P R O S P E C T U S
PECO ENERGY CAPITAL TRUST III
78,105 Capital Trust Pass-through Securities(sm) (TRUPS(r))*
each representing a 7.38% Cumulative Preferred Security,
Series D of PECO Energy Capital, L.P.
(stated liquidation preference $1,000 per Preferred Security)
fully and unconditionally guaranteed to the extent PECO Energy Capital, L.P.
has funds as set forth herein by
PECO ENERGY COMPANY
------------
The Capital Trust Pass-through Securities(sm) ("Capital Securities")
offered hereby by PECO Energy Capital Trust III, a statutory business trust
created under the laws of the State of Delaware (the "Trust") each
represent a 7.38% Cumulative Preferred Security, Series D (a "Series D
Preferred Security") of PECO Energy Capital, L.P., a limited partnership
formed under the laws of the State of Delaware ("PECO Energy Capital").
(continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE CAPITAL SECURITIES, INCLUDING THE PERIOD
DURING WHICH AND CIRCUMSTANCES UNDER WHICH DISTRIBUTIONS ON THE CAPITAL
SECURITIES MAY BE DEFERRED AND THE RELATED FEDERAL INCOME TAX
CONSEQUENCES.
The Capital Securities have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance. Trading of the
Capital Securities is expected to commence within a 30-day period after the
initial delivery thereof.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE COMMISSION(1) THE TRUST(2)(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Capital Security $1,000.00 (2) $1,000.00
- -------------------------------------------------------------------------------
Total $78,105,000 (2) $78,105,000
===============================================================================
</TABLE>
(1) PECO Energy and PECO Energy Capital have agreed to indemnify the
several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Under the Underwriting Agreement, PECO Energy will pay to the
Underwriters $10 per Capital Security (or $781,050 in the aggregate).
See "Underwriting."
(3) Expenses of the offering, which are payable by PECO Energy, are
estimated to be $320,000.
------------
The Capital Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part.
It is expected that delivery of the Capital Securities will be made in
book-entry-only form through the facilities of The Depository Trust Company
on or about April 6, 1998.
* Salomon Brothers Inc has filed an application with the United States
Patent and Trademark Office for the registration of the "Capital Trust
Pass-through Securities" service mark. "TRUPS" is a registered service
mark of Salomon Brothers Inc.
------------
SALOMON SMITH BARNEY MERRILL LYNCH & CO.
APRIL 1, 1998
<PAGE>
(continued from previous page)
The Trust will use the proceeds from the sale of its Capital Securities to
purchase the Series D Preferred Securities, which will be the sole assets of
the Trust. PECO Energy Capital will lend the proceeds from the sale of its
Series D Preferred Securities, plus the capital contribution made by PECO
Energy Capital Corp., a Delaware corporation and the sole general partner of
PECO Energy Capital (the "General Partner"), to PECO Energy Company, a
Pennsylvania corporation ("PECO Energy"), which loan will be evidenced by PECO
Energy's 7.38% Subordinated Deferrable Interest Debentures, Series D, due 2028
(the "Series D Subordinated Debt Securities").
Holders of the Capital Securities will be entitled to receive
Distributions (as defined below) at the rate of 7.38% of the liquidation amount
of $1,000 per Capital Security accumulating from the date of original issuance
and payable (subject to any Extension Period described below) semiannually in
arrears on April 30 and October 31, of each year, commencing April 30, 1998.
Whenever the Trust receives any cash distribution representing a semiannual
distribution on the Series D Preferred Securities (whether or not distributed
by PECO Energy Capital on the regular semiannual distribution date therefor)
or payment under the Payment and Guarantee Agreement (the "Series D
Guarantee") issued by PECO Energy for the benefit of the holders of the Series
D Preferred Securities, the Trust will distribute such amounts to the holders
of the Capital Securities in proportion to their respective number of Series D
Preferred Securities represented by such Capital Securities. As used herein,
the terms "Distribution" and "Distributions" shall include, as the context
requires, all semiannual distributions on the Capital Securities and the
Series D Preferred Securities, including any and all payments made under the
Series D Guarantee, as well as interest payments on the Series D Subordinated
Debt Securities. Under the Indenture dated as of July 1, 1994 between PECO
Energy and First Union National Bank, as successor trustee (as supplemented,
the "Indenture"), PECO Energy has the right at any time, so long as an Event
of Default under the Indenture has not occurred and is continuing, to extend
the interest payment period for all Deferrable Interest Subordinated
Debentures issued thereunder (collectively, "Subordinated Debt Securities")
for up to 60 consecutive months (each, an "Extension Period"). During any
Extension Period, no Distributions will be made on the Series D Preferred
Securities represented by the Capital Securities. See "Description of the
Series D Subordinated Debt Securities and the Indenture--Option to Extend
Interest Payment Period" and "--Events of Default."
PECO Energy will, through the Series D Guarantee, the Amended and Restated
Trust Agreement relating to the Trust (the "Trust Agreement"), the Indenture
and the Series D Subordinated Debt Securities, taken together, fully,
irrevocably and unconditionally guarantee all of PECO Energy Capital's
obligations under the Series D Preferred Securities. Under the Series D
Guarantee, PECO Energy will guarantee payment of accumulated and unpaid
semiannual Distributions, amounts payable upon redemption and amounts payable
upon liquidation with respect to the Series D Preferred Securities, in each
case, only to the extent that PECO Energy Capital has funds on hand legally
available therefor and payment does not violate applicable law. If PECO
Energy fails to make interest payments on its Series D Subordinated Debt
Securities, PECO Energy Capital will not have sufficient funds to pay
Distributions on the Series D Preferred Securities. The Series D Guarantee
does not cover payment of Distributions when PECO Energy Capital does not
have sufficient funds to pay such Distributions. In such event, the holders
of Capital Securities representing the Series D Preferred Securities would be
required to seek enforcement of PECO Energy Capital's rights against PECO
Energy pursuant to the terms of the Indenture as provided under "Description
of the Series D Preferred Securities--Voting Rights." The obligations of PECO
Energy under the Series D Guarantee will be subordinate and junior in right of
payment to all general liabilities of PECO Energy and its obligations under
the Series D Subordinated Debt Securities will be subordinate and junior in
right of payment to all present and future Senior Indebtedness of PECO Energy
(as defined in "Description of the Series D Subordinated Debt Securities--
Subordination"), which aggregated approximately $4.678 billion at
December 31, 1997.
The Capital Securities will be subject to mandatory redemption upon any
redemption of Series D Preferred Securities, which will be subject to optional
redemption upon the occurrence of certain special events at the Special Event
Redemption Price (as defined in "Description of the Series D Preferred
Securities--Special Event Redemptions"), and which will be subject to
mandatory redemption upon payment at maturity or redemption of the Series D
Subordinated Debt Securities. See "Description of the Series D Preferred
Securities--Mandatory Redemption" and "--Special Event Redemptions."
In the event of the liquidation of PECO Energy Capital, the Trust will
distribute to the holders of Capital Securities, after satisfaction of
creditors of the Trust as required by law, the amounts received by the Trust
from PECO Energy Capital representing the lesser of the Partnership
Liquidation Distribution (as defined in "Risk Factors--Rights Under the Series
D Guarantee") or the amount of assets of PECO Energy Capital legally available
therefor, in either case, in proportion to the respective number of Series D
Preferred Securities represented by such Capital Securities. Upon any
voluntary or involuntary dissolution or liquidation of PECO Energy Capital,
the holders of Series D Preferred Securities will be entitled to receive out
of the assets of PECO Energy Capital, after satisfaction of liabilities to
creditors and before distribution of assets is made to holders of its general
partner interests, the sum of their $1,000 stated liquidation preference and
all accumulated and unpaid Distributions to the date of payment. All assets
of PECO Energy Capital remaining after payment of the liquidation distribution
to the holders of all Cumulative Preferred Securities of PECO Energy Capital
(collectively, "Preferred Securities") will be distributed to the General
Partner.
The Capital Securities will be represented by global securities registered
in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Capital Securities will be shown on, and transfers
thereof will be effected only through, records maintained by participants in
DTC. Capital Securities in certificated form will not be issued in exchange
for the global securities. See "Description of the Capital
Securities--Book-Entry-Only Issuance--The Depository Trust Company."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
AVAILABLE INFORMATION
PECO Energy is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy and information statements and
other information with the Securities and Exchange Commission (the "SEC").
Such reports, proxy and information statements and other information filed
by PECO Energy may be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain of its regional offices at Suite 1400, 500 West
Madison Street, Chicago, IL 60661-2511 and Suite 1300, 7 World Trade
Center, New York, NY 10048. Copies of such material may also be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, registration
statements and certain other filings made with the SEC through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are
publicly available through the SEC's site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the SEC
through EDGAR. Securities of PECO Energy are listed on the New York and
Philadelphia Stock Exchanges, where reports, proxy and information
statements and other information concerning PECO Energy may be inspected.
No separate financial statements of PECO Energy Capital or the Trust
have been included herein. PECO Energy does not consider that such
financial statements would be material to holders of Capital Securities
offered hereby because PECO Energy Capital and the Trust are special
purpose entities, have no independent operations and are not engaged in,
and do not propose to engage in, any activity other than as set forth
below. See "PECO Energy Capital" and "The Trust."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC pursuant to Section 13 of
the Exchange Act by PECO Energy (File No. 1-1401) are incorporated herein
by reference:
1. PECO Energy's Annual Report on Form 10-K for the year ended December
31, 1997; and
2. PECO Energy's Current Reports on Form 8-K dated January 9, 1998,
January 15, 1998, January 22, 1998, January 23, 1998 and
January 26, 1998.
Each document filed subsequent to the date of this Prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to the
termination of the offering shall be deemed to be incorporated by reference
in this Prospectus and shall be a part hereof from the date of filing of
such document. Any statement contained herein or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. PECO ENERGY UNDERTAKES TO PROVIDE
WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A
COPY OF ANY OR ALL DOCUMENTS DESCRIBED ABOVE UNDER "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," OTHER THAN EXHIBITS TO SUCH DOCUMENTS.
SUCH REQUESTS SHOULD BE DIRECTED TO PECO ENERGY COMPANY, FINANCIAL
DIVISION, S21-1, P.O. BOX 8699, PHILADELPHIA, PA 19101, (215) 841-5678.
3
<PAGE>
- -------------------------------------------------------------------------------
SUMMARY
The following summary is qualified in its entirety by reference
to the detailed information appearing elsewhere in this Prospectus.
RISK FACTORS
Prospective investors should carefully consider the matters set
forth under "Risk Factors."
PECO ENERGY
Incorporated in Pennsylvania in 1929, PECO Energy provides
retail electric and natural gas service in southeastern
Pennsylvania and, through pilot programs, natural gas service to
areas in Maryland and New Jersey. PECO Energy also engages in the
wholesale marketing of electricity on a national basis and
participates in joint ventures which provide telecommunication
services in the Philadelphia area.
PECO Energy's traditional retail service territory covers 2,107
square miles. Electric service is furnished to an area of 1,972
square miles with a population of approximately 3.6 million,
including 1.6 million in the City of Philadelphia. Approximately
94% of the retail electric service area and 64% of retail
kilowatthour sales are in the suburbs around Philadelphia, and 6%
of the retail service area and 36% of such sales are in the City of
Philadelphia. Natural gas service is supplied in a 1,475-square-
mile area of southeastern Pennsylvania adjacent to Philadelphia
with a population of approximately 1.9 million. Through Horizon
Energy, a wholly owned subsidiary of PECO Energy, and PECO
Energy/EnergyOne, a franchised energy products brand, PECO Energy
participates in Pennsylvania's pilot program for retail
competition for generation. For additional information, see "PECO
Energy."
PECO ENERGY CAPITAL
PECO Energy Capital is a limited partnership formed in 1994
under the laws of the State of Delaware. All of its general
partner interests are owned by PECO Energy Capital Corp., a wholly
owned subsidiary of PECO Energy, as the General Partner. As a
limited partnership, all of the business and affairs of PECO
Energy Capital are managed by the General Partner. PECO Energy
Capital was created solely for the purpose of issuing the Preferred
Securities and lending the proceeds thereof to PECO Energy, and
entering into similar financing arrangements. Such loans are
evidenced by the Subordinated Debt Securities issued by PECO Energy
in series under the Indenture. The Subordinated Debt Securities
are the only assets of PECO Energy Capital and the only revenues of
PECO Energy Capital are interest on the Subordinated Debt
Securities. The General Partner pays all of PECO Energy Capital's
operating expenses and has general liability for all of PECO Energy
Capital's obligations.
THE TRUST
PECO Energy Capital Trust III is a statutory business trust
recently created under the laws of the State of Delaware. The
Trust exists for the sole purpose of issuing the Capital Securities
representing the Series D Preferred Securities to be held by the
Trust and performing functions directly related thereto. The Trust
cannot issue other equity securities or any debt securities. The
Series D Preferred Securities will be the only assets of the Trust.
All expenses and liabilities of the Trust will be paid by the
General Partner; provided that, if the trustee of the Trust (the
"Trustee") incurs fees, charges or expenses for which it is not
otherwise liable under the Trust Agreement at the election of a
holder of Capital Securities or other person, such holder or other
person will be liable for such fees, charges and expenses.
THE OFFERING
Securities Offered.................... $78,105,000 aggregate stated
liquidation preference of
Capital Securities
(liquidation preference
$1,000 per Capital
Security).
Offering Price....................... $1,000 per Capital Security.
General.............................. Each Capital Security will
represent a Series D
Preferred Security issued
by PECO Energy Capital.
Such Series D Preferred
Securities will represent
an undivided beneficial
interest in the assets of
PECO Energy
4
<PAGE>
Capital. PECO Energy Capital
will use the proceeds from
the sale of its Series D
Preferred Securities to
purchase the Series D
Subordinated Debt
Securities, which mature
on April 6, 2028 unless
redeemed earlier as
described under "Series D
Preferred Securities--
Special Event
Redemptions."
Distributions........................ The Distributions payable on the
Capital Securities will
be fixed at a rate per
annum of 7.38% of of the
stated liquidation
preference of $1,000 per
Capital Security and will
accumulate from the date
of original issuance of
the Capital Securities
and (subject to any
Extension Period) will be
payable semiannually, in
arrears, on April 30 and
October 31 of each year,
commencing April 30,
1998. See "Description
of the Capital
Securities--Distributions."
Option to Extend Interest So long as no Event
Payment Period..................... of Default has occurred and
is continuing under the
Indenture, PECO Energy
will have the right to
extend the interest
payment period for all
Subordinated Debt
Securities pursuant to an
Extension Period. No
Extension Period may
exceed 60 consecutive
months or extend beyond
the maturity date of any
Subordinated Debt
Securities.
Distributions on the
Capital Securities will
be deferred during any
Extension Period. See
"Description of the
Series D Subordinated
Debt Securities--Option to
Extend Interest Payment
Period" and "United
States Taxation--Potential
Extension of Payment
Period."
Liquidation Preference............... In the event of the liquidation
of PECO Energy Capital,
the Trust will distribute
to the holders of Capital
Securities, after
satisfaction of creditors
of the Trust as required
by law, the amounts
received by the Trust
from PECO Energy Capital
representing the lesser
of the Partnership
Liquidation Distribution
(as defined in "Risk
Factors--Rights Under the
Series D Guarantee") or
the amount of assets of
PECO Energy Capital
legally available
therefor, in either case,
in proportion to the
respective number of
Series D Preferred
Securities represented by
such Capital Securities.
Upon any voluntary or
involuntary dissolution
or liquidation of PECO
Energy Capital, the
holders of Series D
Preferred Securities will
be entitled to receive
out of the assets of PECO
Energy Capital, after
satisfaction of
liabilities to creditors
and before distribution
of assets is made to
holders of its general
partner interests, the
sum of their $1,000
stated liquidation
preference and all
accumulated and unpaid
Distributions to the date
of payment. See
"Description of the
Series D Preferred
Securities--Liquidation
Distribution."
Redemption of Capital Securities..... The Series D Preferred
Securities are not
subject to redemption
except upon the repayment
of the Series D
Subordinated Debt
Securities at maturity or
upon the occurrence of
certain Special Events as
described in "Description
of the Series D Preferred
Securities--Mandatory
Redemption" and "--Special
Event
5
<PAGE>
Redemptions." The
proceeds from any
redemption of the Series D
Preferred Securities
will be used to redeem a
like amount of Capital
Securities. See
"Description of the Capital
Securities--Redemption."
The Series D Guarantee............... Under the Series D
Guarantee, PECO Energy
will guarantee payment of
accumulated and unpaid
semiannual Distributions,
amounts payable on
redemption and amounts
payable upon liquidation
with respect to the
Series D Preferred Securities,
in each case, only
to the extent that PECO
Energy Capital has funds
on hand legally available
therefor and payment does
not violate applicable
law. The Series D
Guarantee does not cover
payment of Distributions
when PECO Energy Capital
does not have sufficient
funds to pay such
Distributions. PECO
Energy will, through the
Series D Guarantee, the
Trust Agreement, the
Indenture and the Series D
Subordinated Debt
Securities taken
together, fully,
irrevocably and
unconditionally guarantee
all of PECO Energy
Capital's obligations
under the Series D
Preferred Securities.
Ranking.............................. The Series D
Subordinated Debt
Securities will be
subordinate and rank
junior in right of
payment to all Senior
Indebtedness of PECO
Energy. See "Description
of the Series D
Subordinated Debt
Securities--Subordination."
The Guarantee will be
subordinate and rank junior
in right of payment to
all general liabilities
of PECO Energy. See
"Description of the
Guarantee--Status of the
Series D Guarantee."
Voting Rights........................ Holders of Capital
Securities will have
limited voting rights.
See "Description of the
Capital Securities--
Voting Rights."
Ratings.............................. The Capital Securities
have been rated "baa2" by
Moody's Investors
Service, Inc., BBB by
Standard and Poor's
Rating Services, BBB+ by
Fitch IBCA, Inc. and BBB-
by Duff & Phelps. 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 organization.
ERISA Considerations................. Prospective purchasers
should consider the
information set forth
under "ERISA Considerations."
Certain purchasers will be
deemed to be making certain
representations as to their
status under ERISA as set
forth under "ERISA
Considerations."
Use of Proceeds....................... It is anticipated that
PECO Energy will use the
proceeds from the sale of
the Series D Subordinated
Debt Securities to redeem
a series of outstanding
Preferred Securities.
See "Use of Proceeds."
- -------------------------------------------------------------------------------
6
<PAGE>
RISK FACTORS
Prospective purchasers of Capital Securities should carefully review the
information contained elsewhere in this Prospectus and should particularly
consider the following matters:
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE SERIES D GUARANTEE AND
SERIES D SUBORDINATED DEBT SECURITIES
PECO Energy's obligations under the Series D Guarantee will be
subordinate and junior in right of payment to all general liabilities of
PECO Energy and its obligations under the Series D Subordinated Debt
Securities will be subordinate and junior in right of payment to all Senior
Indebtedness of PECO Energy (as defined under "Description of the Series D
Subordinated Debt Securities and the Indenture--Subordination"). At
December 31, 1997, the Senior Indebtedness of PECO Energy aggregated
approximately $4.6 78 billion. There are no terms in the Series D
Subordinated Debt Securities or the Series D Guarantee that limit PECO
Energy's ability to incur additional indebtedness, including indebtedness
that ranks senior to the Series D Subordinated Debt Securities and the
Series D Guarantee. The Series D Guarantee guarantees payment of
accumulated and unpaid semiannual Distributions, amounts payable on
redemption and amounts payable on liquidation with respect to the Series D
Preferred Securities, in each case, how ever, only to the extent that PECO
Energy Capital has funds on hand legally available therefor and payment
thereof does not otherwise violate applicable law. If PECO Energy were to
default on its obligation to pay interest or amounts payable on redemption
or maturity of the Series D Subordinated Debt Securities, PECO Energy
Capital would lack legally available funds for the payment of Distributions
or amounts payable on redemption of the Series D Preferred Securities or
upon liquidation of PECO Energy Capital, and in such event, the holders of
the Capital Securities representing the Series D Preferred Securities would
not be able to rely upon the Series D Guarantee for payment of such
amounts. Instead, holders of the Capital Securities representing the
Series D Preferred Securities would be required to seek enforcement of PECO
Energy Capital's rights against PECO Energy pursuant to the terms of the
Indenture as provided in "Description of the Series D Preferred
Securities--Voting Rights." See "Description of the Series D Guarantee
Status of the Series D Guarantee" and "Description of the Series D
Subordinated Debt Securities and the Indenture--Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSIDERATIONS
PECO Energy will have the right under the Indenture to extend the
interest payment period on all Subordinated Debt Securities for up to 60
consecutive months, and, as a consequence, semiannual Distributions on the
Series D Preferred Securities may be deferred by PECO Energy Capital during
any such Extension Period. Distributions in arrears after the semiannual
distribution date therefor will accumulate additional Distributions thereon
at the rate per annum of 7.38% thereof. In the event PECO Energy exercises
its right to extend the interest payment period on the Subordinated Debt
Securities, PECO Energy may not declare dividends on any shares of its
capital stock during such Extension Period. See "Description of the Series
D Subordinated Debt Securities and the Indenture--Option to Extend Interest
Payment Period."
Should an Extension Period occur, a holder of Capital Securities will
accrue interest income (as original issue discount) on an economic accrual
basis in respect of its pro rata share of the Series D Preferred Securities
held by the Trust. As a result, a holder of Capital Securities will
include such interest in gross income for federal income tax purposes in
advance of the receipt of cash, and will not receive the cash related to
such income from the Trust if the holder disposes of the Capital Securities
prior to the record date for the payment of Distributions. See "United
States Taxation--Taxability of Distributions."
PECO Energy has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Series
D Subordinated Debt Securities. However, should PECO Energy exercise such
right in the future, the market price of the Capital Securities is likely
to be affected. An owner who disposes of Capital Securities during an
Extension Period might not receive the same return on investment as an
owner who continues to hold Capital Securities. In addition, as a result
of the mere existence of PECO Energy's right to defer interest payments on
the Series D Subordinated Debt Securities, the market price of the Capital
Securities may be more volatile than other securities that are not subject
to such deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION
Upon the occurrence and continuation of a Tax Event (as defined in
"Description of the Series D Preferred Securities--Special Event
Redemptions"), the General Partner will have the right to redeem the Series
D Preferred Securities, in whole or in part, and upon the occurrence of an
Investment Company Event (as defined in "Description of the Series D
Preferred Securities--Special Event Redemptions"), the General Partner will
have the right to redeem the Series D Preferred Securities, in whole but
not in part, and in either case, cause a mandatory redemption of the
Capital Securities at the Special Event Redemption Price (as defined in
"Series D Preferred Securities--Special Event Redemptions"). A holder of
Series D
7
<PAGE>
Preferred Securities will recognize gain or loss upon such a redemption for
federal income tax purposes to the extent that the liquidation preference
differs from such holder's adjusted tax basis for the Series D Preferred
Securities. Any accumulated and unpaid Distributions also will be taxable
to the extent that such holder has not already taken such Distributions
into account. See "United States Taxation--Disposition of the Capital
Securities."
RIGHTS UNDER THE SERIES D GUARANTEE
Under the Series D Guarantee, PECO Energy will agree to pay (i) any
accumulated and unpaid Distributions on the Series D Preferred Securities
to the extent that PECO Energy Capital has funds on hand legally available
therefor, (ii) the applicable redemption price payable with respect to any
Series D Preferred Securities called for redemption by PECO Energy Capital
to the extent that PECO Energy Capital has funds on hand legally available
therefor, and (iii) upon liquidation of PECO Energy Capital, the lesser of
(a) the portion of the Partnership Liquidation Distribution (as defined
below) applicable to the Series D Preferred Securities and (b) the amount
of assets of PECO Energy Capital legally available for distribution to
holders of Series D Preferred Securities in liquidation of PECO Energy
Capital. For the purposes hereof, "Partnership Liquidation Distribution"
shall mean the stated liquidation preference of all Preferred Securities
and all accumulated and unpaid Distributions to the date of payment for
such series of Preferred Securities. See "Description of the Series D
Guarantee--General." If PECO Energy were to default on its obligation to
pay amounts payable on the Series D Subordinated Debt Securities, PECO
Energy Capital would lack funds for the payment of Distributions or amounts
payable on redemption of the Series D Preferred Securities or upon
liquidation of PECO Energy Capital, and, in each such event, holders of
Capital Securities would not be able to rely upon the Series D Guarantee
for payment of such amounts. The holders of Capital Securities, together
with the holders of Series D Preferred Securities other than the Trust,
representing not less than 10% aggregate liquidation preference of the
Series D Preferred Securities will have the right to direct the time,
method and place of conducting any proceeding for any remedy available in
respect of the Series D Guarantee, including the right to direct the
General Partner or the Special Representative (as defined under
"Description of the Series D Preferred Securities--Voting Rights"), as the
case may be. If the General Partner or Special Representative fails to
enforce the Series D Guarantee, any holder of the Capital Securities may
institute a legal proceeding directly against PECO Energy to enforce its
rights under the Series D Guarantee without first instituting a legal
proceeding against PECO Energy Capital or any other person or entity. See
"Description of the Series D Guarantee--Status of the Series D Guarantee"
and "Description of the Series D Subordinated Debt Securities and the
Indenture--Subordination."
The Series D Guarantee will constitute an unsecured obligation of PECO
Energy and will rank subordinate and junior in right of payment to all
general liabilities of PECO Energy. The Trust Agreement provides that each
holder of Capital Securities, by acceptance thereof, agrees to the
provisions of the Series D Guarantee, including the subordination
provisions thereof.
LIMITED VOTING RIGHTS
Holders of Capital Securities will have limited voting rights and will
only be entitled, together with the other holders of Preferred Securities,
to appoint and authorize a Special Representative to enforce PECO Energy
Capital's rights against PECO Energy upon the occurrence of the following:
(i) PECO Energy Capital fails to pay Distributions in full on the Preferred
Securities for 18 consecutive months; (ii) an Event of Default (as defined
in the Indenture) occurs and is continuing; or (iii) PECO Energy is in
default on any of its payment obligations under any Payment and Guarantee
Agreement issued by PECO Energy for the benefit of the holders of Preferred
Securities (a "Guarantee"). See "Description of the Series D Preferred
Securities--Voting Rights."
TRADING CHARACTERISTICS OF THE CAPITAL SECURITIES
The Capital Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the Series D
Subordinated Debt Securities. An owner of Capital Securities who disposes
of Capital Securities between record dates for payments of Distributions
will nevertheless be required to include accrued but unpaid interest on the
Series D Subordinated Debt Securities through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis
of the Capital Securities so disposed. Such owner will recognize a capital
loss to the extent the selling price (which may not fully reflect the value
of accrued but unpaid interest) is less than its adjusted tax basis (which
will include accrued but unpaid interest). Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
federal income tax purposes. See "United States Taxation."
8
<PAGE>
PECO ENERGY
Incorporated in Pennsylvania in 1929, PECO Energy provides retail
electric and natural gas service in southeastern Pennsylvania and, through
pilot programs, natural gas service to areas in Maryland and New Jersey.
PECO Energy also engages in the wholesale marketing of electricity on a
national basis and participates in joint ventures which provide
telecommunication services in the Philadelphia area.
PECO Energy's traditional retail service territory covers 2,107 square
miles. Electric service is furnished to an area of 1,972 square miles with
a population of approximately 3.6 million, including 1.6 million in the
City of Philadelphia. Approximately 9 4% of the retail electric service
area and 64% of retail kilowatthour sales are in the suburbs around
Philadelphia, and 6% of the retail service area and 36% of such sales are
in the City of Philadelphia. Natural gas service is supplied in a
1,475-square-mile area of southeastern Pennsylvania adjacent to
Philadelphia with a population of approximately 1.9 million. Through
Horizon Energy, a wholly owned subsidiary of PECO Energy, and PECO
Energy/EnergyOne, a franchised energy products brand, PECO Energy
participates in Pennsylvania's pilot program for retail competition for
generation.
The electric and gas utility industries are both undergoing fundamental
restructuring. 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. In December 1996, Pennsylvania Governor Ridge signed
into law the Electricity Generation Customer Choice and Competition Act
(the "Competition Act") which provides for the restructuring of the
electric utility industry in Pennsylvania, including retail competition for
generation beginning in 1999. At December 31, 1997, the Company
discontinued the use of regulatory accounting in its financial statements
for its electric generation operations.
DEREGULATION
Pursuant to the Competition Act, in April 1997, PECO Energy filed with
the Pennsylvania Public Utility Commission (the "PUC") a comprehensive
restructuring plan detailing its proposal to implement full customer choice
of electric generation supplier. PECO Energy's restructuring plan
identified $7.5 billion of stranded costs (the loss in value of PECO
Energy's electric generation-related assets, which will result from
competition). In August 1997, PECO Energy and various intervenors in PECO
Energy's restructuring proceeding filed with the PUC a Joint Petition for
Partial Settlement (the "Pennsylvania Plan").
In December 1997, the PUC rejected the Pennsylvania Plan and entered an
Opinion and Order, revised in January 1998 (the "PUC Restructuring Order"),
that deregulates PECO Energy's electric generation operations. The PUC
Restructuring Order authorizes PECO Energy to recover stranded costs of
$4.9 billion on a discounted basis, or $5.3 billion on a book-value basis,
over 8-1/2 years beginning in 1999. In January 1998, PECO Energy filed
appeals of the PUC Restructuring Order with the U.S. District Court for
the Eastern District of Pennsylvania (the "Eastern District Court") and the
Commonwealth Court of Pennsylvania (the "Commonwealth Court").
PECO Energy believes that the PUC Restructuring Order provides
sufficient details regarding the deregulation of PECO Energy's electric
generation operations to require PECO Energy to discontinue the use of
regulatory accounting in its financial statements for those operations.
PECO Energy determined that at December 31, 1997, $5.8 billion of its $7.1
billion of electric generation assets were impaired and it had $2.6 billion
of other electric generation-related regulatory assets. Effective December
31, 19 97, PECO Energy recorded an extraordinary charge against income of
$3.1 billion ($1.8 billion net of income taxes) to reflect the amount of
such electric generation-related assets which will not be recovered from
customers either prior to the commencement of competition or under the PUC
Restructuring Order.
On January 25, 1998, PECO Energy's Board of Directors reduced the
quarterly common stock dividend from $0.45 per share to $0.25 per share,
effective with the dividend payable on March 31, 1998. The Board of
Directors concluded that, given the impact of the PUC Restructuring Order,
the dividend reduction was necessary to provide PECO Energy with the
financial flexibility needed to meet the demands of competition. Although
PECO Energy cannot predict the ultimate effect of the PUC Restructuring
Order and competition for electric generation services, PECO Energy
believes that its future financial condition and results of operations will
be adversely affected.
PECO Energy's mailing address is P.O. Box 8699, Philadelphia, PA
19101, and its telephone number is (215) 841-4000.
9
<PAGE>
PECO ENERGY CAPITAL
PECO Energy Capital is a limited partnership formed in 1994 under the
laws of the State of Delaware. All of its general partner interests are
owned by PECO Energy Capital Corp., a wholly owned subsidiary of PECO
Energy, as the General Partner. As a limited partnership, all of the
business and affairs of PECO Energy Capital are managed by the General
Partner. PECO Energy Capital was created solely for the purpose of issuing
the Preferred Securities and lending the proceeds thereof to PECO Energy,
and entering into similar financing arrangements. Such loans are evidenced
by the Subordinated Debt Securities issued by PECO Energy in series under
the Indenture. The Subordinated Debt Securities are the only assets of
PECO Energy Capital and the only revenues of PECO Energy Capital are
interest on the Subordinated Debt Securities. The General Partner pays all
of PECO Energy Capital's operating expenses and has general liability for
all of PECO Energy Capital's obligations. PECO Energy Capital's mailing
address is 1013 Centre Road, Suite 350F, Wilmington, DE 19805, and its
telephone number is (302) 998-0592.
THE TRUST
PECO Energy Capital Trust III is a statutory business trust recently
created under the laws of the State of Delaware. The Trust exists for the
sole purpose of issuing the Capital Securities representing the Series D
Preferred Securities to be held by the Trust and performing functions
directly related thereto. The Trust cannot issue other equity securities
or any debt securities. The Series D Preferred Securities will be the only
assets of the Trust. All expenses and liabilities of the Trust will be
paid by the General Partner, provided that if the Trustee of the Trust
incurs fees, charges or expenses for which it is not otherwise liable under
the Trust Agreement at the election of a holder of Capital Securities or
other person, such holder or other person will be liable for such fees,
charges and expenses. The Trust's mailing address is c/o First Union Trust
Company, National Association, One Rodney Square, 920 King Street, 1st
Floor, Wilmington, DE 19801, and its telephone number is (302) 888-7539.
COVERAGE RATIOS
PECO Energy's Ratio of Earnings to Fixed Charges for each of the
periods indicated was as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
3.15 2.66 3.41 3.29 2.71
The Ratio of Earnings to Fixed Charges represents, on a pre-tax basis,
the number of times earnings cover fixed charges. Earnings consist of net
income to which has been added fixed charges and taxes based on income of
PECO Energy. Fixed charges consist of interest on funded indebtedness,
other interest, amortization of net gain on reacquired debt and net
discount on debt and the interest portion of all rentals charged to income.
PECO Energy's Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends for each of the periods indicated was as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
2.67 2.32 3.12 3.04 2.50
The Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends represents, on a pre-tax basis, the number of times earnings
cover fixed charges and preferred stock dividends. Earnings consist of net
income to which has been added fixed charges and taxes based on income of
PECO Energy. Combined fixed charges and preferred stock dividends consist
of interest on funded indebtedness, other interest, amortization of net
gain on reacquired debt and net discount on debt, preferred stock dividends
(increased to reflect the pre-tax earnings required to cover such dividend
requirements) and the interest portion of all rentals charged to income.
For purposes of calculating the 1997 ratio of earnings to fixed charges
and ratio of earnings to fixed charges and preferred stock dividends, net
income does not reflect the extraordinary charge against income of $3.1
billion ($1.8 billion net of income taxes). See "PECO Energy."
10
<PAGE>
ACCOUNTING TREATMENT
The financial statements of PECO Energy Capital will be consolidated
with PECO Energy's financial statements, with the Series D Preferred
Securities shown on PECO Energy's consolidated financial statements as
"Company Obligated Mandatorily Redeemable Preferred Securities of a
Partnership, which holds Solely Subordinated Debentures of the Company."
PECO Energy's financial statements will include a footnote that discloses,
among other things, that the sole asset of PECO Energy Capital consists of
Subordinated Debt Securities and will specify the principal amount,
interest rate and maturity date of each series of Subordinated Debt
Securities.
USE OF PROCEEDS
The net proceeds from the sale of Capital Securities will be used by
the Trust to purchase the Series D Preferred Securities from PECO Energy
Capital. PECO Energy Capital will lend the proceeds from the sale of the
Series D Preferred Securities, plus the capital contribution made by the
General Partner, to PECO Energy, which loan will be evidenced by the Series
D Subordinated Debt Securities. These funds will be used by PECO Energy in
connection with its redemption of $78,104,575 aggregate liquidation value
of Trust Receipts of PECO Energy Capital Trust I, each representing an
8.72% Cumulative Monthly Income Preferred Security, Series B of PECO Energy
Capital.
DESCRIPTION OF THE CAPITAL SECURITIES
The following is a summary of certain terms and provisions of the
Capital Securities and the Trust Agreement. Reference is made to the Trust
Agreement which is an exhibit to the Registration Statement of which this
Prospectus forms a part.
GENERAL
The Capital Securities will be issued by the Trust pursuant to the
Trust Agreement. Each Capital Security will represent a Series D Preferred
Security, with a stated liquidation preference of $1,000. The Capital
Securities will be issued in book-entry form through DTC or such other
depository at which PECO Energy may have established an account. Capital
Securities may be exchanged for the underlying Series D Preferred
Securities as described under "--Withdrawal of Series D Preferred
Securities."
The Trust is a statutory business trust created under the Delaware
Business Trust Act. The Trustee will hold the Series D Preferred
Securities deposited in the Trust for the benefit of the holders of the
Capital Securities. The Trust Agreement provides that, to the fullest
extent permitted by law, without the need for any other action of any
person, including the Trustee and any other holder of Capital Securities,
each holder of Capital Securities shall be entitled to enforce in the name
of the Trust the Trust's rights under the Series D Preferred Securities
represented by the Capital Securities held by such holder.
It is anticipated that the assets of the Trust available for
distribution to the holders of the Capital Securities will be limited to
payments from PECO Energy Capital under the Series D Preferred Securities,
which payments by PECO Energy Capital will be limited to payments from PECO
Energy on the Series D Subordinated Debt Securities. See "Description of
the Series D Subordinated Debt Securities and the Indenture." If PECO
Energy fails to make a payment on the Series D Subordinated Debt Securities
or if PECO Energy Capital fails to make a Distribution on the Series D
Preferred Securities, the Trust will not have sufficient funds to make
related payments, including Distributions, on the Capital Securities.
DISTRIBUTIONS
Each Capital Security will represent a Series D Preferred Security of
PECO Energy Capital, and Distributions on the Capital Securities will be
made concurrently with Distributions on the Series D Preferred Securities.
Distributions on the Series D Preferred Securities will be cumulative and
will accumulate from the date of original issuance at the annual rate of
7.38% of the liquidation preference of $1,000 per Series D Preferred
Security. Distributions will be payable semiannually in arrears on April
30 and October 31 of each year, commencing April 30, 1998. Distributions
in arrears after the semiannual payment date therefor will accumulate
additional Distributions (to the extent permitted by law) compounded
semiannually at the annual rate of 7.38% thereof. The term
"Distributions," as used herein, shall include any such additional
Distributions. The amount of Distributions payable for any period will be
compounded on the basis of a 360-day year of twelve 30-day months.
11
<PAGE>
Whenever the Trust shall receive any cash Distribution representing a
semiannual Distribution on the Series D Preferred Securities (whether or
not distributed by PECO Energy Capital on the regular semiannual
Distribution date therefor) or payment under the Series D Guarantee in
respect thereof, the Trust shall distribute such amounts to the holders of
the Capital Securities in proportion to the respective number of Series D
Preferred Securities represented by such Capital Securities. Under the
Indenture, PECO Energy shall have the right at any time, so long as an
Event of Default under the Indenture has not occurred and is continuing, to
extend the interest payment period for all Subordinated Debt Securities for
up to 60 consecutive months; provided that, no Extension Period shall
extend beyond the stated maturity date or date of redemption of any series
of Subordinated Debt Securities. At the end of the Extension Period, PECO
Energy shall pay all interest then accrued and payable on the Series D
Subordinated Debt Securities (together with interest thereon to the extent
permitted by applicable law at the rate per annum borne by the Series D
Subordinated Debt Securities). During any Extension Period, no
Distributions will be made on the Series D Preferred Securities represented
by the Capital Securities; however, all accrued and payable Distributions
(together with any applicable Distributions on such Distributions) shall be
paid at the end of any such Extension Period. See "Description of the
Series D Subordinated Debt Securities and the Indenture--Option to Extend
Interest Payment Period."
REDEMPTION OF CAPITAL SECURITIES
The Capital Securities will be subject to mandatory redemption upon
redemption of the Series D Preferred Securities. Whenever PECO Energy
Capital shall elect or is required to redeem the Series D Preferred
Securities in accordance with the Amended and Restated Limited Partnership
Agreement of PECO Energy Capital, dated as of July 25, 1994, as amended
(the "Partnership Agreement"), and as provided under "Description of the
Series D Preferred Securities--Special Event Redemptions," PECO Energy
Capital shall give the Trustee at least 40 days' prior notice thereof. The
Trustee will mail the notice of redemption not less than 30 nor more than
60 days prior to the date fixed for redemption of the Series D Preferred
Securities and the Capital Securities to the holders of the Capital
Securities. On the date of redemption of the Series D Preferred
Securities, provided that PECO Energy Capital (or PECO Energy pursuant to
the Series D Guarantee) shall have deposited with the Trust the aggregate
amount payable upon redemption of all Series D Preferred Securities held by
the Trust to be redeemed, the Trust shall redeem Capital Securities
representing the same number of such Series D Preferred Securities redeemed
by PECO Energy Capital at the same redemption price at which such Series D
Preferred Securities are redeemed. In the event that fewer than all the
outstanding Capital Securities are redeemed, the Capital Securities to be
redeemed shall be selected by lot or pro rata or other equitable method
determined by the Trustee. Under the Trust Agreement, PECO Energy Capital
will agree that if a partial redemption of the Series D Preferred
Securities would result in a delisting of the Capital Securities from any
national exchange on which the Capital Securities are then listed, PECO
Energy Capital will only redeem the Series D Preferred Securities in whole.
PAYMENTS ON LIQUIDATION OF PECO ENERGY CAPITAL
Upon receipt by the Trust of any distribution from PECO Energy Capital
upon liquidation of PECO Energy Capital (or payment by PECO Energy under
the Series D Guarantee in respect thereof), after satisfaction of creditors
of the Trust as required by applicable law, the Trustee shall distribute to
the holders of the Capital Securities such amounts in proportion to the
respective number of Series D Preferred Securities represented by such
Capital Securities.
WITHDRAWAL OF SERIES D PREFERRED SECURITIES
Any beneficial owner of Capital Securities may withdraw all, but not
less than all, of the Series D Preferred Securities represented by such
Capital Securities by providing a written notice and agreement to be bound
by the terms of the Partnership Agreement to the Trustee, with evidence of
beneficial ownership in form satisfactory to the Trustee. Within a
reasonable period after such request has been made, the Trustee shall
instruct DTC to reduce the number of Capital Securities represented by the
global certificate held by DTC by the amount equal to the number of Capital
Securities to be so withdrawn by the withdrawing owner, PECO Energy Capital
shall issue to the withdrawing owner a certificate representing the number
of Series D Preferred Securities so withdrawn and the Trustee shall reduce
the number of Series D Preferred Securities represented by the global
certificate held by the Trust by a like amount; provided that, PECO Energy
Capital shall not issue any fractional number of Series D Preferred
Securities. The Series D Preferred Securities will only be issued in
certificated form.
Any holder of Series D Preferred Securities may redeposit withdrawn
Series D Preferred Securities by delivery to the Trustee of a certificate
or certificates for the Series D Preferred Securities to be deposited,
properly endorsed or accompanied, if required by the Trustee, by a properly
executed instrument of transfer or endorsement in form satisfactory to the
Trustee and in compliance with the terms of the Partnership Agreement,
together with all such certifications as may be required by the Trustee in
its sole discretion and in accordance with the provisions of the Trust
Agreement. Within a
12
<PAGE>
reasonable period after such deposit is properly made, the Trustee shall
instruct DTC to increase the number of Capital Securities represented by the
global certificate held by DTC by an amount equal to the Series D Preferred
Securities to be deposited. The Capital Securities will not be issued in
certificated form.
VOTING RIGHTS
If the holders of the Preferred Securities, acting as a single class,
are entitled to appoint and authorize a Special Representative pursuant to
the Partnership Agreement, the Trustee shall notify the holders of the
Capital Securities of such right, request direction of each holder of a
Capital Security as to the appointment of a Special Representative and vote
the Series D Preferred Securities represented by such Capital Security in
accordance with such direction. If the General Partner fails to convene a
general meeting of PECO Energy Capital as required in the Partnership
Agreement, the Trustee shall notify the holders of the Capital Securities
and, if so directed by the holders of the Capital Securities representing
(i) Preferred Securities constituting at least 10% of the aggregate stated
liquidation preference of the outstanding Preferred Securities or (ii)
Series D Preferred Securities constituting 10% of the aggregate stated
liquidation preference of Series D Preferred Securities, shall convene such
meeting. Under the Trust Agreement, PECO Energy Capital will agree that
without the consent of the holders of 66-2/3% in liquidation amount of the
Capital Securities, it may not consolidate, amalgamate, merge with or into,
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity if, as a
result, the Capital Securities would be delisted by any national securities
exchange or other organization on which the Capital Securities may be
listed, downgraded by any "nationally recognized statistical rating
organization," as that term is defined by the SEC for purposes of Rule
436(g)(2) under the Securities Act of 1933, as amended (the "Securities
Act") or the holders thereof would recognize any gain or loss for federal
income tax purposes as a result of such consolidation, amalgamation,
merger, conveyance or transfer.
Upon receipt of notice of any meeting at which the holders of Series D
Preferred Securities are entitled to vote, the Trustee shall, as soon as
practicable thereafter, mail to the holders of Capital Securities a notice,
which shall be provided by the General Partner and which shall contain (i)
such information as is contained in such notice of meeting, (ii) a
statement that the holders of Capital Securities will be entitled, subject
to any applicable provision of law, to instruct the Trustee as to the
exercise of the voting rights pertaining to the amount of Series D
Preferred Securities represented by their respective Capital Securities,
and (iii) a brief statement as to the manner in which such instructions may
be given. Upon the written request of a holder of a Capital Security, the
Trustee shall vote or cause to be voted the number of Series D Preferred
Securities represented by such Capital Securities in accordance with the
instructions set forth in such request.
AMENDMENT AND TERMINATION OF TRUST AGREEMENT
PECO Energy Capital or the General Partner, and the Trustee, may, at
any time and from time to time enter into one or more agreements
supplemental to the Trust Agreement without the consent of the holders of
the Capital Securities: (i) to evidence the succession of another
partnership, corporation or other entity to PECO Energy Capital or the
General Partner and the assumption by any such successor of the covenants
of PECO Energy Capital or the General Partner in the Trust Agreement; (ii)
to add to the covenants of PECO Energy Capital or the General Partner for
the benefit of the holders of the Capital Securities, or to surrender any
right or power herein conferred upon PECO Energy Capital or the General
Partner; (iii) to correct or supplement any provision in the Trust
Agreement which may be defective or inconsistent with any other provision
therein or to make any other provisions with respect to matters or
questions arising under the Trust Agreement; provided that, any such action
shall not materially adversely affect the interests of the holders of
Capital Securities; or (iv) to cure any ambiguity or correct any mistake.
Any other amendment of the Trust Agreement must be approved by the holders
of 66-2/3% of the Capital Securities.
The Trust Agreement will terminate upon the redemption of the Capital
Securities or a final distribution in respect of the Series D Preferred
Securities and such distribution has been delivered to the holders of the
Capital Securities. In addition, PECO Energy Capital may instruct the
Trustee to dissolve the Trust and distribute the Series D Preferred
Securities on a pro rata basis to the holders of Capital Securities if the
Trust, at any time, is subject to federal income tax with respect to
interest received on its allocable share of interest on the Series D
Subordinated Debt Securities received by PECO Energy Capital, the Trust is
subject to more than a de minimis amount of other taxes, duties or
governmental charges, or a Change in 1940 Act Law (as defined in "Series D
Preferred Securities--Special Event Redemptions") has occurred, to the
effect that the Trust is or will be considered an "Investment Company"
which is required to be registered under the 1940 Act (as defined in
"Series D Preferred Securities--Special Event Redemptions"), which Change
in 1940 Act Law becomes effective on or after the date of the issuance of
the Capital Securities. See "United States Taxation-- Withdrawal or
Distribution of Series D Preferred Securities."
13
<PAGE>
EXPENSES OF THE TRUST
All charges or expenses of the Trust, including the charges and expenses
of the Trustee, will be paid by the General Partner; provided that, if the
Trustee incurs fees, charges or expenses for which it is not otherwise liable
under the Trust Agreement, at the election of a holder of Capital Securities
or other person, such holder or other person will be liable for such fees,
charges and expenses.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trust shall at all times have a Trustee which is a bank that has
its principal place of business in the State of Delaware having a combined
capital and surplus of $50,000,000. If the Trustee ceases to be eligible,
it will resign.
The Trustee may at any time resign as trustee under the Trust Agreement
by notice of its election to do so delivered to PECO Energy Capital and the
General Partner, such resignation to take effect upon the appointment of a
successor trustee and its acceptance of such appointment as hereinafter
provided. The Trustee may at any time be removed by PECO Energy Capital by
notice of such removal delivered to the Trustee, such removal to take
effect upon the appointment of a successor trustee and its acceptance of
such appointment.
In case at any time the Trustee shall resign or be removed, PECO Energy
Capital shall, within 45 days after the delivery of the notice of
resignation or removal, as the case may be, appoint a successor trustee,
which shall be a bank or trust company, or an affiliate of a bank or trust
company, having its principal office in the State of Delaware and having a
combined capital and surplus of at least $50,000,000.
BOOK-ENTRY-ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
DTC will initially act as securities depositary for all of the Capital
Securities. The Capital Securities will be issued only as fully registered
securities registered in the name of Cede & Co. (DTC's nominee) as the
holder thereof. One or more fully registered global securities will be
issued for the Capital Securities and will be deposited with DTC. The
Capital Securities will not be available in certificated form.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, 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 the provisions of Section 17A of
the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of
its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC 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 rules
applicable to DTC and its Participants are on file with the SEC.
Purchases of Capital Securities under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual
purchaser of each Capital Security ("Beneficial Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from DTC of their purchases,
but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of
their holdings, from the Direct or Indirect Participant through which the
Beneficial Owner entered into the transaction. Transfers of ownership
interests in the Capital Securities are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their
ownership interests in Capital Securities, except in the event that use of
the book-entry system for the Capital Securities is discontinued.
To facilitate subsequent transfers, all Capital Securities deposited by
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Capital Securities with DTC and their
registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the
Capital Securities; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Capital Securities are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their
customers.
14
<PAGE>
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Beneficial Owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the
Capital Securities are being redeemed, DTC's practice is to determine by
lot the amount of the interest of each Direct Participant to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Capital Securities. Under its usual procedures, DTC mails an Omnibus Proxy
to the Trust as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Capital Securities are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Redemption proceeds and Distributions on the Capital Securities will be
made to Cede & Co., as nominee of DTC. DTC's practice is to credit Direct
Participants' accounts, upon DTC's receipt of funds and corresponding
detail information from the Trustee on behalf of the Trust on any
Distribution or other payment date in accordance with their respective
holdings shown on DTC's records. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices,
as is the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
Participant and not of DTC, PECO Energy, PECO Energy Capital or the Trust,
subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of redemption proceeds and Distributions to
Cede & Co. shall be the responsibility of the Trustee on behalf of the
Trust, disbursement of such payments to Direct Participants shall be the
responsibility of Cede & Co. and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
DTC may discontinue providing its services as securities depository
with respect to the Capital Securities at any time by giving reasonable
notice to the Trustee and PECO Energy. Under such circumstances, in the
event that a successor securities depository is not obtained, physical
certificates representing Capital Securities are required to be printed and
delivered.
PECO Energy, at its option, may decide to discontinue use of the system
of book-entry transfers through DTC (or a successor securities depository).
In that event, physical certificates representing Capital Securities will
be printed and delivered.
In the event that the book-entry-only system is discontinued, the
Trustee shall keep the registration books for such Capital Securities at
its corporate trust office in Delaware. Such Capital Securities may be
transferred or exchanged for one or more Capital Securities upon surrender
thereof at the corporate trust office of the Trustee in Delaware by the
holders or their duly authorized attorneys or legal representatives. Upon
surrender of any Capital Securities to be transferred or exchanged, the
Trustee shall record the transfer or exchange in the registration books and
shall deliver new Capital Securities appropriately registered. The Trustee
shall not be required to register the transfer of any Capital Securities
that have been called for redemption on or after the liquidation date of
PECO Energy Capital. The Trust and the Trustee shall be entitled to treat
the holders of the Capital Securities, as their names appear in the
registration books, as the owners of those Capital Securities for all
purposes under the Trust Agreement.
The information set forth above concerning DTC and DTC's book-entry
system has been obtained from sources that PECO Energy Capital and PECO
Energy believe to be accurate, but PECO Energy Capital and PECO Energy
assume no responsibility for the accuracy thereof. None of the Trustee,
the Trust, PECO Energy Capital nor PECO Energy has any responsibility for
the performance by DTC or its Participants of their respective obligations
as described herein or under the rules and procedures governing their
respective operations.
DESCRIPTION OF THE SERIES D PREFERRED SECURITIES
The following is a summary of certain terms and provisions of the
Series D Preferred Securities represented by the Capital Securities.
Reference is made to the Partnership Agreement which is an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
Under the Partnership Agreement, PECO Energy Capital is authorized to
issue two classes of partner interests: the Preferred Securities
representing limited partner interests, including the Series D Preferred
Securities, and general partner interests. All of the general partner
interests of PECO Energy Capital are owned by the General Partner, which is
a wholly owned subsidiary of PECO Energy. All of the Preferred Securities
issued by PECO Energy Capital will be of equal rank in participation in the
profits and assets and income of PECO Energy Capital. The Partnership
Agreement authorizes the
15
<PAGE>
General Partner to establish series of Preferred Securities having such
designations, rights, privileges, restrictions and other terms and
provisions as the General Partner may determine. Distributions on all
series of Preferred Securities must be paid in full before the General
Partner may participate in the profits or assets of PECO Energy Capital.
DISTRIBUTIONS
The Series D Preferred Securities will be entitled to Distributions out
of funds on hand legally available therefor held by PECO Energy Capital at
the annual rate of 7.38% of the stated liquidation preference of $1,000,
payable semiannually in arrears on April 30 and October 31 of each year.
Distributions on the Series D Preferred Securities will be cumulative, will
accrue from the original date of issuance, and, except as otherwise
described below, will be payable semiannually in arrears commencing on
April 30, 1998. Distributions in arrears after the semiannual payment date
therefor will accumulate additional Distributions thereon at the rate of
7.38% per annum. PECO Energy Capital has previously issued Cumulative
Monthly Income Preferred Securities, Series A, Series B and Series C, which
have an aggregate stated liquidation preference of $221,250,000,
$78,104,575 and $50,000,000, respectively. PECO Energy intends to use the
proceeds from the sale of its Series D Subordinated Debt Securities to PECO
Energy Capital to redeem its 8.72% Deferrable Interest Subordinated
Debentures, Series B and thereby cause a mandatory redemption of PECO
Energy Capital's 8.72% Cumulative Monthly Income Preferred Securities,
Series B.
The General Partner may make distributions on the general partner
interests of PECO Energy Capital only after payment in full of all
Distributions accrued on the Series D Preferred Securities and any other
outstanding Preferred Securities of PECO Energy Capital.
PECO Energy has the right under the Indenture to extend the interest
payment period from time to time on all Subordinated Debt Securities to a
period not exceeding 60 consecutive months; provided that, such Extension
Period shall not extend beyond the stated maturity date or redemption date
of any series of Subordinated Debt Securities, including the Series D
Subordinated Debt Securities. As a consequence, semiannual Distributions
on the Series D Preferred Securities would be deferred (but would continue
to accumulate with Distributions thereon) by PECO Energy Capital during any
such Extension Period. In the event that PECO Energy exercises its right
to extend the interest payment period on the Subordinated Debt Securities,
PECO Energy may not declare or pay dividends on, or redeem, purchase or
acquire, any of its capital stock during the Extension Period. PECO Energy
Capital and PECO Energy currently believe that the extension of an interest
payment period is unlikely. Prior to the termination of any such Extension
Period, PECO Energy may further extend the interest payment period;
provided that, such Extension Period together with all such previous and
further extensions thereof may not exceed 60 consecutive months. Upon the
termination of any Extension Period and the payment of all amounts then due
on all series of Subordinated Debt Securities, PECO Energy may elect to
extend the interest payment period again, subject to the above
requirements. Following an Extension Period of 18 consecutive months, the
holders of Preferred Securities, including the Series D Preferred
Securities, shall have the right to appoint a Special Representative to
enforce PECO Energy Capital's rights against PECO Energy under the
Subordinated Debt Securities and the Indenture and the obligations of PECO
Energy under the Guarantees. See "--Voting Rights," "Risk Factors" and
"Description of the Series D Subordinated Debt Securities and the
Indenture--Option to Extend Interest Payment Period" and "--Interest."
Distributions on the Series D Preferred Securities must be paid by PECO
Energy Capital to the extent that PECO Energy Capital has funds on hand
legally available therefor. It is anticipated that the funds available for
distribution by PECO Energy Capital will be limited to payments received by
PECO Energy Capital in respect of the Series D Subordinated Debt
Securities. See "Description of the Series D Subordinated Debt Securities
and the Indenture."
The amount of Distributions payable for any period will be computed on
the basis of twelve 30-day months and a 360-day year. Distributions on the
Series D Preferred Securities will be made to the holders thereof as they
appear on the books and records of PECO Energy Capital on the relevant
record dates, which will be April 15 and October 15. If any date on which
Distributions are payable on the Series D Preferred Securities is not a
business day, then payment of the Distributions payable on such date will
be made on the next succeeding day that is a business day (and without any
interest or other payment in respect of any such delay). The term
"business day" shall mean any day other than a day on which banking
institutions in the City of New York or the State of Delaware are
authorized or required by law to close.
CERTAIN RESTRICTIONS ON PECO ENERGY CAPITAL
If distributions have not been paid in full on any series of Preferred
Securities of PECO Energy Capital, PECO Energy Capital shall not: (i) pay
any distributions on any other series of Preferred Securities, unless the
amount of any distributions paid on any Preferred Securities is paid on all
Preferred Securities then outstanding on a pro rata basis in proportion to
the full distributions to which each series of Preferred Securities would
be entitled if paid in full; (ii) pay any
16
<PAGE>
distribution on the general partner interests; or (iii) redeem, purchase
or otherwise acquire any Preferred Securities or the general partner
interests; until, in each case, such time as all accumulated and unpaid
distributions on all series of Preferred Securities shall have been paid in
full for all prior distribution periods.
MANDATORY REDEMPTION
The Series D Preferred Securities will be subject to mandatory
redemption upon the repayment by PECO Energy of the Series D Subordinated
Debt Securities at maturity, at $1,000 per Series D Preferred Security,
plus accumulated and unpaid Distributions (whether or not declared), if
any, to the date fixed for redemption.
The Series D Preferred Securities will not be entitled to any sinking
fund.
SPECIAL EVENT REDEMPTIONS
If a Tax Event (as defined below) shall occur and be continuing, the
Series D Preferred Securities will be subject to redemption, at the option
of the General Partner, in whole or in part at the Special Event Redemption
Price (as defined below) within 90 days following the occurrence of such
Tax Event. "Tax Event" means that PECO Energy Capital shall have received
an opinion of counsel (which may be regular counsel to PECO Energy or an
affiliate but not an employee thereof) experienced in such matters to the
effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision or taxing authority
thereof or therein affecting taxation, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying
such laws or regulations, which amendment or change is effective or such
interpretation or pronouncement is announced on or after the date of
issuance of the Series D Preferred Securities, there is more than an
insubstantial risk that (i) PECO Energy Capital is subject to federal
income tax with respect to interest received on the Series D Subordinated
Debt Securities or PECO Energy Capital will otherwise not be taxed as a
partnership, (ii) interest payable by PECO Energy on the Series D
Subordinated Debt Securities will not be deductible for federal income tax
purposes or (iii) PECO Energy Capital is subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
If an Investment Company Event (as defined below) shall occur and be
continuing, the Series D Preferred Securities will be subject to
redemption, at the option of the General Partner, in whole but not in part
at the Special Event Redemption Price (as defined below) within 90 days
following the occurrence of such Investment Company Event. "Investment
Company Event" means that PECO Energy Capital shall have received an
opinion of counsel (which may be regular counsel to PECO Energy or an
affiliate but not an employee thereof) experienced in such matters to the
effect that a change in law or regulation or a change in official
interpretation of law or regulation by any legislative body, court,
governmental agency or regulatory authority (a "Change in 1940 Act Law")
has occurred to the effect that PECO Energy Capital is or will be
considered an "Investment Company" which is required to be registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), which
Change in 1940 Act Law becomes effective on or after the date of the
issuance of the Series D Preferred Securities.
For the purposes hereof, Special Event Redemption Price shall be equal
to the greater of (i) the liquidation preference of $1,000 or (ii) the sum,
as determined by a Quotation Agent (as defined below), of the present value
of (A) $1,000 payable on April 6, 2028 plus (B) the remaining scheduled
Distributions to April 6, 2028, the maturity of the Series D Subordinated
Debt Securities (including any portion of such Distributions accumulated
but unpaid as of the date of prepayment), in each case, discounted to the
prepayment date on a semiannual basis (assuming a 360-day year consisting
of twelve 30-day months) at the Adjusted Treasury Rate (as defined below),
less (C) any accumulated but unpaid Distributions to the date of prepayment
plus, in either (i) or (ii) above, accumulated but unpaid Distributions to
the date of prepayment.
"Adjusted Treasury Rate" means, with respect to any prepayment date,
the rate per annum equal to (i) the yield, under the heading which
represents the average for the immediately prior week, appearing in the
most recently published statistical release designated "H.15 (519)" or any
successor publication which is published weekly by the Federal Reserve and
which establishes yields on actively traded United States Treasury
Securities adjusted to constant maturity under the caption "Treasury
Constant Maturities," for the maturity date corresponding to the maturity
date of the Series D Subordinated Debt Securities (if no maturity date is
within three months before or after such maturity date, yields for the
first two published maturities most closely corresponding to such maturity
date shall be interpolated and the Adjusted Treasury Rate shall be
interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or
does not contain such yields, the rate per annum equal to the semiannual
equivalent yield to maturity of the Comparable Treasury Issue (as defined
below), assuming a price for the Comparable Treasury Issue (expressed as a
percentage of its principal
17
<PAGE>
amount) equal to the Comparable Treasury Price (as defined below) for
such prepayment date plus, in either case (A) 1.20% if such prepayment
date occurs prior to April 6, 1999, and (B) 0.50% in all other cases.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity date corresponding to
the maturity date of the Series D Subordinated Debt Securities that would
be utilized at the time of selection and in accordance with customary
financial practice, in pricing new issues of corporate debt securities with
a maturity date corresponding to such maturity date. If no United States
Treasury security has a maturity date which is within three months before
or after such maturity date, the two most closely corresponding United
States Treasury securities shall be used as the Comparable Treasury Issue,
and the calculation of the Adjusted Treasury Rate pursuant to clause (ii)
of the definition thereof shall be interpolated or extrapolated on a
straight-line basis, rounding to the nearest month.
"Quotation Agent" means the Reference Treasury Dealer appointed by PECO
Energy. "Reference Treasury Dealer" means: (i) Salomon Brothers Inc and
their respective successors; provided, however, that if the foregoing shall
cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), PECO Energy shall substitute therefor
another Primary Treasury Dealer; and (ii) any other Primary Treasury Dealer
selected by PECO Energy.
"Comparable Treasury Price" means, with respect to any redemption date,
(i) the average of five Reference Treasury Dealer Quotations (as defined
below) for such redemption date, after excluding the highest and lowest of
such Reference Treasury Dealer Quotations, or (ii) if the Quotation Agent
obtains fewer than five such Reference Treasury Dealer Quotations, the
average of all such quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as
determined by the Quotation Agent of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Quotation Agent by such
Reference Treasury Dealer (which may also be the Quotation Agent) at
5:00 p.m. New York City time, on the third business day preceding such
redemption date.
REDEMPTION PROCEDURES
PECO Energy Capital may not redeem any Series D Preferred Securities
unless all accumulated and unpaid Distributions have been paid on all Series D
Preferred Securities for all semiannual Distribution periods terminating on or
prior to the date of redemption.
Notice of any redemption of the Series D Preferred Securities will be
given by PECO Energy Capital by mail or delivery to each record holder of
Series D Preferred Securities to be redeemed not fewer than 30, nor more than
60 days prior to the date fixed for redemption thereof (at least 40 days'
prior for notice to the Trust). A notice of redemption shall be deemed to be
given on the day such notice is first mailed by first-class mail, postage
prepaid, or on the date it was delivered in person, receipt acknowledged to
the holders of such Series D Preferred Securities. Notices of redemption
shall be addressed to the record holders of the Series D Preferred Securities
at the addresses of the holders appearing in the books and records of PECO
Energy Capital.
If notice of redemption shall have been given and payment shall have been
made by PECO Energy Capital to the Trust and any other holder of Series D
Preferred Securities, then, upon the date of such payment, all rights of
owners of the Series D Preferred Securities so called for redemption will
cease. In the event that any date fixed for redemption of Series D Preferred
Securities is not a business day, then payment of the applicable redemption
price payable on such date will be made on the next succeeding day which is a
business day (and without any interest or other payment in respect of any such
delay), except that if such business day falls in the next succeeding calendar
year, such payment will be made on the immediately preceding business day (in
each case with the same force and effect as if made on such day).
LIQUIDATION DISTRIBUTION
In the event of any voluntary or involuntary dissolution and liquidation
of PECO Energy Capital, the holders of the Preferred Securities will be
entitled to receive out of the assets of PECO Energy Capital, after
satisfaction of liabilities to creditors as required by Delaware law and
before any distribution of assets is made to holders of its general partner
interests, the lesser of the Partnership Liquidation Distribution or the
amount of assets of PECO Energy Capital legally available for distribution to
the holders of Preferred Securities. All assets of PECO Energy Capital
remaining after payment thereof will be distributed to the General Partner.
If, upon such liquidation, the Partnership Liquidation Distribution can be
paid only in part because PECO Energy Capital has insufficient assets
available to pay in full the aggregate Partnership Liquidation Distribution on
all Preferred Securities, then the amounts payable on each series of Preferred
Securities shall be paid on a pro rata basis, in proportion to the full
Partnership Liquidation Distribution to which each series of Preferred
Securities would be otherwise entitled.
18
<PAGE>
Pursuant to the Partnership Agreement, PECO Energy Capital shall be
dissolved and its affairs shall be wound up upon the occurrence of any of the
following events: (i) upon the expiration of PECO Energy Capital in 2093; (ii)
upon the withdrawal, removal or bankruptcy of the General Partner or the
occurrence of any other event that under applicable law causes PECO Energy
Capital Corp. to cease to be the General Partner, except for a transfer to a
permitted successor of the General Partner or as otherwise provided in the
Partnership Agreement; (iii) the entry of a decree of judicial dissolution; or
(iv) the written consent of the General Partner and all of the holders of the
Preferred Securities. Upon such dissolution, PECO Energy is required to
redeem all series of Subordinated Debt Securities to fund the Partnership
Liquidation Distribution.
The amount per share payable on the Series D Preferred Securities in the
event of any voluntary or involuntary liquidation of PECO Energy Capital is
$1,000 plus accumulated and unpaid Distributions.
MERGER, CONSOLIDATION, ETC. OF PECO ENERGY CAPITAL
PECO Energy Capital may not consolidate, amalgamate, merge with or into,
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity, except with
the approval of the General Partner and the holders of 66-2/3% in aggregate
stated liquidation preference of the outstanding Preferred Securities or as
otherwise described below. The General Partner may, without the consent of
the holders of the Preferred Securities, cause PECO Energy Capital to
consolidate, amalgamate, merge with or into, or be replaced by, or convey,
transfer or lease its properties and assets substantially as an entirety to, a
corporation, a limited liability company or a limited partnership, a trust or
other entity organized as such under the laws of any state of the United
States of America or the District of Columbia; provided that, (i) such
successor entity either (x) expressly assumes all of the obligations of PECO
Energy Capital under the Preferred Securities or (y) substitutes for the
Preferred Securities other securities having substantially the same terms as
the Preferred Securities (the "Successor Securities") so long as the Successor
Securities rank, as regards to participation in the profits and assets of the
successor entity, at least as high as the Preferred Securities rank, as
regards to participation in the profits and assets of PECO Energy Capital,
(ii) PECO Energy confirms its obligations under the Guarantees with regard to
the Successor Securities, if any, (iii) such consolidation, amalgamation,
merger, replacement, conveyance, transfer or lease does not cause any series
of Preferred Securities or Successor Securities to be delisted by any national
securities exchange or other organization on which such series of Preferred
Securities may be listed, (iv) such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease does not cause the Preferred
Securities or Successor Securities to be downgraded by any "nationally
recognized statistical rating organization," as that term is defined by the
SEC for purposes of Rule 436(g)(2) under the Securities Act, (v) such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease does not adversely affect the powers, preferences and other special
rights of holders of Preferred Securities or Successor Securities in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of PECO Energy Capital and (vii) prior to such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease, PECO Energy has received an opinion of counsel (which may be regular
tax or other counsel to PECO Energy or an affiliate, but not an employee
thereof) experienced in such matters to the effect that (w) holders of
outstanding Preferred Securities will not recognize any gain or loss for
federal income tax purposes as a result of the consolidation, amalgamation,
merger, replacement, conveyance, transfer or lease, (x) such successor entity
will be treated as a partnership for federal income tax purposes, (y)
following such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease, PECO Energy and such successor entity will be in compliance
with the 1940 Act without registering thereunder as an investment company, and
(z) such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease will not adversely affect the limited liability of holders
of Preferred Securities or Successor Securities.
VOTING RIGHTS
Except as provided below and under "--Merger, Consolidation, etc. of
PECO Energy Capital" and "Description of the Series D Guarantee--
- --Amendments" and as otherwise required by law and the Partnership
Agreement, the holders of the Series D Preferred Securities have no voting
rights.
If (i) PECO Energy Capital fails to pay distributions in full on the
Preferred Securities for 18 consecutive months, (ii) an Event of Default
(as defined in the Indenture) occurs and is continuing, or (iii) PECO
Energy is in default on any of its payment obligations under any Guarantee,
then the holders of the Preferred Securities, acting as a single class,
will be entitled by a vote of the majority of the aggregate stated
liquidation preference of the outstanding Preferred Securities to appoint a
special representative (the "Special Representative") to enforce PECO
Energy Capital's rights against PECO Energy under the Subordinated Debt
Securities and the Indenture and the obligations undertaken by PECO Energy
under the Guarantees issued in conjunction with the issuance of the
Preferred Securities, including, after failure to pay distributions for 60
consecutive months on the Preferred Securities, the payment of
distributions on the Preferred Securities. The
19
<PAGE>
Special Representative shall not be admitted as a partner of PECO Energy
Capital or otherwise be deemed a partner of PECO Energy Capital and shall have
no liability for the debts, obligations or liabilities of PECO Energy Capital.
For purposes of determining whether PECO Energy Capital has failed to pay
distributions in full for 18 consecutive months, distributions shall be deemed
to remain in arrears, notwithstanding any payments in respect thereof, until
full cumulative distributions on all Preferred Securities have been or
contemporaneously are paid with respect to all distribution periods for such
Preferred Securities terminating on or prior to the date of payment of such
full cumulative distributions. Subject to the requirements of applicable
law, not later than 30 days after such right to appoint the Special
Representative, the General Partner will convene a general meeting for the
above purpose. If the General Partner fails to convene such meeting within
such 30-day period, the holders of 10% of the aggregate stated liquidation
preference of (i) the Preferred Securities or (ii) the Series D Preferred
Securities will be entitled to convene such meeting. The provisions of the
Partnership Agreement relating to the convening and conduct of the general
meetings of security holders will apply with respect to any such meeting. Any
Special Representative so appointed shall vacate office immediately if PECO
Energy Capital (or PECO Energy pursuant to a Guarantee) shall have paid in
full all accumulated and unpaid distributions on the Preferred Securities or
such Event of Default under the Indenture or default under the Guarantee or
breach, as the case may be, shall have been cured. Notwithstanding the
appointment of any such Special Representative, PECO Energy retains all
rights under the Indenture, including the right to extend the interest payment
period on the Subordinated Debt Securities.
If any proposed amendment to the Partnership Agreement provides for, or
the General Partner otherwise proposes to effect, any action which would
materially adversely affect the powers, preferences or special rights
attached to any series of Preferred Securities, whether by way of amendment
to the Partnership Agreement or otherwise, then the holders of such series
of Preferred Securities will be entitled to vote on such amendment or
action of the General Partner (but not on any other amendment or action)
and, in the case of an amendment or action which would equally adversely
affect the rights or preferences of any other Preferred Securities, such
Preferred Securities shall vote together as a class on such amendment or
action of the General Partner (but not on any other amendment or action),
and such amendment or action shall not be effective except with the
approval of the holders of not less than 66-2/3% of the aggregate stated
liquidation preference of such series of Preferred Securities. Except in
certain circumstances described under "--Liquidation Distribution," PECO
Energy Capital will be dissolved and wound up only with the consent of the
holders of all Preferred Securities then outstanding as well as the General
Partner.
The powers, preferences or special rights attached to any Preferred
Securities will be deemed not to be adversely affected by the creation or
issue of, and no vote will be required for the creation or issue of, any
additional series of Preferred Securities or additional general partner
interests. Holders of Preferred Securities have no preemptive rights.
So long as any series of Subordinated Debt Securities are held by PECO
Energy Capital, the General Partner, unless so directed by the Special
Representative, shall not (i) direct the time, method and place of conducting
any proceeding for any remedy available to the holder of the Subordinated Debt
Securities or the Trustee under the Indenture (the "Indenture Trustee"), or
executing any trust or power conferred on the Indenture Trustee, (ii) waive
any past default which is available under the Indenture, (iii) exercise any
right to rescind or annul a declaration that the principal of all the
Subordinated Debt Securities shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture, where such consent
shall be required, without, in each case, obtaining the prior approval of the
holders of at least 66-2/3% in aggregate stated liquidation preference of all
series of Preferred Securities affected thereby, acting as a single class;
provided, however, that where a consent under the Indenture would require the
consent of each holder affected thereby, no such consent shall be given by the
General Partner without the prior consent of each holder of all series of
Preferred Securities affected thereby. The General Partner shall not revoke
any action previously authorized or approved by a vote of any series of
Preferred Securities. The General Partner shall notify all holders of the
Preferred Securities of any notice of default received from the Indenture
Trustee with respect to any series of Subordinated Debt Securities.
Any required approval of holders of Preferred Securities may be given at a
separate meeting of such holders convened for such purposes, at a meeting of
all partners of PECO Energy Capital or pursuant to written consent. PECO
Energy Capital will cause a notice of any meeting at which holders of any
series of Preferred Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be mailed
to each holder of record of such series of Preferred Securities. Each such
notice will include a statement setting forth (i) the date of such meeting or
the date by which such action is to be taken, (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought and
(iii) instructions for the delivery of proxies or consents.
The holders of the Preferred Securities will have no rights to remove or
replace the General Partner.
20
<PAGE>
MISCELLANEOUS
The General Partner is authorized and directed to use its best efforts to
manage the affairs of PECO Energy Capital in such a way that PECO Energy
Capital would not be deemed to be an "investment company" required to be
registered under the 1940 Act or taxed as a corporation for federal income
tax purposes and so that all series of Subordinated Debt Securities will be
treated as indebtedness of PECO Energy for federal income tax purposes. In
this connection, the General Partner is authorized to take any action not
inconsistent with applicable law, the Certificate of Limited Partnership of
PECO Energy Capital or the Partnership Agreement, and that does not materially
adversely affect the interests of holders of Preferred Securities, that the
General Partner determines in its discretion to be necessary or desirable for
such purposes.
PECO Energy Capital may not borrow money or issue debt or mortgage or
pledge any of its assets.
DESCRIPTION OF THE SERIES D GUARANTEE
The following is a summary of certain provisions of the Series D Guarantee
which will be executed and delivered by PECO Energy concurrently with the
issuance of the Series D Preferred Securities. Reference is made to the
Series D Guarantee, which is filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
GENERAL
Under the Series D Guarantee, PECO Energy will agree to pay (i) any
accumulated and unpaid Distributions on the Series D Preferred Securities
to the extent that PECO Energy Capital has funds on hand legally available
therefor, (ii) the applicable redemption price payable with respect to any
Series D Preferred Securities called for redemption by PECO Energy Capital
(as described under "Series D Preferred Securities--Mandatory Redemption"
and "--Special Event Redemptions") to the extent that PECO Energy Capital
has funds on hand legally available therefor and (iii) upon a liquidation
of PECO Energy Capital, the lesser of (a) the portion of the Partnership
Liquidation Distribution applicable to the Series D Preferred Securities
and (b) the amount of assets of PECO Energy Capital legally available for
distribution to holders of Series D Preferred Securities in liquidation of
PECO Energy Capital (collectively, the "Guarantee Payments"). PECO Energy
will agree to pay the Guarantee Payments, as and when due (except to the
extent paid by PECO Energy Capital), to the fullest extent permitted by
law, regardless of any defense, right of setoff or counterclaim which PECO
Energy may have or assert against PECO Energy Capital, the General Partner,
the Trust or the Trustee. PECO Energy's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by PECO
Energy to the holders of Series D Preferred Securities or by causing PECO
Energy Capital to pay such amounts to such holders.
STATUS OF THE SERIES D GUARANTEE
The Series D Guarantee will constitute an unsecured obligation of PECO
Energy and will rank subordinate and junior in right of payment to all
general liabilities of PECO Energy.
The Series D Guarantee will constitute a guarantee of payment and not
of collection. The Series D Guarantee will be held by the General Partner
for the benefit of the holders of the Series D Preferred Securities. In
the event of the appointment of a Special Representative, the Special
Representative may enforce the Series D Guarantee. If no Special
Representative has been appointed to enforce the Series D Guarantee, the
General Partner will have the right to enforce the Series D Guarantee on
behalf of the holders of the Series D Preferred Securities. The holders of
Capital Securities, together with the holders of the Series D Preferred
Securities other than the Trust, representing not less than 10% in
aggregate stated liquidation preference of the Series D Preferred
Securities will have the right to direct the time, method and place of
conducting any proceeding to enforce any remedy available in respect of the
Series D Guarantee, including the giving of directions to the General
Partner or the Special Representative, as the case may be. If the General
Partner or the Special Representative fails to enforce the Series D
Guarantee as above provided, any holder of Capital Securities representing
Series D Preferred Securities, and any holder of Series D Preferred
Securities other than the Trust, may institute a legal proceeding directly
against PECO Energy to enforce its rights under the Series D Guarantee
without first instituting a legal proceeding against PECO Energy Capital or
any other person or entity. The Series D Guarantee will not be discharged
except by payment of the Guarantee Payments in full to the extent not paid
by PECO Energy Capital and by complete performance of all obligations of
PECO Energy contained in the Series D Guarantee.
RELATIONSHIP AMONG SERIES D GUARANTEE, SERIES D SUBORDINATED DEBT
SECURITIES AND SERIES D PREFERRED SECURITIES
In addition to the obligations of PECO Energy under the Series D
Guarantee, the Indenture provides that PECO Energy shall cause the General
Partner to remain the general partner of PECO Energy Capital and timely
perform all its duties as such (including the duty to pay distributions on
the Preferred Securities), which include, among other things, the General
Partner's duties under the Partnership Agreement to directly pay all costs and
expenses of PECO Energy Capital
21
<PAGE>
(for the purpose of insuring that payment of principal and interest by
PECO Energy on the Subordinated Debt Securities will be sufficient to allow
payment in full to the holders of the Preferred Securities) and the
covenant of the General Partner in the Partnership Agreement to at all
times maintain a "fair market value net worth" of at least 10% of the total
contributions (less redemptions) to PECO Energy Capital. While the assets
of the General Partner will not be available for making distributions on
the Preferred Securities, they will be available for payment of the
expenses of PECO Energy Capital. Accordingly, the Series D Guarantee and
the Indenture, together with the related covenants contained in the
Partnership Agreement and PECO Energy's obligations under the Subordinated
Debt Securities, provide for PECO Energy's full and unconditional guarantee
of the Series D Preferred Securities as set forth above.
CERTAIN COVENANTS OF PECO ENERGY
Under the Series D Guarantee, PECO Energy will covenant that, so long as
any Series D Preferred Securities remain outstanding, neither PECO Energy nor
any majority owned subsidiary of PECO Energy shall declare or pay any dividend
on, or redeem, purchase, acquire or make a liquidation payment with respect
to, any of its capital stock (other than dividends by a wholly owned
subsidiary) if at such time PECO Energy shall be in default with respect to
its payment obligations under the Series D Guarantee or there shall have
occurred any event that, with the giving of notice or the lapse of time or
both, would constitute an Event of Default under the Indenture.
AMENDMENTS
Except with respect to any changes which do not materially adversely
affect the rights of holders of Series D Preferred Securities (in which
case no vote will be required), the Series D Guarantee may be amended only
with the prior approval of the holders of Capital Securities representing
not less than 66-2/3% of the aggregate stated liquidation preference of the
outstanding Series D Preferred Securities.
MERGER OF PECO ENERGY
So long as the Series D Preferred Securities remain outstanding, PECO
Energy will maintain its corporate existence; provided that, PECO Energy may
consolidate with or merge with or into any other person or sell, convey,
transfer or lease all or substantially all its properties and assets to any
person if the successor person shall be organized and existing under the laws
of the United States or any state thereof or the District of Columbia and
shall expressly assume the obligations of PECO Energy under the Series D
Guarantee.
TERMINATION OF THE SERIES D GUARANTEE
The Series D Guarantee will terminate and be of no further force and
effect upon full payment of the applicable redemption price of all Series D
Preferred Securities or upon full payment of the amounts payable with
respect to the Series D Preferred Securities upon liquidation of PECO
Energy Capital. The Series D Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Series
D Preferred Securities must restore payments of any sums paid under the
Series D Preferred Securities or the Series D Guarantee.
DESCRIPTION OF THE SERIES D SUBORDINATED DEBT SECURITIES AND THE INDENTURE
The following is a summary of certain terms and provisions of the Series D
Subordinated Debt Securities and the Indenture. Reference is made to the
Indenture, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Series D Subordinated Debt Securities will be unsecured,
subordinated obligations of PECO Energy issued under the Indenture. The
Series D Subordinated Debt Securities will be in a principal amount equal
to the aggregate stated liquidation preference of the Series D Preferred
Securities plus the General Partner's capital contribution in PECO Energy
Capital, will bear interest at a rate equal to the Distribution rate on the
Series D Preferred Securities payable on the Distribution dates, will have
maturity and redemption provisions corresponding to the redemption
provisions of the Series D Preferred Securities and will be subject to
mandatory redemption upon the dissolution and liquidation of PECO Energy
Capital. The entire principal amount of the Series D Subordinated Debt
Securities will become due and payable, together with any accrued and
unpaid interest thereon, on April 6, 2028.
PECO Energy will deliver the Series D Subordinated Debt Securities to
the General Partner to be held on behalf of the holders of the Series D
Preferred Securities. The Series D Subordinated Debt Securities will be
delivered by PECO
22
<PAGE>
Energy to evidence the loan by PECO Energy Capital to PECO Energy of
an amount equal to the proceeds received from the sale of the Series D
Preferred Securities, plus the General Partner's concurrent capital
contribution in PECO Energy Capital.
REDEMPTION
Except as provided below, the Series D Subordinated Debt Securities may
not be redeemed prior to maturity. PECO Energy Capital has the right to
redeem the Series D Preferred Securities at any time upon the occurrence of
a Tax Event or an Investment Company Event, upon not less than 30 nor more
than 60 days' notice (and not less than 40 days' notice to the Trust), as
described under "Description of the Series D Preferred Securities--Special
Event Redemptions." The Series D Subordinated Debt Securities will be
subject to mandatory redemption upon the dissolution of PECO Energy Capital
or upon redemption of the Series D Preferred Securities.
If PECO Energy gives a notice of redemption in respect of Series D
Subordinated Debt Securities, then, on or prior to the redemption date,
PECO Energy shall deposit with the paying agent funds sufficient to pay the
applicable redemption price and will give irrevocable instructions and
authority to pay the applicable redemption price. If notice of redemption
shall have been given, if required, then the Series D Subordinated Debt
Securities called for redemption shall become due and payable on the
redemption date and upon the redemption date, interest will cease to accrue
on the Series D Subordinated Debt Securities called for redemption and such
Series D Subordinated Debt Securities will no longer be deemed to be
outstanding.
INTEREST
The Series D Subordinated Debt Securities will bear interest at an
annual rate of 7.38% plus Additional Interest (as defined under "
Additional Interest"), if any, from the original date of issuance.
Interest will be payable semiannually in arrears on April 30 and October 31
of each year, commencing on April 30, 1998, to PECO Energy Capital.
PECO Energy will make additional interest payments on any overdue
installment of interest on the Series D Subordinated Debt Securities to
PECO Energy Capital at the same rate per annum as the annual rate payable
on the Series D Subordinated Debt Securities.
Interest payments on the Subordinated Debt Securities are eliminated in
consolidation from the consolidated statements of income of PECO Energy.
Distributions on the Preferred Securities appear as a separate line item
under interest charges entitled "Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership, which holds Solely Subordinated
Debentures of the Company" on the consolidated statements of income of PECO
Energy.
ADDITIONAL INTEREST
If at any time PECO Energy Capital would be required to pay any taxes,
duties or other governmental charges of whatever nature (other than
withholding taxes) imposed by the United States, or any other taxing
authority, then, in any such case, PECO Energy also will pay as additional
interest ("Additional Interest") such amounts as shall be required so that
the net amounts received and retained by PECO Energy Capital after paying
any such taxes, duties or other governmental charges will not be less than
the amounts PECO Energy Capital would have received had no such taxes,
duties or other governmental charges been imposed.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Under the Indenture, PECO Energy shall have the right at any time, so
long as an Event of Default under the Indenture has not occurred and is
continuing, to extend the interest payment period for all Subordinated Debt
Securities for up to 60 consecutive months; provided that no Extension
Period shall extend beyond the stated maturity date or date of redemption
of any series of Subordinated Debt Securities. At the end of the Extension
Period, PECO Energy shall pay all interest then accrued and payable on the
Series D Subordinated Debt Securities (together with interest thereon to
the extent permitted by applicable law at the rate per annum borne by the
Series D Subordinated Debt Securities). During any such Extension Period,
neither PECO Energy nor any majority owned subsidiary of PECO Energy shall
declare or pay any dividend on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock (other than
dividends by wholly owned subsidiaries). Prior to the termination of any
such Extension Period, PECO Energy may shorten or further extend the
interest payment period; provided that, such Extension Period, together
with all such further extensions thereof, may not exceed 60 consecutive
months. Upon the termination of any Extension Period and the payment of
all amounts then due, PECO Energy may select a new Extension Period,
subject to the above requirements. PECO Energy shall give the Indenture
Trustee notice of its selection of such extended or shortened interest
payment period one
23
<PAGE>
business day prior to the earlier of (i) the date PECO Energy has
selected to make the interest payment or (ii) the date PECO Energy Capital
is required to give notice to any national securities exchange or other
applicable self-regulatory organization of the record date or the date
distributions on the Preferred Securities are payable, but in any event not
less than two business days prior to such record date. PECO Energy shall
cause the Indenture Trustee to give such notice of PECO Energy's selection
of such Extension Period to the holders of the Preferred Securities.
SUBORDINATION
The Indenture provides that all payments by PECO Energy in respect of
the Subordinated Debt Securities, including the Series D Subordinated Debt
Securities, shall be subordinated to the prior payment in full of all
amounts payable on Senior Indebtedness. The term "Senior Indebtedness"
means (i) the principal of and premium, if any, in respect of (a)
indebtedness of PECO Energy for money borrowed and (b) indebtedness
evidenced by securities, debentures, bonds or other similar instruments
issued by PECO Energy; (ii) all capital lease obligations of PECO Energy;
(iii) all obligations of PECO Energy issued or assumed as the deferred
purchase price of property, all conditional sale obligations of PECO Energy
and all obligations of PECO Energy under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business); (iv) certain obligations of PECO Energy for the reimbursement of
any obligor on any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction; (v) all obligations of the type
referred to in clauses (i) through (iv) of other persons and all dividends
of other persons (other than Preferred Securities) for the payment of
which, in either case, PECO Energy is responsible or liable as obligor,
guarantor or otherwise; and (vi) all obligations of the type referred to in
clauses (i) through (v) of other persons secured by any lien on any
property or asset of PECO Energy (whether or not such obligation is assumed
by PECO Energy), except for any such indebtedness that is by its terms
subordinated to or pari passu with the Subordinated Debt Securities or
indebtedness between or among PECO Energy and its affiliates.
Upon any payment or distribution of assets or securities of PECO
Energy, upon any dissolution or winding up or total or partial liquidation
or reorganization of PECO Energy, whether voluntary or involuntary, or in
bankruptcy, insolvency, receivership or other proceedings, all amounts
payable on Senior Indebtedness (including any interest accruing on such
Senior Indebtedness subsequent to the commencement of a bankruptcy,
insolvency or similar proceeding) shall first be paid in full before PECO
Energy Capital (as holder of the Subordinated Debt Securities), the
Indenture Trustee on behalf of such holder or any Special Representative
appointed by the holders of the Preferred Securities shall be entitled to
receive from PECO Energy any payment of principal of or interest on or any
other amounts in respect of the Subordinated Debt Securities or
distribution of any assets or securities.
No direct or indirect payment by or on behalf of PECO Energy of
principal of or interest on the Subordinated Debt Securities, whether
pursuant to the terms of the Subordinated Debt Securities or upon
acceleration or otherwise, shall be made if, at the time of such payment,
there exists (i) a default in the payment of all or any portion of any
Senior Indebtedness or (ii) any other default pursuant to which the
maturity of Senior Indebtedness has been accelerated and, in either case,
requisite notice has been received by the Indenture Trustee and such
default shall not have been cured or waived by or on behalf of the holders
of such Senior Indebtedness.
If the Indenture Trustee, PECO Energy Capital (as holder of the
Subordinated Debt Securities) or any Special Representative appointed by
the holders of the Preferred Securities, shall have received any payment on
account of the principal of or interest on the Subordinated Debt Securities
when such payment is prohibited and before all amounts payable on, under or
in connection with Senior Indebtedness are paid in full, then such payment
shall be received and held in trust for the holders of Senior Indebtedness
and shall be paid over or delivered first to the holders of the Senior
Indebtedness remaining unpaid to the extent necessary to pay such Senior
Indebtedness in full.
Nothing in the Indenture shall limit the right of the Indenture
Trustee, PECO Energy Capital (as holder of the Subordinated Debt
Securities) or the Special Representative to take any action to accelerate
the maturity of the Subordinated Debt Securities or to pursue any rights or
remedies against PECO Energy; provided that, all Senior Indebtedness shall
be paid before PECO Energy Capital (as holder of the Subordinated Debt
Securities) is entitled to receive any payment from PECO Energy of
principal of or interest on the Subordinated Debt Securities.
Upon the payment in full of all Senior Indebtedness, PECO Energy
Capital (as holder of the Subordinated Debt Securities) (and any Special
Representative appointed by the holders of the Preferred Securities) shall
be subrogated to the rights of the holders of such Senior Indebtedness to
receive payments or distributions of assets of PECO Energy made on such
Senior Indebtedness until the Subordinated Debt Securities shall be paid in
full.
The Indenture does not limit the aggregate amount of Senior
Indebtedness which PECO Energy may issue.
24
<PAGE>
CERTAIN COVENANTS OF PECO ENERGY
PECO Energy will covenant that it and any majority owned subsidiary will
not declare or pay any dividend on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock (other than
dividends by wholly owned subsidiaries) (i) during an Extension Period, (ii)
if there shall have occurred any event that, with the giving of notice or the
lapse of time or both, would constitute an Event of Default under the
Indenture or (iii) if PECO Energy shall be in default with respect to its
payment obligations under any Guarantee. PECO Energy will also covenant (i)
to maintain direct or indirect 100% ownership of the General Partner and will
cause the General Partner to maintain 100% ownership of the general partner
interests of PECO Energy Capital, (ii) to cause the General Partner to at all
times maintain a "fair market net worth" of at least 10% of the total capital
contributions (less redemptions) to PECO Energy Capital and to maintain
general partner interests representing 3% of all interests in the capital,
income, gain, loss, deduction and credit of PECO Energy Capital, (iii) to
cause the General Partner to timely perform all of its duties as general
partner of PECO Energy Capital (including the duty to pay Distributions on the
Series D Preferred Securities), and (iv) to use its reasonable efforts to
cause PECO Energy Capital to remain a limited partnership and otherwise
continue to be treated as a partnership for federal income tax purposes.
PECO Energy Capital may not waive compliance or waive any default in
compliance by PECO Energy with any covenant or other term in the Indenture
without the approval of the Special Representative or without the direction of
the holders of 66-2/3% of the aggregate stated liquidation preference of the
Preferred Securities.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting PECO Energy and the
Indenture Trustee, without the consent of the Special Representative or
PECO Energy Capital, to modify the Indenture or any supplemental indenture:
(i) to cure any ambiguity, defect or inconsistency; (ii) to comply with the
provisions of the Indenture regarding a successor to PECO Energy; (iii) to
provide for uncertificated Subordinated Debt Securities in addition to or
in place of certificated Subordinated Debt Securities; (iv) to make any
other change that does not adversely affect the rights of any holder of the
Subordinated Debt Securities; (v) to comply with any requirement for
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended; and (vi) to set forth the terms and conditions of any series of
Subordinated Debt Securities.
The Indenture contains provisions permitting PECO Energy and the
Indenture Trustee, with the consent of the Special Representative or PECO
Energy Capital at the direction of the holders of not less than 66-2/3% of
the aggregate stated liquidation preference of the Preferred Securities, to
modify the Indenture or any supplemental indenture or the rights of the
holders of the Subordinated Debt Securities issued under the Indenture;
provided that, no such modification, without the consent of each holder of
the Subordinated Debt Securities affected, may (i) change the stated
maturity date of the principal of, or any installment of principal of or
interest, if any, on, the Subordinated Debt Securities, (ii) reduce the
principal amount of, or premium or rate of interest, if any, on, the
Subordinated Debt Securities, (iii) reduce the amount of principal of
Subordinated Debt Securities payable upon acceleration of the maturity
thereof, (iv) make the Subordinated Debt Securities payable in money or
securities other than as stated in the Subordinated Debt Securities, (v)
impair the right to institute suit for the enforcement of any payment on or
with respect to the Subordinated Debt Securities, (vi) adversely change the
redemption provisions of the Subordinated Debt Securities, (vii) adversely
affect the rights of the holders of the Subordinated Debt Securities with
respect to subordination or (viii) reduce the principal amount of the
holders of the Subordinated Debt Securities that must consent to an
amendment of the Indenture.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture: (i) default
for ten days in payment of any interest on any series of the Subordinated
Debt Securities (other than the payment of interest during an Extension
Period); (ii) default in payment of principal of (or premium, if any, on)
any Subordinated Debt Securities; (iii) default for 60 days after notice in
the performance of any other covenant or agreement in the Indenture or any
series of Subordinated Debt Securities or (iv) certain events of
bankruptcy, insolvency or reorganization of PECO Energy. In case an Event
of Default under the Indenture shall occur and be continuing (other than an
Event of Default relating to bankruptcy, insolvency or reorganization of
PECO Energy, in which case principal and interest on all of the
Subordinated Debt Securities shall become immediately due and payable), the
Indenture Trustee, PECO Energy Capital (as holder of the Subordinated Debt
Securities) or the Special Representative may declare the principal of all
the Subordinated Debt Securities to be due and payable. Under certain
circumstances, a declaration of acceleration with respect to Subordinated
Debt Securities may be rescinded and past defaults (except, unless
theretofore cured, a default in the payment of principal of or interest on
the Subordinated Debt Securities) may be waived only by the Special
Representative or by PECO Energy Capital at the direction of the holders of
66-2/3% in aggregate stated liquidation preference of Preferred Securities.
25
<PAGE>
PECO Energy is required to furnish to the Indenture Trustee annually a
statement as to the performance by PECO Energy of its obligations under the
Indenture and as to any default in such performance.
ENFORCEMENT OF CERTAIN RIGHTS OF HOLDERS OF PREFERRED SECURITIES
The holders of the Preferred Securities will have the rights referred
to under "Description of the Series D Preferred Securities--Voting Rights,"
including the right to appoint a Special Representative authorized to
exercise the rights of PECO Energy Capital, as the holder of the Series D
Subordinated Debt Securities, to declare the principal and interest on the
Series D Subordinated Debt Securities due and payable and to enforce the
obligations of PECO Energy under the Series D Subordinated Debt Securities
and the Indenture directly against PECO Energy, without first proceeding
against PECO Energy Capital or any other person or entity.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that PECO Energy may not consolidate with or
merge with or into, or sell, convey, transfer or lease all or substantially
all its assets (either in one transaction or a series of transactions) to
any person unless, among other things (i) the successor person shall be
organized and existing under the laws of the United States or any state
thereof or the District of Columbia, and shall expressly assume by a
supplemental indenture all of the obligations of PECO Energy under the
Subordinated Debt Securities and the Indenture and (ii) immediately prior
to and after giving effect to such transaction, no Event of Default, and no
event which, after notice or lapse of time or both, would become an Event
of Default, shall have happened and be continuing.
DEFEASANCE AND DISCHARGE
Under the terms of the Indenture, PECO Energy will be deemed to have paid
and discharged the entire indebtedness of the Series D Subordinated Debt
Securities if PECO Energy irrevocably deposits with the Indenture Trustee or
other paying agent, in trust (i) cash and/or (ii) United States Government
Obligations (as defined in the Indenture), which through the payment of
interest thereon and principal thereof in accordance with their terms will
provide cash in an amount sufficient to pay all the principal of, premium, if
any, and interest on, the Series D Subordinated Debt Securities then
outstanding on the dates such payments are due in accordance with the terms of
the Series D Subordinated Debt Securities.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
Subject to the provisions of the Indenture relating to its duties, the
Indenture Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture, unless the Indenture Trustee receives
security and indemnity reasonably satisfactory to it. Subject to such
provision for indemnification, the holders of a majority in principal
amount of the Subordinated Debt Securities then outstanding thereunder or
the Special Representative will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Indenture Trustee thereunder, or exercising any trust or power conferred on
the Indenture Trustee.
The Indenture contains limitations on the right of the Indenture
Trustee, as a creditor of PECO Energy, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. In addition, the Indenture Trustee
may be deemed to have a conflicting interest and may be required to resign
as Indenture Trustee if at the time of default under the Indenture it is a
creditor of PECO Energy.
First Union National Bank, the Indenture Trustee, has from time to time
engaged in transactions with, or performed services for, PECO Energy and its
affiliates in the ordinary course of business and is the trustee under PECO
Energy's First and Refunding Mortgage dated May 1, 1923.
UNITED STATES TAXATION
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, special tax
counsel to PECO Energy, the following are the material federal income tax
consequences (and certain Pennsylvania tax considerations) of the ownership
and disposition of Capital Securities. Unless otherwise stated, this
summary deals only with Capital Securities held as capital assets by
holders. It does not deal with special classes of holders, such as dealers
in securities or currencies, life insurance companies, persons holding
Capital Securities as a hedge against or which are hedged against currency
risks or as a part of a straddle, or persons whose functional currency is
not the United States dollar. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code" ), Treasury regulations
thereunder and administrative and judicial interpretations thereof, as of
the date hereof, all of which are subject to change. Prospective
purchasers should particularly note that any such change could have
retroactive application to Capital Securities acquired through this
offering.
26
<PAGE>
This summary assumes that Capital Securities are held as capital
assets, within the meaning of section 1221 of the Code, and does not
address all of the tax consequences that may be relevant to a particular
holder of Capital Securities ("Securityholder") in light of the
Securityholder's personal circumstances, or to certain types of
Securityholders (such as certain financial institutions, dealers in
securities or commodities, insurance companies, regulated investment
companies, personal holding companies, corporations subject to the
alternative minimum tax, tax-exempt organizations or persons who hold
Capital Securities as positions in a "straddle" or as part of a "hedging,"
"conversion" or "constructive sale" transaction for United States federal
income tax purposes). Also not addressed are the consequences under state,
local and foreign tax laws or the tax consequences to subsequent
Securityholders.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF CAPITAL SECURITIES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR OTHER LAWS.
CLASSIFICATION OF PECO ENERGY CAPITAL AND THE TRUST
In connection with the issuance of Capital Securities, Ballard Spahr
Andrews & Ingersoll, LLP will render its tax opinion to the effect that,
under then current law and assuming full compliance with the terms of the
Partnership Agreement and the Trust Agreement, (i) PECO Energy Capital will
be classified for United States federal income tax purposes as a
partnership and not as a business entity taxable as a corporation and (ii)
the Trust will be classified as a grantor trust and not as a business
entity taxable as a corporation.
As a consequence, each Securityholder will be considered the owner of a
pro rata portion of the Series D Preferred Securities held by the Trust.
As a further consequence, each Securityholder will be required to include
in gross income as fully taxable interest income his pro rata share of the
income accrued on the Series D Subordinated Debt Securities held by PECO
Energy Capital and allocated by the Trust. Such income should not exceed
Distributions received by the Securityholders on the Capital Securities
except in limited circumstances described under "--Potential Extension of
Payment Period." No portion of such income will be eligible for the
dividends received deduction.
TAXABILITY OF DISTRIBUTIONS
PECO Energy Capital will be required to include stated interest on the
Series D Subordinated Debt Securities in its gross income as it accrues. Each
Securityholder, including a taxpayer who otherwise uses the cash method of
accounting, will be required to include his pro rata share of such interest
income in his gross income. Actual distributions of stated interest will not
be separately reported as taxable income. So long as there is no Extension
Period, cash Distributions received by an initial Security holder for any
semiannual interest period should equal the sum of the daily accruals of
income for such interest period.
Under the applicable Treasury Regulations, a "remote" contingency that
stated interest will not be timely paid on the Series D Subordinated Debt
Securities will be ignored in determining whether the Series D Subordinated
Debt Securities are issued with original issue discount. PECO Energy
believes that the likelihood of it exercising its option to defer payments of
interest on the Series D Subordinated Debt Securities is remote since, among
other things, exercising that option would prevent PECO Energy from declaring
dividends on any of its capital stock. Accordingly, PECO Energy intends to
take the position, based on the advice of tax counsel, that the Series D
Subordinated Debt Securities will not be considered to be issued with original
issue discount.
POTENTIAL EXTENSION OF PAYMENT PERIOD
Under the terms of the Indenture, PECO Energy will be permitted to extend
the interest payment period on the Series D Subordinated Debt Securities for
up to 60 consecutive months. In the event that PECO Energy exercises this
right, PECO Energy may not declare dividends on any of its capital stock
during such Extension Period. PECO Energy currently believes that the
extension of an interest payment period is unlikely. In the event that the
interest payment period is extended, PECO Energy Capital will continue to
accrue income, generally equal to the amount of the interest payment due at
the end of the Extension Period, over the length of the Extension Period.
During an Extension Period, PECO Energy Capital will be required to
include original issue discount on the Series D Subordinated Debt Securities
in its gross income as it accrues, in accordance with a constant yield method
based on a compounding of interest. Each Securityholder, including a taxpayer
who otherwise uses the cash method of accounting, will be required to include
his pro rata share of such original issue discount in gross income. Accrued
income will be allocated, but not distributed, to Securityholders of record on
April 15 and October 15 of each year. As a result, during an Extension
Period, Securityholders will be required to include interest in gross income
in advance of the receipt of cash,
27
<PAGE>
and any Securityholders who dispose of Capital Securities prior to the
record date for the payment of Distributions following such Extension Period
will include interest in gross income but will not receive any cash related
thereto from the Trust. The tax basis of a Series D Preferred Security will
be increased by the amount of any interest that is included in income without
a corresponding receipt of cash, and will be decreased again when and if such
cash is subsequently received from PECO Energy and distributed by PECO Energy
Capital and the Trust. The subsequent receipt or distribution of such cash
will not be included in gross income.
WITHDRAWAL OR DISTRIBUTION OF SERIES D PREFERRED SECURITIES
The receipt of Series D Preferred Securities by a Securityholder in
exchange for Capital Securities (and vice versa) at the option of the
Securityholder or upon termination of the Trust will not be a taxable event.
The Securityholder's tax basis and holding period for the Series D Preferred
Securities immediately after such exchange or distribution will equal the
Securityholder's tax basis and holding period for the Capital Securities (or
Series D Preferred Securities, as applicable) surrendered in such exchange or
distribution. Income earned from the Series D Preferred Securities (rather
than the Capital Securities) will be reported annually to the Securityholder
and to the Internal Revenue Service on Schedule K-1 and not on Form 1099.
DISPOSITION OF THE CAPITAL SECURITIES
Gain or loss will be recognized on a sale, including a redemption for
cash, of Capital Securities in an amount equal to the difference between the
amount realized and the Securityholder's tax basis in his pro rata share of
Series D Preferred Securities represented by such Capital Securities. Gain or
loss recognized by a Securityholder on the sale or exchange of Capital
Securities held for (a) more than one year but not more than eighteen months
generally will be taxable as mid-term capital gain or loss and (b) more that
eighteen months generally will be taxable as long-term capital gain or loss.
STATE OF PENNSYLVANIA PERSONAL PROPERTY TAXES
Personal property taxes are no longer being imposed in the State of
Pennsylvania on intangible personal property such as the Capital Securities.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable
Treasury regulations, a Securityholder may be subject to backup withholding
at the rate of 31% with respect to interest paid on, original issue
discount accrued with respect to, or the proceeds of a sale, exchange or
redemption of the Series D Preferred Securities or the Capital Securities,
unless such Securityholder (a) is a corporation or comes within certain
other exempt categories and when required demonstrates this fact or (b)
provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The amount of any backup
withholding from a payment to a Securityholder will be allowed as a credit
against the Securityholder's federal income tax liability and may entitle
such Securityholder to a refund, provided that the required information is
furnished to the Internal Revenue Service ("IRS").
SPECIAL TAX RULES APPLICABLE TO FOREIGN SECURITYHOLDERS
For purposes of the following discussion, a "Foreign Securityholder" is
any securityholder who is not (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States, any state or any political subdivision
thereof, (iii) an estate the income of which is subject to United States
federal income taxation regardless of source, or (iv) 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.
Income received by a Foreign Securityholder in the form of interest and
original issue discount on the Series D Preferred Securities will be
subject to a United States federal withholding tax at a 30% rate upon the
actual payment of interest or original issue discount except as described
below and except where an applicable tax treaty provides for the reduction
or elimination of such withholding tax. A Foreign Securityholder generally
will be taxable in the same manner as a United States corporation or
resident with respect to interest or original issue discount income if such
income is effectively connected with the conduct of a trade or business in
the United States. Such effectively connected income received by a Foreign
Securityholder that is a corporation may in certain circumstances be
subject to an additional "branch profits tax" at a 30% rate, or if
applicable, a lower treaty rate.
28
<PAGE>
Payments of interest and original issue discount on the Series D
Preferred Securities received by a Foreign Securityholder on or prior to
December 31, 1998, will not be subject to United States federal withholding
tax provided that (a) the Foreign Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of PECO Energy entitled to vote, (b) the Securityholder is
not a controlled foreign corporation that is related to PECO Energy through
stock ownership, and (c) either (1) the beneficial owner of the Series D
Preferred Securities, under penalties of perjury, provides PECO Energy or
its agent with its name and address and certifies that it is not a United
States person or (2) 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
PECO Energy or its agent, under penalties of perjury, that such a statement
has been received from the beneficial owner by its or another Financial
Institution and furnishes to PECO Energy or its agent a copy thereof.
Backup withholding and information reporting also generally will not apply
to payments of interest and original discount on or prior to December 31,
1998, if the certification described above is received, provided the payor
does not have actual knowledge that the Securityholder is a United States
person.
Payments of interest and original issue discount received by a Foreign
Securityholder after December 31, 1998, will not be subject to United States
federal withholding tax (or to backup withholding and information reporting)
provided that requirements (a) and (b) of the preceding paragraph are
satisfied and, in general, (1) PECO Energy or its paying agent can reliably
associate the payment with documentation upon which it can rely to treat the
payment as made to a foreign beneficial owner under Treasury regulations
issued under section 1441 of the Code; (2) PECO Energy or its paying agent can
reliably associate the payment with a withholding certificate from a person
claiming to be a withholding foreign partnership and the foreign partnership
can reliably associate the payment with documentation upon which it can rely
to treat the payment as made to a foreign beneficial owner in accordance with
such Treasury regulations; (3) PECO Energy or its paying agent can reliably
associate the payment with a withholding certificate from a person
representing to be a "qualified intermediary" that has assumed primary
withholding responsibility under such Treasury regulations and the qualified
intermediary can reliably associate the payment with documentation upon which
it can rely to treat the payment as made to a foreign beneficial owner in
accordance with its agreement with the IRS; (4) PECO Energy or its paying
agent can reliably associate the payment with a withholding certificate
described in the Treasury Regulations from a person claiming to be a U.S.
branch of a foreign bank or insurance company subject to regulatory
jurisdiction by the Federal Reserve Board or by the National Association of
Insurance Commissioners or the insurance department of a state, a territory or
the District of Columbia under which the U.S. branch agrees to be treated as a
U.S. person with respect to that payment; or (5) PECO Energy or its paying
agent receives 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 such Treasury regulations or that it has received from another
Financial Institution a similar statement that it, or another Financial
Institution acting on behalf of the beneficial owner, has received such a
withholding certificate from the beneficial owner. In general, it will not be
necessary for a Foreign Securityholder to obtain or furnish a United States
taxpayer identification number to PECO Energy or its paying agent in order to
claim any of the foregoing exemptions from United States withholding tax on
payments of interest and original issue discount.
A Foreign Securityholder generally will not be subject to United States
federal income or withholding tax on gain realized on the sale or exchange of
the Series D Preferred Securities or the Capital Securities, unless (i) the
Foreign Securityholder is an individual who is present in the United States
for 183 days or more during the taxable year and as to whom such gain is from
United States sources or (ii) the gain is effectively connected with a United
States trade or business of the holder.
The payment of the proceeds of the sale of the Series D Preferred
Securities or the Capital Securities 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 the Series D Preferred Stock or the Capital Securities 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 the Series D Preferred Securities or the Capital Securities
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 non- United States person and the
broker has no actual knowledge to the contrary. For this purpose, a "United
States related person" is (i) a "controlled foreign corporation" for United
States federal income tax purposes, or (ii) 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 Securityholder will be allowed as a refund or a
credit against such Foreign Securityholder's United States federal income tax,
provided that the required information is furnished to the IRS.
29
<PAGE>
OTHER TAX CONSIDERATIONS
In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, under current
law, interest on the Series D Subordinated Debt Securities is deductible by
PECO Energy. In the past, the Clinton Administration had proposed certain tax
law changes that would, among other things, generally deny interest deductions
to corporate issuers if the debt instrument has a term exceeding 15 years and
is not reflected as indebtedness on such issuer's consolidated balance sheet.
Because the term of the Series D Subordinated Debt Securities exceeds 15
years, if such proposal were to become effective retroactively, PECO Energy
would be precluded from deducting interest on the Series D Subordinated Debt
Securities. There can be no assurance, however, that a legislative proposal
which would affect the ability of PECO Energy to deduct interest on the Series
D Subordinated Debt Securities might not be adopted which, in turn, might give
rise to a Tax Event and, accordingly, the General Partner's optional right to
redeem the Series D Preferred Securities, as described under "Description of
the Series D Preferred Securities--Special Event Redemptions."
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (a "Plan"), should consider the fiduciary standards of
ERISA in the context of the Plan's particular circumstances before
authorizing an investment in the Capital Securities. Accordingly, among
other factors, the fiduciary should consider whether the investment would
satisfy the prudence and diversification requirements of ERISA and would be
consistent with the documents and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as
well as individual retirement accounts and Keogh plans subject to Section
4975 of the Code (also Plans), from engaging in certain transactions
involving "plan assets" with persons who are "parties in interest" under
ERISA or "disqualified persons" under the Code ("Parties in Interest") with
respect to such Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other liabilities under ERISA and/or Section
4975 of the Code for such persons, unless exemptive relief is available
under an applicable statutory or administrative exemption. Employee
benefit plans that are governmental plans (as defined in Section 3(32) of
ERISA), certain church plans (as defined in Section 3(33) of ERISA) and
foreign plans (as described in Section 4(b)(5) of ERISA) are not subject to
the requirements of ERISA or Section 4975 of the Code; governmental plans
may be subject to similar provisions under applicable state laws.
Under a regulation ("Plan Assets Regulations") issued by the U.S.
Department of Labor ("DOL"), the assets of the Trust would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code
if "plan assets" of the Plan were used to acquire an equity interest in the
Trust and no exception were applicable under the Plan Assets Regulation.
An "equity interest" is defined under the Plan Assets Regulation as any
interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features and specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Trust would not be deemed to be "plan assets" of investing
Plans if, immediately after the most recent acquisition of any equity
interest in the Trust, less than 25% of the value of each class of equity
interest in the Trust were held by Plans, other employee benefit plans not
subject to ERISA or Section 4975 of the Code (such as governmental, church
and foreign plans), and entities holding assets deemed to be "plan assets"
of any Plan (collectively, "Benefit Plan Investors"). No assurance can be
given that the value of the Capital Securities held by Benefit Plan
Investors will be less than 25% of the total value of such Capital
Securities at the completion of the initial offering or thereafter, and no
monitoring or other measures will be taken with respect to the satisfaction
of the conditions of this exception.
Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of
the Code with respect to a Plan if the Capital Securities were acquired
with "plan assets" of such Plan and the assets of the Trust were deemed to
be "plan assets" of Plans investing in the Trust. For example, if PECO
Energy were a Party in Interest with respect to a Plan (either directly or
indirectly), extensions of credit between PECO Energy and the Trust (as
represented by the Series D Preferred Securities, Series D Subordinated
Debt Securities and the Series D Guarantee) would likely be prohibited by
Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless
exemptive relief were available under an applicable administrative
exemption (see below).
The DOL has issued five prohibited transaction class exemptions
("PTCEs") that may provide exemptive relief if required for direct or
indirect prohibited transactions that may arise from the purchase or
holding of the Capital Securities if assets of the Trust were deemed to be
"plan assets" of Plans investing in the Trust as described above. Those
class exemptions are PTCE 96-23 (for certain transactions determined by
in-house asset managers), PTCE 95-60 (for certain
30
<PAGE>
transactions involving insurance company general accounts), PTCE 91-38
(for certain transactions involving bank collective investment funds),
PTCE 90-1 (for certain transactions involving insurance company separate
accounts), and PTCE 84-14 (for certain transactions determined by
independent qualified professional asset managers).
Because the Capital Securities may be deemed to be equity interest in
the Trust for purposes of applying ERISA and Section 4975 of the Code, the
Capital Securities may not be purchased and should not be held by any Plan,
any entity whose underlying assets include "plan assets" by reason of any
Plan's investment in the entity (a "Plan Asset Entity") or any person
investing "plan assets" of any Plan, unless such purchaser or holder is
eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38,
90-1 or 84-14 or another applicable exemption. Any purchaser or holder of
Capital Securities or any interest therein will be deemed to have
represented by its purchase and holding thereof that it either (a) is not a
Plan or a Plan Asset Entity and is not purchasing such securities on behalf
of or with "plan assets" of any Plan, or (b) is eligible for the exemptive
relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another
applicable exemption with respect to such purchase or holding.
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering
purchasing the Capital Securities on behalf of or with "plan assets" of any
Plan should consult with their counsel regarding the potential consequences
if the assets of the Trust were deemed to be "plan assets" and the
availability of exemptive relief under PTCE 96-23, 95-60, 91-38, 90-1 or
84-14 or any other applicable exemption.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, PECO
Energy and PECO Energy Capital have agreed to cause the Trust to sell to each
of the Underwriters named below, and each of such Underwriters, for whom
Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner and Smith Incorporated
are acting as Representatives (the "Representatives"), has severally agreed to
purchase from the Trust, the respective number of Capital Securities set forth
opposite its name below:
UNDERWRITER NUMBER OF
----------- CAPITAL SECURITIES
------------------
Salomon Brothers Inc................................. 39,053
Merrill Lynch, Pierce, Fenner and Smith
Incorporated.................................. 39,052
------------
Total................................................ 78,105
============
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Capital Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Capital Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price
less a concession of $6 per Capital Security. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $2.50 per Capital
Security to certain brokers and dealers. After the Capital Securities are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Representatives.
Under the Underwriting Agreement, PECO Energy has agreed to pay to the
Underwriters an underwriting commission of $10 per Capital Security.
Prior to this offering, there has been no public market for the Capital
Securities. The Capital Securities have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance. Trading of the
Capital Securities on the New York Stock Exchange is expected to commence
within a 30-day period after the initial delivery thereof. The
Representatives have advised PECO Energy that they intend to make a market in
the Capital Securities prior to commencement of trading on the New York Stock
Exchange, 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 Capital Securities.
31
<PAGE>
In connection with this offering and in compliance with applicable law,
the Underwriters may effect transactions which stabilize, maintain or
otherwise affect the market price of the Capital Securities at levels above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Capital Securities or effecting purchases of the
Capital Securities for the purpose of pegging, fixing or maintaining the price
of the Capital Securities or for the purpose of reducing a syndicate short
position created in connection with the offering. In addition, the
contractual arrangements among the Underwriters include a provision whereby,
if the Representatives purchase Capital Securities in the open market for the
account of the underwriting syndicate and the Capital Securities purchased can
be traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the Capital Securities in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
Capital Securities in question. The Underwriters are not required to engage
in any of these activities and any such activities, if commenced, may be
discontinued at any time.
PECO Energy and PECO Energy Capital have agreed, during the period
beginning from the date of the Underwriting Agreement and continuing to and
including the earlier of (i) the date on which the distribution of the
Capital Securities ceases, as determined by the Representatives, or (ii) 30
days after the closing date, not to offer, sell, contract to sell or
otherwise dispose of any Capital Securities, Preferred Securities or any
preferred stock or any other securities of PECO Energy which are
substantially similar to the Capital Securities or the Series D Preferred
Securities, including any guarantee of such securities, or any securities
convertible into or exchangeable for or representing the right to receive
any of the foregoing securities, without the prior written consent of the
Representatives.
PECO Energy and PECO Energy Capital have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Series D
Preferred Securities and the Capital Securities will be passed upon for PECO
Energy Capital and the Trust by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to PECO Energy Capital and the Trust. The
validity of the Series D Guarantee and the Series D Subordinated Debt
Securities will be passed upon on behalf of PECO Energy by Ballard Spahr
Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania. Certain legal matters
will be passed upon on behalf of the Underwriters by Drinker Biddle & Reath
LLP, Philadelphia, Pennsylvania, counsel to the Underwriters. Ballard Spahr
Andrews & Ingersoll, LLP and Drinker Biddle & Reath LLP will rely on Richards,
Layton & Finger, P.A. as to certain matters of Delaware law.
EXPERTS
The consolidated financial statements and schedule of PECO Energy
incorporated by reference in this Prospectus have been audited by Coopers &
Lybrand L.L.P., independent accountants, for the periods indicated in their
report thereon which is included in the Annual Report on Form 10-K for the
year ended December 31, 1997. The consolidated financial statements and
schedule audited by Coopers & Lybrand L.L.P. have been incorporated herein by
reference in reliance on their report given on their authority as experts in
accounting and auditing.
32
<PAGE>
======================================
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THE OFFER MADE HEREBY EXCEPT AS
CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND IF
GIVEN OR MADE, NO SUCH INFORMATION
OR REPRESENTATIONS SHOULD BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
PECO ENERGY, PECO ENERGY CAPITAL OR
THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE
CAPITAL SECURITIES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO
DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------
TABLE OF CONTENTS
PAGE
----
Available Information.......... 3
Incorporation of Certain
Documents by Reference....... 3
Summary........................ 4
Risk Factors................... 7
PECO Energy.................... 9
PECO Energy Capital ........... 10
The Trust...................... 10
Coverage Ratios................ 10
Accounting Treatment........... 11
Use of Proceeds................ 11
Description of the Capital
Securities................... 11
Description of the Series D
Preferred Securities......... 15
Description of the Series D
Guarantee................... 21
Description of the Series D
Subordinated Debt Securities
and the Indenture........... 22
United States Taxation......... 26
ERISA Considerations........... 30
Underwriting................... 31
Legal Matters.................. 32
Experts........................ 32
======================================
======================================
$78,105,000
PECO ENERGY
CAPITAL TRUST III
7.38% CAPITAL TRUST
PASS-THROUGH SECURITIES(sm)
(TRUPS(r))
(LIQUIDATION PREFERENCE $1,000 PER
CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
TO THE EXTENT PECO ENERGY CAPITAL,
L.P. HAS FUNDS AS SET FORTH HEREIN BY
PECO ENERGY COMPANY
(PECO ENERGY LOGO)
----------
P R O S P E C T U S
April 1, 1998
----------
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
======================================
