<PAGE>
As filed with the Securities and Exchange Commission on July 20, 1999
Registration No. 333-75369
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NUMBER 3
TO
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
PP&L Transition Bond Company LLC
(Issuer with respect to the Bonds)
(Exact name as specified in registrant's Certificate of Formation)
Delaware 23-3004428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PP&L Transition Bond Company LLC,
Two North Ninth Street, GENA 9-2, Room 3
Allentown, Pennsylvania 18101
(610) 774-7934
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
James E. Abel
Two North Ninth Street, GENA 9-2, Room 3
Allentown, Pennsylvania 18101
(610) 774-7934
(Name, address, including zip code, and telephone number including area code,
of agent for service)
----------------
Copies to:
Christopher J. Kell Dean E. Criddle
Skadden, Arps, Slate, Meagher & Flom Orrick, Herrington & Sutcliffe LLP
LLP 400 Sansome Street
919 Third Avenue San Francisco, CA 94111
New York, New York 10022 (415) 773-5783
(212) 735-2160
----------------
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered per Unit(1) Offering Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds
Issuable in Series.... $2,570,000,000 100% $2,570,000,000 $714,460
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
----------------
The registrant hereby amends this Registration Statement on any date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on a date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 20, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 1999)
$2,570,000,000 Transition Bonds, series 1999-1
PP&L Transition Bond Company LLC
PP&L, Inc., servicer
----------
The following securities are being offered in this prospectus supplement*:
<TABLE>
<CAPTION>
Underwriting Expected
Discounts Final Final
Principal and Net Payment Maturity
Class Amount Price Commissions Proceeds Date Date
- ----- --------- ----- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Bonds......... $ % % $
Class A-2 Bonds......... $ % % $
Class A-3 Bonds......... $ % % $
Class A-4 Bonds......... $ % % $
Class A-5 Bonds......... $ % % $
Class A-6 Bonds......... $ % % $
Class A-7 Bonds......... $ % % $
Class A-8 Bonds......... $ % % $
</TABLE>
(*)These securities will be referred to as the series 1999-1 bonds in this
prospectus supplement.
----------
Interest and principal on the series 1999-1 bonds will be payable quarterly, on
the 25th day of March, June and September and on the 26th day of December or
the first business day after these dates, beginning December 27, 1999.
Consider carefully the risk factors beginning on page 12 of the prospectus.
The series 1999-1 bonds represent obligations of PP&L Transition Bond Company
LLC, which is the issuer, and are backed only by the assets of PP&L Transition
Bond Company LLC. Neither PP&L Inc., PP&L Resources Inc., nor any of their
affiliates are liable for payments on the bonds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
There currently is no secondary market for the series 1999-1 bonds, and there
is no assurance that one will develop.
----------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
BANC ONE CAPITAL MARKETS, INC.
CHASE SECURITIES INC.
FIRST UNION CAPITAL MARKETS CORP.
MELLON FINANCIAL MARKETS, INC.
JANNEY MONTGOMERY SCOTT INC.___________PRYOR, McCLENDON, COUNTS & CO., INC.
This prospectus supplement does not contain complete information about the
offering of the series 1999-1 bonds. Additional information is contained in the
prospectus. Prospective investors are urged to read both this prospectus
supplement and the prospectus in full. Sales of the series 1999-1 bonds may not
be consummated unless the purchaser has received both this prospectus
supplement and the prospectus.
The date of this prospectus supplement is , 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C> <C> <C>
WHERE TO FIND INFORMATION IN THESE PP&L Will Assess Intangible
DOCUMENTS........................... S-3 Transition Charges on Particular
SUMMARY OF TERMS--PROSPECTUS Customers........................ S-18
SUPPLEMENT.......................... S-4 PP&L's Intangible Transition
THE SERIES 1999-1 BONDS.............. S-10 Charges.......................... S-18
General............................ S-10 PP&L May Obtain Adjustments to the
Interest........................... S-11 Intangible Transition Charges.... S-20
Principal.......................... S-11 DESCRIPTION OF PP&L'S BUSINESS...... S-20
Optional Redemption of the Series PP&L's Operations................. S-20
1999-1 Bonds...................... S-14 Information That Is Available to
The Overcollateralization and the Series 1999-1 Bondholders.... S-21
Capital Amounts................... S-15 UNDERWRITING THE SERIES 1999-1
Other Credit Enhancement........... S-16 BONDS.............................. S-22
Issuance of Other Series........... S-17 RATINGS FOR THE SERIES 1999-1
DESCRIPTION OF INTANGIBLE TRANSITION BONDS.............................. S-23
PROPERTY............................ S-17
Customer Class Descriptions........ S-17
</TABLE>
S-2
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This Prospectus Supplement and the attached Prospectus provide information
about PP&L and the issuer of the Transition Bonds which is PP&L Transition
Bond Company LLC, which is referred to as Transition Bond Co. in this
Prospectus Supplement, including terms and conditions that apply to the Series
1999-1 Bonds. The specific terms of the Series 1999-1 Bonds are contained in
this Prospectus Supplement. You should rely only on information about the
Series 1999-1 Bonds provided in this Prospectus Supplement and the attached
Prospectus. We have not authorized anyone to provide you with different
information.
We have included cross references to captions in these materials where you
can find further related discussions. We have started with several
introductory sections describing Transition Bond Co. and terms in abbreviated
form, followed by a more complete description of the terms. The introductory
sections are:
. Summary of Terms--Prospectus Supplement--provides information concerning
the amounts and the payment terms of each class of Series 1999-1 Bonds.
. Description of Intangible Transition Property--provides information
concerning the asset that is the collateral for the Series 1999-1 Bonds.
Cross references may be contained in the introductory sections which will
direct you elsewhere in this Prospectus Supplement or the attached Prospectus
to more detailed descriptions of a particular topic. You can also find
references to key topics in the Table of Contents on the preceding page.
You can find the definition of capitalized terms in the "Glossary of
Defined Terms" which is Appendix A to the Prospectus. This Glossary may be
found after the Section entitled "Various Legal Matters Relating to the
Transition Bonds" in the Prospectus.
S-3
<PAGE>
SUMMARY OF TERMS--PROSPECTUS SUPPLEMENT
This summary contains a brief description of the series 1999-1 bonds. You
will find a detailed description of the terms of the offering of the series
1999-1 bonds following this summary. The terms that apply to all series of
transition bonds appear in the prospectus which follows this prospectus
supplement.
Consider carefully the risk factors beginning on page 12 of the prospectus.
The Issuer of the Transition PP&L Transition Bond Company LLC, a
Bonds: Delaware limited liability company wholly
owned by PP&L.
Issuer's Address: Two North Ninth Street, GENA 9-2, Room 3;
Allentown, PA 18101
Issuer's Telephone Number: (610) 774-7934
Seller of the Intangible
Transition Property to the
Issuer:
CEP Securities, an indirect wholly owned
subsidiary of PP&L.
Seller's Address: 3960 Howard Hughes Parkway, Suite 630
North; Las Vegas, NV 89109
Seller's Telephone Number: (702) 866-2202
Servicer of the Intangible
Transition Property:
PP&L, an electric utility serving
approximately 1.3 million customers in
central and eastern Pennsylvania.
Trustee: The Bank of New York
Closing Date: On or about August , 1999
Minimum Denominations: $1,000
The Terms of the Series 1999-1 Bonds
<TABLE>
<CAPTION>
Class A-1 Bonds Class A-2 Bonds
------------------ ------------------
<S> <C> <C>
Principal Amount: $ $
Bond Rate Per Annum: % %
Interest Accrual Method: 90/360 90/360
Payment Dates:
March 25, June 25, March 25, June 25,
September 25 and September 25 and
December 26 December 26
First Payment Date: December 27, 1999 December 27, 1999
Expected Final Payment Date:
Final Maturity Date:
CUSIP Number:
Anticipated Ratings (Moody's/S&P/Fitch
IBCA): Aaa/AAA/AAA Aaa/AAA/AAA
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
Class A-3 Bonds Class A-4 Bonds
------------------ ------------------
<S> <C> <C>
Principal Amount: $ $
Bond Rate Per Annum: % %
Interest Accrual Method: 90/360 90/360
Payment Dates: March 25, June 25, March 25, June 25,
September 25 and September 25 and
December 26 December 26
First Payment Date: December 27, 1999 December 27, 1999
Expected Final Payment Date:
Final Maturity Date:
CUSIP Number:
Anticipated Ratings (Moody's/S&P/Fitch
IBCA): Aaa/AAA/AAA Aaa/AAA/AAA
<CAPTION>
Class A-5 Bonds Class A-6 Bonds
------------------ ------------------
<S> <C> <C>
Principal Amount: $ $
Bond Rate Per Annum: % %
Interest Accrual Method: 90/360 90/360
Payment Dates: March 25, June 25, March 25, June 25,
September 25 and September 25 and
December 26 December 26
First Payment Date: December 27, 1999 December 27, 1999
Expected Final Payment Date:
Final Maturity Date:
CUSIP Number:
Anticipated Ratings (Moody's/S&P/Fitch
IBCA): Aaa/AAA/AAA Aaa/AAA/AAA
<CAPTION>
Class A-7 Bonds Class A-8 Bonds
------------------ ------------------
<S> <C> <C>
Principal Amount: $ $
Bond Rate Per Annum: % %
Interest Accrual Method: 90/360 90/360
Payment Dates: March 25, June 25, March 25, June 25,
September 25 and September 25 and
December 26 December 26
First Payment Date: December 27, 1999 December 27, 1999
Expected Final Payment Date:
Final Maturity Date:
CUSIP Number:
Anticipated Ratings (Moody's/S&P/Fitch
IBCA): Aaa/AAA/AAA Aaa/AAA/AAA
</TABLE>
S-5
<PAGE>
The Collateral
PP&L Transition Bond Company LLC will own intangible transition property, a
property right created under the competition act. In general terms, the intan-
gible transition property represents the right to recover:
. the principal amount of the transition bonds; and
. the interest, fees, costs, charges, credit enhancement and premiums, if
any, associated with the transition bonds.
Those amounts will be recovered through intangible transition charges pay-
able by retail consumers of electricity within PP&L's service territory who
receive electric delivery service from PP&L. The principal amount of the tran-
sition bonds is equal to a portion of PP&L's stranded costs. Stranded costs
are an electric utility's net electric generation related costs which tradi-
tionally would be recoverable under a regulated environment but which may not
be recoverable in a competitive electric generation market. The intangible
transition property is described in more detail under "The Contribution Agree-
ment--Assignment of the Intangible Transition Property and Related Rights to
the Seller" in the prospectus.
In connection with the issuance of the series 1999-1 bonds, CEP Securities
Co. LLC will sell intangible transition property to PP&L Transition Bond Com-
pany LLC to support the issuance of up to $2.57 billion in principal amount of
transition bonds. PP&L, as servicer of the intangible transition property,
will collect the intangible transition charges from customers on behalf of
PP&L Transition Bond Company LLC. Other entities may be required to collect
intangible transition charges from customers and pay the amounts collected to
PP&L, as servicer. Since the amount of intangible transition charges collected
will depend on the amount of electricity delivered to customers within PP&L's
service territory, the amount of intangible transition charges collected may
vary substantially from year to year. See "The Servicer of the Intangible
Transition Property" in the prospectus.
In order to facilitate the possible issuance of the transition bonds in
multiple series on different issuance dates, PP&L arranged for the formation
of CEP Securities Co. LLC as a bankruptcy remote special purpose entity for
the purpose of holding any remaining intangible transition property not sold
to PP&L Transition Bond Company LLC on or before the issuance of the first se-
ries of transition bonds. PP&L, CEP Securities Co. LLC and two other affili-
ates of PP&L entered into a contribution agreement in order to provide for the
assignment of the intangible transition property to CEP Securities Co. LLC in
accordance with the competition act. See "The Contribution Agreement" in the
prospectus.
Payment Sources
On each payment date, the trustee will pay amounts owed on the series 1999-
1 bonds from:
. amounts received from the servicer with respect to intangible transition
charges during the prior quarter; and
. amounts available for withdrawal from trust accounts held by the trustee
or paid pursuant to contracts pledged to secure one or more series of
transition bonds.
S-6
<PAGE>
The series 1999-1 bonds will not be payable from collateral that is sepa-
rate from that securing other series of bonds. All series will be payable from
the same collateral. If another series of bonds is issued, the principal
source of repayment for that series will also be the intangible transition
charges collected by the servicer. The issuance of other series of transition
bonds is not expected to adversely affect collections of intangible transition
charges to make payments on the series 1999-1 bonds. This is because intangi-
ble transition charges and adjustments of those charges are generally based on
the total principal amount of all transition bonds outstanding. In addition,
the issuance of any additional series of transition bonds would be subject to
confirmation by the applicable rating agencies that this issuance would not
result in a reduction or withdrawal of the current ratings on the outstanding
series 1999-1 bonds. See "The Indenture" in the prospectus.
Interest Payments
On each payment date, PP&L Transition Bond Company LLC will pay interest on
each class of the series 1999-1 bonds.
Interest generally accrues on the outstanding principal balance of the se-
ries 1999-1 bonds on a quarterly basis. Interest payments for all classes of
the series 1999-1 bonds will be made on a pari passu basis. The series 1999-1
bonds will accrue interest on any interest payments that were not made on a
timely basis.
Interest means, for any payment date for the series 1999-1 bonds, the sum,
without duplication, of:
. an amount equal to the amount of interest accrued at the applicable in-
terest rates from the prior payment date with respect to the series
1999-1 bonds; plus
. any unpaid interest plus any interest accrued on this unpaid interest;
plus
. if the transition bonds have been declared due and payable, all accrued
and unpaid interest thereon; plus
. if the series 1999-1 bonds are to be redeemed, the amount of interest
that accrued and is unpaid on the series 1999-1 bonds to the redemption
date.
For the December 27, 1999 payment date, interest will accrue from the clos-
ing date.
Principal Payments
On each payment date, the amount required to be paid as principal on the
transition bonds, including the series 1999-1 bonds, will equal, the sum,
without duplication, of:
. the unpaid principal amount of any transition bonds whose final maturity
date is on that payment date; plus
. the unpaid principal amount of any transition bonds called for redemp-
tion; plus
. the unpaid principal amount if there is a default on the transition
bonds and the trustee or the holders of a majority of the principal
amount of the transition bonds declare the transition bonds to be due
and payable; plus
. the principal scheduled to be paid on the transition bonds on that pay-
ment date.
S-7
<PAGE>
On each payment date, holders of each class of series 1999-1 bonds will be
entitled to receive payments of principal in a sequential manner, to the ex-
tent funds are available, as follows:
1. To the holders of the series 1999-1 bonds, class A-1, until this class
is paid in full;
2. To the holders of the series 1999-1 bonds, class A-2, until this class
is paid in full;
3. To the holders of the series 1999-1 bonds, class A-3, until this class
is paid in full;
4. To the holders of the series 1999-1 bonds, class A-4, until this class
is paid in full;
5. To the holders of the series 1999-1 bonds, class A-5, until this class
is paid in full;
6. To the holders of the series 1999-1 bonds, class A-6, until this class
is paid in full;
7. To the holders of the series 1999-1 bonds, class A-7, until this class
is paid in full; and
8. To the holders of the series 1999-1 bonds, class A-8, until this class
is paid in full.
However, the principal payment on any class on a payment date will
generally not be greater than the amount necessary to reduce the principal
balance of the class to the amount specified in Table 2 in this prospectus
supplement.
Optional Redemption
PP&L Transition Bond Company LLC may redeem the series 1999-1 bonds, at its
option, on any payment date if the outstanding principal balance of the series
1999-1 bonds, after giving effect to payments that would otherwise be made on
that payment date, is less than five percent of the initial principal balance
of the series 1999-1 bonds. In the case of redemption, PP&L Transition Bond
Company LLC will pay the outstanding principal amount of the series 1999-1
bonds together with accrued but unpaid interest as of the redemption date. The
trustee will give notice of the redemption to series 1999-1 bondholders not
less than five days nor more than 45 days prior to the redemption date. The
series 1999-1 bonds will not be redeemed in any other circumstances.
Particular Credit Enhancement Features
Credit enhancement for the series 1999-1 bonds includes the following:
. Adjustments to the intangible transition charges. PP&L, as servicer of
the intangible transition property on behalf of PP&L Transition Bond
Company LLC, will make adjustments to the intangible transition charges
it bills to customers, upon approval by the Pennsylvania PUC if PP&L:
1) collects insufficient intangible transition charges, or
2) collects excess amounts of intangible transition charges,
in order:
1) to make timely payments on the series 1999-1 bonds,
S-8
<PAGE>
2) to pay fees, costs and charges associated with the transition bonds, and
3) to fund any of the subaccounts to its required level.
The following table summarizes the adjustment frequency of the intangible
transition charges with respect to the series 1999-1 bonds:
<TABLE>
<CAPTION>
Adjustment Date
------------------
<S> <C>
Annual Adjustments........................................... 1/1/00-1/1/08
Quarterly Adjustments........................................ 7/1/08 and 10/1/08
Monthly Adjustments.......................................... 1/1/09-5/1/09
</TABLE>
If the last class of the series 1999-1 bonds is not paid at its final matu-
rity date, the intangible transition charges will continue to be charged but
not for electricity delivered after December 31, 2009. In that case, the final
adjustment date will be December 1, 2009. See "The PUC Order and the Intangible
Transition Charges" in the prospectus.
. Collection Account--Under the indenture, the trustee will hold a single
collection account, divided into various subaccounts, for all series of
transition bonds. The primary subaccounts for credit enhancement purposes
are
1) Overcollateralization Subaccount--The funding level for the
overcollateralization subaccount is 0.5% of the initial principal
amount of the series 1999-1 bonds, which will be funded ratably over
the life of the transition bonds, see Table 3 in this prospectus
supplement,
2) Capital Subaccount--An amount equal to 0.5% of the initial principal
amount of the series 1999-1 bonds will be deposited in the capital
subaccount on the closing date, and
3) Reserve Subaccount--Any excess amount of intangible transition charge
collections and investment earnings not released to PP&L Transition
Bond Company LLC will be held in the reserve subaccount.
The credit enhancement for the series 1999-1 bonds is intended to protect
you against losses or delays in scheduled payments on your series 1999-1 bonds.
S-9
<PAGE>
THE SERIES 1999-1 BONDS
The Series 1999-1 Bonds will be issued under and secured pursuant to the
Indenture as supplemented. The following summary describes the material terms
of the Series 1999-1 Bonds.
Where to Find Definitions of Capitalized Terms. Capitalized terms used in
this Prospectus Supplement are defined in a Glossary of Defined Terms which is
Appendix A to the Prospectus. This Glossary may be found after the Section
entitled "Various Legal Matters Relating to the Transition Bonds" in the
Prospectus.
General
The Series 1999-1 Bonds will be issued on the Series Issuance Date and will
include the following Classes.
TABLE 1
<TABLE>
<CAPTION>
Initial Class Expected Final Final
Class Principal Balance Payment Date Maturity Date Bond Rate
- ----- ----------------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
A-1................... $ ( ) ( ) [ %]
A-2................... $ ( ) ( ) [ %]
A-3................... $ ( ) ( ) [ %]
A-4................... $ ( ) ( ) [ %]
A-5................... $ ( ) ( ) [ %]
A-6................... $ ( ) ( ) [ %]
A-7................... $ ( ) ( ) [ %]
A-8................... $ ( ) ( ) [ %]
</TABLE>
How PP&L Transition Bond Company LLC Will Make Series 1999-1 Bond
Payments. PP&L Transition Bond Company LLC will pay interest and principal
relating to the Series 1999-1 Bonds through DTC or, if the Series 1999-1 Bonds
are no longer in book-entry form, at the offices of The Bank of New York at
101 Barclay Street, Floor 12 East, New York, NY 10286, Attention: Asset Backed
Finance Unit. PP&L Transition Bond Company LLC will make payments by wire
transfer in immediately available funds to the account designated by Cede &
Co. as nominee of DTC if the Series 1999-1 Bonds are in book-entry form.
Otherwise, PP&L Transition Bond Company LLC will make payments by check mailed
first-class, postage prepaid to a Series 1999-1 Bondholder's address as it
appears as of the record date on the register maintained by the Trustee. After
prior notice to the Series 1999-1 Bondholders, PP&L Transition Bond Company
LLC will pay the final installment of principal
S-10
<PAGE>
and premium, if any, only upon presentation and surrender of the Series 1999-1
Bonds at a place specified in the notice. A beneficial owner of a Series 1999-
1 Bond will receive payments from the securities intermediary through whom it
holds the Series 1999-1 Bonds.
Interest
Interest on each Class of the Series 1999-1 Bonds will accrue beginning on
the Series Issuance Date at the respective Bond Rates indicated above. For
each Class of the Series 1999-1 Bonds, interest is payable on each Payment
Date, commencing December 27, 1999, to the persons in whose names the Series
1999-1 Bonds of each Class are registered at the close of business on the
preceding record date.
On each Payment Date, each Class of Series 1999-1 Bonds will be entitled to
receive payments of interest on a pari passu basis among all Classes. The
record date with respect to any Payment Date will be the close of business on
the Business Day preceding the Payment Date.
Principal
On each Payment Date, holders of each Class of Series 1999-1 Bonds will be
entitled to receive payments of principal in a sequential manner, to the
extent funds are available, as follows:
1. To the holders of the Series 1999-1 Bonds, Class A-1, until this Class
is retired in full;
2. To the holders of the Series 1999-1 Bonds, Class A-2, until this Class
is retired in full;
3. To the holders of the Series 1999-1 Bonds, Class A-3, until this Class
is retired in full;
4. To the holders of the Series 1999-1 Bonds, Class A-4, until this Class
is retired in full;
5. To the holders of the Series 1999-1 Bonds, Class A-5, until this Class
is retired in full;
6. To the holders of the Series 1999-1 Bonds, Class A-6, until this Class
is retired in full;
7. To the holders of the Series 1999-1 Bonds, Class A-7, until this Class
is retired in full; and
8. To the holders of the Series 1999-1 Bonds, Class A-8, until this Class
is retired in full.
However, the principal payment on any Class on a Payment Date will generally
not be greater than the amount necessary to reduce the Principal Balance of
the Class to the amount specified in Table 2 in this Prospectus Supplement.
The entire unpaid principal amount of each Class of the Series 1999-1
Bonds will be due and payable on the Final Maturity Date for the Class.
In the event of an acceleration of payments following a default on the
Series 1999-1 Bonds, principal payments on each Class of Series 1999-1 Bonds
will be made on a pro rata basis based on the respective outstanding principal
balance for each Class as of the prior Payment Date.
S-11
<PAGE>
The Expected Amortization Schedule for the Series 1999-1 Bonds. The
following table sets forth the principal balance that is scheduled to remain
outstanding on each Payment Date for each Class of the Series 1999-1 Bonds
after giving effect to the payments made on that date. In preparing the table,
it has been assumed, among other things, that:
1. the Series 1999-1 Bonds are issued on August , 1999;
2. payments on the Series 1999-1 Bonds are made on each Payment Date,
commencing on December 27, 1999;
3. the quarterly Servicing Fee for the Series 1999-1 Bonds equals
$312,500;
4. the quarterly fee paid to the Trustee under the Indenture for the
Series 1999-1 Bonds equals $5,625;
5. the quarterly fees paid to the Independent Managers equal $875;
6. the quarterly fee paid to the administrator of Transition Bond Co. for
the Series 1999-1 Bonds equals $25,000;
7. there are no net earnings on amounts on deposit in the Collection
Account;
8. operating expenses, including all other fees, costs and charges of
Transition Bond Co. and amounts owed by Transition Bond Co. to the
Trustee not noted above are paid in the amount of $25,000 in the
aggregate for all Series on each Payment Date; and
9. all ITC Collections are deposited in the Collection Account in
accordance with PP&L's forecasts.
S-12
<PAGE>
TABLE 2
Expected Amortization Schedule
Outstanding Class 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 Class A-8
------------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/27/99................
3/25/00.................
6/25/00.................
9/25/00.................
12/26/00................
3/25/01.................
6/25/01.................
9/25/01.................
12/26/01................
3/25/02.................
6/25/02.................
9/25/02.................
12/26/02................
3/25/03.................
6/25/03.................
9/25/03.................
12/26/03................
3/25/04.................
6/25/04.................
9/25/04.................
12/26/04................
3/25/05.................
6/25/05.................
9/25/05.................
12/26/05................
3/25/06.................
6/25/06.................
9/25/06.................
12/26/06................
3/25/07.................
6/25/07.................
9/25/07.................
12/26/07................
3/25/08.................
6/25/08.................
9/25/08.................
12/26/08................
</TABLE>
Series 1999-1 Bond Principal Payments May Be Made Later than
Scheduled. There can be no assurance that the principal balance of any Class
of the Series 1999-1 Bonds will be reduced to the amounts indicated in the
foregoing table. The actual principal payments on a Class may be made on a
Payment Date later than indicated in the table. The Series 1999-1 Bonds will
not be in default if not paid on the dates specified in Table 2, unless any
Class is not paid in full on or prior to its respective Final Maturity Date.
S-13
<PAGE>
Optional Redemption of the Series 1999-1 Bonds
Transition Bond Co. may redeem the Series 1999-1 Bonds, at its option, on
any Payment Date if the outstanding principal balance of the Series 1999-1
Bonds, after giving effect to payments that would otherwise be made on that
Payment Date, is less than five percent of the initial principal balance of
the Series 1999-1 Bonds. In the case of redemption, Transition Bond Co. will
pay the outstanding principal amount of the Series 1999-1 Bonds together with
accrued but unpaid interest as of the redemption date. The Trustee will give
notice of the redemption to Series 1999-1 Bondholders not less than five days
nor more than 45 days prior to the redemption date. The Series 1999-1 Bonds
will not be redeemed in any other circumstances.
S-14
<PAGE>
The Overcollateralization and Capital Amounts
The Overcollateralization Subaccount. The Overcollateralization Amount for
the Series 1999-1 Bonds is $12.85 million. As shown in Table 3, the Intangible
Transition Charges related to the Series 1999-1 Bonds will be calculated at
and periodically adjusted to a level that is designed to collect the
Overcollateralization Amount in equal amounts over the life of the Series
1999-1 Bonds. The Scheduled Overcollateralization Levels, as of the date of
this Prospectus Supplement, for each Payment Date for the Series 1999-1 Bonds
are set forth below. See also "The Transition Bonds--Credit Enhancement for
the Transition Bonds" and "The Indenture--How Funds in the General Subaccount
Will be Allocated" in the Prospectus.
TABLE 3
<TABLE>
<CAPTION>
Scheduled
Payment Date Overcollateralization Level
- ------------ ---------------------------
<S> <C>
12/27/99............................................
3/25/00.............................................
6/25/00.............................................
9/25/00.............................................
12/26/00............................................
3/25/01.............................................
6/25/01.............................................
9/25/01.............................................
12/26/01............................................
3/25/02.............................................
6/25/02.............................................
9/25/02.............................................
12/26/02............................................
3/25/03.............................................
6/25/03.............................................
9/25/03.............................................
12/26/03............................................
3/25/04.............................................
6/25/04.............................................
9/25/04.............................................
12/26/04............................................
3/25/05.............................................
6/25/05.............................................
9/25/05.............................................
12/26/05............................................
3/25/06.............................................
6/25/06.............................................
9/25/06.............................................
12/26/06............................................
3/25/07.............................................
6/25/07.............................................
9/25/07.............................................
12/26/07............................................
3/25/08.............................................
6/25/08.............................................
9/25/08.............................................
12/26/08............................................
</TABLE>
S-15
<PAGE>
If amounts available in the General Subaccount and the Reserve Subaccount
are not sufficient on any Payment Date to make scheduled payments to the
Series 1999-1 Bondholders and to pay the fees, costs and charges specified in
the Indenture, the Trustee will draw on amounts in the Overcollateralization
Subaccount. See "The Transition Bonds--Credit Enhancement for the Transition
Bonds" and "The Indenture--How Funds in the General Subaccount Will Be
Allocated" in the Prospectus. The Overcollateralization Amount has been set at
a level sufficient to obtain the ratings on the Series 1999-1 Bonds which are
described under "Ratings for the Series 1999-1 Bonds."
The Capital Subaccount. Upon the issuance of the Series 1999-1 Bonds, PP&L
will deposit the Required Capital Amount for the Series 1999-1 Bonds of
$12,850,000 in the Capital Subaccount. If amounts available in the General
Subaccount, the Reserve Subaccount and the Overcollateralization Subaccount
are not sufficient on any Payment Date to make scheduled payments to the
Series 1999-1 Bondholders and to pay the fees, costs and charges specified in
the Indenture, the Trustee will draw on any amounts in the Capital Subaccount
in excess of $100,000. An amount in the Capital Subaccount equal to $100,000
will be set aside to cover other operating expenses not funded from ITC
Collections. The Required Capital Amount has been set at a level sufficient to
obtain the ratings on the Series 1999-1 Bonds which are described below under
"Ratings for the Series 1999-1 Bonds."
Other Credit Enhancement
The Reserve Subaccount for the Series 1999-1 Bonds. ITC Collections, any
Indemnity Amounts plus investment earnings on the Collection Account, except
for investment earnings on the Capital Subaccount which will be released to
Transition Bond Co. if not needed on that Payment Date, will be available on
each Payment Date to pay:
1. the fees and expenses of the Trustee and the Servicer and other fees,
costs and charges associated with the transition bonds including
operating expenses of Transition Bond Co.,
2. scheduled payments of principal of and interest on each Series of
Transition Bonds payable on that Payment Date,
3. any amount required to replenish the Capital Subaccount, and
4. the amounts allocable to the Overcollateralization Subaccount,
all as described under "The Indenture--How Funds in the General Subaccount
Will Be Allocated" in the Prospectus. Any ITC Collections and investment
earnings in excess of the amounts described, with the exception of investment
earnings on the Capital Subaccount, will be allocated to the Reserve
Subaccount. If on any Payment Date, amounts available in the General
Subaccount are not sufficient to make scheduled payments to the Series 1999-1
Bondholders and to pay the fees, costs and charges specified in the Indenture,
the Trustee will draw on any amounts in the Reserve Subaccount.
See "The Indenture--The Collection Account for the Transition Bonds" in the
Prospectus.
S-16
<PAGE>
Issuance of Other Series
Transition Bond Co. may issue other Series of Transition Bonds without the
prior approval of the Transition Bondholders. Those Series may include terms
and provisions which are unique to those particular Series. A new Series of
Transition Bonds may not be issued if it would result in the credit ratings on
the Series 1999-1 Bonds being reduced or withdrawn. See "Risk Factors--Other
Risks Associated With an Investment in the Transition Bonds", "The Transition
Bonds" and "The Indenture" in the Prospectus.
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY
Intangible transition property is a property right created by the
Competition Act. Intangible transition property represents the irrevocable
right of an electric utility or assignee to receive through the imposition of
intangible transition charges amounts sufficient to recover all of the
following:
1. the transition or stranded costs of an electric utility approved by the
PUC for recovery through the issuance of transition bonds;
2. the costs of retiring existing debt or equity capital of the electric
utility or its holding company parent, including accrued interest and
acquisition or redemption premium, costs of defeasance, and other
related fees, costs and charges, through the issuance of transition
bonds or the assignment, sale or other transfer of intangible
transition property; and
3. the costs incurred to issue, service or refinance the transition bonds,
including accrued interest and acquisition or redemption premium, and
other related fees, costs and charges associated with the transition
bonds, or to assign, sell or otherwise transfer intangible transition
property.
In general, each Customer Class is responsible for a fixed percentage of the
Intangible Transition Charges. The Intangible Transition Charges will be
applied to each Rate Schedule within each Customer Class, and will be adjusted
by Customer Class. See "The Competition Act" and "The PUC Order and the
Intangible Transition Charges" in the Prospectus.
Customer Class Descriptions
Three Customer Classes make up PP&L's customer base: Residential, Small
Commercial and Industrial, and Large Commercial and Industrial. Each Customer
Class includes a number of Rate Schedules. Customer Classes and Rate Schedules
are created by PP&L and approved by the PUC, and are subject to change. Any
changes will be reflected in any Adjustment Request filed with the PUC by
PP&L. The current Rate Schedules were effective on or before November 1, 1997.
See "The Servicer of the Intangible Transition Property--PP&L's Customer
Classes and Rate Schedules" in the Prospectus.
S-17
<PAGE>
PP&L Will Assess Intangible Transition Charges on Particular Customers
PP&L will assess Intangible Transition Charges on the bills of each person
that:
1. was a retail customer of electric service of PP&L located within PP&L's
service territory on January 1, 1997 or that became a customer of
electric service within PP&L's service territory after January 1, 1997,
2. is still located within PP&L's service territory, and
3. is receiving electric delivery service from PP&L.
However, the Intangible Transition Charge is not payable by any person who
self-generates electricity with facilities that are not operated in parallel
with PP&L's transmission and distribution grid. The Intangible Transition
Charges have been allocated among the three Customer Classes as well as the
various Rate Schedules within each Customer Class. For a description of the
Customer Classes and the Rate Schedules within each Customer Class, see "--
PP&L's Intangible Transition Charges" below.
PP&L's Intangible Transition Charges
The Qualified Transition Expenses authorized in the PUC Order are to be
recovered from the Customers in each of PP&L's Customer Classes and Rate
Schedules. Each Customer must pay Intangible Transition Charges on all
electricity delivered by PP&L, even if the Customer elects to purchase
electricity from another supplier or elects to self-generate a portion of its
electricity needs. As long as the Customer is located within PP&L's retail
electric service area and receives electric delivery service from PP&L, that
Customer must pay Intangible Transition Charges, even if some other entity is
providing the Customer with electricity generation service.
Intangible Transition Charges will be allocated among PP&L's Customer
Classes and Rate Schedules based on the relative generation-related charges
borne by each Customer Class and each Rate Schedule through the electric rates
specified in PP&L's electricity rate tariff which became effective on January
1, 1999. From this determination, PP&L will calculate the total amount of
Intangible Transition Charges required to be billed to each Customer Class in
order to generate ITC Collections sufficient to ensure timely recovery of
Qualified Transition Expenses. That amount will be expressed as a charge or
charges for each Rate Schedule. Those charges will be reflected in each
Customer's bill within each Rate Schedule. The charges will vary among
Customer Classes and among Rate Schedules within a Customer Class. The dollar
amount of the charge on a Customer's bill is the Intangible Transition Charge
payable by the Customer.
ITC Collections will vary from projections because total electricity
revenues are affected by changes in usage, number of Customers, rate of
delinquencies and write-offs or other factors. PP&L will recalculate the
charge applied to Customers' bills to adjust for such variations on each
Calculation Date. See Tables 3, 4, 5, 6, 7, 8 and 9 under "The Servicer of the
Intangible Transition Property" in the Prospectus.
S-18
<PAGE>
On each Remittance Date, the Servicer will remit all ITC Collections and
any Indemnity Amounts to the Trustee under the Indenture for deposit in the
Collection Account. These funds remitted by the Servicer to the Trustee will
be deposited into the General Subaccount. On each Payment Date, the Trustee
will allocate amounts in the General Subaccount as described under "The
Indenture--How Funds in the General Subaccount Will Be Allocated" in the
Prospectus.
The Average Intangible Transition Charge for Customers. Initially, the
Intangible Transition Charges billed will be approximately $ per month for
an average Customer in the Residential Customer Class; approximately $ per
month for an average Customer in the Small Commercial and Industrial Customer
Class; and approximately $ per month for an average Customer in the Large
Commercial and Industrial Customer Class. Intangible Transition Charges will
be collected from Customers in accordance with the design of existing Rate
Schedules which consist of "block structure" demand per kilowatt and, in the
case of most of the Rate Schedules, per kilowatt hour components. The Average
ITC Rate tabulated below generally reflects the Rate Schedule ITC Collections
divided by Rate Schedule usage in kWh. The average monthly bill for each PP&L
Customer Class during 1998 was $70.69, $422.22 and $48,176.10, respectively.
The following projected average Intangible Transition Charges will be imposed
on Customers in each Customer Class, and the Rate Schedules within each
Customer Class, beginning on the Series Issuance Date for the Series 1999-1
Bonds:
TABLE 4
Projected Average Intangible Transition Charges for the Period From August ,
1999 to December 31, 1999
Residential
<TABLE>
<CAPTION>
Rate Schedule Average ITC Rate per kWh
------------- ------------------------
<S> <C>
Rate Schedule RS....................................
Rate Schedule RTS...................................
Rate Schedule RTD...................................
Small Commercial and Industrial
<CAPTION>
Rate Schedule Average ITC Rate per kWh
------------- ------------------------
<S> <C>
Rate Schedule GS-1..................................
Rate Schedule GS-3..................................
Rate Schedule GH-1(R)...............................
Rate Schedule GH-2(R)...............................
Rate Schedule IS-1..................................
Rate Schedule SA....................................
Rate Schedule SM....................................
Rate Schedule SHS...................................
Rate Schedule SE....................................
Rate Schedule SI-1(R)...............................
Rate Schedule TS....................................
Rate Schedule BL....................................
</TABLE>
S-19
<PAGE>
Large Commercial and Industrial
<TABLE>
<CAPTION>
Rate Schedule Average ITC Rate per kWh
------------- ------------------------
<S> <C>
Rate Schedule LP-4..................................
Rate Schedule IS-P..................................
Rate Schedule LP-5..................................
Rate Schedule LP-6..................................
Rate Schedule IS-T..................................
Rate Schedule LPEP..................................
Rate Schedule ISM...................................
Rate Schedule Standby...............................
</TABLE>
PP&L May Obtain Adjustments to the Intangible Transition Charges
The actual ITC Collections are intended to be neither more nor less than
the amount necessary to pay the principal of the Transition Bonds of each
Series in accordance with the Expected Amortization Schedule, to pay interest
on each Series and to fund the related expenses and reserves. In order to
enhance the likelihood that the appropriate amount of Intangible Transition
Charges will be collected, the Servicing Agreement requires the Servicer to
seek, and the Competition Act and the PUC Order require the PUC to approve,
annual adjustments to the Intangible Transition Charges on January 1 of each
year. These adjustments will be based on actual ITC Collections and updated
assumptions by the Servicer as to projected future usage of electricity by
Customers, expected delinquencies and write-offs and future expenses relating
to the Series 1999-1 Bonds. In addition, the PUC Order provides that,
commencing twelve months prior to the Expected Final Payment Date for the last
Series or Class of Transition Bonds, adjustments may be made quarterly or
monthly. The final Adjustment Date for the Series 1999-1 Bonds will be
December 1, 2009. See "The Servicing Agreement--The PUC's Intangible
Transition Cost Adjustment Process" in the Prospectus.
DESCRIPTION OF PP&L'S BUSINESS
The following is information which supplements that provided under the
heading "PP&L" in the Prospectus. For a more complete discussion of the
Servicer, see "PP&L" and "The Servicer of the Intangible Transition Property"
in the Prospectus.
PP&L's Operations
PP&L is an operating electric utility, incorporated under the laws of the
Commonwealth of Pennsylvania in 1920. PP&L is the primary subsidiary of PP&L
Resources, a holding company formed in 1995. The assets of PP&L equal
approximately 92% of PP&L Resources' consolidated assets. The financial
condition and results of operation of PP&L are currently the principal factors
affecting the financial condition and results of operations of PP&L Resources.
PP&L reported net income of $120 million on revenue of $968 million for
the quarter ended March 31, 1999 as compared with net income of $109 million
on revenue of $861 million for the quarter ended March 31, 1998.
S-20
<PAGE>
Actual electricity usage is dependent on factors such as weather
conditions, demographic changes, and economic conditions. See "Risk Factors--
Unusual Nature of Intangible Transition Property" in the Prospectus. The total
annual usage adjusted for weather effects has increased for the past two
years. The compounded annual growth rate in usage, adjusted for weather
effects, by all Customer Classes from 1994 through 1998 was 1.6%. There can be
no assurance that future usage growth rates for PP&L will be similar to
historical experience.
The Percentage Concentration Within PP&L's Large Commercial and Industrial
Customers. For the year ended December 31, 1998, the largest Customer
represented approximately 3.6%, and the ten largest Customers represented
approximately 20.5%, of PP&L's Large Commercial and Industrial Customer Class
revenues. There are no material concentrations in either of the other two
Customer Classes.
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.
During the three years ending December 31, 1998, the delinquency
experience for all Customers has improved substantially due to more aggressive
collection efforts. However, these efforts have also increased the amount of
write-offs, because these efforts led PP&L to write-off delinquent accounts at
a faster rate. The amount of write-offs is expected, but is not assured, to
decline in coming years due to the implementation of a residential security
deposit policy which PP&L expects to complete by the end of 1999. See "The
Servicer of the Intangible Transition Charges--PP&L's Customer Classes and
Rate Schedules" in the Prospectus.
Information That Is Available to the Series 1999-1 Bondholders
Transition Bond Co. Will File Information With the SEC. Transition Bond
Co. will file with the SEC all periodic reports as are required by the
Exchange Act, and the rules, regulations or orders of the SEC thereunder.
Copies of the Registration Statement and exhibits thereto may be obtained at
the locations specified in the Prospectus under "PP&L" at prescribed rates.
Information filed with the SEC can also be inspected at the SEC's site on the
World Wide Web at http://www.sec.gov. Transition Bond Co. may discontinue
filing periodic reports under the Exchange Act with respect to any Series at
the beginning of the fiscal year following the issuance of Transition Bonds of
that Series if there are fewer than 300 holders of Transition Bonds of that
Series.
Disclaimers About the Prospectus. No dealer, salesperson or other person
has been authorized to give any information or to make any representations
other than those contained in this Prospectus Supplement and the Prospectus
and, if given or made, the information or representations must not be relied
upon as having been authorized by Transition Bond Co., PP&L, the Underwriters
or any dealer, salesperson or other person. Neither the delivery of this
Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time after the date of this Prospectus Supplement
or the Prospectus. This Prospectus Supplement and the Prospectus 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 any similar offer or
solicitation.
S-21
<PAGE>
UNDERWRITING THE SERIES 1999-1 BONDS
Subject to the terms and conditions set forth in the Underwriting
Agreement with the Underwriters, for whom Morgan Stanley & Co. Incorporated is
acting as the representative, Transition Bond Co. has agreed to sell to the
Underwriters, and the Underwriters have severally agreed to purchase, the
principal amount of Series 1999-1 Bonds set forth opposite each Underwriter's
name below:
<TABLE>
<CAPTION>
Class Class Class Class Class Class Class Class
Underwriter A-1 A-2 A-3 A-4 A-5 A-6 A-7 A-8
----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Morgan Stanley & Co.
Incorporated .............
Credit Suisse First Boston
Corporation...............
Merrill Lynch Pierce,
Fenner & Smith
Incorporated..............
Salomon Smith Barney Inc...
Banc One Capital Markets,
Inc.......................
Chase Securities Inc.......
First Union Capital Markets
Corp. ....................
Mellon Financial Markets,
Inc.......................
Janney Montgomery Scott
Inc.......................
Pryor, McClendon, Counts &
Co., Inc..................
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Series 1999-1
Bonds offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 1999-1 Bonds. The
Underwriters propose to offer the Series 1999-1 Bonds in part directly to
retail purchasers at the initial public offering prices set forth on the cover
page of this Prospectus Supplement, and in part to some securities dealers at
a price less a concession not in excess of percent of the principal amount
of the Series 1999-1 Class A-1 Bonds, percent of the principal amount of the
Series 1999-1 Class A-2 Bonds, percent of the principal amount of the Series
1999-1 Class A-3 Bonds, percent of the principal amount of the Series 1999-
1 Class A-4 Bonds, percent of the principal amount of the Series 1999-1
Class A-5 Bonds, percent of the principal amount of the Series 1999-1 Class
A-6 Bonds, percent of the principal amount of the Series 1999-1 Class A-7
Bonds and percent of the principal amount of the Series 1999-1 Class A-8
Bonds. The Underwriters may allow and the dealers may reallow a concession to
some brokers and dealers not in excess of percent of the principal amount of
the Series 1999-1 Class A-1 Bonds, percent of the principal amount of the
Series 1999-1 Class A-2 Bonds, percent of the principal amount of the Series
1999-1 Class A-3 Bonds, percent of the principal amount of the Series 1999-1
Class A-4 Bonds, percent of the principal amount of the Series 1999-1 Class
A-5 Bonds, percent of the principal amount of the Series 1999-1 Class A-6
Bonds, percent of the principal amount of the Series 1999-1 Class A-7 Bonds
and percent of the principal amount of the Series 1999-1 Class A-8 Bonds.
After the Series 1999-1 Bonds are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
No Assurance as to Resale Price or Resale Liquidity for the Series 1999-1
Bonds. The Series 1999-1 Bonds are a new issue of securities with no
established trading market. The Series 1999-1 Bonds will not be listed on any
securities exchange. The Underwriters have advised Transition Bond Co. that
they intend to make a market in the Series 1999-1 Bonds
S-22
<PAGE>
but are not obligated to do so and may discontinue market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Series 1999-1 Bonds.
Various Types of Underwriter Transactions Which May Affect the Price of
the Series 1999-1 Bonds. The Underwriters may engage in overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids with respect to the Series 1999-1 Bonds in accordance with
Regulation M under the Exchange Act. Overallotment transactions involve
syndicate sales in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Series
1999-1 Bonds so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the Series 1999-
1 Bonds in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Underwriters to
reclaim a selling concession from a syndicate member when the Series 1999-1
Bonds originally sold by the syndicate member are purchased in a syndicate
covering transaction. These overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
prices of the Series 1999-1 Bonds to be higher than they would otherwise be in
the absence of these transactions. None of the Seller, PP&L, Transition Bond
Co., the Trustee or any of the Underwriters represent, that the Underwriters
will engage in any of these transactions or that these transactions, once
commenced, will not be discontinued without notice at any time.
In the ordinary course of business, each Underwriter and its affiliates
have engaged and may engage in investment banking and/or commercial banking
transactions with Transition Bond Co. and its affiliates, including PP&L. In
addition, each Underwriter may from time to time take positions in the Series
1999-1 Bonds.
Under the terms of the Underwriting Agreement, Transition Bond Co. and
PP&L have agreed to reimburse the Underwriters for some expenses.
Transition Bond Co. and PP&L have agreed to indemnify the Underwriters
against some liabilities, including liabilities under the Securities Act.
RATINGS FOR THE SERIES 1999-1 BONDS
It is a condition of any Underwriter's obligation to purchase the Series
1999-1 Bonds that each Class of the Series 1999-1 Bonds be rated "AAA" by S&P,
"Aaa" by Moody's and "AAA" by Fitch IBCA.
Limitations of Security Ratings. 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 Series 1999-1 Bond, and, accordingly, there can be no
assurance that the ratings assigned to any Class of Series 1999-1 Bonds upon
initial issuance will not be revised or withdrawn by a Rating Agency at any
time thereafter. If a rating of any Class of Series 1999-1 Bonds is revised or
withdrawn, the liquidity of the Class of Series 1999-1 Bonds may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the Series 1999-1
Bonds other than payment in full of each Class of Series 1999-1 Bonds by the
applicable Final Maturity Date.
S-23
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 20, 1999
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
PP&L Transition Bond Company LLC, Issuer
PP&L, Inc., Servicer
Transition Bonds
<TABLE>
<S> <C>
Consider care- The Issuer
fully the risk
factors begin- may periodically issue transition bonds in one or more
ning on page 12 series, each with one or more classes, and
of this pro- will own:
spectus.
. intangible transition property, which is the right,
These securi- created by Pennsylvania's competition act, to collect
ties are backed intangible transition charges in amounts designed to
by an intangi- be sufficient to repay the transition bonds, to pay
ble asset and other expenses specified in the indenture and to fund
issued by an or replenish the trust accounts, and
issuer that has
no assets other . other property described in this prospectus.
than the prop-
erty described The Transition Bonds
in this pro-
spectus. These . will be payable only from assets of PP&L Transition Bond
securities are Company LLC;
not obligations
of PP&L or any . will be supported by trust accounts held by the trustee
affiliate other for the transition bonds, and, if so stated in the
than PP&L Tran- applicable prospectus supplement, other credit
sition Bond enhancement; and
Company LLC.
This prospectus . will be issued in series, each of which PP&L Transition
may be used to Bond Company LLC may issue without the consent of
offer and sell existing transition bondholders.
a series of
transition
bonds only if
accompanied by
the prospectus
supplement for
that series.
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, nor have they
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this Prospectus is .
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS........... 5
SUMMARY OF TERMS--PROSPECTUS.............................................. 6
RISK FACTORS.............................................................. 12
Legal, Legislative or Regulatory Action That May Adversely Affect Your
Investment............................................................. 12
Unusual Nature of Intangible Transition Property........................ 14
Servicing Risks......................................................... 18
The Risks Associated With Potential Bankruptcy Proceedings.............. 22
Other Risks Associated With an Investment in The Transition Bonds....... 25
FORWARD-LOOKING INFORMATION............................................... 29
PP&L...................................................................... 32
THE COMPETITION ACT....................................................... 32
The Competition Act's General Effect on the Electric Utility Industry in
Pennsylvania........................................................... 32
Recovery of Stranded Costs for PP&L and Other Pennsylvania Utilities.... 33
PP&L and Other Utilities May Securitize Stranded Costs.................. 33
Only a Pennsylvania Utility May Sue for Nonpayment of Intangible
Transition Charges..................................................... 36
PP&L'S RESTRUCTURING PLAN................................................. 36
The History of PP&L's Restructuring Plan................................ 36
The PUC Order........................................................... 37
How the Electricity Generation Service Provider of Last Resort Will Be
Determined............................................................. 40
Other Provisions of PP&L's Restructuring Plan........................... 41
THE PUC ORDER AND THE INTANGIBLE TRANSITION CHARGES....................... 41
The PUC Order........................................................... 41
PP&L's Intangible Transition Charges.................................... 44
Customers Within PP&L's Service Territory May Choose How Their
Electricity Consumption Is Billed...................................... 46
PP&L's Universal Service Program for Low-Income Customers............... 48
PRIOR LEGAL CHALLENGES TO THE COMPETITION ACT OR THE PUC ORDER............ 48
Litigation Relevant to the Competition Act.............................. 48
Legislative Activity.................................................... 50
Potential Unexpected Regulatory Action by the PUC....................... 52
THE SERVICER OF THE INTANGIBLE TRANSITION PROPERTY........................ 52
PP&L.................................................................... 52
PP&L Resources.......................................................... 53
PP&L's Customer Classes and Rate Schedules.............................. 53
How PP&L Forecasts the Number of Customers and the Amount of Electricity
Usage.................................................................. 63
PP&L's Billing Process.................................................. 65
PP&L Maintains Limited Information on its Customers' Creditworthiness... 66
PP&L's Procedures for Collecting Intangible Transition Charges from
Electric Generation Suppliers ......................................... 68
PP&L's Efforts to Deal With the Year 2000 Computer Issue................ 69
PP&L TRANSITION BOND COMPANY LLC.......................................... 72
HOW TRANSITION BOND CO. WILL USE THE PROCEEDS OF THE TRANSITION BONDS..... 75
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 75
</TABLE>
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THE TRANSITION BONDS...................................................... 76
General Terms of the Transition Bonds................................... 76
Payments of Interest and Principal on the Transition Bonds.............. 77
Redemption of the Transition Bonds...................................... 78
Credit Enhancement for the Transition Bonds............................. 78
Transition Bonds Will Be Issued in Book-Entry Form...................... 79
Definitive Transition Bonds............................................. 83
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS... 84
THE CONTRIBUTION AGREEMENT................................................ 85
Assignment of the Intangible Transition Property and Related Rights to
the Seller............................................................. 85
PP&L's Representations and Warranties................................... 86
PP&L's Covenants........................................................ 90
PP&L's Obligation to Indemnify Transition Bond Co. and the Trustee and
to Take Legal Action................................................... 93
Successors to PP&L...................................................... 94
The Treatment of the Assignment of Intangible Transition Property....... 95
THE SALE AGREEMENT........................................................ 95
CEP Securities' Sale and Assignment of Intangible Transition Property
and Rights Under the Contribution Agreement............................ 95
THE SERVICING AGREEMENT................................................... 97
PP&L's Servicing Procedures............................................. 97
Potential Limitations to Collecting Intangible Transition Charges....... 99
The PUC's Intangible Transition Charge Adjustment Process............... 100
PP&L May Obtain a Letter of Credit to Ensure Remittances on Each
Remittance Date........................................................ 101
PP&L's Compensation for Its Role as Servicer and Its Release of Other
Parties................................................................ 101
PP&L's Duties as Servicer............................................... 101
PP&L's Representations and Warranties as Servicer....................... 102
PP&L, as Servicer, Will Indemnify Transition Bond Co. and Other Related
Entities............................................................... 103
PP&L, as Servicer, Will Provide Statements to Transition Bond Co. and to
the Trustee............................................................ 104
PP&L to Provide Compliance Reports Concerning the Servicing Agreement... 105
Matters Regarding PP&L as Servicer...................................... 105
Events Constituting a Default by PP&L in Its Role as Servicer........... 106
The Trustee's Rights If PP&L Defaults in Its Role as Servicer........... 107
The Obligations of a Servicer That Succeeds PP&L........................ 107
THE INDENTURE............................................................. 108
The Security for the Transition Bonds................................... 108
Transition Bonds May Be Issued in Various Series or Classes............. 109
The Collection Account for the Transition Bonds......................... 110
How Funds in the General Subaccount Will Be Allocated................... 114
Reports to Holders of the Transition Bonds.............................. 117
Transition Bond Co. and the Trustee May Modify the Indenture............ 117
What Constitutes an Event of Default on the Transition Bonds............ 121
Covenants of Transition Bond Co. ....................................... 124
Access to the List of Holders of the Transition Bonds................... 126
Transition Bond Co. Must File an Annual Compliance Statement............ 126
The Trustee Must Provide an Annual Report to All Transition
Bondholders............................................................ 126
What Will Trigger Satisfaction and Discharge of the Indenture........... 126
Transition Bond Co.'s Legal Defeasance and Covenant Defeasance Options.. 127
The Trustee............................................................. 128
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HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT............................... 129
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDHOLDERS................ 132
Income Tax Status of the Transition Bonds and Transition Bond Co. ...... 132
Consequences to Non-U.S. Holders........................................ 133
Taxation of Foreign Transition Bondholders.............................. 134
Material Commonwealth of Pennsylvania Tax Matters....................... 136
ERISA CONSIDERATIONS...................................................... 136
Plan Asset Issues For an Investment in the Transition Bonds............. 137
Prohibited Transaction Exemptions....................................... 137
Special Considerations Applicable to Insurance Company General
Accounts............................................................... 138
General Investment Considerations For Prospective Plan Investors in the
Transition Bonds....................................................... 139
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS............................. 140
RATINGS FOR THE TRANSITION BONDS.......................................... 141
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS.................... 141
APPENDIX A................................................................ A-1
FINANCIAL STATEMENTS OF PP&L TRANSITION BOND COMPANY LLC.................. F-1
</TABLE>
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IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information about the Transition Bonds provided in
this Prospectus and in the related Prospectus Supplement. We have not
authorized anyone to provide you with different or additional information.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
This Prospectus and any related Prospectus Supplement do not constitute an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make this offer or solicitation.
You can find a Glossary of the capitalized terms used in this Prospectus
and in the Prospectus Supplement in Appendix A to this Prospectus.
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SUMMARY OF TERMS--PROSPECTUS
This summary contains a brief description of the transition bonds that
applies to all series of transition bonds issued under this prospectus.
Information that relates to a specific series of transition bonds can be found
in the prospectus supplement related to that series. You will find a detailed
description of the terms of the offering of transition bonds following this
summary.
Consider carefully the risk factors beginning on page 12 of this prospectus.
The Issuer of the
Transition Bonds:
PP&L Transition Bond Company LLC, a Delaware
limited liability company wholly owned by PP&L. The
issuer was formed solely to purchase intangible
transition property and to issue one or more series
of transition bonds secured by the intangible
transition property.
Issuer's Address: Two North Ninth Street GENA 9-2, Room 3; Allentown,
PA 18101
Issuer's Telephone
Number:
(610) 774-7934
Seller of the Intangible
Transition Property to
the Issuer:
CEP Securities Co. LLC, an indirect wholly owned
subsidiary of PP&L. On May 13, 1999, PP&L assigned
its intangible transition property to CEP
Securities Co. LLC pursuant to a contribution
agreement. CEP Securities Co. LLC is a special
purpose entity which is not authorized to conduct
any business other than accepting the assignment of
intangible transition property from PP&L, and
selling this asset to the issuer.
Seller's Address: 3960 Howard Hughes Parkway, Suite 630 North; Las
Vegas, NV 89109
Seller's Telephone (702) 866-2202
Number:
Servicer of the
Intangible
Transition Property:
PP&L, an operating electric utility serving
approximately 1.3 million customers in central and
eastern Pennsylvania. PP&L, acting as servicer,
will service the transferred intangible transition
property pursuant to a servicing agreement between
the issuer and the servicer.
Trustee: The Bank of New York
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The Assets of the Issuer: PP&L Transition Bond Company LLC will own:
. the intangible transition property transferred to
PP&L Transition Bond Company LLC, as described
under "The Contribution Agreement--Assignment of
the Intangible Transition Property and Related
Rights to the Seller" in this prospectus;
. trust accounts held by the trustee; and
. other credit enhancement acquired or held to
ensure payment of the transition bonds.
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The Collateral
PP&L Transition Bond Company LLC will own intangible transition property, a
property right created under the competition act. In general terms, the
intangible transition property represents the right to recover:
. the principal amount of the transition bonds, and
. the interest, fees, costs, charges, credit enhancement and premiums, if
any, associated with the transition bonds.
Those amounts will be recovered through intangible transition charges
payable by retail consumers of electricity within PP&L's service territory who
receive electric delivery service from PP&L. The principal amount of the
transition bonds is equal to a portion of PP&L's stranded costs. Stranded
costs are an electric utility's net electric generation related costs which
traditionally would be recoverable under a regulated environment but which may
not be recoverable in a competitive electric generation market. The intangible
transition property is described in more detail under "The Contribution
Agreement--Assignment of the Intangible Transition Property and Related Rights
to the Seller" in this prospectus.
On May 13, 1999, PP&L assigned its intangible transition property to the
seller pursuant to a contribution agreement. The seller will sell intangible
transition property to PP&L Transition Bond Company LLC to support the
issuance of up to $2.57 billion in principal amount of transition bonds. PP&L,
as servicer of the intangible transition prop- erty, will collect the
intangible transition charges from customers within its service territory on
behalf of PP&L Transition Bond Company LLC. Other entities may be required to
collect intangible transition charges from customers within PP&L's service
territory and pay the amounts collected to the servicer. See "The Servicer of
the Intangible Transition Property" in this prospectus.
Payment Sources
On each payment date, the trustee will pay amounts owed on all outstanding
series of transition bonds from:
. amounts collected by the servicer for PP&L Transition Bond Company LLC
with respect to intangible transition charges during the prior quarter;
and
. amounts available from trust accounts held by the trustee.
These accounts are described in greater detail under "The Indenture--The
Collection Account for the Transition Bonds" in this prospectus.
Priority of Distributions
On each payment date specified in the related prospectus supplement, the
trustee will pay or allocate remittances by the servicer and all investment
earnings on the trust accounts, to the extent funds are available in the col-
lection account, in the following order of priority:
(1) payment of the trustee's fee, which will be a fixed fee in an amount
specified in the indenture, plus expenses and indemnity amounts relating to
the trustee, if any;
(2) payment of fees to the independent managers of PP&L Transition Bond
Company LLC, which
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will be fixed in an amount to be agreed upon by PP&L Transition Bond
Company LLC and the independent managers;
(3) payment of the servicing fee which will be a fixed fee or percentage
in an amount specified in the servicing agreement;
(4) payment of the administration fee, which will be a fixed fee in an
amount specified in the administration agreement between PP&L Transition
Bond Company LLC and PP&L;
(5) payment of all operating expenses of PP&L Transition Bond Company
LLC, up to an aggregate of $100,000 for each payment date for all series,
so long as no event of default has occurred and is continuing or would be
caused by this payment;
(6) payment of the interest then due on the transition bonds, including
payment of any amount payable to the swap counterparty on any interest rate
swap;
(7) payment of the principal then legally required to be paid on the
transition bonds, including any principal paid at final maturity or upon
redemption or acceleration;
(8) payment of the principal then scheduled to be paid on the transition
bonds;
(9) payment of any remaining unpaid operating expenses then owed by PP&L
Transition Bond Company LLC;
(10) replenishment of any shortfalls in the capital subaccount;
(11) allocation of any required amount to the overcollateralization
subaccount;
(12) release of an amount equal to investment earnings on amounts in the
capital subaccount to PP&L Transition Bond Company LLC; and
(13) allocation of the remainder, if any, to the reserve subaccount.
The amount of all fees referenced in clauses (1) through (4) above are
described in the prospectus supplement for the related series of transition
bonds. The priority of distributions for ITC collections, as well as available
amounts in the subaccounts, are described in more detail in "The Indenture--How
Funds in the General Subaccount Will Be Allocated" in this prospectus, as well
as in the summary for the prospectus supplement for each series of transition
bonds. A diagram depicting how the intangible transition charges and investment
earnings will be allocated may be found on page 30 of this prospectus.
Credit Enhancement and Accounts
Unless otherwise specified in any prospectus supplement, credit enhancement
for the transition bonds will be as follows:
. The servicer will make adjustments to the intangible transition charges
to make up for any shortfall or reduce any excess in intangible transi-
tion charge collections, upon approval of these adjustments by the Penn-
sylvania PUC. The servicer will make these changes on the dates speci-
fied in the related prospectus supplement. See "The PUC Order and the
Intangible Transition Charges-- The PUC Order" in this prospectus.
. Collection Account--Under the indenture, the trustee will hold a single
collection account, divided into
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various subaccounts, for all series of transition bonds. The primary
subaccounts for credit enhancement purposes are:
1) Overcollateralization Subaccount--The prospectus supplement for each
series of transition bonds will specify a funding level for the
overcollateralization subaccount. That amount will be funded ratably
over the term of the transition bonds,
2) Capital Subaccount--An amount specified in the prospectus supplement
for each series of transition bonds will be deposited into the capi-
tal subaccount on the date of issuance of that series, and
3) Reserve Subaccount--Any excess amount of intangible transition charge
collections and investment earnings not released to PP&L Transition
Bond Company LLC will be held in the reserve subaccount.
Each of the overcollateralization subaccount, the capital subaccount and the
reserve subaccount will be available to make payments on all series of
transition bonds on each payment date.
Additional credit enhancement for any series may include surety bonds or
letters of credit or other forms of credit enhancement. Any additional forms of
credit enhancement for each series will be specified in the related prospectus
supplement. Credit enhancement for the transition bonds is intended to protect
you against losses or delays in scheduled payments on your transition bonds.
State Pledge
The Commonwealth of Pennsylvania has pledged that it will not limit, alter,
impair or reduce the value of the intangible transition property or the
intangible transition charges until the transition bonds are fully repaid or
discharged. However, the Commonwealth does not have to adhere to its pledge if
adequate compensation is provided to the transition bondholders. The
competition act does not define adequate compensation. Thus, the amount of this
compensation may not be sufficient to protect your transition bond investment.
Optional Redemption
A prospectus supplement may provide for redemption of a series of transition
bonds at the option of PP&L Transition Bond Company LLC at a redemption price
not less than the outstanding principal of and accrued interest on the
transition bonds.
Payment and Record Dates
The payment and record dates for each series of transition bonds will be
specified in the corresponding prospectus supplement.
Expected Final Payment Dates and Final Maturity Dates
Failure to pay the entire outstanding amount of the transition bonds of any
class or series by the expected final payment date will not result in a default
with respect to that class or series until the final maturity date for the
class or series. The expected final payment date and the final maturity date of
each series and class of transition bonds will be specified in the
corresponding prospectus supplement.
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Reports to Transition Bondholders
Pursuant to the indenture, the trustee will provide to the holders of record
of the transition bonds regular reports prepared by the servicer containing
information concerning, among other things, PP&L Transition Bond Company LLC
and the collateral. Unless and until transition bonds are issued in definitive
form, the reports will be provided to Cede. The reports will be available to
transition bondholders upon request to the trustee or the servicer. These
reports will not be examined and reported upon by an independent public
accountant. In addition, an independent public accountant will not provide an
opinion thereon. See "The Indenture--The Trustee Must Provide an Annual Report
to All Transition Bondholders" in this prospectus.
Servicing Compensation
PP&L Transition Bond Company LLC will pay the servicer on each payment date
the quarterly servicing fee with respect to all series of transition bonds,
solely to the extent that PP&L Transition Bond Company LLC has funds available
to pay this fee. As long as PP&L acts as servicer, this quarterly fee will be
$312,500. If a successor servicer is appointed, the quarterly servicing fee
will be based on an amount approved by the PUC, but not in excess of a per
annum rate equal to 1.5% of the outstanding principal balance of the transition
bonds. The servicer will be entitled to retain as additional compensation net
investment income it receives on the intangible transition charges it collects
pending remittance to the trustee, as well as any late fees paid by customers
to the servicer which are associated with the intangible transition charges.
Tax Status
PP&L Transition Bond Company LLC and PP&L have received a private letter
ruling from the Internal Revenue Service to the effect that the transition
bonds will be classified as obligations of PP&L. In addition, in the opinion of
Morgan, Lewis & Bockius LLP, special Pennsylvania tax counsel to PP&L and PP&L
Transition Bond Company LLC, interest from transition bonds received by a
person who is not otherwise subject to corporate or personal income tax in
Pennsylvania will not be subject to these taxes. Neither residents nor
nonresidents of Pennsylvania will be subject to an intangible personal property
tax in respect to the transition bonds.
If you purchase a transition bond, you agree to treat it as debt of PP&L for
U.S. federal, state and local tax purposes.
ERISA Considerations
Pension plans and other investors subject to ERISA may acquire the
transition bonds subject to specified conditions. The acquisition and holding
of the transition bonds could be treated as an indirect prohibited transaction
under ERISA. Accordingly, by purchasing the transition bonds, each investor
purchasing on behalf of a pension plan, or other investor subject to ERISA,
will be deemed to certify that the purchase and subsequent holding of the
transition bonds would be exempt from the prohibited transaction rules of
ERISA. For further information regarding the application of ERISA, see "ERISA
Considerations" in this prospectus.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
Legal, Legislative or Regulatory Action That May Adversely Affect Your
Investment
Legal Action May Reduce
the Value of Your
Investment...............
The intangible transition property is the
creation of the Competition Act and an order
issued by the PUC. A court decision or a federal
or state law might seek to overturn either the
Competition Act or the PUC's order. If this
occurs, you may lose some or all of your
investment or you may experience delays in
recovering your investment.
Three lawsuits have challenged the validity of
the Competition Act. Two of these alleged that
the Pennsylvania legislature did not validly
enact the Competition Act. A Pennsylvania court
has rejected these claims. The court's decisions
in those cases have not been appealed and the
period for filing appeals has lapsed.
The third lawsuit asserted that the Competition
Act provisions allowing the recovery of
intangible transition charges violated the
Commerce Clause of the U.S. Constitution. The
Pennsylvania courts rejected that claim, and the
U.S. Supreme Court denied a petition to hear the
case. For a more complete description of relevant
litigation, see "Prior Legal Challenges to the
Competition Act or the PUC Order--Litigation
Relevant to the Competition Act" in this
prospectus.
In addition to any future direct challenges, a
court might overturn a similar statute in another
state. Such a decision would not automatically
invalidate the Competition Act or the related PUC
order, but it might give rise to a challenge to
the Competition Act. Therefore, legal activity in
other states may indirectly affect the value of
your investment. See "Prior Legal Challenges to
the Competition Act or the PUC Order" in this
prospectus.
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Future Legislative
Action May Reduce the
Value of Your
Investment............... The value of your investment may decline due to
legislative action. For example:
. The Pennsylvania legislature may repeal the
Competition Act in order to serve a significant
public purpose such as protecting the public
health and safety. Under these circumstances,
notwithstanding the state pledge described
above, it may be possible for the Pennsylvania
legislature to repeal the Competition Act
without providing adequate compensation to
holders of transition bonds.
. The Pennsylvania legislature may limit or alter
the intangible transition property so as to
reduce its value if the legislature provides
you with an amount deemed to be adequate
compensation. However, that compensation
ultimately may not be sufficient for you to
recover fully your investment.
. Congress or a federal agency may decide that it
can preempt the Pennsylvania legislature and
pass a law or adopt a rule or regulation
prohibiting or limiting the collection of
intangible transition charges.
PP&L will not indemnify you for any changes in
the law that may affect the value of your
transition bonds. See "Prior Legal Challenges to
the Competition Act or the PUC Order--Legislative
Activity" in this prospectus.
The PUC May Take Actions
Which May Reduce the
Value of Your
Investment...............
Apart from key items set forth in the PUC order,
which are stated to be irrevocable, the PUC
retains the power to adopt, revise or rescind
rules or regulations affecting PP&L or a
successor utility. The PUC also retains the power
to interpret the irrevocable portions of the PUC
order. PP&L has agreed to resist any PUC rule,
regulation or decision that would reduce the
value of the intangible transition property.
However, PP&L may not be successful in its
efforts. Thus, future PUC rules, regulations or
decisions may materially reduce the value of your
investment. In this regard, the PUC currently is
considering a request by West Penn Power Co. for
the issuance of a supplemental qualified rate
order. The West Penn Power Co. request is
13
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substantially the same as PP&L's request for a
supplemental qualified rate order that the PUC
approved on May 21, 1999. A number of parties
have intervened in the West Penn Power Co.
proceeding, including the Pennsylvania Office of
Consumer Advocate, an association of power
marketers and an association of industrial
customers. Because the West Penn Power Co.
request is substantially the same as the PP&L
request, an adverse decision by the PUC in the
West Penn Power Co. proceeding could adversely
affect the interpretation of the PUC order for
PP&L, including interpretation of those
provisions designed to protect transition
bondholder interests. See "Prior Legal Challenges
to the Competition Act or the PUC Order--
Potential Unexpected Regulatory Action by the
PUC" in this prospectus.
Unusual Nature of Intangible Transition Property
A Plant Shutdown by PP&L
May Reduce the Value of
Your Investment..........
Under the Competition Act, PP&L Transition Bond
Company LLC's authority to collect intangible
transition charges may depend on the continued
operation of generation facilities for which the
PUC has awarded stranded cost recovery to PP&L.
Failure to operate those facilities at reasonable
availability levels might adversely affect PP&L
Transition Bond Company LLC's right to collect
intangible transition charges. This may
materially reduce the value of your investment.
See "The Competition Act--Recovery of Stranded
Costs for PP&L and Other Pennsylvania Utilities"
in this prospectus.
Revenues to Pay
Principal and Interest
May Be Reduced If
Customers Reduce Energy
Consumption, Move Out of
PP&L's Service Territory
or Install Alternative
Sources of Energy........
The primary source of funds to pay principal and
interest on the transition bonds and other
qualified transition expenses is revenue received
through intangible transition charges. Those
funds may be reduced for various reasons,
including reduction in energy consumption,
departures of
14
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customers from PP&L's service territory or the
installation of alternative sources of energy by
customers. The Competition Act addresses these
possibilities by providing for the adjustment of
intangible transition charges on a periodic
basis. However, these adjustments may not be
adequate if:
.PP&L's projections are inaccurate;
.PP&L requests insufficient adjustments;
. the requested adjustments would cause PP&L's
rates for electricity generation to exceed the
electricity generation rate cap; or
. the PUC does not approve PP&L's requested
adjustments in a full or timely fashion.
Adjustments to
Intangible Transition
Charges May Not Be
Sufficient to Protect
Your Investment..........
PP&L, as servicer, is required to request from
the PUC, on behalf of PP&L Transition Bond
Company LLC, periodic adjustments of the
intangible transition charges. These adjustments
are intended to provide, among other things, for
timely payment of the transition bonds. However,
the frequency of these adjustments is limited.
PP&L will generally base its adjustment requests
on any shortfalls during the prior adjustment
period and on projections of future electricity
use and the customers' ability to pay their
electric bills in full and on a timely basis.
However, unforeseen events, such as weather,
changes in technology associated with distributed
generation, changes in economic conditions or
market changes due to increased competition, may
make projections inaccurate. Accordingly, PP&L
might request adjustments that are insufficient
to provide for timely payment of the transition
bonds. Also, the PUC may not approve PP&L's
requests in a timely fashion. One or more of
these factors may prevent PP&L from collecting a
sufficient amount of intangible transition
charges to repay the transition bonds on a timely
basis. This may materially reduce the value of
your investment. See "The Servicing Agreement" in
this prospectus.
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Adjustments to
Intangible Transition
Charges by Rate Schedule
May Result in
Insufficient
Collections..............
The customers who will be responsible for paying
intangible transition charges are divided into 23
rate schedules. These rate schedules are grouped
among three customer classes. Intangible
transition charges will be assessed by rate
schedule within each customer class. Adjustments
to the intangible transition charges will also be
made to each rate schedule within each customer
class. A shortfall in collection in one rate
schedule must be made up by adjustments to that
rate schedule as well as the other rate schedules
within that customer class. However, shortfalls
in a customer class may not be corrected by
making adjustments to rate schedules in any other
customer class. Some rate schedules in a
particular class have a significantly smaller
number of customers than other rate schedules in
that customer class. If customers in a rate
schedule fail to pay intangible transition
charges, the servicer may have to substantially
increase the intangible transition charges for
the remaining customers in that rate schedule and
the other rate schedules in that customer class.
The servicer may also have to take this action if
consumers representing a significant percentage
of a rate schedule cease to be customers. Such
increases could lead to further failures by the
remaining customers in that customer class to pay
intangible transition charges, thereby increasing
the risk of a shortfall in funds to pay the
transition bonds.
One Customer Class
Cannot Compensate for
the Failure to Collect
Intangible Transition
Charges from Another
Customer Class...........
The Competition Act and the PUC order do not
permit costs to be shifted among customer
classes. As a result, a shortfall in collections
of intangible transition charges in one customer
class cannot be made up by adjustments of
intangible transition charges in the other
customer classes. See "The Competition Act" in
this prospectus.
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The Amount of Generation
Charges Including
Intangible Transition
Charges May Not Exceed a
Statutory Cap............
The Competition Act and the PUC order set a cap
on generation charges including intangible
transition charges through December 31, 2009.
This generation rate cap applies to each rate
schedule within each customer class separately.
If there is a severe or persistent shortfall in
collections of intangible transition charges in
any rate schedule, the rate cap applicable to
that rate schedule may prevent the servicer from
adjusting intangible transition charges for that
rate schedule in excess of the rate cap. If this
occurs, the servicer would have to adjust
intangible transition charges for the remaining
rate schedules within that customer class. These
adjustments may result in the assessment of
intangible transition charges on the remaining
rate schedules at a level that is limited by
their rate caps. This could reduce the amount or
the rate of collections of intangible transition
charges, which may materially and adversely
affect the value of your transition bond
investment. See "The Competition Act--The
Competition Act's General Effect on the Electric
Utility Industry in Pennsylvania" in this
prospectus.
The PUC order gives PP&L the right to request
relief from the generation rate cap, if the
combined total of the charges subject to that cap
exceeds the generation rate cap. However, there
is no assurance that the PUC would grant this
request, or that the PUC would grant the request
in a timely manner.
PP&L Transition Bond
Company LLC May Not
Charge Intangible
Transition Charges for
Electricity Delivered
After December 31,
2009................
PP&L may not charge intangible transition charges
for electricity delivered after December 31,
2009. Amounts collected from intangible
transition charges imposed for electricity
delivery through December 31, 2009, or from
credit enhancement funds, may not be sufficient
to repay the transition bonds in full. If that is
the case, no other funds will be available to pay
the unpaid balance due on
17
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the transition bonds. See "The PUC Order and the
Intangible Transition Charges--PP&L's Intangible
Transition Charges" in this prospectus.
Servicing Risks
Your Investment Relies
on PP&L or its Successor
Acting as Servicer of
the Intangible
Transition Property......
PP&L, as servicer, will be responsible for
billing and collecting intangible transition
charges and for submitting requests to the PUC to
adjust these charges. If PP&L ceased servicing
the intangible transition property, it might be
hard to find a successor that can perform all of
the duties of servicer. For example, a successor
servicer that is not a utility may not impose or
adjust intangible transition charges. A successor
servicer that is not a utility also may not
terminate electricity service to customers or
otherwise take action against customers who fail
to pay their bills. The PUC would have to approve
any adjustment to intangible transition charges
necessary to pay any increased servicing fee for
a successor servicer. PP&L Transition Bond
Company LLC cannot assure that this approval
would be obtained. This may reduce the value of
your investment. See "The Servicing Agreement" in
this prospectus.
Billing and Collection
Practices May Reduce the
Value of Your
Investment...............
The methodology of determining the amount of
intangible transition charges PP&L Transition
Bond Company LLC may impose on each customer is
set by the PUC. Thus, PP&L cannot change this
methodology. However, PP&L, as servicer, may set
its own billing and collection arrangements with
each customer. For example, to recover part of an
outstanding electricity bill, PP&L may agree to
extend a customer's payment schedule or to write
off the remaining portion of the bill. Also,
PP&L, or a successor to PP&L as servicer, may
change billing and collection practices.
Similarly, the PUC may require changes to these
practices. These billing and collection
adjustments may materially reduce the value of
your investment. See "The Servicer of the
Intangible Transition Property--How PP&L
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<PAGE>
Forecasts the Number of Customers and the Amount
of Electricity Usage" in this prospectus.
PP&L May Evaluate
Incorrectly Its
Customers' Ability to
Pay Intangible
Transition Charges.......
If PP&L incorrectly evaluates the customers'
ability to pay their bills, it may experience
delays in receiving payments or it may have to
write off some payments. In that case, it may
have to request intangible transition charge
adjustments. If those adjustments are not timely
and accurate, your investment's value may be
materially reduced. See "The Servicer of the
Intangible Transition Property--PP&L Maintains
Limited Information on its Customers'
Creditworthiness" in this prospectus.
It May Be More Difficult
to Collect Intangible
Transition Charges From
Third Parties than from
PP&L's Retail
Customers................
Customers may pay intangible transition charges
to third parties. These third parties will
forward the charges to PP&L as servicer. These
entities must pay PP&L the intangible transition
charges even if they do not collect them from
retail customers. PP&L will have limited rights
to collect intangible transition charges directly
from those customers who receive their
electricity bills from a third party. If many
customers within PP&L's service territory elect
to receive their electricity bills from third
parties, PP&L Transition Bond Company LLC may
have to rely on a relatively small number of
entities for the collection of the bulk of the
intangible transition charges. This may adversely
affect your investment because:
. Third parties might use more permissive
standards in bill collection and credit
appraisal than PP&L uses towards its retail
customers or might be less effective in
billing and collecting.
. If a third party collector defaults, PP&L or a
successor servicer may then directly bill and
collect intangible transition charges due from
the third party's customers. However, the
servicer will generally have only limited
rights to pursue these customers to pay
amounts owed to PP&L Transition Bond Company
LLC by the
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defaulted third party. In no event may the
servicer directly bill a customer for service
that was previously billed by the third party
and paid by that customer to the third party.
. A default by a third party which collects from
a large number of retail customers would have a
greater impact than a default by a single
retail customer.
The adjustment mechanism and other credit
enhancement may be available to compensate for a
failure by a third party collector to pay
intangible transition charges over to PP&L
Transition Bond Company LLC. However, the amount
of credit enhancement funds may not be sufficient
to protect your investment. See "The PUC Order and
the Intangible Transition Charges" in this
prospectus.
Customers Within PP&L's
Service Territory May
Stop or Delay Making
Intangible Transition
Charge Payments.........
Customers within PP&L's service territory may stop
or delay paying intangible transition charges for
the following reasons:
. They may become confused by the assessment of a
charge they have not seen before.
. Economic or demographic changes may reduce the
number of customers within one or more of
PP&L's customer classes. This would increase
intangible transition charges to other
customers in that customer class. This increase
may raise the possibility that customers would
seek legal intervention to reduce or eliminate
the intangible transition charges.
. A significant number of consumers of
electricity may decide to generate some or all
of the electricity they need. If they do not
operate these generating facilities in parallel
with PP&L's transmission and distribution
system, they generally will not be obligated to
pay intangible transition charges. Even if they
remain connected to PP&L's distribution system
and remain legally responsible for paying
intangible transition charges, these consumers,
and the amount of intangible transition charges
they must pay, may be difficult to identify.
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<PAGE>
For a discussion of electric utility deregulation
in Pennsylvania, see "The Servicing Agreement--
Potential Limitations to Collecting Intangible
Transition Charges" in this prospectus.
Potential Delays in
Payments on Transition
Bonds Due to Potential
Computer Program
Problems Beginning in
the Year 2000............
Principal and interest payments on the transition
bonds could be delayed if PP&L, in its capacity
as servicer, or the trustee experiences problems
in its computer programs, or in the computer
programs of those vendors on whom it relies,
relating to the year 2000. Many existing computer
programs use only two digits to identify a year.
These programs could fail or produce erroneous
results during the transition from the year 1999
to the year 2000 and afterwards. PP&L has
evaluated the impact of preparing its systems for
the year 2000. It has identified areas of
potential impact and is implementing conversion
efforts. As of July 1, 1999, approximately 97% of
PP&L's mainframe applications are year 2000
compliant. All mainframe computer systems are
expected to be year 2000 compliant by the fourth
quarter of 1999.
PP&L, or a third party on whom PP&L relies for
collection of intangible transition charges, may
have a computer system that is not year 2000
compliant by January 1, 2000. If this occurs,
PP&L's ability to service the intangible
transition property may be materially and
adversely affected. In addition, the trustee may
have a computer system that is not year 2000
compliant by January 1, 2000. If this occurs, the
trustee's ability to make distributions on the
transition bonds may be materially and adversely
affected. See "The Servicer of the Intangible
Transition Property--PP&L's Efforts to Deal With
the Year 2000 Computer Issue" in this prospectus.
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<PAGE>
The Risks Associated With Potential Bankruptcy Proceedings
PP&L Will Commingle
Intangible Transition
Charges with Other
Revenues Which May Harm
Your Investment in Case
of Bankruptcy............
PP&L will not segregate the intangible transition
charges from the other funds it collects from its
customers. The intangible transition charges will
be segregated only after PP&L pays them to the
trustee. PP&L will be permitted to remit
collections on a monthly basis only if:
. at any time PP&L has the requisite credit
ratings from the rating agencies or
. PP&L provides credit enhancement satisfactory
to the rating agencies to assure remittance by
PP&L to the Trustee of the intangible
transition charges it collects.
Otherwise, PP&L will be required to remit
collections within two business days of receipt.
Despite these requirements, PP&L might fail to
pay the full amount of the intangible transition
charges to the trustee or might fail to do so on
a timely basis. This failure could materially
reduce the value of your investment.
The Competition Act provides that the rights of
PP&L Transition Bond Company LLC to the
intangible transition property are not affected
by the commingling of these funds with PP&L's
other funds. In a bankruptcy of PP&L, however, a
bankruptcy court might rule that federal
bankruptcy law takes precedence over the
Competition Act and does not recognize the right
of PP&L Transition Bond Company LLC to
collections of the intangible transition charges
that are commingled with other funds of PP&L as
of the date of bankruptcy. If so, the collections
of intangible transition charges held by PP&L as
of the date of bankruptcy would not be available
to pay amounts owing on the transition bonds. In
this case, PP&L Transition Bond Company LLC would
have a general unsecured claim against PP&L for
those amounts. This decision could cause material
delays in payment or losses on your transition
bonds and could materially reduce the value of
your investment. See "How a Bankruptcy May Affect
Your Investment" in this prospectus.
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<PAGE>
Bankruptcy of PP&L Could
Result in Losses or
Delays in Payments on
the Transition Bonds.....
The Competition Act and the PUC order provide
that as a matter of Pennsylvania state law,
. the intangible transition property is a
continuous current property right of PP&L for
all purposes,
. PP&L may make a present transfer of that
property right, including the right to receive
future intangible transition charges that
customers do not yet owe, and
. a transfer of the intangible transition
property from PP&L, or its affiliate, to PP&L
Transition Bond Company LLC is a true sale of
the intangible transition property, not a
pledge of the intangible transition property
to secure a financing by PP&L.
See "The Competition Act" in this prospectus.
These three provisions are important to
maintaining payments on the transition bonds in
accordance with their terms during any bankruptcy
of PP&L. In addition, the transaction has been
structured with the objective of keeping PP&L
Transition Bond Company LLC separate from PP&L in
the event of a bankruptcy of PP&L.
A bankruptcy court generally follows state
property law on issues such as those addressed by
the three provisions described above. However, a
bankruptcy court has authority not to follow
state law if it determines that the state law is
contrary to a paramount federal bankruptcy policy
or interest. If a bankruptcy court in a PP&L
bankruptcy refused to enforce one or more of the
state property law provisions described above for
this reason, the effect of this decision on you
as a transition bondholder would be similar to
the treatment you would receive in a PP&L
bankruptcy if the transition bonds had been
issued directly by PP&L. A decision by the
bankruptcy court, that despite the separateness
of PP&L and PP&L Transition Bond Company LLC, the
two companies should be consolidated, would have
a similar effect on you as a transition
bondholder. That treatment could cause material
delays in payment of, or losses on, your
transition bonds and could materially reduce the
value of your investment. For example:
. the trustee could be prevented from exercising
any remedies against PP&L on your behalf, from
recovering funds to repay the transition
bonds, from using funds in the accounts under
the indenture to
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<PAGE>
make payments on the transition bonds, or from
replacing PP&L as servicer, without permission
from the bankruptcy court;
. the bankruptcy court could order the trustee to
exchange the intangible transition property for
other property, which might be of lower value;
. tax or other government liens on PP&L's
property that arose after the transfer of the
intangible transition property to PP&L
Transition Bond Company LLC might nevertheless
have priority over the trustee's lien and might
be paid from intangible transition charge
collections before payments on the transition
bonds;
. the trustee's lien might not be properly
perfected in intangible transition property
collections that were commingled with other
funds PP&L collects from its customers as of
the date of PP&L's bankruptcy, or might not be
properly perfected in all of the intangible
transition property, and the lien could
therefore be set aside in the bankruptcy, with
the result that the transition bonds would
represent only general unsecured claims against
PP&L;
. the trustee's lien may not extend to intangible
transition charges in respect of electricity
consumed after the commencement of PP&L's
bankruptcy case, with the result that the
transition bonds would represent only general
unsecured claims against PP&L;
. PP&L may not be obligated to make any payments
on the transition bonds during the pendency of
the bankruptcy case;
. PP&L may be able to alter the terms of the
transition bonds as part of its plan of
reorganization;
. the bankruptcy court might rule that the
intangible transition charges should be used to
pay a portion of the cost of providing electric
service; or
. the bankruptcy court might rule that the remedy
provisions of the intangible transition
property contribution agreement are
unenforceable, leaving PP&L Transition Bond
Company LLC with a claim of actual damages
against PP&L, which may be difficult to prove.
Furthermore, if PP&L enters into bankruptcy, it
may be permitted to stop acting as servicer. See
"How a Bankruptcy May Affect Your Investment" in
this prospectus.
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<PAGE>
A PUC Sequestration
Order for Intangible
Transition Property in
Case of Default Might
Not Be Enforceable in
Bankruptcy...............
If PP&L defaults on its obligations as servicer,
the Competition Act allows the PUC to order the
sequestration and payment of all intangible
transition charge collections to the transition
bondholders. The Competition Act states that this
PUC order would be effective even if made while
PP&L or its successor is in bankruptcy. However,
federal bankruptcy law may prevent the PUC from
issuing or enforcing this order. The indenture
requires the trustee to request an order from the
bankruptcy court to permit the PUC to issue and
enforce the order. However, the bankruptcy court
may deny the request. See "How a Bankruptcy May
Affect Your Investment" in this prospectus.
Other Risks Associated With An Investment In The Transition Bonds
Absence of Secondary
Market for Transition
Bonds Could Limit Your
Ability to Resell
Transition Bonds.........
The underwriters for the transition bonds may
assist in resales of the transition bonds but
they are not required to do so. A secondary
market for the transition bonds may not develop.
If it does develop, it may not continue or it may
not be sufficiently liquid to allow you to resell
any of your transition bonds. See "Plan of
Distribution for the Transition Bonds" in this
prospectus.
Potential Loss on
Transition Bonds Due to
Limited Assets of PP&L
Transition Bond Company
LLC ................
You may suffer a material loss on your transition
bonds if the assets of PP&L Transition Bond
Company LLC are insufficient to pay the principal
amount of the transition bonds in full. The only
source of funds for payments on the transition
bonds will be the assets of PP&L Transition Bond
Company LLC. These assets are limited to:
. the intangible transition property,
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<PAGE>
. the funds on deposit in the trust accounts
held by the trustee,
. rights under various contracts and
. any other credit enhancement described in the
related prospectus supplement.
The transition bonds will not be insured or
guaranteed by PP&L, including in its capacity as
servicer, or by the trustee or any other person
or entity. Thus, you must rely for payment of the
transition bonds solely upon collections of the
intangible transition charges, funds on deposit
in the trust accounts held by the trustee and any
other credit enhancement described in the related
prospectus supplement. See "PP&L Transition Bond
Company LLC" in this prospectus.
PP&L Transition Bond
Company LLC May Issue
Additional Series of
Bonds...............
PP&L Transition Bond Company LLC may issue other
series of transition bonds without your prior
review or approval. These series may include
terms and provisions which would be unique to
that particular series. A new series of
transition bonds may not be issued if it would
result in the credit ratings on any outstanding
series of transition bonds being reduced or
withdrawn. However, a new series could be issued
that reduces or delays payments on your
transition bonds. This could result from the fact
that an increase in the amount of transition
bonds issued will increase the amount of
intangible transition charges. That, in turn,
could adversely affect PP&L Transition Bond
Company LLC's ability to increase intangible
transition charges within the generation rate
cap. See "The Transition Bonds" and "The
Indenture" in this prospectus. In addition, some
matters may require the vote of the holders of
all series and classes of transition bonds. Your
interests in these votes may conflict with the
interests of the transition bondholders of
another series or of another class. Thus, these
votes could result in an outcome that is
materially unfavorable to you.
Limited Nature of
Ratings..................
The transition bonds will be rated by one or more
established rating agencies. The ratings merely
analyze the probability that PP&L Transition Bond
Company LLC will repay the total principal amount
of the transition bonds at final maturity and
will make timely interest payments. The
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<PAGE>
ratings do not assess the speed at which PP&L
Transition Bond Company LLC will repay the
principal of the transition bonds. Thus, PP&L
Transition Bond Company LLC may repay the
principal of your transition bonds at a different
rate than you expect, which may materially reduce
the value of your investment. A rating is not a
recommendation to buy, sell or hold transition
bonds. The rating may change at any time. A
rating agency has the authority to revise or
withdraw its bond rating based solely upon its
own judgment. See "Ratings for the Transition
Bonds" in this prospectus.
You May Have to Reinvest
the Principal of your
Transition Bonds at a
Lower Rate of Return
Because of Optional
Redemption of the
Transition Bonds.........
If so provided in a prospectus supplement, there
may be optional redemptions of the transition
bonds. Future market conditions may require you
to reinvest the proceeds of a redemption at a
rate lower than the rate you received on the
transition bonds. PP&L Transition Bond Company
LLC cannot predict whether it will redeem any
series of transition bonds. See "Weighted Average
Life and Yield Considerations for the Transition
Bonds" and "The Transition Bonds--Credit
Enhancement for The Transition Bonds" in this
prospectus.
PP&L's Obligation to
Indemnify PP&L
Transition Bond Company
LLC For a Breach of a
Representation or
Warranty May Not Be
Sufficient to Protect
Your Investment.....
The obligations of PP&L under the contribution
agreement to the seller have been assigned by the
seller to PP&L Transition Bond Company LLC. If
PP&L breaches a representation or warranty in the
contribution agreement, PP&L is obligated to
indemnify PP&L Transition Bond Company LLC and
the trustee for any liabilities, obligation,
claims, actions, suit or payments resulting from
that breach, as well as any reasonable costs and
expenses incurred. In addition, PP&L is obligated
to indemnify PP&L Transition Bond Company LLC and
the trustee for principal and interest on the
transition bonds not paid when
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<PAGE>
due in accordance with their terms as a result of
a breach of a representation or warranty. PP&L
will not be obligated to repurchase the
intangible transition property in the event of a
breach of any of its representations and
warranties regarding the intangible transition
property, and neither the trustee nor the
transition bondholders will have the right to
accelerate payments on the transition bonds as a
result of the breach. PP&L is also obligated to
indemnify PP&L Transition Bond Company LLC and
the trustee for the amount of any deposits to
PP&L Transition Bond Company LLC required to have
been made which are not made when so required as
a result of a breach of a representation or
warranty. However, the amount of any
indemnification paid by PP&L may not be
sufficient for you to recover your transition
bond investment. If PP&L becomes obligated to
indemnify transition bondholders, the ratings on
the transition bonds will likely be downgraded
since transition bondholders will be unsecured
creditors of PP&L with respect to any of these
indemnification amounts. See "The Contribution
Agreement--PP&L's Obligation to Indemnify PP&L
Transition Bond Company LLC and the Trustee and
to Take Legal Action" in this prospectus.
You Might Receive
Principal Payments Later
than You Expected........
The amount and the rate of collection of
intangible transition charges that PP&L will
collect from each customer class will partially
depend on actual electricity usage and the amount
of delinquencies and write-offs for that customer
class. The amount and the rate of collection of
intangible transition charges, together with the
intangible transition charge adjustments
described above, will generally determine whether
there is a delay in the scheduled repayments of
transition bond principal. If PP&L collects
intangible transition charges at a slower rate
than expected from any customer class, it may
have to request adjustments of the intangible
transition charges. If those adjustments are not
timely and accurate, you may experience a delay
in payments of principal and interest or a
material decrease in the value of your
investment. If there is an acceleration of the
transition bonds before maturity, some classes
may be paid later than expected. Unless there is
a redemption or acceleration of the transition
bonds before maturity, the transition bonds will
not be retired earlier than scheduled. See "The
PUC Order and the Intangible Transition Charges--
The PUC Order" in this prospectus.
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<PAGE>
FORWARD-LOOKING INFORMATION
Some statements contained in this Prospectus and the related Prospectus
Supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts, are forward-
looking statements within the meaning of the federal securities laws. Although
PP&L and PP&L Transition Bond Company LLC, which is the issuer of the
Transition Bonds and which is referred to as Transition Bond Co. in this
Prospectus, believe that the expectations and the underlying assumptions
reflected in these statements are reasonable, there can be no assurance that
these expectations will prove to have been correct. The forward-looking
statements involve a number of risks and uncertainties and actual results may
differ materially from the results discussed in the forward-looking
statements. The following are among the important factors that could cause
actual results to differ materially from the forward-looking statements:
1. state and federal legal or regulatory developments;
2. national or regional economic conditions;
3. market demand and prices for energy, capacity and fuel;
4. weather variations affecting customer energy usage;
5. the effect of continued electric industry restructuring;
6. new accounting requirements or new interpretations or applications of
existing requirements;
7. operating performance of PP&L's facilities;
8. the payment patterns of customers including the rate of delinquencies
and the accuracy of the collections curve; and
9. system conditions, including actual results in achieving Year 2000
compliance by PP&L, its subsidiaries, affiliates, vendors and others.
Any forward-looking statements should be considered in light of these
important factors and in conjunction with PP&L Resources' and PP&L's other
documents on file with the SEC.
New factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time. It is not
possible for PP&L or Transition Bond Co. to predict all of these factors, or
the extent to which any factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which the statement is
made and neither PP&L nor Transition Bond Co. undertakes any obligation to
update the information contained in the statement to reflect subsequent
developments or information.
Where to Find Definitions of Capitalized Terms. Capitalized terms used in
this Prospectus are defined in a Glossary of Defined Terms which is Appendix A
to this Prospectus. This Glossary may be found after the Section entitled
"Various Legal Matters Relating to the Transition Bonds" in this Prospectus.
29
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ALLOCATIONS AND DISTRIBUTIONS
[FLOW CHART APPEARS HERE]
30
<PAGE>
PARTIES TO THE TRANSACTION
[FLOW CHART APPEARS HERE]
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PP&L
PP&L's Operations. PP&L is an operating electric utility, incorporated
under the laws of the Commonwealth in 1920. Operating under the name of the
Pennsylvania Power & Light Company until its name was changed in 1997, PP&L is
the primary subsidiary of PP&L Resources, Inc., a holding company formed in
1995. The assets of PP&L comprise approximately 92% of PP&L Resources'
consolidated assets, and the financial condition and results of operation of
PP&L are currently the principal factors affecting the financial condition and
results of operations of PP&L Resources. PP&L serves approximately 1.3 million
customers in a 10,000 square mile territory in 29 counties of central and
eastern Pennsylvania, with a population of approximately 2.6 million persons.
This service area has 129 communities with populations over 5,000, the largest
cities of which are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster,
Scranton, Wilkes-Barre and Williamsport. In addition to delivering its own
generation or purchased power, PP&L delivers power supplied by licensed
electricity generation suppliers pursuant to the Competition Act. PP&L also
markets wholesale electricity in 28 states and Canada.
The electric utility industry is undergoing fundamental restructuring. See
"The Competition Act" in this Prospectus. In addition to the Competition Act,
in 1996 the Federal Energy Regulatory Commission issued Order No. 888
providing for competition in wholesale generation by requiring that all public
utilities file non-discriminatory, open-access transmission tariffs.
Where to Find Information About PP&L and PP&L Resources. PP&L Resources
and PP&L file periodic reports with the SEC as required by the Exchange Act.
Reports filed with the SEC are available for inspection without charge at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of periodic reports and
exhibits thereto may be obtained at the above locations at prescribed rates.
Information filed with the SEC can also be inspected at the SEC site on the
World Wide Web at http://www.sec.gov.
THE COMPETITION ACT
The Competition Act's General Effect on the Electric Utility Industry in
Pennsylvania
An Overview of the Competition Act. The Competition Act, enacted in
December 1996, provides for the restructuring of the electric utility industry
in Pennsylvania. The Competition Act requires the unbundling of electric
services into separate generation, transmission and distribution services with
open retail competition for generation services. While electric utilities will
continue to provide transmission and distribution services, the Competition
Act authorizes electric generation suppliers licensed by the PUC to provide
generation and related services, including billing and metering. Under the
Competition Act, electric generation suppliers are subject to some limited
financial and disclosure requirements and some customer protection
requirements, but are generally unregulated by the PUC. When PP&L provides
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<PAGE>
generation service to its Customers within its service territory, it is
referred to as serving as the provider of last resort. Electric distribution
and transmission services will remain regulated.
Requirements for Utilities Under the Competition Act. The Competition Act
requires utilities to submit restructuring plans, which must include unbundled
rates for electricity generation and transmission and distribution services,
as well as proposed competitive transition charges. Competitive transition
charges are assessed on and collected from all retail consumers of electricity
within a utility's service territory who access the utility's transmission and
distribution system and generally may be collected over a maximum period of
nine years from enactment of the Competition Act. This period may be extended
by the PUC. Under the Competition Act, utilities are subject to a rate cap on
charges for generation through December 31, 2005 which provides that total
generation charges, including the intangible transition charge and the
competitive transition charge, to customers generally cannot exceed rates in
place at December 31, 1996. In the case of PP&L, this generation rate cap has
been extended to December 31, 2009. The Competition Act also caps transmission
and distribution rates from December 31, 1996 through June 30, 2001. In the
case of PP&L, this transmission and distribution rate cap has been extended to
December 31, 2004. Under the Competition Act, each regulated electric utility
was required to implement a retail access pilot program for customers
representing 5% of the peak load of each customer class for the period from
November 1, 1997 through December 31, 1998.
Recovery of Stranded Costs for PP&L and Other Pennsylvania Utilities
The Competition Act allows utilities an opportunity to recover their
allowed stranded costs. Stranded costs include regulatory assets, the unfunded
portion of the utility's projected nuclear generating plant decommissioning
costs and long-term power purchase commitments for which full recovery is
allowed and other costs, including investment in generating plants, spent
nuclear fuel disposal, retirement costs and other transition costs, for which
an opportunity for recovery is allowed in an amount determined by the PUC as
just and reasonable. As a mechanism to recover these stranded costs, the
Competition Act provides for the imposition and collection of competitive
transition charges on customers' bills. Because competitive transition charges
are imposed based on the customer's access to the utility's transmission and
distribution system, the customers will be assessed competitive transition
charges regardless of whether the customers purchase electricity from the
utility or an electric generation supplier. The Competition Act provides,
however, that the utility's right to recover transition or stranded costs is
contingent on the continued operation at reasonable availability levels of the
generation facilities for which the stranded costs were awarded, except where
continued operation is no longer economic on a production cost basis because
of the transition to a competitive market. See "Risk Factors--Unusual Nature
of Intangible Transition Property" in this Prospectus.
PP&L and Other Utilities May Securitize Stranded Costs
The Recovery of Stranded Costs May be Facilitated by the Issuance of
Transition Bonds. The Competition Act authorizes the PUC to issue "qualified
rate orders" approving
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<PAGE>
the issuance of transition bonds to facilitate the recovery or financing of
stranded costs and related expenses of an electric utility. A utility, a
finance subsidiary of a utility or a third-party assignee of a utility may
issue transition bonds. Under the Competition Act, proceeds of transition
bonds are required to be used principally to reduce stranded costs and the
related capitalization costs of the utility as well as to pay related
expenses. The transition bonds are secured by intangible transition property
and payable from the intangible transition charges and may have a maximum
maturity of ten years. The amounts of intangible transition charges must be
allocated to customer classes in a manner that does not shift interclass or
intraclass costs and maintains consistency with the allocation methodology for
utility production plant accepted by the PUC in the utility's most recent base
rate proceeding. Intangible transition charges can be imposed only when and to
the extent that transition bonds are issued.
The Competition Act contains a number of provisions designed to facilitate
the securitization of stranded costs and related expenses.
The PUC Can Declare That a Qualified Rate Order is Irrevocable. Under the
Competition Act, intangible transition property is created by the issuance by
the PUC of a qualified rate order. The Competition Act grants to the PUC the
power to specify that all or a portion of a qualified rate order will be
irrevocable. The Competition Act provides that to the extent that the PUC
declares all or a portion of a qualified rate order irrevocable, the PUC may
not, by any subsequent action, reduce, postpone, impair or terminate either
the order or the intangible transition charge authorized therein. In addition,
under the Competition Act, the Commonwealth pledges and agrees with the
holders of the transition bonds, and with any assignee or finance party, not
to limit or alter or in any way impair or reduce the value of intangible
transition property or the intangible transition charges until the related
transition bonds are fully discharged. The Competition Act provides, however,
that nothing precludes the Commonwealth from limiting or altering intangible
transition property or the qualified rate order, provided that adequate
compensation is made by law for the full protection of the intangible
transition charges collected pursuant to the qualified rate order and of the
holders of the transition bonds and any assignee or finance party. See "Risk
Factors--Legal, Legislative or Regulatory Action That May Adversely Affect
Your Investment" in this Prospectus.
The PUC May Adjust Intangible Transition Charges. The Competition Act
requires the PUC to provide in all qualified rate orders a procedure for
expeditiously approving periodic adjustments to the intangible transition
charges. The Competition Act provides that the PUC must determine whether the
adjustments are required on each anniversary of the issuance of the qualified
rate order or at additional intervals as specified by the PUC. The PUC must
approve the adjustment, if required, within 90 days of each request for
adjustment.
Current Customers Cannot Avoid Paying Competitive Transition Charges and
Intangible Transition Charges. The Competition Act provides that the
competitive transition charges and the intangible transition charges are non-
bypassable which means that a utility collects these charges from retail
consumers of electricity within the utility's service territory who access the
utility's transmission and distribution system, and that the utility is
entitled to collect intangible transition charges from those customers even if
they elect to purchase
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electricity from another supplier or choose to operate self-generation
equipment while accessing the utility's transmission and distribution system.
However, the intangible transition charges are not payable by any person who
self-generates electricity with facilities that do not access the utility's
transmission and distribution grid.
Intangible Transition Property May be Assigned. The Competition Act
further provides that to the extent that the utility, or any assignee of
intangible transition property, assigns, sells, transfers or pledges any
interest in intangible transition property, the PUC will authorize the utility
to contract with the assignee for the utility to:
1. continue to operate the system to provide electric services to the
utility's customers,
2. impose and collect the applicable intangible transition charges for the
benefit and account of the assignee, and
3. account for and remit the applicable intangible transition charges to or
for the account of the assignee.
In addition, to the extent specified in the qualified rate order, the
obligations of the utility under this contract:
1. will be binding upon the utility, its successors and assigns, and
2. will be required by the PUC to be undertaken and performed by the
utility and any other entity which provides electric service to a person
that is a customer of the utility located within the utility's service
territory, as a condition to providing service to the customer or the
municipal entity providing these services in place of the utility.
The Competition Act Protects the Transition Bonds' Lien on Intangible
Transition Property. The Competition Act provides that a valid and enforceable
security interest in intangible transition property automatically attaches
from the time the related transition bonds are issued if:
1. value is given by purchasers of the transition bonds and
2. a filing is made with the PUC to perfect the security interest either
before or within 10 days after issuance of transition bonds.
The Competition Act provides that security interests in the intangible
transition property are created and perfected only by means of a separate
filing with the PUC in accordance with the provisions of the Competition Act.
Upon perfection, the statutorily created lien attaches both to intangible
transition property and to all revenues and proceeds of intangible transition
property, whether or not such revenues have accrued. The Competition Act
provides that this filing will take precedence over any other filing and will
be enforceable against the assignee and all third parties, including judicial
lien creditors, subject only to rights of any third parties holding security
interests in intangible transition property previously perfected in accordance
with the Competition Act. The Competition Act provides that priority of
security interests in intangible transition property will not be defeated or
adversely affected by:
1. commingling of revenues with other funds of the utility or its assignee
or
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2. changes to the qualified rate order or the intangible transition
charges.
The Competition Act Characterizes the Transfer of Intangible Transition
Property as a True Sale. The Competition Act provides that a transfer by the
utility or an assignee of intangible transition property will be treated as a
true sale of the transferor's right, title and interest and not as a pledge or
other financing, other than for federal and state income and franchise tax
purposes, if:
1. the parties expressly state in governing documents that a transfer is to
be a sale or other absolute transfer and
2. the transaction is approved in a qualified rate order.
See "Risk Factors--The Risks Associated With Potential Bankruptcy Proceedings"
in this Prospectus.
Only a Pennsylvania Utility May Sue for Nonpayment of Intangible Transition
Charges
The Competition Act states that only a utility, its successor or any other
entity providing electric service to consumers may bring actions against
consumers for nonpayment of the intangible transition charges. In addition,
the Competition Act grants to the PUC exclusive jurisdiction over all disputes
arising out of the obligations to impose and collect the intangible transition
charges by a utility, its successor or any other entity which provides
electric service to a consumer.
PP&L'S RESTRUCTURING PLAN
The History of PP&L's Restructuring Plan
The Initial Pennsylvania PUC Decision. In accordance with the provisions
of the Competition Act, in April 1997, PP&L filed its Restructuring Plan with
the PUC. The Restructuring Plan was a comprehensive restructuring plan
detailing its proposal to implement full customer choice of electric
generation suppliers. PP&L's restructuring plan identified $4.5 billion of
retail electric generation-related stranded costs. Thirty-nine parties
intervened in the PUC proceeding. The PUC held evidentiary hearings during
August 1997. On June 15, 1998, the PUC issued the PUC Restructuring Order. The
PUC Restructuring Order authorized PP&L to recover stranded costs of $2.864
billion, net of an adjustment associated with depreciation of the Susquehanna
nuclear plant, over 8 1/2 years beginning in 1999.
PP&L, and Other Parties, Object to the PUC Decision. On July 15, 1998,
PP&L filed a complaint in the U.S. District Court for the Eastern District of
Pennsylvania seeking injunctive and monetary relief on the grounds that the
provisions of the PUC Restructuring Order were preempted by the Federal Power
Act and that implementation of the Competition Act by the PUC in the
Restructuring Order violated several provisions of the U.S. Constitution. Also
on July 15, 1998, PP&L filed a Petition for Review in the Commonwealth Court
of Pennsylvania invoking the original jurisdiction of the Commonwealth Court
on the grounds that the provisions of the PUC Restructuring Order and
implementation of the Competition Act violated the Pennsylvania Constitution.
Finally, on July 15, 1998, PP&L filed a Petition for Review in the
Commonwealth Court appealing the PUC Restructuring Order
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based upon errors of law, an arbitrary and capricious abuse of administrative
discretion, and the deprivation of the due process of law. In addition to
these actions, the Anthracite Region Independent Power Producers Association
and the Schuylkill Energy Resources also filed appeals to the Commonwealth
Court challenging various aspects of the PUC's Restructuring Order. Also, PP&L
Industrial Customer Alliance, the Office of Consumer Advocate, Mid-Atlantic
Power Supply Association, Enron Power Marketing, Inc. and the Commission on
Economic Opportunity filed cross-appeals in PP&L's action in the Commonwealth
Court. See "Prior Legal Challenges to the Competition Act or the PUC Order--
Litigation Relevant to the Competition Act" in this Prospectus.
The Joint Petition Is Filed. On August 12, 1998, PP&L and all but three of
the parties that participated in PP&L's Restructuring Plan proceeding filed a
Joint Petition for Full Settlement of PP&L's Restructuring Plan and Related
Court Proceedings with the PUC. The three parties that did not sign the Joint
Petition agreed to abide by the terms and conditions contained therein. On
August 13, a slightly amended Joint Petition was filed with the PUC. The terms
and conditions of the Joint Petition represented a comprehensive settlement
which resolved all issues on appeal before the U.S. District Court for the
Eastern District of Pennsylvania and the Commonwealth Court arising from
challenges to the PUC Restructuring Order. See "Prior Legal Challenges to the
Competition Act or the PUC Order--Litigation Relevant to the Competition Act"
in this Prospectus. On August 27, the PUC approved the Joint Petition, amended
its prior decisions and issued a Final Order. On May 21, 1999, the PUC issued
another order supplementing the Final Order. The Final Order and that
supplemental order are referred to in this Prospectus as the PUC Order.
The PUC Order
PP&L May Recover $2.97 Billion in Stranded Costs. The PUC Order authorizes
PP&L to recover $2.97 billion of Stranded Costs, together with a pre-tax
return of 10.86% on the unamortized balance thereof. The PUC authorized the
recovery of PP&L's Stranded Costs over an 11-year transition period beginning
January 1, 1999 and ending December 31, 2009. Recovery of Stranded Costs and
related expenses, as well as the allowed return, are to be through Competitive
Transition Charges. Competitive Transition Charges will be reduced by the
amount of Intangible Transition Charges upon issuance of the Transition Bonds.
PP&L is authorized to issue or cause the issuance of transition bonds and to
collect Intangible Transition Charges designed to recover $2.85 billion of its
$2.97 billion in Stranded Costs.
The following table shows the average levels of Competitive Transition
Charges, prior to reduction for the amount of Intangible Transition Charges,
for the years 1999 through 2009. In this table, "T&D Rate" represents the
projected Transmission and Distribution Rate and "GRT" represents
Pennsylvania's Gross Receipts Tax. The gross receipts tax is imposed on
electric utilities which are organized under the laws of, or doing business
in, the Commonwealth and is currently levied at the rate of 4.4% on each
dollar of an electric utility's gross receipts arising from sales of energy to
particular Customers. Also, the Revenue Requirement column is subject to
adjustment for actual collections. Under the Joint Petition, kWh are estimated
to increase 1.5 percent per year on a system average basis. The "Shopping
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Credit" column represents the projected Shopping Credit for generation, which
is the bundled rate for electricity consumption that PP&L charged its
customers prior to the implementation of the Competition Act, minus PP&L's
Competitive Transition Charges and minus PP&L's Transmission and Distribution
Rate. This represents the amount that Customers can apply towards electricity
generation charges they receive from other Electricity Generation Suppliers,
less a 4% system average reduction from the current total bundled bill of
Customers in 1999. The Bundled Rate is the sum of the Competitive Transition
Charge Rate, the Transmission and Distribution Rate and the Shopping Credit.
TABLE 1
Average Levels of Competitive Transition Charges--1999-2009
<TABLE>
<CAPTION>
CTC
Revenue T&D Shopping Bundled
kWh Requirement CTC Rate Rate Credit Rate
Year Consumed With GRT (Cents/kWh) (Cents/kWh) (Cents/kWh) (Cents/kWh)
- ---- -------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1999 33,108,701,350 $ 497,938,161 1.57 1.74 3.81 7.12
2000 33,605,331,870 $ 498,026,787 1.55 1.74 4.13 7.42
2001 34,109,411,848 $ 496,670,612 1.52 1.74 4.16 7.42
2002 34,621,053,026 $ 481,094,845 1.45 1.74 4.23 7.42
2003 35,140,368,821 $ 473,995,034 1.41 1.74 4.27 7.42
2004 35,667,474,354 $ 461,682,489 1.35 1.74 4.33 7.42
2005 36,202,486,469 $ 438,637,302 1.27 n/a 4.41 n/a
2006 36,745,523,766 $ 447,325,670 1.27 n/a 4.78 n/a
2007 37,296,706,623 $ 433,106,206 1.21 n/a 4.84 n/a
2008 37,856,157,222 $ 411,419,380 1.14 n/a 4.91 n/a
2009 38,423,999,580 $ 377,372,565 1.03 n/a 5.02 n/a
</TABLE>
Figures in the table result in the recovery of $2.97 billion of Stranded
Costs plus the allowed return from the estimated number of Customers and at
projected usage levels in the period during which the Competitive Transition
Charges and the Intangible Transition Charges will be collected, taking into
account the 4% system average rate reduction during 1999. Both the Competitive
Transition Charges and the Intangible Transition Charges are subject to
adjustment.
PP&L May Securitize Up to $2.85 Billion of its Stranded Costs. Under the
PUC Order, PP&L may securitize through the issuance of transition bonds up to
$2.85 billion of the $2.97 billion in Stranded Costs that the PUC authorized
PP&L to recover. The charging of Intangible Transition Charges associated with
the issuance of transition bonds must terminate for electricity delivered no
later than December 31, 2009. Once the transition bonds are issued,
Competitive Transition Charges will be reduced by the amount of Intangible
Transition Charges, and PP&L will be required to reduce rates by an additional
amount necessary to pass through to Customers 75% of the net savings achieved
as a result of the issuance of the transition bonds. See "The PUC Order and
the Intangible Transition Charges" in this Prospectus.
The Joint Petition required PP&L to unbundle its retail electric rates on
January 1, 1999 into the following components:
1. distribution charges,
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2. transmission charges,
3. Competitive Transition Charges and, if applicable, Intangible Transition
Charges,
4. a Shopping Credit for generation and
5. a metering and billing credit.
PP&L Must Reduce its Electric Rates. PP&L's unbundled rates, rate
reductions and rate caps are reflected in the schedule of system-wide average
rates included in the Joint Petition and shown in Table 2 below. The PUC Order
requires PP&L to reduce rates during 1999 by 4% on a system average basis. The
Joint Petition extends the rate caps on generation rates until December 31,
2009. It also extends rate caps on transmission and distribution rates, which
were scheduled to terminate under the Competition Act on June 30, 2001, until
December 31, 2004. Thus, there are no figures under the Transmission and
Distribution Rate column after 2004. Competitive Transition Charges, or CTC in
Table 2 below, are fixed by Rate Schedule for each year through the year 2009
and include Intangible Transition Charges once the Transition Bonds are
issued. The Generation Rate Cap is set by the PUC and equals the sum of the
Competitive Transition Charges and the Shopping Credit. This represents, on
average, the generation portion of bills for customers who continue to be
supplied by PP&L as the supplier of last resort. The total rate column
represents the average amount that Customers who continue to be supplied by
PP&L as the supplier of last resort will pay. There are no figures in the
Total Rate column after 2004 since it equals the sum of the Transmission and
Distribution rate and the Generation Rate Cap.
TABLE 2
Schedule of System-Wide Average Rates per kWh
<TABLE>
<CAPTION>
Effective Transmission Shopping Generation Total
Date & Distribution CTC Credit Rate Cap Rate
--------- -------------- ---- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Jan. 1, 1999 1.74 1.57 3.81 5.38 7.12
Jan. 1, 2000 1.74 1.55 4.13 5.68 7.42
Jan. 1, 2001 1.74 1.52 4.16 5.68 7.42
Jan. 1, 2002 1.74 1.45 4.23 5.68 7.42
Jan. 1, 2003 1.74 1.41 4.27 5.68 7.42
Jan. 1, 2004 1.74 1.35 4.33 5.68 7.42
Jan. 1, 2005 n/a 1.27 4.41 5.68 n/a
Jan. 1, 2006 n/a 1.27 4.78 6.05 n/a
Jan. 1, 2007 n/a 1.21 4.84 6.05 n/a
Jan. 1, 2008 n/a 1.14 4.91 6.05 n/a
Jan. 1, 2009 n/a 1.03 5.02 6.05 n/a
</TABLE>
The Competition Act authorizes electric distribution companies to recover
changes in their state tax liability resulting from the introduction of
competition in the electric market through adjustments in the rates charged to
customers, which in some circumstances set forth in the regulations adopted by
the PUC may result in rates exceeding the applicable Generation Rate Cap. PP&L
may apply for the recovery of state tax liability changes in accordance with
the procedures outlined in the PUC's regulations if PP&L in fact experiences
increases in its state
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tax liability as contemplated in the Competition Act. PP&L may seek relief
from the Generation Rate Cap for reasons specified in the Competition Act.
PP&L Must Allow Other Entities to Provide Metering and Billing Services. As
provided in the PUC Order, on January 1, 1999, PP&L unbundled its retail
electric rates for metering, meter reading and billing and collection services
to provide credits for those Customers who may elect to have alternative
suppliers perform these services. In mid-1999, for all Rate Schedules, except
for Residential Rate Schedules for which the starting date is January 1, 2000,
PUC-licensed electric generation suppliers may provide billing, collection and
meter reading services to retail Customers. An electric generation supplier or
other third party that bills on behalf of PP&L must comply with all applicable
PUC billing and disclosure requirements, including the unbundling of
transmission and distribution rates, absent a specific waiver by the PUC. Only
PP&L or any successor electric utility, however, may disconnect or reconnect a
consumer's distribution service. Termination of the distribution service is
permitted only for failure to pay for transmission and distribution service or
provider of last resort service. However, as a result of the order in which
payments by Customers are applied, failure to pay Intangible Transition
Charges would also result in termination. See "The PUC Order and the
Intangible Transition Charges--PP&L's Intangible Transition Charges" in this
Prospectus.
Current PP&L Customers May Choose Their Electric Generation Supplier. Under
the Joint Petition, customer choice of electric generation suppliers for
commercial and industrial customers is being phased in between January 1, 1999
and January 2, 2000 with one-third of the load of each customer class entitled
to choose their electric generation supplier on January 1, 1999, an additional
one-third on January 2, 1999 and the remaining one-third by January 2, 2000.
In a settlement of the PUC's Interim Order regarding installed capacity issues
at Docket No. I-00980078, PP&L agreed that all residential customers could
choose their generation suppliers on and after January 2, 1999. With respect
to Rate Schedules LP-4, LP-5, IS-T, IS-P and LPEP, and the applicable riders
related to these Rate Schedules, all of which are in the Large Commercial and
Industrial Customer Class, all customers could shop on January 1, 1999, but if
the individual customer peak load subscriptions exceed the class peak load
limitation, then each customer's subscription will be reduced pro rata to meet
the class peak load limitation.
How the Electricity Generation Service Provider of Last Resort Will Be
Determined
Under the Restructuring Plan and the Joint Petition, PP&L will act as a
provider of last resort through December 31, 2009 for all Customers within its
service territory who do not choose or cannot choose to purchase power from
alternative suppliers, subject to specific terms, conditions and
qualifications. On January 1, 2002, 20% of the Residential Customers,
determined by random selection, including low-income and inability-to-pay
Customers, and without regard to whether these Customers are obtaining
generation service from an electric generation supplier, will be assigned to
Competitive Default Service. The Competitive Default Supplier will be selected
on the basis of an energy and capacity price bidding process approved,
established and maintained by the PUC among electric generation suppliers who
meet specified qualifications. At any time, a Customer assigned to the
Competitive Default
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Supplier can elect to return to PP&L as provider of last resort. Competitive
Default Service will be rebid annually, unless an alternative bidding term is
approved by the PUC. If, 30 days prior to the annual bid, the number of
Residential Customers served by Competitive Default Service has fallen below
17%, a further random selection of Customers will be assigned to Competitive
Default Service to restore the number of Customers to the 20% level. The
further random selection will be chosen in a manner to be determined by the
PUC. Terms and conditions of the Competitive Default Service will be
established, maintained and modified by the PUC. By January 1, 2001, the PUC
will issue the final standards for PP&L governing the responsibilities and
obligations of the competitively determined provider of last resort in PP&L's
service territory.
Other Provisions of PP&L's Restructuring Plan
The Joint Petition also provides that through December 31, 2009, Customers
may choose to purchase power from alternative suppliers and later return to
take provider of last resort service from PP&L or to their assigned
Competitive Default Supplier. PP&L is also authorized to:
1. transfer its generation assets to a separate corporate entity or
entities at book value,
2. include under the capped transmission and distribution rates 0.01 cent
per kilowatt hour for a sustainable energy and economic development
fund, and
3. transfer its Energy Plus division to an affiliated corporation.
THE PUC ORDER AND THE INTANGIBLE TRANSITION CHARGES
The PUC Order
In the PUC Order, the PUC determined that PP&L's recovery of Stranded Costs
as set forth in the Joint Petition is just and reasonable and in the public
interest and that securitization of up to $2.85 billion of its Stranded Costs
is just and reasonable and in the public interest.
PP&L is Authorized to Service the Intangible Transition Property. The PUC
Order provides that, to the extent that PP&L, or any assignee, assigns, sells,
transfers, or pledges any interest in Intangible Transition Property created
by the PUC Order, the PUC authorizes PP&L to contract, for a specified fee,
with the assignee for PP&L to:
1. continue to operate the system to provide electric services to Customers
in PP&L's service territory,
2. impose and collect the Intangible Transition Charges for the benefit and
account of the assignee,
3. make periodic adjustments of Intangible Transition Charges contemplated
under the PUC Order, and
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4. account for and remit the applicable Intangible Transition Charges to or
for the account of the assignee free of any charge, deduction or
surcharge of any kind, other than for the specified fee referred to
above.
The PUC Order also authorizes PP&L to agree that an alternative party,
which may be the Trustee, may replace PP&L under its contract with the
assignee and perform the servicing obligations of PP&L with respect to the
Intangible Transition Charges contemplated in the PUC Order. The obligations
of PP&L, or any other servicing entity, shall be required by the PUC to be
undertaken and performed by PP&L and any other entity which provides
transmission and distribution services to a person that was a Customer of PP&L
located within PP&L's service territory on January 1, 1997, or that became a
Customer of electric services within the service territory after January 1,
1997, and is still located within the service territory, as a condition to
providing service to the Customer by PP&L or another entity. However, the
Intangible Transition Charge is not payable by any person who self-generates
electricity with facilities that are not operated in parallel with PP&L's
transmission and distribution grid.
However, any other servicing entity that is not a utility may not be able
to fulfill all of the duties of the Servicer contemplated by the Servicing
Agreement.
The PUC Authorized PP&L to Issue Transition Bonds. In the PUC Order, the
PUC authorized the issuance of transition bonds in an aggregate principal
amount not to exceed $2.85 billion. PP&L, or any assignee of PP&L to whom
Intangible Transition Property is sold, may issue and sell, in reliance on the
PUC Order, one or more series of transition bonds, each series in one or more
classes, secured by Intangible Transition Property, provided that the final
maturity of any series of transition bonds may not be later than ten years
from the date of issuance and in no event after December 31, 2009. PP&L, or
its assignee, is also authorized to refinance transition bonds in a face
amount not to exceed the unamortized principal thereof and subject to the
foregoing maturity limitation.
Consistent with the Competition Act, the PUC Order provides that PP&L
retains the sole discretion to issue or cause the issuance of transition
bonds. Within 120 days after each transition bond issuance, PP&L is required
to file with the PUC a description of the financing structure of the
transition bonds, including the principal amount, the price at which each
series or class of transition bonds was sold, payment schedules, interest rate
and other financing costs and the final plans for PP&L's use of the proceeds
of the offering. Notwithstanding this filing, the final structure of each
issuance of transition bonds is not subject to change or revision by the PUC
after the date of issuance.
The PUC Authorized PP&L to Impose Intangible Transition Charges. Pursuant
to the PUC Order, the PUC determined that it was just and reasonable and in
the public interest for PP&L to recover from Customers, through Intangible
Transition Charges, up to $2.85 billion of Stranded Costs. Under the PUC
Order, the PUC authorized PP&L to impose on and collect from Customers, either
directly or through bills rendered by electric generation suppliers or other
third parties, Intangible Transition Charges in an amount sufficient to
recover the Qualified Transition Expenses. In addition to the Intangible
Transition Charges, PP&L is
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required to collect and to pay to the Commonwealth a gross receipts tax equal
to 4.4% of the amount of Intangible Transition Charges.
Upon the successful issuance of Transition Bonds, Competitive Transition
Charges will be reduced by an amount equal to the revenue requirement of the
Stranded Costs for which the Transition Bonds have been issued. In addition,
PP&L will reduce the Competitive Transition Charges imposed on Customers by an
additional amount necessary to pass through to Customers 75% of the net
savings achieved as a result of issuance of the Transition Bonds.
PP&L Is Allowed to Make Periodic Adjustments to the Intangible Transition
Charges. In the PUC Order, the PUC approved the allocation and methodology
for imposing Competitive Transition Charges and Intangible Transition Charges
on Customers. The PUC Order also authorizes PP&L to make annual adjustments to
Intangible Transition Charges if collections of the Intangible Transition
Charges fall below or exceed the amount necessary to ensure the receipt by the
Trustee of revenues sufficient to recover fully the Qualified Transition
Expenses. Adjustments beginning twelve months before the Expected Final
Payment Date for the last Series or Class of Transition Bonds will be
quarterly or monthly if necessary to ensure, among other items, full payment
of the transition bonds. The PUC Order states that the revenues received by
the Trustee through Intangible Transition Charges shall be determined to be
sufficient for the foregoing purpose if, and only if, the ITC Collections are
sufficient to pay Qualified Transition Expenses when due. For each annual
adjustment, the PUC Order directs PP&L to file with the PUC:
1. an accounting of Intangible Transition Charges received by the Trustee
for the previous annual period;
2. a statement of any over- or under-receipts; and
3. the charge or credit to be added to Intangible Transition Charges to
ensure that the Intangible Transition Charges received by the Trustee
will be sufficient to amortize the Qualified Transition Expenses in
accordance with the amortization schedule for the transition bonds and
the corresponding reduction or increase in Competitive Transition
Charges.
The PUC Order provides that, in accordance with the Competition Act, the
PUC must approve each annual adjustment request within 90 days of PP&L's
adjustment filing. Beginning twelve months before the Expected Final Payment
Date of the last Series or Class of the Transition Bonds, the PUC will permit
each adjustment request to become effective within 15 days after filing. The
PUC Order does not provide for any other adjustments that may have a material
negative impact on the Intangible Transition Property or otherwise materially
reduce the amounts available for payment on the Transition Bonds.
The PUC Authorized PP&L to Sell Intangible Transition Property. Under the
PUC Order, the PUC concluded that it is in the public interest, and authorized
PP&L, and any assignee of PP&L, to assign, sell, transfer or pledge Intangible
Transition Property. PP&L, or the assignee of PP&L, may assign Intangible
Transition Property in an amount sufficient to recover all of PP&L's Qualified
Transition Expenses and all revenues, collections, claims,
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payments or money or proceeds arising from Intangible Transition Charges. The
PUC directed PP&L to use the proceeds from the sale of Intangible Transition
Property principally to reduce Stranded Costs and related capitalization, as
well as to pay related expenses.
Irrevocable PUC Order. The PUC Order declares that the paragraphs in the
PUC Order concerning the recovery of $2.85 billion of PP&L's Stranded Costs
through the issuance of transition bonds, the imposition of Intangible
Transition Charges on Customers in an amount sufficient to recover Qualified
Transition Expenses, the methodology and allocation and timing of adjustments
to the Intangible Transition Charges and the sale of Intangible Transition
Property, among other things, are irrevocable for purposes of the Competition
Act, and the PUC accordingly agrees that it will not, directly or indirectly,
by any subsequent action, reduce, postpone, impair or terminate the PUC Order
or the Intangible Transition Charges.
PP&L's Intangible Transition Charges
Calculation of PP&L's Intangible Transition Charges. The Qualified
Transition Expenses authorized in the PUC Order are to be recovered from all
Customers in each of PP&L's Customer Classes and Rate Schedules.
Intangible Transition Charges will be allocated among PP&L's Customer
Classes based on the relative generation-related charges borne by each
Customer Class through the electric rates specified in PP&L's electricity rate
tariff which became effective on January 1, 1999. PP&L will determine the
amount to be allocated to each Rate Schedule within that Customer Class. From
this determination, PP&L will calculate the total amount of Intangible
Transition Charges required to be billed to each Customer Class in order to
generate ITC Collections sufficient to ensure timely recovery of Qualified
Transition Expenses. That amount will be expressed as a charge or charges for
each Rate Schedule. Those charges will be reflected in each Customer's bill
within each Rate Schedule. The charges will vary among Customer Classes and
among Rate Schedules within a Customer Class. The dollar amount of the charge
on a Customer's bill is the Intangible Transition Charge payable by the
Customer.
ITC Collections will vary from projections because total electricity
revenues are affected by changes in usage, number of Customers, rate of
delinquencies and write-offs or other factors. PP&L will recalculate the
charge applied to Customers' bills to adjust for such variations on each
Calculation Date. See Tables 3, 4, 5, 6, 7, 8 and 9 under "The Servicer of The
Intangible Transition Property" in this Prospectus.
The imposition of Intangible Transition Charges as a result of the issuance
of Transition Bonds will result in a corresponding reduction in any
Competitive Transition Charges then in effect. In addition, the Competitive
Transition Charge will also be reduced by an amount equal to 75% of the
savings from securitization of PP&L's Stranded Costs.
The Period When Intangible Transition Charges Will Be Billed to Customers.
Intangible Transition Charges for each Series of Transition Bonds will be
assessed on all Customer bills
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as follows. Prior to January 1, 2000, Intangible Transition Charges will be
applied to all services on the bill regardless of whether the service was
provided before or after the date of issuance for a particular Series.
Beginning on January 1, 2000, Intangible Transition Charges will be applied
only to services that were provided on and after the date of issuance for a
particular Series. For instance, if a particular Series Issuance Date is
August 15, 1999, bills that include current charges for services provided
before August 15 will be assessed Intangible Transition Charges for the period
prior to August 15, with respect to that Series. Upon each adjustment of
Intangible Transition Charges or issuance of additional Series of Transition
Bonds, the adjusted Intangible Transition Charges will be assessed in the same
manner.
Intangible Transition Charges Will Be Charged Only for Usage Through
December 31, 2009. The Servicer, or electric generation supplier or other
third party biller, will continue to charge the Intangible Transition Charges
for usage with respect to each Series of Transition Bonds, until the Series
has been paid in full, but in no event for electricity delivered later than
December 31, 2009. Upon payment in full of all Transition Bonds, or December
31, 2009, whichever is sooner, the Servicer will cease assessing Intangible
Transition Charges. However, after December 31, 2009 the Servicer, or electric
generation supplier or other third party biller, will continue to collect the
Intangible Transition Charges accrued by Customers through December 31, 2009.
To the extent that ITC Collections exceed the amount necessary to amortize
fully all Transition Bonds and pay interest thereon, to fund credit
enhancement and to pay related fees, costs and charges associated with the
transition bonds, the ITC Collections will be released by the Trustee to
Transition Bond Co.
The PUC's Intangible Transition Charge Adjustment Process. In order to
enhance the likelihood that actual ITC Collections, net of any amounts on
deposit in the Reserve Account, are neither more nor less than the amount
necessary to amortize the Transition Bonds of each Series in accordance with
the related Expected Amortization Schedule, to pay interest, to fund the
Overcollateralization Subaccount to the Scheduled Overcollateralization Level,
to replenish any shortfalls in the Capital Subaccount, and to pay the
Trustee's fee, the Servicing Fee and the other expenses and costs included in
the Qualified Transition Expenses, the Servicing Agreement requires the
Servicer to seek, and the Competition Act and the PUC Order require the PUC to
approve, annual adjustments to the Intangible Transition Charges based on
actual ITC Collections and updated assumptions by the Servicer as to projected
future usage of electricity by Customers, expected delinquencies and write-
offs and future expenses relating to Intangible Transition Property and the
Transition Bonds. In addition, the PUC Order provides that adjustments
beginning twelve months before the Expected Final Payment Date of the last
Series or Class of Transition Bonds may be made quarterly or monthly. If at
the time of issuance of a Series, the Servicer determines any additional
adjustments are required, the dates for these adjustments will be specified in
the Prospectus Supplement for the Series. These adjustments will cease with
respect to a Series on the final Adjustment Date specified in the related
Prospectus Supplement for the Series.
The Schedule for Making Adjustments to Intangible Transition Charges. The
Servicer is required to file an Adjustment Request with the PUC on October 1
of each year and on any
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other Calculation Date, requesting modifications to the Intangible Transition
Charges. These Adjustment Requests are designed to result in:
1. the Transition Bond Balance for each Series or Class equaling the
Projected Transition Bond Balance for that Series or Class,
2. the amount on deposit in the Overcollateralization Subaccount equaling
the Scheduled Overcollateralization Level,
3. the amount in the Capital Subaccount equaling the Required Capital
Amount, and
4. the amount in the Reserve Account equaling zero.
These Adjustment Requests are designed to achieve each of the above goals
by the Payment Date immediately preceding the next Adjustment Date or with
respect to the period in which monthly rate adjustments are utilized,
generally the 25th day of the calendar month immediately preceding the next
monthly Adjustment Date, as applicable, taking into account any amounts on
deposit in the Reserve Subaccount. The Competition Act and the PUC Order
require the PUC to approve these adjustments within 90 days of the Adjustment
Request. The Adjustment Dates on which adjustments to the Intangible
Transition Charges are to be made will be set forth in the Prospectus
Supplement for the related Series.
In order to obtain approval of each annual adjustment as expeditiously as
possible, on October 1 of each year PP&L, as Servicer, will file with the PUC
a schedule of actual ITC Collections for the nine months ended August 31,
together with an estimate of ITC Collections for the three months ending on
the immediately following November 30, and the estimated Intangible Transition
Charges for the following year. On December 15, PP&L will file a schedule of
actual ITC Collections as of November 30, replacing the estimates submitted on
October 1, and the actual Intangible Transition Charges for the following
year. Interim adjustments beginning twelve months before the Expected Final
Payment Date of the last Series or Class of the Transition Bonds will not
reflect updated assumptions of projected future usage of electricity by
Customers, expected delinquencies and write-offs and future expenses relating
to Intangible Transition Property and the Transition Bonds. Beginning twelve
months before the Expected Final Payment Date of the last Series or Class of
the Transition Bonds, the PUC will permit each adjustment request to become
effective within 15 days after filing. The adjustment process will continue
until the earlier of the final payment of all Series of Transition Bonds or
December 1, 2009.
Customers Within PP&L's Service Territory May Choose How Their Electricity
Consumption Is Billed
The PUC Order and subsequent orders of the PUC give Customers the
opportunity to choose from the following billing options as of mid-1999 for
all Rate Schedules, except for Residential Rate Schedules for which the
starting date is January 1, 2000:
1. consolidated billing from the utility,
2. consolidated billing from the electric generation supplier or
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3. separate billing from the utility and from the electric generation
supplier providing billing services.
Any electric generation supplier that provides consolidated billing is
required to pay the utility amounts billed by the utility to that entity,
including the Intangible Transition Charges, regardless of the entity's
ability to collect these amounts from its customers. In effect, through this
mechanism, the electric generation supplier will replace the consumer as the
obligor on the Intangible Transition Charges. The Servicer, on behalf of
Transition Bond Co., will have limited rights to collect the Intangible
Transition Charges from those consumers that are served by electric generation
suppliers. The Servicer will have the right to bill and collect Intangible
Transition Charges and other amounts payable to the Servicer directly from all
of the electric generation supplier's consolidated billing customers following
a payment default by an electric generation supplier and the expiration of the
applicable grace period. See "Risk Factors--Servicing Risks" in this
Prospectus.
Metering and Billing Guidelines. The PUC Order sets forth and future orders
of the PUC will set forth guidelines governing metering, billing and other
activities by electric generation suppliers. The PUC has determined that if an
electric generation supplier or other third party provides consolidated
billing, the electric generation supplier must first establish its
creditworthiness by either:
1. demonstrating that it has an investment-grade rating for its own long-
term debt or
2. depositing with the PUC a letter of credit or other mechanism sufficient
to cover 30 days of its expected collections of Intangible Transition
Charges.
The PUC Order provides that an electric generation supplier that bills
consumers must comply with all billing, financial and disclosure requirements
applicable to electric generation suppliers. However, the PUC may waive any of
those requirements at any time in the future. These PUC standards include, but
are not limited to, data exchange and billing format standards to facilitate
the efficient, speedy and non-discriminatory exchange of information between
PP&L and any electric generation suppliers. On October 2, 1998, the parties to
the Joint Petition submitted to the PUC proposed competitive metering and
billing specifications which modified the PUC's guidelines as necessary to
assure the standards are consistent with PP&L's systems. This filing resolved
all outstanding billing and metering issues except for two small issues
relating to consolidated electricity generation supplier bills. On October 16,
1998, the PUC approved this competitive billing and metering specifications
filing. See "Risk Factors--Servicing Risks" in this Prospectus.
Discounts PP&L Will Offer to Customers. Under the PUC Order, PP&L will
continue to provide existing discounts to some classes of Customers, for
instance industrial Customers which consume large amounts of power and
Customers in specified low-income assistance programs, among others. These
discounts are already accounted for in the average rates to be charged to all
other Customers, including the Competitive Transition Charges and the
Intangible Transition Charges.
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PP&L's Universal Service Program for Low-Income Customers
PP&L provides five programs that provide energy assistance to low-income
Customers:
1. Customer Assistance and Referral Evaluation Service;
2. Operation HELP;
3. Winter Relief Assistance Program;
4. Keep Warm Plan; and
5. On Track Payment Program Pilot.
The PUC ordered that PP&L increase its funding levels for these programs
from approximately $7 million, which represents the expense incurred for these
programs in 1997, to $18.5 million by 2002. The implementation and management
of these Universal Service Programs, or any other Universal Service Programs
which may be implemented in the future, are not expected to affect materially
Intangible Transition Charge recovery.
PRIOR LEGAL CHALLENGES TO THE COMPETITION ACT OR THE PUC ORDER
Litigation Relevant to the Competition Act
The Union Action and the Fumo Action. Two legal actions alleged that the
adoption of the Competition Act violated provisions of the Pennsylvania
Constitution governing legislative procedure. The first action was filed by
Pennsylvania State Senator Vincent J. Fumo and other plaintiffs; this action
will be referred to as the Fumo Action in this Prospectus. The second action
was filed by the Utility Workers Union of America. This action will be
referred to as the Union Action in this Prospectus. The plaintiffs in those
cases alleged that enactment of the Competition Act by attaching it to a bill
to increase the maximum legal operational age of taxicabs in Philadelphia, a
change already enacted by the legislature, violated the following Pennsylvania
constitutional provisions:
1. prohibiting any bill from addressing more than one subject,
2. prohibiting any bill from being altered or amended during passage so as
to change its original purpose and
3. requiring every bill to be considered on three separate days in each
house of the General Assembly.
The Commonwealth Court Upholds the Competition Act. On September 24, 1998,
the Commonwealth Court ruled in favor of the PUC in the Fumo Action. The Court
first rejected Fumo's argument that the Competition Act was altered and
amended during passage so as to change its original purpose and meaning. The
Court stated that absent confusion or deception as to the content of a bill,
there is no clear violation of the Pennsylvania Constitution. The Court then
said that since the title of the bill which was to become the Competition Act
included, the words ". . . PROVIDING FOR RESTRUCTURING OF THE ELECTRIC UTILITY
INDUSTRY. . . ", the Commonwealth's representatives were on notice as to the
contents of the bill. The Court then rejected Fumo's allegation that the bill
encompassed more
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than one subject. The Court ruled that since the bill involved amendments to
the Commonwealth's Public Utility Code and related subjects dealing with
public utility regulation, there were no obvious constitutional violations
which occurred in the enactment of the Competition Act. Finally the Court
rejected Fumo's contention that the Competition Act was not considered on
three separate days in each house of the legislature. The court held that
since the Competition Act was initially considered on three different days in
the House and three different days in the Senate, ". . . it passed
constitutional muster even though the Senate amendments themselves did not
receive a separate three days of consideration in the House of
Representatives."
On September 24, 1998 the Commonwealth Court dismissed the Union Action on
identical grounds by which it rejected the Fumo Action. Petitioners in these
two cases did not seek further court review and the time period for doing so
has expired.
The IP&L Action. A separate action, filed by Indianapolis Power & Light
Co., which is referred to as IP&L, alleged that the Competition Act's
provision allowing PECO Energy Company, another electricity provider in the
Commonwealth of Pennsylvania, which will be referred to in this Prospectus as
PECO, to recover Stranded Costs discriminates against interstate commerce in
violation of the Commerce Clause of the United States Constitution. In an
opinion dated May 7, 1998, the Commonwealth Court ruled against IP&L, holding,
as a matter of law, that the Competition Act does not violate the Commerce
Clause. IP&L then petitioned the Pennsylvania Supreme Court for allowance of
appeal. In the petition, IP&L claimed that the payment of Stranded Costs to
PECO discriminates against interstate commerce by favoring in-state
electricity producers over out-of-state electricity producers. On September
29, 1998, the Pennsylvania Supreme Court refused to review the Commonwealth
Court's ruling in the IP&L case, without comment. On January 11, 1999, IP&L
filed a petition for a Writ of Certiorari to the United States Supreme Court
seeking a review of the Commonwealth Court's decision. On March 8, 1999, the
Supreme Court rejected IP&L's petition without comment.
PP&L's Action Which Led to the Filing of the Joint Petition. During July
1998, PP&L filed a petition with the Commonwealth Court requesting the court
to halt implementation of the Competition Act because the PUC had misapplied
the Competition Act in promulgating the PUC Restructuring Order. Also during
July 1998, PP&L filed suit in the Federal District Court for the Eastern
District of Pennsylvania asking the court to halt the implementation of the
Competition Act because the Competition Act, of its own force and as construed
and applied by the PUC, violated various provisions of the United States
Constitution and federal law. In July 1998, PP&L filed an appeal to the
Commonwealth Court challenging various aspects of the PUC's Restructuring
Order. In addition to these actions, Anthracite Region Independent Power
Producers Association and Schuylkill Energy Resources also filed appeals to
the Commonwealth Court challenging various aspects of the PUC's Restructuring
Order. PP&L Industrial Customer Alliance, the Office of Consumer Advocate,
Mid-Atlantic Power Supply Association, Enron Power Marketing, Inc. and the
Commission on Economic Opportunity filed cross-appeals in PP&L's action in the
Commonwealth Court. On August 13, 1998, PP&L and all of the parties who had
participated in PP&L's Restructuring Plan cases,
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with the exception of the Sierra Club, Penn PIRG and Lehigh Greens, filed the
Joint Petition with the PUC. The Joint Petition was approved by the PUC
through the PUC Order.
Under the terms of the Joint Petition, PP&L and the entities referenced in
the preceding paragraph petitioned the Commonwealth Court to end further
consideration of their actions. In addition, PP&L petitioned the Eastern
District Court to end its action. The three parties who did not sign the Joint
Petition agreed to abide by the terms and conditions contained in the Joint
Petition. The various courts have granted the parties' requests and all of the
court cases arising from PP&L's Restructuring Plan have been terminated or
withdrawn.
Litigation in Other Jurisdictions Which Could Adversely Affect Transition
Bondholders. A legal action successfully challenging under the U.S.
Constitution or federal law a state deregulation statute similar to the
Competition Act adopted by a jurisdiction other than Pennsylvania could
establish legal principles that would serve as a basis to challenge the
Competition Act. Whether or not a subsequent challenge to the Competition Act
would be successful would depend on the similarity of the other statute and
the applicability of the legal precedent to the Competition Act. While the
Competition Act would not become invalid automatically as a result of a court
decision invalidating another state's statute, this decision could establish a
legal precedent for a successful challenge to the Competition Act that could
adversely affect Transition Bondholders. Legal challenges brought in
jurisdictions other than Pennsylvania that assert claims that are based on
state laws other than the laws of Pennsylvania would not, however, have a
direct effect on the Competition Act or the interests of the Transition
Bondholders.
Legislative Activity
Possible Federal Preemption of the Competition Act. At least one bill was
introduced in the 105th Congress prohibiting the recovery of stranded costs,
and thus threatened the existence of Intangible Transition Property. That
bill, H.R. 1230, was introduced on April 8, 1997 and was referred to the House
Commerce Committee, which referred it to the Subcommittee on Energy and Power.
On October 21, 1997, the Subcommittee on Energy and Power held hearings, but
on October 22, 1997 these hearings were concluded. The 105th Congress
adjourned without taking any further action on H.R. 1230. As of the date
hereof, no member of Congress had introduced a bill that would affect the
existence or value of stranded costs in the 106th Congress. Although the 105th
Congress did not pass H.R. 1230, no prediction can be made as to whether any
future bills, that prohibit the recovery of stranded costs, will become law
or, if they become law, what their final form or effect will be. There is no
assurance that the courts would consider this preemption a "taking." The
courts may consider a preemption of the Competition Act and/or the PUC Order
by the federal government a "taking," for which the government would have to
pay the estimated market value of the Transferred Intangible Transition
Property at the time of the taking. However, there is no assurance that this
compensation would be sufficient to pay the full amount of principal of and
interest on the Transition Bonds.
Possible Commonwealth Amendment or Repeal of the Competition Act. Under the
Competition Act, the Commonwealth has pledged to and agreed with transition
bondholders
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that it will not limit or alter or in any way impair or reduce the value of
intangible transition property or intangible transition charges approved by a
qualified rate order, until the Transition Bonds and interest thereon are
fully paid and discharged. The Competition Act also provides, however, that
subject to the requirements of law, nothing contained in the Competition Act
precludes limitation or alteration by the Commonwealth of the value of
intangible transition property or intangible transition charges. The
Commonwealth may make this limitation or alteration if "adequate compensation
is made by law" for the full protection of the intangible transition charges
collected pursuant to a qualified rate order and of transition bondholders. It
is unclear what compensation would be given to Transition Bondholders by the
Commonwealth if it attempts to limit or alter Intangible Transition Property
or Intangible Transition Charges. Accordingly, no assurance can be given that
this provision would fully compensate Transition Bondholders for their
investment.
In the opinion of Morgan, Lewis & Bockius LLP, counsel to PP&L, under the
Contract Clauses of the United States and Pennsylvania Constitutions, the
Commonwealth could not repeal or amend the Competition Act or take any other
action that substantially impairs the rights of the Transition Bondholders,
unless this action is a reasonable exercise of the Commonwealth's sovereign
powers and of a character appropriate to the public purpose justifying this
action. To date, no cases addressing these issues in the context of Transition
Bonds have been decided. There have been cases in which courts have applied
the Contract Clause of the United States Constitution and parallel state
constitutional provisions to strike down legislation reducing or eliminating
taxes or public charges which supported bonds issued by public
instrumentalities, or otherwise reducing or eliminating the security for
bonds. Based upon case law, in the opinion of Morgan, Lewis & Bockius LLP it
would appear unlikely that the Commonwealth could reduce, modify, alter or
take any other action with respect to the Intangible Transition Property which
would substantially impair the rights of Transition Bondholders, unless the
action is reasonable and appropriate to further a legitimate public purpose.
Moreover, in the opinion of Morgan, Lewis & Bockius LLP, under the Taking
Clauses of the United States and Pennsylvania Constitutions, the Commonwealth
could not repeal or amend the Competition Act or take any action in
contravention of its pledge and agreement without paying just compensation to
the Transition Bondholders if doing so would constitute a permanent
appropriation of the property interest of Transition Bondholders in the
Intangible Transition Property and deprive the Transition Bondholders of their
reasonable expectations arising from their investments in the Transition
Bonds. There is no assurance, however, that, even if a court were to award
just compensation, it would be sufficient to pay the full amount of principal
of and interest on the Transition Bonds. In addition, there can be no
assurance that a repeal of or amendment to the Competition Act will not be
sought or adopted or that any action by the Commonwealth may not occur, any of
which might constitute a violation of the Commonwealth's pledge and agreement
with the Transition Bondholders. In any event, costly and time-consuming
litigation might ensue. Any litigation might adversely affect the price and
liquidity of the Transition Bonds and the dates of payments of interest on and
principal thereof and, accordingly, the weighted average lives thereof.
Moreover, given the lack of judicial precedent directly on point, and the
novelty of the security for the Transition Bondholders, the outcome of any
litigation cannot be predicted with certainty, and accordingly, Transition
Bondholders could incur a loss of their investment.
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Potential Unexpected Regulatory Action by the PUC
Even with the enactment of the Competition Act, the PUC will continue to
regulate some aspects of the electric industry in Pennsylvania. For example,
the PUC will continue to fully regulate electric distribution companies. The
PUC will also establish:
1. financial and other qualifications of electric generation suppliers,
2. guidelines governing customer billing and collection and
3. metering and disclosure requirements applicable to electric generation
suppliers participating in the new market in Pennsylvania.
Pursuant to the Competition Act, the PUC Order issued to PP&L includes an
irrevocable pledge that the PUC will not directly or indirectly, by any
subsequent action, reduce, postpone, impair or terminate the PUC Order or the
Intangible Transition Charges authorized under the PUC Order. The PUC
nevertheless might attempt to revise or rescind any of its regulations in ways
that ultimately have an adverse impact upon the Intangible Transition Charges.
Any new or amended regulations or orders by the PUC could have an effect on
the Transition Bonds. In the Contribution Agreement, PP&L agrees to take legal
or administrative actions, including instituting and pursuing legal actions as
may be reasonably necessary to block or overturn any attempts to cause a
repeal, modification or supplement to the Competition Act, the PUC Order or
the Intangible Transition Property. PP&L will resist attempts to change the
Competition Act, the PUC Order or the Intangible Transition Property by
regulatory action, legislative enactment or constitutional amendment that
would be adverse to the holders of Transition Bonds. PP&L will also resist
proceedings of third parties, which, if successful, would result in a breach
of representations concerning the Intangible Transition Property, the PUC
Order or the Competition Act. See "The Contribution Agreement" in this
Prospectus. There is no assurance that PP&L would be able to take this action
or that any action PP&L is able to take would be successful. Future PUC
regulations or orders may affect the rating of the Transition Bonds, their
price or the rate of ITC Collections and, accordingly, the amortization of
Transition Bonds and their weighted average lives. As a result, Transition
Bondholders could suffer a loss of their investment.
THE SERVICER OF THE INTANGIBLE TRANSITION PROPERTY
PP&L
PP&L is an operating electric utility, incorporated under the laws of the
Commonwealth of Pennsylvania in 1920. PP&L provides electricity delivery
service to approximately 1.3 million Customers in a 10,000 square mile
territory in 29 counties of central eastern Pennsylvania, with a population of
approximately 2.6 million persons. This service area has 129 communities with
populations over 5,000, the largest cities of which are Allentown, Bethlehem,
Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. This
territory is primarily urban and suburban, with an industrial-based economy.
In addition to delivery of its own generation or purchased power, PP&L is
delivering power supplied by licensed electricity generation suppliers
pursuant to the Competition Act. PP&L also markets
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wholesale electricity in 28 states and Canada. During 1998, almost 100% of the
revenue was derived from electric energy sales and marketing activities, with
26% coming from residential customers, 22% from commercial customers, 15% from
industrial customers, 34% from wholesale sales and 3% from others.
PP&L Resources
PP&L is the primary subsidiary of PP&L Resources, a holding company formed
in 1995. The assets of PP&L comprise approximately 92% of PP&L Resources'
consolidated assets, and the financial condition and results of operation of
PP&L are currently the principal factors affecting the financial condition and
results of operations of PP&L Resources. PP&L Resources' other subsidiaries
include:
1. PP&L Global, Inc., an international independent power company which
invests in and develops world-wide power projects;
2. PP&L Spectrum, Inc., which markets energy-related services and products;
3. PP&L Capital Funding, which engages in financing for PP&L Resources and
its subsidiaries other than PP&L;
4. Penn Fuel Gas, Inc., which provides natural gas distribution,
transmission and storage services and sells propane; and
5. H.T. Lyons, Inc., McClure Company, Burns Mechanical, Inc. and McCarl's
Inc. which provide mechanical contractor and engineering services.
PP&L's Customer Classes and Rate Schedules
PP&L's Customer Rate Classes. PP&L's Customer base is divided into three
Customer Classes: Residential, Small Commercial and Industrial, and Large
Commercial and Industrial. These Customer Classes are determined by the
voltage level that the class uses, and not by the characteristics of the
Customers within the class. In its rate calculation and filings, PP&L uses the
designations:
1. "Secondary Voltage Level Customers--Residential" to describe the
Residential Customer Class,
2. "Secondary Voltage Level Customers--Non-Residential" to describe the
Small Commercial and Industrial Customer Class, which includes street-
lighting, and
3. "Transmission/Primary Voltage Level Customers" to describe the Large
Commercial and Industrial Customer Class.
Residential customers comprise the first Customer Class, small commercial
and industrial customers predominantly comprise the second Customer Class and
large commercial and industrial customers predominantly comprise the third
Customer Class. Each Customer Class includes a number of Rate Schedules. Rate
Schedules and Customer Classes are created by PP&L and approved by the PUC,
and are subject to change. Any changes will be reflected in
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any Adjustment Request filed with the PUC by the Servicer. The current Rate
Schedules were effective on or before November 1, 1997. They are:
Residential:
Rate Schedule RS--Residential Service: Single-phase Electric Delivery
Service is available to: 1) a single family dwelling and appurtenant detached
buildings; 2) a separate dwelling unit in an apartment house; 3) a single farm
dwelling and general farm uses; and 4) a building previously wired for single
meter service which is converted to not more than 8 separate dwelling units
served through one meter.
Rate Schedule RTS--Residential Service--Thermal Storage: This Rate Schedule
is applicable to service which would otherwise qualify under Rate Schedule RS
except for the following: 1) two or more separate dwelling units supplied
through a single meter; 2) seasonal service and seasonal use Customers; 3)
service with separate meter controlled water heater service; and 4)
residential service with general farm use which includes more than 2,000 watts
of connected farm load. This Rate Schedule is restricted to existing Customers
in the Rate Schedule as of December 31, 1995.
Rate Schedule RTD--Residential Service--Time-of-Day: Single-phase Electric
Delivery Service is available to: 1) a single family dwelling and appurtenant
detached building; and 2) a separate dwelling unit in an apartment house. This
Rate Schedule will be restricted to existing Customers in this Rate Schedule
as of January 1, 2000.
Small Commercial and Industrial:
Rate Schedule GS-1--General Service: This Rate Schedule is for small
general service at secondary voltage or at a higher available voltage at the
option of the Customer. The billing demand is limited to 5 kilowatts for
accounts served under discontinued rate schedule FC as of June 28, 1980.
Rate Schedule GS-3--Large General Service at Secondary Voltage or Higher:
This rate schedule is for large general service at secondary voltage, or at a
higher available voltage at the option of the Customer.
Rate Schedule GH-1(R)--Single Meter Commercial Space Heating Service: This
Rate Schedule is for all electric commercial service supplied through one
meter when electricity is the sole source of all of the Customer's energy
requirements. Customers may include wholesale and retail trade and associated
warehousing operations, office buildings, and establishments providing
professional personal or business services. This Rate Schedule is in the
process of elimination and is available only to service locations supplied
continuously on or after August 21, 1972, and to locations served under
discontinued Rate Schedule GH-4 as of September 26, 1984.
Rate Schedule GH-2(R)--Separate Meter General Space Heating Service: This
Rate Schedule is for separately metered electric space heating service to
Customers whose general use is supplied under some other general service rate
schedule, and may include service for general use in all electric apartment
buildings when individual living units in the building are
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metered separately under a residential Rate Schedule. This Rate Schedule is in
the process of elimination and is available only to service locations supplied
continuously on or after August 21, 1972, and also to prospective service
locations where a definitive rate commitment has been made as of that date for
so long as service is continuous thereafter.
Rate Schedule IS-1--Interruptible Service to Greenhouses: This Rate
Schedule is for general service at secondary voltage to greenhouses or other
environmentally controlled growing facilities which use a minimum of 300KW of
interruptible lighting load as a daylight supplemental.
Rate Schedule SA--Private Area Lighting Service: This Rate Schedule is for
the lighting of yards, private roadways, alleys and other areas supplied from
existing overhead secondary distribution.
Rate Schedule SM--Mercury Vapor Street Lighting Service: This Rate Schedule
is for lighting service from overhead or underground facilities on public
areas such as streets, highways, bridges and parks, to municipalities, other
governmental agencies, or private property Customers, when this service is
supplied under Company's standard form of contract in accordance with the
various laws applicable thereto.
Rate Schedule SHS--High Pressure Sodium Street Lighting Service: This
service is available only to the following type of Customer: metal pole
overhead--existing locations served under another of PP&L's street lighting
Rate Schedules and locations previously served under Hershey Electric
Company's Rate Schedule SMVO.
Rate Schedule SE--Energy Only Street Lighting Service: This Rate Schedule
is available only to municipalities or other governmental agencies for the
operation of mercury vapor, high pressure sodium, or metal halide street
lighting systems on public areas such as streets, highways, bridges and parks
where the municipality or other governmental agency provides for the
installation, ownership, operation and maintenance of the street lighting
equipment.
Rate Schedule SI-1(R)--Municipal Street Lighting Service: This Rate
Schedule is for municipal lighting service on public streets, highways,
bridges, parks, etc., to municipalities or other governmental agencies when
this service is supplied under PP&L's standard form of contract in accordance
with the various laws applicable thereto. The rates for incandescent lamps are
limited to those fixtures and lamp sizes installed on or before and supplied
continuously after March 28, 1972. This Rate Schedule will be eliminated as of
January 1, 2002.
Rate Schedule TS--Municipal Traffic Lighting Service: This Rate Schedule is
for traffic signal lighting service to cities, boroughs, and townships. The
minimum under this Rate Schedule is 50 watts. This Rate Schedule is in the
process of elimination and service hereunder is available only to existing
locations continuously supplied as of August 26, 1976. It is available to any
municipality using PP&L's standard delivery service for electric traffic
signal lights installed, owned and maintained by the municipality.
Rate Schedule BL--Borderline Service--Electric Service: Available under
reciprocal agreements to neighboring electric utilities for resale in their
adjacent territory.
55
<PAGE>
Large Commercial and Industrial:
Rate Schedule LP-4--Large General Service at 12,470 Volts or Higher: This
Rate Schedule is for large general service supplied from available lines of
12,470 volts or higher when the Customer furnishes and maintains all equipment
necessary to transform the energy from line voltage.
Rate Schedule IS-P--Interruptible Large General Service at 12,470 Volts or
Higher: This Rate Schedule is for interruptible large general service supplied
from available lines of 12,470 volts or higher where the Customer furnishes
and maintains all equipment necessary to transform the energy from line
voltage. Interruptible service under this Rate Schedule is available to
Customers with at least 1,000 kilowatts of year-round interruptible power who
contract to accept interruptible service for at least one year.
Rate Schedule LP-5--Large General Service at 69,000 Volts or Higher: This
Rate Schedule is for large general service supplied from available lines of
69,000 volts or higher when the Customer furnishes and maintains all equipment
necessary to transform the energy from line voltage. It applies to 3 phase, 60
Hertz service.
Rate Schedule LP-6--Large General Service at 69,000 Volts or Higher: This
Rate Schedule is for large general service supplied from available lines of
69,000 volts or higher when the Customer furnishes and maintains all equipment
necessary to transform the energy from line voltage and that does not fall
under the Rate Schedule LP-5.
Rate Schedule IS-T--Interruptible Large General Service at 69,000 Volts or
Higher: This Rate Schedule is for interruptible large general service supplied
from available lines of 69,000 volts or higher where the Customer furnishes
and maintains all equipment necessary to transform the energy from line
voltage. It applies to 3 phase, 60 Hertz service. Interruptible service under
this Rate Schedule is available to Customers with at least 1,000 kilowatts of
year-round interruptible power who contract to accept interruptible service
for at least one year.
Rate Schedule LPEP--Power Service to Electric Propulsion: This Rate
Schedule is available for electric propulsion service from PP&L's high voltage
lines of 69,000 volts or higher, where the Customer furnishes and maintains
all equipment necessary to transform the energy from line voltage.
Rate Schedule ISM--Interruptible Service by Agreement: This service is
available to large general service Customers who take service from available
transmission lines of 69,000 volts or higher. The Customer furnishes and
maintains all equipment necessary to transform the energy from line voltage.
This service is available only to Customers who require interruptible service
which is different than that provided in PP&L's other Rate Schedules, and who
accept service interruptions pursuant to a service agreement.
Rate Schedule Standby--Standby Basic Utility Supply Service: PP&L will
provide this service to qualifying facilities as defined in the Public Utility
Regulatory Policies Act of 1978. PP&L will also provide this service to a
Customer that contracts with a qualifying facility and that must be served
under the requirements of either federal or state law. This service is
56
<PAGE>
provided only where PP&L has available capacity and facilities adequate for
the service requested and only pursuant to a power purchase or interconnection
agreement with PP&L.
If Rate Schedules are eliminated, Customers are expected to remain in the
same Customer Class. In addition, although Customers have historically
migrated between Rate Schedules as their voltage requirements changed, that
migration has not been and is not expected to be significant. Customers are
not expected to migrate between Customer Classes.
Rate Adjustment Among Rate Schedules Within the Three Classes. In general,
each Customer Class is responsible for a fixed percentage of the Intangible
Transition Charges. The PUC has approved this allocation of Intangible
Transition Charges among Customer Classes. The Intangible Transition Charges
will be determined for each Rate Schedule within the three Customer Classes.
The Intangible Transition Charges will be adjusted by Rate Schedule within
each Customer Class, but not among Customer Classes. The Competition Act
prohibits allocating Intangible Transition Charges to Customer Classes in a
manner that results in the interclass or intraclass shifting of costs. In
prior decisions, the PUC has concluded that performing rate adjustments by
Customer Classes does not constitute interclass or intraclass shifting of
costs. See "The Servicing Agreement--The PUC's Intangible Transition Charge
Adjustment Process" in this Prospectus.
Statistics Regarding PP&L's Total Customers. The following tables show
various operating statistics by Customer Class and Rate Schedule within each
Customer Class. Table 3 shows the number and percentage of retail electric
Customers. Table 4 shows retail electric usage. Table 5 shows retail electric
revenues. All Rate Schedules will be billed Intangible Transition Charges. For
the Intangible Transition Charges assessed to individual Rate Schedules as of
any Series Issuance Date and any adjustment thereto, in each case giving
effect to the issuance of Transition Bonds on that date, see the related
Prospectus Supplement. There can be no assurance that total Customers, the
composition of total Customers by Customer Class and Rate Schedule, or usage
levels or revenues for each Customer Class and Rate Schedule will remain at or
near the levels reflected in the following tables. For a description of the
Customer Class and Rate Schedule abbreviations used in Tables 3, 4 and 5, see
"--PP&L's Customer Classes and Rate Schedules" above.
57
<PAGE>
TABLE 3
Number of Retail Electric Customers by Customer Class
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Quarter Ended
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 3/31/99
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Rate Schedule Avg. % of Avg. % of Avg. % of Avg. % of Avg. % of Avg. % of
- ------------- # Total # Total # Total # Total # Total # Total
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Rate Schedule RS.. 1,048,223 86.9% 1,058,939 86.8% 1,066,724 86.7% 1,074,621 86.7% 1,081,800 86.5% 1,087,255 87.0%
Rate Schedule
RTS.............. 14,028 1.2% 14,449 1.2% 14,597 1.2% 14,568 1.2% 14,495 1.2% 13,796 1.1%
Rate Schedule
RTD.............. 313 0.0% 321 0.0% 304 0.0% 294 0.0% 290 0.0% 267 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total........... 1,062,564 88.1% 1,073,709 88.0% 1,081,625 87.9% 1,089,483 87.9% 1,096,585 87.7% 1,101,318 88.1%
Small Commercial &
Industrial
Rate Schedule GS-
1................ 119,146 9.9% 120,921 9.9% 122,383 10.0% 124,374 10.0% 127,090 10.2% 123,030 9.8%
Rate Schedule GS-
3................ 18,401 1.5% 18,981 1.6% 19,801 1.6% 20,313 1.6% 20,525 1.6% 19,893 1.6%
Rate Schedule GH-
1(R)............. 1,621 0.1% 1,588 0.1% 1,403 0.1% 1,144 0.1% 1,078 0.1% 1,008 0.1%
Rate Schedule GH-
2(R)............. 2,964 0.2% 2,911 0.2% 2,862 0.2% 2,805 0.2% 2,739 0.2% 2,614 0.2%
Rate Schedule IS-
1................ 4 0.0% 4 0.0% 4 0.0% 4 0.0% 4 0.0% 4 0.0%
Rate Schedule SA.. 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
Rate Schedule SM.. 135 0.0% 125 0.0% 117 0.0% 115 0.0% 112 0.0% 113 0.0%
Rate Schedule
SHS.............. 760 0.1% 825 0.1% 869 0.1% 903 0.1% 934 0.1% 910 0.1%
Rate Schedule SE.. 57 0.0% 59 0.0% 61 0.0% 63 0.0% 63 0.0% 62 0.0%
Rate Schedule SI-
1(R)............. 5 0.0% 5 0.0% 3 0.0% 3 0.0% 3 0.0% 3 0.0%
Rate Schedule TS.. 17 0.0% 17 0.0% 17 0.0% 17 0.0% 17 0.0% 17 0.0%
Rate Schedule BL.. 24 0.0% 26 0.0% 21 0.0% 13 0.0% 25 0.0% 25 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total........... 143,134 11.8% 145,462 11.9% 147,541 12.0% 149,754 12.0% 152,590 12.2% 147,679 11.8%
Large Commercial &
Industrial
Rate Schedule LP-
4................ 808 0.1% 816 0.1% 827 0.1% 826 0.1% 859 0.1% 900 0.1%
Rate Schedule IS-
P................ 25 0.0% 32 0.0% 32 0.0% 39 0.0% 41 0.0% 34 0.0%
Rate Schedule LP-
5................ 95 0.0% 91 0.0% 87 0.0% 88 0.0% 91 0.0% 85 0.0%
Rate Schedule LP-
6................ 0 0.0% 5 0.0% 5 0.0% 4 0.0% 4 0.0% 4 0.0%
Rate Schedule IS-
T................ 23 0.0% 28 0.0% 30 0.0% 35 0.0% 33 0.0% 32 0.0%
Rate Schedule
LPEP............. 1 0.0% 1 0.0% 1 0.0% 1 0.0% 1 0.0% 1 0.0%
Rate Schedule
ISM.............. 1 0.0% 1 0.0% 1 0.0% 1 0.0% 1 0.0% 1 0.0%
Rate Schedule
Standby.......... 9 0.0% 9 0.0% 10 0.0% 9 0.0% 8 0.0% 0 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total........... 962 0.1% 983 0.1% 993 0.1% 1,003 0.1% 1,038 0.1% 1,057 0.1%
Aggregate Customer
Classes.......... 1,206,660 100.0% 1,220,154 100.0% 1,230,159 100.0% 1,240,240 100.0% 1,250,213 100.0% 1,250,054 100.0%
</TABLE>
58
<PAGE>
TABLE 4
Actual Retail Electric Usage per mWh by Customer Class
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Quarter Ended
Rate Schedule 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 3/31/99
- ------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------
% of % of % of % of % of % of
mWh Total mWh Total mWh Total mWh Total mWh Total mWh Total
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Rate Schedule
RS............... 11,042,348 35.7% 10,905,634 34.9% 11,417,526 35.4% 11,029,356 34.5% 10,783,774 33.6% 3,603,814 39.0%
Rate Schedule
RTS.............. 388,442 1.3% 381,659 1.3% 417,938 1.3% 391,796 1.3% 360,228 1.1% 150,083 1.6%
Rate Schedule
RTD.............. 5,519 0.0% 5,367 0.0% 5,419 0.0% 4,976 0.0% 4,674 0.0% 1,697 0.0%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Total........... 11,436,309 37.0% 11,292,660 36.2% 11,840,883 36.7% 11,426,128 35.8% 11,148,676 34.7% 3,755,594 40.6%
Small Commercial &
Industrial
Rate Schedule GS-
1................ 1,401,597 4.5% 1,413,913 4.5% 1,449,933 4.5% 1,458,263 4.6% 1,507,567 4.7% 453,582 4.9%
Rate Schedule GS-
3................ 6,690,517 21.6% 6,909,728 22.1% 7,205,496 22.3% 7,330,178 22.9% 7,486,597 23.3% 1,984,697 21.5%
Rate Schedule GH-
1(R)............. 510,845 1.7% 476,356 1.5% 439,681 1.4% 365,598 1.1% 321,752 1.0% 116,441 1.2%
Rate Schedule GH-
2(R)............. 95,114 0.3% 85,477 0.3% 88,019 0.3% 78,940 0.3% 69,051 0.2% 33,018 0.4%
Rate Schedule IS-
1................ 3,688 0.0% 4,092 0.0% 4,337 0.0% 4,062 0.0% 3,632 0.0% 1,756 0.0%
Rate Schedule
SA............... 28,061 0.1% 27,494 0.1% 26,858 0.1% 26,482 0.1% 25,894 0.1% 7,265 0.1%
Rate Schedule
SM............... 9,148 0.0% 8,049 0.0% 7,168 0.0% 6,653 0.0% 6,597 0.0% 1,756 0.0%
Rate Schedule
SHS.............. 57,854 0.2% 59,480 0.2% 60,875 0.2% 61,855 0.2% 62,355 0.2% 16,367 0.2%
Rate Schedule
SE............... 9,160 0.0% 9,594 0.0% 10,895 0.0% 11,036 0.0% 11,901 0.0% 3,254 0.0%
Rate Schedule SI-
1(R)............. 350 0.0% 221 0.0% 190 0.0% 189 0.0% 188 0.0% 51 0.0%
Rate Schedule
TS............... 504 0.0% 504 0.0% 504 0.0% 504 0.0% 504 0.0% 123 0.0%
Rate Schedule
BL............... 9,760 0.0% 2,684 0.0% 4,751 0.0% 5,730 0.0% 7,341 0.0% 1,232 0.0%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Total........... 8,816,598 28.4% 8,997,592 28.7% 9,298,707 28.8% 9,349,490 29.2% 9,503,379 29.5% 2,619,542 28.3%
Large Commercial &
Industrial
Rate Schedule LP-
4................ 4,197,312 13.6% 4,212,820 13.5% 4,371,372 13.5% 4,366,189 13.7% 4,599,955 14.3% 1,152,561 12.5%
Rate Schedule IS-
P................ 325,211 1.1% 425,342 1.4% 437,663 1.4% 524,541 1.6% 562,350 1.8% 143,987 1.6%
Rate Schedule LP-
5................ 3,435,484 11.1% 3,215,223 10.3% 2,962,609 9.2% 3,089,211 9.7% 3,045,536 9.5% 771,890 8.3%
Rate Schedule LP-
6................ 0 0.0% 105,071 0.3% 556,707 1.7% 454,463 1.4% 474,633 1.5% 119,185 1.3%
Rate Schedule IS-
T................ 2,151,956 7.0% 2,406,342 7.7% 2,208,843 6.8% 2,161,552 6.8% 2,218,105 6.9% 550,160 6.0%
Rate Schedule
LPEP............. 146,135 0.5% 105,628 0.3% 67,986 0.2% 56,206 0.2% 73,317 0.2% 24,678 0.3%
Rate Schedule
ISM.............. 410,120 1.3% 509,520 1.6% 550,689 1.7% 526,539 1.6% 505,281 1.6% 97,481 1.1%
Rate Schedule
Standby.......... 12,008 0.0% 11,005 0.0% 11,774 0.0% 9,779 0.0% 5,847 0.0% 658 0.0%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Total........... 10,678,226 34.6% 10,990,951 35.1% 11,167,643 34.5% 11,188,480 35.0% 11,485,024 35.8% 2,860,600 31.1%
Aggregate
Customer
Classes.......... 30,931,133 100.0% 31,281,203 100.0% 32,307,233 100.0% 31,964,098 100.0% 32,137,079 100.0% 9,235,736 100.0%
</TABLE>
Actual usage fluctuations are highly dependent on weather conditions. See
"The Servicer of the Intangible Transition Property--How PP&L Forecasts the
Number of Customers and the Amount of Electricity Usage." The actual total
annual usage has increased for each of the past two years. The compounded
annual growth rate for actual usage for all Customer Classes for the period
from 1994 through 1998 was 1.6%. There can be no assurance that future usage
rates will be similar to historical experience. See "Risk Factors--Servicing
Risks" in this Prospectus.
59
<PAGE>
TABLE 5
Retail Electric Revenues (dollars in thousands) by Customer Class Breakdown
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended Quarter Ended
Rate Schedule 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 3/31/99
- ------------- ---------------- ---------------- ---------------- ---------------- ---------------- --------------
% of % of % of % of % of % of
$ Total $ Total $ Total $ Total $ Total $ Total
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Rate Schedule RS.. 909,494 40.6% 904,054 40.1% 976,460 40.9% 948,796 40.3% 909,667 39.5% 285,668 47.9%
Rate Schedule
RTS.............. 20,388 0.9% 20,528 0.9% 22,986 1.0% 21,809 0.9% 20,134 0.9% 7,261 1.2%
Rate Schedule
RTD.............. 418 0.0% 407 0.0% 420 0.0% 386 0.0% 355 0.0% 123 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ------- ------
Total........... 930,300 41.5% 924,989 41.0% 999,866 41.9% 970,991 41.2% 930,156 40.4% 293,052 49.1%
Small Commercial &
Industrial
Rate Schedule GS-
1................ 154,130 6.9% 155,066 6.8% 160,011 6.7% 160,416 6.8% 162,026 7.0% 46,148 7.7%
Rate Schedule GS-
3................ 515,183 23.0% 530,197 23.5% 556,979 23.4% 565,757 24.1% 556,156 24.1% 125,031 21.0%
Rate Schedule GH-
1(R)............. 40,740 1.8% 38,313 1.7% 36,481 1.5% 30,222 1.3% 25,411 1.1% 7,917 1.3%
Rate Schedule GH-
2(R)............. 7,488 0.3% 6,771 0.3% 7,235 0.3% 6,492 0.3% 5,533 0.3% 2,596 0.4%
Rate Schedule IS-
1................ 187 0.0% 202 0.0% 211 0.0% 197 0.0% 167 0.0% 75 0.0%
Rate Schedule SA.. 4,256 0.2% 4,237 0.2% 4,412 0.2% 4,433 0.2% 4,438 0.2% 1,086 0.2%
Rate Schedule SM.. 1,522 0.1% 1,324 0.1% 1,257 0.1% 1,185 0.1% 1,170 0.1% 184 0.0%
Rate Schedule
SHS.............. 14,699 0.7% 15,251 0.7% 16,396 0.7% 16,739 0.7% 16,943 0.7% 4,295 0.7%
Rate Schedule SE.. 365 0.0% 395 0.0% 457 0.0% 462 0.0% 507 0.0% 102 0.0%
Rate Schedule SI-
1(R)............. 71 0.0% 48 0.0% 36 0.0% 36 0.0% 36 0.0% 6 0.0%
Rate Schedule TS.. 60 0.0% 60 0.0% 60 0.0% 60 0.0% 60 0.0% 10 0.0%
Rate Schedule BL.. 863 0.0% 245 0.0% 436 0.0% 527 0.0% 669 0.0% 110 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ------- ------
Total........... 739,564 33.0% 752,109 33.3% 783,971 32.9% 786,526 33.5% 773,116 33.5% 187,560 31.3%
Large Commercial &
Industrial
Rate Schedule LP-
4................ 263,108 11.8% 264,014 11.7% 277,112 11.6% 274,889 11.7% 282,324 12.3% 57,516 9.7%
Rate Schedule IS-
P................ 15,650 0.7% 19,939 0.9% 21,221 0.9% 24,618 1.0% 26,363 1.2% 5,339 0.9%
Rate Schedule LP-
5................ 181,183 8.1% 168,894 7.5% 156,344 6.5% 159,623 6.8% 155,182 6.7% 28,797 4.8%
Rate Schedule LP-
6................ 0 0.0% 5,794 0.2% 29,961 1.3% 24,736 1.1% 24,544 1.1% 3,956 0.7%
Rate Schedule IS-
T................ 82,970 3.7% 92,926 4.1% 88,611 3.7% 87,559 3.7% 87,810 3.8% 15,604 2.6%
Rate Schedule
LPEP............. 8,180 0.4% 6,204 0.3% 4,679 0.2% 4,076 0.2% 4,948 0.2% 1,507 0.3%
Rate Schedule
ISM.............. 16,532 0.7% 19,571 0.9% 20,645 0.9% 18,955 0.8% 18,002 0.8% 3,513 0.6%
Rate Schedule
Standby.......... 1,171 0.1% 1,145 0.1% 1,290 0.1% 1,106 0.0% 908 0.0% 112 0.0%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ------- ------
Total........... 568,794 25.5% 578,487 25.7% 599,863 25.2% 595,562 25.3% 600,081 26.1% 116,344 19.6%
Aggregate Customer
Classes.......... 2,238,658 100.0% 2,255,585 100.0% 2,383,700 100.0% 2,353,079 100.0% 2,303,353 100.0% 596,956 100.0%
</TABLE>
60
<PAGE>
The Percentage Concentration Within PP&L's Large Commercial and Industrial
Customers. For the year ended December 31, 1998, the largest Customer
represented approximately 3.6%, and the ten largest Customers represented
approximately 20.5%, of PP&L's Large Commercial and Industrial Customer Class
revenues. There are no material concentrations in either of the other two
Customer Classes.
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.
PP&L's Delinquency and Write-Off Experience. The tables below set forth the
delinquency and net write-off experience with respect to payments to PP&L for
Residential Customers as well as for all other Customers, for each of the
periods indicated below. During the last three years, the delinquency
experience for all Customers has improved substantially due to more aggressive
collection efforts. However, these efforts have increased the amount of write-
offs. The amount of net write-offs is expected, but is not assured, to decline
in coming years due to the completion of a residential security deposit policy
which is scheduled for December 31, 1999. Changes in the retail electric
market, including but not limited to the introduction of electric generation
suppliers, or other third parties, who, beginning in mid-1999, will be
permitted to provide consolidated billing to PP&L's Customers, could mean that
historical delinquency and write-off ratios will not be indicative of the
future rates.
TABLE 6
Delinquencies as a Percentage of Total Billed Revenues
<TABLE>
<CAPTION>
As Of As Of As Of As Of As Of As Of
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 3/31/99
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential
30-59 days................. 0.79% 0.95% 0.84% 0.89% 0.83% 1.29%
60-89 days 0.28% 0.29% 0.26% 0.33% 0.36% 0.87%
90+ days................... 4.50% 4.49% 3.63% 3.16% 2.85% 2.78%
----- ----- ----- ----- ----- -----
Total.................... 5.57% 5.73% 4.73% 4.38% 4.04% 4.94%
All Other
30-59 days................. 0.14% 0.21% 0.21% 0.11% 0.09% 0.31%
60-89 days................. 0.04% 0.03% 0.03% 0.02% 0.03% 0.08%
90+ days................... 0.15% 0.11% 0.11% 0.13% 0.10% 0.10%
----- ----- ----- ----- ----- -----
Total.................... 0.33% 0.35% 0.35% 0.26% 0.22% 0.49%
----- ----- ----- ----- ----- -----
Grand Total.............. 2.50% 2.54% 2.19% 1.95% 1.75% 2.34%
===== ===== ===== ===== ===== =====
</TABLE>
61
<PAGE>
TABLE 7
Net Write-Offs as a Percentage of Billed Retail Electric Revenues
<TABLE>
<CAPTION>
As Of As Of As Of As Of As Of As Of
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 3/31/99
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential................ 1.60% 1.67% 2.05% 2.02% 2.33% 1.14%
All Other.................. 0.14% 0.15% 0.14% 0.11% 0.14% 0.19%
----- ----- ----- ----- ----- -----
Total.................... 0.74% 0.77% 0.94% 0.90% 1.02% 0.66%
===== ===== ===== ===== ===== =====
</TABLE>
The numbers in Table 6 for delinquencies over 90 days include all accounts
referred to collection agencies and attorneys, plus all accounts on payment
arrangement. Since the collection process is longer for Residential Customers
than it is for other customers, and only accounts for Residential Customers
are referred to collection agencies, the numbers in the over 90 day category
are higher for Residential Customers than the 30 and 60 day categories. In
addition, the state mandated winter moratorium also tends to increase the over
90 day delinquency category for residential Customers. This discrepancy does
not apply to non-residential customers. See "--PP&L Maintains Limited
Information on its Customers' Creditworthiness" below.
Customer bills are written off 90 days after the final bill is issued. A
final bill results from either of two actions:
1. the Customer notifies PP&L that the Customer no longer wants electricity
service at the address, or
2. electricity service is disconnected for nonpayment and the Customer does
not come forward to pay the required amount to have service reconnected.
The net write-offs for the first quarter of 1999 are lower due to a delay
in write-offs for January and February 1999 resulting from the conversion to
PP&L's new billing system on February 1, 1999. It is expected that during the
second quarter, those delinquent accounts will be reviewed and write-offs
adjusted to more normal levels. Also, due to the conversion, there was less
than normal collection activity during January and February of 1999, resulting
in higher delinquencies in the 30 and 60 day categories. However, those
activities were resumed in March. Thus, delinquency levels are expected to
return to normal levels by the end of the second quarter.
The net write-offs for Residential Customers were higher in 1998 as
compared to previous years because:
1. as described in the paragraph titled "PP&L's Delinquency and Write-Off
Experience" on the previous page, increased aggressive collection action
forced PP&L to write-off a higher number of Residential accounts, and
2. billed revenue for Residential Customers was lower in 1998 than in
previous years.
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How PP&L Forecasts the Number of Customers and the Amount of Electricity Usage
Accurate projections of the number of Customers, usage and retail electric
revenue are important in setting, maintaining and adjusting the Intangible
Transition Charges to sufficient levels. These levels must be sufficient to
recover interest on and principal of the Transition Bonds, to fund the
Scheduled Overcollateralization Level, to replenish any shortfalls in the
Capital Subaccount and to pay the Trustee's fee, the Servicing Fee and the
other expenses and costs included in Qualified Transition Expenses. See "The
PUC Order and the Intangible Transition Charges--PP&L's Intangible Transition
Charges" and "Risk Factors--Unusual Nature of Intangible Transition Property"
in this Prospectus.
On a monthly basis, PP&L compares its sales forecast to actual consumption
to determine the accuracy of its forecasting model. PP&L historically has
prepared annual forecasts of electric energy sales for the following year and
several years thereafter. The principal uses of the electric energy forecasts
have been for short-term budgeting and rate-setting purposes. PP&L has also
prepared longer-term forecasts of customer peak demand and energy consumption,
primarily for use in facilities planning. PP&L most recently updated its
electric energy forecasting models in 1998. PP&L uses sophisticated models to
generate forecasts of short-term monthly sales as well as reasonable long-term
forecasts for all customer classes. The residential model forecasts electric
energy sales based on electricity price, real income, household size, weather
and changes in the saturation and efficiency of appliances other than heating
and cooling. The commercial and industrial models forecast electric energy
sales based on electricity price, employment, industrial output and weather.
Known and measurable industrial plant additions, expansions and closures are
incorporated into the electricity sales projections, based on information
obtained by PP&L. PP&L uses economic forecasts, prepared by an independent
economic forecasting and consulting firm employed by PP&L, as inputs to its
forecasting models. Weather inputs to the forecasting models are based on
normal weather conditions, which are developed from historical averages.
In addition, PP&L will use its annual sales forecast to determine the
appropriate levels of Intangible Transition Charges from time to time. As a
result, PP&L's ability to accurately predict energy consumption may affect the
timing of collections of Intangible Transition Charges.
Actual sales can deviate from forecasted sales for many reasons, including
the general economic climate in PP&L's service territory as it impacts net
migration of Customers; weather as it impacts air conditioning and heating
usage; levels of business activity; and the availability of more energy
efficient appliances, new energy conservation technologies and the Customer's
ability to acquire these new products.
The table below compares actual usage for a particular year to the related
forecast prepared during the previous year. For example, the annual 1994
variance is based on a forecast prepared in 1993. The variances for the
Residential Customer Class ranged from (5.78%) to 1.17%. The variances for the
Small Commercial and Industrial Customer Class ranged from 0.30% to 2.91%. The
variances for the Large Commercial and Industrial Customer Class ranged from
(1.74%) to 3.66%. There can be no assurance that the future
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variance between actual and expected consumption in the aggregate or by
Customer Class will be similar to the historical experience set forth below.
In the following table "variance" represents percentage deviation from the
forecasted amount of electricity usage.
TABLE 8
Annual Forecast Variance For the Amount of Electricity Consumed
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential
Forecast (in mWh)....... 11,303,504 11,520,139 11,720,216 11,698,717 11,832,734
Actual (in mWh)......... 11,436,309 11,292,660 11,840,883 11,426,128 11,148,676
Variance................ 1.17% (1.97)% 1.03% (2.33)% (5.78)%
Small Commercial &
Industrial
Forecast (in mWh)....... 8,779,169 8,860,528 9,035,470 9,321,124 9,292,308
Actual (in mWh)......... 8,816,598 8,997,592 9,298,707 9,349,490 9,503,379
Variance................ 0.43% 1.55% 2.91% 0.30% 2.27%
Large Commercial &
Industrial
Forecast (in mWh)....... 10,301,327 10,662,333 10,943,314 11,386,159 11,159,958
Actual (in mWh)......... 10,678,226 10,990,951 11,167,643 11,188,480 11,485,024
Variance................ 3.66% 3.08% 2.05% (1.74)% 2.91%
TOTAL
Forecast (in mWh)....... 30,384,000 31,043,000 31,699,000 32,406,000 32,285,000
Actual (in mWh)......... 30,931,133 31,281,203 32,307,233 31,964,098 32,137,079
Variance................ 1.80% 0.77% 1.92% (1.36)% (0.46)%
</TABLE>
During the last five years, there has been no discernible trend in the
variance between projected electricity consumption and actual electricity
consumption.
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The table below compares actual number of Customers for a particular year
to the related forecast prepared during the previous year. For example, the
annual 1994 variance is based on a forecast prepared in 1993. The variances
for the Residential Customer Class ranged from (0.66%) to 0.01%. The variances
for the Small Commercial and Industrial Customer Class ranged from 0.20% to
1.33%. The variances for the Large Commercial and Industrial Customer Class
ranged from (0.62%) to 2.37%. There can be no assurance that the future
variance between actual and expected number of Customers in the aggregate or
by Customer Class will be similar to the historical experience set forth
below. In the following table "variance" represents percentage deviation from
the forecasted number of Customers.
TABLE 9
Annual Forecast Variance For the Number of Customers
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential
Forecast................ 1,062,493 1,078,402 1,086,567 1,092,868 1,103,905
Actual.................. 1,062,564 1,073,709 1,081,625 1,089,483 1,096,585
Variance................ 0.01% (0.44)% (0.45)% (0.31)% (0.66)%
Small Commercial &
Industrial
Forecast................ 142,843 144,941 146,368 148,058 150,580
Actual.................. 143,134 145,462 147,541 149,754 152,590
Variance 0.20% 0.36% 0.80% 1.15% 1.33%
Large Commercial &
Industrial
Forecast................ 968 977 984 1,000 1,014
Actual.................. 962 983 993 1,003 1,038
Variance................ (0.62)% 0.61% 0.91% 0.30% 2.37%
TOTAL
Forecast................ 1,206,304 1,224,320 1,233,919 1,241,926 1,255,499
Actual.................. 1,206,660 1,220,154 1,230,159 1,240,240 1,250,213
Variance................ 0.03% (0.34)% (0.30)% (0.14)% (0.42)%
</TABLE>
During the last five years, there has been no discernible trend in the
variance between projected number of Customers and actual number of Customers.
PP&L's Billing Process
PP&L operates on a continuous billing cycle, with an approximately equal
number of bills being distributed each business day. Accordingly, the initial
collection of initial Intangible Transition Charges and changes in the amount
of Intangible Transition Charges will occur at different points in each
Customer's billing cycle. For the year ended December 31, 1998, PP&L mailed
out an average of 65,000 bills daily. Normal billing is for a period of
approximately 30 days ending one or two days prior to the mailing of the bill.
Accounts with potential billing errors are held by the computer system for
review. This review examines accounts that have abnormally high or low bills,
potential meter-reading errors, safety problems as identified by the meter-
reading staff and possible meter malfunctions. Subject to statutory and legal
requirements, PP&L may change its billing policies and procedures from
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time to time. It is expected that any change would be designed to enhance
PP&L's ability to make timely recovery of amounts billed to Customers.
PP&L Maintains Limited Information on its Customers' Creditworthiness
Under the Servicing Agreement, any changes to customary billing and
collection practices instituted by PP&L will apply to the servicing of
Intangible Transition Property so long as PP&L is the Servicer.
Under Pennsylvania law, PP&L is obligated to provide service to new
customers. New residential and non-residential customers will be required to
post a security deposit equal to two months of estimated electricity usage
when they apply for electric service. These new customers may avoid the
security deposit requirement if they can demonstrate creditworthiness or were
previously a customer of PP&L with a satisfactory payment history. The
principal means of establishing credit-worthiness is by a letter from another
utility indicating satisfactory payment history. To help prevent fraud, PP&L
uses an on-line identification process for new applicants. The implementation
of the on-line identification process began during the second quarter of 1999,
and will be completed by December 31, 1999.
PP&L's reduced payment program for low income Residential Customers is
called OnTrack. Customers must apply for OnTrack and must demonstrate an
inability to pay overdue electric bills, and annual household gross income
under 150% of the federal poverty level. Customers in OnTrack qualify for
reduced payment amounts and arrearage forgiveness if monthly payments are made
on or before the due date.
PP&L estimates the annual cost of OnTrack at $5.875 million in 1999 and,
pursuant to the settlement of PP&L's Restructuring Plan, increasing to a
maximum annual cost of $11.7 million in 2002. These costs are reflected in the
residential distribution rates set forth in the settlement of PP&L's
Restructuring Plan. As of December 31, 1998, there were 2,579 customers
enrolled in OnTrack accounting for $948,424 in revenue for the twelve months
ended December 31, 1998. The PUC has adopted regulations that establish
reporting requirements for universal service programs, such as the OnTrack
Payment Program, that are applicable to all electric distribution companies.
In 1998, approximately 79% of total bill payments were received by PP&L via
the U.S. mail. During the same period, approximately 9% of total payments were
paid in person at third party collectors throughout the service territory.
Other payment methods include pay-by-phone, payment by credit card and direct
debits of Customer accounts through local banks, which accounted for
approximately 12% of bill payments collected in 1998.
PP&L's Collection Process for Residential Customers. Customer bills for
residential Customers are due 20 days after mailing. If a Customer has an
overdue balance in excess of $150, or is 60 days overdue in paying his or her
bill, PP&L will mail a notice stating that PP&L will shut off electricity
service within 10 days if the Customer takes no action to reduce the
outstanding balance. At least three days prior to the termination date,
another service termination notice is delivered by telephone or by a PP&L
service representative in person.
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On the date of service termination, the PP&L service representative must knock
on the Customer's door. If someone answers the door, termination proceeds. If
there is no answer at the door, a 48 hour notice is left at the residence. If
the Customer does not make a payment or does not agree to pay the overdue
amount to PP&L's satisfaction within 48 hours, PP&L terminates electricity
service.
Termination of Service for Residential Customers in the Winter. Power is
not customarily disconnected if the delinquent Customer is subject to a PUC-
mandated winter moratorium, which requires special approval from the PUC prior
to the disconnection of electricity to some residential Customers during the
period from December 1 of each year through March 31 of the following year.
Currently, residential accounts are managed during the winter moratorium
through a combination of letters, proactive telephone contacts and negotiated
payment plans. Company communications with the delinquent Customer during the
winter moratorium do not contain the warning that electricity service will be
terminated by a particular date.
PP&L's Collection Process for Governmental Customers. The accounts from
Customers in either federal, state or local government have 30 days to pay
their electricity charges from the date the bill is mailed. Service
termination is generally not used as a means of collection for government
accounts. Some government accounts have difficulty paying within the 30 days
due to cash flow, payment approval and other factors. Government accounts that
are frequently delinquent are referred to a collection agency that specializes
in the collection of overdue amounts from commercial accounts.
PP&L's Collection Process for All Other Customers. Customer bills for
commercial and industrial Customers are due 15 days after the bill is mailed.
If the Customer does not pay the bill, collection action can begin on the 16th
day with a three-day service termination notice delivered via telephone or
U.S. mail, if PP&L cannot contact the Customer by telephone. If the overdue
balance is not paid within three days after the collection action has begun,
service will be terminated.
Referrals of Delinquent Accounts to Third-Parties. Residential accounts are
referred to a collection agency 30 days after the final bill is mailed. The
collection agency manages this account for a total of seven and one half
months. Unpaid residential account balances are written-off 90 days after the
final bill is mailed. If any unpaid balance remains after seven and one half
months of collection activity, it is sold as bad debt. Non-residential
accounts with unpaid balances are referred to a collection agency within 30
days of the date that the final bill is mailed. Unpaid non-residential
accounts are written-off 90 days after the final bill is mailed.
Referrals of Delinquent Accounts in Special Circumstances. In some cases,
service termination may prove difficult due to certain factors such as, among
other items, medical illness and landlord-owned property. If this type of
Customer does not have limited income, and has property that PP&L believes to
be valuable in attachment, PP&L will refer the entire overdue balance to an
attorney. Outside counsel approved by PP&L will litigate the amount in
question, perfect a judgment, and take the amount to a sheriff sale for
collection. After the judgment is taken, the Customer also becomes responsible
for the payment of counsel fees,
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court costs and interest. Attorney-referred amounts are exempt from the
service termination process. PP&L uses attorney referrals for overdue accounts
for commercial and residential Customers. Certain commercial accounts may also
be deemed sensitive, such as nursing homes, daycare centers and hospitals. In
these cases, PP&L will refer the entire overdue amount to Dun & Bradstreet for
collection. The Dun & Bradstreet collection process consists of telephone and
letter communications to Customers. These Customers pay the amounts
outstanding through Dun & Bradstreet, which transmits the payments to PP&L.
Definition of a Delinquent Account. If a Residential Customer fails to pay
any portion of the Intangible Transition Charges within 30 days after these
payments are due, or within 50 days after the Intangible Transition Charge
bills have been mailed to the Customer, then the Servicer will consider the
entire amount of the Intangible Transition Charges to be delinquent. If a
third party biller or other entity fails to pay any portion of the Intangible
Transition Charges within 25 days after the charges are communicated to the
electric generation supplier or other third party for Residential Class
Customers, then the Servicer will consider the entire amount of the Intangible
Transition Charges to be delinquent. Similarly, if a third party biller or
other entity fails to pay any portion of the Intangible Transition Charges
within 20 days after the charges are communicated to the electric generation
supplier or other third party for all other Customers, then the Servicer will
consider the entire amount of the Intangible Transition Charges to be
delinquent. Finally, if any other Customer, except a governmental Customer,
fails to pay any portion of the Intangible Transition Charges within 15 days
after these payments are due, then the Servicer will consider the entire
amount of the Intangible Transition Charges to be delinquent.
How PP&L Will Apply Partial Payments by its Customers. On July 11, 1997,
the PUC ruled that all electricity distribution companies must apply partial
payments of electricity bills for balances arising after Customers are
permitted to choose their electricity generation supplier in the following
manner:
1. to the balance due for prior intangible transition charges, competitive
transition charges and transmission and distribution charges;
2. to current intangible transition charges and competitive transition
charges;
3. to current transmission and distribution charges;
4. to the balance due for prior supply charges;
5. to current supply charges; and
6. to non-basic services.
In its Restructuring Order, the PUC adopted this priority allocation
methodology for PP&L.
PP&L's Procedures for Collecting Intangible Transition Charges from Electric
Generation Suppliers
PP&L's Restructuring Plan and subsequent orders of the PUC provide specific
standards for metering, billing and other activities by electric generation
suppliers participating in the
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new market in Pennsylvania. Although PP&L's Restructuring Plan provides that
an electric generation supplier that bills customers must comply with all
billing, financial and disclosure requirements applicable to electric
generation suppliers, the PUC may waive any of those requirements at any time
in the future.
In an order adopted on July 1, 1998, in a case involving PECO, the PUC
ordered that third parties that are neither electric distribution companies
nor electric generation suppliers, and who have no relationship with end
users, are permitted to provide billing and collection services for electric
distribution charges, including intangible transition charges and electric
generation charges. These third parties will be subject to the same
requirements as electric generation suppliers. Except in limited
circumstances, the Servicer, on behalf of Transition Bond Co., will have no
rights to collect Intangible Transition Charges from Customers electing
consolidated billing from a third party. Rather, Transition Bond Co. will be
subject to the risk that the third party does not remit Intangible Transition
Charges.
The Servicer, on behalf of Transition Bond Co., will pursue any electric
generation supplier or other third party that fails to remit the applicable
Intangible Transition Charges. The Servicer will do so in a manner similar to
the manner in which the Servicer pursues any failure by its Customers to remit
Intangible Transition Charges. Except in cases of disputed charges, if PP&L
does not receive payment within 25 calendar days for Residential Customers or
20 calendar days for all other Customers after the charges are communicated to
the electric generation supplier or other third party, then PP&L may provide
notice of breach to the electric generation supplier or other third party at
any time thereafter, at PP&L's discretion. Upon notice of a breach, the
electric generation supplier or other third party will have 20 calendar days
to cure this breach. If the electric generation supplier or other third party
has not cured this breach within 20 calendar days, PP&L may terminate
consolidated billing by the electric generation supplier or other third party
and take over billing functions. In no event will these procedures result in a
Customer being sent two bills covering the same service.
Neither the Seller nor the Servicer will pay any shortfalls resulting from
the failure of any electric generation suppliers or other third parties to
forward ITC Collections to PP&L, as Servicer. There can be no assurance that
third parties will use the same customer credit standards as the Servicer.
Also, there can be no assurance that the Servicer will be able to mitigate
credit risks relating to these third parties in the same manner in or to the
same extent to which it mitigates the risks relating to its Customers. Any
changes in billing and collection regulation might adversely affect the value
of the Transition Bonds and their amortization and, accordingly, their
weighted average lives. These changes may adversely affect the Transition
Bonds by affecting billing terms and the terms of remittances by electric
generation suppliers and other third parties to the Servicer or by making it
more difficult for the Servicer to collect Intangible Transition Charges. See
"Risk Factors--Servicing Risks" in this Prospectus.
PP&L's Efforts to Deal With the Year 2000 Computer Issue
PP&L is faced with the task of addressing the Year 2000 issue. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year and other programming
techniques which limit date calculations or assign
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special meanings to some dates. Any of PP&L's computer systems that have date-
sensitive software or microprocessors may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to measure usage, read meters, process
transactions, send bills or operate electric generation stations. In addition,
the Year 2000 issue could affect the ability of Customers to receive bills
sent by PP&L or to make payments on these bills.
A Company-wide Year 2000 coordination committee was formed to raise the
awareness of the Year 2000 issue, share information and review progress
towards compliance. A seven-step approach was developed to achieve Year 2000
compliance by assessing and remediating the problem in application software,
hardware, plant control systems and devices containing embedded
microprocessors. The seven steps in the plan include awareness, inventory,
assessment, remediation, testing, implementation, and contingency planning.
As of July 1, 1999, PP&L has determined that all of its power plants and
electricity delivery systems are Year 2000 ready. In addition, as of July 1,
1999 PP&L has determined that approximately 97% of mainframe applications that
will remain in production are Year 2000 compliant. As of July 1, 1999, all
mission-critical systems--for example, mainframe, embedded technologies, and
client server applications--are Year 2000 ready, and it is anticipated that
all systems will be Year 2000 ready by November 30, 1999. Year 2000 compliant
means computer systems or equipment with date-sensitive chips will accurately
process date and time data. Year 2000 ready means that the computer systems or
equipment with date-sensitive chips can be used on January 1, 2000 and beyond,
but are not fully Year 2000 compliant.
For many years, PP&L has had basic contingency plans in place to address
issues such as blackouts on the electrical grid, cold starts of generating
facilities and disaster recovery procedures for the computing environment.
PP&L recognized that additional contingency plans were necessary and, as part
of the seven-step remediation process, developed additional contingency plans.
The additional plans that have been developed address loss of
telecommunications, loss of off-site power to various generating stations,
degradation of emergency planning capabilities, running out of consumables,
electrical system disturbance or failure, power plant control system failures,
fuel delivery problems, problems with various relays or programming logic
control, and staffing concerns. PP&L has completed the development of these
contingency plans.
In May 1998, the Nuclear Regulatory Commission, which is referred to as the
NRC in this Prospectus, issued a notification requirement under which nuclear
utilities are required to inform the NRC, in writing, that they are working to
solve the Year 2000 computer problem. In addition, nuclear utilities had until
July 1, 1999 to inform the NRC that their computers are Year 2000 compliant
and Year 2000 ready or to submit a status report summarizing the ongoing work.
On July 1, 1999, PP&L filed its written response with the NRC, stating that
PP&L's nuclear power plant is Year 2000 ready.
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In February 1999, an independent assessment of the Year 2000 Program
Readiness Plan for PP&L's nuclear department was performed with no significant
adverse findings identified. The results of that assessment were incorporated
into the overall Year 2000 Program Readiness Plan for PP&L's nuclear
department. In May 1999, the NRC conducted an audit of PP&L's nuclear-related
Year 2000 compliance activities. This audit was observed by the PUC. There
were no adverse findings identified as a result of the audit.
In July 1998, the PUC initiated a non-adversarial investigation to be
conducted by the Office of Administrative Law Judge "to accurately assess any
and all steps taken and proposed to be taken to resolve the Year 2000
compliance issue by all jurisdictional fixed utilities and mission-critical
service providers such as the PJM." The PUC required all jurisdictional
utilities to file a written response to a list of questions concerning Year
2000 compliance and, if mission-critical systems cannot be made Year 2000
compliant on or before March 31, 1999, to file a detailed contingency plan by
that date. PP&L filed its written response to the PUC questions in August 1998
and in November 1998 submitted testimony to the PUC that PP&L would have its
mission-critical systems Year 2000 ready by July 1, 1999, and all systems
ready by November 30, 1999. On March 31, 1999, PP&L filed its contingency
plans with the PUC and will continue to update these plans on an ongoing
basis. On July 1, 1999, PP&L informed the PUC that all of the systems that
support the generation and delivery of electricity are Year 2000 ready. PP&L
also filed its updated Year 2000 contingency plans with the PUC.
In early March 1999, the PUC conducted an audit of PP&L's Year 2000
compliance activities. In conjunction with this audit, PP&L submitted to the
PUC an update to its November 1998 testimony. On March 26, 1999, PP&L filed
its Year 2000 testing schedule with the PUC; meanwhile, the PUC staff has been
on-site observing some of the testing being performed. PP&L, along with
utilities throughout the country, participated in an emergency exercise that
simulated the loss of normal communications on the power grid as a result of
Year 2000 computer problems. The results of this exercise demonstrated that
all backup communication systems operated properly.
An internal audit performed during the first quarter of 1999 evaluated the
approaches used by each business entity within PP&L to address Year 2000
issues. This review indicated that some improvements were required by certain
business entities to improve their Year 2000 efforts to ensure that all
mission-critical systems are either Year 2000 compliant or Year 2000 ready by
July 1, 1999. The audit recommendations were incorporated into the respective
business entities' Year 2000 remediation efforts.
As of July 1, 1999, PP&L has achieved the following completion percentages
on the seven steps referenced above for Year 2000 compliance: awareness, 97%;
inventory, 100%; assessment, 99%; remediation, 96%; testing, 96%;
implementation, 92%; and additional contingency plans, beyond the basic plans
referenced above, 74%. The preceding percentages are for all of PP&L's
computer systems, including components of the computer systems that are
mission-critical.
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Third-party relationships are very important to the continued operations of
PP&L. These third-party relationships are the means to acquire equipment,
services, consumables and fuel that are needed to keep the generating and
transmission and distribution facilities running smoothly. PP&L began
addressing third-party relationships with respect to the Year 2000 issue
during the fourth quarter of 1998 by identifying the suppliers that are
important to PP&L's day-to-day operations. PP&L identified approximately 400
of these suppliers. An introductory letter, as well as two follow-up letters,
were mailed to the suppliers asking for their Year 2000 compliance status.
Approximately 96% of all vendors have responded to date, with 99% of their
responses being favorable. All of the mission-critical vendors have provided
favorable responses. PP&L is responding to those suppliers whose Year 2000
compliance status does not meet PP&L's expectations.
Delivery of electricity is dependent on the overall reliability of the
electric grid. In this regard, PP&L is cooperating and coordinating with the
North American Electric Reliability Council, which is referred to as NERC in
this Prospectus, and the PJM Interconnection regarding Year 2000 remediation
efforts.
PP&L has participated in three Year 2000 tests with the PJM and plans to
participate in a fourth. The first test with the PJM focused on basic data
communications. The second test with the PJM was done in conjunction with NERC
on April 9, 1999, and focused on redundant communications. The third test
focused on system interfaces. PP&L is planning on participating with the PJM
on the next NERC-sponsored Year 2000 test on September 8, 1999, which will be
a full simulation of generation, transmission and distribution operational
plans. PP&L also will participate with all PJM member companies during late
September of 1999 in conducting similar testing.
Based upon present assessments, PP&L Resources estimates that it will incur
approximately $14 million in Year 2000 remediation costs. Through March 31,
1999, PP&L Resources spent approximately $11 million in remediation costs,
which included assistance from outside consultants. These costs are being
funded through internally generated funds and are being expensed as incurred.
PP&L TRANSITION BOND COMPANY LLC
The issuer of the Transition Bonds is PP&L Transition Bond Company LLC, a
Delaware limited liability company, which was formed on March 25, 1999 and is
referred to as Transition Bond Co. in this Prospectus. The sole member of
Transition Bond Co. is PP&L. PP&L has executed the Limited Liability Company
Agreement of Transition Bond Co. as its sole member. The assets of Transition
Bond Co. are limited to the Transferred Intangible Transition Property, the
other Collateral, any third-party credit enhancement and any money distributed
to Transition Bond Co. from the Collection Account in accordance with the
Indenture. As of the date of this Prospectus, Transition Bond Co. has not
carried on any business activities and has no operating history. Audited
financial statements of Transition Bond Co. are included as an exhibit to this
Prospectus.
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Transition Bond Co.'s Purpose. Transition Bond Co. has been created for the
sole purpose of:
1. purchasing and owning the Transferred Intangible Transition Property,
2. issuing one or more Series of Transition Bonds, each of which may
comprise one or more Classes, from time to time,
3. pledging its interest in the Transferred Intangible Transition Property
and other Collateral to the Trustee under the Indenture in order to
secure the Transition Bonds and
4. performing activities that are necessary, suitable or convenient to
accomplish these purposes.
The Interaction Among PP&L, the Seller and Transition Bond Co. On each
Series Issuance Date, CEP Securities, as the Seller, will sell Intangible
Transition Property to Transition Bond Co. pursuant to the Sale Agreement
between the Seller and Transition Bond Co. PP&L assigned the Intangible
Transition Property to the Seller pursuant to a Contribution Agreement dated
May 13, 1999 among PP&L, the Seller and two affiliated companies. Pursuant to
the Sale Agreement, the Seller will assign its rights under the Contribution
Agreement to Transition Bond Co. The Servicer will service the Transferred
Intangible Transition Property pursuant to the Servicing Agreement.
Transition Bond Co.'s Management. Transition Bond Co.'s business will be
managed by five Managers. Transition Bond Co. will have at all times following
the initial Series Issuance Date at least two Managers who, among other
things, are not and have not been for at least five years from the date of his
or her appointment:
1. a stockholder, member, partner, director, officer, employee, affiliate,
associate, customer, supplier, creditor or independent contractor of, or
any person that has received any benefit in any form whatever from or
any person that has provided any service in any form whatever to,
Transition Bond Co. or PP&L or any of their respective affiliates, other
than as a Customer of PP&L in the ordinary course of business,
2. any person owning beneficially, directly or indirectly, any outstanding
shares of common stock, any limited liability company interests or any
partnership interests, as applicable, of Transition Bond Co. or PP&L or
any of their respective affiliates,
3. a stockholder, member, partner, director, officer, employee, affiliate,
associate, customer, supplier, creditor or independent contractor of, or
any person that has received any benefit in any form whatever from, or
any person that has provided any service in any form whatever to, a
beneficial owner referred to in clause 2 above or any of its affiliates
or associates; or
4. a member of the immediate family of any person described in clauses 1-3
above.
These Managers are referred to as the Independent Managers. The remaining
Managers will be employees or officers of PP&L.
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The Managers will devote the time necessary to conduct the affairs of
Transition Bond Co. The following are the Managers as of the date of this
Prospectus:
<TABLE>
<CAPTION>
Name Age Position at PP&L
---- --- ----------------
<S> <C> <C>
John R. Biggar.................... 54 Senior Vice President and Chief Financial
Officer
James E. Abel..................... 48 Vice President--Finance and Treasurer
James S. Pennington............... 48 Manager--Treasury Operations
</TABLE>
The Managers' Business Experience. Each of the three Managers listed above
currently work for PP&L, the parent of Transition Bond Co., and have worked
for PP&L continuously since January 1994. The Managers' current and prior
positions at PP&L are as follows:
. John R. Biggar--John Biggar is currently serving as Senior Vice
President and Chief Financial Officer of PP&L; his prior positions at
PP&L during the past five years included Vice President--Finance, Vice
President--Finance and Treasurer and Senior Vice President--Financial.
. James E. Abel--James Abel is currently serving as Vice President--
Finance and Treasurer; his prior positions at PP&L during the past five
years included Treasurer and Manager of PP&L's Corporate Audit Services
Department.
. James S. Pennington--James Pennington is Manager--Treasury Operations;
his prior positions at PP&L during the past five years included
Supervisor of PP&L's Remittance Processing Department and Accounting
Analyst.
None of the Managers has been involved in any legal proceedings which are
specified in Item 401 (f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. Transition Bond
Co. has not paid any compensation to any Manager since Transition Bond Co. was
formed. The Managers other than the Independent Managers will not be
compensated by Transition Bond Co. for their services on behalf of Transition
Bond Co.. The Independent Managers will be paid quarterly fees from the
revenues of Transition Bond Co. and will be reimbursed for their reasonable
expenses. These expenses include, without limitation, the reasonable
compensation, expenses and disbursements of agents, representatives, experts
and counsel as the Independent Managers may employ in connection with the
exercise and performance of their rights and duties under the Limited
Liability Company Agreement, the Indenture, the Sale Agreement and the
Servicing Agreement. The Limited Liability Company Agreement provides that the
Managers will not be personally liable under any circumstances except for
material acts or omissions involving intentional misconduct, fraud or a
knowing violation of the law. The Limited Liability Company Agreement further
provides that, to the fullest extent permitted by law, Transition Bond Co.
shall indemnify the Managers against any liability incurred in connection with
their services as Managers for Transition Bond Co., except in the case
described in the preceding sentence.
Transition Bond Co. is a Separate Legal Entity. Under the Limited Liability
Company Agreement, Transition Bond Co. may not file a voluntary petition for
relief under the Bankruptcy Code without a unanimous vote of its Managers,
including the Independent
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Managers. PP&L has agreed that it will not cause Transition Bond Co. to file a
voluntary petition for relief under the Bankruptcy Code. The Limited Liability
Company Agreement requires Transition Bond Co.:
. to take all reasonable steps to continue its identity as a separate
legal entity,
. to maintain its assets and accounts separate from PP&L and its
affiliates and
. to maintain separate records and financial statements and not commingle
its records with the records of PP&L or its affiliates.
The principal place of business of Transition Bond Co. is Two North Ninth
Street, Allentown, PA 18101, and its telephone number is (610) 774-7934.
Administration Agreement. PP&L will provide administrative services for
Transition Bond Co. pursuant to an administration agreement between Transition
Bond Co. and PP&L. Transition Bond Co. will pay PP&L a market rate fee for
performing these services.
HOW TRANSITION BOND CO. WILL USE THE PROCEEDS OF THE TRANSITION BONDS
Transition Bond Co. will use the proceeds of the issuance of the Transition
Bonds to pay expenses of issuance and to purchase the Transferred Intangible
Transition Property from the Seller. The Seller will distribute the proceeds
to its owner, CEP Reserves, Inc., a Delaware corporation, who will make
available these proceeds to PP&L. PP&L proposes using the proceeds it receives
from the sale of the Transferred Intangible Transition Property principally to
reduce Stranded Costs and related capitalization as well as to pay related
expenses.
INCORPORATION OF DOCUMENTS BY REFERENCE
Transition Bond Co. has filed with the SEC a Registration Statement under
the Securities Act, with respect to the Transition Bonds. This Prospectus,
which forms a part of the Registration Statement, and any Prospectus
Supplement describe the material terms of some documents filed as exhibits to
the Registration Statement. However, this Prospectus and any Prospectus
Supplement do not contain all of the information contained in the Registration
Statement and its exhibits. Any statements contained in this Prospectus or any
Prospectus Supplement concerning the provisions of any document filed as an
exhibit to the Registration Statement or otherwise filed with the SEC are not
necessarily complete, and in each instance reference is made to the copy of
the document so filed. Each statement concerning those provisions is qualified
in its entirety by reference to the complete document. For further
information, reference is made to the Registration Statement and the exhibits
thereto, which are available for inspection without charge at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement and exhibits thereto may be obtained at the above locations at
prescribed rates. Information filed with the SEC can also be inspected at the
SEC site on the World Wide Web at http://www.sec.gov. Transition
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Bond Co. will file with the SEC all periodic reports as are required by the
Exchange Act, and the rules, regulations or orders of the SEC thereunder.
Transition Bond Co. may discontinue filing periodic reports under the Exchange
Act at the beginning of the fiscal year following the issuance of the
Transition Bonds of any Series if there are fewer than 300 holders of the
Transition Bonds.
All reports and other documents filed by Transition Bond Co. pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
Transition Bonds will be deemed to be incorporated by reference into this
Prospectus and to be a part hereof. Any statement contained in this
Prospectus, in a Prospectus Supplement or in a document incorporated or deemed
to be incorporated by reference in this Prospectus will be deemed to be
modified or superseded for purposes of this Prospectus and any Prospectus
Supplement to the extent that a statement contained in this Prospectus, in a
Prospectus Supplement or in any separately filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute part of this Prospectus or any
Prospectus Supplement. Transition Bond Co. will provide without charge to each
person to whom a copy of this Prospectus is delivered, on the written or oral
request of this person, a copy of any or all of the documents incorporated
herein by reference, except for the exhibits which are not specifically
incorporated by reference in the documents. Written requests for these copies
should be directed to Transition Bond Co., 2 North Ninth Street, Allentown, PA
18101. Telephone requests for these copies should be directed to Transition
Bond Co. at (610) 774-7934.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by the Indenture
substantially in the form filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The terms of each Series of Transition
Bonds will be provided in a Supplemental Indenture. The following summary
describes some general terms and provisions of the Transition Bonds. The
particular terms of the Transition Bonds of any Series offered by any
Prospectus Supplement will be described in the Prospectus Supplement. This
summary does not purport to be complete and is subject to, and is qualified by
reference to, the terms and provisions of the Transition Bonds and the
Indenture.
General Terms of the Transition Bonds
The Transition Bonds may be issued in one or more Series, each made up of
one or more Classes. The terms of a Series may differ from the terms of
another Series, and the terms of a Class may differ from the terms of another
Class of a Series. The terms of each Series will be specified in the related
Prospectus Supplement.
The Indenture requires, as a condition to the issuance of each Series of
Transition Bonds, that this issuance will not result in any Rating Agency
reducing or withdrawing its then current rating of any outstanding Series or
Class of Transition Bonds. The notification in writing by each Rating Agency
to the Seller, the Servicer, the Trustee and Transition Bond Co. that any
action will not result in a reduction or withdrawal is referred to as the
Rating Agency Condition.
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The Indenture also provides that failure to pay the entire outstanding
principal amount of the Transition Bonds of any Class by the Expected Final
Payment Date will not result in a default on the Class of Transition Bonds
until after the Final Maturity Date for the Class.
Transition Bond Co.'s Transition Bonds Will be Maintained in Book-Entry
Format. The applicable Prospectus Supplement will set forth the procedure for
the manner of the issuance of the Transition Bonds of each Series. Generally,
each Series of Transition Bonds will initially be represented by one or more
Transition Bonds registered in the name of Cede & Co., as the nominee of DTC.
The Transition Bonds will be available for purchase in initial denominations
specified in the applicable Prospectus Supplement, which will be not less than
$1,000. Unless and until definitive Transition Bonds are issued under the
limited circumstances described in this Prospectus, no Transition Bondholder
will be entitled to receive a physical bond representing a Transition Bond.
All references in this Prospectus to actions by Transition Bondholders will
refer to actions taken by DTC upon instructions from DTC Participants. In
addition, all references in this Prospectus to payments, notices, reports and
statements to Transition Bondholders will refer to payments, notices, reports
and statements to DTC or Cede, as the registered holder of each Series of
Transition Bonds. DTC or Cede will receive these payments, notices, reports
and statements for distribution to the beneficial owners of the Transition
Bonds in accordance with DTC's procedures with respect thereto. See "--
Transition Bonds Will be Issued in Book-Entry Form" and "--Definitive
Transition Bonds."
Payments of Interest and Principal on the Transition Bonds
Interest will accrue on the principal balance of Transition Bonds of a
Series or Class at the Bond Rate specified in or determined in the manner
specified in the applicable Prospectus Supplement. Interest will be payable to
the Transition Bondholders of the Series or Class on each Payment Date,
commencing on the Payment Date specified in the related Prospectus Supplement.
On any Payment Date with respect to any Series, Transition Bond Co. will
generally make principal payments on that Series only until the outstanding
principal balance thereof has been reduced to the principal balance specified
for that Payment Date in the Expected Amortization Schedule for that Series,
but only to the extent funds are available therefor as described in this
Prospectus. Accordingly, principal of the Series or Class of Transition Bonds
may be paid later, but not generally sooner, than reflected in the Expected
Amortization Schedule therefor. See "Risk Factors--Other Risks Associated With
An Investment In The Transition Bonds" and "Weighted Average Life and Yield
Considerations for the Transition Bonds" in this Prospectus.
The failure to make a scheduled payment of principal on the Transition
Bonds, other than upon redemption or on the Final Maturity Date of a Series or
Class, does not constitute an Event of Default under the Indenture. The entire
unpaid principal amount of the Transition Bonds will be due and payable if:
1.an Event of Default under the Indenture occurs and is continuing and
2. the Trustee or the holders of a majority in principal amount of the
Transition Bonds of all Series then outstanding, voting as a group,
have declared the Transition Bonds to be immediately due and payable.
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See "The Indenture--What Constitutes an Event of Default on the Transition
Bonds" and "Weighted Average Life and Yield Considerations for the Transition
Bonds" in this Prospectus.
Redemption of the Transition Bonds
Redemption provisions, if any, for any Series will be specified in the
related Prospectus Supplement, including the premiums, if any, payable upon
redemption. Unless the context requires otherwise, all references in this
Prospectus to principal of the Transition Bonds of a Series insofar as it
relates to redemption includes any premium that might be payable thereon if
Transition Bonds of the Series are redeemed, as described in the applicable
Prospectus Supplement. Notice of redemption of any Series of Transition Bonds
will be given by the Trustee to each registered holder of a Transition Bond by
first-class mail, postage prepaid, mailed not less than five days nor more
than 45 days prior to the date of redemption or in another manner or at
another time as may be specified in the related Prospectus Supplement. All
Transition Bonds called for redemption will cease to bear interest on the
specified redemption date, provided funds for their redemption are on deposit
with the Trustee at that time, and will no longer be considered "outstanding"
under the Indenture. The Transition Bondholders will have no further rights
with respect thereto, except to receive payment of the redemption price
thereof and unpaid interest accrued to the date fixed for redemption from the
Trustee.
Credit Enhancement for the Transition Bonds
Credit enhancement with respect to the Transition Bonds of all Series will
be provided principally by adjustments to the Intangible Transition Charges
and amounts on deposit in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount. In addition, for any Series of
Transition Bonds or one or more Classes thereof, additional credit enhancement
may be provided with respect thereto. The amounts and types of credit
enhancement, and the provider of credit enhancement, if any, with respect to
each Series of Transition Bonds or one or more Classes thereof will be
described in the applicable Prospectus Supplement. Credit enhancement may be
in the form of:
1. an additional reserve account,
2. subordination,
3. additional overcollateralization,
4. a financial guaranty insurance policy,
5. a letter of credit,
6. a credit or liquidity facility,
7. a swap agreement,
8. a repurchase obligation,
9. a third party payment or other support,
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10. a cash deposit or other credit enhancement, or
11. any combination of the foregoing, as may be set forth in the applicable
Prospectus Supplement.
If specified in the applicable Prospectus Supplement, credit enhancement
for a Series of Transition Bonds may cover one or more other Series of
Transition Bonds.
If any additional credit enhancement is provided with respect to a Series
offered hereby, the applicable Prospectus Supplement will include a
description of:
1. the amount payable under the credit enhancement,
2. any conditions to payment thereunder not otherwise described in this
Prospectus,
3. the conditions, if any, under which the amount payable under the credit
enhancement may be reduced and under which the credit enhancement may
be terminated or replaced; and
4. any material provisions of any applicable agreement relating to the
credit enhancement.
Additionally, in some cases, the applicable Prospectus Supplement may
describe information with respect to the provider of any third-party credit
enhancement, including:
1. a brief description of its principal business activities,
2. its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
3. if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business; and
4. its total assets, and its stockholders' equity or policyholders'
surplus, if applicable, as of a date specified in the applicable
Prospectus Supplement.
Transition Bonds Will Be Issued in Book-Entry Form
Unless otherwise specified in the related Prospectus Supplement, all
Classes of Transition Bonds will initially be represented by one or more bonds
registered in the name of Cede & Co., as nominee of DTC, or another securities
depository. The Transition Bonds will be available to investors only in the
form of Book-Entry Transition Bonds. Transition Bondholders may also hold
Transition Bonds through CEDEL, or the Euroclear Operator in Europe, if they
are participants in one of those systems or indirectly through Participants.
The Role of Cede, CEDEL and Euroclear. Cede, as nominee for DTC, will hold
the global bond or bonds representing the Transition Bonds. CEDEL and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositories. These depositories will, in turn, hold these
positions in customers' securities accounts in the
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depositories' names on the books of DTC. Citibank, N.A. will act as depository
for CEDEL and Morgan Guaranty Trust Company of New York will act as depository
for Euroclear.
The Function of DTC. DTC is a limited purpose trust company organized under
the laws of the State of New York, and is a member of the Federal Reserve
System. DTC is a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of bonds. Direct Participants of
DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and some other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the Nasdaq-Amex
Market Group and the National Association of Securities Dealers, Inc. Access
to DTC's system is also available to Indirect Participants.
The Function of CEDEL. CEDEL is incorporated under the laws of Luxembourg.
CEDEL holds securities for its customers and facilitates the clearance and
settlement of securities transactions by electronic book-entry transfers
between their accounts. CEDEL provides various services, including
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL also deals with
domestic securities markets in over 30 countries through established
depository and custodial relationships. CEDEL has established an electronic
bridge with Morgan Guaranty Trust as the Operator of the Euroclear system in
Brussels to facilitate settlement of trades between CEDEL and MGT/EOC. CEDEL
currently accepts over 110,000 securities issues on its books.
CEDEL Customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies, and
clearing corporations and may include any underwriters, agents or dealers with
respect to a Series of Transition Bonds offered hereby. CEDEL's U.S. customers
are limited to securities brokers and dealers and banks.
The Function of Euroclear. Euroclear was created in 1968 to hold securities
for Euroclear Participants and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment. By performing these functions, Euroclear eliminated the need
for physical movement of securities and also eliminated any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 30 currencies, including Euros and United States dollars. The
Euroclear System includes various other services, including securities lending
and borrowing, and arrangements with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described below. The Euroclear System is operated by the Euroclear Operator,
under contract with 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 central banks,
commercial banks, securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other
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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 a Federal
Reserve System Member, 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.
Terms and Conditions of Euroclear. 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, which are referred to in this Prospectus as the
Terms and Conditions. The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear
and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific securities to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
The Rules for Transfers Among DTC, CEDEL or Euroclear
Participants. Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Customers and Euroclear Participants will occur
in accordance with their respective rules and operating procedures. Cross-
market transfers between persons holding directly or indirectly through DTC,
on the one hand, and directly or indirectly through CEDEL Customers 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 Depository. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in this system in accordance with its rules and procedures and
within its established deadlines, in European time. The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depository to take action to effect
final settlement on its behalf by delivering or receiving Transition Bonds in
DTC, and making or receiving payments in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Customers and Euroclear
Participants may not deliver instructions directly to the Depositories.
Cede Will be the Holder of Transition Bond Co.'s Transition Bonds. Unless
and until definitive Transition Bonds are issued, it is anticipated that the
only "holder" of Transition Bonds of any Series will be Cede, as nominee of
DTC. Transition Bondholders will only be permitted to exercise their rights as
Transition Bondholders indirectly through Participants and DTC. All references
herein to actions by Transition Bondholders thus refer to actions taken by DTC
upon instructions from its Participants. In addition, all references herein to
payments, notices, reports and statements to Transition Bondholders refer to
payments, notices, reports and statements to Cede, as the registered holder of
the Transition Bonds, for payments to the beneficial owners of the Transition
Bonds in accordance with DTC procedures.
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Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any Book-Entry Transition Bonds of a
Series are outstanding, under DTC's rules, DTC is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the Book-
Entry Transition Bonds. In addition, DTC is required to receive and transmit
payments of principal of, and interest on, the Book-Entry Transition Bonds.
Participants with whom Transition Bondholders have accounts with respect to
Book-Entry Transition Bonds are similarly required to make book-entry
transfers and receive and transmit these payments on behalf of their
respective Transition Bondholders. Accordingly, although Transition
Bondholders will not possess physical bonds, DTC's rules provide a mechanism
by which Transition Bondholders will receive payments and will be able to
transfer their interests.
DTC can only act on behalf of Participants, who in turn act on behalf of
indirect Participants and some banks. Thus, the ability of holders of
beneficial interests in the Transition Bonds to pledge Transition Bonds to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of these Transition Bonds, may be limited due to the
lack of definitive Transition Bonds.
DTC has advised the Trustee that it will take any action permitted to be
taken by a Transition Bondholder under the Indenture only at the direction of
one or more Participants to whose account with DTC the Transition Bonds are
credited.
How Transition Bond Payments Will Be Credited by CEDEL and
Euroclear. Payments with respect to Transition Bonds held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Customers or
Euroclear Participants in accordance with the relevant systems' rules and
procedures, to the extent received by its Depository. These payments will be
subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Material Income Tax Matters for the Transition
Bondholders" in this Prospectus. CEDEL or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Transition
Bondholder under the Indenture on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depository's ability to effect these actions on its behalf
through DTC.
DTC, CEDEL and Euroclear have agreed to the foregoing procedures in order
to facilitate transfers of Transition Bonds among Participants of DTC, CEDEL
and Euroclear. However, they are under no obligation to perform or continue to
perform these procedures and these procedures may be discontinued at any time.
Management of DTC is aware that some systems that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed the industry that it has
developed and is implementing a program so that its systems, as the same
relate to the timely payment of principal payments, interest payments and
related distributions to security-holders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
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However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents,
as well as DTC's Direct Participants and Indirect Participants, third party
vendors from whom DTC licenses software and hardware, and third party vendors
on whom DTC relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTC
has informed the industry that it is contacting, and will continue to contact,
third party vendors from whom DTC acquires services to
1. impress upon them the importance of these services being Year 2000
compliant; and
2. determine the extent of their efforts for Year 2000 remediation and
testing of their services.
In addition, DTC is in the process of developing the contingency plans that it
deems appropriate.
According to DTC, the information in the preceding two paragraphs with
respect to DTC has been provided to the industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
Definitive Transition Bonds
The Circumstances That Will Result in the Issuance of Definitive Transition
Bonds. Unless otherwise specified in the applicable Prospectus Supplement,
each Class of Transition Bonds will be issued in fully registered,
certificated form to Transition Bondholders or their nominees, rather than to
DTC or its nominee, only if:
1. Transition Bond Co. advises the Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository
with respect to this Class of Transition Bonds and Transition Bond Co.
is unable to locate a qualified successor;
2. Transition Bond Co., at its option, elects to terminate the book-entry
system through DTC; or
3. after the occurrence of an Event of Default under the Indenture,
Transition Bondholders representing at least a majority of the
outstanding principal amount of the Transition Bonds of all Series
advise the Trustee through DTC in writing that the continuation of a
book-entry system through DTC, or a successor thereto, is no longer in
the Transition Bondholders' best interest.
The Delivery of Definitive Transition Bonds. Upon the occurrence of any
event described in the immediately preceding paragraph, DTC will be required
to notify all affected beneficial owners of Transition Bonds through
Participants of the availability of definitive Transition Bonds. Upon
surrender by DTC of the definitive bonds representing the applicable
Transition Bonds and receipt of instructions for reregistration, the Trustee
will authenticate and deliver definitive Transition Bonds. Thereafter the
Trustee will recognize the holders of these definitive Transition Bonds as
Transition Bondholders under the Indenture.
The Payment Mechanism for Definitive Transition Bonds. Payments of
principal of, and interest on, Definitive Transition Bonds will be made by the
Trustee, as paying agent, in
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accordance with the procedures set forth in the Indenture. These payments will
be made directly to holders of definitive Transition Bonds in whose names the
definitive Transition Bonds were registered at the close of business on the
related record date specified in each Prospectus Supplement. These payments
will be made by check mailed to the address of the holder as it appears on the
register maintained by the Trustee. The final payment on any Transition Bond,
however, will be made only upon presentation and surrender of the Transition
Bond at the office or agency specified in the notice of final payment to
Transition Bondholders.
The Transfer or Exchange of Definitive Transition Bonds. Definitive
Transition Bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the 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.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS
The rate of principal payments on each Series or Class of Transition Bonds,
the aggregate amount of each interest payment on each Series or Class of
Transition Bonds and the actual final Payment Date of each Series or Class of
Transition Bonds will be dependent on the rate and timing of receipt of ITC
Collections. Accelerated receipts of ITC Collections will generally not,
however, result in payment of principal on the Transition Bonds earlier than
the related Expected Final Payment Dates. This is because receipts in excess
of the amounts necessary to amortize the Transition Bonds in accordance with
the applicable Expected Amortization Schedules and to pay interest and related
fees and expenses will be allocated to the Reserve Subaccount. However,
delayed receipts of ITC Collections may result in principal payments on the
Transition Bonds occurring more slowly than as reflected in the Expected
Amortization Schedules or later than the related Expected Final Payment Dates.
Redemption of any Class or Series of Transition Bonds and acceleration of the
Final Maturity Date after an Event of Default in accordance with the terms
thereof will result in payment of principal earlier than the related Expected
Final Payment Dates.
The Effect of ITC Collections on the Timing of Transition Bond Payments.
The actual payments on each Payment Date for each Series or Class of
Transition Bonds and the weighted average life thereof will be affected
primarily by the rate of ITC Collections and the timing of receipt of ITC
Collections. Amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount will also affect
the weighted average life of the Transition Bonds. The aggregate amount of ITC
Collections and the rate of principal amortization on the Transition Bonds
will depend, in part, on actual energy usage by Customers and the rate of
delinquencies and write-offs. This is because the Intangible Transition
Charges will be calculated based on estimates of usage and the rate of write-
offs and delinquencies. The Intangible Transition Charges will be adjusted
from time to time based in part on the actual rate of ITC Collections.
However, there can be no assurance that the Servicer will be able to forecast
accurately actual electricity usage and the rate of delinquencies and write-
offs or implement adjustments to the Intangible Transition Charges
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that will cause ITC Collections to be received at any particular rate. See
"Risk Factors--Unusual Nature of Intangible Transition Property" and "The PUC
Order and the Intangible Transition Charges--PP&L's Intangible Transition
Charges" in this Prospectus; see also "PP&L" in this Prospectus. If ITC
Collections are received at a slower rate than expected, Transition Bonds may
be retired later than expected. Except in the event of a redemption or the
acceleration of the final Payment Date of the Transition Bonds after an Event
of Default, the Transition Bonds will not be paid earlier than scheduled. This
is because principal will not be paid at a rate faster than that contemplated
in the Expected Amortization Schedule for each Series or Class. A payment on a
date that is earlier than forecasted might result in a shorter weighted
average life, and a payment on a date that is later than forecasted might
result in a longer weighted average life. In addition, if a larger portion of
the delayed payments on the Transition Bonds is received in later years, this
might result in a longer weighted average life of the Transition Bonds.
THE CONTRIBUTION AGREEMENT
The following summary describes all material terms and provisions of the
Contribution Agreement pursuant to which PP&L assigned the Intangible
Transition Property to CEP Securities. CEP Securities is an indirect wholly
owned subsidiary of PP&L. The Contribution Agreement may be amended by the
parties who signed the document, if the Trustee consents, and if notice of the
substance of any amendment is provided to each Rating Agency and the Rating
Agency Condition has been satisfied. The Contribution Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
In order to facilitate the possible issuance of the Transition Bonds in
multiple Series on different issuance dates, PP&L arranged for the formation
of CEP Securities as a bankruptcy remote special purpose entity for the
purpose of holding any remaining Intangible Transition Property not sold to
Transition Bond Co. on or before the issuance of the first Series of
Transition Bonds. PP&L, CEP Securities and two affiliated companies entered
into the Contribution Agreement in order to provide for the assignment of the
Intangible Transition Property to CEP Securities in accordance with the
Competition Act.
Assignment of the Intangible Transition Property and Related Rights to the
Seller
Pursuant to the Contribution Agreement, PP&L has:
1. assigned to CEP Securities, without recourse, all right, title and
interest of PP&L in and to the Intangible Transition Property including,
as provided in the Competition Act, the assignment of all revenues,
collections, claims, payments, money or proceeds of or arising from the
Intangible Transition Charges related to the Intangible Transition
Property, as the same may be adjusted from time to time in accordance
with the Competition Act and the PUC Order and
2. agreed that PP&L's representations, warranties, covenants and
obligations under the Contribution Agreement, including PP&L's
indemnification obligations, inure to the benefit of CEP Securities.
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The assignment of the Intangible Transition Property to CEP Securities is
expressly stated to be an absolute transfer. Pursuant to the Competition Act,
this assignment is treated as an absolute transfer of all of PP&L's right,
title and interest, as in a true sale of the Intangible Transition Property.
PP&L agrees that, after giving effect to the assignment, it has no rights in
the Intangible Transition Property.
PP&L's Representations and Warranties
In the Contribution Agreement, PP&L makes the following representations and
warranties:
1. all information provided by PP&L to CEP Securities or Transition Bond
Co. with respect to the Transferred Intangible Transition Property is
correct in all material respects;
2. the assignment contemplated by the Contribution Agreement constitutes
an absolute transfer of the Intangible Transition Property from PP&L to
CEP Securities as provided in the Competition Act, and the beneficial
interest in and title to the Transferred Intangible Transition Property
would not be part of the debtor's estate in the event of the filing of
a bankruptcy petition by or against PP&L under any bankruptcy law;
3.(a) PP&L was the sole owner of the Intangible Transition Property
assigned to CEP Securities as of the date of the execution of the
Contribution Agreement,
(b) upon the execution and delivery of the assignment, the Intangible
Transition Property was validly assigned, transferred and conveyed
to CEP Securities free and clear of all Liens and
(c) all filings, including filings with the PUC under the Competition
Act, necessary in any jurisdiction to give CEP Securities and its
permitted assignees a valid ownership interest in the Intangible
Transition Property, free and clear of all Liens of PP&L or anyone
claiming through PP&L, have been made;
4. the PUC Order, as issued on August 27, 1998 and as supplemented on May
21, 1999, has been issued by the PUC in accordance with the Competition
Act; the PUC Order and the process by which it was issued comply with
all applicable laws, rules and regulations; and the PUC Order is and as
of the date of issuance of any Transition Bonds will be in full force
and effect;
5. as of the date of issuance of any Series of Transition Bonds, the
Transition Bonds will be entitled to the protections provided by the
Competition Act and in accordance with the Competition Act the
provisions of the PUC Order relating to Intangible Transition Property
and Intangible Transition Charges are not revocable by the PUC;
6.(a) under the Competition Act, neither the Commonwealth of Pennsylvania
nor the PUC may limit, alter or in any way impair or reduce the
value of Intangible Transition Property or Intangible Transition
Charges approved by the PUC Order or any rights thereunder, except
such a limitation or alteration may be made by the Commonwealth of
Pennsylvania or the PUC if adequate compensation is
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made by law for the full protection of the Intangible Transition
Charges and of Transition Bondholders, and
(b) under the Contract Clauses of the Constitutions of the Commonwealth
of Pennsylvania and of the United States, none of the Commonwealth
of Pennsylvania, the PUC or any other governmental entity may take
any action that substantially impairs the rights of the Transition
Bondholders unless such action is a reasonable exercise of the
Commonwealth of Pennsylvania's sovereign powers and appropriate to
further a legitimate public purpose, and, under the Takings Clauses
of the Pennsylvania and United States Constitutions, in the event
such action constitutes a permanent appropriation of the property
interest of Transition Bondholders in the Intangible Transition
Property and deprives the Transition Bondholders of their reasonable
expectations arising from their investments in Transition Bonds,
unless just compensation, as determined by a court of competent
jurisdiction, is provided to Transition Bondholders;
7. there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition Act, the
PUC Order, the Intangible Transition Property or the Intangible
Transition Charges or any rights arising under any of them or which
seeks to enjoin the performance of any obligations under the PUC Order;
8. no other approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is required
in connection with the creation of the Intangible Transition Property,
except those that have been obtained or made;
9. except as disclosed by PP&L, there are no proceedings or investigations
pending, or to PP&L's best knowledge, threatened before any court,
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over PP&L, CEP
Securities or Transition Bond Co. or their respective properties
challenging the PUC Order or the Competition Act;
10. no failure on the date of execution of the Contribution Agreement or
any time hereafter to satisfy any condition imposed by the Competition
Act with respect to the recovery of stranded costs will adversely
affect the creation of the Intangible Transition Property, the transfer
and assignment of the Intangible Transition Property to CEP Securities,
the sale, transfer and assignment of the Intangible Transition Property
to Transition Bond Co. or the right to collect Intangible Transition
Charges;
11. the assumptions used in calculating Intangible Transition Charges are
reasonable and made in good faith;
12. (a)Intangible Transition Property constitutes a current property right;
(b) Intangible Transition Property includes, without limitation;
(1) the irrevocable right of PP&L to receive through Intangible
Transition Charges, subject to the limitations on electricity
rates specified in the Competition Act, an amount sufficient to
recover all of the Qualified Transition Expenses described in the
PUC Order in an amount equal to the
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aggregate principal amount of the Transition Bonds plus an amount
sufficient to provide for any credit enhancement (including the
Overcollateralization Amount relating to each Series of
Transition Bonds), to fund any reserves, and to pay interest,
premium, if any, servicing fees and other expenses relating to
the Transition Bonds,
(2) all right, title and interest of CEP Securities or Transition
Bond Co. in the PUC Order and in all revenues, collections,
claims, payments, money or proceeds of or arising from the
Intangible Transition Charges pursuant to the PUC Order to the
extent that in accordance with the Competition Act, the PUC
Order and the rates and charges authorized under the PUC Order
are declared to be irrevocable, and
(3) the right to obtain adjustments to the Intangible Transition
Charges pursuant to the PUC Order and
(c) paragraphs five through twenty-one of the PUC Order as issued on
August 27, 1998, including the right to collect Intangible
Transition Charges, have been declared to be irrevocable by the PUC,
and any supplemental order of the PUC adopted pursuant to paragraph
19 of the PUC's August 27, 1998 order when issued will have been
declared to be irrevocable by the PUC;
13. PP&L is a corporation duly organized and in good standing under the
laws of the Commonwealth of Pennsylvania, with corporate power and
authority to own its properties and conduct its business as currently
owned and conducted, and each of CEP Securities and Transition Bond Co.
is a limited liability company duly organized 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 and
conducted;
14. each of the parties to the Contribution Agreement has the power and
authority to execute and deliver, and to perform its obligations under,
the Contribution Agreement and the execution, delivery and performance
of the Contribution Agreement has been duly authorized by it, and
(a) PP&L has the power and authority to own the Intangible Transition
Property and to assign, transfer and convey the Intangible
Transition Property, and PP&L has duly authorized such assignment,
transfer and conveyance to CEP Securities pursuant to the assignment
executed and delivered under the Contribution Agreement and
(b) CEP Securities has the power and authority to own the Intangible
Transition Property and to sell, assign, transfer and convey the
Intangible Transition Property to Transition Bond Co., and CEP
Securities has duly authorized this sale, assignment, transfer and
conveyance to Transition Bond Co. pursuant to the Sale Agreement;
15. the Contribution Agreement constitutes a legal, valid and binding
obligation of each of the parties to the Contribution Agreement
enforceable against each of them in accordance with its terms, subject
to bankruptcy, receivership, insolvency, fraudulent
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transfer, reorganization, moratorium or other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity;
16. the execution and delivery by each of the parties to the Contribution
Agreement of the Contribution Agreement, the performance by each of
them of the transactions contemplated by the Contribution Agreement or
the fulfillment by each of them of the terms of the Contribution
Agreement do not conflict with, result in any breach of any of the
terms and provisions of, or constitute a default under, the
organizational documents of any of them, or any indenture, agreement or
other instrument to which any of these entities is a party or by which
it is bound; or result in the creation or imposition of any lien upon
any of its properties pursuant to the terms of any such indenture,
agreement or other instrument; or violate any law or any order, rule or
regulation applicable to any of these entities of any court or of any
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over any of these
entities or its properties;
17. no approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is required
in connection with the execution and delivery of the Contribution
Agreement by each of the parties to the Contribution Agreement, the
performance by it of the transactions contemplated by the Contribution
Agreement or the fulfillment by it of the terms of the Contribution
Agreement, except those that have been obtained or made;
18. there are no proceedings or investigations pending or, to PP&L's best
knowledge, threatened, before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality:
(a) asserting the invalidity of the Basic Documents or the Transition
Bonds,
(b) seeking to prevent the issuance of Transition Bonds or the
consummation of the transactions contemplated by the Basic Documents
or the Transition Bonds or
(c) seeking any determination or ruling that could reasonably be
expected to materially and adversely affect the performance by PP&L,
CEP Securities or Transition Bond Co. of its obligations under, or
the validity or enforceability of, the Basic Documents or the
Transition Bonds;
19. after giving effect to the assignment, transfer and conveyance of the
Intangible Transition Property to CEP Securities pursuant to the
assignment, PP&L:
(a) is solvent and expects to remain solvent;
(b) is adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended
purposes;
(c) is not engaged nor does it expect to engage in a business for which
its remaining property represents an unreasonably small portion of
its capital; and
(d) believes that it will be able to pay its debts as they become due
and that this belief is reasonable; and
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(e) is able to pay its debts as they mature and does not intend to
incur, and does not believe that it will incur, indebtedness that
it will not be able to repay at its maturity;
20. each of the parties to the Contribution Agreement and Transition Bond
Co. is duly qualified to do business as a foreign corporation or
limited liability company, as applicable, in good standing, and has
obtained all necessary licenses and approvals, in all jurisdictions in
which the ownership or lease of its property or the conduct of its
business requires such qualifications, licenses or approvals except
where the failure to so qualify or to obtain such licenses or approvals
would not be reasonably likely to have a material adverse effect on it;
21. the sale, transfer and assignment contemplated by the Sale Agreement
constitute an absolute transfer of the Intangible Transition Property
from CEP Securities to Transition Bond Co. as provided in the
Competition Act and the beneficial interest in and title to the
Transferred Intangible Transition Property would not be part of the
debtor's estate in the event of the filing of a bankruptcy petition by
or against CEP Securities under any bankruptcy law; and
22. CEP Securities is the sole owner of the Intangible Transition Property
being sold, transferred and assigned by CEP Securities to Transition
Bond Co. pursuant to the Bill of Sale; upon the execution and delivery
of the Bill of Sale, the Intangible Transition Property will have been
validly sold, assigned, transferred and conveyed to Transition Bond Co.
free and clear of all Liens; all filings, including filings with the
PUC under the Competition Act, necessary in any jurisdiction to give
Transition Bond Co. and its permitted assignees a valid ownership
interest in the Intangible Transition Property, free and clear of all
Liens of CEP Securities or PP&L or anyone claiming through CEP
Securities or PP&L have been made.
PP&L further agrees that these representations and warranties will inure to
the benefit of CEP Securities and that CEP Securities will have the right to
enforce such representations and warranties directly against PP&L. Also, PP&L
agrees that CEP Securities will have the right to assign or otherwise convey
its rights with respect to such representations and warranties, including such
right of enforcement, to Transition Bond Co. In addition, PP&L agrees that
Transition Bond Co. will have the right to further assign such rights to the
Trustee for the benefit of the Transition Bondholders. These representations
and warranties will survive the assignment of the Intangible Transition
Property to CEP Securities, the further assignment of the Intangible
Transition Property to Transition Bond Co. and the pledge thereof by
Transition Bond Co. to the Trustee pursuant to the Indenture. PP&L represents,
warrants and agrees that these representations and warranties will be true and
correct on and as of each date on which Intangible Transition Property is sold
by CEP Securities to Transition Bond Co. as if made by it on that date.
PP&L's Covenants
In the Contribution Agreement, PP&L makes the following covenants and
agrees that these covenants inure to the benefit of CEP Securities:
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1. so long as any of the Transition Bonds are outstanding, PP&L shall keep
in full force and effect its corporate existence and remain in good
standing under the laws of the Commonwealth of Pennsylvania, and shall
obtain and preserve its qualification to do business in each
jurisdiction in which such qualification is necessary to protect the
validity and enforceability of the Contribution Agreement and each
other instrument or agreement to which PP&L is a party necessary to the
proper administration of the Contribution Agreement and the
transactions contemplated hereby;
2. except for the conveyances in the Contribution Agreement, PP&L shall
not sell, pledge, assign or transfer to any other person, or grant,
create, incur, assume or suffer to exist any lien on, any of the
Intangible Transition Property, whether now existing or hereafter
created, or any interest therein;
3. PP&L shall not at any time assert any lien against or with respect to
any Intangible Transition Property, and shall defend the right, title
and interest of CEP Securities, and upon transfer by CEP Securities to
Transition Bond Co., Transition Bond Co. and the Trustee, in, to and
under the Intangible Transition Property, whether now existing or
hereafter created, against all claims of third parties claiming through
or under PP&L;
4. if PP&L receives collections in respect of the Intangible Transition
Charges or the proceeds thereof, PP&L agrees to pay the Servicer, on
behalf of Transition Bond Co., all payments received by PP&L in respect
thereof as soon as practicable after receipt thereof by PP&L, but in no
event later than two Business Days after such receipt;
5. PP&L shall notify CEP Securities, Transition Bond Co. and the Trustee
promptly after becoming aware of any lien on any Intangible Transition
Property other than the conveyances under the Contribution Agreement or
under the Sale Agreement or the Indenture;
6. PP&L hereby agrees to comply with its organizational or governing
documents and all laws, treaties, rules, regulations and determinations
of any governmental instrumentality applicable to PP&L, except to the
extent that failure to so comply would not adversely affect the
interests of CEP Securities, Transition Bond Co. or the Trustee in the
Intangible Transition Property or under any of the Basic Documents or
PP&L's performance of its obligations hereunder or under any of the
other Basic Documents to which it is a party;
7.(a) so long as any of the Transition Bonds are outstanding, PP&L shall
treat the Transition Bonds as debt of PP&L for federal income tax
purposes;
(b) so long as any of the Transition Bonds are outstanding, PP&L shall:
(1) clearly disclose in its financial statements that it is not the
owner of the Intangible Transition Property and that the assets
of CEP Securities or Transition Bond Co. are not available to
pay creditors of PP&L or any of its other affiliates, and
(2) clearly disclose the effects of all transactions between PP&L
and CEP Securities and Transition Bond Co. in accordance with
generally accepted accounting principles;
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8. PP&L agrees that upon the assignment, transfer and conveyance by PP&L
of the Intangible Transition Property to CEP Securities pursuant to the
assignment executed and delivered pursuant to the Contribution
Agreement:
(a) to the fullest extent permitted by law, including applicable PUC
orders and regulations, CEP Securities shall have all of the rights
originally held by PP&L with respect to the Intangible Transition
Property, other than the rights of an electric distribution company
set forth in the Competition Act, including the right to collect
any amounts payable by any Customer or third party in respect of
such Intangible Transition Property, notwithstanding any objection
or direction to the contrary by PP&L, and
(b) any payment by any Customer or third party in respect of the
Intangible Transition Charges shall discharge such Customer's or
such third party's obligations in respect of such Intangible
Transition Property to the extent of such payment, notwithstanding
any objection or direction to the contrary by PP&L;
9. so long as any of the Transition Bonds are outstanding:
(a) PP&L shall not make any statement or reference in respect of
Transferred Intangible Transition Property that is inconsistent
with the ownership thereof by Transition Bond Co., and
(b) PP&L shall not take any action in respect of the Intangible
Transition Property except solely in its capacity as the Servicer
thereof pursuant to the Servicing Agreement or as otherwise
contemplated by the Basic Documents;
10. in connection with the issuance of any Transition Bonds, PP&L agrees to
execute and deliver, or cause to be delivered, such amendments to the
Contribution Agreement and such additional agreements, certificates,
documents and opinions as may in PP&L's judgment be required to obtain
the highest possible rating for the Transition Bonds from each rating
agency rating the Transition Bonds and to effect the sale of the
Transition Bonds to the underwriters of these bonds;
11. PP&L shall deliver to CEP Securities, Transition Bond Co. and the
Trustee, promptly after having obtained knowledge thereof, written
notice in a certificate, signed by authorized officers of PP&L, of the
occurrence of any event which requires or which, with the giving of
notice or the passage of time or both, would require PP&L to make any
indemnification payment pursuant to the Contribution Agreement;
12. PP&L shall execute and file or cause to be executed and filed any
filings, including filings with the PUC pursuant to the Competition
Act, in the manner and in the places as may be required by law fully to
preserve, maintain and protect the interests of CEP Securities and its
permitted assigns in the Intangible Transition Property, including all
filings contemplated by the Competition Act relating to the transfer of
the ownership of the Intangible Transition Property by PP&L to CEP
Securities;
13. PP&L shall deliver to CEP Securities file-stamped copies of, or filing
receipts for, any document filed as provided above, as soon as
available following such filing;
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14. PP&L agrees to take legal or administrative actions, including
defending against or instituting and pursuing legal actions and
appearing or testifying at hearings or similar proceedings, as may be
reasonably necessary:
(a) to protect CEP Securities and its permitted assigns from claims,
state actions or other actions or proceedings of third parties
which, if successfully pursued, would result in a breach of any
representation or warranty set forth in the Contribution Agreement
or
(b) to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Competition Act or the PUC
Order or the rights of holders of Intangible Transition Property by
legislative enactment or constitutional amendment that would be
adverse to the holders of Intangible Transition Property; and
15. so long as any of the Transition Bonds are outstanding, PP&L shall, and
shall cause each of its subsidiaries to, pay all material taxes,
including gross receipts taxes, assessments and governmental charges
imposed upon it or any of its properties or assets or with respect to
any of its franchises, business, income or property before any penalty
accrues thereon if the failure to pay any such taxes, assessments and
governmental charges would, after any applicable grace periods, notices
or other similar requirements, result in a lien on the Intangible
Transition Property; provided that no such tax need be paid if PP&L or
any of its subsidiaries, is contesting the same in good faith by
appropriate proceedings promptly instituted and diligently conducted
and if PP&L or that subsidiary has established appropriate reserves as
shall be required in conformity with generally accepted accounting
principles.
PP&L agrees that CEP Securities will have the right to enforce the
covenants listed above directly against PP&L, and that CEP Securities will
have the right to assign its rights with respect to these covenants, including
that right of enforcement, to Transition Bond Co. PP&L also agrees that
Transition Bond Co. will have the right to further assign these rights to the
Trustee for the benefit of the Transition Bondholders.
PP&L's Obligation to Indemnify Transition Bond Co. and the Trustee and to
Take Legal Action
Under the Contribution Agreement, PP&L is obligated to indemnify CEP
Securities, Transition Bond Co. and the Trustee and related parties specified
therein, against:
1. any and all taxes, other than any taxes imposed on Transition
Bondholders solely as a result of their ownership of Transition Bonds,
that may at any time be imposed on or asserted against any of those
persons under existing law as of the date of issuance of the Transition
Bonds as a result of the assignment of the Intangible Transition
Property by PP&L to CEP Securities, or the sale and assignment of
Intangible Transition Property by CEP Securities to Transition Bond Co.,
or the acquisition or holding of Intangible Transition Property by CEP
Securities or Transition Bond Co., or the issuance and sale by
Transition Bond Co. of the Transition Bonds, including any sales, gross
receipts, general corporation, personal property, privilege or license
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taxes, but excluding any taxes imposed as a result of a failure of that
person to properly withhold or remit taxes imposed with respect to
payments on any Transition Bond; and
2.
(a) any and all amounts of principal of and interest on the Transition
Bonds not paid when due or when scheduled to be paid in accordance
with their terms and the amount of any deposits to Transition Bond Co.
required to have been made in accordance with the terms of the Basic
Documents which are not made when so required, in either case as a
result of PP&L's breach of any of its representations, warranties or
covenants contained in the Contribution Agreement, and
(b) any and all liabilities, obligations, claims, actions, suits or
payments of any kind whatsoever that may be imposed on or asserted
against any of those persons, other than any liabilities, obligations
or claims for or payments of principal or interest on the Transition
Bonds, together with any reasonable costs and expenses incurred by
that person, as a result of PP&L's breach of any of its
representations, warranties or covenants contained in the Contribution
Agreement.
These indemnification obligations will rank pari passu with other general
unsecured obligations of PP&L. The indemnities described above will survive
the termination of the Contribution Agreement and include reasonable fees and
expenses of investigation and litigation, including reasonable attorneys' fees
and expenses.
PP&L's Obligation to Undertake Legal Action. The Contribution Agreement
requires PP&L to take legal or administrative actions as may be reasonably
necessary to protect the rights of the holders of the Intangible Transition
Property. See "--PP&L's Covenants" above. PP&L will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its obligations under the Contribution Agreement, and that in
its opinion may involve it in any expense or liability. However, this
provision is subject to PP&L's covenant to fully preserve, maintain and
protect the interests of Transition Bond Co. in the Intangible Transition
Property.
Successors to PP&L
The Contribution Agreement provides that any person:
1. into which PP&L may be merged or consolidated and which succeeds to all or
substantially all of the electric distribution business of PP&L,
2. which results from the division of PP&L into two or more persons and which
succeeds to all or substantially all of the electric distribution business
of PP&L,
3. which may result from any merger or consolidation to which PP&L shall be a
party and which succeeds to all or substantially all of the electric
distribution business of PP&L,
4. which may succeed to the properties and assets of PP&L substantially as a
whole and which succeeds to all or substantially all of the electric
distribution business of PP&L, or
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5. which may otherwise succeed to all or substantially all of the electric
distribution business of PP&L,
will be the successor to PP&L. The Contribution Agreement further requires
that:
1. immediately after giving effect to any transaction referred to in this
paragraph, no representation or warranty made in the Contribution
Agreement will have been breached and no Servicer Default, and no event
that, after notice or lapse of time, or both, would become a Servicer
Default will have occurred and be continuing;
2. the successor to PP&L must execute an agreement of assumption to perform
every obligation of PP&L under the Contribution Agreement;
3. the Rating Agencies will have received prior written notice of the
transaction; and
4. officers' certificates and opinions of counsel specified in the
Contribution Agreement will have been delivered to Transition Bond Co. and
the Trustee.
The Treatment of the Assignment of Intangible Transition Property
PP&L's regulatory accounting records and computer systems will reflect the
assignment of transferred Intangible Transition Property to the Seller.
However, PP&L will treat the Transition Bonds as debt of PP&L for federal and
Commonwealth income, gross receipts and franchise tax purposes and for
financial accounting purposes.
THE SALE AGREEMENT
The following summary describes particular material terms and provisions of
the Sale Agreement pursuant to which the Seller is selling and Transition Bond
Co. is purchasing Intangible Transition Property. The Sale Agreement may be
amended by the parties thereto, with the consent of the Trustee, provided
notice of the substance of this amendment is provided by Transition Bond Co.
to each Rating Agency and the Rating Agency Condition has been satisfied. The
form of the Sale Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. This summary does not purport
to be complete and is subject to, and is qualified by reference to, the
provisions of the Sale Agreement.
CEP Securities' Sale and Assignment of Intangible Transition Property and
Rights Under the Contribution Agreement
On the Initial Transfer Date, pursuant to the Sale Agreement, the Seller
will sell and assign to Transition Bond Co., without recourse, except as
provided therein, Transferred Intangible Transition Property. The Intangible
Transition Property transferred on the Initial Transfer Date represents the
irrevocable right to receive through Intangible Transition Charges amounts
sufficient to recover Qualified Transition Expenses with respect to the
applicable Series of Transition Bonds. On the Initial Transfer Date, the
Seller will also assign to Transition Bond Co. all of the Seller's related
rights under the Contribution Agreement, including the right to enforce PP&L's
representations, warranties, covenants and indemnities
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under the Contribution Agreement. The net proceeds received from the sale of
the Transition Bonds issued on the Initial Transfer Date will be applied to
the purchase of the Intangible Transition Property transferred on that date
and the Seller's related rights under the Contribution Agreement.
In addition, the Seller may from time to time on a Subsequent Transfer Date
sell additional Intangible Transition Property to Transition Bond Co., subject
to the satisfaction of the conditions specified in the Sale Agreement and the
Indenture. Each Subsequent Sale will be financed through the issuance of an
additional Series of Transition Bonds.
In accordance with the Competition Act, upon the execution and delivery of
the Sale Agreement and the related bill of sale, the transfer of the Initial
Intangible Transition Property and any subsequent Intangible Transition
Property will be perfected as against all third persons, including judicial
lien creditors.
Initial Intangible Transition Property means Intangible Transition
Property, as identified in the related bill of sale, sold to Transition Bond
Co. on the Initial Transfer Date pursuant to the Sale Agreement in connection
with the issuance of the initial Series of Transition Bonds. Subsequent
Intangible Transition Property means Intangible Transition Property, as
identified in the related bill of sale, sold to Transition Bond Co. on any
Subsequent Transfer Date pursuant to the Sale Agreement in connection with the
subsequent issuance of a Series of Transition Bonds.
Conditions to the Sale of Intangible Transition Property to Transition Bond
Co. Each sale of Intangible Transition Property under the Sale Agreement is
subject to the satisfaction or waiver of each of the following conditions:
1. on or prior to the Initial Transfer Date or Subsequent Transfer Date, as
applicable, the Seller shall have delivered to Transition Bond Co. a duly
executed bill of sale identifying the Intangible Transition Property to be
conveyed on that date, in the form required by the Sale Agreement;
2. as of the Initial Transfer Date or the Subsequent Transfer Date, as
applicable, the Seller shall not be insolvent and shall not have been made
insolvent by the sale, and the Seller shall not be aware of any pending
insolvency with respect to itself;
3. as of the Initial Transfer Date or the Subsequent Transfer Date, as
applicable, no breach by PP&L of its representations, warranties or
covenants in the Contribution Agreement shall exist, and no Servicer
Default shall have occurred and be continuing;
4. as of the Initial Transfer Date or the Subsequent Transfer Date, as
applicable, Transition Bond Co. shall have sufficient funds available to
pay the purchase price for the Transferred Intangible Transition Property
to be conveyed on that date, and all conditions to the issuance of one or
more Series of Transition Bonds intended to provide sufficient funds set
forth in the Indenture shall have been satisfied or waived;
5. on or prior to the Initial Transfer Date or Subsequent Transfer Date, as
applicable, the Seller shall have taken all action required to transfer to
Transition Bond Co. ownership of the Transferred Intangible Transition
Property to be conveyed on that date, free and clear of all liens other
than liens created by Transition Bond Co. pursuant to the
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Indenture, and Transition Bond Co. shall have taken, or the Servicer shall
have taken on behalf of Transition Bond Co., any action required for
Transition Bond Co. to grant the Trustee a first priority perfected
security interest in the Collateral and to maintain this security
interest;
6. in the case of a sale of Subsequent Intangible Transition Property only,
the Seller shall have provided Transition Bond Co. and the Rating Agencies
with a timely additional notice specifying the Subsequent Transfer Date
for the Subsequent Intangible Transition Property not later than 10 days
prior to the Subsequent Transfer Date;
7. the Seller shall have delivered to the Rating Agencies, Transition Bond
Co. and the Trustee the opinions of counsel specified in the Sale
Agreement;
8. the Seller shall have delivered to the Trustee and Transition Bond Co. an
officers' certificate confirming the satisfaction of each condition
precedent specified above; and
9. the Rating Agency Condition shall have been satisfied with respect to any
Subsequent Intangible Transition Property sale.
THE SERVICING AGREEMENT
The following summary describes the material terms and provisions of the
Servicing Agreement pursuant to which the Servicer is undertaking to service
Intangible Transition Property. The Servicing Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Servicing Agreement may be amended by the parties thereto with the consent
of the Trustee under the Indenture provided the Rating Agency Condition has
been satisfied.
PP&L's Servicing Procedures
General. The Servicer, as agent for Transition Bond Co., will manage,
service, administer and make collections in respect of Intangible Transition
Property. The Servicer's duties will include:
1. calculating and billing the Intangible Transition Charges and collecting
the Intangible Transition Charges from Customers, electric generation
suppliers and other third parties, as applicable;
2. responding to inquiries by Customers, electric generation suppliers and
other third parties, the PUC, or any federal, local or other state
governmental authority with respect to the Intangible Transition Property
and Intangible Transition Charges;
3. accounting for ITC Collections, investigating delinquencies, processing
and depositing collections, making periodic remittances and furnishing
periodic reports to Transition Bond Co., the Trustee and the Rating
Agencies;
4. selling, as agent for Transition Bond Co., defaulted or written-off
accounts in accordance with the Servicer's usual and customary practices;
and
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5. taking action in connection with adjustments to the Intangible Transition
Charges as described below.
See also "The PUC Order and the Intangible Transition Charges--Customers
Within PP&L's Service Territory May Choose How Their Electricity Consumption
Is Billed." The Servicer is required to notify Transition Bond Co., the
Trustee and the Rating Agencies in writing of any laws or PUC regulations
promulgated after the execution of the Servicing Agreement that have a
material adverse effect on the Servicer's ability to perform its duties under
the Servicing Agreement.
Servicer Obligation to Undertake Legal Action. The Servicer is required to
institute any action or proceeding necessary to compel performance by the PUC
or the Commonwealth of any of their obligations or duties under the
Competition Act or the PUC Order with respect to the Intangible Transition
Property. The cost of any action reasonably allocated by the Servicer to the
Transferred Intangible Transition Property would be payable from ITC
Collections as an operating expense.
Collections Curve. Periodically, the Servicer will prepare a forecast of
the percentages of amounts billed in a particular calendar month, which is
referred to as a Billing Month, that are expected to be received during each
of the following seven months. These forecasts are referred to as the
Collections Curve. There will be a separate Collections Curve for each
Customer Class.
The Servicer will remit ITC Collections for any Billing Month to the
Trustee for deposit in the Collection Account not later than the
Reconciliation Date for that Billing Month. In addition, the Servicer will
make periodic payments on account of ITC Collections to the Trustee for
deposit in the Collection Account. For so long as
1. PP&L or any successor to PP&L's electric distribution business remains the
Servicer,
2. no Servicer Default has occurred and is continuing, and
3.a. PP&L, or any successor referred to in this paragraph, maintains a
short-term rating of "A-1" or better by S&P, "P-1" or better by
Moody's and "F-1" or better by Fitch IBCA or
b. the Rating Agency Condition has been satisfied, and any conditions or
limitations imposed by the Rating Agencies in connection therewith are
complied with;
the Servicer may make remittances on account of ITC Collections on a monthly
basis. On each Monthly Remittance Date, the Servicer will remit to the Trustee
for each of the seven preceding Billing Months an amount equal to the amount
of ITC Collections estimated to have been received during the preceding
calendar month, based on the Collections Curve for each Customer Class then in
effect, for those Billing Months. If the Servicer has not satisfied the
conditions specified above, the Servicer will be required to remit periodic
payments on account of ITC Collections to the Trustee on each Business Day.
The sum of the amounts paid to the Trustee over a seven-month period,
following a particular Billing Month based on the
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Collections Curves for that Billing Month, is referred to as the Collections
Curve Payment for that Billing Month.
On or before the Reconciliation Date for each Billing Month, the Servicer
will compare the Actual ITC Collections to the Collections Curve Payments
previously made to the Trustee for that Billing Month. If the Collections
Curve Payments previously made for that Billing Month exceed Actual ITC
Collections for that Billing Month, this excess is referred to as an Excess
Curve Payment. In that case, the Servicer may either:
1. reduce the amount that the Servicer remits to the Trustee for deposit in
the Collection Account on the corresponding Remittance Date, and if
necessary, succeeding Remittance Dates, by the amount of the Excess Curve
Payment, or
2. require the Trustee to pay the Servicer from the Collection Account the
amount of the Excess Curve Payments, which upon payment becomes property
of the Servicer.
If the Collections Curve Payments made for a Billing Month are less than
Actual ITC Collections for that Billing Month, this deficiency is referred to
as a Curve Payment Shortfall. In that case, the Servicer must pay the Curve
Payment Shortfall to the Trustee on that Reconciliation Date for deposit in
the Collection Account.
Potential Limitations to Collecting Intangible Transition Charges
Uncertainties Created by Changes in General Economic Conditions and
Electricity Usage. General economic conditions and technological changes may
significantly alter power consumption or reduce the Customer base in PP&L's
historical service area. Additionally, changes in business cycles, departures
of Customers from PP&L's historical service area, weather, occurrence of
natural disasters, dramatic changes in energy prices, implementation of energy
conservation efforts and increased efficiency of equipment, among other
things, affect energy usage. If a sufficient number of Customers within a
Customer Class leave PP&L's service territory, self-generate while bypassing
PP&L's transmission and distribution services, significantly reduce their
electricity consumption, or cease consuming electricity altogether, the
Intangible Transition Charges, as adjusted from time to time, required to be
paid by remaining Customers may become burdensome. This could cause the
required Intangible Transition Charge to exceed the capped amount that may be
charged to the Rate Schedules within that Customer Class. It also could result
in greater delinquencies and write-offs or petitions to the PUC, or in
legislative proposals to reduce Intangible Transition Changes.
The Potential for Customers Within PP&L's Service Territory to Generate
Their Own Electricity. The Servicer's current forecasts of future electricity
demand do not include any shift by Customers to self-generation, because self-
generation of electricity by Customers is not expected to be economically
viable during the period in which the Transition Bonds will be outstanding.
The Customer must pay Intangible Transition Charges on all electricity
delivered by PP&L even if it elects to purchase electricity from another
supplier or to self generate a portion of its electricity needs.
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Uncertainties Associated with Collecting Intangible Transition
Charges. PP&L has no historical performance data for Intangible Transition
Charges, although Customer and energy usage records are available. These
Customer and energy usage records, however, do not reflect Customers' payment
patterns or energy usage in a competitive market. These records also do not
reflect consolidated billing by electric generation suppliers or other third
parties, so these records may have limited predictive value with respect to
the Intangible Transition Charges. Furthermore, the Servicer does not have any
experience administering this type of asset.
PP&L's Customers Have Limited Experience in Paying Intangible Transition
Charges. Changes in Customer billing and payment arrangements may result in
Customer confusion and the misdirection or delay of payments, which could have
the effect of causing shortfalls in ITC Collections. Any problems arising from
new and untested systems or any lack of experience on the part of the electric
generation suppliers or other third parties with Customer billing and
collections could cause delays in billing and collecting the Intangible
Transition Charges. These delays could result in shortfalls in ITC
Collections.
The PUC's Intangible Transition Charge Adjustment Process
Among other things, the Servicing Agreement requires the Servicer to file
Adjustment Requests on each Calculation Date, and the Competition Act and the
PUC Order require the PUC to approve these requests within specified time
periods. These Adjustment Requests are based on actual ITC Collections and
updated assumptions by the Servicer as to projected future usage of
electricity by Customers, expected delinquencies and write-offs and future
payments and expenses relating to Intangible Transition Property and the
Transition Bonds. In addition, the PUC Order provides that adjustments
beginning twelve months before the Expected Final Payment Date of the last
Series or Class of Transition Bonds may be implemented quarterly or monthly.
The Servicer agrees to calculate these adjustments to result in:
1. the Transition Bond Balance equaling the Projected Transition Bond
Balance,
2. the amount on deposit in the Overcollateralization Subaccount equaling the
Scheduled Overcollateralization Level,
3. the replenishment of any shortfalls in the Capital Subaccount to its
required level, and
4. the amount in the Reserve Account equaling zero
by the Payment Date immediately preceding the next Adjustment Date or with
respect to the period in which monthly rate adjustments are utilized,
generally the 25th day of the month immediately preceding the next monthly
Adjustment Date, taking into account any amounts on deposit in the Reserve
Subaccount. The Servicer will file Adjustment Requests on each Calculation
Date for Transition Bond Co. as specified in the Servicing Agreement. In
accordance with the Competition Act and the PUC Order, the PUC has 90 days to
approve the adjustments. The adjustments to the Intangible Transition Charges
are expected to occur on each Adjustment Date. Beginning twelve months before
the Expected Final Payment Date of the last Series or Class of Transition
Class, the PUC will permit each adjustment request to become effective within
15 days after filing. Adjustments to the Intangible Transition Charges
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will cease with respect to each Series on the final Adjustment Date specified
in the Prospectus Supplement for that Series.
Each report and certificate delivered in connection with any filing made to
the PUC by the Servicer on behalf of Transition Bond Co. with respect to
Intangible Transition Charges or Adjustment Requests will constitute a
representation and warranty by the Servicer that each such report or
certificate, as the case may be, is true and correct in all material respects.
However, to the extent any such report or certificate is based in part upon or
contains assumptions, forecasts or other predictions of future events, the
representation and warranty of the Servicer with respect thereto will be
limited to the representation and warranty that such assumptions, forecasts or
other predictions of future events are reasonable based upon historical
performance.
PP&L's Intangible Transition Charge Collections. The Servicer is required
to remit all ITC Collections from whatever source to Transition Bond Co. and
all proceeds of other Collateral, if any, of Transition Bond Co., received by
the Servicer to the Trustee for deposit pursuant to the Indenture on each
Remittance Date. Until ITC Collections are remitted to the Collection Account,
the Servicer will not segregate them from its general funds. Remittances of
ITC Collections will not include interest thereon prior to the Remittance Date
or late fees from Customers, which the Servicer may retain. See "Risk
Factors--The Risks Associated With Potential Bankruptcy Proceedings" in this
Prospectus.
PP&L May Obtain a Letter of Credit to Ensure Remittances on Each Remittance
Date
If specified in the annex to the Servicing Agreement relating to any Series
or Class of Transition Bonds and the related Prospectus Supplement, the
Servicer will obtain a letter of credit to assure remittances of collections
of Intangible Transition Charges on each Remittance Date as specified in the
related Prospectus Supplement.
PP&L's Compensation for Its Role as Servicer and Its Release of Other Parties
Transition Bond Co. agrees to pay the Servicer a Servicing Fee on each
Payment Date. The Servicing Fee for each Series, 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 "The
Indenture -- How Funds in the General Subaccount Will Be Allocated" in this
Prospectus. The Servicing Fee will be paid prior to the payment of or
provision for any amounts in respect of interest on and principal of the
Transition Bonds. In the Servicing Agreement, the Servicer releases Transition
Bond Co. and the Trustee from any and all claims whatsoever relating to
Intangible Transition Property or the Servicer's servicing activities with
respect thereto.
PP&L's Duties as Servicer
In the Servicing Agreement, the Servicer has agreed, among other things,
that, in servicing Intangible Transition Property:
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1. except where the failure to comply with any of the following would not
adversely affect Transition Bond Co.'s or the Trustee's respective
interests in Intangible Transition Property,
(a) it will manage, service, administer and make collections in respect
of Intangible Transition Property with reasonable care and in
material compliance with applicable law, including all applicable PUC
regulations and guidelines, using the same degree of care and
diligence that the Servicer exercises with respect to billing and
collection activities that the Servicer conducts for itself and
others;
(b) it will follow standards, policies and procedures in performing its
duties as Servicer that are customary in the Servicer's industry;
(c) it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain rights in respect of
Intangible Transition Property;
(d) it will calculate Intangible Transition Charges in compliance with
the Competition Act, the PUC Order and any applicable tariffs;
2. it will keep on file, in accordance with customary procedures, all
documents related to Intangible Transition Property and will maintain
accurate and complete accounts, records and computer systems pertaining to
Intangible Transition Property; and
3. it will use all reasonable efforts consistent with its customary servicing
procedures to collect all amounts owed in respect of Intangible Transition
Property as they become due.
The duties of the Servicer set forth in the Servicing Agreement are qualified
by any PUC regulations or orders in effect at the time these duties are to be
performed.
PP&L's Representations and Warranties as Servicer
In the Servicing Agreement, the Servicer will make representations and
warranties as of the date the Seller sells or otherwise transfers Intangible
Transition Property to Transition Bond Co. to the effect, among other things,
that:
1. the Servicer is a corporation duly organized and in good standing under
the laws of the state of its incorporation, with the corporate power and
authority to own its properties and conduct its business as its properties
are currently owned and its business is presently conducted and to
execute, deliver and carry out the terms of the Servicing Agreement and
has the power, authority and legal right to service the Intangible
Transition Property;
2. the Servicer is duly qualified to do business as a foreign corporation in
good standing in all jurisdictions in which it is required to do so;
3. the Servicer's execution, delivery and performance of the Servicing
Agreement have been duly authorized by the Servicer by all necessary
corporate action;
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4. the Servicing Agreement constitutes a legal, valid and binding obligation
of the Servicer, enforceable against the Servicer in accordance with its
terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
5. the consummation of the transactions contemplated by the Servicing
Agreement does not conflict with or result in any breach of the terms and
provisions of nor constitute a default under the Servicer's articles of
incorporation or by-laws or any material agreement to which the Servicer
is a party or bound, nor 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 or its properties;
6. except for filings with the PUC for revising Intangible Transition Charges
and continuation notices filed under the Pennsylvania Uniform Commercial
Code, no governmental approvals, authorizations, consents, orders, or
other actions or filings are required for the Servicer to execute, deliver
and perform its obligations under the Servicing Agreement, except those
which have previously been obtained or made; and
7. no proceeding or investigation is pending or, to the Servicer's best
knowledge, threatened before any court, federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties:
(a) except as disclosed by the Servicer to Transition Bond Co., seeking
any determination or ruling that might materially and adversely
affect the performance by the Servicer of its obligations under, or
the validity or enforceability against the Servicer of, the Servicing
Agreement; or
(b) relating to the Servicer and which might adversely affect the federal
or state income, gross receipts or franchise tax attributes of the
Transition Bonds.
PP&L, as Servicer, Will Indemnify Transition Bond Co. and Other Related
Entities
Under the Servicing Agreement, the Servicer agrees to indemnify defend and
hold harmless Transition Bond Co., the Trustee, for itself and on behalf of
the Transition Bondholders, and related parties specified in the Servicing
Agreement, against any costs, expenses, losses, damages and liabilities of any
kind whatsoever that may be imposed upon, incurred by or asserted against any
of those persons as a result of:
1. the Servicer's willful misconduct, bad faith or gross negligence in the
performance of its duties or observance of its covenants under the
Servicing Agreement or the Servicer's reckless disregard of its
obligations and duties under the Servicing Agreement;
2. the Servicer's breach of any of its representations or warranties under
the Servicing Agreement; and
3. litigation and related expenses relating to its status and obligations as
Servicer.
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PP&L, as Servicer, Will Provide Statements to Transition Bond Co. and to the
Trustee
For each Calculation Date, the Servicer will provide to Transition Bond Co.
and the Trustee a statement indicating, with respect to the Transferred
Intangible Transition Property, among other things:
1. the Transition Bond Balance and the Projected Transition Bond Balance for
each Series as of the immediately preceding Payment Date,
2. the amount on deposit in the Overcollateralization Subaccount and the
Scheduled Overcollateralization Level as of the immediately preceding
Payment Date;
3. the amount on deposit in the Capital Subaccount and the amount required to
be on deposit in the Capital Subaccount as of the immediately preceding
Payment Date;
4. the amount on deposit in the Reserve Subaccount as of the immediately
preceding Payment Date;
5. the Projected Transition Bond Balance and the Servicer's projection of the
Transition Bond Balance for the Payment Date immediately preceding the
next succeeding Adjustment Date;
6. the Scheduled Overcollateralization Level and the Servicer's projection of
the amount on deposit in the Overcollateralization Subaccount for the
Payment Date immediately preceding the next succeeding Adjustment Date;
7. the required Capital Subaccount balance and the Servicer's projection of
the amount on deposit in the Capital Subaccount for the Payment Date
immediately preceding the next succeeding Adjustment Date; and
8. the Servicer's projection of the amount on deposit in the Reserve
Subaccount for the Payment Date immediately preceding the next succeeding
Adjustment Date.
With respect to the period in which monthly rate adjustments are utilized, the
term Payment Date, in the above paragraph only, shall also generally apply to
the 25th day of the calendar month immediately preceding the next monthly
Adjustment Date. Moreover, on or before each Remittance Date, the Servicer
will prepare and furnish to Transition Bond Co. and the Trustee a statement
setting forth the aggregate amount remitted or to be remitted by the Servicer
to the Trustee on that Remittance Date. In addition, on or before each Payment
Date, the Servicer will prepare and furnish to Transition Bond Co. and the
Trustee a statement setting forth the transfers and payments to be made on
that Payment Date and the amounts thereof. Further, on or before each Payment
Date for each Series of Transition Bonds, the Servicer will prepare and
furnish to Transition Bond Co. and the Trustee a statement setting forth the
amounts to be paid to the holders of Transition Bonds of that Series. On the
basis of this information, the Trustee will furnish to the Transition
Bondholders on each Payment Date the report described under "The Indenture--
Reports to Holders of the Transition Bonds" in this Prospectus.
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PP&L to Provide Compliance Reports Concerning the Servicing Agreement
The Servicing Agreement will provide that a firm of independent public
accountants will furnish to Transition Bond Co., the Trustee and the Rating
Agencies, on or before March 31 of each year, a statement as to compliance by
the Servicer during the preceding calendar year, or the relevant portion
thereof, with procedures relating to the servicing of Intangible Transition
Property. This report, which is referred to in this Prospectus as the Annual
Accountant's Report, will state that the firm has performed the procedures in
connection with the Servicer's compliance with the servicing obligations of
the Servicing Agreement, identifying the results of these procedures and
including any exceptions noted. The Annual Accountant's Report will also
indicate that the accounting firm providing the 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 Transition Bond Co. and the Trustee, on or before
March 31 of each year, a certificate signed by an officer of the Servicer.
This certificate will state that the Servicer has fulfilled its obligations
under the Servicing Agreement for the preceding calendar year, or the relevant
portion thereof, or, if there has been a default in the fulfillment of any
relevant obligation, describing each default. The Servicer has agreed to give
Transition Bond Co., each Rating Agency, and the Trustee notice of any
Servicer Default under the Servicing Agreement.
Matters Regarding PP&L as Servicer
Pursuant to the PUC Order, PP&L may assign its obligations under the
Servicing Agreement to any electric distribution company, as this term is
defined in the Competition Act, which succeeds to the major part of PP&L's
electric distribution business. Under the Servicing Agreement, any person:
1. into which the Servicer may be merged or consolidated and which succeeds
to all or substantially all of the electric distribution business of the
Servicer,
2. which results from the division of the Servicer into two or more persons
and which succeeds to all or substantially all of the electric
distribution business of the Servicer,
3. which may result from any merger or consolidation to which the Servicer
shall be a party and which succeeds to all or substantially all of the
electric distribution business of the Servicer,
4. which may succeed to the properties and assets of the Servicer
substantially as a whole and which succeeds to all or substantially all of
the electric distribution business of the Servicer or
5. which may otherwise succeed to all or substantially all of the electric
distribution business of the Servicer,
will be the successor of the Servicer under the Servicing Agreement. The
Servicing Agreement further requires that:
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1. immediately after giving effect to the transaction referred to in this
paragraph, no representation or warranty made by the Servicer in the
Servicing Agreement will have been breached and no Servicer Default, and
no event which, after notice or lapse of time, or both, would become a
Servicer Default will have occurred and be continuing;
2. the successor to PP&L must execute an agreement of assumption to perform
every obligation of PP&L under the Servicing Agreement;
3. officers' certificates and opinions of counsel will have been delivered to
Transition Bond Co., the Trustee, and the Rating Agencies; and
4. prior written notice will have been received by the Rating Agencies.
The Servicing Agreement provides that, subject to the foregoing provisions,
PP&L may not resign from the obligations and duties imposed on it as Servicer.
However, PP&L may resign as Servicer upon a determination, communicated to
Transition Bond Co., the Trustee and each Rating Agency and evidenced by an
opinion of counsel, that the performance of PP&L's duties under the Servicing
Agreement are no longer permissible under applicable law. This resignation
will not become effective until a Successor Servicer has assumed the servicing
obligations and duties of PP&L under the Servicing Agreement.
In addition, the PUC Order and the Competition Act require that the
Servicer's responsibility to collect the applicable Intangible Transition
Charges and other obligations under the Servicing Agreement must be undertaken
and performed by any other entity that provides transmission and distribution
service to the Customers.
Except as expressly provided in the Servicing Agreement, the Servicer will
not be liable to Transition Bond Co. for any action taken or for refraining
from taking any action pursuant to the Servicing Agreement or for errors in
judgment. However, the Servicer will be liable to the extent this liability is
imposed by reason of the Servicer's wilful misconduct, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the Servicing Agreement.
Events Constituting a Default by PP&L in Its Role as Servicer
Servicer Defaults under the Servicing Agreement will include, among other
things:
1. any failure by the Servicer to deliver to the Trustee, on behalf of
Transition Bond Co., any required remittance that continues unremedied for
a period of five Business Days after written notice of such failure is
received by the Servicer from Transition Bond Co. or the Trustee;
2. any failure by the Servicer 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 Intangible Transition Property and which continues
unremedied for 60 days after notice of this failure has been given to the
Servicer, by Transition Bond Co. or the Trustee or after discovery of this
failure by an officer of the Servicer, as the case may be;
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3. any representation or warranty made by the Servicer in the Servicing
Agreement proves to have been incorrect when made, which has a material
adverse effect on any of the Transition Bondholders or Transition Bond Co.
and which continues unremedied for 60 days after notice of this failure
has been given to the Servicer by Transition Bond Co. or the Trustee or
after discovery of this failure by an officer of the Servicer, as the case
may be; or
4. an event of bankruptcy, insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings with respect to the
Servicer or an action by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations as specified in the Servicing Agreement.
The Trustee with the consent of the holders of the majority of the outstanding
principal amount of the Transition Bonds of all Series may waive any default
by the Servicer, except a default in making any required remittances to the
Trustee.
The Trustee's Rights If PP&L Defaults in Its Role as Servicer
As long as a Servicer Default under the Servicing Agreement remains
unremedied, the Trustee, with the consent of the holders of a majority of the
outstanding principal amount of the Transition Bonds of all Series, may
terminate all the rights and obligations of the Servicer under the Servicing
Agreement. However, the Servicer's indemnification obligation and obligation
to continue performing its functions as Servicer may not be terminated until a
Successor Servicer is appointed. Under the Servicing Agreement, the Trustee,
with the consent of the holders of a majority of the outstanding principal
amount of the Transition Bonds of all Series, may appoint a Successor Servicer
which will succeed to all the rights and duties of the Servicer under the
Servicing Agreement. The Trustee may make arrangements for compensation to be
paid to any Successor Servicer. Only a Successor Servicer that is an electric
utility may bring an action against a Customer for nonpayment of Intangible
Transition Charges or terminate service for failure to pay Intangible
Transition Charges.
Upon a Servicer Default based upon the commencement of a case by or against
the Servicer under the Insolvency Laws, the Trustee and Transition Bond Co.
may be prevented from effecting a transfer of servicing. See "Risk Factors--
The Risks Associated With Potential Bankruptcy Proceedings" and "How a
Bankruptcy May Affect Your Investment" in this Prospectus. Upon a Servicer
Default because of a failure to make required remittances, Transition Bond Co.
or the Trustee will have the right to apply to the PUC for sequestration and
payment of revenues arising from the Intangible Transition Property.
The Obligations of a Servicer That Succeeds PP&L
In accordance with the provisions of the PUC Order and pursuant to the
provisions of the Servicing Agreement, if for any reason a third party assumes
or succeeds to the role of the Servicer under the Servicing Agreement, the
Servicing Agreement will require the Servicer to cooperate with Transition
Bond Co., the Trustee and the Successor Servicer in terminating the Servicer's
rights and responsibilities under the Servicing Agreement. This procedure
includes the transfer to the Successor Servicer of all documentation
pertaining to Intangible Transition Property and all cash amounts then held by
the Servicer for remittance or subsequently
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acquired by the Servicer. The Servicing Agreement will provide that the
Servicer will be liable for all reasonable costs and expenses incurred in
transferring servicing responsibilities to the Successor Servicer. A Successor
Servicer may not resign unless it is prohibited from serving by law. The
predecessor Servicer is obligated, on an ongoing basis, to cooperate with the
Successor Servicer and provide whatever information is, and take whatever
actions are, reasonably necessary to assist the Successor Servicer in
performing its obligations under the Servicing Agreement.
The Competition Act states that only an electric utility, its successor or
any other entity which provides electric service to Customers may sue a
Customer for failure to pay intangible transition charges. Thus, a third-party
entity that is not an electric utility may not sue for non-payment of PP&L's
Intangible Transition Property, unless this third-party entity is a successor
to PP&L.
THE INDENTURE
The following summary describes the material terms of the Indenture
pursuant to which Transition Bonds will be issued. The Indenture, including
the Supplemental Indenture, has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
The Security for the Transition Bonds
To secure the payment of principal of and premium, if any, and interest on,
and any other amounts owing in respect of, the Transition Bonds pursuant to
the Indenture, Transition Bond Co. will grant to the Trustee for the benefit
of the Transition Bondholders a security interest in all of Transition Bond
Co.'s right, title and interest in and to the following Collateral:
1. the Intangible Transition Property sold by the Seller to Transition Bond
Co. pursuant to the Sale Agreement and all proceeds thereof;
5. the Sale Agreement;
3. the Contribution Agreement;
4. all bills of sale delivered by the Seller pursuant to the Sale Agreement;
5. the Servicing Agreement;
6. the Collection Account and all amounts on deposit therein from time to
time;
7. all other property of whatever kind owned from time to time by Transition
Bond Co., other than any cash released to Transition Bond Co. by the
Trustee pursuant to the Indenture;
8. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing; and
9. all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing,
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provided that cash or other property released to Transition Bond Co. from the
Collection Account in accordance with the provisions of the Indenture will not
be subject to the lien of the Indenture. See "--How Funds in the General
Subaccount Will Be Allocated."
Transition Bonds May Be Issued in Various Series or Classes
Transition Bonds may be issued under the Indenture from time to time to
finance the purchase by Transition Bond Co. of Intangible Transition Property,
which is referred to as a Financing Issuance. The aggregate principal amount
of Transition Bonds that may be authenticated and delivered under the
Indenture may not exceed $2.85 billion. Any Series of Transition Bonds may
include one or more Classes which differ, among other things, as to interest
rate and amortization of principal. The terms of all Transition Bonds of the
same Series will be identical, unless a Series includes more than one Class,
in which case the terms of all Transition Bonds of the same Class will be
identical. The particular terms of the Transition Bonds of any Series and, if
applicable, Classes thereof, will be set forth in the Supplemental Indenture
for that Series. The terms of this Series and any Classes thereof will not be
subject to consent of the Transition Bondholders of any previously issued
Series. See "Risk Factors--Other Risks Associated With An Investment In The
Transition Bonds,"and "The Transition Bonds" in this Prospectus.
The issuance of more than one Series of Transition Bonds is not expected to
adversely affect collections of Intangible Transition Charges to make payments
on the other Series. This is because Intangible Transition Charges and
adjustments thereof are generally based on the total principal amount of all
Transition Bonds outstanding.
Under the Indenture, the Trustee will authenticate and deliver an
additional Series of Transition Bonds only upon receipt by the Trustee of,
among other things, a certificate of Transition Bond Co. that no Event of
Default has occurred and is continuing, an opinion of counsel to Transition
Bond Co. and evidence of satisfaction of the Rating Agency Condition.
Opinion of Independent Certified Public Accountants Required for Each
Series or Class. In addition, in connection with the issuance of each new
Series, the Trustee must receive a certificate or opinion of a firm of
independent certified public accountants of recognized national reputation.
This certificate will be based on the assumptions used in calculating the
initial Intangible Transition Charges with respect to the Transferred
Intangible Transition Property or, if applicable, the most recent revised
Intangible Transition Charges with respect to the Transferred Intangible
Transition Property. The certificate will state to the effect that, after
giving effect to the issuance of the new Series and the application of the
proceeds therefrom, the Intangible Transition Charges will be sufficient to:
1.pay all fees, costs and charges associated with the Transition Bonds,
2.pay interest of each Series of Transition Bonds when due,
3. pay principal of each Series of Transition Bonds in accordance with the
Expected Amortization Schedule therefor, and
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4. fund the Overcollateralization Subaccount to the Scheduled
Overcollateralization Level and replenish any shortfalls in the Capital
Subaccount
as of each Payment Date taking into account any amounts on deposit in the
Reserve Subaccount.
The Collection Account for the Transition Bonds
Under the Indenture, Transition Bond Co. will establish the Collection
Account with the Trustee or at another Eligible Institution. Funds received
from collections of the Intangible Transition Charges will be deposited into
the Collection Account. The Collection Account will be divided into the
following subaccounts, which need not be separate bank accounts:
1.the General Subaccount,
2.one or more Series Subaccounts,
3.the Overcollateralization Subaccount,
4.the Capital Subaccount,
5.the Reserve Subaccount, and
6.if required by the Indenture, one or more Defeasance Subaccounts.
All amounts in the Collection Account not allocated to any other subaccount
will be allocated to the General Subaccount. Unless the context indicates
otherwise, references in this Prospectus to the Collection Account include all
of the subaccounts contained therein. All monies deposited from time to time
in the Collection Account, all deposits therein pursuant to the Indenture, and
all investments made in Eligible Investments with these monies, will be held
by the Trustee in the Collection Account as part of the Collateral.
The Definition of Eligible Institution. Eligible Institution means:
1.the corporate trust department of the Trustee; or
2. a depository institution organized under the laws of the United States of
America or any state or any domestic branch of a foreign bank, which:
(a) has either:
(1) a long-term unsecured debt rating of "AAA" by S&P and Fitch IBCA
and "A1" by Moody's; or
(2) 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
(b) whose deposits are insured by the Federal Deposit Insurance
Corporation.
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Appropriate Investments for Funds in the Collection Account. So long as no
Default or Event of Default has occurred and is continuing, all funds in the
Collection Account must be invested in any of the following, each of which
referred to as an Eligible Investment:
1. direct obligations of, and obligations fully guaranteed as to timely
payment by, the United States of America;
2. demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any State thereof, or any domestic branch of a
foreign bank, and subject to supervision and examination by federal or
state banking or depository institution authorities; provided, however,
that at the time of the investment or contractual commitment to invest
therein, the commercial paper or other short-term unsecured debt
obligations, other than any obligations thereof where the rating is based
on the credit of a person other than such depository institution or trust
company, shall have a credit rating from each of the Rating Agencies in
the highest investment category granted thereby;
3. commercial paper or other short term obligations of any corporation
organized under the laws of the United States of America, other than PP&L,
whose ratings, at the time of the investment or contractual commitment to
invest therein, from each of the Rating Agencies are in the highest
investment category granted thereby;
4. investments in money market funds having a rating from each of the Rating
Agencies in the highest investment category granted thereby, including
funds for which the Trustee or any of its affiliates act, as investment
manager or advisor;
5. bankers' acceptances issued by any depository institution or trust company
referred to in clause 2 above;
6. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or any
agency or instrumentality thereof the obligations of which are backed by
the full faith and credit of the United States of America, in either case
entered into with a depository institution or trust company, acting as
principal, described in clause 2 above;
7. repurchase obligations with respect to any security or whole loan entered
into with
a. a depository institution or trust company, acting as principal,
described in clause 2 above, except that the rating referred to in the
proviso in that clause 2 shall be A-1 or higher in the case of S&P,
b. a broker/dealer, acting as principal, registered as a broker or dealer
under Section 15 of the Exchange Act, the unsecured short-term debt
obligations of which are rated P-1 by Moody's and at least A-1 by S&P
at the time of entering into this repurchase obligation, or
c. an unrated broker/dealer, acting as principal, that is a wholly-owned
subsidiary of a non-bank or bank holding company the unsecured short-
term debt obligations of
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which are rated P-1 by Moody's and at least A-1 by S&P at the time of
purchase; or
8. any other investment permitted by each of the Rating Agencies; provided,
however, that:
a. any book-entry security, instrument or security having a maturity of
one month or less that would be an Eligible Investment but for its
failure, or the failure of the obligor thereon, to have the rating
specified above shall be an Eligible Investment if such book-entry
security, instrument or security, or the obligor thereon, has a long-
term unsecured debt rating of at least "A2" by Moody's, or the
equivalent thereof by the other Rating Agencies, or a short-term
rating of at least "P-1" by Moody's, or the equivalent thereof by the
other Rating Agencies, and
b. any book-entry security, instrument or security having a maturity of
greater than one month that would be an Eligible Investment but for
its failure, or the failure of the obligor thereon, to have the rating
specified above shall be an Eligible Investment if such book-entry
security, instrument or security, or the obligor thereon, has a long-
term unsecured debt rating of at least "A1" by Moody's, or the
equivalent thereof by the other Rating Agencies, and a short-term
rating of at least "P-1" by Moody's, or the equivalent thereof by the
other Rating Agencies.
These Eligible Investments may not:
1. mature later than the Business Day prior to the next Payment Date; or
2. be sold, liquidated or otherwise disposed of at a loss prior to the
maturity thereof.
In the case of a defeasance, Transition Bond Co. will deposit U.S. government
obligations in the Defeasance Subaccount to fund the defeasance of that
Series. No moneys held in the Collection Account may be invested, and no
investment held in the Collection Account may be sold, unless the security
interest granted and perfected in the Collection Account will continue to be
perfected in the investment or the proceeds of the sale in either case without
any further action by any person.
Remittances to the Collection Account. On each Remittance Date, the
Servicer will remit all ITC Collections and any Indemnity Amounts to the
Trustee under the Indenture for deposit in the Collection Account. Indemnity
Amount means any amount paid by PP&L or the Servicer to the Trustee, for the
Trustee or on behalf of the Transition Bondholders, in respect of
indemnification obligations pursuant to the Contribution Agreement or the
Servicing Agreement. See "The Contribution Agreement" and "The Servicing
Agreement" in this Prospectus.
General Subaccount. ITC Collections and any Indemnity Amounts remitted by
the Servicer to the Trustee will be deposited into the General Subaccount. On
each Payment Date, the Trustee will allocate amounts in the General Subaccount
as described under "How Funds in the General Subaccount Will Be Allocated."
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Series Subaccount. Upon the issuance of each Series of Transition Bonds, a
Series Subaccount will be established with respect to that Series. On the
Business Day preceding each Payment Date, the Trustee will allocate, from
amounts on deposit in the General Subaccount to the Series Subaccount for each
Series an amount sufficient to pay, among other items:
1. interest payable on that Series on that Payment Date;
2. the principal of that Series payable as a result of an acceleration
following the occurrence and continuance of an Event of Default, the
principal of that Series payable on the Final Maturity Date of that
Series, or the principal of that Series payable on a redemption date; and
3. principal scheduled to be paid on that Series on that Payment Date,
excluding amounts provided for in clause 2 above.
On the Business Day preceding each Payment Date, allocations will be made to
each Series Subaccount as described under "How Funds in the General Subaccount
Will Be Allocated" below. On each Payment Date, the Trustee will withdraw
funds from the Series Subaccount to make payments on the related Series of
Transition Bonds.
Capital Subaccount. Upon the issuance of each Series of Transition Bonds,
PP&L will make a capital contribution to Transition Bond Co. in an amount
equal to the Required Capital Amount. Transition Bond Co. will pay this amount
to the Trustee for deposit into the Capital Subaccount which will be invested
in Eligible Investments. The Trustee will draw on amounts in the Capital
Subaccount to the extent that, after the allocation of funds in accordance
with clauses 1 through 9 in "How Funds in the General Subaccount Will Be
Allocated" below, amounts on deposit in the General Subaccount, the Series
Subaccounts, the Reserve Subaccount and the Overcollateralization Subaccount
are insufficient to make scheduled payments on the Transition Bonds and to pay
expenses of Transition Bond Co., the Trustee and the Servicer and other fees,
costs and charges specified in the Indenture. If any Series of Transition
Bonds has been retired as of any Payment Date, the amounts on deposit in the
Capital Subaccount allocable to that Series will be released to Transition
Bond Co., free of the lien of the Indenture.
Overcollateralization Subaccount. To the extent funds are available as
described in "How Funds in the General Subaccount Will Be Allocated" below,
the Trustee will allocate them to the Overcollateralization Subaccount on each
Payment Date. Each Prospectus Supplement will specify the Scheduled
Overcollateralization Level on each Payment Date for the Overcollateralization
Subaccount for the related Series of Transition Bonds. The
overcollateralization amount will be funded over the life of the Transition
Bonds for each Series as specified in the related Prospectus Supplement, and
in aggregate will equal the amount stated in the related Prospectus Supplement
for that Series, which is referred to as the Overcollateralization Amount.
Amounts in the Overcollateralization Subaccount will be invested in Eligible
Investments. On each Payment Date, the Trustee will draw on amounts in the
Overcollateralization Subaccount to the extent that, after allocation of funds
in accordance
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with clauses 1 through 9 in "How Funds in the General Subaccount Will Be
Allocated" below, amounts on deposit in the General Subaccount, the Series
Subaccounts and the Reserve Subaccount are insufficient to make scheduled
payments on the Transition Bonds and to pay expenses of Transition Bond Co.,
the Trustee and the Servicer and other fees, costs and charges specified in
the Indenture. If any Series of Transition Bonds has been retired as of any
Payment Date, the amounts on deposit in the Overcollateralization Subaccount
allocable to that Series will be released to Transition Bond Co., free of the
lien of the Indenture.
Reserve Subaccount. Funds available on any Payment Date that are not
required to be allocated pursuant to clauses 1 through 12 in "How Funds in the
General Subaccount Will Be Allocated" below will be allocated to the Reserve
Subaccount.
Amounts in the Reserve Subaccount will be invested in Eligible Investments.
On each Payment Date, the Trustee will draw on amounts in the Reserve
Subaccount, if any, to the extent that, after the allocation of funds in
accordance with clauses 1 through 11 in "How Funds in the General Subaccount
Will Be Allocated" below, amounts on deposit in the General Subaccount and the
Series Subaccounts are insufficient to make scheduled payments on the
Transition Bonds and pay expenses of Transition Bond Co., the Trustee, the
Servicer and other fees, costs and charges specified in the Indenture.
Defeasance Account. In the event funds are remitted to the Trustee in
connection with the exercise of the Legal Defeasance Option or the Covenant
Defeasance Option, Transition Bond Co. will establish a Defeasance Account for
each Series. If this occurs, funds set aside for future payment of the
Transition Bonds will be deposited into the Defeasance Account. All amounts in
a Defeasance Account will be applied by the Trustee to the payment to the
holders of the particular Transition Bonds for the payment or redemption of
which these amounts were deposited with the Trustee. These amounts will
include, among any other amounts, all sums due for principal, premium, if any,
and interest. These amounts will be applied in accordance with the provisions
of the Transition Bonds and the Indenture. See "Transition Bond Co.'s Legal
Defeasance and Covenant Defeasance Options."
How Funds in the General Subaccount Will Be Allocated
Amounts remitted from the Servicer to the Trustee, including any Indemnity
Amounts, and all investment earnings on the subaccounts in the Collection
Account, will be deposited into the General Subaccount of the Collection
Account. On the Business Day preceding each Payment Date, the Trustee will
allocate all amounts on deposit in the General Subaccount of the Collection
Account in the following priority:
1. all amounts owed to the Trustee, including expenses and Indemnity Amounts
relating to the Trustee, if any, will be paid to the Trustee;
2. all amounts owed to the Independent Managers will be paid to the
Independent Managers;
3. the Servicing Fee and all unpaid Servicing Fees from prior Payment Dates
will be paid to the Servicer;
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4. the administration fee payable under the Administration Agreement between
Transition Bond Co. and PP&L will be paid to PP&L;
5.payment of all operating expenses of Transition Bond Co., up to an
aggregate of $100,000 for each Payment Date for all Series, so long as no
Event of Default has occurred and is continuing or would be caused by this
payment;
6. an amount equal to Interest payable on each Series of Transition Bonds for
the Payment Date will be allocated to the corresponding Series Subaccount
or will be paid to the counterparty on any interest rate swap between
Transition Bond Co. and that counterparty if so specified in the related
Prospectus Supplement;
7. an amount equal to Principal of each Series or Class of Transition Bonds
payable as a result of acceleration following an Event of Default,
Principal of any Series or Class of Transition Bonds payable on the Final
Maturity Date for that Series or Class, or the Principal payable with
respect to a redemption date will be allocated to the corresponding Series
Subaccount;
8. an amount equal to Principal scheduled to be paid on each Series of
Transition Bonds on the Payment Date, excluding amounts provided for
pursuant to clause 7 above, will be allocated to the corresponding Series
Subaccount;
9. all remaining unpaid operating expenses of Transition Bond Co. will be
paid to the persons entitled thereto;
10. any amount necessary to replenish any shortfalls in the Capital
Subaccount will be allocated to that subaccount;
11. an amount necessary to cause the amount in the Overcollateralization
Subaccount to equal the Scheduled Overcollateralization Level for that
Payment Date will be allocated to the Overcollateralization Subaccount;
12. an amount equal to investment earnings on amounts in the Capital
Subaccount will be released to Transition Bond Co.;
13. the balance, if any, will be allocated to the Reserve Subaccount; and
14. following repayment of all outstanding Series of Transition Bonds, the
balance, if any, will be released to Transition Bond Co. free from the
lien of the Indenture.
Interest means, for any Payment Date for any Series of Transition Bonds,
the sum, without duplication, of:
1. an amount equal to the interest accrued on that Series at the applicable
Bond Rate from the prior Payment Date, or with respect to the first
Payment Date, the amount of interest accrued since the Closing Date, with
respect to that Series;
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2. any unpaid interest plus any interest accrued on this unpaid interest;
3. if the Transition Bonds have been declared due and payable, all accrued
and unpaid interest thereon; and
4. with respect to a Series to be redeemed prior to the next Payment Date,
the amount of interest that will be payable as interest on that Series on
the related redemption date.
Principal means, with respect to any Payment Date and any Series of
Transition Bonds the sum, without duplication, of:
1. the amount of principal scheduled to be paid on the next Payment Date;
2. the amount of principal due on the Final Maturity Date of any Series;
3. the amount of principal due as a result of the occurrence and continuance
of an Event of Default and acceleration of the Transition Bonds;
4. the amount of principal and premium, if any, due as a result of a
redemption of Transition Bonds prior to the next Payment Date pursuant to
the Indenture; and
5. any overdue payments of principal.
If on any Payment Date funds in the General Subaccount are insufficient to
make the allocations contemplated by clauses 1 through 9 of the first
paragraph of this subsection, the Trustee will draw from amounts on deposit in
the following subaccounts in the following order up to the amount of the
shortfall:
1. from the Reserve Subaccount,
2. from the Overcollateralization Subaccount, and
3. from the Capital Subaccount.
If, on any Payment Date, available collections of Intangible Transition
Charges, together with available amounts in the subaccounts, are not
sufficient to pay interest due on all outstanding Transition Bonds, amounts
available will be allocated among the outstanding Series of Transition Bonds
pro rata based on the amount of interest payable on the outstanding Series. If
on any Payment Date, remaining collections on the Intangible Transition
Property, together with available amounts in the subaccounts, are not
sufficient to pay principal legally due on all outstanding Series of
Transition Bonds, amounts available will be allocated among the outstanding
Series pro rata based on the scheduled principal then legally due on the
outstanding Series. If on any Payment Date, remaining collections on the
Intangible Transition Property, together with available amounts in the
subaccounts, are not sufficient to pay principal scheduled to be paid on all
outstanding Series of Transition Bonds, amounts available will be allocated on
a pro rata basis based on the scheduled principal payable on the Payment Date.
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Reports to Holders of the Transition Bonds
With respect to each Series of Transition Bonds, on or prior to each
Payment Date, the Trustee will deliver a statement prepared by the Trustee to
each Transition Bondholder of that Series. This statement will include, to the
extent applicable, the following information, as well as any other information
so specified in the applicable Supplemental Indenture, as to the Transition
Bonds of that Series with respect to that Payment Date or the period since the
previous Payment Date, as applicable:
1. the amount paid to Transition Bondholders of that Series and the related
Classes in respect of principal;
2. the amount paid to Transition Bondholders of that Series and the related
Classes in respect of interest;
3. the Transition Bond Balance and the Projected Transition Bond Balance of
that Series and the related Classes as of that Payment Date;
4. the amount on deposit in the Overcollateralization Subaccount and the
Scheduled Overcollateralization Level, with respect to that Series and as
of that Payment Date;
5. the amount on deposit in the Capital Subaccount and the Required Capital
Amount as of that Payment Date; and
6. the amount, if any, on deposit in the Reserve Subaccount for all Series as
of that Payment Date.
Transition Bond Co. and the Trustee May Modify the Indenture
Modifications of the Indenture that Do Not Require Consent of Transition
Bondholders. Without the consent of any of the holders of the outstanding
Transition Bonds but with prior notice to the Rating Agencies, Transition Bond
Co. and the Trustee may execute a Supplemental Indenture for any of the
following purposes:
1. to correct or amplify the description of the Collateral, or to better
assure, convey and confirm unto the Trustee the Collateral, or to subject
to the lien of the Indenture additional property;
2. to evidence the succession, in compliance with the applicable provisions
of the Indenture, of another person to Transition Bond Co., and the
assumption by any applicable successor of the covenants of Transition Bond
Co. contained in the Indenture and in the Transition Bonds;
3. to add to the covenants of Transition Bond Co., for the benefit of the
Holders of the Transition Bonds, or to surrender any right or power
therein conferred upon Transition Bond Co.;
4. to convey, transfer, assign, mortgage or pledge any property to or with
the Trustee;
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5. to cure any ambiguity, to correct or supplement any provision of the
Indenture or in any Supplemental Indenture which may be inconsistent with
any other provision of the Indenture or in any Supplemental Indenture or
to make any other provisions with respect to matters or questions arising
under the Indenture or in any Supplemental Indenture; provided, however,
that:
a. this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
Transition Bondholder; and
b. the Rating Agency Condition shall have been satisfied with respect
thereto;
6. to evidence and provide for the acceptance of the appointment under the
Indenture by a successor Trustee with respect to the Transition Bonds and
to add to or change any of the provisions of the Indenture as shall be
necessary to facilitate the administration of the trusts under the
Indenture by more than one Trustee, pursuant to the requirements specified
in the Indenture;
7. to modify, eliminate or add to the provisions of the Indenture to the
extent necessary to effect the qualification of the Indenture under the
Trust Indenture Act or under any similar federal statute hereafter enacted
and to add to the Indenture any other provisions as may be expressly
required by the Trust Indenture Act; or
8. to set forth the terms of any Series that has not theretofore been
authorized by a Supplemental Indenture, provided that the Rating Agency
Condition has been satisfied.
Additional Modifications to the Indenture that Do Not Require the Consent
of Transition Bondholders. Additionally, without the consent of any of the
Transition Bondholders, Transition Bond Co. and Trustee may execute a
Supplemental Indenture. The Supplemental Indenture referred to in this
paragraph may add provisions to, or change in any manner or eliminate any
provisions of, the Indenture, or modify in any manner the rights of the
Transition Bondholders under the Indenture; provided, however, that
1. this action shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any Transition Bondholder;
and
2. the Rating Agency Condition shall have been satisfied with respect
thereto.
Modifications That Require the Approval of the Transition
Bondholders. Transition Bond Co. and the Trustee also may, with prior notice
to the Rating Agencies and with the consent of the holders of not less than a
majority of the outstanding amount of the Transition Bonds of each Series or
Class to be affected, execute a Supplemental Indenture to add any provisions
to, or change in any manner or eliminate any of the provisions of, the
Indenture or modify in any manner the rights of the Transition Bondholders
under the Indenture. However, this Supplemental Indenture may not, without the
consent of the holder of each outstanding Transition Bond of each Series or
Class affected thereby:
1. change the date of payment of any installment of principal of or premium,
if any, or interest on any Transition Bond, or reduce the principal amount
thereof, the interest rate
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specified thereon or the redemption price or the premium, if any, with
respect thereto, change the provisions of the Indenture and the related
applicable Supplemental Indenture relating to the application of
collections on, or the proceeds of the sale of, the Collateral to payment
of principal of or premium, if any, or interest on the Transition Bonds,
or change the coin or currency in which, any Transition Bond or any
interest thereon is payable;
2. impair the right to institute suit for the enforcement of those provisions
of the Indenture specified therein regarding payment;
3. reduce the percentage of the aggregate amount of the outstanding
Transition Bonds, or of a Series or Class thereof, the consent of the
Transition Bondholders of which is required for any Supplemental
Indenture, or the consent of the Transition Bondholders of which is
required for any waiver of compliance with those provisions of the
Indenture specified therein or of defaults specified therein and their
consequences provided for in the Indenture;
4. reduce the percentage of the outstanding amount of the Transition Bonds
required to direct the Trustee to direct Transition Bond Co. to sell or
liquidate the Collateral;
5. modify any provision of the section of the Indenture relating to the
consent of Transition Bondholders with respect to Supplemental Indentures,
except to increase any percentage specified therein or to provide that
those provisions of the Indenture or the Basic Documents specified in the
Indenture cannot be modified or waived without the consent of each
outstanding Transition Bondholder affected thereby;
6. modify any of the provisions of the Indenture in a manner so as to affect
the amount of any payment of interest, principal or premium, if any,
payable on any Transition Bond on any Payment Date or change the
redemption dates, Expected Amortization Schedules, Series Final Maturity
Dates or Class Final Maturity Dates of any Transition Bonds;
7. decrease the Required Capital Amount with respect to any Series, the
Overcollateralization Amount or the Scheduled Overcollateralization Level
with respect to any Series and any Payment Date;
8. modify or alter the provisions of the Indenture regarding the voting of
Transition Bonds held by Transition Bond Co., PP&L, an affiliate of either
of them or any obligor on the Transition Bonds;
9. decrease the percentage of the aggregate principal amount of the
Transition Bonds required to amend the sections of the Indenture which
specify the applicable percentage of the aggregate principal amount of the
Transition Bonds necessary to amend the Indenture or other related
agreements specified therein; or
10. permit the creation of any lien ranking prior to or on a parity with the
lien of the Indenture with respect to any of the Collateral for the
Transition Bonds or, except as
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otherwise permitted or contemplated in the Indenture, terminate the lien
of the Indenture on any property at any time subject thereto or deprive
the holder of any Transition Bond of the security provided by the lien of
the Indenture.
Enforcement of the Sale Agreement, the Contribution Agreement and Servicing
Agreement. The Indenture provides that Transition Bond Co. will take all
lawful actions to enforce its rights under the Sale Agreement, the
Contribution Agreement and the Servicing Agreement. The Indenture also
provides that Transition Bond Co. will take all lawful actions to compel or
secure the performance and observance by the Seller, PP&L and the Servicer of
each of their respective obligations to Transition Bond Co. under or in
connection with the Sale Agreement, the Contribution Agreement and the
Servicing Agreement. So long as no Event of Default occurs and is continuing,
Transition Bond Co. may exercise any and all rights, remedies, powers and
privileges lawfully available to Transition Bond Co. under or in connection
with the Sale Agreement, the Contribution Agreement and the Servicing
Agreement. However, if Transition Bond Co. or Servicer proposes to amend,
modify, waive, supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the process for
adjusting Intangible Transition Charges, Transition Bond Co. must notify the
Trustee and the Trustee must notify Transition Bondholders of this proposal.
In addition, the Trustee may consent to this proposal only with the consent of
the holders of a majority of the principal amount of the outstanding
Transition Bonds of each Series or Class materially and adversely affected
thereby and only if the Rating Agency Condition is satisfied.
If an Event of Default occurs and is continuing, the Trustee may, and, at
the direction of the holders of a majority of the outstanding amount of the
Transition Bonds of all Series shall, exercise all rights, remedies, powers,
privileges and claims of Transition Bond Co. against the Seller, PP&L or the
Servicer under or in connection with the Sale Agreement, the Contribution
Agreement and the Servicing Agreement, and any right of Transition Bond Co. to
take this action shall be suspended. In the event of a foreclosure, there is
likely to be a limited market, if any, for the Transferred Intangible
Transition Property, and, therefore, foreclosure may not be a realistic or
practical remedy.
Modifications to the Sale Agreement, the Contribution Agreement and the
Servicing Agreement. With the consent of the Trustee, the Sale Agreement, the
Contribution Agreement and the Servicing Agreement may be amended, so long as
the Rating Agency Condition is satisfied in connection therewith, at any time
and from time to time, without the consent of the Transition Bondholders.
However, this amendment may not, as evidenced by an opinion of counsel,
adversely affect the interest of any Transition Bondholder in any material
respect without the consent of the holders of a majority of the outstanding
principal amount of the Transition Bonds.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of Any Modification. If Transition Bond Co., the Seller, PP&L or
the Servicer:
1. proposes to amend, modify, waive, supplement, terminate or surrender, or
agree to any other amendment, modification, waiver, supplement,
termination or surrender of, the
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terms of the Sale Agreement, the Contribution Agreement or the Servicing
Agreement, or
2. waive timely performance or observance by the Seller, PP&L or the Servicer
under the Sale Agreement, the Contribution Agreement or Servicing
Agreement, respectively,
in each case in a way which would materially and adversely affect the
interests of Transition Bondholders, Transition Bond Co. must first notify the
Rating Agencies of the proposed amendment. Upon receiving notification
regarding the Rating Agency Condition, Transition Bond Co. must thereafter
notify the Trustee and the Trustee shall notify the Transition Bondholders of
the proposed amendment and whether the Rating Agency Condition has been
satisfied with respect thereto. The Trustee will consent to this proposed
amendment, modification, supplement or waiver only with the consent of the
holders of a majority of the outstanding principal amount of the Transition
Bonds of each Series or Class materially and adversely affected thereby.
What Constitutes an Event of Default on the Transition Bonds
An Event of Default is defined in the Indenture as being:
1. a default in the payment of any interest on any Transition Bond when the
same becomes due and payable and the continuation of this default for five
Business Days;
2. a default in the payment of the then unpaid principal of any Transition
Bond of any Series on the Final Maturity Date for that Series or, if
applicable, any Class on the Final Maturity Date for that Class;
3. a default in the payment of the Redemption Price for any Transition Bond
on the redemption date therefor;
4. a default in the observance or performance of any covenant or agreement of
Transition Bond Co. made in the Indenture, other than those specifically
dealt with in clause 1, 2 or 3 above, or any representation or warranty of
Transition Bond Co. made in the Indenture or in any certificate or other
writing delivered pursuant to the Indenture or in connection with the
Indenture proving to have been incorrect in any material respect as of the
time when made, and this default shall continues or is not cured, for a
period of 30 days after
a. notice of the default is given to Transition Bond Co. by the Trustee
or to Transition Bond Co. and the Trustee by the holders of at least
25% of the outstanding principal amount of the Transition Bonds of any
Series or Class, or
b. the date Transition Bond Co. has knowledge of the default;
5. the filing of a decree or order for relief by a court having jurisdiction
in respect of Transition Bond Co. or any substantial part of the
Collateral in an involuntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of Transition Bond Co. or for any
substantial part of the
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Collateral, or ordering the winding-up or liquidation of Transition Bond
Co.'s affairs, and such decree or order remains unstayed and in effect for
a period of 90 consecutive days;
6. the commencement by Transition Bond Co. of a voluntary case under any
applicable federal or state bankruptcy, insolvency or other similar law
now or hereafter in effect, or the consent by Transition Bond Co. to the
entry of an order for relief in an involuntary case under any such law, or
the consent by Transition Bond Co. to the appointment or taking possession
by a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of Transition Bond Co. or for any substantial part of the
Collateral, or the making by Transition Bond Co. of any general assignment
for the benefit of creditors, or the failure by Transition Bond Co.
generally to pay its debts as such debts become due, or the taking of
action by Transition Bond Co. in furtherance of any of the foregoing; or
7. any act or failure to act by the Commonwealth of Pennsylvania or any of
its agencies, including the PUC, officers or employees that violates or is
not in accordance with the pledge and agreement of the Commonwealth in the
Competition Act.
If an Event of Default occurs and is continuing, other than a default described
in clause 7 above, the Trustee or holders of a majority in principal amount of
the Transition Bonds of all Series then outstanding may declare the principal
of all Series of the Transition Bonds to be immediately due and payable. This
declaration may, under the circumstances specified therein, be rescinded by the
holders of a majority in principal amount of all Series of the Transition Bonds
then outstanding.
When the Trustee Can Sell the Collateral. If the Transition Bonds of all
Series have been declared to be due and payable following an Event of Default,
the Trustee may, in its discretion, either:
1.sell the Collateral; or
2. elect to have Transition Bond Co. maintain possession of the Collateral
and continue to apply distributions on the Collateral as if there had been
no declaration of acceleration.
The Trustee is prohibited from selling the Collateral following an Event of
Default other than a default for five days or more in the payment of any
interest on any Transition Bond of any Series, a default in the payment of the
then unpaid principal of any Transition Bond of any Series on the Final
Maturity Date for that Series or, if applicable, any Class on the Final
Maturity Date for that Class, or a default in the payment of the Redemption
Price for any Transition Bond on the redemption date therefor unless:
1. the holders of 100% of the principal amount of all Series of Transition
Bonds consent to this sale; or
2. the proceeds of this sale or liquidation are sufficient to pay in full the
principal of and premium, if any, and accrued interest on the outstanding
Transition Bonds; or
3. the Trustee determines that funds provided by the Collateral would not be
sufficient on an ongoing basis to make all payments on the Transition
Bonds of all Series as these
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payments would have become due if the Transition Bonds had not been
declared due and payable, and the Trustee obtains the consent of the
holders of 66 2/3% of the aggregate outstanding principal amount of the
Transition Bonds of all Series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the Indenture,
the holders of a majority in principal amount of the outstanding Transition
Bonds of all Series will have the right to direct the time, method and place
of conducting any proceeding or any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee; provided that, among
other things:
1.this direction does not conflict with any rule of law or with the
Indenture;
2. subject to the provisions specified in the Indenture, any direction to the
Trustee to sell or liquidate the Collateral is by the holders of 100% of
the principal amount of all Series of Transition Bonds then outstanding;
and
3. the Trustee may take any other action deemed proper by the Trustee that is
not inconsistent with this direction.
However, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of Transition
Bonds of any Series if
. it reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying
with this request; or
. it determines that this action might materially adversely affect the
rights of any Transition Bondholder not consenting to this action.
Waiver of Default. The holders of a majority in principal amount of the
Transition Bonds of all Series then outstanding may, in those cases specified
in the Indenture, waive any default with respect thereto. However, they may
not waive a default in the payment of principal of or premium, if any, or
interest on any of the Transition Bonds or a default in respect of a covenant
or provision of the Indenture that cannot be modified without the waiver or
consent of all of the holders of the outstanding Transition Bonds of all
affected Series and Classes.
No Transition Bondholder of any Series will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of the right to
foreclose on the Intangible Transition Property or otherwise enforce the lien
in the Intangible Transition Property, pursuant to Section 2812(d)(3)(v) of
the Competition Act, with respect to the Indenture, unless:
1. the holder previously has given to the Trustee written notice of a
continuing Event of Default;
2. the holders of not less than 25% in principal amount of the outstanding
Transition Bonds of all Series have made written request of the Trustee to
institute the proceeding in its own name as Trustee;
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3. the holder or holders have offered the Trustee security or indemnity
reasonably satisfactory to the Trustee against the costs, expenses, and
liabilities to be incurred in complying with the request;
4. the Trustee for 60 days after its receipt of the notice, request and offer
has failed to institute the proceeding; and
5. no direction inconsistent with this written request has been given to the
Trustee during the 60-day period referred to above by the holders of a
majority in principal amount of the outstanding Transition Bonds of all
Series.
Covenants of Transition Bond Co.
Transition Bond Co. will keep in effect its existence, rights and
franchises as a limited liability company under Delaware law, provided that
Transition Bond Co. may consolidate with or merge into another entity or sell
substantially all of its assets to another entity and dissolve if:
1. the entity formed by or surviving the consolidation or merger or to whom
substantially all of its assets are sold is organized under the laws of
the United States or any state thereof and expressly assumes by a
Supplemental Indenture the due and punctual payment of the principal of
and premium, if any, and interest on all Transition Bonds and the
performance of Transition Bond Co.'s obligations under the Indenture;
2. the entity expressly assumes all obligations and succeeds to all rights of
Transition Bond Co. under the Sale Agreement, the Contribution Agreement
and the Servicing Agreement pursuant to an assignment and assumption
agreement executed and delivered to the Trustee;
3. no default or Event of Default will have occurred and be continuing
immediately after giving effect to the merger, consolidation or sale;
4. the Rating Agency Condition will have been satisfied with respect to this
consolidation or merger or sale;
5. Transition Bond Co. has received an opinion of counsel to the effect that
this consolidation or merger or sale of assets would have no material
adverse tax consequence to Transition Bond Co. or any Transition
Bondholder, the consolidation or merger or sale complies with the
Indenture and all conditions precedent therein provided relating to the
consolidation or merger or sale and will result in the Trustee maintaining
a continuing valid first priority security interest in the Collateral;
6. none of the Intangible Transition Property, the PUC Order or PP&L's, the
Seller's, the Servicer's or Transition Bond Co.'s rights under the
Competition Act or the PUC Order are impaired thereby; and
7. any action that is necessary to maintain the lien and security interest
created by the Indenture has been taken.
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Additional Covenants of Transition Bond Co. Transition Bond Co. will from
time to time execute and deliver all documents, make all filings and take any
other action necessary or advisable to, among other things, maintain and
preserve the lien of the Indenture and the priority thereof. Transition Bond
Co. will not permit the validity of the Indenture to be impaired, the lien to
be amended, subordinated or terminated or discharged, or any person to be
released from any covenants or obligations except as expressly permitted by
the Indenture. Transition Bond Co. will also not permit any lien, charge,
claim, security interest, mortgage or other encumbrance, other than the lien
of the Indenture, to be created on or extend to or otherwise arise upon or
burden the Collateral or any part thereof or any interest therein or the
proceeds thereof.
Transition Bond Co. may not, among other things:
1. except as expressly permitted by the Indenture, the Sale Agreement or the
Servicing Agreement sell, transfer, exchange or otherwise dispose of any
of the Collateral unless directed to do so by the Trustee in accordance
with the Indenture; or
2. claim any credit on, or make any deduction from the principal or premium,
if any, or interest payable in respect of, the Transition Bonds, other
than amounts properly withheld under the Code, or assert any claim against
any present or former Transition Bondholder because of the payment of
taxes levied or assessed upon Transition Bond Co.
Transition Bond Co. may not engage in any business other than purchasing
and owning the Intangible Transition Property, issuing Transition Bonds from
time to time, pledging its interest in the Collateral to the Trustee under the
Indenture in order to secure the Transition Bonds, and performing activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto.
Transition Bond Co. May Not Engage in Any Other Financial
Transactions. Transition Bond Co. may not issue, incur, assume or guarantee
any indebtedness except for the Transition Bonds. Also, Transition Bond Co.
may not guarantee or otherwise become contingently liable in connection with
the obligations, stocks or dividends of, or own, purchase, repurchase or
acquire, or agree contingently to acquire, any stock, obligations, assets or
securities of, or any other interest in, or make any capital contribution to,
any other person, other than the Eligible Investments. Transition Bond Co. may
not, except as contemplated by the Indenture, the Sale Agreement, the
Servicing Agreement, the Contribution Agreement and related documents,
including the Limited Liability Company Agreement, make any loan or advance or
credit to any person. Transition Bond Co. will not make any expenditure for
capital assets or lease any capital asset other than Intangible Transition
Property purchased from the Seller pursuant to, and in accordance with, the
Sale Agreement. Transition Bond Co. may not make any payments, distributions
or dividends to any member of Transition Bond Co. in respect of its membership
interest in Transition Bond Co., except in accordance with the Indenture.
The Servicer will deliver to the Trustee the Annual Accountant's Report,
compliance certificates and monthly reports regarding distributions and other
statements required by the Servicing Agreement. See "The Servicing Agreement"
in this Prospectus.
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Access to the List of Holders of the Transition Bonds
Any Transition Bondholder who has owned a Transition Bond for at least six
months may, by written request to the Trustee, obtain access to the list of
all Transition Bondholders maintained by the Trustee for the purpose of
communicating with other Transition Bondholders with respect to their rights
under the Indenture or the Transition Bonds. In addition, a group of
Transition Bondholders each of whom has owned a Transition Bond for at least
six months may also obtain access to the list of all Transition Bondholders
for the same purpose. The Trustee may elect not to afford the requesting
Transition Bondholders access to the list of Transition Bondholders if it
agrees to mail the desired communication or proxy, on behalf and at the
expense of the requesting Transition Bondholders, to all Transition
Bondholders.
Transition Bond Co. Must File an Annual Compliance Statement
Transition Bond Co. will be required to file annually with the Trustee a
written statement as to the fulfillment of its obligations under the
Indenture. In addition, Transition Bond Co. will furnish to the Trustee an
opinion of counsel concerning filings made by Transition Bond Co. on an annual
basis and before the effectiveness of any amendment to the Sale Agreement, the
Contribution Agreement or the Servicing Agreement.
The Trustee Must Provide an Annual Report to All Transition Bondholders
If required by the Trust Indenture Act, the Trustee will be required to
mail each year to all Transition Bondholders a brief report. This report must
state, among other items:
1. the Trustee's eligibility and qualification to continue as the Trustee
under the Indenture,
2. any amounts advanced by it under the Indenture,
3. the amount, interest rate and maturity date of specific indebtedness owing
by Transition Bond Co. to the Trustee in the Trustee's individual
capacity,
4. the property and funds physically held by the Trustee,
5. any additional issue of a Series of Transition Bonds not previously
reported, and
6. any action taken by it that materially affects the Transition Bonds of any
Series and that has not been previously reported.
What Will Trigger Satisfaction and Discharge of the Indenture
The Indenture will be discharged with respect to the Transition Bonds of
any Series upon the delivery to the Trustee of funds sufficient for the
payment in full of all of the Transition Bonds of that Series with the
Trustee. In addition, Transition Bond Co. must deliver to the Trustee the
officer's certificate and opinion of counsel specified in the Indenture. The
deposited funds will be segregated and held apart solely for paying the
Transition Bonds, and
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the Transition Bonds will not be entitled to any amounts on deposit in the
Collection Account other than amounts on deposit in the Defeasance Subaccount
for the Transition Bonds.
Transition Bond Co.'s Legal Defeasance and Covenant Defeasance Options
Transition Bond Co. may, at any time, terminate:
1. all of its obligations under the Indenture with respect to the Transition
Bonds of any Series; or
2. its obligations to comply with some of the covenants in the Indenture,
including all of the covenants described under "--Covenants of Transition
Bond Co."
The Legal Defeasance Option is the right of Transition Bond Co. to terminate
at any time its obligations under the Indenture with respect to the Transition
Bonds of any Series. The Covenant Defeasance Option is the right of Transition
Bond Co. at any time to terminate its obligations to comply with the covenants
in the Indenture. Transition Bond Co. may exercise the Legal Defeasance Option
with respect to any Series of Transition Bonds notwithstanding its prior
exercise of the Covenant Defeasance Option with respect to that Series. If
Transition Bond Co. exercises the Legal Defeasance Option with respect to any
Series, that Series will be entitled to payment only from the funds or other
obligations set aside under the Indenture for payment thereof on the Expected
Final Payment Date or redemption date therefor as described below. That Series
will not be subject to payment through redemption or acceleration prior to the
Expected Final Payment Date or redemption date, as applicable. If Transition
Bond Co. exercises the Covenant Defeasance Option with respect to any Series,
the final payment of the Transition Bonds of that Series may not be
accelerated because of an Event of Default relating to a default in the
observance or performance of any covenant or agreement of Transition Bond Co.
made in the Indenture.
Transition Bond Co. may exercise the Legal Defeasance Option or the
Covenant Defeasance Option with respect to any Series of Transition Bonds only
if:
1. Transition Bond Co. irrevocably deposits or causes to be deposited in
trust with the Trustee cash or U.S. Government Obligations for the payment
of principal of and premium, if any, and interest on that Series to the
Expected Final Payment Date or redemption date therefor, as applicable,
the deposit to be made in the Defeasance Subaccount for that Series;
2. Transition Bond Co. delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing its
opinion that the payments of principal and interest on the U.S. Government
Obligations when due and without reinvestment plus any cash deposited in
the Defeasance Subaccount will provide cash at times and in sufficient
amounts to pay in respect of the Transition Bonds of that Series:
a. principal in accordance with the Expected Amortization Schedule
therefor, and/or if that Series is to be redeemed, the redemption
price on the redemption date therefor, and
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b. interest when due;
3. in the case of the Legal Defeasance Option, 125 days pass after the
deposit is made and during the 125 day period no default relating to
events of bankruptcy, insolvency, receivership or liquidation of
Transition Bond Co. occurs and is continuing at the end of the period;
4. no default has occurred and is continuing on the day of this deposit and
after giving effect thereto;
5. in the case of the Legal Defeasance Option, Transition Bond Co. delivers
to the Trustee an opinion of counsel stating that:
a. Transition Bond Co. has received from, or there has been published by,
the Internal Revenue Service a ruling or
b. since the date of execution of the Indenture, there has been a change
in the applicable federal income tax law and
in either case confirming that the holders of the Transition Bonds of that
Series will not recognize income, gain or loss for federal income tax
purposes as a result of the exercise of the Legal Defeasance Option and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if the Legal
Defeasance had not occurred;
6. in the case of the Covenant Defeasance Option, Transition Bond Co.
delivers to the Trustee an opinion of counsel to the effect that the
holders of the Transition Bonds of that Series will not recognize income,
gain or loss for federal income tax purposes as a result of the exercise
of the Covenant Defeasance Option and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if the Covenant Defeasance had not occurred; and
7. Transition Bond Co. delivers to the Trustee a certificate of an authorized
officer of Transition Bond Co. and an opinion of counsel, each stating
that all conditions precedent to the satisfaction and discharge of the
Transition Bonds of that Series have been complied with as required by the
Indenture.
There will be no other conditions to the exercise by Transition Bond Co. of
its Legal Defeasance Option or its Covenant Defeasance Option.
The Trustee
The Bank of New York will be the Trustee under the Indenture. The Trustee
may resign at any time upon 30 days notice by so notifying Transition Bond
Co.. The holders of a majority in principal amount of the Transition Bonds of
all Series then outstanding may remove the Trustee by so notifying the Trustee
and may appoint a successor Trustee. Transition Bond Co. will remove the
Trustee if the Trustee ceases to be eligible to continue in this capacity
under the Indenture, the Trustee becomes insolvent, a receiver or other public
officer takes charge of the Trustee or its property or the Trustee becomes
incapable of acting.
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If the Trustee resigns or is removed or a vacancy exists in the office of
Trustee for any reason, Transition Bond Co. will be obligated promptly to
appoint a successor Trustee eligible under the Indenture. No resignation or
removal of the Trustee will become effective until acceptance of the
appointment by a successor Trustee. The Trustee shall at all times satisfy the
requirements of the Trust Indenture Act, as amended, and have a combined
capital and surplus of at least $50 million and a long term debt rating of
"Baa3" or better by Moody's. If the Trustee consolidates with, merges or
converts into, or transfers all or substantially all of its corporate trust
business or assets to, another entity, the resulting, surviving or transferee
entity shall without any further action be the successor Trustee.
HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT
Challenge to True Sale Treatment. PP&L will represent and warrant in the
Contribution Agreement that the assignment of the Intangible Transition
Property in accordance with that agreement constitutes an absolute transfer of
the Intangible Transition Property by PP&L directly to the Seller, and that
the transfer of the Transferred Intangible Transition Property in accordance
with the Sale Agreement constitutes a valid sale and assignment by the Seller
to Transition Bond Co. of the Intangible Transition Property. It is a
condition of closing for the sale of Intangible Transition Property pursuant
to the Sale Agreement that the Seller will take the appropriate actions under
the Competition Act, including filing an intangible transition property
notice, to perfect this sale. The Competition Act provides that a transfer of
intangible transition property by an electric utility to an assignee which the
parties have in the governing documentation expressly stated to be a sale or
other absolute transfer, in a transaction approved in a qualified rate order,
shall be treated as an absolute transfer of all the transferor's right, title
and interest, as in a true sale, and not as a pledge or other financing, of
the relevant intangible transition property. PP&L and Transition Bond Co. will
treat the transactions as a sale under applicable law. PP&L will treat the
Transition Bonds as debt of PP&L for financial accounting and federal and
Commonwealth income tax purposes. See "The Competition Act--PP&L and Other
Utilities May Securitize Stranded Costs" in this Prospectus. In the event of a
bankruptcy of a party to the Contribution Agreement, if a party in interest in
the bankruptcy were to take the position that the transfer of the Transferred
Intangible Transition Property to Transition Bond Co. was a financing
transaction and not a "true sale" under applicable creditors' rights
principles, there can be no assurance that a court would not adopt this
position. Even if a court did not ultimately recharacterize the transaction as
a financing transaction, the mere commencement of a bankruptcy of PP&L or
another party to the Contribution Agreement and the attendant possible
uncertainty surrounding the treatment of the transaction could result in
delays in payments on the Transition Bonds.
Commonwealth law has attempted to mitigate the impact of a possible
recharacterization of a sale of intangible transition property as a financing
transaction under applicable creditors' rights principles. The Competition Act
and the regulations promulgated thereunder provide that if an intangible
transition property notice is filed and the transfer is thereafter
recharacterized by a court as a financing transaction, and not a true sale,
this notice will be deemed to constitute a filing with respect to a security
interest. The Competition Act further
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provides that any relevant filing in respect of transition bonds takes
precedence over any other filings. In addition, the Sale Agreement requires
that financing statements under the Uniform Commercial Code executed by
Transition Bond Co. be filed in the appropriate offices in Pennsylvania and
Nevada. As a result of these filings, Transition Bond Co. would be a secured
creditor of PP&L and entitled to recover against the security, which is the
Collateral. None of this, however, mitigates the risk of payment delays and
other adverse effects caused by a Seller or a PP&L bankruptcy. Further, if,
for any reason, an intangible transition property notice is not filed under
the Competition Act or Transition Bond Co. fails to otherwise perfect its
interest in the Transferred Intangible Transition Property, and the transfer
is thereafter deemed not to constitute a true sale, Transition Bond Co. would
be an unsecured creditor of PP&L or the Seller.
Consolidation of Transition Bond Co. and PP&L and the Seller and CEP
Reserves. If PP&L or CEP Reserves, Inc., a Delaware corporation which is an
indirect wholly owned subsidiary of PP&L and which is referred to as CEP
Reserves in this Prospectus, were to become a debtor in a bankruptcy case, a
party in interest may attempt to substantively consolidate the assets and
liabilities of Transition Bond Co. and PP&L or of the Seller and CEP Reserves,
respectively. PP&L, Transition Bond Co., the Seller and CEP Reserves have
taken steps to attempt to minimize this risk. See "PP&L Transition Bond
Company LLC" in this Prospectus. However, no assurance can be given that if
PP&L or CEP Reserves were to become a debtor in a bankruptcy case, a court
would not order that the assets and liabilities of Transition Bond Co. be
consolidated with those of PP&L or of the Seller with those of CEP Reserves,
respectively.
Estimation of Claims; Challenge to Indemnity Claims. If PP&L were to become
a debtor in a bankruptcy case, claims, including indemnity claims, by
Transition Bond Co. against PP&L under the Contribution Agreement and the
other documents executed in connection therewith would be unsecured claims and
would be subject to being discharged in the bankruptcy case. In addition, a
party in interest in the bankruptcy may request that the Bankruptcy Court
estimate any contingent claims of Transition Bond Co. against PP&L. That party
may then take the position that these claims should be estimated at zero or at
a low amount because the contingency giving rise to these claims is unlikely
to occur. If PP&L were to become a debtor in a bankruptcy case and the
indemnity provisions of the Contribution Agreement were triggered, a party in
interest in the bankruptcy might challenge the enforceability of the indemnity
provisions. If a court were to hold that the indemnity provisions were
unenforceable, Transition Bond Co. would be left with a claim for actual
damages against PP&L based on breach of contract principles. The actual amount
of these damages would be subject to estimation and/or calculation by the
court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what
percentage of their claims, if any, unsecured creditors would receive in any
bankruptcy proceeding involving PP&L.
Status of Intangible Transition Property as Current Property. PP&L has
represented in the Contribution Agreement, and the Competition Act provides,
that the Transferred Intangible Transition Property constitutes a current
property right on the date that the PUC
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Order became effective and that it thereafter exists continuously for all
purposes. Nevertheless, no assurance can be given that, in the event of a
bankruptcy of PP&L or of the Seller, a party in interest in the bankruptcy
would not attempt to take the position that the Transferred Intangible
Transition Property comes into existence only as Customers use electricity. If
a court were to adopt this position, no assurance can be given that a security
interest in favor of the Transition Bondholders would attach to Intangible
Transition Charges in respect of electricity consumed after the commencement
of the bankruptcy case. If it were determined that the Transferred Intangible
Transition Property had not been sold to Transition Bond Co., and the security
interest in favor of the Transition Bondholders did not attach to Intangible
Transition Charges in respect of electricity consumed after the commencement
of the bankruptcy case, then Transition Bond Co. would be an unsecured
creditor of PP&L. If so, there would be delays or reductions in payments on
the Transition Bonds. Whether or not a court determined that the Transferred
Intangible Transition Property had been sold to Transition Bond Co., no
assurances can be given that a court would not rule that any Intangible
Transition Charges relating to electricity consumed after the commencement of
the bankruptcy cannot be transferred to Transition Bond Co. or the Trustee.
In addition, in the event of a bankruptcy of PP&L, a party in interest in
the bankruptcy could assert that Transition Bond Co. should pay a portion of
PP&L's costs associated with the generation, transmission or distribution of
the electricity, consumption of which gave rise to the ITC Collections used to
make payments on the Transition Bonds.
Regardless of whether PP&L is the debtor in a bankruptcy case, if a court
were to accept the argument that the Transferred Intangible Transition
Property comes into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of PP&L arising before
the Transferred Intangible Transition Property came into existence could have
priority over Transition Bond Co.'s interest in the Transferred Intangible
Transition Property. Adjustments to the Intangible Transition Charges may be
available to mitigate this exposure, although there may be delays in
implementing these Adjustments.
Enforcement of Rights by Trustee. Upon an Event of Default under the
Indenture, the Competition Act permits the Trustee to enforce the security
interest in the Transferred Intangible Transition Property in accordance with
the terms of the Indenture. In this capacity, the Trustee is permitted to
request the PUC to order the sequestration and payment to Transition
Bondholders of all revenues arising with respect to the Transferred Intangible
Transition Property. The Competition Act provides that this order will remain
in full force and effect notwithstanding bankruptcy, reorganization, or other
insolvency proceedings with respect to the utility or its assignee. There can
be no assurance, however, that the PUC would issue this order after a PP&L
bankruptcy in light of the automatic stay provisions of Section 362 of the
United States Bankruptcy Code or, alternatively, that a bankruptcy court would
lift the automatic stay to permit this action by the PUC. In that event, the
Trustee may under the Indenture seek an order from the bankruptcy court
lifting the automatic stay with respect to this action by the PUC, and an
order requiring an accounting and segregation of the revenues arising from the
Transferred Intangible Transition Property. There can be no assurance that a
court would grant either order.
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Bankruptcy of Servicer. The Servicer is entitled to commingle ITC
Collections with its own funds until each Remittance Date. The Competition Act
provides that the relative priority of a lien created under the Competition
Act is not defeated or adversely affected by the commingling of ITC
Collections arising with respect to the Intangible Transition Property with
funds of the electric utility. However, in the event of a bankruptcy of the
Servicer, a party in interest in the bankruptcy might assert, and a court
might rule, that ITC Collections commingled by the Servicer with its own funds
and held by the Servicer as of the date of bankruptcy were property of the
Servicer as of that date, and are therefore property of the Servicer's
bankruptcy estate, rather than property of Transition Bond Co. If the court so
rules, then the court would likely rule that the Trustee has only a general
unsecured claim against the Servicer for the amount of commingled ITC
Collections held as of that date and could not recover the commingled ITC
Collections held as of the date of bankruptcy.
However the court rules on the ownership of the commingled ITC Collections,
the automatic stay arising upon the bankruptcy of the Servicer could delay the
Trustee from receiving the commingled ITC Collections held by the Servicer as
of the date of the bankruptcy until the court grants relief from the stay. A
court ruling on any request for relief from the stay could be delayed pending
the court's resolution of whether the commingled ITC Collections are property
of Transition Bond Co. or of the Servicer, including resolution of any tracing
of proceeds issues.
The Servicing Agreement provides that the Trustee, as assignee of
Transition Bond Co., together with the other persons specified therein, may
vote to appoint a Successor Servicer that satisfies the Rating Agency
Condition. The Servicing Agreement also provides that the Trustee, together
with the other persons specified therein, may petition the PUC or a court of
competent jurisdiction to appoint a Successor Servicer that meets this
criterion. However, the automatic stay might delay a Successor Servicer's
replacement of the Servicer. Even if a Successor Servicer may be appointed and
may replace the Servicer, a successor may be difficult to obtain and may not
be capable of performing all of the duties that PP&L as Servicer was capable
of performing. Furthermore, should the Servicer enter into bankruptcy, it may
be permitted to stop acting as Servicer.
Other risks relating to bankruptcy may be found in "Risk Factors--The Risks
Associated With Potential Bankruptcy Proceedings."
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDHOLDERS
Income Tax Status of the Transition Bonds and Transition Bond Co.
Transition Bond Co. and PP&L have received a private letter ruling from the
IRS to the effect that the Transition Bonds will be classified as debt
obligations of PP&L. Based on that private letter ruling and the assumptions
contained therein, including a representation by PP&L that it will not make,
or allow there to be made, any election to the contrary, Skadden, Arps, Slate,
Meagher & Flom LLP, special federal income tax counsel to PP&L and Transition
Bond Co., will render its opinion that Transition Bond Co. will not be subject
to United States federal income tax as an entity separate from PP&L.
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Consequences to Non-U.S. Holders
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the Transition
Bonds applicable to an initial purchaser of Transition Bonds that, for U.S.
federal income tax purposes, is a Foreign Person as defined below. This
summary has been prepared by Skadden, Arps, Slate, Meagher & Flom LLP, special
federal income tax counsel to PP&L and Transition Bond Co., which is referred
to in this Prospectus as Special Tax Counsel. Special Tax Counsel is of the
opinion that this summary is correct in all material respects. Special Tax
Counsel will render no other opinions to Transition Bond Co. with respect to
the Transition Bonds. This summary does not purport to furnish information in
the level of detail or with the attention to an investor's specific tax
circumstances that would be provided by an investor's tax adviser. This
summary also does not address the consequences to holders of the Transition
Bonds under state, local or foreign tax laws. This summary is based upon
current provisions of the Code, Treasury Regulations thereunder, current
administrative rulings, judicial decisions and other applicable authorities in
effect as of the date hereof. Legislative, judicial or administrative changes
may occur, perhaps with retroactive effect, which could affect the accuracy of
the statements and conclusions set forth herein as well as the tax
consequences to holders of the Transition Bonds.
Definition of Foreign Person. For purposes of the discussion below, a
Foreign Person means any person other than:
1. an individual, who is a citizen or resident of the United States for U.S.
federal income tax purposes;
2. a corporation, partnership or other entity created or organized in or
under the laws of the United States, or any state, including the District
of Columbia, or any political subdivision thereof or, in the case of a
partnership, otherwise treated as a U.S. person under applicable Treasury
Regulations;
3. an estate, the net income of which is subject to United States federal
income taxation regardless of its source, or
4. a trust, if a court within the United States is able to exercise primary
supervision over the administration of each trust and one or more United
States Persons have the authority to control all substantial decisions of
such trust.
A Non-U.S. Holder means a holder of a Transition Bond that is a Foreign
Person. The following summary applies only to a Foreign Persons.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
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Taxation of Foreign Transition Bondholders
Payments of interest income received by a Non-U.S. Holder generally will
not be subject to United States federal withholding tax, assuming that the
interest income is not effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States and provided that the Non-
U.S. Holder complies with the requirements listed below.
Withholding Taxation on Interest Received before 2001. Payments of interest
income on the Transition Bonds received by a Non-U.S. Holder that does not
hold its Transition Bonds in connection with the conduct of a trade or
business in the United States on or prior to December 31, 2000, will not be
subject to United States federal withholding tax, or to backup withholding and
information reporting, provided that:
1. a Non-U.S. Holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of PP&L entitled
to vote;
2. a Non-U.S. Holder is not a controlled foreign corporation that is related
to PP&L through stock ownership; and
3. Transition Bond Co. or the Trustee receive
a. from the Non-U.S. Holder, a properly completed Form W-8, or substitute
Form W-8, signed under penalties of perjury, which provides its name
and address and certifies that it is a Foreign Person or
b. from a security clearing organization, bank or other financial
institution that holds the Transition Bonds in the ordinary course of
its trade or business, which is referred to as a Financial
Institution, on behalf of a Non-U.S. Holder, certification signed
under penalties of perjury, that this Form W-8, or substitute Form W-8
has been received by it, or by another Financial Institution, from the
Non-U.S. Holder, and a copy of the Form W-8, or substitute Form W-8,
is furnished to Transition Bond Co. or to the Trustee.
Withholding Taxation on Interest Received After December 31, 2000. Payments
of interest income on the Transition Bonds received by a Non-U.S. Holder that
does not hold its Transition Bonds in connection with the conduct of a trade
or business in the United States after December 31, 2000, will not be subject
to United States federal withholding tax, or to backup withholding and
information reporting, provided that requirements 1 and 2 of the preceding
paragraph are satisfied and, in general, PP&L or its paying agent must
receive:
1. from a Non-U.S. Holder appropriate documentation to treat the payment as
made to a foreign beneficial owner under Treasury regulations issued under
Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a foreign
partnership and the foreign partnership has received appropriate
documentation to treat the payment as made to a foreign beneficial owner
in accordance with these Treasury regulations;
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3. a withholding certificate from a person representing itself to be a
"qualified intermediary" that has assumed primary withholding
responsibility under these Treasury regulations and the qualified
intermediary has received appropriate documentation from a foreign
beneficial owner in accordance with its agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized representative
of a Financial Institution, stating that the Financial Institution has
received from the beneficial owner a withholding certificate described in
these Treasury regulations or that it has received a similar statement
from another Financial Institution acting on behalf of the foreign
beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish a United States taxpayer identification number to PP&L or its paying
agent in order to claim any of the foregoing exemptions from United States
withholding tax on payments of interest. Interest paid to a Non-U.S. Holder
will be subject to a United States withholding tax of 30% upon the actual
payment of interest income, except as described above and except where an
applicable tax treaty provides for the reduction or elimination of this
withholding tax. A Non-U.S. Holder generally will be taxable in the same
manner as a United States corporation or resident with respect to interest
income if the income is effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States. Effectively connected
income received by a Non-U.S. Holder that is a corporation may in some
circumstances be subject to an additional "branch profits tax" at a 30% rate,
or if applicable, a lower rate provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be subject
to United States federal income or withholding tax on gain realized on the
sale or exchange of Transition Bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more during the taxable year and this gain is from United
States sources; or
2. the gain is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and other requirements are
satisfied.
Sale of the Transition Bonds to or Through the Office of a Broker. The
payment of the proceeds of the sale of Transition Bonds to or through the
United States office of a broker will be subject to information reporting and
possible backup withholding at a rate of 31%. To avoid these requirements, a
Non-U.S. Holder must certify its non-United States status under penalties of
perjury or otherwise establish an exemption in accordance with applicable
Treasury regulations. The payment of the proceeds of the sale of Transition
Bonds to or through the foreign office of a broker generally will not be
subject to this backup withholding tax. However, in the case of the payment of
proceeds from the disposition of Transition Bonds through a foreign office of
a broker that is a United States Person or a United States related person, the
applicable Treasury regulations require information reporting on the payment.
To avoid this requirement, the broker must have documentary evidence in its
files that a Non-U.S.
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Holder is a Foreign Person and the broker cannot have actual knowledge to the
contrary. For this purpose, a United States related person is:
1. a "controlled foreign corporation" for United States federal income tax
purposes or
2. a Foreign Person 50% or more of whose gross income from all sources for a
specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against its United
States federal income tax, provided that the required information is furnished
to the IRS.
Material Commonwealth of Pennsylvania Tax Matters
In the opinion of Morgan, Lewis & Bockius LLP, special Pennsylvania tax
counsel to PP&L and Transition Bond Co., interest from Transition Bonds
received by a person who is not otherwise subject to corporate or personal
income tax in the Commonwealth of Pennsylvania will not be subject to these
taxes. Neither residents nor nonresidents of the Commonwealth of Pennsylvania
will be subject to an intangible personal property tax in respect to the
Transition Bonds.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose restrictions on:
1. employee benefit plans, as defined in Section 3(3) of ERISA, that are
subject to Title I of ERISA;
2. plans, as defined in Section 4975(e)(1) of the Code, that are subject to
Section 4975 of the Code, including individual retirement accounts or
Keogh plans;
3. any entities whose underlying assets include plan assets by reason of that
plan's investment in these entities, each of the entities described in 1,
2 and 3 being referred to as a Plan; and
4. persons who have specified relationships to Plans which are "parties in
interest" under ERISA and "disqualified persons" under the Code, which
collectively are referred to as Parties in Interest.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993),
an insurance company's general account may be deemed to include assets of the
Plans investing in the general account, such as through the purchase of an
annuity contract. Thus, this insurance company might be treated as a Party in
Interest with respect to a Plan by virtue of this investment. ERISA also
imposes specific duties on persons who are fiduciaries of Plans subject to
ERISA, and ERISA and Section 4975 of the Code prohibit specified transactions
between a Plan and Parties in
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Interest with respect to the Plan. Violations of these rules may result in the
imposition of excise taxes and other penalties and liabilities under ERISA and
Section 4975 of the Code.
Plan Asset Issues For an Investment in the Transition Bonds
The Plan Asset Regulation is a regulation issued by the United States
Department of Labor which states that if a Plan makes an "equity" investment
in a corporation, partnership, trust or another specified entity, the
underlying assets and properties of the entity will be deemed for purposes of
ERISA and Section 4975 of the Code to be assets of the investing Plan unless
those exceptions set forth in the regulation apply. Although there is little
statutory or regulatory guidance on this subject, and there can be no
assurances in this regard, it appears that the Transition Bonds should not be
treated as an equity interest for purposes of the Plan Asset Regulation.
Accordingly, the assets of the Borrower should not be treated as the assets of
Plans investing in the Transition Bonds.
Prohibited Transaction Exemptions
It should be noted, however, that without regard to the treatment of the
Transition Bonds as equity interests under the Plan Asset Regulation, PP&L,
the Underwriters and/or their affiliates, as a provider of services to Plans,
may be deemed to be Parties in Interest with respect to many Plans. The
purchase and holding of Transition Bonds by or on behalf of one or more of
these Plans could result in a prohibited transaction within the meaning of
Section 406 or 407 of ERISA or Section 4975 of the Code. However, the purchase
and holding of Transition Bonds may be subject to one or more statutory or
administrative exemptions from the prohibited transaction rules of ERISA and
Section 4975 of the Code.
Examples of Prohibited Transaction Class Exemptions. Potentially applicable
prohibited transaction class exemptions, which are referred to as PTCE's,
include the following:
1. PTCE 90-1, which exempts specific transactions involving insurance company
pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving insurance
company general accounts;
3. PTCE 91-38, which exempts specific transactions involving bank collective
investment funds;
4. PTCE 84-14, which exempts specific transactions effected on behalf of a
Plan by a "qualified professional asset manager" as that term is defined
in PTCE 84-14, and which is referred to as a QPAM; or
5. PTCE 96-23, which exempts specific transactions effected on behalf of a
Plan by "in-house" asset managers that satisfy the requirements of PTCE
96-23.
It should be noted, however, that even if the conditions specified in one or
more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
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Conditions That Would Allow the QPAM Exemption to Apply. Plan fiduciaries
intending to rely upon the QPAM exemption should consider the following. As
noted above, although Transition Bond Co. believes that the Transition Bonds
should not constitute "equity interests" for purposes of the Plan Asset
Regulation, it is nonetheless possible that any Class or Series of Transition
Bonds could be treated as "equity interests" for purposes of the Plan Asset
Regulation. In this case, the assets of Transition Bond Co. would be treated
as the plan assets of any Plan purchasing that Class or Series unless another
exemption were applicable. In this event, ITC Collections would be deemed, for
purposes of the prohibited transaction rules, to flow indirectly from
Customers to Plans that own that Class or Series of Transition Bonds. Thus, if
one or more Customers were Parties in Interest with respect to a Plan that
owned that Class or Series of Transition Bonds, this holding could be deemed
to constitute a prohibited transfer of property between a Plan and any Party
in Interest with respect to the Plan. The QPAM exemption requires, among other
things, that at the time of the proposed transaction, the Party in Interest,
or its affiliate, does not have the authority to appoint or terminate the QPAM
as a manager of any of the Plan's assets. This means, however, that if a Party
in Interest with respect to a Plan that holds this Class or Series is a
Customer that has the authority to appoint or terminate the QPAM as a manager
of the Plan's assets, for example, the Plan's sponsor or a director of the
Plan's sponsor, the holding of that Class or Series of Transition Bonds by the
Plan could be deemed to constitute a prohibited transaction to which the QPAM
exemption does not apply. Accordingly, fiduciaries intending to rely upon the
QPAM exemption should carefully discuss the effectiveness of the QPAM
exemption with their legal advisors before purchasing any Class or Series of
Transition Bonds.
Prior to making an investment in the Transition Bonds of any Series, a Plan
investor must determine whether, and each fiduciary causing the Transition
Bonds to be purchased by, on behalf of or using Plan assets of a Plan that is
subject to the prohibited transaction rules of ERISA or Section 4975 of the
Code, including without limitation an insurance company general account, shall
be deemed to have represented and warranted that, an exemption from the
prohibited transaction rules applies, so that the use of plan assets of the
Plan to purchase and hold the Transition Bonds does not and will not
constitute or otherwise result in a non-exempt prohibited transaction in
violation of Section 406 or 407 of ERISA or Section 4975 of the Code.
Special Considerations Applicable to Insurance Company General Accounts
It should be noted that the Small Business Job Protection Act of 1996 added
new Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor was required to issue the General
Account Regulations with respect to insurance policies issued on or before
December 31, 1998 that are supported by an insurer's general account. The
General Account Regulations are to provide guidance on which assets held by
the insurer constitute plan assets for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code. Section
401(c) also provides that until the date that is 18 months after the General
Account Regulations become final, no liability under the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section 4975
may result on
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the basis of a claim that the assets of the general account of an insurance
company constitute the plan assets of any Plan. This provision does not apply
in cases of avoidance of the General Account Regulations or actions brought by
the Secretary of Labor relating to particular breaches of fiduciary duties
that also constitute breaches of state or federal criminal law. The plan asset
status of insurance company separate accounts is unaffected by new Section
401(c) of ERISA, and separate account assets continue to be treated as the
plan assets of any Plan invested in a separate account.
Department of Labor Proposed Regulations. As of the date hereof, the
Department of Labor has issued proposed regulations under Section 401(c). If
the General Account Regulations are adopted substantially in the form in which
proposed, the General Account Regulations may not exempt the assets of
insurance company general accounts from treatment as plan assets after
December 31, 1998. The proposed regulations should not, however, adversely
affect the applicability of PTCE 95-60 to purchases of Transition Bonds by
insurance company general accounts.
General Investment Considerations For Prospective Plan Investors in the
Transition Bonds
Prior to making an investment in the Transition Bonds, prospective Plan
investors should consult with their legal advisors concerning the impact of
ERISA and the Code and the potential consequences of this investment with
respect to their specific circumstances. Moreover, each Plan fiduciary should
take into account, among other considerations,
1.whether the fiduciary has the authority to make the investment;
2. whether the investment constitutes a direct or indirect transaction with a
Party in Interest;
3.the composition of the Plan's portfolio with respect to diversification by
type of asset;
4.the Plan's funding objectives;
5.the tax effects of the investment; and
6. whether under the general fiduciary standards of investment prudence and
diversification an investment in the Transition Bonds is appropriate for
the Plan, taking into account the overall investment policy of the Plan
and the composition of the Plan's investment portfolio.
Governmental plans and some church plans are generally not subject to the
fiduciary responsibility provisions of ERISA or the provisions of Section 4975
of the Code. However, these plans may be subject to substantially similar
rules under state or other federal law, and may also be subject to the
prohibited transaction rules of Section 503 of the Code.
The sale of Transition Bonds to a Plan shall not be deemed a representation
by PP&L, the Seller, Transition Bond Co. or the Underwriters that this
investment meets all relevant legal requirements with respect to Plans
generally or any particular Plan.
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PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The Transition Bonds of each Series may be sold to or through the
Underwriters by a negotiated firm commitment underwriting and public
reoffering by the Underwriters. The Transition Bonds may also be sold to or
through any other underwriting arrangement as may be specified in the related
Prospectus Supplement or may be offered or placed either directly or through
agents. Transition Bond Co. and the Trustee intend that Transition Bonds will
be offered through various methods from time to time. Transition Bond Co. also
intends that offerings may be made concurrently through more than one of these
methods or that an offering of a particular Series of Transition Bonds may be
made through a combination of these methods.
The distribution of Transition Bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The Transition Bonds may be offered through one or more different methods,
including offerings through underwriters. It is not anticipated that any of
the Transition Bonds will be listed on any securities exchange. There can be
no assurance that a secondary market for any Series of Transition Bonds will
develop or, if one does develop, that it will continue.
Compensation to Underwriters. In connection with the sale of the Transition
Bonds, Underwriters or agents may receive compensation in the form of
discounts, concessions or commissions. Underwriters may sell Transition Bonds
to particular dealers at prices less a concession. Underwriters may allow, and
these dealers may reallow, a concession to other dealers. Underwriters,
dealers and agents that participate in the distribution of the Transition
Bonds of a Series may be deemed to be underwriters. Any discounts or
commissions received by the Underwriters from Transition Bond Co. and any
profit on the resale of the Transition Bonds by them may be deemed to be
underwriting discounts and commissions under the Securities Act. These
Underwriters or agents will be identified, and any compensation received from
Transition Bond Co. will be described, in the related Prospectus Supplement.
Other Distribution Issues. Under agreements which may be entered into by
PP&L, the Seller, Transition Bond Co. and the Trustee, Underwriters and agents
who participate in the distribution of the Transition Bonds may be entitled to
indemnification by PP&L and Transition Bond Co. against liabilities specified
therein, including under the Securities Act. The Underwriters may, from time
to time, buy and sell the Transition Bonds, but there can be no assurance that
a secondary market will develop and there is no assurance that this market, if
established will continue.
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RATINGS FOR THE TRANSITION BONDS
It is a condition of any Underwriter's obligation to purchase the
Transition Bonds that each Series or Class receive the ratings indicated in
the related Prospectus Supplement.
Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal
at any time by the assigning Rating Agency. No person is obligated to maintain
the rating on any Transition Bonds, and, accordingly, there can be no
assurance that the ratings assigned to any Series or Class of Transition Bonds
upon initial issuance will not be lowered or withdrawn by a Rating Agency at
any time thereafter. If a rating of any Series or Class of Transition Bonds is
revised or withdrawn, the liquidity of this Class of Transition Bonds may be
adversely affected. In general, ratings address credit risk and do not
represent any assessment of any particular rate of principal payments on the
Transition Bonds other than the payment in full of each Series or Class of
Transition Bonds by the applicable Series Final Maturity Date or Class Final
Maturity Date.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to Transition Bond Co. and the issuance of the
Transition Bonds will be passed upon for Transition Bond Co. by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York and for the Underwriters by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California. Some legal
matters relating to PP&L and Transition Bond Co. will be passed upon for PP&L
and Transition Bond Co. by Morgan Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Other legal matters relating to PP&L will be passed upon for
PP&L by Thelen Reid & Priest LLP, New York, New York. Some legal matters
relating to the federal tax consequences of the issuance of the Transition
Bonds will be passed upon for Transition Bond Co. by Skadden, Arps, Slate,
Meagher & Flom LLP. Some legal matters relating to Commonwealth of
Pennsylvania tax consequences of the issuance of the Transition Bonds will be
passed upon for Transition Bond Co. by Morgan, Lewis & Bockius LLP.
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APPENDIX A
GLOSSARY OF DEFINED TERMS
The following definitions are used in this Prospectus and in any
accompanying Prospectus Supplement:
Actual ITC Collections means actual collections of Intangible Transition
Charges that the Servicer receives for a particular Billing Month.
Adjustment Date means, in relation to each Series of Transition Bonds, the
date on which the adjustments to the Intangible Transition Charges are to be
made.
Adjustment Request in relation to the Intangible Transition Charges means a
request filed by the Servicer requesting modifications to the Intangible
Transition Charges.
Annual Accountants Report means a statement furnished by a firm of
independent public accountants to Transition Bond Co., the Trustee and the
Rating Agencies, as to the compliance by the Servicer during the preceding
calendar year, or the relevant portion thereof, with standards relating to the
servicing of Intangible Transition Property.
Average ITC Rate for each Rate Schedule equals the ITC Collections divided
by the amount of electricity used, in kilowatt hours.
Basic Documents means the Contribution Agreement, the assignment for the
Intangible Transition Property pursuant to the Contribution Agreement, the
Sale Agreement, the Servicing Agreement, the bills of sale for the Intangible
Transition Property pursuant to the Sale Agreement, the Administration
Agreement between Transition Bond Co. and PP&L, the Indenture, and the Limited
Liability Company Agreement and the certificate of formation of Transition
Bond Co.
Bond Rate means, with respect to each Series or, if applicable, each Class
of the Transition Bonds, the rate of interest payable on that Series or Class.
Book-Entry Transition Bonds means Transition Bonds registered in the name
of Cede & Co., as nominee of DTC, or another securities depository which will
be available to investors only in the form of book-entries maintained
indirectly with DTC through organizations that are DTC participants.
Business Day means any day other than a Saturday or Sunday or a day on
which banking institutions in the City of Allentown, Pennsylvania, or in the
City of New York are required or authorized by law or executive order to
remain closed.
Calculation Date in relation to the Intangible Transition Charges means the
date on which the Servicer is required to file an Adjustment Request with the
PUC.
Capital Subaccount means a subaccount in the Collection Account designated
the Capital Subaccount and held by the Trustee under the Indenture.
Cede means Cede & Co., the nominee for The Depository Trust Company.
A-1
<PAGE>
CEDEL means Cedelbank, societe anonyme.
CEDEL Customers means customers of Cedelbank.
CEP Securities means CEP Securities Co. LLC, a Delaware limited liability
company and an indirect wholly owned subsidiary of PP&L.
Class means, with respect to any Series, any one of the classes of
Transition Bonds of that Series.
Class Final Maturity Date in relation to any Class means the Final Maturity
Date of that Class.
Code means the Internal Revenue Code of 1986.
Collateral means the Intangible Transition Property and all other property
pledged to the Trustee by Transition Bond Co. as collateral security for the
Transition Bonds pursuant to the Indenture.
Collection Account means the segregated trust account designated the
Collection Account and held by the Trustee under the Indenture.
Commonwealth means the Commonwealth of Pennsylvania.
Competition Act means the Pennsylvania Electricity Generation Customer
Choice and Competition Act.
Competitive Default Service means, in relation to the Restructuring Plan
and the Joint Petition, electrical generation service provided by a provider
of last resort other than PP&L.
Competitive Default Supplier means, in relation to the Restructuring Plan
and the Joint Petition, a provider of Competitive Default Service.
Competitive Transition Charge means, with respect to PP&L, the
nonbypassable charge applied to the bill of every Customer which charge is
designed to recover PP&L's transition or stranded costs as determined by the
PUC.
Contribution Agreement means the Contribution Agreement dated as of May 13,
1999, among PP&L, CEP Group, Inc., a Pennsylvania corporation wholly owned by
PP&L, CEP Reserves, Inc., a Delaware corporation indirectly wholly owned by
PP&L, and CEP Securities, as amended from time to time.
Cooperative means Euroclear Clearance System S.C., a Belgian cooperative
corporation.
Customer means, with respect to PP&L, a retail consumer of electricity
within PP&L's service territory who accesses PP&L's transmission and
distribution system.
Customer Class means one of the three customer classes which make up PP&L's
customer base.
A-2
<PAGE>
De Minimis Amount means an amount that is less than 0.25% of a Transition
Bond's principal amount payable at expected maturity multiplied by the
weighted average number of years to maturity.
Defeasance Subaccount means a subaccount in the Collection Account
designated the Defeasance Subaccount and held by the Trustee under the
Indenture.
Depositories mean Citibank, N.A., as depository for CEDEL, and Morgan
Guaranty Trust Company of New York, as depository for Euroclear.
Direct Participants means direct participants of DTC which include
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations.
DTC means the Depository Trust Company.
electric generation suppliers means entities, licensed by the PUC, other
than PP&L, which provide electricity generation and related services,
including billing and metering of electricity consumption.
Eligible Institution in relation to the Collection Account means:
1. the corporate trust department of the Trustee; or
2. a depository institution organized under the laws of the United States
of America or any state (or any domestic branch of a foreign bank),
which:
a. has either:
(1) a long-term unsecured debt rating of "AAA" by S&P and "A1" by
Moody's; or
(2) 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
b. whose deposits are insured by the Federal Deposit Insurance
Corporation.
Eligible Investments mean book-entry securities, negotiable instruments or
securities represented by instruments in bearer or registered form which
evidence:
1. direct obligations of, and obligations fully guaranteed as to timely
payment by, the United States of America;
2. demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of
the United States of America or any State thereof, or any domestic
branch of a foreign bank, and subject to supervision and examination by
federal or state banking or depository institution authorities;
provided, however, that at the time of the investment or contractual
commitment to invest therein, the commercial paper or other short-term
unsecured debt obligations, other than any obligations thereof where the
rating is based on the credit of a person
A-3
<PAGE>
other than such depository institution or trust company, shall have a
credit rating from each of the Rating Agencies in the highest investment
category granted thereby;
3. commercial paper or other short-term obligations of any corporation
organized under the laws of the United States of America, other than
PP&L, whose ratings, at the time of the investment or contractual
commitment to invest therein, from each of the Rating Agencies are in
the highest investment category granted thereby;
4. investments in money market funds having a rating from each of the
Rating Agencies in the highest investment category granted thereby,
including funds for which the Trustee or any of its affiliates acts as
investment manager or advisor;
5. bankers' acceptances issued by any depository institution or trust
company referred to in clause 2 above;
6. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or
any agency or instrumentality thereof the obligations of which are
backed by the full faith and credit of the United States of America, in
either case entered into with a depository institution or trust company,
acting as principal, described in clause 2 above;
7. repurchase obligations with respect to any security or whole loan
entered into with
a. a depository institution or trust company, acting as principal,
described in clause 2 above, except that the rating referred to in
the proviso in that clause 2 shall be A-1 or higher in the case of
S&P,
b. a broker/dealer, acting as principal, registered as a broker or
dealer under Section 15 of the Exchange Act, the unsecured short-term
debt obligations of which are rated P-1 by Moody's and at least A-1
by S&P at the time of entering into this repurchase obligation, or
c. an unrated broker/dealer, acting as principal, that is a wholly-owned
subsidiary of a non-bank or bank holding company the unsecured short-
term debt obligations of which are rated P-1 by Moody's and at least
A-1 by S&P at the time of purchase; or
8. any other investment permitted by each of the Rating Agencies;
provided, however, that:
a. any book-entry security, instrument or security having a maturity of
one month or less that would be an Eligible Investment but for its
failure, or the failure of the obligor thereon, to have the rating
specified above shall be an Eligible Investment if such book-entry
security, instrument or security, or the obligor thereon, has a long-
term unsecured debt rating of at least "A2" by Moody's, or the
equivalent thereof by the other Rating Agencies, or a short-term
rating of at least "P-1" by Moody's, or the equivalent thereof by the
other Rating Agencies, and
b. any book-entry security, instrument or security having a maturity of
greater than one month that would be an Eligible Investment but for
its failure, or the failure of the obligor thereon, to have the
rating specified above shall be an Eligible
A-4
<PAGE>
Investment if such book-entry security, instrument or security, or
the obligor thereon, has a long-term unsecured debt rating of at
least "A1" by Moody's, or the equivalent thereof by the other Rating
Agencies, and a short-term rating of at least "P-1" by Moody's, or
the equivalent thereof by the other Rating Agencies.
Equity Interest means, pursuant to the Plan Asset Regulation, any interest
in an entity other than an instrument that is treated as indebtedness under
applicable law and which has no substantial equity features.
Euroclear means the Euroclear System.
Euroclear Operator means the Morgan Guaranty Trust Company of New York in
its role as operator of Euroclear, which is based in its Brussels, Belgium
office.
Euroclear Participants means participants of the Euroclear system.
Exchange Act means the Securities Exchange Act of 1934.
Expected Amortization Schedule means a schedule of the outstanding
principal balance of the Transition Bonds of each Series and, if applicable,
each Class.
Expected Final Payment Date for each Series or Class of Transition Bonds
means the date when all principal is scheduled to be paid for that Series or
Class in accordance with the Expected Amortization Schedule.
Financial Institution means a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business.
Final Maturity Date means, for a Series or Class of Transition Bonds, the
date by which all principal and interest on the Transition Bonds is required
to be paid.
Final Order means the qualified rate order issued by the PUC on August 27,
1999.
Fitch IBCA means Fitch IBCA, Inc.
Foreign Person means a person other than a United States Person.
General Account Regulations means final regulations, which are required to
be issued by the Department of Labor pursuant to Section 401(c) of ERISA, with
respect to insurance policies issued on or before December 31, 1998 that are
supported by an insurer's general account.
General Subaccount means a subaccount in the Collection Account designated
the General Subaccount and held by the Trustee under the Indenture.
Generation Rate Cap means the sum of the Competitive Transition Charge, the
Intangible Transition Charge and the Shopping Credit.
H.R. 1230 means the Consumers Electric Power Act of 1997.
A-5
<PAGE>
Indemnity Amount means any amount paid by PP&L or the Servicer to the
Trustee, for the Trustee or on behalf of the Transition Bondholders, in
respect of indemnification obligations pursuant to the Contribution Agreement
or the Servicing Agreement.
Indenture means the Indenture to be entered into between Transition Bond
Co. and the Trustee providing for the issuance of the Transition Bonds, as the
same may be amended and supplemented from time to time by one or more
indentures supplemental thereto.
Indirect Participants means securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly.
Initial Transfer Date means the Series Issuance Date for the first Series
of Transition Bonds.
Insolvency Laws means the United States Bankruptcy Code or similar laws in
effect in any jurisdiction within the United States.
Intangible Transition Charges means, with respect to PP&L, the amounts
authorized to be imposed on all Customer bills and collected, through a non-
bypassable mechanism by PP&L or its successor or by any other entity which
provides electric service to a Customer, to recover Qualified Transition
Expenses pursuant to the PUC Order.
Intangible Transition Property means, with respect to PP&L, the property
right created under the Competition Act representing the irrevocable right of
PP&L or its assignee to receive through Intangible Transition Charges amounts
sufficient to recover all of its Qualified Transition Expenses.
ITC Collections means the amount of Intangible Transition Charges received
by the Servicer from Customers.
Joint Petition means the Joint Petition for Full Settlement of PP&L's
Restructuring Plan and Related Court Proceedings which was filed with the PUC
on August 12, 1998.
kWh means kilowatt-hour.
Lien means a security interest, lien, charge, pledge, equity or encumbrance
of any kind.
Limited Liability Company Agreement means the Amended and Restated Limited
Liability Company Agreement of Transition Bond Co. to be executed by PP&L as
sole member.
Monthly Remittance Date means the 15th day of each calendar month, or if
such 15th day is not a Business Day, the next Business Day.
Moody's means Moody's Investors Service Inc.
mWh means megawatt-hour.
non-bypassable means, with respect to PP&L, a characteristic of the right
of PP&L to collect the Competitive Transition Charge and the Intangible
Transition Charge from Customers even if those Customers elect to purchase
electricity from another supplier or choose to operate selfgeneration
equipment while accessing PP&L's transmission and distribution system.
A-6
<PAGE>
On Track is PP&L's special reduced payment program for some low income
Residential Customers who are currently served under or otherwise qualify for
Rate Schedule RS.
Overcollateralization Subaccount means a subaccount in the Collection
Account designated the Overcollateralization Subaccount and held by the
Trustee under the Indenture.
Participants means participants of CEDEL, Euroclear or DTC.
Payment Date means the date or dates on which interest and principal are to
be payable on the Transition Bonds.
PECO means PECO Energy Company.
PJM means PJM Interconnection, L.L.C.
PP&L means PP&L, Inc.
PP&L Resources means PP&L Resources, Inc., the parent holding company of
PP&L.
Projected Transition Bond Balance means, for each Series or Class of
Transition Bonds and each Payment Date, the projected aggregate outstanding
principal balance for that Series or Class as specified for that Payment Date
in the Expected Amortization Schedule.
provider of last resort means PP&L as provider of electric generation
service to its Customers.
PUC means the Pennsylvania Public Utility Commission.
PUC Order means the Final Order, together with the supplemental order
issued by the PUC on May 21, 1999 supplementing the Final Order.
PUC Restructuring Order means the order issued by the PUC on June 15, 1998
concerning PP&L's Restructuring Plan.
Qualified Transition Expenses means the transition or stranded costs of an
electric utility approved by the PUC for recovery through the issuance of
transition bonds; the costs of retiring existing debt or equity capital of the
electric utility or its holding company parent, including accrued interest and
acquisition or redemption premium, costs of defeasance, and other related
fees, costs and charges, through the issuance of transition bonds or the
assignment, sale or other transfer of intangible transition property; and the
costs incurred to issue, service or refinance the transition bonds, including
accrued interest and acquisition or redemption premium, and other related
fees, costs and charges associated with the transition bonds, or to assign,
sell or otherwise transfer intangible transition property.
Rate Schedule means one of the rate schedules within a Customer Class.
Rating Agency means any rating agency which has, at the request of
Transition Bond Co., rated the Transition Bonds of any Class or Series at the
time of issuance thereof. If no rating agency remains in existence, then the
term means a nationally recognized statistical rating organization or other
comparable person designated by Transition Bond Co.
Rating Agency Condition means the notification in writing by each Rating
Agency to the Trustee and Transition Bond Co. that a specified action will not
result in a reduction or withdrawal of its then current rating of any
outstanding Series or Class of Transition Bonds.
A-7
<PAGE>
Reconciliation Date means, with respect to any Billing Month, the 12th day
(or if the 12th day is not a Business Day, the next Business Day) in the
eighth month after that Billing Month.
Redemption Price means the price specified in a Supplemental Indenture at
which Transition Bond Co. may, at its option, redeem the relevant Class or
Series of Transition Bonds.
Remittance Date means each date on which the Servicer must remit ITC
Collections to the Trustee for deposit in the Collection Account.
Required Capital Amount means the amount deposited by Transition Bond Co.
in the Capital Subaccount upon the issuance of each Series of Transition Bonds
as specified in the related Prospectus Supplement.
Reserve Subaccount means a subaccount in the Collection Account designated
the Reserve Subaccount and held by the Trustee under the Indenture.
Restructuring Plan means the comprehensive plan filed by PP&L with the PUC
on April 1, 1997 relating to its proposal to implement full customer choice of
electric generation suppliers, in accordance with the provisions of the
Competition Act.
S&P means Standard and Poor's Corporation.
Sale Agreement means the Intangible Transition Property Sale Agreement to
be entered into between CEP Securities and Transition Bond Co.
Scheduled Overcollateralization Level means in relation to any Payment Date
the amount of funds required to be on deposit in the Overcollateralization
Subaccount on that Payment Date.
Securities Act means the Securities Act of 1933.
Seller means CEP Securities as seller under the Sale Agreement.
Series means one or more series of Transition Bonds.
Series Final Maturity Date means the Final Maturity Date for a Series.
Series Issuance Date means the initial issuance date for a Series.
Series Subaccount means a subaccount in the Collection Account designated
the Series Subaccount with respect to a Series and held by the Trustee under
the Indenture.
Servicer means PP&L in its capacity as servicer under the Servicing
Agreement, and any successor in that capacity.
Servicing Agreement means the Servicing Agreement to be entered into
between Transition Bond Co. and the Servicer, as the same may be amended and
supplemented from time to time.
A-8
<PAGE>
Servicing Fee means the fee paid by Transition Bond Co. to the Servicer on
each Payment Date with respect to each Series of Transition Bonds in an amount
to be specified in the related Prospectus Supplement.
Shopping Credit means the bundled rate for electricity consumption that
PP&L charged its customers prior to the implementation of the Competition Act
less PP&L's Competitive Transition Charges, the Intangible Transition Charges
and PP&L's transmission and distribution charges and less a 4% system average
rate reduction during 1999. This represents the amount that Customers can
apply towards electricity generation charges for electricity they purchase
from other Electricity Generation Suppliers.
Stranded Costs means, in relation to PP&L, the net electric generation
related costs which traditionally would be recoverable under a regulated
environment but which may not be recoverable in a competitive electric
generation market and which the PUC has determined will remain following
mitigation of those costs by PP&L.
Subaccount means any subaccount in the Collection Account into which the
funds in the Collection Account will be allocated.
Subsequent Sale means the sale of additional Intangible Transition Property
by the Seller to Transition Bond Co., subject to the satisfaction of the
conditions specified in the Sale Agreement and the Indenture.
Subsequent Transfer Date means the date that a Subsequent Sale will be
effective, specified in a written notice provided by the Seller to Transition
Bond Co.
Successor Servicer means any successor to the Servicer appointed by the
Trustee pursuant to the Servicing Agreement.
Supplemental Indenture means each supplement to the base Indenture.
Transferred Intangible Transition Property means Intangible Transition
Property which has been sold to Transition Bond Co.
Transition Bond Balance means the aggregate outstanding principal balance
for each Series or Class of Transition Bonds.
Transition Bond Co. means PP&L Transition Bond Company LLC, a Delaware
limited liability company which is the issuer of the Transition Bonds.
Transition Bondholder means a beneficial owner of Transition Bonds.
Transition Bonds means any of the transition bonds (as defined in the
Competition Act) issued by Transition Bond Co. pursuant to the Indenture.
Treasury Regulations means existing and proposed treasury regulations
promulgated under the Code.
Trust Indenture Act means the Trust Indenture Act of 1939.
Trustee means The Bank of New York, a New York banking corporation, or its
successor or any successor Trustee under the Indenture.
A-9
<PAGE>
U.S. Government Obligations means direct obligations, or certificates
representing an ownership interest in those obligations, of the United States
of America, including any agency or instrumentality thereof, for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at Transition Bond Co.'s option.
Underwriting Agreement means the underwriting agreement with respect to the
Transition Bonds with the underwriters named in the Prospectus Supplement for
whom Morgan Stanley Dean Witter is acting as the representative.
United States Person means:
1. a citizen or resident of the United States,
2. a corporation, partnership or other specified entity created or
organized in or under the laws of the United States, or any state
(including the District of Columbia) or any political subdivision
thereof,
3. an estate the net income of which is subject to United States federal
income taxation regardless of its source or
4. a trust:
a. over the administration of which a court within the United States is
able to exercise primary supervision and
b. all substantial decisions of which one or more United States Persons
have the authority to control.
United States related person means:
1. a "controlled foreign corporation" for United States federal income tax
purposes or
2. a Foreign Person 50% or more of whose gross income from all sources for
a specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business.
A-10
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF PP&L TRANSITION BOND COMPANY LLC
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheet............................................................ F-3
Statement of Operations and Changes in Member's Equity................... F-4
Statement of Cash Flows.................................................. F-5
Notes to Financial Statements.............................................. F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To PP&L, Inc., the Sole Member
of PP&L Transition Bond Company LLC
In our opinion, the accompanying balance sheet and the related statements of
operations and changes in member's equity and of cash flows present fairly, in
all material respects, the financial position of PP&L Transition Bond Company
LLC (the Company) as of June 30, 1999, and the results of its operations and
its cash flows for the period from March 25, 1999 (date of inception) to June
30, 1999 in conformity with generally accepted accounting principles. 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 conducted our audit of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
July 14, 1999
F-2
<PAGE>
PP&L TRANSITION BOND COMPANY LLC
BALANCE SHEET AT JUNE 30, 1999
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents...................................... $ 1
Unamortized debt issuance expenses............................. 1,056
--------
Total Assets................................................. $ 1,057
========
Liabilities and Member's Equity
Payable to member--as servicer................................. $ 1,056
Member's equity................................................ 1
--------
Total Liabilities and Member's Equity........................ $ 1,057
========
</TABLE>
See accompanying Notes to Financial Statements
F-3
<PAGE>
PP&L TRANSITION BOND COMPANY LLC
STATEMENT OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
For the Period March 25, 1999 (date of inception) to June 30, 1999
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Revenue ......................................................... $ 0
Expenses......................................................... 0
---
Net Income..................................................... $ 0
===
Member's equity--beginning of period............................. $ 0
Member's initial cash contribution............................... 1
---
Member's equity--end of period................................... $ 1
===
</TABLE>
See accompanying Notes to Financial Statements
F-4
<PAGE>
PP&L TRANSITION BOND COMPANY LLC
STATEMENT OF CASH FLOWS
for the Period March 25, 1999 (date of inception) to June 30, 1999
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash Flow from Operating Activities
Net income..................................................... $ 0
Adjustment to reconcile net income to net cash provided by
operating activities:
Increase in payable to member -as servicer................... 1,056
-------
Net cash provided by operating activities.................. 1,056
-------
Cash Flow from Investing Activities............................ 0
Cash Flow from Financing Activities
Member's initial cash contribution............................. 1
Unamortized debt issuance expense.............................. (1,056)
-------
Net cash used in financing activities...................... (1,055)
-------
Net Increase in Cash and Cash Equivalents...................... $ 1
Cash and Cash Equivalents--Beginning of Period................. 0
-------
Cash and Cash Equivalents--End of Period....................... $ 1
=======
</TABLE>
See accompanying Notes to Financial Statements
F-5
<PAGE>
PP&L TRANSITION BOND COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations
PP&L Transition Bond Company LLC (the Company), a limited liability company
established by PP&L, Inc. (PP&L) under the laws of the State of Delaware, was
formed on March 25, 1999 pursuant to a limited liability company agreement.
PP&L is the sole member of the Company. PP&L is an operating electric utility
and is a wholly-owned subsidiary of PP&L Resources, Inc.
The Company was organized for the sole purpose of purchasing and owning
Intangible Transition Property (ITP), issuing Transition Bonds (Bonds),
pledging its interest in ITP and other collateral to the Bank of New York, as
trustee to collateralize the Bonds, and performing activities that are
necessary, suitable or convenient to accomplish these purposes. ITP represents
the irrevocable right of PP&L, or its successor or assignee, to collect a non-
bypassable Intangible Transition Charge (ITC) from customers pursuant to a
Qualified Rate Order (PUC Order) issued August 27, 1998 by the Pennsylvania
Public Utility Commission (PUC) in accordance with the Pennsylvania
Electricity Generation Customer Choice and Competition Act (applicable law)
enacted in Pennsylvania in December 1996. The PUC Order authorizes the ITC to
be sufficient to recover up to $2.85 billion aggregate principal amount of
Bonds, plus an amount sufficient to provide for any credit enhancement, to
fund any reserves and to pay interest, redemption premiums, if any, servicing
fees and other expenses relating to the Bonds. The Company's organizational
documents require it to operate in a manner so that it should not be
consolidated in the bankruptcy estate of PP&L in the event PP&L becomes
subject to a bankruptcy proceeding. Both PP&L and the Company will treat the
transfer of ITP to the Company as a sale under applicable law. The Bonds will
be treated as debt obligations of the Company.
The Company anticipates issuing Bonds in the third quarter of 1999.
The results of operations of the Company will be consolidated with PP&L for
financial and income tax reporting purposes.
2. Summary of Significant Accounting Policies
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions will affect the reported amount
of revenues, expenses, assets, and liabilities and disclosure of
contingencies. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
F-6
<PAGE>
PP&L TRANSITION BOND COMPANY LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unamortized Debt Issuance Costs
The costs associated with the anticipated issuance of the Bonds are being
capitalized and will be amortized evenly over the life of the Bonds. These
costs, consisting primarily of legal fees, have been incurred by PP&L as
servicer and are reflected on the Balance Sheet as "Payable to member-as
servicer" at June 30, 1999. The Company will reimburse PP&L for these and any
additional Bond issuance costs when the Bonds are issued. See Note 4 for
additional information.
Income Taxes
The Company has elected not to be taxed as a corporation for federal income
tax purposes. The Company will be treated as a division of PP&L and will not
be treated as a separate entity.
3. The Bonds
The purpose of the Company is to issue Bonds pursuant to authority granted
by the PUC in the PUC Order. The Company intends to issue Bonds in series (the
Series) from time to time, the maturities and interest rates of which will
depend upon market conditions at the time of issuance. The proceeds will be
used to fund the purchase of ITP. The ITP and other assets of the Company will
collateralize the Bonds. Under applicable law, the Bonds will be recourse to
the Company and will be collateralized on a pro rata basis by the ITP and the
equity and assets of the Company. The source of repayment will be the ITC
authorized pursuant to a PUC Order, which charges will be collected from PP&L
customers by PP&L, as servicer.
ITC collections will be deposited by PP&L with the Company and used to pay
the expenses of the Company, to pay debt service on the Bonds and to fund
credit enhancement for the Bonds. The Company will also pledge the capital
contributed by PP&L to collateralize the debt service requirements of the
Bonds. The debt service requirements will include an Overcollateralization
Account, a Capital Account and a Reserve Account which will be available to
Bond holders. Any amounts collateralizing the Bonds will be returned to the
Company upon payment of the Bonds.
4. Significant Agreements and Related Party Transactions
Under the Servicing Agreement to be entered into by the Company and PP&L
concurrently with the issuance of the first Series of Bonds, PP&L, as
servicer, will be required to manage and administer the ITP of the Company and
to collect the ITC on behalf of the Company. The Company will pay an annual
servicing fee of $1.25 million to PP&L. PP&L will also invoice the Company for
certain other administrative expenses incurred.
All debt issuance costs incurred to date have been or will be paid by PP&L
and reimbursed by the Company upon issuance of the Bonds.
F-7
<PAGE>
The Requirement to Deliver a Copy of the Prospectus. Until 90 days after the
date of this Prospectus Supplement, all dealers effecting transactions in the
related Series of Transition Bonds, whether or not participating in the
distribution of the related Series of Transition Bonds, may be required to
deliver a Prospectus and a 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.
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder
other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Fee...................................................... $714,460
Printing and Engraving Expenses....................................... $ *
Trustee's Fees and Expenses........................................... $ *
Legal Fees and Expenses............................................... $ *
Blue Sky Fees and Expenses............................................ $ *
Accountants' Fees and Expenses........................................ $ *
Rating Agency Fees.................................................... $ *
Miscellaneous Fees and Expenses....................................... $ *
--------
Total............................................................... $ *
========
</TABLE>
- --------
*To be provided by amendment.
Item 15. Indemnification of Members and Managers.
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to specified standards and restrictions, if any, as are set forth in
the limited liability company agreement, a limited liability company shall
have the power to indemnify and hold harmless any member or manager or other
person from and against any and all claims and demands whatsoever.
The Amended and Restated Limited Liability Company Agreement (the "LLC
Agreement") of PP&L Transition Bond Company LLC (the "Issuer") provides that,
to the fullest extent permitted by law, the Issuer shall indemnify its members
and managers against any liability incurred in connection with any proceeding
in which any member or manager may be involved as a party or otherwise by
reason of the fact that the member or manager is or was serving in its
capacity as a member or manager, unless this liability is based on or arises
in connection with the member's or manager's own willful misconduct or gross
negligence, the failure to perform the obligations set forth in the LLC
Agreement, or taxes, fees or other charges on, based on or measured by any
fees, commissions or compensation received by the managers in connection with
any of the transactions contemplated by the LLC Agreement and related
agreements.
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of PP&L Transition Bond Company
LLC.**
4.1.2 Form of Amended and Restated Limited Liability Company Agreement for
PP&L Transition Bond Company LLC.*
4.2 Certificate of Formation of PP&L Transition Bond Company LLC.**
4.3 Form of Indenture.**
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, relating to
legality of the Transition Bonds.**
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to
material federal tax matters.**
8.2 Opinion of Morgan, Lewis & Bockius LLP with respect to material
Commonwealth of Pennsylvania tax matters.**
10.1 Form of Sale Agreement.**
10.2 Form of Contribution Agreement.**
10.3 Form of Servicing Agreement.**
10.4 Joint Petition for Full Settlement of PP&L's Restructuring Plan and
Related Appeals and Application for a Qualified Rate Order and
Application for Transfer of Generation Assets dated August 12, 1998.**
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its
opinion filed as Exhibits 5.1 and 8.1).**
23.1.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 8.2).**
23.2 Consent of PricewaterhouseCoopers LLP.**
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of the Bank of New York, as Trustee under the Indenture.
27.1 Financial Data Schedule.*
99.1.1 Qualified Rate Order issued August 27, 1998.**
99.1.2 Supplemental Order issued on May 21, 1999.**
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
</TABLE>
- --------
* To be filed by amendment
** Previously filed
II-2
<PAGE>
Item 17. Undertakings
The undersigned Registrant on behalf of PP&L Transition Bond Company, LLC
(the "Issuer") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) of the Securities Act of 1933, as amended, if, in the aggregate,
the changes in volume and price represent no more than a twenty percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change in
this information in the Registration Statement; provided, however, that
(a)(1)(i) and (a)(i)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each relevant post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of these securities at that time shall be deemed to
be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934, as amended) with respect to the Issuer that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
these securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions described
under Item 15 above, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Act and is, theretofore,
II-3
<PAGE>
unenforceable. In the event that a claim for indemnification against these
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer of controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether this indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of this issue.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(i) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this Registration Statement as of the time it was
declared effective.
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended,
in accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of PP&L Transition Bond Company
LLC.**
4.1.2 Form of Amended and Restated Limited Liability Company Agreement for
PP&L Transition Bond Company LLC.*
4.2 Certificate of Formation of PP&L Transition Bond Company LLC.**
4.3 Form of Indenture.**
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, relating to
legality of the Transition Bonds.**
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to
material federal tax matters.**
8.2 Opinion of Morgan, Lewis & Bockius LLP with respect to material
Commonwealth of Pennsylvania tax matters.**
10.1 Form of Sale Agreement.**
10.2 Form of Contribution Agreement.**
10.3 Form of Servicing Agreement.**
10.4 Joint Petition for Full Settlement of PP&L's Restructuring Plan and
Related Appeals and Application for a Qualified Rate Order and
Application for Transfer of Generation Assets dated August 12, 1998.**
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its
opinion filed as Exhibits 5.1 and 8.1).**
23.1.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 8.2).**
23.2 Consent of PricewaterhouseCoopers LLP.**
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of the Bank of New York, as Trustee under the Indenture.
27.1 Financial Data Schedule.*
99.1.1 Qualified Rate Order issued August 27, 1998.**
99.1.2 Supplemental Order issued on May 21, 1999.**
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
</TABLE>
- --------
* To be filed by amendment
** Previously filed
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and that the security rating
requirement of Form S-3 will be met by the time of sale, and has duly caused
this Amendment Number 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Allentown, Commonwealth of Pennsylvania, on July 20, 1999.
PP&L Transition Bond Company LLC
/s/ John R. Biggar
By: _________________________________
John R. Biggar
Manager
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John. R. Biggar Manager July 20, 1999
______________________________________
John R. Biggar
/s/ James E. Abel Manager July 20, 1999
______________________________________
James E. Abel
/s/ James S. Pennington Manager July 20, 1999
______________________________________
James S. Pennington
</TABLE>
<PAGE>
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
PP&L Transition Bond Company LLC
(Exact name of obligor as specified in its charter)
Delaware 23-3004428
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
PP&L Transition Bond Company LLC
Two North Ninth Street
Allentown, Pennsylvania 18101
(Address of principal executive offices) (Zip code)
_____________
Transition Bonds Issuable in Series
(Title of the indenture securities)
========================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Name Address
- ----------------------------------------------------------------------------------
<S> <C> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-
29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust
powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with
Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed
with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed
with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 19th day of July, 1999.
THE BANK OF NEW YORK
By: /s/ REMO J. REALE
---------------------------------
Name: REMO J. REALE
Title: VICE PRESIDENT
<PAGE>
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1999,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
ASSETS Dollar Amounts
In Thousands
<S> <C>
Cash and balances due from depository
institutions:
Noninterest-bearing balances and currency and $ 4,508,742
coin...........................................
Interest-bearing balances....................... 4,425,071
Securities:
Held-to-maturity securities..................... 836,304
Available-for-sale securities................... 4,047,851
Federal funds sold and Securities purchased 1,743,269
under agreements to resell......................
Loans and lease financing receivables:
Loans and leases, net of unearned
income...............39,349,679
LESS: Allowance for loan and
lease losses............603,025
LESS: Allocated transfer risk
reserve........................15,906
Loans and leases, net of unearned income, 38,730,748
allowance, and reserve.........................
Trading Assets................................... 1,571,372
Premises and fixed assets (including capitalized 685,674
leases).........................................
Other real estate owned.......................... 10,331
Investments in unconsolidated subsidiaries and 182,449
associated companies............................
Customers' liability to this bank on acceptances 1,184,822
outstanding.....................................
Intangible assets................................ 1,129,636
Other assets..................................... 2,632,309
Total assets..................................... $61,688,578
LIABILITIES
Deposits:
In domestic offices............................. $25,731,036
Noninterest-bearing 10,252,589
Interest-bearing 15,478,447
In foreign offices, Edge and Agreement 18,756,302
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
subsidiaries, and IBFs.........................
Noninterest-bearing 111,386
Interest-bearing 18,644,916
Federal funds purchased and Securities sold 3,276,362
under agreements to repurchase..................
Demand notes issued to the U.S.Treasury.......... 230,671
Trading liabilities.............................. 1,554,493
Other borrowed money:
With remaining maturity of one year or less..... 1,154,502
With remaining maturity of more than one year 465
through three years............................
With remaining maturity of more than three years 31,080
Bank's liability on acceptances executed and 1,185,364
outstanding.....................................
Subordinated notes and debentures................ 1,308,000
Other liabilities................................ 2,743,590
Total liabilities................................ 55,971,865
EQUITY CAPITAL
Common stock..................................... 1,135,284
Surplus.......................................... 764,443
Undivided profits and capital reserves........... 3,807,697
Net unrealized holding gains (losses) on 44,106
available-for-sale securities...................
Cumulative foreign currency translation ( 34,817)
adjustments.....................................
Total equity capital............................. 5,716,713
Total liabilities and equity capital............. $61,688,578
</TABLE>
I, Thomas J. Mastro, Senior Vice President and Comptroller of the above-named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni Directors
Alan R. Griffith
Gerald L. Hassell
