the Funding Law.
AMENDMENT OF GRANT AGREEMENTS
Each Grant Agreement may be amended from time to time by ComEd and the
Grantee, with prior written notice given to the Rating Agencies and the prior
written consent of the Trust, but without the consent of any of the Noteholders,
to cure any ambiguity, to correct or supplement any provisions in such Grant
Agreement or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions in such Grant Agreement or of
modifying in any manner the rights of the Noteholders; provided, however, that
such action shall not, as evidenced by an officer's certificate delivered to the
Trust, adversely affect in any material respect the interests of any Noteholder.
Each Grant Agreement may also be amended from time to time by ComEd and the
Grantee, with prior written notice given to the Rating Agencies and the prior
written consent of the Trust, the Indenture Trustee and Noteholders holding not
less than a majority in principal amount of the then outstanding
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Notes of all Series affected thereby, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such Grant
Agreement or of modifying in any manner the rights of the Noteholders; provided,
however, that no such amendment shall (a) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, IFC Collections relating to the
IFC Charges, or (b) reduce the percentage of the outstanding principal amount of
the Notes, the Noteholders of which are required to consent to any such
amendment, without the consent of the Noteholders of all the outstanding Notes.
INDEMNIFICATION OBLIGATIONS OF COMED
Each Grant Agreement will provide that ComEd will indemnify the Grantee, the
Trust, the Indenture Trustee, the Delaware Trustee and the Noteholders, and each
of their respective officers, directors, employees and agents for, and defend
and hold harmless each such person from and against, (a) any and all taxes
(other than any taxes imposed on the Noteholders) that may at any time be
imposed on or asserted against any such person as a result of the grant of the
Intangible Transition Property to the Grantee, or that may be imposed on or
asserted against any such person under existing law as of the closing date as a
result of the Grantee's ownership and assignment of the Intangible Transition
Property, the Trust's issuance and sale of the Notes, or the other transactions
contemplated herein, including, in each case, any sales, gross receipt, general
corporation, tangible personal property, privilege or license taxes (but
excluding any taxes imposed as a result of a failure of such person to properly
withhold or remit taxes imposed with respect to payments on any Note); and (b)
any and all amounts of principal and interest on the Notes not paid when due in
accordance with their terms and the amount of any deposits to the Trust required
to have been made in accordance with the terms of the Basic Documents which are
not made when so required and any and all liabilities, obligations, claims,
actions, suits or payments of any kind whatsoever that may be imposed on or
asserted against any such person, together with any reasonable costs and
expenses incurred by such person, as a result of ComEd's breach of any of its
representations, warranties or covenants contained in such Grant Agreement. Such
indemnification obligations will rank PARI PASSU with other general unsecured
obligations of ComEd. The indemnities described above will survive the
termination of such Grant Agreement and include reasonable fees and expenses of
investigation and litigation (including reasonable attorneys' fees and
expenses). ComEd will also deliver to the Indenture Trustee a Remediation
Agreement confirming the representations, warranties and covenants of ComEd
contained in the Grant Agreement and its agreement to continue to deduct and pay
IFC Charges in the event the Grant Agreement is declared invalid.
SALE AGREEMENT
Under each Sale Agreement, the Grantee will agree, in consideration of the
Trust remitting to it the net proceeds received from the issuance and sale of
the Notes, to sell, transfer, assign, set over or otherwise convey to the Trust
without recourse all of its right, title and interest in and to the Intangible
Transition Property created in connection with such issuance (such sale,
transfer and assignment to include all revenues, collections, claims, rights,
payments, money or proceeds, including, without limitation, any revenues derived
from lump-sum payments of transition charges, condemnation proceedings or FERC
stranded cost recoveries which are allocable to the IFC Charges under the
Servicing Agreement). Such sale, transfer, assignment, set over and conveyance
by the Grantee contemplated under each Sale Agreement will be expressly stated
to be an absolute transfer pursuant to Section 18-108 of the Funding Law.
In the Sale Agreement, the Grantee will also acknowledge and consent to any
transfer, pledge, assignment or grant of a security interest by the Trust to the
Indenture Trustee for the benefit of the Noteholders pursuant to the Indenture,
of all right, title and interest of the Trust in, to and under the related
Intangible Transition Property and the related assets, and the assignment of any
or all of the Trust's rights and obligations under each Sale Agreement to the
Indenture Trustee.
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REPRESENTATIONS AND WARRANTIES OF GRANTEE
In each Sale Agreement, the Grantee will make representations and warranties
to the Trust to the effect, among other things, that:
(a) the information provided by the Grantee to the Trust with respect to
the applicable Intangible Transition Property and related assets is correct
in all material respects;
(b) immediately prior to the sale of such Intangible Transition Property
to the Trust, the applicable Intangible Transition Property is owned by the
Grantee free and clear of all security interests, liens, charges and
encumbrances, and is not subject to any defenses or counterclaims nor have
any such encumbrances, defenses or counterclaims been asserted with respect
thereto;
(c) the applicable Intangible Transition Property has been validly
transferred and sold to the Trust and all filings to be made by the Grantee
(including filings with the ICC under the Funding Law) necessary in any
jurisdiction to give the Trust a first priority perfected ownership interest
in such Intangible Transition Property will have been made and no further
action is required under Illinois law to maintain such ownership interest in
such Intangible Transition Property;
(d) (i) each Transitional Funding Order pursuant to which any
Intangible Transition Property has been created has been duly entered by
the ICC, is final and non-appealable and is in full force and effect;
(ii) no Transitional Funding Order nor any Intangible Transition
Property created and established thereby nor the related IFC Charges
shall be subject to reduction, postponement, impairment or termination by
any subsequent action of the ICC;
(iii) the State of Illinois may not limit, alter, impair or reduce
the value of the Intangible Transition Property in a manner substantially
impairing the Indenture or the rights and remedies of the Noteholders
(and, consequently, may not revoke, reduce, postpone or terminate the
related Transitional Funding Order or the rights of the Noteholders to
receive IFC Payments and all other proceeds of the Intangible Transition
Property), until the Notes, together with interest thereon, are fully
paid and discharged (except to the extent of a temporary impairment that
the State of Illinois is able to demonstrate is necessary to advance a
significant and legitimate public purpose);
(iv) the process by which the related Transitional Funding Order was
adopted and approved and the related IFC Tariff was filed, and such
Transitional Funding Order and IFC Tariff themselves, comply with all
applicable laws, rules and regulations; and
(v) no other approval or filing with any other governmental body is
required in connection with the grant of the related Intangible
Transition Property, except those that have been obtained or made;
(e) the assumptions used in calculating the related IFC Charges are
reasonable and made in good faith;
(f) upon the effectiveness of the applicable IFC Tariff:
(i) all of the related Intangible Transition Property constitutes a
current property right vested in the Grantee;
(ii) the related Intangible Transition Property includes, without
limitation, (A) the right, title and interest in the related IFC Charges
authorized under the related Transitional Funding Order, as adjusted from
time to time, (B) the right, title and interest in all revenues,
collections, claims, payments, money or proceeds of or arising from the
related IFC Charges set forth in such IFC
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Tariff, and (C) all rights to obtain adjustments to the related IFC
Charges pursuant to the related Transitional Funding Order; and
(iii) the Grantee is entitled to impose and collect the related IFC
Charges in an aggregate amount equal to the principal amount of the
Notes, all interest on the Notes, all amounts required to be deposited in
the Reserve Subaccount, the Overcollateralization Subaccount and (to the
extent payable from the proceeds of the related IFC Charges) the Capital
Subaccount, and all related fees, costs and expenses in respect of the
Notes until they have been paid in full subject only to the limitation
set forth in the Transitional Funding Orders as to the aggregate maximum
dollar amount of Intangible Transition Property;
(g) the Grantee is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware, with
power and authority to own its properties and conduct its business as
currently owned or conducted and to execute, deliver and perform the terms
of such Sale Agreement;
(h) the execution, delivery and performance of such Sale Agreement have
been duly authorized by the Grantee by all necessary company action;
(i) such Sale Agreement constitutes a legal, valid and binding
obligation of the Grantee, enforceable against the Grantee in accordance
with its terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
(j) the consummation of the transactions contemplated by such Sale
Agreement does not conflict with, or result in a default under, the
Grantee's operating agreement or certificate of formation or any agreement
to which the Grantee is a party or bound, result in the creation or
imposition of any lien upon the Grantee's properties pursuant to any
agreement or violate any law or any order, rule or regulation applicable to
the Grantee;
(k) no governmental approvals, authorizations or filings are required
for the Grantee to execute, deliver and perform its obligations under such
Sale Agreement except those which have been previously obtained or made; and
(l) except as disclosed in such Sale Agreement, no court or
administrative proceeding or investigation is pending or, to the Grantee's
knowledge, threatened (i) asserting the invalidity of the Funding Law, such
Sale Agreement, any of the other related Basic Documents or the related
Notes, (ii) seeking to prevent the issuance of the related Notes or the
consummation of any of the transactions contemplated by such Sale Agreement
or any of the other related Basic Documents, (iii) seeking any determination
or ruling that could reasonably be expected to materially and adversely
affect the performance by the Grantee of its obligations under, or the
validity or enforceability of, such Sale Agreement, any of the other related
Basic Documents or the related Notes, or (iv) which could reasonably be
expected to adversely affect the federal or state income tax attributes of
the related Notes.
COVENANTS OF THE GRANTEE
In each Sale Agreement, the Grantee will covenant, among other things, that:
(a) so long as any of the Notes are outstanding, it will keep in full
force and effect its existence, rights and franchises as a limited liability
company under the laws of its jurisdiction of organization and its
qualification to do business to the extent necessary to protect the validity
of the Basic Documents;
(b) it will not sell, pledge, assign or transfer to any other person, or
grant, create, incur, assume, suffer to exist or otherwise assert any lien
on any of the related Intangible Transition Property or related assets;
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(c) it shall defend the right, title and interest of the Trust and
Indenture Trustee in, to and under the related Intangible Transition
Property and related assets against all claims of third parties claiming
through or under the Grantee;
(d) it will hold all payments received by it in respect of the IFC
Charges or the proceeds thereof in trust for the Servicer and pay to the
Servicer all such payments no later than two Business Days after such
receipt by the Grantee;
(e) it shall notify the Trust and the Indenture Trustee promptly after
becoming aware of any lien on any of the related Intangible Transition
Property and related assets other than the conveyances under the Sale
Agreement and the Indenture;
(f) it shall comply with its organizational documents and all
applicable laws to the extent that failure to so comply would materially
adversely affect the Trust's or the Indenture Trustee's interests in the
Intangible Transition Property or related assets or under any Basic Document
to which it is party, or the Grantee's performance of its obligations under
the Sale Agreement or under any Basic Document to which it is party;
(g) it shall indicate in its financial statements that it is not the
owner of the Intangible Transition Property and it shall not own or purchase
any Notes and, except with respect to taxes, not make any statement or
reference in respect of the Intangible Transition Property and related
assets that is inconsistent with the ownership interest of the Trust;
(h) it shall execute and file such filings, and cause to be executed and
filed such filings as may be required by law to fully preserve, maintain,
and protect the interests of the Trust in the related Intangible Transition
Property and related assets, including all filings required under the
Funding Law relating to the transfer of the related Intangible Transition
Property to the Trust;
(i) it shall institute any action or proceeding necessary to compel
performance by the ICC or the State of Illinois of any of their obligations
or duties under the Funding Law, the related Transitional Funding Order and
related Tariff, and will take such legal or administrative actions as may be
reasonably necessary to protect the Trust and Noteholders from claims, state
actions or other actions or proceedings of third parties which, if
successfully pursued, would result in a breach of any representation set
forth in such Sale Agreement;
(j) it shall not, prior to the date which is one year and one day after
the termination of the Indenture, acquiesce, petition or otherwise invoke or
cause any other person to invoke the process of any court or governmental
authority for the purpose of commencing or sustaining a case against, or
appointment of a receiver for, the Trust under any federal or state
bankruptcy, insolvency or similar law;
(k) it shall pay all material taxes, assessments and governmental
charges imposed upon it or any of its properties or assets if the failure to
pay any such taxes, assessments and governmental charges would, after any
applicable grace periods, result in a lien on the Intangible Transition
Property or related assets;
(l) except as otherwise expressly permitted, the Grantee shall not
waive, amend, modify, supplement or terminate any Basic Document or any
provision thereof without the written consent of the Trust;
(m) without derogating from the absolute nature of the assignment
granted to the Trust under the Sale Agreement or the rights of the Trust,
the Grantee will not, without the prior written consent of the Trust, amend,
modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, supplement, termination, waiver or surrender of,
the terms of any collateral securing the Notes or the Basic Documents, or
waive timely performance or observance by ComEd or the Servicer under the
Grant Agreement or the Servicing Agreement, respectively;
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(n) it shall promptly notify the Trust, in writing, of each default
under the Indenture and each material default on the part of ComEd or the
Servicer of their respective obligations under the Grant Agreement or the
Servicing Agreement;
(o) the Grantee will not elect, nor cause or permit the Trust to elect,
to be classified as an association taxable as a corporation for federal
income tax purposes; and
(p) the Grantee shall conduct its affairs separate from those of its
members or affiliates.
In addition, so long as any of the Notes are outstanding, the Grantee will
covenant in each Sale Agreement that it shall not, except as otherwise permitted
thereunder:
(a) sell, transfer, exchange or otherwise dispose of any of its
properties or assets;
(b) take any action that would be inconsistent with the Trust's absolute
and first priority ownership interest in the Intangible Transition Property
and related assets;
(c) engage in any business other than acquiring, owning, financing,
transferring, assigning and otherwise managing the Intangible Transition
Property and related assets;
(d) incur, assume, guarantee or otherwise become liable, directly or
indirectly, for any indebtedness;
(e) make any loan or advance or credit to, or guarantee (directly or
indirectly or by an instrument having the effect of assuring another's
payment or performance on any obligation or capability of so doing or
otherwise), endorse or otherwise become contingently liable, directly or
indirectly, in connection with the obligations, stocks or dividends of, or
own, purchase, repurchase or acquire (or agree contingently to do so) any
stock, obligations, assets or securities of, or any other interest in, or
make any capital contribution to, any other person; and
(f) make any expenditure (by long-term or operating lease or otherwise)
for capital assets (either realty or personalty) in an aggregate amount not
to exceed $25,000 in any calendar year.
AMENDMENT OF SALE AGREEMENTS
Each Sale Agreement may be amended from time to time by the Grantee and the
Trust, with prior written notice given to the Rating Agencies and the prior
written consent of the Indenture Trustee, but without the consent of any of the
Noteholders, to cure any ambiguity, to correct or supplement any provisions in
such Sale Agreement or for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions in such Sale Agreement or of
modifying in any manner the rights of the Noteholders; provided, however, that
such action shall not, as evidenced by an officer's certificate delivered to the
Indenture Trustee, adversely affect in any material respect the interests of any
Noteholder.
Each Sale Agreement may also be amended from time to time by the Grantee and
the Trust, with prior written notice given to the Rating Agencies and the prior
written consent of the Indenture Trustee and Noteholders holding not less than a
majority in principal amount of the then outstanding Notes of all Series
affected thereby, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Sale Agreement or of
modifying in any manner the rights of the Noteholders; provided, however, that
no such amendment shall (a) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, IFC Collections relating to the IFC Charges,
or (b) reduce the percentage of the outstanding principal amount of the Notes,
the Noteholders of which are required to consent to any such amendment, without
the consent of the Noteholders of all the outstanding Notes.
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INDEMNIFICATION OBLIGATIONS OF THE GRANTEE
Each Sale Agreement will provide that the Grantee will indemnify the Trust,
the Indenture Trustee, the Delaware Trustee and the Noteholders, and each of
their respective officers, directors, employees and agents for, and defend and
hold harmless each such person from and against, (a) any and all taxes (other
than any taxes imposed on the Noteholders) that may at any time be imposed on or
asserted against any such person as a result of the grant of the Intangible
Transition Property to the Grantee, or that may be imposed on or asserted
against any such person under existing law as of the closing date as a result of
the Grantee's ownership and assignment of the Intangible Transition Property,
the Trust's issuance and sale of the Notes, or the other transactions
contemplated herein, including, in each case, any sales, gross receipt, general
corporation, tangible personal property, privilege or license taxes (but
excluding any taxes imposed as a result of a failure of such person to properly
withhold or remit taxes imposed with respect to payments on any Note); and (b)
any and all amounts of principal and interest on the Notes not paid when due in
accordance with their terms and the amount of any deposits to the Trust required
to have been made in accordance with the terms of the Basic Documents which are
not made when so required and any and all liabilities, obligations, claims,
actions, suits or payments of any kind whatsoever that may be imposed on or
asserted against any such person, together with any reasonable costs and
expenses incurred by such person, as a result of the Grantee's breach of any of
its representations, warranties or covenants contained in such Sale Agreement.
The indemnities described above will survive the termination of such Sale
Agreement and include reasonable fees and expenses of investigation and
litigation (including reasonable attorneys' fees and expenses).
Notwithstanding the foregoing, but subject to the Grantee's covenant to
fully preserve, maintain and protect the interests of the Trust in the
Intangible Transition Property, the Grantee shall not be under any obligation to
appear in, prosecute or defend any legal action that shall not be incidental to
its obligations under each Sale Agreement.
70
<PAGE>
CERTAIN PAYMENT, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal payments on each Class of Notes, the aggregate amount
of each interest distribution on each Class of Notes and the actual maturity
date of each Class of Notes might be related, in part, to the rate and timing of
receipt of IFC Collections. Accelerated receipts of IFC Collections will not
result in principal payments on the Notes earlier than the related Scheduled
Maturity Dates since receipts in excess of the amounts necessary to make any
Scheduled Payment on the Notes will be deposited in the Reserve Subaccount for
payment in accordance with such schedule, except in the event of an early
redemption or the acceleration of the maturity of the Notes after an Event of
Default, in which event such amounts will be released to pay such accelerated
amounts. However, delayed receipts of IFC Collections may result in principal
payments on the Notes that occur later than the related Scheduled Maturity
Dates.
The actual payments on each date for each Class of Notes and the weighted
average life thereof will be affected primarily by the rate of IFC Collections
and the timing of receipt of such IFC Collections, as well as amounts in the
Reserve Subaccount, the Overcollateralization Subaccount and the Capital
Subaccount. Since each IFC Charge will consist of a charge per kilowatt-hour of
usage by the applicable class of Customers, the aggregate amount of IFC
Collections and the rate of principal amortization on the Notes might depend, in
part, on actual electricity usage by Customers and the rate of delinquencies and
write-offs. Although the amounts of the IFC Charges will be adjusted from time
to time based in part on the actual rate of IFC Collections, no assurances are
given that the Servicer will be able to forecast accurately actual energy usage
and the rate of delinquencies and write-offs or implement adjustments to the IFC
Charges that will cause IFC Collections to be received at any particular rate.
See "Description of the Intangible Transition Property--Adjustments to the IFC
Charges--Reliance on IFC Adjustments." If IFC Collections are received at a
slower rate than expected, a Note may be retired later than expected. Because
principal will only be distributed at a rate not faster than that contemplated
in the Expected Amortization Schedules, except in the event of an early
redemption or the acceleration of the maturity of the Notes after an Event of
Default, the Notes are not expected to mature 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.
No assurances are given that the representations made herein and in the
Prospectus Supplement as to the particular factors that will affect the rate of
IFC Collections, the relative importance of such factors, the percentage of the
principal balance of the Notes that will be paid as of any date or the overall
rate of IFC Collections will be realized.
In addition, pursuant to the terms of the Indenture, any Series of Notes may
be redeemed on any Payment Date if, after giving effect to payments that would
otherwise be made on such date, the outstanding principal balance of such Series
of Notes has been reduced to less than five percent of the initial principal
balance thereof. If specified in the Prospectus Supplement related to any Series
or Class of Notes, the Indenture may also permit the redemption of any such
Series or Class of Notes in full on any Payment Date on or prior to December 31,
2004 using proceeds received from the refinancing of any other Series or Class
of Notes, through the issuance of New Notes. The New Notes will be payable
solely out of the Intangible Transition Property and other Note Collateral.
Redemption will cause such Notes to be retired earlier than would otherwise be
expected and may adversely affect the yield to maturity of the Notes. There can
be no assurance as to whether any Series of Notes will be redeemed, or as to
whether Noteholders will be able to receive an equally attractive rate of return
upon reinvestment of the proceeds resulting from any such redemption.
71
<PAGE>
THE TRUST
The Trust will be a statutory business trust formed under the laws of the
State of Delaware pursuant to the Trust Agreement executed by the Beneficiary
Trustees and the Delaware Trustee (not in its individual capacity but solely in
its trust capacity under the terms of the Trust Agreement). The Trust will not
be an agency or instrumentality of the State of Illinois. Pursuant to the terms
of the Trust Agreement, the Trust will be created for the specific purpose of
acquiring and owning the Intangible Transition Property and the other Note
Collateral, issuing and registering the Notes, pledging its interest in the
Intangible Transition Property and other Note Collateral pursuant to the terms
of the Indenture, making payments on the Notes, distributing amounts released to
the Trust and performing other activities that are necessary, suitable or
convenient to accomplish these purposes. The Trust Agreement will not permit the
Trust to engage in any activities not directly related to the Note financing.
The assets of the Trust will consist of the Intangible Transition Property,
the other Note Collateral, and any money distributed by the Grantee to the
Delaware Trustee on behalf of the Trust to fund the Capital Subaccount. For a
description of the Notes to be issued by the Trust, see "Description of the
Notes."
As of the date of this Prospectus, the Trust has not carried on any business
activities and has no operating history. Audited financial statements of the
Trust are included as an exhibit to this Prospectus. The fiscal year of the
Trust will be the calendar year.
The Trust's business will be managed by the Delaware Trustee. Under the
terms of the Trust Agreement, the Delaware Trustee must at all times be: (1) a
corporation satisfying the provisions of Section 3807(a) of the Delaware
Business Trust Act; (2) authorized to exercise corporate trust powers; (3) have
a combined capital and surplus of at least $50,000,000 and be subject to
supervision or examination by federal or state authorities; and (4) have, or
have a parent which has, a long-term unsecured debt rating of at least "BBB-" by
S&P and at least "Baa3" by Moody's. If the Delaware Trustee at any time fails to
satisfy these provisions, if a receiver is appointed for it, if it is adjudged
bankrupt or if it is otherwise incapable of acting, it will be removed by the
Servicer and the Servicer will appoint a successor Delaware Trustee, which must
also meet the requirements described above.
The Delaware Trustee and the Servicer may jointly appoint a co-trustee for
the purpose of meeting any legal requirements of any state in which any part of
the estate of the Trust may be located. This co-trustee need not meet the
requirements described in the previous paragraph.
The authority of the Beneficiary Trustees under the Trust Agreement is
limited to the performance of the following duties: (1) to execute and file the
Registration Statement of which this Prospectus is a part, and to file any
supplements, amendments and exhibits to this Registration Statement; (2) to
register the Notes with applicable state securities commissions; and (3) to take
any necessary or appropriate related actions (including entering into certain
amendments to the Trust Agreement). The following two people have been named as
the Beneficiary Trustees in the Trust Agreement:
<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------------------- ---- ----------------------
<S> <C> <C>
Ruth Ann M. Gillis 44 Beneficiary Trustee
David R. Zahakaylo 37 Beneficiary Trustee
</TABLE>
Ruth Ann M. Gillis will be a Beneficiary Trustee of the Trust. Ms. Gillis
has served as Vice President and Treasurer of ComEd and Unicom Corporation since
September 1997. From 1996 to 1997, Ms. Gillis served as Chief Financial Officer,
Treasurer and Vice President of The University of Chicago Hospitals and Health
System. Ms. Gillis held the position of Chief Financial Officer and Senior Vice
President at American National Bank and Trust Company between 1993 and 1996.
72
<PAGE>
David R. Zahakaylo will be a Beneficiary Trustee of the Trust. Mr. Zahakaylo
has served as Assistant Treasurer of ComEd since May 1998. He was ComEd's
Director of Financial Forecasting for ComEd from 1997 to 1998 and Supervisor of
Corporate Modeling from 1994 to 1996. Prior to 1994, Mr. Zahakaylo served as
Senior Research Analyst for ComEd.
As of the date of this Prospectus, none of the Trustees have received any
compensation for their services. The Beneficiary Trustees will not be
compensated by the Trust for their services on behalf of the Trust. The Delaware
Trustee will be paid from the assets of the Trust and will be reimbursed for its
reasonable expenses, including, without limitation, the reasonable compensation,
expenses and disbursements of any agents, representatives, experts and counsel
the Delaware Trustee employs in connection with performance of its duties under
the Trust Agreement.
The Trust Agreement provides that neither the Beneficiary Trustees nor the
Delaware Trustee shall be liable under any circumstances except for liabilities
arising from: (1) such Trustee's grossly negligent action; (2) such Trustee's
grossly negligent failure to act; or (3) such Trustee's own willful misconduct.
The Trust Agreement also provides that the Servicer shall indemnify each of the
Delaware Trustee, the Beneficiary Trustees and their successors, assigns, agents
and servants to the fullest extent permitted by law against any liability
incurred with respect to their services under the Trust Agreement.
The Trust Agreement provides that the Trust shall dissolve, wind up and
terminate on the earlier of: (1) final distribution of all money and other
property of the Trust in accordance with the Trust Agreement and other Note
financing documents; (2) December 31, 2020; or (3) if the Grantee elects, the
day following the date when the aggregate outstanding amount of the Notes is
zero. The Grantee is not entitled to revoke or terminate the Trust prior to this
date. Any funds remaining in the Trust after this termination date are to be
distributed to the Grantee.
Under the Trust Agreement, no trustee shall have the power to commence a
voluntary proceeding in bankruptcy relating to the Trust, except that the
Delaware Trustee may commence such a proceeding with the prior approval of the
Grantee and delivery to the Delaware Trustee of a signed certificate from the
Grantee stating that the Grantee reasonably believes that the Trust is
insolvent.
The principal place of business of the Trust 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.
THE GRANTEE
The Grantee, ComEd Funding, LLC, a special purpose Delaware limited
liability company, the sole member of which is ComEd, was organized on July 21,
1998 for the exclusive purposes of (a) initially owning the Intangible
Transition Property established by Transitional Funding Orders, (b) assigning
all of its right, title and interest in the Intangible Transition Property and
the Servicing Agreement to the Trust, (c) entering into the Servicing Agreement
with the Servicer in respect of the Intangible Transition Property, and (d)
engaging in only those other activities incidental thereto and necessary,
suitable or convenient therefor. In addition, the Grantee's limited liability
company agreement and other organizational documents require it to operate in a
manner such that it should not be consolidated in the bankruptcy estate of ComEd
in the event ComEd becomes subject to such a proceeding.
The executive offices of the Grantee are located at Ten South Dearborn
Street, 37th Floor, Chicago, Illinois 60603, and its telephone number is (312)
394-7937.
The Grantee is a recently formed special purpose limited liability company
and, as of the date of this Prospectus, has not carried on any business
activities and has no operating history. Audited financial statements of the
Grantee are included as an exhibit to this Prospectus.
73
<PAGE>
MANAGERS
In accordance with the Amended and Restated Limited Liability Company
Agreement of the Grantee, the management of the Grantee shall be vested entirely
in the Management Committee.
The following is a list of the managers of the Grantee. All such persons
have served in the capacities set forth below since October 15, 1998. The
managers and any officers will devote such time as is necessary to the affairs
of the Grantee. The Grantee will have sufficient officers, managers and
employees to carry on its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------ ----------- ---------
<S> <C> <C>
Ruth Ann M. Gillis 44 Manager
Patricia L. Kampling 39 Manager
John C. Bukovski 57 Manager
Andrew L. Stidd 41 Manager
Kevin P. Burns 29 Manager
</TABLE>
Ruth Ann M. Gillis is a Manager of the Grantee. Ms. Gillis also serves as
Vice President and Treasurer of Unicom and ComEd, positions she has held since
1997. From 1996 to 1997, she was Chief Financial Officer, Treasurer and Vice
President of The University of Chicago Hospitals and Health System. Ms. Gillis
held the position of Chief Financial Officer and Senior Vice President for
American National Bank and Trust Company between 1993 and 1996.
Patricia L. Kampling is a Manager of the Grantee. Ms. Kampling has served as
Manager of Finance for ComEd since May 1998. Ms. Kampling previously was
Assistant Treasurer of ComEd from 1991 to May 1998.
John C. Bukovski is a Manager of the Grantee. Mr. Bukovski has served as
Senior Vice President of Unicom and ComEd since 1997. From 1989 to 1997, he
served as Vice President of ComEd. Mr. Bukovski was appointed Chief Financial
Officer of ComEd in 1992, a position he also holds at Unicom.
Andrew L. Stidd is a Manager of the Grantee. Mr. Stidd has held the position
of President of Global Securitization Services, LLC since January 1998. He
served as Managing Director of Global Securitization Services, LLC between
December 1996 and December 1997. Prior to joining Global Securitization
Services, LLC, Mr. Stidd was Vice President and Director of Lord Securities
Corporation, where he was employed beginning in 1992.
Kevin P. Burns is a Manager of the Grantee. Mr. Burns has been a Vice
President of Global Securitization Services, LLC since December 1996. Prior to
joining Global Securitization Services, LLC, Mr. Burns served as a Director at
Lord Securities Corporation from 1992 to 1996. Prior to joining Lord Securities
in 1992, Mr. Burns was a fixed income analyst with Mabon Securities Corp. of New
York, New York.
The managers and any officers of the Grantee, other than the two managers
who are independent from ComEd (the "Independent Managers"), will not be
compensated by the Grantee for their services on behalf of the Grantee. The
initial annual compensation for both of the Independent Managers will be a total
of $3,500. Any officer will serve in such capacity at the discretion of ComEd,
as sole member of the Grantee. ComEd is an affiliate of the Grantee. The
Grantee's organizational documents provide that any officers and managers of the
Grantee shall be indemnified against liabilities incurred in connection with
their services on behalf of the Grantee.
74
<PAGE>
THE SERVICER
GENERAL
ComEd is engaged principally in the production, purchase, transmission,
distribution and sale of electricity to a diverse base of residential,
commercial, industrial and wholesale customers within its electric service
territory. ComEd's electric service territory currently consists of
approximately 11,300 square miles with an estimated population of approximately
8 million. During 1997, ComEd provided a total of 79,825 million kilowatt-hours
of electricity to 3.4 million retail customers.
ComEd is regulated by the ICC and the FERC.
COMED CUSTOMER BASE, ELECTRIC ENERGY CONSUMPTION AND BASE RATES
ComEd's customer base consists of five (5) revenue reporting classes (each,
a "Reporting Customer Class"): residential, small commercial and industrial,
large commercial and industrial, public authorities and electric railroads. The
Reporting Customer Classes are broad groups that include accounts with a wide
range of load characteristics served under a variety of rate designs. In order
to align the per kilowatt-hour IFC Charges with the electricity rate currently
paid by a Customer more closely than would occur using the Reporting Customer
Classes, each Transitional Funding Order will provide that for purposes of
billing IFC Charges, ComEd's customer base will be divided into the thirteen
(13) customer classes (each, an "IFC Customer Class") set forth below, and that
the total IFC Charges billed for each applicable period shall be allocated among
the IFC Customer Classes on the basis of their respective percentage of the 1996
base rate revenues of ComEd also set forth below. See "Description of the
Intangible Transition Property--Adjustments to the IFC Charges."
<TABLE>
<CAPTION>
PERCENTAGE OF
1996 BASE RATE
IFC CUSTOMER CLASS DESCRIPTION REVENUES(1)
- ------------------------------------ ------------------------------------ -------------------
<S> <C> <C>
Residential--No Space Heat Residential accounts without space 34.7
heating
Residential--Space Heat Residential accounts with space 3.8
heating
Standby Service Rate 18--Standby Service accounts 0.2
Interruptible Service Rider 26--Interruptible Service 1.3
accounts
Street Lighting--Fixture Based Rates Rate 23--Municipal Street Lighting 0.2
accounts and separately billed
Rate 26--Private Outdoor Lighting
accounts
Street Lighting--Dusk to Dawn and Accounts billed under Rate 0.4
Traffic Signal 25--Street, Highway and Traffic
Signal Lighting, as well as
contractual agreements for similar
services
Railroads Electric railroad customers using 0.4
electricity for traction power
Water-Supply and Sewage Pumping Accounts billed under Rate 0.7
Service 24--Water- Supply and Sewage
Pumping Service
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
1996 BASE RATE
IFC CUSTOMER CLASS DESCRIPTION REVENUES(1)
- ------------------------------------ ------------------------------------ -------------------
<S> <C> <C>
In Lieu of Demand Non-residential in lieu of demand 1.9
accounts
0 to and including 100 kW Demand Non-residential accounts with 13.2
highest billing demand during
previous billing year from 0 to
and including 100 kW
Over 100 to and including 1,000 kW Non-residential accounts with 20.1
Demand highest billing demand during
previous billing year over 100 to
and including 1,000 kW
Over 1,000 to and including 10,000 Non-residential accounts with 16.8
kW Demand highest billing demand during
previous billing year over 1,000
to and including 10,000 kW
Over 10,000 kW Demand Non-residential accounts with 6.1
highest billing demand during
previous billing year over 10,000
kW
</TABLE>
- --------------
(1) Total does not equal 100% due to rounding.
If the IFC Charges for any IFC Customer Class increase to an amount such
that the forecasted revenues from Applicable Rates for such IFC Customer Class
during a semiannual or quarterly period are projected to be less than the IFC
Charges allocated to such IFC Customer Class for the same period, the deficiency
shall, in accordance with the IFC Tariff, be ratably allocated among the
remaining IFC Customer Classes based on their percentages of the 1996 base rate
revenues, recalculated to exclude such IFC Customer Class.
The table below shows the electricity sales, billed revenues, number of
customers, and average revenues per kilowatt-hour for each of the five (5)
Reporting Customer Classes for the first nine months of 1998 and each of the
five (5) preceding years. Any updated information relating to the table below
will be set forth in a Prospectus Supplement. There can be no assurances that
the electricity sales, billed revenues, number of customers, average billed
revenues per kilowatt-hour or the composition of any of the foregoing will
remain at or near the levels reflected in the following table.
76
<PAGE>
BILLED ELECTRICITY SALES, BILLED REVENUES AND CUSTOMERS
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1) 1998(1)(2)
------------ ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BILLED ELECTRICITY SALES
(MILLIONS OF
KILOWATT-HOURS):
Residential................. 20,818 21,376 23,303 22,310 22,364 17,771
Small commercial and
industrial................ 23,463 24,320 25,313 25,131 26,038 20,337
Large commercial and
industrial................ 22,917 23,450 23,777 23,896 24,253 17,958
Public authorities.......... 6,741 6,885 7,158 7,336 7,387 5,329
Electric railroads.......... 405 397 390 424 423 306
------------ ------------ ------------ ------------ ------------ -------
Total..................... 74,344 76,428 79,941 79,097 80,465 61,721
------------ ------------ ------------ ------------ ------------ -------
------------ ------------ ------------ ------------ ------------ -------
BILLED REVENUES (MILLIONS):
Residential................. $ 2,341 $ 2,274 $ 2,621 $ 2,542 $ 2,574 $ 1,986
Small commercial and
industrial................ 1,963 1,917 2,074 2,114 2,167 1,683
Large commercial and
industrial................ 1,438 1,381 1,426 1,446 1,475 1,089
Public authorities.......... 474 453 487 503 510 376
Electric railroads.......... 27 26 27 29 30 18
------------ ------------ ------------ ------------ ------------ -------
Gross Total............... $ 6,243 $ 6,051 $ 6,635 $ 6,634 $ 6,756 $ 5,152
Provisions for revenue
refunds(3)................ (1,282) (16) (46)
------------ ------------ ------------ ------------ ------------ -------
Net Total................. $ 4,961 $ 6,035 $ 6,635 $ 6,634 $ 6,710 $ 5,152
------------ ------------ ------------ ------------ ------------ -------
------------ ------------ ------------ ------------ ------------ -------
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CUSTOMERS
(AT YEAR END)
Residential................. 3,009,508 3,047,354 3,079,381 3,102,101 3,123,364
Small commercial and
industrial................ 283,764 286,793 288,848 289,803 291,143
Large commercial and
industrial................ 1,503 1,528 1,539 1,550 1,566
Public authorities.......... 12,023 12,059 12,039 12,142 12,180
Electric railroads.......... 2 2 2 2 2
------------ ------------ ------------ ------------ ------------
Total..................... 3,306,800 3,347,736 3,381,809 3,405,598 3,428,255
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998(2)
------------ ------------ ------------ ------------ ------------ ----------------
AVERAGE BILLED REVENUE PER
KILOWATT-HOUR:
<S> <C> <C> <C> <C> <C> <C>
Residential (excluding light
bulb service)............. 11.21 CENTS 10.60 CENTS 11.22 CENTS 11.36 CENTS 11.47 CENTS 11.18 CENTS
Small commercial and
industrial................ 8.36 CENTS 7.88 CENTS 8.19 CENTS 8.41 CENTS 8.32 CENTS 8.28 CENTS
Large commercial and
industrial................ 6.27 CENTS 5.89 CENTS 6.00 CENTS 6.05 CENTS 6.08 CENTS 6.06 CENTS
Public authorities.......... 7.03 CENTS 6.57 CENTS 6.80 CENTS 6.86 CENTS 6.90 CENTS 7.06 CENTS
Electric railroads.......... 6.81 CENTS 6.60 CENTS 6.90 CENTS 7.00 CENTS 7.16 CENTS 5.88 CENTS
</TABLE>
- --------------
(1) In 1997, ComEd changed its method of accounting for revenue recognition,
retroactive to January 1, 1997, to record estimated revenue for services
delivered but not billed at the end of each accounting period. ComEd
reported sales to ultimate consumers for operating revenues of $6,663.7
million and $5,247 million for the year 1997 and the nine months ended
September 30, 1998, respectively, and for electricity sales of 79,825
million kilowatt-hours and 62,488 million kilowatt-hours for the year 1997
and the nine months ended September 30, 1998, respectively.
(2) Data is available for January 1, 1998 through September 30, 1998.
(3) In November, 1993, two settlements (the "Settlements") related to various
proceedings and matters concerning ComEd's rates (the "Rate Matters
Settlement") and its fuel adjustment clause (the "Fuel Matters Settlement")
became final. The recording of the effects of the Settlements in October
1993 reduced 1993 net income and net income on common stock by approximately
$354 million (after-tax), in addition to the approximately $160 million
(after-tax) effect of the deferred recognition of revenues and after the
partially offsetting effect of recording approximately $269 million
(after-tax) in deferred carrying charges authorized in the ICC rate order
issued in January, 1993. Refunds related to the Rate Matters Settlement, and
reduced fuel adjustment clause collections related to the Fuel Matters
Settlement, have been completed. The Amendatory Act allowed Utilities the
option to eliminate their fuel adjustment clause ("FAC") as of January 1,
1997. Due to the elimination of the FAC, ComEd recorded a provision for
revenue refunds in the fourth quarter of 1997.
Principal factors influencing the number and electricity usage of
residential customers include population growth, weather (I.E., air conditioning
usage and, to a lesser extent, electric space heating usage), price, increased
saturation of electric appliances, the availability of more energy-efficient
appliances, changes in technology, and customer income. Principal factors
influencing the number and electricity usage of commercial customers (which
consist primarily of wholesale and retail trade establishments) include
population growth, service area economic growth, commercial floor space and
commercial employment. Principal factors influencing industrial electricity
usage include overall economic activity, developments in processes and
technologies using electricity, and increases in the efficiency with which
industrial processes use electric energy.
For the year ended December 31, 1997, the 10 largest Customers represented
approximately 3.0% of ComEd's Billed Revenues. 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.
The table below shows the average revenue in cents per kilowatt-hour for
fully bundled services owed to ComEd for each of the thirteen (13) IFC Customer
Classes, based on tariffs then in effect but taking into account the fifteen
percent (15%) reduction in base rates for services charged to residential
78
<PAGE>
retail customers (based on ComEd's rates in effect immediately prior to January
1, 1998), effective as of August 1, 1998:
<TABLE>
<CAPTION>
AVERAGE REVENUE IN
CENTS PER KILOWATT-HOUR
IFC CUSTOMER CLASS FOR FULLY-BUNDLED SERVICES(1)
- ------------------------------------------------------------- -------------------------------
<S> <C>
Residential--No Space Heat................................... 10.41
Residential--Space Heat...................................... 6.87
Standby Service.............................................. 4.33
Interruptible Service........................................ 3.85
Street Lighting--Fixture Based Rates......................... 16.14
Street Lighting--Dusk to Dawn and Traffic Signal............. 5.17
Railroads.................................................... 7.16
Water-Supply and Sewage Pumping Service...................... 6.82
In Lieu of Demand............................................ 11.86
0 to and including 100 kW Demand............................. 9.30
Over 100 to and including 1,000 kW Demand.................... 7.47
Over 1,000 to and including 10,000 kW Demand................. 6.96
Over 10,000 kW Demand........................................ 5.09
</TABLE>
- --------------
(1) Based on year-end 1997 data and derived by dividing total revenue for each
IFC Customer Class (variable energy charge plus fixed demand/customer
charges) by total kilowatt-hour sales for such IFC Customer Class. Revenues
from the delivery service charges are expected to be materially lower than
revenues from rates for fully-bundled services, and may not be calculated in
the same manner. Revenues include decommissioning expense and miscellaneous
other items which will not be included in Applicable Rates.
FORECASTING ELECTRICITY CONSUMPTION
ComEd historically has prepared annual forecasts of electric energy
(kilowatt-hour) sales for the following year and several years thereafter. The
principal uses of the electric energy forecasts have been for shorter-term
budgeting and rate-setting purposes. ComEd has also prepared longer-term
forecasts of customer peak demand and energy consumption, primarily for use in
facilities planning. ComEd most recently updated its electric energy forecasting
models in 1997. Econometric and end-use models were developed for use in
forecasting electric energy sales to the residential, commercial and industrial
customer classes. These models forecast electric energy sales as a function of
electricity price, income, employment, weather and other economic factors that
influence electricity sales. Known and measurable industrial plant additions,
expansions and closures are incorporated into the electricity sales projections,
based on information obtained by account managers assigned to the larger
customer accounts. ComEd uses economic and demographic forecasts prepared by an
independent economic forecasting and consulting firm employed by ComEd
separately from any transaction contemplated by this Prospectus as inputs to its
forecasting models. Weather inputs to the forecasting models are based on
"normal" weather conditions which are based on thirty-year averages for heating
and cooling degree days.
FORECAST VARIANCE
ComEd conducts sales forecast variance analyses on a regular basis to
monitor how well forecasts track recorded consumption. This is important for
short-term resource procurement functions as well as budgeting and financial
reporting. In addition, ComEd will use its annual sales forecast to determine
the appropriate levels of IFC Charges from time to time. As a result, ComEd's
ability to accurately predict energy consumption may affect the timing of IFC
Payments.
79
<PAGE>
Since ComEd updates its forecast on an annual basis, the table below shows
annual variance for forecasts prepared for one year in the future. For example,
the annual 1993 variance is based on a forecast prepared in 1992. The variances
for the aggregate combined Reporting Customer Classes referred to in the table
below, which consist of all Reporting Customer Classes, range from a low of 0.6%
to a high of 4.5% in absolute terms. Any updated information relating to the
table below will be set forth in a Prospectus Supplement. There can be no
assurance that the future variance between actual and expected consumption in
the aggregate or by Reporting Customer Class will be similar to the historical
experience set forth below.
ANNUAL FORECAST VARIANCES
<TABLE>
<CAPTION>
ELECTRICITY SALES (MILLIONS OF KILOWATT-HOURS): 1993 1994 1995 1996 1997(1)
- ------------------------------------------------ --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Residential
Actual........................................ 20,818 21,376 23,303 22,310 22,364
Forecast...................................... 20,383 21,138 21,408 22,393 22,827
--------- --------- --------- --------- -----------
Variance...................................... (2.1%) (1.1%) (8.9%) 0.4% 2.0%
Small commercial and industrial
Actual........................................ 23,463 24,320 25,313 25,131 26,038
Forecast...................................... 23,485 23,764 24,082 24,843 25,772
--------- --------- --------- --------- -----------
Variance...................................... 0.1% (2.3%) (5.1%) (1.2%) (1.0%)
Large commercial and industrial
Actual........................................ 22,917 23,450 23,777 23,896 24,253
Forecast...................................... 22,820 23,229 23,567 23,895 24,510
--------- --------- --------- --------- -----------
Variance...................................... (0.4%) (1.0%) (0.9%) 0.0% 1.0%
Public authorities
Actual........................................ 6,741 6,885 7,158 7,336 7,387
Forecast...................................... 6,721 6,852 6,951 7,078 7,427
--------- --------- --------- --------- -----------
Variance...................................... (0.3%) (0.5%) (3.0%) (3.6%) 0.5%
Electric railroads
Actual........................................ 405 397 390 424 423
Forecast...................................... 442 452 458 395 436
--------- --------- --------- --------- -----------
Variance...................................... 8.4% 12.2% 14.8% (7.3%) 3.0%
Aggregate Combined Reporting Customer Classes:
Actual........................................ 74,344 76,428 79,941 79,097 80,465
Forecast...................................... 73,851 75,435 76,466 78,604 80,972
--------- --------- --------- --------- -----------
Variance...................................... (0.7%) (1.3%) (4.5%) (0.6%) 0.6%
</TABLE>
- --------------
(1) In 1997, ComEd changed its method of accounting for revenue recognition,
retroactive to January 1, 1997, to record estimated revenue for services
delivered but not billed at the end of each accounting period. ComEd
reported sales to ultimate consumers for operating revenues of $6,663.7
million for the year 1997 and for electricity sales of 79,825 million
kilowatt-hours for the year 1997.
During the last five years, no discernible trend is apparent with respect to
the historical forecast variance relating to any one Reporting Customer Class or
the aggregate combined Reporting Customer Classes referred to in the table
above. The variance for the aggregate combined Reporting Customer Classes has
ranged from a 4.5% underestimate of usage in the unseasonably warm year of 1995
to a 0.6% overestimate of usage, with an average inaccuracy of 1.5%.
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CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
ComEd's policies and procedures pertaining to credit (including requirements
for deposits from customers), billing, collections (including procedures for
disconnection of service for non-payment) and restoration of service after
disconnection, are subject to and controlled, to a material extent, by Illinois
statutory requirements, rules and regulations of the ICC and ComEd's filed
tariffs. These statutory provisions, ICC regulations and tariffs may change from
time to time. In addition, to the extent permitted by statutory provisions and
regulatory requirements, ComEd may change its policies and procedures and seek
approval of new tariffs governing these activities from time to time. ComEd will
agree, in each Grant Agreement and the Servicing Agreement, not to initiate any
such changes which are likely to adversely affect ComEd's ability to make timely
recovery of amounts billed to Customers, except for any such changes required by
applicable law. Under the Servicing Agreement, any such changes initiated by
ComEd will also apply to the servicing by ComEd, as the Servicer, of the
Intangible Transition Property.
CREDIT POLICY
Under Illinois law, ComEd is generally required to provide electric service
to all retail customers in its service area. ComEd's review of the credit
history of a new applicant for electric service generally consists of a review
to determine if the applicant has previously received service from ComEd and, if
so, whether there are any delinquent billed amounts outstanding. ComEd relies on
information provided by the applicant, and on its customer information system,
to determine whether ComEd has previously served the customer and whether any
delinquent billed amounts are outstanding. In accordance with ICC regulations,
deposits may be required from certain applicants for service or existing
customer accounts to protect ComEd against losses. Accounts from which deposits
are most frequently obtained are new commercial and industrial customers (I.E.,
applicants with limited or no credit history), and residential customers with
poor payment histories (as defined in ICC regulations). The maximum allowable
amount of the deposit is one-sixth of the projected annual billings to the
customer for residential and small business applicants or customers, and
one-third of projected annual billing for other non-residential customers.
One-third of a requested deposit must be paid by the customer within 12 days and
the balance within two billing periods. The deposit is refunded to a new
customer after one year if the customer has not been disconnected for
non-payment and has not paid a bill after the due date more than three times
during the year. The deposit is refunded to an existing customer after one year
if the customer has not been disconnected for non-payment, and has not paid a
bill after the due date more than five times during the year.
BILLING PROCESS
ComEd generally bills its customers once every 27 to 33 days, with
approximately an equal number of bills being distributed each Servicer Business
Day. Any day other than a Saturday, a Sunday or a day on which the Servicer's
offices are not open for business is a "Servicer Business Day." For the year
ending December 31, 1997, ComEd mailed out an average of 164,400 bills on each
Servicer Business Day to its various customer categories.
For accounts with potential billing errors exception reports are generated
for manual review. This review examines accounts that have abnormally high or
low bills, potential meter-reading errors and possible meter malfunctions.
ComEd may change its billing policies and procedures from time to time. It
is expected that any such changes would be designed to enhance ComEd's ability
to make timely recovery of amounts billed to customers.
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COLLECTION PROCESS
ComEd receives approximately 66 percent (66%) of total bill payments via the
U.S. mail. Approximately 27 percent (27%) of bill payments are received at local
offices and other pay offices. ComEd receives the remainder of payments via
automatic payment service, electronic funds transfer and electronic data
interchange.
Bills are processed and mailed to customers approximately three days after
the customer's meter is scheduled to be read. Bills are considered past due if
not paid within 21 calendar days for residential accounts and within 14 calendar
days for commercial and industrial accounts. Payment is considered timely if
received by mail not more than two days after the due date. These payment
periods are established by ICC regulations. In accordance with statutory
requirements and regulations pertaining to procurement by governmental entities,
certain federal customers are allowed 45 days to make net payment and certain
state, county and municipal customers are allowed 60 days to make net payment
and, in addition, ComEd may be limited under Illinois law in its ability to
impose late payment charges on such customers.
Under Illinois law, ComEd must waive one late payment charge incurred by a
residential customer during each twelve-month period. A reminder notice is
mailed to the customer if payment has not been received on the account by two
days after the due date of the most recent bill. If non-payment continues, a
service disconnection notice may be sent to the customer through operation of a
scoring system calculated by ComEd's customer information system. The scoring of
an account for this purpose is based on factors including the age of the
arrearage and the customer's years of service, non-sufficient funds payment
history, and disconnection history. When dictated by the scoring system, a
service disconnection notice is mailed to notify the customer of disconnection
activity scheduled for seven system days (ten calendar days) after the date of
the notice. If the scoring system does not dictate initiation of a service
disconnection notice, another reminder notice is included with the customer's
next bill.
Customers are entitled to enter into deferred payment arrangements in
accordance with statutory requirements, ICC regulations and ComEd's filed
tariffs. Such payment agreements allow the customer to make partial payments, or
to extend an arrearage, during periods of financial hardship. Service
disconnection is not implemented against a customer who has entered into and is
abiding by a payment agreement. In addition, Illinois statutory law and ICC
regulations prohibit Utilities from disconnecting service under certain
conditions, such as when the temperature is projected to be below 32 degrees
Fahrenheit or on weekends and holidays. ComEd may also be subject to agreements
with agencies administering the Low Income Home Energy Assistance Fund which
limits ComEd's ability to disconnect service to Customers with respect to whom
ComEd is receiving payments under that program.
ComEd sends an unpaid final bill to a database match service (Skip Alert) 40
days after the final bill issue date. An account is charged off as uncollectible
if payment is not received by 90 days after the final bill issue date. The
account is then given to a collection agency for an indefinite period.
ComEd may change its collection policies and procedures from time to time.
It is expected that any such changes would be designed to enhance ComEd's
ability to make timely recovery of amounts billed to customers.
RESTORATION OF SERVICE
Before restoring service that has been disconnected for non-payment, ComEd
has the right to require the payment of all of the following charges: (a) the
total amount owing on an account including any past-due balance, the current
billing, and a credit deposit, if requested; (b) any miscellaneous charges
associated with the reconnection of service (i.e., reconnection charges, field
collection charges, and/or returned item charges); (c) any charges assessed for
unusual costs incidental to the termination
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or restoration of service which have resulted from the customer's action or
negligence; and (d) any unpaid closing bills from other accounts in the name of
the customer of record.
ComEd may change its restoration of service policies and procedures from
time to time. It is expected that any such changes would be designed to enhance
ComEd's ability to make timely recovery of amounts billed to customers.
LOSS AND DELINQUENCY EXPERIENCE
The following table sets forth information relating to the total billed
revenues and net write-off experience of ComEd for each Reporting Customer Class
for the first nine months of 1998 and each of the five preceding years. Such
historical information is presented herein because ComEd's actual experience
with respect to net write-offs and delinquencies may affect the timing of IFC
Payments. Any updated information relating to the table below will be set forth
in a Prospectus Supplement. There can be no assurance that the future net
write-off experience in the aggregate or by Reporting Customer Class will be
similar to the historical experience set forth below. In addition, to the extent
that an ARES is providing consolidated billing for ComEd, there is no assurance
that such ARES will apply the same credit and collection policies and procedures
to Customers as would be applied by ComEd, as the Servicer.
TOTAL BILLED REVENUES
(IN MILLIONS)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1) 1998(1)(2)
--------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Residential................................ $ 2,341 $ 2,274 $ 2,621 $ 2,542 $ 2,574 $ 1,986
Small commercial and industrial............ 1,963 1,917 2,074 2,114 2,167 1,683
Large commercial and industrial............ 1,438 1,381 1,426 1,446 1,475 1,089
Public authorities......................... 474 453 487 503 510 376
Electric railroads......................... 27 26 27 29 30 18
--------- --------- --------- --------- ----------- -----------
Gross Total.............................. $ 6,243 $ 6,051 $ 6,635 $ 6,634 $ 6,756 $ 5,152
Provisions for revenue refunds(3).......... (1,282) (16) -- -- (46)
--------- --------- --------- --------- ----------- -----------
Net Total................................ $ 4,961 $ 6,035 $ 6,635 $ 6,634 $ 6,710 $ 5,152
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
</TABLE>
NET WRITE-OFFS(4)
(IN MILLIONS)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998(2)(5)
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Residential................................ $ 21.6 $ 17.9 $ 17.8 $ 28.1 $ 34.6 $ 19.4
Small commercial and industrial............ 7.1 6.0 6.5 9.1 9.7 8.5
Large commercial and industrial............ 2.0 2.8 1.6 3.0 2.2 2.1
Public authorities......................... 0.0 0.1 0.2 0.2 0.3 0.3
Electric railroads......................... -- -- -- -- -- --
--------- --------- --------- --------- --------- -----
Total.................................... $ 30.7 $ 26.8 $ 26.1 $ 40.4 $ 46.8 $ 30.3
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
</TABLE>
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<PAGE>
NET WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1) 1998(1)(2)
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Residential............................... 0.9% 0.8% 0.7% 1.1% 1.3% 1.1%
Small commercial and industrial........... 0.4% 0.3% 0.3% 0.4% 0.4% 0.5%
Large commercial and industrial........... 0.1% 0.2% 0.1% 0.2% 0.1% 0.2%
Public authorities........................ 0.0% 0.0% 0.0% 0.0% 0.1% 0.1%
Electric railroads........................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- -----
Total................................... 0.5% 0.4% 0.4% 0.6% 0.7% 0.6%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
- --------------
(1) In 1997, ComEd changed its method of accounting for revenue recognition,
retroactive to January 1, 1997, to record estimated revenue for services
delivered but not billed at the end of each accounting period. ComEd
reported sales to ultimate consumers for operating revenues of $6,663.7
million and $5,247 million for the year 1997 and the nine months ended
September 30, 1998, respectively, and for electricity sales of 79,825
million kilowatt-hours and 62,488 million kilowatt-hours for the year 1997
and the nine months ended September 30, 1998, respectively.
(2) Data is available for January 1, 1998 through September 30, 1998.
(3) In November, 1993, two settlements (the "Settlements") related to various
proceedings and matters concerning ComEd's rates (the "Rate Matters
Settlement") and its fuel adjustment clause (the "Fuel Matters Settlement")
became final. The recording of the effects of the Settlements in October
1993 reduced 1993 net income and net income on common stock by approximately
$354 million (after-tax), in addition to the approximately $160 million
(after-tax) effect of the deferred recognition of revenues and after the
partially offsetting effect of recording approximately $269 million
(after-tax) in deferred carrying charges authorized in the ICC rate order
issued in January, 1993. Refunds related to the Rate Matters Settlement, and
reduced fuel adjustment clause collections related to the Fuel Matters
Settlement, have been completed. The Amendatory Act allowed Utilities the
option to eliminate their fuel adjustment clause ("FAC") as of January 1,
1997. Due to the elimination of the FAC, ComEd recorded a provision for
revenue refunds in the fourth quarter of 1997.
(4) Net write-offs include any amounts recovered by ComEd from deposits,
bankruptcy proceedings and payments received after an account has been
closed.
(5) Due to ComEd's recent conversion to a new billing system, this information
has been estimated by ComEd for the third fiscal quarter.
When accounts are billed final, most bills are due 21 days later. If unpaid
after such 21-day period, a series of letters will be issued and the account
reported to ComEd's skip tracing program for internal and external matching. If
still unpaid after 90 days since the bill issue date, the account will be
written off and automatically referred to a collection agency.
On a monthly basis, net write-offs are simply the gross write-offs for the
month, less recoveries (payments and adjustments) for that month. Although, for
the most part, the write-offs are accounts that have reached the 90-day point
during any particular month, recoveries, while received during such month, could
be for accounts charged off in any previous period.
During the five-year period 1993 through 1997, ComEd's net write-offs have
exhibited a slight upward trend. In 1998, ComEd instituted two significant
changes in its collection process in an effort to reverse this trend. The first
is the implementation of the Field Billing Package negotiated in 1997 which,
among other things, changed certain employee work rules. These work rules
changes made it possible to field additional workers to perform service
disconnections in early 1998. Secondly, a tighter credit policy has been enacted
which includes both increased deposit collection for commercial customers
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and stricter guidelines for deferred payment arrangements. The reduction in
active delinquency and the reversal of the increasing write-off trend would
appear to indicate that this is an effective tactic.
DELINQUENCIES
The following table sets forth information relating to the delinquency
experience of ComEd for all Customers as a whole for the first nine months of
1998 and each of the five preceding years. Any updated information relating to
the table below will be set forth in a Prospectus Supplement. There can be no
assurance that the future delinquency experience will be similar to the
historical experience set forth below.
DELINQUENCY DATA(1)
PERCENTAGE OF DELINQUENT CUSTOMERS(2)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998(3)
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
19.3% 18.7% 19.9% 19.5% 18.2% 17.1%
</TABLE>
- --------------
(1) This information is used by ComEd to evaluate delinquency experience because
ComEd does not collect and maintain typical aging data.
(2) This delinquency data is only for customer accounts where service is still
being provided, i.e., active accounts. Once an account enters the write-off
stream, it is no longer an active account and is not included in delinquent
data. The write-off data on the previous table is compiled on a different
basis in that it reflects only customer accounts where service is no longer
provided, i.e., closed accounts. Payment is considered late if received by
mail more than two (2) days after the due date.
(3) Data is available only for January 1, 1998 through September 30, 1998. Due
to ComEd's recent conversion to a new billing system, this information has
been estimated by ComEd for the third fiscal quarter.
In general, a favorable trend is emerging in the reduction of the active
delinquent balance. This is the result of tightening of ComEd's credit policy in
1997. This policy strengthening included more aggressive collection of deposits
on commercial customers, fewer discretionary deferred payment plans and an
increased level of disconnection of service.
YEAR 2000 ISSUES
BACKGROUND
ComEd uses various software applications and embedded systems throughout its
businesses that will be affected by so-called "Year 2000 issues." These issues
may prevent an application or system from correctly processing dates up to the
year 2000 and beyond. Based on ComEd's current schedule for completion of Year
2000 tasks, ComEd believes that its planning is adequate to secure Year 2000
readiness of its critical systems. Nevertheless, achieving Year 2000 readiness
is subject to various risks and uncertainties and ComEd is not able to predict
all the factors that could cause actual results to differ materially from its
current expectations as to its Year 2000 readiness.
ComEd management has established a Year 2000 project team, currently
composed of over 300 members, including members of ComEd's senior management, to
address Year 2000 issues. The team is focused on three elements that are
integral to the project: business continuity, project management and risk
management. Business continuity involves the continuation of reliable electric
supply and service in a safe and cost-effective manner. Project management
involves defining and meeting the
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project scope, schedule and budget. Risk management involves customer
management, contingency planning and legal issues.
In addition to its internal efforts, ComEd is working with various industry
groups to coordinate electric utility industry Year 2000 efforts with the
Clinton Administration's Year 2000 Conversion Council, the Department of Energy
(the "DOE") and Congress. The DOE has asked one of these industry groups to
report on the integrity of the transmission system for North America and to
coordinate and assess the preparation of the electric systems in North America
for the Year 2000. An initial status report and coordination plan was submitted
by this industry group to the DOE in September of 1998, and a full status report
is due by July of 1999, as to the measures that are being taken to prepare
electric power supply and delivery systems for transition into the Year 2000.
STATE OF READINESS
Since July 1996, ComEd has been working to identify and address Year 2000
issues. ComEd's approach to identifying and addressing noncompliant software
applications and embedded systems consists of the following stages: inventory,
analysis, renovation, testing and deployment. In addition, ComEd is engaged in
contingency planning for Year 2000 problems. The first stage is to inventory all
applications and systems. The analysis stage involves assessing whether software
applications and embedded systems are Year 2000 compliant. The renovation stage
involves remediating or upgrading applications and systems to make them Year
2000 ready. The testing stage determines whether the renovated applications and
systems are Year 2000 ready. The deployment stage is when the tested
applications and systems are implemented. ComEd also has begun to develop
contingency plans to address the possibility that the applications and systems
may not be Year 2000 ready at the end of this process. An independent consultant
has been engaged to assist ComEd in the assessment of the process being used to
address the Year 2000 issue.
ComEd's Year 2000 project focuses on those facets of its business that are
required to deliver reliable electric service. The project encompasses the
computer systems that support core business functions such as customer
information and billing, finance, procurement, supply and personnel as well as
the components of metering, transmission, distribution and generation support.
The project also focuses on embedded systems, instrumentation and control
systems in facilities and plants. In accordance with business plans, ComEd has
replaced certain of its financial, human resources and customer service and
billing software, and is planning to replace its payroll system in early 1999,
with new software that is Year 2000 compliant and that addresses ComEd's
strategic needs as it enters a less regulated environment.
The following table summarizes the status as of September 30, 1998 of
ComEd's progress toward achieving Year 2000 readiness. The figures set forth in
the table represent the approximate extent to which ComEd has completed each
phase of its Year 2000 project for software applications and embedded systems.
<TABLE>
<CAPTION>
SOFTWARE APPLICATIONS EMBEDDED SYSTEMS
(PERCENTAGE COMPLETE) (PERCENTAGE COMPLETE)
--------------------------- ---------------------------
<S> <C> <C>
Inventory................... 99 97
Analysis.................... 58 70
Renovation.................. 47 5
Testing..................... 35 7
Deployment.................. 31 4
</TABLE>
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<PAGE>
The following is a brief summary of estimates of progress of the Year 2000
project and certain projected completion dates in each of ComEd's four critical
business areas--nuclear generation, fossil generation, transmission and
distribution and corporate information services:
- NUCLEAR GENERATION--Software applications inventory is 90% complete and
analysis is underway. Embedded systems inventory is 100% complete and
analysis is 84% complete. Eight of ten nuclear units are expected to be
Year 2000 ready in the first half of 1999. If Year 2000 modifications are
necessary, the two remaining units are expected to be made Year 2000 ready
during refueling outages previously scheduled for the fourth quarter of
1999.
- FOSSIL GENERATION--Software applications and embedded systems inventories
are 100% complete. Analysis is 32% complete for software applications and
56% complete for embedded systems. Deployment of software applications and
embedded systems is expected to be completed by May 30, 1999.
- TRANSMISSION AND DISTRIBUTION--Software applications and embedded systems
inventories are 100% complete. Analysis is 33% complete for software
applications and 56% complete for embedded systems. Testing and deployment
are each 20% complete for software applications. Deployment of software
applications and embedded systems is expected to be completed by May 30,
1999.
- CORPORATE INFORMATION SERVICES--Inventory is 100% complete. Analysis is
93% complete. Renovation is 88% complete. Deployment is 57% complete.
Deployment of software applications and embedded systems is expected to be
completed by December 31, 1998.
ComEd's current schedule is subject to change, depending on developments
that may arise through unforeseen business circumstances, and through
remediation and testing phases of its compliance effort. ComEd also depends upon
third parties, including customers, suppliers, government agencies and financial
institutions, to reliably deliver its products and services. ComEd has begun
implementing additional initiatives to assess the degree to which third parties
with whom it has business relationships are addressing Year 2000 issues. These
initiatives include analysis of the Year 2000 compliance programs of ComEd's
critical vendors and obtaining Year 2000 warranties in certain new contracts and
licenses. ComEd also has introduced protocols for assuring that software and
embedded systems remain Year 2000 compliant on a continuing basis. ComEd's
contingency planning is addressing mechanisms for preventing or mitigating
interruption caused by its suppliers. ComEd also has an outreach program in
place for communicating Year 2000 project information to residential and
business customers.
YEAR 2000 COSTS
ComEd estimates that the total cost of remediating or upgrading software
which would not otherwise be replaced in accordance with ComEd's business plans
is approximately $20 million, and the total cost of remediating or upgrading
embedded systems is approximately $20-40 million. Approximately $12.7 million
has been expended as of September 30, 1998 for external labor, hardware and
software costs, and for the costs of ComEd employees who are dedicated full-time
to the Year 2000 project. All of such costs are expensed as incurred. The
foregoing amounts do not include the cost of new software applications installed
as a result of strategic replacement projects described earlier. Such
replacement projects were not accelerated because of Year 2000 issues.
The cost of the project and the dates on which ComEd plans to complete its
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third parties' Year 2000 readiness and other
factors. Further, ComEd expects to incur additional costs after 1999 to
remediate and replace less critical software applications and embedded systems.
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<PAGE>
CONTINGENCY PLAN
ComEd has existing contingency plans in place for events such as extreme
heat, storms, equipment failures and accidents. ComEd is preparing Year 2000
contingency plans based on the framework of existing emergency management system
preparation and scenario development.
ComEd has begun the process of developing contingency plans to address the
most reasonably likely worst case scenarios that could occur in the event that
various Year 2000 issues are not resolved in a timely manner. ComEd expects to
submit the first draft of contingency plans to an industry group by December 31,
1998, as they have requested. Final plans are due to be submitted to such
industry group by June 30, 1999. Contingency planning is an ongoing process and
will continue through the fourth quarter of 1999.
ComEd is using an approach in its contingency planning process that has been
recognized by various industry groups. The phases of the process include:
business impact analysis, contingency planning and testing. ComEd's business
impact analysis requires business unit personnel to evaluate the impact of
mission-critical systems failures on ComEd's core business operations, focusing
on specific failure scenarios and how they can be mitigated. The necessary
conditions for enacting the plans will be documented along with the appropriate
personnel responsible in each of the business units should a Year 2000 failure
occur. Additionally, ComEd will participate in industry-wide readiness drills
scheduled for the spring and fall of 1999.
A failure to correct any critical Year 2000 processing problems prior to
January 1, 2000 could have material adverse operational and financial
consequences if the affected systems either cease to function or produce
erroneous data. For example, the Year 2000 issues could affect, among other
things, the ability of ComEd, as Servicer, and any ARES to bill and collect the
IFC Charges, both because of problems with their own systems and problems that
Customers may have in processing bills, and the ability of the Servicer and ARES
to meter usage. This could result in significant delays in IFC Collections and,
therefore, payments to Noteholders. The Year 2000 issues could also affect usage
by Customers if there are problems with the generation or distribution of
electricity which could cause the amount of Applicable Rates from which IFC
Charges will be deducted to be materially decreased or delayed. See "Risk
Factors--Reduction in Amount of Revenues from Applicable Rates."
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SERVICING
SERVICING PROCEDURES
The Servicer, on behalf of the Trust, will, among other things, manage,
service and administer, and make collections in respect of, the Intangible
Transition Property pursuant to the Servicing Agreement between the Servicer and
the Grantee. The Servicer's duties will also include filing IFC Tariffs with the
ICC to provide for billing and collection of the IFC Charges and the
corresponding adjustments in other charges billed to Customers, calculation and
billing of all amounts based on the IFC Charges, receipt and posting of all IFC
Payments, responding to inquiries of Customers and the ICC with respect to the
Intangible Transition Property and the IFC Charges, accounting for collections
and furnishing monthly, quarterly and annual statements to the Trust and the
Indenture Trustee and taking action in connection with periodic revisions to the
IFC Charges as described below. Pending deposit into the Collection Account, all
IFC Payments received by the Servicer may be invested by the Servicer at its own
risk and for its own benefit, and need not be segregated from other funds of the
Servicer. In the Servicing Agreement, the Servicer will agree to continue to
impose IFC Charges (or equivalent amounts), collect IFC Charges (or equivalent
amounts), and remit IFC Charges (or equivalent amounts), in accordance with the
Servicing Agreement and to ensure that the IFC Charges (or equivalent amounts)
are deducted from ComEd's Applicable Rates and other charges in accordance with
the Basic Documents until the retirement of the Notes, unless expressly
prohibited by law, court or regulatory order in effect at such time.
Each IFC Charge will be expressed as an amount in cents per kilowatt-hour of
electricity usage by the applicable Customer, regardless of whether the Customer
purchases its electricity from ComEd or from another electricity provider.
However, in any Billing Period in which the total IFC Charges to be billed to a
Customer exceeds the amount of Applicable Rates for which the Customer would
otherwise be billed, the Servicer will only bill such Customer an IFC Charge
equal to the amount of Applicable Rates which the Customer would otherwise be
billed. The Servicer expects the applicable IFC Charge to be separately
identified on each Customer's bill with an aggregate amount (which includes the
applicable IFC Charge) to be paid to the Servicer. Bills are sent to each
Customer every 27 to 33 days.
Except as otherwise required by law with respect to taxes or similar
governmental charges included in bills and invoices to Customers, to the extent
that there is a shortfall in the amounts received by the Servicer from (a)
Customers it bills directly or (b) a third-party collection agent, including an
ARES, such shortfall will be allocated by the Servicer in accordance with the
servicing standards set forth below FIRST, to the Trust and ComEd PRO RATA,
based on the amount of Customers' bills constituting IFC Charges, and the amount
constituting other fees and charges not constituting IFC Charges owed to ComEd
or any successor, respectively, until all kilowatt-hour charges, other than late
charges, are paid, and SECOND, such amount of late charges shall be allocated to
ComEd. If such amounts are billed and collected by ComEd for an ARES pursuant to
a consolidated billing arrangement, the total charges due to the ARES will also
be included in the proportional allocation of any partial payment. In the event
that an ARES or another Utility provides consolidated billing to Customers for
both the services provided by such ARES or other Utility and services provided
by ComEd, partial payments made to an ARES by such Customers are required by the
Act to be credited first to amounts due to ComEd's tariffed services (including
IFC Charges collected on behalf of Noteholders), and the Servicer will allocate
such payments as otherwise described above. Unless the Servicer is not the
provider of electric service to Customers, the Servicer will be entitled to
disconnect service to any Customer who fails to pay IFC Charges billed on behalf
of the Trust in accordance with the ICC's regulations and other applicable law
pertaining to disconnections, in the same manner as the Servicer may disconnect
the Customer for failure to pay any charges for tariffed service billed thereby.
In addition, the Servicer will agree to advance its own funds in order to
institute any action or proceeding necessary to compel performance by the ICC or
the State of Illinois of any of their obligations
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or duties under the Funding Law, any Transitional Funding Order or any IFC
Tariff, and to take such legal or administrative actions, including defending
against or instituting and pursuing legal actions and appearing or testifying in
hearings or similar proceedings, as may be necessary to block or overturn any
attempts to cause a repeal, modification of, supplement to or judicial
invalidation of, the Amendatory Act or the Transitional Funding Order or the
rights of holders of Intangible Transition Property by legislative enactment or
otherwise that would be adverse to the Grantee, the Trust or any Noteholders.
The Servicer would be entitled to reimbursement of its expenses advanced by it
in connection with such action or proceeding as an operating expense of the
Trust in accordance with the priority of payments as described in "Security for
the Notes--Allocations; Payments." The Servicer also will undertake to make
filings or initiate ICC proceedings to ensure that the dollar amount of
authorized Intangible Transition Property is adequate for the payment in full of
the Notes.
SERVICING STANDARDS AND COVENANTS
The Servicing Agreement will require the Servicer, in servicing and
administering the Intangible Transition Property, to employ or cause to be
employed procedures and exercise the same care it customarily employs and
exercises in servicing and administering bill collections for its own account.
Consistent with the foregoing, in addition to certain requirements described
in "The Servicer-- Credit Policy; Billing; Collections; Restoration of Service"
above, the Servicer may, in its own discretion, waive any late payment charge or
any other fee or charge relating to delinquent payments, if any, and may waive,
vary or modify any terms of payment of any amounts payable by a Customer, in
each case, if such waiver or action (a) would be in accordance with the
Servicer's customary practices or those of any successor Servicer with respect
to comparable assets that it services for itself, (b) would not materially
adversely affect the Noteholders and (c) would comply with applicable law. In
addition, the Servicer may write off any amounts that it deems uncollectible in
accordance with its customary practices.
In the Servicing Agreement, the Servicer will covenant that, in servicing
the Intangible Transition Property, it will: (a) manage, service, administer and
make collections in respect of the Intangible Transition Property with
reasonable care and in accordance with applicable law, including all applicable
guidelines of the ICC, using the same degree of care and diligence that the
Servicer exercises with respect to bill collections for its own account; (b)
follow customary standards, policies and procedures for the industry in
performing its duties as Servicer; (c) use all reasonable efforts, consistent
with its customary servicing procedures, to enforce, and maintain rights in
respect of, the Intangible Transition Property; (d) comply with all laws
applicable to and binding on it relating to the Intangible Transition Property;
and (e) make all required submissions and provide all required notifications to
the ICC with respect to Adjustments to the IFC Charges as described herein. The
Servicer will acknowledge and agree, to the fullest extent permitted by
applicable law, that its obligations under the Servicing Agreement shall remain
in effect notwithstanding any breach of the State Pledge, whether or not
contested, or subsequent invalidation of the Funding Law or any Transitional
Funding Order or related tariff, and that no such breach of the State Pledge or
invalidation shall excuse the Servicer from liability for any failure to perform
its covenants under the Servicing Agreement on account of any legal inability
stemming from such breach of the State Pledge or invalidation.
In addition, the Servicer will covenant that it will deduct and remit IFC
Charges paid by Customers under any contracts which provide that such Customer
is obligated thereunder to pay an amount equal to the amount of IFC Charges that
would be billed if the services provided under such contract were services
subject to Applicable Rates.
In the Servicing Agreement, the Servicer will indemnify, defend and hold
harmless the Grantee, the Trust, the Indenture Trustee, the Delaware Trustee and
the Noteholders against any costs, expenses, losses, claims, damages and
liabilities that may be imposed on, incurred by or asserted against any such
person as a result of (a) the Servicer's willful misconduct, bad faith, gross
negligence or reckless
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disregard in the performance of its duties or observance of its covenants under
the Servicing Agreement or (b) the Servicer's breach of any of its
representations or warranties thereunder.
REMITTANCES TO COLLECTION ACCOUNT
Under the terms of the IFC Tariff filed in connection with each Transitional
Funding Order, the Trust will begin to impose and collect the related IFC
Charges concurrently with the issuance of the Notes of any Series (each, a
"Series Issuance Date") and such right shall exist continuously thereafter in
accordance with the related Transitional Funding Order. The IFC Charges shall be
imposed and collected based upon the entire electricity consumption of Customers
included in bills issued to Customers on and after the related Series Issuance
Date, including that portion of the applicable Billing Period during which
electric service was provided prior to such Series Issuance Date.
The Servicing Agreement provides, among other things, that the Servicer will
collect the IFC Payments on behalf of the Trust, as assignee of the Grantee. The
Servicer will remit all IFC Payments to the Collection Account within two
Servicer Business Days of receipt (each, a "Daily Remittance Date") unless the
Monthly Remittance Conditions are met, in which case the Servicer will remit to
the Collection Account on the Servicer Business Day immediately preceding the
tenth day of each month (each such monthly date, a "Monthly Remittance Date")
all IFC Payments received by the Servicer during the immediately preceding
Billing Period (the "Monthly IFC Amount").
Because the Servicer does not track cash collections on bills rendered
within a particular Billing Period, amounts remitted to the Collection Account
with respect to IFC Charges included in bills issued to Customers during each
Billing Period will be based upon the actual amounts billed for each class of
Customers and the Servicer's estimation of write-offs and delinquencies for each
class of Customers, all in accordance with the servicing standards set forth
above.
Beginning with the Monthly Remittance Date following the end of the seventh
(7th) Billing Period after the related Series Issuance Date and on every Monthly
Remittance Date thereafter, the Servicer will calculate, in a manner which
conforms to the servicing standards set forth above, the amount of IFC Payments
received (the "Redetermined IFC Payments") with respect to the Billing Period
which is seven (7) Billing Periods prior to such Monthly Remittance Date (the
"Reconciled Billing Period"), and will reconcile such amount to the IFC Payments
for such Reconciled Billing Period previously remitted to the Collection Account
(the "Remitted IFC Payments"). If the Remitted IFC Payments remitted during any
Reconciled Billing Period exceed the Redetermined IFC Payments received during
such Reconciled Billing Period (an "Excess Remittance") or are less than the
Redetermined IFC Payments received during such Reconciled Billing Period (a
"Remittance Shortfall"), the Servicer shall (a) in the case of an Excess
Remittance, (i) reduce the amount(s) which the Servicer remits to the Collection
Account on such Monthly Remittance Date and each Monthly Remittance Date (or
Daily Remittance Date, as the case may be) thereafter until the entire amount of
such Excess Remittance has been recovered or (ii) immediately pay from the
General Subaccount or the Reserve Subaccount the amount of such Excess
Remittance; provided that the payment thereof will not prevent the Servicer from
making the payment of interest on the immediately following Payment Date, and
(b) in the case of a Remittance Shortfall, increase the amount which the
Servicer remits to the Collection Account on such Monthly Remittance Date by the
amount of such Remittance Shortfall, the increase coming from the Servicer's own
funds.
A "Billing Period" is a period created by dividing the calendar year into
twelve consecutive periods of approximately twenty-one (21) Servicer Business
Days each and represents the period for which the Servicer typically renders a
bill for electric service to each of its customers.
Due to difficulties in the implementation of ComEd's new computerized
billing system, ComEd is presently experiencing delays in the issuance of bills
to many large industrial customers and certain other customers. The Servicer
will covenant in the Servicing Agreement that, to the extent current billing
information for any IFC Customer Class is not available, the dollar amount of
IFC Charges billed for that
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class, for purposes of remitting IFC Collections, will be based on such class's
kilowatt usage in the same month of the preceding year (adjusted for normal
growth and unusual weather) until such time as the computer billing information
for that class is current. Any variances between such estimates and the actual
bills issued will be reconciled six Billing Periods later when ComEd reconciles
Remitted IFC Payments with the Redetermined IFC Payments as described above.
ComEd currently believes that substantially all bills will be current by the end
of February, 1999, at which time such usage estimates will no longer be needed,
and that the use of the above-described estimates will not adversely impact the
timing or amounts of IFC Collections.
The Servicing Agreement will require the Servicer to monitor ComEd's receipt
of any lump-sum payments of transition charges under Section 16-108(h) of the
Act, and, concurrently with such receipt, to set aside and allocate for the
benefit of the Trust, as proceeds of the Intangible Transition Property, an
amount equal to the product of (a) the IFC Charge which is then in effect for
such Customer at the time of receipt and (b) the total number of kilowatt-hours
utilized to compute the amount of such lump-sum transition charges. The
Servicing Agreement will also require the Servicer to monitor ComEd's receipt of
any revenues derived from condemnation proceedings, FERC stranded cost
recoveries or any other amounts which reflect compensation for lost revenues
which would otherwise have been attributable to Applicable Rates (collectively,
"Lost Revenue Recoveries"), and, concurrently with the receipt thereof, to set
aside and allocate for the benefit of the Trust, as proceeds of the Intangible
Transition Property, an amount equal to the product of (a) the total dollar
amount of such Lost Revenue Recoveries and (b) a fraction, (1) the numerator of
which equals the weighted average of the IFC Charges applicable to all classes
of Customers the revenues from which are included in the calculation of such
Lost Revenue Recoveries and (2) the denominator of which equals the weighted
average of the Applicable Rates charged to such Customers, with such weighted
averages to be in each case calculated based on the respective IFC Charges and
Applicable Rates applicable to such classes for the most recent calendar year
then ended.
NO SERVICER ADVANCES
The Servicer will not be obligated to, and consequently will not, make any
advances of interest or principal on the Notes.
SERVICING COMPENSATION
On each Payment Date, the Servicer will be entitled to receive the Servicing
Fee specified in the related Prospectus Supplement. The Servicing Fee (together
with any portion of the Servicing Fee that remains unpaid from prior Payment
Dates) will be paid solely to the extent funds are available therefor as
described under "Security for the Notes--Allocations; Payments." The Servicing
Fee will be paid prior to the distribution of any amounts in respect of interest
on and principal of the Notes. The Servicer will be entitled to retain as
additional compensation net investment income on IFC Payments received by the
Servicer prior to remittance thereof to the Collection Account and the portion
of late fees, if any, paid by Customers relating to the IFC Payments.
ALTERNATIVE RETAIL ELECTRIC SUPPLIERS AND OTHER THIRD-PARTY COLLECTORS
As part of the restructuring of the Illinois electric industry, certain
Customers will be allowed, beginning October 1, 1999, and all Customers will be
allowed as of May 1, 2002, to purchase electricity and related services from
ARES and from other Utilities rather than from ComEd. See "Electric Industry
Restructuring in Illinois--Alternative Retail Electric Suppliers." The
Amendatory Act requires ComEd to allow such ARES and other Utilities, pursuant
to a tariff to be filed by ComEd with, and approved by, the ICC, to issue a
single bill to any retail customer purchasing electricity or related services
from the ARES or other Utility and delivery services from ComEd for both the
services provided by the ARES or other Utility and the delivery services
provided by ComEd. The Amendatory Act provides that the tariff to be
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filed by ComEd shall (a) require partial payments made by retail customers to be
credited first to ComEd's tariffed services (which would include the IFC
Charges), (b) impose commercially reasonable terms with respect to credit and
collection, including requests for deposits, (c) retain ComEd's right to
disconnect retail customers, if it does not receive payment for its tariffed
services, in the same manner that it would be permitted to if it had billed for
the services itself, and (d) require an ARES or other Utility that elects this
billing option to include on each bill to retail customers an identification of
the Utility (I.E., ComEd) providing the delivery services and a listing of the
charges applicable to those services.
In addition, under ComEd's current practices, customers are allowed to pay
their electricity bills indirectly through use of third-party collection agents
such as currency exchanges, grocery stores, banks and similar entities which
offer payment of utility bills as a convenience to their customers. The ICC will
approve procedures in each Transitional Funding Order that would (a) require any
third party (including the collection agents described above and any ARES that
is required to collect IFC Charges) who bills or collects IFC Charges on behalf
of Customers to either (i) remit IFC Collections to the Servicer within seven
days of receipt or (ii) pay such IFC Charges to the Servicer within fifteen days
of billing by ComEd irrespective of whether payments have been received from the
ultimate customer, (b) allow the Servicer, within ten days after a default by
any such third party in remitting IFC Collections, to give notice thereof to the
defaulting entity and, if it does not receive payment or other response
initiating dispute resolution within five days thereafter, to assume or transfer
to another third party that defaulting entity's billing and collection
responsibilities with respect to the IFC Charges, (c) grant the Servicer access
to information on total monthly kilowatt usage by the applicable Customers not
otherwise available to the Servicer to the extent reasonably required for the
Servicer to calculate and, if applicable, bill the related IFC Charges owed by
such Customers, and (d) allow the Servicer, pursuant to a tariff subject to
applicable regulatory approval, to impose such other terms with respect to
credit and collection policies as may be reasonably necessary to prevent the
then current rating of the Notes from being withdrawn or downgraded. Each IFC
Tariff filed in connection with the related Transitional Funding Order will
require a third-party collection agent, including any ARES, which assumes
payment responsibilities under clause (a)(ii) above and which does not have
investment-grade credit ratings (at least BBB- or the equivalent) to post a
deposit or comparable security equal to one month's estimated IFC Collections
collected by such third-party collector.
In addition, each Transitional Funding Order will provide that (a) a
third-party collector who is or otherwise becomes obligated to remit payments to
ComEd on a more frequent basis than as set forth above shall remit the IFC
Charges at the same time as such other payments and (b) a third-party collector
disputing payments shall pay the disputed amount under protest (or make other
suitable financial arrangements) pending a hearing. Such procedures will be
described in each Transitional Funding Order and in the related IFC Tariff filed
by ComEd under the Act to authorize the imposition and collection of the related
IFC Charges. In the Servicing Agreement, the Servicer will agree to implement
procedures and policies to ensure that the remittance obligations of ARES and
other third-party collection agents are properly enforced, including maintaining
adequate records and information about such ARES or third-party collectors,
monitoring the performance of and payments by such ARES or third-party
collectors, enforcing the obligations of such ARES or third-party collectors and
implementing appropriate credit and collection policies. Nonetheless, there can
be no assurance that an ARES or other third-party collection agent will apply
the same credit and collection policies and procedures to Customers as would be
applied by ComEd. In addition, the Servicer will have no meaningful ability to
control the collection procedures of ARES or other third-party collection agents
who simply forward payments on behalf of Customers and not pursuant to
contractual arrangements with ComEd or pursuant to consolidated billing
procedures. See "Risk Factors--Potential Servicing Issues--Possible Payment
Delays Caused by Reliance on Alternative Retail Electric Suppliers and Other
Third-Party Collectors."
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SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the Servicer will make representations and
warranties to the Grantee, which will be assigned to the Trust, to the effect,
among other things, that: (a) the Servicer is a corporation duly organized and
in good standing under the laws of the State of Illinois, with power and
authority to own its properties and conduct its business as currently owned or
conducted and to execute, deliver and carry out the terms of the Servicing
Agreement; (b) the execution, delivery and carrying out of the Servicing
Agreement have been duly authorized by the Servicer by all necessary corporate
action; (c) the Servicing Agreement constitutes a legal, valid and binding
obligation of the Servicer, enforceable against the Servicer in accordance with
its terms, subject to applicable insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws relating to or affecting creditors'
rights generally from time to time in effect, and to general principles of
equity; (d) the consummation of the transactions contemplated by the Servicing
Agreement does not conflict with the Servicer's articles of incorporation or
bylaws or any agreement to which the Servicer is a party or bound, result in the
creation or imposition of any lien upon the Servicer's properties or violate any
law or any order, rule or regulation applicable to the Servicer; (e) the
Servicer has all licenses necessary for it to perform its obligations under the
Servicing Agreement (except where the failure to have such licenses would not be
reasonably likely to have a material adverse effect on the Servicer or an
adverse effect on the Intangible Transition Property); (f) no governmental
approvals, authorizations or filings are required for the Servicer to execute,
deliver and perform its obligations under the Servicing Agreement except those
which have previously been obtained or made and those which the Servicer is
required to make in the future; (g) except as disclosed in the Servicing
Agreement, no court or administrative proceeding or investigation is pending or,
to the Servicer's knowledge, threatened (i) asserting the invalidity of, or
seeking to prevent the consummation of the transactions contemplated by, the
Servicing Agreement, (ii) seeking a determination that might materially and
adversely affect the performance by the Servicer of its obligations thereunder,
or (iii) relating to the Servicer which could reasonably be expected to
adversely affect the federal or state income tax attributes of the Notes; and
(h) that the collection curve used to calculate the remittance amounts of IFC is
correct in all material respects.
In the event of a breach by the Servicer of any of its representations and
warranties described in the preceding paragraph, the Servicer will indemnify,
defend and hold harmless the Grantee, the Trust, the Indenture Trustee, the
Delaware Trustee and the Noteholders against any losses, claims, damages,
liabilities and reasonable costs or expenses incurred as a result thereof.
STATEMENTS BY SERVICER
On or before the 20th calendar day of each month, the Servicer will prepare
and furnish to the Grantee, the Trust, the Indenture Trustee and the Rating
Agencies a statement for the applicable calendar month (the "Monthly Servicer's
Statement") setting forth the aggregate amount of IFC Payments remitted by the
Servicer to the Collection Account and the Excess Remittance or the Remittance
Shortfall during the Billing Period immediately preceding such Monthly
Remittance Date. In addition, the Servicer will prepare, and the Indenture
Trustee will furnish to the Noteholders on each Payment Date, the quarterly
Servicer's Statement described under "Security for the Notes--Reports to
Noteholders."
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement will provide that a firm of independent public
accountants retained by the Servicer at the Servicer's expense will furnish to
the Grantee, the Trust, the Indenture Trustee and the Rating Agencies on or
before September 30 of each year, beginning September 30, 1999, a statement as
to compliance by the Servicer during the preceding twelve months ended June 30
with certain standards relating to the servicing of the Intangible Transition
Property. This report (the "Annual Accountant's Report") shall state that such
firm has performed certain procedures in connection with the Servicer's
compliance with the servicing procedures of the Servicing Agreement, identifying
the results of such
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procedures and including any exceptions noted. The Annual Accountant's Report
will also indicate that the accounting firm providing such report is independent
of the Servicer within the meaning of the Code of Professional Ethics of the
American Institute of Certified Public Accountants.
The Servicing Agreement will also provide for delivery to the Grantee, the
Trust, the Indenture Trustee and the Rating Agencies, on or before September 30
of each year, commencing September 30, 1999, of a certificate signed by an
officer of the Servicer stating that the Servicer has fulfilled its obligations
in all material respects under the Servicing Agreement throughout the preceding
twelve months ended June 30 (or in the case of the first such certificate, the
period from the closing date to June 30, 1999) or, if there has been a default
in the fulfillment of any such material obligation, describing each such
material default. The Servicer has agreed to give the Grantee, the Trust, the
Indenture Trustee and the Rating Agencies notice of certain Servicer Defaults
under the Servicing Agreement.
Copies of such statements and certificates may be obtained by Noteholders by
a request in writing addressed to the Indenture Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement will provide that ComEd may not resign from its
obligations and duties as Servicer thereunder, except upon (a) either (i) a
determination that ComEd's performance of such duties is no longer permissible
under applicable law, disregarding any breach of the State Pledge that is being
contested, or any subsequent invalidation of the Funding Law, any Transitional
Funding Order and/or the related IFC Tariff filed in connection therewith or
(ii) satisfaction of the Rating Agency Condition and (b) to the extent required
under any Transitional Funding Order, the approval by the ICC of such
resignation. No such resignation will become effective until a successor
Servicer has assumed ComEd's servicing obligations and duties under the
Servicing Agreement. The Servicer may perform its duties through agents or by
delegating them to a third party, but in any event the Servicer shall remain
liable for the performance of its duties and its obligations under the Servicing
Agreement and the other Basic Documents. Unless expressly reimbursable under the
Servicing Agreement, the fees and expenses of any such agent or third party
shall be paid by the Servicer.
The Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees, and agents will be under any
liability to the Grantee, the Indenture Trustee, the Trust, the Delaware
Trustee, the Noteholders or any other person, except as provided under the
Servicing Agreement, for taking any action or for refraining from taking any
action pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any liability that would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement will provide that the Servicer is under no obligation to
appear in, prosecute, or defend any legal action that is not related or
incidental to its servicing responsibilities under the Servicing Agreement and
that, in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the properties and assets of the Servicer substantially as a whole
or, with respect to its obligations as Servicer, which corporation or other
entity in each of the foregoing cases assumes the obligations of the Servicer,
will be the successor of the Servicer under the Servicing Agreement.
SERVICER DEFAULTS
"Servicer Defaults" under the Servicing Agreement will include, among other
things, (a) any failure by the Servicer to make any required deposit into the
Collection Account, which failure continues
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unremedied for three Servicer Business Days after written notice from the
Grantee, the Trust or the Indenture Trustee is received by the Servicer or after
discovery by the Servicer; (b) any failure by the Servicer or ComEd, as the case
may be, duly to observe or perform in any material respect any other covenant or
agreement in the Servicing Agreement or any other Basic Document to which it is
a party, which failure materially and adversely affects the rights of
Noteholders and which continues unremedied for 30 days after the giving of
notice of such failure (i) to the Servicer or ComEd, as the case may be, by the
Grantee or the Trust or (ii) to the Servicer or ComEd, as the case may be, by
holders of Notes evidencing not less than 25 percent in principal amount of the
outstanding Notes of all Series; (c) any representation or warranty made by the
Servicer in the Servicing Agreement shall prove to have been incorrect when
made, which has a material adverse effect on the Grantee, the Trust or the
Noteholders and which material adverse effect continues unremedied for a period
of 60 days after the giving of notice to the Servicer by the Grantee, the Trust
or the Indenture Trustee; and (d) certain events of insolvency or similar
proceedings with respect to the Servicer or the Grantee and certain actions by
the Servicer or the Grantee indicating its insolvency, reorganization pursuant
to bankruptcy proceedings, or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Servicing Agreement remains
unremedied, either the Indenture Trustee or Noteholders evidencing not less than
25 percent in principal amount of then outstanding Notes of all Series may by
written notice terminate all the rights and obligations of the Servicer (other
than the Servicer's indemnity obligation) under the Servicing Agreement,
whereupon a successor servicer appointed by the Trust, with the Grantee's prior
written consent, will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Servicing Agreement and will be entitled
to similar compensation arrangements. In addition, upon a Servicer Default, each
of the following shall be entitled to apply to the ICC for sequestration and
payment of revenues arising with respect to the Intangible Transition Property:
(1) the Noteholders and the Indenture Trustee as beneficiary of any statutory
lien permitted by the Funding Law; (2) the Grantee or its assignees; (3) the
Trust; or (4) pledgees or transferees of the Intangible Transition Property. If,
however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting a transfer of servicing. The Indenture Trustee may
appoint, or petition the ICC or a court of competent jurisdiction for the
appointment of, a successor servicer which satisfies criteria specified by the
Rating Agencies if, within 30 days after notice of termination is given, the
Trust shall not have appointed a successor servicer. The Indenture Trustee may
make such arrangements for compensation to be paid.
WAIVER OF PAST DEFAULTS
Noteholders holding at least a majority in principal amount of the then
outstanding Notes of all Series, on behalf of all Noteholders, may waive any
default by the Servicer in the performance of its obligations under the
Servicing Agreement and its consequences, except a default in making any
required deposits to the Collection Account in accordance with the Servicing
Agreement. The Servicing Agreement provides that no such waiver will impair the
Noteholders' rights with respect to subsequent defaults.
SUCCESSOR SERVICER
If for any reason a third party assumes the role of the Servicer under the
Servicing Agreement (such third party in such role, the "Successor Servicer"),
the Servicing Agreement will require the Servicer being replaced to cooperate
with the Grantee, the Trust, the Indenture Trustee and the Successor
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Servicer in terminating such replaced Servicer's rights and responsibilities
under the Servicing Agreement, including the transfer to the Successor Servicer
of all cash amounts then held by the Servicer for remittance or subsequently
acquired. The Servicing Agreement will provide that the Servicer shall be liable
for all reasonable out-of-pocket costs and expenses (including attorneys' fees
and expenses) incurred in transferring its servicing responsibilities to the
Successor Servicer. Any Successor Servicer must satisfy the requirements of the
Act.
AMENDMENT
The Servicing Agreement may be amended by the parties thereto, without the
consent of the Noteholders, but with five Business Days' prior written notice to
the Rating Agencies and the consent of the Indenture Trustee, to cure any
ambiguity, to correct or supplement any provision or for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of that agreement or of modifying in any manner the rights of the Noteholders,
provided that such action will not, as certified in a certificate of an officer
of the Servicer delivered to the Indenture Trustee, the Grantee and the Delaware
Trustee, adversely affect in any material respect the interest of any
Noteholder. The Servicing Agreement may also be amended by the Servicer and the
Grantee with the consent of the Indenture Trustee and the holders of Notes
evidencing at least a majority in principal amount of the then outstanding Notes
of all Series and Classes for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such agreement or
of modifying in any manner the rights of the Noteholders; provided, however,
that no such amendment may (a) increase or reduce in any manner the amount of,
or accelerate or delay the timing of, IFC Collections or (b) reduce the
aforesaid percentage of the Notes the holders of which are required to consent
to any such amendment, without the consent of the holders of all the outstanding
Notes.
TERMINATION
The obligations of the Servicer and the Grantee pursuant to the Servicing
Agreement will terminate upon the payment to the Noteholders and corresponding
distribution to the Noteholders of all amounts required to be paid or
distributed to them pursuant to the Servicing Agreement, the Notes and the
Indenture.
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DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Notes pursuant to the terms of an Indenture (the
"Indenture") between the Trust and the Indenture Trustee. The particular terms
of the Notes of any Series will be established in a supplement to the Indenture
or a trustee's issuance certificate and, in either case, the material terms
thereof will be described in the related Prospectus Supplement. Although all
material terms of the Notes and the Indenture have been disclosed in this
Prospectus, this summary does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, the terms and provisions of the
Indenture and related supplements or trustee's issuance certificates thereto,
forms of which are filed as exhibits to the Registration Statement.
The Notes may be issued in one or more Series, any one or more of which may
be comprised of one or more Classes. Classes of Notes may differ as to the
interest rate and the timing, sequential order and amount of payments of
principal or interest, or both. Each Series of Notes may include one or more
Classes of Notes that accrue interest at a variable rate based on the index
described in the related Prospectus Supplement. Each such Series will be secured
by a Swap Agreement, in addition to the security provided under the Indenture.
See "Floating Rate Notes" below. While the specific terms of only the Series of
Notes (and the Classes of such Series (if any)) in respect of which this
Prospectus is being delivered will be described in the related Prospectus
Supplement, the terms of such Series and any Classes thereof will not be subject
to prior review of or consent of the holders of outstanding Notes. All Notes of
the same Series will be identical in all respects except for the denominations
thereof, unless such Series is comprised of more than one Class, in which case
all Notes of the same Class will be identical in all respects except for the
denominations thereof.
All Notes issued under the Indenture will be payable solely from, and
secured solely by, a pledge of and lien on the Intangible Transition Property
and the other Note Collateral as provided in the Indenture. See "Security for
the Notes--Pledge of Note Collateral." All Notes issued under the Indenture,
irrespective of when issued, shall have a parity lien on the Note Collateral,
although Floating Rate Notes shall also be secured by a Swap Agreement which
relates solely to such Series. See "--Conditions of Issuance of Additional
Series."
The Prospectus Supplement for a Series of Notes will describe the following
terms of such Series of Notes and, if applicable, the Classes thereof: (a) the
designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues (the "Note
Interest Rate"), (d) the Payment Dates, (e) the scheduled maturity date (the
"Scheduled Maturity Date") and the final termination date of the Series (the
"Final Maturity Date"), (f) the initial Reconciliation Payment Date and the
initial True-Up Payment Date, (g) the Series Issuance Date of such Series, (h)
the place or places for the payment of principal, (i) the authorized
denominations, (j) the provisions for optional redemption of such Series or
Class, (k) the Expected Amortization Schedule for principal of such Series and,
if applicable, the Classes thereof, (l) the IFC Charges as of the Series
Issuance Date of such Series of Notes and the portion of total IFC Charges
authorized and initially imposed in connection with such issuance, (m) the total
dollar amount of Intangible Transition Property authorized by the related
Transitional Funding Order, (n) any other material terms of such Class that are
not inconsistent with the provisions of the Notes and that will not result in
any Rating Agency reducing or withdrawing its then current rating of any
outstanding Class of Notes (the notification in writing by each Rating Agency to
the Servicer, the Grantee, the Indenture Trustee and the Delaware Trustee that
any action will not result in such a reduction or withdrawal is referred to
herein as the "Rating Agency Condition"), (o) the identity of the Indenture
Trustee and the Delaware Trustee, and (p) the terms of any Swap Agreement
executed solely to permit the issuance of Floating Rate Notes and the identity
of any swap counterparty related thereto.
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The Notes do not constitute a debt, liability or other obligation of the
State of Illinois or of any political subdivision, agency or instrumentality
thereof and do not represent an interest in or obligation of ComEd or any of its
affiliates. The Notes will not be guaranteed or insured by ComEd or any of its
affiliates. Transitional Funding Orders authorizing issuance of the Notes do not
constitute a pledge of the full faith and credit of the State of Illinois or of
any of its political subdivisions. The issuance of the Notes under the Funding
Law shall not directly, indirectly or contingently obligate the State of
Illinois or any political subdivision thereof to levy or to pledge any form of
taxation therefor or to make any appropriation for their payment.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of a Class of Notes at the per
annum rate either specified in or determined in the manner specified in the
related Prospectus Supplement and will be payable on the Payment Dates specified
in the related Prospectus Supplement. IFC Collections, including such amounts as
are available in the Reserve Subaccount, the Overcollateralization Subaccount
and, if necessary, the amounts available in the Capital Subaccount, will be used
to make interest payments to the Noteholders of each Class on each Payment Date
with respect thereto. See "Security for the Notes--Allocations; Payments."
Principal of the Notes of each Class will be payable in the amounts and on
the Payment Dates specified in the related Prospectus Supplement, but only to
the extent that amounts in the Collection Account are available therefor, and
subject to the other limitations described below. See "Security for the
Notes--Allocations; Payments." Each Prospectus Supplement will set forth the
Expected Amortization Schedule for each Series of Notes and, if applicable, the
Classes of such Series. On any Payment Date, unless an Event of Default has
occurred and is continuing and the Notes have been declared due and payable, the
Indenture Trustee will make principal payments on the Notes only until the
outstanding principal balances thereof have been reduced to the principal
balances specified in the applicable Expected Amortization Schedule for such
Payment Date (each, a "Scheduled Payment"). Any IFC Collections in excess of
amounts payable as (a) expenses of the Grantee, the Delaware Trustee and the
Indenture Trustee (including the Servicing Fee and Quarterly Administration
Fee), (b) payments of interest on and principal of the Notes, (c) allocations to
the Capital Subaccount, and (d) allocations to the Overcollateralization
Subaccount (all as described under "Security for the Notes--Allocations;
Payments") will be retained by the Indenture Trustee in the Reserve Subaccount
for payment on subsequent Payment Dates. However, if insufficient IFC
Collections are received with respect to any Payment Date, and amounts in the
Collection Account are not sufficient to make up the shortfall, principal of any
Class of Notes may be payable later than expected as described herein. See "Risk
Factors--Uncertain Payment Amounts and Weighted Average Life." The entire unpaid
principal amount of the Notes of all Series will be due and payable on the date
on which an Event of Default (other than a breach by the State of Illinois of
the State Pledge) has occurred and is continuing, if the Indenture Trustee or
the holders of not less than a majority in principal amount of the Notes of all
Series then outstanding have declared the Notes to be immediately due and
payable. See "Security for the Notes--Events of Default; Rights Upon Event of
Default."
Unless the context requires otherwise, all references in this Prospectus to
principal of the Notes of a Series includes any premium that might be payable
thereon if Notes of such Series are redeemed, as described in the related
Prospectus Supplement.
PAYMENTS ON THE NOTES
The Indenture Trustee will distribute on each Payment Date to the holders of
each Class of Notes all payments of principal and interest then due with respect
thereto (other than Special Payments, as defined in the Indenture) or, in the
case of Floating Rate Notes, in lieu of such interest, payments under any
related Swap Agreement with respect to interest. Each such payment other than
the final payment
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with respect to any Note will be made by the Indenture Trustee to the holders of
record of the Notes of the applicable Class on the Record Date in respect of
such Payment Date. The final payment with respect to any Note, however, will be
made only upon presentation and surrender of such Note at the office or agency
of the Indenture Trustee specified in the notice given by the Indenture Trustee
with respect to such final payment.
If interest on the Notes of any Series is not paid when due, such defaulted
interest shall be paid (plus interest on such defaulted interest at the
applicable Note Interest Rate to the extent lawful) to the persons who are
Noteholders on a subsequent Special Record Date (as defined in the Indenture),
which date shall be at least five Business Days prior to the Special Payment
Date (as defined in the Indenture). The Trust shall fix or cause to be fixed any
such Special Record Date and Special Payment Date, and, at least 20 days before
any such Special Record Date, the Trust shall mail to each affected Noteholder a
notice that states the Special Record Date, the Special Payment Date and the
amount of defaulted interest (plus interest on such defaulted interest) to be
paid.
At such time, if any, as the Notes of any Series are issued in the form of
Definitive Notes and not to DTC or its nominee, payments by the Indenture
Trustee with respect to such Class on a Payment Date or a Special Payment Date
will be made by check mailed to each holder of a Definitive Note of such Class
of record on the applicable Record Date at its address appearing on the register
maintained with respect to the Notes of such Series, or, upon application by a
holder of any Class of Notes in the principal amount of $10,000,000 or more to
the Indenture Trustee not later than the applicable Record Date, by wire
transfer to an account maintained by the payee in New York, New York. The final
payment for each Class of Notes, however, will be made only upon presentation
and surrender of the Notes of such Class at the office or agency of the
Indenture Trustee specified in the notice given by the Indenture Trustee of such
final payment. The Indenture Trustee will mail such notice of the final payment
to the Noteholders of such Class no later than five days prior to such final
payment date, specifying the date set for such final payment and the amount of
such payment.
If any Special Payment Date or other date specified herein for distribution
of any payments to Noteholders is not a Business Day, payments scheduled to be
made on such Special Payment Date or other date may be made on the next
succeeding Business Day and no interest shall accrue upon such payment during
the intervening period. "Business Day" means any day other than a Saturday, a
Sunday or a day on which banking institutions or trust companies in New York,
New York, Wilmington, Delaware, or Chicago, Illinois are, or DTC is, authorized
or obligated by law, regulation or executive order to remain closed.
FLOATING RATE NOTES
If any Floating Rate Notes of any Class are offered, the Trust will enter
into one or more swap agreements (each, a "Swap Agreement") with a swap
counterparty identified and having the terms described in the related Prospectus
Supplement. Generally, pursuant to a Swap Agreement, on each Payment Date, the
Trust will be obligated to pay to the swap counterparty, solely from payments
received with respect to such Class of Notes, an amount equal to the interest
due on such Class of Notes on such Payment Date, and the swap counterparty will
be obligated to pay to the Trust an amount equal to the product of (a) the
floating rate and (b) the principal balance of the Floating Rate Notes as of the
close of business on the preceding Payment Date after giving effect to all
payments of principal made to the Floating Rate Noteholders on such preceding
Payment Date. See "Risk Factors--Additional Risks of Floating Rate Notes."
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NO THIRD-PARTY CREDIT ENHANCEMENT
It is not currently anticipated that the Notes will have the benefit of any
third-party credit enhancement, such as guarantees, letters of credit, insurance
or the like. If, however, any Series of Notes is to be issued with any
third-party credit enhancement, it will be set forth in the related Prospectus
Supplement.
REGISTRATION AND TRANSFER OF THE NOTES
If so specified in the related Prospectus Supplement, one or more Classes of
Notes will be issued in definitive form and will be transferable and
exchangeable at the office of the registrar identified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, no
service charge will be made for any such registration or transfer of such Notes,
but the owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
Each Class of Notes will be issued in the minimum initial denominations set
forth in the related Prospectus Supplement and, except as otherwise provided in
the related Prospectus Supplement, in integral multiples thereof.
Payments of interest and principal will be made on each Payment Date to the
Noteholders in whose names the Notes were registered on the related Record Date.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, one or more Classes of
Notes initially may be Book-Entry Notes, which are initially represented by one
or more Notes registered in the name of Cede, as nominee of DTC, or another
securities depository, and are available only in the form of book-entries. Any
Book-Entry Notes will initially be registered in the name of Cede, the nominee
of DTC. Holders may also hold Notes of a Class through Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") or the Euroclear System ("Euroclear") (in
Europe), if they are participants in such systems or indirectly through
organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Note or Notes. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective Depositaries (as defined herein) which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC. Citibank, N.A. will act as depositary for CEDEL and Morgan
Guaranty Trust Company of New York will act as depositary for Euroclear (in such
capacities, the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations, which are the Participants, and facilitate the settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of securities. Participants include underwriters, securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to Indirect Participants, which are others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their respective
rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary. Cross-market transactions will require delivery of instructions
to the relevant European international clearing system by the counterparty in
such system in accordance with its rules 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 notes in DTC, and making or receiving
distributions in accordance with normal procedures for same-day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Business Day following the DTC
settlement date. Such credits or any transactions in such Notes settled during
such processing will be reported to the relevant Euroclear or CEDEL Participant
on such Business Day. Cash received in CEDEL or Euroclear as a result of sales
of Notes by or through a CEDEL Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
Business Day following settlement in DTC.
Noteholders that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in, Notes
may do so only through Participants and Indirect Participants. In addition,
Noteholders will receive all payments of principal of and interest on the Notes
from the Indenture Trustee through DTC and its Participants. Under a book-entry
format, Noteholders will receive payments after the related Payment Date, as the
case may be, because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward them to Indirect
Participants or holders of beneficial interests in the Notes. The Indenture
Trustee, the Grantee, the Servicer and any paying agent, transfer agent or
registrar may treat the registered holder in whose name any Note is registered
(expected to be Cede) as the absolute owner thereof (whether or not such Note is
overdue and notwithstanding any notice of ownership or writing thereon or any
notice to the contrary) for the purpose of making payments and for all other
purposes.
Unless and until Definitive Notes (as defined below) are issued, it is
anticipated that the only "holder" of Book-Entry Notes of any Series will be
Cede, as nominee of DTC. Noteholders will only be permitted to exercise their
rights as Noteholders indirectly through Participants and DTC. All references
herein to actions by Noteholders thus refer to actions taken by DTC upon
instructions from its Participants, and all references herein to payments,
notices, reports and statements to Noteholders refer to payments, notices,
reports and statements to Cede, as the registered holder of the Notes, for
distribution to the beneficial owners of the Notes in accordance with DTC
procedures.
While any Book-Entry Notes of a Series are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Notes and is required to receive and transmit payments
of principal of, and interest on, the Book-Entry Notes. Participants with whom
Noteholders have accounts with respect to Book-Entry Notes are similarly
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Noteholders. Accordingly, although Noteholders will
not possess physical notes, the Rules provide a mechanism by which Noteholders
will receive payments and will be able to transfer their interests.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Notes to pledge Notes to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
Notes, may be limited due to the lack of a Definitive Note for such Notes.
DTC has advised the Indenture Trustee that it will take any action permitted
to be taken by a Noteholder under the Indenture and the related Prospectus
Supplement only at the direction of one or more Participants to whose account
with DTC the Notes are credited. Additionally, DTC has advised the Indenture
Trustee that it may take actions with respect to the Noteholders' interest that
might conflict with other of its actions with respect thereto.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to a Series of Notes offered hereby. Indirect access to CEDEL is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a CEDEL Participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 29 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the "Euroclear
Operator"), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a
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fungible basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Payments with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant systems' rules and procedures, to the extent
received by its Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States federal tax laws and regulations. See
"Material United States Federal Tax Consequences" herein. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Noteholder under the Indenture or the relevant Prospectus Supplement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DEFINITIVE NOTES
Notes of a Series will be issued in registered form to Noteholders, or their
nominees, rather than to DTC (such Notes being referred to herein as "Definitive
Notes") only under the circumstances provided in the Indenture, which will
include, (a) the Administrator (initially, ComEd) advising the Indenture Trustee
in writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the Book-Entry Notes
of such Series and the Administrator being unable to locate a qualified
successor, (b) the Administrator (with written notice to the Indenture Trustee)
electing to terminate the book-entry system through DTC, or (c) after the
occurrence of a Servicer Default, holders of Notes representing not less than 50
percent of the aggregate outstanding principal amount of the Notes of any Series
maintained as Book-Entry Notes advising the Indenture Trustee, the
Administrator, the Trust and DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Noteholders of such Series. Upon issuance of Definitive Notes of a
Series, such Notes will be transferable directly (and not exclusively on a
book-entry basis) and registered holders will deal directly with the Indenture
Trustee with respect to transfers, notices and payments.
Upon surrender by DTC of the definitive securities representing the Notes
and instructions for registration, the Indenture Trustee will issue the Notes in
the form of Definitive Notes, and thereafter the Indenture Trustee will
recognize the holders of such Definitive Notes as Noteholders under the
Indenture.
Payment of principal of and interest on the Notes will be made by the
Indenture Trustee directly to Noteholders in accordance with the procedures set
forth herein and in the Indenture and the related Prospectus Supplement.
Interest payments and principal payments will be made to Noteholders in whose
names the Definitive Notes were registered at the close of business on the
related Record Date. Payments will be made by check mailed to the address of
such Noteholder as it appears on the register maintained by the Indenture
Trustee or in such other manner as may be provided in the related trustee's
issuance certificate or supplement to the Indenture and except that certain
payments will be made by wire transfer as described in the Indenture. The final
payment on any Note (whether Definitive Notes or Notes registered in the name of
Cede), however, will be made only upon presentation and surrender of such Note
on the final payment date at such office or agency as is specified in the notice
of final payment to Noteholders. The Indenture Trustee will provide such notice
to registered Noteholders not later than the fifth day prior to the Final
Payment Date.
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Definitive Notes will be transferable and exchangeable at the offices of the
transfer agent and registrar, which initially will be the Indenture Trustee. No
service charge will be imposed for any registration of transfer or exchange, but
the transfer agent and registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
OPTIONAL REDEMPTION
Pursuant to the terms of the Indenture, a Series of Notes may be redeemed on
any Payment Date if, after giving effect to payments that would otherwise be
made on such date, the outstanding principal balance of such Series of Notes has
been reduced to less than five percent of the initial principal balance thereof.
If specified in the Prospectus Supplement related to any Series or Class of
Notes, the Indenture may also permit the redemption of such Series or Class of
Notes in full for cash on any Payment Date on or prior to December 31, 2004
using proceeds received from the issuance of any additional Series or Class of
Notes (the "New Notes"). The New Notes will be payable solely out of the
Intangible Transition Property and other Note Collateral and will have no more
than a PARI PASSU lien thereon VIS-A-VIS all existing Series of Notes. In
addition, a Series of Notes shall be subject to redemption if and to the extent
provided in the related Prospectus Supplement.
No redemption shall be permitted under the Indenture unless each Rating
Agency (other than Moody's, to which prior written notice will be given) with
respect to any Notes that will remain outstanding after such redemption shall
have affirmed the then current rating of all such outstanding Notes. Upon any
redemption of any Series or Class of Notes, the Trust will have no further
obligations under the Indenture with respect thereto. The Notes may be so
redeemed in all instances of optional redemptions permitted by the Indenture
upon payment of the outstanding principal amount of the Notes to be redeemed and
accrued but unpaid interest thereon as of the date of redemption. Notice of such
redemption will be given by the Trust to the Indenture Trustee and the Rating
Agencies not less than 25 days nor more than 50 days prior to the date of
redemption, and written notice shall also be given to each holder of Notes to be
redeemed by first-class mail, postage prepaid, mailed not less than five days
nor more than 25 days prior to the applicable date of redemption.
CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES AND ACQUISITION OF SUBSEQUENT
INTANGIBLE TRANSITION PROPERTY
The Trust's acquisition of Subsequent Intangible Transition Property and
issuance of any additional Series of Notes with respect thereto is subject to
the following conditions, among others:
(a) appropriate documentation required by the Indenture and Trust
Agreement, including supplements thereto, shall have been authorized,
executed and delivered by all parties required to do so by the terms of the
relevant documents;
(b) the Grantee shall have irrevocably assigned all of its right, title
and interest in such Subsequent Intangible Transition Property to the Trust
and a filing required by Section 18-107 of the Act shall have been made with
respect to such assignment;
(c) the Rating Agency Condition shall have been satisfied with respect
to such transactions;
(d) ComEd shall have delivered to the Grantee, the Trust, the Delaware
Trustee and the Indenture Trustee an opinion of independent tax counsel
and/or a ruling from the IRS (as selected by, and in form and substance
reasonably satisfactory to, ComEd) to the effect that, for federal income
tax purposes, (i) such issuance, and the transfer of the Note proceeds to
ComEd, will not result in gross income to the Grantee, the Trust or ComEd
and (ii) such issuance will not adversely affect the characterization of the
then outstanding Notes as obligations of ComEd;
(e) no Event of Default shall have occurred and be continuing under the
Indenture;
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(f) as of the date of issuance, the Trust shall have sufficient funds
available to pay the purchase price for such Subsequent Intangible
Transition Property, and all conditions to the issuance of a new series of
Notes shall have been satisfied or waived; and
(g) delivery by the Trust to the Indenture Trustee of certain
certificates and opinions specified in the Indenture.
LIST OF NOTEHOLDERS
Upon written request of any Noteholder or group of Noteholders of any Series
or of all outstanding Series of Notes evidencing not less than 10 percent of the
aggregate outstanding principal amount of the Notes of such Series or all
Series, as applicable, the Indenture Trustee will afford such Noteholder or
Noteholders access during business hours to the current list of Noteholders of
such Series or of all outstanding Series, as the case may be, for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture.
The Indenture does not provide for any annual or other meetings of
Noteholders.
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SECURITY FOR THE NOTES
GENERAL
The Notes issued under the Indenture are payable solely from and secured
solely by a pledge of and lien of the Intangible Transition Property and the
other Note Collateral as provided in the Indenture. See "Description of the
Intangible Transition Property." As noted under the heading, "Description of the
Notes," the Trust will issue the Notes pursuant to the terms of the Indenture.
The particular terms of the Notes of any Series will be established in a
supplement to the Indenture or a trustee's issuance certificate and material
terms thereof will be described in the Prospectus Supplement for the related
Series of Notes.
This summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the terms and provisions of the
Indenture and supplements or trustee's issuance certificate related thereto,
forms of which are filed as exhibits to the Registration Statement.
PLEDGE OF NOTE COLLATERAL
To secure the payment of principal of and interest on the Notes, the Trust
will grant to the Indenture Trustee a security interest in all of the Trust's
right, title and interest in and to (a) all of the Intangible Transition
Property and, to the fullest extent permitted by law, all proceeds thereof, (b)
the Grant Agreements, Sale Agreements and Servicing Agreement, (c) the
Collection Account and all amounts of cash or investment property on deposit
therein or credited thereto from time to time, (d) with respect to Floating Rate
Notes only, any Swap Agreement entered into with respect to the issuance of such
Floating Rate Notes, (e) all rights to compel ComEd, as Servicer (or any
successor), to file for and obtain adjustments to the IFC Charges in accordance
with Section 18-104(d) of the Act, the Transitional Funding Orders and all IFC
Tariffs filed with the ICC in connection therewith, (f) all present and future
claims, demands, causes and choses in action in respect of any or all of the
foregoing and all payments on or under the foregoing and (g) all proceeds in
respect of any or all of the foregoing; provided, however, that (1) the cash
transferred to the Trust by the Grantee which is not held in the Capital
Subaccount, including cash that has been released to the Grantee or as it
directs following retirement of all Series of Notes, (2) net investment earnings
which have been released to the Trust by the Indenture Trustee pursuant to the
terms of the Indenture, (3) the Overcollateralization Amount that has been
released to the Grantee or as it directs following retirement of all Series of
Notes, and (4) amounts deposited with the Trust on any Series Issuance Date for
payment of costs of issuance with respect to the related Series of Notes
(together with any interest earnings thereon) will not be covered by the
foregoing security interest. The foregoing assets to which the Trust, as
assignee of the Grantee, will grant the Indenture Trustee a security interest
are referred to collectively as the "Note Collateral" herein.
SECURITY INTEREST IN NOTE COLLATERAL
CREATION AND PERFECTION OF SECURITY INTEREST UNDER THE ACT
Section 18-107 of the Act provides that neither Intangible Transition
Property, nor any right, title or interest in Intangible Transition Property,
shall constitute property in which a security interest may be created under the
UCC, nor shall any such rights be deemed proceeds of any property which is not
Intangible Transition Property. Rather, Section 18-107(c) of the Act provides
that a valid and enforceable security interest in Intangible Transition Property
shall attach and be perfected only by the means set forth in that Section
18-107(c). Specifically, Section 18-107(c) provides that, to the extent that
transitional funding instruments, such as the Notes, are purported to be secured
by Intangible Transition Property, as specified in the applicable Transitional
Funding Order, the lien of the transitional funding instruments shall attach
automatically to such Intangible Transition Property from the time of issuance
of the transitional funding instruments. Section 18-107(c) of the Act provides
that such lien shall be a valid and
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enforceable security interest in Intangible Transition Property, securing the
transitional funding instruments, and shall be continuously perfected if, before
the date of issuance of the applicable transitional funding instruments, or
within no more than 10 days thereafter, a filing has been made by or on behalf
of the holder with the Chief Clerk of the ICC stating that such transitional
funding instruments have been issued.
The liens provided under Section 18-107(c) of the Act are enforceable
against the Utility, any assignee, grantee or issuer and all third parties,
including judicial lien creditors. Moreover, a perfected lien in Intangible
Transition Property is a continuously perfected security interest in all then
existing or thereafter arising revenues and proceeds arising with respect to
such Intangible Transition Property, whether or not the electric power and
energy included in the calculation of such revenues and proceeds have been
provided. The lien created by Section 18-107(c) of the Act is perfected and
ranks prior to any other lien, including any judicial lien, which subsequently
attaches to the Intangible Transition Property, and to any other rights created
by the Transitional Funding Orders or any revenues or proceeds of the foregoing.
The relative priority of the lien created by Section 18-107(c) of the Act is
not defeated or adversely affected by (a) changes to the transitional funding
order or to the related instrument funding charges payable by any retail
customer, class of retail customers or other person or group of persons
obligated to pay such charges or (b) (subject to the tracing requirements of
federal bankruptcy law) the commingling of revenues arising with respect to any
intangible transition property with funds of the Utility or other funds of the
assignee, issuer or grantee.
Section 18-107(c)(5) of the Act provides that the ICC shall maintain
segregated records which reflect the date and time of receipt of all filings
made under Section 18-107(c). See "Filings Made With Respect to the Intangible
Transition Property" below.
RIGHT OF FORECLOSURE
Section 18-107(c)(4) of the Act provides that, if an event of default occurs
under the transitional funding instruments, the holders thereof or their
authorized representatives, as secured parties, may foreclose or otherwise
enforce the lien in the intangible transition property securing the transitional
funding instruments, subject to the rights of any third parties holding prior
security interests therein (perfected in the manner described in such
subsection). Upon application by such holders or their authorized
representatives, the ICC shall order the sequestration and payment to the
holders or their authorized representatives of revenues arising with respect to
the intangible transition property pledged to the holders. Section 18-107(c)(4)
of the Act provides that any such order shall remain in full force and effect
notwithstanding any bankruptcy, reorganization or other insolvency proceedings
with respect to the Utility, grantee, assignee or issuer. See "Risk
Factors--Bankruptcy and Creditors' Rights Issues-- Possible Adverse Effect on
Noteholders as a Result of the Bankruptcy of ComEd, the Grantee or the Trust."
FILINGS MADE WITH RESPECT TO THE INTANGIBLE TRANSITION PROPERTY
ComEd, as Servicer, pledges in the Servicing Agreement to file with the ICC
on or before the date of issuance of any Series of Notes the filing required by
Section 18-107(c)(1) of the Act to perfect the lien of the Indenture Trustee in
the Intangible Transition Property. The Grantee will represent, at the time of
issuance of any Series of Notes, that no prior filing has been made under the
terms of Section 18-107 of the Act with respect to such Intangible Transition
Property, other than a filing which provides the Indenture Trustee with a first
priority perfected security interest in such Intangible Transition Property on a
parity basis with that securing any outstanding Notes, if any.
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SECURITY INTEREST IN ADDITIONAL NOTE COLLATERAL
Certain items of the Note Collateral do not constitute Intangible Transition
Property and the perfection of the Indenture Trustee's security interest in such
items of Note Collateral is, therefore, subject to the UCC or common law and not
Section 18-107 of the Act. These items consist of the rights of the Trust in (a)
any Grant Agreement, any Sale Agreement or the Servicing Agreement, (b) the
Capital Subaccount or any other funds on deposit in the Collection Account which
do not constitute IFC Collections, (c) any interest rate exchange agreements,
and (d) proceeds of the foregoing items. Additionally, any contractual rights of
the Trust against Customers (other than the right to impose instrument funding
charges as defined in the Funding Law and rights otherwise included in the
definition of intangible transition property) would be collateral to which the
UCC applies. As a condition to the issuance of any Series of Notes, the Trust
shall have made all filings and taken any other action required by the UCC or
common law to perfect the lien of the Indenture Trustee in all such items
included in the Note Collateral which do not constitute Intangible Transition
Property, and will covenant to take all actions necessary to maintain or
preserve such lien and security interest on a first priority basis. Each of the
Grantee and the Trust will represent, at the time of issuance of any Series of
Notes, that no prior filing has been made with respect to such party under the
terms of the UCC, other than a filing which provides the Indenture Trustee with
a first priority perfected security interest in such Note Collateral on a parity
basis with that securing any outstanding Notes.
DESCRIPTION OF INDENTURE ACCOUNTS
COLLECTION ACCOUNT
Pursuant to the Indenture, a segregated trust account (the "Collection
Account") will be established by the Trust with an Eligible Institution. The
Collection Account will be held by the Indenture Trustee for the benefit of the
Noteholders and the Trust. The Collection Account will consist of four
subaccounts: a general subaccount (the "General Subaccount"), a reserve
subaccount (the "Reserve Subaccount"), a subaccount for the
Overcollateralization Amount with respect to each Series of Notes (the
"Overcollateralization Subaccount"), and a capital subaccount (the "Capital
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 herein to the Collection Account include each of
the subaccounts contained therein.
An "Eligible Institution" means (a) the corporate trust department of the
Indenture Trustee or (b) a depository institution organized under the laws of
the United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank) (i) which has either (A) a
long-term unsecured debt rating of "AAA" by S&P and "A2" by Moody's or (B) a
certificate of deposit rating of "A-1+" by S&P and "P-1" by Moody's, or any
other long-term, short-term or certificate of deposit rating acceptable to the
Rating Agencies and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC").
Funds in the Collection Account may be invested in any of the following
(subject to additional restrictions in the Indenture): (a) direct obligations
of, or obligations fully and unconditionally guaranteed as to timely payment by,
the United States of America, (b) demand deposits, time deposits, certificates
of deposit or bankers' acceptances of Eligible Institutions which are described
in clause (b) of the preceding paragraph, (c) commercial paper (other than
commercial paper issued by ComEd or any of its affiliates) having, at the time
of investment or contractual commitment to invest, a rating in the highest
rating category from each Rating Agency from which a rating is available, (d)
money market funds which have the highest rating from each Rating Agency from
which a rating is available, (e) repurchase obligations with respect to any
security that is a direct obligation of, or fully guaranteed by, the United
States of America or certain agencies or instrumentalities thereof, entered into
with certain depository institutions or trust companies, or (f) any other
investment permitted by each Rating Agency (collectively,
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the "Eligible Investments"), in each case which mature on or before the Business
Day preceding the next Payment Date. The Indenture Trustee will have access to
the Collection Account for the purpose of making deposits in and withdrawals
from the Collection Account in accordance with the Indenture.
The Servicer will remit IFC Payments to the Collection Account in the manner
described under "Servicing--Remittances to Collection Account."
GENERAL SUBACCOUNT
The General Subaccount will hold all funds held in the Collection Account
that are not held in the other three subaccounts. The Servicer will remit all
IFC Payments to the General Subaccount. On each Payment Date, the Indenture
Trustee will draw on amounts in the General Subaccount to pay expenses of the
Trust and to pay interest and make Scheduled Payments on the Notes and to make
other payments and transfers in accordance with the terms of the Indenture.
RESERVE SUBACCOUNT
IFC Collections available with respect to any Payment Date in excess of
amounts necessary to make the Specified Payments will be allocated to the
Reserve Subaccount.
OVERCOLLATERALIZATION SUBACCOUNT
Each Transitional Funding Order will provide that the Trust, as the assignee
of the Intangible Transition Property created thereby, is entitled to collect an
additional amount (for any Series, the "Overcollateralization Amount") specified
in the related Prospectus Supplement which is intended to enhance the likelihood
that payments on the Notes will be made in accordance with their Expected
Amortization Schedules. Each Transitional Funding Order will permit the Servicer
to set the IFC Charges at levels that are expected to produce IFC Collections in
amounts that exceed the amounts expected to be required to pay interest and make
Scheduled Payments on the Notes, and to pay all related fees and expenses of the
Trust, including the Servicing Fee and any Quarterly Administration Fee in order
to collect the Overcollateralization Amount. The Overcollateralization Amount
established in connection with each Series of Notes will be specified in the
related Prospectus Supplement, but will not be less than 0.50 percent of the
initial principal balance of such Series of Notes, and will be collected over
the expected life of the Notes of such Series (I.E., over the period from the
Series Issuance Date of the Notes of such Series through the latest Scheduled
Maturity Date for any Note in such Series). The Overcollateralization Amount for
all Series of Notes will be held in the Overcollateralization Subaccount. The
amount required to be on deposit in the Overcollateralization Subaccount as of
any Payment Date with respect to each Series, as specified in the schedule set
forth in the related Prospectus Supplement, is referred to herein as the
"Required Overcollateralization Level."
Amounts in the Overcollateralization Subaccount will be invested in Eligible
Investments, and the Trust will be entitled to earnings thereon, subject to the
limitations described under "--Allocations; Payments." Amounts in the
Overcollateralization Subaccount are intended to cover any shortfall in IFC
Collections that might otherwise occur on any Payment Date or at the last
Scheduled Maturity Date for any Series or Class of Notes.
CAPITAL SUBACCOUNT
Prior to or upon the issuance of each Series of Notes, the Grantee will
transfer capital to the Trust in an amount which will be at least equal to 0.50
percent of the initial principal amount of such Series of Notes. Such amount in
the aggregate for all Series of Notes (with respect to each Series, the
"Required Capital Level") will be deposited into the Capital Subaccount.
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ALLOCATIONS; PAYMENTS
On each Payment Date, the Indenture Trustee will apply, at the direction of
the Servicer, all amounts on deposit in the Collection Account (including net
earnings thereon) which have accumulated from the first billing date of the
month in which the prior Payment Date occurred until the final billing date of
the month immediately preceding the month of the relevant Payment Date, to pay
the following amounts in the following priority:
(a) all amounts owed by the Trust to the Delaware Trustee and the
Indenture Trustee will be paid to such persons;
(b) the Servicing Fee and all unpaid Servicing Fees from any prior
Payment Dates will be paid to the Servicer;
(c) the Quarterly Administration Fee, if any, and all unpaid Quarterly
Administration Fees (or any portions thereof) from prior Payment Dates will
be paid to the Administrator;
(d) so long as no Event of Default has occurred and is continuing or
would be caused by such payment, all other Operating Expenses will be paid
to the persons entitled thereto, provided that the amount paid on each
Payment Date pursuant to this clause (d) may not exceed $100,000;
(e) any overdue Quarterly Interest (together with, to the extent lawful,
interest on such overdue Quarterly Interest at the applicable Note Interest
Rate) and then Quarterly Interest with respect to each Series of Notes will
be paid to the Noteholders;
(f) principal on any Series of Notes payable as a result of an Event of
Default or on the Final Maturity Date for such Series of Notes will be paid
to the Noteholders of the applicable Series;
(g) the Scheduled Payments for any Series of Notes based on priorities
described in each Prospectus Supplement will be paid to the Noteholders of
the applicable Series;
(h) unpaid Operating Expenses (including any amounts owed under the
Administration Agreement exceeding the Quarterly Administration Fee) will be
paid to the persons entitled thereto;
(i) the amount, if any, by which the Required Capital Level with
respect to all outstanding Series of Notes exceeds the amount in the Capital
Subaccount as of such Payment Date will be allocated to the Capital
Subaccount;
(j) the amount, if any, by which the Required Overcollateralization
Level exceeds the amount in the Overcollateralization Subaccount as of such
Payment Date will be allocated to the Overcollateralization Subaccount;
(k) funds up to the net earnings on amounts in the Collection Account
for the prior quarter without cumulation will be released to the Trust;
(l) the balance, if any, will be allocated to the Reserve Subaccount
for distribution on subsequent Payment Dates; and
(m) following the payment in full of all outstanding Series of Notes,
the balance, if any (including amounts in the Overcollateralization
Subaccount and the Capital Subaccount), will be released to the Trust.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the payments contemplated by clauses (a) through (g) above,
the Indenture Trustee will (x) first, draw from amounts on deposit in the
Reserve Subaccount, (y) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (z) third, draw from amounts on deposit in
the Capital Subaccount, up to the amount of such shortfall, in order to make
such payments in full. If amounts on deposit in the Capital Subaccount or the
Overcollateralization Subaccount are used to pay such amounts or make
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such transfers, as the case may be, subsequent Adjustments shall take into
account, among other things, such amounts and on subsequent Payment Dates the
Capital Subaccount or the Overcollateralization Subaccount, as the case may be,
will be replenished to the extent IFC Collections exceed amounts required to pay
amounts having a higher priority of payment, as more fully described above. In
addition, if on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the transfers described in clauses (i) and (j) above, the
Indenture Trustee will draw from amounts on deposit in the Reserve Subaccount to
make such transfers notwithstanding the fact that, on such Payment Date, the
allocation contemplated by clause (h) above may not have been fully satisfied.
If on any Payment Date when there is more than one Series of Notes outstanding,
funds on deposit in the Collection Account are insufficient to make the payments
contemplated by clauses (e), (f) and (g) above, such funds will be allocated
among the various Series and Classes pro rata, as specified in the related
Prospectus Supplement.
For purposes of the foregoing allocations:
"Quarterly Administration Fee" means the $25,000 fee payable quarterly
to ComEd (or any successor Administrator) as the Administrator under the
Administration Agreement among ComEd, the Grantee and the Trust.
"Quarterly Interest" means, with respect to any Payment Date and any
Series of Notes, the quarterly interest for such date and Series as
specified in the related Prospectus Supplement.
Payments to the Noteholders of a Series will be made to such holders as
specified in the related Prospectus Supplement.
STATE PLEDGE
The Funding Law provides: "The State [of Illinois] pledges to and agrees
with the holders of any transitional funding instruments who may enter into
contracts with an electric utility, grantee, assignee or issuer pursuant to this
Article XVIII [of the Act] that the State will not in any way limit, alter,
impair or reduce the value of intangible transition property created by, or
instrument funding charges approved by, a transitional funding order so as to
impair the terms of any contract made by such electric utility, grantee,
assignee or issuer with such holders or in any way impair the rights and
remedies of such holders until the pertinent grantee instruments or, if the
related transitional funding order does not provide for the issuance of grantee
instruments, the pertinent transitional funding instruments and interest,
premium and other fees, costs and charges related thereto, as the case may be,
are fully paid and discharged. Electric utilities, grantees and issuers are
authorized to include these pledges and agreements of the State in any contract
with the holders of transitional funding instruments or with any assignees
pursuant to this Article XVIII [of the Act] and any assignees are similarly
authorized to include these pledges and agreements of the State [of Illinois] in
any contract with any issuer, holder or any other assignee. Nothing in this
Article XVIII [of the Act] shall preclude the State of Illinois from requiring
adjustments as may otherwise be allowed by law to the electric utility's base
rates, transition charges, delivery services charges, or other charges for
tariffed services, so long as any such adjustment does not directly affect or
impair any instrument funding charges previously authorized by a transitional
funding order issued by the [ICC]."
Each Transitional Funding Order will provide that the Noteholders and the
Indenture Trustee for the benefit of the Noteholders shall be entitled to the
benefit of the pledges and agreements of the State of Illinois set forth in
Section 18-105(b) of the Act and that each of ComEd, the Grantee and the Trust
is authorized to include such pledges and agreements in any contract with the
Noteholders, the Indenture Trustee or with any assignees pursuant to Section
18-105(b) of the Act. The Grantee will include these pledges and agreements of
the State of Illinois in each Sale Agreement to the Trust, and the Trust, in
turn, has included these pledges and agreements in the Indenture and the Notes
for the benefit of the Indenture Trustee and the Noteholders.
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REPORTS TO NOTEHOLDERS
On or prior to each Payment Date, Special Payment Date or any other date
specified in the Indenture for payments with respect to any Class of Notes, the
Indenture Trustee will deliver to the Noteholders of such Class a statement with
respect to such payment to be made on such Payment Date, Special Payment Date or
other date, as the case may be, setting forth the following information:
(a) the amount of the payment to Noteholders allocable to (i) principal
and (ii) interest;
(b) the aggregate outstanding principal balance of the Notes, after
giving effect to payments allocated to principal reported under (a) above;
and
(c) the difference, if any, between the amount specified in (b) above
and the principal amount scheduled to be outstanding on such date according
to the related Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Indenture Trustee
will mail to each person who at any time during such calendar year has been a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of United States
federal and state income tax returns. See "Material United States Federal Tax
Consequences."
SUPPLEMENTAL INDENTURES
The Trust and the Indenture Trustee may, from time to time, and without the
consent of the Noteholders of any Series (but with prior notice to the Rating
Agencies), enter into one or more agreements supplemental to the Indenture for
various purposes described in the Indenture, including (1) to add to the
covenants for the benefit of the Noteholders; (2) to cure any ambiguity or
correct or supplement any provision in the Indenture or in any supplemental
indenture which may be inconsistent with any other provision in the Indenture or
in any supplemental indenture or to make any other provisions with respect to
matters or questions arising under the Indenture; provided that any such action
shall not adversely affect the interests of the Noteholders; (3) to evidence the
succession of another person to the Trust or the Indenture Trustee in accordance
with the terms of the Indenture; (4) to effect qualification under the Trust
Indenture Act of 1939, as amended; or (5) to set forth the terms of any
additional Series of Notes or to provide for the terms of any Swap Agreement.
The Trust and the Indenture Trustee may also, without the consent of the
Noteholders, enter into one or more other agreements supplemental to the
Indenture so long as such supplemental agreement does not, as evidenced by an
opinion of counsel, adversely affect the interests of any Noteholders in any
material respect and the Rating Agency Condition shall have been satisfied with
respect thereto.
In addition, the Trust and the Indenture Trustee will, with the consent of
Noteholders holding not less than a majority of the aggregate outstanding
principal amount of the Notes of all affected Series or Classes, enter into one
or more indentures supplemental to the Indenture for the purpose of, among other
things, adding any provisions to or changing in any manner or eliminating any of
the provisions of the Indenture. No such supplement, however, may, without the
consent of each Noteholder of each Series or Class affected thereby, take
certain actions enumerated in the Indenture, including (a) reduce in any manner
the amount of, or delay the timing of, deposits or payments on any Note, (b)
reduce the aforesaid percentage of the aggregate outstanding principal amount of
the Notes the holders of which are required to consent to any such supplement,
(c) modify the provisions in the Indenture relating to amendments with the
consent of Noteholders to decrease any minimum percentage of Noteholders
required to approve such amendments, (d) permit the creation of any lien on the
Note Collateral ranking prior to or on a parity with the lien of the Indenture,
or (e) cause any material adverse federal income tax consequences to ComEd, the
Grantee, the Trust, the Delaware Trustee, the Indenture Trustee or the then
existing Noteholders. Promptly following the execution of any such supplement to
the Indenture, the Indenture Trustee will furnish written notice of the
substance of such supplement to each Noteholder.
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Any supplement to the Indenture or trustee's issuance certificate executed
in connection with the issuance of one or more additional Series of Notes will
not be considered an amendment to the Indenture.
CERTAIN COVENANTS OF THE DELAWARE TRUSTEE AND THE TRUST
The Trust may not consolidate with or merge into any other entity, unless
(a) the entity formed by or surviving such consolidation or merger is organized
under the laws of the United States, any state thereof or the District of
Columbia, (b) such entity expressly assumes by an indenture supplemental to the
Indenture the performance or observance of every agreement and covenant of the
Trust under the Indenture, (c) no Default (as defined in the Indenture) or Event
of Default will have occurred and be continuing immediately after such merger or
consolidation, (d) the Rating Agency Condition will have been satisfied with
respect to such transaction, (e) ComEd shall have delivered to the Grantee, the
Trust, the Delaware Trustee and the Indenture Trustee an opinion of independent
tax counsel (as selected by, and in form and substance reasonably satisfactory
to, ComEd, and which may be based on a ruling from the IRS) to the effect that
such consolidation or merger will not result in a material adverse federal
income tax consequence to ComEd, the Grantee, the Trust, the Delaware Trustee,
the Indenture Trustee or the then existing Noteholders, (f) the Trust shall have
delivered to the Indenture Trustee an officer's certificate and an opinion of
counsel, each stating that all conditions precedent in the Indenture provided
for relating to such transaction have been complied with and (g) any action as
is necessary to maintain the lien and security interest created by the Indenture
will have been taken.
The Trust may not sell, convey, exchange or transfer or otherwise dispose of
any of the properties or assets of the Trust to any person or entity, unless (a)
the person or entity acquiring the properties and assets (i) is a United States
citizen or an entity organized under the laws of the United States, any state
thereof or the District of Columbia, (ii) expressly assumes by an indenture
supplemental to the Indenture the performance or observance of every agreement
and covenant of the Trust under the Notes, (iii) expressly agrees by such
supplemental indenture that all right, title and interest so conveyed or
transferred will be subject and subordinate to the rights of Noteholders, (iv)
unless otherwise specified in the supplemental indenture referred to in clause
(ii) above, expressly agrees to indemnify, defend and hold harmless the Trust
against and from any loss, liability or expense arising under or related to the
Indenture and the Notes, and (v) expressly agrees by means of such supplemental
indenture that such person (or if a group of persons, then one specified person)
shall make all filings with the Commission (and any other appropriate person)
required by the Exchange Act in connection with the Notes, (b) no Event of
Default will have occurred and be continuing immediately after such transaction,
(c) the Rating Agency Condition will have been satisfied with respect to such
transaction, (d) ComEd shall have delivered to the Grantee, the Trust, the
Delaware Trustee and the Indenture Trustee an opinion of independent tax counsel
(as selected by, and in form and substance reasonably satisfactory to, ComEd,
and which may be based on a ruling from the IRS) to the effect that such
disposition will not result in a material adverse federal income tax consequence
to ComEd, the Grantee, the Trust, the Delaware Trustee, the Indenture Trustee or
the then existing Noteholders, (e) the Trust shall have delivered to the
Indenture Trustee an officer's certificate and an opinion of counsel, each
stating that such conveyance or transfer complies with the Indenture and all
conditions precedent therein provided for relating to such transaction have been
complied with and (f) any action as is necessary to maintain the lien and
security interest created by the Indenture shall have been taken.
The Trust will not, among other things, for so long as any Notes are
outstanding, (a) except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, unless directed
to do so by the Indenture Trustee, (b) claim any credit on, or make any
deduction from the principal or interest payable in respect of, the Notes (other
than amounts properly withheld under the Code) or assert any claim against any
present or former Noteholder because of the payment of taxes levied or assessed
upon any part of the Intangible Transition Property and the other
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Note Collateral, (c) terminate the existence of, or dissolve or liquidate in
whole or in part, the Trust, (d) permit the validity or effectiveness of the
Indenture to be impaired, (e) permit the lien of the Indenture to be amended,
hypothecated, subordinated, terminated or discharged or permit any person to be
released from any covenants or obligations with respect to the Notes except as
may be expressly permitted by the Indenture, (f) permit any lien, charge,
excise, claim, security interest, mortgage or other encumbrance, other than the
lien and security interest granted under the Indenture, to be created on or
extend to or otherwise arise upon or burden the Note Collateral or any part
thereof or any interest therein or the proceeds thereof (other than tax liens
arising by operation of law with respect to amounts not yet due) or (g) permit
the lien granted under the Indenture not to constitute a valid first priority
security interest in the Note Collateral.
The Trust may not engage in any business other than financing, purchasing,
owning and managing the Intangible Transition Property and the other Note
Collateral and the issuance of the Notes in the manner contemplated by the
Notes, the Sale Agreements, the Servicing Agreement, the Trust Agreement, the
Grant Agreements, or certain related documents (collectively, the "Basic
Documents") and activities incidental thereto.
The Trust will not issue, incur, assume, guarantee or otherwise become
liable for any indebtedness except for the Notes.
The Trust will not, except as contemplated by the Basic Documents, make any
loan or advance or credit to, or guarantee, endorse or otherwise become
contingently liable in connection with the obligations, stocks or dividends of,
or own, purchase, repurchase or acquire (or agree contingently to do so) any
stock, obligations, assets or securities of, or any other interest in, or make
any capital contribution to, any other person. The Trust will not, except as
contemplated by the Basic Documents, make any expenditure (by long-term or
operating lease or otherwise) for capital assets (either realty or personalty).
The Trust will not, directly or indirectly, make payments to or distributions
from the Collection Account except in accordance with the Basic Documents.
The Trust will not make any payments, distributions or dividends to any
holder of beneficial interests in the Trust in respect of such beneficial
interest for any calendar month unless no Event of Default shall have occurred
and be continuing and any such distributions do not cause the book value of the
remaining equity in the Trust to decline below 0.50 percent of the initial
principal amount of all Series of Notes issued and outstanding pursuant to the
Indenture.
The Trust will cause the Servicer to deliver to the Indenture Trustee the
annual accountant's certificates, compliance certificates, reports regarding
distributions and statements to Noteholders required by the Servicing Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
An "Event of Default" with respect to any Series of Notes is defined in the
Indenture as being: (a) a default for five days in the payment of any interest
on any Note; (b) a default in the payment of the then unpaid principal of any
Note on the Final Maturity Date for such Series; (c) a default in the payment of
the optional redemption price for any Note on the optional redemption date
therefor; (d) a default in the observance or performance in any material respect
of any covenant or agreement of the Trust made in the Indenture (other than a
default under clauses (a) through (c) above) and the continuation of any such
default for a period of 30 days after written notice thereof is given to the
Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by the
holders of at least 25 percent in principal amount of the Notes of such Series
then outstanding; (e) any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within 30 days after notice thereof is given
to the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee
by the holders of at least 25 percent in principal amount of the Indenture of
such Series then outstanding;
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(f) certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust; (g) a breach by the State of Illinois or any of its agencies (including
the ICC), officers or employees of the State Pledge; or (h) any other event
designated as such in a trustee's issuance certificate or series supplement
relating to such Series.
If an Event of Default (other than as specified in clause (g) above) should
occur and be continuing with respect to any Series of Notes, the Indenture
Trustee or holders of not less than a majority in principal amount of the Notes
of all Series then outstanding may declare the principal of the Notes of all
Series to be immediately due and payable. Such declaration may, under certain
circumstances set forth in the Indenture, be rescinded by the holders of a
majority in principal amount of the Notes of all Series then outstanding. If an
Event of Default as specified in clause (g) above has occurred, the Servicer
shall be obligated to institute (and the Indenture Trustee, for the benefit of
the Noteholders, shall be entitled and empowered to institute) any suits,
actions or proceedings at law, in equity or otherwise, to enforce the State
Pledge and to collect any monetary damages as a result of a breach thereof, and
each of the Servicer and the Indenture Trustee may prosecute any such suit,
action or proceeding to final judgment or decree. The Servicer would be required
to advance its own funds in order to bring any such suits, actions or
proceedings and, for so long as such legal actions were pending, the Servicer
would, unless otherwise prohibited by applicable law or court or regulatory
order in effect at such time, be required to bill and collect the IFC Charges,
perform Adjustments and discharge its obligations under the Servicing Agreement.
The Servicer would be entitled to reimbursement of its expenses advanced by it
in connection with such legal or administrative action as an operating expense
of the Trust under the Indenture.
If the Notes of all Series have been declared to be due and payable
following an Event of Default, the Indenture Trustee may, in its discretion,
either sell the Intangible Transition Property or elect to have the Trust
maintain possession of the Intangible Transition Property and continue to apply
IFC Collections as if there had been no declaration of acceleration. There is
likely to be a limited market, if any, for the Intangible Transition Property
following a foreclosure thereon, in light of the preceding default, the unique
nature of the Intangible Transition Property as an asset and other factors
discussed herein. In addition, the Indenture Trustee is prohibited from selling
the Intangible Transition Property following an Event of Default with respect to
any Series, other than a default in the payment of any principal or redemption
price or a default for five days or more in the payment of any interest on any
Note of any Series unless (a) the holders of all the outstanding Notes of all
Series consent to such sale, (b) the proceeds of such sale are sufficient to pay
in full the principal of and the accrued interest on the outstanding Notes of
all Series or (c) the Indenture Trustee determines that the proceeds of the Note
Collateral would not be sufficient on an ongoing basis to make all payments on
the Notes of all Series as such payments would have become due if the Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the holders of 66 2/3 percent of the aggregate outstanding amount of the
Notes of all Series.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers under the Notes at the request or direction of any of the holders of
Notes of any Series if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of not less than a majority in principal amount of the outstanding Notes of all
Series (or, if less than all Series or Classes are affected, the affected
Series, Class or Classes) will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee and the holders of not less than a majority in principal amount of the
Notes of all Series then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the consent of all of the holders of the outstanding Notes
of all Series or Classes affected thereby.
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With respect to the Notes, no holder of any Note of any Series will have the
right to institute any proceeding with respect to the Notes, unless (a) such
holder previously has given to the Indenture Trustee written notice of a
continuing Event of Default with respect to such Series, (b) the holders of not
less than 25 percent in principal amount of the outstanding Notes of all Series
have made written request of the Indenture Trustee to institute such proceeding
in its own name as Indenture Trustee, (c) such holder or holders have offered
the Indenture Trustee satisfactory indemnity, (d) the Indenture Trustee has for
60 days failed to institute such proceeding and (e) no direction inconsistent
with such written request has been given to the Indenture Trustee during such
60-day period by the holders of a majority in principal amount of the
outstanding Notes of all Series.
In addition, each of the Indenture Trustee, the Noteholders and the Servicer
will covenant that it will not, prior to the date which is one year and one day
after the termination of the Indenture, institute against the Grantee, the Trust
or the Delaware Trustee any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law, subject to the right of the ICC
to order sequestration and payment of revenues arising with respect to the
Intangible Transition Property.
Neither the Delaware Trustee nor the Indenture Trustee in its individual
capacity, nor any holder of any ownership interest in the Trust, nor any of
their respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes of any Series or for the agreements of the Trust contained in the
Indenture.
ACTIONS BY NOTEHOLDERS
Subject to certain exceptions, the holders of not less than a majority of
the aggregate outstanding amount of the Notes of all Series (or, if less than
all Series or Classes are affected, the affected Series or Class or Classes)
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or exercising any
trust or power conferred on the Indenture Trustee under the Indenture; provided
that: (1) such direction shall not be in conflict with any rule of law or with
the Indenture and would not involve the Indenture Trustee in personal liability
or expense; (2) the Indenture Trustee shall not have determined that the action
might materially adversely affect the rights of any Noteholder not consenting to
such action; and (3) the Indenture Trustee may take any other action deemed
proper by the Indenture Trustee which is not inconsistent with such direction.
In circumstances under which the Indenture Trustee is required to seek
instructions from the holders of the Notes of any Class with respect to any such
action or vote, the Indenture Trustee will take such action or vote for or
against any proposal in proportion to the principal amount of the corresponding
Class, as applicable, of Notes taking the corresponding position.
Notwithstanding the foregoing, each Noteholder shall be allowed to institute
suit for the nonpayment of (a) the interest, if any, on its Note which remains
unpaid as of the applicable due date and (b) the unpaid principal, if any, of
such Notes on the Final Maturity Date therefor.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee and
the Rating Agencies a written statement as to the fulfillment of its obligations
under the Notes.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
The following discussion is a summary of material United States federal
income and estate tax consequences relevant to the purchase, ownership and
disposition of the Notes by the beneficial owners thereof ("Noteholders"). The
discussion is limited to Noteholders and, except as specifically addressed
herein, does not address the tax consequences to subsequent purchasers of Notes.
This summary does not purport to be a complete analysis of all the potential
United States federal income and estate tax effects relating to the purchase,
ownership and disposition of the Notes. There can be no assurance that the IRS
will take a similar view of such consequences. Further, the discussion does not
address all aspects of taxation that might be relevant to particular purchasers
in light of their individual circumstances (including the effect of any state,
local, non-United States or other tax laws) or to certain types of purchasers
(including dealers in securities, insurance companies, financial institutions
and tax-exempt entities) subject to special treatment under United States
federal tax law.
The discussion below is based on the Code, administrative pronouncements,
judicial decisions, existing, proposed and temporary United States Treasury
Regulations, all in effect as of the date hereof, all of which are subject to
change at any time, and any such change may be applied retroactively. The
discussion below assumes that the Notes are held as capital assets within the
meaning of Section 1221 of the Code.
IT IS RECOMMENDED THAT PERSONS CONSIDERING THE PURCHASE OF NOTES CONSULT
THEIR TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE UNITED STATES FEDERAL
INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX
CONSEQUENCES TO THEM ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR NON-UNITED
STATES TAXING JURISDICTION.
With respect to each Series of Notes, ComEd expects to receive a ruling from
the IRS to the effect that, among other things, (a) the Trust's issuance of the
Notes will not result in gross income to ComEd and (b) the Notes will be
obligations of ComEd. ComEd has received such a ruling with respect to the Notes
to be issued in accordance with the Initial TFO. For a given Series of Notes,
however, ComEd may decide that, in lieu of obtaining a ruling from the IRS,
ComEd will rely on an opinion from its tax counsel to the effect that, among
other things, the Notes will be obligations of ComEd. The IRS ruling or the tax
opinion will be discussed in the related Prospectus Supplement.
The following summary of material United States federal income and estate
tax consequences relevant to the purchase, ownership and disposition of the
Notes by Noteholders is based on the advice of Sidley & Austin, counsel to
ComEd, and assumes that, based on the ruling or tax opinion discussed above, the
Notes will constitute indebtedness of ComEd for federal income and estate tax
purposes.
TAX CONSEQUENCES TO UNITED STATES NOTEHOLDERS
UNITED STATES NOTEHOLDER
As used herein, the term "United States Noteholder" means a Noteholder who
or which is, for United States federal income tax purposes, (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any state
thereof (including the District of Columbia), (c) an estate the income of which
is subject to United States federal income taxation regardless of its source, or
(d) a trust described in Section 7701(a)(30) of the Code (taking into account
changes thereto and associated effective dates, elections and transition rules).
The term also includes certain Noteholders who are former citizens or residents
of the United States whose income and gain from the Notes will be subject to
United States taxation.
PAYMENTS OF INTEREST
Interest paid on a Note will generally be taxable to a United States
Noteholder as ordinary interest income at the time it accrues or is received in
accordance with the United States Noteholder's method of accounting for United
States federal income tax purposes. The preceding sentence assumes that, in the
case of Floating Rate Notes, the Floating Rate Notes will qualify as "variable
rate debt instruments" as
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defined in Treasury Regulation Section 1.1275-5(a) and that interest on such
Floating Rate Notes will be unconditionally payable, or will be constructively
received under Section 451 of the Code, in cash or in property at least annually
at a single "qualified floating rate" or "objective rate." If such assumption is
incorrect with respect to a Floating Rate Note, the taxation of interest on such
Floating Rate Note will be addressed in the related Prospectus Supplement.
"ORIGINAL ISSUE DISCOUNT"
Because it is expected that the stated principal amount of the Notes will
not exceed their issue price by more than a statutory DE MINIMIS amount (I.E.,
0.25% of the principal amount of a Note multiplied by its weighted average
maturity), the Notes should not be issued with "original issue discount." If the
stated principal amount of a Note exceeds its issue price by an amount that is
less than or equal to such DE MINIMIS amount, the excess generally will be taken
into income by a United States Noteholder as gain from the retirement of a Note
(as described below under "--Sale, Exchanges, Redemption or Retirement of the
Notes"), in proportion to principal payments made on the Notes. A United States
Noteholder may elect to treat all interest on a Note as original issue discount.
If such an election is made, the excess of a Note's stated principal amount over
its issue price would not be treated as DE MINIMIS, and would be taken into
income on a constant yield basis under the rules applicable to accrual of
original issue discount.
MARKET DISCOUNT AND PREMIUM
A Noteholder attempting to sell a Note in the secondary market should be
aware that a subsequent Noteholder who purchases a Note at a discount might be
subject to the "market discount" rules of the Code. Also, a subsequent
Noteholder who purchases a Note at a premium may elect to amortize and deduct
the premium over the remaining term of the Note in accordance with rules set
forth in Section 171 of the Code.
SALE, EXCHANGES, REDEMPTION OR RETIREMENT OF THE NOTES
Upon the sale, exchange, redemption or retirement of a Note, a United States
Noteholder will recognize taxable gain or loss equal to the difference between
the amount realized on such sale, exchange, redemption or retirement (not
including any amount attributable to accrued but unpaid interest) and such
Noteholder's adjusted tax basis in the Note. To the extent the amount realized
is attributable to accrued but unpaid interest, the amount recognized by the
United States Noteholder will be treated as a payment of interest. See
"--Payments of Interest" above. A United States Noteholder's adjusted tax basis
in a Note generally will equal the cost of the Note to such Noteholder, reduced
by any principal payments received by such Noteholder.
Gain or loss recognized on the sale, exchange, redemption or retirement of a
Note will be capital gain or loss. For non-corporate taxpayers, capital gain
recognized on the disposition of an asset (including a Note) held for more than
one year is subject to United States federal income tax at a maximum rate of
20%. Recently enacted legislation eliminated the long-term capital gain tax rate
differential between capital assets held for more than 18 months and capital
assets held for more than one year but not more than 18 months. Capital gain on
the disposition of an asset (including a Note) held for not more than one year
is taxed at the rates applicable to ordinary income (I.E., up to 39.6%). The
distinction between capital gain or loss and ordinary income or loss is relevant
for purposes of, among other things, limitations on the deductibility of capital
losses.
TAX CONSEQUENCES TO NON-UNITED STATES NOTEHOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) payments of principal and interest (including original issue
discount, if any) on a Note by the Trust or any paying agent to a Noteholder
that is not a United States Noteholder, as defined
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above (hereinafter, "Non-United States Noteholder"), will not be subject to
withholding of United States federal income tax, provided that, in the case
of interest, (i) such Noteholder does not own, actually or constructively,
10 percent or more of the total combined voting power of all classes of
stock of ComEd entitled to vote, (ii) such Noteholder is not, for United
States federal income tax purposes, a controlled foreign corporation
related, directly or indirectly, to ComEd through stock ownership, (iii)
such Noteholder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and (iv) the certification requirements under
Section 871(h) or Section 881(c) of the Code and Treasury Regulations
thereunder (summarized below) are met;
(b) a Non-United States Noteholder will not be subject to United States
federal income tax on gain recognized on the sale, exchange, redemption,
retirement or other disposition of such Note, unless (i) such Noteholder is
a non-resident alien individual who is present in the United States for 183
days or more in the taxable year of disposition, and certain conditions are
met or (ii) such gain is effectively connected with the conduct by such
Noteholder of a trade or business in the United States; and
(c) a Note held by an individual who is not a citizen or resident (as
defined for United States federal estate tax purposes) of the United States
at the time of his death will not be subject to United States federal estate
tax as a result of such individual's death, provided that, at the time of
such individual's death, (i) the individual does not own, actually or
constructively, 10 percent or more of the total combined voting power of all
classes of stock of ComEd entitled to vote and (ii) payments with respect to
such Note, if received at the time of the individual's death, would not have
been effectively connected with the conduct by such individual of a trade or
business in the United States.
Sections 871(h) and 881(c) of the Code and United States Treasury
Regulations thereunder require that, in order to obtain the exemption from
withholding tax described in paragraph (a) above, either (a) the beneficial
owner of a Note must certify, under penalties of perjury, to the Trust or paying
agent, as the case may be, that such owner is a Non-United States Noteholder and
must provide such owner's name and address, or (b) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution") and holds the Note on behalf of the beneficial owner thereof must
certify, under penalties of perjury, to the Trust or paying agent, as the case
may be, that such certificate has been received from the beneficial owner by it
or by a Financial Institution between it and the beneficial owner and must
furnish the payor with a copy thereof. A certificate described in this paragraph
is effective only with respect to payments of interest made to the certifying
Non-United States Noteholder after issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. Under
temporary United States Treasury Regulations, the foregoing certification may be
provided by the beneficial owner of a Note on IRS Form W-8.
Notwithstanding the foregoing, interest described in Section 871(h)(4) of
the Code is subject to United States withholding tax at a 30% rate (or such
lower rate as may be provided by an applicable treaty). In general, interest
described in Section 871(h)(4) of the Code includes (subject to certain
exceptions) any interest, the amount of which is determined by reference to
receipts, sales or other cash flow of the issuer or a related person, any income
or profits of the issuer or a related person, any change in the value of any
property of the issuer or a related person or any dividends, partnership
distribution or similar payments made by the issuer or a related person.
Interest described in Section 871(h)(4) of the Code may include other types of
contingent interest identified by the IRS in future Treasury Regulations. The
Trust does not currently expect to issue Notes, the interest on which is
described in Section 871(h)(4) of the Code. However, if such Notes are issued,
the taxation of such Notes will be addressed in the related Prospectus
Supplement.
On October 14, 1997, the IRS published in the Federal Register final
Regulations (the "1997 Final Regulations") which affect the United States
taxation of Non-United States Noteholders. As promulgated, the 1997 Final
Regulations will be effective for payments after December 31, 1998, regardless
of
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the issue date of the instrument with respect to which such payments are made,
subject to certain transition rules. The IRS thereafter announced its intention
to amend the 1997 Final Regulations to extend this date to December 31, 1999,
subject to certain transition rules. The discussion under this heading and under
"--Backup Withholding and Information Reporting," below, is not intended to be a
complete discussion of the provisions of the 1997 Final Regulations or the
subsequent IRS announcement, and it is recommended that prospective purchasers
of the Notes consult their tax advisors concerning the tax consequences of their
acquiring, holding and disposing of the Notes in light of the 1997 Final
Regulations.
The 1997 Final Regulations provide documentation procedures designed to
simplify compliance by withholding agents. The 1997 Final Regulations generally
do not affect the documentation rules described above, but add other
certification options. Under one such option, a withholding agent will be
allowed to rely on an intermediary withholding certificate furnished by a
"qualified intermediary" (as defined below) on behalf of one or more beneficial
owners (or other intermediaries) without having to obtain the beneficial owner
certificate described above. "Qualified intermediaries" include: (a) foreign
financial institutions or foreign clearing organizations (other than a United
States branch or United States office of such institution or organization) or
(b) foreign branches or offices of United States financial institutions or
foreign branches or offices of United States clearing organizations, which, as
to both (a) and (b), have entered into withholding agreements with the IRS. In
addition to certain other requirements, qualified intermediaries must obtain
withholding certificates, such as revised IRS Form W-8 (see below), from each
beneficial owner. Under another option, an authorized foreign agent of a United
States withholding agent will be permitted to act on behalf of the United States
withholding agent, provided certain conditions are met.
For purposes of the certification requirements, the 1997 Final Regulations
generally treat, as the beneficial owners of payments on a Note, those persons
that, under United States tax principles, are the taxpayers with respect to such
payments, rather than persons such as nominees or agents legally entitled to
such payments. In the case of payments to an entity classified as a foreign
partnership under United States tax principles, the partners, rather than the
partnership, generally will be required to provide the required certifications
to qualify for the withholding exemption described above. A payment to a United
States partnership, however, is treated for these purposes as payment to a
United States payee, even if the partnership has one or more foreign partners.
The 1997 Final Regulations provide certain presumptions with respect to
withholding for Noteholders not furnishing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Final Regulations will replace a number of current tax certification forms
(including IRS Form W-8 and IRS Form 4224, discussed below) with a single,
revised IRS Form W-8 (which, in certain circumstances, requires information in
addition to that previously required). Under the 1997 Final Regulations, this
Form W-8 will remain valid, generally, until the last day of the third calendar
year following the year in which the certificate is signed. The 1997 Final
Regulations contained detailed rules, which might be changed in light of the
recent IRS announcement that the effective date will be postponed, governing tax
certifications during the transition period prior to and immediately following
the effectiveness of the 1997 Final Regulations.
If a Non-United States Noteholder is engaged in a trade or business in the
United States, and if interest on the Note, or gain recognized on the sale,
exchange, redemption, retirement or other disposition of a Note, is effectively
connected with the conduct of such trade or business, the Non-United States
Noteholder, although exempt from withholding of United States income tax, will
generally be subject to regular United States income tax on such interest or
gain in the same manner as if it were a United States Noteholder. See "--Tax
Consequences to United States Noteholders" above. In lieu of the certificate
described above, such a Noteholder must provide to the withholding agent a
properly executed IRS Form 4224 (or successor form) in order to claim an
exemption from withholding. In addition, if such Non-United States Noteholder is
a foreign corporation, it may be subject to a branch profits tax equal to 30%
(or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for
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the taxable year, subject to certain adjustments. For purposes of the branch
profits tax, interest on, and any gain recognized on the sale, exchange,
redemption, retirement or other disposition of, a Note will be included in the
effectively connected earnings and profits of such Non-United States Noteholder
if such interest or gain is effectively connected with the conduct by the
Non-United States Noteholder of a trade or business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, a 31% backup withholding
tax and information reporting requirements apply to certain payments of
principal and interest made to, and to the proceeds of sale before maturity by,
certain Noteholders.
In the case of a non-corporate United States Noteholder, backup withholding
will apply only if (a) such Noteholder fails to furnish its Taxpayer
Identification Number ("TIN") (which, for an individual, is his or her Social
Security number) to the payor in the manner required, (b) such Noteholder
furnishes an incorrect TIN and the payor is so notified by the IRS, (c) the
payor is notified by the IRS that such Noteholder has failed properly to report
payments of interest or dividends or (d) under certain circumstances, such
Noteholder fails to certify, under penalties of perjury, that it has furnished a
correct TIN and has not been notified by the IRS that it is subject to backup
withholding for failure to report interest or dividend payments. Backup
withholding does not apply with respect to payments made to certain exempt
recipients, such as a corporation (within the meaning of Section 7701(a) of the
Code) and tax-exempt organizations. United States Noteholders should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a United States
Noteholder will be allowed as a credit against such Noteholder's United States
federal income tax liability and may entitle such Noteholder to a refund,
provided that the required information is furnished to the IRS.
In the case of a Non-United States Noteholder, under currently applicable
United States Treasury Regulations, backup withholding and information reporting
will not apply to payments of principal or interest made by the Trust or any
paying agent thereof on a Note (absent actual knowledge that the Noteholder is a
United States Noteholder) if such Noteholder has provided the required
certification under penalties of perjury that it is not a United States
Noteholder (as defined above) or has otherwise established an exemption. If such
Noteholder does not provide the required certification, such Noteholder may
nevertheless avoid backup withholding or information reporting in the
circumstances described below, but might be subject to withholding of United
States federal income tax as described above under "--Tax Consequences to
Non-United States Noteholders."
Under currently applicable United States Treasury Regulations, if payments
of principal or interest are collected outside the United States by a foreign
office of a custodian, nominee or other agent acting on behalf of a beneficial
owner of a Note, such custodian, nominee or other agent will not be required to
apply backup withholding to such payments made to such beneficial owner, and
generally will not be subject to information reporting requirements. However, if
such custodian, nominee or other agent is a United States person, a controlled
foreign corporation for United States tax purposes or a foreign person 50% or
more of whose gross income is effectively connected with a United States trade
or business for a specified three-year period, information reporting (but not
backup withholding) will be required unless such custodian, nominee or other
agent has in its records documentary evidence that the beneficial owner is not a
United States Noteholder (which such agent does not actually know to be false)
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption.
Under currently applicable United States Treasury Regulations, payments on
the sale, exchange, redemption, retirement or other disposition of a Note made
to or through a foreign office of a broker generally will not be subject to
backup withholding, and generally will not be subject to information reporting
requirements. Such payments, however, will be subject to information reporting
(but not
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backup withholding) if the broker is, for United States federal income tax
purposes, a United States person, a controlled foreign corporation or a foreign
person 50% or more of whose gross income is effectively connected with a United
States trade or business for a specified three-year period, unless the broker
has in its records documentary evidence that the beneficial owner is not a
United States Noteholder (which such broker does not actually know to be false)
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption. Payments made to or through the United States office
of a broker will be subject to backup withholding and information reporting
unless the Non-United States Noteholder certifies, under penalties of perjury,
that it is not a United States person or otherwise establishes an exemption.
In general, the 1997 Final Regulations do not significantly alter the
substantive backup withholding and information reporting requirements described
above. As under current law, backup withholding and information reporting will
not apply to (a) payments to a Non-United States Noteholder of principal and
interest and (b) payments to a Non-United States Noteholder on the sale,
exchange, redemption, retirement or other disposition of a Note, in each case if
such Non-United States Noteholder provides the required certification to
establish an exemption from the withholding of United States federal income tax
or otherwise establishes an exemption. Similarly, even if a Non-United States
Noteholder does not provide such certification or otherwise establish an
exemption, unless the payor has actual knowledge that the payee is a United
States Noteholder, backup withholding will not apply to (a) payments of interest
made outside the United States to certain offshore accounts and (b) payments on
the sale, exchange, redemption, retirement or other disposition of a Note
effected outside the United States. However, information reporting (but not
backup withholding) will apply to (a) payments of interest made by a payor
outside the United States and (b) payments on the sale, exchange, redemption,
retirement or other disposition of a Note effected outside the United States if
payment is made by a broker that is, for United States federal income tax
purposes, (i) a United States person, (ii) a controlled foreign corporation,
(iii) a United States branch of a foreign bank or foreign insurance company,
(iv) a foreign partnership controlled by United States persons or engaged in a
United States trade or business or (v) a foreign person 50% or more of whose
gross income is effectively connected with the conduct of a United States trade
or business for a specified three-year period, in each case unless such payor or
broker has in its records documentary evidence that the beneficial owner is not
a United States Noteholder and certain other conditions are met or the
beneficial owner otherwise establishes an exemption (in which case neither
information reporting nor backup withholding will apply). As noted above, the
IRS has announced that the 1997 Final Regulations will be amended to be
effective generally for payments after December 31, 1999, subject to certain
transition rules.
Non-United States Noteholders should consult their tax advisors regarding
the application of information reporting and backup withholding in their
particular situations, the availability of an exemption therefrom, and the
procedure for obtaining such an exemption, if available. Any amounts withheld
from a payment to a Non-United States Noteholder under the backup withholding
rules will be allowed as a credit against such Noteholder's United States
federal income tax liability and may entitle such Noteholder to a refund,
provided that the required information is furnished to the IRS.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT BE
APPLICABLE DEPENDING UPON A NOTEHOLDER'S PARTICULAR SITUATION. IT IS RECOMMENDED
THAT PROSPECTIVE NOTEHOLDERS CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NOTES, INCLUDING THE TAX CONSEQUENCES UNDER FEDERAL, STATE, LOCAL, NON-UNITED
STATES AND OTHER TAX LAWS AND THE EFFECTS OF CHANGES IN SUCH LAWS.
123
<PAGE>
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "Plans"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and Plan
fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and/or
Section 4975 of the Code if assets of the Trust were deemed to be Plan Assets.
Regulations issued by the United States Department of Labor, set forth in 29
C.F.R. Section 2510.3-101 (the "Plan Asset Regulations"), provide rules
regarding when assets of an entity, such as the Trust, would be treated as Plan
Assets. Under those rules, the assets of the Trust would be treated as Plan
Assets of a Plan for the purposes of ERISA and Section 4975 of the Code only if
the Plan acquires an equity interest in the Trust and none of the exceptions
contained in the Plan Asset Regulations is applicable. An equity interest is
defined under the Plan Asset Regulations as an interest in an entity other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is no authority
directly on point, it is anticipated that the Notes should be treated as
indebtedness under local law without any substantial equity features for
purposes of the Plan Asset Regulations. Accordingly, the assets of the Trust
should not be treated as Plan Assets.
Without regard to whether the Notes are treated as an equity interest for
such purposes, the acquisition or holding of Notes by or on behalf of a Plan or
with Plan Assets could be considered to give rise to a prohibited transaction if
ComEd, the Trust, the Indenture Trustee, the Delaware Trustee, the Grantee, the
Administrator, the Servicer, any swap counterparty, any Underwriter or any of
their respective affiliates is or becomes a Party in Interest with respect to
such Plan. In this event, certain exemptions from the prohibited transaction
rules could be applicable depending on the type and circumstances of the
fiduciary making the decision to acquire Notes. Included among these exemptions
are Prohibited Transaction Class Exemption ("PTCE") 75-1, which exempts certain
transactions involving Plans and certain broker-dealers, reporting dealers and
banks, PTCE 90-1, which exempts certain transactions between insurance company
separate accounts and Parties in Interest, PTCE 91-38, which exempts certain
transactions between bank collective investment funds and Parties in Interest,
PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager," PTCE 95-60, which exempts certain
transactions between insurance company general accounts and Parties in Interest
and PTCE 96-23, which exempts certain transactions effected on behalf
124
<PAGE>
of a Plan by an "in-house asset manager" (collectively, the "Exemptions"). Even
if the conditions specified in one or more of the Exemptions are met, the scope
of the relief provided by the Exemptions might or might not cover all acts which
might be construed as prohibited transactions.
Nevertheless, a Plan generally should not purchase Notes if ComEd, the
Indenture Trustee, the Delaware Trustee, the Grantee, the Administrator, the
Servicer, any swap counterparty, any Underwriter or any of their respective
affiliates either (a) has investment discretion with respect to the investment
of assets of such Plan; (b) has authority or responsibility to give or regularly
gives investment advice with respect to assets of such Plan for a fee and
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that such
advice will be based on the particular investment needs of such Plan; or (c) is
an employer maintaining or contributing to such Plan. A party that is described
in clause (a) or (b) of the preceding sentence is a fiduciary under ERISA with
respect to the Plan, and any such purchase might result in a "prohibited
transaction" under ERISA or the Code for which no exemption may be available.
ANY FIDUCIARY OR OTHER PLAN INVESTOR CONSIDERING WHETHER TO PURCHASE THE
NOTES OF ANY CLASS OR SERIES ON BEHALF OF OR WITH PLAN ASSETS OF ANY PLAN SHOULD
CONSULT WITH ITS LEGAL ADVISORS.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, except as provided in the applicable Prospectus Supplement,
assets of such plans may be invested in the Notes of any Class or Series without
regard to the ERISA considerations described herein, subject to the provisions
of other applicable federal and state law. However, any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
is subject to the prohibited transaction rules set forth in Section 503 of the
Code.
USE OF PROCEEDS
The Trust will pay over the proceeds received from each sale of a Series of
Notes (net of the expenses of issuance and amounts required to fund the Capital
Subaccount) to the Grantee as the consideration for the Grantee's assignment of
its ownership rights in the related Intangible Transition Property and related
assets (as defined in the Basic Documents) to the Trust. The Grantee will
declare distributions to its sole member, ComEd, in the amount of the proceeds
received from the Trust net of the expenses of issuance and amounts required to
fund the Capital Subaccount and thereby transfer such proceeds to ComEd in
consideration for ComEd's request in each application for a Transitional Funding
Order that the related Intangible Transition Property be granted to and vested
in the Grantee.
Subject to the limitations on the use of proceeds described in "Description
of the Intangible Transition Property--Limitations on the Amounts of
Transitional Funding Instruments, Intangible Transition Property and Instrument
Funding Charges Which Can Be Authorized; Permitted Uses of Proceeds," ComEd
anticipates using the aggregate net proceeds which it receives from the Grantee
to redeem, retire or refinance mortgage bonds and notes, together with certain
premia anticipated in connection with such redemptions, to redeem preference
stock and securities, to repurchase common equity from its parent company,
including commissions in connection with such repurchases, and to pay any
transaction costs incurred in connection with such redemptions, retirements,
refinancings and repurchases. ComEd's parent company will use the proceeds it
receives from any repurchase of ComEd common equity to repurchase the parent
company's publicly-traded common stock, including payment of commissions
thereon.
125
<PAGE>
PLAN OF DISTRIBUTION
The Notes of each Series may be sold to or through underwriters named in the
related Prospectus Supplement (the "Underwriters") by a negotiated firm
commitment underwriting and public reoffering by the Underwriters or such other
underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Grantee and the Trust intend that Notes will be offered through such various
methods from time to time and that offerings may be made concurrently through
more than one of such methods or that an offering of a particular Series of
Notes may be made through a combination of such methods.
The distribution of Notes may be effected from time to time in one or more
transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
In connection with the sale of the Notes, Underwriters or agents may receive
compensation in the form of discounts, concessions or commissions. Underwriters
may sell Notes to certain dealers at prices less a concession. Underwriters may
allow and such dealers may reallow a concession to certain other dealers.
Underwriters, dealers and agents that participate in the distribution of the
Notes of a Series may be deemed to be underwriters and any discounts or
commissions received by them from the Trust and any profit on the resale of the
Notes by them may be deemed to be underwriting discounts and commissions under
the Securities Act. Any such Underwriters or agents will be identified, and any
such compensation received from the Trust will be described in the related
Prospectus Supplement.
Under agreements which may be entered into by the Grantee and the Trust,
Underwriters and agents who participate in the distribution of the Notes may be
entitled to indemnification by the Grantee and ComEd and against certain
liabilities, including liabilities under the Securities Act.
The Underwriters may, from time to time, buy and sell Notes, but there can
be no assurance that an active secondary market will develop and there is no
assurance that any such market, if established, will continue.
RATINGS
It is a condition of issuance of each Class of Notes that at the time of
issuance such 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 Note, and,
accordingly, there can be no assurance that the ratings assigned to any Class of
Notes upon initial issuance will not be lowered or withdrawn by a Rating Agency
at any time thereafter. If a rating of any Class of Notes is revised or
withdrawn, the liquidity of such Class of Notes may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of the
rate of principal payments on the Notes.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Notes and certain
legal matters relating to the United States federal income tax consequences of
the issuance of the Notes will be passed upon for the Trust by Sidley & Austin,
Chicago, Illinois, counsel to ComEd. Certain legal matters relating to the Trust
and the issuance of the Notes will be passed upon by Foley & Lardner, Chicago,
Illinois, counsel to ComEd, and for the Underwriters by Winston & Strawn,
Chicago, Illinois. Winston & Strawn acts from time to time as counsel to ComEd
and its affiliates in certain matters unrelated to the offering of the Notes.
126
<PAGE>
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
127
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM ON PAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
1997 Final Regulations........................................................... 120
Act.............................................................................. 8
Adjustments...................................................................... 17, 57
Administration Agreement......................................................... 10
Administrator.................................................................... 10
Amendatory Act................................................................... 8
Amendatory Tariff................................................................ 17
Annual Accountant's Report....................................................... 94
Applicable Rates................................................................. 15, 56
Basic Documents.................................................................. 115
Beneficiary Trustee.............................................................. 11
Billing Period................................................................... 91
Book-Entry Note.................................................................. 25
Business Day..................................................................... 100
Capital Subaccount............................................................... 21, 109
Cede............................................................................. 25
CEDEL............................................................................ 101
CEDEL Participants............................................................... 103
Class............................................................................ 11
Code............................................................................. 27
Collection Account............................................................... 109
ComEd............................................................................ 8
Cooperative...................................................................... 103
Customers........................................................................ 14
Daily Remittance Date............................................................ 91
Debt Service Billing Requirement................................................. 58
Debt Service Requirement......................................................... 58
Definitive Notes................................................................. 104
Delaware Trustee................................................................. 11
Depositaries..................................................................... 101
DOE.............................................................................. 86
Downgrade Event.................................................................. 45
DTC.............................................................................. 3, 25
Eligible Institution............................................................. 109
Eligible Investments............................................................. 110
ERISA............................................................................ 26
Euroclear........................................................................ 101
Euroclear Operator............................................................... 103
Euroclear Participants........................................................... 103
Event of Default................................................................. 19, 115
Excess Remittance................................................................ 91
Exchange Act..................................................................... 3
Excluded Amounts................................................................. 15, 56
Exemptions....................................................................... 125
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM ON PAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
Expected Amortization Schedule................................................... 19
FDIC............................................................................. 109
FERC............................................................................. 35
Final Maturity Date.............................................................. 18, 98
Financial Institution............................................................ 120
Floating Rate Notes.............................................................. 12
Funding Law...................................................................... 8
General Subaccount............................................................... 21, 109
Grant Agreement.................................................................. 8
Grantee.......................................................................... 11
ICC.............................................................................. 8
IFC Charges...................................................................... 14
IFC Collections.................................................................. 11
IFC Customer Class............................................................... 75
IFC Payments..................................................................... 14, 55
IFC Tariff....................................................................... 9
Indenture........................................................................ 11, 98
Indenture Trustee................................................................ 13
Independent Managers............................................................. 74
Indirect Participant............................................................. 26
Initial Intangible Transition Property........................................... 59
Initial TFO...................................................................... 55
Intangible Transition Property................................................... 14
Lost Revenue Recoveries.......................................................... 92
Monthly IFC Amount............................................................... 91
Monthly Remittance Conditions.................................................... 42
Monthly Remittance Date.......................................................... 91
Monthly Servicer's Statement..................................................... 94
Moody's.......................................................................... 41
New Notes........................................................................ 21, 105
Non-United States Noteholder..................................................... 120
Note Collateral.................................................................. 107
Note Interest Rate............................................................... 98
Noteholders...................................................................... 3, 118
Notes............................................................................ 8
Operating Expenses............................................................... 11
Overcollateralization Amount..................................................... 21, 110
Overcollateralization Subaccount................................................. 21, 109
Participants..................................................................... 25
Parties in Interest.............................................................. 124
Payment Date..................................................................... 18
Plan Asset Regulations........................................................... 124
Plan Assets...................................................................... 124
Plans............................................................................ 124
PTCE............................................................................. 124
</TABLE>
129
<PAGE>
<TABLE>
<CAPTION>
DEFINED
DEFINED TERM ON PAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
Quarterly Administration Fee..................................................... 112
Quarterly Interest............................................................... 112
Rating Agency.................................................................... 13
Rating Agency Condition.......................................................... 98
Reconciled Billing Period........................................................ 91
Reconciliation Payment Date...................................................... 16, 57
Record Date...................................................................... 18
Redetermined IFC Payments........................................................ 91
Remittance Shortfall............................................................. 91
Remitted IFC Payments............................................................ 91
Reporting Customer Class......................................................... 75
Required Capital Level........................................................... 22, 110
Required Overcollateralization Level............................................. 22, 110
Reserve Subaccount............................................................... 21, 109
Rules............................................................................ 102
S&P.............................................................................. 41
Sale Agreement................................................................... 8
Scheduled Maturity Date.......................................................... 18, 98
Scheduled Payment................................................................ 19, 99
Series........................................................................... 11
Series Issuance Date............................................................. 23, 91
Servicer......................................................................... 10
Servicer Business Day............................................................ 81
Servicer Defaults................................................................ 95
Servicing Agreement.............................................................. 9
Servicing Fee.................................................................... 25
Servicing Standard............................................................... 23
Specified Payments............................................................... 9
State Pledge..................................................................... 18
Subsequent Intangible Transition Property........................................ 59
Subsequent Transfer Date......................................................... 59
Successor Servicer............................................................... 96
Swap Agreement................................................................... 9, 100
Terms and Conditions............................................................. 103
TIN.............................................................................. 122
Transitional Funding Order....................................................... 13, 55
True-Up Payment Date............................................................. 17, 57
Trust............................................................................ 11
Trust Agreement.................................................................. 11
UCC.............................................................................. 42
Unicom........................................................................... 10
United States Noteholder......................................................... 118
Utilities........................................................................ 8
</TABLE>
130
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
FINANCIAL STATEMENTS OF THE GRANTEE.................................................. F-2
Report of Independent Public Accountants............................................. F-3
Statement of Operations.............................................................. F-4
Balance Sheet........................................................................ F-5
Statement of Changes in Member's Equity.............................................. F-6
Statement of Cash Flows.............................................................. F-7
Notes to Financial Statements........................................................ F-8
FINANCIAL STATEMENTS OF THE TRUST.................................................... F-10
Definitions.......................................................................... F-11
Report of Independent Public Accountants............................................. F-12
Statement of Operations.............................................................. F-13
Balance Sheet........................................................................ F-14
Statement of Changes in Owner's Equity............................................... F-15
Statement of Cash Flows.............................................................. F-16
Notes to Financial Statements........................................................ F-17
</TABLE>
F-1
<PAGE>
COMED FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF COMMONWEALTH EDISON COMPANY)
FINANCIAL STATEMENTS
AS OF JULY 31, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Member of
ComEd Funding, LLC:
We have audited the accompanying balance sheet of ComEd Funding, LLC (a
special purpose Delaware limited liability company) as of July 31, 1998, and the
related statements of operations, changes in member's equity and cash flows for
the period from inception (July 21, 1998) to July 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ComEd Funding, LLC as of
July 31, 1998, and the results of its operations and its cash flows for the
period from inception (July 21, 1998) to July 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
August 3, 1998
F-3
<PAGE>
COMED FUNDING, LLC
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 21, 1998) TO JULY 31, 1998
<TABLE>
<S> <C>
Revenues......................................................................... $ --
Expenses:
Administrative and General..................................................... $ 16,000
---------
Net Loss......................................................................... $ (16,000)
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-4
<PAGE>
COMED FUNDING, LLC
BALANCE SHEET
JULY 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Accounts Receivable from Commonwealth Edison....................................... $ 1,000
---------
Total Assets................................................................... $ 1,000
---------
---------
LIABILITIES AND MEMBER'S EQUITY
Member's Equity.................................................................... $ 1,000
---------
Total Liabilities and Member's Equity.......................................... $ 1,000
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-5
<PAGE>
COMED FUNDING, LLC
STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 21, 1998) TO JULY 31, 1998
<TABLE>
<S> <C>
Member's Equity at Inception..................................................... $ --
Add: Net Loss.................................................................. (16,000)
Contributed Equity........................................................ 17,000
---------
Member's Equity at End of Period................................................. $ 1,000
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-6
<PAGE>
COMED FUNDING, LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 21, 1998) TO JULY 31, 1998
<TABLE>
<S> <C>
Cash Flows From Operating Activities............................................. $ --
---------
Cash Flows From Investing Activities............................................. $ --
---------
Cash Flows From Financing Activities............................................. $ --
---------
Net Increase/(Decrease) in Cash.................................................. $ --
Cash at Inception................................................................ --
---------
Cash at End of Period............................................................ $ --
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-7
<PAGE>
COMED FUNDING, LLC
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial statements include the accounts of ComEd Funding, LLC (CE
Funding), a special purpose Delaware limited liability company, whose sole
member is Commonwealth Edison Company (ComEd). ComEd, the principal subsidiary
of Unicom Corporation (Unicom), is engaged in the production, purchase,
transmission, distribution and sale of electricity to a diverse base of
customers. CE Funding was formed on July 21, 1998, for the exclusive purposes of
(i) initially owning the "intangible transition property" (described below),
(ii) assigning all of its right, title and interest in the intangible transition
property and the servicing agreement to ComEd Transitional Funding Trust
(Trust), and (iii) entering into the servicing agreement with the servicer in
respect to the intangible transition property. The Trust is a special purpose
Delaware business trust which will issue Transitional Funding Trust Notes
(Notes) secured by the intangible transition property to investors and will
remit the proceeds to CE Funding in consideration for the transferring of its
interest in the intangible transition property. CE Funding, in turn, will remit
the net proceeds to ComEd in consideration for the intangible transition
property that will be vested in CE Funding. ComEd anticipates that the Notes
will be issued sometime in the fourth quarter of 1998.
CE Funding was organized solely to acquire, own, hold, administer, service
or enter into agreements regarding the receipt and servicing of intangible
transition property, along with certain other related assets. The Trust will be
organized with the sole purpose of limited business activities as are necessary
or reasonably related to the issuance of the Notes. CE Funding and the Trust are
structured and are to be operated in a manner such that even in the event of
bankruptcy proceedings against ComEd, the assets of CE Funding and the Trust
will not be consolidated into the bankruptcy estate of ComEd.
The intangible transition property is the separate property right, as
created under the Transitional Funding Order issued by the Illinois Commerce
Commission on July 21, 1998, including, without limitation, the right, title and
interest to impose and receive instrument funding charges (IFC). IFC's are
non-bypassable, usage-based, per kilowatt-hour charges to be imposed on
designated consumers of electricity.
(2) SUMMARY OF ACCOUNTING POLICIES
(A) GENERAL
CE Funding follows the accrual method of accounting. Administrative and
general expenses associated with CE Funding will be paid by ComEd and have
been recorded as member's equity. The accounts receivable from ComEd was
received subsequent to the Balance Sheet date.
(B) INVESTMENT IN THE TRUST
CE Funding will have an investment in and 100% ownership of the Trust.
(C) INCOME TAXES
As a limited liability company, the member intends for CE Funding to be
treated as a partnership for tax purposes. Income and losses are passed
through to the member and, accordingly, there is no provision for income
taxes.
F-8
<PAGE>
COMED FUNDING, LLC
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(2) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(D) 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Notwithstanding the non-recourse nature of the transactions, ComEd
(individually, as Servicer or otherwise) will be required under the transaction
documents (i) to make certain representations and warranties with respect to,
among other things, the validity of CE Funding's and its assignees' title to the
intangible transition property and (ii) to observe certain covenants for the
benefit of CE Funding and its assignees. ComEd will also be required to
indemnify CE Funding and its assignees against any breaches of such
representations, warranties and covenants and to protect such parties against
certain other losses, which result from actions or inactions of ComEd.
ComEd will act as the initial servicer (in such capacity, together with any
successor-in-interest, the "Servicer") for CE Funding under the transaction
documents. CE Funding's rights under the Servicing Agreement will be assigned to
the Trust. The transaction documents will contain provisions allowing the
Servicer to be replaced under limited circumstances. The Servicer will be paid a
servicing fee in consideration for billing and collecting the IFCs on behalf of
the Trust, calculating the reconciliation and true-up adjustments and performing
related services. Such servicing fees shall be paid to the Servicer from the IFC
collections.
F-9
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
(A WHOLLY-OWNED SUBSIDIARY OF COMED FUNDING, LLC)
FINANCIAL STATEMENTS
AS OF OCTOBER 31, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-10
<PAGE>
DEFINITIONS
The following terms are used in these Financial Statements with the
following meanings:
<TABLE>
<CAPTION>
TERM MEANING
- ----------------------------- ------------------------------------------------------------
<S> <C>
CE Funding ComEd Funding, LLC, whose sole member is ComEd
ComEd Commonwealth Edison Company, a wholly-owned subsidiary of
Unicom
Funding Law The Illinois Electric Utility Transitional Funding Law of
1997
IFC Instrument Funding Charges
Notes Transitional Funding Trust Notes
Servicer Responsible for Servicing, Managing and Receiving IFC
Payments for a Servicing Fee
Transitional Funding Order Illinois Commerce Commission order, dated July 21, 1998,
issued pursuant to the Funding Law, which provides, among
other things, for the creation of intangible transition
property
Trust ComEd Transitional Funding Trust, whose sole owner is CE
Funding
Unicom Unicom Corporation
</TABLE>
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owner of
ComEd Transitional Funding Trust:
We have audited the accompanying balance sheet of ComEd Transitional Funding
Trust (a special purpose Delaware business trust) as of October 31, 1998, and
the related statements of operations, changes in owner's equity and cash flows
for the period from inception (October 28, 1998) to October 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ComEd Transitional Funding
Trust as of October 31, 1998, and the results of its operations and its cash
flows for the period from inception (October 28, 1998) to October 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 9, 1998
F-12
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1998) TO OCTOBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Revenues............................................................................. $ --
Expenses............................................................................. $ --
---------
Net Income (Loss).................................................................... $ --
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-13
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets:
Accounts Receivable from CE Funding............... $ 1,000
------------
Deferred Charges:
Unamortized Issuance Expense of Notes............. $ 16,000
------------
Total Assets.................................... $ 17,000
------------
------------
LIABILITIES AND OWNER'S EQUITY
Current Liabilities:
Accounts Payable.................................. $ 16,000
------------
Owner's Equity.................................... $ 1,000
------------
Total Liabilities and Owner's Equity............ $ 17,000
------------
------------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-14
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
STATEMENT OF CHANGES IN OWNER'S EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1998) TO OCTOBER 31, 1998
<TABLE>
<S> <C>
Owner's Equity at Inception........................................................ $ --
Add: Net Income (Loss)........................................................... --
Contributed Equity........................................................... 1,000
---------
Owner's Equity at End of Period.................................................... $ 1,000
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-15
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1998) TO OCTOBER 31, 1998
<TABLE>
<S> <C>
Cash Flows From Operating Activities............................................... $ --
---------
Cash Flows From Investing Activities............................................... $ --
---------
Cash Flows From Financing Activities............................................... $ --
---------
Net Increase/(Decrease) in Cash.................................................... $ --
Cash at Inception.................................................................. --
---------
Cash at End of Period.............................................................. $ --
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-16
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial statements include the accounts of the Trust, a special
purpose Delaware business trust, whose sole owner is CE Funding. CE Funding is a
special purpose Delaware limited liability company, whose sole member is ComEd.
ComEd, the principal subsidiary of Unicom, is engaged in the production,
purchase, transmission, distribution and sale of electricity to a diverse base
of customers. The Trust was formed on October 28, 1998, for the exclusive
purpose of issuing Notes and will remit the proceeds to CE Funding in
consideration for the transferring of CE Funding's interest in the intangible
transition property (described below). CE Funding, in turn, will remit the net
proceeds to ComEd in consideration for the intangible transition property that
will be vested in CE Funding. CE Funding was formed on July 21, 1998, for the
exclusive purposes of (i) initially owning the intangible transition property,
(ii) assigning all of its right, title and interest in the intangible transition
property and the servicing agreement to the Trust, and (iii) entering into the
servicing agreement with the servicer in respect to the intangible transition
property. In accordance with the Funding Law and the related Transitional
Funding Order, the Trust shall be entitled to receive the intangible transition
property created by such Transitional Funding Order as assignee of CE Funding,
and shall be authorized to issue Notes as transitional funding instruments. The
assets of the Trust will consist of the intangible transition property and the
other collateral, including capital transferred by CE Funding in an amount
specified in each Prospectus Supplement which will be sufficient to meet certain
requirements of the indenture between the Trust and the indenture trustee. ComEd
anticipates that the Notes will be issued sometime in the fourth quarter of
1998.
The Trust was organized with the sole purpose of limited business activities
as are necessary or reasonably related to the issuance of the Notes. CE Funding
and the Trust are structured and are to be operated in a manner such that even
in the event of bankruptcy proceedings against ComEd, the assets of CE Funding
and the Trust will not be consolidated into the bankruptcy estate of ComEd.
The intangible transition property is the separate property right, as
created under the Transitional Funding Order issued by the Illinois Commerce
Commission on July 21, 1998, including, without limitation, the right, title and
interest to impose and receive the IFCs. IFCs are non-bypassable, usage-based,
per kilowatt hour charges to be imposed on designated consumers of electricity.
(2) SUMMARY OF ACCOUNTING POLICIES
(A) GENERAL
The Trust follows the accrual method of accounting. The accounts
receivable from CE Funding was received subsequent to the Balance Sheet
date. The issuance expenses in connection with the Notes will be paid from
the proceeds received for the Notes.
(B) UNAMORTIZED ISSUANCE EXPENSE IN CONNECTION WITH THE NOTES
The unamortized issuance expenses in connection with the Notes will be
amortized over the life of the Notes.
(C) INCOME TAXES
As a special purpose business trust, the member of CE Funding intends
for the Trust, CE Funding and ComEd to be treated as a single entity for tax
purposes. Income and losses are passed through to the member of CE Funding
and, accordingly, there will be no provision for income taxes.
F-17
<PAGE>
COMED TRANSITIONAL FUNDING TRUST
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(2) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(D) 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Notwithstanding the non-recourse nature of the transactions, ComEd
(individually, as Servicer or otherwise) will be required under the transaction
documents (i) to make certain representations and warranties with respect to,
among other things, the validity of CE Funding's and its assignees' title to the
intangible transition property and (ii) to observe certain covenants for the
benefit of CE Funding and its assignees. ComEd will also be required to
indemnify CE Funding and its assignees against any breaches of such
representations, warranties and covenants and to protect such parties against
certain other losses, which result from actions or inactions of ComEd.
ComEd will act as the initial servicer for CE Funding under the transaction
documents. CE Funding's rights under the Servicing Agreement will be assigned to
the Trust. The transaction documents will contain provisions allowing the
Servicer to be replaced under limited circumstances. The Servicer will be paid a
servicing fee in consideration for billing and collecting the IFCs on behalf of
the Trust, calculating the reconciliation and true-up adjustments and performing
related services. Such servicing fees shall be paid to the Servicer from the IFC
collections.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH THEY RELATE OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTIONS IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF COMED SINCE THE
DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports to Holders S-3
Prospectus Supplement Summary.................. S-4
Description of the Offered Notes............... S-14
Description of the Intangible Transition
Property..................................... S-18
The Servicer................................... S-20
Servicing...................................... S-20
Material United States Federal Tax
Consequences................................. S-21
Underwriting................................... S-21
Ratings........................................ S-22
Legal Matters.................................. S-23
Index of Principal Definitions................. S-24
PROSPECTUS
Available Information.......................... 3
Reports to Holders............................. 3
Incorporation of Certain Documents by
Reference.................................... 3
Prospectus Supplement.......................... 4
Table of Contents.............................. 5
Prospectus Summary............................. 8
Risk Factors................................... 28
Electric Industry Restructuring in Illinois.... 45
Description of the Intangible Transition
Property..................................... 51
Certain Payment, Weighted Average Life and
Yield Considerations......................... 71
The Trust...................................... 72
The Grantee.................................... 73
The Servicer................................... 75
Servicing...................................... 89
Description of the Notes....................... 98
Security for the Notes......................... 107
Material United States Federal Tax
Consequences................................. 118
ERISA Considerations........................... 124
Use of Proceeds................................ 125
Plan of Distribution........................... 126
Ratings........................................ 126
Legal Matters.................................. 126
Experts........................................ 127
Index of Principal Definitions................. 128
Index of Financial Statements.................. F-1
</TABLE>
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
$3,400,000,000
COMED TRANSITIONAL FUNDING TRUST
$424,967,313 CLASS A-1
5.38% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$425,032,687 CLASS A-2
5.29% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$258,860,915 CLASS A-3
5.34% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$421,139,085 CLASS A-4
5.39% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$598,510,714 CLASS A-5
5.44% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$761,489,286 CLASS A-6
5.63% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
$510,000,000 CLASS A-7
5.74% TRANSITIONAL FUNDING TRUST NOTES, SERIES 1998
COMMONWEALTH EDISON COMPANY
SERVICER
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
CHASE SECURITIES INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
BNY CAPITAL MARKETS, INC.
GARDNER RICH & COMPANY
LOOP CAPITAL MARKETS, LLC
MESIROW FINANCIAL, INC.
RAMIREZ & CO., INC.
SIEBERT BRANDFORD SHANK & CO., LLC
(A DIVISION OF MURIEL SIEBERT & CO., INC.)
