S-3 1 d511777ds3.htm FORM S-3 FORM S-3
Table of Contents

As filed with the Securities and Exchange Commission on April 2, 2013.

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

CEI Funding LLC   OE Funding LLC   TE Funding LLC

(Registrants and Issuers of the Phase-In-Recovery Bonds)

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   Delaware   Delaware

(State or other jurisdiction of

incorporation or organization)

 

(State or other jurisdiction of

incorporation or organization)

 

(State or other jurisdiction of

incorporation or organization)

46-1367273   46-1367425   46-1367453

(I.R.S. Employer

Identification No.)

 

(I.R.S. Employer

Identification No.)

 

(I.R.S. Employer

Identification No.)

 

 

 

The Cleveland Electric

Illuminating Company

  Ohio Edison Company   The Toledo Edison Company

(Registrants, Sponsors, Sellers and Initial Servicers)

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   Ohio    Ohio

(State or other jurisdiction of

incorporation or organization)

 

(State or other jurisdiction of

incorporation or organization)

  

(State or other jurisdiction of

incorporation or organization)

34-0150020   34-0437786    34-4375005

(I.R.S. Employer

Identification No.)

 

(I.R.S. Employer

Identification No.)

  

(I.R.S. Employer

Identification No.)

 

c/o FirstEnergy Corp.

76 South Main Street

Akron, Ohio 44308

(800) 736-3402

  

 

 

Rhonda S. Ferguson, Esq.

Vice President and Corporate Secretary

FirstEnergy Corp.

76 South Main Street

Akron, Ohio 44308

(800) 736-3402

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With copies to:

 

Lucas F. Torres, Esq.

Akin Gump Strauss Hauer & Feld LLP

One Bryant Park

New York, New York 10036

(212) 872-1000

 

Douglas E. Davidson, Esq.

Morgan, Lewis & Bockius LLP
101 Park Avenue

New York, New York 10178-0060

(212) 309-6000

 

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.  ¨

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.  x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.  ¨

If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be

Registered

 

Proposed

Maximum

Offering Price

per Certificate(1)

 

Proposed

Maximum

Aggregate

Offering Price(2)

 

Amount of

Registration Fee

Pass-Through Trust Certificates of FirstEnergy Ohio PIRB Special Purpose Trust 2013

  $505,000,000   100%   $505,000,000   $68,882

Phase-In-Recovery Bonds of CEI Funding LLC

  (2)   (2)   (2)   None

Phase-In-Recovery Bonds of OE Funding LLC

  (2)   (2)   (2)   None

Phase-In-Recovery Bonds of TE Funding LLC

  (2)   (2)   (2)   None

Total

  $505,000,000   100%   $505,000,000   $68,882

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(2) No additional consideration will be paid by the purchasers of the Pass-Through Trust Certificates for the Phase-In-Recovery Bonds that secure the Pass-Through Trust Certificates.

 

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus supplement is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated April 2, 2013

Prospectus Supplement to Prospectus, dated                     , 2013

$        

FirstEnergy Ohio PIRB Special Purpose Trust 2013

Issuing Entity

Pass-Through Trust Certificates

 

CEI Funding LLC    OE Funding LLC    TE Funding LLC

Issuers of the Phase-In-Recovery Bonds

The Cleveland Electric Illuminating Company

Ohio Edison Company    The Toledo Edison Company

Sponsors, Sellers and Initial Servicers

 

 

Tranche

   Expected
Weighted
Average Life
(Years)
   Principal
Amount
Issued
     Certificate
Interest  Rate
    Price to
Public
    Underwriting
Discounts  and
Commissions
    Proceeds to
Issuing  Entity
(Before Expenses)
    Scheduled
Final
Payment
Date
   Final
Maturity
Date

[A-1]

      $                                                                          

[A-2]

      $                                                                          

[A-3]

      $                                                                          

The total price to the public is $         . The total amount of the underwriting discounts and commissions is $         . The total amount of proceeds to the issuing entity after underwriting discounts and commissions and before deduction of expenses is $         .

 

 

Investing in the pass-through trust certificates involves risks. Please read “Risk Factors” beginning on page 16 of the accompanying prospectus.

FirstEnergy Ohio PIRB Special Purpose Trust 2013, referred to herein as the trust, is issuing $         of             pass-through             trust certificates, referred to herein as the certificates, in [three] tranches. Each tranche of certificates will represent fractional undivided interests in the corresponding tranches of phase-in-recovery bonds, collectively referred to herein as the bonds, of CEI Funding LLC, a wholly-owned subsidiary of The Cleveland Electric Illuminating Company, OE Funding LLC, a wholly-owned subsidiary of Ohio Edison Company, and TE Funding LLC, a wholly-owned subsidiary of The Toledo Edison Company. CEI Funding LLC, OE Funding LLC and TE Funding LLC are collectively referred to herein as the bond issuers. The bonds will be 100% owned by the trust. The trust will grant to the Certificate trustee, for the benefit of the certificateholders, a lien on the bonds and other trust property relating to each tranche of bonds issued by each of the bond issuers. The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company are the sellers of the phase-in-recovery properties (described below) and will serve as the initial servicers with regard to the bonds.

Each of the bonds will be secured primarily by the right to impose, charge and collect irrevocable nonbypassable usage-based charges payable by retail electric customers in the service territories of The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, as the case may be. Each of the bonds will be a non-recourse obligation of CEI Funding LLC, OE Funding LLC or TE Funding LLC, as the case may be. Neither the bonds nor the certificates will be legal obligations of CEI, OE or TE, as the sponsors, sellers and initial servicers.

Neither the certificates, the bonds nor the phase-in-recovery property securing the bonds is an obligation of the State of Ohio, the Public Utilities Commission of Ohio, or any political subdivision, governmental agency, authority or instrumentality of the State of Ohio or of FirstEnergy Corp., The Cleveland Electric Illuminating Company, Ohio Edison Company or The Toledo Edison Company or any of their respective affiliates, except for the bond issuers and the trust.

Neither the full faith and credit nor the taxing power of the State of Ohio, nor the Public Utilities Commission of Ohio, nor any political subdivision, agency, authority or instrumentality of the State of Ohio is pledged to the payment of principal of, or interest on, the certificates or the bonds, or the payments securing the bonds. Furthermore, neither the State of Ohio, nor the Public Utilities Commission of Ohio, nor any political subdivision, agency, authority or instrumentality of the State of Ohio will appropriate any funds for the payment of any of the certificates or the bonds.

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

The underwriters expect to deliver the certificates through the book-entry facilities of The Depository Trust Company against payment in immediately available funds on or about                     , 2013. Each certificate will be entitled to interest on             and             of each year. The first scheduled payment date is                     , 2013. Interest will accrue from                     , 2013 and must be paid by the purchaser if the certificates are delivered after that date. There currently is no secondary market for the certificates, and we cannot assure you that one will develop.

Prospectus Supplement dated                     , 2013


Table of Contents

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

     Page  

READING THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

     S-iii   

SUMMARY OF THE TERMS

     S-1   

DESCRIPTION OF THE CERTIFICATES

     S-8   

Distributions of Interest and Principal

     S-8   

DESCRIPTION OF THE BONDS

     S-9   

Interest

     S-9   

Principal

     S-10   

EXPECTED AMORTIZATION SCHEDULES

     S-12   

Weighted Average Life Sensitivity

     S-12   

Assumptions

     S-13   

Fees and Expenses

     S-13   

THE PHASE-IN-RECOVERY PROPERTY

     S-14   

THE TRUSTEES

     S-15   

CREDIT ENHANCEMENT

     S-16   

Statutory True-Up Adjustment Mechanism for Payment of Scheduled Principal and Interest and Other Financing Costs

     S-16   

Collection Accounts and Subaccounts

     S-16   

HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED

     S-18   

Cap on Certain Financing Costs

     S-19   

UNDERWRITING

     S-20   

RATINGS

     S-22   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     S-23   

LEGAL PROCEEDINGS

     S-23   

WHERE YOU CAN FIND MORE INFORMATION

     S-23   

LEGAL MATTERS

     S-23   

OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS

     S-24   

 

S-i


Table of Contents

PROSPECTUS

 

     Page  

READING THIS PROSPECTUS

     iv   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     v   

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     16   

REVIEW OF PHASE-IN-RECOVERY PROPERTY

     28   

THE SECURITIZATION ACT

     31   

DESCRIPTION OF THE PHASE-IN-RECOVERY PROPERTY

     36   

SALE AGREEMENTS

     40   

BANKRUPTCY AND CREDITORS’ RIGHTS ISSUES

     46   

THE ISSUING ENTITY

     50   

THE TRUSTEES

     51   

THE BOND ISSUERS

     53   

THE SPONSORS, SELLERS AND INITIAL SERVICERS

     56   

SERVICING AGREEMENTS

     66   

DESCRIPTION OF THE BONDS

     74   

DESCRIPTION OF THE CERTIFICATES

     85   

WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE CERTIFICATES

     94   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     95   

OHIO STATE TAXATION

     99   

CERTAIN ERISA AND OTHER CONSIDERATIONS

     100   

USE OF PROCEEDS

     103   

PLAN OF DISTRIBUTION

     103   

RATINGS

     103   

WHERE YOU CAN FIND MORE INFORMATION

     104   

REPORTS TO HOLDERS

     105   

LEGAL MATTERS

     105   

GLOSSARY OF DEFINED TERMS

     106   

Until 90 days after the date of this prospectus supplement, all dealers that effect transactions in these securities, whether or not participating in the offering described in this prospectus supplement, may be required to deliver a prospectus supplement and prospectus. This is in addition to the dealers’ obligation to deliver a prospectus supplement and prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

S-ii


Table of Contents

READING THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

This prospectus supplement and the accompanying prospectus provide information about us, the certificates, the bonds, the bond issuers and The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, as the sponsors, sellers and initial servicers.

The specific terms of the certificates are contained in this prospectus supplement. The accompanying prospectus provides general information about the certificates. You should read both of these documents in full before buying the certificates.

References in this prospectus supplement and the accompanying prospectus to the terms we, us, our or the issuing entity mean FirstEnergy Ohio PIRB Special Purpose Trust 2013, the entity which will issue the certificates. References to the pass-through trust certificates or the certificates, unless the context otherwise requires, means the trust certificates offered pursuant to this prospectus supplement. References to the certificateholders or the holders, unless the context otherwise requires, means the registered holders of the certificates. References to the bond issuers refer to CEI Funding LLC, OE Funding LLC and TE Funding LLC, as the case may be. References to the phase-in-recovery bonds or the bonds refer to the phase-in-recovery bonds issued by the bond issuers. References to the Ohio Companies, the sponsors, the sellers or the initial servicers refer to The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, as the case may be. The Ohio Companies are also sometimes referred to respectively as CEI, OE and TE. FirstEnergy Corp., the parent of the Ohio Companies, is referred to herein and in the accompanying prospectus as FirstEnergy. References to the Securitization Act refer to Sections 4928.23 through 4928.2318 of the Ohio Revised Code, passed by the Ohio House of Representatives and the Ohio Senate in December 2011, and effective March 2012, which Securitization Act created the regulatory structure that allows electric utilities to issue bonds to securitize certain phase-in costs. Unless the context otherwise requires, the term customer or retail customer means a retail end user of electricity and related services provided by a retail electric service provider via the transmission and distribution system of an electric distribution utility. References to the Ohio commission or the PUCO refer to the Public Utilities Commission of Ohio. You can find a glossary of certain defined terms used in this prospectus supplement and the accompanying prospectus on page 106 of the accompanying prospectus.

We have included cross-references to sections in this prospectus supplement and the accompanying prospectus where you can find further related discussions.

You should rely only on information about the certificates provided in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not offering to sell the certificates in any jurisdiction where the offer or sale is not permitted. The information in this prospectus supplement is current only as of the date of this prospectus supplement.

 

S-iii


Table of Contents

SUMMARY OF THE TERMS

The following section is a summary of selected information and will not provide you with all the information you will need to make your investment decision. You will find a detailed description of the offering of the certificates following this summary. To understand all of the terms of this offering of the certificates, carefully read the entire prospectus supplement and accompanying prospectus. This prospectus supplement and the accompanying prospectus contain terms, appearing in bold text at their first usage, that are specific to the regulated utility industry and to the certificates and may be technical in nature. Please refer to the Glossary of Defined Terms.

 

Securities Offered

$         FirstEnergy Ohio PIRB Special Purpose Trust 2013 Pass-Through Trust Certificates.

 

  Each tranche of certificates will represent fractional undivided beneficial interests in the corresponding tranches of bonds of each of the bond issuers. Holders of each tranche of certificates will receive payments received by the trust on the corresponding tranche of bonds of each bond issuer, which will be the primary source of distributions on a tranche of certificates. Please read “Description of the Certificates” and “Description of the Bonds” in this prospectus supplement and the accompanying prospectus.

 

Issuing Entity and Capital Structure

FirstEnergy Ohio PIRB Special Purpose Trust 2013.

 

  The trust was formed by the bond issuers on                     , 2013 specifically for the purpose of purchasing the bonds from the bond issuers and issuing the certificates offered hereby. The trust is a Delaware statutory trust. The principal assets of the trust will be the bonds. The declaration of trust does not permit the trust to engage in any activities other than holding the bonds, issuing the certificates and engaging in other related activities. The trust may not issue additional certificates other than in connection with transfers, exchanges or replacements permitted under the certificate indenture.

 

  Each bond issuer will be capitalized by an upfront cash deposit by CEI, in the case of CEI Funding LLC, OE, in the case of OE Funding LLC and TE, in the case of TE Funding LLC, of 0.50% of the initial principal amount of the bonds of the related bond issuer (to be held in the capital subaccount) and will have an excess funds subaccount to retain, until the next payment date, any amounts collected remaining after all payments on the bonds have been made.

 

Relationship with the PUCO

Pursuant to the financing order:

 

   

the PUCO or its designated representative has a decision-making role co-equal with the sponsors with respect to the structuring and pricing of the certificates and all matters related to the structuring and pricing of the certificates will be determined through a joint decision of the sponsors and the PUCO or its designated representative or financial advisor;

 

   

the PUCO’s financial advisor will participate fully in all plans and decisions related to the pricing, marketing and structuring of the bond and certificates and will be provided timely information as necessary to fulfill its obligation to advise the PUCO in a timely manner but makes no representations as to any of the information contained herein; and

 

 

S-1


Table of Contents
   

the servicers will file periodic adjustments to the phase-in- recovery charges with the PUCO on our and the bond issuers’ behalf.

 

  The bond issuers have agreed that certain reports concerning phase-in-recovery charge collections will be provided to the PUCO.

 

Our Address

c/o FirstEnergy Service Company

76 South Main Street

Akron, Ohio 44308

 

Our Telephone Number

(800) 736-3402

 

Bond Issuers

CEI Funding LLC, or CEI Funding, OE Funding LLC, or OE Funding, and TE Funding LLC, or TE Funding. The address of the bond issuers is c/o FirstEnergy Service Company, 76 South Main Street, Akron, Ohio 44308. The telephone number of the bond issuers is (800) 736-3402.

 

Trustees

U.S. Bank Trust National Association, a national banking association, will serve as the Delaware trustee of the issuing entity and U.S. Bank National Association, a national banking association, will serve as trustee under the certificate indenture and each bond indenture. Please read “The Trustees” in this prospectus supplement for a description of certain of the trustee’s relevant prior experience and “The Trustees” in the accompanying prospectus for a description of the trustee’s duties and responsibilities as certificate trustee under the certificate indenture and as bond trustee under each bond indenture.

 

Purpose of the Offering

The issuance of the bonds and the certificates is intended to enable the sponsors to recover certain previously approved costs, referred to as phase-in costs, on terms more favorable to customers than would be achievable through the recovery methods previously approved by the PUCO. Please read “The Securitization Act” in the accompanying prospectus.

 

Phase-In-Recovery Property

The phase-in-recovery property of each bond issuer generally consists of its irrevocable right to impose, charge and collect nonbypassable usage-based phase-in-recovery charges from retail electric customers in its sponsor’s service territory. Each bond issuer will purchase its phase-in-recovery property from its seller. See “The Phase-In- Recovery Property” in this prospectus supplement and “Description of the Phase-In-Recovery Property” in the accompanying prospectus.

 

Sponsors, Sellers and Initial Servicers

The Cleveland Electric Illuminating Company, or CEI, is a public electric utility, which provides regulated electric distribution services in northeastern Ohio, and a wholly-owned subsidiary of FirstEnergy.

 

  Ohio Edison Company, or OE, is a public electric utility, which provides regulated electric distribution services in central and northeastern Ohio, and a wholly-owned subsidiary of FirstEnergy.

 

 

S-2


Table of Contents
  The Toledo Edison Company, or TE, is a public electric utility, which provides regulated electric distribution services in northwestern Ohio, and a wholly-owned subsidiary of FirstEnergy.

 

  Each of the Ohio Companies has an address at 76 South Main Street, Akron, Ohio 44308. The telephone number of the sponsors, sellers and initial servicers is (800) 736-3402.

 

  CEI, OE and TE, acting as the initial servicers, and any successor servicer(s), referred to in this prospectus supplement and the accompanying prospectus as the servicers, will service the phase-in-recovery property securing the bonds under separate servicing agreements with the bond issuers. Please read “Servicing” and “The Sponsors, Sellers and Initial Servicers of the Phase-In-Recovery Property” in the accompanying prospectus.

 

  None of the Ohio Companies, FirstEnergy or any of their respective affiliates (other than the bond issuers and the trust) is an obligor on the bonds or the certificates.

 

Servicing Fees

Each servicer will be entitled to receive an annual servicing fee in an amount equal to 0.10% of the initial principal balance of the bonds of the applicable bond issuer. If any servicer is replaced by a non-utility successor servicer, such non-utility successor servicer may be paid a servicing fee of up to 0.75% per year of the initial principal balance of the applicable bonds.

 

  Each bond trustee will pay the unpaid servicing fees semiannually on each payment date to the extent of available funds prior to the distribution of any interest on and principal of its bonds.

 

Expected Settlement

                    , 2013, settling flat. DTC, Clearstream and Euroclear.

 

State of Ohio Pledge

The Securitization Act contains a pledge and agreement by the State of Ohio with the bondholders and bond issuers that the State of Ohio will not take or permit any action that impairs the value of phase-in-recovery property under a financing order or revises the phase-in-costs for which recovery is authorized under a financing order or, except for the approved adjustment mechanism authorized in a financing order and allowed under the Securitization Act, reduce, alter or impair phase-in-recovery charges until the bonds, all financing costs and all amounts to be paid under any ancillary agreement are paid or performed in full. The PUCO invoked this pledge on behalf of the State of Ohio in the financing order.

 

Optional Redemption

Neither the certificate indenture nor the bond indentures permit an optional redemption of the certificates or the bonds, respectively.

 

Minimum Denomination of the Certificates

$100,000 or integral multiples of $1,000 in excess thereof except for one certificate of each tranche, which may be of a smaller denomination.

 

 

S-3


Table of Contents

Ratings

We expect the bonds and the certificates will receive credit ratings from three nationally recognized statistical rating organizations, or NRSROs. Please see “Ratings” in this prospectus supplement.

 

Initial Phase-In-Recovery Charges as a Portion of Customers Total Electricity Bill

Phase-in-recovery charges are nonbypassable in that such charges cannot be avoided by any customer or other person obligated to pay the charges. Subject to the methodology approved in the financing order, the phase-in-recovery charges will apply to all customers of CEI, OE and TE, as the case may be, for as long as they remain customers of such electric distribution utility. If a customer of the electric distribution utility purchases electric generation service from a competitive retail electric service provider, the electric distribution utility is authorized by the Securitization Act to collect the phase-in-recovery charges directly from that customer.

 

  The phase-in-recovery charges are separate and apart from CEI’s, OE’s and TE’s base rates, and are subject to adjustment semiannually (other than the initial adjustment, which will be completed within 12 months after the issuance date of the bonds, and adjustments in the last year each tranche of bonds is expected to be outstanding, in which case adjustments as frequently as monthly may be necessary). See “Phase-In-Recovery Property” in this prospectus supplement and “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges” in the accompanying prospectus.

 

  CEI customers are expected to have estimated initial phase-in-recovery charges of [    ] cents/kWh resulting in an estimated monthly cost of $[        ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [    ] cents/kWh resulting in a monthly cost of $[        ].

 

  OE customers are expected to have estimated initial phase-in-recovery charges of [    ] cents/kWh resulting in an estimated monthly cost of $[        ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [    ] cents/kWh resulting in a monthly cost of $[        ].

 

  TE customers are expected to have estimated initial phase-in-recovery charges of [    ] cents/kWh resulting in an estimated monthly cost of $[         ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [    ] cents/kWh resulting in a monthly cost of $[        ].

 

 

The amounts shown above are dependent on a number of assumptions and based on estimates and market conditions as of                     ,

 

 

S-4


Table of Contents
 

2013. Such amounts will also periodically change throughout the recovery period in accordance with the approved adjustment mechanism described in the accompanying prospectus.

 

True-Up Adjustment Mechanism for Payments on the Bonds and other Financing Costs

Please read “Credit Enhancement” in this prospectus supplement and “Prospectus Summary—Adjustments to the Phase-In-Recovery Charges” and “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges” in the accompanying prospectus.

 

  Pursuant to the Securitization Act, the PUCO provided a description in the financing order of the adjustment mechanism to be used in the imposition, charging and collection of the phase-in-recovery charges, such phase-in-recovery charges to be reviewed and adjusted at least annually or more frequently as provided in the financing order, based on estimates of consumption for each customer class and other mathematical factors. The PUCO’s review of these requests is limited to determining whether there is any mathematical error in the servicer’s application of the adjustment mechanism to the phase-in-recovery charges, including the calculation of any proportionate charges allocated to governmental aggregation customers as directed in the financing order. Such adjustments will become automatically effective 60 days after the request is submitted unless otherwise ordered by the PUCO.

 

Priority of Payments

Please read “How Funds in the Collection Account Will Be Allocated” in this prospectus supplement.

 

Use of Proceeds

The trust will use the net proceeds received from the sale of the certificates to purchase the bonds from the bond issuers. Each bond issuer will use the net proceeds from the sale of its bonds to purchase the phase-in-recovery property from its seller and to pay its share of the costs of issuing the bonds and the certificates. The sellers will use the net proceeds from the sale of the phase-in-recovery properties primarily to repay outstanding debt. Net proceeds may also be used by any seller for other general corporate purposes to the extent set forth in the financing order.

 

Security/Credit Enhancement

Each tranche of certificates will represent fractional undivided interests in the corresponding tranches of bonds of the bond issuers. The trust will grant to the certificate trustee, for the benefit of the certificateholders, a lien on the bonds and other trust property relating to each tranche of bonds issued by each of the bond issuers. See “Description of the Certificates” in this prospectus supplement and in the accompanying prospectus. The bonds issued by each bond issuer will be secured primarily by the phase-in-recovery property of such bond issuer, which will generally consist of its irrevocable right to impose, charge and collect nonbypassable usage-based phase-in-recovery charges from retail electric customers in its sponsor’s service territory. Credit enhancement for the bonds, through a true-up adjustment mechanism and capital subaccount, is intended to protect

 

 

S-5


Table of Contents
 

against losses or delays in scheduled payments on the bonds and accordingly, the certificates. Please read “The Phase-In-Recovery Property” and “Credit Enhancement” in this prospectus supplement, as well as “The Securitization Act” and “Description of the Phase-In-Recovery Property” in the accompanying prospectus.

 

Tax Status of the Certificates

For federal income tax purposes, the trust will be treated as a “grantor trust,” and thus not taxable as a corporation, and each tranche of certificates will be treated as representing ownership of fractional undivided beneficial interests in the related tranche of bonds. Interest and original issue discount, if any, on the certificates, and any gain on the sale of the certificates, generally will be included in gross income of certificateholders for federal income tax purposes. See “Material U.S. Federal Income Tax Consequences.” Interest on the certificates and any profit on the sale of the certificates are subject to Ohio personal income taxes. For taxpayers other than a limited class of financial institutions, Ohio does not currently impose a personal property tax to which the certificates would be subject. See “Ohio State Taxation” in the accompanying prospectus.

 

ERISA

See “Certain ERISA and Other Considerations,” which begins on page 100 of the accompanying prospectus.

 

Payment Dates and Interest Accrual

Interest will be distributed on the certificates semi-annually, on             and             . The first scheduled interest and principal distribution date is                     , 2013. If any interest distribution date is not a business day, distributions scheduled to be made on such date may be made on the next succeeding business day and no interest shall accrue upon such payment during the intervening period. On each distribution date, the certificate trustee will distribute interest on and principal of the certificates to the extent interest and principal is received on the corresponding tranches of bonds to the holders of each tranche of certificates as of the close of business on the record date. Interest on the bonds will be calculated on a 30/360 basis. See “Description of the Certificates” and “Description of the Bonds” in this prospectus supplement and the accompanying prospectus.

 

  Interest is due on each distribution date and principal is due upon the final maturity date for each tranche of certificates.

 

Continuing Disclosure

Each bond issuer will or will cause its sponsor to, post on http://www.                    .com, a collective website to be used by all bond issuers, periodic reports containing the information required by the related bond indenture (which will include reports and other information required to be filed with the SEC and information regarding the phase-in-recovery charges). See “Description of the Bonds—Website Disclosure” in the accompanying prospectus.

 

Events of Default

Events of default under each of the bond indentures include a default in the payment of interest on the applicable bonds and a default in the payment of unpaid principal on the final maturity date. An event of default under any of the bond indentures will constitute an event of

 

 

S-6


Table of Contents
 

default under the certificate indenture. Please read “Description of the Bonds—Bond Events of Default; Rights on Bond Event of Default” and “Description of the Certificates—Events of Default” in the accompanying prospectus. An event of default in respect of the bonds of one bond issuer will not constitute an event of default with respect to the bonds of any other bond issuers.

 

Risk Factors

You should carefully consider the risk of investing in the certificates. See “Risk Factors,” which begins on page 16 of the accompanying prospectus.

 

 

S-7


Table of Contents

DESCRIPTION OF THE CERTIFICATES

Each tranche of certificates issued by the trust will represent fractional undivided beneficial interests in the corresponding tranches of bonds of CEI Funding, OE Funding and TE Funding, as the case may be, and the proceeds thereof. The trust will grant to the certificate trustee, for the benefit of the certificateholders, a lien on the bonds and other trust property relating to each tranche of bonds issued by each of the bond issuers. Each tranche of CEI Funding bonds, OE Funding bonds and TE Funding bonds will have the same interest rate, scheduled final distribution date and final maturity date as the related tranche of certificates. Taken together, the tranches of bonds of the bond issuers corresponding to tranches of certificates will have the same aggregate principal amount and expected amortization schedule as the related tranche of certificates. See “Description of the Bonds.” The trust will issue the certificates in minimum denominations of $100,000 or in integral multiples of $1,000 in excess thereof except for one certificate of each tranche, which may be of a smaller denomination. The initial principal amounts, the interest rates, the scheduled final distribution dates and final maturity dates of the certificates of each tranche are listed below:

 

Tranche

   Expected
Weighted
Average Life
(Years)
   Principal
Amount  Issued
     Certificate
Interest  Rate
    Scheduled
Final
Distribution

Date
   Final
Maturity Date

[A-1]

      $                               

[A-2]

      $                               

[A-3]

      $                               

The scheduled final distribution date for a tranche of certificates is the date when the trust expects to receive in full all interest on, and principal of, the corresponding tranche of bonds of the bond issuers, and distribute such amounts as payment of all interest on, and principal of, that tranche of certificates. The final maturity date for a tranche of certificates is the legal maturity date of that tranche. The failure to distribute the portion of principal of any tranche of certificates representing principal of either the CEI Funding bonds, the OE Funding bonds or the TE Funding bonds in full by the final maturity date for that tranche is an event of default with respect to the bonds of the defaulting bond issuer, and, if that occurs, the certificate trustee may vote all, and upon the written direction of the holders of at least a majority (greater than 50%) in principal amount of all outstanding certificates, will vote a corresponding majority, of the bonds of the defaulting bond issuer in favor of declaring the unpaid principal amount of all such bonds and accrued interest thereon to be due and payable. A foreclosure on the phase-in-recovery property securing the bonds of a defaulting bond issuer upon the acceleration of the unpaid principal amount of the bonds of such defaulting bond issuer may be an inadequate remedy due to the limited market for phase-in recovery property. See “Risk Factors—Risks Related to Limited Source of Payments and Credit Enhancement—You could experience payment delays or losses as a result of limited sources of payment for the certificates and limited credit enhancement” in the accompanying prospectus. A default on the bonds of one bond issuer will not constitute a default with respect to the bonds of any other bond issuer or the certificates to the extent that they represent fractional undivided interests in the bonds of any non-defaulting bond issuer. See “Description of the Certificates—Events of Default” in the accompanying prospectus.

The fees and expenses related to retirement of the certificates will be allocated to the bond issuers pro rata based on the original principal amount of the bonds of each bond issuer.

Distributions of Interest and Principal

Interest on each tranche of certificates will accrue from its issuance date at the interest rate listed in the preceding table. The certificate trustee is required to make distributions of interest on and principal of the certificates semiannually on             and             (or, if any distribution date is not a business day, the following business day) of each year, beginning on                     , 2013. On each distribution date, the certificate trustee will distribute interest on and principal of the certificates to the extent interest and principal is received on the corresponding tranches of bonds to the holders of each tranche of certificates as of the close of business on the record date. The record date for any distribution of interest on, and principal of, the certificates will be the business day immediately before the distribution date. Each distribution date will also be a payment date for interest on, and principal of, the bonds.

 

S-8


Table of Contents

DESCRIPTION OF THE BONDS

Each of CEI Funding, OE Funding and TE Funding will issue and sell its respective bonds to the trust, in each case, in exchange for an allocable portion (based on the aggregate principal amount of the bonds of each bond issuer) of the net proceeds from the sale of the certificates by the trust. Each tranche of bonds of CEI Funding, OE Funding and TE Funding will provide funds for the payment of an allocable portion of the related tranche of certificates and will have the same interest rate, scheduled maturity date and final maturity date as the related tranche of certificates. Taken together, the tranches of bonds of the bond issuers corresponding to a tranche of certificates will have the same aggregate principal amount and expected amortization schedule as the corresponding trache of certificates.

The bonds will consist of the following tranches, in the initial principal amounts and bearing the interest rates and having the scheduled maturity dates and final maturity dates listed below:

CEI Funding LLC

 

Tranche

   Expected
Weighted
Average Life
(Years)
   Principal
Amount  Issued
     Bond
Interest Rate
    Scheduled
Final Payment

Date
   Final
Maturity Date

[A-1]

      $                               

[A-2]

      $                               

[A-3]

      $                               

OE Funding LLC

 

Tranche

   Expected
Weighted
Average Life
(Years)
   Principal
Amount  Issued
     Bond
Interest Rate
    Scheduled
Final Payment

Date
   Final
Maturity Date

[A-1]

      $                               

[A-2]

      $                               

[A-3]

      $                               

TE Funding LLC

 

Tranche

   Expected
Weighted
Average Life
(Years)
   Principal
Amount  Issued
     Bond
Interest Rate
    Scheduled
Final Payment
Date
   Final
Maturity Date

[A-1]

      $                               

[A-2]

      $                               

[A-3]

      $                               

The scheduled final payment date for a tranche of bonds is the final date by which the bond issuer expects to distribute in full all interest on, and principal of, that tranche of bonds. The final maturity date for a tranche of bonds is the legal maturity date of that tranche.

Interest

Interest on each tranche of bonds will accrue from its issuance date at the interest rate listed in the preceding table. The bond issuers are required to pay interest to the trust semiannually on             and             (or, if any payment date is not a business day, the following business day) of each year, beginning on                     , 2013.

The bond issuers will pay interest on the bonds prior to paying principal of the bonds. See “Description of the Bonds—Allocations and Payments” in the accompanying prospectus.

 

S-9


Table of Contents

On each payment date, each bond issuer will pay interest as follows:

 

   

if there has been a payment default in respect of any tranche of the bonds of the bond issuer, any unpaid interest payable on any prior payment dates, together with interest at the applicable bond interest rate on any of this unpaid interest; and

 

   

accrued interest on the principal balance of each tranche of bonds of the bond issuer as of the close of business on the preceding payment date, or the date of the original issuance of the tranche of bonds, if applicable, after giving effect to all payments of principal made on the preceding payment date, or the date of the original issuance of the tranche of bonds, if applicable.

If there is a shortfall in the amounts necessary to make these interest payments, the related bond trustee will distribute interest pro rata on each such tranche of bonds of the related bond issuer based on the respective amounts of interest owed on the bonds of each such tranche. The distributions to the certificateholders of the corresponding tranches will be reduced by an amount equal to the shortfalls in respect of the corresponding tranches of bonds.

The bond issuers will calculate interest on the basis of a 360-day year of twelve 30-day months.

Principal

After paying interest as described above, to the extent funds are available, each bond issuer will pay principal in respect of its bonds on each payment date in the following order of priority:

 

  (1) to the holders of the [A-1] bonds, until the principal balance of that tranche has been reduced to zero;

 

  (2) to the holders of the [A-2] bonds, until the principal balance of that tranche has been reduced to zero; and

 

  (3) to the holders of the [A-3] bonds, until the principal balance of that tranche has been reduced to zero.

A bond issuer will not pay principal, however, on a payment date of any tranche of bonds if making the payment would reduce the principal balance of that tranche to an amount lower than that specified in the expected amortization schedule for that tranche on that payment date. If an event of default under the bond indenture applicable to a bond issuer has occurred and is continuing, the bond trustee may declare the unpaid principal amount of all outstanding bonds of that bond issuer and accrued interest on such bonds to be due and payable. Payments of principal due and payable on the bonds of a bond issuer as a result of an event of default, or upon final maturity, will be paid pro rata based on the respective outstanding principal amount of the bonds of each tranche of the defaulting bond issuer. An event of default under the bond indenture of one bond issuer will not constitute an event of default under the bond indenture of any other bond issuer.

The following expected amortization schedules list the scheduled outstanding principal balance for each tranche of bonds of the bond issuers on each payment date from the issuance date to the scheduled maturity date, after giving effect to the payments expected to be made on the payment dates. In preparing the following tables, we have assumed, among other things, that:

 

   

the bonds are issued on                     , 2013;

 

   

payments on the bonds are made on each payment date, commencing                     , 2013;

 

   

annual servicing fee will equal 0.10% of the initial principal amount of the bonds of the respective bond issuers;

 

   

there are no earnings on amounts on deposit in the collection accounts;

 

   

annual operating expenses will equal approximately $         in the case of CEI Funding, approximately $         in the case of OE Funding, and approximately $         in the case of TE Funding, including the administration fee (which, as to each administrator is expected to be its pro rata portion, based on bond issuance amount, of $100,000, payable semiannually), amounts owed to the bond trustee, the Delaware

 

S-10


Table of Contents
 

trustee and the certificate trustee (which is not expected to exceed in the aggregate $         per year in the case of CEI Funding, $         per year in the case of OE Funding and $         per year in the case of TE Funding) and amounts owed to the independent directors of each bond issuer (which is not expected to exceed in the aggregate $         per year in the case of CEI Funding, $         per year in the case of OE Funding and $         per year in the case of TE Funding); and

 

   

collections from phase-in-recovery charges are deposited in the collection accounts of the bond issuers as expected.

 

S-11


Table of Contents

EXPECTED AMORTIZATION SCHEDULES

Outstanding Bond Balances

CEI Funding LLC

 

Date

  

Tranche [A-1]

  

Tranche [A-2]

  

Tranche [A-3]

        
        
        

OE Funding LLC

 

Date

  

Tranche [A-1]

  

Tranche [A-2]

  

Tranche [A-3]

        
        
        

TE Funding LLC

 

Date

  

Tranche [A-1]

  

Tranche [A-2]

  

Tranche [A-3]

        
        
        

Outstanding Certificate Balances

FirstEnergy Ohio PIRB Special Purpose Trust 2013

 

Date

  

Tranche [A-1]

  

Tranche [A-2]

  

Tranche [A-3]

        
        
        

We cannot assure you that the principal balances of the tranches of bonds of any of the bond issuers, and the related tranches of certificates, will be amortized according to the tables above. The actual amortization of principal may be slower (but cannot be faster) than that indicated in the tables. See “Risk Factors” in the accompanying prospectus for various factors that may, individually or in the aggregate, affect the expected amortization of the principal balances of any tranches of bonds and the related tranches of certificates.

On each payment date, the trustee will make principal payments on the bonds to the extent the principal balance of each tranche of the bonds exceeds the amount indicated for that payment date in the tables above and to the extent of funds available in the collection account after payment of certain fees and expenses and interest. The bonds will not be in default if principal is not paid as specified in the tables above unless the principal of any tranche is not paid in full on or before the final maturity date of that tranche.

Weighted Average Life Sensitivity

Weighted average life refers to the average amount of time from the date of issuance of a security until each dollar of principal of the security has been repaid to the investor. The rate of principal payments, the amount of each interest payment and the final maturity date for each tranche of bonds, and, thus, a related portion of the certificates, will be dependent on the rate and timing of receipt of phase-in-recovery charge collections supporting the payment of such bonds. Please read “Weighted Average Life and Yield Considerations for the Certificates” in the accompanying prospectus for further information. Changes in the expected weighted average

 

S-12


Table of Contents

lives of the respective tranches of the bonds on an aggregate basis, and, thus, a related portion of the certificates, in relation to variances in actual energy consumption levels (retail electric sales) from forecast levels are shown below.

 

Tranche

   Expected Weighted
Average  Life (WAL)
(Years)
   Forecast Error of
5%
   Forecast Error of
15%
      WAL (yrs)    Change
(days)*
   WAL (yrs)    Change
(days)*
              
              
* Number is rounded to whole days.

Assumptions

For the purposes of preparing the above charts, the following assumptions, among others, have been made:

 

  (i) the forecast error stays constant over the life of the bonds and is equal to an over-estimate of electricity consumption of 5% or 15%;

 

  (ii) each servicer makes timely and accurate filings to true-up the phase-in-recovery charges semiannually (other than the initial adjustment, which will be completed within 12 months after the issuance date of the bonds and the last year each tranche of bonds is outstanding, during which adjustments may be made as frequently as monthly);

 

  (iii) customer charge-off rates are held constant at 0.75% for each of CEI and TE and 0.55% for OE, in each case for all classes of customers;

 

  (iv) operating expenses are equal to projections;

 

  (v) there is no acceleration of the final maturity date of the bonds;

 

  (vi) a permanent loss of all customers has not occurred; and

 

  (vii) the closing date is                     , 2013.

 

  (viii) There can be no assurance that the weighted average lives of the bonds and, thus, a related portion of the certificates, will be as shown.

Fees and Expenses

As set forth in the table below, we are obligated to pay fees to the servicers, the trustees, the independent directors and the administrators from the phase-in-recovery charge collections and investment earnings. The following table illustrates this arrangement.

 

Recipient

  

Fees and Expenses Payable

Each servicer

   $[        ] per annum for each servicer (so long as such servicer is CEI, OE or TE or a successor electric distribution utility, as the case may be).

Bond trustee

   $[        ] per annum plus expenses.

Certificate trustee

   $[        ] per annum plus expenses.

Delaware trustee

   $[        ] per annum plus expenses.

Independent directors

   $[        ] per annum plus expenses.

Each administrator

   Its pro rata portion (based on bond issuance amount) of $100,000 per annum.

If any servicer is replaced by a non-utility successor servicer, such non-utility successor servicer may be paid a servicing fee of up to 0.75% per year of the initial principal balance of the bonds.

 

S-13


Table of Contents

THE PHASE-IN-RECOVERY PROPERTY

The phase-in-recovery property of each bond issuer consists generally of its property, rights and interests under the financing order issued by the PUCO on October 10, 2012, as amended by the entry on rehearing, issued by the PUCO on December 19, 2012, and as further amended by the entry nunc pro tunc issued by the PUCO on January 9, 2013, collectively referred to herein as the financing order, including each bond issuer’s right:

 

   

to impose, charge and collect irrevocable, nonbypassable phase-in-recovery charges from each retail customer within the service territory of CEI, OE or TE, as applicable, and

 

   

to adjust those phase-in-recovery charges, in accordance with the adjustment mechanism set forth in the financing order, in an amount sufficient to pay principal and interest on its bonds and, subject to the cap to the extent applicable, other financing costs approved under the financing order.

Each bond issuer will purchase its phase-in-recovery property from its seller. The bonds of each bond issuer are secured primarily by the phase-in-recovery property of such bond issuer. The phase-in-recovery property is not a receivable and, as the primary collateral securing the bonds of the bond issuer, is not a pool of receivables. Collections from the phase-in-recovery charges, as such charges may be adjusted pursuant to the adjustment mechanism, will be used to pay principal and interest on the bonds and, subject to the cap to the extent applicable, other financing costs approved under the financing order. These irrevocable nonbypassable charges will be included in the customer bills of CEI, OE or TE, as applicable, and will be collected until the applicable bonds and approved financing costs are paid in full. Phase-in-recovery charges may not be reduced, impaired or adjusted by the PUCO except for periodic adjustments, in accordance with the adjustment mechanism, to correct overcollections or undercollections to ensure the recovery of amounts sufficient to timely provide all payments of principal and interest on the bonds and, subject to the cap to the extent applicable, other approved financing costs. All revenues and collections from the phase-in-recovery charges provided for in the financing order are part of the phase-in-recovery property. Please read “Credit Enhancement” in this prospectus supplement and “Description of the Phase-In-Recovery Property” in the accompanying prospectus for more information relating to the phase-in-recovery property.

 

S-14


Table of Contents

THE TRUSTEES

U.S. Bank Trust National Association, a national banking association, or U.S. Bank Trust, will serve as Delaware trustee of the issuing entity. U.S. Bank National Association, a national banking association, or U.S. Bank, will serve as trustee under the certificate indenture and each bond indenture. U.S. Bank will also act as paying agent and registrar in each trustee capacity. U.S. Bank Trust is a wholly-owned subsidiary of U.S. Bank. U.S. Bancorp, with total assets exceeding $354 billion as of December 31, 2012, is the parent of U.S. Bank, the fifth largest commercial bank in the United States. As of December 31, 2012, U.S. Bancorp served approximately 17 million customers and operated over 3,000 branch offices in 25 states. A network of specialized U.S. Bancorp offices across the nation provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, governments and institutions.

U.S. Bank has one of the largest corporate trust businesses in the country with office locations in 48 domestic and three international cities. The certificate indenture and each bond indenture will be administered from U.S. Bank’s corporate trust office located at 190 S. LaSalle Street, 7th Floor, Chicago, IL 60603.

U.S. Bank has provided corporate trust services since 1924. As of December 31, 2012, U.S. Bank was acting as trustee with respect to over 87,000 issuances of securities with an aggregate outstanding principal balance of over $2.8 trillion. This portfolio includes corporate and municipal bonds, mortgage-backed and asset-backed securities and collateralized debt obligations.

The certificate trustee shall make available to the certificateholders via the certificate trustee’s website at www.usbank.com/abs all bond payments reports, certificate distribution reports, periodic reports and related information provided to the trustee by the respective bond issuers or their respective sponsors. Certificateholders with questions may direct them to the certificate trustee’s bondholder services group at (800) 934-6802.

U.S. Bank and U.S. Bank Trust serve or has served as trustee, paying agent and registrar on several issues of similar asset-backed securities.

Except for the information set forth in this section titled “The Trustees” neither U.S. Bank nor U.S. Bank Trust has participated in the preparation of this prospectus supplement or the accompanying prospectus and assumes no responsibility for their contents.

None of the bond trustee, the Delaware trustee or the certificate trustee has any obligation with respect to the bonds, the trust or the certificates except for its express obligations under the bond indenture, the declaration of trust or the certificate indenture, as the case may be.

 

S-15


Table of Contents

CREDIT ENHANCEMENT

Credit enhancement for the bonds is intended to protect you against losses or delays in scheduled payments on the bonds and, thus, the certificates.

Statutory True-Up Adjustment Mechanism for Payment of Scheduled Principal and Interest and Other Financing Costs

Consistent with the Securitization Act and the irrevocable financing order, phase-in-recovery charges on all retail electric customers in the sponsors’ respective service territories will be reviewed and adjusted within 12 months after the issuance of the bonds and then semiannually to ensure the recovery of amounts sufficient to timely provide payment of scheduled principal and interest on the bonds and other approved financing costs. During the last year that the bonds are outstanding, adjustment of the phase-in-recovery charges may occur as frequently as monthly. The PUCO will act pursuant to the financing order to ensure the full and timely imposition, charging, collection and adjustment, pursuant to the approved adjustment mechanism, of the phase-in-recovery charges. The State of Ohio has pledged and agreed in the Securitization Act and the PUCO has pledged in the financing order not to take or permit any action that impairs the value of the phase-in-recovery property or, except as allowed under the Securitization Act, reduces, alters or impairs phase-in-recovery charges that are imposed, charged, collected or remitted until the bonds and all other approved financing costs are paid in full. The obligations of the PUCO and the State of Ohio in the final financing order are direct, explicit, irrevocable and unconditional upon issuance of the bonds and are legally enforceable against the State of Ohio. Please read “The Phase-In-Recovery Property” in this prospectus supplement and “Description of the Phase-In-Recovery Property” and “The Securitization Act” in the accompanying prospectus.

While there is no “cap” on the level of phase-in-recovery charges that may be imposed on retail electric customers to pay on a timely basis scheduled principal and interest on the bonds and replenish capital subaccounts, there is a “cap” on certain approved financing costs that may be recovered through phase-in-recovery charges. Please read “How Funds in the Collection Account Will Be Allocated—Cap on Certain Financing Costs” in this prospectus supplement and “Description of the Bonds—Allocations and Payments” in the accompanying prospectus.

Collection Accounts and Subaccounts

The bond trustee for each bond issuer will establish a collection account to hold payments arising from the phase-in-recovery charges as well as the capital contributions made to that bond issuer. Each collection account will consist of three subaccounts:

 

   

a general subaccount;

 

   

a capital subaccount for the capital contributions to the bond issuer; and

 

   

an excess funds subaccount.

Withdrawals from, and deposits to, these subaccounts will be made as described under “Description of the Bonds—Allocations and Payments” in the accompanying prospectus.

General Subaccount. The bond trustee for each bond issuer will deposit collected phase-in-recovery charges remitted to it by its servicer with respect to its bonds into the general subaccount. On each payment date, the bond trustee will allocate amounts in the general subaccount as described under “How Funds in the Collection Account Will Be Allocated” in this prospectus supplement and “Description of the Bonds—Allocations and Payments” in the accompanying prospectus.

Capital Subaccount. Prior to the issuance of the bonds, CEI will contribute capital of $         to CEI Funding, OE will contribute capital of $         to OE Funding and TE will contribute capital of $         to TE

 

S-16


Table of Contents

Funding, which amounts represent, with respect to each bond issuer, 0.50% of the initial principal amount of the bonds of the related bond issuer. The bond trustee for each bond issuer will deposit the capital into the capital subaccount of the bond issuer. A bond trustee will draw on amounts available in the capital subaccount of the related bond issuer, to the extent amounts available in the general subaccount and excess funds subaccount of that bond issuer are insufficient to pay interest on, and principal of, its bonds and, subject to the cap to the extent applicable, fees and expenses of servicing and retiring such bonds and an allocable portion of the certificates.

If a bond trustee uses amounts on deposit in a capital subaccount to make payments on the bonds of the related bond issuer on a payment date, then that capital subaccount will be replenished by the related bond issuer on subsequent payment dates to the extent the servicer remits payments arising from phase-in-recovery charges exceeding the amounts required to pay amounts having a higher priority of payment.

Excess Funds Subaccount. Each excess funds subaccount will be funded with collected phase-in-recovery charges and earnings on amounts in the collection account in excess of the amount necessary to:

 

   

subject to the cap to the extent applicable, pay fees and expenses (including any indemnity payments) related to the servicing and retirement of the bonds (including trustee, independent director and administration fees and expenses) of that bond issuer and the portion of the certificates allocable to that bond issuer;

 

   

pay interest on, and principal of, such bonds to the extent required to be paid on that payment date; and

 

   

replenish the capital subaccount of that bond issuer to the required capital level.

A bond trustee will draw on amounts in the excess funds subaccount of a bond issuer to the extent amounts available in the bond issuer’s general subaccount are insufficient to pay the amounts listed above.

 

S-17


Table of Contents

HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED

On each semi-annual payment date, or for any amount payable under clauses (1) through (4) below, on any business day, a bond trustee will allocate or, subject to the cap (discussed below under “—Cap on Certain Financing Costs”) if applicable, pay all amounts on deposit in the collection account of the related bond issuer, including earnings on those amounts, as follows and in the following order of priority:

 

  (1) first, all amounts owed by that bond issuer to the related bond trustee (including indemnity payments) will be paid, and second, all amounts owed by that bond issuer to the Delaware trustee, the certificate trustee and the certificate issuer under the applicable basic documents will be paid;

 

  (2) the servicing fee and all unpaid servicing fees from any prior payment dates will be paid to that bond issuer’s servicer;

 

  (3) the administration fee and all unpaid administration fees from prior payment dates and amounts due independent directors will be paid to that bond issuer’s administrator and the independent directors, respectively;

 

  (4) payment of all other operating expenses, such as accounting and audit fees, rating agency fees, legal fees and certain reimbursable costs of the servicer under the related servicing agreement, and taxes and indemnities payable by the bond issuer will be paid to the persons entitled thereto;

 

  (5) first, any overdue interest on the bonds of that bond issuer after a payment default (together with, to the extent lawful, interest on overdue interest at the applicable bond interest rate) and second, interest currently due and payable on such bonds will be transferred to the certificate trustee, as bondholder, for distribution to the applicable certificateholders;

 

  (6) first, funds necessary to pay any principal on the bonds of that bond issuer payable by that bond issuer as a result of a bond event of default or on the final maturity date of a tranche of bonds of that bond issuer and second, principal based on priorities described above under “Description of the Bonds—Principal” will be transferred to the certificate trustee, as bondholder, for distribution to the applicable certificateholders according to the expected amortization schedule for each tranche of bonds;

 

  (7) unpaid operating expenses and indemnities owed by that bond issuer under the basic documents will be paid to the persons entitled thereto;

 

  (8) the amount, if any, by which that bond issuer’s capital subaccount needs to be funded to equal the required capital level as of a payment date will be allocated to the capital subaccount;

 

  (9) an amount equal to one-half of 6.85% of the required capital level will be paid to that bond issuer’s seller;

 

  (10) allocation of the remainder, if any, to the excess funds subaccount; and

 

  (11) following, first, the repayment of all bonds and the corresponding portion of the certificates and all approved financing costs, and, second, the payment of any unpaid amounts, due the Delaware trustee, the certificate trustee or the applicable bond trustee under clause (1) above, that exceeded the cap, the balance, together with all amounts in the capital subaccount and the excess funds subaccount, will be released to that bond issuer free and clear of the lien of the indenture.

If on any payment date, or for any amounts payable under clauses (1) through (4) above, on any business day, funds on deposit in the general subaccount of a bond issuer are insufficient to make the transfers contemplated by clauses (1) through (6) above, the related bond trustee will:

 

   

first, draw from amounts on deposit in the excess funds subaccount of that bond issuer; and

 

   

second, draw from amounts on deposit in the capital subaccount of that bond issuer,

up to the amount of the shortfall, in order to make the transfers described above.

 

S-18


Table of Contents

In addition, if on any payment date funds on deposit in the general subaccount of a bond issuer are insufficient to make the transfer described in clause (8) above, the related bond trustee will draw from amounts on deposit in the excess funds subaccount of that bond issuer to make the required transfer.

Cap on Certain Financing Costs

Pursuant to the financing order, certain approved ongoing financing costs recoverable through phase-in recovery charges (including those referenced in clauses (1) through (4) and clauses (7) and (9) above) may not exceed on an annual basis the aggregate amount approved for such ongoing financing costs by more than 5%. The sum of such approved ongoing financing costs ($1,072,732) plus an amount equal to 5% of such costs is equal to $1,126,369, which amount is referred to as the cap. The ongoing financing costs referenced in clauses (1) through (4) and clauses (7) and (9) above, to the extent in excess of the cap for any given annual period, may be recovered in any subsequent annual period (subject to the annual cap in such subsequent period). Unused cap amounts in a given year will not be available for recovery of any ongoing financing costs in a subsequent year. The foregoing amounts do not reflect a servicing fee that would be paid to any non-utility successor servicer which would result in a higher cap.

The initial servicer of each bond issuer will agree in its servicing agreement to indemnify each applicable trustee (i.e., its bond trustee and its allocable portion as to the certificate trustee and Delaware trustee) for all due and unpaid indemnity and other payments, of the applicable bond issuer under the applicable basic documents, that exceed the cap. Each servicing agreement will provide that this initial servicer obligation will continue as an obligation of such initial servicer in the event a successor servicer is appointed.

 

S-19


Table of Contents

UNDERWRITING

The trust, the bond issuers, CEI, OE, TE and the underwriters for the offering named below have entered into an underwriting agreement relating to the certificates. Assuming that conditions in the underwriting agreement are met, each underwriter has severally agreed to purchase the respective principal amount of certificates indicated in the following table.

 

Underwriters

   Tranche [A-1]    Tranche [A-2]    Tranche [A-3]
        
        
        

The underwriters are committed to take and pay for all of the certificates being offered, if any are taken. If an underwriter defaults, the underwriting agreement provides that the purchase commitment of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the amount of certificates to which the default relates.

Certificates sold by the underwriters to the public will be initially offered at the initial public offering prices set forth on the cover of this prospectus supplement. We and the bond issuers have been advised that the underwriters propose initially to offer the certificates to dealers at the initial public offering prices, less a selling concession not to exceed the percentage of the certificate denomination set forth below, and that the underwriters may allow and dealers may reallow a discount not to exceed the percentage of the certificate denomination set forth below:

 

Tranche

   Selling
Concession
   Reallowance
Discount
     
     
     

If all the certificates are not sold at the initial offering price, the underwriters may change the offering price and the other selling terms.

The certificates are a new issue of securities with no established trading market. We and the bond issuers have been advised by the underwriters that the underwriters intend to make a market in the certificates but are not obligated to do so and may discontinue market making at any time without notice. The certificates will not be listed on any securities exchange. No assurance can be given as to the ability of holders of the certificates to resell the certificates.

In connection with the offering, the underwriters may purchase and sell certificates in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of certificates than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the certificates while the offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased certificates sold by or for the account of such underwriter in stabilizing or short covering transactions.

These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the certificates. As a result, the price of the certificates may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected in the over-the-counter market or otherwise.

 

S-20


Table of Contents

The bond issuers estimate that their share of the total expenses of the offering of the certificates, excluding underwriting discounts and commissions, will be approximately $         million.

The bond issuers and each of CEI, OE and TE have agreed to indemnify the underwriters and the trust against certain liabilities, including liabilities under the Securities Act.

The underwriters or their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for CEI, OE and TE, for which they received or will receive customary fees and expenses. Goldman, Sachs & Co., previously served as the structuring advisor to CEI, OE and TE, and in such role, it has rendered certain structuring services to CEI, OE and TE in respect of the bond issuers and the trust and received a fee for such services and reimbursement for certain expenses in connection with such services.

 

S-21


Table of Contents

RATINGS

We expect that the certificates will receive credit ratings from three NRSROs.

A security rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn at any time by the assigning NRSRO. Each rating should be evaluated independently of any other rating. No person is obligated to maintain its rating on the certificates, and accordingly, we cannot assure you that a rating assigned to any tranche of the certificates upon initial issuance will not be revised or withdrawn by an NRSRO at any time thereafter. If a rating of any tranche of the certificates is revised or withdrawn, the liquidity of that tranche may be adversely affected. In general, ratings address credit risk and do not represent any assessment of the likelihood of any particular level of principal payments on the certificates other than payment in full of each tranche of the certificates by the applicable final maturity date, as well as the timely payment of interest.

Under Rule 17g-5 of the Exchange Act, NRSROs providing the sponsors with the requisite certification will have access to all information posted on a website by the sponsors for the purpose of determining the initial rating and monitoring the rating after the closing date in respect of the certificates. As a result, an NRSRO other than an NRSRO hired by the sponsor, referred to as a hired NRSRO may issue ratings on the certificates, or Unsolicited Ratings, which may be lower, and could be significantly lower, than the ratings assigned by a hired NRSRO. The Unsolicited Ratings may be issued prior to, or after, the closing date in respect of the certificates. Issuance of any Unsolicited Rating will not affect the issuance of the certificates. Issuance of an Unsolicited Rating lower than the ratings assigned by a hired NRSRO on the certificates might adversely affect the value of the certificates and, for regulated entities, could affect the status of the certificates as a legal investment or the capital treatment of the certificates. Investors in the certificates should consult with their legal counsel regarding the effect of the issuance of a rating by a non-hired NRSRO that is lower than the rating of a hired NRSRO.

In addition to the fees paid by the Ohio Companies to a hired NRSRO at closing, the sponsors may pay a fee to the NRSRO for ongoing surveillance for so long as the certificates are outstanding. However, no NRSRO is under any obligation to continue to monitor or provide a rating on the certificates. There can be no assurance that the credit ratings will be maintained.

 

S-22


Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

Akin Gump Strauss Hauer & Feld LLP will issue an opinion, based on Revenue Procedure 2005-62, 2005-2 C.B. 507, that, for U.S. federal income tax purposes, (i) the underlying bonds of each bond issuer will be treated as obligations of CEI, OE or TE, as the case may be, (ii) the bond issuers will not be subject to U.S. federal income tax as entities separate from the sellers and (iii) the trust will not be a business entity classified as a corporation or a publicly traded partnership treated as a corporation, but will be treated as a grantor trust. Please read “Material U.S. Federal Income Tax Consequences” in the accompanying prospectus.

LEGAL PROCEEDINGS

There are no legal or governmental proceedings pending against us, the sponsors, sellers, bond issuers, bond trustees, certificate trustee or servicers, or of which any property of the foregoing is subject, that is material to the holders of the certificates.

WHERE YOU CAN FIND MORE INFORMATION

To the extent that we are required to file such reports and information with the SEC under the Exchange Act, we will file (or any of our sponsors, in its capacity as sponsor, will file on our behalf) annual, distribution and current reports and other information with the SEC. We are incorporating by reference any future filings which we (file no. 333-            ) or any sponsor, but solely in its capacity as a sponsor, makes with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering of the certificates, excluding any information that is furnished to, and not filed with, the SEC. These reports will be filed under the trust’s name as issuing entity. Please also read “Where You Can Find More Information” in the accompanying prospectus. We may voluntarily suspend or terminate our filing obligations as issuing entity with the SEC to the extent permitted by law.

LEGAL MATTERS

Certain legal matters relating to the issuing entity, bond issuers, the bonds and the certificates, including certain U.S. federal income tax matters, will be passed on by Akin Gump Strauss Hauer & Feld LLP, New York, New York, counsel to the issuing entity, the sellers and the bond issuers. Certain legal matters relating to the bonds and Ohio law will be passed upon by Calfee, Halter & Griswold LLP, Cleveland, Ohio, special local counsel to the sellers and the bond issuers. Certain legal matters relating to the issuing entity, the bond issuers and the certificates will be passed upon by Richards, Layton & Finger, P.A., Wilmington, Delaware, Delaware counsel to the issuing entity and the bond issuers. Morgan, Lewis & Bockius LLP, New York, New York, is counsel to the underwriters. Morgan, Lewis & Bockius LLP has in the past represented, and continues to represent, the Ohio Companies and certain of their affiliates on other matters.

 

S-23


Table of Contents

OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS

NOTICE TO RESIDENTS OF SINGAPORE

EACH UNDERWRITER ACKNOWLEDGES THAT THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS HAVE NOT BEEN REGISTERED AS A PROSPECTUS WITH THE MONETARY AUTHORITY OF SINGAPORE. ACCORDINGLY, EACH UNDERWRITER REPRESENTS, WARRANTS AND AGREES THAT IT HAS NOT OFFERED OR SOLD ANY CERTIFICATES OR CAUSED THE CERTIFICATES TO BE MADE THE SUBJECT OF AN INVITATION FOR SUBSCRIPTION OR PURCHASE, AND WILL NOT OFFER OR SELL ANY CERTIFICATES OR CAUSE THE CERTIFICATES TO BE MADE THE SUBJECT OF AN INVITATION FOR SUBSCRIPTION OR PURCHASE, AND HAS NOT CIRCULATED OR DISTRIBUTED, NOR WILL IT CIRCULATE OR DISTRIBUTE THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS OR ANY OTHER DOCUMENT OR MATERIAL IN CONNECTION WITH THE OFFER OR SALE, OR INVITATION FOR SUBSCRIPTION OR PURCHASE, OF CERTIFICATES, WHETHER DIRECTLY OR INDIRECTLY, TO PERSONS IN SINGAPORE OTHER THAN (I) TO AN INSTITUTIONAL INVESTOR UNDER SECTION 274 OF THE SECURITIES AND FUTURES ACT, CHAPTER 289 OF SINGAPORE (THE “SFA”), OR ANY PERSON PURSUANT TO SECTION 275(1A), AND IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN SECTION 275 OF THE SFA OR (II) TO A RELEVANT PERSON PURSUANT TO SECTION 275(1) OR ANY PERSON PURSUANT TO SECTION 275(1A) OF THE SFA, AND IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN SECTION 275 OF THE SFA OR (III) OTHERWISE PURSUANT TO, AND IN ACCORDANCE WITH THE CONDITIONS OF, ANY OTHER APPLICABLE PROVISION OF THE SFA.

WHERE THE CERTIFICATES ARE SUBSCRIBED OR PURCHASED UNDER SECTION 275 BY A RELEVANT PERSON WHICH IS:

(A) A CORPORATION (WHICH IS NOT AN ACCREDITED INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA)) THE SOLE BUSINESS OF WHICH IS TO HOLD INVESTMENTS AND THE ENTIRE SHARE CAPITAL OF WHICH IS OWNED BY ONE OR MORE INDIVIDUALS, EACH OF WHOM IS AN ACCREDITED INVESTOR; OR

(B) A TRUST (WHERE THE TRUSTEE IS NOT AN ACCREDITED INVESTOR) WHOSE SOLE PURPOSE IS TO HOLD INVESTMENTS AND EACH BENEFICIARY OF THE TRUST IS AN INDIVIDUAL WHO IS AN ACCREDITED INVESTOR,

SHARES, DEBENTURES AND UNITS OF SHARES AND DEBENTURES OF THAT CORPORATION OR THE BENEFICIARIES’ RIGHTS AND INTEREST (HOWSOEVER DESCRIBED) IN THAT TRUST SHALL NOT BE TRANSFERRED WITHIN 6 MONTHS AFTER THAT CORPORATION OR THAT TRUST HAS ACQUIRED THE CERTIFICATES PURSUANT TO AN OFFER MADE UNDER SECTION 275 EXCEPT:

(1) TO AN INSTITUTIONAL INVESTOR (FOR CORPORATIONS, UNDER SECTION 274 OF THE SFA) OR TO A RELEVANT PERSON DEFINED IN SECTION 275(2) OF THE SFA, OR TO ANY PERSON PURSUANT TO AN OFFER THAT IS MADE ON TERMS THAT SUCH RIGHTS OR INTEREST ARE ACQUIRED AT A CONSIDERATION OF NOT LESS THAN S$200,000 (OR ITS EQUIVALENT IN A FOREIGN CURRENCY) FOR EACH TRANSACTION, WHETHER SUCH AMOUNT IS TO BE PAID FOR IN CASH OR BY EXCHANGE OF SECURITIES OR OTHER ASSETS, AND FURTHER FOR CORPORATIONS, IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN SECTION 275 OF THE SFA;

(2) WHERE NO CONSIDERATION IS OR WILL BE GIVEN FOR THE TRANSFER; OR

(3) WHERE THE TRANSFER IS BY OPERATION OF LAW. THE PROSPECTUS RELATING TO THE CERTIFICATES (“PROSPECTUS”) WILL, PRIOR TO ANY SALE OF SECURITIES PURSUANT TO THE

 

S-24


Table of Contents

PROVISIONS OF SECTION 106D OF THE COMPANIES ACT (CAP.50), BE LODGED, PURSUANT TO SAID SECTION 106D, WITH THE REGISTRAR OF COMPANIES IN SINGAPORE, WHICH WILL TAKE NO RESPONSIBILITY FOR ITS CONTENTS. HOWEVER, NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE PROSPECTUS HAS BEEN AND NOR WILL THEY BE REGISTERED AS A PROSPECTUS WITH THE REGISTRAR OF COMPANIES IN SINGAPORE. ACCORDINGLY, THE CERTIFICATES MAY NOT BE OFFERED, AND NEITHER THIS PROSPECTUS SUPPLEMENT NOR ANY OTHER OFFERING DOCUMENT OR MATERIAL RELATING TO THE CERTIFICATES MAY BE CIRCULATED OR DISTRIBUTED, DIRECTLY OR INDIRECTLY, TO THE PUBLIC OR ANY MEMBER OF THE PUBLIC IN SINGAPORE OTHER THAN TO INSTITUTIONAL INVESTORS OR OTHER PERSONS OF THE KIND SPECIFIED IN SECTION 106C AND SECTION 106D OF THE COMPANIES ACT OR ANY OTHER APPLICABLE EXEMPTION INVOKED UNDER DIVISION 5A OF PART IV OF THE COMPANIES ACT. THE FIRST SALE OF SECURITIES ACQUIRED UNDER A SECTION 106C OR SECTION 106D EXEMPTION IS SUBJECT TO THE PROVISIONS OF SECTION 106E OF THE COMPANIES ACT.

NOTICE TO RESIDENTS OF THE PEOPLE’S REPUBLIC OF CHINA

THE CERTIFICATES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES LAW OF THE PEOPLE’S REPUBLIC OF CHINA (AS THE SAME MAY BE AMENDED FROM TIME TO TIME) AND ARE NOT TO BE OFFERED OR SOLD TO PERSONS WITHIN THE PEOPLE’S REPUBLIC OF CHINA (EXCLUDING THE HONG KONG AND MACAU SPECIAL ADMINISTRATIVE REGIONS).

NOTICE TO RESIDENTS OF JAPAN

THE CERTIFICATES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES AND EXCHANGE LAW OF JAPAN (THE “SEL”), AND MAY NOT BE OFFERED OR SOLD IN JAPAN OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY RESIDENT OF JAPAN OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY RESIDENT OF JAPAN OR TO OTHERS FOR RE-OFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY RESIDENT OF JAPAN, EXCEPT PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF, AND OTHERWISE IN COMPLIANCE WITH, THE SEL, AND IN COMPLIANCE WITH THE OTHER RELEVANT LAWS AND REGULATIONS OF JAPAN. AS USED IN THIS PARAGRAPH, “RESIDENT OF JAPAN” MEANS ANY PERSON RESIDENT IN JAPAN, INCLUDING ANY CORPORATION OR OTHER ENTITY ORGANIZED UNDER THE LAWS OF JAPAN.

NOTICE TO RESIDENTS OF HONG KONG

EACH UNDERWRITER HAS REPRESENTED AND AGREED THAT:

IT HAS NOT OFFERED OR SOLD AND WILL NOT OFFER OR SELL IN HONG KONG, BY MEANS OF ANY DOCUMENT, ANY CERTIFICATES OTHER THAN (A) TO PERSONS WHOSE ORDINARY BUSINESS IS TO BUY OR SELL SHARES OR DEBENTURES (WHETHER AS PRINCIPAL OR AGENT); OR (B) TO PROFESSIONAL INVESTORS WITHIN THE MEANING OF THE SECURITIES AND FUTURES ORDINANCE (CAP. 571) OF THE LAWS OF HONG KONG AND ANY RULES MADE THEREUNDER; OR (C) IN CIRCUMSTANCES THAT DO NOT RESULT IN THE DOCUMENT BEING A “PROSPECTUS” AS DEFINED IN THE COMPANIES ORDINANCE (CAP. 32) OF THE LAWS OF HONG KONG OR THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THAT ORDINANCE; AND

 

S-25


Table of Contents

IT HAS NOT ISSUED OR HAD IN ITS POSSESSION FOR THE PURPOSE OF ISSUE, AND WILL NOT ISSUE OR HAVE IN ITS POSSESSION FOR THE PURPOSE OF ISSUE, WHETHER IN HONG KONG OR ELSEWHERE ANY ADVERTISEMENT, INVITATION OR DOCUMENT RELATING TO THE CERTIFICATES, WHICH IS DIRECTED AT, OR THE CONTENTS OF WHICH ARE LIKELY TO BE ACCESSED OR READ BY, THE PUBLIC OF HONG KONG (EXCEPT IF PERMITTED TO DO SO UNDER THE SECURITIES LAWS OF HONG KONG) OTHER THAN WITH RESPECT TO CERTIFICATES THAT ARE INTENDED TO BE DISPOSED OF ONLY TO PERSONS OUTSIDE HONG KONG OR ONLY TO “PROFESSIONAL INVESTORS” AS DEFINED UNDER THE SECURITIES AND FUTURES ORDINANCE (CAP. 571) OF THE LAWS OF HONG KONG AND ANY RULES MADE UNDER THAT ORDINANCE.

NOTICE TO RESIDENTS OF THE EUROPEAN ECONOMIC AREA

IN RELATION TO EACH MEMBER STATE OF THE EUROPEAN ECONOMIC AREA WHICH HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE, WHICH WE REFER TO HEREIN AS A RELEVANT MEMBER STATE, EACH UNDERWRITER HAS REPRESENTED AND AGREED THAT WITH EFFECT FROM AND INCLUDING THE DATE ON WHICH THE PROSPECTUS DIRECTIVE IS IMPLEMENTED IN THAT RELEVANT MEMBER STATE (THE “RELEVANT IMPLEMENTATION DATE”), IT HAS NOT MADE AND WILL NOT MAKE AN OFFER OF CERTIFICATES TO THE PUBLIC IN THAT RELEVANT MEMBER STATE PRIOR TO THE PUBLICATION OF A PROSPECTUS IN RELATION TO THE CERTIFICATES WHICH HAS BEEN APPROVED BY THE COMPETENT AUTHORITY IN THAT RELEVANT MEMBER STATE OR, WHERE APPROPRIATE, APPROVED IN ANOTHER RELEVANT MEMBER STATE AND NOTIFIED TO THE COMPETENT AUTHORITY IN THAT RELEVANT MEMBER STATE, ALL IN ACCORDANCE WITH THE PROSPECTUS DIRECTIVE, EXCEPT THAT IT MAY, WITH EFFECT FROM AND INCLUDING THE RELEVANT IMPLEMENTATION DATE, MAKE AN OFFER OF CERTIFICATES TO THE PUBLIC IN THAT RELEVANT MEMBER STATE AT ANY TIME:

(A) TO QUALIFIED INVESTORS AS DEFINED IN THE PROSPECTUS DIRECTIVE;

(B) TO FEWER THAN 100 (OR, IF THE RELEVANT MEMBER STATE HAS IMPLEMENTED THE RELEVANT PROVISION OF THE 2010 PD AMENDING DIRECTIVE, 150) NATURAL OR LEGAL PERSONS (OTHER THAN QUALIFIED INVESTORS AS DEFINED IN THE PROSPECTUS DIRECTIVE) SUBJECT TO OBTAINING THE PRIOR CONSENT OF THE REPRESENTATIVES FOR ANY SUCH OFFER; OR

(C) IN ANY OTHER CIRCUMSTANCES WHICH DO NOT REQUIRE THE PUBLICATION BY THE ISSUING ENTITY OF A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE PROSPECTUS DIRECTIVE.

FOR THE PURPOSES OF THIS PROVISION, THE EXPRESSION AN “OFFER OF CERTIFICATES TO THE PUBLIC” IN RELATION TO ANY CERTIFICATES IN ANY RELEVANT MEMBER STATE MEANS THE COMMUNICATION IN ANY FORM AND BY ANY MEANS OF SUFFICIENT INFORMATION ON THE TERMS OF THE OFFER AND THE CERTIFICATES TO BE OFFERED SO AS TO ENABLE AN INVESTOR TO DECIDE TO PURCHASE OR SUBSCRIBE THE CERTIFICATES, AS THE SAME MAY BE VARIED IN THAT RELEVANT MEMBER STATE BY ANY MEASURE IMPLEMENTING THE PROSPECTUS DIRECTIVE IN THAT RELEVANT MEMBER STATE, THE EXPRESSION “PROSPECTUS DIRECTIVE” MEANS DIRECTIVE 2003/71/EC AND INCLUDES ANY RELEVANT IMPLEMENTING MEASURE IN EACH RELEVANT MEMBER STATE AND THE EXPRESSION “2010 PD AMENDING DIRECTIVE” MEANS DIRECTIVE 2010/73/EU.

 

S-26


Table of Contents

NOTICE TO RESIDENTS OF THE UNITED KINGDOM

THE UNDERWRITER HAS REPRESENTED AND AGREED THAT:

(A) IT HAS ONLY COMMUNICATED OR CAUSED TO BE COMMUNICATED AND WILL ONLY COMMUNICATE OR CAUSE TO BE COMMUNICATED AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000, AS AMENDED (THE “FSMA”)) RECEIVED BY IT IN CONNECTION WITH THE ISSUE OR SALE OF THE CERTIFICATES IN CIRCUMSTANCES IN WHICH SECTION 21(1) OF THE FSMA DOES NOT APPLY TO THE ISSUING ENTITY; AND

(B) IT HAS COMPLIED AND WILL COMPLY WITH ALL APPLICABLE PROVISIONS OF THE FSMA WITH RESPECT TO ANYTHING DONE BY IT IN RELATION TO THE CERTIFICATES IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM.

THIS OFFERING DOCUMENT IS DIRECTED ONLY AT PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM OR (II) ARE INVESTMENT PROFESSIONALS FALLING WITHIN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 AS AMENDED (THE “ORDER”) OR (III) ARE HIGH NET WORTH ENTITIES FALLING WITHIN ARTICLE 49(2)(A) TO (D) OF THE ORDER OR (IV) SUCH OTHER PERSONS TO WHOM IT MAY LAWFULLY BE COMMUNICATED (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THIS OFFERING DOCUMENT MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING DOCUMENT RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS.

 

S-27


Table of Contents

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated April 2, 2013

PROSPECTUS

FirstEnergy Ohio PIRB Special Purpose Trust 2013

Issuing Entity

Pass-Through Trust Certificates

CEI Funding LLC

OE Funding LLC

TE Funding LLC

Issuers of the Phase-In-Recovery Bonds

The Cleveland Electric Illuminating Company

Ohio Edison Company

The Toledo Edison Company

Sponsors, Sellers and Initial Servicers

 

 

See “Risk Factors” beginning on page 16 to read about factors you should consider before buying the certificates.

The trust may sell one or more tranches of certificates as described in the prospectus supplement. Each tranche of certificates will represent fractional undivided beneficial interests in the corresponding tranches of bonds of CEI Funding LLC, OE Funding LLC and TE Funding LLC held by the trust. The assets of the trust will consist solely of the bonds, which are known as “phase-in-recovery bonds” under Ohio law. The trust will grant to the certificate trustee, for the benefit of certificateholders, a lien on the bonds and other trust property relating to each tranche of bonds issued by each of the bond issuers.

Each of the bonds will be secured primarily by the right to impose, charge and collect irrevocable nonbypassable usage-based charges payable by retail electric customers in the service territories of CEI, OE or TE, as the case may be. Each of the bonds will be a non-recourse obligation of CEI Funding LLC, OE Funding LLC or TE Funding LLC, as the case may be. Neither the bonds nor the certificates will be legal obligations of CEI, OE or TE, as the sponsors, sellers and initial servicers.

Neither the certificates, the bonds or the phase-in-recovery property securing the bonds are an obligation of the State of Ohio, the Public Utilities Commission of Ohio, or any political subdivision, governmental agency, authority or instrumentality of the State of Ohio or of FirstEnergy, CEI, OE or TE or any of their respective affiliates, except for the bond issuers and the trust.

Neither the full faith and credit or the taxing power of the State of Ohio, nor the Public Utilities Commission of Ohio, nor any political subdivision, agency, authority or instrumentality of the State of Ohio, is pledged to the payment of principal of, or interest on, the certificates or the bonds, or the payments securing the bonds. Furthermore, neither the State of Ohio, nor the Public Utilities Commission of Ohio, nor any political subdivision, agency, authority or instrumentality of the State of Ohio will appropriate any funds for the payment of any of the certificates or the bonds.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2013


Table of Contents

TABLE OF CONTENTS

PROSPECTUS

 

     Page  

READING THIS PROSPECTUS

     iv   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     v   

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     16   

Risks Related to Limited Source of Payments and Credit Enhancement

     16   

Risks Associated with Potential Judicial, Legislative or Regulatory Actions

     16   

Servicing Risks

     19   

Storm-Related Risks

     21   

Risks Related to the Phase-In-Recovery Property

     22   

Bankruptcy and Creditors’ Rights Issues

     22   

Other Risks Associated with an Investment in the Certificates

     25   

REVIEW OF PHASE-IN-RECOVERY PROPERTY

     28   

THE SECURITIZATION ACT

     31   

Background and Regulatory Overview

     31   

Recovery of Phase-In Costs

     31   

CEI, OE and TE and Other Utilities May Securitize Phase-In Costs

     32   

DESCRIPTION OF THE PHASE-IN-RECOVERY PROPERTY

     36   

Overview

     36   

Financing Order and Issuance Advice Letters

     36   

Phase-In-Recovery Property

     37   

Phase-In-Recovery Charges

     37   

Adjustments to the Phase-In-Recovery Charges

     38   

SALE AGREEMENTS

     40   

Seller Representations and Warranties

     40   

Seller Covenants

     42   

BANKRUPTCY AND CREDITORS’ RIGHTS ISSUES

     46   

True Sale

     46   

Substantive Consolidation

     47   

Estimation of Claims; Challenges to Indemnity Claims

     48   

Enforcement of Rights by the Bond Trustee

     48   

Bankruptcy of a Servicer

     48   

THE ISSUING ENTITY

     50   

THE TRUSTEES

     51   

Certificate Trustee

     51   

Bond Trustee

     51   

THE BOND ISSUERS

     53   

Restricted Purpose

     53   

Management

     54   

Limitation on Liabilities

     54   

Bond Issuers’ Relationship with the Ohio Companies

     54   

Relationship with PUCO

     55   

Administration Agreement

     55   

THE SPONSORS, SELLERS AND INITIAL SERVICERS

     56   

Revenues, Customer Base and Energy Consumption

     56   

Electricity Delivered to Retail Customers, Electric Delivery Revenues and Retail Customers

     57   

Forecasting Electricity Consumption

     59   

 

i


Table of Contents
     Page  

Billing and Collections

     62   

Credit Policy

     62   

Billing

     63   

Collection Process

     63   

Loss Experience

     64   

Days Sales Outstanding

     64   

Delinquencies

     65   

Where to Find Information about CEI, OE and TE

     65   

SERVICING AGREEMENTS

     66   

Servicing Procedures

     66   

Servicing Standards and Covenants

     66   

True-Up Adjustment Process

     67   

Remittances to Collection Account

     68   

Servicing Compensation

     68   

Third Party Billers

     68   

Servicer Representations and Warranties; Indemnification

     69   

Statements by Servicers

     70   

Evidence as to Compliance

     71   

Matters Regarding the Servicers

     71   

Servicer Defaults

     72   

Rights When a Servicer Defaults

     72   

Waiver of Past Defaults

     73   

Successor Servicer

     73   

Amendment

     73   

DESCRIPTION OF THE BONDS

     74   

Security

     74   

State Pledge

     74   

Collection Account

     75   

General Subaccount

     76   

Capital Subaccount

     76   

Excess Funds Subaccount

     76   

Interest and Principal

     76   

Optional Redemption

     77   

Allocations and Payments

     77   

Actions by Bondholders

     78   

Bond Events of Default; Rights on Bond Event of Default

     79   

Covenants of the Bond Issuers

     80   

Reports to Bondholders

     82   

Website Disclosure

     83   

Annual Compliance Statement

     83   

Bond Trustee Report to Bondholders

     83   

Legal Defeasance and Covenant Defeasance Options

     83   

DESCRIPTION OF THE CERTIFICATES

     85   

Payments and Distributions

     85   

Voting of the Certificates

     86   

Events of Default

     87   

Reports to Certificateholders

     88   

Website Disclosure

     89   

Annual Compliance Statement

     89   

Certificate Trustee Report to Certificateholders

     89   

Supplemental Certificate Indentures

     89   

 

ii


Table of Contents
     Page  

List of Certificateholders

     90   

Registration and Transfer of the Certificates

     91   

Book-Entry Registration and Definitive Certificates

     91   

WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE CERTIFICATES

     94   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     95   

General

     95   

Treatment of the Certificates

     96   

Taxation of U.S. Certificateholders

     96   

Non-U.S. Certificateholders

     97   

Information Reporting and Backup Withholding

     97   

OHIO STATE TAXATION

     99   

CERTAIN ERISA AND OTHER CONSIDERATIONS

     100   

USE OF PROCEEDS

     103   

PLAN OF DISTRIBUTION

     103   

RATINGS

     103   

WHERE YOU CAN FIND MORE INFORMATION

     104   

REPORTS TO HOLDERS

     105   

LEGAL MATTERS

     105   

GLOSSARY OF DEFINED TERMS

     106   

 

iii


Table of Contents

READING THIS PROSPECTUS

This prospectus provides information about us, the certificates, the bonds, the bond issuers and The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, as the sponsors, sellers and initial servicers.

The specific terms of the certificates are contained in the prospectus supplement that accompanies this prospectus. This prospectus provides general information about the certificates. You should read both of these documents in full before buying the certificates.

References in this prospectus to the terms we, us, our or the issuing entity mean FirstEnergy Ohio PIRB Special Purpose Trust 2013, the entity which will issue the certificates. References to the pass-through trust certificates or the certificates, unless the context otherwise requires, means the trust certificates offered pursuant to this prospectus and the accompanying prospectus supplement. References to the certificateholders or the holders, unless the context otherwise requires, means the registered holders of the certificates. References to the bond issuers refer to CEI Funding LLC, OE Funding LLC and TE Funding LLC, as the case may be. References to the phase-in-recovery bonds or the bonds refer to the phase-in-recovery bonds issued by the bond issuers. References to the Ohio Companies, the sponsors, the sellers or the initial servicers refer to The Cleveland Electric Illuminating Company, Ohio Edison Company and The Toledo Edison Company, as the case may be. The Ohio Companies are also referred to respectively as CEI, OE and TE. FirstEnergy Corp., the parent of the Ohio Companies, is referred to herein as FirstEnergy. References to the Securitization Act refer to Sections 4928.23 through 4928.2318 of the Ohio Revised Code, passed by the Ohio House of Representatives and the Ohio Senate in December 2011, and effective March 2012, which Securitization Act created the regulatory structure that allows electric utilities to issue bonds to securitize certain phase-in costs. Unless the context otherwise requires, the term customer or retail customer means a retail end user of electricity and related services provided by a retail electric service provider via the transmission and distribution system of an electric distribution utility. References to the Ohio commission or the PUCO refer to the Public Utilities Commission of Ohio. You can find a glossary of certain defined terms used in this prospectus on page 106.

We have included cross-references to sections in this prospectus where you can find further related discussions.

You should rely only on information on the certificates provided in this prospectus and the accompanying prospectus supplement. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not offering to sell the certificates in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current only as of the date of this prospectus.

 

iv


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some statements contained in this prospectus and the accompanying prospectus supplement concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts, including statements in the documents that are incorporated by reference as discussed in this prospectus under the heading “Where You Can Find More Information,” are forward-looking statements within the meaning of the federal securities laws. Actual events or results may differ materially from those expressed or implied by these statements. In some cases, you can identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words.

Forward-looking statements are based on beliefs, expectations and assumptions based on information available at the time the statements are made. Assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements are discussed in the section entitled “Risk Factors” beginning on page 16. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and the note issuers undertake no obligation to update or revise any forward-looking statement.

The following are some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements:

 

   

changes in customers’ demand for power, including but not limited to changes resulting from implementation of state and federal energy efficiency and peak demand restriction mandates and demographic patterns;

 

   

weather variations and other natural disasters affecting retail electric customer energy usage in the Ohio Companies’ respective service territories;

 

   

state and federal legislative and regulatory actions or developments affecting various aspects of the Ohio Companies’ respective businesses, including, among others, energy deregulation or re-regulation, health care reform, financial reform and tax legislation;

 

   

the accuracy of the servicers’ forecast of electrical consumption or the payment of phase-in-recovery charges;

 

   

non-payment of phase-in-recovery charges by retail electric customers;

 

   

the reliability of the systems, procedures and other infrastructure necessary to operate the retail electric business in the Ohio Companies’ respective service territories;

 

   

damage to and the general operating performance of the Ohio Companies’ facilities and the facilities of retail electric providers operating in the Ohio Companies’ respective service territories;

 

   

the direct or indirect effects of cyber attacks, data security breaches or other attempts to disrupt the business of the Ohio Companies or retail electric providers operating in the Ohio Companies’ respective service territories;

 

   

the servicers’ ability to perform their billing, collection and other functions;

 

   

national or regional economic conditions affecting retail electric customer energy usage in the Ohio Companies’ respective service territories;

 

   

acts of war or terrorism or other catastrophic events affecting retail electric customer energy usage in the Ohio Companies’ respective service territories; and

 

   

other factors we discuss in this prospectus and the accompanying prospectus supplement.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statement.

 

v


Table of Contents

PROSPECTUS SUMMARY

This summary highlights some information from this prospectus. Because this is a summary, it does not contain all of the information that may be important to you. You should read both this prospectus and the accompanying prospectus supplement before you buy the certificates. This prospectus contains terms, appearing in bold text on their first usage, that are specific to the regulated utility industry and the certificates and may be technical in nature. Please refer to the Glossary of Defined Terms.

 

Issuing Entity

FirstEnergy Ohio PIRB Special Purpose Trust 2013, a Delaware statutory trust to be formed prior to the offering of the certificates.

 

Certificates

FirstEnergy Ohio PIRB Special Purpose Trust 2013 Pass-Through Trust Certificates.

 

  The trust may issue certificates in one or more tranches under the certificate indenture between the trust and the certificate trustee. Each tranche of certificates will represent fractional undivided beneficial interests in the corresponding tranches of bonds of the bond issuers. Holders of each tranche of certificates will receive payments received by the trust on the related tranches of bonds of each bond issuer. These payments will be the primary source of distributions on a tranche of certificates. The trust may not issue additional certificates other than in connection with transfers, exchanges or replacements permitted under the certificate indenture. See “Description of the Certificates” in this prospectus.

 

Bonds

CEI Funding bonds, OE Funding bonds and TE Funding bonds.

 

  Each tranche of the CEI Funding bonds, OE Funding bonds and TE Funding bonds will have the same interest rate, scheduled maturity date and final maturity date as the related tranche of certificates. Taken together, the tranches of bonds of the bond issuers relating to the corresponding tranches of certificates will have the same aggregate principal amount and expected amortization schedule as the corresponding tranches of certificates, all as described in the accompanying prospectus supplement. The CEI Funding bonds will be secured primarily by the phase-in-recovery property relating thereto sold to it by CEI. The OE Funding bonds will be secured primarily by the phase-in-recovery property relating thereto sold to it by OE. The TE Funding bonds will be secured primarily by the phase-in-recovery property relating thereto sold to it by TE. See “Description of the Bonds” in this prospectus.

 

Purpose of the Offering

The issuance of the bonds and the certificates is intended to enable the sponsors to recover certain previously approved costs, referred to as phase-in costs, on terms more favorable to customers than would be achievable through the recovery methods previously approved by the PUCO. Please read “The Securitization Act” in this prospectus.

 

Relationship with the PUCO

Pursuant to the financing order:

 

   

the PUCO or its designated representative has a decision-making role co-equal with the sponsors with respect to the structuring and pricing of the certificates and all matters related to the

 

 

1


Table of Contents
 

structuring and pricing of the certificates will be determined through a joint decision of the sponsors and the PUCO or its designated representative or financial advisor;

 

   

the PUCO’s financial advisor will participate fully in all plans and decisions related to the pricing, marketing and structuring of the bonds and certificates and will be provided timely information as necessary to fulfill its obligation to advise the PUCO in a timely manner but makes no representations as to any of the information contained herein; and

 

   

the servicers will file periodic adjustments to the phase-in recovery charges with the PUCO on our behalf.

 

  The bond issuers have agreed that certain reports concerning phase-in-recovery charge collections will be provided to the PUCO.

 

Transaction Overview

Ohio law permits electric distribution utilities, such as CEI, OE and TE, to issue bonds to securitize certain costs that have been previously approved by the Ohio commission to be deferred as regulatory assets and collected from customers at a later date, including certain fuel costs, purchase power costs, infrastructure costs and environmental clean-up expenses. Once securitized through bonds issued pursuant to a final financing order of the Ohio commission, these costs, which are referred to as phase-in costs, may be recovered through usage-based charges called phase-in-recovery charges that are imposed on an electric distribution utility’s customers.

 

  Ohio law permits special purpose entities formed by electric distribution utilities to issue and sell bonds, referred to as phase-in-recovery bonds, secured by property, rights and interests of an electric distribution utility, or assignee, under a financing order, including the right to impose, charge and collect the phase-in-recovery charges to be used to pay and secure the payment of such phase-in-recovery bonds and financing costs, the right to obtain adjustments to those charges and any revenues, rights to payments, moneys or other proceeds arising from the rights and interests created under the financing order, if doing so would measurably enhance cost savings for the electric distribution utility’s customers and would mitigate rate impacts to customers as compared with the previously-approved recovery methods. The foregoing property, rights and interests are referred to as the phase-in-recovery property. See “Description of the Phase-In-Recovery Property” in this prospectus.

 

  The following sets forth the primary steps of the transaction underlying the offering of the certificates:

 

   

The Cleveland Electric Illuminating Company, or CEI, will sell its phase-in-recovery property to CEI Funding LLC, or CEI Funding, in exchange for the net proceeds from the sale of the bonds issued by CEI Funding.

 

 

2


Table of Contents
  Ohio Edison Company, or OE, will sell its phase-in-recovery property to OE Funding LLC, or OE Funding, in exchange for the net proceeds from the sale of the bonds issued by OE Funding.

 

  The Toledo Edison Company, or TE, will sell its phase-in-recovery property to TE Funding LLC, or TE Funding, in exchange for the net proceeds from the sale of the bonds issued by TE Funding.

 

  Unless the context otherwise requires, we refer to the bonds issued by CEI Funding, OE Funding and TE Funding collectively as the bonds.

 

   

Each of CEI Funding, OE Funding and TE Funding will sell its respective bonds to the trust, in each case in exchange for an allocable portion, based on the aggregate principal amounts of the bonds of each bond issuer, of the net proceeds from the sale of the certificates issued by the trust.

 

   

The trust, whose principal assets are the bonds, will sell the certificates to the underwriters named in the accompanying prospectus supplement.

 

   

CEI will act as the servicer of CEI Funding’s phase-in-recovery property and as the administrator of CEI Funding. OE will act as the servicer of OE Funding’s phase-in-recovery property and as the administrator of OE Funding. TE will act as the servicer of TE Funding’s phase-in-recovery property and as the administrator of TE Funding.

 

  Neither the certificates, the bonds nor the phase-in-recovery property securing the bonds is an obligation of the State of Ohio, the PUCO or any political subdivision, governmental agency, authority or instrumentality of the State of Ohio or of CEI, OE, TE, FirstEnergy or any of their respective affiliates, except for the bond issuers and the trust.

 

 

3


Table of Contents

The following diagram shows the parties to the transaction related to this offering and summarizes their roles and their relationship to each other:

 

LOGO

 

 

4


Table of Contents

Risk Factors

You should consider and carefully read the risks described under “Risk Factors,” which begin on page 16 before investing in the certificates. These risks may delay the distribution of interest on, and principal of, the certificates or cause you to suffer a loss on your investment.

 

Sponsors, Sellers and Initial Servicers

CEI is a public electric utility, which provides regulated electric distribution services in northeastern Ohio, and a subsidiary of FirstEnergy. It will be the seller of phase-in-recovery property to CEI Funding and will serve as the initial servicer for the CEI Funding bonds.

 

  OE is a public electric utility, which provides regulated electric distribution services in central and northeastern Ohio, and a subsidiary of FirstEnergy. It will be the seller of phase-in-recovery property to OE Funding and will serve as the initial servicer for the OE Funding bonds.

 

  TE is a public electric utility, which provides regulated electric distribution services in northwestern Ohio, and a subsidiary of FirstEnergy. It will be the seller of phase-in-recovery property to TE Funding and will serve as the initial servicer for the TE Funding bonds.

 

  Please read “The Sponsors, Sellers and Initial Servicers” in this prospectus.

 

Our Address

c/o FirstEnergy Service Company

 

  76 South Main Street

 

  Akron, Ohio 44308

 

Our Telephone Number

(800) 736-3402

 

Bond Issuers

CEI Funding, OE Funding and TE Funding, each having an address at 76 South Main Street, Akron, Ohio 44308. The telephone number of the bond issuers is (800) 736-3402.

 

Trustees

U.S. Bank Trust National Association, a national banking association, will serve as the Delaware trustee of the issuing entity and U.S. Bank National Association, a national banking association, will serve as trustee under the certificate indenture and under each bond indenture. Please read “The Trustees” in the prospectus supplement for a description of certain of the trustee’s relevant prior experience and “The Trustees” in this prospectus for a description of the trustee’s duties and responsibilities as certificate trustee under the certificate indenture and as bond trustee under each bond indenture.

 

Interest

Interest payable with respect to each tranche of certificates will represent the sum of the interest paid on the related tranches of bonds and will accrue at the interest rate specified in the accompanying prospectus supplement. The certificate trustee will distribute interest accrued on each tranche of certificates on each distribution date, to the extent interest is paid on the related tranches of bonds of each bond issuer on the related payment date.

 

 

5


Table of Contents

Principal

The certificate trustee will distribute principal of each tranche of certificates, to the extent principal is paid on the corresponding tranches of bonds on the related payment date in the amounts and on the distribution dates specified in the expected amortization schedule in the accompanying prospectus supplement. See “Description of the Bonds—Allocations and Payments” and “Description of the Certificates—Payments and Distributions” in this prospectus.

 

  On any payment date, the bond issuers will pay principal of their respective bonds only until the outstanding principal balances of the various tranches have been reduced to the principal balances specified for those tranches in the expected amortization schedules for such bonds. If cash is not available to a bond issuer to make such principal payments in respect of all tranches of bonds of that bond issuer, principal will be paid in respect of such tranches of bonds in the order of priority set forth in the accompanying prospectus supplement.

 

  If an event of default under a bond indenture in respect of the bonds of a bond issuer has occurred and is continuing, the certificate trustee may vote all, and upon the written direction of the holders of at least a majority in principal amount of the outstanding certificates will vote a corresponding majority of, the bonds of that bond issuer held by the certificate trustee in favor of directing the bond trustee to declare the unpaid principal amount of the outstanding bonds of that bond issuer, and accrued interest thereon, to be due and payable. Principal due and payable on the bonds of a bond issuer as the result of an event of default will be paid pro rata based on the outstanding principal amount of the bonds of each tranche. See “Description of the Certificates—Events of Default” in this prospectus.

 

Final Payment / Final Maturity Date

Failure to pay a scheduled principal payment on any payment date or the entire outstanding amount of the bonds of any tranche by the scheduled final payment date will not result in a default with respect to that tranche of bonds of a bond issuer. The failure to pay the entire outstanding principal balance of the bonds of any tranche will result in a default only if such payment has not been made by the final maturity date for such tranche. For the scheduled final payment date and the final maturity date of each tranche of bonds of each bond issuer, see “Description of the Bonds” in the accompanying prospectus supplement.

 

Payment and Record Dates

The payment and record dates for the bonds and certificates will be specified in the prospectus supplement. See “Description of the Certificates—Distributions of Interest and Principal” and “Description of the Bonds” in the accompanying prospectus supplement.

 

Ratings

We expect the bonds and the certificates will receive credit ratings from three nationally recognized statistical rating organizations, or NRSROs. Please see “Ratings” in this prospectus and in the accompanying prospectus supplement.

 

 

6


Table of Contents

Phase-In-Recovery Charges

CEI, OE and TE have obtained from the PUCO, which regulates electric distribution utilities in Ohio, a financing order (i) designating the phase-in costs and approving certain financing costs associated with issuing and servicing the CEI Funding bonds, the OE Funding bonds and the TE Funding bonds, respectively, (ii) authorizing the sale of the phase-in-recovery property to CEI Funding, OE Funding and TE Funding and (ii) authorizing the trust structure. This order, referred to as the financing order, authorizes CEI, OE and TE to recover their respective phase-in costs and approved financing costs and authorizes the billing and collection by CEI, OE and TE of the respective phase-in-recovery charges (as defined in the glossary on page 106) as servicers of the bond issuers.

 

  Phase-in-recovery charges are nonbypassable in that such charges cannot be avoided by any customer or other person obligated to pay the charges. Subject to the methodology approved in the financing order, the phase-in-recovery charges will apply to all retail customers of CEI, OE and TE, as the case may be, for as long as they remain retail customers of such electric distribution utility. If a customer of the electric distribution utility purchases electric generation service from a competitive retail electric service provider, the electric distribution utility is authorized by the Securitization Act to collect the phase-in-recovery charges directly from that customer.

 

  The phase-in-recovery charges are separate and apart from CEI’s, OE’s and TE’s base rates, and are subject to adjustment semiannually (other than the initial adjustment, which will be completed within 12 months after the issuance date of the bonds, and adjustments in the last year each tranche of bonds is expected to be outstanding, in which case adjustments as frequently as monthly may be necessary). See “—Statutory Adjustments to the Phase-In-Recovery Charges” and “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges” in this prospectus.

 

  CEI customers are expected to have estimated initial phase-in-recovery charges of [            ] cents/kWh resulting in an estimated monthly cost of $[        ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [            ] cents/kWh resulting in a monthly cost of $[            ].

 

  OE customers are expected to have estimated initial phase-in-recovery charges of [            ] cents/kWh resulting in an estimated monthly cost of $[            ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [            ] cents/kWh resulting in a monthly cost of $[            ].

 

 

7


Table of Contents
  TE customers are expected to have estimated initial phase-in-recovery charges of [            ] cents/kWh resulting in an estimated monthly cost of $[            ] for the typical residential bill (1,000 kWh), which represents approximately [        ]% of such monthly residential bill. Under current recovery methods, a 1,000 kWh residential customer would pay on average an estimated total monthly charge of [            ] cents/kWh resulting in a monthly cost of $[            ].

 

  The amounts shown above are dependent on a number of assumptions and based on estimates and market conditions as of ,2013. Such amounts will also periodically change throughout the recovery period in accordance with the approved adjustment mechanism described in this prospectus.

 

Customers

All retail customers of CEI, OE and TE within their respective geographic territories will be subject to the phase-in-recovery charges.

 

Statutory Adjustments to the Phase-In-Recovery Charges

Each of the servicers will calculate and set their respective initial phase-in-recovery charges at a level estimated to generate sufficient revenues (and taking into account the cap on certain ongoing financing costs):

 

   

to pay fees and expenses related to the servicing and retirement of the bonds of the related bond issuer and of the certificates allocable to the bond issuer, including, without limitation, trustee fees and expenses, servicing costs, rating agency surveillance fees, legal and accounting fees and other ongoing financing costs, as well as adjustments for dealing with estimated and actual costs;

 

   

to pay interest on the bonds;

 

   

to pay principal of each tranche of such bonds according to the related expected amortization schedule;

 

   

to replenish the capital subaccount to the required capital level; and

 

   

to pay all additional fees, costs and charges and other financing costs approved under the financing order.

The initial adjustment to the phase-in-recovery charges will be completed within 12 months after the issuance date of the bonds. Thereafter, such adjustments will be made semiannually, with the exception of the last year each tranche of bonds is expected to be outstanding, in which case adjustments may be made as frequently as monthly, if necessary.

Each servicer will base adjustments to the related phase-in-recovery charges on actual overcollections and undercollections, debt service costs and updated assumptions as to various factors, including electricity usage by customers and rates of charge-offs. These adjustments will continue until interest on and principal of all tranches of the CEI Funding bonds, in the case of CEI, OE Funding bonds, in the case of OE and the TE Funding bonds, in the case of TE, have been paid in full.

 

 

8


Table of Contents

No later than November 1 and May 1 of each year after the initial adjustment, each servicer will file with the PUCO its semiannual request for approval of the adjusted phase-in-recovery charges. Such adjustments will become effective within 60 days after the request is submitted unless otherwise ordered by the PUCO. The PUCO’s review of these requests is limited to determining whether there is any mathematical error in the servicer’s application of the adjustment mechanism to the phase-in-recovery charges.

See “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges” in this prospectus.

 

Security/Credit Enhancement

The bonds will be secured primarily by the phase-in-recovery property of the related bond issuer, generally consisting of the respective bond issuer’s irrevocable right to impose, charge and collect nonbypassable usage-based phase-in-recovery charges from retail electric customers in the sponsors’ respective service territories. The certificates will be secured primarily by the bonds. Credit enhancement for the bonds, through a true-up adjustment mechanism and capital subaccount, is intended to protect against losses or delays in scheduled payments on the bonds and accordingly, the certificates. There will be no other forms of credit enhancement for the bonds except for amounts held in the capital subaccounts and excess funds subaccounts. We do not anticipate that the bonds or the certificates will have the benefit of any liquidity facility or of any third-party credit enhancement, such as guarantees, letters of credit or insurance. The bonds of a bond issuer will be payable only from its phase-in-recovery property and its other bond collateral and not from the phase-in-recovery property or other bond collateral of the two other bond issuers. See “The Securitization Act” and “Description of the Phase-In-Recovery Property” in this prospectus.

 

State of Ohio Pledge

The Securitization Act and the financing order contains a pledge and agreement by the State of Ohio with the bondholders and bond issuers that the State of Ohio will not take or permit any action that impairs the value of phase-in-recovery property under the financing order or revises the phase-in-costs for which recovery is authorized under the financing order or, except for the approved adjustment mechanism authorized in the financing order and allowed under the Securitization Act, reduce, alter or impair phase-in-recovery charges until the bonds, all financing costs and all amounts to be paid under any ancillary agreement are paid or performed in full.

 

Optional Redemption

Neither the certificate indenture nor the bond indentures permit an optional redemption of the certificates or the bonds, respectively.

 

Collection Accounts and Subaccounts

Each bond issuer will establish a collection account to hold collections of its phase-in-recovery charges as well as the capital contributions made to that bond issuer. Each collection account will consist of three subaccounts:

 

   

a general subaccount;

 

 

9


Table of Contents
   

a capital subaccount for the initial capital contributions to the bond issuer; and

 

   

an excess funds subaccount.

 

  All amounts in a collection account not allocated to any other subaccount will be allocated to the general subaccount. Withdrawals from and deposits to these subaccounts will be made as described under “Description of the Bonds—Allocations and Payments.”

 

Capital Subaccounts

Prior to issuance of the bonds, CEI will contribute capital to CEI Funding, OE will contribute capital to OE Funding and TE will contribute capital to TE Funding, in each case, in the amount specified in the accompanying prospectus supplement. Each bond issuer will deposit the capital into its capital subaccount. A bond trustee will draw on amounts available in the related bond issuer’s capital subaccount to the extent that amounts available in that bond issuer’s general subaccount and excess funds subaccount are insufficient to pay interest on, or principal of, its bonds and, subject to the cap, the fees and expenses of servicing and retiring such bonds and an allocable portion of the certificates.

 

  If a bond trustee uses amounts on deposit in a capital subaccount to make payments on the related bonds on a payment date, then that capital subaccount will be replenished by the related bond issuer on subsequent payment dates to the extent the servicer remits payments arising from the phase-in-recovery charges exceeding the amounts required to pay amounts having a higher priority of payment. See “Description of the Bonds—Allocations and Payments” in this prospectus.

 

Excess Funds Subaccounts

Each excess funds subaccount will be funded with collected phase-in-recovery charges and earnings on amounts in the collection account in excess of the amount necessary to:

 

   

subject to the cap to the extent applicable, pay fees and expenses (including any indemnity payments) related to the servicing and retirement of the bonds (including trustee, independent director and administration fees and expenses) of that bond issuer and the portion of the certificates allocable to that bond issuer;

 

   

pay interest on, and principal of, such bonds to the extent required to be paid on that payment date; and

 

   

replenish the capital subaccount of that bond issuer to the required capital level.

 

  A bond trustee will draw on amounts in the excess funds subaccount of a bond issuer to the extent amounts available in the bond issuer’s general subaccount are insufficient to pay the amounts listed above.

 

 

10


Table of Contents

Collections; Allocations; Distributions; Priority of Payments

Starting with the first deemed collection date after the issuance of the bonds, each servicer will remit daily to the collection account for its bond issuer an amount equal to the actual phase-in-recovery charges billed, less an allowance for estimated charge-offs, within two business days after the day payments arising from the phase-in-recovery charges are deemed to be collected, subject to an annual reconciliation. See “Servicing Agreements—Remittances to Collection Account” in this prospectus.

 

  On each semi-annual payment date, or for any amount payable under clauses (1) through (4) below, on any business day, each bond trustee will allocate or, subject to the cap to the extent applicable, pay all amounts in the collection account of the related bond issuer, including earnings on these amounts, as follows and in the following order of priority:

 

  (1) first, all amounts owed by that bond issuer to the related bond trustee (including indemnity payments) will be paid, and second, all amounts owed by that bond issuer to the Delaware trustee, the certificate trustee and the certificate issuer under the applicable basic documents will be paid;

 

  (2) the servicing fee and all unpaid servicing fees from any prior payment dates will be paid to the bond issuer’s servicer;

 

  (3) the administration fee and all unpaid administration fees from any prior payment dates and amounts due independent directors will be paid to the bond issuer’s administrator and the independent directors, respectively;

 

  (4) payment of all other operating expenses, such as accounting and audit fees, rating agency fees, legal fees and certain reimbursable costs of the servicer under the related servicing agreement, and taxes and indemnities payable by the bond issuer will be paid to the person entitled thereto;

 

  (5) first, any overdue interest after a payment default and second, semiannual interest in respect of the bonds of the bond issuer will be transferred to the certificate trustee, as bondholder, for distribution to the certificateholders;

 

  (6) first, funds necessary to pay any principal payable as a result of a bond event of default or on the final maturity date, and second, principal based on priorities described in the accompanying prospectus supplement will be transferred to the certificate trustee, as bondholder, for distribution to the applicable certificateholders according to the expected amortization schedule for each tranche of bonds;

 

  (7) unpaid operating expenses and indemnities owed by that bond issuer under the basic documents will be paid to the persons entitled thereto;

 

 

11


Table of Contents
  (8) the amount, if any, by which that bond issuer’s capital subaccount needs to be funded to equal the required capital level as of a payment date will be allocated to the capital subaccount;

 

  (9) an amount equal to one-half of 6.85% of the required capital level will be paid to that bond issuer’s seller;

 

  (10) allocation of the remainder, if any, to the excess funds subaccount; and

 

  (11) following, first, the repayment of all bonds and the corresponding portion of the certificates and all approved financing costs, and, second, the payment of any unpaid amounts, due the Delaware trustee, the certificate trustee, the applicable bond trustee under clause (1) above, that exceeded the cap, the balance, together with all amounts in the capital subaccount and the excess funds subaccount, will be released to that bond issuer free and clear of the lien of the indenture.

 

  If, on any payment date, or for any amounts payable under clauses (1) through (4) above, on any business day, funds on deposit in the general subaccount of the bond issuer are insufficient to make the transfers contemplated by clauses (1) through (6) above, the bond trustee will first, draw from amounts on deposit in the excess funds subaccount of the bond issuer and second, draw from amounts on deposit in the bond issuer’s capital subaccount, up to the amount of the shortfall, in order to make the transfers described above. In addition, if on any payment date funds on deposit in the general subaccount of a bond issuer are insufficient to make the transfer described in clause (8) above, the related bond trustee will draw from amounts on deposit in the excess funds subaccount of that bond issuer to make the required transfer. See “Description of the Bonds—Allocations and Payments” in this prospectus.

 

  The following diagram provides a general summary of the flow of funds from the customers of a bond issuer through the servicer to the collection account of that bond issuer, and the various allocations from the collection account:

 

 

12


Table of Contents

 

LOGO

 

 

13


Table of Contents

Cap on Certain Financing Costs

Pursuant to the financing order, certain approved ongoing financing costs recoverable through phase-in-recovery charges (including those referenced in clauses (1) through (4) and clauses (7) and (9) above) may not exceed on an annual basis the aggregate amount approved for such ongoing financing costs by more than 5%. The sum of such approved ongoing financing costs ($1,072,732) plus an amount equal to 5% of such costs is equal to $1,126,369, which amount is referred to as the cap. The ongoing financing costs referenced in clauses (1) through (4) and clauses (7) and (9) above, to the extent in excess of the cap for any given annual period, may be recovered in any subsequent annual period (subject to the annual cap in such subsequent period). Unused cap amounts in a given year will not be available for recovery of any ongoing financing costs in a subsequent year. See “Description of the Bonds—Allocations and Payments.” The foregoing amounts do not reflect a servicing fee that would be paid to any non-utility successor servicer, which would result in a higher cap.

 

  The initial servicer of each bond issuer will agree in its servicing agreement to indemnify each applicable trustee (i.e., its bond trustee and its allocable portion as to the certificate trustee and Delaware trustee) for all due and unpaid indemnity and other payments of the applicable bond issuer under the applicable basic amounts, which exceed the cap. Each servicing agreement will provide that this initial servicer obligation will continue as an obligation of such servicer in the event a successor servicer is appointed.

 

Servicing

The servicers will service and administer the respective phase-in-recovery properties and bill and collect the respective phase-in-recovery charges in the same manner that they service and administer bill collections for their own account and the accounts they service for others, if any. See “Servicing Agreements—Servicing Standards and Covenants.”

 

Servicing Compensation

Each servicer will be entitled to receive an annual servicing fee in an amount equal to 0.10% of the initial principal balance of the bonds of its bond issuer. If any of the servicers are replaced by a non-utility successor servicer, such non-utility successor servicer may be paid an annual servicing fee of up to 0.75% of the initial principal balance of the bonds.

 

  The bond trustees will pay the unpaid servicing fees semiannually on each payment date to the extent of available funds prior to the distribution of any interest on and principal of its bonds.

 

Tax Status of the Certificates

For federal income tax purposes, the trust will be treated as a “grantor trust,” and thus not taxable as a corporation, and each tranche of certificates will be treated as representing ownership of fractional undivided beneficial interests in the related tranches of bonds. Interest and original issue discount, if any, on the certificates, and any gain on

 

 

14


Table of Contents
 

the sale of the certificates, generally will be included in gross income of certificateholders for federal income tax purposes. See “Material U.S. Federal Income Tax Consequences.” Interest on the certificates and any profit on the sale of the certificates are subject to Ohio personal income taxes. For taxpayers other than a limited class of financial institutions, Ohio does not currently impose a personal property tax to which the certificates would be subject. See “Ohio State Taxation” in this prospectus.

 

ERISA

See “Certain ERISA and Other Considerations” in this prospectus.

 

Payment Dates and Interest Accrual

Interest will be distributed on the certificates semi-annually, on              and             . The first scheduled interest and principal distribution date is                     , 2013. If any interest distribution date is not a business day, distributions scheduled to be made on such date may be made on the next succeeding business day and no interest shall accrue upon such payment during the intervening period. On each distribution date, the certificate trustee will distribute interest on and principal of the certificates to the extent interest and principal is received on the corresponding tranches of bonds to the holders of each tranche of certificates as of the close of business on the record date. Interest on the bonds will be calculated on a 30/360 basis. See “Description of the Certificates” and “Description of the Bonds.”

 

  Interest is due on each distribution date and principal is due upon the final maturity date for each tranche of certificates.

 

Continuing Disclosure

Each bond issuer will or will cause its sponsor to, post on http://www.                .com, a collective website to be used by all bond issuers, period reports containing the information required by the related bond indenture (which will include reports and other information required to be filed with the SEC and information regarding the Phase-In-Recovery Charges). See “Description of the Bonds—Website Disclosure” in this prospectus.

 

 

15


Table of Contents

RISK FACTORS

Before investing in the certificates you should carefully consider the risks described below, as well as the other information contained in this prospectus and the accompanying prospectus supplement. These are risks we consider to be material to your decision whether to invest in the certificates. There may be risks that you view in a different way than we do, and we may omit a risk that we consider immaterial, but you consider important. If any of the risks discussed below occur, an investment in the certificates could be materially harmed.

Risks Related to Limited Source of Payments and Credit Enhancement

You could experience payment delays or losses as a result of limited sources of payment for the certificates and limited credit enhancement.

You could experience payment delays or losses on your certificates because payments on each tranche of bonds that correspond to your tranche of certificates are the primary source of distributions on the certificates. The bonds are the principal assets of the trust. The phase-in-recovery properties and the other bond collateral, which is expected to be of relatively small value, are in turn the only sources of payments on the bonds.

There will be no forms of credit enhancement for the bonds except for the right to adjust the phase-in-recovery charges and amounts held in the capital subaccounts and excess funds subaccounts. We do not anticipate that the bonds or the certificates will have the benefit of any liquidity facility or of any third-party credit enhancement, such as guarantees, letters of credit or insurance. The bonds of a bond issuer will be payable only from its phase-in-recovery property and its other bond collateral and not from the phase-in-recovery property or other bond collateral of any other bond issuer. The obligations of the bond issuers in respect of the bonds are separate and an event of default on the bonds of one bond issuer will not cause an event of default on the bonds of any other bond issuer.

If distributions are not made on the certificates in a timely manner as a result of nonpayment of the related bonds of one or more of the bond issuers, the holders of at least a majority of the outstanding principal amount of the certificates may direct the certificate trustee to bring an action against the defaulting bond issuer to foreclose on the phase-in-recovery property of that bond issuer and the other bond collateral securing its bonds. There is not likely to be a market, however, for the sale of the phase-in-recovery property and the other bond collateral.

Risks Associated with Potential Judicial, Legislative or Regulatory Actions

You could experience payment delays or losses as a result of amendment, repeal or invalidation of the Securitization Act or breach of the pledge of the State of Ohio.

In the Securitization Act, the State of Ohio and in the financing order, the PUCO on behalf of the State of Ohio, has pledged and agreed that it will not take or permit any action that impairs the value of the phase-in-recovery property or, except as allowed under the Securitization Act, reduce or impair phase-in-recovery charges that are imposed, charged or collected until the bonds and all other approved financing costs are paid in full. Even though the obligations of the PUCO and the State of Ohio in the financing order are direct, explicit, irrevocable and unconditional upon issuance of the bonds and are legally enforceable by the bond issuers, the bond trustee and the bond holders against the State of Ohio, it is possible that actions could be taken (even if such actions were ultimately found to be unlawful) to alter the provisions of the Securitization Act or limit or alter the phase-in-recovery properties or the financing order.

Ohio has both an initiative and a referendum process. The time for challenging the Securitization Act through referendum has expired, but the right of voters in Ohio to enact laws by initiative can be exercised at any time, provided a lengthy process is followed and successfully concluded. Supporters first must petition the Ohio legislature, and the legislature then has an opportunity to act on the proposed legislation. If the legislature rejects the proposed legislation or takes no action, then the initiative question will go to the ballot if additional signature requirements are met. Ohio voters may also initiate constitutional amendments by a similar process involving the Secretary of State, the Attorney General and the Ohio Ballot Board.

 

16


Table of Contents

Legislative Actions

Our counsel has opined to us that under applicable constitutional principles relating to the impairment of contracts, the State of Ohio could not repeal or amend the Securitization Act, or take or permit any action prohibited by, or fail to take any action required, under its pledge described above, if the repeal or amendment or the action or inaction would impair the value of the phase-in-recovery property or, except as allowed under the Securitization Act, reduce or impair phase-in-recovery charges that are imposed, charged or collected until the bonds and all other approved financing costs are paid in full, so as to cause a substantial impairment of the contractual obligation undertaken in the pledge, absent a demonstration by the State of Ohio that is a reasonable exercise of its sovereign power and of a character reasonable and appropriate to the public purpose justifying such action.

Although there have been numerous cases in which legislative or popular concerns with the burden of taxation or governmental charges have led to adoption of legislation reducing or eliminating taxes or charges that supported bonds or other contractual obligations entered into by public instrumentalities, courts have generally not considered these concerns by themselves to provide sufficient justification for a substantial impairment of the pledged security provided by the taxes or governmental charges for such bonds or obligations. Based on these court decisions (which, however, to date have not addressed directly the bonds and, thus, the certificates, or the State of Ohio’s pledge described above or any substantially similar bonds, certificates or pledges), it would appear unlikely that the State of Ohio could substantially impair the value of the phase-in-recovery property, or reduce or impair phase-in-recovery charges, unless the action is reasonable and appropriate to further a legitimate public purpose.

Moreover, in the opinion of our counsel, under the takings clauses of the United States and Ohio Constitutions, the State of Ohio could not repeal or amend the Securitization Act (by way of legislative process, or take or refuse to take any action in contravention of its pledge (described above)) without paying just compensation to the bondholders (and, thus, the certificateholders), as determined by a court of competent jurisdiction, if doing so would deny all economically beneficial or productive use of the phase-in-recovery property of the bondholders (and, thus, the certificateholders) or if the court determined that the State of Ohio’s action rose to the level of a taking based upon the character of the action, the economic impact of the State of Ohio’s regulation and the extent to which the regulation interfered with distinct investment-backed expectations of the bondholders and certificateholders in connection with their investments in the bonds and certificates, respectively. There is no assurance, however, that, even if a court were to award just compensation, it would be sufficient to pay the full amount of principal of and interest on the bonds and distributions on the certificates.

To the extent voter initiative is relevant, Article 2, Section 1 of the State of Ohio Constitution specifically limits the rights of the people themselves to enact laws to the same limits applicable to the General Assembly and provides that “[t]he limitations expressed in the constitution, on the power of the General Assembly to enact laws, shall be deemed limitations on the power of the people to enact laws.” Thus, any State of Ohio constitutional limitations with respect to impairment of legislation would also apply to any voter initiative.

We are not aware of any proposed or pending initiative petition or of any proposed or pending legislation in the State of Ohio that would affect any of the provisions of the Securitization Act, and we are not aware of any pending suit that challenges any of the provisions of the Securitization Act, relating to the issuance by the PUCO of a financing order, the creation or characterization of the phase-in-recovery property or the issuance of “phase-in-recovery bonds,” such as the bonds.

Nonetheless, we cannot assure you that a repeal or amendment of the Securitization Act will not be adopted or sought or that any action or refusal to act by the State of Ohio will not occur, any of which may constitute a violation of the State of Ohio’s pledge to the owners of the phase-in-recovery properties. If a violation of this pledge occurred, costly and time consuming litigation might ensue. Any litigation might adversely affect the price of the certificates and your ability to resell the certificates and might delay the timing of distributions on the

 

17


Table of Contents

certificates. Moreover, given the lack of controlling judicial precedent directly addressing the bonds and, thus, the certificates and the State of Ohio’s pledge, we cannot predict the outcome of any litigation with certainty, and, accordingly, you could experience a delay in receipt of distributions on or incur a loss on your investment in the certificates.

Court Decisions

If a court were to determine that the relevant provisions of the Securitization Act or the financing order are unlawful, invalid or unenforceable in whole or in part, it could adversely affect the validity of the bonds and the certificates or the trust’s ability to make distributions on the certificates. In either case, you could suffer a loss on your investment in the certificates.

CEI, OE or TE will not indemnify you for any changes in the law, including any amendment or repeal of the Securitization Act that may affect the value of your certificates. See “—Risks Related to the Phase-In-Recovery Property—Limited rights and remedies may impair ability to realize on collateral” below.

Litigation and other events in jurisdictions other than Ohio could adversely affect certificateholders.

Other states have passed laws permitting securitization by electric utilities similar to those permitted by the Securitization Act, and some of these laws have been challenged by judicial actions. To date, none of these challenges have succeeded, but future challenges might be made. A legal action successfully challenging under the U.S. Constitution or other federal law a state statute similar to the Securitization Act adopted by a jurisdiction other than the State of Ohio could establish legal principles that would serve as a basis to challenge the Securitization Act. Although the Securitization Act would not become invalid automatically as a result of a court decision invalidating another state’s statute, such a decision could establish a legal precedent for a successful challenge to the Securitization Act. Similarly, legislative, administrative, political or other actions in other states would not directly impact the Securitization Act or the interests of certificateholders, but could heighten awareness of the political and other risks associated with these types of securities as perceived by the capital markets, and in that way, limit the ability of certificateholders to resell the certificates and impair their value. We cannot assure you that future challenges to similar types of electric distribution utility securitizations in other states will not significantly impair your ability to resell the certificates or the value of the certificates.

The federal government might preempt the Securitization Act without full compensation.

Federal preemption of the Securitization Act could prevent bondholders from receiving payments on the bonds, and thus, certificateholders from receiving distributions on the certificates and cause a loss on your investment in the certificates. In the past, bills have been introduced in Congress to prohibit the recovery of charges similar to the phase-in-recovery charges, although Congress has not enacted any such law. As of the date of this prospectus, we are not aware of the House, the Senate, or committees thereof having primary relevant jurisdiction having considered legislation that would prohibit the recovery of charges similar to the phase-in-recovery charges. However, we can give no assurances that Congress may not do so in the future. Enactment of a federal law prohibiting the recovery of charges similar to the phase-in-recovery charges might have the effect of preempting the Securitization Act and thereby prohibiting the recovery of the phase-in-recovery charges, which would cause delays and losses on payments on the bonds and, thus, distributions on the certificates.

We can give no assurances that a court would consider the preemption by federal law of the Securitization Act to be a taking of property from the bond issuers, from us as the bondholders or, thus, from the certificateholders under the U.S. Constitution or under the Constitution of the State of Ohio. Moreover, even if this preemption of the Securitization Act by the federal government were considered a taking under the U.S. Constitution or under the Constitution of the State of Ohio for which the federal government had to pay “just compensation,” we can give no assurance that this compensation would be sufficient to pay the full amount of principal of and interest on the bonds, and, thus, distributions on the certificates, or to pay such amounts on a timely basis.

 

18


Table of Contents

The PUCO might take actions that could reduce the value of your investment in the certificates.

The Securitization Act provides that a final financing order is irrevocable and that the PUCO may not reduce, impair, postpone, or terminate the phase-in-recovery charges authorized in the final financing order or impair the property or the collection or recovery of phase-in costs. However, the PUCO retains the power to adopt, revise or rescind rules or regulations affecting the Ohio Companies. The PUCO also retains the power to interpret the financing order granted to the Ohio Companies, and in that capacity might be called upon to rule on the meanings of provisions of the order that might need further elaboration. Any new or amended regulations or orders from the PUCO might affect the ability of the servicers to collect the phase-in-recovery charges in full and on a timely basis, the rating of the bonds and the certificates and, accordingly, the amortization of the bonds and certificates and their weighted average lives, which in turn could adversely affect distributions on your certificates.

The financing order provides for a formula-based mechanism relating to adjustments to phase-in-recovery charges. See “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges.” Applications of adjustment procedures similar to the ones set forth in the financing order have been challenged in the past in other states and may be challenged in the future. Challenges to or delays in the adjustment process might adversely affect the market perception and valuation of the certificates. Also, any litigation might materially delay phase-in-recovery charge collections due to delayed implementation of adjustments and might result in missing payments or payment delays and lengthened weighted average life of the bonds, and, thus, missing distributions or distribution delays and lengthened average life of the certificates.

Servicing Risks

Inaccurate consumption forecasting might result in phase-in-recovery charges that result in inadequate collections to make scheduled payments on the bonds and, thus, scheduled distributions on the certificates.

The phase-in-recovery charges are imposed based on forecasted customer usage, i.e., kilowatt-hours of electricity consumed by customers. The amount and timeliness of phase-in-recovery charge collections will depend in part on actual electricity usage and the amount of collections and write-offs for each customer class. If the servicers inaccurately forecast electricity consumption when setting or adjusting the phase-in-recovery charges, there could be a shortfall or material delay in phase-in-recovery charge collections, which might result in missed or delayed payments of principal and interest and lengthened weighted average life of the bonds, which in turn could lead to missed or delayed distributions and lengthened weighted average life of the certificates. Please read “Description of the Phase-In-Recovery Property—Financing Order and Issuance Advice Letters” and “—Adjustments to the Phase-In-Recovery Charges” in this prospectus.

Inaccurate forecasting of electricity consumption by the servicers might result from, among other things, the general economic environment in the service territories of the Ohio Companies being worse than expected, causing retail electric customers to migrate from the Ohio Companies’ service territories or reduce their electricity consumption; the impact of weather conditions, resulting in less electricity consumption than forecast; levels of business activity; customers consuming less electricity than anticipated because of increased energy prices, unanticipated increases in conservation efforts or unanticipated increases in electric usage efficiency; the occurrence of a natural or other disaster, or an act of terrorism, cyber attack or other catastrophic event; unanticipated changes in the market structure of the electric industry; or customers switching to alternative sources of energy, including self-generation of electric power.

Your investment in the certificates depends on the actions of the Ohio Companies or their successors or assignees, as servicers of the phase-in-recovery property.

The Ohio Companies, as servicers, will be responsible for, among other things, calculating, billing and collecting the phase-in-recovery charges from customers, submitting requests to the PUCO to adjust these charges, monitoring the collateral for the bonds and taking certain actions in the event of non-payment by a retail electric customer. The bond trustees’ receipt of collections in respect of the phase-in-recovery charges, which

 

19


Table of Contents

will be used to make payments on the bonds resulting in distributions on the certificates, will depend in part on the skill and diligence of the servicers in performing these functions. Difficulties or failures in the servicers’ handling of the collateral could result in a shortfall in funds to pay debt service on the bonds and, thus, distributions on the certificates. The systems that the servicers have in place for phase-in-recovery charge billings and collections might, in particular circumstances, cause the servicers to experience difficulty in performing these functions in a timely and completely accurate manner.

If the servicers fail to make collections for any reason, then the servicers’ payments to the bond trustees in respect of the phase-in-recovery charges might be delayed or reduced. In that event, payments on the bonds might be delayed or reduced resulting in delayed or reduced distributions on the certificates.

If the bond issuers have to replace the Ohio Companies as the servicers, they may experience difficulties finding and using replacement servicers.

If the Ohio Companies cease to service the phase-in-recovery properties, it might be difficult to find successor servicers. Also, any successor servicers might have less experience and ability than the Ohio Companies and might experience difficulties in collecting phase-in-recovery charges and determining appropriate adjustments to the phase-in-recovery charges and billing and/or payment arrangements may change, resulting in delays or disruptions in collections. In the event of the commencement of a case by or against any of the servicers under the United States Bankruptcy Code or similar laws, the bond trustees might be prevented from effecting a transfer of servicing due to operation of the bankruptcy code. Any of these factors and others might delay the timing of payments and may reduce the value of your investment in the certificates. Please read “Servicing” in this prospectus.

Changes to billing and collection practices might reduce the value of your investment in the certificates.

The financing order specifies the methodology for determining the amount of the phase-in-recovery charges that may be imposed. The servicers may not change this methodology without approval from the PUCO. Also, the servicers may change billing and collection practices, which might adversely impact the timing and amount of customer payments and might reduce phase-in-recovery charge collections, thereby limiting our ability to make scheduled distributions on the certificates. Separately, the PUCO might require changes to these practices. Any changes in billing and collection practices regulations might make it more difficult for the servicers to collect the phase-in-recovery charges which could adversely affect the value of your investment in the certificates. Please read “The Sponsors, Sellers and Initial Servicers” in this prospectus.

Limits on rights to terminate electric service might make it more difficult to collect the phase-in-recovery charges.

Ohio statutory requirements and the rules and regulations of the PUCO, which may change from time to time, regulate and control the right to disconnect service. For example, retail electric providers in Ohio generally may not terminate service to a customer (1) on a holiday or weekend day or after 12:30 p.m. on the day immediately preceding a holiday or weekend, (2) during the period of November through April 15th except under certain conditions, (3) if such disconnection would be especially dangerous to the health of a person, (4) if such customer is an energy assistance client under certain circumstances or (5) if the customer is a mastermetered apartment complex unless certain notices are given. To the extent these retail electric customers do not pay for their electric service, retail electric providers will not be able to collect phase-in-recovery charges from these retail electric customers. Although retail electric providers will have to pay the servicers the phase-in-recovery charges on behalf of those customers (subject to any charge-off allowance and reconciliation rights), required service to nonpaying end-use customers could affect the ability of retail electric providers to make such payment.

 

20


Table of Contents

Future adjustments to the phase-in-recovery charges by rate schedule might result in insufficient collections.

The customers of each Ohio Company are provided service under one of eight different rate schedules. The phase-in-recovery charges imposed by the related bond issuer will be allocated among these rate schedules and imposed in accordance with the formula required under the Securitization Act and specified in the financing order. A shortfall in collections of the phase-in-recovery charges will be corrected in the next adjustment to the phase-in-recovery charges and allocated to such Ohio Company’s rate schedules in the same fashion. If enough customers receiving service under an individual rate schedule fail to pay the phase-in-recovery charges or cease to be customers, the applicable servicer might have to substantially increase the phase-in-recovery charges for the remaining customers. These increases could lead to further failures by the remaining customers to pay the phase-in-recovery charges, thereby increasing the risk of a shortfall in funds to pay debt service on the bonds of the applicable bond issuer and, thus, distributions on the certificates.

Phase-in-recovery charges will apply to all retail customers of an electric distribution utility for as long as they remain customers of such electric distribution utility. If a customer of the utility subsequently receives retail electric distribution service from another electric distribution utility operating in the same service area, including by succession, assignment, transfer or merger, the phase-in-recovery charges will continue to apply to that customer. However, if a customer switches its retail electric distribution service to a municipal utility, the phase-in-recovery charges will not continue to apply to that customer.

Expenses may be incurred in excess of the cap on certain financing costs provided in the financing order.

Under the financing order, phase-in-recovery charges may not be imposed by the respective bond issuers for certain ongoing financing costs to the extent they exceed the cap for such amounts. In addition, the respective bond issuers’ other assets, substantially all of which are pledged to the trustee under the respective bond indentures, may not be used by the trustee to pay such excess amounts. Examples of the costs subject to the cap include payment of specified fees and expenses to the trustee, the servicer and the administrator. No assurance can be given that expenses will not be incurred for these purposes in excess of the cap level and, if this were to occur, there may not be sufficient funds to make payments for these excess amounts. Creditors which are owed these amounts and not paid may obtain judgment liens against a bond issuer’s assets or seek to place a bond issuer in bankruptcy. The foregoing events could adversely affect the trust, as holder of the bonds, and thus, certificateholders.

The initial servicer of each bond issuer will agree in its servicing agreement to indemnify each applicable trustee (i.e., its bond trustee and its allocable portion as to the certificate trustee and Delaware trustee) for all due and unpaid indemnity and other payments, of the applicable bond issuer under the applicable basic documents, that exceed the cap. Each servicing agreement will provide that this initial servicer obligation will continue as an obligation of such initial servicer in the event a successor servicer is appointed.

Storm-Related Risks

Storm damage to the service territories could impair the payment of distributions on the certificates.

The Ohio Companies’ service territories have been impacted by severe weather, such as tornadoes, hurricanes, such as Hurricane Sandy, ice or snowstorms, droughts and other natural disasters, which disrupt the Ohio Companies’ operations. Future storms could have similar effects. Transmission, distribution and usage of electricity could be interrupted temporarily, reducing the amount of phase-in-recovery charges collected. There could be longer-lasting weather-related adverse effects on residential and commercial development and economic activity in the Ohio Companies’ service territories, which could cause the per-KWh phase-in-recovery charge to be greater than expected after the adjustment process. Legislative action adverse to the certificateholders might be taken in response, and such legislation, if challenged as violative of the State of Ohio’s pledge, might be defended on the basis of public necessity. Please read “The Securitization Act—CEI, OE and TE and Other Utilities May Securitize Phase-In Costs—The State Pledge” and “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions—Legislative Actions” in this prospectus.

 

21


Table of Contents

Risks Related to the Phase-In-Recovery Property

Foreclosure of the bond trustees’ lien on the phase-in-recovery property securing the bonds might not be practical, and acceleration of the bonds before maturity might have little practical effect.

Under the Securitization Act and the bond indentures, the bond trustees have the right to foreclose or otherwise enforce the lien on the phase-in-recovery property securing the bonds. However, in the event of foreclosure, there is likely to be a limited market, if any, for the phase-in-recovery property. Therefore, foreclosure might not be a realistic or practical remedy. Moreover, although payments on the bonds will be due and payable upon acceleration of the bonds before maturity, the phase-in-recovery charges likely would not be accelerated. The true-up adjustment mechanism will be used to adjust phase-in-recovery charges to meet scheduled payments but not accelerated maturity. As a result, the nature of the bond issuers’ business will result in payments on the bonds being paid as funds become available. If there is an acceleration of the bonds, all tranches of the bonds will be paid pro rata; therefore, some tranches might be paid earlier than expected and some tranches might be paid later than expected, which could adversely affect distributions on the certificates and affect the value of your investment in the certificates.

Bankruptcy and Creditors’ Rights Issues

The bankruptcy of an Ohio Company could delay or reduce payments on the bonds of its related bond issuer and, thus, an allocable portion of the certificates and adversely affect the ability to resell the phase-in-recovery property of that bond issuer.

If an Ohio Company were to become a debtor in a bankruptcy case, and a creditor or bankruptcy trustee of the Ohio Company or the Ohio Company itself as debtor in possession were to take the position that the phase-in-recovery property constituted property of the Ohio Company’s bankruptcy estate, and a court were to adopt this position, then delays or reductions in payments on bonds of the related bond issuer, and therefore an allocable portion of the certificates, could result. For example, a creditor or bankruptcy trustee of an Ohio Company or the Ohio Company itself as debtor in possession might argue that, contrary to Ohio law as set forth in the Securitization Act, the sale of the phase-in-recovery property to the bond issuers was a loan to the Ohio Company from its respective bond issuer, secured by a pledge of the phase-in-recovery property rather than an absolute transfer and true sale of such phase-in-recovery property. If the bankruptcy court accepted that argument, the phase-in-recovery property would be considered property of the bankruptcy estate of the Ohio Company, the exercise of rights of the bond issuer in respect of the phase-in-recovery property would be subject to the automatic stay that arises upon the commencement of the Ohio Company’s bankruptcy case, and the rights of the related bond issuer as secured creditor would be subject to modification to the extent permitted under the Bankruptcy Code. Such modifications could include, among other things, reductions of the amounts of payment of interest and principal on the bonds, delays in payments and alteration of other terms of the bonds, leading to delays or reductions in payments on the certificates.

Generally, bankruptcy courts look to state law to create and define property interests held by a debtor in a bankruptcy case. The Securitization Act provides, among other things, that, a financing order shall remain in effect and unabated notwithstanding the bankruptcy, reorganization, or insolvency of the electric distribution utility or any affiliate of the electric distribution utility or the commencement of any judicial or nonjudicial proceeding on the financing order. It also provides that any sale, assignment or transfer of phase-in-recovery property under a financing order sale shall be an absolute transfer and true sale of, and not a pledge of or secured transaction relating to, the seller’s right, title, and interest in, to, and under the property, if the documents governing the transaction expressly state that the transaction is a sale or other absolute transfer. Each of the sale agreements contains an explicit statement that this securitization is an absolute transfer and true sale. See “Bankruptcy and Creditors’ Rights Issues—True Sale.”

Nevertheless, by reason of the so-called Supremacy Clause and Article I, Section 8, clause 4 of the United States Constitution, Congress has the right to enact bankruptcy legislation that could overturn or be inconsistent with the Securitization Act. Further, to the extent that a bankruptcy court determined that the provisions of the

 

22


Table of Contents

Securitization Act dealing with the creation and definition of the phase-in-recovery property, or the treatment of the sale of the phase-in-recovery property as an absolute transfer, as in a true sale, were in actual conflict with existing provisions of the Bankruptcy Code, the bankruptcy court could ignore those provisions of the Securitization Act and, among other things, determine that the phase-in-recovery property was property of the bankruptcy estate of the Ohio Company.

Under certain circumstances, a court might hold that, notwithstanding the creation and definition of phase-in-recovery property under Ohio law, the bankruptcy estate of an Ohio Company retains some interest in the phase-in-recovery property sufficient to justify the exercise by the Ohio Company’s bankruptcy court of jurisdiction over the phase-in-recovery property. In 2001, in the case of LTV Steel Company, Case No. 00-43866 in the United States Bankruptcy Court for the Northern District of Ohio, the court initially ruled that the debtor retained “some equitable interest” in securitized receivables and inventory sufficient to permit the bankruptcy court to authorize the debtor to use proceeds of such securitized assets as cash collateral for post-petition operations of the debtor. In refusing to modify the interim cash collateral order, the court stated that it could not conclude that the receivables were not property of the debtor’s estate until an evidentiary hearing on such issue was held. While the parties to the LTV Steel Company proceeding ultimately settled their disputes, and the court entered an order affirming the true sale nature of the underlying securitization, the initial ruling was not vacated. There is no assurance that a bankruptcy court in a bankruptcy case of an Ohio Company might not take a similar view, particularly if failure to do so would cause significant harm to the seller’s bankruptcy estate or otherwise to the continued operations of the Ohio Company, its ultimate reorganization under the Bankruptcy Code or other significant public interests, such as the delivery of electricity to consumers.

Because the phase-in-recovery charges are usage-based, if an Ohio Company were to become the debtor in a bankruptcy case, a creditor of, or a bankruptcy trustee for, the Ohio Company, or the Ohio Company itself as debtor in possession could argue that its related bond issuer should pay a portion of the costs of the Ohio Company associated with the generation, transmission or distribution of the electricity the price of which gave rise to the payments arising from the phase-in-recovery charges that are used to make distributions on the bond issuer’s bonds and an allocable portion of the certificates. If a court were to adopt this position, the amounts paid to the bond trustee, and thus to the holders of the certificates, could be reduced.

Regardless of whether an Ohio Company is the debtor in a bankruptcy case, and notwithstanding that the Securitization Act states that the phase-in-recovery property shall constitute an existing, present property right, notwithstanding any requirement that the imposition, charging, and collection of phase-in-recovery charges depend on the electric distribution utility continuing to deliver retail electric distribution service or continuing to perform its servicing functions relating to the collection of phase-in-recovery charges or on the level of future energy consumption, if a court were to accept the arguments of a creditor of the Ohio Company that phase-in-recovery property comes into existence only as customers use electricity, a tax, government lien or other lien on property of the Ohio Company arising before the phase-in-recovery property came into existence may have priority over the related bond issuer’s interest in the phase-in-recovery property, which could result in the bond issuer being treated as an unsecured creditor in the seller’s bankruptcy case and a potential reduction in the amounts distributed to certificateholders. See “Bankruptcy and Creditors’ Rights Issues.”

Regardless of whether the bankruptcy court made any adverse determination in an Ohio Company bankruptcy case, the mere existence of an Ohio Company bankruptcy case could have an adverse effect on the resale market for the certificates and the market value of the certificates.

The bankruptcy of an Ohio Company or any successor entity might limit the remedies available to the bond trustee.

Upon an event of default under a bond indenture, the bond trustee will enforce the security interest in the phase-in-recovery property in accordance with the terms of the bond indenture. Under the Securitization Act, if a utility servicer defaults on any required payment of phase-in-recovery revenues, a court, upon application by the

 

23


Table of Contents

bond trustee (or any other interested party) and without limiting any other remedies available to the bond trustee, shall order the sequestration and payment of the revenues for the benefit of bondholders, the applicable bond issuer and any bond trustee or other financing party. The court order shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric distribution utility or any affiliate. There can be no assurance, however, that a court would issue this order after an Ohio Company’s bankruptcy in light of the automatic stay provisions of Section 362 of the United States Bankruptcy Code. In that event, the bond trustee would likely seek an order from the bankruptcy court lifting the automatic stay to permit or authorize this action by the court, and an order requiring an accounting and segregation of the revenues arising from the phase-in-recovery property. There can be no assurance that a court would grant either order.

The Ohio Companies and any successor servicers will commingle the phase-in-recovery charges with other revenues they collect, which might obstruct access to the phase-in-recovery charges in case of a servicer’s bankruptcy and reduce the value of the bonds and, thus, your investment in the certificates.

The servicers will be required to remit collections to the bond trustees within two business days after the payments arising from the phase-in-recovery charges are deemed to be collected as described under “Servicing—Remittances to Collection Account.” The servicers will not segregate the phase-in-recovery charges from the other funds they collect from retail electric customers [or retail electric providers] or their general funds. The phase-in-recovery charges will be segregated only when the servicers pay them to the bond trustees.

Despite this requirement, the servicers might fail to pay the full amount of the phase-in-recovery charges to the bond trustees or might fail to do so on a timely basis. This failure, whether voluntary or involuntary, might materially reduce the amount of phase-in-recovery charge collections available to make payments on the bonds and, thus, distributions on the certificates.

The Securitization Act provides that the bond issuers’ rights to the phase-in-recovery property are not affected by the commingling of these funds with any other funds of the servicers. In a bankruptcy of a servicer, however, a bankruptcy court might rule that federal bankruptcy law does not recognize a bond issuer’s right to collections of the phase-in-recovery charges that are commingled with other funds of the servicer as of the date of bankruptcy. If so, the collections of the phase-in-recovery charges held by the servicer as of the date of bankruptcy would not be available to pay amounts owing on the bonds and distributions on the certificates. In this case, the bond issuers’ would have only a general unsecured claim against the servicer for those amounts. This decision could cause material delays in payments of principal or interest, or losses, on the bonds and material delays in payment of distributions, or losses, on the certificates, which could materially reduce the value of your investment in the certificates. Please read “Bankruptcy and Creditors’ Rights Issues” in this prospectus.

Bankruptcy of a servicer could also delay or reduce payments.

The bankruptcy or insolvency of a servicer could result in delays or reductions in distributions on the certificates. Each of the servicers will remit payments arising from the respective phase-in-recovery charges out of its general funds and will not segregate these amounts from its general funds. In the event of a bankruptcy of a servicer, the related bond trustee likely will not have a perfected interest in commingled funds and the inclusion of the commingled funds in the bankruptcy estate of the affected servicer may result in delays and reductions in distributions on the related bond issuer’s bonds and an allocable portion of the certificates. To the extent that a servicer had made payment of phase-in-recovery charges out of commingled funds to the bond issuer during a period of up to one year prior to the commencement of the bankruptcy case of the servicer, a trustee in bankruptcy of the servicer, or the servicer as debtor-in-possession, may contend that some portion or all of such payments are recoverable as preferences from the bond issuer for the benefit of the bankruptcy estate of the servicer. If a bankruptcy court determined that such payments were preferences, and no applicable defenses to the recovery thereof was available, the bond issuer could be required to repay such preferences to the bankruptcy estate of the servicer. In that event, the bond issuer would have an unsecured claim against the bankruptcy estate

 

24


Table of Contents

of the servicer for the amounts that it had repaid to the estate of the servicer. Furthermore, if a servicer is in bankruptcy, it may stop performing its functions as servicer and it may be difficult to find a third party to act as successor servicer. See “—Servicing Risks.”

Claims against an Ohio Company or any successor entity might be limited in the event of a bankruptcy of such Ohio Company.

If an Ohio Company were to become a debtor in a bankruptcy case, claims, including indemnity claims, by the bond issuer against the Ohio Company under the sale agreement and the other documents executed in connection with the sale agreement would be unsecured claims and could be modified or eliminated altogether disposed of in the bankruptcy case. In addition, the bankruptcy court might estimate any contingent claims that the bond issuer has against the Ohio Company and, if it determines that the contingency giving rise to these claims is unlikely to occur, estimate the claims at a lower amount. A party in interest in the bankruptcy of the Ohio Company might challenge the enforceability of the indemnity provisions in a sale agreement. If a court were to hold that the indemnity provisions were unenforceable, the bond issuer would be left with a claim for actual damages against the Ohio Company based on breach of contract principles, which would be subject to estimation and/or calculation by the court. We cannot give any assurance as to the result if any of the above-described actions or claims were made. Furthermore, we cannot give any assurance as to what percentage of their claims, if any, unsecured creditors would receive in any bankruptcy proceeding involving the Ohio Company.

Other Risks Associated with an Investment in the Certificates

The Ohio Companies’ ratings might affect the market value of the certificates.

A downgrading of the credit ratings on the debt of an Ohio Company could have an adverse effect on the market value of the bonds and, thus, the certificates. Credit ratings may change at any time. A rating agency has the authority to revise or withdraw its rating based solely upon its own judgment.

The Ohio Companies’ indemnification obligations under the sale and servicing agreements are limited and might not be sufficient to protect your investment in the certificates.

Each Ohio Company, in its capacity as seller, is obligated under its sale agreement to indemnify its bond issuer and the bond trustee, for itself and on behalf of the bondholders, only in specified circumstances and will not be obligated to repurchase or replace any phase-in-recovery property in the event of a breach of any of its representations, warranties or covenants regarding the phase-in-recovery property. Similarly, each Ohio Company is obligated under its servicing agreement, in its capacity as servicer, to indemnify the bond issuers and the bond trustee, for itself and on behalf of the bondholders, only in specified circumstances. Please read “Sale Agreements—Seller Covenants” and “Servicing Agreements—Servicer Representations and Warranties; Indemnification” in this prospectus.

No bond trustee or the bondholders will have the right to accelerate payments on the applicable bonds as a result of a breach under the applicable sale agreement or servicing agreement, absent an event of default under the applicable bond indenture. See “Description of the Bonds—Events of Default.” Furthermore, the Ohio Companies might not have sufficient funds available to satisfy its indemnification obligations under these agreements, and the amount of any indemnification paid by the Ohio Companies might not be sufficient for you to recover all of your investment in the certificates. In addition, if the Ohio Companies become obligated to indemnify bondholders, the ratings on the certificates may be downgraded as a result of the circumstances causing the breach. Bondholders would be unsecured creditors of the Ohio Companies with respect to any of these indemnification amounts.

The sellers will not be in breach of any representation or warranty as a result of a change in law.

No seller will be in breach of any representation or warranty as a result of a change in the law by means of a legislative enactment, constitutional amendment or voter initiative. Each seller will agree in its sale agreement

 

25


Table of Contents

and each servicer will agree in its servicing agreement to institute any action or proceeding as may be reasonably necessary to block or overturn any attempts to cause a repeal, modification or supplement to the Securitization Act that would be adverse to its bond issuer, bond trustee or bondholders (and thus the trust, the certificate trustee and the Delaware trustee). Please read “Sale Agreements—Seller Covenants” and “Servicing Agreements—Servicing Procedures.” However, we cannot assure you that any of the Ohio Companies would be able to take this action or that any such action would be successful.

The credit ratings are no indication of the expected rate of payment of principal on the bonds and, thus, distributions on the certificates.

We expect the bonds and the certificates will receive credit ratings from three NRSROs. A rating is not a recommendation to buy, sell or hold the bonds or the certificates. The ratings merely analyze the probability that the bond issuers and thus the certificate issuer, will repay the total principal amount of the bonds and the certificates, respectively, at the final maturity date (which is later than the scheduled final payment date) and will make timely interest payments. The ratings are not an indication that the rating agencies believe that principal payments are likely to be paid on time according to the expected amortization schedules.

Under Rule 17g-5 of the Exchange Act, NRSROs providing the sponsor with the requisite certification will have access to all information posted on a website by the sponsor for the purpose of determining the initial rating and monitoring the rating after the closing date in respect of the bonds. As a result, an NRSRO other than an NRSRO hired by the sponsor, referred to as a hired NRSRO, may issue ratings on the certificates, or Unsolicited Ratings, which may be lower, and could be significantly lower, than the ratings assigned by a hired NRSROs. The Unsolicited Ratings may be issued prior to, or after, the closing date in respect of the bonds. Issuance of any Unsolicited Rating will not affect the issuance of the bonds. Issuance of an Unsolicited Rating lower than the ratings assigned by a hired NRSRO on the bonds might adversely affect the value of the bonds and, thus, the certificates, and, for regulated entities, could affect the status of the bonds and, thus, the certificates as a legal investment or the capital treatment of the bonds and, thus, the certificates. Investors in the certificates should consult with their legal counsel regarding the effect of the issuance of a rating by a non-hired NRSRO that is lower than the rating of a hired NRSRO. None of the Ohio Companies, the bond issuers, us, the underwriters or any of their affiliates will have any obligation to inform you of any unsolicited ratings assigned after the date of this prospectus. In addition, if we, the bond issuers or the Ohio Companies fail to make available to a non-hired NRSRO any information provided to any hired rating agency for the purpose of assigning or monitoring the ratings on the bonds or certificates, a hired NRSRO could withdraw its ratings on the bonds or certificates, which could adversely affect the market value of your certificates and/or limit your ability to resell your certificates.

Other subsidiaries or affiliates of the Ohio Companies may issue other similar bonds or certificates similar to the certificates in the future without your prior review or approval.

The Ohio Companies may sell property created pursuant to a financing order it may obtain in the future to other subsidiaries or affiliates of the Ohio Companies in connection with the issuance of other similar bonds or certificates in the future without your prior review or approval. In the event a customer who is taking generation service from a retail electric service provider does not pay in full all amounts owed under any bill, including phase-in-recovery charges for the bonds and other similar bonds, pursuant to Ohio administrative rules or PUCO order requirements, the amount remitted shall first be credited to past due charges for such retail electric service, second be credited to past due electric utility distribution and transmission charges, including phase-in-recovery charges for the bonds and other similar bonds, and thereafter to current electric utility distribution and transmission charges, including phase-in-recovery charges for the bonds and other similar bonds. Amounts credited to electric utility distribution and transmission charges will be allocated ratably among the phase-in-recovery charges relating to all such bonds and other distribution and transmission charges and fees and charges. We cannot assure you that the issuance of additional bonds similar to the bonds would not cause reductions or delays in payments on the bonds and, thus, distributions on the certificates.

 

26


Table of Contents

Regulatory provisions affecting certain investors could adversely affect the liquidity of the certificates.

Regulatory or legislative provisions applicable to certain investors may (if and to the extent they apply in relation to an investment in the certificates) have the effect of limiting or restricting their ability to hold or acquire the certificates, which in turn may adversely affect the ability of investors in the certificates who are not subject to those provisions to sell their certificates in the secondary market. For example, certain member states of the European Economic Area, or EEA, have implemented, or are expected to implement, Article 122a of Directive 2006/48/EC, as amended, or Article 122a, which may apply to the purchase of the certificates by certain investors. Among other provisions, Article 122a prohibits investments by an EEA regulated credit institution in securitizations that fail to comply with certain requirements concerning retention by the originator, sponsor or original lender of the securitized assets of a portion of the securitization’s credit risk. Under Article 122a the regulator of such an EEA-regulated credit institution may impose a substantial additional capital charge on that institution if it acquires securities in a securitization and that securitization fails to meet the requirements of Article 122a. None of the Ohio Companies, the bond issuers or us have taken, or intend to take, any steps to comply with the requirements of Article 122a, nor to determine if and to what extent Article 122a applies to the certificates. The fact that the certificates have not been structured to comply with Article 122a could limit the ability of an EEA-regulated credit institution to purchase certificates, which in turn may adversely affect the liquidity of the certificates in the secondary market. This could adversely affect the liquidity of the market should you seek to sell your certificates or the price you may receive upon any sale of your certificates.

 

27


Table of Contents

REVIEW OF PHASE-IN-RECOVERY PROPERTY

Pursuant to the rules of the SEC, the sponsors have performed, as described below, a review of the phase-in-recovery property underlying the bonds. As required by these rules, the review was designed and effected to provide reasonable assurance that disclosure regarding the phase-in-recovery property is accurate in all material respects. The sponsors did not engage a third party in conducting their review.

The bonds are secured primarily by the phase-in-recovery property of the bond issuers. The phase-in-recovery property is a present property right authorized and created pursuant to the Securitization Act and an irrevocable financing order. The phase-in-recovery property includes the irrevocable right to impose, charge and collect nonbypassable phase-in-recovery charges from each retail customer within the service territory of CEI, OE or TE, as applicable, and to adjust those phase-in-recovery charges, in accordance with the adjustment mechanism set forth in the financing order, in an amount sufficient to pay principal and interest on the bonds and, subject to the cap to the extent applicable, other approved financing costs.

The phase-in-recovery property is not a static pool of receivables or assets. Phase-in-recovery charges authorized in the financing order that relate to the phase-in-recovery property are irrevocable and may not be reduced, impaired or adjusted by the PUCO except for periodic adjustments, in accordance with the adjustment mechanism, to correct overcollections or undercollections to ensure the recovery of amounts sufficient to timely provide all payments of debt service on the bonds and, subject to the cap to the extent applicable, other approved financing costs. While there is no “cap” on the level of phase-in-recovery charges that may be imposed on retail electric customers to pay on a timely basis scheduled principal of and interest on the bonds and replenish capital subaccounts, there is a “cap” on certain approved financing costs. See “Description of the Bonds—Allocations and Payments” in this prospectus. All revenues and collections resulting from the phase-in-recovery charges provided for in the financing order that relate to the bonds are part of the phase-in-recovery property. The phase-in-recovery property relating to the bonds is described in more detail under “Description of the Phase-In-Recovery Property” in this prospectus.

In the financing order, the PUCO, among other things:

 

   

orders that each of CEI, OE and TE, as applicable, as servicer under its respective servicing agreement, shall collect from all customers required to pay or collect phase-in-recovery charges under the financing order, phase-in-recovery charges in an amount sufficient to timely provide all payments of debt service on the bonds and, subject to the cap to the extent applicable, other approved financing costs,

 

   

orders that upon the transfer of the phase-in-recovery property to bond issuers by sellers, the bond issuers shall have all of the rights, title and interest of the sellers with respect to its respective phase-in-recovery property, and

 

   

states that it will act pursuant to the financing order as expressly authorized by the Securitization Act to ensure that expected phase-in-recovery charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the bonds and, subject to the cap to the extent applicable, other approved financing costs.

Please read “The Securitization Act” and “Description of the Phase-In-Recovery Property—Financing Order and Issuance Advice Letters” in this prospectus for more information.

The characteristics of phase-in-recovery property are unlike the characteristics of assets underlying mortgage and other commercial asset securitizations because phase-in-recovery property is a creature of statute and state regulatory commission proceedings. Because the nature and characteristics of the phase-in-recovery property and many elements of the securitization are set forth and constrained by the Securitization Act, the sponsors do not select the assets to be securitized in ways common to many securitizations. Moreover, the bonds do not contain origination or underwriting elements similar to typical mortgage or other loan transactions involved in other forms of asset-backed securities. The Securitization Act and the PUCO require the imposition

 

28


Table of Contents

on, and collection of phase-in-recovery charges from, existing and future retail customers located within the sponsors’ respective service territories. Since the phase-in-recovery charges are imposed on all such retail customers and the true-up adjustment mechanism adjusts for the impact of customer defaults, the collectability of the phase-in-recovery charges is not ultimately dependent upon the credit quality of particular customers; as would be the case in the absence of the true-up adjustment mechanism.

The review by the sponsors of the phase-in-recovery property underlying the bonds has involved a number of discrete steps and elements as described in more detail below. First, each sponsor has analyzed and applied the Securitization Act’s requirements for securitization of phase-in costs in seeking approval of the PUCO for the issuance of the financing order and in its proposal with respect to the characteristics of the phase-in-recovery property to be created pursuant to the financing order. In preparing this proposal, the sponsors worked with their counsel and its financial advisor in preparing the application for a financing order. Moreover, the sponsors worked with their counsel, their financial advisor and counsel to the underwriters in preparing the legal agreements that provide for the terms of the bonds and the security for the bonds. Each sponsor has analyzed economic issues and practical issues for the scheduled payment of the bonds and reviewed the prior experience of its affiliates in terms of impacts of economic factors, potentials for disruptions due to weather or catastrophic events and its own forecasts for customer growth as well as the historic accuracy of its prior forecasts.

In light of the unique nature of the phase-in-recovery property, each sponsor has taken (or prior to this offering, will take) the following actions in connection with its review of its respective phase-in-recovery property and the preparation of the disclosure for inclusion in this prospectus and the accompanying prospectus supplement describing the phase-in-recovery property, the bonds and the proposed securitization:

 

   

reviewed the Securitization Act and the rules and regulations of the PUCO as they relate to the phase-in-recovery property in connection with the preparation and filing of the application with the PUCO for the approval of the financing order in order to confirm that the application and proposed financing order satisfied applicable statutory and regulatory requirements;

 

   

actively participated in the proceeding before the PUCO relating to the approval of the requested financing order;

 

   

compared the financing order, as issued by the PUCO, to the Securitization Act and the rules and regulations of the PUCO as they relate to the phase-in-recovery property to confirm that the financing order met such requirements;

 

   

compared the proposed terms of the bonds to the applicable requirements in the Securitization Act, the financing order and the regulations of the PUCO to confirm that they met such requirements;

 

   

prepared and reviewed the agreements to be entered into in connection with the issuance of the bonds and compared such agreements to the applicable requirements in the Securitization Act, the financing order and the regulations of the PUCO to confirm that they met such requirements;

 

   

reviewed the disclosure in this prospectus and the accompanying prospectus supplement regarding the Securitization Act, the financing order and the agreements to be entered into in connection with the issuance of the bonds, and compared such descriptions to the relevant provisions of the Securitization Act, the financing order and such agreements to confirm the accuracy of such descriptions;

 

   

consulted with legal counsel to assess if there is a basis upon which the bondholders (or the bond trustee acting on their behalf) could successfully challenge the constitutionality of any legislative action by the State of Ohio (including the PUCO) that could repeal or amend the securitization provisions of the Securitization Act that could substantially impair the value of the phase-in-recovery property, or substantially reduce, alter or impair the phase-in-recovery charges;

 

   

reviewed the process and procedures in place for it, as servicer, to perform its obligations under the servicing agreement, including without limitation, billing and collecting the phase-in-recovery charges to be provided for under the phase-in-recovery property, forecasting phase-in-recovery charge revenues and preparing and filing applications for true-up adjustments to the phase-in-recovery charges;

 

29


Table of Contents
   

reviewed the operation of the true-up adjustment mechanism for adjusting phase-in-recovery charge levels to meet the scheduled payments on the bonds; and

 

   

assisted its financial advisor and the underwriters with the preparation of financial models in order to set the initial phase-in-recovery charges to be provided for under the phase-in-recovery property at a level sufficient to pay on a timely basis scheduled principal and interest on the bonds.

In connection with its assistance with the preparation of such models, each sponsor:

 

   

reviewed (i) the historical retail electric usage and customer growth within its service territory and (ii) forecasts of expected energy sales and customer growth;

 

   

reviewed its historical collection of rate charges; and

 

   

analyzed the sensitivity of the weighted average life of the bonds in relation to variances in actual energy consumption levels (retail electric sales) from forecasted levels and in relation to the true-up adjustment mechanism in order to assess the probability that the weighted average life of the bonds may be extended as a result of such variances, and in the context of the operation of the true-up adjustment mechanism for adjustment of phase-in-recovery charges to address under or overcollections in light of scheduled payments on the bonds.

As a result of this review, each sponsor has concluded that:

 

   

the phase-in-recovery property, the financing order and the agreements to be entered into in connection with the issuance of the bonds meet in all material respects the applicable statutory and regulatory requirements;

 

   

the disclosure in this prospectus and the accompanying prospectus supplement regarding the Securitization Act, the financing order and the agreements to be entered into in connection with the issuance of the bonds is, or in the case of the accompanying prospectus supplement, will be, as of its respective date, accurate in all material respects;

 

   

it, as servicer, has adequate processes and procedures in place to perform its obligations under the servicing agreement;

 

   

phase-in-recovery charge revenues, as adjusted from time to time as provided in the Securitization Act and the financing order, are expected to be sufficient to pay on a timely basis scheduled principal and interest on the bonds and, as a result, the distributions on the certificates; and

 

   

the design and scope of its review of the phase-in-recovery property as described above is effective to provide reasonable assurance that the disclosure regarding the phase-in-recovery property in this prospectus and the accompanying prospectus supplement is accurate in all material respects.

 

30


Table of Contents

THE SECURITIZATION ACT

Background and Regulatory Overview

On December 21, 2011, the Governor of Ohio signed into law Sections 4928.23 through 4928.2318 of the Ohio Revised Code, referred to herein as the Securitization Act, which amended and enacted certain provisions of Ohio law to establish standards for the securitization of certain costs for electric distribution utilities. The Securitization Act became effective on March 22, 2012. Among other things, the Securitization Act:

 

   

permits an electric distribution utility, such as CEI, OE and TE, to apply to the PUCO for a financing order authorizing the issuance of bonds to recover certain uncollected “phase-in costs” previously authorized by the PUCO and financing costs through securitization;

 

   

permits an electric distribution utility under a financing order to impose, charge and collect phase-in-recovery charges on retail customers as long as they remain customers, or if they receive distribution from another electric distribution utility operating in the same service area, in accordance with a PUCO-approved adjustment mechanism;

 

   

specifies that the phase-in-recovery charges are nonbypassable as long as bonds and financing costs have not been paid in full;

 

   

specifies that financing orders are irrevocable and remain in effect until the bonds and financing costs on the bonds have been paid in full;

 

   

provides for the creation of phase-in-recovery property and contains provisions regarding transferring, conveying and pledging the phase-in-recovery property to facilitate the securitization and secure payment of bonds and financing costs, and the creation, perfection, enforcement and priority of any security interest in the phase-in-recovery property; and

 

   

exempts the imposition, charging, collection and receipt of the phase-in-recovery revenues and the transfer and ownership of phase-in-recovery property from Ohio state taxation and similar charges.

On May 3, 2012, CEI, OE and TE filed a joint application with the PUCO requesting the issuance of an irrevocable financing order to recover through securitization certain uncollected “phase-in costs” previously authorized by the PUCO for recovery and associated financing costs, and to impose, charge and collect the phase-in-recovery charges.

On October 10, 2012, the PUCO issued a financing order authorizing CEI, OE and TE to recover the previously authorized “phase-in costs,” enter into transactions for the issuance of the bonds and to impose, charge and collect the phase-in-recovery charges.

On November 9, 2012, CEI, OE and TE filed a joint application with the PUCO for rehearing of the financing order to clarify and amend certain provisions of the financing order.

On December 19, 2012, the PUCO issued an entry on rehearing, which amended the financing order previously issued by the PUCO.

On January 9, 2013, the PUCO issued an entry nunc pro tunc, which further amended the financing order to provide for certain revisions and corrections to the entry on rehearing.

Recovery of Phase-In Costs

In Case No. 08-935-EL-SSO Order, dated March 25, 2009, the PUCO approved the recovery, by CEI, of certain deferred costs, with carrying charges, associated with purchase power costs incurred that exceeded the purchase power recovery mechanism revenue from January 1, 2009 through May 31, 2009, which, prior to the issuance of the bonds, were recovered through a separate rider mechanism, namely the Deferred Generation Cost Recovery Rider, or Rider DGC.

 

31


Table of Contents

In Case No. 08-935-EL-SSO Order, dated March 25, 2009, Case No. 07-1003-EL-ATA Order, dated March 24, 2010, and continued by Case No. 10-388-EL-SSO dated August 25, 2010, the PUCO approved the recovery, by each of CEI, OE and TE, of certain deferred costs, with carrying charges, associated with the actual fuel costs incurred that exceeded the fuel recovery mechanism revenues collected from January 1, 2006 through December 31, 2007, which, prior to the issuance of the bonds, were recovered through a separate rider mechanism, namely the Deferred Fuel Cost Recovery Rider, or Rider DFC.

In Case No. 10-176-EL-ATA Order, dated May 25, 2011, the PUCO approved the recovery of certain deferred costs, with carrying charges, associated with purchase power costs incurred from March 17, 2010 through June 30, 2011 that exceeded the associated purchase power recovery mechanism revenue due to implementation of the Residential Generation Credit Rider, or Rider RGC, which, prior to the issuance of the bonds, were recovered through a separate rider mechanism, namely the Residential Electric Heating Recovery Rider, or Rider RER1.

On February 18, 2013, the financing order, which (among other things) authorizes CEI, OE and TE to recover their respective uncollected balances in Rider DGC, Rider DFC and Rider RER1, as applicable, as phase-in costs became final. See “Description of the Phase-In-Recovery Property—Financing Order and Issuance Advice Letters.”

CEI, OE and TE and Other Utilities May Securitize Phase-In Costs

The Bond Issuers May Issue Bonds to Recover CEI’s, OE’s and TE’s Phase-In Costs. The Securitization Act authorizes the PUCO to issue financing orders approving the issuance of bonds to recover certain phase-in costs of an electric distribution utility. A utility or an assignee of a utility may obtain securitization financing through the issuance of bonds. Under the Securitization Act, proceeds of the issuance of the bonds must be used to recover, finance or refinance phase-in costs and financing costs. Such bonds are secured by, and payable from, phase-in-recovery property, which includes the right to impose, charge and collect phase-in-recovery charges.

The Securitization Act contains a number of provisions designed to facilitate the securitization of phase-in costs, as set out below.

Creation of Phase-In-Recovery Property. Under the Securitization Act, phase-in-recovery property may be created when the rights and interests of an electric distribution utility under a financing order, including the right to impose, charge and collect phase-in-recovery charges authorized in the financing order, are first transferred to an assignee, such as to the bond issuers, and pledged in connection with the issuance of bonds.

A Financing Order is Irrevocable. A financing order, once effective, together with the phase-in-recovery charges authorized in the financing order, is irrevocable and the PUCO may not reduce, impair, postpone or terminate the phase-in-recovery charges authorized in the financing order or impair the property or the collection or recovery of phase-in costs, except for periodic adjustments, in accordance with the adjustment mechanism, to correct overcollections or undercollections to ensure the recovery of amounts sufficient to timely provide all payments of debt service on the bonds and other approved financing costs. Although a financing order is irrevocable, the Securitization Act allows electric utilities to apply for one or more new financing orders to provide for retiring and refunding bonds upon satisfaction of certain requirements set forth in the Securitization Act.

The State Pledge. Under the Securitization Act, the State of Ohio has pledged, for the benefit of the bondholders and the bond issuers, and agreed that it will not take or permit any action that impairs the value of the phase-in-recovery property or, except for adjustments as discussed in “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges,” reduce, alter or impair the phase-in-recovery charges that are imposed, charged, collected or remitted for the benefit of bondholders, until the bonds and all other

 

32


Table of Contents

approved financing costs are paid in full. For a description of risks related to the enforcement of this pledge, please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions—Legislative Actions” and “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions— The PUCO might take actions that could reduce the value of your investment in the certificates” in this prospectus.

Constitutional Matters. To date, no federal or Ohio cases addressing the repeal or amendment of securitization provisions analogous to those contained in the Securitization Act have been decided. There have been cases in which federal courts have applied the Contract Clause of the United States Constitution and Ohio courts have applied the Contract Clause of the Ohio Constitution, which is interpreted by the Ohio Supreme Court by reference to United States Supreme Court precedent, to strike down legislation regarding similar or analogous matters, such as legislation reducing or eliminating taxes, statutory fees, public charges or other sources of revenues servicing other types of bonds issued by public instrumentalities or private issuers, or otherwise substantially impairing or eliminating the security for bonds or other indebtedness.

Based upon this case law, Akin Gump Strauss Hauer & Feld LLP, federal counsel to the bond issuers and trust, and Calfee, Halter & Griswold LLP, Ohio counsel to the bond issuers, expect to deliver an opinion prior to the closing of the offering of the bonds to the effect that the pledge described above creates a binding contractual obligation for purposes of the Contract Clauses of the United States and Ohio constitutions, respectively, and provides a basis upon which the bondholders (or the bond trustees acting on their behalf) could challenge successfully, under the Contract Clauses of the United States and Ohio Constitutions, the constitutionality of any action by the State of Ohio (including the PUCO) of a legislative character, including the repeal or amendment of the securitization provisions of the Securitization Act, that violates the pledge described above in a way that a court would determine impairs the value of the phase-in-recovery property, or reduces, alters or impairs the phase-in-recovery charges, so as to cause a substantial impairment of the contract, unless such action is a reasonable exercise of the sovereign powers of the State of Ohio and of a character reasonable and appropriate to the public purpose justifying such action.

It may be possible for the Ohio legislature to repeal or amend the Securitization Act, or for the PUCO to amend or revoke the financing order notwithstanding the State’s pledge, if the legislature or the PUCO acts in order to serve a significant and legitimate public purpose, such as protecting the public health and safety or responding to a national or regional catastrophe affecting CEI’s, OE’s or TE’s respective service territories, or if the legislature otherwise acts in the valid exercise of the state’s police power.

In addition, any action of the Ohio legislature adversely affecting the phase-in-recovery property or the ability to impose, charge or collect phase-in-recovery charges may be considered a “taking” under the United States or Ohio Constitutions. Akin Gump Strauss Hauer & Feld LLP and Calfee, Halter & Griswold LLP, respectively, have advised us that they are not aware of any federal or Ohio court cases addressing the applicability of the Takings Clause of the United States or Ohio Constitution, respectively, in a situation analogous to that which could be involved in an amendment or repeal of the Securitization Act. It is possible that a court would decline even to apply a Takings Clause analysis to a claim based on an amendment or repeal of the Securitization Act, since, for example, a court might determine that a Contract Clause analysis rather than a Takings Clause analysis should be applied. Assuming a Takings Clause analysis were applied under the United States or Ohio Constitution, Akin Gump Strauss Hauer & Feld LLP and Calfee, Halter & Griswold LLP, respectively, expect to render opinions prior to the closing of the offering of the certificates to the effect that under existing case law, if a court concludes that the phase-in-recovery property is protected by the Takings Clause of the United States or Ohio Constitution, respectively, it would find a compensable taking if the State of Ohio were to enact a law that, without paying just compensation to the bondholders (i) permanently appropriates the phase-in-recovery property or denies all economically productive use of the phase-in-recovery property; or (ii) destroys the phase-in-recovery property, other than in response to emergency conditions; or (iii) substantially impairs the value of the phase-in-recovery property, if the law inflicts severe economic impact on the bondholders and unduly interferes with such bondholders’ reasonable investment backed expectations. In examining whether action of the Ohio legislature amounts to a regulatory taking, both federal and state courts will consider the character of the governmental action and whether such action substantially advances the State’s

 

33


Table of Contents

legitimate governmental interests, the economic impact of the governmental action on the bondholders, and the extent to which the governmental action interferes with distinct investment-backed expectations. There is no assurance, however, that, even if a court were to award just compensation, it would be sufficient for bondholders to recover fully their investment in the bonds or, thus, for you to recover fully your investment in the certificates.

In connection with the foregoing, our legal counsel has advised us that issues relating to the Contract and Takings Clauses of the United States and Ohio constitutions are essentially decided on a case by case basis and that the courts’ determinations, in most cases, appear to be strongly influenced by the facts and circumstances of the particular case. We have been further advised that there are no reported controlling judicial precedents that are directly on point. The opinions described above will be subject to the qualifications included in them. The degree of impairment necessary to meet the standards for relief under a Takings Clause analysis or Contract Clause analysis could be substantially in excess of what a bondholder or you would consider material. Copies of the opinions described above will be filed with the SEC as an exhibit to an amendment to the registration statement of which this prospectus is a part.

For a discussion of risks associated with potential judicial, legislation or regulatory actions, please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions—Legislative Actions” and “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions—Court Decisions” in this prospectus.

The PUCO May Adjust Phase-In-Recovery Charges. Pursuant to the Securitization Act, the PUCO provided a description in the financing order of the adjustment mechanism to be used in the imposition, charging and collection of the phase-in-recovery charges, such phase-in-recovery charges to be reviewed and adjusted at least annually or more frequently as provided in the financing order, based on estimates of consumption for each customer class and other mathematical factors. The PUCO’s review of these requests is limited to determining whether there is any mathematical error in the servicer’s application of the adjustment mechanism to the phase-in-recovery charges, including the calculation of any proportionate charges allocated to governmental aggregation customers as directed in the financing order. Such adjustments will become automatically effective 60 days after the request is submitted unless otherwised ordered by the PUCO.

Phase-In-Recovery Charges are Nonbypassable. The Securitization Act provides that, as long as the bonds are outstanding and the related phase-in costs and approved financing costs have not been recovered in full, the phase-in-recovery charges authorized under the financing order are nonbypassable. Nonbypassable means that phase-in-recovery charges cannot be avoided by any customer or other person obligated to pay such charges. Subject to the adjustment mechanism discussed above, phase-in-recovery charges will apply to all retail customers of an electric distribution utility for as long as they remain customers of such electric distribution utility. If a customer of the electric distribution utility purchases electric generation service from a competitive retail electric service provider, the utility will collect the phase-in-recovery charges directly from that customer. If a customer of the utility subsequently receives retail electric distribution service from another electric distribution utility operating in the same service area, including by succession, assignment, transfer or merger, the phase-in-recovery charges will continue to apply to that customer. If a customer switches its retail electric distribution service to a municipal utility, the phase-in-recovery charges will not continue to apply to that customer.

The Securitization Act Protects the Bond Trustee’s Lien on Phase-In-Recovery Property. The Securitization Act provides that a valid and binding security interest in phase-in-recovery property may be created only by a financing order and the execution and delivery of a security agreement in connection with the issuance of bonds. The security interest attaches without any physical delivery of collateral or other act. Upon filing of a financing statement with the office of the Secretary of State of Ohio, the lien of the security interest is valid, binding and perfected against all parties having claims of any kind in tort, contract or otherwise against the person granting the security interest, regardless of whether the parties have notice of the lien. A security interest in the phase-in-recovery property under a financing order is created, valid and binding on the later of:

 

   

the date on which the security agreement is executed and delivered, or

 

   

the date on which value is received for the bonds.

 

34


Table of Contents

The Securitization Act provides that the description of the phase-in-recovery property in a transfer or security agreement and a financing statement is sufficient only if the description refers to the applicable section of the Securitization Act and the financing order creating the phase-in-recovery property.

On perfection through the filing of a financing statement with the Secretary of State of Ohio, the security interest (1) will be a continuously perfected lien and security interest in the phase-in-recovery property and (2) will have a priority over all parties having claims, including judicial or other lien creditors, other than creditors holding a prior security interest, ownership interest or assignment previously perfected in accordance with the statutory provision.

The Securitization Act provides that priority of a security interest in phase-in-recovery property will not be impaired by:

 

   

commingling of phase-in-recovery revenues with other amounts, or

 

   

application of the adjustment mechanism described in “Description of the Phase-In-Recovery Property—Adjustments to the Phase-In-Recovery Charges.”

The Securitization Act Characterizes the Transfer of Phase-In-Recovery Property as a True Sale. The Securitization Act provides (and each sale agreement also provides as required by the Securitization Act) that an electric utility’s or an assignee’s transfer of phase-in-recovery property under a financing order is a “true sale” under Ohio law and is not a pledge or a secured transaction, if the documents governing that transfer expressly state that the transfer is a sale or other absolute transfer. Please read “Bankruptcy and Creditors’ Rights Issues” and “Risk Factors—Bankruptcy and Creditors’ Rights Issues” in this prospectus.

 

35


Table of Contents

DESCRIPTION OF THE PHASE-IN-RECOVERY PROPERTY

Overview

The phase-in-recovery property of each bond issuer consists generally of its property, rights and interests under the financing order issued by the PUCO on October 10, 2012, as amended by the entry on rehearing issued by the PUCO on December 19, 2012 upon application for rehearing, and entry nunc pro tunc issued by the PUCO on January 9, 2013, collectively referred to herein as the financing order, including each bond issuer’s right:

 

   

to impose, charge and collect irrevocable, nonbypassable phase-in-recovery charges from each retail customer within the service territory of CEI, OE or TE, as applicable, and

 

   

to adjust those phase-in-recovery charges, in accordance with the adjustment mechanism set forth in the financing order, in an amount sufficient to pay principal and interest on its bonds and, subject to the cap to the extent applicable, other financing costs approved under the financing order.

Portions of the financing order are summarized in this section and elsewhere in this prospectus. We have filed the financing order as an exhibit to the registration statement of which this prospectus is a part.

Each bond issuer will purchase its phase-in-recovery property from its seller. The bonds of each bond issuer are secured primarily by the phase-in-recovery property of the bond issuers. The phase-in-recovery property is not a receivable and, as the primary collateral securing the bonds of the bond issuer, is not a pool of receivables. Collections from the phase-in-recovery charges, as such charges may be adjusted pursuant to the adjustment mechanism, will be used to pay principal and interest on the bonds and, subject to the cap to the extent applicable, other financing costs approved under the financing order. These irrevocable nonbypassable charges will be included in the retail customer bills of CEI, OE or TE, as applicable, and will be collected until the bonds and approved financing costs are paid in full. Phase-in-recovery charges may not be reduced, impaired or adjusted by the PUCO except for periodic adjustments, in accordance with the adjustment mechanism, to correct overcollections or undercollections to ensure the recovery of amounts sufficient to timely provide all payments of debt service on the bonds and, subject to the cap to the extent applicable, other approved financing costs. All revenues and collections from phase-in-recovery charges provided for in the financing order are part of the phase-in-recovery property. Please read “Credit Enhancement” in the accompanying prospectus supplement for more information relating to the phase-in-recovery property.

Financing Order and Issuance Advice Letters

The Securitization Act authorizes the PUCO to issue a financing order, which is a regulatory order that approves the amount of an electric utility’s phase-in costs that it is permitted to finance through the issuance of bonds. On May 3, 2012, CEI, OE and TE filed a joint petition for a financing order with the PUCO. The PUCO issued a financing order dated October 10, 2012, as amended, which authorized the issuance of up to $555 million aggregate principal amount of bonds based upon then current estimates of unrecovered phase-in-cost balances of the Ohio Companies as of December 31, 2012.

The financing order, together with the issuance advice letters, establishes, among other things, the phase-in-recovery charges for each Ohio Company to recover its reimbursable phase-in costs and financing costs as specified in the financing order. The phase-in-recovery charges of each Ohio Company are nonbypassable in that customers must pay it whether or not they purchase energy from CEI, OE and TE, or a third party supplier of energy. The Securitization Act provides that the right to collect payments based on the phase-in-recovery charges is a property right which may be pledged, transferred, assigned or sold in connection with the issuance of the bonds. Under the financing order, the phase-in-recovery property is created simultaneous with its sale to the applicable bond issuer who, as the owner of such phase-in-recovery property, is entitled to impose, bill and collect the phase-in-recovery charges until it has received payments from customers of the applicable Ohio Company sufficient to retire all outstanding bonds and to pay all other approved financing costs, including all upfront and ongoing financing costs approved in the financing order. Phase-in-recovery charges are subject to adjustment semiannually (other than the

 

36


Table of Contents

initial adjustment, which will be completed within 12 months after the issuance date of the bonds and the last year each tranche of bonds is outstanding, during which adjustments may be made as frequently as monthly). Such charges will be included in retail customers’ bills, and there will be a separate notation on customers’ bills denoting that the right to impose, charge and collect phase-in-recovery charges is owned by the applicable bond issuer. Please read “—Phase-In-Recovery Charges” and “—Adjustments to the Phase-In-Recovery Charges” below.

The financing order requires each of the sellers to submit an issuance advice letter relating to the bonds to the PUCO no later than the end of the first business day after the pricing date for that tranche of bonds. Each issuance advice letter, in the form set forth in the financing order and attached as an exhibit to this prospectus, will establish final terms and conditions of the applicable bonds. The financing order also requires each of the sellers to file updated tariff sheets to reflect the final initial phase-in-recovery charges based upon actual costs and any other revised assumptions at the time of pricing of the bonds. The initial phase-in-recovery charges and final terms of the bonds as set forth in an issuance advice letter will automatically become effective no later than the fourth business day after pricing unless prior to such time the PUCO issues an order finding that market conditions are such that customers will not realize cost savings from the issuance of the bonds and directing the bond issuers not to proceed with the securitization.

Phase-In-Recovery Property

The phase-in-recovery property is a property right consisting generally of the right to impose, charge and collect phase-in-recovery charges from retail customers, the right to adjust those phase-in-recovery charges and the right to all revenues, collections, claims, payments, money or proceeds of or arising from the phase-in-recovery charges and the property, rights and interests created under the financing order. The bonds of each bond issuer will be secured by the phase-in-recovery property, as well as the other bond collateral described under “Description of the Bonds—Security.”

Phase-In-Recovery Charges

The phase-in-recovery charges of each Ohio Company are designed to recover on a fully reconciling basis all of its respective phase-in costs. The phase-in-recovery charges are the mechanism through which each of CEI, OE and TE is allowed to recover its respective phase-in costs. Recovery of the phase-in costs was previously approved by the PUCO through separate existing riders. See “The Securitization Act—Recovery of Phase-In Costs.”

Each of the servicers will calculate and set their respective initial phase-in-recovery charges at a level estimated to generate sufficient revenues (and taking into account the cap on certain ongoing financing costs):

 

   

to pay fees and expenses related to the servicing and retirement of the bonds of the related bond issuer and of the certificates allocable to the bond issuer, including, without limitation, fees and expenses related to trustee costs, rating agency surveillance fees, legal and accounting fees and other ongoing financing costs, as well as adjustments for dealing with estimated and actual costs;

 

   

to pay interest on the bonds;

 

   

to pay principal of each tranche of such bonds according to the related expected amortization schedule;

 

   

to replenish the capital subaccount to the required capital level; and

 

   

to pay all additional fees, costs and charges and, subject to the cap to the extent applicable, other financing costs approved under the financing order.

 

37


Table of Contents

The table below sets forth each Ohio Company’s estimate of its respective initial phase-in-recovery charges as of                     , 2013, compared with the estimate of the charges based on current recovery methods. The amounts shown in the table are dependent on a number of assumptions as described below and based on current estimates and market conditions. Such amounts will also periodically change throughout the recovery period in accordance with the approved adjustment mechanism described below. See “—Adjustments to the Phase-In-Recovery Charges.”

 

Company

   Estimated  Initial
Phase-In-Recovery
Charges (per kWh)
     Estimated Monthly
Cost for Typical
Residential Bill
(per 1,000 kWh)
     Average  Total
Monthly

Charge for 1,000 kWh
Residential Customer
Under Current

Recovery
     Estimated Total
Monthly Savings for
1,000 kWh

Residential
Customer
 

CEI

   $                    $                    $                    $                

OE

   $         $         $         $     

TE

   $         $         $         $     

The estimated initial phase-in-recovery charges are based on a number of assumptions as of                     , 2013 including but not limited to the settlement date of the transaction, the long-term electricity sales forecast, interest rates, average uncollectible percentages, average days sales outstanding and financing costs.

Adjustments to the Phase-In-Recovery Charges

The initial adjustment to the phase-in-recovery charges will be completed within 12 months after the issuance date for the bonds. Thereafter, during the life of the bonds of a bond issuer, the related servicer will calculate and adjust the phase-in-recovery charges semiannually, with the exception of the last year each tranche of bonds is expected to be outstanding, in which case adjustments as frequently as monthly may be necessary. These adjustments to the phase-in-recovery charges will be set at levels estimated to generate revenues sufficient to pay, subject to the cap to the extent applicable, approved fees and expenses of servicing the bonds and an allocable portion of the certificates, to pay interest on, and principal of, the bonds and, thus, an allocable portion of the certificates, to fund and replenish other subaccounts of the bond issuer as required for the upcoming year and other financing costs approved in financing order.

Each servicer will increase or decrease the phase-in-recovery charges for its bond issuer over the life of the bonds issuer’s bonds as a result of several factors, including but not limited to:

 

   

changes in electricity sales forecasts;

 

   

changes in weighted average days outstanding of customer receivables and charge-off experience (including defaults by any third party billers);

 

   

changes in any ongoing fees, costs and expenses or other ongoing financing costs; and

 

   

unpaid interest on or deferred principal of the bonds.

The adjustments to the phase-in-recovery charges will continue until all interest on, and principal of, all tranches of bonds of the related bond issuer, and, thus, an allocable portion of the related tranches of certificates, and, subject to the cap to the extent applicable, other approved financing costs have been paid or distributed in full.

The financing order provides that the servicers will each file adjustment requests as follows:

 

   

No later than November 1 and May 1 of each year (subject to the exceptions described above for the initial adjustment and the last year each tranche of bonds is expected to be outstanding), each servicer will file with the PUCO an adjustment request for approval of such servicers’ adjusted phase-in-recovery charges and corresponding amended tariff sheets.

 

38


Table of Contents
   

Unless otherwise ordered by the PUCO, these adjusted phase-in-recovery charges and the associated tariff amendments will become automatically effective on a service rendered basis 60 days after the filing of the adjustment request. The PUCO’s review of these requests is limited to determining whether there is any mathematical error in the servicer’s application of the adjustment mechanism to the phase-in-recovery charges.

The adjustment requests will take into account amounts available in a bond issuer’s general subaccount and excess funds subaccount, and amounts necessary to replenish the capital subaccount to its required level, in addition to amounts payable on the bonds and related fees and expenses.

 

39


Table of Contents

SALE AGREEMENTS

The following summary describes particular material terms and provisions of the sale agreements pursuant to which each bond issuer will purchase phase-in-recovery property from its seller. We will file the form of the sale agreement as an exhibit to the registration statement of which this prospectus forms a part. This summary does not purport to be complete and is subject and qualified by reference to the provisions of the sale agreements.

The Ohio Companies, as sellers, have agreed in the sale agreements not to sell phase-in-recovery property to secure another issuance of bonds or certificates if it would cause the then existing ratings on the certificates from Standard & Poor’s, Moody’s and Fitch’s to be downgraded.

On the issuance date of the certificates, each seller will sell and assign to the applicable bond issuer, without recourse, its entire interest in its phase-in-recovery property. Each seller’s phase-in-recovery property will include all of such seller’s rights under the financing order related to such phase-in-recovery property to impose, charge and collect phase-in-recovery charges in an amount sufficient to pay the applicable bond issuer’s bonds and approved financing costs. Each bond issuer will apply the net proceeds from the sale of its bonds to the trust to purchase its phase-in-recovery property. Each seller’s financial statements will indicate that it is not the owner of the phase-in-recovery property. However, for financial reporting and tax purposes a seller will treat the bonds as representing debt of such seller.

Seller Representations and Warranties

In the sale agreements, each of the sellers will separately represent and warrant to its bond issuer, as of the closing date, among other things, that:

 

  (a) the information describing such seller in “The Sponsors, Sellers and Initial Servicers” section of this prospectus is correct in all material respects;

 

  (b) the seller has transferred the phase-in-recovery property, free and clear of all security interests, liens, charges and encumbrances (other than any created by Section 4928.2312 of the Securitization Act and any in favor of the bond issuer);

 

  (c) the phase-in-recovery property has been validly transferred and sold to the bond issuer and all filings (including filings with the Secretary of State of the State of Ohio as required under the Securitization Act) necessary in any jurisdiction to give the bond issuer a valid, perfected ownership interest (subject to any lien created by Section 4928.2312 of the Securitization Act) in the phase-in-recovery property have been made;

 

  (d) under the laws of the State of Ohio (including the Securitization Act) and the United States in effect on the closing date:

 

   

the financing order pursuant to which the phase-in-recovery property has been created is in full force and effect;

 

   

the bondholders are entitled to the protections of the Securitization Act and the financing order is not revocable by the PUCO;

 

   

the State of Ohio may not rescind, alter or amend the Securitization Act or take or permit any other action that impairs the value of the phase-in-recovery property or revise the phase-in costs for which recovery is authorized under the financing order or, except for periodic adjustments allowed in accordance with the adjustment mechanism in Section 4928.238 of the Securitization Act, reduce, alter or impair phase-in-recovery charges that are imposed, collected or remitted for the benefit of the bondholders in a manner that would substantially impair the rights of bondholders, absent a demonstration by the State of Ohio that an impairment is a reasonable exercise of its sovereign power and of a character reasonable and appropriate to the public purpose justifying such action until the bonds, together with accrued interest, and, subject to the cap to the extent applicable, all other approved financing costs are fully paid and performed in full;

 

40


Table of Contents
   

the process by which the financing order was adopted and approved, and the financing order and issuance advice letters themselves, comply with all applicable laws, rules and regulations;

 

   

the issuance advice letters have been filed in accordance with the financing order;

 

   

the PUCO may not, either by rescinding, altering or amending the financing order, in any way reduce, impair, postpone or terminate the phase-in-recovery charges or impair the phase-in-recovery property or the collection or recovery of the phase-in costs absent a demonstration by the State of Ohio that an impairment is a reasonable exercise of its sovereign power and of a character reasonable and appropriate to the public purpose justifying such action until the bonds, together with accrued interest, and, subject to the cap to the extent applicable, all other approved financing costs are fully paid and performed in full; and

 

   

no other approval, order or other action of, or sale or filing with any other governmental body is required in connection with the creation of the phase-in-recovery property, except those that have been obtained or made or will be obtained or made on the closing date;

 

  (e) based on information available to the seller on the closing date, the assumptions used in calculating the initial phase-in-recovery charges are reasonable and are made in good faith;

 

  (f) on the effectiveness of the financing order and the issuance advice letter:

 

   

all of the phase-in-recovery property constitutes an existing property right;

 

   

the phase-in-recovery property consists of the right to impose, charge and collect phase-in-recovery charges, the right to all revenues, collections, claims, payments, money, or proceeds of or arising from the phase-in-recovery charges, as adjusted from time to time pursuant to the financing order, and all rights to obtain adjustments to the phase-in-recovery charges pursuant to the financing order; and

 

   

the owner of the phase-in-recovery property is legally entitled to collect payments arising from the phase-in-recovery charges in the aggregate sufficient to pay the interest on and principal of the bonds of the bond issuer, to pay the fees and expenses of servicing the bonds and an allocable portion of the certificates, to replenish the capital subaccount to the required capital level and pay other approved financing costs until the bonds and, subject to the cap to the extent applicable, all other approved financing costs are paid in full;

 

  (g) the seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio, with the requisite corporate power and authority to own its properties as owned on the closing date and to conduct its business as conducted by it on the closing date and to execute, deliver and perform the terms of the sale agreement;

 

  (h) the execution, delivery and performance of the sale agreement have been duly authorized by all necessary corporate action on the part of the seller;

 

  (i) the sale agreement constitutes a legal, valid and binding obligation of the seller, enforceable against it in accordance with its terms, subject to applicable insolvency, reorganization, moratorium, fraudulent transfer and other laws relating to or affecting creditors’ or secured parties’ rights generally from time to time in effect and to general principles of equity, regardless of whether considered in a proceeding in equity or law;

 

  (j) the consummation of the transactions contemplated by the sale agreement do not conflict with the seller’s articles of incorporation or by-laws or any material agreement or instrument to which the seller is a party or bound, result in the creation or imposition of any lien upon the seller’s properties pursuant to the terms of a material agreement or instrument (other than any lien that may be granted under the transaction documents or any lien created by Section 4928.2312 of the Securitization Act) or violate any existing law or any existing order, rule or regulation applicable to the seller or any federal or state court or regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the seller or its properties;

 

41


Table of Contents
  (k) no governmental approvals, authorizations, consents, orders or other actions or filings are required for the seller to execute, deliver and perform its obligations under the sale agreement except those which have previously been obtained or made or which are required to be obtained or made in the future pursuant to the servicing agreement; and

 

  (l) except as disclosed to the bond issuer, no court or administrative proceeding is pending and, to the seller’s knowledge, no court or administrative proceeding is threatened and no investigation is pending or threatened:

 

   

asserting the invalidity of the sale agreement, the Securitization Act or the financing order, or seeking to prevent the consummation of the transactions contemplated by, the sale agreement or other basic documents;

 

   

seeking a determination that might materially adversely affect the performance by the seller of its obligations under, or the validity or enforceability of, the sale agreement, the Securitization Act or the financing order; or

 

   

adversely affect the federal or state income tax classification of the bonds or the certificates as debt.

Notwithstanding the above, the sellers will not be in breach of a representation or warranty due to a change in law by legislative enactment, constitutional amendment or initiative petition and will not represent or warrant that any amounts actually collected arising from the phase-in-recovery charges will in fact be sufficient to meet payment obligations on the bonds, and thus its bond issuer’s allocable portion of the certificates, or that assumptions made in calculating the phase-in-recovery charges will in fact be realized.

Seller Covenants

In the sale agreements, each of the sellers will separately make the following covenants:

 

  (a) so long as any of the bonds of the applicable bond issuer are outstanding, except as otherwise provided under the sale agreement, such seller (a) will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its organization and (b) will obtain and preserve its qualification to do business, in each case to the extent that in each such jurisdiction such existence or qualification is or shall be necessary to protect the validity and enforceability of the sale agreement, the other basic documents to which such seller is a party and each other instrument or agreement necessary or appropriate to the proper administration of the sale agreement and the transactions contemplated thereby;

 

  (b) except for the conveyances under the sale agreement, the lien under the Securitization Act or the back-up security interest, the seller will not sell, pledge, assign or transfer, or grant, create, or incur any lien on, any of the phase-in-recovery property, or any interest therein, and such seller shall defend the right, title and interest of its bond issuer and the bond trustee in, to and under the phase-in-recovery property against all claims of third parties claiming through or under such seller. Such seller, in its capacity as seller, will not at any time assert any lien against, or with respect to, any of the phase-in-recovery property;

 

  (c) if the seller receives any payments in respect of the phase-in-recovery charge or the proceeds thereof when it is not acting as the servicer, such seller will pay to the servicer all payments received by it in respect thereof as soon as practicable after receipt by it;

 

  (d) the seller will notify the applicable bond issuer and bond trustee promptly after becoming aware of any lien on any of the phase-in-recovery property, other than the conveyances under the sale agreement, any lien under the basic documents or the lien under the Securitization Act or for the benefit of the bond issuer;

 

42


Table of Contents
  (e) the seller will comply with its organizational and governing documents and all laws, treaties, rules, regulations and determinations of any governmental instrumentality applicable to it, except to the extent that failure to so comply would not adversely affect the applicable bond issuer’s or the bond trustee’s interests in the phase-in-recovery property or under any of the other basic documents to which such seller is party or the seller’s performance of its obligations under the sale agreement or under any of the other basic documents to which it is party;

 

  (f) so long as any of the bonds of the applicable bond issuer are outstanding:

 

   

the seller will treat such bonds as debt of the applicable bond issuer and not of such seller, except for financial accounting or tax reporting purposes;

 

   

the seller will indicate in its financial statements that it is not the owner of the phase-in-recovery property and will disclose the effects of all transactions between itself and the applicable bond issuer in accordance with generally accepted accounting principles; and

 

   

the seller will not own or purchase any bonds or certificates;

 

  (g) the seller agrees that, upon the sale by such seller of the phase-in-recovery property to the applicable bond issuer pursuant to the sale agreement:

 

   

to the fullest extent permitted by law, including applicable PUCO regulations, such bond issuer will have all of the rights originally held by the seller with respect to the phase-in-recovery property, including the right (subject to the terms of the servicing agreement) to exercise any and all rights and remedies to collect any amounts payable by any customer in respect of the phase-in-recovery property, notwithstanding any objection or direction to the contrary by the seller; and

 

   

any payment by any customer to such bond issuer will discharge such customer’s obligations in respect of the phase-in-recovery property to the extent of such payment, notwithstanding any objection or direction to the contrary by the seller;

 

  (h) so long as any of the bonds of the applicable bond issuer are outstanding:

 

   

the seller will not make any statement or reference in respect of the phase-in-recovery property that is inconsistent with the ownership thereof by the applicable bond issuer (other than for financial accounting or tax reporting purposes); and

 

   

the seller will not take any action in respect of the phase-in-recovery property except solely in its capacity as the servicer thereof pursuant to the servicing agreement or as otherwise contemplated by the basic documents;

 

  (i)

the seller will execute and file such filings, including filings with the PUCO pursuant to the Securitization Act and UCC filings, and cause to be executed and filed such filings, all in such manner and in such places as may be required by law fully to preserve, maintain and protect the ownership interest of the applicable bond issuer, and the security interest of the applicable bond trustee, in the phase-in-recovery property and the back-up security interest, including all filings required under the Securitization Act and the applicable UCC relating to the transfer of the ownership interest in the phase-in-recovery property by such seller to such bond issuer, the granting of a security interest in the phase-in-recovery property by such bond issuer to such bond trustee, and the back-up security interest, and the continued perfection of such ownership interest, security interest and back-up security interest. Such seller shall deliver (or cause to be delivered) to the bond trustee (with copies to the applicable bond issuer) file-stamped copies of, or filing receipts for, any document filed as provided above, as soon as available following such filing. Such seller will institute any action or proceeding necessary to compel performance by the PUCO or the State of Ohio of any of their obligations or duties under the Securitization Act or the financing order, and such seller will take such legal or administrative actions, including defending against or instituting and pursuing legal actions and appearing or testifying at hearings or similar proceedings, as may be reasonably necessary (i) to protect the applicable bond

 

43


Table of Contents
  issuer, bond trustee, bondholders, and any of their respective affiliates, officials, directors, employees, and agents from claims, state actions or other actions or proceedings of third parties which, if successfully pursued, would result in a breach of any representation set forth in the sale agreement or (ii) to block or overturn any attempts to cause a repeal of, modification of or supplement to the Securitization Act, the financing order, the issuance advice letters, any other advice letter (as defined in the applicable servicing agreement), or the rights of applicable bondholders by executive action, legislative enactment or constitutional amendment that would be adverse to the applicable bond issuer, bond trustee or bondholders. If the applicable servicer performs its obligations under the applicable provision of its servicing agreement, such performance will be deemed to constitute performance of such seller’s obligations pursuant to clause (ii) of the preceding sentence. In such event, such seller agrees to assist the servicer as reasonably necessary to perform its obligations under such provisions of its servicing agreement. The costs of any such actions or proceedings shall be payable from phase-in-recovery charge collections as an operating expense in accordance with the priorities set forth in the applicable bond indenture. Such seller’s obligations pursuant to this covenant in the sale agreement will survive and continue notwithstanding the fact that the payment of operating expenses pursuant to the priorities set forth in the applicable bond indenture may be delayed (it being understood that such seller may be required to advance its own funds to satisfy its obligations thereunder);

 

  (j) notwithstanding any prior termination of the applicable sale agreement or bond indenture, but subject to the right of a court of competent jurisdiction to order the sequestration and payment of revenues arising with respect to the phase-in-recovery property notwithstanding any bankruptcy, reorganization or other insolvency proceedings with respect to such seller pursuant to Section 4928.2310 of the Securitization Act, such seller solely in its capacity as a creditor of such bond issuer shall not, prior to the date which is one year and one day after the termination of the bond indenture, petition or otherwise invoke or cause such bond issuer to invoke the process of any court or government authority for the purpose of commencing or sustaining an involuntary case against such bond issuer under any Federal or state bankruptcy, insolvency or similar law, appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of such bond issuer or any substantial part of the property of such bond issuer, or, to the fullest extent permitted by law, ordering the winding up or liquidation of the affairs of such bond issuer;

 

  (k) so long as any of the bonds of the applicable bond issuer are outstanding, such seller will, and will cause each of its subsidiaries to, pay all material taxes, assessments and governmental charges imposed upon it or any of its properties or assets or with respect to any of its franchises, business, income or property before any penalty accrues thereon if the failure to pay any such taxes, assessments and governmental charges would, after any applicable grace periods, notices or other similar requirements, result in a lien on the phase-in-recovery property; provided that no such tax need be paid if such seller or one of its subsidiaries is contesting the same in good faith by appropriate proceedings promptly instituted and diligently conducted and if such seller or such subsidiary has established appropriate reserves as shall be required in conformity with generally accepted accounting principles;

 

  (l) so long as any of the bonds of the applicable bond issuer are outstanding, such seller will not sell any “phase-in-recovery property” (as defined in the Securitization Act) to secure another issuance of “phase-in-recovery bonds” (as defined in the Securitization Act) if it would cause the then existing ratings on the certificates from the rating agencies to be downgraded; and

 

  (m) the seller agrees not to withdraw the filing of the issuance advice letter with the PUCO.

In the event of a seller’s willful misconduct or gross negligence in the performance of its duties or observance of the covenants under the sale agreement or a breach of any representation or warranty in the sale agreement, the seller shall be required to indemnify, defend and hold harmless its bond issuer and the bondholders against any costs, expenses, losses, claims, damages and liabilities incurred as a result of the breach, except to the extent of any costs, expenses, losses, claims, damages and liabilities either resulting from the willful misconduct or gross negligence of such indemnified person or resulting from a breach of a representation and

 

44


Table of Contents

warranty made by such indemnified person in any transaction document that gives rise to the seller’s breach; provided, however, that the bondholders may only enforce their rights against the seller through an action brought by the bond trustee. The remedies provided for in the sale agreement are the sole and exclusive remedies of the bond issuer and the bond trustee (for the benefit of the bondholders) against the seller for breach of its representations and warranties in the sale agreement.

In addition, a seller shall indemnify and hold harmless the related bond trustee, the Delaware trustee and the certificate trustee and any of their respective affiliates, officials, officers, directors, employees and agents against any expenses (including legal fees and expenses), losses, claims, taxes, damages and liabilities incurred by any of these persons as a result of the seller’s willful misconduct or gross negligence in the performance of its duties or observance of the covenants under the sale agreement or a breach in any material respect by the seller of its representations and warranties in the sale agreement, except to the extent of amounts either resulting from the willful misconduct or gross negligence of the indemnified person or resulting from a breach of a representation or warranty made by the indemnified person in the transaction documents that gives rise to the seller’s breach.

 

45


Table of Contents

BANKRUPTCY AND CREDITORS’ RIGHTS ISSUES

True Sale

Each seller will represent and warrant to its bond issuer in its sale agreement that the transfer of the phase-in-recovery property to its bond issuer is a valid sale and assignment of the phase-in-recovery property from the seller to the bond issuer. Each seller will also represent and warrant that it will take the appropriate actions under the Securitization Act to perfect this sale. The Securitization Act provides that the transactions described in the sale agreement shall constitute an absolute, true sale of the phase-in-recovery property to the bond issuer, and the seller and the bond issuer will treat the transactions as a sale under applicable law, although for financial reporting and federal income tax purposes the transactions will be treated as a secured borrowing of the seller. Please read “Material U.S. Federal Income Tax Consequences” and “Risk Factors—Bankruptcy and Creditors’ Rights Issues.”

In the event of a bankruptcy of a party to a sale agreement, if a party in interest in the bankruptcy were to take the position that the transfer of the phase-in-recovery property to a bond issuer pursuant to that sale agreement was a financing transaction and not a true sale under applicable creditors’ rights principles, there can be no assurance that a court would not adopt this position. Even if a court did not ultimately recharacterize the transaction as a financing transaction, the mere commencement of a bankruptcy of CEI, OE or TE and the attendant possible uncertainty surrounding the treatment of the transaction could result in delays in payments on the bonds and, thus, the certificates.

In that regard, we note that the bankruptcy court in In re: LTV Steel Company, Inc., et al., 274 B.R. 278 (Bankr. N. D. Oh. 2001) issued an interim order that observed that a debtor, LTV Steel Company, which had previously entered into securitization arrangements with respect both to its inventory and its accounts receivable, may have “at least some equitable interest in the inventory and receivables, and that this interest is property of the debtor’s estate…sufficient to support the entry of” an interim order permitting the debtor to use proceeds of the property sold in the securitization. 274 B.R. at 285. The court based its decision in large part on its view of the equities of the case.

LTV and the securitization investors subsequently settled their dispute over the terms of the interim order and the bankruptcy court entered a final order in which the parties admitted and the court found that the pre-petition transactions constituted “true sales.” The court did not otherwise overrule its earlier ruling. The LTV memorandum opinion serves as an example of the pervasive equity powers of bankruptcy courts and the importance that such courts may ascribe to the goal of reorganization, particularly where the assets sold are integral to the ongoing operation of the debtor’s business.

Even if creditors did not challenge the sale of phase-in-recovery property as a true sale, a bankruptcy filing by CEI, OE or TE could trigger a bankruptcy filing by the bond issuers with similar negative consequences for bondholders and ultimately for holders of the certificates. In a recent bankruptcy case, In re General Growth Properties, Inc., General Growth Properties, Inc. filed for bankruptcy together with many of its direct and indirect subsidiaries, including many subsidiaries that were organized as special purpose vehicles. The bankruptcy court upheld the validity of the filings of these special purpose subsidiaries and allowed the subsidiaries, over the objections of their creditors, to use the lenders’ cash collateral to make loans to the parent for general corporate purposes. The creditors received adequate protection in the form of current interest payments and replacement liens to mitigate any diminution in value resulting from the use of the cash collateral, but the opinion serves as a reminder that bankruptcy courts may subordinate legal rights of creditors to the interests of helping debtors reorganize.

We, the bond issuers and the sellers have attempted to mitigate the impact of a possible recharacterization of a sale of phase-in-recovery property as a financing transaction under applicable creditors’ rights principles. Should the transfer of the phase-in-recovery property to a bond issuer be recharacterized, in a bankruptcy case of the seller or otherwise, as a borrowing by the seller, the Securitization Act provides that there is a perfected first

 

46


Table of Contents

priority statutory lien on the phase-in-recovery property that secures all obligations to the bondholders. In addition, in the sale agreement, the seller grants to the bond issuer a security interest in the phase-in-recovery property and covenants that it will take appropriate actions to perfect the security interest, although the seller takes the position that it has no rights in the phase-in-recovery property to which a security interest could attach.

A creditor or bankruptcy trustee of a seller or a seller itself as debtor in possession might argue that, contrary to Ohio law as set forth in the Securitization Act, the sale of the phase-in-recovery property to its bond issuer was a loan to the seller from the related bond issuer, secured by a pledge of the phase-in-recovery property. If the bankruptcy court accepted that argument or other arguments that the seller retained an interest of some kind in the phase-in-recovery property, the phase-in-recovery property could be treated as property of the bankruptcy estate of the seller or in which the bankruptcy estate had an interest. In such event, the exercise of rights of the related bond issuer in respect of the phase-in-recovery property would be subject to the automatic stay that arises upon the commencement of the seller’s bankruptcy case, and the rights of the bond issuer as secured creditor would be subject to modification to the extent permitted under the Bankruptcy Code. Such modifications could include, among other things, reductions of the amounts of payment of interest and principal on the bonds, delays in time of payments and alteration of other terms of the bonds, leading to delays or reductions in payments on the certificates.

Under the Securitization Act, on the effective date of the financing order, the phase-in-recovery property identified in the issuance advice letter constitutes a property right that continuously exists as property for all purposes. Nonetheless, if a seller were to become the debtor in a bankruptcy case, a creditor of, or a bankruptcy trustee for, the seller, or the seller itself as debtor in possession, may attempt to take the position that, because the payments based on the phase-in-recovery charges are usage-based charges, phase-in-recovery property comes into existence only as customers use electricity. If a court were to adopt this position, we cannot assure you that either the statutory lien created by the statute or the security interest granted in the sale agreement would be valid as to electricity consumed after the commencement of a bankruptcy case by or against the seller.

If a court were to determine that the phase-in-recovery property has not been sold to a bond issuer, and that the statutory lien created by the Securitization Act and the security interest granted in the sale agreement are invalid against payments arising from the phase-in-recovery charges that become collectible as a result of the consumption of electricity consumed after the commencement of a bankruptcy case of the seller, then the certificate trustee, as bondholder and for the benefit of holders of the certificates, would be an unsecured creditor of the seller, and delays or reductions in distributions on the certificates could result.

Whether or not the court determined that the phase-in-recovery property had been sold to a bond issuer, the court could rule that any payments arising from the phase-in-recovery charges that become collectible as a result of the consumption of electricity after the commencement of the related seller’s bankruptcy cannot be transferred to the bond trustee or the certificate trustee, thus resulting in delays or reductions of distributions on the certificates.

To the extent that claims are made by a bond issuer against the bankruptcy estate of a seller on the basis of contractual indemnity in its related sale agreement or any other documentation, such claims may be subject to significant requirements of proof of actual damage, may be subject to disallowance as contingent to the extent that actual damage has not yet occurred and may hold only the status of unsecured claims against the bankruptcy estate of the seller.

Substantive Consolidation

The sellers and the bond issuers have taken steps to reduce the risk that, in the event a seller or an affiliate of a seller were to become the debtor in a bankruptcy case, a court would order that the assets and liabilities of the bond issuer be substantively consolidated with those of the seller or an affiliate. These steps include the fact that each of the bond issuers is a separate, special purpose limited liability company, the organizational documents of

 

47


Table of Contents

which provide, among other things, that it shall not commence a voluntary bankruptcy case without the unanimous affirmative vote of all of its directors, including two directors independent of the seller. Nonetheless, these steps may not be completely effective, and thus if a seller or an affiliate of a seller were to become a debtor in a bankruptcy case, a court may order that the assets and liabilities of the bond issuer be consolidated with those of the seller or an affiliate, thus potentially resulting in delays or reductions in payments on the bonds and, thus, distributions on the certificates. Other factors that may tend to support consolidation include the ownership of a bond issuer by a seller, the designation of officers or employees of a seller as directors, other than independent directors, of the bond issuer and the existence of indemnities by a seller for some liabilities of the bond issuer.

Estimation of Claims; Challenges to Indemnity Claims

If a seller were to become a debtor in a bankruptcy case, claims, including indemnity claims, by the bondholders or the bond trustee against CEI, OE or TE, as the case may be, as a seller under its sale agreement and the other documents executed in connection therewith would be unsecured claims and would be subject to being discharged in the bankruptcy case. In addition, a party in interest in the bankruptcy may request that the bankruptcy court estimate any contingent claims that the bondholders or the bond trustee have against CEI, OE or TE, as the case may be. That party may then take the position that these claims should be estimated at zero or at a low amount because the contingency giving rise to these claims is unlikely to occur. If a court were to hold that the indemnity provisions were unenforceable, such parties would be left with a claim for actual damages against CEI, OE or TE, as the case may be, based on breach of contract principles. The actual amount of these damages would be subject to estimation and/or calculation by the court. No assurances can be given as to the result of any of the above-described actions or claims. Furthermore, no assurance can be given as to what percentage of their claims, if any, unsecured creditors would receive in any bankruptcy proceeding involving CEI, OE or TE.

Enforcement of Rights by the Bond Trustee

Upon an event of default of the bonds under the applicable bond indenture, the bond trustee will enforce the security interest in the phase-in-recovery property in accordance with the terms of the bond indenture. Under the Securitization Act, if a utility servicer defaults on any required payment of phase-in-recovery revenues, a court, upon application by the bond trustee (or any other interested party) and without limiting any other remedies available to the bond trustee, shall order the sequestration and payment of the revenues for the benefit of bondholders, the applicable bond issuer and other bond trustee or any financing party. The court order shall remain in full force and effect notwithstanding any bankruptcy, reorganization, or other insolvency proceedings with respect to the electric distribution utility or any affiliate. There can be no assurance, however, that a court would issue this order after an Ohio Company’s bankruptcy in light of the automatic stay provisions of Section 362 of the United States Bankruptcy Code. In that event, the bond trustee would likely seek an order from the bankruptcy court lifting the automatic stay to permit or authorize this action by the court, and an order requiring an accounting and segregation of the revenues arising from the phase-in-recovery property. There can be no assurance that a court would grant either order.

Bankruptcy of a Servicer

Each servicer is entitled to commingle the phase-in-recovery charges that it receives with its own funds until each date on which such servicer is required to remit funds to the bond trustee as specified in its respective servicing agreement. The Securitization Act provides that the bond issuers’ rights to the phase-in-recovery property are not affected by the commingling of these funds with any other funds of the servicers. In a bankruptcy of a servicer, however, a bankruptcy court might rule that federal bankruptcy law does not recognize a bond issuer’s right to collections of the phase-in-recovery charges that are commingled with other funds of the servicer as of the date of bankruptcy. If so, the collections of the phase-in-recovery charges held by the servicer

 

48


Table of Contents

as of the date of bankruptcy would not be available to pay amounts owing on the bonds and, thus, distributions on the certificates. In this case, the bond issuers would have only a general unsecured claim against the servicer for those amounts. This decision could cause material delays in payments of principal or interest, or losses, on the bonds and, thus, material delays in distributions, or losses, on the certificates, which could materially reduce the value of your investment in the certificates.

The servicing agreement will provide that in the event of a bankruptcy of a servicer, either the applicable bond trustee or holders of bonds of the applicable bond issuer evidencing not less than 25% in principal amount of then outstanding bonds may terminate all the rights and obligations of the servicer (other than the servicer’s indemnity obligation) under the servicing agreement, whereupon a successor servicer appointed by the bond issuer, with the prior written consent of the bond trustee and the approval of the PUCO, will succeed to all the responsibilities, duties and liabilities of the servicer under the servicing agreement.

If, however, a bankruptcy trustee or similar official has been appointed for a servicer, and no servicer default other than an appointment of a bankruptcy trustee or similar official has occurred, that trustee or official may have the power to prevent the bond trustee or the bondholders from effecting a transfer of servicing. The servicing agreement will also provide that the bond trustee may appoint, or petition a court of competent jurisdiction for the appointment of, a successor servicer which satisfies criteria specified by the nationally recognized statistical rating organizations rating the certificates. However, the automatic stay in effect during a servicer bankruptcy might delay or prevent a successor servicer’s replacement of the servicer. Even if a successor servicer may be appointed and may replace the servicer, a successor may be difficult to obtain and may not be capable of performing all of the duties that CEI, OE or TE, as the case may be, as servicer was capable of performing. Furthermore, should the servicer enter into bankruptcy, it may be permitted to stop acting as servicer.

 

49


Table of Contents

THE ISSUING ENTITY

The trust will be formed by the bond issuers specifically for the purpose of acquiring the bonds from the bond issuers and issuing the certificates offered by this prospectus and the accompanying prospectus supplement. The trust will be a Delaware statutory trust. The bond issuers and U.S. Bank Trust National Association, a national banking association, not acting in its individual capacity but acting as the Delaware trustee on behalf of the trust, will enter into a declaration of trust to create the trust. The principal assets of the trust will be the bonds. The declaration of trust will not permit, and may not be amended, modified or supplemented to permit, the trust to engage in any activities other than holding the bonds, issuing the certificates and engaging in other related activities.

Each tranche of certificates will represent fractional pro rata undivided beneficial interests in the corresponding tranches of bonds of each of the bond issuers, including all amounts due and to become due under the corresponding tranches of bonds of the bond issuers, and will represent the right to receive the payments on the corresponding tranches of bonds of the bond issuers. See “Description of the Certificates—Payments and Distributions.”

The bond issuers, the Ohio Companies, the trust, the Delaware trustee and the certificate trustee will enter into a fee and indemnity agreement under which the bond issuers, subject to the cap, will each pay an allocable portion of the Delaware trustee’s and the certificate trustee’s reasonable compensation and reasonable fees and expenses. The fee and indemnity agreement will further provide that the bond issuers, subject to the cap, will indemnify the trust, the Delaware trustee and the certificate trustee for, and hold them harmless against, among other things, any loss, liability or expense incurred by them arising from the failure of any party to perform its obligations under the various transaction documents. Any amounts due and owing to the Delaware trustee or the certificate trustee under the applicable basic documents that exceed the cap will be paid by the applicable initial servicer pursuant to the servicing agreement.

The fiscal year of the trust will be the calendar year.

 

50


Table of Contents

THE TRUSTEES

The initial certificate trustee and each initial bond trustee will be U.S. Bank National Association, a national banking association, whose address, principal office and experience are provided in the prospectus supplement.

Certificate Trustee

The certificate trustee may resign under certain circumstances provided in the certificate indenture, including at any time upon 30 days’ prior written notice to us, the bond issuers and the bond trustee. Upon 30 days prior written notice, the holders of a majority in principal amount of the certificates then outstanding may remove the certificate trustee by so notifying the certificate trustee, the bond issuers and the bond trustees. The certificate trustee may also be removed under other circumstances provided in the certificate indenture, including by us upon failure of the certificate trustee to company with Section 310 of the Trust Indenture Act, the certificate trustee ceasing to be eligible pursuant to the eligibility requirements in the certificate indenture or the certificate trustee being adjudged bankrupt or insolvent. If the certificate trustee shall resign or be removed, we are obligated to promptly appoint a successor. No resignation or removal of the certificate trustee and no appointment of a successor certificate trustee will be effective until a successor has been appointed and has accepted such appointment and, in certain cases, receipt of written confirmation from each rating agency that no lowering or withdrawal of the then current ratings will result from such appointment.

The certificate trustee will at all times be eligible to act as a trustee under Section 310(a) of the Trust Indenture Act, have a combined capital and surplus of at least $50 million and a long-term debt rating of at least “A” (or the equivalent thereof) by each of the rating agencies. If the certificate trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation will without any further action be the successor certificate trustee, provided that such entity is otherwise qualified and eligible under the terms of the certificate indenture.

The certificate trustee will not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its discretion, rights or powers under the certificate indenture so long as its conduct does not constitute willful misconduct, negligence or bad faith. Pursuant to the fee and indemnity agreement, the bond issuers have agreed to indemnify the certificate trustee and its affiliates, officers, directors, employees and agents against any and all losses, liabilities and expenses (including liabilities under state and federal securities laws) arising in connection with the certificate indenture and other basic documents and the transactions contemplated by each of the foregoing, provided that no bond issuer will be required to indemnify any loss, liability or expense resulting from the willful misconduct or negligence of any such indemnified person.

For more information about the certificate trustee, see “Description of the Certificates” in this prospectus.

Bond Trustee

Each bond trustee may resign at any time upon written notice to the applicable bond issuer; provided, however, that no such resignation will be effective until either a qualified successor has been designated and accepted such appointment or the collateral has been completely liquidated and the proceeds thereof distributed to bondholders. Bondholders holding a majority in principal amount of bonds outstanding may remove the bond trustee and appoint a successor. A bond issuer must remove a bond trustee if (i) the bond trustee ceases to be eligible to continue in its capacity as bond trustee under the bond indenture, (ii) the bond trustee is adjudged a bankrupt or insolvent, (iii) a receiver or other public officer takes charge of the bond trustee or its property, (iv) the bond trustee otherwise becomes incapable of acting or (v) the bond trustee fails to provide to the bond issuer or the sponsor any information reasonably requested by the bond issuer and necessary for the bond issuer to comply with its reporting obligations under the Exchange Act and Regulation AB and such failure is not resolved to the bond issuer’s and bond trustee’s mutual satisfaction within a reasonable period of time. If a bond

 

51


Table of Contents

trustee resigns or is removed or if a vacancy exists in the office of the bond trustee for any reason, the applicable bond issuer will promptly appoint a successor bond trustee meeting the eligibility requirements of the bond indenture. The successor bond trustee will mail notice of such appointment to bondholders and each rating agency.

Each bond trustee must at all times satisfy the requirements of Section 310(a) of the Trust Indenture Act, have a combined capital and surplus of at least $50 million and a long-term debt rating of at least “A” (or the equivalent thereof) by each of the rating agencies. If a bond trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation or banking association will without any further act be the successor bond trustee. The successor bond trustee will mail a notice of such merger, conversion, consolidation or transfer to each rating agency.

No bond trustee will be liable for any action it takes or omits to take in good faith in accordance with a direction received by it under the bond indenture or for any error in judgment made in good faith by a responsible officer unless it is proved that the bond trustee was negligent in ascertaining the particular facts. Each bond issuer has agreed to indemnify its bond trustee and such bond trustee’s affiliates, officers, directors, employees and agents against any and all losses, liabilities or expenses (including liabilities under state or federal securities laws) arising in connection with the bond indenture and other basic documents and the transactions contemplated by each of the foregoing, provided no bond issuer will be required to indemnify any loss, liability or expense resulting from the willful misconduct or negligence of any such indemnified person.

None of the bond trustees the Delaware trustee or the certificate trustee will be obligated to supervise the servicers or have any liability for a servicer default or misconduct. In no event shall any of the foregoing trustees be required to act as a successor servicer.

For more information about the bond trustee, see “Description of the Bonds” in this prospectus.

 

52


Table of Contents

THE BOND ISSUERS

Each of the bond issuers is a limited liability company organized under the laws of the State of Delaware. CEI is the sole member of CEI Funding, OE is the sole member of OE Funding and TE is the sole member of TE Funding. The principal executive office of each of the bond issuers is located at 76 South Main Street, Akron, Ohio 44308. The telephone number for each of the bond issuers is (800) 736-3402. The sellers organized the bond issuers for the limited purpose of holding the phase-in-recovery properties and issuing bonds secured by the phase-in-recovery properties and the other bond collateral and related activities. The bond issuers’ organizational documents restrict them from engaging in other activities other than those described below. In addition, the bond issuers’ organizational documents require them to operate in a manner intended to reduce the likelihood that they would be consolidated in a seller’s bankruptcy estate if the seller becomes involved in a bankruptcy proceeding. Selected provisions of the bond issuers’ amended and restated limited liability company agreements are summarized below and a form of such agreements has been filed as an exhibit to the registration statement of which this prospectus is a part.

On the date of issuance of the bonds, the capital of each bond issuer will be at least equal to 0.5% of the principal amount of the bonds issued by such bond issuer or such greater amount as may allow the bonds to achieve the desired security rating and treat the bonds as debt of the applicable bond issuer under applicable guidance issued by the Internal Revenue Service.

The assets of each bond issuer will consist of:

 

   

its respective phase-in-recovery property,

 

   

its rights under transaction documents to which it is a party,

 

   

the collection account and all subaccounts established in the bond indentures,

 

   

the cash used to capitalize such bond issuer,

 

   

all other property owned by the bond issuers, including all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing, and

 

   

all proceeds of each of the foregoing.

The bond issuers are recently formed entities and, as of the date of this prospectus, have not carried on any business activities and have no operating history.

Restricted Purpose

Each bond issuer has been created for the sole purpose of:

 

   

purchasing, owning, administering and servicing its phase-in-recovery property and the other collateral;

 

   

issuing and registering the bonds of such bond issuer;

 

   

making payments on the bonds of such bond issuer;

 

   

managing, selling, assigning, pledging, collecting amounts due on, or otherwise dealing with the phase-in-recovery property and the other bond collateral and related assets of such bond issuer;

 

   

negotiating, executing, assuming and performing such bond issuers’ obligations under the basic documents;

 

   

pledging its interest in the phase-in-recovery property and other collateral to the bond trustee under its bond indenture in order to secure the bonds; and

 

   

performing other activities that are incidental to, or necessary, suitable or convenient to accomplish these purposes.

 

53


Table of Contents

The bond issuers’ organizational documents will not permit them to engage in any activities not directly related to these purposes, including issuing securities (other than the bonds), borrowing money or making loans to other persons. The list of permitted activities set forth in each bond issuer’s limited liability company agreement may not be altered, amended or repealed without the affirmative vote of a majority of our directors, which vote must include the affirmative vote of our independent directors. The bond issuers’ limited liability company agreement and the bond indentures will prohibit the bond issuers from issuing any phase-in-recovery bonds other than the bonds that the bond issuers will offer pursuant to the prospectus supplement.

Management

The business of each bond issuer will be managed by a management committee consisting of at least three and no more than five directors. Each of the bond issuers will at all times have at least two directors who are independent directors. The same people will serve as officers and directors of all three bond issuers. The following is a list of the officers and directors of the bond issuers upon the closing of the offering:

 

Name

   Age    Title
     
     
     

All of the bond issuers’ officers and directors, including the independent directors, will begin to serve effective immediately prior to the closing of the offering. Pursuant to an agreement between CEI, OE, TE and             , pursuant to which             has agreed to make              and              available to the Ohio Companies as independent directors, the initial aggregate annual compensation for both of the independent directors will be $        . The officers and directors of each bond issuer, other than the independent directors, will not be compensated for their services on behalf of the bond issuers. Any officer of a bond issuer will serve at the discretion of the bond issuer’s directors. [None of the bond issuers’ managers or officers has been involved in any legal proceedings which are specified in Item  401(f) of the SEC’s Regulation S-K.]

Limitation on Liabilities

The bond issuers’ organizational documents provide that, to the extent permitted by law, no director or officer shall be personally liable to a bond issuer for monetary damages for any act taken or omission made in good faith on behalf of such bond issuer and in a manner reasonably believed to be within the scope of authority conferred on such officer or director, without gross negligence or willful misconduct. In addition, the organizational documents of the bond issuers provides that, to the fullest extent permitted by law, they will indemnify their respective officers and directors against liabilities incurred in connection with their services on behalf of the bond issuers for any act or omission performed or omitted by such officer or director in good faith on behalf of such bond issuer and in a manner reasonably believed to be within the scope of authority conferred on such officer or director, without the gross negligence or willful misconduct. The officers and directors will devote as much time as is necessary to the affairs of the bond issuers. The bond issuers will have sufficient officers, directors and employees to carry on their business.

Bond Issuers’ Relationship with the Ohio Companies

On the issue date for the bonds, the Ohio Companies will sell their respective phase-in-recovery property to the related bond issuer pursuant to a sale agreement between such Ohio Company and its related bond issuer. The Ohio Companies will service the phase-in-recovery property pursuant to a servicing agreement between such Ohio Company and its related bond issuer and will provide administrative services to each bond issuer pursuant to an administration agreement between such Ohio Company and its related bond issuer.

 

54


Table of Contents

Relationship with PUCO

Pursuant to the financing order:

 

   

the PUCO or its designated representative has a decision-making role co-equal with the sponsors with respect to the structuring and pricing of the certificates and all matters related to the structuring and pricing of the certificates will be determined through a joint decision of the sponsors and the PUCO or its designated representative or financial advisor;

 

   

the PUCO’s financial advisor will participate fully in all plans and decisions related to the pricing, marketing and structuring of the bonds and certificates and will be provided timely information as necessary to fulfill its obligation to advise the PUCO in a timely manner but makes no representations as to any of the information contained herein; and

 

   

the servicers will file periodic adjustments to the phase-in-recovery charges with the PUCO on the bond issuers’ behalf.

The bond issuers have agreed that certain reports concerning phase-in-recovery charge collections will be provided to the PUCO.

Administration Agreement

The bond issuers do not have any employees, but CEI, OE and TE, as the case may be, will provide their respective bond issuer with administrative services, including services relating to the preparation of financial statements, required filings with the SEC, any tax returns we might be required to file under applicable law, qualifications to do business, and minutes of our managers’ meetings, and office space according to the terms of an administration agreement.

Each bond issuer is required to pay its administrator such bond issuer’s pro rata portion (based on bond issuance amount) of $100,000 payable semiannually, for as long as CEI, OE and TE, as the case may be, provide these services, plus the reimbursement for all costs and expenses for services performed by unaffiliated third parties and actually incurred by CEI, OE and TE, as the case may be, in performing such services described above.

 

55


Table of Contents

THE SPONSORS, SELLERS AND INITIAL SERVICERS

CEI, OE and TE will be the sellers and initial servicers of the phase-in-recovery properties securing the bonds, and will be the sponsors of the securitization in which the bonds and certificates covered by this prospectus are issued. CEI, OE and TE are all wholly owned, electric distribution utility subsidiaries of FirstEnergy and each company is incorporated in Ohio. FirstEnergy is a diversified energy company with 10 electric distribution companies comprising one of the nation’s largest investor-owned electric systems. FirstEnergy’s diverse generating fleet features non-emitting nuclear, scrubbed baseload coal, natural gas, hydro and pumped-storage hydro and other renewables and has a total generating capacity of approximately 20,000 megawatts.

CEI was organized under the laws of the State of Ohio in 1892 and does business as an electric public utility in that state. CEI provides regulated electric distribution services in an area of 1,600 square miles in northeastern Ohio, serving 747,000 customers. The area it serves has a population of approximately 1.7 million. CEI also procures generation services for those customers electing to retain them as their power supplier. As of December 31, 2012, CEI’s distribution system consisted of 33,252 pole miles of distribution lines; and its substations’ transformer capacity is 8,938,000 kV amperes.

OE was organized under the laws of the State of Ohio in 1930 and owns property and does business as an electric public utility in that state. OE engages in the distribution and sale of electric energy to communities in a 7,000 square mile area of central and northeastern Ohio, serving 1,032,000 customers. OE conducts business in portions of Ohio, providing regulated electric distribution services and procurement of generation services for those franchise customers electing to retain it as their power supplier. The area served by OE has a population of approximately 2.3 million. As of December 31, 2012, OE’s transmission and distribution system consisted of 62,238 pole miles of distribution lines and 461 pole miles of transmission lines; and its substations’ transformer capacity is 7,763,000 kV amperes. OE also engages in the distribution and sale of electric energy through its wholly owned subsidiary, Pennsylvania Power Company, to approximately 161,000 customers in western Pennsylvania; however those customers will not be subject to phase-in-recovery charges and that subsidiary will not be involved in any manner in the transactions described in this prospectus and the accompanying prospectus supplement.

TE was organized under the laws of the State of Ohio in 1901 and does business as an electric public utility in that state. TE provides regulated electric distribution services in an area of 2,300 square miles in northwestern Ohio, serving 309,000 customers. The area it serves has a population of approximately 0.7 million. TE also provides generation services to those customers electing to retain them as their power supplier. As of December 31, 2012, TE’s transmission and distribution system consisted of 17,593 pole miles of distribution lines and 81 pole miles of transmission lines; and its substations’ transformer capacity is 3,040,000 kV amperes.

The retail rates, conditions of service, issuance of securities and other matters regarding CEI, OE and TE are subject to regulation by the PUCO in the State of Ohio — the state in which each company operates as an electric distribution utility. In addition, under Ohio law, municipalities may regulate rates of a public utility, subject to appeal to the PUCO if not acceptable to the utility. On the federal level, each of CEI, OE and TE are subject to regulation by the Federal Energy Regulatory Commission.

Revenues, Customer Base and Energy Consumption

The retail customer bases of CEI, OE and TE consist of four customer classes: residential, commercial, industrial and public street and highway lighting. The customer classes are broad groups that include accounts with a wide range of load characteristics served under a variety of rate designs. Several factors influence the number of retail customers served by CEI, OE and TE and the amount of energy consumed by such customers, including general economic conditions and weather conditions in the respective service territories. General

 

56


Table of Contents

economic conditions affect migration of residential, commercial and industrial customers into and out of the service territories and weather conditions affect the amount of electricity consumed, with higher consumption typically occurring in the winter and summer months when heating or cooling demands are highest.

The following tables show the electricity delivered to retail customers, retail electric revenues and number of retail customers for each of the four revenue reporting customer classes for the periods indicated. There can be no assurances that the retail electricity sales, retail electric revenues and number of retail customers or the composition of any of the foregoing will remain at or near the levels reflected in the following tables.

Electricity Delivered to Retail Customers, Electric Delivery Revenues and Retail Customers

CEI

 

Retail Electric Usage (As Measured by Billed GWh Sales) by Customer Class and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     5,429         30.8     5,726         30.3     5,710         30.2     5,678         30.2

Commercial

     4,646         26.3     4,779         25.3     6,774         35.8     6,665         35.4

Industrial

     7,410         42.0     8,216         43.5     6,284         33.2     6,324         33.6

Public Street and Highway Lighting

     155         0.9     149         0.8     148         0.8     138         0.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     17,639         100.0     18,870         100.0     18,916         100.0     18,805         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Retail Electric Revenue by Customer Class

and Percentage Composition (Dollars in thousands)

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     567,111         34.2     466,689         38.6     366,117         42.2     385,200         46.1

Commercial

     509,576         30.8     343,758         28.4     379,719         43.8     326,006         39.0

Industrial

     559,517         33.8     377,038         31.2     100,704         11.6     105,444         12.6

Public Street and Highway Lighting

     20,390         1.2     22,676         1.9     20,540         2.4     19,531         2.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     1,656,595         100.0     1,210,161         100.0     867,080         100.0     836,180         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Average Number of Metered Retail Electric Customers and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     667,171         88.5     666,343         88.6     664,170         88.7     660,818         88.7

Commercial

     84,152         11.2     83,304         11.1     83,728         11.2     83,432         11.2

Industrial

     2,243         0.3     2,212         0.3     650         0.1     657         0.1

Public Street and Highway Lighting

     299         0.0     348         0.0     387         0.1     421         0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     753,865         100.0     752,207         100.0     748,935         100.0     745,328         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

57


Table of Contents

OE

 

Retail Electric Usage (As Measured by Billed GWh Sales) by Customer Class and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     8,974         39.3     9,493         39.3     9,512         38.6     9,400         38.5

Commercial

     6,835         29.9     7,006         29.0     6,726         27.3     6,691         27.4

Industrial

     6,900         30.2     7,510         31.1     8,272         33.5     8,208         33.6

Public Street and Highway Lighting

     148         0.6     146         0.6     146         0.6     142         0.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     22,857         100.0     24,155         100.0     24,656         100.0     24,441         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Retail Electric Revenue by Customer Class

and Percentage Composition (Dollars in thousands)

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     956,441         47.1     774,436         56.8     653,195         55.5     690,782         58.3

Commercial

     654,638         32.3     389,146         28.6     323,340         27.5     301,274         25.4

Industrial

     404,866         19.9     184,852         13.6     186,616         15.9     179,053         15.1

Public Street and Highway Lighting

     13,634         0.7     13,836         1.0     13,944         1.2     13,128         1.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     2,029,579         100.0     1,362,269         100.0     1,177,095         100.0     1,184,237         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Average Number of Metered Retail Electric Customers and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     922,861         88.9     922,104         88.9     921,314         89.1     918,450         89.0

Commercial

     112,265         10.8     111,978         10.8     109,747         10.6     109,836         10.6

Industrial

     906         0.1     900         0.1     1,423         0.1     1,415         0.1

Public Street and Highway Lighting

     1,966         0.2     1,999         0.2     2,050         0.2     2,060         0.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     1,037,998         100.0     1,036,981         100.0     1,034,534         100.0     1,031,761         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

58


Table of Contents

TE

 

Retail Electric Usage (As Measured by Billed GWh Sales) by Customer Class and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     2,405         25.3     2,588         25.0     2,596         24.9     2,569         24.7

Commercial

     2,584         27.2     2,680         25.9     2,039         19.5     2,018         19.4

Industrial

     4,466         47.0     5,014         48.5     5,750         55.1     5,743         55.3

Public Street and Highway Lighting

     48         0.5     51         0.5     51         0.5     51         0.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     9,503         100.0     10,334         100.0     10,437         100.0     10,381         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Retail Electric Revenue by Customer Class

and Percentage Composition (Dollars in thousands)

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     266,912         34.8     208,372         47.6     191,981         49.6     194,611         49.8

Commercial

     257,319         33.5     139,351         31.9     111,540         28.8     99,318         25.4

Industrial

     235,460         30.7     81,965         18.7     74,933         19.4     88,903         22.7

Public Street and Highway Lighting

     7,616         1.0     7,811         1.8     8,448         2.2     8,082         2.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     767,307         100.0     437,499         100.0     386,902         100.0     390,914         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Average Number of Metered Retail Electric Customers and Percentage Composition

 

Customer Class

   Year ended December 31,  
   2009     2010     2011     2012  

Residential

     272,839         87.8     272,283         87.9     272,771         88.3     272,006         88.3

Commercial

     37,042         11.9     36,427         11.8     34,781         11.3     34,641         11.2

Industrial

     213         0.1 %      210         0.1     459         0.1     479         0.2

Public Street and Highway Lighting

     631         0.2     980         0.3     1,009         0.3     1,021         0.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     310,725         100.0     309,900         100.0     309,020         100.0     308,147         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For each of the Ohio Companies, the decrease in retail electric revenue (which includes generation sales as well as transmission and distribution revenues) since 2009 reflected in the tables above results primarily from a decrease in retail generation sales volume primarily due to increased customer shopping in the Ohio Companies’ service territories. This increased customer shopping, which does not impact earnings for the Ohio Companies, is expected to continue. Total generation provided by alternative suppliers as a percentage of total megawatt-hour deliveries increased to 79% in 2012 from 76% in 2011 for the Ohio Companies.

Forecasting Electricity Consumption

CEI, OE and TE prepare kilowatt-hour and revenue forecasts for annual planning purposes. These forecasts are updated periodically throughout the year, typically on a quarterly basis, based on most current available information and known results to date. The Ohio Companies monitor the accuracy of each forecast by conducting variance analysis on a monthly basis taking into account weather impacts on kilowatt-hour sales and deviations from forecast within the customer count. The most current sales forecast will be used for the semiannual updates to the phase-in-recovery charges. In addition to the internal planning process described above, the Ohio Companies also file a long-term sales forecast with the PUCO on an annual basis. This long-term forecast is typically prepared at the beginning of the year and filed in early spring; it includes a forecast for the current calendar year, as well as ten years into the future.

The Ohio Companies’ forecasting process incorporates analyses for each major customer class (residential, commercial, industrial, and public street and highway lighting) and takes into account local and national

 

59


Table of Contents

economic conditions, as well as historical usage patterns and energy efficiency reductions, which information is processed by statistical energy forecasting software developed by a third party vendor. Historic data include economic data supplied by a third party service and weather data. Variables are then modeled and evaluated for a best fit. The model is then tested using ordinary least squares regression and modified, if appropriate based on statistical results, for the best fit. The forecast is adjusted for the energy-efficiency impacts associated with achieving the energy savings benchmarks defined in Ohio Senate Bill 221.

A brief description of the forecasting methodology utilized for the most recent long-term sales forecast filed with the PUCO, by customer class, is provided below:

 

   

Residential—The residential class energy forecast is the product of the forecasted number of customers and average use per customer. Information used for this class’ forecast includes the results of a residential appliance saturation survey conducted in 2010 by FirstEnergy, as well as regional information from the U.S. Energy Information Administration on regional appliance saturation

 

   

Commercial & Industrial—Economic and demographic variables considered in regression models for the commercial and industrial sectors include weather variables, disposable income, non-agricultural employment, and local contribution to gross domestic product. In addition, projections of industrial production and manufacturing employment are considered in the development of the forecast for the industrial sector

 

   

Public Street & Highway Lighting—The forecast was estimated using an analytical approach. The forecast for this class is based on the nominal wattages and the standard burning hours of each installed lighting fixture, along with the recent history of traffic lighting use. The street lighting usage was trended downward assuming that, as mercury vapor lights failed, they would be replaced with sodium vapor lights. A 20-year life for mercury vapor lights and a 45% reduction in energy when replaced by sodium vapor lighting was used to establish this downward trend. Other than for the month-to-month fluctuations, traffic lighting use was kept constant throughout the forecast period

In addition, the most recent long-term sales forecast filed with the PUCO reflects the impact of customer self-generation that occurs “behind-the-meter” using analytical and statistical techniques. In order to estimate the impact of customer self-generation, the previous year’s year-end amount of energy resulting from known installed solar and wind customer-owned generation is determined. This amount is then increased at the same annual percentage rate as the increase in the renewable benchmarks for the State of Ohio from Ohio Senate Bill 221 and reflected in the forecasted projections.

The Ohio constitution permits municipalities to form municipal electric utilities and has permitted municipalities to take such action since 1912, but also provides limits on how much utility service may be provided outside of municipal boundaries. Ohio statutory provisions and Ohio Supreme Court opinions further refine parameters of constitutional authority. For forecasting purposes, the Ohio Companies do not make adjustments associated with municipal electric utilities.

 

60


Table of Contents

CEI

Annual Forecast Variance for Ultimate Electric Delivery (GWh)

 

     Year ended December 31,  
   2009      2010      2011      2012  

Residential

           

Forecast

     5,600         5,622         5,462         5,532   

Actual

     5,429         5,726         5,710         5,678   

Variance (%)

     3.2%         -1.8%         -4.3%         -2.6%   

Commercial

           

Forecast

     4,879         4,830         6,870         7,060   

Actual

     4,646         4,779         6,774         6,665   

Variance (%)

     5.0%         1.1%         1.4%         5.9%   

Industrial

           

Forecast

     7,643         7,901         5,721         6,331   

Actual

     7,410         8,216         6,284         6,324   

Variance (%)

     3.1%         -3.8%         -9.0%         0.1%   

Public Street and Highway Lighting

           

Forecast

     165         164         163         162   

Actual

     155         149         148         138   

Variance (%)

     6.6%         10.1%         9.9%         17.3%   

Total

           

Forecast

     18,287         18,517         18,215         19,086   

Actual

     17,639         18,870         18,916         18,805   

Variance (%)

     3.7%         -1.9%         -3.7%         1.5%   

OE

Annual Forecast Variance for Ultimate Electric Delivery (GWh)

 

     Year ended December 31,  
   2009      2010      2011      2012  

Residential

           

Forecast

     9,317         9,359         9,079         9,130   

Actual

     8,974         9,493         9,512         9,400   

Variance (%)

     3.8%         -1.4%         -4.6%         -2.9%   

Commercial

           

Forecast

     7,085         7,116         6,852         6,715   

Actual

     6,835         7,006         6,726         6,691   

Variance (%)

     3.7%         1.6%         1.9%         0.4%   

Industrial

           

Forecast

     7,499         9,147         7,853         8,269   

Actual

     6,900         7,510         8,272         8,208   

Variance (%)

     8.7%         21.8%         -5.1%         0.7%   

Public Street and Highway Lighting

           

Forecast

     141         141         141         139   

Actual

     148         146         146         142   

Variance (%)

     -4.6%         -3.7%         -3.7%         -1.9%   

Total

           

Forecast

     24,042         25,763         23,925         24,253   

Actual

     22,857         24,155         24,656         24,441   

Variance (%)

     5.2%         6.7%         -3.0%         -0.8%   

 

61


Table of Contents

TE

Annual Forecast Variance for Ultimate Electric Delivery (GWh)

 

     Year ended December 31,  
   2009      2010      2011      2012  

Residential

           

Forecast

     2,515         2,529         2,449         2,505   

Actual

     2,405         2,588         2,596         2,569   

Variance (%)

     4.6%         -2.3%         -5.7%         -2.5%   

Commercial

           

Forecast

     2,808         2,745         2,169         2,150   

Actual

     2,584         2,680         2,039         2,018   

Variance (%)

     8.7%         2.4%         6.3%         6.6%   

Industrial

           

Forecast

     4,393         4,839         5,455         6,164   

Actual

     4,466         5,014         5,750         5,743   

Variance (%)

     -1.6%         -3.5%         -5.1%         7.3%   

Public Street and Highway Lighting

           

Forecast

     57         55         55         54   

Actual

     48         51         51         51   

Variance (%)

     17.3%         7.7%         6.7%         4.7%   

Total

           

Forecast

     9,773         10,167         10,127         10,873   

Actual

     9,503         10,334         10,437         10,381   

Variance (%)

     2.8%         -1.6%         -3.0%         4.7%   

Billing and Collections

Each servicer will bill its retail electric customers for charges arising from the phase-in-recovery property attributable to that customer and will be obligated to remit daily to its respective bond trustee an amount equal to the actual phase-in-recovery charges billed, less an allowance for estimated phase-in-recovery charge charge-offs, within two business days after the day payments arising from the phase-in-recovery charges are deemed to be collected as described under “Servicing—Remittances to Collection Account.” A servicer’s duties will include responding to inquiries from customers and the PUCO regarding the phase-in-recovery property and the phase-in-recovery charges, calculating electricity usage, accounting for collections, furnishing periodic reports and statements to its bond issuer, the bond trustee and the certificate trustee and periodically adjusting the phase-in-recovery charges . See “Servicing Agreements” in this prospectus.

Credit Policy

The credit and collections policies of CEI, OE and TE are regulated by the PUCO. Under PUCO regulations, the Ohio Companies are obligated to provide service to all customers within their respective service territory.

On application for service, the identification and credit standing of all customers is verified through the use of a major credit-reporting bureau. In instances where customers do not meet minimum credit standards, credit must be established. This can be done through providing a security deposit (130% of the average monthly bill), third party guarantor (residential only), furnishing a surety bond and/or a bank letter of credit. The PUCO does not permit the Ohio Companies to obtain security deposits from their residential customers that are enrolled in a low income payment plan.

 

62


Table of Contents

According to PUCO regulations, each Ohio Company may refuse to provide service, at any location, to an applicant who is indebted to it for any service previously furnished to the applicant. Each Ohio Company will commence service, however, if a reasonable payment plan for the indebtedness is first made between a residential applicant and the Ohio Company, and it may likewise commence service for an industrial or commercial applicant.

Billing

Each of CEI, OE and TE bill their respective customers about once every 30.9 days, with approximately an equal number of bills being distributed each business day. For the year ending December 31, 2012, CEI produced an average of 35,475 bills, OE produced an average of 49,137 bills, and TE produced an average of 14,661 bills, on each business day to customers in their various customer categories.

Budget billing is limited to residential customers. Approximately 90,407 residential customers, who constitute approximately 13.69% of CEI’s residential customer base, approximately 127,848 residential customers, who constitute approximately 13.92% of OE’s residential customer base and approximately 32,085 residential customers, who constitute approximately 11.8% of TE’s residential customer base, choose to be billed using the Ohio Companies’ budget billing program. For these customers, the Ohio Companies determine and bill a monthly budget amount based on the last 12 months of billing history for each account. The budget amount is recalculated each March and September, if necessary. Overpayments or underpayments for actual usage during the prior year are reconciled on each customer’s August bill.

For accounts with potential billing errors exception reports are generated for manual review. This review examines accounts that have abnormally high or low bills, potential meter-reading errors and possible meter malfunctions.

Collection Process

CEI, OE and TE receive a large percentage of their payments via the U.S. mail; however, other payment options are also available. These options include electronic payments, credit card, check free, pay by phone and automatic check withdraw and electronic fund transfers, as well as direct payment at the Ohio Companies’ payment agency network.

The Ohio Companies consider residential and nonresidential customer bills to be delinquent if they are unpaid 30 days after the billing date. In general, the Ohio Companies’ collection process begins when balances are unpaid for 30 days or more from the billing date. At that time, the Ohio Companies begin collection activities ranging from delinquency notice mailings, to telephone calls, to personal collection and ending with electricity shut-off. The Ohio Companies outsource a portion of their residential and commercial collection activity to two unaffiliated vendors, which handle incoming collection calls. In addition, one of these vendors provides outbound collection calls for the Ohio Companies. The Ohio Companies also sell bad debt and use collection agencies and legal collection experts as needed throughout the collection process.

 

63


Table of Contents

Loss Experience

The following tables set forth information relating to the annual net charge-offs for CEI, OE and TE.

CEI

Net Charge-Offs as a Percentage of Billed Transmission & Distribution Revenues

 

     As of
12/31/09
     As of
12/31/10
     As of
12/31/11
     As of
12/31/12
 

Billed Electric Revenues ($000)

     1,656,594         1,210,160            867,080            836,180   

Net Charge-Offs ($000)

     9,557         13,133         6,923         8,266   

Percentage of Billed Revenue

     0.58%         1.09%         0.80%         0.99%   

OE

Net Charge-Offs as a Percentage of Billed Transmission & Distribution Revenues

 

     As of
12/31/09
     As of
12/31/10
     As of
12/31/11
     As of
12/31/12
 

Billed Electric Revenues ($000)

     2,029,578         1,362,268         1,177,095         1,184,237   

Net Charge-Offs ($000)

     14,365         8,234         6,558         9,691   

Percentage of Billed Revenue

     0.71%         0.60%         0.56%         0.82%   

TE

Net Charge-Offs as a Percentage of Billed Transmission & Distribution Revenues

 

     As of
12/31/09
     As of
12/31/10
     As of
12/31/11
     As of
12/31/12
 

Billed Electric Revenues ($000)

        767,307            437,498            386,901            390,914   

Net Charge-Offs ($000)

     7,867         4,243         3,333         4,177   

Percentage of Billed Revenue

     1.03%         0.97%         0.86%         1.07%   

Days Sales Outstanding

The following tables set forth information relating to the average number of days that retail customer bills from CEI, OE and TE remained outstanding during the calendar year (or other period referred to below) ending on each of the dates referred to below.

CEI

Average Days Sales Outstanding