<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION STATEMENT NO. 333-30715
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST PG&E-1
(ISSUER OF SECURITIES)
PG&E FUNDING LLC
(DEPOSITOR OF THE TRUST DESCRIBED HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF FORMATION)
DELAWARE 94-3274751
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
ORGANIZATION) NUMBER)
PG&E FUNDING LLC
245 MARKET STREET, ROOM 424
SAN FRANCISCO, CA 94105
(415) 972-5467
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
LESLIE EVERETT
CORPORATE SECRETARY
PG&E FUNDING LLC
245 MARKET STREET, ROOM 424
SAN FRANCISCO, CA 94105
(415) 972-5467
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<CAPTION>
<S> <C> <C>
DEAN E. CRIDDLE ERIC D. TASHMAN GREGORY M. SHAW
MARK R. LEVIE CATHY M. KAPLAN CRAVATH, SWAINE & MOORE
ORRICK, HERRINGTON BROWN & WOOD LLP WORLDWIDE PLAZA
& SUTCLIFFE LLP 555 CALIFORNIA STREET, 50TH FLOOR 825 EIGHTH AVENUE
OLD FEDERAL RESERVE BANK BUILDING SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10019
400 SANSOME STREET
SAN FRANCISCO, CALIFORNIA 94111
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
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, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER +
+TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF +
+THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Dated November 25, 1997
PRELIMINARY PROSPECTUS SUPPLEMENT
(To Prospectus dated November 25, 1997)
California Infrastructure and Economic Development Bank
Special Purpose Trust PG&E-1
$2,901,000,000 RATE REDUCTION CERTIFICATES, SERIES 1997-1
<TABLE>
<S> <C>
$125,000,000 Class A-1 5.94% Certificates $290,000,000 Class A-5 6.25% Certificates
$265,000,000 Class A-2 6.01% Certificates $375,000,000 Class A-6 6.32% Certificates
$280,000,000 Class A-3 6.15% Certificates $866,000,000 Class A-7 6.42% Certificates
$300,000,000 Class A-4 6.16% Certificates $400,000,000 Class A-8 6.48% Certificates
</TABLE>
----------
PG&E Funding LLC
Issuer of the Notes
Pacific Gas and Electric Company
Seller and Servicer
----------
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES. NONE
OF THE OFFERED CERTIFICATES, THE UNDERLYING NOTES OR THE TRANSITION
PROPERTY WILL BE GUARANTEED OR INSURED BY THE STATE OF
CALIFORNIA, THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER
OR ITS AFFILIATES.
THE CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE
TRUST PG&E-1 RATE REDUCTION CERTIFICATES, SERIES 1997-1 (THE "OFFERED
CERTIFICATES"), OFFERED HEREBY WILL CONSIST OF THE EIGHT CLASSES LISTED ABOVE.
EACH CLASS OF OFFERED CERTIFICATES REPRESENTS A FRACTIONAL UNDIVIDED BENEFICIAL
INTEREST IN THE RELATED CLASS OF PG&E FUNDING LLC NOTES, SERIES 1997-1 (THE
"UNDERLYING NOTES"), ISSUED BY PG&E FUNDING LLC, A DELAWARE SPECIAL PURPOSE
LIMITED LIABILITY COMPANY (THE "NOTE ISSUER"). EACH UNDERLYING NOTE WILL BE
SECURED PRIMARILY BY THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER, AS
DESCRIBED UNDER "DESCRIPTION OF THE TRANSITION PROPERTY" HEREIN AND IN THE
PROSPECTUS; THE UNDERLYING NOTES WILL ALSO BE SECURED BY THE OTHER NOTE
COLLATERAL DESCRIBED UNDER "DESCRIPTION OF THE NOTES--SECURITY" IN THE
PROSPECTUS. THE UNDERLYING NOTES, TOGETHER WITH OTHER SERIES OF NOTES ISSUED
FROM TIME TO TIME BY THE NOTE ISSUER UNDER THE NOTE INDENTURE (TOGETHER WITH
THE UNDERLYING NOTES, THE "NOTES"), ARE OWNED BY THE CALIFORNIA INFRASTRUCTURE
AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE TRUST PG&E-1 (THE "TRUST").
(CONTINUED ON FOLLOWING PAGE.)
----------
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES, AND
THERE IS NO ASSURANCE THAT ONE WILL DEVELOP. PROSPECTIVE INVESTORS
SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH
UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 28 IN
THE PROSPECTUS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS TRUST(1)(2)
--------- ------------- -----------
<S> <C> <C> <C>
Per Class A-1 Certificate............................. 99.99656% 0.20939% 99.78717%
Per Class A-2 Certificate............................. 99.99664% 0.30000% 99.69664%
Per Class A-3 Certificate............................. 99.98875% 0.35000% 99.63875%
Per Class A-4 Certificate............................. 99.97709% 0.40000% 99.57709%
Per Class A-5 Certificate............................. 99.98630% 0.45000% 99.53630%
Per Class A-6 Certificate............................. 99.95817% 0.50000% 99.45817%
Per Class A-7 Certificate............................. 99.98876% 0.55000% 99.43876%
Per Class A-8 Certificate............................. 99.99358% 0.65000% 99.34358%
Total................................................. $2,900,566,955 $13,779,738 $2,886,787,217
</TABLE>
- -----
(1) Plus accrued interest, if any, at the applicable Certificate Interest
Rate from December 8, 1997.
(2) Before deduction of expenses estimated to be $5,900,000.
----------
The Offered Certificates are offered by the Underwriters when, as and if
issued by the Trust and accepted by the Underwriters and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Offered Certificates will be delivered on or about December 8, 1997, in
book-entry form through the facilities of The Depository Trust Company, Cedel
Bank, societe anonyme, and the Euroclear System.
----------
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
ARTEMIS CAPITAL GROUP, INC. BLAYLOCK & PARTNERS, L.P.
COAST PARTNERS SECURITIES, INC. REDWOOD SECURITIES GROUP, INC.
The date of this Prospectus Supplement is November 25, 1997.
<PAGE>
Interest on each Class of Offered Certificates at the applicable Certificate
Interest Rate will be distributable quarterly on March 25, June 25, September
25 and December 26 or, if any such day is not a Certificate Business Day, the
next succeeding Certificate Business Day (each, a "Distribution Date")
commencing March 25, 1998. INTEREST AND PRINCIPAL ON ANY CLASS OF OFFERED
CERTIFICATES WILL BE DISTRIBUTABLE ONLY TO THE EXTENT OF PAYMENTS RECEIVED BY
THE TRUST ON THE RELATED CLASS OF UNDERLYING NOTES. See "Description of the
Notes" herein.
The Offered Certificates are part of a separate Series of California
Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 Rate
Reduction Certificates being offered by the Trust from time to time pursuant
to a Prospectus dated November 25, 1997 (the "Prospectus"), of which this
Prospectus Supplement is a part and which accompanies this Prospectus
Supplement.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF
THE NOTE ISSUER ARE THE SOLE SOURCE OF PAYMENTS ON THE UNDERLYING NOTES.
PAYMENTS ON THE UNDERLYING NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF
DISTRIBUTIONS ON THE OFFERED CERTIFICATES. NONE OF THE STATE OF CALIFORNIA,
THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES WILL HAVE ANY
OBLIGATIONS IN RESPECT OF THE OFFERED CERTIFICATES, THE UNDERLYING NOTES OR
THE TRANSITION PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN AND IN THE
PROSPECTUS.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, OR INTEREST ON, THE UNDERLYING
NOTES OR THE OFFERED CERTIFICATES OR TO THE PAYMENTS IN RESPECT OF THE
TRANSITION PROPERTY NOR IS THE STATE OF CALIFORNIA OR ANY POLITICAL
SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IN ANY MANNER OBLIGATED TO MAKE
ANY APPROPRIATION FOR THE PAYMENT THEREOF.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
CERTIFICATES. SUCH TRANSACTIONS MAY INCLUDE OVERALLOTMENT TRANSACTIONS,
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE
"UNDERWRITING" HEREIN.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page S-34 herein and which begins on page 90 in the Prospectus
for the location of the definitions of capitalized terms that appear in the
Prospectus and this Prospectus Supplement.
S-2
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Servicer indirectly will provide to Cede & Co., as nominee of The
Depository Trust Company ("DTC") and registered holder of the Offered
Certificates and, upon request, to Participants of DTC, periodic reports
concerning the Offered Certificates. See "Servicing--Statements by Servicer"
in the Prospectus. Such reports may be made available to the holders of
interests in the Offered Certificates (the "Certificateholders") upon request
to their Participants. Such reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. The
financial information provided to Certificateholders will not be examined and
reported upon, nor will an opinion thereon be provided, by any independent
public accountant.
The Note Issuer will file with the Securities and Exchange Commission (the
"Commission") such periodic reports as are required by the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules, regulations or
orders of the Commission thereunder. Copies of the Registration Statement and
exhibits thereto may be obtained at the locations specified in the Prospectus
under "Available Information" at prescribed rates. Information filed with the
Commission can also be inspected at the Commission's site on the World Wide
Web at http://www.sec.gov. The Note Issuer may discontinue filing periodic
reports under the Exchange Act at the beginning of the fiscal year following
the issuance of the Offered Certificates if there are fewer than 300 holders
of such Offered Certificates.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK,
THE UNDERWRITERS OR ANY DEALER, SALESPERSON OR OTHER PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION.
S-3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Holders......................................................... S-3
Prospectus Supplement Summary.............................................. S-5
Recent Developments........................................................ S-15
Description of the Certificates............................................ S-16
Description of the Notes................................................... S-18
Description of the Transition Property..................................... S-23
Certain Distribution, Weighted Average Life and Yield Considerations....... S-24
The Seller and Servicer.................................................... S-25
Servicing.................................................................. S-25
Certain Federal Income Tax Consequences.................................... S-26
State Taxation............................................................. S-29
ERISA Considerations....................................................... S-30
Underwriting............................................................... S-32
Ratings.................................................................... S-33
Legal Matters.............................................................. S-33
Index of Principal Definitions............................................. S-34
PROSPECTUS
Available Information...................................................... 2
Reports to Holders......................................................... 2
Incorporation of Certain Documents by Reference............................ 3
Prospectus Supplement...................................................... 3
Prospectus Summary......................................................... 7
Risk Factors............................................................... 28
Energy Deregulation and New California Market Structure.................... 39
Description of the Transition Property..................................... 40
Certain Distribution, Weighted Average Life and Yield Considerations....... 46
The Trust.................................................................. 47
The Infrastructure Bank.................................................... 48
The Note Issuer............................................................ 49
The Seller and Servicer.................................................... 50
Servicing.................................................................. 55
Description of the Notes................................................... 61
Description of the Certificates............................................ 70
Certain Federal Income Tax Consequences.................................... 82
State Taxation............................................................. 87
ERISA Considerations....................................................... 88
Use of Proceeds............................................................ 88
Plan of Distribution....................................................... 89
Ratings.................................................................... 89
Legal Matters.............................................................. 89
Index of Principal Definitions............................................. 90
Financial Statements....................................................... F-1
</TABLE>
S-4
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the detailed information appearing elsewhere herein and in the
Prospectus. Certain capitalized terms used but not defined in this Prospectus
Supplement Summary have the meanings ascribed to such terms elsewhere in this
Prospectus Supplement or, to the extent not defined herein, have the meanings
ascribed to such terms in the Prospectus. The Index of Principal Definitions
included in this Prospectus Supplement which begins on page S-34 sets forth the
pages on which the definitions of certain principal terms appear.
Summary of Offered
Certificates................ The California Infrastructure and Economic
Development Bank Special Purpose Trust PG&E-1
Rate Reduction Certificates, Series 1997-1 (the
"Offered Certificates"). On the date of initial
issuance of the Offered Certificates (the
"Series Issuance Date"), the Offered
Certificates will be issued as described below.
<TABLE>
<CAPTION>
INITIAL CERTIFICATE
PRINCIPAL SCHEDULED FINAL INTEREST
CLASS AMOUNT DISTRIBUTION DATE TERMINATION DATE RATE
----- ------------ ------------------ ------------------ -----------
<S> <C> <C> <C> <C>
A-1 $125,000,000 September 25, 1998 September 25, 2000 5.94%
A-2 $265,000,000 June 25, 1999 June 25, 2001 6.01%
A-3 $280,000,000 June 25, 2000 June 25, 2002 6.15%
A-4 $300,000,000 June 25, 2001 June 25, 2003 6.16%
A-5 $290,000,000 June 25, 2002 June 25, 2004 6.25%
A-6 $375,000,000 September 25, 2003 September 25, 2005 6.32%
A-7 $866,000,000 September 25, 2006 September 25, 2008 6.42%
A-8 $400,000,000 December 26, 2007 December 26, 2009 6.48%
</TABLE>
Transaction Overview........ For a brief summary of the statutes and
proceedings which form the basis for the
issuance and sale of the Offered Certificates by
the Trust, and a diagram of the parties to the
transaction, their roles and their various
relationships to the other parties, investors
are directed to the discussion under the heading
"Prospectus Summary--Transaction Overview" in
the Prospectus.
The Note Issuer will issue the Underlying Notes,
and sell the Underlying Notes to the Trust in
exchange for the proceeds of the sale of the
Offered Certificates. The Trust has been
established by the Infrastructure Bank. The
Trust, whose sole assets will be the Underlying
Notes and other Notes issued under the
Indenture, will issue the Offered Certificates,
which will be sold to the Underwriters. The
Offered Certificates of each Class represent
fractional undivided beneficial interests in the
related Class of Underlying Notes and the
proceeds thereof. The Underlying Notes will be
secured primarily by the Transition Property.
The Underlying Notes will also be secured by the
Transition Property Purchase and Sale Agreement
between PG&E and the Note Issuer, any subsequent
sale agreement relating to a separate Series of
Notes, the Transition Property Servicing
Agreement between PG&E and the Note Issuer, the
Collection Account and all amounts or investment
property on deposit therein or credited thereto
from time to time, all other property of
whatever kind (other than certain cash amounts
described herein)
S-5
<PAGE>
owned from time to time by the Note Issuer, if
any, all present and future claims, demands,
causes and choses in action in respect of any or
all of the foregoing and all payments on or
under and all proceeds in respect of any or all
of the foregoing.
The charges included in the Transition Property
described in the Prospectus are calculated to be
sufficient over time to pay principal and
interest on the Offered Certificates, to pay all
related fees and expenses, to collect the
Overcollateralization Amount described herein
and to replenish the Capital Subaccount to the
extent that amounts are drawn therefrom. These
charges will be subject to adjustment pursuant
to the true-up mechanism described in the
Prospectus over the life of the Offered
Certificates to enhance the likelihood of timely
recovery of such amounts, although there can be
no assurance that the true-up mechanism will
operate as intended or that any of the Offered
Certificates will mature as scheduled. See
"Description of the Transition Property--
Adjustments to the FTA Charges" in the
Prospectus.
Risk Factors................ Investors should consider the risks associated
with an investment in the Offered Certificates.
For a discussion of certain material risks
associated therewith, investors should review
the discussion under "Risk Factors" which begins
on page 28 of the Prospectus.
The Offered Certificates....
The California Infrastructure and Economic
Development Bank Special Purpose Trust PG&E-1
Rate Reduction Certificates, Series 1997-1. The
Offered Certificates are comprised of the eight
Classes listed on the cover page hereof (each, a
"Class"). As of the Series Issuance Date, the
aggregate principal balance of the Offered
Certificates (the "Original Certificate
Principal Balance") will be $2,901,000,000. Each
Class of Offered Certificates will have a
principal balance (the "Class Principal
Balance") equal to the initial amount of
principal allocable to such Class, reduced by
principal distributed to such Class in
accordance with the terms of the Trust
Agreement. See "Description of the Certificates"
herein and in the Prospectus.
None of the Offered Certificates, the Underlying
Notes or the Transition Property will be
guaranteed or insured by the State of
California, the Infrastructure Bank, the Trust
or any other governmental agency or
instrumentality or by the Seller or any of its
affiliates. Neither the full faith and credit
nor the taxing power of the State of California
or any political subdivision, agency or
instrumentality thereof is pledged to the
distributions of principal of or interest on the
Offered Certificates or the Underlying Notes
S-6
<PAGE>
or to the payments in respect of the Transition
Property. The issuance and sale of the Offered
Certificates is contingent upon the
effectiveness of the Issuance Advice Letter
related thereto. See "Description of the
Transition Property--Financing Order and Advice
Letters" in the Prospectus.
Seller and Servicer......... Pacific Gas and Electric Company, a California
corporation ("PG&E" or, in its capacity as
seller of the Transition Property, the "Seller"
or, in its capacity as servicer of the
Transition Property, the "Servicer"). For a more
complete discussion of PG&E and its roles as
Seller and Servicer, see "The Seller and
Servicer" herein and in the Prospectus.
Issuer of Certificates...... A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
PG&E-1" (the "Trust") established by the
California Infrastructure and Economic
Development Bank (the "Infrastructure Bank").
The Trust will not be an agency or
instrumentality of the State of California. The
Infrastructure Bank will not guarantee or insure
the Offered Certificates, the Underlying Notes
or the Transition Property. For a more complete
discussion of the Trust, see "The Trust" in the
Prospectus, and for a more complete discussion
of the Infrastructure Bank, see "The
Infrastructure Bank" in the Prospectus.
Certificate Trustee......... Bankers Trust Company of California, N.A., a
national banking association (the "Certificate
Trustee").
Delaware Trustee............ Bankers Trust (Delaware), a Delaware banking
corporation (the "Delaware Trustee").
Note Issuer.................
PG&E Funding LLC, a Delaware special purpose
limited liability company whose sole member is
PG&E (the "Note Issuer"). The principal
executive office of the Note Issuer is located
at 245 Market Street, Room 424, San Francisco,
California 94105, and its telephone number is
(415) 972-5467.
The Underlying Notes........
PG&E Funding LLC Notes, Series 1997-1 (the
"Underlying Notes"), issued by the Note Issuer.
The Underlying Notes are comprised of eight
classes (each, a "Class"). As of the Series
Issuance Date for the Underlying Notes, the
aggregate principal balance thereof will be
$2,901,000,000. Each Class of Underlying Notes
secures the payment of the corresponding Class
of Offered Certificates and will have the same
Class Principal Balance as the corresponding
Class of Offered Certificates. See "Description
of the Notes" herein and in the Prospectus.
Note Trustee ............... Bankers Trust Company of California, N.A., a
national banking association (the "Note
Trustee").
S-7
<PAGE>
Transition Property......... As more fully described under "Description of the
Transition Property" herein and in the
Prospectus, the property right created under the
PU Code including, without limitation, the
right, title and interest of an electrical
corporation or its transferee (i) in and to the
FTA Charges, as adjusted from time to time, (ii)
to be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges as provided in
the PU Code.
FTA Charges.................
As more fully described under "Description of the
Transition Property" in the Prospectus,
nonbypassable, usage-based, per kilowatt hour
charges payable by Residential Customers and
Small Commercial Customers, which are expected
to yield the amounts which are necessary to
provide for the amortization of all Certificates
in accordance with the applicable Expected
Amortization Schedules, the payment of fees and
expenses related to the issuance and servicing
of the Certificates, the collection of the
Overcollateralization Amount described herein
and the replenishment of the Capital Subaccount
to the extent that amounts are drawn therefrom.
Based on the Expected Amortization Schedule set
forth herein and the assumptions related
thereto, the initial FTA Charge payable by
Residential Customers would be 1.61508 cents per
kilowatt hour and the initial FTA Charge payable
by Small Commercial Customers would be 1.68825
cents per kilowatt hour. See "Description of the
Notes--Principal" herein.
Adjustments to FTA Charges..
In order to enhance the likelihood that the FTA
Collections are neither more nor less than the
amount necessary to amortize the Offered
Certificates in accordance with the Expected
Amortization Schedule, fund the
Overcollateralization Subaccount as scheduled,
pay fees and expenses relating to the issuance
and servicing of the Offered Certificates and
replenish the Capital Subaccount to the extent
that amounts have been drawn therefrom, the
Servicing Agreement and the Financing Order
require the Servicer to seek periodic
adjustments to the FTA Charges based on actual
FTA Collections and updated assumptions by the
Servicer as to, among other factors, the
electricity usage by Customers and the rate of
delinquencies and write-offs. The adjustments to
the FTA Charges will continue until all interest
and principal on all Series of Notes and
corresponding Series of Certificates have been
paid or distributed in full. See "Description of
the Transition Property -- Adjustments to the
FTA Charges" in the Prospectus.
Distribution Dates..........
Each March 25, June 25, September 25 and December
26 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate
Business Day), commencing March 25, 1998, the
dates on which distributions will be made to
holders of Offered Certificates (each, a
"Distribution Date"). Each Distribution Date
with respect to the Certificates will also be a
date on which payments are made with respect to
the Notes (each, a "Payment Date").
S-8
<PAGE>
Record Date................. With respect to any Distribution Date, the
Business Day preceding such Distribution Date if
the Offered Certificates are Book-Entry
Certificates or, if Definitive Certificates are
issued, the last day of the preceding calendar
month (each, a "Record Date").
Scheduled Final
Distribution and
Termination Dates..........
The Scheduled Final Distribution Date for each
Class of the Offered Certificates, which is the
date when all principal and interest on such
Class of Offered Certificates is expected to be
distributed in full, based on certain
assumptions described herein, and the
Termination Date for each Class of Offered
Certificates are specified herein under
"Description of the Certificates."
Failure to distribute principal of any Class of
Offered Certificates in full by the related
Termination Date shall constitute an Event of
Default, and the Certificate Trustee may and,
upon the written direction of the holders of a
majority in principal amount of all Certificates
of all Series then outstanding, shall declare
the unpaid principal amount of all the Notes of
all Series then outstanding to be due and
payable. See "Description of the Certificates--
Events of Default" and "Ratings" in the
Prospectus.
Issuance of New Series...... The Trust may issue new Series of Certificates
from time to time. A new Series may be issued
only upon satisfaction of the conditions
described under "Description of the
Certificates--Conditions of Issuance of
Additional Series" in the Prospectus.
Interest....................
On each Distribution Date, the Certificate
Trustee shall distribute pro rata to the
Certificateholders of each Class as of the
related Record Date any unpaid interest payable
on any prior Distribution Dates, together with
interest thereon at the applicable Certificate
Interest Rate, and interest in an amount equal
to one-fourth of the product of (a) the
applicable Certificate Interest Rate and (b) the
applicable Class Principal Balance as of the
close of business on the preceding Distribution
Date after giving effect to all payments of
principal made to the Certificateholders on such
preceding Distribution Date; provided, however,
that with respect to the initial Distribution
Date, interest on each outstanding Class
Principal Balance will accrue from and including
the Series Issuance Date to, but excluding, such
initial Distribution Date. Interest will be
calculated on the basis of a 360-day year of
twelve 30-day months. Interest on any Class of
Offered Certificates will be distributable only
to the extent interest has been paid on the
related Class of Underlying Notes. Interest on
the Offered Certificates will be distributed
prior to any distribution of principal on the
Offered Certificates. See "Description of the
Certificates--Distributions of Interest" herein
and "Description of the Notes--Interest and
Principal" in the Prospectus.
S-9
<PAGE>
Principal...................
On each Distribution Date, the Certificate
Trustee shall distribute to the
Certificateholders as of the related Record Date
amounts distributable as principal, in the
following order and priority: (1) to the holders
of the Class A-1 Certificates, until the Class
Principal Balance thereof has been reduced to
zero; (2) to the holders of the Class A-2
Certificates, until the Class Principal Balance
thereof has been reduced to zero; (3) to the
holders of the Class A-3 Certificates, until the
Class Principal Balance thereof has been reduced
to zero; (4) to the holders of the Class A-4
Certificates, until the Class Principal Balance
thereof has been reduced to zero; (5) to the
holders of the Class A-5 Certificates, until the
Class Principal Balance thereof has been reduced
to zero; (6) to the holders of the Class A-6
Certificates, until the Class Principal Balance
thereof has been reduced to zero; (7) to the
holders of the Class A-7 Certificates, until the
Class Principal Balance thereof has been reduced
to zero; and (8) to the holders of the Class A-8
Certificates, until the Class Principal Balance
thereof has been reduced to zero; provided,
however, that in no event shall the principal
payment on any Class on a Distribution Date be
greater than the amount necessary to reduce the
Class Principal Balance of such Class below the
amount specified in the Expected Amortization
Schedule for such Class and Distribution Date.
The principal amounts distributable with respect
to any Class of Offered Certificates will be
payable only to the extent of payments of
principal made on the related Class of
Underlying Notes. See "Description of the
Certificates--Distributions of Principal" herein
and "Description of the Notes--Interest and
Principal" in the Prospectus.
Optional Redemption......... The Note Issuer may redeem the Underlying Notes
relating to the Offered Certificates, and
accordingly cause the Trust to redeem the
Offered Certificates, on any Payment Date if the
outstanding principal balance of the Underlying
Notes (after giving effect to payments that
would otherwise be made on such date) has been
reduced to less than five percent of the initial
principal balance of the Underlying Notes. See
"Description of the Certificates--Optional
Redemption" herein.
Mandatory Redemption........ The Seller may be required to repurchase the
Transition Property as described under
"Description of the Transition Property--Seller
Representations and Warranties and Repurchase
Obligation" in the Prospectus, which repurchase
will require the Trust to redeem the Offered
Certificates.
Collection Account and
Subaccounts................. Upon issuance of the initial Series of Notes, the
Note Issuer will establish the Collection
Account, which will be held by the Note Trustee
for the benefit of the Noteholders. The
Collection Account will consist of four
subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount
S-10
<PAGE>
(the "Overcollateralization Subaccount") and a
capital subaccount (the "Capital Subaccount").
Unless the context indicates otherwise,
references herein to the Collection Account
include each of the subaccounts contained
therein. Withdrawals from and deposits to these
subaccounts will be made as described under
"Description of the Notes--Allocations;
Payments" in the Prospectus.
Credit Enhancement.......... The Offered Certificates will benefit from the
following forms of credit enhancement:
Overcollateralization. The Financing Order
provides that the Note Issuer, as the owner of
the Transition Property, is entitled to collect
an additional amount (for the Underlying Notes,
the "Overcollateralization Amount") which is
intended to enhance the likelihood that payments
on the Underlying Notes will be made in
accordance with the Expected Amortization
Schedule. The Overcollateralization Amount for
the Underlying Notes will be $14,505,000, which
is 0.50% of the initial principal amount of the
Underlying Notes. The FTA Charges will be set
and adjusted at a rate that is intended to
recover the Overcollateralization Amount ratably
over the life of the Offered Certificates
according to the schedule set forth under
"Description of the Notes--
Overcollateralization Amount" herein. The
Overcollateralization Amount for all Series of
Certificates will be held in the
Overcollateralization Subaccount, as described
further under "Description of the Notes--
Overcollateralization Amount" in the Prospectus,
and will be available to pay any periodic
shortfalls in amounts available for scheduled
payments on the Notes. The amount required to be
on deposit in the Overcollateralization
Subaccount as of any Payment Date, as specified
in the schedule set forth in this Prospectus
Supplement, is referred to herein as the
"Required Overcollateralization Level."
Capital Subaccount. Upon the issuance of the
Underlying Notes, the Seller will make a capital
contribution of $14,505,000 to the Note Issuer.
Such amount is equal to 0.50% of the initial
principal amount of the Underlying Notes. Such
amount, less $100,000 in the aggregate for all
Series of Notes, is the Required Capital Level
with respect to the Underlying Notes and will be
deposited into the Capital Subaccount.
Withdrawals from and deposits to the Capital
Subaccount will be made as described under
"Description of the Notes--Allocations;
Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available
with respect to any Payment Date in excess of
amounts payable as (a) fees and expenses of the
Note Issuer and the Trust, (b) payments of
principal of and interest on the Underlying
Notes, (c) allocations to the
Overcollateralization Subaccount and (d)
allocations to the Capital Subaccount (all as
described under "Description of the
S-11
<PAGE>
Notes--Allocations; Payments" in the
Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note
Trustee will draw on amounts in the Reserve
Subaccount, to the extent amounts available in
the General Subaccount are insufficient to make
scheduled payments on the Underlying Notes or to
make required allocations to the
Overcollateralization Subaccount or the Capital
Subaccount.
Collections; Allocations;
Distributions............... On each Distribution Date, amounts on deposit in
the Collection Account will be applied in the
manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
Servicing Compensation......
The Servicer will be entitled to receive a fee on
each Payment Date with respect to the Offered
Certificates in an amount equal to (a) one-
fourth of 0.25 percent of the outstanding
principal balance of the Underlying Notes
(before giving effect to payments on such date)
for so long as FTA Charges are included as a
line item on bills otherwise sent to Customers
and (b) one-fourth of 1.50 percent of the
outstanding principal balance of the Underlying
Notes (before giving effect to payments on such
date) if FTA Charges are not included as a line
item on bills otherwise sent to Customers but,
instead, are billed separately to Customers (the
"Servicing Fee"). The Servicing Fee will be paid
prior to the distribution of any amounts in
respect of interest on and principal of the
Underlying Notes. The Servicer will be entitled
to retain as additional compensation net
investment income on FTA Payments received by
the Servicer prior to remittance thereof to the
Collection Account and the portion of late fees,
if any, paid by Customers relating to the FTA
Payments. See "Servicing--Servicing
Compensation" herein and in the Prospectus.
No Servicer Advances........
The Servicer will not make any advances of
interest or principal on the Underlying Notes or
the Offered Certificates.
Maturity, Weighted Average
Life and Yield
Considerations............. The actual Distribution Dates on which principal
is distributed on each Class of Certificates
will be affected by, among other things, the
amount and timing of receipt of FTA Collections
and amounts available in the
Overcollateralization Subaccount, Capital
Subaccount and Reserve Subaccount. Since each
FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of
Customers in the Territory, the aggregate amount
and timing of FTA Collections (and the resulting
amount and timing of principal amortization on
the Offered Certificates) will depend, in part,
on actual usage of electricity by Customers and
the rate of delinquencies and write-offs.
Although the amount of the FTA Charges will be
adjusted from time to time based in part on the
actual rate of FTA Collections, no assurances
can be given that the Servicer will be able to
forecast accurately actual Customer electricity
usage and the rate of delinquencies and write-
offs and implement adjustments to the FTA
Charges that will cause FTA Payments to be made
at any particular rate.
S-12
<PAGE>
If FTA Collections are received at a slower rate
than expected, distributions on a Certificate
may be made later than expected, and a
Certificate may be retired later than expected.
Because principal will only be distributed at a
rate not faster than that contemplated in the
Expected Amortization Schedule, except in the
event of an early redemption or the acceleration
of the maturity of the Certificates after an
Event of Default, the Certificates are not
expected to be retired earlier than scheduled.
If the Note Issuer exercises its option to redeem
all of the outstanding Underlying Notes on any
Payment Date commencing on the Payment Date on
which the outstanding principal balance of the
Underlying Notes (after giving effect to
payments that would otherwise be made on such
date) has been reduced to less than five percent
of the initial principal balance of the
Underlying Notes, the Certificate Trustee will
be required to redeem the Offered Certificates.
Such redemption may adversely affect the yield
to maturity of the Offered Certificates. See
"Certain Distribution, Weighted Average Life and
Yield Considerations" and "Description of the
Transition Property--Adjustments to the FTA
Charges" in the Prospectus.
Denominations...............
Each Class of Offered Certificates will be issued
in minimum initial denominations of $1,000 and
in integral multiples thereof.
Registration of the
Certificates................ The Offered Certificates will initially be
represented by one or more certificates
registered in the name of Cede & Co. ("Cede")
("Book-Entry Certificates"), the nominee of The
Depository Trust Company ("DTC"), and available
only in the form of book-entries on the records
of DTC, its Participants and its Indirect
Participants. Holders may also hold such
Certificates through CEDEL or the Euroclear
System in Europe. For a more complete discussion
of the Book-Entry Certificates, see "Risk
Factors--Nature of the Certificates" and
"Description of the Certificates--Book-Entry
Registration" in the Prospectus.
Ratings.....................
It is a condition of issuance of the Offered
Certificates that the Offered Certificates be
rated "AAA" by Standard and Poor's, a division
of The McGraw-Hill Companies, Inc., "Aaa" by
Moody's Investors Service, Inc. and "AAA" by
Fitch Investors Service, L.P. (each of such
rating agencies, a "Rating Agency"). Each Class
of Underlying Notes will receive the same rating
from each Rating Agency as the corresponding
Class of Offered Certificates.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any Offered
Certificate and, accordingly, there can be no
assurance that the ratings assigned to any Class
of Offered Certificates upon initial issuance
thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a
rating of any Class of Offered Certificates is
revised or withdrawn, the liquidity of such
S-13
<PAGE>
Class of Offered Certificates may be adversely
affected. In general, the ratings address credit
risk and do not represent any assessment of the
rate of principal payments on the Offered
Certificates. See "Risk Factors--Nature of the
Certificates--Uncertain Distribution Amounts and
Weighted Average Life " in the Prospectus,
"Certain Distribution, Weighted Average Life and
Yield Considerations" herein and in the
Prospectus and "Ratings" herein and in the
Prospectus.
Tax Status of the
Certificates................ The Offered Certificates will be treated as
representing ownership of an interest in the
related Underlying Notes for federal income tax
purposes. Interest and original issue discount,
if any, on the Offered Certificates generally
will be included in gross income for federal
income tax purposes. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
Interest and original issue discount, if any, on
the Offered Certificates will be exempt from
California personal income tax, but not exempt
from the California franchise tax applicable to
banks and corporations. See "State Taxation"
herein and in the Prospectus.
ERISA Considerations........ Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus,
the Offered Certificates are eligible for
purchase with "plan assets" of any Plan (as
defined below) ("Plan Assets"). A fiduciary or
other person contemplating purchasing the
Offered Certificates on behalf of or with Plan
Assets of any employee benefit plan or other
plan or arrangement (including but not limited
to an insurance company general account) that is
subject to Title I of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code")
(collectively, "Plans"), should carefully review
with its legal advisors whether the purchase or
holding of the Offered Certificates could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or Section
4975 of the Code.
S-14
<PAGE>
RECENT DEVELOPMENTS
VOTER INITIATIVE
As described in the Prospectus under "Risk Factors--Unusual Nature of the
Transition Property--Possible State Amendment or Repeal of the Statute and
Related Litigation," certain California groups have previously announced their
intention to qualify a ballot initiative intended to eliminate the ability of
California's investor-owned utilities to recover fully stranded costs,
including the cost of nuclear plants, and intended to prohibit the collection
of FTA Charges. On November 24, 1997, proponents, including The Utility Reform
Network ("TURN"), a California consumer advocacy group, and Harvey Rosenfield
(the proponent of a successful voter initiative relating to automobile
insurance), submitted to the California State Attorney General a proposed
ballot initiative (the "TURN Initiative"), which is the first step in
qualifying the TURN Initiative for an election. In order to qualify an
initiative for an election, a petition must be signed by electors constituting
five percent of votes cast at the last gubernatorial election. See "Risk
Factors--Unusual Nature of the Transition Property--Possible State Amendment
or Repeal of the Statute and Related Litigation."
One of the stated purposes of the TURN Initiative is to "prohibit taxes,
surcharges, bond payments or any other assessment from being added to
electricity bills to pay off utility companies' past bad investments in
nuclear power plants and other generation-related assets." The TURN
Initiative, among other things, would prohibit the collection of FTA Charges
by a utility for the payment of rate reduction bonds (such as the
Certificates), or if such a prohibition were found to be unenforceable by a
court of competent jurisdiction, require the utility to offset any such FTA
Charge by crediting back to the customer the amount of such charge (presumably
from distribution or other charges due to the utility). In addition, the TURN
Initiative states that "any underwriter or bond purchaser who purchases rate
reduction bonds after November 15, 1997, issued pursuant to [provisions of the
Statute] shall be deemed to have notice of the [TURN Initiative]." The TURN
Initiative also would require a 20% reduction in electricity rates charged to
residential and small commercial customers.
Any adverse impact upon the Certificateholders resulting from the
circulation or adoption of the TURN Initiative (or any similar initiative)
will not result in a breach of the Seller's representations and warranties
under the Sale Agreement and thus will not require the Seller to repurchase
the Transition Property (and, hence, discharge the Certificates) as described
in the Prospectus under "Risk Factors--Unusual Nature of the Transition
Property--Limited Rights and Remedies."
As described in the Prospectus under "Risk Factors--Unusual Nature of the
Transition Property--Possible State Amendment or Repeal of the Statute and
Related Litigation," in the opinion of Brown & Wood LLP, under applicable
United States and State of California constitutional principles relating to
the impairment of contracts, the State of California could not repeal or amend
the Statute (by way of either legislative process or California voter
initiative) if such repeal or amendment would substantially impair the rights
of the Certificateholders, absent a demonstration by the State of California
of a "great public calamity" that justifies a contractual impairment. In the
further opinion of Brown & Wood LLP, knowledge of the pendency of a proposed
voter initiative by prospective Certificateholders should not diminish the
protection afforded by the contracts clause of the United States Constitution
(and, by analogy, the Constitution of the State of California). The opinions
of Brown & Wood LLP are based upon analogous case law; none of such cases
addresses these particular circumstances directly. The opinions of Brown &
Wood LLP do not constitute a guarantee of the outcome of any particular
litigation.
There can be no assurance that the proposed TURN Initiative (or a similar
initiative) will not be qualified and ultimately approved by the electorate.
In such event, costly and time consuming litigation may ensue. Any such
litigation may adversely affect the secondary market of the Certificates,
including the price and liquidity of the Certificates, and the dates of
maturity thereof, and accordingly the weighted average lives thereof.
Moreover, given the lack of judicial precedent directly on point and the
novelty of the security for the Certificates, the outcome of such litigation
cannot be predicted with certainty and, accordingly, Certificateholders could
incur a loss on their investment.
S-15
<PAGE>
PETITION FOR WRIT OF REVIEW
As described in the Prospectus under "Risk Factors--Unusual Nature of the
Transition Property--Legal Challenges," TURN had previously announced its
intention to file a petition for writ of review of the Financing Order with
the California Supreme Court. On November 24, 1997, TURN, Public Media Center,
Consumers Union and Harvey Rosenfield filed such a petition. The CPUC had
previously denied TURN's application for rehearing regarding the Financing
Order. If the California Supreme Court grants the petition for writ of review,
under the PU Code the Court would determine only whether the CPUC acted within
its authority in issuing the Financing Order. A decision by the California
Supreme Court to hear such a case in and of itself could adversely affect the
secondary market of the Certificates, including an adverse effect on the
liquidity and market value of the Certificates. See "Risk Factors--Unusual
Nature of the Transition Property--Legal Challenges."
In connection with their petition for writ of review, TURN and the other
petitioners have requested that the California Supreme Court issue an interim
writ or order suspending implementation of the Financing Order until such time
as the Court resolves the petition for writ of review. The Court has broad
equitable discretion in granting such writs and orders, which it generally
exercises based upon consideration of three factors: (a) great or irreparable
damage would otherwise result to the proponent, (b) the proponent is likely to
prevail on the merits of the underlying claim and (c) the harm that would
result from not granting the interim writ or order outweighs the harm that
would be caused from granting the interim writ or order. If such an interim
writ or order is granted and not lifted on or before the Closing Date, it
would delay and could prevent the execution and delivery of the Certificates.
If such an interim writ or order is granted thereafter, payments of principal
and accrued interest in respect of the Certificates could be delayed.
Furthermore, the granting of such an interim writ or order could adversely
affect the secondary market of the Certificates, including the liquidity and
market value of the Certificates. The granting of such a writ or order may
also result in a breach of a representation and warranty requiring the Seller,
under certain circumstances, to repurchase the Transition Property at the time
and in the manner described in the Prospectus under "Description of the
Transition Property--Seller Representations and Warranties and Repurchase
Obligation." No assurances are given that PG&E, as the Seller of the
Transition Property, would be able to repurchase the Transition Property.
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates, Series 1997-1 (the "Offered
Certificates"), together with the Certificates of other Series issued by the
Trust (collectively, the "Certificates"), will be issued by the Trust pursuant
to the Trust Agreement and the Series 1997-1 Supplement thereto. Pursuant to
the Trust Agreement, the Infrastructure Bank and the Certificate Trustee may
execute further series supplements in order to issue additional Series of
Certificates. This summary should be read together with the material under the
heading "Description of the Certificates" in the Prospectus.
GENERAL
The Offered Certificates will be issued on the Series Issuance Date and will
consist of eight Classes in the initial principal amounts, bearing the
Certificate Interest Rates and having the Scheduled Final Distribution Dates
and Termination Dates described under "Prospectus Supplement Summary--Summary
of Offered Certificates."
DISTRIBUTIONS OF INTEREST
Interest on each Class of the Offered Certificates will accrue from the
Series Issuance Date at the rates indicated above (each, a "Certificate
Interest Rate"), in each case distributable quarterly on March 25, June 25,
September 25 and December 26 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate Business Day) each year (each, a
"Distribution Date"), commencing March 25, 1998.
S-16
<PAGE>
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the close of business on the
related Record Date interest to the extent paid on such date with respect to
the Class of Underlying Notes with the same alphanumeric designation, as
described below under "Description of the Notes--Interest."
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute to the
Certificateholders of each Class as of the close of business on the related
Record Date principal to the extent paid on such date with respect to the Class
of Underlying Notes with the same alphanumeric designation, as described below
under "Description of the Notes--Principal."
The entire unpaid principal amount of the Offered Certificates will be due
and distributable on the date on which a Certificate Event of Default has
occurred and is continuing, if the Certificate Trustee or holders of a majority
in principal amount of the Offered Certificates of all Series then outstanding
have declared the Certificates to be immediately due and payable. See
"Description of the Certificates--Events of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Trust shall be required to redeem the Offered Certificates if the Note
Issuer elects to redeem the Underlying Notes, which the Note Issuer may elect
to do on any Payment Date commencing with the Payment Date on which the
outstanding principal balance of the Underlying Notes (after giving effect to
payments that would otherwise be made on such date) has been reduced to less
than five percent of the initial principal balance of the Underlying Notes.
Such Payment Date will correspond to the Distribution Date on which the
outstanding principal balance of the Offered Certificates has been reduced to
less than five percent of the Original Certificate Principal Balance. Notice of
such redemption will be given by the Trust to each holder of Certificates to be
redeemed by first-class mail, postage prepaid, mailed not less than five days
nor more than 25 days prior to the date of redemption.
MANDATORY REDEMPTION
If the Seller is required to repurchase the Transition Property as described
under "Description of the Transition Property--Seller Representations and
Warranties and Repurchase Obligation" in the Prospectus, the Note Issuer will
be required to redeem the Underlying Notes on the fifth Certificate Business
Day following the date of such repurchase, and accordingly the Trust will be
required to redeem the Offered Certificates on such date. See "Description of
the Certificates--Redemption" in the Prospectus.
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<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The PG&E Funding LLC Notes, Series 1997-1 (the "Underlying Notes"), will be
issued by the Note Issuer to the Trust on December 8, 1997 (the "Series
Issuance Date"), pursuant to the Note Indenture and the Series 1997-1
Supplement thereto. Pursuant to the Note Indenture, the Note Issuer and the
Note Trustee may execute further series supplements in order to issue
additional Series of Notes. This summary should be read together with the
material under the heading "Description of the Notes" in the Prospectus.
The Underlying Notes, together with the Notes of other Series issued by the
Note Issuer (collectively, the "Notes"), will be issued pursuant to the Note
Indenture. The Underlying Notes will be comprised of the following eight
Classes:
<TABLE>
<CAPTION>
INITIAL NOTE
PRINCIPAL SCHEDULED FINAL INTEREST
CLASS AMOUNT MATURITY DATE MATURITY DATE RATE
- ----- ------------ ------------------ ------------------ --------
<S> <C> <C> <C> <C>
A-1 $125,000,000 September 25, 1998 September 25, 2000 5.94%
A-2 $265,000,000 June 25, 1999 June 25, 2001 6.01%
A-3 $280,000,000 June 25, 2000 June 25, 2002 6.15%
A-4 $300,000,000 June 25, 2001 June 25, 2003 6.16%
A-5 $290,000,000 June 25, 2002 June 25, 2004 6.25%
A-6 $375,000,000 September 25, 2003 September 25, 2005 6.32%
A-7 $866,000,000 September 25, 2006 September 25, 2008 6.42%
A-8 $400,000,000 December 26, 2007 December 26, 2009 6.48%
</TABLE>
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer has granted to the Note Trustee, for the benefit of the holders of the
Notes (the "Noteholders"), a security interest in all of the Note Issuer's
right, title and interest in and to the Note Collateral. The Note Collateral
is described more specifically under "Description of the Notes--Security" in
the Prospectus.
INTEREST
Interest on each Class of the Underlying Notes will accrue from the Series
Issuance Date at the rates indicated above (each, a "Note Interest Rate"), in
each case payable quarterly on March 25, June 25, September 25 and December 26
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "Payment Date"), commencing March
25, 1998, to the persons in whose names the Underlying Notes are registered at
the close of business on the related Record Date.
On each Payment Date, Noteholders of each Class will be entitled to receive
any unpaid interest payable on any prior Payment Dates, together with interest
thereon at the applicable Note Interest Rate, and interest in an amount equal
to one-fourth of the product of (a) the applicable Note Interest Rate and (b)
the applicable Class Principal Balance as of the close of business on the
preceding Payment Date after giving effect to all payments of principal made
to the Noteholders on such preceding Payment Date; provided, however, that
with respect to the initial Payment Date, interest on each outstanding Class
Principal Balance will accrue from and including the Series Issuance Date to
but excluding such first Payment Date. Interest will be calculated on the
basis of a 360-day year of twelve 30-day months. See "Description of the
Notes--Interest and Principal" in the Prospectus.
S-18
<PAGE>
PRINCIPAL
On each Payment Date, each Class of the Underlying Notes will be entitled to
receive payments of principal as follows:
(1) to the holders of the Class A-1 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(2) to the holders of the Class A-2 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(3) to the holders of the Class A-3 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(4) to the holders of the Class A-4 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(5) to the holders of the Class A-5 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(6) to the holders of the Class A-6 Certificates, until the Class
Principal Balance thereof has been reduced to zero;
(7) to the holders of the Class A-7 Certificates, until the Class
Principal Balance thereof has been reduced to zero; and
(8) to the holders of the Class A-8 Certificates, until the Class
Principal Balance thereof has been reduced to zero; provided, however, that
in no event shall the principal payment on any Class on a Distribution Date
be greater than the amount necessary to reduce the Class Principal Balance
of such Class below the amount specified in the Expected Amortization
Schedule for such Class and Distribution Date.
Principal will be payable at the Corporate Trust Office of the Note
Trustee in the City of New York, or at the office or agency of the Note
Trustee maintained for such purposes in the Borough of Manhattan, the City
of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Underlying Notes at
each Payment Date from the Series Issuance Date to the Scheduled Maturity Date
for such Class. In preparing the following table, it has been assumed, among
other things, that (i) the Offered Certificates are issued on December 8,
1997, (ii) payments on the Offered Certificates are made on each Distribution
Date, commencing March 25, 1998, (iii) the Servicing Fee equals one-fourth of
0.25% of the outstanding principal amount of the Notes, (iv) there are no net
earnings on amounts on deposit in the Collection Account, (v) Operating
Expenses, Quarterly Administration Fees and amounts owed to the Note Trustee,
the Delaware Trustee and the Certificate Trustee are in the aggregate $31,250
per quarter, and all such amounts are payable in arrears and (vi) all FTA
Collections are deposited in the Collection Account in accordance with the
Seller's forecasts.
S-19
<PAGE>
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
OUTSTANDING PRINCIPAL BALANCE
----------------------------------------------------------------
PAYMENT DATE CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Series Issuance Date. $125,000,000 $265,000,000 $280,000,000 $300,000,000 $290,000,000
Mar. 1998....... 106,301,458 265,000,000 280,000,000 300,000,000 290,000,000
June 1998....... 24,180,963 265,000,000 280,000,000 300,000,000 290,000,000
Sept. 1998...... 0 197,119,806 280,000,000 300,000,000 290,000,000
Dec. 1998....... 0 99,900,000 280,000,000 300,000,000 290,000,000
Mar. 1999....... 0 14,470,651 280,000,000 300,000,000 290,000,000
June 1999....... 0 0 232,189,255 300,000,000 290,000,000
Sept. 1999...... 0 0 163,057,145 300,000,000 290,000,000
Dec. 1999....... 0 0 89,800,000 300,000,000 290,000,000
Mar. 2000....... 0 0 16,411,349 300,000,000 290,000,000
June 2000....... 0 0 0 250,558,413 290,000,000
Sept. 2000...... 0 0 0 177,245,891 290,000,000
Dec. 2000....... 0 0 0 99,700,000 290,000,000
Mar. 2001....... 0 0 0 24,432,693 290,000,000
June 2001....... 0 0 0 0 248,916,995
Sept. 2001...... 0 0 0 0 176,300,487
Dec. 2001....... 0 0 0 0 99,600,000
Mar. 2002....... 0 0 0 0 24,770,146
June 2002....... 0 0 0 0 0
Sept. 2002...... 0 0 0 0 0
Dec. 2002....... 0 0 0 0 0
Mar. 2003....... 0 0 0 0 0
June 2003....... 0 0 0 0 0
Sept. 2003...... 0 0 0 0 0
Dec. 2003....... 0 0 0 0 0
Mar. 2004....... 0 0 0 0 0
June 2004....... 0 0 0 0 0
Sept. 2004...... 0 0 0 0 0
Dec. 2004....... 0 0 0 0 0
Mar. 2005....... 0 0 0 0 0
June 2005....... 0 0 0 0 0
Sept. 2005...... 0 0 0 0 0
Dec. 2005....... 0 0 0 0 0
Mar. 2006....... 0 0 0 0 0
June 2006....... 0 0 0 0 0
Sept. 2006...... 0 0 0 0 0
Dec. 2006....... 0 0 0 0 0
Mar. 2007....... 0 0 0 0 0
June 2007....... 0 0 0 0 0
Sept. 2007...... 0 0 0 0 0
Dec. 2007....... 0 0 0 0 0
<CAPTION>
OUTSTANDING PRINCIPAL BALANCE
-----------------------------------------------------
SERIES
PAYMENT DATE CLASS A-6 CLASS A-7 CLASS A-8 1997-1
- ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Series Issuance Date. $375,000,000 $866,000,000 $400,000,000 $2,901,000,000
Mar. 1998....... 375,000,000 866,000,000 400,000,000 2,882,301,458
June 1998....... 375,000,000 866,000,000 400,000,000 2,800,180,963
Sept. 1998...... 375,000,000 866,000,000 400,000,000 2,708,119,806
Dec. 1998....... 375,000,000 866,000,000 400,000,000 2,610,900,000
Mar. 1999....... 375,000,000 866,000,000 400,000,000 2,525,470,651
June 1999....... 375,000,000 866,000,000 400,000,000 2,463,189,255
Sept. 1999...... 375,000,000 866,000,000 400,000,000 2,394,057,145
Dec. 1999....... 375,000,000 866,000,000 400,000,000 2,320,800,000
Mar. 2000....... 375,000,000 866,000,000 400,000,000 2,247,411,349
June 2000....... 375,000,000 866,000,000 400,000,000 2,181,558,413
Sept. 2000...... 375,000,000 866,000,000 400,000,000 2,108,245,891
Dec. 2000....... 375,000,000 866,000,000 400,000,000 2,030,700,000
Mar. 2001....... 375,000,000 866,000,000 400,000,000 1,955,432,693
June 2001....... 375,000,000 866,000,000 400,000,000 1,889,916,995
Sept. 2001...... 375,000,000 866,000,000 400,000,000 1,817,300,487
Dec. 2001....... 375,000,000 866,000,000 400,000,000 1,740,600,000
Mar. 2002....... 375,000,000 866,000,000 400,000,000 1,665,770,146
June 2002....... 333,909,318 866,000,000 400,000,000 1,599,909,318
Sept. 2002...... 261,190,055 866,000,000 400,000,000 1,527,190,055
Dec. 2002....... 184,500,000 866,000,000 400,000,000 1,450,500,000
Mar. 2003....... 109,704,693 866,000,000 400,000,000 1,375,704,693
June 2003....... 43,605,239 866,000,000 400,000,000 1,309,605,239
Sept. 2003...... 0 836,923,567 400,000,000 1,236,923,567
Dec. 2003....... 0 760,400,000 400,000,000 1,160,400,000
Mar. 2004....... 0 685,717,128 400,000,000 1,085,717,128
June 2004....... 0 619,362,446 400,000,000 1,019,362,446
Sept. 2004...... 0 546,689,411 400,000,000 946,689,411
Dec. 2004....... 0 470,300,000 400,000,000 870,300,000
Mar. 2005....... 0 395,711,287 400,000,000 795,711,287
June 2005....... 0 329,092,847 400,000,000 729,092,847
Sept. 2005...... 0 256,436,544 400,000,000 656,436,544
Dec. 2005....... 0 180,200,000 400,000,000 580,200,000
Mar. 2006....... 0 105,715,908 400,000,000 505,715,908
June 2006....... 0 38,832,155 400,000,000 438,832,155
Sept. 2006...... 0 0 366,190,629 366,190,629
Dec. 2006....... 0 0 290,100,000 290,100,000
Mar. 2007....... 0 0 215,130,076 215,130,076
June 2007....... 0 0 146,755,743 146,755,743
Sept. 2007...... 0 0 72,786,689 72,786,689
Dec. 2007....... 0 0 0 0
</TABLE>
There can be no assurance that the Class Principal Balances of the
Underlying Notes and the related Offered Certificates will be reduced at the
rates indicated in the foregoing table, and the actual reductions in such
Class Principal Balances may be slower than those indicated in the chart. See
"Risk Factors" in the Prospectus for a discussion of various factors which
may, individually or in the aggregate, affect the rate of reductions of the
Class Principal Balances of the Underlying Notes and the Offered Certificates.
The entire unpaid principal amount of the Underlying Notes will be due and
payable on the date on which a Note Event of Default has occurred and is
continuing, if the Note Trustee or holders of a majority in principal amount
of the Notes of all Series then outstanding have declared the Underlying Notes
to be immediately due and payable. See "Description of the Notes--Note Events
of Default; Rights Upon Note Event of Default" in the Prospectus.
S-20
<PAGE>
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, the Underlying Notes, and
accordingly cause the Trust to redeem the Offered Certificates, on any Payment
Date commencing with the Payment Date on which the outstanding principal
balance of the Underlying Notes (after giving effect to payments that would
otherwise be made on such date) has been reduced to less than five percent of
the initial principal balance of the Underlying Notes. Notice of such
redemption will be given by the Note Issuer to each holder of Underlying Notes
by first-class mail, postage prepaid, mailed not less than five days nor more
than 25 days prior to the date of redemption.
MANDATORY REDEMPTION
If the Seller is required to repurchase the Transition Property as described
under "Description of the Transition Property--Seller Representations and
Warranties and Repurchase Obligation" in the Prospectus, the Note Issuer will
be required to redeem the Underlying Notes on the fifth Certificate Business
Day following the date of such repurchase. See "Description of the Notes--
Mandatory Redemption" in the Prospectus.
S-21
<PAGE>
OVERCOLLATERALIZATION AMOUNT
The Financing Order provides that the Note Issuer, as the owner of the
Transition Property, is entitled to collect an additional amount (for the
Underlying Notes, the "Overcollateralization Amount") which is intended to
enhance the likelihood that payments on the Underlying Notes will be made in
accordance with the Expected Amortization Schedule. The Overcollateralization
Amount for the Underlying Notes will be $14,505,000, which is 0.50% of the
initial principal amount of the Underlying Notes. The Overcollateralization
Amount is scheduled to be collected ratably over the life of the Offered
Certificates in equal increments of $362,625. The Required
Overcollateralization Level on each Payment Date is as follows:
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
<TABLE>
<CAPTION>
PAYMENT REQUIRED
DATE OVERCOLLATERALIZATION LEVEL
------- ---------------------------
<S> <C>
Mar. 1998 $ 362,625.00
June 1998 $ 725,250.00
Sept. 1998 $ 1,087,875.00
Dec. 1998 $ 1,450,500.00
Mar. 1999 $ 1,813,125.00
June 1999 $ 2,175,750.00
Sept. 1999 $ 2,538,375.00
Dec. 1999 $ 2,901,000.00
Mar. 2000 $ 3,263,625.00
June 2000 $ 3,626,250.00
Sept. 2000 $ 3,988,875.00
Dec. 2000 $ 4,351,500.00
Mar. 2001 $ 4,714,125.00
June 2001 $ 5,076,750.00
Sept. 2001 $ 5,439,375.00
Dec. 2001 $ 5,802,000.00
Mar. 2002 $ 6,164,625.00
June 2002 $ 6,527,250.00
Sept. 2002 $ 6,889,875.00
Dec. 2002 $ 7,252,500.00
Mar. 2003 $ 7,615,125.00
June 2003 $ 7,977,750.00
Sept. 2003 $ 8,340,375.00
Dec. 2003 $ 8,703,000.00
Mar. 2004 $ 9,065,625.00
June 2004 $ 9,428,250.00
Sept. 2004 $ 9,790,875.00
Dec. 2004 $10,153,500.00
Mar. 2005 $10,516,125.00
June 2005 $10,878,750.00
Sept. 2005 $11,241,375.00
Dec. 2005 $11,604,000.00
Mar. 2006 $11,966,625.00
June 2006 $12,329,250.00
Sept. 2006 $12,691,875.00
Dec. 2006 $13,054,500.00
Mar. 2007 $13,417,125.00
June 2007 $13,779,750.00
Sept. 2007 $14,142,375.00
Dec. 2007 $14,505,000.00
</TABLE>
S-22
<PAGE>
OTHER CREDIT ENHANCEMENT
Capital Subaccount. Upon the issuance of the Underlying Notes, the Seller
will make a capital contribution of $14,505,000 to the Note Issuer. Such
amount is equal to 0.50% of the initial principal amount of the Underlying
Notes. Such amount, less $100,000 in the aggregate for all Series of Notes, is
the Required Capital Level with respect to the Underlying Notes and will be
deposited into the Capital Subaccount. Withdrawals from and deposits to the
Capital Subaccount will be made as described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization Subaccount and (d) allocations to the
Capital Subaccount (all as described under "Description of the Notes--
Allocations; Payments" in the Prospectus) will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will draw on amounts in the
Reserve Subaccount, to the extent amounts available in the General Subaccount
are insufficient to make scheduled payments on the Underlying Notes or to make
required allocations to the Overcollateralization Subaccount or the Capital
Subaccount.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will at the direction of the Servicer
apply all amounts on deposit in the Collection Account with respect to the
prior three month period in the manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
The Certificate Trustee will then apply amounts paid by the Note Trustee on
the related Payment Date with respect to each Class of the Underlying Notes
first to pay interest on the related Class of Certificates and then to pay
principal on the related Class of Certificates on a pro rata basis as
described above under "--Principal."
DESCRIPTION OF THE TRANSITION PROPERTY
FINANCING ORDER AND ADVICE LETTERS
The Financing Order requires the Seller to submit an Issuance Advice Letter
to the CPUC with respect to each Series of Certificates issued. The first
Issuance Advice Letter, which is to be filed in connection with the Offered
Certificates, establishes the FTA Charges pursuant to which nonbypassable
charges will be payable by the applicable classes of Customers in an amount
sufficient to recover, within the time period specified in the Issuance Advice
Letter, the FTA Charges designated in the Issuance Advice Letter based on
factors including, but not limited to, the projected electricity usage of each
such class of Customer and the rate of delinquencies and write-offs. These
charges are nonbypassable in that applicable consumers cannot avoid paying
them by purchasing electricity from a supplier other than the Seller.
Subsequent Issuance Advice Letters will modify the FTA Charges to support the
issuance of additional Series of Certificates.
The Issuance Advice Letter filed in connection with the Offered Certificates
establishes the following FTA Charges which will be billed to Customers
beginning on the Series Issuance Date and will remain in effect until such FTA
Charges are adjusted as described below:
<TABLE>
<CAPTION>
CLASS OF
CUSTOMERS FTA CHARGE PER KILOWATT HOUR
--------- ----------------------------
<S> <C>
Residential 1.61508c
Small Commercial 1.68825c
</TABLE>
S-23
<PAGE>
As of the date hereof, the FTA Charge for an average Residential Customer
will amount to approximately $9 per month, and the FTA Charge for an average
Small Commercial Customer will amount to approximately $25 per month. The
average monthly electricity bill, excluding local taxes, during 1996 was $65
for a Residential Customer and $188 for a Small Commercial Customer.
ADJUSTMENTS TO THE FTA CHARGES
The Servicer is required to seek annual adjustments to the FTA Charges from
time to time as described under "Description of the Transition Property--
Adjustments to the FTA Charges" in the Prospectus. No quarterly adjustments to
the FTA Charges will be required.
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal distributions on each Class of Offered Certificates,
the aggregate amount of each interest distribution on each Class of Offered
Certificates and the actual maturity date of each Class of Offered
Certificates will be related to the rate and timing of FTA Collections.
Accelerated receipts of FTA Collections will not result in principal
distributions on the Offered Certificates earlier than the Scheduled Final
Distribution Dates since receipts in excess of the amounts necessary to
amortize the Offered Certificates in accordance with the applicable Expected
Amortization Schedule will be deposited in the Reserve Subaccount for
distribution in accordance with such schedule. However, delayed receipts of
FTA Collections may result in principal distributions on the Offered
Certificates that occur later than the related Scheduled Final Distribution
Dates.
The actual distributions on each Distribution Date for each Class of Offered
Certificates and the weighted average life thereof will be affected primarily
by the rate of FTA Collections and the timing of receipt of such FTA
Collections, as well as amounts available in the Overcollateralization
Subaccount, Capital Subaccount and Reserve Subaccount. Since each FTA Charge
will consist of a charge per kilowatt hour of usage by the applicable classes
of Customers, the aggregate amount of FTA Collections and the rate of
principal amortization on the Offered Certificates will depend, in part, on
actual energy usage by Customers and the rate of delinquencies and write-offs.
Although the amounts of the FTA Charges will be adjusted from time to time
based in part on the actual rate of FTA Collections, no assurances are given
that the Servicer will be able to forecast accurately actual electricity usage
and the rate of delinquencies and write-offs or implement adjustments to the
FTA Charges that will cause FTA Collections to be received at any particular
rate. If FTA Collections are received at a slower rate than expected, an
Offered Certificate may be retired later than expected. Because principal will
only be distributed at a rate not faster than that contemplated in the
Expected Amortization Schedule, except in the event of an early redemption or
the acceleration of the maturity of the Offered Certificates after an Event of
Default, the Offered Certificates are not expected to mature earlier than
scheduled. A distribution on a date that is earlier than forecasted will
result in a shorter weighted average life, and a distribution on a date that
is later than forecasted will result in a longer weighted average life. In
addition, if a larger portion of the delayed distributions on the Offered
Certificates are received in later years, this will result in a longer
weighted average life of the Offered Certificates.
No assurances are given that the representations made herein and in the
Prospectus as to the particular factors that will affect the rate of FTA
Collections, the relative importance of such factors, the percentage of the
principal balance of the Offered Certificates that will be distributed as of
any date or the overall rate of FTA Collections will be realized.
In addition, the Note Issuer has the option to redeem all of the outstanding
Underlying Notes on any Payment Date commencing on the Payment Date on which
the outstanding principal balance of the Underlying Notes (after giving effect
to payments that would otherwise be made on such date) has been reduced to
less than five percent of the initial principal balance of the Underlying
Notes. Redemption of the Underlying Notes will require the Certificate Trustee
to redeem the Offered Certificates. Redemption will cause such Offered
Certificates to be retired earlier than would otherwise be expected and may
adversely affect the yield to maturity of the Offered Certificates. There can
be no assurance as to whether the Note Issuer will exercise the option to
redeem the Underlying Notes, or as to whether Certificateholders will be able
to receive an equally attractive rate of return upon reinvestment of the
proceeds resulting from any such redemption.
S-24
<PAGE>
THE SELLER AND SERVICER
The following is information which supplements that provided under the
heading "The Seller and Servicer" in the Prospectus. For a more complete
discussion of the Seller and Servicer, see "The Seller and Servicer" in the
Prospectus.
Pacific Gas and Electric Company reported net income of $277,086,000 on
revenues of $2,541,077,000 for the quarter ended September 30, 1997, as
compared with net income of $233,695,000 on revenues of $2,521,852,000 for the
quarter ended September 30, 1996. Pacific Gas and Electric Company reported
net income of $755,209,000 on revenues of $9,609,972,000 for the year ended
December 31, 1996, as compared with net income of $1,338,885,000 on revenues
of $9,621,765,000 for the year ended December 31, 1995.
SERVICING
GENERAL
The Servicer, as agent for the Note Issuer, will manage, service and
administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
For a detailed discussion of the Servicer's procedures, the manner in which
payments from Customers are remitted to the Collection Account, and related
matters, see "Servicing" in the Prospectus.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Underlying Notes or the Certificates.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each calendar
quarter on each Payment Date, in an amount equal to (a) one-fourth of 0.25
percent of the outstanding principal balance of the Underlying Notes (before
giving effect to payments on such date) for so long as FTA Charges are
included as a line item on bills otherwise sent to Customers and (b) one-
fourth of 1.50 percent of the outstanding principal balance of the Underlying
Notes (before giving effect to payments on such date) if FTA Charges are not
included as a line item on bills otherwise sent to Customers but, instead, are
billed separately to Customers. The Servicing Fee (together with any portion
of the Servicing Fee that remains unpaid from prior Payment Dates) will be
paid solely to the extent funds are available therefor as described under
"Description of the Notes--Allocations; Payments" in the Prospectus. The
Servicing Fee will be paid prior to the distribution of any amounts in respect
of interest on and principal of the Underlying Notes. The Servicer will be
entitled to retain as additional compensation net investment income on FTA
Payments received by the Servicer prior to remittance thereof to the
Collection Account and the portion of late fees, if any, paid by Customers
relating to the FTA Payments.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to provide a consolidated bill to their
retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and other charges, including the
applicable FTA Charges.
Any ESP that provides consolidated billing is required to pay the Servicer
amounts billed by the Servicer to the ESP, including the FTA Charges,
regardless of the ESP's ability to collect such amounts from its customers. In
such event, the collecting ESP will in effect replace the Customer as the
obligor with respect to such FTA Charges and the Note Issuer, as the holder of
the Transition Property, will have no right to collect such FTA Charges from
the Customer. There can be no assurance that each ESP will utilize the same
customer credit standards as the Servicer, or that the Servicer will be able
to mitigate credit risks relating to ESPs in the same manner in which it
S-25
<PAGE>
mitigates such risks relating to its Customers. The Servicer, on behalf of the
Note Issuer, will pursue any ESP that fails to remit applicable FTA Charges in
a manner similar to that in which the Servicer will pursue any failure by a
Customer to remit FTA Charges. The Servicer will not have the right to pursue
Customers of an ESP that defaults in the payment of FTA Charges. However, the
Servicer will have the right to bill and collect FTA Charges and other amounts
payable to the Servicer directly from all of the ESP's consolidated billing
Customers following certain payment defaults by an ESP. An ESP that has
defaulted will nevertheless have the right to elect consolidated billing six
months after its default upon the satisfaction of certain conditions. Frequent
changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection of payments, which could have the effect of
causing delays in distributions to Certificateholders. Neither the Seller nor
the Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to the Servicer. The true-up adjustment mechanism for the
FTA Charges, as well as amounts available in the Overcollateralization
Subaccount, the Capital Subaccount and the Reserve Subaccount, are intended to
mitigate this risk relating to the timing of collections and payments.
However, delays in distributions to Offered Certificateholders might occur as
a result of delays in implementation of the adjustment mechanism. See "Risk
Factors--Potential Servicing Issues--Reliance on Aggregators and Other
Suppliers" in the Prospectus.
STATEMENTS BY SERVICER
For each Remittance Date and each Distribution Date, the Servicer will
provide the statements and reports described under "Servicing--Statements by
Servicer" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Offered Certificates will be included in gross income for
federal income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Offered
Certificate, and is based on the opinion of Brown & Wood LLP, counsel to the
Trust ("Special Counsel"). This discussion represents the opinion of Special
Counsel, subject to the qualifications set forth therein or herein. This
discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax
consequences to Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Certificateholder in light of that Certificateholder's
circumstances, and some Certificateholders may be subject to special tax rules
and limitations not discussed below (e.g., life insurance companies, tax-
exempt organizations, financial institutions or broker-dealers). CONSEQUENTLY,
EACH PROSPECTIVE CERTIFICATEHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER IN
DETERMINING THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF AN OFFERED
CERTIFICATE.
For purposes of this discussion, "U.S. Person" means (i) a citizen or
resident of the United States; (ii) a corporation (or entity treated as a
corporation for tax purposes) created or organized in the United States, or
under the laws of the United States or of any state thereof (including the
District of Columbia); (iii) a partnership (or entity treated as a partnership
for tax purposes) organized in the United States, or under the laws of the
United States or of any state thereof (including the District of Columbia),
unless provided otherwise by future Treasury regulations; (iv) an estate the
income of which is includible in gross income for U.S. federal income tax
purposes regardless of its source; or (v) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons has the authority to control all
S-26
<PAGE>
substantial decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons prior to
such date, may elect to continue to be U.S. Persons. The term "U.S.
Certificateholder" means any U.S. Person and any other person to the extent
that income attributable to its interest in an Offered Certificate is
effectively connected with that person's conduct of a U.S. trade or business.
The term "non-U.S. Certificateholder" means any person other than a U.S.
Certificateholder.
The discussion assumes that an Offered Certificate is issued in registered
form. Moreover, the discussion assumes that any original issue discount
("OID") on the Underlying Notes (i.e., any excess of the stated redemption
price at maturity of the Underlying Note over its issue price) is less than a
de minimis amount (i.e., 0.25 percent of its stated redemption price at
maturity multiplied by the Underlying Note's weighted average maturity), all
within the meaning of the OID regulations.
TREATMENT OF THE OFFERED CERTIFICATES
The Seller has received a ruling from the Internal Revenue Service ("IRS")
holding that the Underlying Notes are obligations of the Seller for federal
income tax purposes. Special Counsel has opined that 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. Further,
Special Counsel has opined that each Class of Offered Certificates will
evidence ownership of a fractional undivided beneficial interest in the
related Class of Underlying Notes.
TAXATION OF U.S. CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Offered Certificates represent ownership of the Underlying Notes for federal
income tax purposes, stated interest on a beneficial interest in such Offered
Certificates will be taxable as ordinary income when received or accrued by
U.S. Certificateholders in accordance with their method of accounting.
Generally, interest received on the Offered Certificates will constitute
"investment income" for purposes of certain limitations of the Code concerning
the deductibility of investment interest expense.
Market Discount. A U.S. Certificateholder who purchases (including a
purchase at original issuance for a price less than the issue price) an
interest in an Offered Certificate at a discount that exceeds any unamortized
OID may be subject to the "market discount" rules of sections 1276 through
1278 of the Code. These rules generally provide that, subject to a
statutorily-defined de minimis exception, if a U.S. Certificateholder acquires
an Offered Certificate at a market discount (i.e., at a price below its stated
redemption price at maturity or its revised issue price if it was issued with
OID) and thereafter recognizes gain upon a disposition of the Offered
Certificate (or disposes of it in certain non-recognition transactions,
including by gift), the lesser of such gain (or appreciation, in the case of
an applicable non-recognition transaction) or the portion of the market
discount that accrued while the Offered Certificate was held by such holder
will be treated as ordinary interest income at the time of the disposition. In
addition, a U.S. Certificateholder who acquired an Offered Certificate at a
market discount would be required to treat as ordinary interest income the
portion of any principal payment attributable to accrued market discount on
such Offered Certificate. Generally, market discount accrues ratably over the
life of a debt instrument unless the debt holder elects to accrue market
discount on a constant yield to maturity basis. It is not clear how either the
ratable accrual or constant yield accrual methodologies apply to instruments
such as the Offered Certificates where the timing of principal payments is
uncertain. Investors should consult their own tax advisors concerning the
accrual of market discount. The market discount rules also provide that a U.S.
Certificateholder who acquires an Offered Certificate at a market discount may
be required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to purchase or carry the
Offered Certificate until the holder disposes of the Offered Certificate in a
taxable transaction.
A U.S. Certificateholder who acquired an Offered Certificate at a market
discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or
S-27
<PAGE>
after the first day of the first taxable year to which the election applies,
and may not be revoked without the consent of the IRS. If a holder elects to
include market discount in income in accordance with the preceding sentence,
the foregoing rules with respect to the recognition of ordinary income on
sales, principal payments and certain other dispositions of the Offered
Certificates and the deferral of interest deductions on indebtedness related
to the investor certificates will not apply.
Amortizable Bond Premium. A U.S. Certificateholder who purchases an interest
in an Offered Certificate at a premium may elect to offset the premium against
interest income under the constant yield method over the remaining term of the
Offered Certificate in accordance with the provisions of section 171 of the
Code. A holder that elects to amortize bond premium must reduce the tax basis
in the related Offered Certificate by the amount of bond premium used to
offset interest income. If an Offered Certificate purchased at a premium is
redeemed in full prior to its maturity, a holder who has elected to amortize
bond premium should be entitled to a deduction in the taxable year of
redemption in an amount equal to the excess, if any, of the adjusted basis of
the Offered Certificate over the greater of the redemption price or the amount
payable on maturity.
SALE OR EXCHANGE OF OFFERED CERTIFICATES
Upon a disposition of an interest in an Offered Certificate, a U.S.
Certificateholder generally will recognize gain or loss equal to the
difference between (i) the amount of cash and the fair market value of any
other property received (other than amounts attributable to, and taxable as,
accrued stated interest) and (ii) the U.S. Certificateholder's adjusted basis
in its interest in the Offered Certificate. The adjusted basis in the interest
in the Offered Certificate will equal its cost, increased by any OID or market
discount included in income with respect to the interest in the Offered
Certificate prior to its disposition and reduced by any payments reflecting
principal or OID previously received with respect to the interest in the
Offered Certificate and any amortized premium. Subject to the OID and market
discount rules, gain or loss will generally be capital gain or loss if the
interest in the Offered Certificate was held as a capital asset. Capital
losses generally may be used by a corporate taxpayer only to offset capital
gains and by an individual taxpayer only to the extent of capital gains plus
$3,000 of other income.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S. federal
income tax on interest (including OID) on a beneficial interest in an Offered
Certificate unless (i) the non-U.S. Certificateholder is a controlled foreign
corporation that is related to the Seller through stock ownership or (ii) the
non-U.S. Certificateholder is a bank which receives interest as described in
Code Section 881(c)(3)(A). To qualify for the exemption from taxation, the
last U.S. Person in the chain of payment prior to payment to a non-U.S.
Certificateholder (the "Withholding Agent") must have received (in the year in
which a payment of interest or principal occurs or in either of the two
preceding years) a statement that (i) is signed by the non-U.S.
Certificateholder under penalty of perjury, (ii) certifies that the non-U.S.
Certificateholder is not a U.S. Person and (iii) provides the name and address
of the non-U.S. Certificateholder. The statement may be made on a Form W-8 or
substantially similar substitute form, and the non-U.S. Certificateholder must
inform the Withholding Agent of any change in the information on the statement
within 30 days of the change. If an Offered Certificate is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. However, in that case, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Certificateholder to the
organization or institution holding the Offered Certificate on behalf of the
non-U.S. Certificateholder. The U.S. Treasury Department is considering
implementation of further certification requirements aimed at determining
whether the issuer of a debt obligation is related to holders thereof.
Generally, any gain or income realized by a non-U.S. Certificateholder upon
retirement or disposition of an interest in an Offered Certificate (other than
gain attributable to accrued interest or OID, which is addressed in the
preceding paragraph) will not be subject to U.S. federal income tax, provided
that in the case
S-28
<PAGE>
of a Certificateholder that is an individual, such Certificateholder is not
present in the United States for 183 days or more during the taxable year in
which such retirement or disposition occurs. Certain exceptions may be
applicable, and an individual non-U.S. Certificateholder should consult a tax
adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of an Offered Certificate to a registered
owner who is not an "exempt recipient" and who fails to provide certain
identifying information (such as the registered owner's taxpayer
identification number) in the manner required. Generally, individuals are not
exempt recipients whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a U.S. Certificateholder must be
reported to the IRS, unless the U.S. Certificateholder is an exempt recipient
or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) Offered Certificates to non-U.S. Certificateholders,
temporary Treasury regulations provide that backup withholding and information
reporting will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been established
(provided that neither the Certificate Trustee nor a paying agent has actual
knowledge that the holder is a U.S. Person or that the conditions of any other
exemption are not in fact satisfied). Payments of the proceeds of the sale of
an Offered Certificate to or through a foreign office of a broker that is a
U.S. Person, a controlled foreign corporation for United States federal income
tax purposes or a foreign person 50% or more of whose gross income is
effectively connected with the conduct of a trade or business within the
United States for the specified three-year period are currently subject to
certain information reporting requirements, unless the payee is an exempt
recipient or such broker has evidence in its records that the payee is not a
U.S. Person and no actual knowledge that such evidence is false and certain
other conditions are met. Temporary Treasury regulations indicate that such
payments are not currently subject to backup withholding. Under current
Treasury regulations, payments of the proceeds of a sale to or through the
United States office of a broker will be subject to information reporting and
backup withholding unless the payee certifies under penalty of perjury as to
his or her status as a non-U.S. Person and certain other qualifications (and
no agent of the broker who is responsible for receiving or reviewing such
statement has actual knowledge that it is incorrect) and provides his or her
name and address or the payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Certificateholder would be allowed as a refund or a credit against such
Certificateholder's U.S. federal income tax, provided that the required
information is furnished to the IRS.
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the final
regulations permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules. Certificateholders should consult
their own tax advisors with respect to the impact, if any, of the final
regulations.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Offered
Certificates will be exempt from California personal income tax, but not
exempt from the California franchise tax applicable to banks and corporations.
Gain or loss, if any, resulting from an exchange or redemption of Offered
Certificates will be recognized in the year of the exchange or redemption.
Present California law taxes both long-term and short-term capital gains at
the rates applicable to ordinary income. Interest on indebtedness incurred or
continued by a Certificateholder in connection with the purchase of Offered
Certificates will not be deductible for California personal income tax
purposes.
S-29
<PAGE>
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Offered Certificates under any state or local tax law other than that of the
State of California. Each investor should consult its own tax adviser
regarding state and local tax consequences.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or Section 4975 of the Code impose certain requirements on employee
benefit plans and certain other plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which
such plans, accounts or arrangements are invested, that are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA and/or
Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of assets
that are treated as "plan assets" of any Plan for purposes of applying Title I
of ERISA and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan
fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Generally, any person who has discretionary authority or control respecting
the management or disposition of Plan Assets, and any person who provides
investment advice with respect to Plan Assets for a fee or other
consideration, is a fiduciary with respect to such Plan Assets.
Subject to the considerations described below, the Offered Certificates are
eligible for purchase with Plan Assets of any Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to
a Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject
to penalties imposed under ERISA and/or excise taxes imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transaction rules generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Offered Certificates of any Class on behalf of or with Plan Assets of any Plan
should determine whether such purchase is consistent with its fiduciary duties
and whether such purchase would constitute or result in a non-exempt
prohibited transaction under ERISA and/or Section 4975 of the Code because any
of PG&E, the Certificate Trustee, the Underwriters or their respective
affiliates may be deemed to be benefiting from the issuance of the Offered
Certificates and is a Party in Interest with respect to the investing Plan. In
particular, the Offered Certificates may not be purchased with Plan Assets of
any Plan if any of PG&E, the Certificate Trustee, the Underwriters or their
respective affiliates (a) has investment or administrative discretion with
respect to the Plan Assets used to effect such purchase; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan Assets, for a fee and pursuant to an agreement or understanding that
such advice (1) will serve as a primary basis for investment decisions with
respect to such Plan Assets, and (2) will be based on the particular
investment needs of such Plan; or (c) unless exemptive relief is available
under DOL Prohibited Transaction Exemption 95-60, 91-38 or 90-1 (as described
below), is an employer maintaining or contributing to such Plan. Each
purchaser of the Offered Certificates will be deemed to have represented and
warranted that its purchase of the Offered Certificates or any interest
therein does not violate the foregoing limitations.
S-30
<PAGE>
PLAN ASSET REGULATION
Because the Offered Certificates are likely to be treated as "equity
interests" in the Trust under a regulation (the "Plan Asset Regulation")
issued by the U.S. Department of Labor (the "DOL"), which provides that
beneficial interests in a trust are equity interests, purchasing the Offered
Certificates with Plan Assets may cause the assets of the Trust to be deemed
Plan Assets of the investing Plan which, in turn, would subject the Trust and
its assets to the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code. A
violation of the prohibited transaction rules could occur if the Offered
Certificates are purchased with Plan Assets of any Plan and any of PG&E, the
Certificate Trustee, the Underwriters or their respective affiliates is a
Party in Interest with respect to such Plan, unless a statutory or
administrative exemption is available or an exception applies under the Plan
Asset Regulation. However, the possibility that prohibited transactions may
occur by reason of the operation of the Trust is substantially less than in
other pass-through trusts because each Class of Offered Certificates
represents an interest in the corresponding Class of Underlying Notes and only
minimal administrative activity is expected to occur at the Trust level.
Before purchasing any Class of Offered Certificates of this Series, a
fiduciary or other Plan investor should consider whether a prohibited
transaction might arise by reason of any such relationship between the
investing Plan and any of PG&E, the Certificate Trustee, the Underwriters or
their respective affiliates and consult its legal advisors regarding the
purchase in light of the considerations described herein and in the
Prospectus. The DOL has issued five class exemptions that may afford exemptive
relief for otherwise prohibited transactions arising from the purchase or
holding of the Offered Certificates, i.e., DOL Prohibited Transaction
Exemptions 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Investment Managers), 95-60 (Class Exemption for Certain Transactions
Involving Insurance Company General Accounts), 91-38 (Class Exemption for
Certain Transactions Involving Bank Collective Investment Funds), 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts), or 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers). A purchaser of the Offered
Certificates should be aware, however, that even if the conditions specified
in one or more of the above exemptions are met, the scope of the relief
provided by the exemption might not cover all acts which might be construed as
prohibited transactions.
CONCLUSION
In light of the foregoing, fiduciaries or other Plan investors considering
whether to purchase the Offered Certificates with Plan Assets of any Plan
should consult their own legal advisors regarding whether the Trust assets
would be considered Plan Assets of Plan investors, the consequences that would
apply if the Trust's assets were considered Plan Assets, and the availability
of exemptive relief from the prohibited transaction rules or an exception
under the Plan Asset Regulation. Fiduciaries and other Plan investors should
also consider the fiduciary standards under ERISA or other applicable law in
the context of the Plan's particular circumstances before authorizing an
investment of a Plan Assets in the Offered Certificates. Among other factors,
such persons should consider whether the investment (a) satisfies the
diversification requirement of ERISA or other applicable law, (b) is in
accordance with the Plan's governing instruments, and (c) is prudent in light
of the "Risk Factors" and other factors discussed herein and in the
Prospectus.
For further information see "ERISA Considerations" in the Prospectus.
S-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Trust has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, for whom Morgan Stanley & Co.
Incorporated and Lehman Brothers Inc. are acting as representatives, has
severally agreed to purchase, the respective principal amounts of the Offered
Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7 CLASS A-8
NAME CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ---- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Morgan Stanley &
Co.
Incorporated... $ 68,750.0 $145,750.0 $154,000.0 $165,000.0 $159,500.0 $206,250.0 $476,300.0 $220,000.0
Lehman Brothers
Inc. .......... 31,250.0 66,250.0 70,000.0 75,000.0 72,500.0 93,750.0 216,500.0 100,000.0
Bear, Stearns &
Co. Inc. ...... 6,250.0 13,250.0 14,000.0 15,000.0 14,500.0 18,750.0 43,300.0 20,000.0
J.P. Morgan &
Co. ........... 6,250.0 13,250.0 14,000.0 15,000.0 14,500.0 18,750.0 43,300.0 20,000.0
Merrill Lynch &
Co............. 6,250.0 13,250.0 14,000.0 15,000.0 14,500.0 18,750.0 43,300.0 20,000.0
Artemis Capital
Group, Inc..... 1,562.5 3,312.5 3,500.0 3,750.0 3,625.0 4,687.5 10,825.0 5,000.0
Blaylock &
Partners, L.P.. 1,562.5 3,312.5 3,500.0 3,750.0 3,625.0 4,687.5 10,825.0 5,000.0
Coast Partners
Securities,
Inc............ 1,562.5 3,312.5 3,500.0 3,750.0 3,625.0 4,687.5 10,825.0 5,000.0
Redwood
Securities
Group, Inc..... 1,562.5 3,312.5 3,500.0 3,750.0 3,625.0 4,687.5 10,825.0 5,000.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........... $ 125,000 $ 265,000 $ 280,000 $ 300,000 $ 290,000 $ 375,000 $ 866,000 $ 400,000
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered
Certificates offered hereby, if any are taken.
The Underwriters propose to offer the Offered Certificates in part directly
to retail purchasers at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and in part to certain securities
dealers at such price less a concession not in excess of 0.12563% of the
principal amount of the Class A-1 Certificates, 0.18000% of the principal
amount of the Class A-2 Certificates, 0.21000% of the principal amount of the
Class A-3 Certificates, 0.24000% of the principal amount of the Class A-4
Certificates, 0.27000% of the principal amount of the Class A-5 Certificates,
0.30000% of the principal amount of the Class A-6 Certificates, 0.33000% of
the principal amount of the Class A-7 Certificates and 0.39000% of the
principal amount of the Class A-8 Certificates. The Underwriters may allow and
such dealers may reallow a concession, not in excess of 0.06282% of the
principal amount of the Class A-1 Certificates, 0.09000% of the principal
amount of the Class A-2 Certificates, 0.10500% of the principal amount of the
Class A-3 Certificates, 0.12000% of the principal amount of the Class A-4
Certificates, 0.13500% of the principal amount of the Class A-5 Certificates,
0.15000% of the principal amount of the Class A-6 Certificates, 0.16500% of
the principal amount of the Class A-7 Certificates and 0.19500% of the
principal amount of the Class A-8 Certificates. After the Offered Certificates
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Offered Certificates are a new issue of securities with no established
trading market. The Offered Certificates will not be listed on any securities
exchange. The Trust has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Offered Certificates.
The Underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Offered Certificates in accordance with Regulation M under the Exchange
Act. Overallotment transactions involve syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Offered Certificates so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Offered Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Offered Certificates originally
sold by such syndicate member are purchased in a syndicate covering
transaction. Such overallotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause the prices of the
Offered Certificates to be higher than they would otherwise be in the absence
of
S-32
<PAGE>
such transactions. Neither the Seller, the Note Issuer, the Trust, the
Infrastructure Bank, the STO nor any of the Underwriters represent that the
Underwriters will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice at any time.
Under the terms of the Underwriting Agreement, the Note Issuer has agreed to
reimburse the Underwriters for certain expenses.
The Note Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of issuance of the Offered Certificates that the Offered
Certificates be rated "AAA" by Standard and Poor's, a division of The McGraw-
Hill Companies, Inc., "Aaa" by Moody's Investors Service, Inc. and "AAA" by
Fitch Investors Service, L.P. (each of such rating agencies, a "Rating
Agency"). Each Class of Underlying Notes will receive the same ratings from
each Rating Agency as the corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any Offered
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon initial issuance will not
be revised or withdrawn by a Rating Agency at any time thereafter. If a rating
of any Class of Offered Certificates is revised or withdrawn, the liquidity of
such Class of Offered Certificates may be adversely affected. In general,
ratings address credit risk and do not represent any assessment of the rate of
principal payments.
LEGAL MATTERS
Certain legal matters relating to the Underlying Notes will be passed upon
by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, counsel to
the Seller and the Note Issuer. Certain legal matters relating to the Offered
Certificates and certain federal and California income tax consequences of the
issuance of the Offered Certificates will be passed upon by Brown & Wood LLP,
San Francisco, California, counsel to the Trust. Certain legal matters
relating to the Offered Certificates will be passed upon by Richards, Layton &
Finger, P.A., Wilmington, Delaware, Delaware counsel to the Trust, and by
Cravath, Swaine & Moore, New York, New York, counsel to the Underwriters.
S-33
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Book-Entry Certificates.......................................... S-13
Capital Subaccount............................................... S-11
Cede............................................................. S-13
Certificate Interest Rate........................................ S-16
Certificate Trustee.............................................. S-7
Certificateholders............................................... S-3
Certificates..................................................... S-16
Class............................................................ S-6, S-7
Class Principal Balance.......................................... S-6
Code............................................................. S-14, S-26
Commission....................................................... S-3
Delaware Trustee................................................. S-7
Distribution Date................................................ S-2, S-8, S-16
DOL.............................................................. S-31
DTC.............................................................. S-3, S-13
ERISA............................................................ S-14, S-30
ESPs............................................................. S-25
Exchange Act..................................................... S-3
General Subaccount............................................... S-10
Infrastructure Bank.............................................. S-7
IRS.............................................................. S-27
Non-U.S. Certificateholder....................................... S-27
Note Interest Rate............................................... S-19
Note Issuer...................................................... S-1, S-7
Note Trustee..................................................... S-7
Noteholder....................................................... S-18
Notes............................................................ S-1, S-18
Offered Certificates............................................. S-1, S-5, S-16
OID.............................................................. S-27
Original Certificate Principal Balance........................... S-6
Overcollateralization Amount..................................... S-11, S-22
Overcollateralization Subaccount................................. S-11
Parties in Interest.............................................. S-30
Payment Date..................................................... S-8, S-18
PG&E............................................................. S-7
Plan............................................................. S-14, S-30
Plan Assets...................................................... S-14, S-30
Rating Agency.................................................... S-13, S-33
Record Date...................................................... S-9
Required Overcollateralization Amount............................ S-11
Reserve Subaccount............................................... S-10
Seller........................................................... S-7
Series Issuance Date............................................. S-18
Servicer......................................................... S-7
Servicing Fee.................................................... S-12
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Special Counsel.................................................. S-26
Trust............................................................ S-1, S-7
U.S. Certificateholder........................................... S-27
U.S. Person...................................................... S-26
Underlying Notes................................................. S-1, S-7, S-18
Underwriters..................................................... S-32
Withholding Agent................................................ S-28
</TABLE>
S-35
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER +
+TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF +
+THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[FORM OF PROSPECTUS SUPPLEMENT]
Subject to Completion Dated , 1997
PRELIMINARY PROSPECTUS SUPPLEMENT
(To Prospectus dated , 1997)
California Infrastructure and Economic Development Bank
Special Purpose Trust PG&E-1
RATE REDUCTION CERTIFICATES, SERIES 199 -
$ Original Principal Balance
$ Class % Certificates
$ Class % Certificates
$ Class % Certificates
$ Class % Certificates
[$ Class Floating Rate Certificates]
----------
PG&E Funding LLC
Issuer of the Notes
----------
Pacific Gas and Electric Company
Seller and Servicer
----------
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES. NONE
OF THE OFFERED CERTIFICATES, THE UNDERLYING NOTES OR THE TRANSITION
PROPERTY WILL BE GUARANTEED OR INSURED BY THE STATE OF
CALIFORNIA, THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER
OR ITS AFFILIATES.
THE CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE
TRUST PG&E-1 RATE REDUCTION CERTIFICATES, SERIES 199 - (THE "OFFERED
CERTIFICATES") OFFERED HEREBY WILL CONSIST OF THE FOLLOWING CLASSES:
. EACH CLASS OF OFFERED CERTIFICATES REPRESENTS A FRACTIONAL UNDIVIDED
BENEFICIAL INTEREST IN THE RELATED CLASS OF PG&E FUNDING LLC NOTES, SERIES
199 - (THE "UNDERLYING NOTES"), ISSUED BY PG&E FUNDING LLC, A DELAWARE SPECIAL
PURPOSE LIMITED LIABILITY COMPANY (THE "NOTE ISSUER") [AND, WITH RESPECT TO THE
CLASS CERTIFICATES (THE "FLOATING RATE CERTIFICATES"), PAYMENTS PURSUANT TO
THE SWAP AGREEMENT]. EACH UNDERLYING NOTE WILL BE SECURED PRIMARILY BY THE
TRANSITION PROPERTY OWNED BY THE NOTE ISSUER, AS DESCRIBED UNDER "DESCRIPTION
OF THE TRANSITION PROPERTY" HEREIN AND IN THE PROSPECTUS; THE UNDERLYING NOTES
WILL ALSO BE SECURED BY THE OTHER NOTE COLLATERAL DESCRIBED UNDER "DESCRIPTION
OF THE NOTES--SECURITY" IN THE PROSPECTUS. THE UNDERLYING NOTES, TOGETHER WITH
OTHER SERIES OF NOTES ISSUED FROM TIME TO TIME BY THE NOTE ISSUER UNDER THE
NOTE INDENTURE (TOGETHER WITH THE UNDERLYING NOTES, THE "NOTES"), ARE OWNED BY
THE CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE
TRUST PG&E-1 (THE "TRUST"). (CONTINUED ON FOLLOWING PAGE.)
----------
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES, AND
THERE IS NO ASSURANCE THAT ONE WILL DEVELOP. PROSPECTIVE INVESTORS
SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH
UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE IN
THE PROSPECTUS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS TRUST(1)(2)
--------- ------------- -----------
<S> <C> <C> <C>
Per Class Certificate.... % % %
Per Class Certificate.... % % %
Per Class Certificate.... % % %
Per Class Certificate.... % % %
Per Class Certificate.... % % %
Total..................... $ $ $
</TABLE>
- -----
(1) Plus accrued interest, if any, at the applicable Certificate Interest
Rate from , 199 .
(2) Before deduction of expenses estimated to be $ .
----------
The Offered Certificates are offered by the Underwriters when, as and if
issued by the Trust and accepted by the Underwriters and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Offered Certificates will be delivered on or about , 199 ,
in book-entry form through the facilities of The Depository Trust Company[,
Cedel Bank, societe anonyme, and the Euroclear System].
----------
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
ARTEMIS CAPITAL GROUP, INC. BLAYLOCK & PARTNERS, L.P.
COAST PARTNERS SECURITIES, INC. REDWOOD SECURITIES GROUP, INC.
The date of this Prospectus Supplement is , 199
<PAGE>
Interest on each Class of Offered Certificates at the applicable Certificate
Interest Rate will be distributable quarterly on or about the 25th day of
March, June, September and December or, if any such day is not a Certificate
Business Day, the next succeeding Certificate Business Day (each, a
"Distribution Date") commencing , 199 . INTEREST AND PRINCIPAL ON ANY
CLASS OF OFFERED CERTIFICATES WILL BE DISTRIBUTABLE ONLY TO THE EXTENT OF
PAYMENTS RECEIVED BY THE TRUST ON THE RELATED CLASS OF UNDERLYING NOTES. See
"Description of the Notes" herein.
The Offered Certificates are part of a separate Series of California
Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 Rate
Reduction Certificates being offered by the Trust from time to time pursuant
to a Prospectus dated , 1997 (the "Prospectus"), of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN
THE PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF
THE NOTE ISSUER ARE THE SOLE SOURCE OF PAYMENTS ON THE UNDERLYING NOTES.
PAYMENTS ON THE UNDERLYING NOTES [AND PAYMENTS ON ANY RELATED SWAP AGREEMENT]
RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF DISTRIBUTIONS ON THE OFFERED
CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR THE SELLER OR ANY
OF ITS AFFILIATES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE OFFERED
CERTIFICATES, THE UNDERLYING NOTES OR THE TRANSITION PROPERTY, EXCEPT AS
EXPRESSLY SET FORTH HEREIN AND IN THE PROSPECTUS.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IS
PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, OR INTEREST ON, THE UNDERLYING
NOTES OR THE OFFERED CERTIFICATES OR TO THE PAYMENTS IN RESPECT OF THE
TRANSITION PROPERTY NOR IS THE STATE OF CALIFORNIA OR ANY POLITICAL
SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IN ANY MANNER OBLIGATED TO MAKE
ANY APPROPRIATION FOR THE PAYMENT THEREOF.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING"
HEREIN.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page S-35 herein and which begins on page 90 in the Prospectus
for the location of the definitions of capitalized terms that appear in the
Prospectus and this Prospectus Supplement.
S-2
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Servicer indirectly will provide to Cede & Co., as nominee of The
Depository Trust Company ("DTC") and registered holder of the Offered
Certificates and, upon request, to Participants of DTC, periodic reports
concerning the Offered Certificates. See "Servicing--Statements by Servicer"
herein and in the Prospectus. Such reports may be made available to the
holders of interests in the Offered Certificates (the "Certificateholders")
upon request to their Participants. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting
principles. The financial information provided to Certificateholders will not
be examined and reported upon, nor will an opinion thereon be provided by, any
independent public accountant.
The Note Issuer will file with the Securities and Exchange Commission (the
"Commission") such periodic reports as are required by the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules, regulations or
orders of the Commission thereunder. Copies of the Registration Statement and
exhibits thereto may be obtained at the locations specified in the Prospectus
under "Available Information" at prescribed rates. Information filed with the
Commission can also be inspected at the Commission's site on the World Wide
Web at http://www.sec.gov. The Note Issuer may discontinue filing periodic
reports under the Exchange Act at the beginning of the fiscal year following
the issuance of the Offered Certificates if there are fewer than 300 holders
of such Offered Certificates.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK,
THE UNDERWRITERS OR ANY DEALER, SALESPERSON OR OTHER PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION.
S-3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Holders........................................................ S-3
Prospectus Supplement Summary............................................. S-5
Description of the Certificates........................................... S-16
[Summary of Certain Provisions of the Series Supplement to the Trust
Agreement]............................................................... S-18
Description of the Notes.................................................. S-20
Description of the Transition Property.................................... S-23
Certain Distribution, Weighted Average Life and Yield Considerations...... S-24
The Seller and Servicer................................................... S-24
Servicing................................................................. S-25
Certain Federal Income Tax Consequences................................... S-26
State Taxation............................................................ S-31
ERISA Considerations...................................................... S-31
Underwriting.............................................................. S-33
Ratings................................................................... S-34
Legal Matters............................................................. S-34
Index of Principal Definitions............................................ S-35
PROSPECTUS
Available Information..................................................... 2
Reports to Holders........................................................ 2
Incorporation of Certain Documents by Reference........................... 3
Prospectus Supplement..................................................... 3
Prospectus Summary........................................................ 7
Risk Factors.............................................................. 28
Energy Deregulation and New California Market Structure................... 39
Description of the Transition Property.................................... 40
Certain Distribution, Weighted Average Life and Yield Considerations...... 46
The Trust................................................................. 47
The Infrastructure Bank................................................... 48
The Note Issuer........................................................... 49
The Seller and Servicer................................................... 50
Servicing................................................................. 55
Description of the Notes.................................................. 61
Description of the Certificates........................................... 70
Certain Federal Income Tax Consequences................................... 82
State Taxation............................................................ 87
ERISA Considerations...................................................... 88
Use of Proceeds........................................................... 88
Plan of Distribution...................................................... 89
Ratings................................................................... 89
Legal Matters............................................................. 89
Index of Principal Definitions............................................ 90
Financial Statements...................................................... F-1
</TABLE>
S-4
<PAGE>
- -------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the detailed information appearing elsewhere herein and in the
Prospectus. Certain capitalized terms used but not defined in this Prospectus
Supplement Summary have the meanings ascribed to such terms elsewhere in this
Prospectus Supplement or, to the extent not defined herein, have the meanings
assigned to such terms in the Prospectus. The Index of Principal Definitions
included in this Prospectus Supplement which begins on page S-35 sets forth the
pages on which the definitions of certain principal terms appear.
Summary of Offered The California Infrastructure and Economic
Certificates................ Development Bank Special Purpose Trust PG&E-1
Rate Reduction Certificates, Series 199 - (the
"Offered Certificates"). On the date of initial
issuance of the Offered Certificates (the
"Series Issuance Date"), the Offered
Certificates will be issued as described below.
<TABLE>
<CAPTION>
INITIAL CERTIFICATE
PRINCIPAL SCHEDULED FINAL INTEREST
CLASS AMOUNT DISTRIBUTION DATE TERMINATION DATE RATE
----- --------- ---------------------- ---------------------- -----------
<S> <C> <C> <C> <C>
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
[ $ , ( years) , ( years) (1)
</TABLE>
- --------
[(1) Calculated as described under "Description of the Certificates--Floating
Rate Certificates--Determination of Certificate Interest Rate on Floating
Rate Certificates."]
Transaction Overview........ For a brief summary of the statutes and
proceedings which form the basis for the
issuance and sale of the Offered Certificates by
the Trust, and a diagram of the parties to the
transaction, their roles and their various
relationships to the other parties, investors
are directed to the discussion under the heading
"Prospectus Summary--Transaction Overview" in
the Prospectus.
The Note Issuer will issue the Underlying Notes,
and sell the Underlying Notes to the Trust in
exchange for the proceeds of the sale of the
Offered Certificates. The Trust has been
established by the Infrastructure Bank. The
Trust, whose sole assets will be the Underlying
Notes and other Notes issued under the Indenture
[and its rights under the Swap Agreement], will
issue the Offered Certificates, which will be
sold to the Underwriters. The Offered
Certificates of each Class represent fractional
undivided beneficial interests in the related
Class of Underlying Notes and the proceeds
thereof[, together, in the case of the Floating
Rate Certificates, with the proceeds of the Swap
Agreement]. The Underlying Notes will be secured
primarily by the Transition Property. The
Underlying Notes will also be secured by the
Transition Property Purchase and Sale Agreement
between PG&E and the Note Issuer, any subsequent
sale agreement relating to a separate Series of
Notes, the Transition Property Servicing
Agreement between PG&E and the Note Issuer, the
Collection Account and all amounts or investment
property on deposit therein or credited thereto
from time to time, all other property of
whatever kind (other than certain cash amounts
described herein)
- -------------------------------------------------------------------------------
S-5
<PAGE>
- -------------------------------------------------------------------------------
owned from time to time by the Note Issuer, if
any, all present and future claims, demands,
causes and choses in action in respect of any or
all of the foregoing and all payments on or
under and all proceeds in respect of any or all
of the foregoing.
The charges included in the Transition Property
described in the Prospectus are calculated to be
sufficient over time to pay principal and
interest on the Offered Certificates, to pay all
related fees and expenses, to collect the
Overcollateralization Amount described herein
and to replenish the Capital Subaccount to the
extent that amounts are drawn therefrom. These
charges will be subject to adjustment pursuant
to the true-up mechanism described in the
Prospectus over the life of the Offered
Certificates to enhance the likelihood of timely
recovery of such amounts, although there can be
no assurance that the true-up mechanism will
operate as intended or that any of the Offered
Certificates will mature as scheduled. See
"Description of the Transition Property--
Adjustments to the FTA Charges" in the
Prospectus.
Risk Factors................ Investors should consider the risks associated
with an investment in the Offered Certificates.
For a discussion of certain material risks
associated therewith, investors should review
the discussion under "Risk Factors" which begins
on page 28 of the Prospectus.
[In addition, an investment in the Floating Rate
Certificates involves the additional risks
discussed herein under "Additional Risk Factors
Relating to the Floating Rate Certificates."]
The Offered Certificates.... The California Infrastructure and Economic
Development Bank Special Purpose Trust PG&E-1
Rate Reduction Certificates, Series 199 - . The
Offered Certificates are comprised of the
following classes (each, a "Class"):
. As of the Series Issuance Date, the
aggregate principal balance of the Offered
Certificates (the "Original Certificate
Principal Balance") will be $ . Each
Class of Offered Certificates will have a
principal balance (the "Class Principal
Balance") equal to the initial amount of
principal allocable to such Class, reduced by
principal distributed to such Class in
accordance with the terms of the Trust
Agreement. See "Description of the Certificates"
herein and in the Prospectus.
None of the Offered Certificates, the Underlying
Notes or the Transition Property will be
guaranteed or insured by the State of
California, the Infrastructure Bank, the Trust
or any other governmental agency or
instrumentality or by the Seller or any of its
affiliates. Neither the full faith and credit
nor the taxing power of the State of California
or any political subdivision, agency or
instrumentality thereof is pledged to the
distributions of principal of, or interest on,
the Offered Certificates or the Underlying Notes
- -------------------------------------------------------------------------------
S-6
<PAGE>
- -------------------------------------------------------------------------------
or to the payments in respect of the Transition
Property. The issuance and sale of the Offered
Certificates is contingent upon the
effectiveness of the Issuance Advice Letter
related thereto. See "Description of the
Transition Property--Financing Order and Advice
Letters" in the Prospectus.
Seller and Servicer......... Pacific Gas and Electric Company, a California
corporation ("PG&E" or, in its capacity as
seller of the Transition Property, the "Seller"
or, in its capacity as servicer of the
Transition Property, the "Servicer"). For a more
complete discussion of PG&E and its roles as
Seller and Servicer, see "The Seller and
Servicer" herein and in the Prospectus.
Issuer of Certificates...... A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
PG&E-1" (the "Trust") established by the
California Infrastructure and Economic
Development Bank (the "Infrastructure Bank").
The Trust will not be an agency or
instrumentality of the State of California. The
Infrastructure Bank will not guarantee or insure
the Offered Certificates, the Underlying Notes
or the Transition Property. For a more complete
discussion of the Trust, see "The Trust" in the
Prospectus, and for a more complete discussion
of the Infrastructure Bank, see "The
Infrastructure Bank" in the Prospectus.
Certificate Trustee......... Bankers Trust Company of California, N.A., a
national banking association (the "Certificate
Trustee").
Delaware Trustee............ Bankers Trust (Delaware), a Delaware banking
corporation (the "Delaware Trustee").
Note Issuer................. PG&E Funding LLC, a Delaware special purpose
limited liability company whose single member is
PG&E (the "Note Issuer"). The principal
executive office of the Note Issuer is located
at 245 Market Street, Room 424, San Francisco,
California 94105, and its telephone number is
(415) 972-5467.
The Underlying Notes........ PG&E Funding LLC Notes, Series 199 - (the
"Underlying Notes"), issued by the Note Issuer.
The Underlying Notes are comprised of
classes (each, a "Class"). As of the Series
Issuance Date for the Underlying Notes, the
aggregate principal balance thereof will be
$ . Each Class of Underlying Notes
secures the payment of the corresponding Class
of Offered Certificates and will have the same
Class Principal Balance as the corresponding
Class of Offered Certificates. See "Description
of the Notes" herein and in the Prospectus.
Note Trustee ............... Bankers Trust Company of California, N.A., a
national banking association (the "Note
Trustee").
- -------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
Transition Property......... As more fully described under "Description of the
Transition Property" herein and in the
Prospectus, the property right created under the
PU Code including, without limitation, the
right, title and interest of an electrical
corporation or its transferee (i) in and to the
FTA Charges, as adjusted from time to time, (ii)
to be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges as provided in
the PU Code.
FTA Charges................. As more fully described under "Description of the
Transition Property" in the Prospectus,
nonbypassable, usage-based, per kilowatt hour
charges payable by Residential Customers and
Small Commercial Customers, which will yield the
amounts which are necessary to provide for the
amortization of all Certificates in accordance
with the applicable Expected Amortization
Schedules, the payment of fees and expenses
related to the issuance and servicing of the
Certificates, the collection of the
Overcollateralization Amount described herein
and the replenishment of the Capital Subaccount
to the extent that amounts are drawn therefrom.
Based on the Expected Amortization Schedule set
forth herein and the assumptions related
thereto, the initial FTA Charge payable by
Residential Customers would be cents per
kilowatt hour and the initial FTA Charge payable
by Small Commercial Customers would be cents
per kilowatt hour. See "Description of the
Notes--Principal" herein.
Adjustments to FTA Charges.. In order to enhance the likelihood that the FTA
Collections are neither more nor less than the
amount necessary to amortize the Offered
Certificates in accordance with the Expected
Amortization Schedule, fund the
Overcollateralization Subaccount as scheduled,
pay fees and expenses relating to the issuance
and servicing of the Offered Certificates and
replenish the Capital Subaccount, the Servicing
Agreement and the Financing Order require the
Servicer to seek periodic adjustments to the FTA
Charges based on actual FTA Collections and
updated assumptions by the Servicer as to, among
other factors, the electricity usage by
Customers and the rate of delinquencies and
write-offs. The adjustments to the FTA Charges
will continue until all interest and principal
on all Series of Notes and corresponding Series
of Certificates have been paid or distributed in
full.
Distribution Dates.......... Each March 25, June 25, September 25 and December
26 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate
Business Day), commencing , 199 , the
dates on which distributions will be made to
holders of Offered Certificates (each, a
"Distribution Date"). Each Distribution Date
with respect to the Certificates will also be a
date on which payments are made with respect to
the Notes (each, a "Payment Date").
- -------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
Record Date................. With respect to any Distribution Date, the
Business Day preceding such Distribution Date if
the Offered Certificates are Book-Entry
Certificates or, if Definitive Certificates are
issued, the last day of the preceding calendar
month (each, a "Record Date").
Scheduled Final
Distribution and
Termination Dates..........
The Scheduled Final Distribution Date for each
Class of the Offered Certificates, which is the
date when all principal and interest on such
Class of Offered Certificates is expected to be
distributed in full, based on certain
assumptions described herein, and the
Termination Date for each Class of Offered
Certificates are specified herein under
"Description of the Certificates."
Failure to distribute principal of any Class of
Offered Certificates in full by the related
Termination Date shall constitute an Event of
Default, and the Certificate Trustee may and,
upon the written direction of the holders of a
majority in principal amount of all Certificates
of all Series then outstanding, shall declare
the unpaid principal amount of all the Notes of
all Series then outstanding to be due and
payable. See "Description of the Certificates--
Events of Default" and "Ratings" in the
Prospectus.
Issuance of New Series...... The Trust may issue new Series of Certificates
from time to time. A new Series may be issued
only upon satisfaction of the conditions
described under "Description of the
Certificates--Conditions of Issuance of
Additional Series" in the Prospectus.
[Swap Agreement............. The Trust will enter into a swap agreement dated
the Closing Date (the "Swap Agreement") with
Caisse des Depots et Consignations, as swap
counterparty (the "Swap Counterparty"). Pursuant
to the Swap Agreement, on each Distribution
Date, the Trust will be obligated to pay to the
Swap Counterparty, solely from payments received
with respect to the Class Notes, an amount
equal to the interest due on the Class Notes
on such Distribution Date, and the Swap
Counterparty will be obligated to pay to the
Trust an amount equal to the product of (a) the
Floating Rate and (b) the Class Principal
Balance as of the close of business on the
preceding Distribution Date after giving effect
to all payments of principal made to the holders
of the Class Certificates on such preceding
Distribution Date. Payments between the Swap
Counterparty and the Trust will be made on a net
basis as further described herein.
The Swap Agreement will terminate or may be
terminated upon the occurrence of certain events
of default or termination events as described
herein under "Summary of Certain Provisions of
the Swap Agreement." Upon termination of the
Swap Agreement, the Certificate Interest Rate
payable with respect to the Floating Rate
Certificates will automatically convert to a
fixed rate equal to the interest rate payable on
the Class Notes. See "Description of the
Certificates--Floating Rate Certificates" and
"Additional Risk Factors Relating to the
Floating Rate Certificates" herein. With respect
to each Distribution Date, any difference
between the quarterly payment by the Swap
Counterparty to the Trust and the
- -------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
quarterly payment by the Trust to the Swap
Counterparty will be referred to herein as the
"Net Trust Swap Receipt," if such difference is
a positive number, and the "Net Trust Swap
Payment," if such difference is a negative
number. Net Trust Swap Receipts will be included
in funds available for distribution to Floating
Rate Certificateholders on each Distribution
Date and Net Trust Swap Payments will be paid to
the Swap Counterparty out of payments on the
Class Notes on each Distribution Date.]
Interest.................... On each Distribution Date, the Certificate
Trustee shall distribute pro rata to the
Certificateholders of each Class as of the
related Record Date interest in an amount equal
to one-fourth of the product of (a) the
applicable Certificate Interest Rate and (b) the
applicable Class Principal Balance as of the
close of business on the preceding Distribution
Date after giving effect to all payments of
principal made to the Certificateholders on such
preceding Distribution Date; provided, however,
that with respect to the initial Distribution
Date, interest on each outstanding Class
Principal Balance will accrue from and including
the Series Issuance Date to, but excluding, such
initial Distribution Date. Interest will be
calculated on the basis of a 360-day year of
twelve 30-day months [except that with respect
to the Floating Rate Certificates interest will
be calculated as described under "Description of
the Certificates--Floating Rate Certificates"
herein]. Interest on any Class of Offered
Certificates will be distributable only to the
extent interest has been paid on the related
Class of Underlying Notes [and, in the case of
the Floating Rate Certificates, interest will be
distributed at the variable rate payable
pursuant to the Swap Agreement (the "Floating
Rate") so long as payments are received under
the terms of the Swap Agreement]. Interest on
the Offered Certificates will be distributed
prior to any distribution of principal on the
Offered Certificates. See "Description of the
Certificates--Distributions of Interest" herein
and "Description of the Notes--Interest and
Principal" in the Prospectus.
Principal................... On each Distribution Date, the Certificate
Trustee shall distribute to the
Certificateholders as of the related Record Date
amounts distributable as principal, in the
following order and priority: [TO BE DETERMINED
UPON ISSUANCE]. The principal amounts
distributable with respect to any Class of
Offered Certificates will be payable only to the
extent of payments of principal made on the
related Class of Underlying Notes. See
"Description of the Certificates--Distributions
of Principal" herein and "Description of the
Notes--Interest and Principal" in the
Prospectus.
Optional Redemption......... The Note Issuer may redeem the Underlying Notes
relating to the Offered Certificates, and
accordingly cause the Trust to redeem the
Offered Certificates, on any Payment Date if the
outstanding principal balance of the Underlying
Notes (after giving effect to payments that
would otherwise be made on such date) has been
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
reduced to less than five percent of the initial
principal balance of the Underlying Notes. See
"Description of the Certificates--Optional
Redemption" herein.
Mandatory Redemption........ The Seller may be required to repurchase the
Transition Property as described under
"Description of the Transition Property--Seller
Representations and Warranties and Repurchase
Obligation" in the Prospectus, which repurchase
will require the Trust to redeem the Offered
Certificates.
Collection Account and Upon issuance of the initial Series of Notes, the
Subaccounts................. Note Issuer will establish the Collection
Account, which will be held by the Note Trustee
for the benefit of the Noteholders. The
Collection Account will consist of four
subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount (the
"Overcollateralization Subaccount") and a
capital subaccount (the "Capital Subaccount").
Unless the context indicates otherwise,
references herein to the Collection Account
include each of the subaccounts contained
therein. Withdrawals from and deposits to these
subaccounts will be made as described under
"Description of the Notes--Allocations;
Payments" in the Prospectus.
Credit Enhancement.......... The Offered Certificates will benefit from the
following forms of credit enhancement:
Overcollateralization. The Financing Order
provides that the Note Issuer, as the owner of
the Transition Property, is entitled to collect
an additional amount (for the Underlying Notes,
the "Overcollateralization Amount") which is
intended to enhance the likelihood that payments
on the Underlying Notes will be made in
accordance with the Expected Amortization
Schedule. The Overcollateralization Amount for
the Underlying Notes will be $ , which
is 0.50% of the initial principal amount of the
Underlying Notes. The FTA Charges will be set
and adjusted at a rate which is intended to
recover the Overcollateralization Amount ratably
over the life of the Offered Certificates
according to the schedule set forth under
"Description of the Notes--
Overcollateralization Amount" herein. The
Overcollateralization Amount for all Series of
Certificates will be held in the
Overcollateralization Subaccount, as described
further under "Description of the Notes--
Overcollateralization Amount" in the Prospectus,
and will be available to pay any periodic
shortfalls in amounts available for scheduled
payments on the Notes. The amount required to be
on deposit in the Overcollateralization
Subaccount as of any Payment Date, as specified
in the schedule set forth in this Prospectus
Supplement, is referred to herein as the
"Required Overcollateralization Level."
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S-11
<PAGE>
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Capital Subaccount. Upon the issuance of the
Underlying Notes, the Seller will make a capital
contribution of $ to the Note Issuer.
Such amount is equal to 0.50% of the initial
principal amount of the Underlying Notes. Such
amount, less $100,000 in the aggregate for all
Series of Notes, is the Required Capital Level
with respect to the Underlying Notes and will be
deposited into the Capital Subaccount.
Withdrawals from and deposits to the Capital
Subaccount will be made as described under
"Description of the Notes--Allocations;
Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available
with respect to any Payment Date in excess of
amounts payable as (a) fees and expenses of the
Note Issuer and the Trust, (b) payments of
principal of and interest on the Underlying
Notes, (c) allocations to the
Overcollateralization Subaccount and (d)
allocations to the Capital Subaccount (all as
described under "Description of the Notes--
Allocations; Payments" in the Prospectus), will
be allocated to the Reserve Subaccount. On each
Payment Date, the Note Trustee will draw on
amounts in the Reserve Subaccount, to the extent
amounts available in the General Subaccount are
insufficient to make scheduled payments on the
Underlying Notes or to make required allocations
to the Overcollateralization Subaccount or the
Capital Subaccount.
Collections; Allocations;
Distributions............... On each Distribution Date, amounts on deposit in
the Collection Account will be applied in the
manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
Servicing Compensation...... The Servicer will be entitled to receive a fee on
each Payment Date with respect to the Offered
Certificates in an amount equal to (i) one-
fourth of percent of the outstanding
principal balance of the Underlying Notes
(before giving effect to payments on such date)
for so long as FTA Charges are included as a
line item on bills otherwise sent to Customers
and (ii) one-fourth of percent of the
outstanding principal balance of the Underlying
Notes (before giving effect to payments on such
date) if FTA Charges are not included as a line
item on bills otherwise sent to Customers but,
instead, are billed separately to Customers (the
"Servicing Fee"). The Servicing Fee will be paid
prior to the distribution of any amounts in
respect of interest on and principal of the
Underlying Notes. The Servicer will be entitled
to retain as additional compensation net
investment income on FTA Payments received by
the Servicer prior to remittance thereof to the
Collection Account and the portion of late fees,
if any, paid by Customers relating to the FTA
Payments. See "Servicing--Servicing
Compensation" herein and in the Prospectus.
No Servicer Advances........ The Servicer will not make any advances of
interest or principal on the Underlying Notes.
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S-12
<PAGE>
- --------------------------------------------------------------------------------
Maturity, Weighted Average
Life and Yield
Considerations.............
The actual Distribution Dates on which principal
is distributed on each Class of Certificates
will be affected by, among other things, the
amount and timing of receipt of FTA Collections
and amounts available in the
Overcollateralization Subaccount, Capital
Subaccount and Reserve Subaccount. Since each
FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of
Customers in the Territory, the aggregate amount
and timing of FTA Collections (and the resulting
amount and timing of principal amortization on
the Offered Certificates) will depend, in part,
on actual usage of electricity by Customers and
the rate of delinquencies and write-offs.
Although the amount of the FTA Charges will be
adjusted from time to time based in part on the
actual rate of FTA Collections, no assurances
can be given that the Servicer will be able to
forecast accurately actual Customer electricity
usage and the rate of delinquencies and write-
offs and implement adjustments to the FTA
Charges that will cause FTA Payments to be made
at any particular rate.
If FTA Collections are received at a slower rate
than expected, distributions on a Certificate
may be made later than expected, and a
Certificate may be retired later than expected.
Because principal will only be distributed at a
rate not faster than that contemplated in the
Expected Amortization Schedule, except in the
event of an early redemption or the acceleration
of the maturity of the Certificates after an
Event of Default, the Certificates are not
expected to be retired earlier than scheduled.
If the Note Issuer exercises its option to redeem
all of the outstanding Underlying Notes on any
Payment Date commencing on the Payment Date on
which the outstanding principal balance of the
Underlying Notes (after giving effect to
payments that would otherwise be made on such
date) has been reduced to less than five percent
of the initial principal balance of the
Underlying Notes, the Certificate Trustee will
be required to redeem the Offered Certificates.
Such redemption may adversely affect the yield
to maturity of the Offered Certificates. See
"Certain Distribution, Weighted Average Life and
Yield Considerations" and "Description of the
Transition Property--Adjustments to the FTA
Charges" in the Prospectus.
Denominations............... Each Class of Offered Certificates will be issued
in minimum initial denominations of [$1,000] and
in integral multiples thereof.
Registration of the The [Offered] [Class ] Certificates will
Certificates................ initially be represented by one or more
certificates registered in the name of Cede &
Co. ("Cede") ("Book-Entry Certificates"), the
nominee of The Depository Trust Company ("DTC"),
and available only in the form of book-entries
on the records of DTC, its Participants and its
Indirect Participants. Holders may also hold
such Certificates through CEDEL or the Euroclear
system in Europe. For a more complete discussion
of the Book-Entry Certificates, see "Risk
Factors" and "Description of the Certificates--
Book-Entry Registration" in the Prospectus.
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S-13
<PAGE>
- --------------------------------------------------------------------------------
Ratings..................... It is a condition of issuance of the Offered
Certificates that the Offered Certificates
be rated " " by , " " by
and " " by (each of ,
and , a "Rating Agency"). Each Class of
Underlying Notes will receive the same rating
from each Rating Agency as the corresponding
Class of Offered Certificates.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any Offered
Certificate and, accordingly, there can be no
assurance that the ratings assigned to any Class
of Offered Certificates upon initial issuance
thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a
rating of any Class of Offered Certificates is
revised or withdrawn, the liquidity of such
Class of Offered Certificates may be adversely
affected. In general, the ratings address credit
risk and do not represent any assessment of the
rate of principal payments on the Offered
Certificates. See "Risk Factors--Nature of the
Certificates--Uncertain Distribution Amounts and
Weighted Average Life " in the Prospectus,
"Certain Distribution, Weighted Average Life and
Yield Considerations" herein and in the
Prospectus and "Ratings" herein and in the
Prospectus.
Tax Status of the The Offered Certificates[, other than the
Certificates................ Floating Rate Certificates,] will be treated as
representing ownership of an interest in the
related Underlying Notes for federal income tax
purposes. [The Floating Rate Certificates will
be treated as representing ownership of an
interest in the related Underlying Notes and in
the related Swap Agreement.] Interest and
original issue discount, if any, on the Offered
Certificates generally will be included in gross
income for federal income tax purposes. [All
holders of Floating Rate Certificates, and all
individual holders in particular, should
seriously consider making an election to
"integrate" the Underlying Notes and the related
Swap Agreement for tax purposes by making a
notation on their books and records on or before
the date the Floating Rate Certificates are
acquired.] See "Certain Federal Income Tax
Consequences" in the Prospectus and herein.
Interest and original issue discount, if any, on
the Offered Certificates will be exempt from
California personal income tax, but not exempt
from the California franchise tax applicable to
banks and corporations. See "State Taxation" in
the Prospectus and herein.
ERISA Considerations........ Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus,
the Offered Certificates are eligible for
purchase with "plan assets" of any Plan (as
defined below) ("Plan Assets"). A fiduciary or
other person contemplating purchasing the
Offered Certificates on behalf of or with Plan
- --------------------------------------------------------------------------------
S-14
<PAGE>
- -------------------------------------------------------------------------------
Assets of any employee benefit plan or other
plan or arrangement (including but not limited
to an insurance company general account) that is
subject to Title I of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code")
(collectively, "Plans"), should carefully review
with its legal advisors whether the purchase or
holding of the Offered Certificates could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or Section
4975 of the Code.
- --------------------------------------------------------------------------------
S-15
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates, Series 199 - (the "Offered
Certificates"), together with the Certificates of other Series issued by the
Trust (collectively, the "Certificates"), will be issued by the Trust pursuant
to the Trust Agreement and the Series 199 - Supplement thereto. Pursuant to
the Trust Agreement, the Infrastructure Bank and the Certificate Trustee may
execute further series supplements in order to issue additional Series of
Certificates. This summary should be read together with the material under the
heading "Description of the Certificates" in the Prospectus.
GENERAL
The Offered Certificates will be issued on the Series Issuance Date and will
consist of Classes in the initial principal amounts, bearing the
Certificate Interest Rates and having the Scheduled Final Distribution Dates
and Termination Dates described under "Prospectus Supplement Summary--Summary
of Offered Certificates."
[FLOATING RATE CERTIFICATES
Determination of Certificate Interest Rate on Floating Rate
Certificates. The Certificate Interest Rate on the Floating Rate Certificates
for the initial Interest Accrual Period (as defined below) ending , 1998,
will be %. Following the initial Interest Accrual Period, the Certificate
Interest Rates applicable from time to time to the Floating Rate Certificates
will be determined by Bankers Trust Company (together with any successor Agent
Bank under the Trust Agreement, the "Agent Bank") in accordance with the
following provisions:
(a) On the second day on which dealings in deposits in U.S. dollars are
transacted in the London interbank market (a "London Banking Day")
immediately preceding the first day of each Interest Accrual Period (as
defined below) and on the Closing Date with respect to the first Interest
Accrual Period (each such day, an "Interest Determination Date"), the Agent
Bank will determine "LIBOR" based on the offered rate for deposits in U.S.
dollars for a period of three months commencing on the first day of such
Interest Accrual Period that currently appears on display page 3750 of the
Dow Jones Telerate Service for the purpose of displaying the London
interbank offered rate of major banks for U.S. dollars as of 11:00 a.m.,
London time, on such Interest Determination Date (such display page being
the "Telerate Page"). Notwithstanding the foregoing, if no offered rate
appears, LIBOR for such Interest Accrual Period will be determined as if
the parties had specified the rate described in clause (b) below. The
Certificate Interest Rate applicable to the Class Certificates for the
Interest Accrual Period relating to an Interest Determination Date shall be
the sum of LIBOR as determined by the Agent Bank on the most recent
Interest Determination Date plus %.
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the London interbank
market, selected by the Agent Bank, to provide the Agent Bank with its
offered quotation for deposits in U.S. dollars for a period of three
months, commencing on the second London Banking Day immediately following
such Interest Determination Date, to prime banks in the London interbank
market at approximately 11:00 a.m., London time, on such Interest
Determination Date and in a principal amount not less than $1 million that
is representative for a single transaction in U.S. dollars in such market
at such time. If at least two such quotations are provided, LIBOR for the
relevant Interest Accrual Period will be the arithmetic mean of such
quotations. If fewer than two quotations are provided, LIBOR for such
Interest Accrual Period will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. in The City of New York, on such Interest
Determination Date by three major banks in The City of New York selected by
the Agent Bank for loans in U.S. Dollars to leading European banks, for the
period of three months, commencing on the second London Banking Day
immediately following such Interest Determination Date and in a principal
amount not less than $1 million that is representative for a single
transaction in U.S. dollars in such market at such time; provided, however,
that if any of the banks so selected by the Agent Bank are not quoting as
mentioned in this sentence, the Certificate Interest Rate in effect for
such Interest Accrual Period will be the Certificate Interest Rate in
effect on such Interest Determination Date.
S-16
<PAGE>
(c) There will be no maximum or minimum Certificate Interest Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, the interest rate with respect to the Floating Rate Certificates
shall be % per annum (calculated on the basis of a 360-day year consisting
of twelve 30-day months), effective as of the first day of the Interest
Accrual Period in which the termination of the Swap Agreement occurs.
Calculation of Quarterly Interest. The Agent Bank will, as soon as
practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the Certificate Interest Rate applicable to, and calculate the
amount of interest payable on, each of the Floating Rate Certificates for the
relevant Interest Accrual Period. Interest payments will be made in an amount
equal to the product of (a)(1) the actual number of days in the related
Interest Accrual Period divided by 360, multiplied by (2) the applicable
Certificate Interest Rate and (b) the Class Principal Balance (as defined
herein) as of the close of business on the preceding Distribution Date after
giving effect to all payments of principal made to the Class
Certificateholders on such preceding Distribution Date (or, in the case of the
first Distribution Date, as of the Closing Date) (such amount, the "Quarterly
Interest" with respect to such Class). The "Interest Accrual Period" with
respect to any Distribution Date shall be the period from and including the
preceding Distribution Date (or, in the case of the first Distribution Date,
from and including the Closing Date) to and excluding such Distribution Date.
The determination of the Certificate Interest Rate and the Quarterly Interest
by the Agent Bank shall (in the absence of manifest error) be final and
binding upon all parties.
Notice of Floating Rate and Interest Payments. The Agent Bank will notify
the Infrastructure Bank, the Certificate Trustee and any Paying Agents of the
Floating Rate and the Quarterly Interest due on the Floating Rate Certificates
for each Interest Accrual Period and the relevant Distribution Date as soon as
possible after their determination but in no event later than the first
Business Day of any Interest Accrual Period.
Determination or Calculation by Certificate Trustee. If the Agent Bank fails
to determine a Floating Rate or calculate Quarterly Interest as described
under "--Calculation of Quarterly Interest" above at any time or for any
reason, the Certificate Trustee shall determine the Floating Rate and
calculate the Quarterly Interest as described under "--Calculation of
Quarterly Interest" above, and each such determination or calculation shall be
deemed to have been made by the Agent Bank. The determination by the Agent
Bank or the Certificate Trustee (as the case may be) of any Floating Rate and
calculation thereby of any Quarterly Interest shall, in the absence of
manifest error, be final and binding on all parties.
Agent Bank. The Infrastructure Bank will agree that, so long as any of the
Certificates remain outstanding, there will at all times be an Agent Bank. The
initial Agent Bank will be Bankers Trust Company. The Infrastructure Bank,
upon written notice to the Agent Bank and the Certificate Trustee, may
terminate the appointment of the Agent Bank for any reason. Notice of any such
termination will be given by the Certificate Trustee to Certificateholders
within ten days of such termination. If (a) any person is unable or unwilling
to continue to act as the Agent Bank, (b) the appointment of the Agent Bank is
terminated or (c) the Agent Bank fails duly to determine the Floating Rate
and/or the Quarterly Interest for any Interest Accrual Period, then the
Infrastructure Bank will appoint a successor Agent Bank to act as such in its
place and give notice of such appointment to the Certificate Trustee, provided
that neither the resignation nor removal of the Agent Bank shall take effect
until a successor has been appointed. Notice of any appointment of a successor
Agent Bank will be given by the Certificate Trustee to the Certificateholders
within ten days of such appointment. Any successor Agent Bank will be a
banking institution organized under the laws of any state or of the United
States with capital and surplus of at least $50 million and which is an active
dealer in LIBOR-based securities.]
DISTRIBUTIONS OF INTEREST
Interest on each Class of the Offered Certificates will accrue from the
Series Issuance Date at the rates indicated above (each, a "Certificate
Interest Rate"), in each case distributable quarterly on March 25, June 25,
September 25 and December 26 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate Business Day) each year (each, a
"Distribution Date"), commencing .
S-17
<PAGE>
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the close of business on the
related Record Date interest to the extent paid on such date with respect to
the Class of Underlying Notes with the same alphanumeric designation, as
described below under "Description of the Notes--Interest " [or, with respect
to the Floating Rate Certificates, payments received from the Swap
Counterparty pursuant to the Swap Agreement].
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute to the
Certificateholders of each Class as of the close of business on the related
Record Date principal to the extent paid on such date with respect to the
Class of Underlying Notes with the same alphanumeric designation, as described
below under "Description of the Notes--Principal."
The entire unpaid principal amount of the Offered Certificates will be due
and distributable on the date on which a Certificate Event of Default has
occurred and is continuing, if the Certificate Trustee or holders of a
majority in principal amount of the Offered Certificates of all Series then
outstanding have declared the Certificates to be immediately due and payable.
See "Description of the Certificates--Events of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Trust shall be required to redeem the Offered Certificates if the Note
Issuer elects to redeem the Underlying Notes, which the Note Issuer may elect
to do on any Payment Date commencing with the Payment Date on which the
outstanding principal balance of the Underlying Notes (after giving effect to
payments that would otherwise be made on such date) has been reduced to less
than five percent of the initial principal balance of the Underlying Notes.
Such Payment Date will correspond to the Distribution Date on which the
outstanding principal balance of the Offered Certificates has been reduced to
less than five percent of the Original Certificate Principal Balance. Notice
of such redemption will be given by the Trust to each holder of Certificates
to be redeemed by first-class mail, postage prepaid, mailed not less than five
days nor more than 25 days prior to the date of redemption.
MANDATORY REDEMPTION
If the Seller is required to repurchase the Transition Property as described
under "Description of the Transition Property--Seller Representations and
Warranties and Repurchase Obligation" in the Prospectus, the Note Issuer will
be required to redeem the Underlying Notes on the fifth Certificate Business
Day following the date of such repurchase, and accordingly the Trust will be
required to redeem the Offered Certificates on such date. See "Description of
the Certificates--Mandatory Redemption" in the Prospectus.
[SUMMARY OF CERTAIN PROVISIONS OF THE
SERIES SUPPLEMENT TO THE TRUST AGREEMENT]
SUMMARY OF CERTAIN PROVISIONS OF THE SWAP AGREEMENT
Pursuant to the Swap Agreement, on each Distribution Date, the Trust will be
obligated to pay to the Swap Counterparty the Net Trust Swap Payment (solely
from payments received on the related Class of Notes), or the Swap
Counterparty will be obligated to pay to the Trust an amount equal to the Net
Trust Swap Receipt.
The Swap Agreement requires that in the event of a downgrading of the Swap
Counterparty's credit rating by either of Moody's or S&P below "AAA" (a
"Downgrade Event"), the Swap Counterparty must attempt to assign its rights
and obligations under the Swap Agreement to a replacement counterparty (a
"Replacement Counterparty") rated "AAA" by such Rating Agencies.
S-18
<PAGE>
If (a) the Swap Counterparty does not successfully make such an assignment
within 90 days of such a Downgrade Event, or (b) prior thereto the rating of
the Swap Counterparty is reduced below "AA" by either of Moody's or S&P and a
Replacement Counterparty rated "AAA" by both Moody's and S&P has not assumed
the Swap Counterparty's rights and obligations under the Swap Agreement within
30 days, then the Trust may attempt to assign the Swap Agreement as further
described below. If the Swap Counterparty certifies to the Trust that a
Replacement Counterparty rated "AAA" by both Moody's and S&P will not bid to
replace the Swap Counterparty, and such certification is reviewed and
confirmed by a recognized ISDA swap dealer appointed by the Trust with capital
and surplus of at least $50 million (the "Swap Agent"), then the Swap
Counterparty may assign the Swap Agreement to a Replacement Counterparty that
is rated "AAA" by either of Moody's or S&P, and not rated below "AA" by the
other Rating Agency. This process will continue until the highest rated
Replacement Counterparty can be identified, which, in any event, will be rated
not lower than "A" by Moody's and S&P.
If, upon conclusion of the above-referenced 90 day or 30 day period, the
Swap Counterparty's rights and obligations under the Swap Agreement have not
been successfully assigned by the Swap Counterparty, then the Swap Agent shall
independently solicit a Replacement Counterparty using the process described
above for a period not exceeding 90 days, but in no event later than the date
the Swap Counterparty is no longer rated at least "A" by both Moody's and S&P.
If the Swap Agent is successful in identifying a Replacement Counterparty, the
Trust will execute an agreement (substantially in the form of the Swap
Agreement) with the Replacement Counterparty and the Swap Agreement and the
Swap Counterparty's rights and obligations shall be deemed to have been
assigned to such Replacement Counterparty effective as of the Distribution
Date immediately succeeding such execution, without any further action by the
Swap Counterparty. If, upon conclusion of such 90 day period (or, if earlier,
upon the downgrading of the Swap Counterparty below "A" by either Moody's or
S&P), a qualified Replacement Counterparty has not entered into a Swap
Agreement with the Trust, a termination event will be deemed to have occurred
with respect to the Swap Agreement, with the Swap Counterparty as the affected
party. An "event of default" under the Swap Agreement will occur upon: (i) the
failure of the Trust or the Swap Counterparty to pay any amount when due under
the Swap Agreement if such failure is not remedied on or before the fifth
Certificate Business Day after the occurrence of such failure; (ii) the
occurrence of certain events of insolvency or bankruptcy of the Trust or the
Swap Counterparty; and (iii) certain other standard events of default (which
are applicable solely with respect to the Swap Counterparty) under the Swap
Agreement. Upon the occurrence of any event of default by the Swap
Counterparty, or a Downgrade Event resulting in a termination event, the Trust
is required under the Trust Agreement to terminate the Swap Agreement. Upon
the occurrence of an event of default by the Trust, the Swap Counterparty has
the right to terminate the Swap Agreement.
An "Event of Default" under the Swap Agreement, in addition to the Downgrade
Event discussed above, would also occur upon: (i) the failure of the Trust or
the Swap Counterparty to pay any amount when due under the Swap Agreement
after giving effect to the applicable grace period, if any; (ii) the
occurrence of certain events of insolvency or bankruptcy of the Trust or the
Swap Counterparty and (iii) certain other standard events of default (which
are applicable solely with respect to the Swap Counterparty) under the Swap
Agreement.
The Swap Agreement may also be terminated in the event of an "illegality,"
which would occur due to the adoption of, or any change in, any applicable
law, or due to the promulgation of, or any change in, the interpretation by
any court, tribunal or regulatory authority with competent jurisdiction over
any applicable law, as a result of which it becomes unlawful for the Trust or
the Swap Counterparty to perform any obligation to make a payment or to
receive a payment or to comply with any other material provision of the Swap
Agreement. If the Swap Agreement is terminated because of an "illegality" as
described above, neither the Trust nor the Swap Counterparty will be required
to pay the other party's resulting out-of-pocket expenses.
If the Swap Agreement is terminated because of an event of default as
described above and the Swap Counterparty is the defaulting party, the Swap
Counterparty is required to pay the Trust's resulting out-of-pocket expenses.
The Trust is not required to pay the Swap Counterparty's out-of-pocket
expenses even if the Trust is the defaulting party. In addition, upon an
assignment of the Swap Agreement as a result of a Downgrade Event, the Swap
Counterparty will be responsible for the payment of all resulting fees and
expenses with respect thereto,
S-19
<PAGE>
including any Swap Agent's fees. In the event of an early termination of the
Swap Agreement for any reason, the Swap Counterparty is required to make a
marked-to-market payment of its obligations to the Trust, but the Trust is not
required to make any marked-to-market payment of its obligations to the Swap
Counterparty. Any such termination payment will be distributed to the Floating
Rate Certificateholders on a pro-rata basis on the Distribution Date so
received, or if not received on a Distribution Date, on a Special Distribution
Date.
In the event that the Swap Agreement is terminated for any reason, the
interest rate payable with respect to the Floating Rate Certificates will
automatically convert to a fixed rate equal to the interest rate payable on
the related Class of Notes effective as of the first day of the Interest
Accrual Period in which such termination event occurs or, in the case of a
termination resulting from the failure of the Swap Counterparty to pay a Net
Trust Swap Receipt, effective as of the first day of the Interest Accrual
Period preceding such termination. Such fixed interest rate may be
substantially less than the rate that might otherwise be payable on the
Floating Rate Certificates, and such conversion may adversely affect both the
liquidity and the market value of the Floating Rate Certificates.
Under the Trust Agreement, the Trust has covenanted to enforce its rights
under the Swap Agreement, and to promptly appoint a Swap Agent, as required,
during the continuance of a Downgrade Event.]
[THE SWAP COUNTERPARTY
CDC Financial Products, Inc. (the "Swap Counterparty") is a corporation
formed under the laws of the State of Delaware and a wholly owned, indirect
subsidiary of Caisse des Depots et Consignations ("CDC"). The obligations of
the Swap Counterparty under the Swap Agreement are unconditionally guaranteed
by CDC. The Swap Counterparty has recently commenced commercial operation, and
therefore has not previously engaged in swap transactions.
CDC is a special national legislative public instrumentality (etablissement
public a statut legal special) governed by French administrative law. As of
December 31, 1996, the consolidated balance sheet total assets of CDC was FRF
842.7 billion and equity was FRF 57.8 billion. Upon request additional
information can be obtained from Caisse des Depots et Consignations, services
des etudes economiques et financieres, 195 Boulevard Saint Germain, 75007
Paris, France.]
DESCRIPTION OF THE NOTES
GENERAL
The PG&E Funding LLC Notes, Series 199 - (the "Underlying Notes"), will be
issued by the Note Issuer to the Trust on (the "Series Issuance
Date"), pursuant to the Note Indenture and the Series 199 - Supplement
thereto. Pursuant to the Note Indenture, the Note Issuer and the Note Trustee
may execute further series supplements in order to issue additional Series of
Notes. This summary should be read together with the material under the
heading "Description of the Notes" in the Prospectus.
The Underlying Notes, together with the Notes of other Series issued by the
Note Issuer (collectively, the "Notes"), will be issued pursuant to the Note
Indenture. The Underlying Notes will be comprised of the following
Classes:
<TABLE>
<CAPTION>
INITIAL NOTE
PRINCIPAL SCHEDULED FINAL INTEREST
CLASS AMOUNT MATURITY DATE MATURITY DATE RATE
----- --------- ------------------------ ------------------------ --------
<S> <C> <C> <C> <C>
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
$ , ( years) , ( years) . %
</TABLE>
S-20
<PAGE>
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer has granted to the Note Trustee, for the benefit of the holders of the
Notes (the "Noteholders"), a security interest in all of the Note Issuer's
right, title and interest in and to the Note Collateral. The Note Collateral
is described more specifically under "Description of the Notes--Security" in
the Prospectus.
INTEREST
Interest on each Class of the Underlying Notes will accrue from the Series
Issuance Date at the rates indicated above (each, a "Note Interest Rate"), in
each case payable quarterly on March 25, June 25, September 25 and December 26
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "Payment Date"), commencing
, to the persons in whose names the Underlying Notes are registered
at the close of business on the related Record Date.
On each Payment Date, Noteholders of each Class will be entitled to receive
an amount equal to one-fourth of the product of (a) the applicable Note
Interest Rate and (b) the applicable Class Principal Balance as of the close
of business on the preceding Payment Date after giving effect to all payments
of principal made to the Noteholders on such preceding Payment Date; provided,
however, that with respect to the initial Payment Date, interest on each
outstanding Class Principal Balance will accrue from and including the Series
Issuance Date to but excluding such first Payment Date. Interest will be
calculated on the basis of a 360-day year of twelve 30-day months. See
"Description of the Notes--Interest and Principal" in the Prospectus.
PRINCIPAL
On each Payment Date, each Class of the Underlying Notes will be entitled to
receive payments of principal as follows: [TO BE PREPARED UPON ISSUANCE].
Principal will be payable at the Corporate Trust Office of the Note Trustee in
the City of , or at the office or agency of the Note Issuer maintained
for such purposes in the Borough of Manhattan, the City of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding Class Principal Balance for each Class of the Underlying Notes at
each Payment Date from the Series Issuance Date to the Scheduled Maturity Date
for such Class. In preparing the following table, it has been assumed that (i)
the Offered Certificates are issued on , (ii) payments on the
Offered Certificates are made on each Distribution Date, commencing
, 199 , (iii) the Servicing Fee equals %, (iv) there are no
net earnings on amounts on deposit in the Collection Account, (v) Operating
Expenses are $ per quarter, Quarterly Administration Fees are
$ per quarter, and amounts owed to the Note Trustee, the Delaware
Trustee and the Certificate Trustee are $ per quarter, and all such
amounts are payable in arrears and (vi) all FTA Collections are deposited in
the Collection Account in accordance with the Seller's forecasts.
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
OUTSTANDING PRINCIPAL BALANCE
----------------------------------------
SERIES
DATE 199 - CLASS CLASS CLASS CLASS CLASS
---- ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Series Issuance Date $ $ $ $ $ $
, 199
, 199
, 199
[Etc.]
Weighted Average Life
</TABLE>
S-21
<PAGE>
There can be no assurance that the Class Principal Balances of the
Underlying Notes and the related Offered Certificates will be reduced at the
rates indicated in the foregoing table, and the actual reductions in such
Class Principal Balances may be slower than those indicated in the chart. See
"Risk Factors" in the Prospectus for a discussion of various factors which
may, individually or in the aggregate, affect the rate of reductions of the
Class Principal Balances of the Underlying Notes and the Offered Certificates.
The entire unpaid principal amount of the Underlying Notes will be due and
payable on the date on which a Note Event of Default has occurred and is
continuing, if the Note Trustee or holders of a majority in principal amount
of the Notes of all Series then outstanding have declared the Underlying Notes
to be immediately due and payable. See "Description of the Notes--Note Events
of Default; Rights Upon Note Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, the Underlying Notes, and
accordingly cause the Trust to redeem the Offered Certificates, on any Payment
Date commencing with the Payment Date on which the outstanding principal
balance of the Underlying Notes (after giving effect to payments that would
otherwise be made on such date) has been reduced to less than five percent of
the initial principal balance of the Underlying Notes. Notice of such
redemption will be given by the Note Issuer to each holder of Underlying Notes
by first-class mail, postage prepaid, mailed not less than five days nor more
than 25 days prior to the date of redemption.
OVERCOLLATERALIZATION AMOUNT
The Financing Order provides that the Note Issuer, as the owner of the
Transition Property, is entitled to collect an additional amount (for the
Underlying Notes, the "Overcollateralization Amount") which is intended to
enhance the likelihood that payments on the Underlying Notes will be made in
accordance with the Expected Amortization Schedule. The Overcollateralization
Amount for the Underlying Notes will be $ , which is 0.50% of the
initial principal amount of the Underlying Notes. The Overcollateralization
Amount will be collected ratably over the life of the Offered Certificates
according to the following schedule:
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
<TABLE>
<CAPTION>
PAYMENT REQUIRED
DATE OVERCOLLATERALIZATION LEVEL
------- ---------------------------
<S> <C>
, 199 $
, 199 $
, 199 $
[Etc.] $
</TABLE>
OTHER CREDIT ENHANCEMENT
Capital Subaccount. Upon the issuance of the Underlying Notes, the Seller
will make a capital contribution of $ to the Note Issuer. Such
amount is equal to 0.50% of the initial principal amount of the Underlying
Notes. Such amount, less $100,000 in the aggregate for all Series of Notes, is
the Required Capital Level with respect to the Underlying Notes and will be
deposited into the Capital Subaccount. Withdrawals from and deposits to the
Capital Subaccount will be made as described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization Subaccount and (d) allocations to the
Capital Subaccount (all as described under "Description of the Notes--
Allocations; Payments" in the Prospectus) will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will draw on amounts in the
Reserve Subaccount, to the extent amounts available in the General Subaccount
are insufficient to make scheduled payments on the Underlying Notes or to make
required allocations to the Overcollateralization Subaccount or the Capital
Subaccount.
S-22
<PAGE>
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will at the direction of the Servicer
apply all amounts on deposit in the Collection Account with respect to the
prior three month period in the manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
The Certificate Trustee will then apply all amounts paid by the Note Trustee
on the related Payment Date with respect to the Underlying Notes in the
following priority:
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE TRANSITION PROPERTY
FINANCING ORDER AND ADVICE LETTERS
The Financing Order requires the Seller to submit an Issuance Advice Letter
to the CPUC with respect to each Series of Certificates issued. The first
Issuance Advice Letter [, which was filed in connection with the Offered
Certificates,] established the FTA Charges pursuant to which nonbypassable
charges will be payable by the applicable classes of Customers in an amount
sufficient to recover, within the time period specified in the Issuance Advice
Letter, the FTA Charges designated in the Issuance Advice Letter based on
factors including, but not limited to, the projected electricity usage of each
such class of Customer and the rate of delinquencies and write-offs. These
charges are nonbypassable in that applicable consumers cannot avoid paying
them by purchasing electricity from a supplier other than the Seller.
[Subsequent Issuance Advice Letters have modified the FTA Charges to support
the issuance of additional Series of Certificates, including the
Offered Certificates.]
The Issuance Advice Letter filed in connection with the Offered Certificates
establishes the following FTA Charges which will be billed to Customers
beginning on the Series Issuance Date and will remain in effect until such FTA
Charges are adjusted as described below:
<TABLE>
<CAPTION>
CLASS OF
CUSTOMERS FTA CHARGE PER KILOWATT HOUR
--------- ----------------------------
<S> <C>
Residential
Small Commercial
</TABLE>
As of the date hereof, the FTA Charge for an average Residential Customer
will amount to approximately $ per month, and the FTA Charge for an
average Small Commercial Customer will amount to approximately $ per
month. The average monthly electricity bill, excluding local taxes, during
1996 was $65 for a Residential Customer and $188 for a Small Commercial
Customer.
ADJUSTMENTS TO THE FTA CHARGES
[The following table reflects information regarding the changes to the FTA
Charges which have been requested through Advice Letters since the Financing
Order was issued:
FTA CHARGE FOR RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
ADJUSTMENT RESULTING
TO FTA AGGREGATE
CHARGE PER FTA CHARGE EFFECTIVE
KILOWATT PER DATE OF
ADVICE LETTER FILING DATE HOUR KILOWATT HOUR ADJUSTMENT
------------------------- ---------- ------------- ----------
<S> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
FTA CHARGE FOR SMALL COMMERCIAL CUSTOMERS
<CAPTION>
ADJUSTMENT RESULTING
TO FTA AGGREGATE
CHARGE PER FTA CHARGE EFFECTIVE
KILOWATT PER DATE OF
ADVICE LETTER FILING DATE HOUR KILOWATT HOUR ADJUSTMENT
------------------------- ---------- ------------- ----------
<S> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
</TABLE>
See "Description of the Transition Property--Adjustments to the FTA Charges"
in the Prospectus.
S-23
<PAGE>
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal distributions on each Class of Offered Certificates,
the aggregate amount of each interest distribution on each Class of Offered
Certificates and the actual maturity date of each Class of Offered
Certificates will be related to the rate and timing of FTA Collections.
Accelerated receipts of FTA Collections will not result in principal
distributions on the Offered Certificates earlier than the Scheduled Final
Distribution Dates since receipts in excess of the amounts necessary to
amortize the Offered Certificates in accordance with the applicable Expected
Amortization Schedule will be deposited in the Reserve Subaccount for
distribution in accordance with such schedule. However, delayed receipts of
FTA Collections may result in principal distributions on the Offered
Certificates that occur later than the related Scheduled Final Distribution
Dates.
The actual distributions on each Distribution Date for each Class of Offered
Certificates and the weighted average life thereof will be affected primarily
by the rate of FTA Collections and the timing of receipt of such FTA
Collections, as well as amounts available in the Overcollateralization
Subaccount, Capital Subaccount and Reserve Subaccount. Since each FTA Charge
will consist of a charge per kilowatt hour of usage by the applicable classes
of Customers, the aggregate amount of FTA Collections and the rate of
principal amortization on the Offered Certificates will depend, in part, on
actual energy usage by Customers and the rate of delinquencies and write-offs.
Although the amounts of the FTA Charges will be adjusted from time to time
based in part on the actual rate of FTA Collections, no assurances are given
that the Servicer will be able to forecast accurately actual electricity usage
and the rate of delinquencies and write-offs or implement adjustments to the
FTA Charges that will cause FTA Collections to be received at any particular
rate. If FTA Collections are received at a slower rate than expected, an
Offered Certificate may be retired later than expected. Because principal will
only be distributed at a rate not faster than that contemplated in the
Expected Amortization Schedule, except in the event of an early redemption or
the acceleration of the maturity of the Offered Certificates after an Event of
Default, the Offered Certificates are not expected to mature earlier than
scheduled. A distribution on a date that is earlier than forecasted will
result in a shorter weighted average life, and a distribution on a date that
is later than forecasted will result in a longer weighted average life. In
addition, if a larger portion of the delayed distributions on the Offered
Certificates are received in later years, this will result in a longer
weighted average life of the Offered Certificates.
No assurances are given that the representations made herein and in the
Prospectus as to the particular factors that will affect the rate of FTA
Collections, the relative importance of such factors, the percentage of the
principal balance of the Offered Certificates that will be distributed as of
any date or the overall rate of FTA Collections will be realized.
In addition, the Note Issuer has the option to redeem all of the outstanding
Underlying Notes on any Payment Date commencing on the Payment Date on which
the outstanding principal balance of the Underlying Notes (after giving effect
to payments that would otherwise be made on such date) has been reduced to
less than five percent of the initial principal balance of the Underlying
Notes. Redemption of the Underlying Notes will require the Certificate Trustee
to redeem the Offered Certificates. Redemption will cause such Offered
Certificates to be retired earlier than would otherwise be expected and may
adversely affect the yield to maturity of the Offered Certificates. There can
be no assurance as to whether the Note Issuer will exercise the option to
redeem the Underlying Notes, or as to whether Certificateholders will be able
to receive an equally attractive rate of return upon reinvestment of the
proceeds resulting from any such redemption.
THE SELLER AND SERVICER
The following is information which supplements that provided under the
heading "The Seller and Servicer" in the Prospectus. For a more complete
discussion of the Seller and Servicer, see "The Seller and Servicer" in the
Prospectus.
Pacific Gas and Electric Company reported net income of $277,086,000 on
revenues of $2,541,077,000 for the quarter ended September 30, 1997, as
compared with net income of $233,695,000 on revenues of $2,521,852,000 for the
quarter ended September 30, 1996. Pacific Gas and Electric Company reported
net income of $755,209,000 on revenues of $9,609,972,000 for the year ended
December 31, 1996, as compared with net income of $1,338,885,000 on revenues
of $9,621,765,000 for the year ended December 31, 1995.
S-24
<PAGE>
SERVICING
GENERAL
The Servicer, as agent for the Note Issuer, will manage, service and
administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
For a detailed discussion of the Servicer's procedures, the manner in which
payments from Customers are remitted to the Collection Account, and related
matters, see "Servicing" in the Prospectus.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Underlying Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each calendar
quarter on each Payment Date, in an amount equal to (i) one-fourth of
percent of the outstanding principal balance of the Underlying Notes (before
giving effect to payments on such date) for so long as FTA Charges are
included as a line item on bills otherwise sent to Customers and (ii) one-
fourth of percent of the outstanding principal balance of the Underlying
Notes (before giving effect to payments on such date) if FTA Charges are not
included as a line item on bills otherwise sent to Customers but, instead, are
billed separately to Customers. The Servicing Fee (together with any portion
of the Servicing Fee that remains unpaid from prior Payment Dates) will be
paid solely to the extent funds are available therefor as described under
"Description of the Notes--Allocations; Payments" in the Prospectus. The
Servicing Fee will be paid prior to the distribution of any amounts in respect
of interest on and principal of the Underlying Notes. The Servicer will be
entitled to retain as additional compensation net investment income on FTA
Payments received by the Servicer prior to remittance thereof to the
Collection Account and the portion of late fees, if any, paid by Customers
relating to the FTA Payments.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to provide a consolidated bill to their
retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and other charges, including the
applicable FTA Charges.
Any ESP that provides consolidated billing is required to pay the Servicer
amounts billed by the Servicer to the ESP, including the FTA Charges,
regardless of the ESP's ability to collect such amounts from its customers. In
such event, the collecting ESP will in effect replace the Customer as the
obligor with respect to such FTA Charges and the Note Issuer, as the holder of
the Transition Property, will have no right to collect such FTA Charges from
the Customer. There can be no assurance that each ESP will utilize the same
customer credit standards as the Servicer, or that the Servicer will be able
to mitigate credit risks relating to ESPs in the same manner in which it
mitigates such risks relating to its Customers. The Servicer, on behalf of the
Note Issuer, will pursue any ESP that fails to remit applicable FTA Charges in
a manner similar to that in which the Servicer will pursue any failure by a
Customer to remit FTA Charges. The Servicer will not have the right to pursue
Customers of an ESP that defaults in the payment of FTA Charges. However, the
Servicer will have the right to bill and collect FTA Charges and other amounts
payable to the Servicer directly from all of the ESP's consolidated billing
Customers following certain payment defaults by an ESP. An ESP that has
defaulted will nevertheless have the right to elect consolidated billing six
months after its default upon the satisfaction of certain conditions. Frequent
changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection of payments, which could have the effect of
causing delays in distributions to Certificateholders. Neither the Seller nor
the Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to PG&E, as Servicer. The true-up adjustment mechanism
for the FTA Charges, as well as amounts available in the Overcollateralization
Subaccount, the Capital Subaccount and the Reserve Subaccount, are intended to
mitigate this risk relating to the timing of collections and payments.
However, delays in distributions to Offered Certificateholders might occur as
a result of delays in implementation of the adjustment mechanism. See "Risk
Factors--Potential Servicing Issues--Reliance on Aggregators and Other
Suppliers" in the Prospectus.
S-25
<PAGE>
STATEMENTS BY SERVICER
For each Remittance Date and each Distribution Date, the Servicer will
provide the statements and reports described under "Servicing--Statements by
Servicer" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Offered Certificates will be included in gross income for
federal income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Offered
Certificate, and is based on the opinion of Brown & Wood LLP, counsel to the
Trust ("Special Counsel"). This discussion represents the opinion of Special
Counsel, subject to the qualifications set forth therein or herein. This
discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax
consequences to Offered Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Offered Certificateholder in light of that Offered
Certificateholder's circumstances, and some Offered Certificateholders may be
subject to special tax rules and limitations not discussed below (e.g., life
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers). CONSEQUENTLY, EACH PROSPECTIVE OFFERED CERTIFICATEHOLDER IS
URGED TO CONSULT ITS OWN TAX ADVISER IN DETERMINING THE FEDERAL, STATE, LOCAL
AND FOREIGN INCOME AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF AN OFFERED CERTIFICATE.
For purposes of this discussion, "U.S. Person" means (i) a citizen or
resident of the United States; (ii) a corporation (or entity treated as a
corporation for tax purposes) created or organized in the United States, or
under the laws of the United States or of any state thereof (including the
District of Columbia); (iii) a partnership (or entity treated as a partnership
for tax purposes) organized in the United States, or under the laws of the
United States or of any state thereof (including the District of Columbia),
unless provided otherwise by future Treasury regulations; (iv) an estate the
income of which is includible in gross income for U.S. federal income tax
purposes regardless of its source or; (v) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons has the authority to control all
substantial decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons prior to
such date, may elect to continue to be U.S. Persons. The term "U.S. Offered
Certificateholder" means any U.S. Person and any other person to the extent
that income attributable to its interest in an Offered Certificate is
effectively connected with that person's conduct of a U.S. trade or business.
The term "non-U.S. Offered Certificateholder" means any person other than a
U.S. Offered Certificateholder.
The discussion assumes that an Offered Certificate is issued in registered
form. Moreover, the discussion assumes that any original issue discount
("OID") on the Underlying Notes (i.e., any excess of the stated redemption
price at maturity of the Underlying Note over its issue price) is less than a
de minimis amount (i.e., 0.25 percent of its stated redemption price at
maturity multiplied by the Underlying Note's weighted average maturity), all
within the meaning of the OID regulations.
TREATMENT OF THE OFFERED CERTIFICATES
The Seller has received a ruling from the Internal Revenue Service ("IRS")
holding that the Underlying Notes are obligations of the Seller for federal
income tax purposes. Special Counsel has opined that the Trust will not be a
business entity classified as a corporation or a publicly traded partnership
treated as a corporation,
S-26
<PAGE>
but will be treated as a grantor trust. Further, Special Counsel has opined
that each Class of Offered Certificates bearing a fixed interest rate (the
"Fixed Rate Certificates") will evidence ownership of a fractional undivided
beneficial interest in the related Class of Underlying Notes, and each Class
of Floating Rate Certificates will evidence ownership of a fractional
undivided beneficial interest in the related Class of Underlying Notes and the
related Swap Agreement.
TAXATION OF U.S. FIXED RATE CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Fixed Rate Certificates represent ownership of the Underlying Notes for
federal income tax purposes, stated interest on a beneficial interest in such
Offered Certificates will be taxable as ordinary income when received or
accrued by U.S. Offered Certificateholders in accordance with their method of
accounting. Generally, interest received on the Fixed Rate Certificates will
constitute "investment income" for purposes of certain limitations of the Code
concerning the deductibility of investment interest expense.
Market Discount. A U.S. Offered Certificateholder who purchases (including a
purchase at original issuance for a price less than the issue price) an
interest in a Fixed Rate Certificate at a discount that exceeds any
unamortized OID may be subject to the "market discount" rules of sections 1276
through 1278 of the Code. These rules generally provide that, subject to a
statutorily-defined de minimis exception, if a U.S. Offered Certificateholder
acquires a Fixed Rate Certificate at a market discount (i.e., at a price below
its stated redemption price at maturity or its revised issue price if it was
issued with OID) and thereafter recognizes gain upon a disposition of the
Fixed Rate Certificate (or disposes of it in certain non-recognition
transactions, including by gift), the lesser of such gain (or appreciation, in
the case of an applicable non-recognition transaction) or the portion of the
market discount that accrued while the Fixed Rate Certificate was held by such
holder will be treated as ordinary interest income at the time of the
disposition. In addition, a U.S. Offered Certificateholder who acquired a
Fixed Rate Certificate at a market discount would be required to treat as
ordinary interest income the portion of any principal payment attributable to
accrued market discount on such Fixed Rate Certificate. Generally, market
discount accrues ratably over the life of a debt instrument unless the debt
holder elects to accrue market discount on a constant yield to maturity basis.
It is not clear how either the ratable accrual or constant yield accrual
methodologies apply to instruments such as the Fixed Rate Certificates where
the timing of principal payments is uncertain. Investors should consult their
own tax advisors concerning the accrual of market discount. The market
discount rules also provide that a U.S. Offered Certificateholder who acquires
a Fixed Rate Certificate at a market discount may be required to defer a
portion of any interest expense that otherwise may be deductible on any
indebtedness incurred or maintained to purchase or carry the Fixed Rate
Certificate until the holder disposes of the Offered Certificate in a taxable
transaction.
A U.S. Offered Certificateholder who acquired a Fixed Rate Certificate at a
market discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
IRS. If a holder elects to include market discount in income in accordance
with the preceding sentence, the foregoing rules with respect to the
recognition of ordinary income on sales, principal payments and certain other
dispositions of the Fixed Rate Certificates and the deferral of interest
deductions on indebtedness related to the investor certificates will not
apply.
Amortizable Bond Premium. A U.S. Offered Certificateholder who purchases an
interest in a Fixed Rate Certificate at a premium may elect to offset the
premium against interest income under the constant yield method over the
remaining term of the Fixed Rate Certificate in accordance with the provisions
of section 171 of the Code. A holder that elects to amortize bond premium must
reduce the tax basis in the related Fixed Rate Certificate by the amount of
bond premium used to offset interest income. If a Fixed Rate Certificate
purchased at a premium is redeemed in full prior to its maturity, a holder who
has elected to amortize bond premium should be entitled to a deduction in the
taxable year of redemption in an amount equal to the excess, if any, of the
adjusted basis of the Fixed Rate Certificate over the greater of the
redemption price or the amount payable on maturity.
S-27
<PAGE>
[TAXATION OF U.S. FLOATING RATE CERTIFICATEHOLDERS
Generally, as explained above, each Floating Rate Certificateholder will be
treated as having purchased an interest in an Underlying Note and an interest
in the related Swap Agreement. The tax treatment of the Certificateholder's
interest in the Underlying Note would generally be the same as that described
above in the case of a Certificateholder who purchased an interest in a Class
of Fixed Rate Certificates.
Each Floating Rate Certificateholder will include in income its share of the
fixed rate interest on the Underlying Note in accordance with its regular
method of tax accounting. As the tax owner of an undivided interest in the
Swap Agreement related to that Class, the Certificateholder would account for
income and expense with respect to the Swap Agreement under the rules set out
in Treas. Reg. 1.446-3 (the "Notional Principal Contract" or "NPC"
regulations).
The tax treatment of payments made or received under the Swap Agreement
depends on whether the payments are periodic payments, non-periodic payments,
or termination payments. A periodic payment is any payment made under a
contract payable at intervals of one year or less during the entire term of
the contract that is based on a specified index (which includes a fixed rate)
and a notional principal amount. A non-periodic payment is usually an upfront
payment made by one party to a notional principal contract to induce the other
party to enter into the contract. The Swap Agreement will not call for any
non-periodic payments.
For any taxable year, a Floating Rate Certificateholder would include in, or
deduct from, gross income the Certificateholder's net swap income or expense.
Net swap income or expense would include the sum of all periodic payments
recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a Floating Rate Certificateholder
would include or deduct its share of the net periodic payments allocated to
the year.
Each purchaser of a Floating Rate Certificate would be required to allocate
its purchase price between the Underlying Note and the related Swap Agreement
based on their relative fair market values. For example, even if a Floating
Rate Certificate were purchased for its face amount, the holder might be
considered to have acquired the Underlying Note at a discount and to have
acquired the related Swap Agreement for the remaining purchase price. This
bifurcation of the purchase price of the Floating Rate Certificate could
result in aggregate net income to the Floating Rate Certificateholder that
differed somewhat in any particular year from the interest actually payable on
the Certificate for such year. A holder could avoid such results by making an
integration election on or before the acquisition date of the Floating Rate
Certificate in the manner described below under "--Integration of the
Underlying Notes and the Swap Agreement."
Moreover, if an individual were to hold a Floating Rate Certificate, any net
swap expense for any year would be treated as a miscellaneous itemized
deduction. In computing taxable income, an individual is allowed to deduct
miscellaneous itemized deductions only to the extent the sum of such
deductions exceeds two percent of the individual's adjusted gross income.
Further, an individual is not allowed a deduction for miscellaneous itemized
deductions in computing alternative minimum taxable income. Thus, for any
period for which the fixed rate on the Underlying Notes exceeded the floating
rate payments made to the Trust under the Swap Agreement, an individual would
include in income interest at the full fixed rate payable on the Underlying
Note, but could be precluded from deducting the net swap expense for the
period due to the limitations imposed on miscellaneous itemized deductions. An
individual could avoid such treatment by making an integration election in the
manner described below under "--Integration of the Underlying Notes and the
Swap Agreement."
A termination payment is a payment made to assign or extinguish a party's
rights and obligations under a swap contract. If a Certificateholder were to
sell its interest in a Floating Rate Certificate, it would be considered to
have made or to have received a termination payment with respect to its
interest in the Swap Agreement. The Certificateholder would recognize gain or
loss in the year that it terminated its interest in the Swap Agreement
determined by reference to the amount of the termination payment made or
received and the Certificateholder's basis in the Swap Agreement.
S-28
<PAGE>
A Floating Rate Certificateholder could also receive a termination payment
if a Swap Counterparty default event were to occur. If such an event were to
occur, the Certificateholder could recognize gain upon receipt of a
termination payment.
INTEGRATION OF THE UNDERLYING NOTES AND THE SWAP AGREEMENT
In lieu of the tax treatment described above, a Floating Rate
Certificateholder could identify the purchase of a Floating Rate Certificate
as the acquisition of a fixed rate debt instrument together with a Treas. Reg.
1.1275-6 hedge, under Treas. Reg. 1.1275-6. In essence, if the
Certificateholder identifies the Underlying Note and the related Swap
Agreement as an integrated transaction on its books and records, on or before
the acquisition date of the Floating Rate Certificate, it may be able to
integrate the cash flows on the Swap Agreement and the fixed rate Underlying
Note and treat the combined cash flows as a single synthetic floating rate
debt instrument. All interest on the synthetic floating rate debt instrument
would be treated as original issue discount, includible in income as it
accrues regardless of the holder's method of accounting. The disposition of a
Floating Rate Certificate that was identified under the integration regime
would be treated as the disposition of a single synthetic floating rate debt
instrument.
If a Swap Counterparty default event were to occur so that the Swap
Agreement terminated, a Certificateholder who had made an integration election
would be treated as having "legged-out" of integration. Such a
Certificateholder could recognize gain as a result of such legging-out.
Certificateholders are urged to consult their own tax advisors concerning the
integration election.]
SALE OR EXCHANGE OF FIXED RATE CERTIFICATES
Upon a disposition of an interest in a Fixed Rate Certificate, a U.S.
Offered Certificateholder generally will recognize gain or loss equal to the
difference between (i) the amount of cash and the fair market value of any
other property received (other than amounts attributable to, and taxable as,
accrued stated interest) and (ii) the U.S. Offered Certificateholder's
adjusted basis in its interest in the Fixed Rate Certificate. The adjusted
basis in the interest in the Fixed Rate Certificate will equal its cost,
increased by any OID or market discount included in income with respect to the
interest in the Fixed Rate Certificate prior to its disposition and reduced by
any payments reflecting principal or OID previously received with respect to
the interest in the Fixed Rate Certificate and any amortized premium. Subject
to the OID and market discount rules, gain or loss will generally be capital
gain or loss if the interest in the Fixed Rate Certificate was held as a
capital asset. Capital losses generally may be used by a corporate taxpayer
only to offset capital gains and by an individual taxpayer only to the extent
of capital gains plus $3,000 of other income.
[SALE OR EXCHANGE OF FLOATING RATE CERTIFICATES
If a Floating Rate Certificateholder does not make an integration election,
then the sale or exchange of a Floating Rate Certificate will be treated as
the sale of an interest in the Underlying Note, and an assignment of an
interest in the Swap Agreement. The total sale proceeds would be allocated
between the Underlying Note and the Swap Agreement in proportion to their
relative fair market values. Gain or loss on the Underlying Note would be
determined in the manner described above, and gain or loss on the Swap
Agreement would give rise to gain or loss as described above for termination
payments. If the Swap Agreement has a negative value at the time of the sale
of a Floating Rate Certificate, the Floating Rate Certificateholder would
apparently be treated as having sold the Underlying Note for its fair market
value (which would exceed the sale proceeds) and as having paid such excess to
the purchaser of the Floating Rate Certificate in consideration for the
assumption of the obligations under the Swap Agreement. If an integration
election is made, however, the Certificateholder would be viewed as having
sold a single floating rate debt instrument and could recognize gain or loss
on such sale.]
S-29
<PAGE>
NON-U.S. OFFERED CERTIFICATEHOLDERS
In general, a non-U.S. Offered Certificateholder will not be subject to U.S.
federal income tax on interest (including OID) on a beneficial interest in an
Offered Certificate unless (i) the non-U.S. Offered Certificateholder is a
controlled foreign corporation that is related to the Seller through stock
ownership or (ii) the non-U.S. Offered Certificateholder is a bank which
receives interest as described in Code Section 881(c)(3)(A). To qualify for
the exemption from taxation, the last U.S. Person in the chain of payment
prior to payment to a non-U.S. Offered Certificateholder (the "Withholding
Agent") must have received (in the year in which a payment of interest or
principal occurs or in either of the two preceding years) a statement that (i)
is signed by the non-U.S. Offered Certificateholder under penalties of
perjury, (ii) certifies that the non-U.S. Offered Certificateholder is not a
U.S. Person and (iii) provides the name and address of the non-U.S. Offered
Certificateholder. The statement may be made on a Form W-8 or substantially
similar substitute form, and the non-U.S. Offered Certificateholder must
inform the Withholding Agent of any change in the information on the statement
within 30 days of the change. If an Offered Certificate is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. However, in that case, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Offered Certificateholder
to the organization or institution holding the Offered Certificate on behalf
of the non-U.S. Offered Certificateholder. The U.S. Treasury Department is
considering implementation of further certification requirements aimed at
determining whether the issuer of a debt obligation is related to holders
thereof.
Generally, any gain or income realized by a non-U.S. Offered
Certificateholder upon retirement or disposition of an interest in an Offered
Certificate (other than gain attributable to accrued interest or OID, which is
addressed in the preceding paragraph) will not be subject to U.S. federal
income tax, provided that in the case of an Offered Certificateholder that is
an individual, such Offered Certificateholder is not present in the United
States for 183 days or more during the taxable year in which such retirement
or disposition occurs. Certain exceptions may be applicable, and an individual
non-U.S. Offered Certificateholder should consult a tax adviser.
[If a non-U.S. Certificateholder were to hold an interest in a Floating Rate
Certificate, generally, any income attributable to the non-U.S.
Certificateholder's interest in the Swap Agreement, irrespective of whether an
integration election were made, would not be U.S. source income. Consequently,
it would not be subject to U.S. federal income tax.]
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of an Offered Certificate to a registered
owner who is not an "exempt recipient" and who fails to provide certain
identifying information (such as the registered owner's taxpayer
identification number) in the manner required. Generally, individuals are not
exempt recipients whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a U.S. Offered Certificateholder must
be reported to the IRS, unless the U.S. Offered Certificateholder is an exempt
recipient or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) Offered Certificates to non-U.S. Offered
Certificateholders, temporary Treasury regulations provide that backup
withholding and information reporting will not apply to payments with respect
to which either requisite certification has been received or an exemption has
otherwise been established (provided that neither the Certificate Trustee nor
a paying agent has actual knowledge that the holder is a U.S. Person or that
the conditions of any other exemption are not in fact satisfied). Payments of
the proceeds of the sale of an Offered Certificate to or through a foreign
office of a broker that is a U.S. Person, a controlled foreign corporation for
United States federal income tax purposes or a foreign person 50% or more of
whose gross income is effectively connected with the conduct of a trade or
business within the United States for the specified three-year period are
currently subject to certain information reporting requirements, unless the
payee is an exempt recipient or such broker has evidence in its records that
the payee is not a U.S. Person and no actual knowledge that such evidence
S-30
<PAGE>
is false and certain other conditions are met. Temporary Treasury regulations
indicate that such payments are not currently subject to backup withholding.
Under current Treasury regulations, payments of the proceeds of a sale to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the payee certifies under penalties of
perjury as to his or her status as a non-U.S. Person and certain other
qualifications (and no agent of the broker who is responsible for receiving or
reviewing such statement has actual knowledge that it is incorrect) and
provides his or her name and address or the payee otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to an
Offered Certificateholder would be allowed as a refund or a credit against
such Offered Certificateholder's U.S. federal income tax, provided that the
required information is furnished to the IRS.
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the final
regulations permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules. Certificateholders should consult
their own tax advisors with respect to the impact, if any, of the final
regulations.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Offered
Certificates will be exempt from California personal income tax, but not
exempt from the California franchise tax applicable to banks and corporations.
Gain or loss, if any, resulting from an exchange or redemption of Offered
Certificates will be recognized in the year of the exchange or redemption.
Present California law taxes both long-term and short-term capital gains at
the rates applicable to ordinary income. Interest on indebtedness incurred or
continued by an Offered Certificateholder in connection with the purchase of
Offered Certificates will not be deductible for California personal income tax
purposes.
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Offered Certificates under any state or local tax law other than that of the
State of California. Each investor should consult its own tax adviser
regarding state and local tax consequences.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or Section 4975 of the Code impose certain requirements on employee
benefit plans and certain other plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which
such plans, accounts or arrangements are invested, that are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA and/or
Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of assets
that are treated as "plan assets" of any Plan for purposes of applying Title I
of ERISA and Section 4975 of the Code ("Plan Assets"). ERISA imposes on Plan
fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Generally, any person who has
S-31
<PAGE>
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to
Plan Assets for a fee or other consideration, is a fiduciary with respect to
such Plan Assets.
Subject to the considerations described below, the Offered Certificates are
eligible for purchase with Plan Assets of any Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to
a Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject
to penalties imposed under ERISA and/or excise taxes imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transaction rules generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Offered Certificates of any Class on behalf of or with Plan Assets of any Plan
should determine whether such purchase is consistent with its fiduciary duties
and whether such purchase would constitute or result in a non-exempt
prohibited transaction under ERISA and/or Section 4975 of the Code because any
of PG&E, the Certificate Trustee, the Underwriters or their respective
affiliates may be deemed to be benefiting from the issuance of the Offered
Certificates and is a Party in Interest with respect to the investing Plan. In
particular, the Offered Certificates may not be purchased with Plan Assets of
any Plan if any of PG&E, the Certificate Trustee, the Underwriters or their
respective affiliates (a) has investment or administrative discretion with
respect to the Plan Assets used to effect such purchase; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan Assets, for a fee and pursuant to an agreement or understanding that
such advice (1) will serve as a primary basis for investment decisions with
respect to such Plan Assets, and (2) will be based on the particular
investment needs of such Plan; or (c) unless exemptive relief is available
under DOL Prohibited Transaction Exemption 95-60, 91-38 or 90-1 (as described
below), is an employer maintaining or contributing to such Plan. Each
purchaser of the Offered Certificates will be deemed to have represented and
warranted that its purchase of the Offered Certificates or any interest
therein does not violate the foregoing limitations.
PLAN ASSET REGULATION
Because the Offered Certificates are likely to be treated as "equity
interests" in the Trust under a regulation (the "Plan Asset Regulation")
issued by the U.S. Department of Labor (the "DOL"), which provides that
beneficial interests in a trust are equity interests, purchasing the Offered
Certificates with Plan Assets may cause the assets of the Trust to be deemed
Plan Assets of the investing Plan which, in turn, would subject the Trust and
its assets to the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code. A
violation of the prohibited transaction rules could occur if the Offered
Certificates are purchased with Plan Assets of any Plan and any of PG&E, the
Certificate Trustee, the Swap Counterparty, the Underwriters or their
respective affiliates is a Party in Interest with respect to such Plan, unless
a statutory or administrative exemption is available or an exception applies
under the Plan Asset Regulation. However, the possibility that prohibited
transactions may occur by reason of the operation of the Trust is
substantially less than in other pass-through trusts because each Class of
Offered Certificates represents an interest in the corresponding Class of
Underlying Notes and only minimal administrative activity is expected to occur
at the Trust level.
Before purchasing any Class of Offered Certificates of this Series, a
fiduciary or other Plan investor should consider whether a prohibited
transaction might arise by reason of any such relationship between the
investing Plan and any of PG&E, the Certificate Trustee, the Underwriters or
their respective affiliates and consult its legal advisors regarding the
purchase in light of the considerations described herein and in the
Prospectus. The DOL has issued five class exemptions that may afford exemptive
relief for otherwise prohibited transactions arising from the purchase or
holding of the Offered Certificates, i.e., DOL Prohibited Transaction
Exemptions 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Investment Managers), 95-60 (Class
S-32
<PAGE>
Exemption for Certain Transactions Involving Insurance Company General
Accounts), 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds), 90-1 (Class Exemption for Certain Transactions
Involving Insurance Company Pooled Separate Accounts), or 84-14 (Class
Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers). A purchaser of the Offered Certificates should
be aware, however, that even if the conditions specified in one or more of the
above exemptions are met, the scope of the relief provided by the exemption
might not cover all acts which might be construed as prohibited transactions.
CONCLUSION
In light of the foregoing, fiduciaries or other Plan investors considering
whether to purchase the Offered Certificates with Plan Assets of any Plan
should consult their own legal advisors regarding whether the Trust assets
would be considered Plan Assets of Plan investors, the consequences that would
apply if the Trust's assets were considered Plan Assets, and the availability
of exemptive relief from the prohibited transaction rules or an exception
under the Plan Asset Regulation. Fiduciaries and other Plan investors should
also consider the fiduciary standards under ERISA or other applicable law in
the context of the Plan's particular circumstances before authorizing an
investment of a Plan Assets in the Offered Certificates. Among other factors,
such persons should consider whether the investment (a) satisfies the
diversification requirement of ERISA or other applicable law, (b) is in
accordance with the Plan's governing instruments, and (c) is prudent in light
of the "Risk Factors" and other factors discussed herein and in the
Prospectus.
For further information see "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Trust has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, for whom Morgan Stanley & Co.
Incorporated and Lehman Brothers Inc. are acting as representatives, has
severally agreed to purchase, the respective principal amounts of the Offered
Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS CLASS
NAME CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
---- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Morgan Stanley & Co.
Incorporated........... $ $ $ $ $
Lehman Brothers Inc. ... $ $ $ $ $
Bear, Stearns & Co. Inc. $ $ $ $ $
J.P. Morgan & Co. ...... $ $ $ $ $
Merrill Lynch & Co...... $ $ $ $ $
Artemis Capital Group,
Inc.................... $ $ $ $ $
Blaylock & Partners,
L.P.................... $ $ $ $ $
Coast Partners
Securities, Inc........ $ $ $ $ $
Redwood Securities
Group, Inc............. $ $ $ $ $
---- ---- ---- ---- ----
Total............... $ $ $ $ $
==== ==== ==== ==== ====
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered
Certificates offered hereby, if any are taken.
The Underwriters propose to offer the Offered Certificates in part directly
to retail purchasers at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and in part to certain securities
dealers at such price less a concession not in excess of % of the
principal amount of the Class Certificates, % of the principal amount of
the Class Certificates, % of the principal amount of the Class
Certificates, % of the principal amount of the Class Certificates and %
of the principal
S-33
<PAGE>
amount of the Class Certificates. The Underwriters may allow and such
dealers may reallow a concession, not in excess of % of the principal
amount of the Class Certificates, % of the principal amount of the Class
Certificates, % of the principal amount of the Class Certificates, %
of the principal amount of the Class Certificates and % of the principal
amount of the Class Certificates. After the Offered Certificates are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Underwriters.
The Offered Certificates are a new issue of securities with no established
trading market. [The Offered Certificates will not be listed on any securities
exchange.] The Trust has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Offered Certificates.
The Underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Offered Certificates in accordance with Regulation M under the Exchange
Act. Over-allotment transactions involve syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the Offered Certificates so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Offered Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Offered Certificates originally
sold by such syndicate member are purchased in a syndicate covering
transaction. Such overallotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause the prices of the
Offered Certificates to be higher than they would otherwise be in the absence
of such transactions. Neither the Seller, the Note Issuer, the Trust, the
Infrastructure Bank, the STO nor any of the Underwriters represent that the
Underwriters will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice at any time.
The Note Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of issuance of the Offered Certificates that the Offered
Certificates be rated " " by , " " by and " " by
(each of , and , a "Rating Agency"). Each
Class of Underlying Notes will receive the same ratings from each Rating
Agency as the corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any Offered
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon initial issuance will not
be revised or withdrawn by a Rating Agency at any time thereafter. If a rating
of any Class of Offered Certificates is revised or withdrawn, the liquidity of
such Class of Offered Certificates may be adversely affected. In general,
ratings address credit risk and do not represent any assessment of the rate of
principal payments.
LEGAL MATTERS
Certain legal matters relating to the Underlying Notes will be passed upon
by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, counsel to
the Seller and the Note Issuer. Certain legal matters relating to the Offered
Certificates and certain federal and California income tax consequences of the
issuance of the Offered Certificates will be passed upon by Brown & Wood LLP,
San Francisco, California, counsel to the Trust. Certain legal matters
relating to the Offered Certificates will be passed upon by Richards, Layton &
Finger, P.A., Wilmington, Delaware, Delaware counsel to the Trust, and by
Cravath, Swaine & Moore, New York, New York, counsel to the Underwriters.
S-34
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Agent Bank....................................................... S-16
Book-Entry Certificates.......................................... S-13
Capital Subaccount............................................... S-11
CDC.............................................................. S-20
Cede............................................................. S-13
Certificate Interest Rate........................................ S-17
Certificate Trustee.............................................. S-7
Certificateholders............................................... S-3
Certificates..................................................... S-16
Class............................................................ S-6, S-7
Class Principal Balance.......................................... S-6
Code............................................................. S-15, S-26
Commission....................................................... S-3
Delaware Trustee................................................. S-7
Distribution Date................................................ S-2, S-8, S-17
DOL.............................................................. S-32
Downgrade Event.................................................. S-18
DTC.............................................................. S-3, S-13
ERISA............................................................ S-15, S-31
ESPs............................................................. S-25
Exchange Act..................................................... S-3
Fixed Rate Certificates.......................................... S-27
Floating Rate.................................................... S-10
Floating Rate Certificates....................................... S-1
General Subaccount............................................... S-11
Infrastructure Bank.............................................. S-7
Interest Accrual Period.......................................... S-17
Interest Determination Date...................................... S-16
IRS.............................................................. S-26
LIBOR............................................................ S-16
London Banking Day............................................... S-16
Net Trust Swap Payment........................................... S-10
Net Trust Swap Receipt........................................... S-10
Non-U.S. Offered Certificateholder............................... S-26
Note Interest Rate............................................... S-20
Note Issuer...................................................... S-1, S-7
Note Trustee..................................................... S-7
Noteholder....................................................... S-20
Notes............................................................ S-1, S-20
Notional Principal Contract...................................... S-28
NPC.............................................................. S-28
Offered Certificates............................................. S-1, S-5, S-16
OID.............................................................. S-26
Original Certificate Principal Balance........................... S-6
Overcollateralization Amount..................................... S-11, S-22
Overcollateralization Subaccount................................. S-11
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Parties in Interest.............................................. S-32
Payment Date..................................................... S-8, S-20
PG&E............................................................. S-7
Plan............................................................. S-15, S-31
Plan Assets...................................................... S-14, S-31
Quarterly Interest............................................... S-17
Rating Agency.................................................... S-14, S-34
Record Date...................................................... S-9
Replacement Counterparty......................................... S-18
Required Overcollateralization Amount............................ S-11
Reserve Subaccount............................................... S-11
Seller........................................................... S-7
Series Issuance Date............................................. S-5, S-20
Servicer......................................................... S-7
Servicing Fee.................................................... S-12
Special Counsel.................................................. S-26
Swap Agent....................................................... S-19
Swap Agreement................................................... S-9
Swap Counterparty................................................ S-20
Telerate Page.................................................... S-16
Trust............................................................ S-1, S-7
U.S. Offered Certificateholder................................... S-26
U.S. Person...................................................... S-26
Underlying Notes................................................. S-1, S-7, S-20
Underwriters..................................................... S-34
Withholding Agent................................................ S-30
</TABLE>
S-36
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 25, 1997
PRELIMINARY PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST PG&E-1
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
----------
PG&E FUNDING LLC
ISSUER OF THE NOTES
----------
PACIFIC GAS AND ELECTRIC COMPANY
SELLER AND SERVICER
----------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE STATE
OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES. NONE OF THE
CERTIFICATES, THE NOTES OR THE UNDERLYING TRANSITION PROPERTY WILL BE
GUARANTEED OR INSURED BY THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR
ITS AFFILIATES.
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates (the "Certificates") offered hereby in
an aggregate principal amount of up to $3,500,000,000 may be sold from time to
time in series (each, a "Series"), each of which may be comprised of one or
more classes (each, a "Class"), as described in the related Prospectus
Supplement. Each Series of Certificates will be issued by the California
Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 (the
"Trust") established by the California Infrastructure and Economic Development
Bank (the "Infrastructure Bank").
The assets of the Trust will consist solely of the PG&E Funding LLC Notes
(the "Notes") issued by PG&E Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer"), and the proceeds thereof. The sole
member of the Note Issuer is Pacific Gas and Electric Company, a California
corporation ("PG&E"). The Notes will be secured primarily by the Transition
Property, as described under "Prospectus Summary--Transition Property" and
"Description of the Transition Property" herein. The Notes will also be secured
by each Transition Property Purchase and Sale Agreement between PG&E and the
Note Issuer, the Transition Property Servicing Agreement between PG&E and the
Note Issuer, the Collection Account and all amounts or investment property on
deposit therein or credited thereto from time to time, all other property of
whatever kind (other than certain cash amounts described herein) owned from
time to time by the Note Issuer, if any, all present and future claims,
demands, causes and choses in action in respect of any or all of the foregoing
and all payments on or under and all proceeds in respect of any or all of the
foregoing.
PG&E will sell Transition Property (in such capacity, the "Seller") to the
Note Issuer pursuant to a Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer. See "Description of the Transition
Property--Sale and Assignment of Transition Property" herein. The Seller will
also service the Transition Property (in its capacity as servicer, the
"Servicer") pursuant to the Transition Property Servicing Agreement between the
Servicer and the Note Issuer. See "Servicing" herein.
The Note Issuer will issue Notes from time to time in series to the Trust,
and the Trust will issue to investors separate Series of Certificates from time
to time upon terms determined at the time of sale and described in the related
Prospectus Supplement. Each Series of Notes (each, a "Series") may be issuable
in one or more classes (each, a "Class"). A Series may include Classes which
differ as to the interest rate, timing, sequential order and amount of
distributions of principal or interest or both or otherwise. As more
specifically described under "Description of the Notes--Allocations; Payments"
herein, the Note Issuer will use all payments made with respect to Transition
Property to pay certain expenses described herein, interest due on the Notes
and principal payable on the Notes, allocated among the Series and Classes of
Notes based on the priorities described herein and in the related Prospectus
Supplement. All principal not previously paid, if any, on any Note is due and
payable on the Final Maturity Date of such Note. Each Class of Certificates
will correspond to a Class of Notes and will represent fractional undivided
beneficial interests in such underlying Class of Notes, the proceeds thereof
and payments pursuant to any related Swap Agreement. As such, each Class of
Certificates will entitle the holders thereof to receive the payments received
by the Trust in respect of the corresponding Class of Notes. The funds received
by the Trust from the payments on each Class of Notes and from payments
pursuant to any Swap Agreement entered into with respect to such Class will be
the only source of distributions on the Certificates of the corresponding
Class. While the specific terms of any Series of Certificates (and the Classes,
if any, thereof) will be described in the related Prospectus Supplement, the
terms of such Series and any Classes thereof will not be subject to prior
review by, or consent of, the holders of the Certificates of any previously
issued Series.
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described under
"Plan of Distribution" herein and "Underwriting" in the related Prospectus
Supplement. There will have been no secondary market for the Certificates of
any Series prior to the offering thereof. There can be no assurance that a
secondary market for any Series of Certificates will develop or, if one does
develop, that it will continue. It is not anticipated that any of the
Certificates will be listed on any securities exchange.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 28
HEREIN.
----------
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF
THE NOTE ISSUER WILL BE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. PAYMENTS ON
THE NOTES RECEIVED BY THE TRUST AND PAYMENTS ON ANY RELATED SWAP AGREEMENT
ARE THE SOLE SOURCE OF DISTRIBUTIONS ON THE CERTIFICATES. NONE OF THE STATE
OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR THE SELLER OR ITS AFFILIATES WILL HAVE ANY
OBLIGATIONS IN RESPECT OF THE CERTIFICATES, THE NOTES OR THE TRANSITION
PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT.
----------
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF
IS PLEDGED TO THE PAYMENT OF PRINCIPAL OF, OR INTEREST ON, THE CERTIFICATES
OR THE NOTES OR TO THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY NOR
IS THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION, AGENCY OR
INSTRUMENTALITY THEREOF IN ANY MANNER OBLIGATED TO MAKE ANY
APPROPRIATION FOR THE PAYMENT THEREOF.
----------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED
HEREBY UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page 90 herein for the location of the definitions of
capitalized terms that appear in this Prospectus.
November 25, 1997
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Seller, the Note Issuer, the Trust, the Infrastructure Bank
or any dealer, salesperson, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof.
This Prospectus and the related Prospectus Supplement do not constitute an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction in which it is unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Note Issuer has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (as amended, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Certificates and the Notes. This Prospectus, which
forms a part of the Registration Statement, and any Prospectus Supplement
describe the material terms of each document filed as an exhibit to the
Registration Statement; however, this Prospectus and any Prospectus Supplement
do not contain all of the information contained in the Registration Statement
and the exhibits thereto. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission are not necessarily complete, and in
each instance reference is made to the copy of such document so filed. Each
such statement is qualified in its entirety by such reference. For further
information, reference is made to the Registration Statement and the exhibits
thereto, which are available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement and exhibits thereto may be obtained at the above locations at
prescribed rates. Information filed with the Commission can also be inspected
at the Commission's site on the World Wide Web at http://www.sec.gov.
The Note Issuer will file with the Commission such periodic reports with
respect to each Series of Certificates as are required by the Securities
Exchange Act of 1934, as amended (the "Exchange Act "), and the rules,
regulations or orders of the Commission thereunder. The Note Issuer may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of the Certificates of any Series if
there are fewer than 300 holders of such Certificates.
REPORTS TO HOLDERS
Unless and until the Certificates are no longer issued in book-entry form,
the Servicer will provide to Cede & Co., as nominee of The Depository Trust
Company ("DTC") and registered holder of the Certificates, and, upon request,
to Participants of DTC, periodic reports concerning the Certificates. See
"Description of the Certificates--Reports to Certificateholders" herein. Such
reports may be made available to the holders of interests in the Certificates
(the "Certificateholders") upon request to their Participants. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. The financial information provided to
Certificateholders will not be examined and reported upon, nor will an opinion
thereon be provided, by any independent public accountant.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Note Issuer pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering made hereby
shall be deemed to be incorporated by reference in this Prospectus and to be
part hereof. Any statement contained herein or in a Prospectus Supplement, or
in a document incorporated or deemed to be incorporated by reference herein or
therein shall be deemed to be modified or superseded for purposes of this
Prospectus and any Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
or any Prospectus Supplement.
The Note Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any of or all the documents incorporated herein by reference
(other than exhibits to such documents). Requests for such copies should be
directed to the Note Issuer at Mail Code N4E, P.O. Box 770000, San Francisco,
CA 94177 or by telephone at (415) 972-5467.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Certificates will describe the
following terms of such Series and, if applicable, the Classes thereof: (a)
the designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues or, if the
Trust has entered into a Swap Agreement with respect to such Series, the index
on which a variable rate of interest will be based, (d) the dates on which
distributions of interest and principal will occur, (e) the Scheduled Final
Distribution Date, (f) the Termination Date of the Series, (g) the issuance
date of the Series, (h) the place or places for the payment of principal and
interest, (i) the authorized denominations, (j) the provisions for redemption
by the Trust as a result of an optional redemption by the Note Issuer of the
underlying Notes which will, in no event, be permitted unless the outstanding
principal balance thereof is less than five percent of the initial principal
balance thereof, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the FTA Charges as of the
date of issuance of such Series of Certificates, (m) any other terms of such
Series and any Class thereof that are not inconsistent with the provisions of
the Certificates and that will not result in any Rating Agency reducing or
withdrawing its then current rating of any outstanding Series or Class of
Notes or Certificates, (n) the identity of the Certificate Trustee and the
Delaware Trustee and (o) the terms of any Swap Agreement executed solely to
permit the issuance of variable rate Certificates.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................... 2
REPORTS TO HOLDERS......................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
PROSPECTUS SUPPLEMENT...................................................... 3
PROSPECTUS SUMMARY......................................................... 7
RISK FACTORS............................................................... 28
Unusual Nature of the Transition Property................................ 28
Potential Servicing Issues............................................... 31
Uncertainties Related to the Electric Industry Generally................. 33
Bankruptcy and Creditors' Rights Issues.................................. 34
Nature of the Certificates............................................... 37
Additional Risks of Floating Rate Certificates........................... 39
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE.................... 39
DESCRIPTION OF THE TRANSITION PROPERTY..................................... 40
General.................................................................. 40
Financing Order and Advice Letters....................................... 41
Transition Property...................................................... 42
Nonbypassable FTA Charges................................................ 42
Adjustments to the FTA Charges........................................... 43
Sale and Assignment of Transition Property............................... 44
Seller Representations and Warranties and Repurchase Obligation.......... 45
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS....... 46
THE TRUST.................................................................. 47
THE INFRASTRUCTURE BANK.................................................... 48
THE NOTE ISSUER............................................................ 49
Officers and Directors................................................... 49
THE SELLER AND SERVICER.................................................... 50
General.................................................................. 50
PG&E Customer Base and Electric Energy Consumption....................... 50
Forecasting Consumption.................................................. 51
Forecast Variance........................................................ 51
Credit Policy; Billing; Collections; Restoration of Service.............. 52
Loss and Delinquency Experience.......................................... 54
Delinquencies............................................................ 55
SERVICING.................................................................. 55
Servicing Procedures..................................................... 55
Servicing Standards and Covenants........................................ 56
Remittances to Collection Account........................................ 56
No Servicer Advances..................................................... 57
Servicing Compensation................................................... 57
Aggregators and Other Suppliers.......................................... 57
Servicer Representations and Warranties.................................. 58
Statements by Servicer................................................... 59
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Evidence as to Compliance................................................ 59
Certain Matters Regarding the Servicer................................... 59
Servicer Defaults........................................................ 60
Rights Upon Servicer Default............................................. 60
Waiver of Past Defaults.................................................. 60
Successor Servicer....................................................... 60
Amendment................................................................ 61
Termination.............................................................. 61
DESCRIPTION OF THE NOTES................................................... 61
General.................................................................. 61
Security................................................................. 62
Collection Account....................................................... 62
Interest and Principal................................................... 63
Optional Redemption...................................................... 63
Mandatory Redemption..................................................... 64
Overcollateralization Amount............................................. 64
Capital Subaccount....................................................... 64
Reserve Subaccount....................................................... 65
Allocations; Payments.................................................... 65
Actions by Noteholders................................................... 66
Note Events of Default; Rights Upon Note Event of Default................ 67
Certain Covenants of the Note Issuer..................................... 68
Reports to Noteholders................................................... 69
Annual Compliance Statement.............................................. 70
DESCRIPTION OF THE CERTIFICATES............................................ 70
General.................................................................. 70
State Pledge............................................................. 71
Payments and Distributions............................................... 71
Floating Rate Certificates............................................... 72
Voting of the Notes...................................................... 74
Events of Default........................................................ 75
Redemption............................................................... 76
Reports to Certificateholders............................................ 76
Supplemental Trust Agreements............................................ 77
List of Certificateholders............................................... 77
Registration and Transfer of the Certificates............................ 78
Book-Entry Registration.................................................. 78
Definitive Certificates.................................................. 81
Conditions of Issuance of Additional Series.............................. 82
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 82
General.................................................................. 82
Treatment of the Certificates............................................ 83
Taxation of U.S. Fixed Rate Certificateholders........................... 83
Taxation of U.S. Floating Rate Certificateholders........................ 84
Integration of the Underlying Notes and the Swap Agreement............... 85
Sale or Exchange of Fixed Rate Certificates.............................. 86
Sale or Exchange of Floating Rate Certificates........................... 86
Non-U.S. Certificateholders.............................................. 86
Information Reporting and Backup Withholding............................. 87
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
STATE TAXATION............................................................. 87
California Taxation...................................................... 87
Other States............................................................. 88
ERISA CONSIDERATIONS....................................................... 88
USE OF PROCEEDS............................................................ 88
PLAN OF DISTRIBUTION....................................................... 89
RATINGS.................................................................... 89
LEGAL MATTERS.............................................................. 89
INDEX OF PRINCIPAL DEFINITIONS............................................. 90
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
6
<PAGE>
PROSPECTUS SUMMARY
The following Prospectus Summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Prospectus Summary have the meanings ascribed to such terms
elsewhere in this Prospectus. The Index of Principal Definitions which begins
on page 90 sets forth the pages on which the definitions of certain principal
terms appear.
Transaction Overview........ Assembly Bill 1890, Chapter 854, California
Statutes of 1996 (as amended, the "Statute"),
permits the California investor-owned utilities
(collectively, the "Utilities"), including PG&E,
to finance the recovery of a portion of their
respective "Transition Costs" through the
issuance of the Certificates, in conjunction
with a reduction in electricity rates for
Residential Customers and Small Commercial
Customers. Transition Costs consist of the costs
of generation-related assets and obligations
that may become uneconomic as a result of a
competitive generation market, together with
certain other costs associated therewith.
The Seller will sell to the Note Issuer the
Transition Property, which represents the right
to receive payments made in respect of certain
nonbypassable charges included in the regular
utility bills of residential and small
commercial consumers located in the historical
service territory of the Seller. These charges
are nonbypassable in that applicable consumers
cannot avoid paying them if they purchase
electricity from a supplier other than the
Seller. The Seller will sell the Transition
Property to the Note Issuer in exchange for the
proceeds of the Notes.
The Note Issuer will issue the Notes and sell the
Notes to the Trust in exchange for the proceeds
of the sale of the Certificates. The Trust is
being established by the Infrastructure Bank.
The Trust, whose sole assets will be the Notes
and any interest rate exchange agreement
executed solely to permit the issuance of
variable rate Certificates (a "Swap Agreement"),
will issue the Certificates, which will be sold
to the underwriters named in each Prospectus
Supplement. The Certificates of each Class
represent fractional undivided beneficial
interests in the related Class of Notes, the
proceeds thereof and payments pursuant to any
related Swap Agreement. The Notes will be
secured primarily by the Transition Property.
The Notes also will be secured by each
Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer, the
Transition Property Servicing Agreement between
the Servicer and the Note Issuer, the Collection
Account and all amounts or investment property
on deposit therein or credited thereto from time
to time, all other property of whatever kind
(other than certain cash amounts described
herein) owned from time to time by the Note
Issuer, if any, all present and future claims,
demands, causes and choses in action in respect
of any or all of the foregoing and all payments
on or under and all proceeds in respect of any
or all of the foregoing. See "Description of the
Notes -- Security" herein.
7
<PAGE>
The charges represented by the Transition
Property are calculated to be sufficient over
time to amortize the Notes in accordance with
the Expected Amortization Schedules, pay all
related fees and expenses, fund the
Overcollateralization Subaccount up to the
Required Overcollateralization Level and
replenish the Capital Subaccount up to the
Required Capital Level to the extent amounts are
drawn therefrom, all as more fully described
herein. These charges will be subject to
adjustment pursuant to the true-up mechanism
described under "Description of the Transition
Property--Adjustments to the FTA Charges" herein
over the term of each Series of Certificates to
enhance the likelihood of timely recovery of
such amounts, although there can be no assurance
that the true-up mechanism will operate as
intended or that principal of and interest on
any Series or Class of Certificates will be paid
as scheduled.
The following diagram represents a general
summary of the parties to the transactions
contemplated hereby, their roles and their
various relationships to the other parties.
8
<PAGE>
[Diagram]
[The omitted graphic reflects the various parties to the transaction, their
roles and their contractual relationships to various other parties.]
9
<PAGE>
Risk Factors................ Investors should consider, among other things,
the following risks associated with an
investment in the Certificates. Such risks may
adversely affect the timing of payments to
Certificateholders or cause Certificateholders
to suffer losses on their investment in
Certificates.
The ability of the Note Issuer to receive FTA
Payments and make payments on the Notes could be
adversely affected by: a legal challenge to the
validity or enforceability of the Statute, the
Financing Order or the Advice Letters or the
failure of the CPUC to implement timely
adjustments under the True-Up Mechanism; any
attempted limitation or alteration of the
Statute, the Transition Property or related
matters, or amendment or repeal of the Statute,
whether by the Legislature of the State of
California, voter initiative or legal challenge;
the resignation or removal of the Servicer; the
ability of the Servicer to forecast accurately
the aggregate electricity usage of Customers and
the delinquency and write-off experience
relating to FTA Payments; problems in the
implementation of the new California electricity
market system; changes in the regulatory
framework applicable to the electricity
industry; economic and technological factors
affecting electricity consumption; the
bankruptcy or insolvency of the Seller, the
Servicer or the Infrastructure Bank; federal
preemption of the Statute adversely affecting
the ability of the Note Issuer to receive
payments in respect of the FTA Charges; any
alteration by the Servicer or any successor
thereto of its billing and collection practices;
or any of the factors described below
potentially affecting the price and liquidity of
the Certificates.
The price and liquidity of the Certificates and
the dates of maturity thereof, and, accordingly,
the weighted average lives thereof, may be
affected by any delay in adjustments to the FTA
Charges, a delay or failure by the Servicer or
an alternative energy service provider to remit
FTA Payments, or incorrect evaluation by the
Servicer of the creditworthiness of a
significant number of the Customers.
There is no historical performance data for an
asset type such as the Transition Property and
the Servicer does not have any experience
administering this specific type of regulatory
asset. In addition, foreclosure upon the
Transition Property may not be a realistic or
practical remedy for the Certificateholders.
The Certificates will have limited liquidity,
will be available only in book-entry form, will
not be obligations of any entity other than the
Trust, will be issuable in Series, will have
ratings which are limited in nature, will have
uncertain distributions of interest and
principal and weighted average lives, and will
be subject to optional redemption.
For a more detailed discussion of certain
material risks associated therewith, investors
should review the discussion under "Risk
Factors" which begins on page 28.
10
<PAGE>
Seller and Servicer......... Pacific Gas and Electric Company, a California
corporation ("PG&E"). PG&E will sell the
Transition Property (in its capacity as seller,
the "Seller") to PG&E Funding LLC, a Delaware
limited liability company of which the Seller is
the sole member (the "Note Issuer"), pursuant to
a Transition Property Purchase and Sale
Agreement between the Seller and the Note Issuer
(together with any subsequent sale agreement
relating to Subsequent Transition Property, the
"Sale Agreement").
The Seller will also act as the servicer of the
Transition Property (in its capacity as
servicer, the "Servicer") pursuant to a
Transition Property Servicing Agreement between
the Note Issuer and the Servicer (the "Servicing
Agreement").
PG&E is a public utility primarily engaged in the
business of supplying electric energy and
natural gas to customers in an approximately
70,000 square-mile area of Northern and Central
California.
See "The Seller and Servicer" herein.
Issuer of Certificates...... A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
PG&E-1" (the "Trust") to be established by the
California Infrastructure and Economic
Development Bank (the "Infrastructure Bank").
The Trust will not be an agency or
instrumentality of the State of California. The
Trust will be governed by an Amended and
Restated Declaration and Agreement of Trust
among the Infrastructure Bank, the Delaware
Trustee and the Certificate Trustee (the "Trust
Agreement"). The Certificateholders will be the
beneficiaries of the Trust upon the issuance of
the Certificates. See "The Trust" herein.
Infrastructure Bank......... A public body established within the state
government of the State of California. Under the
Statute, the Infrastructure Bank must approve
the issuance of Certificates by the Trust.
However, the Infrastructure Bank will not
guarantee, insure or otherwise support payments
or distributions on, as applicable, the
Certificates, the Notes or the Transition
Property, nor will the Infrastructure Bank have
any other obligations with respect thereto. See
"The Infrastructure Bank" herein.
Certificate Trustee......... The entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus
Supplement (the "Certificate Trustee").
Delaware Trustee............ The Delaware entity named as co-trustee under the
Trust Agreement, as set forth in each Prospectus
Supplement (the "Delaware Trustee").
The Certificates............
The California Infrastructure and Economic
Development Bank Special Purpose Trust PG&E-1
Rate Reduction Certificates (the
"Certificates"), issuable in Series. The
Certificates will be issuable under the Trust
Agreement.
11
<PAGE>
The Certificates may be issued in one or more
series (each, a "Series"), and the Certificates
of each Series may be issued in one or more
classes (each, a "Class"). Each Class of
Certificates will correspond to a Class of Notes
and will represent fractional undivided
beneficial interests in such underlying Class of
Notes, the proceeds thereof and payments
pursuant to any related Swap Agreement.
Accordingly, each Class of Certificates will
entitle the holders thereof to receive the
payments received by the Trust in respect of the
corresponding Class of Notes. The funds received
by the Trust from the payments on each Class of
Notes, and from the payments pursuant to any
related Swap Agreement, will be the only source
of distributions on the Certificates of the
corresponding Class. Each Note will be secured
by all of the Transition Property owned by the
Note Issuer and the other Note Collateral
described under "Description of the Notes--
Security" herein. The Certificates are entitled
to all of the benefits accorded to "rate
reduction bonds" by the Statute. The issuance
and sale of any Series or Class of Certificates
is contingent upon the effectiveness of the
Financing Order and the applicable Issuance
Advice Letter.
A Series may include two or more Classes of
Certificates that differ as to the interest
rate, timing, sequential order and amount of
distributions of principal or interest or both
or otherwise.
Each Series of Certificates may include one or
more Classes of Certificates that accrue
interest at a variable rate based on the index
described in the related Prospectus Supplement
(the "Floating Rate Certificates"). See
"Description of the Certificates--Floating Rate
Certificates."
While the specific terms of any Series of
Certificates (and the Classes thereof, if any)
in respect of which this Prospectus is being
delivered will be described in the related
Prospectus Supplement, the terms of such Series
and any Classes thereof will not be subject to
prior review by, or consent of, the holders of
the Certificates of any previously issued
Series.
The assets of the Trust will be allocated among
the Certificateholders of each Series of
Certificates issued by the Trust in the manner
described herein. If a Series includes two or
more Classes of Certificates, the assets of the
Trust allocable to the Certificates of such
Series will be further allocated among each
Class in such Series in the manner described in
the Prospectus Supplement.
All Certificates of the same Series will be
identical in all respects except for the
denominations thereof, unless such Series is
comprised of two or more Classes, in which case
all Certificates of the same Class will be
identical in all respects except for the
denominations thereof.
12
<PAGE>
So long as any Certificates are outstanding, the
Certificateholders will direct the Certificate
Trustee, as sole Noteholder, as to matters in
which the Noteholders are permitted or required
to take action; provided, however, that the
Certificate Trustee will be permitted to take
certain actions specified in the Trust Agreement
without the direction of the Certificateholders.
See "Description of the Notes--Actions by
Noteholders" herein.
None of the Certificates, the Notes or the
underlying Transition Property will be
guaranteed or insured by any governmental agency
or instrumentality or by the Seller or any of
its affiliates. Neither the full faith and
credit nor the taxing power of the State of
California or any political subdivision, agency
or instrumentality thereof is pledged to the
payment of principal of or interest on the
Certificates or the Notes or to the payments in
respect of the Transition Property.
See "Description of the Certificates" and
"Description of the Notes" herein.
Note Issuer.................
PG&E Funding LLC, a Delaware special purpose
limited liability company whose sole member is
PG&E. The assets of the Note Issuer will consist
of the Transition Property and the other Note
Collateral, including a portion of the capital
contributed by PG&E in an amount specified in
each Prospectus Supplement.
The principal executive office of the Note Issuer
is located at 245 Market Street, Room 424, San
Francisco, California 94105, and its telephone
number is (415) 972-5467.
The Notes................... The Notes of each Series and Class issued by the
Note Issuer will be in an initial aggregate
principal amount equal to the initial aggregate
principal amount of the related Series and Class
of Certificates, and the Notes of each Series
and Class will bear interest at an interest rate
equal to the interest rate of the related Series
and Class of Certificates, unless a Swap
Agreement is entered into in connection with the
issuance of any Series or Class of Certificates,
as described in the related Prospectus
Supplement.
The Note Issuer will use collections received
with respect to the Transition Property (FTA
Collections, as more specifically defined below)
to pay fees payable to the Note Trustee, the
Certificate Trustee, the Delaware Trustee, the
Servicer and the Administrator, Operating
Expenses, interest due on the Notes and
principal payable on the Notes, allocated among
the Series and Classes of Notes based on the
priorities described herein and in the
Prospectus Supplement, until each outstanding
Series and Class of Notes is retired. However,
as described under "Description of the Notes--
Interest and Principal" herein, principal of any
Series or Class of Notes on any Payment Date
will only be paid until the outstanding
principal balance of such
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<PAGE>
Series or Class has been reduced to the
principal balance specified in the applicable
Expected Amortization Schedule for such
Distribution Date. Any FTA Collections remaining
with respect to such Distribution Date will be
allocated to the various subaccounts of the
Collection Account, as described below. All
principal not previously paid, if any, on a Note
is due and payable on the Final Maturity Date of
such Note, which will correspond with the
Termination Date of the related Class of
Certificates.
Each Series of Notes represents a non-recourse
obligation of the Note Issuer, and will be
secured only by Transition Property owned by the
Note Issuer, together with the other Note
Collateral.
See "Description of the Notes" herein.
Note Trustee................ The entity named as trustee under the Note
Indenture, as set forth in each Prospectus
Supplement (the "Note Trustee").
Transition Costs............ In connection with the restructuring of the
electric utility industry in California to
facilitate increased competition among providers
of electricity, Sections 367 and 369 of the
California Public Utilities Code (the "PU Code")
provide the Seller, as well as the other
Utilities providing electricity to consumers in
California, with an opportunity to recover
certain costs. These costs, commonly known as
stranded costs and referred to herein and in the
Statute as "Transition Costs," consist of the
costs of generation-related assets and
obligations that may become uneconomic as a
result of a competitive generation market,
together with certain other costs associated
therewith. Examples of generation-related assets
include generation facilities, generation-
related regulatory assets, amounts recoverable
in electric rates pursuant to settlement
agreements with the California Public Utilities
Commission (the "CPUC") in connection with
nuclear power plants and power purchase
contracts with third-party generators of
electricity (including voluntary restructuring,
renegotiations or terminations thereof). These
assets may become uneconomic in a competitive
generation market, since they are obligations
that were undertaken either pursuant to legal
requirements or with the understanding that they
would be recoverable in rates approved by the
CPUC. Since other participants in a competitive
market, unburdened by these uneconomic assets,
may be able to offer electricity at lower rates,
the costs relating to these uneconomic assets
may not be recoverable in a competitive market.
FTA Charges................. Under Section 840 of the PU Code, the Seller has
obtained from the CPUC a Financing Order and
related interim opinion (together, the
"Financing Order") designating the amount of the
Seller's Transition Costs to be financed, along
with the costs of providing, recovering,
financing or refinancing the Transition Costs,
including the costs of issuing, servicing and
retiring the Certificates. The total amount
specified in the Financing Order
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<PAGE>
which may be financed is $3,500,000,000. In
order to enable the Seller to recover the
Transition Costs and associated costs, the CPUC
has authorized, in the Financing Order, the
establishment of nonbypassable, usage-based, per
kilowatt hour charges on designated consumers of
electricity (the "FTA Charges"). The FTA Charges
will be payable by existing and future
Residential Customers and Small Commercial
Customers (each, as defined below and
collectively, the "Customers") of electricity in
the territory of the Seller specified by the
Statute. The territory specified by the Statute
is the territory in which the Seller provided
electricity services as of December 20, 1995
(the "Territory"). The two defined classes of
consumers comprising the Customers are (i)
residential consumers (the "Residential
Customers") and (ii) small commercial consumers,
which are defined as all commercial consumers
who do not have demand meters, other commercial
consumers whose peak demand, determined on a
one-time basis, was less than 20 kilowatts in at
least nine of the twelve billing periods prior
to October 1, 1997, and new commercial customers
since that time whose peak demand, estimated on
a one-time basis, is less than 20 kilowatts
("Small Commercial Customers"). Because of
differences in the tariff rate for each class of
Customers, the FTA Charge payable by Residential
Customers is expected to be different from the
FTA Charge payable by Small Commercial
Customers; the initial FTA Charges are expected
to result in FTA Payments by the Residential
Customers and Small Commercial Customers
representing approximately 77% and 23%,
respectively, of the aggregate FTA Payments
expected to be collected in 1998. The foregoing
percentages may change from time to time based
on fluctuations in Customer composition,
electricity usage and delinquency and write-off
rates. To the extent that Customers choose to
purchase electricity services from an ESP that
provides consolidated billing, payments of FTA
Charges relating to the electricity usage of
such Customers will, in effect, be owed by the
ESP rather than the Customers. See "Risk
Factors--Potential Servicing Issues--Reliance on
Aggregators and Other Suppliers" and
"Servicing--Aggregators and Other Suppliers"
herein.
The FTA Charges will be calculated and adjusted
from time to time to generate projected revenues
sufficient to provide for the amortization of
each Series of Certificates in accordance with
the related Expected Amortization Schedule, the
collection of the Overcollateralization Amount
described herein, the payment of fees and
expenses related to the issuance and servicing
of the Certificates and the replenishment of the
Capital Subaccount to the extent that amounts
are drawn therefrom. The FTA Charges are,
specifically, separate charges that will be
assessed on (i) the class of electricity
consumers comprised of Residential Customers and
(ii) the class of electricity consumers
comprised of Small Commercial Customers. In each
case, the FTA Charge will be
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<PAGE>
assessed for the benefit of the Note Issuer as
owner of the Transition Property based on the
applicable Customer's actual consumption of
electricity. Such amounts will be collected by
the Servicer, either directly from Customers or
from alternative energy service providers
("ESPs") that collect such amounts from
Customers, as part of its normal collection
activities and will be deposited into the
Collection Account under the terms of the Note
Indenture and the Servicing Agreement on each
Remittance Date (as defined below).
The Financing Order requires a notification
letter (each, an "Issuance Advice Letter") to be
submitted to the CPUC prior to the issuance of
each Series of Certificates. The first Issuance
Advice Letter will establish the initial FTA
Charges, calculated using the Base Calculation
Model which is described under "Description of
the Transition Property--Financing Order and
Advice Letters" herein. Subsequent Issuance
Advice Letters may modify the FTA Charges to
support the issuance of additional Series of
Certificates. The Issuance Advice Letters and
the True-Up Mechanism Advice Letters (as defined
below) are collectively referred to as "Advice
Letters." The Servicing Agreement requires the
Servicer to calculate adjustments to the FTA
Charges and to file True-Up Mechanism Advice
Letters from time to time as needed, but not
less than annually.
Transition Property......... The right to collect payments based on the FTA
Charges from the Customers (such payments,
whether collected directly from Customers or
through ESPs, the "FTA Payments") gives rise to
a separate property right under California law
and is referred to herein generally as the
"Transition Property." FTA Payments received by
the Servicer and remitted to the Collection
Account are referred to generally herein as the
"FTA Collections." "Transition Property" is
defined more specifically in Section 840(g) of
the PU Code as the property right created under
the PU Code including, without limitation, the
right, title and interest of an electrical
corporation or its transferee (i) in and to the
FTA Charges, as adjusted from time to time, (ii)
to be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges, as provided in
the PU Code.
Adjustments to FTA Charges.. In order to enhance the likelihood that actual
FTA Collections are neither more nor less than
the amount necessary to amortize the Notes in
accordance with the Expected Amortization
Schedules, pay all related fees and expenses,
fund the Overcollateralization Subaccount up to
the Required Overcollateralization Level and
replenish the Capital Subaccount up to the
Required Capital Level, the Servicing Agreement
requires the Servicer to seek, and the Statute
and the Financing Order require the CPUC to
approve, periodic adjustments to the FTA Charges
based on actual FTA Collections and updated
assumptions by the Servicer as to future
16
<PAGE>
usage of electricity by Customers, future
expenses relating to the Transition Property,
the Notes and the Certificates, and the rate of
delinquencies and write-offs and assuming no net
earnings on any amounts in the Collection
Account. Each Advice Letter relating to an
adjustment to the FTA Charges is referred to as
a "True-Up Mechanism Advice Letter." The
adjustments to the FTA Charges will continue
until all interest on and principal of all
Series of Notes and corresponding Series of
Certificates have been paid or distributed in
full.
The Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting
modifications to the FTA Charges. Calculations
of appropriate modifications to the FTA Charges
will be made based on the True-Up Mechanism
Calculation Model, which is described under
"Description of the Transition Property--
Adjustments to the FTA Charges" herein. The
Servicer may also file a routine True-Up
Mechanism Advice Letter quarterly if so
specified in the Prospectus Supplement. In
addition, the Servicer may file a non-routine
True-Up Mechanism Advice Letter as often as
quarterly, to revise the Base Calculation Model
or True-Up Mechanism Calculation Model, if
either of such models no longer accurately
calculates FTA Charges. True-Up Mechanism Advice
Letters will take into account amounts available
in the General Subaccount and Reserve
Subaccount, and amounts necessary to fund the
Overcollateralization Subaccount and replenish
the Capital Subaccount to required levels, in
addition to amounts payable on the Notes and
related fees and expenses.
See "Description of the Transition Property--
Adjustments to the FTA Charges" herein.
State Pledge................ Pursuant to Section 841(c) of the PU Code, the
Infrastructure Bank, on behalf of the State of
California, pledges and agrees with the Note
Issuer, the Trust and the holders of the
Certificates that the State of California
shall neither limit nor alter the FTA Charges,
the Transition Property, or the Financing
Order or Advice Letters relating thereto, or
any rights thereunder, until the Certificates,
together with the accrued and unpaid interest
thereon, are fully paid and discharged,
provided nothing contained in such pledge and
agreement precludes such limitation or
alteration if and when adequate provision
shall be made by law for the protection of the
Note Issuer, the Trust and the
Certificateholders (the "State Pledge").
Customers................... The Customers consist of Residential Customers
and Small Commercial Customers in the
Territory. The sole source of payments on the
Certificates will be payments on the Notes and
payments pursuant to any related Swap
Agreement; the sole sources of payments on the
Notes will be FTA Payments collected from the
Customers and amounts available or realized
from the other Note Collateral (which is not
expected to be
17
<PAGE>
substantial). Of amounts collected from the
Customers, only the portion of amounts
collected attributable to the FTA Charges, as
adjusted from time to time, will be available
for distributions on the Certificates.
Distribution and Payment Unless otherwise specified in the related
Dates....................... Prospectus Supplement, each March 25, June 25,
September 25 and December 26 (or, if any such
date is not a Certificate Business Day, the
next succeeding Certificate Business Day)
following the Closing Date for a Series of
Certificates, the quarterly dates on which
distributions will be made to specified
holders of Certificates of such Series (each,
a "Distribution Date"). Each Distribution Date
with respect to the Certificates will also be
a date on which payments are made with respect
to the Notes (each, a "Payment Date").
Record Dates................ With respect to any Distribution Date, the
Business Day preceding such Distribution Date
if the Certificates are Book-Entry
Certificates or, if Definitive Certificates
are issued, the last day of the preceding
calendar month (each, a "Record Date").
Scheduled Final
Distribution and
Termination Dates..... For each Class of Certificates, the related
Prospectus Supplement will specify a Scheduled
Final Distribution Date and a Termination Date.
The "Scheduled Final Distribution Date" will be
the date when all principal of the related Class
of Certificates is expected to be distributed in
full, based on various assumptions described
herein. Failure to pay principal of any Class of
Certificates in full by the "Termination Date,"
which will be a date specified in the related
Prospectus Supplement after the related
Scheduled Final Distribution Date, shall
constitute an Event of Default and the
Certificate Trustee may, and upon the written
direction of the holders of not less than a
majority in principal amount of all Certificates
of all Series then outstanding shall, declare
the unpaid principal amount of all the Notes of
all Series then outstanding to be due and
payable. The Scheduled Final Distribution Date
and the Termination Date for any Class of
Certificates will coincide with the Scheduled
Maturity Date and Final Maturity Date,
respectively, for the related Class of Notes.
See "Description of the Certificates--Events of
Default" and "Ratings" herein.
Issuance of New Series...... The Trust is authorized to issue new Series of
Certificates from time to time. See "Description
of the Transition Property--Financing Order and
Advice Letters." A new Series may be issued only
upon satisfaction of the conditions described
under "Description of the Certificates--
Conditions of Issuance of Additional Series"
herein. Each Series of Certificates will
represent a fractional undivided beneficial
interest in payments to be made on a Series of
Notes, which in turn will be secured by the
Transition Property
18
<PAGE>
and the other Note Collateral. A Certificate
Event of Default with respect to one Series of
Certificates (or one or more Classes thereof)
may adversely affect other outstanding Classes
and Series of Certificates since such event will
be considered a Certificate Event of Default
with respect to all Series of Certificates and
each such Class or Series will be entitled only
to its ratable portion of the Transition
Property. In addition, all Transition Property
owned by the Note Issuer will secure all Series
of Notes and any remedial action taken by
holders of one Series will affect the other
Series.
Interest.................... Unless otherwise specified in the related
Prospectus Supplement, interest on each Class of
Certificates will accrue and be distributable in
arrears at the interest rate for such Class
specified in the related Prospectus Supplement.
Interest accrued on each Class of Certificates
at the applicable interest rate will be
distributed, to the extent monies are available
therefor, on each Distribution Date, commencing
on the day specified in the related Prospectus
Supplement and will be distributed in the manner
specified in such Prospectus Supplement, to the
extent of payments received with respect to the
related Class of Notes or any related Swap
Agreement on the Payment Date for the Notes
occurring on the same day as such Distribution
Date. Note Events of Default will include
failure to make any payment of interest within
five days after the Payment Date on which such
payment is due.
Principal................... Principal of each Class of Certificates will be
distributed to the Certificateholders of such
Class in the amounts and on the Distribution
Dates specified in the related Prospectus
Supplement, but only to the extent that amounts
in the Collection Account are available
therefor, and subject to the other limitations
described below. See "Description of the Notes--
Allocations; Payments" and "Description of the
Certificates--Payments and Distributions"
herein. The related Prospectus Supplement will
set forth a schedule of the expected
amortization of principal of the related Series
of Certificates and, if applicable, the Classes
thereof (for any Series or Class, the "Expected
Amortization Schedule"). On any Payment Date,
the Note Issuer will make principal payments on
the Notes only until the outstanding principal
balances thereof have been reduced to the
principal balances specified in the applicable
Expected Amortization Schedules for such Payment
Date; accordingly, on the related Distribution
Date, the Trust similarly will only make
principal distributions on the Certificates in
such amounts. Any FTA Collections in excess of
amounts payable as (a) expenses of the Note
Issuer and the Trust, (b) payments of interest
on and principal of the Notes, (c) allocations
to the Overcollateralization Subaccount and (d)
allocations to the Capital Subaccount (all as
described herein under "Description of the
Notes--Allocations; Payments"
19
<PAGE>
herein) will be retained by the Note Trustee in
the Reserve Subaccount for payment on subsequent
Payment Dates. However, if insufficient FTA
Collections are received with respect to any
Payment Date, and amounts in the Collection
Account are not sufficient to make up the
shortfall, principal of any Series or Class of
Certificates may be distributed later than
reflected in the related Expected Amortization
Schedule, as described herein and in the related
Prospectus Supplement. See "Risk Factors--Nature
of the Certificates--Uncertain Distribution
Amounts and Weighted Average Life" and "Certain
Distribution, Weighted Average Life and Yield
Considerations" herein.
If an event of default under the Trust Agreement,
other than a breach of the State Pledge by the
State of California, has occurred and is
continuing with respect to any Series or Class
of Certificates, the Certificate Trustee may,
and upon the written direction of the holders of
a majority in principal amount of all Series of
Certificates then outstanding shall declare the
unpaid principal amount of all the Notes of all
Series then outstanding to be due and payable.
An event of default is defined as the occurrence
and continuance of an event of default under the
Notes (a "Note Event of Default") or a breach by
the State of California of the State Pledge
(collectively, a "Certificate Event of Default"
and, together with a Note Event of Default, an
"Event of Default"). See "Description of the
Certificates--Events of Default" herein.
Optional Redemption......... The Note Issuer may redeem any Series of Notes
relating to a Series of Certificates, and
accordingly cause the Trust to redeem the
related Series of Certificates on any
Distribution Date if, after giving effect to
distributions that would otherwise be made on
such date, the outstanding principal balance of
such Series of Notes has been reduced to less
than five percent of the initial principal
balance thereof. See "Description of the
Certificates--Redemption" herein.
Mandatory Redemption........ If the Seller is required to repurchase the
Transition Property as described under
"Description of the Transition Property--Seller
Representations and Warranties and Repurchase
Obligation" herein, the Note Issuer will be
required to redeem the Notes on the fifth
Certificate Business Day following the date of
such repurchase, and accordingly the Trust will
be required to redeem the Certificates on such
day.
Collection Account and Upon issuance of the initial Series of Notes, the
Subaccounts................. Note Issuer will establish the Collection
Account, which will be held by the Note Trustee
for the benefit of the Noteholders. The
Collection Account will consist of four
subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount (the
"Overcollateralization Subaccount") and a
capital subaccount
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<PAGE>
(the "Capital Subaccount"). Unless the context
indicates otherwise, references herein to the
Collection Account include each of the
subaccounts contained therein. Withdrawals from
and deposits to these subaccounts will be made
as described under "Description of the Notes--
Allocations; Payments" herein.
Overcollateralization....... The Financing Order provides that the Note
Issuer, as the owner of the Transition Property,
is entitled to recover FTA Charges in amounts
equal to the principal amount of all Series of
Notes, all interest thereon, an additional
amount (for any Series, the
"Overcollateralization Amount") specified in the
related Prospectus Supplement and all related
fees, costs and expenses. The
Overcollateralization Amount with respect to
each Series is intended to enhance the
likelihood that distributions on each Series of
the Notes will be made in accordance with their
Expected Amortization Schedules. The Financing
Order provides further that the Infrastructure
Bank and/or the California State Treasurer's
Office should determine the
Overcollateralization Amount required for each
Series of Notes prior to their issuance. The
Overcollateralization Amount for each Series of
Notes will be either (a) 0.50% of the initial
principal amount of the Series of Notes or (b)
such greater amount as is necessary to obtain
from the Rating Agencies the highest possible
investment grade ratings for the Notes upon
issuance. FTA Charges will be set and adjusted
at a level that is intended to collect the
Overcollateralization Amount ratably over the
life of the related Certificates according to a
schedule set forth in the related Prospectus
Supplement. The Overcollateralization Amount for
all Series of Certificates will be held in the
Overcollateralization Subaccount, as described
further under "Description of the Notes--
Overcollateralization Amount" herein, and will
be available to pay any periodic shortfalls in
amounts available for scheduled payments on the
Notes. The amount required to be on deposit in
the Overcollateralization Subaccount as of any
Payment Date, as specified in the schedule set
forth in the Prospectus Supplement, is referred
to herein as the "Required Overcollateralization
Level."
Capital Subaccount.......... Upon the issuance of each Series of Notes, the
Seller will contribute capital to the Note
Issuer in an amount specified in each Prospectus
Supplement, which will equal 0.50% of the
initial principal amount of such Series of
Notes. Such amount, less $100,000 in the
aggregate for all Series of Notes (with respect
to each Series, the "Required Capital Level"),
will be deposited into the Capital Subaccount.
On each Payment Date, the Note Trustee will draw
on amounts in the Capital Subaccount, if any, to
the extent amounts available in the General
Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are
insufficient to pay expenses of the Note Issuer
and the Trust and to make scheduled payments on
the Notes. If amounts on deposit in the Capital
Subaccount are used to pay such amounts, on
subsequent Payment
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<PAGE>
Dates the Capital Subaccount will be replenished
to the extent FTA Collections exceed amounts
required to pay amounts having a higher priority
of payment, as more fully described under
"Description of the Notes--Allocations;
Payments."
Reserve Subaccount.......... FTA Collections available with respect to any
Payment Date in excess of amounts payable as (a)
expenses of the Note Issuer and the Trust, (b)
payments of principal of and interest on the
Notes, (c) allocations to the
Overcollateralization Subaccount and (d)
allocations to the Capital Subaccount (all as
described under "Description of the Notes--
Allocations; Payments" herein), will be
allocated to the Reserve Subaccount. On each
Payment Date, the Note Trustee will draw on
amounts in the Reserve Subaccount, to the extent
amounts available in the General Subaccount are
insufficient to make scheduled payments on the
Notes.
Collections; Allocations; Except as otherwise specified herein, on the
Distributions............... twentieth calendar day of each calendar month
(or, if such day is not a Certificate Business
Day, the following Certificate Business Day),
the Servicer will remit to the Collection
Account FTA Payments expected to have been
received during the preceding calendar month.
Because the Servicer does not track cash
collections on bills rendered within each
calendar month, the amounts remitted will be
based on estimates using the model described
herein under "Servicing--Remittances to
Collection Account."
On each Payment Date, amounts in the Collection
Account, including net earnings thereon, will be
allocated to the following (in the priority
indicated, subject to the priority of
withdrawals described in the following
paragraph): (1) all amounts owed by the Note
Issuer or the Trust to the Note Trustee, the
Delaware Trustee and the Certificate Trustee
will be paid to such persons; (2) the Servicing
Fee and all unpaid Servicing Fees from any prior
Payment Dates will be paid to the Servicer; (3)
the Quarterly Administration Fee payable under
the Administrative Services Agreement between
the Note Issuer and an administrator (the
"Administrator"), initially PG&E, and all unpaid
Quarterly Administration Fees from prior Payment
Dates will be paid to the Administrator; (4) so
long as no Event of Default has occurred or
would be caused by such payment, all other fees,
costs, expenses and indemnities of the Note
Issuer and the Trust ("Operating Expenses") will
be paid to the persons entitled thereto,
provided that the amount paid on each Payment
Date pursuant to this clause (4) may not exceed
$100,000; (5) any overdue Quarterly Interest and
then Quarterly Interest with respect to each
Series of Notes will be transferred to the
Certificate Trustee, as Noteholder, for
distribution to the Certificateholders; (6)
principal on any Series of Notes payable as a
result of a Note Event of Default or on the
Final Maturity Date for such Series of Notes
will be transferred to the Certificate Trustee,
as Noteholder, for distribution to the
Certificateholders; (7) funds
22
<PAGE>
necessary to pay Quarterly Principal for any
Series of Notes based on priorities described in
each Prospectus Supplement will be transferred
to the Certificate Trustee, as Noteholder, for
distribution to the applicable
Certificateholders; (8) unpaid Operating
Expenses will be paid to the persons entitled
thereto; (9) the amount, if any, by which the
Required Overcollateralization Level exceeds the
amount in the Overcollateralization Subaccount
as of such Payment Date will be allocated to the
Overcollateralization Subaccount; (10) the
amount, if any, by which the Required Capital
Level with respect to all outstanding Series of
Notes exceeds the amount in the Capital
Subaccount as of such Payment Date will be
allocated to the Capital Subaccount; (11) funds
up to the net earnings on amounts in the
Collection Account for the prior quarter without
cumulation will be released to the Note Issuer;
(12) if any Series of Notes has been retired as
of such Payment Date, the excess of the amount
in the Overcollateralization Subaccount over the
aggregate Required Overcollateralization Level
with respect to all Series of Notes remaining
outstanding will be released to the Note Issuer;
(13) if any Series of Notes has been retired as
of such Payment Date, the excess of the amount
in the Capital Subaccount over the aggregate
Required Capital Level with respect to all
Series of Notes remaining outstanding will be
released to the Note Issuer; (14) the balance,
if any, will be allocated to the Reserve
Subaccount for distribution on subsequent
Payment Dates; and (15) following the repayment
of all outstanding Series of Notes, the balance,
if any, will be released to the Note Issuer.
If on any Payment Date funds on deposit in the
General Subaccount are insufficient to make the
transfers contemplated by clauses (1) through
(7) above, the Note Trustee will (i) first, draw
from amounts on deposit in the Reserve
Subaccount, (ii) second, draw from amounts on
deposit in the Overcollateralization Subaccount,
and (iii) third, draw from amounts on deposit in
the Capital Subaccount, up to the amount of such
shortfall, in order to make the transfers
described above. In addition, if on any Payment
Date funds on deposit in the General Subaccount
are insufficient to make the transfers described
in clauses (9) and (10) above, the Note Trustee
will draw from amounts on deposit in the Reserve
Subaccount to make such transfers. See
"Description of the Notes--Allocations;
Payments" herein.
The following diagram provides a general summary
of the flow of funds from the Customers through
the Servicer to the Collection Account, and the
various allocations therefrom.
23
<PAGE>
[Diagram]
[The omitted graphic reflects the flow of funds from Customers, in the form of
FTA Payments, to the Servicer, monthly remittances by the Servicer to the
Collection Account, and quarterly applications of amounts in the manner
described under "Description of the Notes--Allocations; Payments" in the
Prospectus.
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<PAGE>
Servicing................... The Servicer is responsible for servicing,
managing and receiving FTA Payments in the same
manner that it services and administers bill
collections for its own account. On each
Remittance Date, the Servicer will remit FTA
Payments expected to have been received during
the preceding calendar month (or, if Remittance
Dates are more frequent, for the period since
the preceding Remittance Date). Because the
Servicer does not track cash collections on
bills rendered within each calendar month, the
amounts remitted will be based on estimates
using the model described under "Servicing--
Remittances to Collection Account" herein,
adjusted for actual write-offs. Subject to
certain conditions described herein, pending
deposit into the Collection Account, actual FTA
Payments received by the Servicer may be
invested by the Servicer at its own risk and for
its own benefit, and will not be segregated from
other funds of the Servicer. See "Servicing--
Remittances to Collection Account" herein.
Servicing Compensation...... The Servicer will be entitled to receive a
Servicing Fee on each Payment Date in an amount
equal to one-fourth of the percent specified in
the related Prospectus Supplement of the then
outstanding principal amount of the Notes (the
"Servicing Fee"). The Servicing Fee will be paid
prior to the distribution of any amounts in
respect of interest on and principal of the
Notes. The Servicer will be entitled to retain
as additional compensation net investment income
on FTA Payments received by the Servicer prior
to remittance thereof to the Collection Account
and the portion of late fees, if any, paid by
Customers relating to the FTA Payments. See
"Servicing--Servicing Compensation" herein.
No Servicer Advances........ The Servicer will not make any advances of
interest or principal on the Notes or the
Certificates.
Denominations............... Each Class of Certificates will be issued in the
minimum initial denominations set forth in the
related Prospectus Supplement and in integral
multiples thereof.
Registration of the Each Class of Certificates may be issued in
Certificates................ definitive form or initially may be represented
by one or more certificates registered in the
name of Cede & Co. ("Cede") ("Book-Entry
Certificates"), the nominee of The Depository
Trust Company ("DTC"), and available only in the
form of book-entries on the records of DTC,
participating members thereof ("Participants")
and other entities, such as banks, brokers,
dealers and trust companies, that clear through
or maintain custodial relationships with a
Participant, either directly or indirectly
("Indirect Participants"). If so indicated in
the applicable Prospectus Supplement,
Certificateholders may also hold Book-Entry
Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants
in such systems or indirectly through
organizations that are participants in such
systems. Certificates
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representing Book-Entry Certificates will be
issued in definitive form only under the limited
circumstances described herein and in the
related Prospectus Supplement. With respect to
the Book-Entry Certificates, all references
herein to "holders" reflect the rights of owners
of the Book-Entry Certificates as they may
indirectly exercise such rights through DTC and
Participants, except as otherwise specified
herein. See "Risk Factors" and "Description of
the Certificates--Book-Entry Registration"
herein.
Ratings..................... It is a condition of issuance of each Class of
Certificates that at the time of issuance such
Class receive the rating indicated in the
related Prospectus Supplement, which will be in
one of the four highest categories, from one or
more nationally recognized statistical rating
agencies (each, a "Rating Agency") specified
therein. Each Class of Notes will receive the
same rating from the applicable Rating Agencies
as the corresponding Class of Certificates. See
"Ratings" in the related Prospectus Supplement.
A security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time. No person is
obligated to maintain any rating on any
Certificate and, accordingly, there can be no
assurance that the ratings assigned to any Class
of Certificates upon initial issuance thereof
will not be revised or withdrawn by a Rating
Agency at any time thereafter. If a rating of
any Class of Certificates is revised or
withdrawn, the liquidity of such Class of
Certificates may be adversely affected. In
general, the ratings address credit risk and do
not represent any assessment of the rate of
principal payments on the Certificates. See
"Risk Factors--Nature of the Certificates--
Uncertain Distribution Amounts and Weighted
Average Life," "Certain Distribution, Weighted
Average Life and Yield Considerations" and
"Ratings" herein.
Tax Status of the Each Class of Certificates bearing a fixed
Certificates................ interest rate will be treated as representing
ownership of an interest in the related Class of
Notes (the "Underlying Notes") for federal
income tax purposes. Each Class of Floating Rate
Certificates will be treated as representing
ownership of an interest in the Underlying Notes
and in the related Swap Agreement. Interest and
original issue discount, if any, on the
Certificates generally will be included in gross
income for federal income tax purposes. All
holders of Floating Rate Certificates, and all
individual holders in particular, should
seriously consider making an election to
"integrate" the related Notes and the related
Swap Agreement for tax purposes by making a
notation on their books and records on or before
the date the Floating Rate Certificates are
acquired. See "Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
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Interest and original issue discount, if any, on
the Certificates will be exempt from California
personal income tax, but not exempt from the
California franchise tax applicable to banks and
corporations. See "State Taxation" herein.
ERISA Considerations........ A fiduciary of any employee benefit plan or other
plan or arrangement that is subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), should carefully review with its legal
advisors whether the purchase or holding of the
Certificates of any Class or Series could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code.
See "ERISA Considerations" herein and in the
related Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
UNUSUAL NATURE OF THE TRANSITION PROPERTY
RELIANCE ON FTA ADJUSTMENTS
The Servicer will be obligated to submit True-Up Mechanism Advice Letters to
the CPUC at least annually and, if so specified in the related Prospectus
Supplement, as often as quarterly, seeking adjustments to the FTA Charges to
reflect the actual rate of FTA Collections and changes in projections
regarding such rate. Such adjustments will also reflect amounts available in
the General Subaccount and Reserve Subaccount and amounts required to fund the
Overcollateralization Subaccount and replenish the Capital Subaccount to
required levels. The actual rate of FTA Collections will vary from projections
upon which the FTA Charges were based primarily as a result of variations from
projected electricity usage by Customers and expected delinquencies and write-
offs. PU Code Section 841(c) requires the CPUC to approve adjustments
requested by True-Up Mechanism Advice Letters necessary to assure timely
recovery of Transition Costs, including interest on and principal of the
Certificates in accordance with the related Expected Amortization Schedule,
the funding of the Overcollateralization Subaccount and payment of related
fees and expenses. Despite the Statute and the Financing Order, there can be
no assurance that the CPUC will approve such requests in a timely manner. Any
delay in adjustments to the FTA Charges, and any litigation that might ensue
as a consequence, might adversely affect the price and liquidity of the
Certificates and the dates of maturity thereof, and, accordingly, the weighted
average lives thereof.
POSSIBLE STATE AMENDMENT OR REPEAL OF THE STATUTE AND RELATED LITIGATION
Under the Statute, the State of California pledged and agreed with the
owners of Transition Property and the holders of the Certificates, and the
Infrastructure Bank as agent for the State of California will pledge and agree
in the Trust Agreement for the benefit of Certificateholders, that the State
will neither limit nor alter the fixed transition amounts, transition
property, financing orders and all rights thereunder until all obligations
under the Certificates are fully met and discharged; provided that nothing
contained in the Statute or the Trust Agreement precludes such limitation or
alteration by the State if and when adequate provision shall be made by law
for the protection of the Note Issuer, the Trust and the Certificateholders.
It is unclear what "adequate provision" would be afforded to
Certificateholders by the State if such limitation or alteration were
attempted. Accordingly, no assurance can be given that any such provision
would not adversely affect the price of the Certificates, or the timing of
receipt of payments with respect to the Certificates.
Under California law, the electorate has the right, through its initiative
powers, to propose statutes as well as amendments to the California
Constitution. Generally, any matter that is a proper subject of legislation
can become the subject of an initiative. Among other procedural requirements,
in order for an initiative measure to qualify for an election, the initiative
measure must be submitted to the State Attorney General and a petition signed
by electors constituting five percent, in the case of a statutory initiative,
and eight percent, in the case of a constitutional initiative, of the votes
cast at the immediately preceding gubernatorial election must be submitted to
the Secretary of State. To become effective, the initiative must then be
approved by a majority vote of the electors voting at the next general
election.
Consumer advocacy groups have publicly announced their opposition to certain
elements of the restructuring plan embodied in the Statute, including the
ability of the Utilities to recover fully their stranded costs and the
issuance of the Certificates. These opponents have indicated their intent to
commence litigation to prevent the sale of the Certificates and have
challenged the validity of the Financing Order, as described below under "--
Legal Challenges." In addition, opponents who include Ralph Nader and the head
of a prior successful initiative campaign relating to automobile insurance
have announced their intention to draft a ballot initiative
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intended to eliminate the Utilities' ability to recover fully stranded costs,
including the cost of nuclear plants, and intended to prohibit the collection
of FTA Charges. Such a ballot initiative has been submitted to the State
Attorney General, which is the first step in commencing the initiative
qualification process. No assurances are given as to whether any such
litigation will commence, whether any such voter initiative measure will be
adopted, the terms of any such voter initiative measure and the effect any such
litigation or voter initiative measure will have on the Certificates.
In the opinion of Brown & Wood LLP, counsel to the Trust ("Special Counsel"),
under applicable United States and State of California Constitutional
principles relating to the impairment of contracts, the State of California
could not repeal or amend the Statute (by way of either legislative process or
California voter initiative) or take, or refuse to take, any action required by
the State of California under its pledge and agreement with the
Certificateholders (described above) if such repeal or amendment, or such
action or inaction would substantially impair the rights of the
Certificateholders, absent a demonstration by the State of California of a
"great public calamity" that justifies a contractual impairment. 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 which supported bonds or other contractual
obligations entered into by public instrumentalities. However, such concerns
have not been considered by the courts to provide sufficient justification for
a substantial impairment of the security for such bonds or obligations provided
by the taxes or governmental charges involved. Based upon such analogous case
law (which, however, does not address these particular circumstances directly),
it would appear unlikely that the State could reduce, modify or alter the
Transition Property, or take, or refuse to take, any action with respect to the
Transition Property in a manner which would substantially impair the rights of
the Note Issuer, as owner of the Transition Property, or of Certificateholders.
Nonetheless, no assurance can be given that a repeal of or amendment to the
Statute will not be sought or adopted or that any action, or refusal to act, by
the State may not occur, any of which might constitute a violation of the
State's pledge and undertaking with the Certificateholders. In any such event,
costly and time consuming litigation might ensue. Any such litigation might
adversely affect the price and liquidity of the Certificates and the dates of
maturity thereof, and, accordingly, the weighted average lives thereof.
Moreover, given the lack of judicial precedent directly on point, and the
novelty of the security for the Certificates, the outcome of any such
litigation cannot be predicted with certainty and, accordingly,
Certificateholders could incur a loss on their investment.
Furthermore, Section 3 of Article XIIIC of the California Constitution
("Proposition 218") provides that the initiative process shall not be
prohibited or otherwise limited in matters of reducing or repealing any "local"
tax, assessment, fee or charge. There is no controlling precedent interpreting
Proposition 218, given its recent adoption. However, in the opinion of Special
Counsel, the FTA Charges are not a "local" tax, assessment fee or charge to
which Proposition 218 applies, and the initiative power described in
Proposition 218 is therefore inapplicable to the FTA Charges, the Transition
Property, the Notes and the Certificates.
POSSIBLE FEDERAL PREEMPTION OF THE STATUTE
At least one bill was introduced in the 105th Congress, First Session,
prohibiting the recovery of stranded costs such as the Transition Costs, which
could negate the existence of the Transition Property that is the source of
payments on the Notes and the Certificates. The bill is H.R. 1230 (The
Consumers Electric Power Act of 1997) ("H.R. 1230"), which was introduced on
April 8, 1997, and has been referred to the House Commerce Committee, where no
further action has been taken. However, the entire 52-member California
delegation to the House of Representatives is on record opposing any federal
bill that does not grandfather the provisions of the Statute. No prediction can
be made as to whether H.R. 1230, or any future proposed bill that would
prohibit the recovery of stranded costs, will become law or, if it becomes law,
what its final form or effect will be. Federal preemption of the Statute could
prevent Certificateholders from receiving the principal and interest payable on
the Certificates and Certificateholders could suffer a loss on their
investment. See "Energy Deregulation and New California Market Structure"
herein.
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LEGAL CHALLENGES
The existence of the Transition Property and its adequacy as a source of
distributions on the Certificates are dependent on relevant provisions of the
PU Code, the Financing Order and applicable Advice Letters. In addition,
resolutions adopted by the Infrastructure Bank relating to the issuance of the
Certificates are subject to legal challenge within 60 days of their adoption.
If the relevant provisions of the PU Code, the Financing Order or any such
Advice Letters were determined to be unlawful, invalid or unenforceable in
whole or in part, or if the resolutions of the Infrastructure Bank were
determined to be invalid, any such determination could adversely affect the
validity of the Certificates or the ability of the Note Issuer to make timely
payments on the Notes, and in either case, the Certificateholders could suffer
a loss. At the time of issuance of the Certificates, the General Counsel of
the Infrastructure Bank will deliver an opinion to the effect that the
issuance resolutions were validly adopted and are in full force and effect at
such time.
On October 6, 1997, The Utility Reform Network ("TURN"), a California
consumer advocacy group, filed an application for rehearing with the CPUC
seeking rehearing of the Financing Order, alleging that the Financing Order is
unlawful on various grounds. The CPUC denied the application for rehearing on
October 22, 1997. TURN has announced that it will challenge the CPUC's denial
by filing a petition for writ of review of the Financing Order with the
California Supreme Court. Such a petition has been filed. If the petition for
writ of review were to be granted by the California Supreme Court, under the
PU Code the court would determine only whether the CPUC acted within its
authority in issuing the Financing Order. A decision by the California Supreme
Court to hear such a case in and of itself could adversely affect the
liquidity and value of the Certificates.
As of the date of this Prospectus, the Financing Order is in full force and
effect. If the relevant provisions of the Financing Order, the PU Code or any
Advice Letters are determined to be unlawful, invalid or unenforceable under
existing law, such determination may result in a breach of a representation
and warranty requiring the Seller, under certain circumstances, to repurchase
the Transition Property as described under "Description of the Transition
Property--Seller Representations and Warranties and Repurchase Obligation." No
assurances are given that PG&E, as Seller, will be able to repurchase the
Transition Property.
UNCERTAINTIES ASSOCIATED WITH NEW ASSET TYPE
There is no historical performance data for an asset type such as the
Transition Property. Although energy usage records are available, such records
have limited predictive value with respect to the Certificates. Furthermore,
the Servicer does not have any experience administering this specific type of
regulatory asset. See "Servicing" herein. In addition, foreclosure upon the
Transition Property may not be a realistic or practical remedy for the
Certificates.
LIMITED RIGHTS AND REMEDIES
Under the terms of the Sale Agreement, PG&E, as the Seller, will be required
to repurchase the Transition Property, at a purchase price equal to the
outstanding principal amount of the Notes and all accrued and unpaid interest
thereon as of the date that is five Certificate Business Days after the
repurchase date, if, among other things, there has been a breach of the
Seller's representation that the Financing Order and each Issuance Advice
Letter pursuant to which any applicable Transition Property has been created
are valid, binding and irrevocable as of the date of any sale of Transition
Property, but only if such breach continues beyond a 90-day grace period and
has a material adverse effect on the Certificateholders. A determination by a
court that, based on laws in effect on the date any Transition Property is
sold, the Transition Property, the Financing Order or any Issuance Advice
Letter violated any such laws, or is otherwise invalid or unenforceable, would
be considered to be a breach of the Seller's representation, thereby
obligating the Seller to repurchase the Transition Property under the Sale
Agreement. The Seller will not be in breach of any representations and
warranties as a result of a change in law by legislative enactment, voter
initiative or constitutional amendment, including a breach of the State
Pledge, or as a result of a breach of the State Pledge otherwise effected that
constitutes a temporary impairment of the Certificateholders' rights which
under current law would be permitted if it can be shown to be necessary
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<PAGE>
to advance an important public interest, as described below. No assurances are
given that the Seller will be able to repurchase the Transition Property. In
the event of any such repurchase, the Note Issuer would be obligated to redeem
the Notes and accordingly cause the Trust to redeem the Certificates. See
"Description of the Transition Property--Seller Representations and Warranties
and Repurchase Obligation."
In contrast, the Seller will not be required to repurchase the Transition
Property if the FTA Charges become uncollectible as a result of a change in
law by legislative enactment, voter initiative or constitutional amendment
occurring after the date the Transition Property is sold. In addition, no
breach of the Seller's representations will be deemed to have occurred if the
State breaches the State Pledge by otherwise effecting a temporary impairment
of the Certificateholders' rights which under current law would be permitted
if it can be shown to be necessary to advance an important public interest.
Such a public interest may arise in connection with a great public calamity,
which might include, for example, economic upheaval or natural disasters. A
repeal of the Statute, an amendment thereto voiding the Transition Property or
the adoption of a federal statute prohibiting the recovery of all stranded
costs are examples of changes in law. If any such event were to occur, the
Servicer, on behalf of the Certificateholders, would be required to bring
legal action seeking to overturn any such change in law. The Servicer would be
entitled to reimbursement of its expenses in connection with such legal or
administrative action as an operating expense of the Trust under the Note
Indenture. Any such litigation might adversely affect the price and liquidity
of the Certificates and the dates of maturity thereof, and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point, and the novelty of the security for the Certificates, the
outcome of any such litigation cannot be predicted with certainty and,
accordingly, Certificateholders may suffer a loss of their investment in the
Certificates.
POTENTIAL SERVICING ISSUES
RELIANCE ON SERVICER
The Trust relies on the Servicer for the determination of any adjustments to
the FTA Charges and for the Customer billing and collection that is necessary
to recover the FTA Payments and, therefore, necessary to make distributions on
the Certificates. If, as a result of its insolvency or liquidation or
otherwise, PG&E were to cease servicing the Transition Property, determining
any adjustments to the FTA Charges or collecting FTA Payments, it may be
difficult to find a substitute Servicer. In such an event, the timing of
recovery of payment on the Transition Property could be delayed. Any successor
servicer under current law may not be able to invoke a remedy of shutting off
service to a consumer for nonpayment of the FTA Charge. A successor servicer
may otherwise experience difficulties in collecting FTA Payments and
determining appropriate adjustments to FTA Charges. A transfer of servicing
will require regulatory cooperation. See "Servicing" herein.
INACCURATE USAGE AND CREDIT PROJECTIONS
The ability of the Servicer to forecast accurately the electricity usage of
Customers and the delinquency and write-off experience relating to FTA
Payments will affect significantly whether Certificateholders will receive
timely distributions on the Certificates. Actual energy usage may differ from
projections as a result of weather during the relevant period that is warmer
or cooler than expected. In addition, actual energy usage, delinquencies and
write-offs may differ from projections as a result of general economic
conditions, trends in demographics that are not precisely as predicted,
unexpected catastrophes, and other causes. During the past five years, the
Servicer's forecasts for energy consumption have been quite accurate, with an
average of a 1.18% overestimate of usage. See "The Seller and Servicer--
Forecast Variance" herein. The accuracy of the Servicer's historical forecasts
are not necessarily indicative of the accuracy of the Servicer's future
forecasts and there can be no assurances that actual usage, delinquencies and
write-offs will not be significantly different from future forecasts thereof.
The adjustment mechanism for the FTA Charges described under "Description of
the Transition Property--Adjustments to the FTA Charges", as well as the
collection of the Overcollateralization Amount and the pledge of amounts
deposited in the Capital Subaccount, are intended to mitigate these risks
relating to the timing of collections and payments, although the frequency of
the adjustments to the FTA Charges is limited and accordingly delays in
distributions to Certificateholders might result. See "The Seller and
Servicer--Credit Policy; Billing; Collections; Restoration of Service" herein.
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DELAYS CAUSED BY CHANGES IN PAYMENT TERMS
The Servicer is permitted to alter the terms of billing and collection
arrangements and modify amounts due from Customers. Although the Servicer does
not have the right to change the amount of a Customer's individual FTA Charge,
it does have the right to take actions that in its judgment will maximize
actual collections from Customers with respect to any utility bill. In
addition, the Servicer has the right to write off outstanding bills that it
deems uncollectible in accordance with its customary practices. Such actions
might include, for example, agreeing to an extended payment schedule or
agreeing to write off a portion of an outstanding bill in order to recover a
portion thereof. While PG&E has no current intention of taking actions that
would change the billing and collection arrangements in a manner which would
affect adversely the collection of FTA Payments, there can be no assurance
that changes in PG&E's customary and usual practices for comparable assets it
services for itself might not result in a determination to do so or that a
successor Servicer may not make such a determination. It is possible that any
such changes could delay collections from Customers or result in lower
collections, and accordingly could adversely affect the distribution of
interest on the Certificates on a timely basis or the distribution of the
principal of the Certificates pursuant to the Expected Amortization Schedules
or in full by the applicable Scheduled Final Distribution or Termination
Dates. See "Certain Distribution, Weighted Average Life and Yield
Considerations" herein.
LIMITED CREDIT POLICY AND PROCEDURES
The ability of the Servicer to collect amounts billed to Customers under the
FTA Charges, as adjusted from time to time, will depend in part on the
creditworthiness of the Customers. PG&E generally is obligated to provide
service to new Customers under California law and generally no outside credit
investigations are performed on new Customers. PG&E's information regarding
the credit status of new Customers is limited to information regarding prior
service, if any, by PG&E to such Customers. PG&E relies on the information
provided by Customers and its customer information system audits to indicate
whether a new Customer has had previous service from PG&E. If PG&E evaluates
the creditworthiness of a significant number of its Customers incorrectly,
resulting in significant increases in delinquencies and write-offs, delays in
distributions to Certificateholders may occur. See "The Seller and Servicer--
Credit Policy; Billing; Collections; Restoration of Service" herein.
RELIANCE ON AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to provide a consolidated bill to their
retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and other charges, including the
applicable FTA Charges.
Any ESP that provides consolidated billing, including monthly amounts with
respect to the FTA Charges, is required to pay the Servicer periodic amounts
billed by the Servicer to the ESP, including the FTA Charges, regardless of
the ESP's ability to collect such amounts from its Customers. In such event,
the collecting ESP will in effect replace the Customer as the obligor with
respect to such FTA Charges and the Note Issuer, as the holder of the
Transition Property, will have no right to collect such FTA Charges from the
Customer. There can be no assurance that each ESP will utilize the same
customer credit standards as the Servicer, or that the Servicer will be able
to mitigate credit risks relating to ESPs in the same manner in which it
mitigates such risks relating to its Customers. See "Servicing--Aggregators
and Other Suppliers" herein. The Servicer, on behalf of the Note Issuer, will
pursue any ESP that fails to remit applicable FTA Charges in a manner similar
to that in which the Servicer will pursue any failure by a Customer to remit
FTA Charges. The Servicer will not have the right to pursue Customers of an
ESP that defaults in the payment of FTA Charges. However, the Servicer will
have the right to bill and collect FTA Charges and other amounts payable to
the Servicer directly from all of the ESP's consolidated billing Customers
following certain payment defaults by an ESP. An ESP that has defaulted will
nevertheless have the right to elect consolidated billing six months after its
default upon the satisfaction of certain conditions. Frequent
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changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection of payments, which could have the effect of
causing delays in distributions to Certificateholders. Neither the Seller nor
the Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to PG&E, as Servicer. The true-up adjustment mechanism
for the FTA Charges, as well as the collection of the Overcollateralization
Amount and the pledge of amounts deposited in the Capital Subaccount, are
intended to mitigate this risk relating to the timing of collections and
payments. However, delays in distributions to Certificateholders might occur
as a result of delays in implementation of the adjustment mechanism.
In addition, if a substantial number of Customers elect to have their
electricity provided by ESPs that provide consolidated billing, the Note
Issuer may be relying on a small number of ESPs, rather than a large number of
Customers, to remit FTA Charges. In this circumstance, a default in the
payment of FTA Charges by a single ESP that provides electricity services to a
large number of Customers may adversely affect the timing of payments on the
Certificates.
COMMINGLING OF FTA PAYMENTS WITH SERVICER'S OTHER FUNDS; INVESTMENT OF FTA
PAYMENTS FOR SERVICER'S ACCOUNT
Except as described under "Servicing--Remittances to Collection Account"
herein, on each Remittance Date the Servicer will remit to the Collection
Account FTA Payments expected to have been received during the preceding
calendar month. Accordingly, FTA Payments received by the Servicer will not be
segregated from the Servicer's general funds until they are remitted to the
Collection Account. The Servicer will invest FTA Payments received but not yet
remitted for its own account. A failure or inability of the Servicer to remit
the full amount of the estimated FTA Payments on any Remittance Date, whether
voluntary or involuntary, might result in delays in distributions to
Certificateholders. The true-up adjustment mechanism, as well as the
collection of the Overcollateralization Amount and the pledge of amounts
deposited in the Capital Subaccount, are intended to mitigate this risk
relating to the timing of collections and payments. However, delays in
distributions to Certificateholders may occur as a result of delays in
implementation of the adjustment mechanism. Furthermore, six months after each
calendar month, the Actual FTA Payments with respect to such month are
determined. If there has been a Remittance Shortfall (i.e., Actual FTA
Payments exceed Estimated FTA Payments), the Servicer is required to increase
the amount that it otherwise would remit on the Remittance Date following the
calculation of the Remittance Shortfall, with such increased amount coming
from its own funds. In the event of the insolvency of the Servicer, payments
of the Remittance Shortfall by the Servicer may be delayed significantly.
UNCERTAINTIES RELATED TO THE ELECTRIC INDUSTRY GENERALLY
UNTRIED NEW CALIFORNIA MARKET STRUCTURE
The California electric industry will change dramatically in the near
future, as a result of recent decisions by the CPUC and enactment of the
Statute. See "Energy Deregulation and New California Market Structure" herein.
The new California electric market structure, scheduled to begin January 1,
1998, has neither been tested nor implemented. Many elements of the new market
structure present novel regulatory issues yet to be resolved as well as many
practical issues of implementation such as the development of systems,
software and procedures for each of (a) the independent power exchange (the
"PX"), which will provide an auction process to match electricity supply and
demand, (b) the independent system operator (the "ISO"), which will have
operational control of the Utilities' transmission facilities, and (c) all of
the market participants who will transact with the PX and ISO. If the new
market structure is not implemented in a timely and orderly fashion,
electricity generation, transmission and distribution may be adversely
affected, FTA Payments may not be made as expected, the Servicer's business
may be impacted or Certificateholders may fail to receive distributions of
principal and interest.
CHANGING REGULATORY ENVIRONMENT
In addition to actions taken by the California Legislature and regulation by
the CPUC, the electric industry is also subject to federal law and regulation
by the Federal Energy Regulatory Commission (the "FERC"). At
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least five bills were introduced into the 105th Congress, First Session,
mandating the deregulation of the electric utility industry on the state
level. In general, the bills provide for open competition in the furnishing of
electricity to all retail customers. As described above under "--Unusual
Nature of the Transition Property--Possible Federal Preemption of the
Statute," at least one of the bills may prohibit the recovery of FTA Charges;
however, none of the bills have passed in committee. No prediction can be made
as to whether these bills, or any future proposed bills to mandate the
deregulation of the electric industry, will become law or, if they become law,
what their final form or effect would be. Any changes in the existing legal
structure regulating the electric industry might have an impact on the manner
in which electricity is distributed and payments therefor are collected, or on
the Servicer and its business, and thus the likelihood that Certificateholders
will receive distributions in the amounts and at the times scheduled.
CHANGES IN GENERAL ECONOMIC CONDITIONS AND ELECTRICITY USAGE
General economic conditions and technological changes that would
significantly alter power consumption or reduce the residential and small
commercial consumer base in the Seller's historical service area may affect
payments on the Notes and, accordingly, distributions on the Certificates.
Changes in business cycles, departures of Customers from the Seller's
historical service area, weather, occurrence of natural disasters such as
earthquakes and floods, implementation of energy conservation efforts and
increased efficiency of equipment all affect energy usage. If a sufficient
number of Customers reduce significantly their electricity consumption or
cease consuming electricity altogether, the FTA Charges, as adjusted from time
to time through True-Up Mechanism Advice Letters, as described herein,
required to be paid by each remaining Customer could become burdensome. See
"--Unusual Nature of the Transition Property--Reliance on FTA Adjustments"
herein.
RELIANCE ON BROAD BASE OF CUSTOMERS
The FTA Charges are relatively modest in amount on an individual Customer
basis, when imposed on the Seller's current base of Customers. However, if one
or more of the risks described under the heading "--Uncertainties Relating to
the Electric Industry Generally" or an unforeseen catastrophe were to occur,
the number of Customers on whom the FTA Charges would be levied might be
reduced significantly. Such a reduction would increase the amount of the
applicable FTA Charge for each Customer, which might cause more Customers to
avoid paying the applicable FTA Charge after the Rate Freeze Period by leaving
the Territory. If the number of Customers were to be substantially reduced,
the remaining Customers might be unable or unwilling to pay the FTA Charges.
Alternatively, a reduced number of Customers and corresponding higher per
kilowatt hour FTA Charges might increase the reluctance of the CPUC to allow
adjustments to the FTA Charges or provide greater incentive for the California
legislature to amend the Statute in a manner intended to reduce or eliminate
the FTA Charges in respect of the Transition Property. Although the Note
Issuer believes that the likelihood of this scenario occurring is remote, this
result might cause Certificateholders to fail to receive the full amount of
distributions to which they are entitled. Furthermore, the Note Issuer expects
that the applicable FTA Charge could be imposed on certain Customers who self-
generate their electricity, based on historical usage. However, the ability of
the Servicer to collect such FTA Charges may be limited because the Servicer
will not be able to exercise shut-off rights as an enforcement tool against a
self-generator.
In addition, if a substantial number of Customers elect to have their
electricity provided by ESPs that provide consolidated billing, the Note
Issuer may be relying on a small number of ESPs, rather than a large number of
individual Customers, to remit FTA Charges. In this circumstance, a default in
the payment of FTA Charges by a single ESP that provides electricity services
to a large number of Customers may adversely affect the timing of payments on
the Certificates.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
POTENTIAL BANKRUPTCY OF SELLER
The Seller will represent and warrant in the Sale Agreement that the
transfer of the Transition Property pursuant thereto to the Note Issuer is a
valid sale and assignment of such Transition Property from the Seller to
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the Note Issuer. The Seller and the Note Issuer will also represent and
warrant that they will each take the appropriate actions under the PU Code to
perfect this sale. The Statute provides that the transactions described in the
Sale Agreement shall constitute a sale of the Transition Property to the Note
Issuer, and the Seller and the Note Issuer will treat the transactions as a
sale under applicable law, although for financial reporting purposes the
transactions will be treated as debt of the Seller. If the Seller were to
become a debtor in a bankruptcy case, and a creditor or bankruptcy trustee of
the Seller or the Seller itself as debtor in possession were to take the
position that the sale of the Transition Property to the Note Issuer should be
recharacterized as a pledge of such Transition Property to secure a borrowing
of the Seller, and a court were to adopt such position, then delays or
reductions in distributions on the Certificates could result. Regardless of
any specific adverse determinations in a PG&E bankruptcy proceeding, the mere
fact of a PG&E bankruptcy proceeding could have an adverse effect on the
secondary market of the Certificates, including an adverse effect on the
liquidity and market value of the Certificates.
The Seller and the Note Issuer have taken steps to minimize the risk that in
the event the Seller or an affiliate of the Seller were to become the debtor
in a bankruptcy case, a court would order that the assets and liabilities of
the Seller or such affiliate be substantively consolidated with those of the
Note Issuer. These steps include the fact that the Note Issuer is a separate,
special purpose limited liability company, the organizational documents of
which provide that it shall not commence a voluntary bankruptcy case without
the unanimous affirmative vote of all of its directors. Nonetheless, these
steps may not be completely effective, and thus no assurance can be given that
if the Seller or an affiliate of the Seller were to become a debtor in a
bankruptcy case, a court would not order that the assets and liabilities of
the Note Issuer be consolidated with those of the Seller or such affiliate,
thus resulting in delays or reductions in distributions on the Certificates.
Should the transfer of the Transition Property to the Note Issuer be
recharacterized as a borrowing by the Seller, the Statute provides that there
is a perfected first priority statutory lien on the Transition Property that
secures all obligations to the holders of the Certificates. In addition, in
the Sale Agreement, the Seller grants to the Note Issuer a security interest
in the Transition Property and covenants that the appropriate actions will be
taken to perfect such security interest, although the Seller takes the
position that it has no rights in the Transition Property to which a security
interest could attach. The Seller's First and Refunding Mortgage, dated
December 1, 1920, as amended, contains limits on the Seller's ability to grant
consensual security interests, and thus no assurances can be given that any
such security interest is valid or enforceable.
Pursuant to the Statute and the Financing Order, upon the effective date of
each Issuance Advice Letter associated with the Financing Order, the
Transition Property identified in such Issuance Advice Letter constitutes a
current property right and it thereafter continuously exists as property for
all purposes. Nonetheless, no assurances can be given that if the 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 would not
attempt to take the position that, because the payments based on the FTA
Charges are usage-based charges, Transition Property comes into existence only
as Customers use electricity. If a court were to adopt this position, no
assurances can be given that either the statutory lien created by the Statute
or the security interest purported to be granted in the Sale Agreement would
attach to FTA Collections in respect of electricity consumed after the
commencement of a bankruptcy case by or against the Seller. If it were
determined that the Transition Property has not been sold to the Note Issuer,
and that the statutory lien created by the Statute and the security interest
purported to be granted in the Sale Agreement do not attach to collections of
FTA Payments in respect of electricity consumed after the commencement of a
bankruptcy case for the Seller, then the Certificate Trustee, as Noteholder
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
Transition Property had been sold to the Note Issuer, no assurances can be
given that the court would not rule that any FTA Payments relating to
electricity consumed after the commencement of the Seller's bankruptcy cannot
be transferred to the Note Issuer or the Certificate Trustee, thus resulting
in delays or reductions of distributions on the Certificates.
Because the FTA Charges are usage-based charges, if the 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 could take
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the position that the Note Issuer should pay a portion of the costs of the
Seller associated with the generation, transmission, or distribution by the
Seller of the electricity whose consumption gave rise to the FTA Collections
that are used to make distributions on the Certificates. If a court were to
adopt this position, the result could initially be a reduction in the amounts
paid to the Note Issuer, and thus to the holders of the Certificates. The FTA
Charges may be adjusted through True-Up Mechanism Advice Letters, although
delays in implementation thereof may cause a delay in receipt of scheduled
distributions.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the arguments of a creditor of the Seller that Transition
Property comes into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transition Property came into existence may have priority over the
Note Issuer's interest in such Transition Property, thereby possibly initially
resulting in a reduction of amounts distributed to the holders of the
Certificates. The FTA Charges may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in
receipt of scheduled distributions.
POTENTIAL BANKRUPTCY OF SERVICER
For so long as the Servicer maintains a short-term debt rating of at least
"A-1" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), and "P-1" by Moody's Investors Service, Inc. ("Moody's") or certain
other conditions are satisfied, the Servicer is entitled to commingle FTA
Payments with its own funds until the relevant Remittance Date. In the event
of a bankruptcy of the Servicer, the Note Trustee likely will not have a
perfected interest in such commingled funds and the inclusion thereof in the
bankruptcy estate of the Servicer may result in delays in distributions due on
the Certificates. Furthermore, if the 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 "--Potential Servicing Issues--
Reliance on Servicer" herein.
POTENTIAL BANKRUPTCY OF INFRASTRUCTURE BANK
The Infrastructure Bank is a public body established within the state
government of the State of California. The State of California cannot be a
debtor in a case under the Bankruptcy Code. If a court were to determine that
the Infrastructure Bank is an "instrumentality" of the State, rather than an
integral part of the State, then the Infrastructure Bank could become a debtor
in a case commenced under Chapter 9 of the Bankruptcy Code if the requirements
set forth in the Bankruptcy Code for the commencement of a voluntary case
under Chapter 9 were met. An involuntary case cannot be commenced against the
Infrastructure Bank under Chapter 9, and neither a voluntary nor an
involuntary case can be commenced by or against the Infrastructure Bank under
any other chapter of the Bankruptcy Code.
The Certificates will be issued by the Trust, which is a business trust
formed by the Infrastructure Bank under Title 12, Chapter 38 of the Laws of
the State of Delaware (the "Delaware Business Trust Act"). The Trust may be
subject to a voluntary or involuntary case under the Bankruptcy Code. However,
the Trust will be created solely to issue and administer the Certificates, and
the only assets of the Trust will consist of the Notes and the right to
receive payments under any related Swap Agreement. The Trust and the
Infrastructure Bank have taken steps to minimize the risk that in the event
the Infrastructure Bank becomes a debtor in a case under Chapter 9 of the
Bankruptcy Code, a bankruptcy court having jurisdiction over such case should
order that the assets and liabilities of the Trust be substantively
consolidated with those of the Infrastructure Bank. These steps include (a)
creating the Trust as a separate business trust under the Delaware Business
Trust Act which includes provisions preventing creditors of the Infrastructure
Bank from having any right to the assets of the Trust, (b) limiting
interaction between the Infrastructure Bank and the Trust, (c) maintaining
accounting, bookkeeping, business forms and financial statements for the Trust
separate from those of the Infrastructure Bank, and (d) restricting the nature
of the Trust's business and its ability to commence a voluntary case under the
Bankruptcy Code.
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NATURE OF THE CERTIFICATES
LIMITED LIQUIDITY
There is no assurance that a secondary market for any of the Certificates
will develop or, if one does develop, that it will provide the
Certificateholders with liquidity of investment or that it will continue for
the life of such Certificates. It is not anticipated that any Certificates
will be listed on any securities exchange.
RESTRICTIONS ON BOOK-ENTRY REGISTRATION
The Certificates will be initially represented by one or more Certificates
registered in Cede's name, as nominee for DTC, and will not be registered in
the names of the Certificateholders or their nominees. Therefore, unless and
until Definitive Certificates are issued, Certificateholders will not be
recognized by the Certificate Trustee as Certificateholders. Hence, until such
time, Certificateholders will only be able to receive distributions from, and
exercise the rights of Certificateholders indirectly through, DTC and
participating organizations, and, unless a Certificateholder requests a copy
of any such report from the Certificate Trustee or the Servicer, will receive
reports and other information provided for under the Servicing Agreement only
if, when and to the extent provided to Certificateholders by DTC and its
participating organizations. In addition, the ability of Certificateholders to
pledge Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Certificates, may be
limited due to the lack of physical certificates for such Certificates. See
"Description of the Certificates--Book-Entry Registration" herein.
LIMITED OBLIGATIONS
Neither the Notes nor the Certificates will represent an interest in or
obligation of the Seller, the State of California or the Infrastructure Bank.
The Transition Property owned by the Note Issuer and the other Note
Collateral, which is expected to be relatively small, are the sole source of
payments on the Notes. It is anticipated that the Note Collateral, which is
described under "Description of the Notes--Security" herein, will with the
limited exceptions specified therein constitute the Note Issuer's only assets.
The Note Issuer's organizational documents will restrict its right to acquire
other assets unrelated to the transactions described herein. The Notes are
limited obligations of the Note Issuer, and are the sole assets of the Trust
other than the Trust's rights under any Swap Agreement. The Certificates
represent fractional undivided beneficial interests in the related Class of
Notes held by the Trust, and the sole source of distributions thereon is the
payments on such Notes and, for Floating Rate Certificates, the proceeds of
any Swap Agreement. If distributions are not made on the Certificates in a
timely manner as a result of nonpayment of the related Notes, the
Certificateholders may direct the Certificate Trustee to bring an action
against the Note Issuer to foreclose upon the Transition Property and the
other Note Collateral securing the Notes and, if the Certificate Trustee fails
to bring such action, the Certificateholders may bring such an action
themselves, as described under "Description of the Certificates--Events of
Default" herein. If the Swap Counterparty fails to remit payment of Net Trust
Swap Receipts, the interest rate on the related Floating Rate Certificates
will convert to a fixed rate equal to the rate on the related Class of Notes
effective as of the Distribution Date immediately preceding such default. None
of the Certificates, the Notes or the underlying Transition Property will be
guaranteed or insured by the State of California, the Infrastructure Bank or
any other governmental agency or instrumentality or by the Seller or its
affiliates. Neither the full faith and credit nor the taxing power of the
State of California is pledged to the payment of principal of or interest on
the Certificates or the Notes or the payments in respect of the Transition
Property.
ISSUANCE IN SERIES
The Note Issuer expects to issue new Series of Notes from time to time, and
accordingly the Trust is expected to issue new corresponding Series of
Certificates from time to time. While the terms of any Series of Notes and the
corresponding Series of Certificates will be specified in supplements to the
Note Indenture and the Trust Agreement, respectively, and described in the
related Prospectus Supplement, the provisions of supplements to the Note
Indenture and the Trust Agreement and, therefore, the terms of any new Series,
will not
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be subject to the prior review or consent of holders of the Notes or
Certificates of any previously issued Series. The terms of a new Series of
Certificates may include without limitation the matters described under
"Description of the Certificates--General" herein. The ability of the Trust to
issue any new Series of Certificates is subject to the condition, among
others, that such issuance will not result in any Rating Agency reducing or
withdrawing its then existing rating of the Certificates of any outstanding
Class. There can be no assurance, however, that the issuance of any other
Series of Certificates, including any Series issued from time to time
hereafter, might not have an impact on the timing or amount of distributions
received by a Certificateholder. See "Description of the Certificates--
Conditions of Issuance of Additional Series" herein. In addition, various
matters relating to the Certificates are subject to a vote of all
Certificateholders for all Series and Classes of Certificates, even though
there may be differences in the interests or positions among such Series or
Classes which could result in voting outcomes adverse to the interests of one
or more Series or Classes of Certificates.
LIMITED NATURE OF RATINGS
It is a condition of issuance of each Class of Certificates that they
receive from the Rating Agencies the respective ratings set forth in the
applicable Prospectus Supplement. The ratings of the Certificates address the
likelihood of the ultimate distribution of principal and the timely
distribution of interest on the Certificates. The ratings do not represent an
assessment of the likelihood that the rate of FTA Collections might differ
from that originally anticipated; as a result of such differences, any Series
or Class of Certificates might mature later than scheduled, resulting in a
weighted average life of such Certificates which is more than expected. A
security rating is not a recommendation to buy, sell or hold securities. There
can be no assurance that a rating will remain in effect for any given period
of time or that a rating will not be revised or withdrawn entirely by a Rating
Agency if, in its judgment, circumstances so warrant.
UNCERTAIN DISTRIBUTION AMOUNTS AND WEIGHTED AVERAGE LIFE
The actual dates on which principal is paid on each Class of Certificates
might be affected by, among other things, the amount and timing of receipt of
FTA Collections. Since each FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of Customers in the Territory, the
aggregate amount and timing of receipt of FTA Collections (and the resulting
amount and timing of principal amortization on the Certificates) will depend,
in part, on actual usage of electricity by Customers and the rate of
delinquencies and write-offs. See "--Potential Servicing Issues--Inaccurate
Usage and Credit Projections" herein. Although the amount of the FTA Charges
will adjust from time to time based in part on the actual rate of FTA
Collections, no assurances can be given that the Servicer will be able to
forecast accurately actual Customer energy usage and the rate of delinquencies
and write-offs and implement adjustments to the FTA Charges that will cause
FTA Payments to be made at any particular rate. If FTA Collections are
received at a slower rate than expected, distributions on a Certificate may be
made later than expected. Because principal will only be distributed at a rate
not to exceed that set forth in the Expected Amortization Schedules, except in
the event of an early redemption, the Certificates are not expected to be
retired earlier than scheduled. A distribution on a date that is earlier than
forecasted will result in a shorter weighted average life, and a distribution
on a date that is later than forecasted will result in a longer weighted
average life. See "Certain Distribution, Weighted Average Life and Yield
Considerations" and "Description of the Transition Property--Adjustments to
the FTA Charges" herein.
EFFECT OF REDEMPTION ON WEIGHTED AVERAGE LIFE AND YIELD
As described more fully under "Description of the Notes--Optional
Redemption" herein, the Note Issuer has the option to redeem all of the
outstanding Notes of any Series on any Payment Date if, after giving effect to
payments that would otherwise be made on such date, the outstanding principal
balance of such Series of Notes has been reduced to less than five percent of
the initial outstanding principal balance thereof. In addition, the Note
Issuer may be required to redeem the Notes if the Seller is required to
repurchase the Transition Property as a result of a breach of the Seller's
representations and warranties in the Sale Agreement as described herein under
"Description of the Transition Property--Seller Representations and Warranties
and Repurchase Obligation."
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Redemption of a Series of Notes will require the Certificate Trustee to redeem
the related Series of Certificates. Redemption will cause such Certificates to
be retired earlier than would otherwise be expected, and if the payment
schedule otherwise does not differ from that originally anticipated, will
result in a shorter than expected weighted average life for such Certificates.
Such a redemption may also adversely affect the yield to maturity of the
Certificates. There can be no assurance as to whether the Note Issuer will
redeem any Series of Notes, or as to whether Certificateholders will be able
to receive an equally attractive rate of return upon reinvestment of the
proceeds resulting from any such redemption.
ADDITIONAL RISKS OF FLOATING RATE CERTIFICATES
As described herein under "Description of the Certificates--Floating Rate
Certificates," upon the occurrence of an event of default or termination event
under the Swap Agreement, the Swap Agreement pursuant to which interest will
be paid on any Floating Rate Certificates will terminate or may be terminated.
In particular, the Swap Agreement will be terminated if the Swap
Counterparty's rating by either of Moody's or S&P falls below "AAA" (or the
equivalent rating) (a "Downgrade Event") and the Swap Agreement is not
assigned to a replacement swap counterparty satisfying such ratings criteria
or such lower ratings criteria as may be permitted by the Swap Agreement
within the time period specified in the related Prospectus Supplement. In no
event will any successor swap counterparty be rated below "A" (or the
equivalent rating) by either of the above-referenced Rating Agencies. Upon the
occurrence of a Downgrade Event and the failure to assign the Swap Agreement,
a termination event will have occurred under the Swap Agreement and, in such
event or upon any other swap termination, the interest rate payable with
respect to the Floating Rate Certificates will convert permanently to a fixed
rate equal to the interest rate on the related Class of Notes, which may be
substantially less than the rate otherwise payable on the Floating Rate
Certificates. In the event of such conversion to a fixed interest rate, both
the liquidity and the market value of the Floating Rate Certificates may be
adversely affected.
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE
The electric industry is experiencing intensifying competitive pressures,
particularly in the wholesale generation and industrial customer markets.
Historically, electric utilities operated as regulated monopolies in their
service territories, pursuant to which they were the sole suppliers of
electricity, and in California their rates were set by the CPUC based upon the
utilities' cost of providing services and a reasonable return on their capital
investments. Changes to the traditional market structure are occurring at both
the federal and state levels.
At the federal level, the National Energy Policy Act of 1992 was designed to
increase competition in the wholesale electric generation market by easing
regulatory restrictions on producers of wholesale power and by authorizing the
FERC to mandate access to electric transmission systems by wholesale power
generators. In addition, at least five bills have been introduced in the 105th
Congress, First Session, which would mandate the deregulation of the electric
industry on the state level; however, none of these bills has passed in
committee. In their current forms, some but not all of the bills contain
provisions recognizing the validity of prior state actions relating to
deregulation. At least one of the bills, H.R. 1230, prohibits the recovery of
stranded costs such as the Transition Costs. The entire California delegation
to Congress has signed a letter to the chairman of the House Subcommittee
responsible for holding hearings regarding the bills, which expresses the
shared concern that the effect of the Statute should not be impacted by
federal legislation. No prediction can be made as to whether any of these
bills, or any future proposed bills to deregulate the electric industry, will
become law or, if they become law, what their final form or effect will be.
At the state level, the California electric industry will change
dramatically in the near future as a result of recent decisions by the CPUC
and enactment of the Statute. Among other things, the PX will create a
competitive market for electric energy in California through the creation of a
competitive auction where all suppliers, including the Utilities, municipal
utilities, power marketing agencies, independent power producers, and out-of-
state generators, will have the opportunity to sell electricity according to
established competitive bidding procedures with winning bids awarded to those
suppliers that bid to supply electricity at the lowest price. In
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addition, the Utilities will be required, and other transmission owners will
be permitted, to place certain of their transmission facilities under the
operational control of the ISO. Ownership and maintenance of the transmission
lines will remain with the transmission line owners. All power suppliers will
receive nondiscriminatory access to the transmission grid under the control of
the ISO and will be subject to the same protocols and pricing procedures.
Customers will have the opportunity to choose the generators from whom they
purchase their electricity. Notwithstanding these changes, the Utilities are
expected to continue to be the sole providers of electricity distribution
services within their service territories. The Utilities have been encouraged,
through CPUC-established incentives, to divest at least 50 percent of their
fossil-fueled electricity generation assets, in order to address market
dominance issues. PG&E has announced its intent to sell eight fossil-fueled
power plants representing 98 percent of PG&E's fossil-fueled generating
capacity.
The changes which are occurring at both the federal and the California
levels will have a significant impact on PG&E and the other Utilities, as well
as other entities in the industry. PG&E faces greater competition for
resources and for customers. Competitors include privately owned independent
power producers, exempt wholesale power generators, industrial customers
developing their own generation resources, suppliers of natural gas and other
fuels, other investor-owned electric utilities and municipal generators. There
can be no assurance that such trends will not have a significant adverse
impact on PG&E's business in the future.
DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, legislation implementing an electric industry
restructuring program for the State of California became law. The legislation,
which as amended is referred to herein as the Statute, was adopted to provide,
among other things, for the issuance of "rate reduction bonds," which are the
Certificates issued hereunder, and a ten percent reduction in rates for
services charged to Residential Customers and Small Commercial Customers,
effective as of January 1, 1998 and continuing until the earlier of March 31,
2002 or the date on which Transition Costs have been fully recovered (the
"Rate Freeze Period"). As part of this legislation, Sections 367 and 369 of
the PU Code provide the Seller an opportunity to recover the Transition Costs.
The Transition Costs consist of the costs of generation-related assets and
obligations that may become uneconomic as a result of a competitive generation
market, together with costs for capital additions to generating facilities
that the CPUC determines to be reasonable, costs of refinancing or retiring of
debt or equity capital, and associated federal and state tax liabilities.
Examples of generation-related assets include generation facilities, amounts
recoverable in electric rates pursuant to settlement agreements with the CPUC
in connection with nuclear power plants, power purchase contracts with third-
party generators of electricity (including voluntary restructuring,
renegotiations or terminations thereof) and generation-related regulatory
assets. Generation-related regulatory assets are those "regulatory assets"
whose origin can be attributed to the generation portion of a utility's
business. "Regulatory assets" reflect incurred costs that otherwise would have
been expensed, but have been capitalized because it is probable that such
costs will be recovered in future rates. All of the foregoing generation-
related assets may become uneconomic in a competitive generation market, since
they are obligations that were undertaken either pursuant to legal
requirements or with the understanding that they would be recoverable in rates
approved by the CPUC. Since other participants in a competitive market,
unburdened by these uneconomic assets, may be able to offer electricity at
lower rates, the costs relating to these uneconomic assets may not be
recoverable in market prices in a competitive market.
The Statute provides for the creation of Transition Property, which is the
right to be paid the FTA Payments based on the FTA Charges in order to recover
a portion of the Transition Costs. The Seller has estimated its total
Transition Costs to be between $8 billion and $14 billion, with the Customers'
share of Transition Costs ultimately expected to be at least $4 billion.
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FINANCING ORDER AND ADVICE LETTERS
The Statute authorizes the CPUC to issue the Financing Order, a regulatory
order which allows the Seller to reduce electricity rates for Customers by ten
percent, and approves the amount of the Seller's Transition Costs which the
Seller is permitted to finance through the issuance of rate reduction bonds.
On May 6, 1997, PG&E filed its application for the Financing Order with the
CPUC. The CPUC issued the Financing Order dated September 3, 1997. The
Financing Order also permits the sale of Certificates in an aggregate
principal amount not to exceed $3,500,000,000. As issued, the Financing Order
also requires the Seller to reduce electricity rates for the Customers by ten
percent through the Rate Freeze Period. The principal amount of the
Certificates approved in the Financing Order was calculated so as to result in
a reduction in revenue requirements for the Seller sufficient to enable the
Seller to provide the ten percent rate reduction and to enable the owner of
Transition Property to pay interest on and principal of the Certificates,
together with related fees and expenses, including the Overcollateralization
Amount. The principal amount of the Certificates was derived based upon a
number of variables, including sales forecasts and the expected interest rate
and amortization schedule for the Certificates. If estimated usage exceeds the
assumptions used in the Financing Order, the Seller intends to request the
authority to issue additional Certificates to support the rate reduction
resulting from this increased usage. The issuance of additional Certificates
will result in a corresponding increase in the FTA Charges, and thus in the
amounts payable with respect thereto by Customers. See "Description of the
Certificates--Conditions of Issuance of Additional Series" herein.
The Financing Order, together with the applicable Issuance Advice Letter,
establishes, among other things, the FTA Charges, which constitute separate
nonbypassable charges payable by Residential Customers and Small Commercial
Customers in an aggregate amount sufficient to repay in full the Certificates,
fund the Overcollateralization Subaccount and pay all related fees and
expenses. The FTA Charges are stated to be nonbypassable on the basis that the
Statute authorizes the Note Issuer, as the owner of the Transition Property,
to continue to collect payments based on the FTA Charges from all Customers
notwithstanding any of the circumstances described under "--Nonbypassable FTA
Charges" below. The Statute provides that the right to collect payments based
on the FTA Charges is a property right which may be pledged, assigned or sold
in connection with the issuance of the Certificates. Under the Statute and the
Financing Order, the owner of Transition Property is entitled to collect FTA
Charges until such owner has received FTA Collections sufficient to retire all
outstanding Series of Certificates and cover related fees and expenses and the
Overcollateralization Amount.
The Financing Order entitles the Note Issuer, as the owner of the Transition
Property, to receive the payments made pursuant to the FTA Charges from all
Residential Customers and Small Commercial Customers. Such payments are
referred to herein as the FTA Payments. The Financing Order requires the
Seller to submit an Issuance Advice Letter to the CPUC with respect to each
Series of Certificates issued. The first Issuance Advice Letter will establish
the initial FTA Charges. The Financing Order provides that Issuance Advice
Letters become effective five business days after filing with the CPUC.
Subsequent Issuance Advice Letters may increase the FTA Charges to support the
issuance of additional Series of Certificates. The Financing Order permits the
Servicer to file True-Up Mechanism Advice Letters to modify the FTA Charges
from time to time, in order to enhance the likelihood of retirement of each
Series and Class of Certificates on a timely basis. See "--Adjustments to the
FTA Charges" herein.
The initial FTA Charges will be calculated by determining first (i)
projected monthly electricity sales to the Customers and the timing and extent
of receipt of payments therefor during the first year following the Closing
Date and (ii) the required amounts to be covered by FTA Collections on a
projected basis, including interest on the Notes, ongoing transaction expenses
including the Servicing Fee, the related Overcollateralization Amount and
scheduled principal payments on the Notes. Then, based on the figures
determined for the two foregoing amounts, the lowest aggregate charges which
will be adequate to cover all of the amounts to be covered by FTA Collections
will be calculated (the "Base Calculation Model"). Because of differences in
the tariff rate for each class of Customers, the FTA Charge payable by
Residential Customers is expected to be different from the FTA Charge payable
by Small Commercial Customers; the initial FTA Charges are expected to result
in FTA Payments by the Residential Customers and Small Commercial Customers
representing approximately 77% and
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23%, respectively, of the aggregate FTA Payments expected to be collected in
1998. The foregoing percentages may change from time to time based on
fluctuations in Customer composition, electricity usage and delinquency and
write-off rates.
The Prospectus Supplement related to a Series of Certificates will specify,
based on the applicable Issuance Advice Letter, the amount of each of the FTA
Charges as of the date thereof.
TRANSITION PROPERTY
The right to be paid the FTA Payments gives rise to a separate property
right under California law and is referred to herein generally as the
"Transition Property." "Transition Property" is defined more specifically in
Section 840(g) of the PU Code as the property right created under the PU Code
including, without limitation, the right, title and interest of an electrical
corporation or its transferee (i) in and to the FTA Charges, as adjusted from
time to time, (ii) to be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges, as provided in the PU Code.
Each Class of Notes will be issued in connection with a specific issuance of
a Class of Certificates. Each Note will be secured by Transition Property, as
well as the other Note Collateral described under "Description of the Notes--
Security" herein. Following the initial Issuance Advice Letter, each
subsequent Issuance Advice Letter will authorize the creation of additional
Transition Property to support payments on the related Series or Class of
Notes. Any additional Transition Property acquired by the Note Issuer pursuant
to a Sale Agreement will be combined into a single asset with all other
Transition Property acquired by the Note Issuer pursuant to previous Sale
Agreements. Accordingly, the aggregate amount of Transition Property will
increase as additional Issuance Advice Letters become effective.
NONBYPASSABLE FTA CHARGES
The Financing Order provides that the FTA Charges are nonbypassable, meaning
that Customers will still be required to make payments with respect to the
applicable FTA Charges, even if a Customer elects to purchase electricity from
another supplier, another entity takes over a portion of PG&E's existing
service territory or a Small Commercial Customer's load increases so that such
Customer is no longer a Small Commercial Customer. The Financing Order
provides that each Customer who leaves PG&E's system during the Rate Freeze
Period through annexation by another electricity supplier will pay an ongoing
charge based on the electricity usage of such Customer prior to annexation or
the Customer's actual or estimated current consumption. The Financing Order
provides that each Customer who ceases to be a Small Commercial Customer as a
result of increased electricity usage will continue to pay the applicable FTA
Charge, based on either (i) the last twelve months of the Customer's recorded
pre-departure use, (ii) an average derived from the last three years of
recorded use or (iii) actual use; provided, however, that any such Customer
will have the opportunity to continue to pay for electricity based on the
Small Commercial Customer rates, including the applicable FTA Charge. If a
substantial number of Customers elect to have their electricity provided by
ESPs that provide consolidated billing, the Note Issuer may be relying on a
small number of ESPs, rather than a large number of Customers, to remit FTA
Charges. In this circumstance, a default in the payment of FTA Charges by a
single ESP that provides electricity services to a large number of Customers
may adversely affect the timing of payments on the Certificates. See
"Servicing--Aggregators and Other Suppliers." In addition, the Note Issuer
expects that the applicable FTA Charge could be imposed on certain Customers
who self-generate their electricity, based on historical usage. However, the
ability of the Servicer to collect such FTA Charges may be limited because the
Servicer will not be able to exercise shut-off rights as an enforcement tool
against a self-generator. The Servicer's current forecasts of future
electricity demand do not include any shift by Customers to self-generation,
because self-generation of electricity by Customers is not expected to be
economically viable during the period in which the Certificates will be
outstanding.
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ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that actual FTA Collections are neither
more nor less than the amount necessary to amortize the Notes in accordance
with the applicable Expected Amortization Schedule, pay all related fees and
expenses, fund the Overcollateralization Subaccount as scheduled and replenish
the Capital Subaccount to the extent amounts are drawn therefrom, the
Servicing Agreement requires the Servicer to seek, and the Financing Order and
the Statute require the CPUC to approve, periodic adjustments to the FTA
Charges based on actual FTA Collections and updated assumptions by the
Servicer as to future usage of electricity by Customers, future expenses
relating to the Transition Property, the Notes and the Certificates, and the
rate of delinquencies and write-offs. The date as of which any calculation is
performed and which forms the basis for a requested adjustment to the FTA
Charges is referred to as a "Calculation Date." The adjustments to the FTA
Charges will continue until all interest and principal on all Series of Notes
and corresponding Series of Certificates have been paid or distributed in
full.
The Financing Order provides that the Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting modifications to the FTA Charges
which are intended to return the projected principal balance of each
outstanding Series of Certificates to the amount provided for in the Expected
Amortization Schedule within a twelve month period or, if earlier, by the
Final Maturity Date. Modifications to the FTA Charges will also factor in any
amount in the Reserve Subaccount available for distribution to
Certificateholders and any amounts necessary within a twelve month period: (a)
to fund the Overcollateralization Subaccount up to the Required
Overcollateralization Level and (b) to the extent that withdrawals have been
made from the Capital Subaccount, to ensure that the amount on deposit in the
Capital Subaccount will equal the Required Capital Level.
Calculations of appropriate modifications to the FTA Charges will be made
based on the Base Calculation Model, except that (i) the amount of debt
service and related expenses including funding of the Overcollateralization
Subaccount for the following year and replenishing the Capital Subaccount
shall be increased or decreased to reflect the amount by which expected FTA
Collections through the end of the month preceding the month of calculation
were less than or exceeded the aggregate actual portion of the debt service on
the Certificates and related expenses for such period, (ii) forecasted
electricity sales for the remaining period of the transaction will be revised
based on the methodology described in the Seller's application for the
Financing Order, (iii) estimated transaction expenses will be modified to
reflect changed circumstances, (iv) assumed delinquencies and write-offs will
be modified to reflect changed circumstances and (v) an adjustment will be
made to reflect any collections which are expected to be received at the
existing levels of FTA Charges from the end of the month preceding the month
of calculation (the "True-Up Mechanism Calculation Model").
The Servicer may also file a routine True-Up Mechanism Advice Letter
quarterly if so specified in the related Prospectus Supplement. Furthermore,
the Financing Order provides that the Servicer may file a non-routine True-Up
Mechanism Advice Letter as often as quarterly, to reflect any changes to the
Base Calculation Model or True-Up Mechanism Calculation Model which are
necessary to meet any Expected Amortization Schedule and fund the
Overcollateralization Subaccount as scheduled. Finally, the Statute requires
the Servicer to file a True-Up Mechanism Advice Letter with the CPUC annually,
prior to each anniversary of the issuance of the Financing Order (a "Financing
Order Anniversary"); however, given the other routine filings required to be
made, the Servicer does not intend to seek adjustments on each Financing Order
Anniversary unless necessary. True-Up Mechanism Advice Letters will take into
account amounts available in the General Subaccount and Reserve Subaccount,
and amounts necessary to fund the Overcollateralization Subaccount and the
Capital Subaccount to required levels, in addition to amounts payable on the
Notes.
The Servicing Agreement will require the Servicer to deliver a written copy
of each True-Up Mechanism Advice Letter, together with a copy of all
supporting calculations, to the Note Issuer, the Note Trustee, the
Infrastructure Bank and the Certificate Trustee upon filing such True-Up
Mechanism Advice Letter with the CPUC.
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The Financing Order provides that (i) routine True-Up Mechanism Advice
Letters shall be filed with the CPUC annually at least 15 days before the end
of each calendar year, with resulting adjustments to the FTA Charges to become
effective at the beginning of the next calendar year, (ii) routine True-Up
Mechanism Advice Letters may be filed with the CPUC quarterly at least 15 days
before the end of each calendar quarter, with resulting adjustments to the FTA
Charges to become effective at the beginning of the next calendar quarter,
(iii) non-routine True-Up Mechanism Advice Letters may be filed with the CPUC
quarterly at least 90 days before the end of each calendar quarter, with
resulting adjustments to the FTA Charges to become effective at the beginning
of the next calendar quarter, and (iv) True-Up Mechanism Advice Letters shall
be filed with the CPUC at least 15 days before each Financing Order
Anniversary, with resulting adjustments to the FTA Charges, if necessary, to
become effective within 90 days of such Financing Order Anniversary.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
On the date on which the initial Series of Certificates is issued and sold
(the "Closing Date"), pursuant to the Sale Agreement the Seller will sell and
assign to the Note Issuer, without recourse, its entire interest in the
Transition Property that is described in the first Issuance Advice Letter
submitted by the Servicer (the "Initial Transition Property"). The net
proceeds received by the Note Issuer from the sale of the Notes will be
applied, together with capital contributed to the Note Issuer, to the purchase
of the Initial Transition Property. Thereafter, the Seller may agree with the
Note Issuer to sell additional Transition Property ("Subsequent Transition
Property") to the Note Issuer, subject to the satisfaction of certain
conditions. Such Subsequent Transition Property will be sold to the Note
Issuer effective on a date (a "Subsequent Transfer Date") specified in the
written agreement between the Seller and the Note Issuer. The Note Issuer will
issue and sell additional Notes to the Trust, and the Trust will issue and
sell additional Certificates, in connection therewith.
The Note Issuer will appoint the Servicer as custodian of the documentation
relating to the Transition Property. The Seller's data systems will reflect
the sale and assignment of the Transition Property to the Note Issuer. The
Seller's financial statements will indicate that the Transition Property has
been sold to the Note Issuer and will not be available to creditors, although
for financial reporting purposes the Seller will treat the Transition Property
as representing debt of the Seller.
Subsequent Transition Property may be sold by the Seller to the Note Issuer
from time to time, solely in connection with the issuance and sale of
additional Notes by the Note Issuer and of corresponding additional
Certificates by the Trust. Any conveyance of Subsequent Transition Property is
subject to the following conditions, among others:
(a) the Seller shall have entered into a written sale agreement with the
Note Issuer;
(b) the Seller shall have filed an Issuance Advice Letter with the CPUC
relating to such Subsequent Transition Property, which Issuance Advice
Letter shall have become effective;
(c) as of the applicable Subsequent Transfer Date, the Seller shall not
be insolvent and shall not be made insolvent by such conveyance;
(d) the Rating Agency Condition shall have been satisfied with respect to
such conveyance;
(e) such conveyance will not result in an adverse tax consequence to the
Trust or the Certificateholders;
(f) as of the applicable Subsequent Transfer Date, no breach by the
Seller of its representations, warranties or covenants in the applicable
Sale Agreement shall exist; and
(g) as of the applicable Subsequent Transfer Date, the Note Issuer shall
have sufficient funds available to pay the purchase price for the
Subsequent Transition Property to be transferred on such date and all
conditions to the issuance of new series of Notes and Certificates shall
have been satisfied or waived.
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SELLER REPRESENTATIONS AND WARRANTIES AND REPURCHASE OBLIGATION
In the initial Sale Agreement and each subsequent Sale Agreement, the Seller
will make representations and warranties to the Note Issuer to the effect,
among other things, that: (a) the information provided by the Seller to the
Note Issuer with respect to the applicable Transition Property is correct in
all material respects; (b) at the related Series Issuance Date, the applicable
Transition Property is owned by the Seller and is free and clear of all
security interests, liens, charges and encumbrances, no offsets, defenses or
counterclaims exist or have been asserted or threatened with respect thereto
and the Seller, in its capacity as Seller or Servicer, will not at any time
assert any security interest, lien, charge or encumbrance against or with
respect to any applicable Transition Property; (c) at the related Series
Issuance Date, the applicable Transition Property has been validly transferred
and sold to the Note Issuer and all filings (including filings with the CPUC
under the PU Code) necessary in any jurisdiction to give the Note Issuer a
first perfected ownership interest in the applicable Transition Property shall
have been made; (d) under the laws of the State of California and the United
States in effect on the Series Issuance Date (i) the Financing Order and each
Issuance Advice Letter pursuant to which any applicable Transition Property
has been created are in full force and effect; (ii) as of the issuance of the
Certificates, the Certificates are entitled to certain protections provided in
the PU Code and, accordingly, the Financing Order and the Issuance Advice
Letter are not revocable by the CPUC; (iii) none of the State of California,
the CPUC or the Infrastructure Bank may revoke, limit, alter or modify the
Transition Property, the Financing Order or the Advice Letters, and all rights
thereunder, in a manner adversely affecting the Noteholders, other than a
temporary impairment described in the following sentence, until the
Certificates are fully discharged, unless adequate provision shall be made by
law for the protection of the Note Issuer, the Trust and the
Certificateholders; (iv) the process by which the Financing Order and the
resolutions of the Infrastructure Bank were approved and the Issuance Advice
Letter was filed, and such order, resolutions and letter themselves, comply
with all applicable laws, rules and regulations, and no court or other
administrative body can, prior to the discharge in full of the Certificates
unless adequate provision shall be made by law for the protection of the
Certificateholders, order the revocation, limitation or other impairment of
the Financing Order, the Issuance Advice Letter, the approving resolutions of
the Infrastructure Bank, the Transition Property or the FTA Charges or enjoin
the performance of any obligations thereunder; and (v) no other approval or
filing with any other governmental body is required in connection with the
creation of the Transition Property, except those that have been obtained or
made; (e) the assumptions used in calculating the FTA Charges related to the
applicable Transition Property are reasonable and made in good faith; (f) upon
the effectiveness of the Issuance Advice Letter: (i) all of the Transition
Property constitutes a current property right; (ii) the Transition Property
includes, without limitation, (A) the right, title and interest in and to the
FTA Charges, as adjusted from time to time, (B) the right to be paid the total
amounts set forth in the Issuance Advice Letter, (C) the right, title and
interest in and to all revenues, collections, claims, payments, money, or
proceeds of or arising from the FTA Charges set forth in the Issuance Advice
Letter, and (D) all rights to obtain adjustments to the FTA Charges pursuant
to the Financing Order; and (iii) the holders of the Transition Property are
entitled to recover the Transition Costs described in the Financing Order or
the Issuance Advice Letter in the aggregate amount equal to the principal
amount of the Notes and the Certificates, all interest thereon, the
Overcollateralization Amount relating to the Notes and all related fees, costs
and expenses in respect of the Notes and the Certificates until they have been
paid in full; (g) the Seller is a corporation duly organized and in good
standing under the laws of the State of California, with power and authority
to own its properties and conduct its business as currently owned or conducted
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 the Seller by all necessary corporate action; (i) the Sale
Agreement constitutes a legal, valid and binding obligation of the Seller,
enforceable against the Seller in accordance with its terms; (j) the
consummation of the transactions contemplated by the Sale Agreement do not
conflict with the Seller's articles of incorporation or bylaws or any material
agreement to which the Seller is a party or bound, result in the creation or
imposition of any lien upon the Seller's properties or violate any law or any
order, rule or regulation applicable to the Seller; (k) no governmental
approvals, authorizations 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; and (l) except as disclosed to
the Note Issuer, no court or administrative proceeding or investigation is
pending or, to the Seller's knowledge, threatened (i) asserting the invalidity
of, or
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seeking to prevent the consummation of the transactions contemplated by, the
Sale Agreement, the Note Indenture, the Trust Agreement or any of the other
Basic Documents, (ii) seeking a determination that might materially and
adversely affect the performance by the Seller of its obligations thereunder,
or (iii) which might adversely affect the federal or state income tax
attributes of the Notes or the Certificates. For purposes of clause (d) (iii)
above, a "temporary impairment" shall mean a breach of the State Pledge
effecting a temporary impairment of the Certificateholders' rights which under
current law would be permitted if it can be shown to be necessary to advance
an important public interest; such a public interest may arise in connection
with a great public calamity, which might, for example, include economic
upheaval or natural disasters.
In the event of a breach by the Seller of any representation specified in
clause (d) or clause (f) above that has a material adverse effect on the
Certificateholders, the Seller shall be obligated to repurchase the Transition
Property from the Note Issuer at a purchase price equal to the outstanding
principal amount of the Notes and all accrued and unpaid interest thereon as
of the date that is five Certificate Business Days after the repurchase date
(the "Repurchase Price"); provided, however, that the Seller shall not be
obligated to repurchase the Transition Property if (A) within 90 days after
the date of the occurrence thereof such breach is cured or the Seller takes
remedial action such that there is not and will not be a material adverse
effect on the Certificateholders as a result of such breach and (B) the Seller
either (i) if the Seller had, immediately prior to the breach, a long term
debt rating of at least "BBB-" or the equivalent by each of the Rating
Agencies (or such other long-term debt rating as shall be approved by the
Rating Agencies), enters into a binding agreement with the Note Issuer to pay
any amounts necessary so that all interest payments due on the Notes during
such 90-day period will be paid in full, or (ii) if the Seller does not have
such long term debt ratings, deposits, within two business days of such
breach, an amount in escrow with the Note Trustee sufficient to pay all
interest payments, taking into account amounts available in the Collection
Account, which will become due on the Notes during such 90-day period. Such
escrowed amounts will be used by the Note Trustee to make such interest
payments if there are not sufficient funds otherwise available therefor. The
Sale Agreement will provide that any change in law by legislative enactment,
constitutional amendment or voter initiative that renders any of the foregoing
representations untrue would not constitute a breach under the Sale Agreement.
In the event of a breach by the Seller of any other representation or
warranty specified in clauses (b), (c), (g), (h), (i) or (j) above, if within
30 days after the Seller receives written notice from the Note Trustee or the
Certificate Trustee or otherwise becomes aware of such breach, such breach has
not been cured and the Seller has not taken remedial action such that there is
not and will not be a material adverse effect on the Certificateholders as a
result of such breach, then the Seller shall be required to repurchase the
Transition Property for the Repurchase Price. Upon the payment by the Seller
of the Repurchase Price, no person shall have any other claims, rights or
remedies against the Seller for a breach of the foregoing representations and
warranties. In the event of a breach of any other representation or warranty
of the Seller specified above, the Seller shall be required to indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Delaware Trustee, the Certificate Trustee, the
Certificateholders, the California State Treasurer's Office, as agent for sale
(the "STO"), and the Infrastructure Bank against any costs, expenses, losses,
claims, damages and liabilities incurred as a result of such breach. The
Seller will also agree to take any legal or administrative action, including
defending against or instituting and pursuing legal actions, as may be
reasonably necessary to protect the Note Issuer and the Certificateholders
from claims, state actions or other actions or proceedings of third parties
which, if successfully pursued, would result in a breach of any representation
described above.
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal distributions on each Class of Certificates, the
aggregate amount of each interest distribution on each Class of Certificates
and the actual maturity date of each Class of Certificates will be related to
the rate and timing of receipt of FTA Collections. Accelerated receipts of FTA
Collections will not result in principal distributions on the Certificates
earlier than the related Scheduled Final Distribution Dates since receipts in
excess of the amounts necessary to amortize the Certificates in accordance
with the applicable Expected Amortization Schedule will be deposited in the
Reserve Subaccount for distribution in accordance with such
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schedule. However, delayed receipts of FTA Collections may result in principal
distributions on the Certificates that occur later than the related Scheduled
Final Distribution Dates.
The actual distributions on each date for each Class of Certificates and the
weighted average life thereof will be affected primarily by the rate of FTA
Collections and the timing of receipt of such FTA Collections, as well as
amounts available in the Reserve Subaccount, the Overcollateralization
Subaccount and the Capital Subaccount. Since each FTA Charge will consist of a
charge per kilowatt hour of usage by the applicable class of Customers, the
aggregate amount of FTA Collections and the rate of principal amortization on
the Certificates will depend, in part, on actual energy usage by Customers and
the rate of delinquencies and write-offs. Although the amounts of the FTA
Charges will be adjusted from time to time based in part on the actual rate of
FTA Collections, no assurances are given that the Servicer will be able to
forecast accurately actual electricity usage and the rate of delinquencies and
write-offs or implement adjustments to the FTA Charges that will cause FTA
Collections to be received at any particular rate. See "Risk Factors--Unusual
Nature of the Transition Property" and "Description of the Transition
Property--Adjustment to the FTA Charges--Reliance on FTA Adjustments" herein.
If FTA Collections are received at a slower rate than expected, a Certificate
may be retired later than expected. Because principal will only be distributed
at a rate not faster than that contemplated in the Expected Amortization
Schedules, except in the event of an early redemption or the acceleration of
the maturity of the Certificates after an Event of Default, the Certificates
are not expected to mature earlier than scheduled. A distribution on a date
that is earlier than forecasted will result in a shorter weighted average
life, and a distribution on a date that is later than forecasted will result
in a longer weighted average life. In addition, if a larger portion of the
delayed distributions on the Certificates are received in later years, this
will result in a longer weighted average life of the Certificates.
No assurances are given that the representations made herein and in the
Prospectus Supplement as to the particular factors that will affect the rate
of FTA Collections, the relative importance of such factors, the percentage of
the principal balance of the Certificates that will be distributed as of any
date or the overall rate of FTA Collections will be realized.
In addition, the Note Issuer has the option to redeem all of the outstanding
Notes of any Series on any Payment Date if, after giving effect to payments
that would otherwise be made on such date, the outstanding principal balance
of such Series of Notes has been reduced to less than five percent of the
initial principal balance thereof. Redemption of a Series of Notes will
require the Certificate Trustee to redeem the related Series of Certificates.
Redemption will cause such Certificates to be retired earlier than would
otherwise be expected and may adversely affect the yield to maturity of the
Certificates. There can be no assurance as to whether the Note Issuer will
exercise the option to redeem any Series of Notes, or as to whether
Certificateholders will be able to receive an equally attractive rate of
return upon reinvestment of the proceeds resulting from any such redemption.
THE TRUST
The Trust will be specifically created for the purpose of acquiring the
Notes. The Trust will be formed under the laws of the State of Delaware
pursuant to the Trust Agreement to be entered into among the Infrastructure
Bank, the Delaware Trustee and the Certificate Trustee, each such trustee not
in its individual capacity but acting as trustee on behalf of the holders of
the Certificates. The Trust will not be an agency or instrumentality of the
State of California. The Trust will have no assets other than the Notes and
the Trust's rights under any Swap Agreement. The Trust Agreement will not
permit the Trust to engage in any activities other than holding such assets,
issuing the Certificates, acting as paying agent and engaging in certain other
activities related thereto.
Each Class of Certificates offered hereby will represent a fractional
undivided beneficial interest in the corresponding Class of Notes, including
all monies due and to become due under such corresponding Class of Notes, and
will represent the right to receive a portion of the payments of principal of
and interest on the corresponding Class of Notes, together with payments
pursuant to any related Swap Agreement. See "Description of the Certificates--
Payments and Distributions" herein.
The Fee and Indemnity Agreement among the Note Issuer, the Note Trustee, the
Infrastructure Bank, the Delaware Trustee and the Certificate Trustee (the
"Fee Agreement") will provide that the Note Issuer will pay
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the Delaware Trustee's and the Certificate Trustee's fees and expenses. The
Fee Agreement will further provide that the Delaware Trustee, the Certificate
Trustee, the STO and the Infrastructure Bank will be entitled to
indemnification by the Note Issuer for, and will be held harmless against, any
loss, liability or expense incurred by the Delaware Trustee, the Certificate
Trustee, the STO and the Infrastructure Bank, as applicable, arising from the
issuance of the Certificates and any ongoing responsibilities associated
therewith (other than through such party's own wilful misconduct, bad faith or
negligence or by reason of a breach of any of its representations or
warranties set forth in the Trust Agreement).
The fiscal year of the Trust will be the calendar year.
The Trust will be formed shortly prior to the first offering of Certificates
as a special purpose Delaware business trust and, as of the date of this
Prospectus, has not carried on any business activities and has no operating
history. Because the Trust does not have any operating history, this
Prospectus does not include any financial statements or related information
for the Trust.
THE INFRASTRUCTURE BANK
The Infrastructure Bank is a public body organized within the government of
the State of California and created pursuant to the Bergeson-Peace
Infrastructure and Economic Development Bank Act, codified at 63000 et seq. of
the California Government Code, as amended (the "Act"). The Infrastructure
Bank is governed, and its corporate powers are exercised, by a Board of
Directors consisting of the State Director of Finance, the State Treasurer and
the State Secretary of Trade and Commerce.
Pursuant to the Act and the Statute, the Infrastructure Bank may authorize a
"special purpose trust" created by the Bank to issue "rate reduction bonds"
and to purchase with the proceeds of such "rate reduction bonds" notes issued
by the Utilities or their affiliates secured by Transition Property. For the
purposes of the Act and the Statute, the Trust will constitute a "special
purpose trust" and each Series of Certificates issued by the Trust will
constitute "rate reduction bonds" entitled to all of the benefits under the
Statute.
Pursuant to a resolution duly adopted by the Infrastructure Bank, the
Infrastructure Bank, at or before the delivery of any Series or Class of
Certificates, has made or will make certain findings, determinations and
approvals with respect to such Certificates, as required by the Act and
Statute. The validity of such resolution may be subject to challenge under
applicable law for 60 days. At the Closing Date for any Series or Class of
Certificates, the General Counsel to the Infrastructure Bank will issue an
opinion to the effect that such resolution has been duly and validly adopted
by the Infrastructure Bank, and that such resolution is in full force and
effect.
Pursuant to the Act, the Infrastructure Bank has no authority to alter or
modify any term or condition related to the Transition Costs or the Transition
Property as set forth in the Financing Order, and has no authority over any
matter that is subject to the approval of the CPUC.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates. None of the
Certificates, the Notes or the underlying Transition Property will be
guaranteed or insured by the State of California, the Infrastructure Bank, the
Trust or any other governmental agency or instrumentality, or by the Seller or
any of its affiliates. None of such entities will have any obligations in
respect of the Certificates, except as expressly set forth herein or in the
related Prospectus Supplement.
Neither the full faith and credit nor the taxing power of the State of
California or any agency or instrumentality thereof is pledged to the
distributions of principal of, or interest on, the Certificates or the Notes
or to the payments in respect of the Transition Property.
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THE NOTE ISSUER
The Note Issuer is a special purpose, single member limited liability
company organized under the laws of the State of Delaware. The Seller is the
sole member of the Note Issuer. The principal executive office of the Note
Issuer is located at 245 Market Street, Room 424, San Francisco, California
94105. Its mailing address is Mail Code N4E, P.O. Box 770000, San Francisco,
CA 94177 and its phone number is (415) 972-5467. The Note Issuer was organized
for the limited purpose of holding and servicing the Transition Property and
issuing Notes secured by the Transition Property and the other Note Collateral
and related activities, and is restricted by its organizational documents from
engaging in other activities. The assets of the Note Issuer will consist
primarily of the Transition Property and the other Note Collateral, including
a portion of the capital contributed by PG&E as described under "Description
of the Notes--Capital Subaccount." In addition, the Note Issuer's
organizational documents require it to operate in a manner such that it should
not be consolidated in the bankruptcy estate of PG&E in the event PG&E becomes
subject to such a proceeding.
The Note Issuer is a recently formed special purpose limited liability
company and, as of the date of this Prospectus, has not carried on any
business activities and has no operating history. Audited financial statements
of the Note Issuer are included as an exhibit to this Prospectus.
OFFICERS AND DIRECTORS
The following is a list of the principal officers and directors of the Note
Issuer. All officers have served in the capacities set forth below since July
2, 1997, and all directors have served in such capacity since November 7,
1997. The officers and directors will devote such time as is necessary to the
affairs of the Note Issuer. The Note Issuer will have sufficient officers,
directors and employees to carry on its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Kent M. Harvey................................. 39 President and Director
Gabriel B. Togneri............................. 44 Treasurer and Director
Walter S. Levison.............................. 62 Director
Christopher P. Johns........................... 37 Controller
Leslie H. Everett.............................. 46 Corporate Secretary
</TABLE>
Kent M. Harvey is President and a director of the Note Issuer. Mr. Harvey
has served as Senior Vice President and Chief Financial Officer of PG&E since
1997 and Treasurer of PG&E since 1993.
Gabriel B. Togneri is Treasurer and a director of the Note Issuer. Mr.
Togneri has served as Assistant Treasurer of PG&E since 1994, and prior
thereto was Manager of Financial Planning and Analysis of PG&E, a position he
had held since 1989.
Walter S. Levison is the independent director of the Note Issuer. Mr.
Levison has served in that capacity since November 7, 1997. Mr. Levison served
as Vice President of Dodge & Cox Investment Managers from 1985 until his
retirement in 1996.
Christopher P. Johns is Controller of the Note Issuer. Mr. Johns has served
as Vice President and Controller of PG&E since 1996 and as Vice President and
Controller of PG&E Corporation, the parent of PG&E, since 1997. Prior to that
time, Mr. Johns served in various accounting capacities with KPMG Peat
Marwick, an accounting and audit firm, from 1988.
Leslie H. Everett is Corporate Secretary of the Note Issuer. Ms. Everett has
served as Vice President of PG&E since 1996 and Corporate Secretary of PG&E
since 1993.
No compensation has been paid by the Note Issuer to any officer or director
of the Note Issuer since the Note Issuer was formed. The officers and
directors of the Note Issuer, other than the independent director, will not be
compensated by the Note Issuer for their services on behalf of the Note
Issuer. The compensation of the
49
<PAGE>
independent director of the Note Issuer is $5,000 annually and $500 per
meeting, payable quarterly in arrears. Each officer serves in such capacity at
the discretion of the Note Issuer's Board of Directors. PG&E is an affiliate
of the Note Issuer. The Note Issuer's organizational documents limit, to the
extent permitted by Delaware law, the personal liability of each officer and
director of the Note Issuer to the Note Issuer for monetary damages resulting
from breaches of such officer's or director's duty of care. The Note Issuer's
organizational documents provide that officers and directors of the Note
Issuer shall be indemnified against liabilities incurred in connection with
their services on behalf of the Note Issuer, including liabilities under
applicable securities laws.
THE SELLER AND SERVICER
GENERAL
The Seller is engaged in the business of generating, transmitting and
distributing electric power to residential, commercial, industrial and
agricultural customers within its electric service territory. PG&E's electric
service territory currently consists of approximately 70,000 square miles
throughout Northern and Central California with an estimated population of 13
million, and includes all or portions of 48 of California's 58 counties.
During 1996, PG&E provided a total of 73,181 million kilowatt-hours of
electricity to 4.46 million customers, including 32,440 million kilowatt-hours
of electricity provided to its approximately 4.26 million Residential
Customers and Small Commercial Customers.
As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
PG&E CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
PG&E's customer base is divided into several categories, including the
residential and small commercial categories covered by the Statute.
Residential Customers use electricity for lighting, operating household
appliances and other domestic purposes. The primary factor influencing the
number of Residential Customers is the number of housing starts, which is a
measure of the strength of the economy. The primary factors influencing short-
term energy consumption are weather and electricity prices. Long-term factors
would include the availability of more energy efficient appliances, new energy
consuming technologies and the customers' ability to acquire these new
products. Small Commercial Customers use electricity for lighting, operating
appliances and operating equipment in office and retail settings. The primary
factor influencing the number of Small Commercial Customers is commercial
employment, which is also a measure of the strength of the economy. The
factors influencing the energy consumption of a Small Commercial Customer
would include those of the Residential Customers, but would also include the
level of business activity associated with the particular Small Commercial
Customer. The table below sets forth the number of customers, electric energy
consumption and billed revenues for the two categories.
CUSTOMERS AND ENERGY CONSUMPTION
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average Number of
Customers
Residential............ 3,708,374 3,748,831 3,788,044 3,825,413 3,874,223
Small Commercial....... 390,885 380,451 381,482 383,574 386,800
---------- ---------- ---------- ---------- ----------
Total................. 4,099,259 4,129,282 4,169,526 4,208,987 4,261,023
Energy Consumption (GWh)
Residential............ 23,664 24,111 24,326 24,391 25,458
Small Commercial....... 6,709 6,387 6,450 6,657 6,982
---------- ---------- ---------- ---------- ----------
Total................. 30,373 30,498 30,776 31,048 32,440
Billed Revenues ($000s)
Residential............ $2,790,605 $2,952,893 $2,980,966 $2,979,590 $3,033,612
Small Commercial....... 934,749 888,759 879,425 896,486 873,410
---------- ---------- ---------- ---------- ----------
Total................. $3,725,354 $3,841,652 $3,860,391 $3,876,076 $3,907,022
</TABLE>
50
<PAGE>
FORECASTING CONSUMPTION
PG&E has developed sales and load forecasts since the company's inception.
The only things that have changed over the years have been the length of the
forecast horizon and the methods of forecasting. Sales forecasts have always
had a short horizon since they are used for rate making and budgeting
purposes. Load forecast horizons have varied over the years, depending on the
lead time necessary to construct new resources. In the early years, the
horizon was as short as four or five years, but since then it has been twelve
to twenty years. Forecasts developed in the early years used simple trending
techniques. Forecasts produced more recently have been done using more
sophisticated statistical techniques. These models produce quarterly
estimates, which are then spread to the months using recorded monthly sales
data as allocation factors.
PG&E's electric sales forecast was last updated in January 1997 and is based
on a combination of short-term and long-term forecasting models. The short-
term forecasting models are econometric models used to project sales for the
first two years after the base year. PG&E develops econometric models to
forecast electric sales for the classes of Residential Customers and small
light and power customers (which represent approximately 95% of the Small
Commercial Customers). These forecasts also will be used in calculating the
FTA Charges for any given period, in order to determine the revenue required
(in the form of FTA Payments) to meet the Expected Amortization Schedules.
The long-term models are used to forecast sales for years three through
twenty after the base year. They are end-use models as required by the
California Energy Commission's Common Forecasting Methodology process. Such
models explicitly forecast energy consumption by end-uses such as lighting and
heating.
For the residential sector, energy consumption is the product of the total
number of households in the PG&E service area, average appliance saturations,
and average unit energy consumption by end-use. Adjustments for additional
conservation savings and appliance utilization are also accounted for in the
model.
For the small commercial sector, energy consumption is the product of floor
space (organized by building type and climate area), average end-use equipment
saturation and average unit energy consumption by end-use. Equipment
replacement rates and efficiency rates of new equipment are accounted for in
the calculations. Adjustments for additional conservation savings and
equipment utilization are also accounted for in the model.
The short- and long-term models have been in use for more than twenty years
and have undergone extensive review by the CPUC and the California Energy
Commission, respectively. Each year PG&E updates these models with the most
recent recorded data, and conducts testing to ensure that model statistics
meet the highest standards possible.
PG&E utilizes DRI/McGraw Hill ("DRI") to produce economic and demographic
forecasts. The most recent DRI regional economic forecast (September 1996) was
used to drive PG&E's electric sales forecast of both the short-term and long-
term models of the residential, small light and power, and medium light and
power sectors.
The forecasted weather related drivers assume normal weather conditions.
Normal weather conditions imply a twenty year average for such weather drivers
as heating and cooling degree days.
FORECAST VARIANCE
PG&E conducts sales forecast variance analyses on a regular basis to monitor
how well forecasts track recorded consumption. This is important for short-
term resource procurement functions as well as budgeting and financial
reporting.
Since PG&E updates its forecast on an annual basis, the table below shows
annual variance for forecasts prepared for one year in the future. For
example, the annual 1992 variance is based on a forecast prepared in 1991.
With the exception of 1996, PG&E has over-forecasted the energy consumption of
these customers. The
51
<PAGE>
variances for the Aggregate Combined Classes, which consists of both the
Residential and the Small Light and Power classes, range, from a low of 1.09%
to a high of 3.37% in absolute terms.
ANNUAL FORECAST VARIANCES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential:
Forecast (1)................... 23,957 24,151 24,171 24,845 24,946
Actual (1)..................... 23,664 24,111 24,326 24,391 25,458
Variance....................... -1.24% -0.17% 0.64% -1.86% 2.01%
Small Light and Power (2):
Forecast (1)................... 7,306 6,796 6,697 6,458 6,464
Actual (1)..................... 6,579 6,179 6,208 6,410 6,717
Variance....................... -11.05% -9.99% -7.88% -0.75% 3.77%
Aggregate Combined Classes:
Forecast (1)................... 31,263 30,947 30,868 31,303 31,410
Actual (1)..................... 30,243 30,290 30,534 30,801 32,175
Variance....................... -3.37% -2.17% -1.09% -1.63% 2.38%
</TABLE>
- --------
(1) In GigaWatt hours.
(2) The Servicer has not historically prepared separate forecasts for the
Small Commercial Customers. However, the small light and power class of
customers represents approximately 95% of the Small Commercial Customers.
Accordingly, the Note Issuer believes that the figures relating to the
small light and power class of customers is indicative of the Servicer's
forecasting history with respect to the Small Commercial Customers.
During the last five years, no discernible trend is apparent with respect to
the historical forecast variance relating to the Residential Customers or the
Aggregate Combined Classes. The variance for the Residential Customer class
has ranged from a 1.86% overestimate of usage to a 2.01% underestimate of
usage, with an average 0.12% overestimate of usage. The variance for the
Aggregate Combined Classes has ranged from a 3.37% overestimate of usage to a
2.38% underestimate of usage, with an average 1.18% overestimate of usage.
With respect to the historical forecast variances relating to the small light
and power class of customers, which comprise the majority of the Small
Commercial Customers, there has been a trend towards significant improvement
in forecasting in recent years. During the early 1990's, a significant number
of customers were reclassified into classes other than the small light and
power class of customers, resulting in significant overestimates of usage
relating to such class.
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
CREDIT POLICY
PG&E is obligated to provide service to all customers under California law.
PG&E relies on the information provided by the customer and its customer
information system audits to indicate whether the customer has been previously
served by PG&E.
Certain accounts are secured with deposits or guarantees to reduce losses.
Since the vast majority of customers pay their bills within the allotted time,
it is not necessary to require deposits from all customers. Specific criteria
have been developed for establishing credit. These criteria are based on such
factors as prior service, property ownership, or providing an acceptable
guarantor.
As a rule, Residential Customers may establish credit by depositing cash
equal to twice the average monthly bill or furnishing a satisfactory
guarantor. Deposits or guarantees may not be required if the applicant has
been a PG&E customer during the past two years, and (a) the applicant has not
had more than two past-due billings during the last 12 consecutive months, (b)
the applicant has paid all bills for domestic service previously supplied to
the applicant and has proof of payment, or (c) the applicant's credit is
otherwise established to the satisfaction of PG&E. Credit that is "established
to the satisfaction of PG&E" is a broad category that includes options such as
acceptable payment records with other utilities, credit scoring, and other
factors that would establish creditworthiness.
52
<PAGE>
Small Commercial Customers may establish credit by depositing cash equal to
twice the maximum monthly bills, owning substantial equity in the location to
be served, furnishing a satisfactory guarantor, or otherwise establishing
credit to the satisfaction of PG&E.
Deposits or guarantees may not be required if the applicant has been a PG&E
customer during the past two years with like service, during the past 12
consecutive months of that prior service has not had more than two past due
bills, the billing for the previous service was equal to at least 50 percent
of that estimated for the new service, and the customer has paid all prior
PG&E bills.
PG&E may change its credit policies and procedures from time to time. It is
expected that any such changes would be designed to enhance PG&E's ability to
make timely recovery of amounts billed to customers.
BILLING PROCESS
PG&E bills its customers once every 27 to 33 days, with approximately an
equal number of bills being distributed each Servicer Business Day. Any day
other than a Saturday, a Sunday or a day on which the Servicer's offices are
not open for business is a "Servicer Business Day." For the year ending
December 31, 1996, PG&E mailed out an average of 235,000 bills on each
Servicer Business Day to customers in its various customer categories.
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.
PG&E may change its billing policies and procedures from time to time. It is
expected that any such changes would be designed to enhance PG&E's ability to
make timely recovery of amounts billed to customers.
COLLECTION PROCESS
PG&E receives approximately 68 percent of total bill payments via the U.S.
mail. Approximately 17 percent of bill payments are received at local offices,
and 8 percent are received at local pay stations. PG&E receives the remainder
of payments via automatic payment service, electronic funds transfer, credit
card payments and electronic data interchange.
Two days after the meter is scheduled to be read, bills are processed and
mailed to customers. Bills are due on presentation, and are considered past
due after 15 calendar days for small commercial accounts, and after 19 days
for residential accounts. Timing and collection follow-up is based on customer
type, as follows.
For Residential Customers, a reminder notice is sent to Residential
Customers if payment has not been received at the time of the second month's
billing. Eight days after the reminder notice bill is issued, a fifteen-day
notice is mailed directly to the customer if the account has a prior balance.
Ten workdays after the fifteen-day notice is sent, a 48-hour notice is mailed,
notifying the customer that service is scheduled to be shut off if payment is
not received within 48 hours. A telephone contact, or reasonable attempt at
making telephone contact, is also required to all residential customers prior
to service shut off.
For Small Commercial Customers, thirteen Servicer Business Days after the
first billing, a seven-day notice is mailed directly to Small Commercial
Customers. A 24-hour notice, although not required, is often given to notify
Small Commercial Customers that shut-off is scheduled.
For both Residential and Small Commercial Customers, a closing bill
including all unpaid amounts is generally issued within three to ten days of
service termination. Unpaid closed accounts are written-off six months after
the closing bill is issued.
PG&E may change its collection policies and procedures from time to time. It
is expected that any such changes would be designed to enhance PG&E's ability
to make timely recovery of amounts billed to customers.
53
<PAGE>
RESTORATION OF SERVICE
Before restoring service that has been shut-off for non-payment, PG&E has
the right to require the payment of all of the following charges: (i) the
total amount owing on an account including any past-due balance, the current
billing, and a credit deposit, if requested; (ii) any miscellaneous charges
associated with the reconnection of service (i.e., reconnection charges, field
collection charges, and/or returned check charges); (iii) any charges assessed
for unusual costs incidental to the termination or restoration of service
which have resulted from the customer's action or negligence; and (iv) any
unpaid closing bills from other accounts in the name of the customer of
record.
PG&E may change its restoration of service policies and procedures from time
to time. It is expected that any such changes would be designed to enhance
PG&E's ability to make timely recovery of amounts billed to customers.
LOSS AND DELINQUENCY EXPERIENCE
The following table sets forth information relating to the total billed
revenues and write-off experience of PG&E for (i) residential and (ii)
commercial, industrial and agricultural customers for the first seven months
of 1997 and each of the five preceding years. Such historical information, as
well as the delinquency information that follows, is presented herein because
PG&E's actual experience with respect to write-offs and delinquencies may
affect the timing of FTA Payments.
TOTAL GAS AND ELECTRIC BILLED REVENUES
<TABLE>
<CAPTION>
JAN.-JULY
1992 1993 1994 1995 1996 1997
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Residential............. $3,883,024,170 $4,105,456,235 $4,251,147,446 $4,186,692,646 $4,144,856,090 $2,507,354,821
Commercial, Industrial &
Agricultural (1)....... 5,865,106,178 5,787,993,498 5,484,670,968 5,458,124,905 5,089,201,197 2,990,295,732
-------------- -------------- -------------- -------------- -------------- --------------
Total................... $9,748,130,348 $9,893,449,733 $9,735,818,414 $9,644,817,551 $9,234,057,287 $5,497,650,553
NET GAS AND ELECTRIC WRITE-OFFS (2)
<CAPTION>
JAN.-JULY
1992 1993 1994 1995 1996 1997
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Residential............. $ 20,235,760 $ 22,362,116 $ 25,064,904 $ 33,358,262 $ 26,726,988 10,502,641
Commercial, Industrial &
Agricultural (1)....... 7,483,259 7,027,293 9,078,783 10,393,267 7,524,792 3,563,344
-------------- -------------- -------------- -------------- -------------- --------------
Total................... $ 27,719,019 $ 29,389,409 $ 34,143,687 $ 43,751,529 $ 34,251,780 $ 14,065,985
</TABLE>
NET WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE (2)
<TABLE>
<CAPTION>
JAN.-
JULY
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Residential................................ 0.52% 0.54% 0.59% 0.80% 0.64% 0.42%
Commercial, Industrial & Agricultural (1).. 0.13% 0.12% 0.17% 0.19% 0.15% 0.12%
Aggregate Combined Classes................. 0.28% 0.30% 0.35% 0.45% 0.37% 0.26%
</TABLE>
- --------
(1) PG&E has not historically maintained separate information regarding write-
offs for the Small Commercial Customers. Revenues for Small Commercial
Customers constituted approximately 20% of revenues for the commercial,
industrial and agricultural class of electricity consumers in 1996. Since
the composition of the Small Commercial Customers class differs from the
composition of the commercial, industrial and agricultural class, the
write-off experience of the larger class may not be indicative of the
write-off experience of the Small Commercial Customers class.
(2) Net write-offs include any amounts recovered by PG&E from deposits,
bankruptcy proceedings and payments received after an account has been
closed.
Slight historical trends towards increased net write-offs are apparent with
respect to both the Residential Customers and the commercial, industrial and
agricultural users. However, the trend in historical net write-offs continues
to be statistically insignificant.
54
<PAGE>
DELINQUENCIES
The following table sets forth information relating to the delinquency
experience of PG&E for (i) residential and (ii) commercial, industrial and
agricultural customers for the first seven months of 1997 and each of the five
preceding years:
RESIDENTIAL AND COMMERCIAL, INDUSTRIAL AND AGRICULTURAL DELINQUENCY DATA (1)
<TABLE>
<CAPTION>
JAN.-
JULY
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Residential:
Percent of Billed Revenue
Not Collected Within:
0-30 days................................. 38.0% 39.0% 42.0% 44.0% 34.0% 38.0%
31-60 days................................ 27.8% 27.9% 30.9% 28.2% 24.2% 26.2%
61-90 days................................ 7.5% 7.8% 9.6% 9.8% 7.9% 8.5%
<CAPTION>
JAN.-
JULY
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial, Industrial & Agricultural(2):
Percent of Billed Revenue Not Collected
Within:
0-30 days................................. 21.0% 23.0% 25.0% 24.0% 20.0% 16.0%
31-60 days................................ 17.3% 18.9% 18.9% 18.0% 15.7% 12.5%
61-90 days................................ 2.4% 2.8% 3.5% 3.0% 2.1% 1.8%
</TABLE>
- --------
(1) Data shows delinquency statistics for combined gas and electric revenues
and collections.
(2) PG&E has not historically maintained separate information relating to
delinquencies for the Small Commercial Customers. Revenues for Small
Commercial Customers constituted approximately 20% of the commercial,
industrial and agricultural class of electricity consumers in 1996. Since
the composition of the Small Commercial Customers class differs from the
composition of the commercial, industrial and agricultural class, the
delinquency experience of the larger class may not be indicative of the
delinquency experience of the Small Commercial Customers class.
No discernible trends are apparent with respect to PG&E's delinquency
experiences with respect to the Residential Customers and the commercial,
industrial and agricultural customers. The Note Issuer does not believe that
the delinquency experience with respect to the FTA Payments will differ
substantially from the approximate rates indicated above.
SERVICING
SERVICING PROCEDURES
The Servicer, as agent for the Note Issuer, will manage, service and
administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
The Servicer's duties will include calculation and billing of all amounts
based on the FTA Charges, receipt and posting of all FTA Payments, responding
to inquiries of Customers and the CPUC with respect to the Transition Property
and the FTA Charges, obtaining usage calculations, accounting for collections
and furnishing monthly, quarterly and annual statements to the Note Issuer,
the Note Trustee and the Certificate Trustee and taking action in connection
with periodic revisions to the FTA Charges as described below.
Each FTA Charge will be expressed as an amount per kilowatt hour of
electricity usage by the applicable Customer, regardless of whether the
Customer purchases its electricity from the Servicer or from another
electricity provider. The Servicer expects the applicable FTA Charge to be
separately identified on each Customer's bill, with an aggregate amount to be
paid to the Servicer. Bills are sent to each Customer every 27 to 33 days.
55
<PAGE>
Any amounts collected by the Servicer that represent partial payments of the
total amount billed will be proportionately allocated between the Note Issuer
and PG&E based on the portions of the amount billed allocable to the FTA
Charge and the total charges due to PG&E. If such amounts are billed and
collected by PG&E for an alternative energy service provider pursuant to a
consolidated billing arrangement, the total charges due to the alternative
energy service provider will also be included in the proportional allocation
of any partial payment.
In addition, the Servicer will agree to take such legal or administrative
actions, including defending against or instituting and pursuing legal actions
and appearing or testifying in hearings or similar proceedings, as may be
reasonably necessary to block or overturn any attempts to cause a repeal,
modification or supplement to the Statute or the Financing Order or the rights
of holders of Transition Property by legislative enactment, voter initiative
or constitutional amendment that would be adverse to Certificateholders. The
cost of any such action will be payable from FTA Collections as an expense of
the Trust.
SERVICING STANDARDS AND COVENANTS
The Servicing Agreement will require the Servicer, in servicing and
administering the Transition Property, to employ or cause to be employed
procedures and exercise the same care it customarily employs and exercises in
servicing and administering bill collections for its own account.
Consistent with the foregoing, the Servicer may in its own discretion waive
any late payment charge or any other fee or charge relating to delinquent
payments, if any, and may waive, vary or modify any terms of payment of any
amounts payable by a Customer, in each case, if such waiver or action (a)
would be in accordance with the Servicer's customary practices or those of any
successor Servicer with respect to comparable assets that it services for
itself, (b) would not materially adversely affect the Certificateholders and
(c) would comply with applicable law. In addition, the Servicer may write off
any amounts that it deems uncollectible in accordance with its customary
practices.
In the Servicing Agreement, the Servicer will covenant that, in servicing
the Transition Property it will: (a) manage, service, administer and make
collections in respect of the Transition Property with reasonable care and in
accordance with applicable law, including all applicable guidelines of the
CPUC, using the same degree of care and diligence that the Servicer exercises
with respect to bill collections for its own account; (b) follow customary
standards, policies and procedures for the industry in performing its duties
as Servicer; (c) use all reasonable efforts, consistent with its customary
servicing procedures, to enforce, and maintain rights in respect of, the
Transition Property; (d) comply with all laws applicable to and binding on it
relating to the Transition Property; and (e) submit True-Up Mechanism Advice
Letters to the CPUC seeking adjustments to the FTA Charges as described
herein.
In the event of a breach by the Servicer of any of these covenants, the
Servicer will indemnify, defend and hold harmless the Note Issuer, the Trust,
the Noteholders, the Note Trustee, the Certificate Trustee, the Delaware
Trustee, the Certificateholders, the STO and the Infrastructure Bank against
any costs, expenses, losses, claims, damages and liabilities incurred as a
result thereof.
REMITTANCES TO COLLECTION ACCOUNT
Periodically, the Servicer will prepare a forecast of the percentages of
amounts billed in a particular month that are expected to be received during
that month and each of the following five months (the "Collections Curve").
For so long as (a) no Servicer Default shall have occurred and be continuing
and (b) the Rating Agency Condition shall have been satisfied (and any
conditions or limitations imposed by the Rating Agencies in connection
therewith are complied with), the Servicer is required to remit FTA Payments
expected to have been received during the preceding calendar month, based on
the applicable Collections Curve, to the Collection Account on or before the
twentieth day of each calendar month (or, if such twentieth day is not a
Certificate Business Day, the Certificate Business Day immediately following
such twentieth day). The sum of the amounts to be remitted with respect to a
particular calendar month during the six months following the beginning of
such
56
<PAGE>
calendar month based on the Collections Curve is referred to as the "Estimated
FTA Payments" herein. Pending remittance to the Collection Account, FTA
Payments may be invested by the Servicer at its own risk and for its own
benefit, and will not be segregated from funds of the Servicer. If any of the
conditions described above are not satisfied, the Servicer will remit to the
Collection Account an amount equal to the FTA Payments estimated to have been
received on each Servicer Business Day within two Servicer Business Days of
such day. The date on which FTA Payments received by the Servicer with respect
to the FTA Charges are required to be deposited in the Collection Account is
referred to herein as the "Remittance Date."
On or prior to the Remittance Date in the sixth month following each
calendar month, the Servicer will compare actual FTA Payments received with
respect to that calendar month (the "Actual FTA Payments") to the Estimated
FTA Payments for that calendar month remitted to the Collection Account. If
Estimated FTA Payments remitted with respect to a calendar month exceed Actual
FTA Payments attributable to such calendar month (such excess, an "Excess
Remittance"), the Servicer shall be entitled to either (a) reduce the amount
which the Servicer remits to the Collection Account on such Remittance Date by
the amount of such Excess Remittance, the amount of such reduction becoming
the property of the Servicer or (b) immediately be paid from the Collection
Account or any subaccount therein the amount of such Excess Remittance, such
payment becoming the property of the Servicer. If Estimated FTA Payments
remitted with respect to a calendar month are less than Actual FTA Payments
attributable to such calendar month (such deficiency, a "Remittance
Shortfall"), the amount which the Servicer remits to the Collection Account on
such Remittance Date will be increased by the amount of such Remittance
Shortfall, such increase coming from the Servicer's own funds. The Estimated
FTA Payments calculated for any Remittance Date shall not be affected by any
Excess Remittance or Remittance Shortfall which modifies the actual amount
remitted by the Servicer on such Remittance Date.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Notes or the Certificates.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee on each Payment
Date, in an amount equal to one-fourth of the percent specified in the related
Prospectus Supplement of the then outstanding principal amount of the Notes.
The Servicing Fee (together with any portion of the Servicing Fee that remains
unpaid from prior Payment Dates) will be paid solely to the extent funds are
available therefor as described under "Description of the Notes--Allocations;
Payments." The Servicing Fee will be paid prior to the distribution of any
amounts in respect of interest on and principal of the Notes. The Servicer
will be entitled to retain as additional compensation net investment income on
FTA Payments received by the Servicer prior to remittance thereof to the
Collection Account and the portion of late fees, if any, paid by Customers
relating to the FTA Payments.
AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to provide a consolidated bill to their
retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and other charges, including the
applicable FTA Charges.
The CPUC has determined that if any ESP elects to perform consolidated
billing, the ESP must first establish its creditworthiness by either (1)
demonstrating that it has a credit rating of "Baa2" or higher from Moody's or
"BBB" or higher from S&P, Fitch Investors Service L.P. or Duff & Phelps Credit
Rating Co., (2) submitting a credit application to the Servicer for
evaluation, with final credit approval granted by the Servicer, or (3)
submitting to the Servicer a deposit equal to twice the estimated maximum
monthly amount owed to the Servicer.
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Any ESP that provides consolidated billing, including monthly amounts with
respect to the FTA Charges, is required to pay the Servicer periodic amounts
billed by the Servicer to the ESP, including the FTA Charges, regardless of
the ESP's ability to collect such amounts from its Customers. In such event,
the collecting ESP will in effect replace the Customer as the obligor with
respect to such FTA Charges and the Note Issuer, as the holder of the
Transition Property, will have no right to collect such FTA Charges from the
Customer. There can be no assurance that each ESP will utilize the same
customer credit standards as the Servicer, or that the Servicer will be able
to mitigate credit risks relating to ESPs in the same manner in which it
mitigates such risks relating to its Customers. The Servicer, on behalf of the
Note Issuer, will pursue any ESP that fails to remit applicable FTA Charges in
a manner similar to that in which the Servicer will pursue any failure by a
Customer to remit FTA Charges. The Servicer will not have the right to pursue
Customers of an ESP that defaults in the payment of FTA Charges. However, the
Servicer will have the right to bill and collect FTA Charges and other amounts
payable to the Servicer directly from all of the ESP's consolidated billing
Customers following certain payment defaults by an ESP. An ESP that has
defaulted will nevertheless have the right to elect consolidated billing six
months after its default upon the satisfaction of certain conditions. Frequent
changes in Customer billing and payment arrangements may result in Customer
confusion and the misdirection of payments, which could have the effect of
causing delays in distributions to Certificateholders. Neither the Seller nor
the Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to PG&E, as Servicer. The true-up adjustment mechanism
for the FTA Charges, as well as the collection of the Overcollateralization
Amount and the pledge of amounts deposited in the Capital Subaccount, are
intended to mitigate this risk relating to the timing of collections and
payments. However, delays in distributions to Certificateholders might occur
as a result of delays in implementation of the adjustment mechanism.
In addition, if a substantial number of Customers elect to have their
electricity provided by ESPs that provide consolidated billing, the Note
Issuer may be relying on a small number of ESPs, rather than a large number of
Customers, to remit FTA Charges. In this circumstance, a default in the
payment of FTA Charges by a single ESP that provides electricity services to a
large number of Customers may adversely affect the timing of payments on the
Certificates.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the Servicer will make representations and
warranties to the Note Issuer to the effect, among other things, that: (a) the
Servicer is a corporation duly organized and in good standing under the laws
of the State of California, with power and authority to own its properties and
conduct its business as currently owned or conducted and to execute, deliver
and carry out the terms of the Servicing Agreement; (b) the execution,
delivery and carrying out of the Servicing Agreement have been duly authorized
by the Servicer by all necessary corporate action; (c) the Servicing Agreement
constitutes a legal, valid and binding obligation of the Servicer, enforceable
against the Servicer in accordance with its terms; (d) the consummation of the
transactions contemplated by the Servicing Agreement does not conflict with
the Servicer's articles of incorporation or bylaws or any agreement to which
the Servicer is a party or bound, result in the creation or imposition of any
lien upon the Servicer's properties or violate any law or any order, rule or
regulation applicable to the Servicer; (e) the Servicer has all licenses
necessary for it to perform its obligations under the Servicing Agreement; (f)
no governmental approvals, authorizations or filings are required for the
Servicer to execute, deliver and perform its obligations under the Servicing
Agreement except those which have previously been obtained or made; and (g)
except as disclosed to the Note Issuer, no court or administrative proceeding
or investigation is pending or, to the Servicer's knowledge, threatened (i)
asserting the invalidity of, or seeking to prevent the consummation of the
transactions contemplated by, the Servicing Agreement or (ii) seeking a
determination that might materially and adversely affect the performance by
the Servicer of its obligations thereunder.
In the event of a breach by the Servicer of any of its representations and
warranties described in the preceding paragraph, the Servicer will indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Certificate Trustee, the Delaware Trustee, the
Certificateholders, the STO and the Infrastructure Bank against any costs,
expenses, losses, claims, damages and liabilities incurred as a result
thereof.
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STATEMENTS BY SERVICER
On or before each Remittance Date, the Servicer will prepare and furnish to
the Note Trustee, the Certificate Trustee, the Infrastructure Bank and the
Note Issuer a statement for the applicable calendar months (the "Monthly
Servicer's Certificate") setting forth the aggregate amount of FTA Payments
remitted by the Servicer to the Collection Account and the Excess Remittance
or the Remittance Shortfall. In addition, the Servicer will prepare, and the
Note Trustee will furnish to the Noteholders on each Payment Date the
Quarterly Servicer's Certificate described under "Description of the Notes--
Reports to Noteholders." The Servicer will also prepare and the Certificate
Trustee will furnish to the Certificateholders on each Payment Date the report
described under "Description of the Certificates--Reports to
Certificateholders" herein.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement will provide that a firm of independent public
accountants will furnish to the Note Issuer, the Infrastructure Bank, the Note
Trustee and the Certificate Trustee on or before September 30 of each year,
beginning September 30, 1998, a statement as to compliance by the Servicer
during the preceding twelve months ended June 30 with certain standards
relating to the servicing of the Transition Property. This report (the "Annual
Accountant's Report") shall state that such firm has performed certain
procedures in connection with the Servicer's compliance with the servicing
procedures of the Servicing Agreement, identifying the results of such
procedures and including any exceptions noted. The Annual Accountant's Report
will also indicate that the accounting firm providing such report is
independent of the Servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
The Servicing Agreement will also provide for delivery to the Note Issuer,
the Infrastructure Bank, the Note Trustee and the Certificate Trustee, on or
before September 30 of each year, commencing September 30, 1998, of a
certificate signed by an officer of the Servicer stating that the Servicer has
fulfilled its obligations under the Servicing Agreement throughout the
preceding twelve months ended June 30 (or in the case of the first such
certificate, the period from the Closing Date to June 30, 1998) or, if there
has been a default in the fulfillment of any such obligation, describing each
such default. The Servicer has agreed to give the Note Issuer, the
Infrastructure Bank, the Note Trustee and the Certificate Trustee notice of
certain Servicer Defaults under the Servicing Agreement.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Certificate
Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement will provide that PG&E may not resign from its
obligations and duties as Servicer thereunder, except upon either (a) a
determination that PG&E's performance of such duties is no longer permissible
under applicable law or (b) satisfaction of the Rating Agency Condition and
consent of the CPUC. No such resignation will become effective until a
successor Servicer has assumed PG&E's servicing obligations and duties under
the Servicing Agreement.
The Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees, and agents will be under any
liability to the Note Issuer, the Note Trustee, the Infrastructure Bank, the
Trust, the Noteholders, the Delaware Trustee, the Certificate Trustee, the
Certificateholders or any other person, except as provided under the Servicing
Agreement, for taking any action or for refraining from taking any action
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misconduct, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. In
addition, the Servicing Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Servicing Agreement and
that, in its opinion, may cause it to incur any expense or liability.
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Under the circumstances specified in the Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any
entity succeeding to the business of the Servicer or, with respect to its
obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the successor
of the Servicer under the Servicing Agreement.
SERVICER DEFAULTS
"Servicer Defaults" under the Servicing Agreement will include, among other
things, (a) any failure by the Servicer to make any required deposit into the
Collection Account, which failure continues unremedied for three Servicer
Business Days after written notice from the Note Issuer or the Note Trustee is
received by the Servicer or after discovery by the Servicer; (b) any failure
by the Servicer or the Seller, as the case may be, duly to observe or perform
in any material respect any other covenant or agreement in the Servicing
Agreement, the Sale Agreement or any other Basic Document to which it is a
party, which failure materially and adversely affects the rights of
Noteholders and which continues unremedied for 30 days after the giving of
notice of such failure (i) to the Servicer or the Seller, as the case may be,
by the Note Issuer or the Note Trustee or (ii) to the Servicer by holders of
Notes evidencing not less than 25 percent in principal amount of the
outstanding Notes of all Series; (c) any representation or warranty made by
the Servicer in the Servicing Agreement shall prove to have been incorrect
when made, which has a material adverse effect on the Note Issuer or the
Certificateholders and which material adverse effect continues unremedied for
a period of 60 days after the giving of notice to the Servicer by the Note
Issuer or the Note Trustee; and (d) certain events of insolvency, readjustment
of debt, marshaling of assets and liabilities, or similar proceedings with
respect to the Servicer or the Seller and certain actions by the Servicer or
the Seller indicating its insolvency, reorganization pursuant to bankruptcy
proceedings, or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Servicing Agreement remains
unremedied, either the Note Trustee or holders of Notes evidencing not less
than 25 percent in principal amount of then outstanding Notes of all Series
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 Note Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to similar compensation arrangements. In
addition, upon a Servicer Default, each of the following shall be entitled to
apply to the CPUC for sequestration and payment of revenues arising with
respect to the Transition Property: (1) the Certificateholders and the
Certificate Trustee as beneficiary of any statutory lien permitted by the PU
Code; (2) the Note Issuer or its assignees; or (3) pledgees or transferees,
including transferees under PU Code 844, of the Transition Property. If,
however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred,
such trustee or official may have the power to prevent the Note Trustee or the
Noteholders from effecting a transfer of servicing. The Note Trustee may
appoint, or petition a court of competent jurisdiction for the appointment of,
a successor servicer which satisfies criteria specified by the Rating
Agencies. The Note Trustee may make such arrangements for compensation to be
paid.
WAIVER OF PAST DEFAULTS
Holders of Notes evidencing at least a majority in principal amount of the
then outstanding Notes of all Series, on behalf of all Noteholders, may waive
any default by the Servicer in the performance of its obligations under the
Servicing Agreement and its consequences, except a default in making any
required deposits to the Collection Account in accordance with the Servicing
Agreement. The Servicing Agreement provides that no such waiver will impair
the Noteholders' rights with respect to subsequent defaults.
SUCCESSOR SERVICER
If for any reason a third party assumes the role of the Servicer under the
Servicing Agreement (in such role, the "Successor Servicer"), the Servicing
Agreement will require the Servicer to cooperate with the Note Issuer, the
Note Trustee and the Successor Servicer in terminating the Servicer's rights
and responsibilities under the Servicing Agreement, including the transfer to
the Successor Servicer of all cash amounts then held by the
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Servicer for remittance or subsequently acquired. The Servicing Agreement will
provide that the Servicer shall be liable for all reasonable costs and
expenses incurred in transferring servicing responsibilities to the Successor
Servicer. There can be no assurance that the Note Issuer will be able to
engage a Successor Servicer if PG&E ceases to act as Servicer for any reason.
Furthermore, even if the Note Issuer appoints a Successor Servicer, a
Successor Servicer may encounter difficulties in collecting FTA Payments and
determining appropriate adjustments to FTA Charges. Any Successor Servicer may
have less experience than PG&E and less capable systems than those employed by
PG&E. In addition, under current law the Successor Servicer may not be able to
invoke a remedy of shutting off service to a Customer for nonpayment of the
applicable FTA Charge.
AMENDMENT
The Servicing Agreement may be amended by the parties thereto, without the
consent of the Noteholders (or, accordingly, the Certificateholders), but with
the consent of the Note Trustee, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of that
agreement or of modifying in any manner the rights of the Noteholders (or,
accordingly, the Certificateholders), provided that such action will not, as
certified in a certificate of an officer of the Servicer delivered to the Note
Trustee and the Note Issuer, materially and adversely affect the interest of
any Noteholder (or, accordingly, any Certificateholder). The Servicing
Agreement may also be amended by the Servicer and the Note Issuer with the
consent of the Note Trustee and the holders of Notes evidencing at least a
majority in principal amount of the then outstanding Notes of all Series and
Classes for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such agreement or of modifying in any
manner the rights of the Noteholders or the Certificateholders; provided,
however, that no such amendment may (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, FTA Collections or (ii)
reduce the aforesaid percentage of the Notes the holders of which are required
to consent to any such amendment, without the consent of the holders of all
the outstanding Notes.
TERMINATION
The obligations of the Servicer and the Note Issuer pursuant to the
Servicing Agreement will terminate upon the payment to the Noteholders and
corresponding distribution to the Certificateholders of all amounts required
to be paid or distributed to them pursuant to the Servicing Agreement, the
Notes, the Note Indenture, the Certificates and the Trust Agreement.
DESCRIPTION OF THE NOTES
The Notes of any Class will be issued by the Note Issuer to the Trust (as
such, the "Noteholder") pursuant to the terms of an Indenture (the "Note
Indenture") between the Note Issuer and the Note Trustee, in a principal
amount equal to the initial aggregate principal amount of the related Class of
Certificates. The following summary describes the material terms and
provisions of the Note Indenture. The particular terms of the Notes of any
Class will be established in a supplement to the Note Indenture and the
material terms thereof will be described in the Prospectus Supplement for the
related Series of Certificates. This summary does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the terms
and provisions of the Note Indenture and related supplements thereto, forms of
which are filed as exhibits to the Registration Statement.
GENERAL
The Notes may be issued in one or more Series, any one or more of which may
be comprised of one or more Classes. All Notes of the same Series will be
identical in all respects except for the denominations thereof, unless such
Series is comprised of more than one Class, in which case all Notes of the
same Class will be identical in all respects except for the denominations
thereof.
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The Prospectus Supplement for a Series of Certificates will describe the
following terms of the related Series of Notes and, if applicable, the Classes
thereof: (a) the designation of the Series and, if applicable, the Classes
thereof, (b) the principal amount, (c) the annual rate at which interest
accrues (the "Note Interest Rate"), (d) the Payment Dates, (e) the scheduled
maturity date (the "Scheduled Maturity Date"), (f) the final termination date
of the Series (the "Final Maturity Date"), (g) the issuance date of the Series
(the "Series Issuance Date"), (h) the place or places for the payment of
principal, (i) the authorized denominations, (j) the provisions for optional
redemption by the Note Issuer, (k) the Expected Amortization Schedule for
principal of such Series and, if applicable, the Classes thereof, (l) the FTA
Charges as of the date of issuance of such Series of Notes, and the
portion of the FTA Charges attributable to such Series of Notes and (m) any
other terms of such Class that are not inconsistent with the provisions of the
Notes and that will not result in any Rating Agency reducing or withdrawing
its then current rating of any outstanding Class of Notes or Certificates (the
notification in writing by each Rating Agency to the Seller, the Servicer, the
Note Trustee and the Note Issuer that any action will not result in such a
reduction or withdrawal is referred to herein as the "Rating Agency
Condition").
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer will grant to the Note Trustee a security interest in all of the Note
Issuer's right, title and interest in and to (a) all of the Transition
Property and all proceeds thereof, (b) the Sale Agreement, (c) the Servicing
Agreement, (d) the Collection Account and all amounts or investment property
on deposit therein or credited thereto from time to time, (e) all other
property of whatever kind owned from time to time by the Note Issuer, which
such other property is expected to be relatively small, (f) all present and
future claims, demands, causes and choses in action in respect of any or all
of the foregoing and all payments on or under the foregoing and (g) all
proceeds in respect of any or all of the foregoing; provided, however, that
(1) the cash contributed to the Note Issuer by the Seller which is not held in
the Capital Subaccount, including cash that has been released to the Note
Issuer following retirement of a related Series of Certificates, (2) net
investment earnings which have been released to the Note Issuer by the Note
Trustee pursuant to the terms of the Indenture and (3) the
Overcollateralization Amount with respect to a Series of Certificates that has
been released to the Note Issuer following retirement of such Series will not
be covered by the foregoing security interest. The foregoing assets to which
the Note Issuer will grant the Note Trustee a security interest are referred
to collectively as the "Note Collateral" herein.
COLLECTION ACCOUNT
The Note Issuer will establish, in the name of the Note Trustee, a
segregated identifiable account (the "Collection Account") with an Eligible
Institution. The Collection Account will be held by the Note Trustee for the
benefit of the Noteholders. The Collection Account will consist of four
subaccounts: a general subaccount (the "General Subaccount"), a reserve
subaccount (the "Reserve Subaccount"), a subaccount for the
Overcollateralization Amount with respect to each Series of Notes (the
"Overcollateralization Subaccount") and a capital subaccount (the "Capital
Subaccount"). All amounts in the Collection Account not allocated to any other
subaccount will be allocated to the General Subaccount. Unless the context
indicates otherwise, references herein to the Collection Account include each
of the subaccounts contained therein.
An "Eligible Institution" means (a) the corporate trust department of the
Note Trustee or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) has either (A)
a long-term unsecured debt rating of "AAA" by S&P and "A2" by Moody's or (B) a
certificate of deposit rating of "A-1+" by S&P and "P-1" by Moody's, or any
other long-term, short-term or certificate of deposit rating acceptable to the
Rating Agencies and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC").
Funds in the Collection Account may be invested in any of the following: (a)
direct obligations of, or obligations fully and unconditionally guaranteed as
to timely payment by, the United States of America, (b) demand deposits, time
deposits, certificates of deposit or bankers' acceptances of Eligible
Institutions, (c) commercial paper
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(other than commercial paper issued by the Seller) having, at the time of
investment, a rating in the highest rating category from each Rating Agency,
(d) money market funds which have the highest rating from each Rating Agency,
(e) demand deposits, time deposits and certificates of deposit which are fully
insured by the FDIC, (f) repurchase obligations with respect to any security
that is a direct obligation of, or fully guaranteed by, the United States of
America or certain agencies or instrumentalities thereof, entered into with
certain depository institutions or trust companies, or (g) any other
investment permitted by each Rating Agency (collectively, the "Eligible
Investments"), in each case which mature on or before the Certificate Business
Day preceding the next Payment Date. The Note Trustee and the Certificate
Trustee will have access to the Collection Account for the purpose of making
deposits in and withdrawals from the Collection Account in accordance with the
Note Indenture.
The Servicer will remit to the Collection Account, on each Remittance Date,
FTA Payments expected to have been received during the preceding calendar
month, based on the Collections Curve, modified by the Excess Remittance or
Remittance Shortfall, if any, as described under "Servicing--Remittances to
Collection Account" herein.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of a Class of Notes at the per
annum rate either specified in or determined in the manner specified in the
related Prospectus Supplement and will be payable on the Payment Dates
specified in the related Prospectus Supplement. FTA Collections, including
such amounts as are available in the Reserve Subaccount and the
Overcollateralization Subaccount and, if necessary, the amounts available in
the Reserve Subaccount will be used to make interest payments to the
Noteholders of each Class on each Payment Date with respect thereto.
Principal of the Notes of each Class will be payable in the amounts and on
the Payment Dates specified in the related Prospectus Supplement, but only to
the extent that amounts in the Collection Account are available therefor, and
subject to the other limitations described below. See "--Allocations;
Payments" herein. Each Prospectus Supplement will set forth the Expected
Amortization Schedule for the related Series of Notes and, if applicable, the
Classes of such Series. On any Payment Date, the Note Issuer will make
payments on the Notes only until the outstanding principal balances thereof
have been reduced to the principal balances specified in the applicable
Expected Amortization Schedule for such Distribution Date. Any FTA Collections
in excess of amounts payable as (a) expenses of the Note Issuer and the Trust,
(b) payments of interest on and principal of the Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to the Capital Subaccount
(all as described herein under "--Allocations; Payments" herein) will be
retained by the Note Trustee in the Reserve Subaccount for payment on
subsequent Payment Dates. However, if insufficient FTA Collections are
received with respect to any Payment Date, and amounts in the Collection
Account are not sufficient to make up the shortfall, principal of any Class of
Notes may be payable later than expected as described herein. See "Risk
Factors--Unusual Nature of the Transition Property" and "Risk Factors--
Uncertain Distribution Amounts and Weighted Average Life" herein. The entire
unpaid principal amount of the Notes of a Class will be due and payable on the
date on which a Note Event of Default has occurred and is continuing with
respect to such Class, if the holders of a majority in principal amount of the
Notes of all Series then outstanding have declared the Notes to be immediately
due and payable. See "--Note Events of Default; Rights Upon Note Event of
Default" herein.
Unless the context requires otherwise, all references in this Prospectus to
principal of the Notes of a Series includes any premium that might be payable
thereon if Notes of such Series are redeemed, as described in the related
Prospectus Supplement.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, any Series of Notes and
accordingly cause the Trust to redeem the related Series of Certificates on
any Distribution Date if, after giving effect to distributions that would
otherwise be made on such date, the outstanding principal balance of the
Series of Notes has been reduced to
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less than five percent of the initial principal balance thereof. The Notes may
be so redeemed upon payment by the Note Issuer of the outstanding principal
amount of the Notes and accrued but unpaid interest thereon as of the date of
redemption. Unless otherwise specified in the related Prospectus Supplement,
notice of such redemption will be given by the Note Issuer to each holder of
Notes to be redeemed by first-class mail, postage prepaid, mailed not less
than five days nor more than 25 days prior to the date of redemption.
MANDATORY REDEMPTION
If the Seller is required to repurchase the Transition Property as described
herein under "Description of the Transition Property--Seller Representations
and Warranties and Repurchase Obligation," the Note Issuer will be required to
redeem all Series of Notes on the fifth Certificate Business Day following the
date of such repurchase.
OVERCOLLATERALIZATION AMOUNT
The Financing Order provides that the Note Issuer, as the owner of the
Transition Property, is entitled to recover FTA Charges in amounts equal to
the principal amount of all Series of Notes, all interest thereon, an
additional amount (for any Series, the "Overcollateralization Amount")
specified in the related Prospectus Supplement and all related fees, costs and
expenses. The Overcollateralization Amount with respect to each Series is
intended to enhance the likelihood that distributions on each Series of the
Notes will be made in accordance with their Expected Amortization Schedules.
The Financing Order provides further that the Infrastructure Bank and/or the
California State Treasurer's Office should determine the Overcollateralization
Amount required for each Series of Notes prior to their issuance. The
Overcollateralization Amount for each Series of Notes will be either (a) 0.50%
of the initial principal amount of the Series of Notes or (b) such greater
amount as is necessary to obtain from the Rating Agencies the highest possible
investment grade ratings for the Notes upon issuance. FTA Charges will be set
and adjusted at a level that is intended to collect the Overcollateralization
Amount ratably over the life of the related Certificates according to a
schedule set forth in the related Prospectus Supplement.
On each Payment Date, all FTA Collections will be applied as described under
"--Allocations; Payments" herein. On any Payment Date, an amount equal to the
lesser of (a) the amount remaining after payment of scheduled amounts due on
the Notes and related fees and expenses and (b) the amount, if any, by which
the Required Overcollateralization Level exceeds the amount in the
Overcollateralization Subaccount, will be deposited in the
Overcollateralization Subaccount. Amounts in the Overcollateralization
Subaccount will be invested in Eligible Investments, and the Note Issuer will
be entitled to earnings thereon, subject to the limitations described under
"--Allocations; Payments" herein. Amounts in the Overcollateralization
Subaccount are intended to cover any shortfall in FTA Collections that might
otherwise occur on any Payment Date or at the last Scheduled Maturity Date for
any Series or Class of Notes. Any amounts remaining in the
Overcollateralization Subaccount with respect to a particular Series of Notes
in excess of the amounts required to make distributions on the related Series
of Certificates in full at the Termination Date will be returned to the Note
Issuer, which may distribute such amounts to its members under the
circumstances described under "--Certain Covenants of the Note Issuer" herein.
CAPITAL SUBACCOUNT
Upon the issuance of each Series of Notes, the Seller will contribute
capital to the Note Issuer in an amount specified in each Prospectus
Supplement, which will equal 0.50% of the initial principal amount of such
Series of Notes. Such amount, less $100,000 in the aggregate for all Series of
Notes (with respect to each Series, the "Required Capital Level"), will be
deposited into the Capital Subaccount. On each Payment Date, the Note Trustee
will draw on amounts in the Capital Subaccount, if any, to the extent amounts
available in the General Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to make scheduled payments
on the Notes and pay expenses of the Note Issuer and the Trust. Deposits to
the Capital Subaccount will be made as described under "--Allocations;
Payments" herein.
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RESERVE SUBACCOUNT
FTA Collections available with respect to any Payment Date in excess of
amounts payable as expenses of the Note Issuer and the Trust, as payments of
interest and principal on the Notes, as allocations to the
Overcollateralization Subaccount and as allocations to the Capital Subaccount
(all as described under "--Allocations; Payments" herein), will be allocated
to the Reserve Subaccount. On each Payment Date, the Note Trustee will draw on
amounts in the Reserve Subaccount, if any, to the extent amounts available in
the General Subaccount are insufficient to make scheduled payments on the
Notes, pay expenses of the Note Issuer and the Trust, fund the
Overcollateralization Subaccount as scheduled and replenish the Capital
Subaccount. Amounts in the Reserve Subaccount will be invested in Eligible
Investments, and the Note Issuer will be entitled to earnings thereon, subject
to the limitations described under "--Allocations; Payments" herein.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will apply, at the direction of the
Servicer, all amounts on deposit in the Collection Account, including net
earnings thereon (subject to the priority of withdrawals described in the
following paragraph), to pay the following amounts in the following priority:
(a) all amounts owed by the Note Issuer or the Trust to the Note Trustee,
the Delaware Trustee and the Certificate Trustee will be paid to such
persons;
(b) the Servicing Fee and all unpaid Servicing Fees from any prior
Payment Dates will be paid to the Servicer;
(c) the Quarterly Administration Fee and all unpaid Quarterly
Administration Fees from prior Payment Dates will be paid to the
Administrator;
(d) so long as no Event of Default has occurred or would be caused by
such payment, all other Operating Expenses will be paid to the persons
entitled thereto, provided that the amount paid on each Payment Date
pursuant to this clause (d) may not exceed $100,000;
(e) any overdue Quarterly Interest (together with, to the extent lawful,
interest on such overdue Quarterly Interest at the applicable Note Interest
Rate) and then Quarterly Interest with respect to each Series of Notes will
be transferred to the Certificate Trustee, as Noteholder, for distribution
to the Certificateholders;
(f) principal on the Notes payable as a result of a Note Event of Default
or on the Final Maturity Date for any Notes will be transferred to the
Certificate Trustee, as Noteholder, for distribution to the
Certificateholders;
(g) funds necessary to pay Quarterly Principal for any Series of Notes
based on priorities described in each Prospectus Supplement will be
transferred to the Certificate Trustee, as Noteholder, for distribution to
the applicable Certificateholders;
(h) unpaid Operating Expenses will be paid to the persons entitled
thereto;
(i) the amount, if any, by which the Required Overcollateralization Level
exceeds the amount in the Overcollateralization Subaccount as of such
Payment Date will be allocated to the Overcollateralization Subaccount;
(j) the amount, if any, by which the Required Capital Level with respect
to all outstanding Series of Notes exceeds the amount in the Capital
Subaccount as of such Payment Date will be allocated to the Capital
Subaccount;
(k) funds up to the net earnings on amounts in the Collection Account for
the prior quarter without cumulation will be released to the Note Issuer;
(l) if any Series of Notes has been retired as of such Payment Date, the
excess of the amount in the Overcollateralization Subaccount over the
aggregate Required Overcollateralization Level with respect to all Series
of Notes remaining outstanding will be released to the Note Issuer;
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(m) if any Series of Notes has been retired as of such Payment Date, the
excess of the amount in the Capital Subaccount over the aggregate Required
Capital Level with respect to all Series of Notes remaining outstanding
will be released to the Note Issuer;
(n) the balance, if any, will be allocated to the Reserve Subaccount for
distribution on subsequent Payment Dates; and
(o) following the repayment of all outstanding Series of Notes, the
balance, if any, will be released to the Note Issuer.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the transfers contemplated by clauses (a) through (g)
above, the Note Trustee will (x) first, draw from amounts on deposit in the
Reserve Subaccount, (y) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (z) third, draw from amounts on deposit
in the Capital Subaccount, up to the amount of such shortfall, in order to
make the transfers described above. In addition, if on any Payment Date funds
on deposit in the General Subaccount are insufficient to make the transfers
described in clauses (i) and (j) above, the Note Trustee will draw from
amounts on deposit in the Reserve Subaccount to make such transfers. If on any
Payment Date when there is more than one Series of Notes outstanding, funds on
deposit in the Collection Account are insufficient to make the transfers
contemplated by clauses (e) and (f) above, such funds will be allocated among
the various Series and Classes, pro rata as specified in the related
Prospectus Supplement.
For purposes of the foregoing allocations:
"Quarterly Administration Fee" means the quarterly fee payable to PG&E as
the Administrator under the Administrative Services Agreement between PG&E
and the Note Issuer, which will be specified in each Prospectus Supplement.
"Quarterly Interest" means, with respect to any Payment Date and any
Series of Notes, the quarterly interest for such date and Series as
specified in the related Prospectus Supplement.
"Quarterly Principal" means, with respect to any Payment Date and any
Series of Notes, the excess, if any, of the then-outstanding principal
balance of such Series of Notes over the outstanding principal balance
specified for such Payment Date on the applicable Expected Amortization
Schedule.
Payments to the Noteholders of a Series will be made to such holders as
specified in the related Prospectus Supplement.
ACTIONS BY NOTEHOLDERS
The Certificate Trustee, on behalf of the Trust as sole initial holder of
the Notes, has the right to vote and give consents and waivers in respect of
modifications to any Class or Series of Notes and to the provisions of certain
Basic Documents under the Note Indenture. Subject to certain exceptions, the
holders of a majority of the aggregate outstanding amount of the Certificates
of all Series (or, if less than all Series or Classes are affected, the
affected Series or Class or Classes) shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Certificate Trustee, or exercising any trust or power conferred on the
Certificate Trustee under the Trust Agreement, including any right of the
Certificate Trustee as holder of the Notes of the corresponding Series or
Class or Classes, in each case unless a different percentage is specified in
the Trust Agreement; provided that: (1) such direction shall not be in
conflict with any rule of law or with the Trust Agreement and would not
involve the Certificate Trustee in personal liability or expense; (2) the
Certificate Trustee shall not have determined that the action so directed
would be unjustly prejudicial to the holders of Certificates of such Series or
Class or Classes not taking part in such direction; (3) the Certificate
Trustee may take any other action deemed proper by the Certificate Trustee
which is not inconsistent with such direction; and (4) if a Note Event of
Default with respect to such Series or Class or Notes shall have occurred and
be continuing, such direction shall not obligate the Certificate Trustee to
vote more than a corresponding majority of the related Notes held by the Trust
in favor of declaring the unpaid principal amount of the Notes of all Series
and accrued interest thereon to
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be due and payable or directing any action by the Note Trustee with respect to
such Note Event of Default. In circumstances under which the Certificate
Trustee is required to seek instructions from the holders of the Certificates
of any Class with respect to any such action or vote, the Certificate Trustee
will take such action or vote for or against any proposal in proportion to the
principal amount of the corresponding Class, as applicable, of Certificates
taking the corresponding position. See "Description of the Certificates--
Voting of the Notes" herein.
NOTE EVENTS OF DEFAULT; RIGHTS UPON NOTE EVENT OF DEFAULT
An "Event of Default" with respect to any Series of Notes (a "Note Event of
Default") is defined in the Note Indenture as being: (a) a default for five
days or more in the payment of any interest on any Note; (b) a default in the
payment of the then unpaid principal of any Note of any Series on the Final
Maturity Date for such Series; (c) a default in the payment of the redemption
price for any Note on the redemption date therefor; (d) a default in the
observance or performance of any covenant or agreement of the Note Issuer made
in the Note Indenture and the continuation of any such default for a period of
30 days after notice thereof is given to the Note Issuer by the Note Trustee
or to the Note Issuer and the Note Trustee by the holders of at least 25
percent in principal amount of the Notes of such Series then outstanding; (e)
any representation or warranty made by the Note Issuer in the Note Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect in a material respect as of the time made, and such
breach not having been cured within 30 days after notice thereof is given to
the Note Issuer by the Note Trustee or to the Note Issuer and the Note Trustee
by the holders of at least 25 percent in principal amount of the Note
Indenture of such Series then outstanding; or (f) certain events of
bankruptcy, insolvency, receivership or liquidation of the Note Issuer.
If a Note Event of Default should occur and be continuing with respect to
any Series of Notes, the Note Trustee or holders of not less than a majority
in principal amount of the Notes of all Series then outstanding may declare
the principal of the Notes of all Series to be immediately due and payable.
Such declaration may, under certain circumstances set forth in the Note
Indenture, be rescinded by the holders of a majority in principal amount of
the Notes of all Series then outstanding.
If the Notes of all Series have been declared to be due and payable
following a Note Event of Default, the Note Trustee may, in its discretion,
either sell the Transition Property or elect to have the Note Issuer maintain
possession of the Transition Property and continue to apply FTA Collections as
if there had been no declaration of acceleration. There is likely to be a
limited market, if any, for the Transition Property following a foreclosure
thereon, in light of the preceding default, the unique nature of the
Transition Property as an asset and other factors discussed herein. In
addition, the Note Trustee is prohibited from selling the Transition Property
following a Note Event of Default with respect to any Series, other than a
default in the payment of any principal or redemption price or a default for
five days or more in the payment of any interest on any Note of any Series
unless (a) the holders of all the outstanding Notes of all Series consent to
such sale, (b) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes of all Series
or (c) the Note Trustee determines that the proceeds of the Transition
Property would not be sufficient on an ongoing basis to make all payments on
the Notes of all Series as such payments would have become due if the Notes
had not been declared due and payable, and the Note Trustee obtains the
consent of the holders of 66 2/3 percent of the aggregate outstanding amount
of the Notes of all Series.
Subject to the provisions of the Note Indenture relating to the duties of
the Note Trustee, in case a Note Event of Default will occur and be
continuing, the Note Trustee will be under no obligation to exercise any of
the rights or powers under the Notes at the request or direction of any of the
holders of Notes of any Series if the Note Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities
which might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the Note
Indenture, the holders of a majority in principal amount of the outstanding
Notes of all Series (or, if less than all Classes are affected, the affected
Class or Classes) will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Note Trustee and the
holders of a majority in principal amount of the Notes of all Series then
outstanding may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a
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default in respect of a covenant or provision of the Note Indenture that
cannot be modified without the waiver or consent of all of the holders of the
outstanding Notes of all Classes affected thereby.
With respect to the Notes, no holder of any Note of any Series will have the
right to institute any proceeding with respect to the Notes, unless (a) such
holder previously has given to the Note Trustee written notice of a continuing
Event of Default with respect to such Series, (b) the holders of not less than
25 percent in principal amount of the outstanding Notes of all Series have
made written request of the Note Trustee to institute such proceeding in its
own name as Note Trustee, (c) such holder or holders have offered the Note
Trustee reasonable indemnity, (d) the Note Trustee has for 60 days failed to
institute such proceeding and (e) no direction inconsistent with such written
request has been given to the Note Trustee during such 60-day period by the
holders of a majority in principal amount of the outstanding Notes of all
Series.
In addition, the Servicer will covenant that it will not at any time
institute against the Note Issuer or the Trust any bankruptcy, reorganization
or other proceeding under any Federal or state bankruptcy or similar law.
Neither the Certificate Trustee nor the Note Trustee in its individual
capacity, nor any holder of any ownership interest in the Note Issuer, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes of any Series or for the agreements of the Note Issuer
contained in the Note Indenture.
CERTAIN COVENANTS OF THE NOTE ISSUER
The Note Issuer may not consolidate with or merge into any other entity,
unless (a) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state thereof or the
District of Columbia, (b) such entity expressly assumes by an indenture
supplemental to the Note Indenture the Note Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of
every agreement and covenant of the Note Issuer under the Note Indenture, (c)
no Event of Default will have occurred and be continuing immediately after
such merger or consolidation, (d) the Rating Agency Condition will have been
satisfied with respect to such transaction, (e) the Note Issuer has received
an opinion of counsel to the effect that such consolidation or merger would
have no material adverse tax consequence to the Note Issuer, the Trust, any
Noteholder or any Certificateholder and such consolidation or merger complies
with the Notes and all conditions precedent therein provided for relating to
such transaction have been complied with and (f) any action as is necessary to
maintain the lien and security interest created by the Note Indenture will
have been taken.
The Note Issuer may not convey or transfer substantially all of its
properties or assets to any person or entity, unless (a) the person or entity
acquiring the properties and assets (i) is a United States citizen or an
entity organized under the laws of the United States, any state thereof or the
District of Columbia, (ii) expressly assumes by an indenture supplemental to
the Note Indenture the Note Issuer's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement
and covenant of the Note Issuer under the Notes, (iii) expressly agrees by
such supplemental indenture that all right, title and interest so conveyed or
transferred will be subject and subordinate to the rights of Noteholders, (iv)
unless otherwise specified in the supplemental indenture referred to in clause
(ii) above, expressly agrees to indemnify, defend and hold harmless the Note
Issuer against and from any loss, liability or expense arising under or
related to the Note Indenture and the Notes, and (v) expressly agrees by means
of such supplemental indenture that such person (or if a group of persons,
then one specified person) shall make all filings with the Commission (and any
other appropriate person) required by the Exchange Act in connection with the
Notes, (b) no Event of Default will have occurred and be continuing
immediately after such transaction, (c) the Rating Agency Condition will have
been satisfied with respect to such transaction, (d) the Note Issuer has
received an opinion of counsel to the effect that such transaction will not
have any material adverse tax consequence to the Note Issuer, the Trust, any
Noteholder or any Certificateholder and such conveyance or transfer complies
with the Note Indenture and all
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conditions precedent therein provided for relating to such transaction have
been complied with and (e) any action as is necessary to maintain the lien and
security interest created by the Note Indenture shall have been taken.
The Note Issuer will not, among other things, (a) except as expressly
permitted by the Note Indenture, sell, transfer, exchange or otherwise dispose
of any of the assets of the Note Issuer, unless directed to do so by the Note
Trustee, (b) claim any credit on, or make any deduction from the principal or
interest payable in respect of, the Notes (other than amounts properly
withheld under the Code) or assert any claim against any present or former
Noteholder because of the payment of taxes levied or assessed upon any part of
the Transition Property and the other Note Collateral, (c) terminate its
existence, dissolve or liquidate in whole or in part, (d) permit the validity
or effectiveness of the Notes to be impaired, (e) permit the lien of the Note
Indenture to be amended, hypothecated, subordinated, terminated or discharged
or permit any person to be released from any covenants or obligations with
respect to the Notes except as may be expressly permitted by the Indenture,
(f) permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance, other than the lien and security interest created by the
Indenture, to be created on or extend to or otherwise arise upon or burden the
Note Collateral or any part thereof or any interest therein or the proceeds
thereof or (g) permit the lien of the Note Indenture not to constitute a valid
first priority security interest in the Note Collateral.
The Note Issuer may not engage in any business other than financing,
purchasing, owning and managing the Transition Property in the manner
contemplated by the Notes, the Sale Agreement, the Servicing Agreement, the
Trust Agreement, the Note Purchase Agreement between the Note Issuer and the
Trust, or certain related documents (collectively, the "Basic Documents") and
activities incidental thereto.
The Note Issuer will not issue, incur, assume, guarantee or otherwise become
liable for any indebtedness except for the Notes.
The Note Issuer will not, except for any Eligible Investments as
contemplated by the Basic Documents, make any loan or advance or credit to, or
guarantee, endorse or otherwise become contingently liable in connection with
the obligations, stocks or dividends of, or own, purchase, repurchase or
acquire (or agree contingently to do so) any stock, obligations, assets or
securities of, or any other interest in, or make any capital contribution to,
any other person. The Note Issuer will not, except as contemplated by the
Basic Documents, make any expenditure (by long-term or operating lease or
otherwise) for capital assets (either realty or personalty). The Note Issuer
will not, directly or indirectly, make payments to or distributions from the
Collection Account except in accordance with the Basic Documents.
The Note Issuer will not make any payments, distributions or dividends to
any holder of beneficial interests in the Note Issuer in respect of such
beneficial interest for any calendar month unless no Note Event of Default
shall have occurred and be continuing and any such distributions do not cause
the book value of the remaining equity in the Note Issuer to decline below
0.50% of the initial principal amount of all Series of Notes issued and
outstanding pursuant to the Indenture.
The Note Issuer will cause the Servicer to deliver to the Note Trustee and
the Certificate Trustee the annual accountant's certificates, compliance
certificates, reports regarding distributions and statements to Noteholders
and the Certificateholders required by the Servicing Agreement.
REPORTS TO NOTEHOLDERS
With respect to each Series of Notes, on or prior to each Payment Date, the
Servicer will prepare and provide to the Note Issuer, the Infrastructure Bank,
the Note Trustee and the Certificate Trustee a statement (the "Quarterly
Servicer's Certificate") to be delivered to the Noteholders on such Payment
Date. With respect to each Series of Notes, each such statement to be
delivered to Noteholders will include (to the extent applicable) the following
information (and any other information so specified in the related Prospectus
Supplement) as to the Notes of such Series with respect to such Payment Date
or the period since the previous Payment Date, as applicable:
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(a) the amount of the distribution to Noteholders allocable to principal;
(b) the amount of the distribution to Noteholders allocable to interest;
(c) the aggregate outstanding principal balance of the Notes, after
giving effect to payments allocated to principal reported under (a) above;
and
(d) the difference, if any, between the amount specified in (c) above and
the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Note Trustee will
mail to each person who at any time during such calendar year has been a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of Federal and
state income tax returns. See "Certain Federal Income Tax Consequences" and
"State Taxation" herein.
ANNUAL COMPLIANCE STATEMENT
The Note Issuer will be required to file annually with the Note Trustee, the
Certificate Trustee and the Rating Agencies a written statement as to the
fulfillment of its obligations under the Notes.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust will issue the Certificates pursuant to the Trust Agreement, the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary describes the material terms
and provisions of the Trust Agreement. The particular terms of the
Certificates of any Class will be established in a supplement to the Trust
Agreement, and the material terms thereof will be described in the related
Prospectus Supplement. The following summary description of the Certificates
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Trust Agreement and the Certificates, a form of which is
also filed as an exhibit to the Registration Statement.
The Certificates will be issued in fully registered form only. Each Class of
Certificates offered hereby will represent a fractional undivided beneficial
interest in the corresponding Class of Notes, the proceeds thereof and
payments pursuant to any related Swap Agreement. Each Certificate of each
Class will correspond to a pro rata share of the outstanding principal amount
of the corresponding Class of the Notes held in the Trust and will be issued
in minimum denominations specified in the applicable Prospectus Supplement.
Each Class of Certificates will bear interest at the rate per annum borne by
the corresponding Class of the Notes, unless a Swap Agreement is entered into
in connection with the issuance of any Class of Certificates, as described in
the related Prospectus Supplement, in which case such Class of Certificates
may bear interest at a variable rate. See "Description of the Notes--Interest
and Principal" herein. Payments of interest and principal made in respect of
any Class of Notes are required to be passed through to holders of the
corresponding Class of Certificates or to the Swap Counterparty with respect
to Floating Rate Certificates at the times and in the manner described herein.
See "--Payments and Distributions" below and "Description of the Notes--
Interest and Principal" herein.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates. The Certificates will
not be guaranteed or insured by the State of California, the Infrastructure
Bank, the Trust or any other governmental agency or instrumentality or by the
Seller or any of its affiliates. Neither the full faith and credit nor the
taxing power of the State of California or any agency or instrumentality
thereof is pledged to the distributions of principal of, or interest on, the
Certificates.
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STATE PLEDGE
Pursuant to Section 841(c) of the PU Code, the Infrastructure Bank, on
behalf of the State of California, pledges and agrees with the Note Issuer,
the Trust and the holders of the Certificates that the State of California
shall neither limit nor alter the FTA Charges, the Transition Property, or the
Financing Order or Advice Letters relating thereto, or any rights thereunder,
until the Certificates, together with the accrued and unpaid interest thereon,
are fully paid and discharged, provided nothing contained in such pledge and
agreement precludes such limitation or alteration if and when adequate
provision shall be made by law for the protection of the Note Issuer, the
Trust and the Certificateholders (the "State Pledge").
PAYMENTS AND DISTRIBUTIONS
The Certificate Trustee is scheduled to receive payments of interest on and
principal of the Notes (in each case, the amounts paid to any Series or Class
of the Notes will be determined from time to time in accordance with the
provisions described under "Description of the Notes--Allocations; Payments"
herein) on each Payment Date.
The Certificate Trustee will distribute on each Distribution Date to the
holders of each Class of Certificates all payments of principal and interest
with respect to the corresponding Class of Notes (other than payments received
following a payment default in respect of such Class of Notes), or, in lieu of
such interest, payments under the related Swap Agreement with respect to
interest, the receipt of which is confirmed by the Certificate Trustee by 1:00
p.m. (New York City time) on such Distribution Date or, if such receipt is
confirmed after 1:00 p.m. (New York City time) on such Distribution Date, then
on the following Certificate Business Day. Each such distribution other than
the final distribution with respect to any Certificate will be made by the
Certificate Trustee to the holders of record of the Certificates of the
applicable Class on the Record Date in respect of such Distribution Date. If a
payment of principal or interest with respect to any Class of the Notes (other
than a payment received following a payment default in respect of such Class
of Notes) is not received by the Certificate Trustee on a Distribution Date
but is received within five days thereafter, it will be distributed to such
holders of record on the date receipt thereof is confirmed by the Certificate
Trustee, if such receipt is confirmed by the Certificate Trustee by 1:00 p.m.
(New York City time) or, if such receipt is confirmed after 1:00 p.m. (New
York City time), then on the following Certificate Business Day. If such
payment is received by the Certificate Trustee after such five-day period, it
will be treated as a payment received following a payment default in respect
of such Class of Notes and distributed as described below. The final
distribution with respect to any Certificate, however, will be made only upon
presentation and surrender of such Certificate at the office or agency of the
Certificate Trustee specified in the notice given by the Certificate Trustee
with respect to such final distribution.
Any payment received by the Certificate Trustee following a payment default
in respect of any Class of the Notes ("Special Payments") will be distributed
on the later of (i) the date such receipt is confirmed by the Certificate
Trustee and (ii) the date on which any Special Payment is scheduled to be
distributed by the Certificate Trustee (a "Special Distribution Date").
However, in the case of any such Special Payment receipt of which is confirmed
after 1:00 p.m. (New York City time), such Special Payment will be distributed
on the following Certificate Business Day. The Certificate Trustee will mail
notice to the holders of record of Certificates of the applicable Class as of
the most recent Record Date not less than 20 days prior to the Special
Distribution Date on which any Special Payment is scheduled to be distributed
in respect of Certificates of such Class stating such anticipated Special
Distribution Date. Each distribution of any such Special Payment will be made
by the Certificate Trustee on the Special Distribution Date to the holders of
record of the Certificates of such Class as of the most recent Record Date.
See "--Events of Default" below.
The Trust Agreement requires that the Certificate Trustee establish and
maintain, for the Trust and for the benefit of the holders of each Class of
Certificates, one or more non-interest bearing accounts (a "Certificate
Account") for the deposit of payments on the Notes corresponding to such
Class. Pursuant to the terms of the Trust Agreement, the Certificate Trustee
is required to deposit any payments received by it with respect to any Class
of Notes in the corresponding Certificate Account. All amounts so deposited
will be distributed by the Certificate Trustee to holders of the applicable
Class of Certificates on a Distribution Date or a Special Distribution Date,
as appropriate, unless a different date for distribution of such amount is
specified herein.
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At such time, if any, as the Certificates of any Class are issued in the
form of Definitive Certificates and not to DTC or its nominee, distributions
by the Certificate Trustee from the Certificate Account with respect to such
Class on a Distribution Date or a Special Distribution Date will be made by
check mailed to each holder of a Definitive Certificate of such Class of
record on the applicable Record Date at its address appearing on the register
maintained with respect to the Certificates of such Series, or, upon
application by a holder of any Class of Certificates in the principal amount
of $1,000,000 or more to the Certificate Trustee not later than the applicable
Record Date, by wire transfer to an account maintained by the payee in New
York, New York. The final distribution for each Class of Certificates,
however, will be made only upon presentation and surrender of the Certificates
of such Class at the office or agency of the Certificate Trustee specified in
the notice or agency given by the Certificate Trustee of such final
distribution. The Certificate Trustee will mail such notice of the final
distribution to the Certificateholders of such Class, specifying the date set
for such final distribution and the amount of such distribution.
If any Special Distribution Date or other date specified herein for
distribution of any distributions to Certificateholders is not a Certificate
Business Day, distributions scheduled to be made on such Special Distribution
Date or other date may be made on the next succeeding Certificate Business Day
and no interest shall accrue upon such distribution during the intervening
period. "Certificate Business Day" means any day other than a Saturday, a
Sunday or a day on which banking institutions or trust companies in New York,
New York or San Francisco, California are authorized or obligated by law,
regulation or executive order to remain closed.
FLOATING RATE CERTIFICATES
If any Floating Rate Certificates are offered, the Trust will enter into a
swap agreement (the "Swap Agreement") with a swap counterparty identified and
described in the related Prospectus Supplement (the "Swap Counterparty").
Pursuant to the Swap Agreement, on each Distribution Date, the Trust will be
obligated to pay to the Swap Counterparty, solely from payments received with
respect to the related Class of Notes, an amount equal to the interest due on
the related Class of Notes on such Distribution Date, and the Swap
Counterparty will be obligated to pay to the Trust an amount equal to the
product of (a) the Floating Rate and (b) the principal balance of the Floating
Rate Certificates as of the close of business on the preceding Distribution
Date after giving effect to all payments of principal made to the Floating
Rate Certificateholders on such preceding Distribution Date. With respect to
each Distribution Date, any difference between the quarterly payment by the
Swap Counterparty to the Trust and the quarterly payment by the Trust to the
Swap Counterparty will be referred to herein as the "Net Trust Swap Receipt,"
if such difference is a positive number, and the "Net Trust Swap Payment," if
such difference is a negative number. Net Trust Swap Receipts will be included
in available funds on each Distribution Date and Net Trust Swap Payments will
be paid out of available funds on each Distribution Date.
The Swap Agreement will terminate or may be terminated upon the occurrence
of certain events of default or termination events as described in the related
Prospectus Supplement. In particular, the Swap Agreement will be terminated if
the Swap Counterparty's rating by either of Moody's or S&P falls below "AAA"
(or the equivalent rating) (a "Downgrade Event") and the Swap Agreement is not
assigned to a replacement swap counterparty satisfying such ratings criteria
or such lower ratings criteria as may be permitted by the Swap Agreement
within the time period specified in the related Prospectus Supplement. In no
event will any successor swap counterparty be rated below "A" (or the
equivalent rating) by either of the above-referenced Rating Agencies. Upon the
occurrence of a Downgrade Event and the failure to assign the Swap Agreement,
a termination event will have occurred under the Swap Agreement and the
interest rate payable with respect to the Floating Rate Certificates will
automatically convert permanently to a fixed rate equal to the interest rate
payable on the related Class of Notes, which may be substantially more or less
than the rate otherwise payable on the Floating Rate Certificates. See "Risk
Factors--Additional Risks of Floating Rate Certificates."
Unless otherwise specified in the related Prospectus Supplement, the amount
of interest payable on the Floating Rate Certificates from time to time will
be determined as follows.
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(i) Determination of LIBOR. The Agent Bank named in the related Prospectus
Supplement (together with any successor Agent Bank under the Trust Agreement,
the "Agent Bank") will determine the interest rate payable on the Floating
Rate Certificates in accordance with the following provisions:
(a) On the second day on which dealings in deposits in U.S. dollars are
transacted in the London interbank market (a "London Banking Day")
immediately preceding the first day of each Interest Accrual Period (as
defined below) and on the Closing Date with respect to the first Interest
Accrual Period (each such day, an "Interest Determination Date"), the Agent
Bank will determine "LIBOR" based on the offered rate for deposits in U.S.
dollars for the period specified in the related Prospectus Supplement,
commencing on the first day of such Interest Accrual Period that appears on
the display page of the Dow Jones Telerate Service for the purpose of
displaying the London interbank offered rate of major banks for U.S.
dollars as of 11:00 a.m., London time, on such Interest Determination Date
(such display page being the "Telerate Page"). Notwithstanding the
foregoing, if no offered rate appears, LIBOR for such Interest Accrual
Period will be determined as if the parties had specified the rate
described in clause (b) below. The interest rate applicable to the Floating
Rate Certificates for the Interest Accrual Period relating to an Interest
Determination Date shall be the sum of LIBOR as determined by the Agent
Bank on the most recent Interest Determination Date plus the margin
specified in any related Prospectus Supplement (the "Floating Rate").
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the London interbank
market selected by the Agent Bank to provide the Agent Bank with its
offered quotation for deposits in U.S. dollars for a period specified in
the related Prospectus Supplement, commencing on the second London Banking
Day immediately following such Interest Determination Date, to prime banks
in the London interbank market at approximately 11:00 a.m., London time, on
such Interest Determination Date and in a principal amount not less than $1
million that is representative for a single transaction in U.S. dollars in
such market at such time. If at least two such quotations are provided,
LIBOR for the relevant Interest Accrual Period will be the arithmetic mean
of such quotations. If fewer than two quotations are provided, LIBOR for
such Interest Accrual Period will be the arithmetic mean of the rates
quoted at approximately 11:00 a.m. in The City of New York, on such
Interest Determination Date by three major banks in The City of New York
selected by the Agent Bank for loans in U.S. dollars to leading European
banks, for the period specified in the related Prospectus Supplement,
commencing on the second London Banking Day immediately following such
Interest Determination Date and in a principal amount not less than $1
million that is representative for a single transaction in U.S. dollars in
such market at such time; provided, however, that if any of the banks so
selected by the Agent Bank are not quoting as mentioned in this sentence,
the Floating Rate in effect for such Interest Accrual Period will be the
interest rate in effect on such Interest Determination Date.
(c) There will be no maximum or minimum Floating Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, the interest rate with respect to the Floating Rate Certificates
shall be the fixed interest rate payable on the related Class of Notes
(calculated on the basis of a 360-day year consisting of twelve 30-day
months), effective as of the first day of the Interest Accrual Period in which
the termination of the Swap Agreement occurs.
(ii) Calculation of Quarterly Interest. The Agent Bank will, as soon as
practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the Certificate Interest Rate applicable to, and calculate the
amount of interest payable on, each of the Floating Rate Certificates for the
relevant Interest Accrual Period. Interest payments will be made in an amount
equal to the product of (a)(1) the actual number of days in the related
Interest Accrual Period (as defined herein) divided by 360, multiplied by (2)
the applicable Floating Rate and (b) the principal balance of the Floating
Rate Certificates as of the close of business on the preceding Distribution
Date after giving effect to all payments of principal made to the Floating
Rate Certificateholders on such preceding Distribution Date (or, in the case
of the first Distribution Date, as of the Closing Date) (such amount, the
"Quarterly Interest" with respect to such Class). The "Interest Accrual
Period" with respect to any Distribution Date shall be the period from and
including the preceding Distribution Date (or, in the case of the
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first Distribution Date, from and including the Closing Date) to and excluding
such Distribution Date. The determination of the Floating Rate and the
Quarterly Interest by the Agent Bank shall (in the absence of manifest error)
be final and binding upon all parties.
(iii) Notice of Floating Rate and Interest Payments. The Agent Bank will
notify the Infrastructure Bank, the Certificate Trustee and any Paying Agents
of the Floating Rate and the Quarterly Interest due on the Floating Rate
Certificates for each Interest Accrual Period and the relevant Distribution
Date as soon as possible after their determination but in no event later than
the first Business Day of any Interest Accrual Period.
(iv) Determination or Calculation by Certificate Trustee. If the Agent Bank
fails to determine a Floating Rate or calculate Quarterly Interest in
accordance with paragraph (ii) above at any time or for any reason, the
Certificate Trustee shall determine the Floating Rate and calculate the
Quarterly Interest in accordance with paragraph (ii) above, and each such
determination or calculation shall be deemed to have been made by the Agent
Bank. The determination by the Agent Bank or the Certificate Trustee (as the
case may be) of any Floating Rate and calculation thereby of any Quarterly
Interest shall, in the absence of manifest error, be final and binding on all
parties.
(v) Agent Bank. The Infrastructure Bank will agree that, so long as any of
the Certificates remain outstanding, there will at all times be an Agent Bank.
The Infrastructure Bank, upon written notice to the Agent Bank and the
Certificate Trustee, may terminate the appointment of the Agent Bank for any
reason. Notice of any such termination will be given by the Certificate
Trustee to Certificateholders within ten days of such termination. If (a) any
person is unable or unwilling to continue to act as the Agent Bank, (b) the
appointment of the Agent Bank is terminated or (c) the Agent Bank fails duly
to determine the Floating Rate and/or the Quarterly Interest for any Interest
Accrual Period, then the Infrastructure Bank will appoint a successor Agent
Bank to act as such in its place and notify the Certificate Trustee of such
appointment, provided that neither the resignation nor removal of the Agent
Bank shall take effect until a successor has been appointed. Notice of any
appointment of a successor Agent Bank will be given by the Certificate Trustee
to the Certificateholders within ten days of such appointment. Any successor
Agent Bank will be a banking institution organized under the laws of any state
or of the United States with capital and surplus of at least $50 million and
which is an active dealer in LIBOR-based securities.
VOTING OF THE NOTES
The Certificate Trustee, as sole initial holder of the Notes, has the right
to vote and give consents and waivers in respect of modifications to any Class
of Notes. Subject to certain exceptions, the holders of a majority of the
aggregate outstanding amount of the Certificates of all Series (or, if less
than all Series or Classes are affected, the affected Series or Class or
Classes) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Certificate Trustee,
or exercising any trust or power conferred on the Certificate Trustee under
the Trust Agreement, including any right of the Certificate Trustee as holder
of the Notes of the corresponding Series or Class or Classes, in each case
unless a different percentage is specified in the Trust Agreement; provided
that: (1) such direction shall not be in conflict with any rule of law or with
the Trust Agreement and would not involve the Certificate Trustee in personal
liability or expense; (2) the Certificate Trustee shall not have determined
that the action so directed would be unjustly prejudicial to the holders of
Certificates of such Series or Class or Classes not taking part in such
direction; and (3) the Certificate Trustee may take any other action deemed
proper by the Certificate Trustee which is not inconsistent with such
direction. If the Certificate Trustee is required to seek instructions from
the holders of the Certificates of any Class with respect to any such action
or vote, the Certificate Trustee will take such action or vote for or against
any proposal in proportion to the principal amount of the corresponding Class,
as applicable, or Certificates taking the corresponding position.
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EVENTS OF DEFAULT
An event of default with respect to any Class of Certificates under the
Trust Agreement (a "Certificate Event of Default") is defined as the
occurrence and continuance of a Note Event of Default or a breach by the State
of California of the State Pledge. For a description of the Note Events of
Default, see "Description of the Notes -- Note Events of Default; Rights Upon
Note Event of Default" herein.
The Trust Agreement provides that, if a Note Event of Default shall have
occurred and be continuing with respect to any Class of Certificates, the
Certificate Trustee may and, upon the written direction of holders
representing not less than a majority of the aggregate outstanding principal
amount of the Certificates of all Series, shall vote all the Notes of all
Series in favor of declaring the unpaid principal amount of all Series of
Notes and accrued interest thereon to be due and payable. In addition, the
Trust Agreement provides that, if a Note Event of Default with respect to any
Class of Certificates shall have occurred and be continuing, the Certificate
Trustee may and, upon the written direction of holders representing not less
than a majority of the aggregate outstanding principal amount of the
Certificates of all Series, shall vote all the Notes of all Series in favor of
directing the Note Trustee as to the time, method and place of conducting any
proceeding for any remedy available to the Note Trustee or of exercising any
trust or power conferred on the Note Trustee under the Note Indenture.
As an additional remedy, if a Note Event of Default shall have occurred and
be continuing with respect to a particular Series or Class of Certificates,
the Trust Agreement provides that the Certificate Trustee may and, upon the
written direction of the holders of Certificates representing not less than a
majority of the aggregate outstanding principal amount of the Certificates of
such Series or Class, will sell any Note or Notes, without recourse to or
warranty by the Certificate Trustee or any Certificateholder, to any person,
for cash. The Certificate Trustee may, but shall not be obligated to refrain,
in its sole discretion, from liquidating any Notes if (i) the Certificate
Trustee determines that amounts receivable from the Note Collateral with
respect to the applicable Class of Notes will be sufficient to pay (a) all
principal of and interest on that Class of Notes in accordance with its terms
without regard to any declaration of acceleration thereof and (b) all sums due
to the Certificate Trustee and any other administrative expenses specified in
the Trust Agreement, and (ii) holders of Certificates representing not less
than a majority of the aggregate outstanding principal amount of the
Certificates of all Series have not directed the Certificate Trustee to sell
any Note or Notes. In addition, the Certificate Trustee is prohibited from
selling any Notes following certain nonpayment Note Events of Default unless
(x) the Certificate Trustee determines that the amounts receivable from the
Note Collateral with respect to each Class of Notes are not sufficient to pay
in full the principal of and accrued interest on the Notes of each such Class
and to pay all sums due to the Certificate Trustee and other administrative
expenses specified in the Trust Agreement and the Certificate Trustee obtains
the written consent of holders of Certificates of each such Class representing
66 2/3% of the aggregate outstanding principal amount of each such Class of
Certificates or (y) the Certificate Trustee obtains the written consent of
holders of 100% of the aggregate outstanding principal amount of each such
Class of Certificates. Any proceeds received by the Certificate Trustee upon
any such sale will be deposited in the Certificate Account for such Class and
will be distributed to the holders of Certificates of such Class on a Special
Distribution Date.
If a Certificate Event of Default in the form of a breach by the State of
California of the State Pledge has occurred, then, as the sole and exclusive
remedy for such breach, the Certificate Trustee, in its own name and as
trustee of an express trust, as holder of the Notes, shall be, to the extent
permitted by State and Federal law, entitled and empowered to institute any
suits, actions or proceedings at law, in equity or otherwise, to enforce the
State Pledge and to collect any monetary damages as a result of a breach
thereof, and may prosecute any such suit, action or proceeding to final
judgment or decree.
Any funds (a) representing payments received with respect to any Series or
Class of Notes in default, (b) representing the proceeds from the sale by the
Certificate Trustee of any Class of Notes or (c) otherwise arising from a
Certificate Event of Default, held by the Certificate Trustee in a Certificate
Account shall, to the extent practicable, be invested and reinvested by the
Certificate Trustee in Eligible Investments permitted under the
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Trust Agreement maturing in not more than 60 days or such lesser time as is
required for the distribution of any such funds on a Special Distribution
Date, pending the distribution of such funds to Certificateholders as
described herein.
The Trust Agreement provides that, with respect to the Certificates of any
Class, within 30 days after the occurrence of any event that is, or after
notice or lapse of time or both would become, a Certificate Event of Default
with respect to such Class of Certificates (a "Default"), the Certificate
Trustee will give to the Infrastructure Bank, the Note Trustee and the holders
of such Certificates notice, transmitted by mail, of all such uncured or
unwaived Defaults known to it. However, except in the case of a Default
relating to the payment of principal of or interest on any of the Notes, the
Certificate Trustee will be protected in withholding such notice if in good
faith it determines that the withholding of such notice is in the interests of
the holders of the Certificates of such Class.
The Trust Agreement contains a provision entitling the Certificate Trustee
to be indemnified by the holders of the Certificates before proceeding to
exercise any right or power under the Trust Agreement at the request or
direction of Certificateholders.
In certain cases, the holders of Certificates representing not less than a
majority of the outstanding aggregate principal amount of the Certificates of
all Series may waive any past Default or Certificate Event of Default under
the Trust Agreement and thereby annul any previous direction given by the
Certificate Trustee with respect thereto, except a Default (i) in the deposit
or distribution of any payment on the Notes or Special Payment required to be
made with respect to any Class of Certificates, (ii) in the payment of
principal of or interest on any of the Notes, and (iii) in respect of any
covenant or provision of the Trust Agreement that cannot be modified or
amended without the consent of the holder of each Certificate of all Classes
affected hereby. Upon any such direction, the Certificate Trustee shall vote a
corresponding percentage of the corresponding Class of Notes in favor of such
waiver. The Notes provide that, with certain exceptions, the holders of not
less than a majority in aggregate unpaid principal amount of the Notes of all
Series may waive any Note Event of Default or any event that is, or after
notice or passage of time, or both, would be, a Note Event of Default.
The Trust may hold two or more Classes of Notes, each of which may have a
different interest rate and, in the case of different Classes, a different or
potentially different schedule of the repayment of principal and different
rights in the security therefor. Accordingly, the holders of Certificates of
each Class may have divergent or conflicting interests from the holders of
Certificates of other Classes.
REDEMPTION
The Trust shall redeem any Series of Certificates if the related Series of
Notes is redeemed. Unless otherwise specified in the related Prospectus
Supplement, notice of such redemption will be given by the Trust to each
holder of Certificates to be redeemed by first-class mail, postage prepaid,
mailed not less than five days nor more than 25 days prior to the date of
redemption.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, Special Distribution Date or any other date
specified in the Trust Agreement for distribution of any payments with respect
to any Class of Certificates, the Certificate Trustee will include with each
distribution to holders of Certificates of such Class a statement with respect
to such distribution to be made on such Distribution Date, Special
Distribution Date or other date, as the case may be, setting forth the
following information, in each case, to the extent received by the Certificate
Trustee from the Note Trustee, no later than two Certificate Business Days
prior to such Distribution Date, Special Distribution Date or other date
specified herein for such distribution:
(a) the amount of the distribution to Certificateholders allocable to (i)
principal and (ii) interest, in each case per $1,000 original principal
amount of each Class of Certificates;
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(b) the aggregate outstanding principal balance of the Certificates,
after giving effect to distributions allocated to principal reported under
(a) above; and
(c) the difference, if any, between the amount specified in (b) above and
the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Certificate
Trustee will mail to each person who at any time during such calendar year has
been a Certificateholder and received any distribution thereon, a statement
containing certain information for the purposes of such Certificateholder's
preparation of Federal and state income tax returns. See "Certain Federal
Income Tax Consequences" and "State Taxation" herein.
SUPPLEMENTAL TRUST AGREEMENTS
The Infrastructure Bank (with the prior written approval of the Note Issuer)
may, and the Certificate Trustee and the Delaware Trustee will, from time to
time, and without the consent of the Certificateholders of any Series, enter
into one or more agreements supplemental to the Trust Agreement, (1) to add to
the covenants of the Infrastructure Bank for the benefit of the
Certificateholders, or to surrender any right or power conferred upon the
Infrastructure Bank; (2) to correct or supplement any provision in the Trust
Agreement or in any supplemental agreement which may be defective or
inconsistent with any other provision in the Trust Agreement or in any
supplemental agreement or to make any other provisions with respect to matters
or questions arising under the Trust Agreement; provided that any such action
shall not adversely affect the interests of the Certificateholders; (3) to
cure any ambiguity or correct any mistake; (4) to qualify, if necessary, the
Trust Agreement (including any supplement thereto) under the Trust Indenture
Act of 1939, as amended; or (5) to provide for the issuance of the
Certificates of any Series or Class, or to provide for the execution and
delivery of any Swap Agreement.
In addition, the Infrastructure Bank (with the prior written approval of the
Note Issuer) may, and the Certificate Trustee and the Delaware Trustee will,
with the consent of Certificateholders holding not less than a majority of the
aggregate outstanding principal amount of the Certificates of all affected
Classes, enter into one or more agreements supplemental to the Trust Agreement
for the purpose of, among other things, adding any provisions to or changing
in any manner or eliminating any of the provisions of the Trust Agreement. No
amendment, however, may, without the consent of each Certificateholder
affected thereby, (a) reduce in any manner the amount of, or delay the timing
of, deposits or distributions on any Certificate, (b) permit the disposition
of any Note held by the Trust except as permitted by the Trust Agreement, or
otherwise deprive any Certificateholder of the benefit of the ownership of the
related Notes held by the Trust, (c) reduce the aforesaid percentage of the
aggregate outstanding principal amount of the Certificates the holders of
which are required to consent to any such amendment, (d) modify the provisions
in the Trust Agreement relating to amendments with the consent of
Certificateholders, except to increase the percentage vote necessary to
approve amendments or to add further provisions which cannot be modified or
waived without the consent of all Certificateholders, or (e) adversely affect
the status of the Trust as a grantor trust not taxable as a corporation for
federal income tax purposes. Promptly following the execution of any amendment
to the Trust Agreement (other than an amendment described in the preceding
paragraph), the Certificate Trustee will furnish written notice of the
substance of such amendment to each Certificateholder.
Any supplement to the Trust Agreement executed in connection with the
issuance of one or more new Series of Certificates will not be considered an
amendment to the Trust Agreement.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder or group of Certificateholders
of any Series or of all outstanding Series of record holding Certificates
evidencing not less than 10 percent of the aggregate outstanding principal
amount of the Certificates of such Series or all Series, as applicable, the
Certificate Trustee will afford
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such Certificateholder or Certificateholders access during business hours to
the current list of Certificateholders of such Series or of all outstanding
Series, as the case may be, for purposes of communicating with other
Certificateholders with respect to their rights under the Trust Agreement.
The Trust Agreement does not provide for any annual or other meetings of
Certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates will be issued in definitive form and will be transferable and
exchangeable at the office of the registrar identified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no service charge will be made for any such registration or
transfer of such Certificates, but the owner may be required to pay a sum
sufficient to cover any tax or other governmental charge.
Each Class of Certificates will be issued in the minimum initial
denominations set forth in the related Prospectus Supplement and, except as
otherwise provided in the related Prospectus Supplement, in integral multiples
thereof.
Distributions of interest and principal will be made on each Distribution
Date to the Certificateholders in whose names the Certificates were registered
on the related Record Date.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates initially may be Book-Entry Certificates, which are initially
represented by one or more certificates registered in the name of Cede, as
nominee of DTC, or another securities depository, and are available only in
the form of book-entries. Any Book-Entry Certificates will initially be
registered in the name of Cede, the nominee of DTC. Holders may also hold
Certificates of a Class through Centrale de Livraison de Valeurs Mobilieres
S.A. ("CEDEL") or the Euroclear System ("Euroclear") (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems.
Cede, as nominee for DTC, will hold the global Certificate or Certificates.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective Depositaries (as defined herein) which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear (in such capacities, the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations, which are the Participants, and facilitate the
settlement of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical movement of securities. Participants include underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to Indirect Participants, which are others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their
respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its Depositary. Cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving bonds in DTC, and
making or receiving distributions in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Certificate Business Day
following the DTC settlement date. Such credits or any transactions in such
Certificates settled during such processing will be reported to the relevant
Euroclear or CEDEL Participant on such Certificate Business Day. Cash received
in CEDEL or Euroclear as a result of sales of Certificates by or through a
CEDEL Participant or a Euroclear Participant to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the Certificate Business
Day following settlement in DTC.
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Certificates may do so only through Participants and Indirect
Participants. In addition, Certificateholders will receive all distributions
of principal of and interest on the Certificates from the Certificate Trustee
through DTC and its Participants. Under a book-entry format,
Certificateholders will receive distributions after the related Distribution
Date, as the case may be, because, while distributions are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward
such distributions to its Participants, which thereafter will be required to
forward them to Indirect Participants or holders of beneficial interests in
the Certificates. The Certificate Trustee, the Seller, the Servicer and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Certificate is registered (expected to be Cede) as the absolute
owner thereof (whether or not such Certificate is overdue and notwithstanding
any notice of ownership or writing thereon or any notice to the contrary) for
the purpose of making distributions and for all other purposes.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Certificateholders will only be permitted to
exercise their rights as Certificateholders indirectly through Participants
and DTC. All references herein to actions by Certificateholders thus refer to
actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders refer to distributions, notices, reports and statement to
Cede, as the registered holder of the Certificates, for distribution to the
beneficial owners of the Certificate in accordance with DTC procedures.
While any Book-Entry Certificates of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants with whom Certificateholders have accounts with
respect to Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificateholders. Accordingly, although Certificateholders will
not possess physical certificates, the Rules provide a mechanism by which
Certificateholders will receive distributions and will be able to transfer
their interests.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Certificates to pledge Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such Certificates, may be limited due to the lack of a
Definitive Certificate for such Certificates.
DTC has advised the Certificate Trustee that it will take any action
permitted to be taken by a Certificateholder under the Trust Agreement and the
related Prospectus Supplement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC has advised the Certificate Trustee that it may take actions
with respect to the Certificateholders' Interest that might conflict with
other of its actions with respect thereto.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to a Series of Certificates offered hereby. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of securities and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 29 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium
office (the "Euroclear Operator"), under contract with Euroclear Clearance
System S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
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Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Trust Agreement or the
relevant Prospectus Supplement on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates of a Class will be issued in registered form to
Certificateholders, or their nominees, rather than to DTC (such Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the Trust Agreement, which will include (a) DTC
advising the Certificate Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Certificates of such Class and the Certificate
Trustee or the Infrastructure Bank being unable to locate a qualified
successor, (b) the Infrastructure Bank (with the prior written approval of the
Note Issuer) electing to terminate the book-entry system through DTC or (c)
after the occurrence of an Event of Default under the terms of the Trust
Agreement, holders of Certificates representing not less than 50 percent of
the aggregate outstanding principal amount of the Certificates of all Series
advising DTC in writing that the continuation of a book-entry system through
DTC (or a successor thereto) to the exclusion of any physical certificates
being issued to Certificateholders is no longer in the best interests of
Certificateholders. Upon issuance of Definitive Certificates of a Class, such
Certificates will be transferable directly (and not exclusively on a book-
entry basis) and registered holders will deal directly with the Certificate
Trustee with respect to transfers, notices and distributions.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive securities representing the Certificates and instructions for
registration, the Certificate Trustee will issue the Certificates in the form
of Definitive Certificates, and thereafter the Certificate Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Trust Agreement and the related Prospectus Supplement.
Distribution of principal of and interest on the Certificates will be made
by the Certificate Trustee directly to Certificateholders in accordance with
the procedures set forth herein and in the Trust Agreement and the related
Prospectus Supplement. Interest distributions and principal distributions will
be made to Certificateholders in whose names the Definitive Certificates were
registered at the close of business on the related Record Date. Distributions
will be made by check mailed to the address of such Certificateholder as it
appears on the register maintained by the Certificate Trustee. The final
distribution on any Certificate (whether Definitive Certificates or
Certificates registered in the name of Cede), however, will be made only upon
presentation and surrender of such Certificate on the final distribution date
at such office or agency as is specified in the notice of final distribution
to Certificateholders. The Certificate Trustee will provide such notice to
registered Certificateholders not later than the fifth day of the month of the
final distribution.
Definitive Certificates will be transferable and exchangeable at the offices
of the transfer agent and registrar, which initially will be the Certificate
Trustee. No service charge will be imposed for any registration of transfer or
exchange, but the transfer agent and registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
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CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES
The issuance of any additional Series of Certificates is subject to the
following conditions, among others:
(a) appropriate documentation required by the Note Indenture and Trust
Agreement, including supplements thereto, shall have been authorized,
executed and delivered by all parties required to do so by the terms of the
relevant documents;
(b) an Issuance Advice Letter shall have been submitted to the CPUC and
shall have become effective;
(c) the Rating Agency Condition shall have been satisfied with respect to
such issuance;
(d) such issuance will not adversely affect the status of the Trust as a
grantor trust not taxable as a corporation for federal income tax purposes;
(e) no Event of Default shall have occurred and be continuing under the
Note Indenture or the Trust Agreement;
(f) as of the date of issuance, the Trust shall have sufficient funds
available to pay the purchase price for the related Series of Notes, as
well as the costs of issuance of the Series of Certificates (to the extent
not payable from Note proceeds) and all conditions to the issuance of a new
series of Notes and Certificates shall have been satisfied or waived; and
(g) delivery by the Note Issuer to the Note Trustee of certain
certificates and opinions specified in the Note Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Certificates will be included in gross income for federal
income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of a
Certificate, and is based on the opinion of Special Counsel. This discussion
represents the opinion of Special Counsel, subject to the qualifications set
forth therein or herein. Additional federal income tax considerations relevant
to a particular Series may be set forth in the related Prospectus Supplement.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations, and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax
consequences to Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Certificateholder in light of that Certificateholder's
circumstances, and some Certificateholders may be subject to special tax rules
and limitations not discussed below (e.g., life insurance companies, tax-
exempt organizations, financial institutions or broker-dealers). CONSEQUENTLY,
EACH PROSPECTIVE CERTIFICATEHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER IN
DETERMINING THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF A CERTIFICATE.
For purposes of this discussion, "U.S. Person" means (i) a citizen or
resident of the United States; (ii) a corporation (or entity treated as a
corporation for tax purposes) created or organized in the United States, or
under the laws of the United States or of any state thereof (including the
District of Columbia); (iii) a partnership (or entity treated as a partnership
for tax purposes) organized in the United States, or under the laws of the
United States or of any state thereof (including the District of Columbia),
unless provided otherwise by future Treasury regulations; (iv) an estate the
income of which is includible in gross income for U.S. federal income tax
purposes
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regardless of its source; or (v) a trust if a court within the United States
is able to exercise primary supervision over the administration of the trust
and one or more United States persons has the authority to control all
substantial decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons prior to
such date, may elect to continue to be U.S. Persons. The term "U.S.
Certificateholder" means any U.S. Person and any other person to the extent
that income attributable to its interest in a Certificate is effectively
connected with that person's conduct of a U.S. trade or business. The term
"non-U.S. Certificateholder" means any person other than a U.S.
Certificateholder.
The discussion assumes that a Certificate is issued in registered form.
Moreover, the discussion assumes that any original issue discount ("OID") on
the Underlying Notes (i.e., any excess of the stated redemption price at
maturity of the Underlying Note over its issue price) is less than a de
minimis amount (i.e., 0.25 percent of its stated redemption price at maturity
multiplied by the Underlying Note's weighted average maturity), all within the
meaning of the OID regulations. The applicable Prospectus Supplement will set
forth a discussion of any additional material tax consequences with respect to
Certificates not conforming to the foregoing assumptions.
TREATMENT OF THE CERTIFICATES
The Seller has received a ruling from the Internal Revenue Service ("IRS")
holding that the Underlying Notes are obligations of the Seller for federal
income tax purposes. Special Counsel has opined that 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. Further,
Special Counsel has opined that each Class of Certificates bearing a fixed
interest rate (the "Fixed Rate Certificates") will evidence ownership of a
fractional undivided beneficial interest in the related Class of Underlying
Notes, and each Class of Floating Rate Certificates will evidence ownership of
a fractional undivided beneficial interest in the related Class of Underlying
Notes and the related Swap Agreement.
TAXATION OF U.S. FIXED RATE CERTIFICATEHOLDERS
GENERAL
Assuming, in accordance with Special Counsel's opinion, that the Fixed Rate
Certificates represent ownership of the Underlying Notes for federal income
tax purposes, stated interest on a beneficial interest in such Certificates
will be taxable as ordinary income when received or accrued by U.S.
Certificateholders in accordance with their method of accounting. Generally,
interest received on the Fixed Rate Certificates will constitute "investment
income" for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
MARKET DISCOUNT
A U.S. Certificateholder who purchases (including a purchase at original
issuance for a price less than the issue price) an interest in a Fixed Rate
Certificate at a discount that exceeds any unamortized OID may be subject to
the "market discount" rules of sections 1276 through 1278 of the Code. These
rules generally provide that, subject to a statutorily-defined de minimis
exception, if a U.S. Certificateholder acquires a Fixed Rate Certificate at a
market discount (i.e., at a price below its stated redemption price at
maturity or its revised issue price if it was issued with OID) and thereafter
recognizes gain upon a disposition of the Fixed Rate Certificate (or disposes
of it in certain non-recognition transactions, including by gift), the lesser
of such gain (or appreciation, in the case of an applicable non-recognition
transaction) or the portion of the market discount that accrued while the
Fixed Rate Certificate was held by such holder will be treated as ordinary
interest income at the time of the disposition. In addition, a U.S.
Certificateholder who acquired a Fixed Rate Certificate at a market discount
would be required to treat as ordinary interest income the portion of any
principal payment attributable to accrued market discount on such Fixed Rate
Certificate. Generally, market discount accrues ratably over the life of a
debt instrument unless the debt holder elects to accrue market discount on a
constant yield to maturity basis. It is
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not clear how either the ratable accrual or constant yield accrual
methodologies apply to instruments such as the Fixed Rate Certificates where
the timing of principal payments is uncertain. Investors should consult their
own tax advisors concerning the accrual of market discount. The market
discount rules also provide that a U.S. Certificateholder who acquires a Fixed
Rate Certificate at a market discount may be required to defer a portion of
any interest expense that otherwise may be deductible on any indebtedness
incurred or maintained to purchase or carry the Fixed Rate Certificate until
the holder disposes of the Certificate in a taxable transaction.
A U.S. Certificateholder who acquired a Fixed Rate Certificate at a market
discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
IRS. If a holder elects to include market discount in income in accordance
with the preceding sentence, the foregoing rules with respect to the
recognition of ordinary income on sales, principal payments and certain other
dispositions of the Fixed Rate Certificates and the deferral of interest
deductions on indebtedness related to the investor certificates will not
apply.
AMORTIZABLE BOND PREMIUM
A U.S. Certificateholder who purchases an interest in a Fixed Rate
Certificate at a premium may elect to offset the premium against interest
income under the constant yield method over the remaining term of the Fixed
Rate Certificate in accordance with the provisions of section 171 of the Code.
A holder that elects to amortize bond premium must reduce the tax basis in the
related Fixed Rate Certificate by the amount of bond premium used to offset
interest income. If a Fixed Rate Certificate purchased at a premium is
redeemed in full prior to its maturity, a holder who has elected to amortize
bond premium should be entitled to a deduction in the taxable year of
redemption in an amount equal to the excess, if any, of the adjusted basis of
the Fixed Rate Certificate over the greater of the redemption price or the
amount payable on maturity.
TAXATION OF U.S. FLOATING RATE CERTIFICATEHOLDERS
Generally, as explained above, each Floating Rate Certificateholder will be
treated as having purchased an interest in an Underlying Note and an interest
in the related Swap Agreement. The tax treatment of the Certificateholder's
interest in the Underlying Note would generally be the same as that described
above in the case of a Certificateholder who purchased an interest in a Class
of Fixed Rate Certificates.
Each Floating Rate Certificateholder will include in income its share of the
fixed rate interest on the Underlying Note in accordance with its regular
method of tax accounting. As the tax owner of an undivided interest in the
Swap Agreement related to that Class, the Certificateholder would account for
income and expense with respect to the Swap Agreement under the rules set out
in Treas. Reg. 1.446-3 (the "Notional Principal Contract" or "NPC"
regulations).
The tax treatment of payments made or received under a Swap Agreement
depends on whether the payments are periodic payments, nonperiodic payments,
or termination payments. A periodic payment is any payment made under a
contract payable at intervals of one year or less during the entire term of
the contract that is based on a specified index (which includes a fixed rate)
and a notional principal amount. A nonperiodic payment is usually an up-front
payment made by one party to a notional principal contract to induce the other
party to enter into the contract. It is not anticipated that there will be any
non-periodic payment made with respect to a Swap Agreement. If such a non-
periodic payment is expected to be made, the tax treatment will be described
in a Prospectus Supplement.
For any taxable year, a Floating Rate Certificateholder would include in, or
deduct from, gross income the Certificateholder's net swap income or expense.
Net swap income or expense would include the sum of all periodic payments
recognized and attributable to the year.
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Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a Floating Rate Certificateholder
would include or deduct its share of the net periodic payments allocated to
the year.
Each purchaser of a Floating Rate Certificate would be required to allocate
its purchase price between the Underlying Note and the related Swap Agreement
based on their relative fair market values. For example, even if a Floating
Rate Certificate were purchased for its face amount, the holder might be
considered to have acquired the Underlying Note at a discount and to have
acquired the related Swap Agreement for the remaining purchase price. This
bifurcation of the purchase price of the Floating Rate Certificate could
result in aggregate net income to the Floating Rate Certificateholder that
differed somewhat in any particular year from the interest actually payable on
the Certificate for such year. A holder could avoid such results by making an
integration election on or before the acquisition date of the Floating Rate
Certificate in the manner described below under "Integration of the Underlying
Notes and the Swap Agreement."
Moreover if an individual were to hold a Floating Rate Certificate, any net
swap expense for any year would be treated as a miscellaneous itemized
deduction. In computing taxable income, an individual is allowed to deduct
miscellaneous itemized deductions only to the extent the sum of such
deductions exceeds two percent of the individual's adjusted gross income.
Further, an individual is not allowed a deduction for miscellaneous itemized
deductions in computing alternative minimum taxable income. Thus, for any
period for which the fixed rate on the Underlying Notes exceeded the floating
rate payments made to the Trust under the Swap Agreement, an individual would
include in income interest at the full fixed rate payable on the Underlying
Notes, but could be precluded from deducting the net swap expense for the
period due to the limitations imposed on miscellaneous itemized deductions. An
individual could avoid such treatment by making an integration election in the
manner described below under "Integration of the Underlying Notes and the Swap
Agreement."
A termination payment is a payment made to assign or extinguish a party's
rights and obligations under a swap contract. If a Certificateholder were to
sell its interest in a Floating Rate Certificate, it would be considered to
have made or to have received a termination payment with respect to its
interest in the Swap Agreement. The Certificateholder would recognize gain or
loss in the year that it terminated its interest in the Swap Agreement
determined by reference to the amount of the termination payment made or
received and the Certificateholder's basis in the Swap Agreement.
A Floating Rate Certificateholder could also receive a termination payment
if an event of default under the Swap Agreement were to occur. If such an
event were to occur, the Certificateholder could recognize gain upon receipt
of a termination payment.
INTEGRATION OF THE UNDERLYING NOTES AND THE SWAP AGREEMENT
In lieu of the tax treatment described above, a Floating Rate
Certificateholder could identify the purchase of a Floating Rate Certificate
as the acquisition of a fixed rate debt instrument together with a Treas. Reg.
1.1275-6 hedge. In essence, if the Certificateholder identifies the Underlying
Note and the related Swap Agreement as an integrated transaction on its books
and records, on or before the acquisition date of the Floating Rate
Certificate, it may be able to integrate the cash flows on the Swap Agreement
and the fixed rate Underlying Note and treat the combined cash flows as a
single synthetic floating rate debt instrument. All interest on the synthetic
floating rate debt instrument would be treated as original issue discount,
includible in income as it accrues regardless of the holder's method of
accounting. The disposition of a Floating Rate Certificate that was identified
under the integration regime would be treated as the disposition of a single
synthetic floating rate debt instrument.
If a Swap Counterparty default event were to occur so that the Swap
Agreement terminated, a Certificateholder who had made an integration election
would be treated as having "legged-out" of integration. Such a
Certificateholder could recognize gain as a result of such legging-out.
Certificateholders are urged to consult their own tax advisors concerning the
integration election.
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SALE OR EXCHANGE OF FIXED RATE CERTIFICATES
Upon a disposition of an interest in a Fixed Rate Certificate, a U.S.
Certificateholder generally will recognize gain or loss equal to the
difference between (i) the amount of cash and the fair market value of any
other property received (other than amounts attributable to, and taxable as,
accrued stated interest) and (ii) the U.S. Certificateholder's adjusted basis
in its interest in the Fixed Rate Certificate. The adjusted basis in the
interest in the Fixed Rate Certificate will equal its cost, increased by any
OID or market discount included in income with respect to the interest in the
Fixed Rate Certificate prior to its disposition and reduced by any payments
reflecting principal or OID previously received with respect to the interest
in the Fixed Rate Certificate and any amortized premium. Subject to the OID
and market discount rules, gain or loss will generally be capital gain or loss
if the interest in the Fixed Rate Certificate was held as a capital asset.
Capital losses generally may be used by a corporate taxpayer only to offset
capital gains and by an individual taxpayer only to the extent of capital
gains plus $3,000 of other income.
SALE OR EXCHANGE OF FLOATING RATE CERTIFICATES
If a Floating Rate Certificateholder does not make an integration election,
then the sale or exchange of a Floating Rate Certificate will be treated as
the sale of an interest in the related Note, and an assignment of an interest
in the Swap Agreement. The total sale proceeds would be allocated between the
Underlying Note and the Swap Agreement in proportion to their relative fair
market values. Gain or loss on the Underlying Note would be determined in the
manner described above, and gain or loss on the Swap Agreement would give rise
to gain or loss as described above for termination payments. If the Swap
Agreement has a negative value at the time of the sale of a Floating Rate
Certificate, the Floating Rate Certificateholder would apparently be treated
as having sold the Underlying Note for its fair market value (which would
exceed the sale proceeds) and as having paid such excess to the purchaser of
the Floating Rate Certificate in consideration for the assumption of the
obligations under the Swap Agreement. If an integration election is made,
however, the Certificateholder would be viewed as having sold a single
floating rate debt instrument and could recognize gain or loss on such sale.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S. federal
income tax on interest (including OID) on a beneficial interest in a
Certificate unless (i) the non-U.S. Certificateholder is a controlled foreign
corporation that is related to the Seller through stock ownership or (ii) the
non-U.S. Certificateholder is a bank which receives interest as described in
Code Section 881(c)(3)(A). To qualify for the exemption from taxation, the
last U.S. Person in the chain of payment prior to payment to a non-U.S.
Certificateholder (the "Withholding Agent") must have received (in the year in
which a payment of interest or principal occurs or in either of the two
preceding years) a statement that (i) is signed by the non-U.S.
Certificateholder under penalty of perjury, (ii) certifies that the non-U.S.
Certificateholder is not a U.S. Person and (iii) provides the name and address
of the non-U.S. Certificateholder. The statement may be made on a Form W-8 or
substantially similar substitute form, and the non-U.S. Certificateholder must
inform the Withholding Agent of any change in the information on the statement
within 30 days of the change. If a Certificate is held through a securities
clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. However, in that case, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Certificateholder to the
organization or institution holding the Certificate on behalf of the non-U.S.
Certificateholder. The U.S. Treasury Department is considering implementation
of further certification requirements aimed at determining whether the issuer
of a debt obligation is related to holders thereof.
Generally, any gain or income realized by a non-U.S. Certificateholder upon
retirement or disposition of an interest in a Certificate (other than gain
attributable to accrued interest or OID, which is addressed in the preceding
paragraph) will not be subject to U.S. federal income tax, provided that in
the case of a Certificateholder that is an individual, such Certificateholder
is not present in the United States for 183 days or more during the taxable
year in which such retirement or disposition occurs. Certain exceptions may be
applicable, and an individual non-U.S. Certificateholder should consult a tax
adviser.
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If a non-U.S Certificateholder were to hold an interest in a Floating Rate
Certificate, generally, any income attributable to the non-U.S.
Certificateholder's interest in the Swap Agreement, irrespective of whether an
integration election were made, would not be U.S. source income. Consequently,
it would not be subject to U.S. federal income tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of a Certificate to a registered owner who
is not an "exempt recipient" and who fails to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the manner required. Generally, individuals are not exempt recipients whereas
corporations and certain other entities are exempt recipients. Payments made
in respect of a U.S. Certificateholder must be reported to the IRS, unless the
U.S. Certificateholder is an exempt recipient or otherwise establishes an
exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) Certificates to non-U.S. Certificateholders,
temporary Treasury regulations provide that backup withholding and information
reporting will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been established
(provided that neither the Certificate Trustee nor a paying agent has actual
knowledge that the holder is a U.S. Person or that the conditions of any other
exemption are not in fact satisfied). Payments of the proceeds of the sale of
a Certificate to or through a foreign office of a broker that is a U.S.
Person, a controlled foreign corporation for United States federal income tax
purposes or a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a trade or business within the United States for
the specified three-year period are currently subject to certain information
reporting requirements, unless the payee is an exempt recipient or such broker
has evidence in its records that the payee is not a U.S. Person and no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury regulations, payments of
the proceeds of a sale to or through the United States office of a broker will
be subject to information reporting and backup withholding unless the payee
certifies under penalty of perjury as to his or her status as a non-U.S.
Person and certain other qualifications (and no agent of the broker who is
responsible for receiving or reviewing such statement has actual knowledge
that it is incorrect) and provides his or her name and address or the payee
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Certificateholder would be allowed as a refund or a credit against such
Certificateholder's U.S. federal income tax, provided that the required
information is furnished to the IRS.
The Treasury Department recently promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the final
regulations permit the shifting of primary responsibility for withholding to
certain financial intermediaries acting on behalf of beneficial owners. The
final regulations are generally effective for payments made after December 31,
1998, subject to certain transition rules. Certificateholders should consult
their own tax advisors with respect to the impact, if any, of the final
regulations.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Certificates will
be exempt from California personal income tax, but not exempt from the
California franchise tax applicable to banks and corporations. Gain or loss,
if any, resulting from an exchange or redemption of Certificates will be
recognized in the year of the exchange or redemption. Present California law
taxes both long-term and short-term capital gains at the rates applicable to
ordinary income. Interest on indebtedness incurred or continued by a
Certificateholder in connection with the purchase of Certificates will not be
deductible for California personal income tax purposes.
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OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Certificates under any state or local tax law other than that of the State of
California. Each investor should consult its own tax adviser regarding state
and local tax consequences.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain
collective investment funds or insurance company general or separate accounts
in which such plans, accounts or arrangements are invested, that are subject
to the fiduciary responsibility and prohibited transaction provisions of ERISA
and/or Section 4975 of the Code (collectively, "Plans"), and on persons who
are fiduciaries with respect to Plans, in connection with the investment of
assets that are treated as "plan assets" of any Plan for purposes of applying
Title I of ERISA and Section 4975 of the Code ("Plan Assets"). ERISA imposes
on Plan fiduciaries certain general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Generally, any person who has discretionary authority or control respecting
the management or disposition of Plan Assets, and any person who provides
investment advice with respect to Plan Assets for a fee or other
consideration, is a fiduciary with respect to such Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to
a Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "Parties in Interest")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject
to penalties imposed under ERISA and/or excise taxes imposed pursuant to
Section 4975 of the Code, unless a statutory or administrative exemption is
available. These prohibited transactions generally are set forth in Section
406 of ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Certificates of any Class or Series on behalf or with Plan Assets of any Plan
should consult with its legal advisors and refer to the related Prospectus
Supplement for guidance regarding the ERISA Considerations applicable to the
Certificates offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, except as provided in the applicable Prospectus Supplement,
assets of such plans may be invested in the Certificates of any Class or
Series without regard to the ERISA considerations described herein, subject to
the provisions of other applicable federal and state law. However, any such
plan that is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
USE OF PROCEEDS
The Trust will use the net proceeds received from each sale of a Series of
Certificates to purchase the related Note or Notes from the Note Issuer. The
Note Issuer will use such proceeds to purchase the Transition Property from
the Seller and to pay issuance costs related to the Notes. The Seller will use
such proceeds to repay outstanding debt and reduce the amount of outstanding
equity generally in proportion to its existing capital structure.
88
<PAGE>
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters named
in the related Prospectus Supplement (the "Underwriters") by a negotiated firm
commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Note Issuer and the Trust intend that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Certificates of a Series may be deemed to be
underwriters and any discounts or commissions received by them from the Trust
and any profit on the resale of the Certificates by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from the Trust will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, the Note Issuer
and the Trust, Underwriters and agents who participate in the distribution of
the Certificates may be entitled to indemnification by the Seller and the Note
Issuer against certain liabilities, including liabilities under the Securities
Act.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
RATINGS
It is a condition of issuance of each Class of Certificates that at the time
of issuance such Class receive the rating indicated in the related Prospectus
Supplement, which will be in one of the four highest categories, from at least
one Rating Agency. Each Class of Notes will receive the same rating from the
applicable Rating Agencies as the corresponding Class of Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Certificates upon initial issuance will not be
lowered or withdrawn by a Rating Agency at any time thereafter. If a rating of
any Class of Certificates is revised or withdrawn, the liquidity of such Class
of Certificates may be adversely affected. In general, ratings address credit
risk and do not represent any assessment of the rate of principal payments on
the Certificates.
LEGAL MATTERS
Certain legal matters relating to the Notes will be passed upon by Orrick,
Herrington & Sutcliffe LLP, San Francisco, California, counsel to the Seller
and the Note Issuer. Certain legal matters relating to the Certificates and
certain federal and California income tax consequences of the issuance of the
Certificates will be passed upon by Brown & Wood LLP, San Francisco,
California, counsel to the Trust. Certain legal matters relating to the
Certificates will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, Delaware counsel to the Trust, and by Cravath, Swaine &
Moore, New York, New York, counsel to the Underwriters.
89
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Act................................................................ 48
Actual FTA Payments................................................ 57
Administrator...................................................... 22
Advice Letters..................................................... 16
Agent Bank......................................................... 73
Annual Accountant's Report......................................... 59
Base Calculation Model............................................. 41
Basic Documents.................................................... 69
Book-Entry Certificates............................................ 25
Calculation Date................................................... 43
Capital Subaccount................................................. 21, 62
Cede............................................................... 25
CEDEL.............................................................. 78
CEDEL Participants................................................. 80
Certificate Account................................................ 71
Certificate Business Day........................................... 72
Certificate Event of Default....................................... 20, 75
Certificate Trustee................................................ 11
Certificateholders................................................. 2
Certificates....................................................... 1, 11
Class.............................................................. 1, 12
Closing Date....................................................... 44
Code............................................................... 27, 82
Collection Account................................................. 62
Collections Curve.................................................. 56
Commission......................................................... 2
Cooperative........................................................ 80
CPUC............................................................... 14
Customers.......................................................... 15
Default............................................................ 76
Definitive Certificates............................................ 81
Delaware Business Trust Act........................................ 36
Delaware Trustee................................................... 11
Depositaries....................................................... 78
Distribution Date.................................................. 18
Downgrade Event.................................................... 39, 72
DRI................................................................ 51
DTC................................................................ 2, 25
Eligible Institution............................................... 62
Eligible Investments............................................... 63
ERISA.............................................................. 27
ESPs............................................................... 16
Estimated FTA Payments............................................. 57
Euroclear.......................................................... 78
Euroclear Operator................................................. 80
Euroclear Participants............................................. 80
Event of Default................................................... 20
Excess Remittance.................................................. 57
Exchange Act....................................................... 2
Expected Amortization Schedule..................................... 19
</TABLE>
90
<PAGE>
<TABLE>
<S> <C>
FDIC.................................................................... 62
Fee Agreement........................................................... 47
FERC.................................................................... 33
Final Maturity Date..................................................... 62
Financing Order......................................................... 14
Financing Order Anniversary............................................. 43
Fixed Rate Certificate.................................................. 83
Floating Rate........................................................... 73
Floating Rate Certificates.............................................. 12
FTA Charges............................................................. 15
FTA Collections......................................................... 16
FTA Payments............................................................ 16
General Subaccount...................................................... 20, 62
H.R. 1230............................................................... 29
Indirect Participants................................................... 25
Infrastructure Bank..................................................... 1, 11
Initial Transition Property............................................. 44
Interest Accrual Period................................................. 73
Interest Determination Date............................................. 73
IRS..................................................................... 83
ISO..................................................................... 33
Issuance Advice Letter.................................................. 16
LIBOR................................................................... 73
London Banking Day...................................................... 73
Monthly Servicer's Certificate.......................................... 59
Moody's................................................................. 36
Net Trust Swap Payment.................................................. 72
Net Trust Swap Receipt.................................................. 72
Non-U.S. Certificateholder.............................................. 83
Note Collateral......................................................... 62
Note Event of Default................................................... 20, 67
Note Indenture.......................................................... 61
Note Interest Rate...................................................... 62
Note Issuer............................................................. 1, 11
Note Trustee............................................................ 14
Noteholder.............................................................. 61
Notes................................................................... 1
Notional Principal Contract............................................. 84
NPC..................................................................... 84
OID..................................................................... 83
Operating Expenses...................................................... 22
Overcollateralization Amount............................................ 21, 64
Overcollateralization Subaccount........................................ 20, 62
Participants............................................................ 25
Parties in Interest..................................................... 88
Payment Date............................................................ 18
PG&E.................................................................... 1, 11
Plan Assets............................................................. 88
Plans................................................................... 88
Proposition 218......................................................... 29
PU Code................................................................. 14
PX...................................................................... 33
</TABLE>
91
<PAGE>
<TABLE>
<S> <C>
Quarterly Administration Fee............................................ 66
Quarterly Interest...................................................... 66, 74
Quarterly Principal..................................................... 66
Quarterly Servicer's Certificate........................................ 69
Rate Freeze Period...................................................... 40
Rating Agency........................................................... 26
Rating Agency Condition................................................. 62
Record Date............................................................. 18
Registration Statement.................................................. 2
Remittance Date......................................................... 57
Remittance Shortfall.................................................... 57
Repurchase Price........................................................ 46
Required Capital Level.................................................. 21, 64
Required Overcollateralization Level.................................... 21
Reserve Subaccount...................................................... 20, 62
Residential Customers................................................... 15
Rules................................................................... 79
S&P..................................................................... 36
Sale Agreement.......................................................... 11
Scheduled Final Distribution Date....................................... 18
Scheduled Maturity Date................................................. 62
Securities Act.......................................................... 2
Seller.................................................................. 1, 11
Series.................................................................. 1, 12
Series Issuance Date.................................................... 62
Servicer................................................................ 1, 11
Servicer Business Day................................................... 53
Servicer Defaults....................................................... 60
Servicing Agreement..................................................... 11
Servicing Fee........................................................... 25
Small Commercial Customers.............................................. 15
Special Counsel......................................................... 29
Special Distribution Date............................................... 71
Special Payments........................................................ 71
State Pledge............................................................ 17, 71
Statute................................................................. 7
STO..................................................................... 46
Subsequent Transfer Date................................................ 44
Subsequent Transition Property.......................................... 44
Successor Servicer...................................................... 60
Swap Agreement.......................................................... 7, 72
Swap Counterparty....................................................... 72
Telerate Page........................................................... 73
Termination Date........................................................ 18
Terms and Conditions.................................................... 80
Territory............................................................... 15
Transition Costs........................................................ 14
Transition Property..................................................... 16
True-Up Mechanism Advice Letter......................................... 17
True-Up Mechanism Calculation Model..................................... 43
Trust................................................................... 1, 11
Trust Agreement......................................................... 11
</TABLE>
92
<PAGE>
<TABLE>
<S> <C>
TURN........................................................................ 30
U.S. Certificateholder...................................................... 83
U.S. Person................................................................. 82
Underlying Notes............................................................ 26
Underwriters................................................................ 89
Utilities................................................................... 7
Withholding Agent........................................................... 86
</TABLE>
93
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Member of PG&E Funding LLC:
We have audited the accompanying balance sheet of PG&E Funding LLC (a
Delaware Limited Liability Company) as of September 30, 1997, and the related
statements of income and changes in member's equity and cash flows for the
period from inception (July 1, 1997) to September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PG&E Funding LLC as of
September 30, 1997, and the results of its operations and its cash flows for
the period from inception (July 1, 1997) to September 30, 1997 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California
November 3, 1997
F-1
<PAGE>
PG&E FUNDING LLC
BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash............................................................. $ 10
Unamortized Debt Issuance Expenses............................... 1,379
------
Total Assets................................................... $1,389
======
LIABILITIES AND MEMBER'S EQUITY
Accrued Expenses and Accounts Payable............................. $1,381
Member's Equity................................................... 8
------
Total Liabilities and Member's Equity.......................... $1,389
======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-2
<PAGE>
PG&E FUNDING LLC
STATEMENT OF INCOME AND CHANGES IN MEMBER'S EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 1, 1997) TO SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Rent Expense....................................................... $ (2)
----
Net Loss.......................................................... $ (2)
Member's Equity at Inception (July 1, 1997)........................ --
Cash Contributed................................................... 10
----
Member's Equity at September 30, 1997............................. $ 8
====
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-3
<PAGE>
PG&E FUNDING LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1997) TO SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATIONS:
Net Loss....................................................... $ (2)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Unamortized debt expense...................................... (1,379)
Change in operating assets and liabilities:
Accrued expenses and accounts payable........................ 1,381
-------
Net Cash provided by Operations.............................. $ --
-------
FINANCING ACTIVITIES:
Equity contribution from Pacific Gas and Electric Company...... $ 10
-------
Net Change in Cash............................................. 10
Cash at Inception (July 1, 1997)............................... --
-------
Cash at September 30, 1997.................................... $ 10
=======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The financial statements include the accounts of PG&E Funding LLC, a
Delaware special purpose limited liability company, whose sole member is
Pacific Gas and Electric Company (PG&E), a provider of electric and gas
services. PG&E is a wholly owned subsidiary of PG&E Corporation. PG&E Funding
LLC was formed on July 1, 1997, in order to effect the issuance of notes (the
"Underlying Notes") intended to support a 10% electric rate reduction to be
provided to PG&E's residential and small commercial customers in connection
with electric industry restructuring mandated by California Assembly Bill 1890
(electric restructuring legislation).
PG&E Funding LLC was organized for the limited purpose of purchasing
Transition Property (the right to be paid a specified amount from a
nonbypassable charge authorized by the California Public Utility Commission
(CPUC) pursuant to the electric restructuring legislation) and issuing the
Underlying Notes, and is restricted by its organizational documents from
engaging in other activities. In addition, PG&E Funding LLC's organizational
documents require it to operate in such a manner that it should not be
consolidated in the bankruptcy estate of PG&E in the event PG&E becomes
subject to such a proceeding. The assets of PG&E Funding LLC will consist
primarily of the Transition Property.
PG&E Funding LLC is legally separate from PG&E, the assets of PG&E Funding
LLC are not available to creditors of PG&E or PG&E Corporation, and, upon the
transfer of the Transition Property to PG&E Funding LLC by PG&E in connection
with the issuance of the Underlying Notes, the Transition Property will not be
legally an asset of PG&E or PG&E Corporation.
B. SUMMARY OF ACCOUNTING POLICIES
Unamortized Debt Issuance Expenses
The expenses associated with the issuance of the Underlying Notes have been
capitalized and will be amortized over the life of the Underlying Notes.
Income Taxes
PG&E Funding LLC is a single-member limited liability company. Accordingly,
all federal income tax effects and all material State of California franchise
tax effects of PG&E Funding LLC's activities accrue to PG&E.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and the disclosure of
contingencies. Actual results could differ from these estimates.
C. LONG TERM NOTES
The sole holder of the Underlying Notes will be the California
Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 (the
Trust) which will issue "rate reduction bonds" with an original principal
amount equal to the original principal amount of the Underlying Notes.
PG&E Funding LLC intends to issue approximately $3.0 billion of Underlying
Notes in December 1997, the maturities and interest rates of which will depend
upon market conditions at the time of issuance. The proceeds will be used to
purchase the Transition Property from PG&E. The Underlying Notes are expected
to be secured solely by the Transition Property and other assets of PG&E
Funding LLC.
F-5
<PAGE>
PG&E FUNDING LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The source of repayment will be a nonbypassable charge authorized by the
CPUC, which will be collected from PG&E's customers by PG&E, as Servicer.
Collections of the nonbypassable charge will be deposited by PG&E, as
Servicer, with the trustee of the Trust on a monthly basis. Each quarter such
monies will be used to make principal and interest payments on the Underlying
Notes. The debt service requirements will include an overcollateralization
amount which will be retained for the benefit of the holders of the Underlying
Notes. Any amounts not required for debt service will be returned to PG&E
Funding LLC.
D. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a Transition Property Servicing Agreement, PG&E, the Servicer, is
required to manage and administer the Transition Property of PG&E Funding LLC
and to collect the nonbypassable charge from the electricity ratepayers on
behalf of PG&E Funding LLC. PG&E Funding LLC shall pay a servicing fee equal
to a percentage, which will be determined when the Notes are issued, of the
principal amount of each Series of the Underlying Notes. The Servicer will
also be entitled to receive as compensation any interest earnings on
nonbypassable charge collections prior to remittance to the Trust and any late
payment charges collected from PG&E's customers.
The Trust was created solely for the purpose of purchasing the Underlying
Notes from PG&E Funding LLC, issuing rate reduction bonds, and applying the
proceeds from the Underlying Notes to the payment of the rate reduction bonds.
Under the Fee and Indemnity Agreement, PG&E Funding LLC is responsible for
paying all fees and expenses incurred by the Certificate Trustee, Bankers
Trust Company of California, N.A., and the Delaware Trustee, Bankers Trust
(Delaware).
F-6
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder
other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Statement Fee.................................... $1,060,606.06
Printing and Engraving Expenses............................... 430,000.00
Trustees' Fees and Expenses .................................. 30,000.00
Legal Fees and Expenses....................................... 3,100,000.00
Blue Sky Fees and Expenses.................................... 10,000.00
Accountants' Fees and Expenses................................ 200,000.00
Rating Agency Fees............................................ 350,000.00
Miscellaneous Fees and Expenses............................... 750,000.00
-------------
Total....................................................... $5,930,606.06
=============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may and has
the power to indemnify and hold harmless any member or other person from and
against any and all claims and demands whatsoever. Section 20 of the Amended
and Restated Limited Liability Company Agreement of the Registrant provides
that, to the full extent permitted by applicable law, the Registrant shall
indemnify any member, officer, director, employee or agent of the Registrant
and any employee, representative, agent or affiliate of the member
(collectively, "Covered Persons") for any loss, damage or claim incurred by
reason of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Registrant and in a manner reasonably believed to
be within the scope of the authority conferred on such Covered Person by the
Amended and Restated Limited Liability Company Agreement, except that the
Registrant shall not indemnify any such Covered Person for any loss, damage or
claim incurred by such Covered Person by reason of such Covered Person's gross
negligence or willful misconduct with respect to such acts or omissions.
Section 317 of the California Corporation Law (the "California Law")
provides that a corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any proceeding or
action by reason of the fact that he or she is or was a director, officer,
employee or other agent of such corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation or enterprise. Section 317 also grants authority to a
corporation to include in its articles of incorporation indemnification
provisions in excess of that permitted in Section 317, subject to certain
limitations.
Article SIXTH of the Articles of Incorporation of Pacific Gas and Electric
Company (the "Member") authorizes the Member to provide indemnification of
directors and officers through bylaws, resolutions, agreements with agents,
vote of shareholders or disinterested directors, or otherwise, in excess of
the indemnification otherwise permitted by Section 317 of the California Law,
subject only to the applicable limits set forth in Section 204 of the
California Law. The Registrant believes that the officers of the Registrant
are serving at the request of the Member and are therefore entitled to such
indemnity from the Member.
The Board of Directors of the Member has adopted a resolution implementing
the authority granted in Article SIXTH of the Articles of Incorporation. The
resolution provides for the indemnification of any director and officer of the
Member for any threatened, pending or completed action, suit or proceeding to
the fullest extent permissible under California Law and the Articles of
Incorporation, subject to the terms of any agreement between the Member and
such a person; provided that, no such person shall be indemnified: (i) except
to the extent that the aggregate of losses to be indemnified exceeds the
amount of such losses for which the director or
II-1
<PAGE>
officer is paid pursuant to any director's or officer's liability insurance
policy maintained by the Member; (ii) for any suit or judgment resulting from
an accounting of profits made through the purchase or sale of securities of
the Member pursuant to Section 16(b) of the Securities Exchange Act of 1934;
(iii) if a court of competent jurisdiction determines that the indemnification
is unlawful; (iv) for any acts or omissions involving intentional misconduct
or knowing and culpable violation of law; (v) for acts or omissions that the
director or officer believes to be contrary to the best interests of the
Member or its shareholders, or that involve the absence of good faith; (vi)
for any transaction from which the director or officer derived an improper
personal benefit; (vii) for acts or omissions that show a reckless disregard
for the director's or officer's duty to the Member or its shareholders in
circumstances in which the director or officer was aware, or should have been
aware, in the ordinary course of performing his or her duties, of a risk of
serious injury to the Member or its shareholders; (viii) for acts or omissions
that constitute an unexcused pattern of inattention that amount to an
abdication of the director's or officer's duties to the Member or its
shareholders; (ix) for costs, charges, expenses, liabilities and losses
arising under Section 310 or 316 of the California Law; or (x) as to
circumstances in which indemnity is expressly prohibited by Section 317. The
exclusions set forth in clauses (iv) through (x) above shall apply only to
indemnification for acts, omissions or transactions involving breach of duty
to the Member or its shareholders. The resolution also provides that the
Member shall indemnify any director or officer in connection with (a) a
proceeding (or part thereof) initiated by him or her only if such proceeding
(or part thereof) was authorized by the Board of Directors or (b) a proceeding
(or part thereof), other than a proceeding by or in the name of the Member to
procure a judgment in its favor, only if any settlement of such a proceeding
is approved in writing by the Member. Indemnification shall cover all costs,
charges, expenses, liabilities and losses, including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes, or penalties and
amounts paid or to be paid in settlement, reasonably incurred or suffered by
the director or officer.
The Member has directors' and officers' liability insurance policies in
force insuring directors and officers of the Member and its subsidiaries.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
+3.3 Form of Amended and Restated Limited Liability Company Agreement.
+3.4 Amended and Restated Limited Liability Company Agreement.
+4.1 Form of Note Indenture.
+4.2 Form of Trust Agreement.
+4.3 Form of Note.
+4.4 Form of Rate Reduction Certificate.
+5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to legality
of the Notes.
+5.2 Opinion of Richards, Layton & Finger, P.A.with respect to legality of
the Rate Reduction Certificates.
+5.3 Opinion of Richards, Layton & Finger, P.A. with respect to due
authorization of the Notes and the Indenture by the Note Issuer.
+8.1 Opinion of Brown & Wood LLP with respect to tax matters.
+8.2 Internal Revenue Service Revenue Ruling.
+10.1 Form of Transition Property Purchase and Sale Agreement.
+10.2 Form of Transition Property Servicing Agreement.
+10.3 Form of Note Purchase Agreement.
+10.4 Form of Fee and Indemnity Agreement.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in its opinion
filed as Exhibit 5.1).
+23.2 Consent of Brown & Wood LLP (included in its opinions filed as Exhibits
8.1 and 99.8).
+23.3 Consent of Richards, Layton & Finger, P.A. (included in its opinions
filed as Exhibits 5.2 and 5.3).
23.4 Consent of Arthur Andersen LLP.
+23.5 Consent of Brooke Bassett, Esq.
+25.1 Statement of Eligibility and Qualification of Note Trustee on Form T-1.
+25.2 Statement of Eligibility and Qualification of Certificate Trustee on
Form T-1.
+27 Financial Data Schedule.
+99.1 Application for Financing Order.
+99.2 Financing Order.
+99.3 Form of Issuance Advice Letter.
+99.4 Application to Infrastructure Bank (Exhibit A to Part I thereof is
incorporated by reference to Exhibit 99.1 of this Registration
Statement; Exhibits B, C, F, G, H, J, K and L to Part II thereof are
incorporated by reference to Exhibits 4.2, 3.3, 10.4, 4.1, 10.3, 10.1,
10.2 and 1.1 of this Registration Statement, respectively, and Exhibit
D to Part II thereof is incorporated by reference to Amendment No. 2 to
this Registration Statement).
+99.5 Form of Issuance Resolutions of Infrastructure Bank.
+99.6 Interim Opinion of CPUC.
+99.7 Opinion of Brown & Wood LLP with respect to impairment of contracts.
+99.8 Opinion of Brown & Wood LLP with respect to Proposition 218.
+99.9 Form of opinion of Brooke Bassett, Esq. with respect to validity of
Issuance Resolutions.
</TABLE>
- --------
+Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of the California Infrastructure and
Economic Development Bank Special Purpose Trust PG&E-1 (the "Trust") hereby
undertakes as follows:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement; (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement (Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.); (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement; provided, however, that
(a)(1)(i) and (a)(1)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering hereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934), with
respect to the Trust that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
under Item 15 above, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS POST-EFFECTIVE
AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN FRANCISCO, STATE OF
CALIFORNIA, ON NOVEMBER 25, 1997.
PG&E FUNDING LLC
AS REGISTRANT
By: /s/ Kent M. Harvey
---------------------------------
Name:Kent M. Harvey
Title:President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registration Statement has been signed on
November 25, 1997 by the following persons in the capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
(Principal Executive Officer)
/s/ Kent M. Harvey President and
- -------------------------------- Director November 25,
KENT M. HARVEY 1997
(Principal Financial Officer)
/s/ Gabriel B. Togneri Treasurer and
- -------------------------------- Director November 25,
GABRIEL B. TOGNERI 1997
(Principal Accounting Officer)
/s/ Christopher P. Johns Controller
- -------------------------------- November 25,
CHRISTOPHER P. JOHNS 1997
/s/ Walter S. Levison Director
- -------------------------------- November 25,
WALTER S. LEVISON 1997
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
+1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
+3.3 Form of Amended and Restated Limited Liability Company
Agreement.
+3.4 Amended and Restated Limited Liability Company
Agreement.
+4.1 Form of Note Indenture.
+4.2 Form of Trust Agreement.
+4.3 Form of Note.
+4.4 Form of Rate Reduction Certificate.
+5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with
respect to legality of the Notes.
+5.2 Opinion of Richards, Layton & Finger, P.A. with respect
to legality of the Rate Reduction Certificates.
+5.3 Opinion of Richards, Layton & Finger, P.A. with respect
to due authorization of the Notes and the Indenture by
the Note Issuer.
+8.1 Opinion of Brown & Wood LLP with respect to tax
matters.
+8.2 Internal Revenue Service Revenue Ruling.
+10.1 Form of Transition Property Purchase and Sale
Agreement.
+10.2 Form of Transition Property Servicing Agreement.
+10.3 Form of Note Purchase Agreement.
+10.4 Form of Fee and Indemnity Agreement.
+23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included
in its opinion filed as Exhibit 5.1).
+23.2 Consent of Brown & Wood LLP (included in its opinions
filed as Exhibits 8.1 and 99.8).
+23.3 Consent of Richards, Layton & Finger, P.A. (included in
its opinions filed as Exhibits 5.2 and 5.3).
23.4 Consent of Arthur Andersen LLP.
+23.5 Consent of Brooke Bassett, Esq.
+25.1 Statement of Eligibility and Qualification of Note
Trustee on Form T-1.
+25.2 Statement of Eligibility and Qualification of
Certificate Trustee on Form T-1.
+27 Financial Data Schedule.
+99.1 Application for Financing Order.
+99.2 Financing Order.
+99.3 Form of Issuance Advice Letter.
+99.4 Application to Infrastructure Bank (Exhibit A to Part I
thereof is incorporated by reference to Exhibit 99.1 of
this Registration Statement; Exhibits B, C, F, G, H, J,
K and L to Part II thereof are incorporated by
reference to Exhibits 4.2, 3.3, 10.4, 4.1, 10.3, 10.1,
10.2 and 1.1 of this Registration Statement,
respectively, and Exhibit D to Part II thereof is
incorporated by reference to Amendment No. 2 to this
Registration Statement).
+99.5 Form of Issuance Resolutions of Infrastructure Bank.
+99.6 Interim Opinion of CPUC.
+99.7 Opinion of Brown & Wood LLP with respect to impairment
of contracts.
+99.8 Opinion of Brown & Wood LLP with respect to Proposition
218.
+99.9 Form of opinion of Brooke Bassett, Esq. with respect to
validity of Issuance Resolutions.
</TABLE>
- --------
+Previously filed.
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 3, 1997, included in Post-effective Amendment No. 1 to Form S-3
Registration Statement No. 333-30715 (relating to the California Infrastructure
and Economic Development Bank Special Purpose Trust PG&E-1), dated November 26,
1997, and to all references to our Firm included in this registration statement.
/s/ Arthur Andersen
San Francisco, California
November 26, 1997
