AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ________, 1999
REGISTRATION NO. 333-_______
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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
------------------- --------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
PP&L TRANSITION BOND COMPANY LLC,
TWO NORTH NINTH STREET
ALLENTOWN, PENNSYLVANIA 18101
(610)774-5151
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive
offices)
JAMES E. ABEL
TWO NORTH NINTH STREET
ALLENTOWN, PENNSYLVANIA 18101
(610) 774-5151
(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 LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
919 THIRD AVENUE 400 SANSOME STREET
NEW YORK, NEW YORK 10022 SAN FRANCISCO, CA 94111
(212) 735-2160 (415) 773-5783
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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) FEE (2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds $ 1,000,000 ____% $____ $ 278
Issuable in Series
- ----------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
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.
- ------------------------------------------------------------------------------
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 ________, 1999
Prospectus Supplement
(To Prospectus dated __________, 1999)
$_____ Transition Bonds, Series 1999-_ Bonds
PP&L Transition Bond Company LLC
PP&L, Inc., Seller and Servicer
THE FOLLOWING SECURITIES ARE BEING OFFERED IN THIS PROSPECTUS SUPPLEMENT*:
Class Bonds Class Bonds Class Bonds
Principal Amount $ $ $
------------ ------------ ------------
Price ------------% ------------% ------------%
Underwriting Discounts
and Commissions ------------% ------------% ------------%
Net Proceeds
Bond Rate ------------% ------------% ------------%
Expected Final
Payment Date ------------ ------------ ------------
Final Maturity Date ------------ ------------ ------------
=====================
(*) These securities will be defined as the "Series 1999-_ Bonds" in this
Prospectus Supplement.
Interest and principal on the Series 1999-_ Bonds will be payable , on the
_____ day of __________ or the first business day after these dates.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE OF THE PROSPECTUS.
THE SERIES 1999-_ BONDS REPRESENT OBLIGATIONS OF PP&L TRANSITION BOND
COMPANY LLC, THE "ISSUER", AND ARE BACKED ONLY BY THE ASSETS OF THE ISSUER.
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-_ Bonds,
and there is no assurance that one will develop.
All capitalized terms used in this Prospectus Supplement are defined
in this Prospectus Supplement or in the Prospectus. See the "Index of
Principal Definitions" which begins on page S-21 of this Prospectus
Supplement and on page 111 of the Prospectus for the location of the
definitions of capitalized terms that appear in this Prospectus Supplement.
Morgan Stanley Dean Witter
The date of this Prospectus Supplement is __________, 1999.
This prospectus supplement does not contain complete information about
the offering of the Series 1999-_ 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-_ Bonds may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
TABLE OF CONTENTS
Prospectus Supplement
WHERE TO FIND INFORMATION IN THESE DOCUMENTS...............................S-4
SUMMARY OF TERMS - PROSPECTUS SUPPLEMENT...................................S-6
THE SERIES 1999-_ BONDS....................................................S-9
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY.............................S-12
DESCRIPTION OF PP&L'S BUSINESS............................................S-16
MATERIAL FEDERAL INCOME TAX MATTERS FOR THE SERIES 1999-_ BONDS...........S-17
UNDERWRITING THE SERIES 1999-_ BONDS......................................S-18
RATINGS FOR THE SERIES 1999-_ BONDS.......................................S-19
INDEX OF PRINCIPAL DEFINITIONS............................................S-21
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This Prospectus Supplement and the attached Prospectus provide information
about the Issuer and PP&L, Inc., including terms and conditions that apply
to the Series 1999-_ Bonds. The specific terms of the 1999-_ Bonds are
contained in this Prospectus Supplement. You should rely only on
information on the Series 1999-_ 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 the Issuer and terms in abbreviated form,
followed by a more complete description of the terms. The introductory
sections are:
o Summary of Terms of the Series 1999-_ Bonds-- provides information
concerning the amounts and the payment terms of each class of Series
1999-_ Bonds.
o Risk Factors -- describes briefly some of the risks to investors of a
purchase of the Series 1999-_ 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 a listing of the pages where capitalized terms are defined
under the caption "Index of Principal Definitions" beginning on page S-21
in this Prospectus Supplement and under "Index of Terms" beginning on page
111 of the attached Prospectus.
FORWARD-LOOKING INFORMATION
Some statements contained in this Prospectus Supplement and the
Prospectus 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 the Issuer 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 and capacity;
4. weather variations affecting customer energy usage;
5. the need for and effect of any business or industry restructuring;
6. new accounting requirements or new interpretations or applications of
existing requirements;
7. operating performance of PP&L's facilities;
8. environmental conditions and requirements; 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 the Issuer 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 the Issuer undertakes any obligation
to update the information contained in the statement to reflect subsequent
developments or information.
SUMMARY OF TERMS - PROSPECTUS SUPPLEMENT
This summary contains a brief description of the Series 1999-_ Bonds.
You will find a detailed description of the terms of the offering of the
Series 1999-_ 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 14 OF THE PROSPECTUS.
THE ISSUER: PP&L Transition Bond Company LLC, a
Delaware limited liability company, wholly
owned by CEP Group, Inc., a Pennsylvania
corporation wholly owned by PP&L, Inc.
ISSUER'S ADDRESS: Two North Ninth Street; Allentown, PA 18101
ISSUER'S TELEPHONE NUMBER: (610) 774-5151
SELLER OF THE PROPERTY TO PP&L, Inc., an operating electric utility,
THE ISSUER: incorporated under the laws
of the Commonwealth of Pennsylvania in 1920.
PP&L serves approximately 1.3 million
customers in 29 counties of central eastern
Pennsylvania, with a population of
approximately 2.6 million persons.
SELLER'S ADDRESS: Two North Ninth Street, Allentown, PA 18101
SELLER'S TELEPHONE NUMBER: (610) 774-5151
SERVICER OF THE PROPERTY: PP&L, Inc.
TRUSTEE: The Bank of New York
THE TERMS OF THE SERIES 1999 - BONDS
Class Bonds Class Bonds
Principal Amount: $__________ $__________
Interest Rate Per Annum: _____% _____%
Interest Accrual Method: _____ _____
Payment Dates: ____ (___) ____ (___)
,
First Payment Date: _________, 1999 _________, 1999
Expected Final Payment Date:* ____________ ____________
Final Maturity Date: ____________ ____________
Anticipated Ratings
(Moody's/Standard & Poor's/Fitch
IBCA/Duff & Phelps):** _______ _______
- ----------------
* The expected final payment date is the date upon which the issuer
expects to make the final payment on the Series 1999-_ Bonds. However,
under some circumstances the final payment on the Series 1999-_ Bonds may
be made after that date. The Series 1999-_ Bonds will not be in default
unless they are not paid in full by the final maturity date.
** It is a condition to the offering of the Series 1999-_ Bonds that these
ratings be obtained upon issuance. However, a rating agency in its
discretion may lower or withdraw its rating in the future.
THE COLLATERAL
The Issuer 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, through intangible
transition charges payable by retail consumers of electricity within PP&L's
service territory who access PP&L's transmission and distribution system,
(i) the principal amount of the transition bonds, and (ii) the interest,
fees, expenses, credit enhancement and premiums, if any, associated with
the transition bonds. 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 Sale Agreement
- --PP&L's Sale and Assignment of Intangible Transition Property" in the
Prospectus.
In connection with the issuance of the Series 1999-_ Bonds, PP&L will sell [$ ]
billion of its intangible transition property to the issuer. PP&L, as
servicer of the intangible transition property, will collect the intangible
transition charges from Customers on behalf the Issuer. Other entities may
be required to collect intangible transition charges from Customers and pay
the amounts collected to PP&L, as Servicer. See "The Seller and Servicer of
the Intangible Transition Property" in the Prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts owed on Series 1999-_
Bonds from
o amounts received from the servicer with respect to intangible transition
charges during the prior quarter; and
o 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. See "The Indenture-The Collection Account
for the Transition Bonds" in the Prospectus.
PRINCIPAL PAYMENTS
On each payment date, the amount required to be paid as principal on the
transition bonds, including the Series 1999-_ Bonds, will equal:
o the principal scheduled to be paid on the transition bonds on that
payment date; plus
o the unpaid principal amount of any series due on the final payment date
of that series; plus
o 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.
On each payment date, the issuer will distribute principal on the Series
1999-_ Bonds in the following order:
[To be provided at issuance]
INTEREST PAYMENTS
On each payment date, the issuer will pay interest on each class of the
Series 1999-_ Bonds as follows:
[To be provided at issuance]
OPTIONAL REDEMPTION
[Optional redemption provisions, if any, to be provided at issuance.]
PARTICULAR CREDIT ENHANCEMENT FEATURES
Credit enhancement for the Series 1999-_ Bonds includes the following:
o PP&L, Inc., as servicer of the intangible transition property on behalf
of the Issuer, will make adjustments to the intangible transition
charges it bills to customers, upon approval by the Pennsylvania PUC.
PP&L will make these adjustments if it determines that it is not
collecting sufficient intangible transition charges for the Issuer to
make timely payments on the Series 1999-_ Bonds and to pay transaction
fees and expenses, or if any of the subaccounts is not funded to its
required level. PP&L can make these changes, with the approval of the
PUC, once a year, except during the last year of the transaction, when
it can make these adjustments as frequently as monthly. See "The PUC
Order and the Intangible Transition Charges - The PUC Order" in the
Prospectus.
[Additional credit enhancement, if any, to be provided at issuance.]
The credit enhancement for the Series 1999-_ Bonds is intended to protect
you against losses or delays in scheduled payments on your Series 1999-
Bonds.
TAX STATUS
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP for federal
income tax purposes, and in the opinion of Morgan, Lewis & Bockius LLP for
Pennsylvania income tax purposes:
o the Series 1999-_ Bonds will be characterized as debt of PP&L, Inc.; and
o the issuer will be treated as a division of PP&L and not as a separate
taxable entity.
The issuer and PP&L have received a private letter ruling from the Internal
Revenue Service regarding the federal income tax aspects of the
transactions described above. Tax counsel have relied on that ruling in
rendering their opinions.
If you purchase a Series 1999-_ Bond, you agree to treat it as debt of PP&L
for tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the Series
1999-_ Bonds subject to specified conditions. The acquisition and holding of
the Series 1999-_ Bonds could be treated as an indirect prohibited
transaction under ERISA. Accordingly, by purchasing the Series 1999-_ Bonds,
each investor purchasing on behalf of a pension plan will be deemed to
certify that the purchase and subsequent holding of the Series 1999-_ Bonds
would be exempt from the prohibited transaction rules of ERISA. For further
information regarding the application of ERISA, see "ERISA Considerations"
in the Prospectus.
THE SERIES 1999-_ BONDS
The PP&L Transition Bond Company LLC Transition Bonds, Series 1999-_ (the
"Series 1999-_ Bonds") will be issued under and secured pursuant to a base
indenture dated as of __________, 1999 between the Issuer and the Trustee,
as supplemented by the Series 1999-_ Supplemental Indenture thereto (as so
supplemented, the "Indenture"). The following summary does not purport to
be complete and is subject to, and qualified by reference to, the terms and
provisions of the Indenture and by reference to the terms and provisions of
the Series 1999-_ Bonds.
GENERAL
The Series 1999-_ Bonds will be issued on the Series Issuance Date and
will include the following Classes:
TABLE 1
Initial Clas Expected Final Final
Class Principal Balance Payment Date Maturity Date Bond Rate*
$___________ ____________ ____________ [_________%]
(_______) (_______)
[ $___________ ____________ ____________ [_________%]
(_______) (_______)
$___________ ____________ ____________ [_________%]
(_______) (_______)
* Calculated as described below under "Interest."
How the Issuer Will Make Series 1999-_ Bond Payments. The Issuer will
pay interest and principal relating to the Series 1999-_ Bonds through DTC
or, if the Series 1999-_ Bonds are no longer in book-entry form, at the
offices of ___________ at __________, New York, New York ____. The Issuer
will make payments by wire transfer in immediately available funds to the
account designated by Cede & Co. as nominee of DTC or, if the Series 1999-_
Bonds are no longer in book entry form, by check mailed first-class,
postage prepaid to a Series 1999-_ Bondholder's address as it appears on the
Record Date. After prior notice to the Series 1999-_ Bondholders, the Issuer
will pay the final installment of principal and premium, if any, only upon
presentation and surrender of the Series 1999-_ Bonds at a place specified
in the notice. A beneficial owner of a Series 1999-_ Bond will receive
payments from the securities intermediary through whom it holds the Series
1999-_ Bonds.
INTEREST
Interest on each Class of the Series 1999-_ Bonds will accrue
beginning on the Series Issuance Date at the respective Bond Rates
indicated above, in each case payable on each Payment Date, commencing
__________, 1999, to the persons in whose names the Series 1999-_ Bonds of
each Class are registered at the close of business on the preceding record
date.
Interest on the Series 1999-_ Bonds Class ___ will be calculated as
follows:
[To be provided at issuance for any Class with a floating rate Bond Rate]
On each Payment Date, each Class of Series 1999-_ Bonds will be
entitled to receive payments of interest as follows:
[To be provided at issuance]
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-_ Bonds
will be entitled to receive payments of principal, to the extent funds are
available, as follows:
[To be provided at issuance.]
provided that the principal payment on any Class on a Payment Date will not
be greater than the amount necessary to reduce the Class Principal Balance
of the Class to the amount specified in Table 2 for the Class and Payment
Date.
The entire unpaid principal amount of each Class of the Series 1999-_
Bonds will be due and payable on the Final Maturity Date for the Class.
The Expected Amortization Schedule for the Series 1999-_ Bonds. The
following table sets forth the Principal Balance that is scheduled to
remain outstanding for each Class of the Series 1999-_ Bonds at each
Payment Date after giving effect to the payments made on that date from the
Series Issuance Date to the Expected Final Payment Date for the Class. In
preparing the table, it has been assumed, among other things, that:
1. the Series 1999-_ Bonds are issued on ________,
2. payments on the Series 1999-_ Bonds are made on each Payment Date,
commencing on ________,
3. the Quarterly Servicing Fee for the Series 1999-_ Bonds equals ,
4. there are no net earnings on amounts on deposit in the Collection
Account,
5. operating expenses, including all fees, costs and expenses of the
Issuer and amounts owed by the Issuer to the Trustee, are paid (in
the amount of $_____ in the aggregate for all Series on each Payment
Date), and
6. all ITC Collections are deposited in the Collection Account in
accordance with the PP&L's forecasts.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Outstanding Class Principal Balance
Payment Date Series/Class [ ]
- ------------ --------------------------------------
, 1999
, 1999
, 1999
, 1999
, 2000
, 2000
, 2000
, 2000
, 2001
, 2001
, 2001
, 2001
[etc.]
Series 1999-_ 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-_ Bonds will be reduced in the amounts indicated
in the foregoing table. The actual principal payments on the Class may be
made on a Payment Date later than indicated in the table. The Series 1999-_
Bonds will not be in default if not paid on the date specified in Table 2.
OPTIONAL REDEMPTION OF THE SERIES 1999-_ BONDS
[Optional redemption provisions, if any, to be provided at issuance.]
THE OVERCOLLATERALIZATION AND CAPITAL AMOUNT
The Overcollateralization Subaccount. The Overcollateralization
Amount for the Series 1999-_ Bonds is $_______ million. As shown in Table
3, the Intangible Transition Charges related to the Series 1999-_ 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-_ Bonds. The Scheduled Overcollateralization Level for
each Payment Date for all Series of Transition Bonds and the Scheduled
Overcollateralization Level for each Payment Date, in each case as of the
date of this Prospectus Supplement, 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
Calculated
Payment Date Overcollateralization Level
------------ ---------------------------
[To be provided at issuance.]
On each Payment Date, the Trustee will draw on amounts in the Series 1999-_
Bondholders Overcollateralization Subaccount to the extent that amounts
available in the General Subaccount and the Reserve Subaccount are
insufficient to make scheduled allocations to the Series 1999-_ Bondholders
and to pay expenses of the Issuer, the Trustee and the Servicer and other
fees and expenses specified in the Indenture. 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 Capital Subaccount. Upon the issuance of the Series 1999-_ Bonds,
PP&L will deposit the Required Capital Amount for the Series 1999-_ Bonds of
$____ in the Capital Subaccount. On each Payment Date, the Trustee will draw on
any amounts in the Capital Subaccount in excess of to the extent amounts
available in the General Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to make scheduled
distributions to the Series 1999-_ Bondholders and to pay expenses of the
Issuer, the Trustee, the Servicer and other fees and expenses specified in
the Indenture.
OTHER CREDIT ENHANCEMENT
The Reserve Subaccount for the Series 1999-_ Bonds. ITC Collections
available on any Payment Date in excess of the amount necessary to pay:
1. expenses of the Trustee and the Servicer and other fees and expenses,
2. the amounts allocable to Series Subaccounts for principal of and
interest on each Series of Transition Bonds payable on the next
Payment Date,
3. 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 and
4. any amount required to replenish the Capital Subaccount
will be allocated to the Reserve Subaccount. On each Payment Date, the
Trustee will draw on any amounts in the Reserve Subaccount to the extent
amounts available in the General Subaccount are insufficient to make
scheduled distributions to the Series 1999-_ Bondholders and to pay expenses
of the Issuer, the Trustee, the Servicer and other fees and expenses
specified in the Indenture.
[Any others to be provided at issuance.]
See "The Indenture--The Collection Account for the Transition Bonds" 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 relating to, 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, or to assign,
sell or otherwise transfer intangible transition property.
Each Customer Class is responsible for a fixed percentage of the Intangible
Transition Charges. The Intangible Transition Charges will be applied among
Rate Schedules within the three Customer Classes, and will be adjusted
by Customer Class.
CUSTOMER CLASS DESCRIPTIONS:
PP&L's Customer Classes. Three customer classes (each, a "Customer
Class") make up PP&L's customer base: residential ("Residential"), small
commercial and industrial, including street-lighting ("Small Commercial and
Industrial") and large commercial and industrial ("Large Commercial and
Industrial"). Each Customer Class includes a number of rate schedules
(each, a "Rate Schedule"). 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 Customer Classes and Rate Schedules were effective on or before
November 1, 1997.
PP&L WILL ASSESS INTANGIBLE TRANSITION CHARGES ON PARTICULAR CUSTOMERS
PP&L will assess Intangible Transition Charges on the bills of each
person:
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 distribution 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 Final Order
issued on August 27, 1998 (the "PUC Order") by the Pennsylvania Public
Utility Commission (the "PUC") are to be recovered from each Customer in
each of PP&L's Customer Classes and Rate Schedules, so long as the Customer
accesses PP&L's transmission and distribution system, even if the Customer
elects to purchase electricity from another supplier or if the Customer
chooses to operate self-generation equipment while still accessing PP&L's
transmission and distribution system, as long as the Customer is located
within PP&L's retail electric service area.
Recovery of Qualified Transition Expenses will be allocated among
PP&L's Customer Classes based on the relative generation-related charges
borne by PP&L's Customer Classes through the electric rates specified in
PP&L's current electricity rate tariff. PP&L will determine the amount to
be allocated to each Rate Schedule within that Customer Class. That amount
will to be expressed as a charge or charges for each Rate Schedule. 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. 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. To the extent that
total revenues are affected by changes in usage, number of Customers, rate
of delinquencies and write-offs or other factors, ITC Collections will vary
from projections. 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 Seller and Servicer of the Intangible
Transition Property" 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, use (per kilowatt hour) components. The "Average ITC
Rate" tabulated below reflects the Rate Schedule ITC Collections divided by
the Rate Schedule use in kilowatt hour ("kwh"). The average monthly bill
for each PP&L Customer Class during 1998 was $______, $____ and $______,
respectively. The following projected average Intangible Transition Charges
(expressed as a rate applied to each Customer's total bill or
non-generation portion of the bill, as applicable) 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-_
Bonds:
TABLE 4
PROJECTED AVERAGE INTANGIBLE TRANSITION CHARGES FOR THE PERIOD FROM
TO DECEMBER 31, 1999
RESIDENTIAL
Rate Schedule Average ITC Rate per kwh
------------- ------------------------
Rate Schedule RS
Rate Schedule RTS
Rate Schedule RTD
SMALL COMMERCIAL AND INDUSTRIAL
Rate Schedule Average ITC Rate per kwh
------------- ------------------------
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
LARGE COMMERCIAL AND INDUSTRIAL
Rate Schedule Average ITC Rate per kwh
------------- ------------------------
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
PP&L MAY OBTAIN ADJUSTMENTS TO THE INTANGIBLE TRANSITION CHARGES
The Servicer on behalf of the Issuer is required to seek adjustments
to the Intangible Transition Charges on each Calculation Date as described
under "The PUC Order and the Intangible Transition Charges" in the Prospectus.
The PUC's Intangible Transition Charge Adjustment Process. In order
to enhance the likelihood that the actual ITC Collections are 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 the Series and to fund the related expenses and
reserves, 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
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- Bonds. In addition, the PUC Order provides that adjustments during
the final year of ITC Collections for any Series of Transition Bonds may be
made quarterly or monthly. The final Adjustment Date for the Series 1999-
Bonds will be ____.
The following table reflects information regarding the adjustments to
the Intangible Transition Charges assessed on each Customer Class and each
Rate Schedule that have been implemented since the first Adjustment
Date:
[To be provided at issuance of subsequent Series, if applicable.]
DESCRIPTION OF PP&L'S BUSINESS
The following is information which supplements that provided under
the heading "PP&L, Inc." in the Prospectus. For a more complete discussion
of the Seller and the Servicer, see "PP&L, Inc." and "The Seller and
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, Inc., a holding company formed in 1995. The assets of PP&L
equal approximately 92% of PP&L Resources's 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 reported net income of $________ on revenue of $_________ for
the [quarter][year] ended __________, 1999 as compared with net income of
$________ on revenue of $________ for the [quarter][year] ended _________,
1998.
Actual 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 the usage, adjusted for weather
effects, by all Customer Classes from 1988 through 1998 was __%. 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 period ended __________, the largest Customer
represented approximately ____%, and the ten largest Customers represented
approximately ____%, 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 do to the implementation of
a residential security deposit policy which is expected to be completed by
the end of 1999. PP&L does not expect, but cannot assure, that the
delinquency or write-off experience with respect to ITC Collections will
differ substantially from its delinquency and write-off history in
collecting electricity usage charges from its Customers.
INFORMATION WHICH IS AVAILABLE TO THE SERIES 1999-_ BONDHOLDERS
The Issuer Will File Information With the SEC. The Issuer will file
with the Securities and Exchange Commission (the "SEC") all periodic
reports as are required by the Securities Exchange Act of 1934, (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 "Available
Information" 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.
The Issuer may discontinue filing periodic reports under the Exchange Act
at the beginning of the fiscal year following the issuance of Transition
Bonds of any 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 the
Issuer, 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
since 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.
MATERIAL FEDERAL INCOME TAX MATTERS
FOR THE SERIES 1999-_ BONDS
Tax Treatment of Any Original Issue Discount for the Series 1999-_
Bonds. In the event a Class of Series 1999-_ Bonds is issued at a price
which is lower than its stated principal amount by more than a de minimis
amount, the excess of a Series 1999-_ Bond's stated redemption price at
expected maturity over its issue price will give rise to OID, which will be
treated as additional interest income to the holder of a Series 1999-_
Bond. Accordingly, a Series 1999-_ Bondholder will be subject to the
following tax consequences in addition to the tax consequences described in
the Prospectus. In general, the issue price of a Class of Series 1999-_
Bonds is the first price at which a substantial amount of Series 1999-_
Bonds of the Class is sold to the public. In general, if the principal
amount of a Series 1999-_ Bond exceeds its issue price by an amount that is
less than 0.25% of the Series 1999-_ Bond's principal amount payable at
expected maturity multiplied by the weighted average number of years to
maturity (the "De Minimis Amount"), then the excess is treated as de
minimis OID and the Series 1999-_ Bond is not treated as having been issued
with OID. Unless a Series 1999-_ Bondholder makes an election to accrue all
interest on a constant-yield basis, the Series 1999-_ Bondholder must
include de minimis OID in income proportionately as stated principal
payments on the Series 1999-_ Bond are made.
OID Is Calculated on Constant-Yield Basis. Except as set forth above,
a Series 1999-_ Bondholder that is a United States Person will be required
to include in taxable income any OID income as it accrues on a
constant-yield method based on the compounding of interest before the
receipt of cash payments attributable to this income. A Series 1999-_
Bondholder must take any OID income into account currently, regardless of
the Series 1999-_ Bondholder's general method of accounting for other
items. In general, a Series 1999-_ Bondholder will be required to include
in gross income the sum of the daily portions of OID with respect to the
Series 1999-_ Bond for each day during the taxable year in which the Series
1999-_ Bondholder holds the Series 1999-_ Bond. The daily portion is
determined by allocating to each day in any "accrual period" a pro rata
portion of the OID allocable to that accrual period. Accrual periods with
respect to a Series 1999-_ Bond may be of any length selected by the Series
1999-_ Bondholder and may vary in length over the term of the Series 1999-_
Bond, so long as:
1. no accrual period is longer than one year and
2. each scheduled payment of interest or principal on the Series 1999-_
Bond occurs on either the final day or the first day of the accrual
period. The amount of OID on a Series 1999-_ Bond that is allocable
to the accrual period is equal to the excess of:
a. the product of the adjusted issue price of the Series 1999-_ Bond
at the beginning of the accrual period and the yield to maturity
of the Series 1999-_ Bond (determined on the basis of compounding
at the close of each accrual period and properly adjusted for the
length of the accrual period) over
b. the sum of the payments of interest on the Series 1999-_ Bond that
are allocable to the accrual period.
The adjusted issue price of a Series 1999-_ Bond at the beginning of any
accrual period is the issue price of the Series 1999-_ Bond, increased by
the amount of accrued OID for each prior accrual period and decreased by
the amount of any payments of principal previously made on the Series
1999-_ Bond. A Series 1999-_ Bondholder that is a United States Person will
have a tax basis in a Series 1999-_ Bond equal to the Series 1999-_
Bondholder's purchase price (exclusive of any portion thereof representing
accrued but unpaid interest), decreased by any principal repayments and
increased by the amount of any OID previously taken into income.
OID Taxation Issues for Foreign Persons. A Series 1999-_ Bondholder
that is a Foreign Person will be subject to a United States withholding tax
of 30% upon the actual payment of OID income, except as described in the
Prospectus in the context of:
1. a Foreign Person that:
a. does not own directly or constructively 10% or more of the total
combined voting power of all classes of stock of PP&L entitled
to vote,
b. is not a controlled foreign corporation that is related to PP&L
through stock ownership and
c. meets the withholding documentation requirements discussed in the
Prospectus; and
2. where an applicable tax treaty provides for the reduction or
elimination of the withholding tax.
In the context of backup withholding and information reporting
requirements, the discussion in the Prospectus regarding interest income
would be similarly applicable to OID income. A Series 1999-_ Bondholder
that is a Foreign Person generally will be taxable in the same manner as a
United States corporation or resident with respect to OID income if the
income is effectively connected with the conduct of a trade or business in
the United States.
UNDERWRITING THE SERIES 1999-_ BONDS
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Issuer, PP&L and the
underwriters named below (the "Underwriters") for whom Morgan Stanley Dean
Witter is acting as the representative, the Issuer has agreed to sell to
the Underwriters, and the Underwriters have severally agreed to purchase,
the principal amount of Series 1999-_ Bonds set forth opposite each
Underwriter's name below:
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Series 1999-_
Bonds offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 1999- Bonds. The
Underwriters propose to offer the Series 1999-_ 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-_ Class Bonds, percent of the principal
amount of the Series 1999-_ Class Bonds and percent of the principal amount
of the Series 1999-_ Class 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-_ Class ___ Bonds,
percent of the principal amount of the Series 1999-_ Class Bonds and
percent of the principal amount of the Series 1999-_ Class ___ Bonds. After
the Series 1999-_ 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- Bonds. The Series 1999-_ Bonds are a new issue of securities with no
established trading market. The Series 1999-_ Bonds will not be listed on
any securities exchange. The Issuer has been advised by the Underwriters
that they intend to make a market in the Series 1999-_ Bonds but are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the Series 1999-_ Bonds.
Various Types of Underwriter Transactions Which May Affect the Price
of the Series 1999-_ Bonds. The Underwriters may engage in overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids with respect to the Series 1999-_ Bonds in accordance with
Regulation M under the Securities Exchange Act of 1934. Overallotment
transactions involve syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the Series 1999-_ Bonds so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve
purchases of the Series 1999-_ 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-_ 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-_ Bonds to be higher than they would otherwise be in the
absence of these transactions. None of the Seller, the Issuer or 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 the Issuer and its affiliates,
including PP&L. In addition, each Underwriter may from time to time take
positions in the Series 1999-_ Bonds.
Under the terms of the Underwriting Agreement, the Issuer and PP&L
have agreed to reimburse the Underwriters for some expenses.
The Issuer and the Seller have agreed to indemnify the several
Underwriters against some liabilities, including liabilities under the
Securities Act.
RATINGS FOR THE SERIES 1999-_ BONDS
It is a condition of any Underwriter's obligation to purchase the
Series 1999- Bonds that the Series 1999-_ Class Bonds be rated " " by S&P,
" " by Moody's , " " by Fitch and " " by Duff & Phelps, the Series 1999-_
Class Bonds be rated " " by S&P, " " by Moody's , " " by Fitch and " " by
Duff & Phelps, and the Series 1999-_ Class Bonds be rated " " S&P, " " by
Moody's , " " by Fitch and " " by Duff & Phelps, which, in each case, is in
one of the four highest rating categories of the Rating Agency.
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-_ Bond, and,
accordingly, there can be no assurance that the ratings assigned to any
Class of Series 1999-_ 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-_ Bonds is revised or withdrawn, the liquidity of the
Class of Series 1999-_ 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-_ Bonds other than payment in
full of each Class of Series 1999-_ Bonds by the applicable Final Maturity
Date.
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this
Prospectus Supplement and defined herein and the pages on which the
definition may be found. Some of the defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal
Definitions" on page 110 of the Prospectus.
TERM PAGE
De Minimis Amount......................................................S-17
Exchange Act...........................................................S-17
PUC Order..............................................................S-13
PUC....................................................................S-13
SEC....................................................................S-17
Series 1999-_ Bonds................................................S-2, S-9
Underwriters...........................................................S-18
Prospectus
PP&L Transition Bond Company, LLC, Issuer
PP&L, Inc., Seller and Servicer
Transition Bonds
CONSIDER THE ISSUER
CAREFULLY THE
RISK FACTORS o may periodically issue transition bonds in one or
BEGINNING more series with one or more classes;
ON PAGE OF
THIS PROSPECTUS. o will own:
These securities are o intangible transition property, which is the
backed by an right, created by Pennsylvania's Competition
intangible asset and Act, to collect intangible transition charges
issued by an issuer in amounts designed to be sufficient to repay
that has no assets the transition bonds, to pay other expenses
other than the specified in the Indenture and to fund the
property described trust accounts
in this Prospectus.
These securities are o other property described in this Prospectus.
not obligations of
PP&L, Inc. or any THE TRANSITION BONDS
affiliate other than
the issuer. o will be payable only from assets of the Issuer;
This Prospectus may o will be supported by trust accounts held by the
be used to offer and trustee for the transition bonds, and, if so
sell a series of stated in the applicable prospectus
transition bonds supplement, other credit enhancement; and
only if accompanied
by the Prospectus o will be issued in series, each of which the
Supplement for that issuer may issue without the consent of
series. existing transition bondholders.
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 __________.
TABLE OF CONTENTS
Page
INFORMATION ABOUT THE ISSUER THAT IS PUBLICLY AVAILABLE......................5
REPORTS TO TRANSITION BONDHOLDERS............................................5
INCORPORATION OF DOCUMENTS BY REFERENCE......................................5
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS..............6
Forward Looking Information............................................6
SUMMARY OF TERMS - PROSPECTUS................................................8
RISK FACTORS................................................................14
Legal, Legislative or Regulatory Action Which Could Adversely
Affect Transition Bondholders.........................................14
Unusual Nature of Intangible Transition Property......................15
Servicing Risks.......................................................16
The Risks Associated With Potential Bankruptcy Proceedings............18
Other Risks Associated With An Investment In The Transition Bonds.....20
PP&L, INC...................................................................23
THE COMPETITION ACT.........................................................24
The Competition Act's General Effect on the Electric Utility
Industry in Pennsylvania..............................................24
Recovery of Stranded Costs for PP&L and Other Pennsylvania Utilities..24
PP&L and Other Utilities May Securitize Stranded Costs................25
Only a Pennsylvania Utility May Sue for Nonpayment of Intangible
Transition Charges....................................................27
PP&L'S RESTRUCTURING PLAN...................................................27
The History of PP&L's Restructuring Plan..............................27
The PUC Order.........................................................28
How the Electricity Generation Service Provider of Last
Resort Will be Determined.............................................31
Other Provisions of PP&L's Restructuring Plan.........................31
THE PUC ORDER AND THE INTANGIBLE TRANSITION CHARGES.........................32
The PUC Order ........................................................32
PP&L's Intangible Transition Charges..................................34
Customers Within PP&L's Service Territory May Choose How Their
Electricity Consumption Is Billed.....................................35
PP&L's Universal Service Program for Low-Income Customers.............37
LEGAL ACTIVITY CHALLENGING THE COMPETITION ACT OR THE PUC ORDER.............37
Litigation Relevant to the Competition Act............................37
Legislative Activity..................................................39
Potential Unexpected Regulatory Action by the PUC.....................40
THE SELLER AND SERVICER OF THE INTANGIBLE TRANSITION PROPERTY...............41
PP&L, Inc.............................................................41
PP&L Resources, Inc...................................................41
PP&L's Customer Classes and Rate Schedules............................41
How PP&L Forecasts the Number of Customers and the Amount of
Electricity Usage.....................................................53
PP&L's Billing Process................................................55
PP&L Maintains Limited Information on its Customers' Creditworthiness.56
PP&L's Procedures for Collecting Intangible Transition Charges
from Electric Generation Suppliers and Other Third Party Billers......58
PP&L's Efforts to Deal With the Year 2000 Computer Issue..............59
PP&L TRANSITION BOND COMPANY LLC, THE ISSUER................................60
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS................62
THE TRANSITION BONDS........................................................62
General Terms of the Transition Bonds.................................63
Payments of Interest and Principal on the Transition Bonds............64
Redemption of the Transition Bonds....................................64
Credit Enhancement for the Transition Bonds...........................64
Transition Bonds Will be Issued in Book-Entry Format..................65
Definitive Transition Bonds...........................................68
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS...................................................69
THE SALE AGREEMENT..........................................................70
PP&L's Sale and Assignment of Intangible Transition Property..........70
PP&L's Representations and Warranties.................................71
PP&L's Obligation to Indemnify the Issuer and the Trustee and to
Take Legal Action.....................................................75
Successors to PP&L...................................................75
Governing Law for the Sale Agreement Between PP&L and the Issuer......76
THE SERVICING AGREEMENT.....................................................76
PP&L's Servicing Procedures...........................................76
Potential Limitations to Collecting Intangible Transition Charges.....77
The PUC's Intangible Transition Cost Adjustment Process...............78
PP&L May Provide a Letter of Credit to Ensure Remittances on Each
Remittance Date ......................................................79
PP&L May Make Advances of Interest and Principal on the
Transition Bonds......................................................79
PP&L's Compensation for Its Role as Servicer and Its Release of Other
Parties...............................................................79
PP&L's Duties as Servicer.............................................79
PP&L's Representations and Warranties as Servicer.....................80
PP&L, as Servicer, Will Indemnify the Issuer and Other Related
Entities..............................................................81
PP&L, as Servicer, Will Provide Statements to the Issuer and to the
Trustee...............................................................81
PP&L to Provide Compliance Reports Concerning the Servicing Agreement.82
Matters Regarding PP&L as Servicer....................................82
Events Constituting a Default by PP&L in Its Role as Servicer.........83
The Trustee's Rights If PP&L Defaults in Its Role as Servicer.........84
The Obligation of a Servicer That Succeeds PP&L.......................84
THE INDENTURE...............................................................84
The Security for the Transition Bonds.................................84
Transition Bonds May Be Issued in Various Series or Classes...........85
The Collection Account for the Transition Bonds.......................86
How Funds in the General Subaccount Will Be Allocated.................89
Reports to Holders of the Transition Bonds............................91
The Issuer and the Trustee May Modify the Indenture...................91
What Constitutes an Event of Default on the Transition Bonds..........94
Covenants of the Issuer...............................................96
Access to the List of Holders of the Transition Bonds.................97
The Issuer Must File an Annual Compliance Statement...................97
The Trustee Must Provide an Annual Report to All Transition
Bondholders...........................................................97
What Will Trigger Satisfaction and Discharge of the Indenture.........98
The Issuer's Legal Defeasance and Covenant Defeasance Options.........98
The Trustee...........................................................99
HOW A BANKRUPTCY OF THE ISSUER, SELLER OR SERVICER MAY AFFECT YOUR
INVESTMENT.................................................................100
MATERIAL TAX MATTERS FOR THE TRANSITION BONDS..............................102
General: Scope of Federal Income Tax Opinion.........................102
Tax Status of the Issuer and of the Transition Bonds.................104
Taxation of United States Transition Bondholders.....................104
Information Reporting and Backup Withholding.........................104
Taxation of Foreign Transition Bondholders...........................105
Material Commonwealth of Pennsylvania Tax Matters....................106
ERISA CONSIDERATIONS.......................................................107
Plan Asset Issues for an Investment in the Transition Bonds..........107
Prohibited Transaction Exemptions....................................107
Special Considerations Applicable to Insurance Company General
Accounts.............................................................108
General Investment Considerations For Prospective Plan Investors
in the Transition Bonds..............................................109
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS..............................109
RATINGS FOR THE TRANSITION BONDS...........................................110
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS.....................110
INDEX OF PRINCIPAL DEFINITIONS.............................................111
INFORMATION ABOUT THE ISSUER THAT IS PUBLICLY AVAILABLE
The Issuer has filed with the Securities and Exchange Commission (the
"SEC") a registration statement (as amended, the "Registration Statement")
under the Securities Act of 1933 (the "Securities Act"), with respect to
bonds it proposes to issue (the "Transition Bonds"). This Prospectus, which
forms a part of the Registration Statement, and any supplement to this
Prospectus (each, a "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. The
Issuer will file with the SEC all periodic reports as are required by the
Securities Exchange Act of 1934 (the "Exchange Act"), and the rules,
regulations or orders of the SEC thereunder. The Issuer may discontinue
filing periodic reports under the Exchange Act at the beginning of the
fiscal year following the issuance of the Transition Bonds of any Series if
there are fewer than 300 holders of the Transition Bonds.
REPORTS TO TRANSITION BONDHOLDERS
Pursuant to the Indenture, The Bank of New York, as Trustee (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, the Issuer and the Intangible Transition Property and
all other property pledged to the Trustee (the "Collateral"). Unless and
until Transition Bonds are issued in definitive form, the reports will be
provided to Cede & Co. ("Cede"), as the nominee for The Depository Trust
Company ("DTC"). The reports will be available to beneficial owners of the
Transition Bonds (each, a "Transition Bondholder") upon request to the
Trustee or the Servicer. The financial information provided to Transition
Bondholders will not be examined and reported upon, nor will an opinion
thereon be provided, by an independent public accountant. See "The
Indenture --The Trustee Must Provide an Annual Report to All Transition
Bondholders" in this Prospectus and "Description of Intangible Transition
Property-Reports to Transition Bondholders" in the Prospectus Supplement.
INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer 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. The Issuer will provide
without charge to each person to whom a copy of this Prospectus is
delivered, on the written or oral request of this person, a copy of any or
all of the documents incorporated herein by reference, except the exhibits
to the documents (unless these exhibits are specifically incorporated by
reference in the documents). Written requests for these copies should be
directed to the Issuer, c/o __. Telephone requests for these copies should be
directed to the Issuer at ___.
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information on 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.
The information in this Prospectus and a Prospectus Supplement may
not be current as of any date after the date of the Prospectus or
Prospectus Supplement.
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 listing of the pages where capitalized terms used in
this Prospectus are defined beginning on page 111 in this Prospectus.
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 the Issuer 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 and capacity;
4. weather variations affecting customer energy usage;
5. the need for and effect of any business or industry restructuring;
6. new accounting requirements or new interpretations or applications of
existing requirements;
7. operating performance of PP&L's facilities;
8. environmental conditions and requirements; 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 the Issuer 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 the Issuer undertakes any obligation
to update the information contained in the statement to reflect subsequent
developments or information.
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 14 OF THIS PROSPECTUS.
THE ISSUER: PP&L Transition Bond Company LLC, a Delaware
limited liability company (the "Issuer"),
wholly owned by CEP Group, Inc., a
Pennsylvania corporation wholly owned by
PP&L, Inc. ("PP&L") was formed solely to
purchase intangible transition property and
to issue one or more series of transition
bonds secured by the intangible transition
property. Each series may consist of one or
more classes. On the issue date for each
series, except in the event of a refunding of
outstanding transition bonds, PP&L will sell
intangible transition property to the Issuer
pursuant to an agreement between PP&L and the
Issuer. PP&L, acting as servicer, will
service the transferred intangible transition
property pursuant to a servicing agreement
between the Issuer and the servicer.
Issuer's Address: Two North Ninth Street; Allentown, PA 18101
Issuer's Telephone Number: (610) 774-5151
Seller of the Intangible PP&L, an operating electric utility,
Transition incorporated under the laws of the
Property to the Issuer: Commonwealth of Pennsylvania in 1920. PP&L
serves approximately 1.3 million customers in
29 counties of central eastern Pennsylvania,
with a population of approximately 2.6
million persons.
Seller's Address: Two North Ninth Street, Allentown, PA 18101
Seller's Telephone Number: (610) 774-5151
Servicer of the Intangible PP&L will be responsible for collecting
Transition Property: intangible transition charges on behalf of the
Issuer.
Trustee: The Bank of New York
The Assets of the Issuer: The Issuer will own:
o the portion of the intangible transition
property transferred to the Issuer (See
"The Sale Agreement --PP&L's Sale and
Assignment of Intangible Transition
Property" in this Prospectus);
o trust accounts held by the Trustee; and
o other credit enhancement acquired or held
to ensure payment of the transition bonds.
THE COLLATERAL
The Issuer 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, through intangible
transition charges payable by retail consumers of electricity within PP&L's
service territory who access PP&L's transmission and distribution system,
(i) the principal amount of the transition bonds, and (ii) the interest,
fees, expenses, credit enhancement and premiums, if any, associated with
the transition bonds. 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 Sale Agreement
- --PP&L's Sale and Assignment of Intangible Transition Property" in this
Prospectus.
PP&L's Customers belong to one of three customer classes. These classes
are: residential, small commercial and industrial (which includes street-
lighting), and large commercial and industrial. Each customer class is
further divided into rate schedules. These rate schedules total 23. These
customer classes are described in greater detail in "The Seller and
Servicer of the Intangible Transition Property-PP&L's Customers" in this
Prospectus.
PP&L will sell up to $2.85 billion of its intangible transition property to
the Issuer. PP&L, as servicer of the intangible transition property, will
collect the intangible transition charges from Customers within its service
territory on behalf of the Issuer. Other entities may be required to
collect intangible transition charges from Customers within PP&L's service
territory and pay the amounts collected to the Servicer. See "The Seller
and Servicer of the Intangible Transition Property" in this Prospectus.
PAYMENT SOURCES
On each payment date, the Trustee will pay amounts owed on all outstanding
series of transition bonds from:
o amounts collected by the Servicer for the Issuer with respect to
intangible transition charges during the prior quarter; and
o amounts available for withdrawal from trust accounts held by the
Trustee, including specified investment earnings on amounts in the
trust accounts, or paid pursuant to contracts pledged to secure one or
more series of transition bonds. All accounts referred to in this
Prospectus will be held by the Trustee in trust, and are described in
greater detail under "The Indenture-The Collection Account for the
Transition Bonds" in this Prospectus.
PRIORITY OF DISTRIBUTIONS
On each payment date specified in the related Prospectus Supplement, the
Trustee will pay or allocate remittances by the Servicer of collections of
intangible transition charges and certain investment earnings, to the
extent funds are available in the collection account, in the following
order of priority:
(1) payment of the Trustee's fee;
(2) payment of fees to the independent manager of the Issuer;
(3) payment of the servicing fee to the Servicer in the amount specified
in the related Prospectus Supplement;
(4) payment of the administration fee payable under the administration
agreement between the Issuer and PP&L;
(5) payment of current operating expenses of the Issuer (up to an
aggregate of [$ ] for each payment date for all series);
(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;
(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 the
Issuer;
(10) replenishment of any shortfalls in the capital subaccount;
(11) allocation of any required amount to the overcollateralization
subaccount;
(12) allocation of the remainder, if any, to the reserve 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 sum of interest and 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 class or series of transition bonds, amounts
available will be allocated on a pro-rata basis based on the sum of
interest and scheduled principal payable on the payment date.
For a diagram depicting how the intangible transition charges will be
allocated, refer to page 12 in this Prospectus.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any Prospectus Supplement, credit enhancement
for the transition bonds will be as follows:
o The servicer of the intangible transition property on behalf of the
Issuer will make adjustments to the intangible transition charges it
bills to customers, once the Pennsylvania PUC approves these
adjustments. PP&L will make these adjustments if it determines that
intangible transition charges are either greater or lesser than the
amount necessary to make timely payments on the transition bonds and
to pay transaction fees and expenses, or if any of the subaccounts is
not funded to its required level. The servicer can make these changes,
with the approval of the PUC, once a year, except during the last year
of the transaction, when it can make these adjustments as frequently
as monthly. See "The PUC Order and the Intangible Transition Charges -
The PUC Order" in this Prospectus.
o Collection Account - Under the Indenture, the Issuer will establish a
single collection account for all series of transition bonds which
will be held by the Trustee. The collection account will be divided
into "subaccounts" which will allocate the funds deposited in the
collection account to specific uses. Funds received from collections
of the intangible transition charges will initially be allocated to
the general subaccount of the collection account. In addition, each
series of transition bonds will have its own series subaccount.
Amounts on deposit in a series subaccount will be used to pay the
principal of and interest on the related series of transition bonds.
The primary subaccounts for credit enhancement purposes are:
1) Overcollateralization Subaccount - Each Prospectus Supplement will
set a funding level for the overcollateralization subaccount that
takes into account the issuance of the additional series of
transition bonds. The overcollateralization amount to be funded by
each series of transition bonds will equal the percentage of the
principal amount of that series stated in the related Prospectus
Supplement. That amount will be funded over the term of the
transition bonds.
2) Capital Subaccount - The amount of capital required to be held by the
Issuer for a series of transition bonds, which will be the amount
specified in the related Prospectus Supplement, will be deposited
into the capital subaccount on the date of issuance of that series.
Any shortfall in the aggregate capital subaccount for an existing
series will be replenished before a new series may be issued and to
the extent funds are depleted during the term of the transaction.
3) Reserve Subaccount - If the Issuer collects intangible transition
charges in excess of amounts then scheduled to be paid or due on a
series of transition bonds plus related expenses, any required
replenishment of the capital subaccount and the scheduled
overcollateralization amount, the excess 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, as specified in the
related Prospectus Supplement. The credit enhancement for the transition
bonds is intended to protect you against losses or delays in scheduled
payments on your transition bonds.
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 which were approved by an order of the PUC
until the transition bonds are fully repaid or discharged. However, the
Commonwealth may limit or alter the value of intangible transition charges
or intangible transition property if adequate compensation is made for the
full protection of the 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 the Issuer.
PAYMENT AND RECORD DATES
The payment and record dates for each series of transition bonds will be
listed in the corresponding Prospectus Supplement.
EXPECTED FINAL PAYMENT DATES AND FINAL MATURITY DATES
The expected final payment date for each series or class of transition
bonds will be the date when all interest and principal of that series or
class is expected to be paid in full. The final maturity date for a series
or class of transition bonds will be on or after the expected final payment
date. 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.
THE ALLOCATIONS AND DISTRIBUTIONS DIAGRAM IS OMITTED
THE PARTIES TO THE TRANSACTION DIAGRAM IS OMITTED
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
Legal, Legislative or Regulatory Action Which Could Adversely Affect
Transition Bondholders
Legal Action May Reduce The intangible transition property is the creation
The Value of Your of the Competition Act and an order issued by
Investment the Pennsylvania Public Utility Commission (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
Competition Act was not validly enacted by the
Pennsylvania legislature. 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 law suit asserted that the Competition
Act provisions that allowed for the recovery of
intangible transition charges violated the
Commerce Clause of the U.S. Constitution. The
Pennsylvania courts rejected that claim, and a
petition that the U.S. Supreme Court hear the case
was denied. For a more complete description of
relevant litigation, see "Legal Activity
Challenging 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 "Legal Activity Challenging
The Competition Act or The PUC Order" in this
Prospectus.
Future Legislative The value of your investment may decline due to
Action May Reduce legislative action. For example
The Value of Your
Investment o The Pennsylvania legislature may repeal the
Competition Act in order to serve a
significant public purpose such as protecting
the public health and safety.
o 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.
o 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 "Legal Activity Challenging the
Competition Act or the PUC Order-Legislative
Activity" in this Prospectus.
The PUC May Take Apart from key items set forth in the PUC Order,
Actions Which May which are stated to be irrevocable, the PUC
Reduce the Value of retains the power to adopt, revise or rescind rules
Your Investment or regulations affecting PP&L or a successor utility.
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. See "Legal
Activity Challenging 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 Under the Competition Act, the Issuer's authority to
PP&L May Reduce the collect intangible transition charges may depend
Value of Your on the continued operation of generation
Investment 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 the Issuer'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.
Adjustments To PP&L, as servicer, is required to request from the
Intangible PUC, on behalf of the Issuer, periodic adjustments
Transition Charges of the intangible transition charges. These
May Not Be adjustments are intended to provide, among other
Sufficient To things, for timely payment of the transition bonds.
Protect Your However, the frequency of these adjustments is
Investment limited. PP&L will 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. However, unforeseen events, such as
weather, changes in economic conditions or market
changes due to increased competition, may make
projections inaccurate. Moreover, PP&L might
request adjustments that are insufficient to
provide for timely payment of the transition
bonds. In addition, 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.
Adjustments To The customers who will be responsible for paying
Intangible Transition intangible transition charges are divided into
Charges by Rate twenty-three rate schedules. These rate schedules
Schedule May Result In are grouped among three customer classes. Intangible
Insufficient Collections transition charges will be assessed by rate schedule
within each customer class and 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 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, or if consumers representing a
significant percentage of a rate schedule cease to
be customers, 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. 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 The Competition Act and the PUC Order do not permit
Cannot Compensate costs to be shifted among customer classes. As a
For the Failure To result, a shortfall in collections of intangible
Collect Intangible transition charges in one customer class cannot be
Transition Charges made up by adjustments of intangible transition
From Another charges in the other customer classes. See "The
Customer Class Competition Act" in this Prospectus.
The Amount of Intangible The Competition Act and the PUC Order set a cap on
Transition Charges May adjustments of intangible transition charges
Not Exceed a Statutory through December 31, 2009. This cap applies to
Cap 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. If the servicer
cannot adjust intangible transition charges within
a rate schedule for that reason, the servicer
would have to adjust intangible transition charges
for the remaining rate schedules within that
customer class. These adjustments to the remaining
rate schedules in that customer class may result
in intangible transition charges which are
assessed on those remaining rate schedules
reaching 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" in this
Prospectus.
The Issuer May Not PP&L may not charge intangible transition charges
Charge Intangible for electricity usage after December 31, 2009. If
Transition Charges the transition bonds are not paid in full from
After December 31, 2009 intangible transition charges imposed for
electricity usage through December 31, 2009, or
from credit enhancement funds, no other funds will
be available to pay the unpaid balance due on 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 PP&L, as servicer, will be responsible for billing
on PP&L or its Successor and collecting intangible transition charges and
Acting as Servicer of for submitting requests to the PUC to adjust these
the Intangible charges. If PP&L ceased servicing the intangible
Transition Property transition property, it might be hard to find a
successor servicer. A successor servicer may have
difficulty performing these functions. For
example, a successor servicer that is not a
utility may not adjust intangible transition
charges or 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 and the
Issuer can not 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 PP&L cannot change the method of determining the
Practices May amount of intangible transition charges the Issuer
Reduce the Value Of imposes on each customer, because the methodology
Your Investment of calculating such charges is set in the PUC
Order. 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 or the PUC may
require changes to these practices. These billing
and collection adjustments may materially reduce
the value of your investment. See "The Seller and
Servicer of the Intangible Transition
Property--How PP&L Forecasts the Number of
Customers and the Amount of Electricity Usage" in
this Prospectus.
PP&L has Limited If PP&L incorrectly evaluates the Customers'
Information On The ability to pay their bills, it may experience
Customers' Ability To delays in receiving payments and it may have to
Pay Intangible write off some payments. In that case, it may have
Transition Charges to request adjustments of the intangible
transition charges and, if those adjustments are
not timely and accurate, your investment's value
may be materially reduced. See "The Seller and
Servicer of the Intangible Transition
Property--PP&L Maintains Limited Information on
its Customers' Creditworthiness" in this
Prospectus.
It May be More Customers may pay intangible transition charges to
Difficult to third parties which will forward the charges to
Collect Intangible PP&L, as servicer for the Issuer. These entities
Transition must pay PP&L the intangible transition charges
Charges From Third even if they do not collect them from retail
Parties Than customers. PP&L will have limited rights to
From Pp&l's Retail collect intangible transition charges directly
Customers 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, the Issuer
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:
o 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.
o If a third party collector defaults, PP&L or
a successor servicer may subsequently
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 the
Issuer by the defaulted third party. Also, 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.
Although 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 the Issuer,
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 Customer within PP&L's service territory may stop or
Service Territory May delay paying intangible transition charges
Delay Making Intangible for the following reasons:
Transition Charge
Payments o They may become confused by the assessment of a
charge they have not seen before.
o Economic or demographic changes may lower 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 and raise
the possibility that customers would seek
legal intervention to reduce or eliminate the
intangible transition charges.
o 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. If they remain connected to PP&L's
distribution system, they will still be
responsible for paying intangible transition
charges. However, these consumers, and the
amount of intangible transition charges they
must pay, may be difficult to identify.
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 Principal and interest payments on the transition
Payments On Transition bonds could be delayed if PP&L, in its capacity as
Bonds Due To servicer, or the Trustee experiences problems in
Potential Computer its computer programs (or those of vendors on whom
Program Problems they rely) relating to the year 2000. Many
Beginning In existing computer programs use only two digits to
The Year 2000 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 December
31, 1998 more than 75% of PP&L's mainframe
applications were Year 2000 compliant. All
mainframe computer systems are expected to be Year
2000 compliant by mid-1999. If PP&L (or a third
party on whom PP&L relies for collection of
intangible transition charges) does not have a
computer system that is year 2000 compliant by
January 1, 2000, PP&L's ability to service the
intangible transition property may be materially
and adversely affected. If the Trustee does not
have a computer system that is year 2000 compliant
by January 1, 2000, the Trustee's ability to make
distributions on the transition bonds may be
materially and adversely affected. See "The Seller
and Servicer of the Intangible Transition
Property--PP&L's Efforts to Deal With the Year
2000 Computer Issue" in this Prospectus.
The Risks Associated With Potential Bankruptcy Proceedings
PP&L Will Commingle PP&L will not segregate the intangible transition
Intangible Transition charges from the other funds it collects from its
Charges With Other customers. The intangible transition charges will
Revenues Which May be segregated only after PP&L pays them to the
Harm Your Investment Trustee. If at any time PP&L has the requisite
In Case of Bankruptcy credit ratings from the rating agencies, or if
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, then PP&L will be required to
remit collections on a monthly basis only.
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 and this could materially reduce the
value of your investment.
The Competition Act provides that the rights of
the Issuer to the intangible transition property
are not affected by the commingling of the funds
with PP&L's other funds. In a bankruptcy of PP&L,
however, a bankruptcy court might rule that
federal bankruptcy law, which may take precedence
over state law, does not recognize the right of
the Issuer 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, and the Issuer would have a
general unsecured claim against PP&L for that
amount. That treatment 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 of the Issuer,
Seller or Servicer May Affect Your Investment" in
this Prospectus.
Bankruptcy Of PP&L The Competition Act and the PUC order provide that
Could Result in as a matter of Pennsylvania state law,
Losses or Delays In
Payments On The o intangible transition property is a continuous
Transition Bonds. current property right of PP&L for all purposes,
o 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
o a transfer of the intangible transition
property from PP&L to the Issuer 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 the
Issuer 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 concluded that one or more of the state
property law provisions described above violate
fundamental bankruptcy policies and therefore
refused to enforce them, or if the bankruptcy
court concluded that despite the separateness of
PP&L and the Issuer, the two companies should be
consolidated, the effect 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.
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:
o the Trustee could be prevented from exercising
any remedies against PP&L on your behalf, from
recovering funds to repay the transition bonds
or from replacing PP&L as servicer, without
permission from the bankruptcy court;
o the bankruptcy court could order the Trustee
to exchange the intangible transition property
for other property, which might be of lower
value;
o tax or other government liens on PP&L's
property that arose after the transfer of the
intangible transition property to the Issuer
might nevertheless have priority over the
Trustee's lien and might be paid from
intangible transition charge collections before
payments on the transition bonds;
o 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;
o the bankruptcy court might rule that the
intangible transition charges collected by the
Issuer should be used to pay a portion of the
cost of providing electric service; or
o the bankruptcy court might rule that the remedy
provisions of the intangible transition
property sale agreement are unenforceable,
leaving the Issuer with a claim of actual
damages against PP&L, which may be difficult to
prove.
See "How a Bankruptcy of the Issuer, Seller or
Servicer May Affect Your Investment" in this
Prospectus.
A PUC Sequestration If PP&L defaults on its obligations as servicer,
Order for Intangible the Competition Act allows the PUC to order the
Transition Property sequestration and payment of all intangible
In Case of Default transition charge collections to the transition
Might Not Be bondholders. The Competition Act states that this
Enforceable In PUC order would be effective even if made while
Bankruptcy 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, but the bankruptcy court may
deny the request. See "How a Bankruptcy of the
Issuer, Seller or Servicer May Affect Your
Investment" in this Prospectus.
Other Risks Associated With an Investment in the Transition Bonds
Absence of Secondary The underwriters for the transition bonds may
Market for Transition assist in resales of the transition bonds but they
Bonds Could Limit Your are not required to do so. A secondary market for
Ability to Resell the transition bonds may not develop. If a
Transition Bonds secondary market for the transition bonds 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 You may suffer a material loss on your transition
Transition bonds if the assets of the Issuer are insufficient
Bonds Due to Limited to pay the principal amount of the transition
Assets of the Issuer bonds in full. The only source of funds for
payments on the transition bonds will be the
assets of the Issuer. These assets are limited to
the intangible transition property, the funds on
deposit in the trust accounts held by the Trustee,
contractual 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 seller, 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,
The Issuer" in this Prospectus.
The Issuer May Issue The Issuer may issue other series of transition bonds
Additional Series Of without your prior review or approval. These series
Bonds 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, but it may reduce or delay payment on
your transition bonds. 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 The transition bonds will be rated by one or more
Ratings established rating agencies. The ratings
merely analyze the probability that the Issuer
will repay the total principal amount of the
transition bonds at final maturity and will make
timely interest payments. The ratings do not
assess the speed at which the Issuer will repay
the principal of the transition bonds. Thus, the
principal of your transition bonds may be repaid
earlier (but only in the case of a redemption or
acceleration) or later 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, and 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 If so provided in a Prospectus Supplement, there
Reinvest the Principal may be optional redemptions of the transition
Of Your Transition bonds. Future market conditions may require you to
Bonds At a Lower Rate reinvest the proceeds of a redemption at a rate
Of Return Because Of lower than the rate you received on the transition
Optional Redemption bonds. The Issuer cannot predict whether it will
Of the Transition redeem any series of transition bonds. See
Bonds "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 If the seller breaches a representation or
Indemnify the Issuer warranty, it is obligated to indemnify the Issuer
For a Breach of A and the trustee for any liabilities, obligation,
Representation Or claims, actions, suit or payments resulting from
Warranty May Not Be that breach, as well as any reasonable costs and
Sufficient to ProtecT expenses incurred. In addition, the seller is
Your Investment obligated to indemnify the Issuer and the trustee
for principal and interest on the transition bonds
not paid when due in accordance with their terms
and the amount of any deposits to the Issuer
required to have been made which are not made when
so required as a result of a breech of a
representation or warranty. However, the amount of
any indemnification paid by the servicer or the
seller may not be sufficient for you to recover
your transition bond investment. See "The Sale
Agreement - PP&L's Obligation to Indemnify the
Issuer and the Trustee and to Take Legal Action"
in this Prospectus.
You Might Receive The amount and the rate of collection of
Principal Payments intangible transition charges that PP&L will
Later Than You collect from each customer class will partially
Expected 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. 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.
PP&L, INC.
PP&L's Operations. PP&L, Inc. ("PP&L") is an operating electric
utility, incorporated under the laws of the Commonwealth of Pennsylvania
(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. ("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
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. During 1998, about 96% of
total operating 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' 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 and McCarl's Inc., which provide
mechanical contractor and engineering services.
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 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 Pennsylvania Electricity
Generation Customer Choice and 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 ("electric generation suppliers") 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 Pennsylvania Public
Utility Commission (the "PUC"). When PP&L provides 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
(with respect to PP&L, "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 (with respect to PP&L, a
"Customer") 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 (and in the case of PP&L was extended to December 31, 2009). 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.
In August 1997, the PUC issued an order modifying and approving
PP&L's pilot program under Competition Act and PUC guidelines. Retail
customers participating in the PP&L and other Pennsylvania utilities' pilot
programs began to receive power from their supplier of choice in November
1997. Under its pilot program, approximately 60,000 PP&L residential,
commercial and industrial customers chose their electric supplier. PP&L
continued to provide all transmission and distribution, customer service
and back-up energy supply services to participating customers in its
service area. Only those alternative suppliers licensed by the PUC and in
compliance with the state tax obligations set forth in the Competition Act
could participate in the pilot programs. Approximately 87 suppliers
obtained such licenses to participate in the pilot programs.
RECOVERY OF STRANDED COSTS FOR PP&L AND OTHER PENNSYLVANIA UTILITIES
The Competition Act allows utilities (including PP&L) 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 access
to the utility's transmission and distribution system, the customers will
be assessed regardless of whether the customers purchases 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 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 (with respect to PP&L, 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 (with respect to PP&L,
the "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
Which Could Adversely Affect Transition Bondholders" 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 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
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: (i) the parties expressly
state in governing documents that a transfer is to be a sale or other
absolute transfer and (ii) 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 with the PUC a
comprehensive restructuring plan (the "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 and evidentiary hearings were held during August
1997. On June 15, 1998, the PUC issued an order concerning PP&L's
restructuring plan (the "PUC Restructuring Order"). The PUC Restructuring
Order authorized PP&L to recover stranded costs of $2.864 billion, less 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 (the "Eastern District Court") 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 (the "Commonwealth Court") 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
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, the 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 Commonwealth Court. See "Legal Activity
Challenging 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, Inc.'s
Restructuring Plan and Related Court Proceedings (the "Joint Petition")
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 Eastern District Court and
the Commonwealth Court arising from challenges to the PUC Restructuring
Order. See "Legal Activity Challenging 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 (together with the order of the PUC supplementing
that Final Order, 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 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 determines will remain following
mitigation by PP&L (the "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. 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 for the years 1999 through 2009.
<TABLE>
<CAPTION>
TABLE 1
AVERAGE LEVELS OF COMPETITIVE TRANSITION CHARGES - 1999-2009
Kwh CTC Revenue CTC Rate T&D Shopping Bundled
Year Consumed Requirement (Cents/kwh) Rate(3) Credit(4) Rate(5)
With GRT (Cents/kw (Cents/kwh) (Cents/kwh)
(1)(2)
<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 37,856,157,22 $ 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>
- --------------------
(1) The gross receipts tax is imposed on public utilities (including
electric utilities) organized under the laws of, or doing business
in, the Commonwealth and is currently 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.
(2) 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.
(3) Transmission and Distribution Rate.
(4) "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 the 4% system average reduction from the
current total bundled bill of Customers in 1999.
(5) Sum of the CTC Rate plus the T&D Rate plus the Shopping Credit.
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 will be collected, taking into account the
4% system average reduction from the current total bundled bill of
Customers in 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 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.
PP&L Must Unbundle its Electric Rates. The Joint Petition requires
PP&L to unbundle its retail electric rates on January 1, 1999 into the
following components:
1. distribution charges,
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 for One Year. 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 and extends rate caps on transmission and distribution rates until
December 31, 2004. 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.
TABLE 2
SCHEDULE OF SYSTEM-WIDE AVERAGE RATES (PER KILOWATT-HOUR ("KWH")
Effective Transmission CTC Shopping Generation Total
Date & Distribu- (1) Credit Rate Cap(2) Rate(3)
tion(4)
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 (4) 1.27 4.41 5.68 (4)
Jan. 1, 2006 (4) 1.27 4.78 6.05 (4)
Jan. 1, 2007 (4) 1.21 4.84 6.05 (4)
Jan. 1, 2008 (4) 1.14 4.91 6.05 (4)
Jan. 1, 2009(5) (4) 1.03 5.02 6.05 (4)
- ---------------
(1) CTC rates are fixed by Rate Schedule for each year of the transition
period and include Intangible Transition Charges once the Transition Bonds
are issued.
(2) The "Generation Rate Cap" equals the sum of the CTC and Shopping
Credit. The generation portion of bills for customers who continue to be
supplied by PP&L as the supplier of last resort will not, on average,
exceed the figures in this column.
(3) The total rate equals the sum of Transmission & Distribution plus
Generation Rate Cap. Customers who continue to be supplied by PP&L as the
supplier of last resort will, on average, pay the total rate shown in the last
column. The 1999 rate represents a 4% reduction from the average bundled
rate of 7.42 cents/kwh.
(4) Under the PUC Order the cap on PP&L's transmission and distribution
rates is extended through 2004. Under the Competition Act, T&D rates were
capped until June 30, 2001.
(5) Effective until December 31, 2009.
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 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 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 will be 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 by January 1,
1999, an additional one-third by January 2, 1999 and the remaining
one-third by January 1, 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 can 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 applicable riders), all of which are in the Large
Commercial and Industrial Customer Class, all customers can 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 a provider of last resort other than PP&L (the service provided by this
supplier, "Competitive Default Service"). The alternative supplier (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
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.
The Intangible Transition Charges Will Be Assessed, Even if PP&L
Delegates its Rights and Responsibilities. 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
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 the specified fee referred to
above).
The PUC Order also authorizes PP&L to agree that an alternative party,
which may be a Trustee, will 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:
1. shall be binding upon PP&L or the alternative entity, its successors
and assigns and
2. 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 aggregate principal amount
of transition bonds and to pay interest thereon, plus an amount sufficient
to provide for any credit enhancement, to fund any reserves, redemption
premiums, if any, servicing fees and other expenses relating to the
Transition Bonds (collectively, the "Qualified Transition Expenses"). In
addition to the Intangible Transition Charges, PP&L is 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 the amount necessary to ensure the
receipt by the Trustee of revenues sufficient to recover fully the
Qualified Transition Expenses. Adjustments during the final 12 months
during which any series of transition bonds is outstanding may be quarterly
or monthly if necessary to ensure 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 amount received by the Trustee in
Intangible Transition Charges from Customers (the "ITC Collections") is
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. During the last year the Transition Bonds are
outstanding, the PUC will permit each adjustment request to become
effective within 15 days after filing.
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 in an amount sufficient to recover
all of PP&L's Qualified Transition Expenses and all revenues, collections,
claims, 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
each Customer in each of PP&L's Customer Classes and Rate Schedules.
Recovery of Qualified Transition Expenses will be allocated among
PP&L's Customer Classes based on a one-time calculation of a percentage
representing the relative generation-related costs borne by PP&L's Rate
Schedules through current electric rates approved by the PUC. PP&L will
determine the total amount of Intangible Transition Charges required to be
billed to each Rate Schedule in order to generate ITC Collections
sufficient to ensure timely recovery of Qualified Transition Expenses.
These charges will be reflected in each Customer's bill within each Rate
Schedule. The charges will vary 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. To the extent that
total revenues are affected by changes in usage, number of Customers, rate
of delinquencies and write-offs or other factors, ITC Collections will vary
from projections. 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 Seller And Servicer of The Intangible
Transition Property-PP&L's Customer Classes and Rate Schedules" 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, which will be pro-rated in
the case of the first bill after issuance of a Series of Transition Bonds
to account for any partial month since the date of issuance. For instance,
if a particular Series Issuance Date is August 15, bills that include
current charges for services provided before August 15 will not 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 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 and expenses, the ITC
Collections will be released by the Trustee to the Issuer.
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 amortization schedule (each an "Expected
Amortization Schedule"), to pay interest, to fund the Overcollateralization
Subaccount to the amount required to be on deposit in the
Overcollateralization Subaccount (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, 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 during the last year that the Transition Bonds
are outstanding 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 a request with the PUC (each, an
"Adjustment Request") on October 1 of each year and on any additional date
or dates specified in the Prospectus Supplement for any Series of
Transition Bonds (each, a "Calculation Date"), requesting modifications to
the Intangible Transition Charges which are designed to result in the
aggregate outstanding principal balance for each Series or Class (the
"Transition Bond Balance") equaling the amount provided for in the Expected
Amortization Schedule for that Series or Class (the "Projected Transition
Bond Balance"), the amount on deposit in the Overcollateralization
Subaccount equaling the Scheduled Overcollateralization Level, and the
amount in the Capital Subaccount equaling the Required Capital Amount, each
by the Payment Date immediately preceding the next Adjustment Date or the
Expected Final Payment 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 whether these adjustments should be instituted
within 90 days of the Adjustment Request. The adjustments to the Intangible
Transition Charges are expected to be implemented on January 1 of the next
year and on the date or dates in the final year of ITC Collections for a
Series of Transition Bonds specified in the related Prospectus Supplement
(each, an "Adjustment Date"). In order to obtain approval of the 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. Adjustments during the final
year that the Transition Bonds are outstanding 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. During the last year the
Transition Bonds are outstanding, 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 and December 31, 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 several billing options as of mid-1999 for all
Rate Schedules, except for Residential Rate Schedules for which the
starting date is January 1, 2000: consolidated billing from the utility,
consolidated billing from the electric generation supplier or other third
party, or separate billing from the utility and from either the electric
generation supplier or other third party providing billing services. Any
electric generation supplier or other third party that provides
consolidated billing is required to pay the utility amounts billed by the
utility to the electric generation supplier or other third party, including
the Intangible Transition Charges, regardless of the electric generation
supplier's or other third party's ability to collect these amounts from its
customers. In effect, through this mechanism, the electric generation
supplier or other third party will replace the consumer as the obligor on
the Intangible Transition Charges, and the Servicer, on behalf of the
Issuer, will have limited rights to collect the Intangible Transition
Charges from the consumer. The Servicer will have the right to bill and
collect Intangible Transition Charges and other amounts payable to the
Servicer directly from all of the electric generation supplier's or other
third party's consolidated billing customers following a payment default by
an electric generation supplier or other third party 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 and other third parties.
The PUC has determined that if an electric generation supplier or other
third party provides consolidated billing, the electric generation supplier
or other third party must first establish its creditworthiness by either:
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 from
Intangible Transition Charges.
While the PUC Order provides that an electric generation supplier or other
third party that bills consumers 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.
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 third party
electricity generation suppliers necessary to a properly functioning
competitive market for retail electric generation services. On October 2,
1998, the Joint Petitioners 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 the Joint Petitioners'
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. In addition, the Competition Act and the PUC
Order require PP&L to cooperate with Customer requests for an alternative
Competitive Transition Charges payment methodology that fully collects the
same present value of Competitive Transition Charges responsibility without
underpayment by the Customer or over collection by PP&L. During the 1998
fiscal year, all of PP&L's Customers became eligible to exercise this
option.
Special Charges and Termination Fees for Customers Who Generate Some
or All of Their Electricity Needs. The recovery of both Competitive
Transition Charges and Intangible Transition Charges from industrial and
commercial Customers that significantly reduce their purchases of
electricity generation from PP&L through the installation of on-site
generation equipment will be governed by special arrangements as set forth
in the Joint Petition. These special arrangements were designed so that
Customers who operate generation equipment in parallel with PP&L's
transmission and distribution system pay their fully allocated share of
Stranded Costs and related expenses through Competitive Transition Charges
and Intangible Transition Charges. For each self-generating consumer, the
Servicer will determine annually, after the end of each calendar year in
which Competitive Transition Charges or Intangible Transition Charges are
assessed, whether the consumer purchased at least 10% fewer kwh of
electricity through the transmission and distribution system than the
consumer purchased in the applicable base year. For consumers who began
self-generation on or after January 1, 1999, the base year is 1996. If the
consumer installs on-site generation, which after January 1, 1999 operates
in parallel with other generation on the Servicer's system and which
reduces by 10% or more the consumer's purchase of electricity through the
PP&L's transmission and distribution system, the Servicer will bill the
consumer separately in an amount equal to the total Competitive Transition
Charges and Intangible Transition Charges that the consumer paid in the
preceding calendar year plus one-third of the difference between:
1. the total Competitive Transition Charges and Intangible Transition
Charges that the Customer would have paid using usage and demand data
for the base year (as adjusted for any portion not related to
self-generation) and
2. the total Competitive Transition Charges and Intangible Transition
Charges that the Customer paid in the preceding calendar year.
There are other special rules for Customers whose peak load during 1996 was
at least 4 megawatts and who can prove that they were actively considering
self-generation as of December 31, 1998 or earlier. Based upon its
experience to date and assessment of the current state of technology, PP&L
does not expect the number of Customers who self-generate or the kwh
produced by self-generation to be significant. The calculation of any
adjusted Intangible Transition Charges will reflect self-generation at the
time of each calculation.
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 (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.
LEGAL ACTIVITY CHALLENGING THE COMPETITION ACT OR THE PUC ORDER
LITIGATION RELEVANT TO THE COMPETITION ACT
The Union Action and the Fumo Action. Two actions, one filed by the
Utility Workers Union of America (the "Union Action") and one filed by a
group of plaintiffs including State Senator Vincent J. Fumo (the "Fumo
Action"), respectively, alleged that the adoption of the Competition Act
violated provisions of the Pennsylvania Constitution governing legislative
procedure. In particular, these plaintiffs 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 Pennsylvania constitutional provisions
prohibiting any bill from addressing more than one subject, prohibiting any
bill from being altered or amended during passage so as to change its
original purpose and 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 of Pennsylvania 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 contents of the bill.
The Court then rejected Fumo's allegation that the bill encompassed more
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 challenging the Competition Act,
filed by Indianapolis Power & Light Co. ("IP&L"), alleges that the
Competition Act's provision allowing PECO Energy Company ("PECO"), another
electricity provider in the Commonwealth of Pennsylvania, 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 claims 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 Pennsylvania 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
Commonwealth Court to halt implementation of the Competition Act because
the PUC had misapplied the Competition Act in promulgating its
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 it violated the
Interstate Commerce Clause of the United States Constitution. 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. The 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 Commonwealth Court. On
August 13, 1998, PP&L and all of the parties who had participated in PP&L's
Restructuring Plan cases, 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 (the Sierra Club, Penn PIRG and Lehigh Greens)
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 this prohibition could negate the existence of Intangible
Transition Property. That bill, The Consumers Electric Power Act of 1997,
("H.R. 1230"), was introduced on April 8, 1997 and 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." Moreover, even if this preemption of the Competition
Act and/or the PUC Order by the federal government were considered a
"taking," for which the government had to pay the estimated market value of
the Transferred Intangible Transition Property at the time of the taking,
there is no assurance that this compensation would be sufficient to pay the
full amount of principal of and interest on the Transition Bonds.
Possible Commonwealth Amendment or Repeal of the Competition Act.
Under the Competition Act, the Commonwealth has pledged to and agreed with
transition bondholders that it will not limit or alter or in any way impair
or reduce the value of intangible transition property or intangible
transition charges approved by a qualified rate order, until the Transition
Bonds and interest thereon are fully paid and discharged. The 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 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
"adequate compensation . . . by law" 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 the Transition 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 (by way of
legislative process) or take any action in contravention of its pledge and
agreement (described above) 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.
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,
including full regulation of electric distribution companies, the
establishment of financial and other qualifications of electric generation
suppliers and other third parties, guidelines governing customer billing
and collection, metering and disclosure requirements applicable to electric
generation suppliers or other third parties 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 Sale
Agreement, the Seller agrees to take legal or administrative actions,
including instituting and provoking 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 by regulatory action, legislative enactment or
constitutional amendment materially adverse to the holders of Transition
Bonds, or 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 Sale Agreement" in
this Prospectus. There is no assurance that the Seller would be able to
take this action or that any action the Seller 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 Intangible Transition Charge
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 SELLER AND SERVICER OF THE INTANGIBLE TRANSITION PROPERTY
PP&L, INC.
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 wholesale electricity in 28 states and Canada. During
1998, about 96% of total operating 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, INC.
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's 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 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 rate classes (each, a "Customer Class"): residential ("Residential"),
small commercial and industrial ("Small Commercial and Industrial") and
large commercial and industrial ("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.
Nevertheless, in effect, residential customers predominantly 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 (each, a "Rate
Schedule"). 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 the Servicer. The
current Customer Classes and 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 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 contact 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.
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, 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 contact 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 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.
Customers in Rate Schedules that are eliminated are expected to
remain in the same Customer Class. In addition, Customers have historically
migrated between Rate Schedules as their voltage requirements changed,
Customer migration between Rate Schedules 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. Each
Customer Class is responsible for a fixed percentage of the Intangible
Transition Charges. 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 ruled that performing rate adjustments by Customer
Classes does not constitute interclass or intraclass shifting of costs.
Statistics Regarding PP&L's Total Customers. The following tables
show, by Customer Class and Rate Schedule within each Customer Class the
number and percentage of retail electric Customers (Table 3), retail
electric usage (Table 4) and retail electric revenues (Table 5). 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.
<TABLE>
<CAPTION>
TABLE 3
NUMBER OF RETAIL ELECTRIC CUSTOMERS
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 (1) % of % of % of % of % of % of
Avg. Total Avg. Total Avg. Total Avg. Total Avg. Total Avg. Total
# Customers # Customers # Customers # Customers # Customers # Customers
----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
Rate Schedule RS
Rate Schedule RTS
Rate Schedule RTD
Total
Small Commercial &
Industrial
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
Total
Large Commercial &
Industrial
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
Total
</TABLE>
- ---------------
(1) For a description of the meanings of Customer Class and Rate Schedule
abbreviations, see "-PP&L's Customer Classes and Rate Schedules"
above.
<TABLE>
<CAPTION>
TABLE 4
ACTUAL RETAIL ELECTRIC USAGE (PER MEGAWATT-HOUR ("MWH")
Year Ended Year Ended Year Ended Year Ended Year Ended Quarter Ended
Rate Schedule (1) 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
Rate Schedule RTS
Rate Schedule RTD
Total
Small Commercial &
Industrial
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
Total
Small Commercial &
Industrial
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
Total
</TABLE>
- ---------------
(1) For a description of the meanings of Customer Class and Rate Schedule
abbreviations, see "-PP&L's Customer Classes and Rate Schedules"
above.
Actual usage fluctuations are highly dependent on weather conditions.
See "The Seller and 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
from 1994 through 1998 was %. There can be no assurance that future usage
rates will be similar to historical experience. See "Risk Factors-Servicing
Risks" in this Prospectus.
<TABLE>
<CAPTION>
TABLE 5
RETAIL ELECTRIC REVENUES (DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended Year Ended Year Ended Quarter Ended
Rate Schedule (1) 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
Rate Schedule RTS
Rate Schedule RTD
Total
Small Commercial &
Industrial
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
Total
Large Commercial &
Industrial
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
Total
</TABLE>
- ---------------
(1) For a description of the meanings of Customer Class and Rate Schedule
abbreviations, see "-PP&L's Customer Classes and Rate Schedules"
above.
The Percentage Concentration Within PP&L's Large Commercial and
Industrial Customers. For the period ended __________, the largest Customer
represented approximately ____%, and the ten largest Customers represented
approximately ____%, 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 following table sets
forth the delinquency and 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 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. PP&L does
not expect, but cannot assure, that the delinquency or write-off experience
with respect to ITC Collections will differ substantially from the rates
indicated. For example, 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>
<CAPTION>
TABLE 6
DELINQUENCIES AS PERCENTAGE OF TOTAL BILLED REVENUES
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
-------- ----------- ---------- ---------- ---------- ---------
Residential
<S> <C> <C> <C> <C> <C> <C>
30+ days % % % % % %
60+ days % % % % % %
90+ days % % % % % %
All Other
30+ days % % % % % %
60+ days % % % % % %
90+ days % % % % % %
</TABLE>
<TABLE>
<CAPTION>
TABLE 7
NET WRITE-OFFS AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
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
--------- ----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Residential % % % % % %
All Other % % % % % %
Total % % % % % %
</TABLE>
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 levels sufficient to recover interest on
and principal of the Transition Bonds, to maintain the Scheduled
Overcollateralization Level, to fund 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 bases 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 a low of _______ to a high of
________. The variances for the Small Commercial and Industrial Customer
Class, ranged from a low of ________ to a high of _________. The variances
for the Large Commercial and Industrial Customer Class, ranged from a low
of _______ to a high of . There can _______. There can be no assurance that
the future variance between actual and expected consumption in the
aggregate or by Customer Class will be similar to the historical experience
set forth below.
TABLE 8
ANNUAL FORECAST VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED
1994 1995 1996 1997 1998
RESIDENTIAL
Forecast (in Mwh)
Actual (in Mwh)
Variance (in percentage)
SMALL COMMERCIAL & INDUSTRIAL
Forecast (in Mwh)
Actual (in Mwh)
Variance (in percentage)
LARGE COMMERCIAL & INDUSTRIAL
Forecast (in Mwh)
Actual (in Mwh)
Variance(in percentage)
TOTAL
Forecast
Actual
Variance
During the last five years, there has been no discernible trend in
the variance between projected electricity consumption and actual
electricity consumption.
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 a low of
______ to a high of ______. The variances for the Small Commercial and
Industrial Customer Class, ranged from a low of _______ to a high of
_________. The variances for the Large Commercial and Industrial Customer
Class, ranged from a low of _________ to a high of _________. 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.
TABLE 9
ANNUAL FORECAST VARIANCE FOR THE NUMBER OF CUSTOMERS
1994 1995 1996 1997 1998
RESIDENTIAL
Forecast (in units)
Actual (in units)
Variance (in percentage)
SMALL COMMERCIAL & INDUSTRIAL
Forecast (in units)
Actual (in units) Variance
(in percentage)
LARGE COMMERCIAL & INDUSTRIAL
Forecast (in units)
Actual (in units)
Variance(in percentage)
TOTAL
Forecast (in units)
Actual (in units)
Variance (in percentage)
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. When a particular Intangible Transition Charge is imposed (or
ceases to be imposed) as of a specific date, PP&L customarily pro rates
each Customer's usage during its meter reading and billing cycle for
purposes of imposing the charge. 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 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
residential 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, unless they can
demonstrate creditworthiness or were previously a customer of PP&L with a
satisfactory payment history. The principal means of establishing
creditworthiness 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 will begin during the second quarter of
1999, and will be completed by December 31, 1999.
PP&L has developed a special reduced payment program ("OnTrack") for
some low income Residential Customers who are currently served under or
otherwise qualify for Rate Schedule RS. 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 approximately 2,000
customers enrolled in OnTrack accounting for approximately $ million of
revenues 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. 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 (the "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, 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.
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 in the following manner:
1. For a Customer who has an outstanding balance for periods prior to
the time that the Customer was permitted to choose its electricity
generation supplier (or "Pre-Retail Access"), the payment
will be applied as follows:
(a) to the outstanding Pre-Retail Access balance or the installment
amount for a payment agreement on this amount;
(b) to intangible transition charges and competitive transition
charges;
(c) to transmission and distribution charges;
(d) to supply charges; and
(e) to non-basic services charges.
If the Customer's account develops an outstanding balance for periods
after the time that the Customer was permitted to choose its electricity
generation supplier (or "Post-Retail Access"), partial payments will be
applied to the Pre-Retail Access balance, according to the terms of the
Pre-Retail Access payment agreement, before being applied to any other
outstanding Post-Retail Access charges.
2. For a Customer with no Pre-Retail Access but with a Post-Retail
Access balance, the payment will be applied as follows:
(a) to the balance due for prior intangible transition charges,
competitive transition charges and transmission and distribution
charges;
(b) to current intangible transition charges and competitive transition
charges;
(c) to current transmission and distribution charges;
(d) to the balance due for prior supply charges;
(e) to current supply charges; and
(f) 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 AND OTHER THIRD PARTY BILLERS
PP&L's Restructuring Plan and subsequent orders of the PUC provide
specific standards for metering, billing and other activities by electric
generation suppliers and other third parties participating in the 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, and, except in limited
circumstances, the Servicer, on behalf of the Issuer, will have no rights
to collect Intangible Transition Charges from the Customer electing
consolidated billing from a third party. Rather, the Issuer will be subject
to the risk that the third party does not remit Intangible Transaction
Charges.
The Servicer, on behalf of the Issuer, will pursue any electric
generation supplier or other third party that fails to remit the applicable
Intangible Transition Charges in a manner similar to the manner in which
the Servicer will pursue any failure by its Customers to remit Intangible
Transition Charges. The Servicer will have the right to bill and collect
Intangible Transition Charges and other amounts payable to the Issuer or
the Servicer directly from all of the consolidated billing Customers of the
electric generation suppliers or other third parties. If PP&L does not
receive payment (except for disputed charges) within 25 calendar days for
Residential class 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 or 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 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 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 make payments on these bills.
PP&L formed a company-wide Year 2000 coordination committee to raise
the awareness of the Year 2000 issue, share information and review the
progress. A seven-step approach was developed to achieve Year 2000
compliance by assessing and remedying 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.
PP&L has identified and communicated with critical suppliers, such as fuel
suppliers, in order to obtain assurances that they are in compliance with
Year 2000 issues. The majority of the responses from these parties are
favorable, with some responses still being evaluated and followed-up as
appropriate.
Delivery of electricity is dependent on the overall reliability of
the electricity distribution system. PP&L is cooperating and coordinating
with the North American Electric Reliability Council and the PJM
Interconnection, L.L.C. (the "PJM") regarding Year 2000 remediation
efforts.
As of December 31, 1998, approximately 75% of the mainframe
applications that will remain in production have been determined as being
Year 2000 Compliant. It is anticipated that all mission critical systems
(i.e. mainframe, embedded technologies, and client server applications)
will be Year 2000 Ready by July 1999 and all client systems ready by
November 30, 1999. "Year 2000 Compliant" means that 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.
PP&L has basic contingency plans to address issues such as blackouts
on the electrical grid, restarting generating facilities after these
facilities have shut down and disaster recovery procedures for the
computing environment. PP&L recognizes that additional contingency plans
are necessary and, as part of its Year 2000 strategy, PP&L is currently
working on identifying and developing additional contingency plans, as
appropriate.
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 that all
jurisdictional utilities to file a written response to a list of questions
concerning Year 2000 compliance; and that, 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
these questions in August 1998 and in November 1998 submitted testimony to
the PUC that the Company would have its mission-critical systems Year 2000
ready by July 1, 1999 and all systems ready by November 30, 1999.
At this time, PP&L has achieved the following completion percentages
on the seven steps referenced above for Year 2000 compliance: awareness,
87%; inventory, 97%; assessment, 87%; remediation, 70%; testing, 72%;
implementation, 56%; and additional contingency plans (beyond the basic
plans referenced above), 16%.
Based upon present assessments, PP&L Resources estimates that it will
incur approximately $15 million in Year 2000 related costs. Through
December 31, 1998, PP&L Resources spent approximately $8 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
PP&L Transition Bond Company LLC (the "Issuer"), a Delaware limited
liability company, was formed on March 25, 1999 pursuant to a limited
liability company agreement (the "Prior Limited Liability Company
Agreement") of CEP Group, Inc., a Pennsylvania corporation wholly owned by
PP&L, as sole member of the Issuer. The Prior Limited Liability Company
Agreement was subsequently amended and restated in its entirety by an
Amended and Restated Limited Liability Company Agreement dated ______, 1999
(the "Limited Liability Company Agreement") executed by PP&L as sole
member. The assets of the Issuer are limited to the Intangible Transition
Property which was sold to the Issuer (the "Transferred Intangible
Transition Property"), the other Collateral, any third-party credit
enhancement and any money distributed to the Issuer from the Collection
Account in accordance with the Indenture. As of the date of this
Prospectus, the Issuer has not carried on any business activities and has
no operating history. Audited financial statements of the Issuer are
included as an exhibit to this Prospectus.
The Issuer's Purpose. The Issuer has been created for the sole
purpose of purchasing and owning the Transferred Intangible Transition
Property, issuing one or more Series of Transition Bonds (each a "Series")
from time to time, 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 performing activities that are
necessary, suitable or convenient to accomplish these purposes. Each series
may be comprised of one or more classes (each, a "Class").
The Interaction Between PP&L and the Issuer. On the issue date for
each Series (each, a "Series Issuance Date"), except in the event of a
refunding of outstanding Transition Bonds, PP&L will sell Intangible
Transition Property to the Issuer pursuant to an agreement (the "Sale
Agreement") between PP&L (in this capacity, the "Seller") and the Issuer.
PP&L (in this capacity and along with any successors in that capacity, the
"Servicer") will service the Transferred Intangible Transition Property
pursuant to a Servicing Agreement (the "Servicing Agreement") between the
Issuer and the Servicer.
The Issuer's Management. The Issuer's business will be managed by
three managers (the "Managers") appointed from time to time by PP&L or, in
the event that PP&L transfers its interest in the Issuer, by the new owner
or owners. The Issuer will have at all times following the initial Series
Issuance Date at least one Manager (the "Independent Manager") who, among
other things, is not and has not been for at least three years from the
date of his or her or its appointment (i) a direct or indirect legal or
beneficial owner of the Issuer or PP&L or any of their respective
affiliates, (ii) a relative, supplier, employee, officer, director,
manager, contractor or material creditor of the Issuer or PP&L or any of
their respective affiliates, or (iii) a person who controls PP&L or its
affiliates. The remaining Managers will be employees or officers of PP&L.
The Managers will devote the time necessary to conduct the affairs of
the Issuer. The following are the Managers as of the date of this
Prospectus:
NAME AGE POSITION AT PP&L
John R. Biggar 54 Senior Vice President and Chief Financial
Officer
James E. Abel 48 Treasurer
Jim Pennington 48 Manager - Treasury Operations
The Managers' Compensation and Limitation on Liabilities. The Issuer
has not paid any compensation to any Manager since the Issuer was formed.
The Managers other than the Independent Manager will not be compensated by
the Issuer for their services on behalf of the Issuer. The Independent
Manager will be paid an annual retainer from the assets of the Issuer and
will be reimbursed for his or her reasonable expenses, including, without
limitation, the reasonable compensation, expenses and disbursements of
these agents, representatives, experts and counsel as the Independent
Manager may employ in connection with the exercise and performance of his
or her 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:
1. liabilities arising from their own willful misconduct or gross
negligence,
2 liabilities arising from the failure by any of the Managers to
perform obligations expressly undertaken in the Limited Liability
Company Agreement or
3. taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the Managers in connection
with the transactions described in this Prospectus.
The Limited Liability Company Agreement further provides that, to the
fullest extent permitted by law, the Issuer shall indemnify the Managers
against any liability incurred in connection with their services as
Managers for the Issuer, unless this liability is based on or arises in
connection with the circumstances described in clauses 1 through 3 above.
The Issuer is a Separate and Distinct Legal Entity. Under the Limited
Liability Company Agreement, the Issuer may not file a voluntary petition
for relief under the Bankruptcy Code without a unanimous vote of its
Managers, including the Independent Manager. PP&L has agreed that it will
not cause the Issuer to file a voluntary petition for relief under the
Bankruptcy Code. The Limited Liability Company Agreement requires the
Issuer to take all reasonable steps to continue its identity as a separate
legal entity and to make it apparent to third persons that it is an entity
with assets and liabilities distinct from those of PP&L, other affiliates
of PP&L, the Managers or any other person, and that, except for federal and
Commonwealth tax purposes, it is not a division of PP&L or any of its
affiliated entities or any other person.
The principal place of business of the Issuer is Two North Ninth
Street; Allentown, PA 18101, and its telephone number is (610) 774-5151.
Administration Agreement. PP&L will provide administrative services
for the Issuer pursuant to an administration agreement between the Issuer
and PP&L. The Issuer will pay PP&L a market rate fee for performing these
services.
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS
The Issuer 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 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.
THE TRANSITION BONDS
The Transition Bonds will be issued under and secured by a base
indenture between the Issuer and the Trustee 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 separate supplement to the base indenture (each supplement, a
"Supplemental Indenture" and together with the base Indenture, the
"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.
The Prospectus Supplement for a Series of Transition Bonds will
describe the following terms of the Series and, if applicable, the Classes
thereof:
1. the designation of the Series and, if applicable, the Classes thereof,
2. the aggregate principal amount of the Transition Bonds of the Series
and, if applicable, each Class thereof,
3. the Bond Rate of the Series or, if applicable, each Class thereof, or
the formula, if any, used to calculate the applicable Bond Rate or
Bond Rates for the Series, (each a "Bond Rate")
4. the date or dates on which interest and principal will be payable
(each, a "Payment Date"),
5. the Expected Final Payment Date of the Series and, if applicable,
each Class thereof,
6. the final maturity date for the Series (the "Series Final Maturity
Date") and, if applicable, each Class thereof (each, a "Class Final
Maturity Date"),
7. the Series Issuance Date for the Series,
8. the place or places for payments on the Series,
9. the authorized initial denominations for the Series,
10. the redemption provisions, if any, of the Series,
11. the Expected Amortization Schedule for the Series, and, if
applicable, each Class thereof,
12. the Overcollateralization Amount with respect to the Series and the
aggregate Overcollateralization Level as of each Payment Date,
13. the required funding level for the Capital Subaccount,
14. the Calculation Dates and Adjustment Dates for the Series,
15. the terms of any credit enhancement applicable to the Series and
16. any other terms of the Series or Class that are not inconsistent with
the provisions of the Indenture.
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
which has rated the Transition Bonds of any Class or Series at the time of
issuance thereof at the request of the Issuer (each, a "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 the Issuer that any
action will not result in a reduction or withdrawal being referred to in
this Prospectus as the "Rating Agency Condition"). If no Rating Agency
remains in existence, "Rating Agency" shall be a nationally recognized
statistical rating organization or other comparable person designated by
the Issuer.
Definition of Expected Final Payment Date and Final Maturity Date.
The "Expected Final Payment Date" for each Series or Class of Transition
Bonds will be the date when all interest and principal is scheduled to be
paid in accordance with the Expected Amortization Schedule. The "Final
Maturity Date" for a Series or Class of Transition Bonds will be on or
after the Expected Final Payment Date and is the date by which all
principal and interest on the Transition Bonds is required to be paid.
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.
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 these Series. The terms of each Series will be specified
in the related Prospectus Supplement.
The Issuer'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 denominations will be not less than $1,000). Unless and until
definitive Transition Bonds are issued under the limited circumstances
described in this Prospectus, no Transition Bondholder will be entitled to
receive a physical bond representing a Transition Bond. All references in
this Prospectus to actions by Transition Bondholders will refer to actions
taken by DTC upon instructions from DTC Participants and all references in
this Prospectus to payments, notices, reports and statements to Transition
Bondholders will refer to payments, notices, reports and statements to DTC
or Cede, as the registered holder of each Series of Transition Bonds, 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 Format" and "--Definitive Transition Bonds" below.
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 and 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, the Issuer will
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 on
that Payment Date, 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 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 an Event of Default under the Indenture occurs and is
continuing and 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. 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 to be redeemed by first-class mail, postage prepaid,
mailed not less than five days nor more than 45 days prior to the date of
redemption or in another manner or at another time as may be specified in
the related Prospectus Supplement. Notice of redemption may be conditioned
upon the deposit of moneys with the Trustee before the redemption date and
this notice will be of no effect unless these moneys are so deposited. All
Transition Bonds called for redemption will cease to bear interest on the
specified redemption date, provided funds for their redemption are on
deposit with the 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 an additional reserve
account, subordination, additional overcollateralization, a financial
guaranty insurance policy, a letter of credit, a credit or liquidity
facility, a repurchase obligation, a third party payment or other support,
a cash deposit or other credit enhancement, or any combination of the
foregoing, as may be set forth in the applicable Prospectus Supplement. If
specified in the applicable Prospectus Supplement, credit enhancement for a
Series of Transition Bonds may cover one or more other Series of Transition
Bonds.
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, and will be available to investors only in the form
of book-entries maintained indirectly with DTC through organizations that
are DTC participants ("Book-Entry Transition Bonds"). Transition
Bondholders may also hold Transition Bonds through Cedelbank, societe
anonyme ("CEDEL"), or the Euroclear System ("Euroclear") (in Europe), if
they are participants in one of those systems or indirectly through
organizations that are participants in one of those systems (together with
DTC's participants, "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 which in turn will hold these
positions in customers' securities accounts in the 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 (in these capacities, the "Depositories").
The Function of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered 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 ("Direct Participants") 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 others
such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants").
The Function of CEDEL. CEDEL is incorporated under the laws of
Luxembourg. CEDEL holds securities for its customers ("CEDEL 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 (MGT/EOC) 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 participants of the Euroclear System ("Euroclear
Participants") and to clear and settle transactions between Euroclear
Participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of securities
and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 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 Morgan Guaranty Trust Company of New York, out of its
Brussels, Belgium office (the "Euroclear Operator"), under contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As 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 (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities and
cash within Euroclear, withdrawals of securities and cash from Euroclear
and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a 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 (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 the Issuer'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, and 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.
Book-Entry Transfers and Transmission of Payments. While any
Book-Entry Transition Bonds of a Series are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Transition Bonds and is required to
receive and transmit payments of principal of, and interest on, the
Book-Entry Transition Bonds. Participants with whom Transition Bondholders
have accounts with respect to Book-Entry Transition Bonds are similarly
required to make book-entry transfers and receive and transmit these
payments on behalf of their respective Transition Bondholders. Accordingly,
although Transition Bondholders will not possess physical bonds, the Rules
provide a mechanism by which Transition Bondholders will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act
on behalf of indirect Participants and some banks, the ability of holders
of beneficial interests in the Transition Bonds to pledge Transition Bonds
to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of these Transition Bonds, may be limited
due to the lack of a 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 Tax Matters for the Transition Bonds" 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.
Although 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, 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 computer applications, systems
and the like for processing data ("Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed Direct Participants and
Indirect Participants and other members of the financial community (the
"Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions
(including principal and interest payments) 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.
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,
as appropriate, 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. the Issuer 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 the
Issuer is unable to locate a qualified successor;
2. the Issuer, at its option, elects to terminate the book-entry system
through DTC; or
3. after the occurrence of an Event of Default under the Indenture,
Transition Bondholders representing at least a majority of the
outstanding principal amount of the Transition Bonds of all Series
advise the 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 re-registration, the
Trustee will authenticate and deliver definitive Transition Bonds, and
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 accordance with the procedures set forth
in the Indenture directly to holders of definitive Transition Bonds in
whose names the definitive Transition Bonds were registered at the close of
business on the related Record Date 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
not, however, result in payment of principal on the Transition Bonds
earlier than the related Expected Final Payment Dates since receipts in
excess of the amounts necessary to amortize the Transition Bonds in
accordance with the applicable Expected Amortization Schedules will be
allocated to the Capital Subaccount (if necessary), the
Overcollateralization Subaccount or 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, as well as amounts available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital Subaccount. Because the
Intangible Transition Charges will be calculated based on estimates of
usage and revenue, the aggregate amount of 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. Although the Intangible Transition Charges will be adjusted
from time to time based in part on the actual rate of ITC Collections, no
assurances are given 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 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, Inc." in this Prospectus. If
ITC Collections are received at a slower rate than expected, Transition
Bonds may be retired later than expected. Because principal will not be
paid at a rate faster than that contemplated in the Expected Amortization
Schedule for each Series or Class, except in the event of a redemption or
the acceleration of the final Payment Date of the Transition Bonds after an
Event of Default as specified in the Indenture, the Transition Bonds are
not expected to be paid earlier than scheduled. A payment on a date that is
earlier than forecasted 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 SALE AGREEMENT
The following summary describes particular material terms and
provisions of the Sale Agreement pursuant to which the Seller is selling
and the Issuer 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
the Issuer 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.
PP&L'S SALE AND ASSIGNMENT OF INTANGIBLE TRANSITION PROPERTY
On the Series Issuance Date for the first Series of Transition Bonds
(the "Initial Transfer Date"), pursuant to the Sale Agreement, the Seller
will sell and assign to the Issuer, without recourse, except as provided
therein, Initial Intangible Transition Property representing 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. 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 Transferred Intangible Transition Property.
In addition, the Seller may from time to time offer to sell additional
Intangible Transition Property to the Issuer, subject to the satisfaction
of the conditions specified in the Sale Agreement and the Indenture (each,
a "Subsequent Sale"). Each Subsequent Sale will be financed through the
issuance of an additional Series of Transition Bonds. If this offer is
accepted by the Issuer, the Subsequent Sale will be effective on a date (a
"Subsequent Transfer Date") specified in a written notice provided by the
Seller to the Issuer.
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 will be perfected as against
all third persons, including judicial lien creditors, and upon the
execution of a subsequent bill of sale and an additional notice, a transfer
of Subsequent Intangible Transition Property will also be perfected 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 the Issuer 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 the Issuer on any
Subsequent Transfer Date pursuant to the Sale Agreement in connection with
the subsequent issuance of a Series of Transition Bonds.
The Treatment of the Sale of Intangible Transition Property. The
Seller's regulatory accounting records and computer systems will reflect
the sale and assignment of transferred Intangible Transition Property to
the Issuer, although the Seller will treat the Transition Bonds as debt of
the Seller for federal and Commonwealth income, gross receipts and
franchise tax purposes and for financial accounting purposes. 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 the Issuer a duly
executed bill of sale identifying the Intangible Transition Property
to be conveyed on that date, in the form required by the Sale
Agreement;
2. as of the 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 the Seller of its representations,
warranties or covenants in the Sale 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, the Issuer 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 the Issuer ownership of the Transferred Intangible
Transition Property to be conveyed on that date, free and clear of
all liens other than liens created by the Issuer pursuant to the
Indenture, and the Issuer shall have taken, or the Servicer shall
have taken on behalf of the Issuer, any action required for the
Issuer to grant the 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 the Issuer 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, the Issuer and
the Trustee the opinions of counsel specified in the Sale Agreement;
8. the Seller shall have delivered to the Trustee and the Issuer 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.
PP&L'S REPRESENTATIONS AND WARRANTIES
In the Sale Agreement, the Seller will make representations and
warranties to the Issuer as of the Initial Transfer Date and any Subsequent
Transfer Date to the effect, among other things, that:
1. all information provided by the Seller to the Issuer with respect to
the Transferred Intangible Transition Property is correct in all
material respects;
2. the transfers and assignments contemplated by the Sale Agreement
constitute sales of the Initial Intangible Transition Property or the
Subsequent Intangible Transition Property, as the case may be, from
the Seller to the Issuer, and the beneficial interest in and title to
the Transferred Intangible Transition Property would not be part of
the debtor's estate in the event of the filing of a bankruptcy
petition by or against the Seller under any bankruptcy law;
3. (a) the Seller is the sole owner of the Intangible Transition Property
being sold to the Issuer on the Initial Transfer Date or
Subsequent Transfer Date, as applicable,
(b) the Transferred Intangible Transition Property has been validly
transferred and sold to the Issuer free and clear of all liens
other than liens created by the Issuer pursuant to the Indenture
and
(c) all filings (including filings with the PUC under the Competition
Act) necessary in any jurisdiction
(1) to give the Issuer a valid, first perfected ownership interest
in Transferred Intangible Transition Property free and clear of
all liens of the Seller or anyone claiming through the Seller
and
(2) to give the Trustee a first priority perfected security interest
in Transferred Intangible Transition Property
have been made;
4. the PUC Order 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 in full force and effect;
5. as of the date of issuance of any Series of Transition Bonds, the
Transition Bonds are entitled to the protections provided by the
Competition Act and, in accordance with the Competition Act, the
provisions of the PUC Order relating to the Intangible Transition
Property and Intangible Transition Charges are not revocable by the
PUC;
6. (a) under the Competition Act, neither the Commonwealth 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 if adequate compensation is made by law for the
full protection of the Intangible Transition Charges and of
Transition Bondholders;
(b) under the laws of the Commonwealth and the United States, neither
the Commonwealth, the PUC nor any other governmental entity can
take any action that impairs the rights of the Transition
Bondholders unless this action is a reasonable exercise of the
Commonwealth of Pennsylvania's sovereign powers and appropriate to
further a legitimate public purpose, and, under the Pennsylvania
and United States Constitutions, in the event this 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,
this action cannot be taken 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 that
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 or transfer of Intangible
Transition Property, except those that have been obtained or made;
9. except as disclosed by the Seller to the Issuer, there are no
proceedings or investigations pending or, to the best of the Seller's
knowledge, threatened before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality
having jurisdiction over the Seller or its properties challenging the
PUC Order or the Competition Act;
10.no failure on the Initial Transfer Date or any Subsequent Transfer
Date or any time thereafter to satisfy any condition imposed by the
Competition Act with respect to the recovery of stranded costs will
adversely affect the creation or transfer under the Sale Agreement of
the Intangible Transition Property or the right to collect Intangible
Transition Charges;
11.the assumptions used in calculating Intangible Transition Charges are
reasonable and made in good faith;
12.(a) Intangible Transition Property, other than Intangible Transition
Property retained by the Seller, constitutes a current property
right;
(b) Intangible Transition Property includes, without limitation;
(1) the irrevocable right of the Issuer to receive, subject to the
limitations on electricity rates specified in Section 2804 (4)
of the Competition Act, through Intangible Transition Charges
an amount sufficient to recover all of the Seller's Qualified
Transition Expenses described in the PUC Order in an amount
equal to the aggregate principal amount of Transition Bonds
plus an amount sufficient to provide for any credit enhancement
(including the Overcollateralization Amount relating to each
Series of Transition Bonds), to fund any reserves and to
pay interest, premium, if any, servicing fees and other expenses
relating to the Transition Bonds,
(2) all right, title and interest of the Seller or the Issuer
applicable to the Transition Bonds in the PUC Order and in all
revenues, collections, claims, payments, money, or proceeds of
or arising from the Intangible Transition Charges applicable to
the Transition Bonds set forth in the 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) the PUC Order provides that paragraphs 5 through 21 of the PUC
Order, including the right to collect Intangible Transition
Charges, are irrevocable by the PUC;
13. the Seller is a corporation duly organized and in good standing under
the laws of the Commonwealth of Pennsylvania, with corporate power
and authority to own its properties and conduct its business as
currently owned or conducted;
14. the Seller has the corporate power and authority to execute and
deliver the Sale Agreement and to carry out its terms, the Seller has
full corporate power and authority to own the Intangible Transition
Property and sell and assign the Initial Intangible Transition
Property, in the case of the Initial Transfer Date, and the Subsequent
Intangible Transition Property, in the case of each Subsequent Transfer
Date, as applicable, and the Seller has duly authorized this sale and
assignment to the Issuer by all necessary corporate action and the
execution, delivery and performance of the Sale Agreement have been
duly authorized by the Seller by all necessary corporate action;
15. the Sale Agreement constitutes a legal, valid and binding obligation
of the Seller, enforceable against the Seller in accordance with its
terms, subject to customary exceptions relating to bankruptcy and
equitable principles;
16. the consummation of the transactions contemplated by the Sale
Agreement and the fulfillment of the terms thereof do not conflict
with, result in any breach of any of the terms and provisions of,
nor constitute (with or without notice or lapse of time) a default
under, the articles of incorporation or by-laws of the Seller, or
any indenture, agreement or other instrument to which the Seller is
a party or by which it shall be bound; nor result in the creation or
imposition of any lien upon any of its properties pursuant to the
terms of any applicable indenture, agreement or other instrument;
nor violate any law or any order, rule or regulation applicable to
the Seller of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Seller or its properties;
17. no approval, authorization, consent, order or other action of, or
filing with, any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is
required in connection with the execution and delivery by the Seller
of the Sale Agreement, the performance by the Seller of the
transactions contemplated by the Sale Agreement or the fulfillment
by the Seller of the terms of the Sale Agreement, except those which
have previously been obtained or made;
18. there are no proceedings or investigations pending or, to the
Seller's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Seller or its
properties
(a) asserting the invalidity of the Sale Agreement, the Servicing
Agreement, any bills of sale for Intangible Transition Property,
the Limited Liability Company Agreement or the certificate of
formation filed with the State of Delaware to establish the
Issuer (collectively, 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,
(c) seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by
the Seller of its obligations under, or the validity or
enforceability of, the Basic Documents or the Transition Bonds,
or
(d) challenging the Seller's treatment of the Transition Bonds as
debt of the Seller for federal and Commonwealth income, gross
receipts or franchise tax purposes;
19. after giving effect to the sale of any Transferred Intangible
Transition Property under the Sale Agreement, the Seller:
(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
20. the Seller is duly qualified to do business as a foreign corporation
in good standing, and has obtained all necessary licenses and
approvals, in all jurisdictions in which the ownership or lease of
property or the conduct of its business require any qualifications,
licenses or approvals (except where the failure to so qualify would
not be reasonably likely to have a material adverse effect on the
Seller's business, operations, assets, revenues, properties or
prospects).
PP&L'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL
ACTION.
Under the Sale Agreement, the Seller is obligated to indemnify the
Issuer and the Trustee and related parties specified therein, against:
1. any and all taxes or other fees or charges (other than any taxes
imposed on Transition Bondholders solely as a result of their
ownership of Transition Bonds) resulting from the acquisition or
holding of Transferred Intangible Transition Property by the Issuer
or the issuance and sale by the Issuer of Transition Bonds; and
2. any and all amounts of principal and interest on the Transition
Bonds not paid when due in accordance with their terms and the
amount of any deposits to the Issuer required to have been made in
accordance with the terms of the Basic Documents which are not made
when so required and any and all liabilities, obligations, claims,
actions, suits or payments of any kind whatsoever that may be
imposed on or asserted against any such person, together with any
reasonable costs and expenses incurred by that person, as a result
of the Seller's breach of any of its representations or warranties
contained in the Sale Agreement.
These indemnification obligations will rank pari passu with other general
unsecured obligations of the Seller. The indemnities described above will
survive the termination of the Sale Agreement and include reasonable fees
and expenses of investigation and litigation (including reasonable
attorneys' fees and expenses).
PP&L Is Not Obligated to Undertake Legal Action. Notwithstanding the
foregoing, but subject to the Seller's covenant to fully preserve, maintain
and protect the interests of the Issuer in the Intangible Transition
Property, the Seller will not be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its obligations
under the Sale Agreement.
SUCCESSORS TO PP&L
The Sale Agreement provides that any person which succeeds to the
major part of the electric distribution business of the Seller will be the
successor to the Seller if this person is considered a "Successor" as
defined by the Competition Act. The Sale Agreement further requires that:
1. immediately after giving effect to any transaction referred to in
this paragraph, no representation or warranty made in the Sale
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 Rating Agencies will have received prior written notice of the
transaction and the Rating Agency Condition will have been satisfied;
and
3. officers' certificates and opinions of counsel specified in the Sale
Agreement will have been delivered to the Issuer and the Trustee.
GOVERNING LAW FOR THE SALE AGREEMENT BETWEEN PP&L AND THE ISSUER
The Sale Agreement will be governed by and construed under the laws
of the Commonwealth of Pennsylvania.
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 form of the Servicing 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
Servicing Agreement.
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 the Issuer, 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 (from Customers, electric generation suppliers and other
third parties, as applicable) and posting all ITC Collections;
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 and furnishing periodic reports to the
Issuer, the Trustee and the Rating Agencies;
4. selling, as agent for the Issuer, defaulted or written-off accounts
in accordance with the Servicer's usual and customary practices; and
5. taking action in connection with adjustments to the Intangible
Transition Charges as described below.
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 the Issuer, 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.
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 serviced Intangible Transition
Property would be payable from ITC Collections as an operating expense.
Periodically, the Servicer will prepare a forecast of the percentages
of amounts billed in a particular calendar month (a "Billing Month") that
are expected to be received during each of the following five months in the
case of non-residential Customers and six months in the case of residential
Customers (the "Collections Curve"). There will be a separate Collections
Curve for each Customer Class.
The Servicer must remit actual ITC Collections for any Billing Month
to the Trustee for deposit in the Collection Account not later than five
months (in the case of non-residential Customers) or six months (in the
case of residential Customers) after that Billing Month. In addition, for
so long as a Servicer Default is not continuing and 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 must make periodic payments on account of ITC Collections to the
Trustee. By the twentieth day of each calendar month (or, if the twentieth
is not a Business Day, then by the next Business Day), the Servicer must
pay the Trustee for each of the prior five Billing Months (in the case of
non-residential Customers) and for each of the prior six Billing Months (in
the case of residential Customers) an amount equal to the amount of ITC
Collections estimated to have been received during the preceding calendar
month, based on the Collections Curve then in effect, for those Billing
Months. The sum of the amounts paid to the Trustee over a five-month period
(in the case of non-residential Customers) or a six-month period (in the
case of residential Customers) based on the Collections Curve following a
particular Billing Month is referred to as the "Collections Curve Payment"
for that Billing Month. Each date on which the Servicer must remit ITC
Collections and pay Collection Curve Payments to the Bond Trustee for
deposit in the Collection Account is a "Remittance Date". A "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.
On or before the Remittance Date in the fifth month (in the case of
non-residential Customers) or the sixth month (in the case of residential
Customers) after a Billing Month, the Servicer will compare actual ITC
Collections it has received for that Billing Month (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 a Billing Month exceed Actual ITC Collections for that
Billing Month (the excess, an "Excess Curve Payment"), the Servicer may
either:
1. reduce the amount that the Servicer remits to the Trustee for deposit
in the Collection Account on that Remittance Date by the amount of
the Excess Curve Payment, or
2. require the Trustee to pay the Servicer from the Collection Account
or any subaccount of 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, a "Curve
Payment Shortfall"), the Servicer must pay the Curve Payment Shortfall to
the Trustee on that Remittance Date, in addition to any other amounts due
on that Remittance Date, for deposit in the Collection Account. Any Excess
Curve Payment or Curve Payment Shortfall for a Remittance Date will not
affect the underlying Collections Curve Payments otherwise due on that
Remittance Date.
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 and 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. While the applicable Intangible
Transition Charges will be imposed on Customers who only partially
self-generate, the ability of the Servicer to collect those Intangible
Transition Charges may be reduced because the Servicer may not have ready
access to data about which Customers are self-generating.
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 and 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 resulting in shortfalls in ITC
Collections.
THE PUC'S INTANGIBLE TRANSITION CHARGE ADJUSTMENT PROCESS
Among other things, the Servicing Agreement requires the Servicer to
file, and the Competition Act and the PUC Order require the PUC to approve,
Adjustment Requests on each Calculation Date 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 during the final calendar year during which any Series of
transition bonds is outstanding may be implemented quarterly or monthly.
The Servicer agrees to calculate these adjustments to result in the
Transition Bond Balance equaling the Projected Transition Bond Balance, the
amount on deposit in the Overcollateralization Subaccount equaling the
Scheduled Overcollateralization Level and the replenishment of any
shortfalls in the Capital Subaccount to its required level by the Payment
Date immediately preceding the next Adjustment Date or the Expected Final
Payment Date, as applicable, taking into account any amounts on deposit in
the Reserve Subaccount. The Servicer will file Adjustment Requests on each
Calculation Date for the Issuer 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. During the last year
the Transition Bonds are outstanding, the PUC will permit each adjustment
request to become effective within 15 days after filing. Adjustments to the
Intangible Transition Charges will cease with respect to each Series on the
final Adjustment Date specified in the Prospectus Supplement for that
Series.
PP&L's Intangible Transition Charge Collections. The Servicer is
required to remit all ITC Collections (from whatever source), based on the
Collections Curve, to the Issuer and all proceeds of other Collateral, if
any, of the Issuer, received by the Servicer to the Trustee for deposit
pursuant to the Indenture on each Remittance Date. As long as PP&L or any
successor to PP&L's electric distribution business is the Servicer, the
Remittance Date is the twentieth calendar day of each month, or if this day
is not a Business Day, the next Business Day, provided that, among other
things:
1. PP&L or its successor maintains a short-term rating of at least "A-1"
by Standard & Poor's Rating Group ("S&P") and "P-1" by Moody's
Investors Service Inc. ("Moody's"), F-1 by Fitch IBCA ("Fitch") or
"D-1" by Duff & Phelps or
2. the Rating Agency Condition has satisfied (and any conditions or
limitations imposed by the Rating Agencies in connection therewith
are complied with).
If PP&L does not meet these conditions it will be required to remit ITC
Collections within two Business Days of receipt. 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 PROVIDE 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 provide a letter of credit assuring remittances of
collections of Intangible Transition Charges on each Remittance Date as
specified in the related Prospectus Supplement.
PP&L MAY MAKE ADVANCES OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
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 make advances of interest or principal on the related
Series of Transition Bonds in the manner and to the extent specified
therein.
PP&L'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF
OTHER PARTIES
The Issuer agrees to pay the Servicer a servicing fee on each
Payment Date with respect to each Series of Transition Bonds in an amount
to be specified in the related Prospectus Supplement (the "Servicing Fee").
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 the
Issuer 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:
1. except where the failure to comply with any of the following would
not adversely affect the Issuer'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.
P&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 the Issuer 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;
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 or constitute a default under the Servicer's
articles of incorporation or by-laws or any material agreement to
which the Servicer is a party or bound, result in the creation or
imposition of any lien upon the Servicer's properties 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 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 the Issuer, 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 THE ISSUER AND OTHER RELATED ENTITIES
Under the Servicing Agreement, the Servicer agrees to indemnify the
Issuer, the Trustee, on behalf of the Transition Bondholders, and related
parties specified in the Servicing Agreement, against any costs, expenses,
losses, damages, claims and liabilities that may be imposed upon, incurred
by or asserted against any of those persons as a result of:
1. the Servicer's willful misfeasance, bad faith or gross negligence in
the performance of its duties or observance of its covenants under
the 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.
PP&L, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND
TO THE TRUSTEE
For each Payment Date, the Servicer will provide to the Issuer 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 and the
Projected Transition Bond Balance for the Payment Date immediately
preceding the next succeeding Adjustment 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 Reserve Subaccount as of the immediately
preceding Payment Date;
4. the amount on deposit in the Capital Subaccount as of the immediately
preceding Payment Date;
5. the Projected Transition Bond Balance for the next Payment Date and
the Servicer's projection of the Transition Bond Balance as of the
next Payment Date;
6. the Scheduled Overcollateralization Level and the Servicer's
projection of the amount on deposit in the Overcollateralization
Subaccount as of the next Payment Date;
7. the required Capital Subaccount balance as of the Payment Date
immediately preceding the next Payment Date; and
8. the required Reserve Subaccount balance as of the Payment Date
immediately preceding the next Payment Date.
Moreover, on or before each Remittance Date, the Servicer will prepare and
furnish to the Issuer and the Trustee a statement setting forth the
aggregate amount remitted or to be remitted by the Servicer to the Trustee
for deposit on that Remittance Date pursuant to the Indenture. In addition,
on or before each Payment Date, the Servicer will prepare and furnish to
the Issuer 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 the Issuer 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 Transition Bondholders" in this Prospectus.
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 the Issuer, 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 standards relating to the servicing of Intangible Transition
Property. This report (the "Annual Accountant's Report") will state that
the firm has performed the procedures in connection with the Servicer's
compliance with the servicing procedures 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 the Issuer and the Trustee, on or before March 31 of each year,
a certificate signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its obligations under the 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 the Issuer, 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
which succeeds to the major part of the electric distribution business of
the Servicer, which assumes the obligations of the Servicer, will be the
successor of the Servicer under the Servicing Agreement. The Servicing
Agreement further requires that:
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. officers' certificates and opinions of counsel will have been
delivered to the Issuer, the Trustee, and the Rating Agencies; and
3. prior written notice will have been received by the Ratings Agencies,
and the Rating Agency Condition will have been satisfied.
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 except upon a determination, communicated to the Issuer, the
Trustee and each Rating Agency and evidenced by an opinion of counsel, that
the performance of its 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 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 the Issuer for any action taken or for refraining
from taking any action pursuant to the Servicing Agreement or for errors in
judgment, except to the extent this liability is imposed by reason of the
Servicer's wilful misfeasance, 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
the Issuer, any required remittance that continues unremedied for a
period of three Business Days;
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 30 days after notice of
this failure has been given to the Servicer, by the Issuer or the
Trustee or after discovery of this failure by an officer of the
Servicer, as the case may be;
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 the
Issuer and which continues unremedied for 60 days after notice of
this failure has been given to the Servicer by the Issuer or the
Trustee or after discovery of this failure by an officer of the
Servicer, as the case may be; and
4. specified events of insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings with respect to the
Servicer and specified actions by the Servicer indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations.
The Trustee with the consent of the holders of 51% of the principal amount
of the Transition Bonds of all Series and Classes 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 may terminate all the rights and obligations of the
Servicer under the Servicing Agreement (other than the Servicer's
indemnification obligation and obligation to continue performing its
functions as Servicer until a successor Servicer is appointed). Under the
Servicing Agreement, the Trustee may appoint a successor Servicer
("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 Bankruptcy Code or similar laws (the
"Insolvency Laws"), the Trustee and the Issuer may be prevented from
effecting a transfer of servicing. See "Risk Factors--The Risks Associated
With Potential Bankruptcy Proceedings" and "How a Bankruptcy of the Issuer,
Seller or Servicer May Affect Your Investment" in this Prospectus. Upon a
Servicer Default because of a failure to make required remittances, the
Issuer or its pledgees or transferees 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 the Issuer, the Trustee and the Successor Servicer in terminating the
Servicer's rights and responsibilities under the Servicing Agreement,
including the transfer to the Successor Servicer of all documentation
pertaining to Intangible Transition Property and all cash amounts then held
by the Servicer for remittance or subsequently acquired by the Servicer.
The 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 a person
that was a Customer of an electric utility located within the utility's
service territory on January 1, 1997, or that became a Customer of
electricity generation services within the utility's service territory
after January 1, 1997, and is still located within the service territory
may sue a retail 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 some of the terms of the Indenture
pursuant to which Transition Bonds will be issued. The form of the
Indenture, including the form of the Supplemental Indenture, 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 Indenture. See "PP&L,
Inc." in this Prospectus.
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, the Issuer will grant to the Trustee for
the benefit of the Transition Bondholders a security interest in all of the
Issuer's right, title and interest in and to the following Collateral:
1. the Transferred Intangible Transition Property sold by the Seller to
the Issuer pursuant to the Sale Agreement and all proceeds thereof;
2. the Sale Agreement;
3. all bills of sale delivered by the Seller pursuant to the Sale
Agreement;
4. the Servicing Agreement;
5. the Collection Account and all amounts on deposit therein from time
to time, with the exception of $100,000 which is to be held in the
Collection Account free of the lien of the Indenture to ensure that
the Issuer has sufficient assets to pay its expenses as they come
due;
6. all other property of whatever kind owned from time to time by the
Issuer, which other property is not expected to be substantial;
7. all present and future claims, demands, causes and choses in action
in respect of any or all of the foregoing; and
8. all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing,
provided that cash or other property released to the Issuer from the
Collection Account in accordance with the provisions of the Indenture will
not be subject to the lien of the Indenture. See "-How Funds in the General
Subaccount Will Be Allocated" below.
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 the Issuer of Intangible Transition Property (a
"Financing Issuance") or to pay the cost of refunding, through redemption
or payment, all or part of the Transition Bonds (a "Refunding Issuance").
The aggregate principal amount of Transition Bonds that may be
authenticated and delivered under the Indenture may not exceed $2.85
billion plus the amount of any Refunding Issuance. 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 prior review by, or consent of, the
Transition Bondholders of any previously issued Series. See "Risk
Factors-Other Risks Associated With An Investment In The Transition Bonds,"
"The Transition Bonds" and "PP&L's Restructuring Plan" 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, since 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 the Issuer that no Event of Default
has occurred and is continuing, an opinion of counsel to the Issuer 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 will have to receive a certificate or opinion of a firm
of independent certified public accountants of recognized national
reputation based on the assumptions used in calculating the initial
Intangible Transition Charges with respect to the Transferred Intangible
Property or, if applicable, the most recent revised Intangible Transition
Charges with respect to the Transferred Intangible Tangible Property, 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 pay all fees and expenses, interest of each
Series of Transition Bonds when due, principal of each Series of Transition
Bonds in accordance with the Expected Amortization Schedule therefor, and
to fund 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.
If the issuance is a Refunding Issuance, the amount of money
necessary to pay premiums, if any, and the outstanding principal balance of
and interest on the Transition Bonds being refunded will be deposited into
a separate account with the Trustee.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the Indenture, the Issuer will establish one or more segregated
trust accounts in the Trustee's name, which collectively comprise 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 subaccounts, which need not be separate bank accounts: the
General Subaccount, one or more Series Subaccounts, the
Overcollateralization Subaccount, the Capital Subaccount, the Reserve
Subaccount and, if required by the Indenture, one or more Defeasance
Subaccounts (each, a "Defeasance Subaccount"). All amounts in the
Collection Account not allocated to any other subaccount will be allocated
to the General Subaccount. Unless the context indicates otherwise,
references in this Prospectus to the Collection Account include all of the
subaccounts contained 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
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.
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 shall be invested in any of the following:
1. direct obligations of, and obligations fully and unconditionally
guaranteed as to the timely payment by, the United States of America;
2. demand deposits, time deposits, certificates of deposit of depository
institutions or trust companies specified in the Indenture;
3. commercial paper having, at the time of investment, a rating in the
highest rating category from each Rating Agency;
4. demand deposits, time deposits and certificates of deposit which are
fully insured by the Federal Deposit Insurance Corporation;
5. money market funds which have the highest rating from each Rating
Agency (including funds for which the Trustee or any of its
affiliates is investment manager or advisor);
6. banker's acceptances issued by any depository institution or trust
company referred to in clause 2 above;
7. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America
or agencies or instrumentalities thereof, entered into with
depository institutions or trust companies in each case as specified
in the Indenture; or
8. any other investment permitted by each Rating Agency (collectively,
the "Eligible Investments"); 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 the
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 this 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, the Issuer 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 (from whatever source) and all
proceeds of other Collateral received by the Servicer to the Trustee under
the Indenture for deposit in the Collection Account. "Indemnity Amounts"
means any amounts paid by the Seller or the Servicer to the Trustee, for
itself or on behalf of the Transition Bondholders, in respect of
indemnification obligations pursuant to the Sale Agreement and the
Servicing Agreement. See "The Sale Agreement" and "The Servicing Agreement"
in this Prospectus.
General Subaccount. ITC Collections remitted by the Servicer to the
Trustee, will be deposited into a subaccount entitled the "General
Subaccount". All investment earnings realized on the General Subaccount
will be released to the Issuer. On each Payment Date, the Trustee will
allocate amounts in the General Subaccount to make the allocation described
under "How Funds in the General Subaccount Will Be Allocated" below.
Series Subaccount. Upon the issuance of each Series of Transition
Bonds, a subaccount entitled the "Series Subaccount" will be established
with respect to that Series. 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, the Seller will make a capital contribution in an amount equal to
the amount specified in the related Prospectus Supplement, representing a
capital contribution from PP&L (with respect to each Series, the "Required
Capital Amount") to the Issuer, and the Issuer will pay this amount to the
Trustee for deposit into a subaccount (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 distributions and to pay
expenses of the Issuer, the Trustee and the Servicer and other fees and
expenses 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 the Issuer, free of
the lien of the Indenture.
Overcollateralization Subaccount. ITC Collections to the extent
available as described in "How Funds in the General Subaccount Will Be
Allocated" below will be allocated to a subaccount (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 (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 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 distributions and to pay expenses of the
Issuer, the Trustee and the Servicer and other fees and expenses 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 the Issuer, free of
the lien of the Indenture.
Reserve Subaccount. ITC Collections available on any Payment Date
that are not necessary to pay clauses 1 to through 11 in "How Funds in
the General Subaccount Will Be Allocated" below will be allocated to a
subaccount entitled 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 9 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
distributions and pay expenses of the Issuer, the Trustee, the Servicer and
other fees and expenses 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, the Issuer will establish a Defeasance Account for each
Series into which funds set aside for future payment of the Transition
Bonds will be deposited. All amounts in a Defeasance Account will be
applied by the Trustee, in accordance with the provisions of the Transition
Bonds and the Indenture, to the payment to the holders of the particular
Transition Bonds for the payment or redemption of which these amounts were
deposited with the Trustee, including all sums due for principal, premium,
if any, and interest. See "The Issuer's Legal Defeasance and Covenant
Defeasance Options" below.
HOW FUNDS IN THE GENERAL SUBACCOUNT WILL BE ALLOCATED
Amounts remitted from the Servicer to the Trustee, and all investment
earnings on the subaccounts in the Collections 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 legal fees and expenses)
will be paid to the Trustee;
2. all amounts owed to the Independent Manager will be paid to the
Independent Manager;
3. the Servicing Fee and all unpaid Servicing Fees from prior Payment
Dates will be paid to the Servicer;
4. the administration fee payable under the Administration Agreement
between the Issuer and PP&L will be paid to PP&L.
5. so long as no Event of Default has occurred and is continuing or
would be caused by this payment, all operating expenses of the
Issuer other than those specified in clauses 1, 2, 3 and 4 above
will be paid to the Persons entitled thereto, provided that the
amount paid on any Payment Date pursuant to this clause 5 may not
exceed [$ ] in the aggregate for all Series;
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 the Issuer 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 triggered by 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 next Payment Date (excluding amounts
provided for pursuant to clause 7 above) will be allocated to the
corresponding Series Subaccount;
9. all unpaid operating expenses of the Issuer will be paid to the
persons entitled thereto;
10. any amount necessary to replenish the Capital Subaccount will be
allocated to that subaccount;
11. an amount will be allocated to the Overcollateralization Subaccount
to cause the amount in the Overcollateralization Subaccount to equal
the Scheduled Overcollateralization Level;
12. an amount equal to investment earnings on amounts in General
Subaccount and the Capital Subaccount will be released to the
Issuer;
13. the balance, if any, will be allocated to the Reserve Subaccount;
and
14. following repayment of the outstanding Series of Transition Bonds,
the balance, if any, will be released to the Issuer 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 amount of interest accrued at the applicable
interest rates from the prior Payment Date with respect to that
Series;
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 the
Series on that Redemption Date.
"Principal" means, with respect to any Payment Date and any Series of
Transition Bonds:
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.
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 which will include (to the
extent applicable) the following information (and any other information so
specified in the applicable Supplemental Indenture) as to the Transition
Bonds of that Series with respect to that Payment Date or the period since
the previous Payment Date, as applicable:
1. the amount paid to Transition Bondholders of that Series in respect of
principal;
2. the amount paid to Transition Bondholders of that Series in respect
of interest;
3. the Transition Bond Balance and the Projected Transition Bond Balance
for that Series as of the relevant Payment Date;
4. the amount on deposit in the Overcollateralization Subaccount and the
Scheduled Overcollateralization Level, with respect to that Series
and as of the relevant Payment Date;
5. the amount on deposit in the Capital Subaccount as of the relevant
Payment Date; and
6. the amount, if any, on deposit in the Reserve Subaccount for all Series
as of the most recent Payment Date.
THE ISSUER 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,
the Issuer 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 better to
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 the Issuer, and the
assumption by any applicable successor of the covenants of the Issuer
contained in the Indenture and in the Transition Bonds;
3. to add to the covenants of the Issuer, for the benefit of the Holders
of the Transition Bonds, or to surrender any right or power therein
conferred upon the Issuer;
4. to convey, transfer, assign, mortgage or pledge any property to or
with the Trustee;
5. to cure any ambiguity, to correct or supplement any provision of the
Indenture or in any Supplemental Indenture which may be inconsistent
with any other provision of the Indenture or in any Supplemental
Indenture or to make any other provisions with respect to matters or
questions arising under the Indenture or in any Supplemental
Indenture; provided, however, that:
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, the Issuer and Trustee may execute a
Supplemental Indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture, or to modify in any manner the
rights of the Transition Bondholders under the Indenture; provided,
however, 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. The Issuer 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 for the purpose
of adding any provisions to, or changing in any manner or eliminating of
any of the provisions of, the Indenture or modifying in any manner the
rights of the Transition Bondholders under the Indenture; provided,
however, that 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 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 any place of payment where, or 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 holders of which is required for any Supplemental Indenture, or
the consent of the holders of which is required for any waiver of
compliance with 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 the Issuer to sell or
liquidate the Collateral;
5. modify any provision of the section of the Indenture relating to the
consent of Transition Bondholders with respect to Supplemental
Indentures, except to increase any percentage specified 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 the Holder of each Outstanding Transition
Bond 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 or 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 Payment Date;
8. modify or alter the provisions of the Indenture regarding the voting
of Transition Bonds held by the Issuer, the Seller, an affiliate of
either of them or any obligor on the Transition Bonds;
9. decrease the percentage of the aggregate principal amount of the
Transition Bonds required to amend the sections of the Indenture
which specify the applicable percentage of the aggregate principal
amount of the Transition Bonds necessary to amend the Indenture or
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 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 and Servicing Agreement. The
Indenture will provide that the Issuer will take all lawful actions to
enforce its rights under the Sale Agreement and the Servicing Agreement and
to compel or secure the performance and observance by the Seller and the
Servicer of each of their respective obligations to the Issuer under or in
connection with the Sale Agreement and the Servicing Agreement. So long as
no Event of Default occurs and is continuing, the Issuer may exercise any
and all rights, remedies, powers and privileges lawfully available to the
Issuer under or in connection with the Sale Agreement and the Servicing
Agreement. However, if the Issuer and the Seller or Servicer propose to
amend, modify, waive, supplement, terminate or surrender, or agree to any
amendment, modification, supplement, termination, waiver or surrender of,
the process for adjusting Intangible Transition Charges, the Issuer must
notify the Trustee and the Trustee must notify Transition Bondholders of
this proposal and the Trustee may consent thereto only with the consent of
the Holder of each Outstanding Transition Bond of each Series or Class
materially and adversely affected thereby.
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 the Issuer against the Seller or
the Servicer under or in connection with the Sale Agreement and the
Servicing Agreement, and any right of the Issuer 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 and the Servicing Agreement. With
the consent of the Trustee, the Sale 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, provided that this amendment shall
not, as evidenced by an opinion of counsel, adversely affect the interest
of any Transition Bondholder in any material respect or change the
adjustment process for the Intangible Transition Charges in any respect
that would materially and adversely affect any Transition Bondholder.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of Any Modification. If the Issuer, the Seller or the Servicer
proposes to amend, modify, waive, supplement, terminate or surrender, or
agree to any other amendment, modification, waiver, supplement, termination
or surrender of, the terms of the Sale Agreement or the Servicing
Agreement, or waive timely performance or observance by the Seller or the
Servicer under the Sale Agreement or Servicing Agreement, respectively, in
each case in a way which would adversely affect the interests of Transition
Bondholders, the Issuer shall first notify the Rating Agencies of the
proposed amendment and, upon receiving notification regarding the Rating
Agency Condition, thereafter shall 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 shall 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 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 for five Business Days in the payment of any interest on any
Transition Bond;
2. a default in the payment of the then unpaid principal of any
Transition Bond of any Series on the Series Final Maturity Date for
that Series or, if applicable, any Class on the Class 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 the Issuer made in the Indenture (other than those
specifically dealt with in 1, 2 or 3 above) and the continuation of
that default for a period of 30 days after the earlier of the date
notice thereof is given to the Issuer by the Trustee or to the Issuer
and the Trustee by the holders of at least 25% in principal amount of
the Transition Bonds of any Series or Class or the date the Issuer
has knowledge of the default; and
5. some events of bankruptcy, insolvency, receivership or liquidation of
the Issuer.
If an Event of Default occurs and is continuing, 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 sell the Collateral or
elect to have the Issuer maintain possession of the Collateral and continue
to apply distributions on the Collateral as if there had been no
declaration of acceleration. The Trustee is prohibited from selling the
Collateral following an Event of Default other than a default in the
payment of any principal, a default for five days or more in the payment of
any interest on any Transition Bond of any Series or a default on the
payment of the price set for redemption in the related Supplemental
Indenture for any Transition Bond on the date for redemption therefor set
forth in the related Supplemental Indenture 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 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 principal outstanding amount of the Transition Bonds of all
Series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions of the Indenture relating to the duties of the Trustee, 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 the Trustee 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. Subject to these 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;
provided that, among other things:
1. this direction shall 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 shall be 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 these direction.
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, except
a default in the payment of principal of or premium, if any, or interest on
any of the Transition Bonds or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all of the holders of the outstanding Transition Bonds of all
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;
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 THE ISSUER
The Issuer will keep in effect its existence, rights and franchises
as a limited liability company under Delaware law, provided that the Issuer
may consolidate with or merge into another entity or sell substantially all
of its assets to another entity and dissolve if:
1. the entity formed by or surviving 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 the Issuer's obligations under the
Indenture;
2. the entity expressly assumes all obligations and succeeds to all
rights of the Issuer under the Sale 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 the merger, consolidation or sale;
4. the Rating Agency Condition will have been satisfied with respect to
this consolidation or merger or sale;
5. the Issuer 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 the Issuer 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 the Issuer'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 will have been taken.
Additional Covenants of the Issuer. The Issuer 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 and security interest (and priority thereof) of the Indenture and
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, nor will it permit any lien, charge, claim, security
interest, mortgage or other encumbrance, other than the lien and security
interest created by the Indenture, to be created on or extend to or
otherwise arise upon or burden the Collateral or any part thereof or any
interest therein or the proceeds thereof, or permit the lien of the
Indenture not to constitute a continuing valid first priority security
interest in the Collateral.
The Issuer 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 the Issuer.
The Issuer may not engage in any business other than purchasing and
owning the Transferred Intangible Transition Property, issuing Transition
Bonds from time to time, pledging its interest in the Collateral to the
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.
The Issuer May Not Engage in Any Other Financial Transactions. The
Issuer may not issue, incur, assume or guarantee any indebtedness except
for the Transition Bonds or guarantee or otherwise become contingently
liable in connection with the obligations, stocks or dividends of, or own,
purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other person, other than the Eligible
Investments. The Issuer may not, except as contemplated by the Indenture,
the Sale Agreement, the Servicing Agreement and related documents,
including the Limited Liability Company Agreement, make any loan or advance
or credit to any person. The Issuer will not make any expenditure (by
long-term or operating lease or otherwise) for capital assets (either
realty or personalty) other than Intangible Transition Property purchased
from the Seller pursuant to, and in accordance with, the Sale Agreement.
The Issuer may not make any payments, distributions or dividends to any
member of the Issuer in respect of its membership interest in the Issuer,
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.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any Transition Bondholder or group of Transition Bondholders (each of
whom has owned a Transition Bond for at least six months) may, by written
request to the 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. 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.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a
written statement as to the fulfillment of its obligations under the
Indenture. In addition, the Issuer will furnish to the Trustee an opinion
of counsel concerning filings made by the Issuer on an annual basis and
before the effectiveness of any amendment to the Sale Agreement or the
Servicing Agreement.
THE TRUSTEE MUST PROVIDE AN ANNUAL REPORT TO ALL TRANSITION BONDHOLDERS
If required by the Trust Indenture Act of 1939, as amended, ("Trust
Indenture Act") the Trustee will be required to mail each year to all
Transition Bondholders a brief report relating to, among other items, its
eligibility and qualification to continue as the Trustee under the
Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of specific indebtedness owing by the
Issuer to it in the Trustee's individual capacity, the property and funds
physically held by the Trustee, any additional issue of a Series of
Transition Bonds not previously reported and any action taken by it that
materially affects the Transition Bonds of any Series and that has not been
previously reported.
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 and the Issuer has delivered 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 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.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
The Issuer may, at any time, terminate:
1. all of its obligations under the Indenture with respect to the
Transition Bonds of any Series ("Legal Defeasance Option"); or
2. its obligations to comply with the covenants in the Indenture,
including the covenants described under "The Indenture--Covenants of
the Issuer" (the "Covenant Defeasance Option").
The Issuer may exercise the Legal Defeasance Option with respect to any
Series of Transition Bonds notwithstanding its prior exercise of the
Covenant Defeasance Option with respect to that Series. If the Issuer
exercises the Legal Defeasance Option with respect to any Series, that
Series 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 the
Issuer 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 the Issuer made
in the Indenture.
The Issuer may exercise the Legal Defeasance Option or the Covenant
Defeasance Option with respect to any Series of Transition Bonds only if:
1. the Issuer irrevocably deposits or causes to be deposited in trust
with the 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. the Issuer 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: (x) 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 (y) interest
when due;
3. in the case of the Legal Defeasance Option, 95 days pass after the
deposit is made and during the 95-day period no default relating to
events of bankruptcy, insolvency, receivership or liquidation of the
Issuer occurs and is continuing at the end of the period;
4. no default has occurred and is continuing on the day of this deposit
and after giving effect thereto;
5. in the case of the Legal Defeasance Option, the Issuer delivers to
the Trustee an opinion of counsel stating that:
a. the Issuer 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, the Issuer 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. the Issuer delivers to the Trustee a certificate of an authorized
officer of the Issuer and an opinion of counsel, each stating that
all conditions precedent to the satisfaction and discharge of the
Transition Bonds of that Series have been complied with as required
by the Indenture.
There will be no other conditions to the exercise by the Issuer of its
Legal Defeasance Option or its Covenant Defeasance Option.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in these 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 the Issuer's
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 the
Issuer. 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. The Issuer 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. If the Trustee resigns or is removed or a
vacancy exists in the office of Trustee for any reason, the Issuer will be
obligated 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 OF THE ISSUER, SELLER OR SERVICER MAY AFFECT
YOUR INVESTMENT
True Sale or Financing. The Seller will represent and warrant in the
Sale Agreement that the transfer of the Transferred Intangible Transition
Property in accordance with that agreement constitutes a valid sale and
assignment by the Seller to the Issuer of the Transferred Intangible
Transition Property. The Seller will also represent and warrant in the Sale
Agreement, and it is a condition of closing for the sale of Intangible
Transition Property, that it 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.
The Seller and the Issuer will treat the transactions as a sale under
applicable law, although for financial reporting and federal and
Commonwealth income, gross receipts and franchise tax purposes the
Transition Bonds will be treated as a financing and not a sale. See "The
Competition Act--PP&L and Other Utilities May Securitize Stranded Costs" in
this Prospectus. If the Seller were to become a debtor in a bankruptcy case
and a bankruptcy trustee of the Seller, the Seller itself as debtor in
possession or another party in interest were to take the position that the
sale of the Transferred Intangible Transition Property to the Issuer was a
financing transaction and not a "true sale," 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 Seller bankruptcy and the attendant possible uncertainty
surrounding the treatment of the transaction could result in delays in
payments on the Transition Bonds.
In order to mitigate the impact of the possible recharacterization of
a sale of intangible transition property as a financing transaction, the
Competition Act and the regulations promulgated thereunder provide that if
an intangible transition property notice is filed and the transfer is
thereafter held to constitute a financing transaction (as opposed to a true
sale), this notice will be deemed to constitute a filing with respect to a
security interest. The Competition Act further 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 the Issuer be filed in the
appropriate offices in Pennsylvania. As a result of these filings, the
Issuer would be a secured creditor of the Seller 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 bankruptcy. Further, if, for any reason, an intangible transition
property notice is not filed under the Competition Act or the Issuer fails
to otherwise perfect its interest in the Transferred Intangible Transition
Property, and the transfer is thereafter deemed not to constitute a true
sale, the Issuer would be an unsecured creditor of the Seller.
Consolidation of the Issuer and the Seller. If the Seller were to
become a debtor in a bankruptcy case, a bankruptcy trustee of the Seller,
the Seller itself as a debtor in possession or another party in interest
may attempt to substantively consolidate the assets and liabilities of the
Issuer and the Seller. Although the Seller and the Issuer have taken steps
to attempt to minimize this risk (see "PP&L Transition Bond Company LLC,
the Issuer" in this Prospectus), no assurance can be given that if the
Seller or an affiliate of the Seller (other than the Issuer) were to become
a debtor in a bankruptcy case, a court would not order that the assets and
liabilities of the Issuer be consolidated with those of the Seller or its
affiliate.
Estimation of Claims; Challenge to Indemnity Claims. If the Seller
were to become a debtor in a bankruptcy case, claims (including indemnity
claims) by the Issuer against the Seller under the Sale 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 bankruptcy trustee of the Seller, the Seller as debtor in
possession or another party in interest may request that the Bankruptcy
Court estimate any contingent claims of the Issuer against the Seller and
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 the Seller were to become a debtor in a bankruptcy case and the
indemnity provisions of the Sale Agreement were triggered, a bankruptcy
trustee of the Seller, the Seller as debtor in possession or another party
in interest might challenge the enforceability of the indemnity provisions.
If a court were to hold that the indemnity provisions were unenforceable,
the Issuer would be left with a claim for actual damages against the Seller
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 the Seller.
Status of Intangible Transition Property as Current Property. The
Seller has represented in the Sale Agreement, and the Competition Act
provides, that the Transferred Intangible Transition Property constitutes a
current property right on the date that the PUC Order became effective and
that it thereafter exists continuously for all purposes. Nevertheless, no
assurance can be given that if the Seller were to become a debtor in a
bankruptcy case, a bankruptcy trustee of the Seller, the Seller itself as
debtor in possession or another party in interest would not attempt to take
the position that, because the payments based on the Transferred Intangible
Transition Property are in whole or in part generally usage-based charges,
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 a bankruptcy case for the
Seller. If it were determined that the Transferred Intangible Transition
Property had not been sold to the Issuer, 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 a
bankruptcy case of the Seller, then the Issuer would be an unsecured
creditor of the Seller, and delays or reductions in payments on the
Transition Bonds could result. Whether or not a court determined that the
Transferred Intangible Transition Property had been sold to the Issuer, 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 Seller's bankruptcy cannot be transferred to the Issuer or the
Trustee.
In addition, because the payments based on the Intangible Transition
Charges are in whole or in part generally usage-based charges, if the
Seller were to become the debtor in a bankruptcy case, a bankruptcy trustee
of the Seller, the Seller itself as debtor in possession or another party
in interest could assert that the Issuer should pay a portion of the
Seller's costs associated with the generation, transmission or distribution
by the Seller of the electricity, consumption of which gave rise to the ITC
Collections used to make payments on the Transition Bonds.
Regardless of whether the Seller 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 the
Seller arising before the Transferred Intangible Transition Property came
into existence could have priority over the Issuer'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 and 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.
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 the Issuer. 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 the Issuer or of the Servicer,
including resolution of any tracing of proceeds issues.
The Servicing Agreement provides that the Trustee, as assignee of the
Issuer, together with the other persons specified therein, may vote to
appoint a Successor Servicer that satisfies the Rating Agency Condition or
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.
MATERIAL TAX MATTERS FOR THE TRANSITION BONDS
GENERAL: SCOPE OF FEDERAL INCOME TAX OPINION
Set forth below is a general discussion of the material United States
federal income tax consequences of the purchase, ownership and disposition
of the Transition Bonds which are anticipated to be relevant to most
categories of investors and has been prepared and reviewed by Skadden,
Arps, Slate, Meagher & Flom LLP, special federal income tax counsel to PP&L
and the Issuer ("Special Tax Counsel"). Special Tax Counsel is of the
opinion that this discussion is correct in all material respects. As more
fully described below, Special Tax Counsel will render its opinion, subject
to the analysis and assumptions contained therein, that the Issuer will not
be treated as an entity separate from PP&L for federal income tax purposes.
Special Tax Counsel will render no other opinions to the Transferor with
respect to the Transition Bonds. In addition, Special Tax Counsel's opinion
and this discussion rely in part, on a ruling PP&L and the Issuer have
received from the Internal Revenue Service (the "IRS"). Furthermore, this
discussion is intended solely as an explanatory discussion of the possible
effects of the classification of the Transition Bonds as indebtedness on
investors generally and of related tax matters affecting investors
generally, and 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 discussion is
based upon current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed treasury regulations ("Treasury
Regulations") thereunder, current administrative rulings, judicial
decisions and other applicable authorities in effect as of the date hereof,
all of which are subject to change, possibly with retroactive effect.
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.
This Summary of Material Federal Tax Matters Is Not Meant to Be
Comprehensive. This summary does not address all aspects of federal income
taxation that may be relevant to the holders of Transition Bonds in light
of their personal investment circumstances nor, except for limited
discussions of particular topics, to types of holders subject to special
treatment under the federal income tax laws (e.g., financial institutions,
broker-dealers, life insurance companies, tax-exempt organizations, persons
who hold Transition Bonds as positions in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction for United
States federal income tax purposes, and persons whose functional currency
is not the United States dollar.). This information is directed to
prospective purchasers who purchase the Transition Bonds in the initial
distribution thereof, who are citizens or residents of the United States,
including domestic corporations and partnerships, and who hold the
Transition Bonds as "capital assets" within the meaning of Section 1221 of
the Code. This summary also generally does not address the consequences to
holders of the Transition Bonds under state, local or foreign tax laws.
Except to the extent discussed below under "Taxation of Foreign
Transition Bondholders," this discussion may not apply to foreign persons
who are not subject to United States federal income tax on a net income
basis. Taxpayers and preparers of tax returns (including those filed by any
partnership or other entity) should be aware that under applicable Treasury
Regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice:
1. is given with respect to events that have occurred at the time the
advice is rendered and is not given with respect to the consequences
of contemplated actions, and
2. is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their respective tax advisers and tax
return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein.
Definition of "United States Person". For purposes of the discussion
below, 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,
and "Foreign Person" means a person other than a United States Person.
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.
TAX STATUS OF THE ISSUER AND OF THE TRANSITION BONDS
The Issuer is a wholly owned, non-corporate subsidiary of PP&L which
has not elected to be taxed as a corporation for federal income tax
purposes. Tax Counsel has advised PP&L that, as a result, the Issuer will
be treated as a division of PP&L and will not be treated as a separate
taxable entity. The Issuer and PP&L have received a private letter ruling
from the IRS regarding some aspects of the transactions described in this
Prospectus, upon which Tax Counsel has relied in rendering its advice and
in preparing this section. In that ruling, the IRS ruled that:
1. the issuance of the PUC Order would not result in the recognition of
gross income by PP&L, and
2. the Transition Bonds would be classified as debt obligations of PP&L.
TAXATION OF UNITED STATES TRANSITION BONDHOLDERS
For federal income tax purposes, the transactions described in this
Prospectus will be treated as an issuance of debt obligations by PP&L to
the holders of the Transition Bonds secured by a pledge of the Collateral.
Accordingly, assuming, as is anticipated, that the Transition Bonds are
issued at par value (or at a discount of not more than the statutorily
prescribed de minimus amount each holder of Transition Bonds that is a
United States Person will be required to include in income, in accordance
with its usual method of accounting, the portion of the stated interest
attributable to the Transition Bonds during the period the Transition Bonds
are held by the holder.
Capital Gains Issues for the Transition Bonds. A holder of Transition
Bonds that is a United States Person will recognize capital gain or loss
upon the sale or exchange of a Transition Bond equal to the difference
between the amount realized from this sale or exchange (exclusive of any
portion thereof reflecting accrued but unpaid interest, which is taxable as
ordinary income) and its tax basis in the Transition Bond. A Transition
Bondholder that is a United States Person will have a tax basis in a
Transition Bond equal to the Transition Bondholder's purchase price for the
Transition Bond (exclusive of any portion thereof representing accrued but
unpaid interest), decreased by any principal repayments. Capital gain or
loss will be long-term capital gain or loss, provided that the holder has
held the Transition Bonds for more than one year at the time of
disposition.
1. 39.6% if the United States Person held the Transition Bond for not more
than one year before sale or
2. 20% if the United States Person held the Transition Bond for more
than one year.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee or other responsible person will be required to report
annually to the IRS, and to each holder of Transition Bonds of record,
information specified in the Indenture, including the name, address and
taxpayer identification number of the holder, the aggregate amount of
principal and interest paid and the amount of tax withheld, if any. This
obligation, however, does not apply with respect to some United States
Persons, including corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts and individual retirement accounts, who
provide certification as to their status.
Backup Withholding for Failure to Provide the Correct Taxpayer
Identification Number. In the event a United States Person subject to the
reporting requirements described above fails to supply its correct taxpayer
identification number in the manner required by applicable law or under
reports its tax liability, the Issuer or its agents may be required by the
Internal Revenue Service to withhold United States federal income tax equal
to 31% of each payment of principal and interest on the Transition Bonds.
This backup withholding is not an additional tax and will be credited
against the Transition Bondholder's United States federal income tax
liability, provided that required information is furnished to the IRS.
TAXATION OF FOREIGN TRANSITION BONDHOLDERS
Payments of interest income received by a Transition Bondholder that
is a Foreign Person generally will not be subject to United States federal
withholding tax, provided that the Foreign Person complies with the
requirements listed below.
Withholding Taxation on Interest Received by Foreign Persons During
1999. Payments of interest income on the Transition Bonds received by a
Foreign Person on or prior to December 31, 1999, will not be subject to
United States federal withholding tax (or to backup withholding and
information reporting), provided that:
1. the Foreign Person 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. the Foreign Person is not a controlled foreign corporation that is
related to PP&L through stock ownership, and
3. either:
a. the beneficial owner of the Transition Bonds, under penalties of
perjury, provides PP&L or its paying agent with its name and
address and certifies that it is not a United States Person or
b. a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution")
certifies to PP&L or its paying agent, under penalties of perjury,
that this statement has been received from the beneficial owner by
it or another Financial Institution and furnishes to PP&L or its
agent a copy thereof.
Backup withholding and information reporting also generally will not apply
to payments of interest on or prior to December 31, 1999, if the
certification described above is received, provided that the payor does not
have actual knowledge that the Transition Bondholder is a United States
Person.
Withholding Taxation on Interest Received by Foreign Persons After
1999. Payments of interest income on the Transition Bonds received by a
Foreign Person after December 31, 1999, 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 has received:
1. 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,
3. a withholding certificate from a person representing 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 Transition Bondholder that is a
Foreign Person 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 holder of Transition Bonds that is a Foreign Person 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 Transition Bondholder that is a Foreign Person generally
will be taxable in the same manner as a United States corporation or
resident with respect to interest income if this income is effectively
connected with the conduct of a trade or business in the United States.
This effectively connected income received by a Foreign Person 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 treaty rate.
Capital Gains Tax Issues for Foreign Persons. A Transition Bondholder
that is a Foreign Person 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 Foreign Person is an individual who is present in the United
States for 183 days or more during the taxable year and as to whom
this gain is from United States sources or
2. the gain is effectively connected with a United States trade or
business of the Foreign Person 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% unless the owner
certifies its non-United States status under penalties of perjury or
otherwise establishes 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 unless the broker has documentary evidence in its files that
the owner is a Foreign Person and the broker has no 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
Foreign Person will be allowed as a refund or a credit against this Foreign
Person's 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 the Issuer, interest from Transition Bonds received
by a person who is not otherwise subject to corporate or personal income
tax in the Commonwealth will not be subject to these taxes. Neither the
Commonwealth nor any of its political subdivisions presently impose
intangible personal property taxes and therefore Commonwealth residents
will not be subject to these taxes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("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
a plan's investment in these entities (each of 1, 2 and 3, a "Plan")
and
4. persons who have specified relationships to Plans ("parties in
interest" under ERISA and "disqualified persons" under the Code
(collectively, "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 (e.g., through the
purchase of an annuity contract), and 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 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
Under a regulation issued by the United States Department of Labor
(the "Plan Asset Regulation"), if a Plan makes an "equity" investment in a
corporation, partnership, trust or other specified entities, 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 Plan Asset Regulation apply. The Plan
Asset Regulation defines an "equity interest" as any interest in an entity
other than an instrument that is treated as indebtedness under applicable
local law and which has no substantial equity features. 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 or as indebtedness under the Plan
Asset Regulation, the Seller and/or its 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,
unless the transaction were 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 administrative class exemptions include the following:
1. Prohibited Transaction Class Exemption ("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" ("QPAM"); or
5. PTCE 96-23, which exempts specific transactions effected on behalf of
a Plan by specific "in-house" asset managers.
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.
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.
Conditions That Would Allow the QPAM Exemption to Apply. Plan
fiduciaries intending to rely upon the QPAM exemption should consider the
following potential prohibited transactions. As noted above, although the
Issuer 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 that do not qualify
as Publicly Offered Securities could be treated as "equity interests" for
purposes of the Plan Asset Regulation, in which case the assets of the
Issuer would be treated as the assets of any Plan purchasing that Class or
Series. In this event, ITC Collections will 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, which in the absence of
an applicable exemption could be deemed to constitute a prohibited transfer
of property between a Plan and any Party in Interest with respect to the
Plan that is also a Customer. 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
the Plan sponsor, a director of the Plan sponsor or other Party in Interest
with respect to a Plan is also a Customer, and this person has the
authority to appoint or terminate the QPAM as a manager of the Plan's
assets, 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.
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 is required to
issue final regulations (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, except in
the case of avoidance of the General Account Regulations and actions
brought by the Secretary of Labor relating to particular breaches of
fiduciary duties that also constitute breaches of state or federal criminal
law, 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
the basis of a claim that the assets of the general account of an insurance
company constitute the plan assets of any Plan. 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,
whether the fiduciary has the authority to make the investment; whether the
investment constitutes a direct or indirect transaction with a Party in
Interest; the composition of the Plan's portfolio with respect to
diversification by type of asset; the Plan's funding objectives; the tax
effects of the investment; and 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 the Seller or the Underwriters that this investment meets
all relevant legal requirements with respect to Plans generally or any
particular Plan.
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The Transition Bonds of each Series may be sold to or through
underwriters named in the related Prospectus Supplement (the
"Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters or any other underwriting arrangement as may
be specified in the related Prospectus Supplement or may be offered or
placed either directly or through agents. The Issuer and the Trustee intend
that Transition Bonds will be offered through various methods from time to
time and that offerings may be made concurrently through more than one of
these methods or that an offering of a particular Series of Transition
Bonds may be made through a combination of these methods.
The distribution of Transition Bonds may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The Transition Bonds may be offered through one or more different
methods, including offerings through underwriters. It is not anticipated
that any of the Transition Bonds will be listed on any securities exchange.
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, and any discounts or commissions received by them from the
Issuer and any profit on the resale of the Transition Bonds by them may be
deemed to be underwriting discounts and commissions under the Securities
Act. These Underwriters or agents will be identified, and any compensation
received from the Issuer will be described, in the related Prospectus
Supplement.
Other Distribution Issues. Under agreements which may be entered into
by the Seller, the Issuer and the Trustee, Underwriters and agents who
participate in the distribution of the Transition Bonds may be entitled to
indemnification by the Seller and the Issuer 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 an active secondary market will develop and there is no
assurance that this market, if established will continue.
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 Transaction Bonds by
the applicable Series Termination Date or Class Termination Date.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to the Issuer and the issuance of the
Transition Bonds will be passed upon for the Issuer 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 will be passed upon for PP&L by Morgan Lewis &
Bockius LLP, Philadelphia, Pennsylvania. Some legal matters relating to the
federal tax consequences of the issuance of the Transition Bonds will be
passed upon for the Issuer 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 the Issuer by Morgan, Lewis & Bockius LLP.
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of defined terms used in this Prospectus
and defined herein and the pages on which the definitions may be found.
TERM PAGE
Actual ITC Collections....................................................77
Adjustment Date...........................................................35
Adjustment Request........................................................35
Annual Accountant's Report................................................82
Basic Documents...........................................................74
Billing Month.............................................................77
Bond Rate.................................................................62
Book-Entry Transition Bonds...............................................65
Business Day..............................................................77
Calculation Date..........................................................35
Capital Subaccount........................................................88
Cede.......................................................................5
CEDEL.....................................................................65
CEDEL Customers...........................................................66
Class.....................................................................60
Class Final Maturity Date.................................................62
Code.....................................................................102
Collateral.................................................................5
Collection Account........................................................86
Collections Curve.........................................................77
Collections Curve Payment.................................................77
Commonwealth..............................................................23
Commonwealth Court........................................................27
Competition Act...........................................................24
Competitive Default Service...............................................31
Competitive Default Supplier..............................................31
Competitive Transition Charges............................................24
Cooperative...............................................................66
Covenant Defeasance Option................................................98
Curve Payment Shortfall...................................................77
Customer..................................................................24
Customer Class............................................................41
Defeasance Subaccount.....................................................86
Depositories..............................................................65
Direct Participants.......................................................66
DTC........................................................................5
Eastern District Court....................................................27
electric generation suppliers.............................................24
Eligible Institution......................................................86
Eligible Investments......................................................87
Equity Interest..........................................................107
ERISA....................................................................107
Euroclear.................................................................65
Euroclear Operator........................................................66
Euroclear Participants....................................................66
Event of Default..........................................................94
Excess Curve Payment......................................................77
Exchange Act............................................................ . 5
Expected Amortization Schedule............................................35
Expected Final Payment Date...............................................63
Financial Institution....................................................105
Final Maturity Date.......................................................63
Financing Issuance........................................................85
Fitch.....................................................................79
Foreign Person...........................................................103
Fumo Action...............................................................37
General Account Regulations..............................................108
General Subaccount........................................................88
Generation Rate Cap.......................................................30
H.R. 1230.................................................................39
Indemnity Amounts.........................................................88
Indenture.................................................................62
Independent Manager.......................................................61
Indirect Participants.....................................................66
Industry................................................................. 68
Initial Intangible Transition Property....................................70
Initial Transfer Date.....................................................70
Insolvency Laws...........................................................84
Intangible Transition Charges.............................................25
Intangible Transition Property............................................25
Interest..................................................................90
IP&L......................................................................38
IRS......................................................................102
Issuer....................................................................60
ITC Collections...........................................................33
Joint Petition............................................................27
Kwh.......................................................................30
Large Commercial and Industrial...........................................41
Legal Defeasance Option...................................................98
Limited Liability Company Agreement.......................................60
Managers..................................................................61
Moody's...................................................................79
Mwh.......................................................................48
non-bypassable............................................................25
On Track..................................................................56
Overcollateralization Amount..............................................88
Overcollateralization Subaccount..........................................88
Participants..............................................................65
Parties in Interest......................................................107
Payment Date..............................................................62
PECO......................................................................38
PJM.......................................................................59
PP&L...................................................................8, 23
PP&L Resources............................................................23
Plan ....................................................................107
Plan Asset Regulation....................................................107
Post-Retail Access........................................................58
Pre-Retail Access.........................................................57
Principal.................................................................90
Prior Limited Liability Company Agreement.................................60
Projected Transition Bond Balance.........................................35
Prospectus Supplement......................................................5
provider of last resort...................................................24
PTCE.....................................................................107
PUC...................................................................14, 24
PUC Order.................................................................27
PUC Restructuring Order...................................................27
QPAM.....................................................................108
Qualified Transition Expenses.............................................33
Rate Schedule.............................................................42
Rate Schedule BL..........................................................43
Rate Schedule GH-1(R).....................................................42
Rate Schedule GH-2(R).....................................................42
Rate Schedule GS-1........................................................42
Rate Schedule GS-3........................................................42
Rate Schedule IS-1........................................................43
Rate Schedule IS-P........................................................43
Rate Schedule IS-T........................................................44
Rate Schedule ISM.........................................................44
Rate Schedule LP-4........................................................43
Rate Schedule LP-5........................................................44
Rate Schedule LP-6........................................................44
Rate Schedule LPEP........................................................44
Rate Schedule RS..........................................................42
Rate Schedule RTD.........................................................42
Rate Schedule RTS.........................................................42
Rate Schedule SA..........................................................43
Rate Schedule SE..........................................................43
Rate Schedule SHS.........................................................43
Rate Schedule SI-1(R).....................................................43
Rate Schedule Standby.....................................................44
Rate Schedule TS..........................................................43
Rate Schedule SM..........................................................43
Rating Agency.............................................................63
Rating Agency Condition...................................................63
Refunding Issuance........................................................85
Registration Statement.....................................................5
Remittance Date...........................................................77
Required Capital Amount...................................................88
Reserve Subaccount........................................................89
Residential...............................................................41
Restructuring Plan........................................................27
Rules.....................................................................67
S&P.......................................................................79
Sale Agreement............................................................60
Scheduled Overcollateralization Level.....................................35
SEC........................................................................5
Securities Act.............................................................5
Seller....................................................................60
Series....................................................................60
Series Final Maturity Date................................................62
Series Issuance Date......................................................60
Series Subaccount.........................................................88
Servicer..................................................................60
Servicer Defaults.........................................................83
Servicing Agreement.......................................................61
Servicing Fee.............................................................79
Shopping Credit...........................................................28
Small Commercial and Industrial...........................................41
Special Tax Counsel......................................................102
Stranded Costs............................................................28
Subaccounts...............................................................10
Subsequent Intangible Transition Property.................................70
Subsequent Sale...........................................................70
Subsequent Transfer Date..................................................70
Successor Servicer........................................................84
Supplemental Indenture....................................................62
Systems...................................................................68
Terms and Conditions......................................................66
Transferred Intangible Transition Property................................60
Transition Bond Balance...................................................35
Transition Bondholder......................................................5
Transition Bonds...........................................................5
Treasury Regulations.....................................................102
Trust Indenture Act.......................................................97
Trustee....................................................................5
U.S. Government Obligations...............................................99
Underwriters.............................................................109
Union Action..............................................................37
United States Person.....................................................103
United States related person.............................................106
Winter Moratorium.........................................................57
Year 2000 Compliant.......................................................59
Year 2000 Ready...........................................................59
INDEX TO FINANCIAL STATEMENTS OF PP&L TRANSITION BOND COMPANY LLC
Page
Report of Independent Accountants........................................F-2
Statement of Net Assets Available for Issuer Activities...............F-3
Statement of Changes in Net Assets Available for Issuer Activities....F-4
Notes to Financial Statements............................................F-5
Report of Independent Accountants........................................F-6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners
of PP&L Transition Bond Company LLC
In our opinion, the accompanying statement of net assets available
for Issuer activities of PP&L Transition Bond Company LLC and related
statements of changes in net assets available for Issuer activities
present, in all material respects, net asset available for Issuer activity
of PP&L Transition Bond Company LLC at ______, 1999 and the changes in its
net assets available for Issuer activities for the period from (date of
inception) through (date) in conformity with generally accepted accounting
principles. These financial statements are the responsibility of PP&L
Transition Bond Company LLC'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
_________, 1999
--------------------
______, 1999
PP&L Transition Bond Company LLC
Statement of Net Assets Available for Issuer Activities as of _______, 1999
ASSETS
Cash $
Unamortized debt issuance costs $____________
Total Assets $
Due to related party (Note ____) $____________
Net Assets available for Issuer activities $
============
See accompanying notes to financial statements.
PP&L Transition Bond Company LLC
Statement of Changes in net assets available for Issuer activities for the
period from _____, 1999 (date of inception) to _______, 1999
Additions:
Contribution by Grantor $
Deductions:
Changes in Net Assets Available for Activities $
Net Assets Available for Activities at
Inception ______, 1999 $____________
Net Assets Available for Activities at _______, 1999 $
============
See accompanying notes to financial statements.
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 of PP&L, as 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 the Intangible Transition Property (ITP), issuing Transition Bonds
(Bonds), pledging its interest in ITP and other collateral to the 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 $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.
For financial reporting and federal and Commonwealth of Pennsylvania
income and franchise tax purposes, the transfer of ITP to the Company will
be treated as a financing arrangement and not as a sale. Furthermore, the
results of operations of the Company will be consolidated with PP&L for
financial and income tax reporting purposes.
2. Significant Accounting Policies
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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.
UNAMORTIZED DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds have
been capitalized and will be amortized over the life of the Bonds utilizing
the effective interest method.
INCOME TAXES
The Company is a wholly owned subsidiary of CEP Group, Inc. which 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 taxable 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 (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 from PP&L. The Bonds will
be collateralized by the ITP and other assets of the Company. Under
applicable law, the Bonds will not be an obligation of PP&L or secured by
the assets of PP&L. Also 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 quarterly 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 secure the debt service
requirements of the Bonds. The debt service requirements will include an
Overcollateralization Account, a Capital Account and an
Overcollateralization 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 equal to [$ ], which will be determined when the Bonds
are issued.
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.
TABLE OF CONTENTS
Prospectus Supplement
WHERE TO FIND INFORMATION IN THESE DOCUMENTS.............................S-4
SUMMARY OF TERMS - PROSPECTUS SUPPLEMENT.................................S-6
THE SERIES 1999-_ BONDS..................................................S-9
DESCRIPTION OF INTANGIBLE TRANSITION PROPERTY...........................S-12
DESCRIPTION OF PP&L'S BUSINESS..........................................S-16
MATERIAL FEDERAL INCOME TAX MATTERS FOR THE SERIES 1999-_BONDS..........S-17
UNDERWRITING THE SERIES 1999-_ BONDS....................................S-18
RATINGS FOR THE SERIES 1999-_ BONDS.....................................S-19
INDEX OF PRINCIPAL DEFINITIONS..........................................S-21
Prospectus
INFORMATION ABOUT THE ISSUER THAT IS PUBLICLY AVAILABLE....................5
REPORTS TO TRANSITION BONDHOLDERS..........................................5
INCORPORATION OF DOCUMENTS BY REFERENCE....................................5
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS............6
SUMMARY OF TERMS - PROSPECTUS..............................................8
RISK FACTORS..............................................................14
PP&L, INC.................................................................23
THE COMPETITION ACT.......................................................24
PP&L'S RESTRUCTURING PLAN.................................................27
THE PUC ORDER AND THE INTANGIBLE TRANSITION CHARGES.......................32
LEGAL ACTIVITY CHALLENGING THE COMPETITION ACT OR THE PUC ORDER...........37
THE SELLER AND SERVICER OF THE INTANGIBLE TRANSITION PROPERTY.............41
PP&L TRANSITION BOND COMPANY LLC, THE ISSUER..............................60
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS..............62
THE TRANSITION BONDS......................................................62
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION
BONDS...................................................................69
THE SALE AGREEMENT........................................................70
THE SERVICING AGREEMENT...................................................76
THE INDENTURE.............................................................84
HOW A BANKRUPTCY OF THE ISSUER, SELLER OR SERVICER MAY AFFECT YOUR
INVESTMENT.............................................................100
MATERIAL TAX MATTERS FOR THE TRANSITION BONDS...........................102
ERISA CONSIDERATIONS.....................................................107
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS............................109
RATINGS FOR THE TRANSITION BONDS.........................................110
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS...................110
INDEX OF PRINCIPAL DEFINITIONS...........................................111
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.
PP&L Transition Bond Company LLC
$
Transition Bonds
Series 1999-_
___%
--------------------
PROSPECTUS SUPPLEMENT
__________, 1999
--------------------
[Underwriters]
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions.
Registration Fee.............................................$ 278
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........................................................$ *
============
* To be provided by amendment.
Item 15. Indemnification of Members and Mangers.
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 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.
Item 16. Exhibits
Exhibit
No. Description
- ------- -----------
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 Servicing Agreement.*
10.3 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.*
24.1 Power of Attorney.*
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 Qualified Rate Order issued August 27, 1998.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
*To be filed by amendment
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, 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.
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 Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Allentown,
Commonwealth of Pennsylvania, on March 31, 1999.
PP&L Transition Bond Company LLC
By: /s/ John R. Biggar
-----------------------------
Name: John R. Biggar
Title: 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.
March 31, 1999 /s/ John R. Biggar
--------------- ----------------------
Date Name: John. R. Biggar
Title: Manager
March 31, 1999 /s/ James E. Abel
--------------- ----------------------
Date Name: James E. Abel
Title: Manager
March 31, 1999 /s/ Jim Pennington
--------------- ----------------------
Date Name: Jim Pennington
Title: Manager
INDEX TO EXHIBITS
Exhibit
No. Description
- ------ -----------
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 Servicing Agreement.*
10.3 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.*
24.1 Power of Attorney.*
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 Qualified Rate Order issued August 27, 1998.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
*To be filed by amendment
EXHIBIT 4.1.1
LIMITED LIABILITY COMPANY AGREEMENT OF
PP&L TRANSITION BOND COMPANY, LLC
LIMITED LIABILITY COMPANY AGREEMENT
OF
PP&L TRANSITION BOND COMPANY LLC,
a Delaware Limited Liability Company
(the "Company")
ARTICLE I
General Provisions
1.01 Registered Office. The registered office of the Company in
this state shall be CT Corporation, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The member of the Company (the "Member")
may change said registered office from one location to another in the State
of Delaware.
1.02 Other Offices. The Company may have an office at Two North
Ninth Street, Allentown, Pennsylvania or at any other offices that may at
any time be established by the Member at any place or places within or
outside the State of Delaware.
1.03 Purpose; Nature of Business Permitted; Powers. The Company
is organized primarily for the object and purpose of purchasing intangible
transition property, investing in investment securities, issuing transition
bonds and entering into related credit enhancement transactions. The
Company shall possess and may exercise all the powers and privileges
granted by the Delaware Limited Liability Company Act of the State of
Delaware (the "Act") or by any other law or by this Agreement, together
with any powers incidental thereto, insofar as such powers and privileges
are necessary or convenient to the conduct, promotion or attainment of the
business purposes or activities of the Company.
1.04 Limited Liability Company Agreement; Certificate of
Formation. This document (the "Agreement") shall constitute a "limited
liability company agreement" within the meaning of the Act. The
Certificate of Formation of this Company (the "Certificate of Formation")
was filed with the Secretary of State of the State of Delaware on March 25,
1999.
ARTICLE II
Capital
2.01 Initial Capital. The initial capital of the Company shall
be the sum of cash contributed to the Company by the Member in the amount
set out opposite the name of the Member on Schedule A hereto, as amended
from time to time and incorporated herein by this reference.
2.02 Capital Account. A Capital Account shall be established
and maintained for the Member on the Company's books (the "Capital
Account").
2.03 Interest. No interest shall be paid or credited to the
Member on its Capital Account or upon any undistributed profits left on
deposit with the Company.
ARTICLE III
Member
3.01 Powers. Subject to the provisions of the Certificate of
Formation, this Agreement and the Act, all powers shall be exercised by or
under the authority of, and the business and affairs of the Company shall
be controlled by, the Member pursuant to Section 3.05. The Member may
delegate any or all such powers to the Managers. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the Member shall have the following powers:
First - To select and remove the Managers and all officers,
agents and employees of the Company, prescribe such powers and duties for
them as may be consistent with the Act and other applicable law, the
Certificate of Formation and this Agreement, fix their compensation, and
require from them security for faithful service.
Second - To conduct, manage and control the affairs and business
of the Company, and to make such rules and regulations therefor consistent
with the Act and other applicable law, the Certificate of Formation and
this Agreement.
Third - To change the registered office of the Company in
Delaware from one location to another; to fix and locate from time to time
one or more other offices of the Company; and to designate any place within
or without the State of Delaware for the conduct of the business of the
Company.
3.02 Compensation of Member. The Company shall have authority
to pay to the Member reasonable compensation for the Member's services to
the Company. It is understood that the compensation paid to the Member
under the provisions of this Section shall be determined without regard to
the income of the Company, shall not be deemed to constitute distributions
to the recipient of any profit, loss or capital of the Company and shall be
considered as an operating expense of the Company.
3.03 Bank Accounts. From time to time, the Member may designate
a person or persons, whether such persons be the Member or not, to open and
maintain one or more bank accounts; rent safety deposit boxes or vaults;
sign checks, written directions, or other instruments to withdraw all or
any part of the funds belonging to the Company and on deposit in any
savings account or checking account; negotiate and purchase certificates of
deposit, obtain access to the Company safety deposit box or boxes, and
generally sign such forms on behalf of the Company as may be required to
conduct the banking activities of the Company.
3.04 Other Ventures. It is expressly agreed that the Member and
any affiliates, officers, directors, managers, stockholders, partners or
employees of the Member, may engage in other business ventures of every
nature and description, whether or not in competition with the Company,
independently or with others, and the Company shall not have any rights in
and to any independent venture or activity or the income or profits derived
therefrom.
3.05 Actions by the Member. All actions of the Member may be
taken by written resolution of the Member which shall be signed on behalf
of the Member by an authorized officer of the Member and filed with the
records of the Company.
ARTICLE IV
Common Interest
4.01 General. "Common Interest" means the interest in the
Company. The Common Interest of the Member in the Company constitutes
personal property and shall be freely transferable upon registration on
such transfer on the books of the Company in accordance with the procedures
established for such purpose by the Managers of the Company. The Common
Interest of the Member in the Company shall be evidenced by a certificate
in the form set forth in Schedule B hereto.
4.02 Distributions. The Member shall be entitled to receive,
out of the assets of the Company legally available therefor, when, as and
if declared by the Managers, distributions payable in cash in such amounts,
if any, as the Managers shall declare.
4.03 Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Company, the Member shall be entitled to all remaining assets of
the Company available for distribution to the Member after payment of all
liabilities, debts and obligations of the Company.
(b) Neither the sale of all or substantially all of the
property or business of the Company, nor the merger or consolidation of the
Company into or with another Company or other entity, shall be deemed to be
a dissolution, liquidation or winding up, voluntary or involuntary, for the
purpose of this Section 4.03.
4.04 Redemption. The Common Interest shall not be redeemable.
4.05 Voting Rights. The Member shall have the sole right to
vote on all matters as to which members of a limited liability company
shall be entitled to vote pursuant to the Act and other applicable law.
ARTICLE V
Managers
5.01 Managers.
(a) The management of the Company's business shall be
vested in the managers of the Company (the "Managers") who shall be
appointed by the Member. The Member hereby appoints the persons identified
on Schedule C to initially be the Managers of the Company.
(b) Each Manager shall be elected by the Member and shall
hold office for the term for which elected and until a successor has been
appointed and qualified.
(c) The Managers shall be obliged to devote only as much of
their time to the Company's business as shall be reasonably required in
light of the Company's business and objectives. A Manager shall perform
his or her duties as a Manager in good faith, in a manner he or she
reasonably believes to be in the best interests of the Company, and with
such care as an ordinarily prudent person in a like position would use
under similar circumstances.
(d) The Managers shall act by the affirmative vote of a
majority of the Managers. Each Manager shall have the authority to sign
agreements and other instruments on behalf of the Company without the
joinder of any other Manager.
(e) Any action may be taken by the Managers without a
meeting if authorized by the written consent of a majority of the Managers.
(f) Every Manager is an agent of the Company for the
purpose of its business, and the act of every Manager, including the
execution in the Company name of any instrument for carrying on the
business of the Company, binds the Company, unless such act is in
contravention of the Certificate of Formation or this Agreement or unless
the Manager so acting otherwise lacks the authority to act for the Company
and the person with whom he or she is dealing has knowledge of the fact
that he or she has no such authority.
5.02 Powers of the Managers. The Managers shall have the right
and authority to take all actions which the Managers deem necessary, useful
or appropriate for the day-to-day management and conduct of the Company's
business.
The Managers may exercise all powers of the Company and do all
such lawful acts and things as are not by the Act, other applicable law,
the Certificate of Formation or this Agreement directed or required to be
exercised or done by the Member. All instruments, contracts, agreements
and documents providing for the acquisition or disposition of property of
the Company shall be valid and binding on the Company if executed by one or
more of the Managers. All instruments, contracts, agreements and documents
of whatsoever type executed on behalf of the Company shall be executed in
the name of the Company by one or more Managers.
5.03 Compensation. The Company may pay to any Manager
compensation for such Manager's services rendered to the Company. Such
compensation shall be treated as expenses of the Company and shall not be
deemed to constitute distributions to the recipient of any profit, loss or
capital of the Company.
5.04 Removal of Managers.
(i) The Member may remove any Manager with or
without cause at any time.
(ii) Any removal of a Manager shall become
effective on such date as may be specified by the Member and in a
notice delivered to any remaining Managers or the Manager elected
to replace the removed Manager (except that it shall not be
effective on a date earlier than the date such notice is
delivered to the remaining or newly-elected Manager). Should a
Manager be removed who is also the Member, the Member shall
continue to participate in the Company as the Member and receive
its share of the Company's income, gains, losses, deductions and
credits pursuant to this Agreement.
5.05 Resignation of Manager. A Manager may resign as a Manager
at any time by notice to the Member. Such resignation shall be effective
as set forth in such notice.
5.06 Vacancies. Any vacancies among the Managers may be filled
by the Member.
ARTICLE VI
Allocations of Profits and Losses
All profits and losses of the Company for any fiscal period shall
be allocated and credited to the Member's Common Interest.
ARTICLE VII
Expenses
Except as otherwise provided in this Agreement, the Company shall
be responsible for all expenses and the allocation thereof including
without limitation:
(a) all expenses incurred by the Member or its
affiliates in organizing the Company;
(i) all expenses related to the payment of the
prinicpal of and interest on the transition bonds issued by the
Company;
(a) all expenses related to the business of the
Company and all routine administrative expenses of the Company,
including the maintenance of books and records of the Company,
the preparation and dispatch to the Member of checks, financial
reports, tax returns and notices required pursuant to this
Agreement;
(b) all expenses incurred in connection with any
litigation or arbitration involving the Company (including the
cost of any investigation and preparation) and the amount of any
judgment or settlement paid in connection therewith;
(c) all expenses for indemnity or contribution payable
by the Company to any person;
(d) all expenses incurred in connection with the
collection of amounts due to the Company from any person;
(e) all expenses incurred in connection with the
preparation of amendments to this Agreement;
(f) all expenses incurred in connection with the
liquidation, dissolution and winding up of the Company; and
(g) all expenses otherwise allocated in good faith to
the Company by the Managers.
ARTICLE VIII
Accounting and Records
8.01 Records and Accounting. The books and records of the
Company shall reflect all Company transactions and shall be appropriate and
adequate for the Company's business. The fiscal year of the Company for
financial reporting and for federal income tax purposes shall be the
calendar year.
8.02 Access to Accounting Records. All books and records of the
Company shall be maintained at any office of the Company or at the
Company's principal place of business, and the Member, and its duly
authorized representative, shall have access to them at such office of the
Company and the right to inspect and copy them at reasonable times.
8.03 Tax Elections. The Managers shall make the following
elections on behalf of the Company:
(a) To elect the calendar year as the Company's fiscal year
if permitted by applicable law;
(b) To elect the accrual method of accounting;
(c) To elect to treat all organization and start-up costs
of the Company as deferred expenses amortizable over 60 months under
Section 195 of the Code; and
(d) To elect with respect to such other federal, state and
local tax matters as the Managers shall agree upon from time to time.
8.04 Annual Tax Information. The Managers shall cause the
Company to deliver to the Member all information necessary for the
preparation of the Member's federal income tax return.
8.05 Tax Matters Member. The Member shall communicate and
negotiate with the Internal Revenue Service on any tax matter on behalf of
the Member and the Company.
ARTICLE IX
Perpetual Existence
The Company shall have a perpetual existence. So long as any of
the Company's transition bonds shall remain outstanding, the sole Member
shall not be entitled to consent to the dissolution of the Company.
ARTICLE X
Indemnification
10.01 Indemnity. Subject to the provisions of Section 10.04
hereof, the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the Company, by
reason of the fact that such person is or was a Manager, Member, officer,
controlling person, employee, legal representative or agent of the Company,
or is or was serving at the request of the Company as a member, manager,
director, officer, partner, shareholder, controlling person, employee,
legal representative or agent of another limited liability company,
partnership, corporation, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with the action, suit or proceeding if such person acted in good faith and
in a manner which such person reasonably believed to be in or not opposed
to the best interests of the Company, and, with respect to a criminal
action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
10.02 Indemnity for Actions By or In the Right of the Company.
Subject to the provisions of Section 10.04 hereof, the Company shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
rights of the Company to procure a judgment in its favor by reason of the
fact that he is or was a Member, Manager, officer, controlling person,
employee, legal representative or agent of the Company, or is or was
serving at the request of the Company as a member, manager, director,
officer, partner, shareholder, controlling person, employee, legal
representative or agent of another limited liability company, corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by such person in connection with the defense or
settlement of the actions or suit if such person acted in good faith and in
a manner which such person reasonably believed to be in or not opposed to
the best interests of the Company. Indemnification may not be made for any
claim, issue or matter as to which such person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the Company or for amounts paid in settlement to the Company,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
10.03 Indemnity If Successful. The Company may indemnify a
Member, Manager, officer, employee or agent of the Company against
expenses, including attorneys' fees, actually and reasonably incurred by
him or her in connection with the defense of any action, suit or proceeding
referred to in Sections 10.01 and 10.02 or in defense of any claim, issue
or matter therein, to the extent that such person or entity has been
successful on the merits.
10.04 Expenses. Any indemnification under Sections 10.01 and
10.02, as well as the advance payment of expenses permitted under Section
10.05 unless ordered by a court or advanced pursuant to Section 10.05
below, must be made by the Company only as authorized in the specific case
upon a determination that indemnification of the Member, Manager, officer,
employee or agent is proper in the circumstances. The determination must
be made:
(a) By the Member if the Member was not a party to the act,
suit or proceeding; or
(b) If the Member was a party to the act, suit or
proceeding by independent legal counsel in a written opinion.
10.05 Advance Payment of Expenses. The expenses of the Member
and each Manager incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Company as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of
an undertaking by or on behalf of the Member or such Manager's to repay the
amount if it is ultimately determined by a court of competent jurisdiction
that the Member or such Manager is not entitled to be indemnified by the
Company. The provisions of this subsection do not affect any rights to
advancement of expenses to which personnel other than the Member or the
Managers may be entitled under any contract or otherwise by law.
10.06 Other Arrangements Not Excluded. The indemnification and
advancement of expenses authorized in or ordered by a court pursuant to
this Article 10:
(a) Does not exclude any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under
the Certificate of Formation or any agreement, decision of the Member or
otherwise, for either an action of a Member, Manager, officer, employee or
agent in the official capacity of such person or an action in another
capacity while holding such position, except that indemnification, unless
ordered by a court pursuant to Section 10.05 above, may not be made to or
on behalf of the Member or any Manager if a final adjudication established
that its acts or omissions involved intentional misconduct, fraud or a
knowing violation of the law and was material to the cause of action; and
(b) Continues for a person who has ceased to be a Member,
Manager, officer, employee or agent and inures to the benefit of the
successors, heirs, executors and administrators of such a person.
ARTICLE XI
Miscellaneous Provisions
11.01 Amendments. This Limited Liability Company Agreement may
be amended by written instrument executed by the Member and the Company.
11.02 Applicable Law. This Agreement, and its application,
shall be governed by the laws of the State of Delaware.
11.03 Headings. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define,
or limit the scope, extent or intent of this Agreement or any provisions
contained herein.
11.04 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be deemed invalid,
illegal or unenforceable to any extent, the remainder of this Agreement and
the application thereof shall not be affected and shall be enforceable to
the fullest extent permitted by law.
11.05 Assigns. Each and all of the covenants, terms, provisions
and agreements contained in this Agreement shall be binding upon and inure
to the benefit of the Member, and its successors and assigns.
IN WITNESS WHEREOF, this Limited Liability Company Agreement is
hereby executed by the undersigned as the sole Member of the Company as of
March 25, 1999.
CEP GROUP, INC.
By: /s/ John R. Biggar
--------------------
Name: John R. Biggar
Title: Vice President
SCHEDULE A
Schedule of Capital Contributions of Member
COMMON INTEREST
CAPITAL COMMON INTEREST CAPITAL
MEMBER'S NAME CONTRIBUTION PERCENTAGE ACCOUNT
------------- ------------ --------------- --------
CEP Group, Inc. $1,000 100% $1,000
SCHEDULE B
Form of Common Interest Certificate
SCHEDULE C
Initial Managers
Names
-----
1) John R. Biggar
2) James E. Abel
3) James S. Pennington
EXHIBIT 4.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 03/25/1999
991116179 - 3021120
CERTIFICATE OF FORMATION
OF
PP&L Transition Bond Company LLC
(a) The name of the limited liability company is PP&L Transition
Bond Company LLC.
(b) The address of its registered office in the State of
Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
of Formation of PP&L Transition Bond Company LLC this 25th day of March,
1999.
PP&L Transition Bond Company LLC
By: /s/ Michael A. McGrail
-----------------------------
Name: Michael A. McGrail
Title: Authorized Person
