Item 1. Business.
PECO Energy Transition Trust (PETT) is a special purpose business trust established under the laws of the State of Delaware and a wholly owned subsidiary of PECO Energy Company (PECO). PETT was formed on June 23, 1998 pursuant to a trust agreement, amended and restated on May 2, 2000 and amended on March 1, 2001, between PECO, as grantor, First Union Trust Company, N.A., as issuer trustee, and two beneficiary trustees appointed by PECO (Trust Agreement).
PECO is principally engaged in the purchase, transmission, distribution, and sale of electricity to residential, commercial, industrial and wholesale customers and in the purchase, distribution and sale of natural gas to residential, commercial and industrial customers in its franchised services territory in southeastern Pennsylvania. On October 20, 2000, Exelon Corporation (Exelon) became the parent corporation for each of PECO Energy Company (PECO) and Commonwealth Edison Company (ComEd) as a result of the completion of the transactions contemplated by an Agreement and Plan of Exchange and Merger, as amended, among PECO Unicom Corporation (Unicom) and Exelon PECO and ComEd, which was a subsidiary of Unicom, became the principal utility subsidiaries of Exelon through a mandatory exchange of each share of outstanding common stock of PECO for one share of common stock of Exelon and a merger of Unicom into Exelon.
PETT was organized as a special purpose, bankruptcy-remote entity to purchase and own Intangible Transition Property (ITP) and to issue transition bonds to securitize a portion of PECO's stranded cost recovery authorized by the Pennsylvania Public Utility Commission (PUC) pursuant to the Pennsylvania Electric Generation Customer Choice and Competition Act (Competition Act). The Competition Act, enacted in December 1996, allows utilities to recover the anticipated loss in value of their generation-related assets caused by the transition from regulated rates for generation to market pricing.
Under its Trust Agreement with PECO, PETT is authorized to purchase and own ITP, issue transition bonds, pledge its interest in ITP and other collateral to the bond trustee to secure the transition bonds, and perform activities that are necessary and suitable to accomplish these purposes. ITP represents the irrevocable right of PECO, or its successor or assignee, to collect a non-bypassable Intangible Transition Charge (ITC) from customers. The PUC authorized PETT to collect ITC in a Qualified Rate Order issued on May 14, 1998 (1998 QRO). The 1998 QRO authorizes collections of ITC to recover up to $4 billion of PECO's stranded cost and an amount sufficient to recover the aggregate principal amount of the Series 1999-A Transition Bonds (Series 1999-A Transition Bonds), plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Series 1999-A Transition Bonds. The Series 1999-A Transition Bonds are solely debt obligations of PETT. PETT used the proceeds of the Series 1999-A Transition Bonds to purchase ITP from PECO for $4.080 billion which represented an amount sufficient to recover the aggregate principal amount of the Series 1999-A Transition Bonds and related expenses including interest and servicing fees.
The PUC authorized PETT to collect additional ITC in the PUC's Qualified Rate Order issued on March 16, 2000 (2000 QRO). The 2000 QRO authorizes PETT to collect an additional $1 billion of PECO's stranded cost and an amount sufficient to recover the aggregate principal amount of the Series 2000-A Transition Bonds (Series 2000-A Transition Bonds), plus an amount sufficient to provide for credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and any other expenses relating to the Series 2000-A Transition Bonds. PETT used the proceeds of the Series 2000-A Transition Bonds to purchase $1.009 billion of ITP from PECO which represented an amount sufficient to recover the aggregate principal amount of the Series 2000-A Transition Bonds and related expenses including interest and servicing fees.
On March 1, 2001 PETT issued $805 million of Series 2001-A Transition Bonds to refinance a portion of the Series 1999-A Transition Bonds.
PETT has no employees. PETT entered into a Master Servicing Agreement with PECO on March 25, 1999, amended and restated as of May 2, 2000 and amended on March 1, 2001, pursuant to which PECO is required to service the collections of securitized ITC on behalf of PETT.
PETT's Trust Agreement requires it to operate in such a manner that it should not be consolidated in the bankruptcy estate of PECO in the event PECO becomes subject to such a proceeding, and both PECO and PETT have treated the transfer of ITP from PECO to PETT as a sale under the Competition Act.
For financial reporting purposes and Federal and Commonwealth of Pennsylvania income and franchise tax purposes, the transfer of ITP from PECO to PETT will be treated as a financing arrangement and not a sale. Furthermore, the results of operations of PETT will be consolidated with Exelon for financial and income tax reporting purposes. As a special purpose business trust incorporated in the State of Delaware, PETT is not subject to Delaware state income taxes.
On April 1, 2002, the name of First Union will change to Wachovia Bank, National Association.
Item 2.
Item 2. Properties.
PETT has no physical property. PETT's primary asset is the ITP, which is described above in Item 1.
Item 3.
Item 3. Legal Proceedings.
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to Instruction I of Form 10-K.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Sales of Unregistered Securities. PETT has no common equity. PECO has made capital contributions to PETT aggregating $25 million as of December 31, 2001.
(b) Dividends. The transition bond indenture between PECO and the Bank of New York, as bond trustee, dated March 1, 1999, as supplemented by the series supplements (Indenture) prohibits PETT from making any payments, distributions or dividends to any holder of beneficial interests in PETT in respect of such beneficial interest for any calendar month unless no event of default has occurred and is continuing thereunder and any such distributions would not cause the book value of the remaining equity in PETT to decline below 0.50 percent of the original principal amount of all series of transition bonds which remain outstanding. As of December 31, 2001, PETT has not made any distributions.
(c) Bondholders. As of March 29, 2002, the sole registered holder of the transition bonds was Cede & Co. as nominee of the Depository Trust Company (DTC). Records provided by the DTC indicate that as of December 31, 2001, there were less than 300 beneficial holders of the transition bonds. Accordingly, on January 30, 2002 PETT filed a Form 15, suspending reporting requirements under the Securities Exchange Act of 1934. The transition bonds are not registered on any national securities exchange and are not traded on any established trading market.
Item 6.
Item 6. Selected Financial Data.
Omitted pursuant to Instruction I of Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of the financial condition and results of activities of PETT is in an abbreviated format pursuant to Instruction I of Form 10-K. Such analysis should be read in conjunction with the financial statements attached hereto and the financial statements of PECO.
PETT is a special purpose business trust established by PECO under the laws of the State of Delaware and a wholly owned subsidiary of PECO. On March 25, 1999 and May 2, 2000, PETT issued transition bonds and transferred the proceeds in exchange for all rights, title, and interest in the related ITP from PECO to PETT. On March 1, 2001, PETT refinanced $805 million of floating rate Series 1999-A Transition Bonds through the issuance of fixed-rate transition bonds (Series 2001-A Transition Bonds). Approximately 72% of the Class A-3 and 70% of the Class A-5 Series 1999-A Transition Bonds were redeemed. The Series 2001-A Transition Bonds are non-callable, fixed-rate securities with an interest rate of 6.52%. The Series 2001-A Transition Bonds have an expected final payment date of September 1, 2010 and a termination date of December 31, 2010. The Series 2001-A Transition Bonds are solely obligations of PETT, secured by intangible transition property (ITP) sold by PECO Energy Company (PECO) to PETT concurrently with the issuance of the Series 1999-A and Series 2000-A Transition Bonds and certain other related collateral. As PETT was formed for limited purposes, the Statement of Changes in Net Assets Available for Trust Activities reflects primarily additions from collections of ITC by PECO, as servicer, remitted to PETT and unremitted billings, interest income earned on the capital subaccounts maintained by the bond trustee, interest expense on the transition bonds, amortization of the ITP, servicing fees and other administrative expenses.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
Excluding the effects of the issuance of the Series 2001-A Transition Bonds, the issuance of the Series 2000-A Transition Bonds and the purchase of intangible transition property (ITP), and contributions from PECO, additions for the years ended December 31, 2001 and 2000, were $645 million and $516 million, respectively. The increase in additions of $129 million is primarily attributable to $118 million of additional collections related to the issuance of the 2000-A Transition Bonds and an $11 million prepayment of competitive transition charges by a large customer. Deductions for the year ended December 31, 2001 and December 31, 2000 on the same basis were $707 million and $496 million, respectively. The increase of $211 million is primarily attributable to higher amortization expense of intangible transition property of $184 million and higher interest expense of $11 million associated with the issuance of the Series 2000-A Transition Bonds and an increase related to the interest rate swaps fair value adjustment which was the result of the SFAS 133 transition adjustment of $19 million.
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Excluding the effects of the purchase of ITP, debt issuance costs and contributions from PECO, additions for the years ended December 31, 2000 and 1999, were $516 million and $356 million, respectively. The increase in additions of $160 million is primarily attributable to higher recovery amounts authorized by the 2000 QRO in connection with the issuance of the Series 2000-A Transition Bonds. Excluding the effects of issuing transition bonds and due to related party, deductions for the years ended December 31, 2000 and 1999, were $478 million and $289 million, respectively. The increase in deductions of $189 million is primarily attributable to an increase in interest charges of $99 million and higher amortization expense of intangible transition property of $83 million associated with the issuance of the Series 2000-A Transition Bonds and an increase of $5 million of servicing fee expense, also attributable to the issuance of the Series 2000-A Transition Bonds.
Accounting for Derivative Instruments
PETT utilizes derivatives to manage its exposure to fluctuation in interest rates related to outstanding variable rate debt instruments. Derivative financial instruments are accounted for under Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative and Hedging Activities" (SFAS No. 133). Hedge accounting has been used for all interest rate derivatives to date based on the probability of the transaction and the expected highly effective nature of the hedging relationship between the interest rate swap contract and the interest payment or changes in fair value of the hedged debt. Dealer quotes are available for all of PETT's interest rate swaps agreement derivatives. Accounting for derivatives continues to evolve through guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting Standards Board (FASB). To the extent that changes by the DIG modify current guidance, including the normal purchases and normal sales determination, the accounting treatment for derivatives may change.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
PETT is exposed to market risks associated with interest rates. The inherent risk in market sensitive instruments and positions is the potential loss arising from adverse changes in interest rates. Exelon's corporate Risk Management Committee (RMC) sets risk management philosophy and objectives through a corporate policy, and establishes procedures for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of derivative activity and risk exposures. The RMC is chaired by Exelon's chief risk officer and includes the chief financial officer, general counsel, treasurer, vice president of corporate planning and officers from each of the business units. The RMC reports to the board of directors on the scope of PETT's derivative activities.
PETT uses a combination of fixed rate and variable rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate based upon market conditions.
In 1999, PETT entered into interest rate swaps to manage interest rate exposure associated with the floating rate series of transition bonds issued to securitize PECO's stranded cost recovery. The interest rate swaps related to the Class A-3 and Class A-5 Series 1999-A Transition Bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.65%. In connection with the refinancing in 2001, PETT cancelled $800 million of interest rate swaps. At December 31, 2001, the aggregate notional amount of these swaps was $326 million. At December 31, 2001, these interest rate swaps had an aggregate fair market value exposure of $19 million based on the present value difference between the contract and market rates at December 31, 2001.
The aggregate fair value exposure of the interest rate swaps that would have resulted from a hypothetical 50 basis point decrease in the spot yield at December 31, 2001 is estimated to be $23 million. If these derivative instruments had been terminated at December 31, 2001, this estimated fair value represents the amount that would be paid by PETT to the counterparties.
The aggregate fair value exposure of the interest rate swaps that would have resulted from a hypothetical 50 basis point increase in the spot yield at December 31, 2001 is estimated to be $15 million. If these derivative instruments had been terminated at December 31, 2001, this estimated fair value represents the amount to be paid by PETT to the counterparties.
Item 8.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of the PECO Energy Transition Trust Wilmington, DE:
In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the net assets available for trust activities of the PECO Energy Transition Trust (PETT) at December 31, 2001 and December 31, 2000, and the changes in net assets available for trust activities for the three years then ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the PETT's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 29, 2002
See Notes to Financial Statements.
PECO ENERGY TRANSITION TRUST STATEMENTS OF NET ASSETS AVAILABLE FOR TRUST ACTIVITIES (in Millions)
See Notes to Financial Statements.
PECO ENERGY TRANSITION TRUST Notes to Financial Statements
1. Basis of Presentation
PECO Energy Transition Trust (PETT), is a statutory business trust established under the laws of the State of Delaware and a wholly owned subsidiary of PECO Energy Company (PECO). PETT was formed pursuant to a trust agreement between PECO, as grantor, First Union Trust Company, N.A., as issuer trustee, and two beneficiary trustees appointed by PECO.
PECO is principally engaged in the purchase, transmission, distribution, and sale of electricity to residential, commercial, industrial and wholesale customers and in the purchase, distribution and sale of natural gas to residential, commercial and industrial customers in its franchised services territory in southeastern Pennsylvania. On October 20, 2000, Exelon Corporation (Exelon) became the parent corporation for each of PECO Energy Company (PECO) and Commonwealth Edison Company (ComEd) as a result of the completion of the transactions contemplated by an Agreement and Plan of Exchange and Merger, as amended, among PECO Unicom Corporation (Unicom) and Exelon PECO and ComEd, which was a subsidiary of Unicom, became the principal utility subsidiaries of Exelon through a mandatory exchange of each share of outstanding common stock of PECO for one share of common stock of Exelon and a merger of Unicom into Exelon.
PETT was organized by PECO as a special purpose, bankruptcy-remote entity to issue transition bonds to securitize a portion of PECO's stranded cost recovery authorized by the Pennsylvania Public Utility Commission (PUC) pursuant to the Pennsylvania Electric Generation Customer Choice and Competition Act (Competition Act). The Competition Act, enacted in December 1996, allows utilities to recover the anticipated loss in value of their generation-related assets caused by the transition from regulated rates for generation to market pricing.
Under its trust agreement, PETT is authorized to purchase and own Intangible Transition Property (ITP), issue transition bonds, pledge its interest in ITP and other collateral to the bond trustee to secure the transition bonds, and perform activities that are necessary and suitable to accomplish these purposes. ITP represents the irrevocable right of PECO, or its successor or assignee, to collect a non-bypassable Intangible Transition Charge (ITC) from customers. The PUC initially authorized PETT to collect ITC in the PUC's Qualified Rate Order issued on May 14, 1998 (1998 QRO). The 1998 QRO authorizes collections of ITC to recover up to $4 billion of PECO's stranded costs and an amount sufficient to recover the aggregate principal amount of the Series 1999-A Transition Bonds (Series 1999-A Transition Bonds), plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Series 1999-A Transition Bonds. PETT used the proceeds of the Series 1999-A Transition Bonds to purchase ITP from PECO for $4.080 billion which represented an amount sufficient to recover the aggregate principal amount of the Series 1999-A Transition Bonds and related expenses including interest and servicing fees. The Series 1999-A Transition Bonds are solely debt obligations of PETT.
The PUC authorized PETT to collect an additional ITC in the PUC's Qualified Rate Order issued on March 16, 2000 (2000 QRO). The 2000 QRO authorizes collections of ITC to recover up to $1 billion of PECO's stranded costs and an amount sufficient to recover the aggregate principal amount of the Series 2000-A Transition Bonds (Series 2000-A Transition Bonds), plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Series 2000-A Transition Bonds. PETT used the proceeds of the Series 2000-A Transition Bonds to purchase ITP from PECO for $1.009 billion which represented an amount sufficient to recover the aggregate principal amount of the Series 2000-A Transition Bonds and related expenses including interest and servicing fees. The Series 2000-A Transition Bonds are solely debt obligations of PETT.
On March 1, 2001 PETT issued $805 million of Series 2001-A Transition Bonds to refinance a portion of the Series 1999-A Transition Bonds. The Series 2001-A Transition Bonds are solely debt obligations of PETT.
PECO, as servicer, deposits ITC collections into a general subaccount maintained by the Bank of New York, as bond trustee, under the Indenture. The collections are restricted for the specific uses of PETT. The Indenture provides for an overcollateralization subaccount, which will be funded ratably with ITC collections, to a balance of $100 million, over the life of the transition bonds. Semiannually, monies in the general subaccount
are used to make principal and interest payments on the transition bonds. Additionally, each month, monies are used to pay fees, costs and charges specified in the Indenture. The Indenture also provides for a reserve subaccount that is maintained for the purpose of retaining any ITC collections and investment earnings that are in excess of specific fees and expenses and amounts allocable to the payment of principal of and interest on the transition bonds and to the overcollateralization subaccount. The balances of the reserve and overcollateralization subaccounts as of December 31, 2001 was $56 million and $26 million, respectively. Additionally, amounts of $20 million and $5 million, representing PECO's initial capitalization of the Series 1999-A Transition Bonds and Series 2000-A Transition Bonds, respectively, was deposited into the capital subaccount under the Indenture on the date of issuance of the related series of transition bonds. If amounts available in the general, reserve and overcollateralization subaccounts are not sufficient on any payment date to make scheduled payments, the bond trustee will draw on accounts in the capital subaccount. Any amounts remaining in the Indenture accounts will be released to PETT upon payment of the transition bonds in full.
PETT's Trust Agreement requires it to operate in such a manner that it should not be consolidated in the bankruptcy estate of PECO in the event PECO becomes subject to such a proceeding, and both PECO and PETT have treated the transfer of ITP from PECO to PETT as a sale under the Competition Act.
For financial reporting purposes and Federal and Commonwealth of Pennsylvania income and franchise tax purposes, the transfer of ITP from PECO to PETT will be treated as a financing arrangement and not a sale. Furthermore, the results of operations of PETT will be consolidated with Exelon for financial and income tax reporting purposes. As a special purpose entity incorporated in the State of Delaware, PETT is not subject to Delaware state income taxes.
On or before May 14th of each year, the anniversary date of the 1998 QRO, PECO, as servicer of the ITP, submits a report to determine the adequacy of ITC collections for the annual period to the PUC. If adjustments are needed, the PUC is required by the Competition Act, 1998 QRO and the 2000 QRO to adjust collection rates on a prospective basis within 90 days of May 14th.
2. Summary of Accounting Policies
Restricted Cash and Cash Equivalents
PETT considers all cash investments purchased with an original maturity of three months or less to be cash equivalents. Financial instruments which potentially subject PETT to concentrations of credit risk consist principally of cash equivalents. PETT places its cash equivalents with high-credit quality financial institutions. Generally, such investments are in excess of the Federal Deposit Insurance Corporation limit. PETT is restricted in how it uses ITC Collections. See Note 1 - Basis of Presentation.
Intangible Transition Property
The ITP is being amortized in conjunction with the reduction of transition bond principal on an accrual basis. As of December 31, 2001 and 2000, accumulated ITP amortization was $611 million and $257 million, respectively. Amortization expense for ITP for the years ended December 31, 2001, 2000 and 1999 was $354 million, $170 million and $87 million, respectively.
Unamortized Debt Issuance Costs
The costs associated with the issuance of the transition bonds have been capitalized and are being amortized on a straight-line basis, which approximates the effective interest method over the life of the transition bonds. As of December 31, 2001 and 2000, accumulated amortization of debt issuance cost was $14 million and $6 million, respectively. Amortization expense for debt issuance costs for the years ended December 31, 2001, 2000 and 1999 was $8 million, $4 million and $2 million, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and changes therein. Actual results could differ from those estimates.
Derivative Financial Instruments
PETT accounts for derivative financial instruments under Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivatives and Hedging Activities" (SFAS No. 133). Under the provisions of SFAS No. 133, all derivatives are recognized on the balance sheet at their fair value unless they qualify for a normal purchases and normal sales exception. Changes in the fair value of the derivative financial instruments are recognized in earnings unless specific hedge accounting criteria are met. A derivative financial instrument can be designated as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). Changes in the fair value of a derivative that is highly effective as, and is designated and qualifies as, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective as, and is designated as and qualifies as a cash flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows being hedged. In connection with Exelon's Risk Management Policy (RMP), PETT enters into derivatives to manage its exposure to fluctuation in interest rates related to its variable rate debt instruments. Prior to the adoption of SFAS No. 133, PETT applied hedge accounting only if the derivative reduced the risk of the underlying hedged item and was designated at the inception of the hedge, with respect to the hedged item. PETT recognized any gains or losses on these derivatives when the underlying physical transaction affected earnings. PETT does not hold or issue derivative financial instruments for trading purposes.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes.
3. Transition Bonds
On March 25, 1999, PETT issued $4 billion aggregate principal amount of Series 1999-A Transition Bonds to securitize a portion of PECO's authorized stranded cost recovery. On May 2, 2000, PETT issued an additional $1 billion aggregate principal amount of Series 2000-A Transition Bonds also to securitize stranded cost recovery. On March 1, 2001, PETT refinanced $805 million of floating rate Series 1999-A Transition Bonds through the issuance of fixed-rate transition bonds (Series 2001-A Transition Bonds). Approximately 72% of the Class A-3 and 70% of the Class A-5 Series 1999-A Transition Bonds were redeemed. The Series 2001-A Transition Bonds are non-callable, fixed-rate securities with an interest rate of 6.52%. The Series 2001-A Transition Bonds have an expected final payment date of September 1, 2010 and a termination date of December 31, 2010.
The transition bonds are solely obligations of PETT, secured by ITP sold by PECO to PETT concurrently with the issuance of the transition bonds and certain other collateral related thereto. The following table summarizes the outstanding principal balances of the transition bonds at December 31:
Year In Millions ---- ----------- 2002 326 2003 239 2004 318 2005 428 2006 500 Thereafter 2,771 ----- Total $4,582 ======
PETT makes semi-annual principal payments on transition bonds pursuant to an amortization schedule in the Indenture. In 2001, principal payments were made in the amount of $1,061 million, which reduced the outstanding principal balance of the Series 1999-A Transition Bonds and the Series 2000-A Transition Bonds by $951 million and $110 million, respectively.
Fair values of the transition bonds are estimated based on quoted market prices. The carrying amounts and fair values of the transition bonds as of December 31, 2001 were $4.578 billion and $4.761 billion, respectively. The carrying amounts and fair values of the transition bonds as of December 31, 2000 were $4.831 billion and $4.941 billion, respectively.
PETT is exposed to market risks associated with interest rates. The inherent risk in market sensitive instruments and positions is the potential loss arising from adverse changes in interest rates. Exelon's corporate Risk Management Committee (RMC) sets risk management philosophy and objectives through a corporate policy, and establishes procedures for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of derivative activity and risk exposures. The RMC is chaired by Exelon's chief risk officer and includes the chief financial officer, general counsel, treasurer, vice president of corporate
planning and officers from each of the business units. The RMC reports to the board of directors on the scope of PETT's derivative activities.
PETT uses a combination of fixed rate and variable rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate based upon market conditions.
In 1999, PETT entered into interest rate swaps to manage interest rate exposure associated with the floating rate series of transition bonds issued to securitize PECO's stranded cost recovery. The interest rate swaps related to the Class A-3 and Class A-5 Series 1999-A Transition Bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.65%. In connection with the refinancing in 2001, PETT cancelled $800 million of interest rate swaps. At December 31, 2001, the aggregate notional amount of these swaps was $326 million. At December 31, 2001, these interest rate swaps had an aggregate fair market value exposure of $19 million based on the present value difference between the contract and market rates at December 31, 2001.
The aggregate fair value exposure of the interest rate swaps that would have resulted from a hypothetical 50 basis point decrease in the spot yield at December 31, 2001 is estimated to be $23 million. If these derivative instruments had been terminated at December 31, 2001, this estimated fair value represents the amount that would be paid by PETT to the counterparties.
The aggregate fair value exposure of the interest rate swaps that would have resulted from a hypothetical 50 basis point increase in the spot yield at December 31, 2001 is estimated to be $15 million. If these derivative instruments had been terminated at December 31, 2001, this estimated fair value represents the amount to be paid by PETT to the counterparties.
4. Adoption of New Accounting Principle
On January 1, 2001, PETT adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivatives Instruments and Hedging Activities," as amended, and recorded a transition adjustment decreasing Net Assets Available for Trust Activities by $19 million. The transition adjustment related to the interest rate swaps. As of December 31, 2001, the fair value of interest rate swaps is an exposure of $19 million. This exposure is reflected as Interest Rate Swaps on PETT's Statements of Net Assets Available for Trust Activities.
As of December 31, 2001, the expected impact on net assets available for trust activities over the next twelve months is a $2 million loss.
5. Significant Agreements and Related Party Transactions
Pursuant to the Amended and Restated Intangible Transition Property Sale Agreement by and between PECO and PETT, dated March 25, 1999, as amended on May 2, 2000 and March 1, 2001 (Sale Agreement), PETT purchased ITP from PECO. Under the Sale Agreement, PECO makes certain representations and warranties about the ITP and indemnifies PETT for losses caused by the breach of such representations and warranties. To the extent a breach concerns the existence of the ITP or the ability to charge intangible transition charges (ITC) in the amounts sufficient to meet a pre-set amortization schedule for the Transition Bonds, PECO must pay liquidated damages equal to the lost principal and interest of the amortization schedule.
As described in Note 1 - Basis of Presentation, the transfer of ITP to PETT is treated as a financing arrangement and not a sale.
Transition bonds were issued pursuant to the Indenture dated March 1, 1999, as supplemented by the series supplements (Indenture). Under the Indenture, PETT has pledged all of its property, including the ITP, to secure the Transition Bonds. The Indenture prohibits PETT from selling, transferring, exchanging, or otherwise disposing of any of the collateral unless directed to do so by the trustee; from claiming any credit or making any deduction from the principal, premium, if any, or interest on Transition Bonds or against any Transition Bond holder; permitting the validity of effectiveness of the Indenture to be impaired or permitting the lien of the Indenture to be amended, hypothecated, subordinated, terminated, or discharged; permitting any person to be released from any of the covenants or obligations with respect to Transition Bonds, except as expressly permitted
by the Indenture; permitting any liens, charges, or claims, security interest or mortgage (other than the lien created by the Indenture) to be created in or extended to or otherwise arise upon or burden the collateral or any part thereof; or permitting the lien of the Indenture not to constitute a valid, first priority security interest in the collateral.
Under the Amended and Restated Master Servicing Agreement by and between PETT and PECO, dated March 25, 1999, as amended on May 2, 2000 and March 1, 2001, PECO, as servicer, manages and administers the ITP sold to PETT and collects the ITC related thereto on behalf of PETT. For the years ended December 31, 2001, 2000 and 1999, PETT recorded $636 million, $468 million and $310 million of ITC collections, respectively. These increases are primarily due to additional ITC collections as a result of the issuance of the 2000-A Transition Bonds in May 2000 and the 1999-A Transition Bonds in March 1999. For the years ended December 31, 2001, 2000 and 1999, PETT recorded $12 million, $12 million and $7 million, respectively, in servicing fees based upon the outstanding principal amount of the Transition Bonds.
As of December 31, 2001 and 2000, the Due from Related Party balance was $70 million and $81 million, respectively. The Due from Related Party balance primarily represents ITC billings by PECO that have not yet been collected of $66 million and $77 million, respectively, and ITC collections by PECO that have not yet been remitted to PETT of $4 million and $5 million, respectively.
As of December 31, 2001 and 2000, the Due to Related Party balance of $129 million, represents cumulative advances from PECO for initial capital requirements and operating expenses that are not considered to be currently due and payable by PETT.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to Instruction I of Form 10-K.
Item 11.
Item 11. Executive Compensation.
Omitted pursuant to Instruction I of Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to Instruction I of Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to Instruction I of Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: Report of Independent Public Accountants Statement of Changes in Net Assets Available for Trust Activities Statement of Net Assets Available for Trust Activities Notes to Financial Statements
2. Financial Statement Schedule:
None
3. See index to Exhibits which appears following the signature page to this report.
(b) Reports on Form 8-K filed during the reporting period.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PECO ENERGY TRANSITION TRUST
March 29, 2002 By /s/ George R. Shicora -------------------------- George R. Shicora Beneficiary Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 29th day of March, 2002.
Signature Title ----------------------- -----------------------------------
/s/ George R. Shicora Beneficiary Trustee (Principal Executive Officer) - ---------------------- George R. Shicora
/s/ Thomas R. Miller Beneficiary Trustee (Principal Financial Officer - ---------------------- and Principal Accounting Officer) Thomas R. Miller
INDEX TO EXHIBITS
Certain of the following exhibits are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended.