<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION STATEMENT NO. 333-30785
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
(Issuer of Securities)
SCE FUNDING LLC
(Depositor of the Trust described herein)
(Exact Name of Registrant as Specified in Its Certificate of Formation)
<TABLE>
<S> <C>
DELAWARE 95-4640661
(State or Other Jurisdiction of Organization) (I.R.S. Employer Identification Number)
</TABLE>
SCE FUNDING LLC
2244 WALNUT GROVE AVENUE, ROOM 180, ROSEMEAD, CA 91770, (626) 302-1850
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
KENNETH S. STEWART
SECRETARY
SCE FUNDING LLC
2244 WALNUT GROVE AVENUE, ROOM 180, ROSEMEAD, CA 91770, (626) 302-1850
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
<TABLE>
<S> <C> <C>
DAVID B. ROGERS ERIC D. TASHMAN GREGORY M. SHAW
JOHN M. JAMESON CATHY M. KAPLAN CRAVATH, SWAINE & MOORE
GEOFFREY K. HURLEY BROWN & WOOD LLP WORLDWIDE PLAZA
LATHAM & WATKINS 555 CALIFORNIA STREET, 50TH FLOOR 825 EIGHTH AVENUE
633 WEST FIFTH STREET, SUITE 4000 SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10019
LOS ANGELES, CALIFORNIA 90071
</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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(2) PER UNIT OFFERING PRICE FEE(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate Reduction Certificates............... $1,000,000 100%(1) $1,000,000(1) $303.03
- ------------------------------------------------------------------------------------------------------
Notes..................................... $1,000,000 (2) (2) None
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) No additional consideration will be paid by the purchasers of the Rate
Reduction Certificates for the Notes which secure the Rate Reduction
Certificates.
(3) Fee of $303.03 paid in connection with original Registration Statement
filed on July 3, 1997.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION +
+PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A REGISTRATION +
+STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE +
+SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE SECURITIES +
+ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE DELIVERED +
+TO PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[FORM OF PROSPECTUS SUPPLEMENT]
SUBJECT TO COMPLETION DATED , 199
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
RATE REDUCTION CERTIFICATES, SERIES 199 -
$ ORIGINAL PRINCIPAL BALANCE
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
[$ CLASS FLOATING RATE CERTIFICATES]
SCE FUNDING LLC
(ISSUER OF THE NOTES)
SOUTHERN CALIFORNIA EDISON 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 SCE-1 Rate Reduction Certificates, Series 199 - (the "Offered
Certificates"), offered hereby will consist of the following Classes:
. Each Class of Offered Certificates represents an undivided interest in
the related class of SCE Funding LLC Notes, Series 199 - (the "Underlying
Notes"), issued by SCE Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer") [and, with respect to the Class
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 SCE-1 (the "Trust").
(Continued on following page)
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.
-----------
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 25 IN THE
PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT TRUST(1)(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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].
[UNDERWRITERS]
The date of this Prospectus Supplement is , 199
<PAGE>
(Continued from previous 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.
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.
PAYMENT 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 (OTHER THAN THE NOTE
ISSUER) WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE OFFERED CERTIFICATES, THE
UNDERLYING NOTES OR THE UNDERLYING 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, PREMIUM, IF ANY, PURCHASE PRICE
OF, OR INTEREST ON, THE OFFERED CERTIFICATES OR THE UNDERLYING NOTES, OR TO
THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY, NOR IS THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION OR AGENCY OR INSTRUMENTALITY THEREOF
IN ANY MANNER OBLIGATED TO MAKE ANY APPROPRIATION FOR THE PAYMENT THEREOF.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page S-30 herein and which begins on page 82 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 "Description of the Certificates--
Reports to Certificateholders" herein. 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.
S-3
<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-30 sets forth the
pages on which the definitions of certain principal terms appear.
Summary of Offered
Certificates............... The Offered Certificates will be issued on the
Series Issuance Date. The Offered Certificates
will be comprised of the following
Classes:
<TABLE>
<CAPTION>
CERTIFICATE
SCHEDULED FINAL INTEREST
CLASS DISTRIBUTION DATE TERMINATION DATE RATE
- ----- ----------------- ---------------- -----------
<S> <C> <C> <C>
, 200 ( years) , 200 ( years) . %
, 200 ( years) , 200 ( years) . %
, 200 ( years) , 200 ( years) . %
, 200 ( years) , 200 ( years) . %
, 200 ( years) , 200 ( years) . %(1)
</TABLE>
- --------
(1) Calculated as described under "Floating Rate on Class 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, investors are directed to the discussion
under the heading "Prospectus Summary--
Transaction Overview" in the Prospectus.
The Note Issuer will issue the Underlying Notes,
which will be secured primarily by the Transition
Property, 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 (and any
other comparable interest rate swap agreements)
to which it is a party], will issue the Offered
Certificates, which will be sold to the
Underwriters. The Offered Certificates of each
Class represent an undivided interest in the
related Class of Underlying Notes and the
proceeds thereof [, together with the proceeds of
the Swap Agreement]. The Underlying Notes will
also be secured by the Transition Property
Purchase and Sale Agreement between Edison and
the Note Issuer, the Transition Property
Servicing Agreement between Edison 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.
S-4
<PAGE>
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, all related
fees and expenses and the Overcollateralization
Amount described herein. 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.
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 25 of the Prospectus. [In addition, an
investment in the Class Certificates involves
the additional risks discussed herein under
"Additional Risk Factors Relating to the Class
Certificates."]
The Offered Certificates....
The California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1 Rate
Reduction Certificates, Series 199 - (the
"Offered Certificates"). The Offered Certificates
are comprised of the following classes
(each, a "Class"): . As of the Series
Issuance Date for the Offered Certificates, the
aggregate principal balance thereof (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 agency or
instrumentality thereof is pledged to the
distributions of principal of, or interest on,
the Offered Certificates or the Underlying Notes
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.
Seller and Servicer......... Southern California Edison Company, a California
corporation ("Edison" 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 Edison and its roles as Seller and
Servicer, see "The Seller and Servicer" herein
and in the Prospectus.
S-5
<PAGE>
Issuer of Certificates...... California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-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], a (the
"Certificate Trustee").
Delaware Trustee............
[Bankers Trust Company of Delaware], a
(the "Delaware Trustee").
Note Issuer................. SCE Funding LLC, a Delaware special purpose
limited liability company whose single member is
Edison (the "Note Issuer").
The principal executive office of the Note Issuer
is located at 2244 Walnut Grove Avenue, Room 180,
Rosemead, CA 91770, and its telephone number is
(626) 302-1850.
The Underlying Notes........ SCE 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 (the
"Original Note Principal Balance") 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], a (the "Note
Trustee").
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" herein and in the
Prospectus, the amounts permitted to be recovered
from the Customers which are necessary to provide
for the amortization of all Certificates in
accordance with the applicable Expected
Amortization Schedules, together with all costs
and expenses related thereto and the
Overcollateralization Amount.
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 , ,
the dates on which distributions will be made to
holders of Offered
S-6
<PAGE>
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").
Record Date................. With respect to any Distribution Date, the last
day of the preceding calendar month (each, a
"Record Date").
Final Distribution Date..... 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 pay principal of and interest on 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--Certificate Events of Default;
Rights Upon Certificate Event 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" herein.
[Swap Agreement............. The Trust will enter into a swap agreement dated
the Closing Date (the "Swap Agreement") with
, 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 the
(a) 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 Class
Certificateholders on such preceding Distribution
Date.
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." If, upon or prior to the
termination of the Swap Agreement, the
Infrastructure Bank, using its best efforts, is
unable to find a successor swap counterparty
satisfying the requirements specified in the
Trust Agreement, the Certificate Interest Rate
payable with respect to the Class 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 on
S-7
<PAGE>
Class Certificates" and "Additional Risk
Factors Relating to the Class Certificates."]
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, the
following 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 Class Certificates interest will be
calculated as described under "Description of the
Certificates--Floating Rate on Class
Certificates."] Interest on any Class of Offered
Certificates will be payable only to the extent
interest has been paid on the related Class of
Underlying Notes [and, in the case of the Class
Certificates, interest will be paid based upon
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]. See "Description of the
Certificates--Distributions of Interest" herein
and "Description of the Certificates--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 payable
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 Certificates--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 Note Principal Balance (after giving
effect to payments on such date) has been reduced
to less than five percent of the Original Note
Principal Balance. See "Description of the
Certificates--Optional Redemption" herein.
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 (the
"Overcollateralization Subaccount") and a capital
subaccount (the
S-8
<PAGE>
"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. In order to enhance the
likelihood that distributions on each Class of
the Offered Certificates will be made in
accordance with their Expected Amortization
Schedules, the Financing Order permits the
Servicer to set the FTA Charges at levels that
are expected to produce FTA Collections in an
aggregate of $ in excess of the amounts
expected to be required to make all distributions
on all outstanding Classes of Offered
Certificates in a timely manner and to pay all
related fees and expenses. Such excess is the
Overcollateralization Amount related to the
Offered Certificates and will be allocated to the
Overcollateralization Subaccount. The
Overcollateralization Amount will be collected
ratably over the life of the Offered Certificates
and is expected to represent percent of the
FTA Collections for each Collection Period. See
also "Description of the Notes--
Overcollateralization Amount" herein and in the
Prospectus.
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 percent 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.
Other. See "Description of the Certificates--
Other Credit Enhancement" herein and in the
Prospectus.
S-9
<PAGE>
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
Servicing Fee for each calendar quarter with
respect to the Offered Certificates in an amount
equal to one-fourth of [ ] percent per annum of
the then outstanding principal balance of the
Underlying 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 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.
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 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) could 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
adjust from time to time based in part on the
actual rate of FTA Collections during prior
Collection Periods, 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. See "Risk Factors--Unusual
Nature of the Transition Property--Reliance on
FTA Adjustments" in the Prospectus.
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 in accordance with the
Expected Amortization Schedules, except in the
event of an early redemption, 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 (after
giving effect to payments on such date) has been
reduced to less
S-10
<PAGE>
than five percent of the Original Principal
Balance, the Certificate Trustee will be required
to redeem the Offered Certificates. Such
redemption will adversely affect the yield to
maturity of Offered Certificates purchased at par
or at a premium. See "Certain Distribution,
Weighted Average Life and Yield Considerations"
and "Description of the Transition Property--
Adjustments to the FTA Charges" in the
Prospectus.
Each Class of Offered Certificates will be issued
Denominations............... in minimum initial denominations of [$1,000] and
in integral multiples thereof.
Registration of the
Certificates................ The [Offered] [Class ] 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" and "Description of the Certificates--
Book-Entry Registration" in the Prospectus.
Ratings..................... It is a condition of issuance of the Offered
Certificates that the Class Certificates be
rated " " by , " " by ,
" " by and " " by (each of
, , and , a
"Rating Agency") and that the Class
Certificates be rated " " by " " by
, " " by and " " by .
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
FTA Collections. See "Risk Factors--Uncertain
Distribution Amounts, Weighted Average Life and
Yield Considerations" in the Prospectus "Certain
Distribution and Weighted Average Life
Considerations" herein and in the Prospectus and
"Ratings" herein and in the Prospectus.
Tax Status of the The Offered Certificates will be treated as
Certificates................ representing ownership of debt 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" in the Prospectus and
herein.
S-11
<PAGE>
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 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-12
<PAGE>
[ADDITIONAL RISK FACTORS RELATING TO THE CLASS CERTIFICATES
As described herein under "Summary of Certain Provisions of the Swap
Agreement," upon the occurrence of certain events of default or termination
events, the Swap Agreement will terminate or may be terminated. Such
termination events include the right of the Infrastructure Bank and the
Certificate Trustee to terminate the Swap Agreement if the long-term unsecured
debt rating of the Swap Counterparty is withdrawn or suspended by either S&P
or Moody's or falls below the rating of "A" of either such Rating Agency. If
the Swap Agreement is terminated, the Infrastructure Bank will use its best
efforts to find a successor swap counterparty satisfying the qualifications
described in the Trust Agreement. If, upon or prior to such termination, the
Infrastructure Bank is unable to find such a successor swap counterparty, the
Certificate Interest Rate payable with respect to the Class Certificates
will convert to a fixed rate equal to the interest rate on the Class Notes,
which is percent. Distributions of interest with respect to the Class
Certificates will continue at this fixed interest rate until a successor swap
counterparty has been found, and no assurances are given that a successor swap
counterparty will be found. In such event, both the liquidity and the market
value of the Class Certificates may be adversely affected.]
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust SCE-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. The
Offered Certificates will be comprised of the following Classes:
<TABLE>
<CAPTION>
CERTIFICATE
SCHEDULED FINAL INTEREST
CLASS DISTRIBUTION DATE TERMINATION DATE RATE
- ----- --------------------- --------------------- -----------
<S> <C> <C> <C>
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %
................... , 200 ( years) , 200 ( years) . %(1)
</TABLE>
- --------
(1) Calculated as described under "Floating Rate on Class Certificates."
[FLOATING RATE ON CLASS CERTIFICATES
Determination of Class Certificate Interest Rate. The Certificate
Interest Rate applicable from time to time to Class Certificates will be
determined by the (together with any successor Agent Bank under the Trust
Agreement the "Agent Bank") in accordance with the following provisions:
(a) On the second 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
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
S-13
<PAGE>
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 percent.
(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 (after consultation with the
Infrastructure 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 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 (after consultation with
the Infrastructure 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 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 rate of interest in effect on such Interest
Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or minimum
Certificate Interest Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, the
interest rate with respect to the Class Certificates shall be percent
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
immediately preceding the termination of the Swap Agreement.
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 Class 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 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 Certificate Interest Rate and Interest Payments. The Agent Bank
will notify the Infrastructure Bank, the Certificate Trustee and any Paying
Agents of the Certificate Interest Rate and the Quarterly Interest due on the
Class 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 Certificate Interest Rate or calculate Quarterly Interest in
accordance with "Calculation of Quarterly Interest" above at any
S-14
<PAGE>
time or for any reason, the Certificate Trustee shall determine the Certificate
Interest Rate and calculate the Quarterly Interest in accordance with
"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 Certificate Interest 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
Infrastructure Bank may (with the prior written approval of the Certificate
Trustee) terminate the appointment of the Agent Bank for any reason. Notice of
any such termination will be given 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 Certificate Interest Rate and/or the
Quarterly Interest for any Interest Accrual Period, then the Infrastructure
Bank will, with the approval of the Certificate Trustee, appoint a successor
Agent Bank to act as such in its place, provided that neither the resignation
nor removal of the Agent Bank shall take effect until a successor approved by
the Certificate Trustee has been appointed. Notice of any such appointment of a
successor Agent Bank will be given to the Certificateholders within ten days of
such appointment.]
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 .
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the related Record Date interest
to the extent paid on such date with respect to the Class of Underlying Notes
with the same alphabetical [or alphanumeric] designation, as described below
under "Description of the Notes--Interest" [or, with respect to the Class
Certificates, payments received from the Swap Counterparty pursuant to the Swap
Agreement.]
DISTRIBUTIONS OF PRINCIPAL
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 principal to the extent paid on such date with respect to
the Class of Underlying Notes with the same alphabetical [or 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--Certificate Events of Default; Rights Upon
Certificate Event 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 Note Principal Balance (after giving effect to payments on such
date) has been reduced to less than five percent of the Original Note Principal
Balance. Such Payment Date will correspond to the Distribution Date on which
the Outstanding Certificate Principal Balance has been reduced to 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.
S-15
<PAGE>
SUMMARY OF CERTAIN PROVISIONS OF THE SERIES
SUPPLEMENT TO THE TRUST AGREEMENT
[TO BE PREPARED UPON ISSUANCE]
[SUMMARY OF CERTAIN PROVISIONS OF THE SWAP AGREEMENT]
[TO BE PREPARED UPON ISSUANCE]
[THE SWAP COUNTERPARTY]
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE NOTES
GENERAL
The SCE 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>
NOTE
SCHEDULED MATURITY INTEREST
CLASS DATE FINAL MATURITY DATE RATE
- ----- ---------------------- ---------------------- --------
<S> <C> <C> <C>
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
..................... , 200 ( years) , 200 ( years) . %
</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
, 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
S-16
<PAGE>
close of business on the preceding Distribution Date after giving effect to
all payments of principal made to the Noteholders 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 the
following Distribution 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 AT 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 percentage of the initial 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 the Series
Issuance Date, (ii) payments on the Offered Certificates are made on each
Distribution Date, commencing , 199 , (iii) the initial Class
Principal Balance is $ and the initial Class Principal Balance
is $ , (iv) all FTA Collections are deposited in the Collection Account
in accordance with the Seller's forecasts, (v) the Note Issuer does not redeem
the Underlying Notes and ( ) [other assumptions].
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
OUTSTANDING PRINCIPAL BALANCE
PERCENTAGE OF INITIAL CLASS
PRINCIPAL BALANCE OUTSTANDING
---------------------------------------
PAYMENT DATE CLASS CLASS CLASS CLASS CLASS
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage......................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
, 199 ..........................
[Etc.]
</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.
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 Note Principal
Balance (after giving effect to payments on such date) has been reduced to
less than five percent
S-17
<PAGE>
of the Original Note Principal Balance. 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
In order to enhance the likelihood that distributions on each Class of the
Offered Certificates will be made in accordance with their Expected
Amortization Schedules, the Financing Order and the Issuance Advice Letter
relating to the Offered Certificates permit the recovery of $
through FTA Payments in excess of the amount expected to be required to pay
interest on and principal of all outstanding Classes of Offered Certificates
and related fees and expenses. Such excess is the Overcollateralization Amount
related to the Offered Certificates and will be allocated to the
Overcollateralization Subaccount. The Overcollateralization Amount will be
collected ratably over the life of the Certificates and is expected to
represent percent of the FTA Collections for each Collection Period. For a
further discussion of the Overcollateralization Amount, see "Description of
the Notes--Overcollateralization Amount" in the Prospectus.
OTHER CREDIT ENHANCEMENT
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.
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 percent 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.
[OTHER TO BE PREPARED AT ISSUANCE]
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 Collection 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 AT ISSUANCE]
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<PAGE>
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 actual electricity usage of each
such Customer and the rate of delinquencies and write-offs. These charges are
nonbypassable in that applicable consumers cannot avoid paying them if they
purchase 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 which was filed in connection with the Offered
Certificates establishes the following FTA Charges:
<TABLE>
<CAPTION>
CLASS OF
CUSTOMERS FTA CHARGE PER KILOWATT HOUR
--------- ----------------------------
<S> <C>
RESIDENTIAL
SMALL
COMMERCIAL
</TABLE>
Initially, 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 bill (excluding local taxes) during 1996 was $64.98 for a Residential
Customer and $114.15 for a Small Commercial Customer.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the FTA Collections are neither more
nor less than the amount necessary to amortize the Certificates in accordance
with the Expected Amortization Schedule, to replenish the Capital Subaccount
up to the Required Capital Level and fund the Overcollateralization Subaccount
up to the Required Overcollateralization Level, 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, electricity usage by Customers 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 "Variance Trigger" means [ ].
[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>
REQUESTED ADJUSTMENT RESULTING
ADJUSTMENT TO FTA CHARGE AGGREGATE
TO FTA CHARGE GRANTED BY CPUC FTA CHARGE EFFECTIVE DATE OF
FILING DATE PER KILOWATT HOUR PER KILOWATT HOUR PER KILOWATT HOUR ADJUSTMENT
----------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
[TO BE PREPARED UPON ISSUANCE]
S-19
<PAGE>
FTA CHARGE FOR SMALL COMMERCIAL CUSTOMERS
<TABLE>
<CAPTION>
REQUESTED ADJUSTMENT RESULTING
ADJUSTMENT TO FTA CHARGE AGGREGATE
TO FTA CHARGE GRANTED BY CPUC FTA CHARGE EFFECTIVE DATE OF
FILING DATE PER KILOWATT HOUR PER KILOWATT HOUR PER KILOWATT HOUR ADJUSTMENT
----------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
</TABLE>
[TO BE PREPARED UPON ISSUANCE]
See "Description of the Transition Property--Adjustments to the FTA Charges"
in the Prospectus.
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.
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 on deposit in the Overcollateralization
Subaccount, Capital Subaccount and Reserve Subaccount. Since the FTA Charges
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 energy 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 in accordance with the Expected Amortization Schedules, except in
the event of an early redemption, 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 (after giving effect to payments on such
date) has been reduced to less than five percent of the Original Principal
Balance. 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 will
adversely affect the yield to maturity of Offered Certificates purchased at
par or at a premium. 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-20
<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.
Southern California Edison Company reported net income of $ on
revenues of $ for the [quarter][year] ended , 199 , as
compared with net income of $ on revenues of $ for the
[quarter][year] ended , 199 .
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 one-fourth of percent
per annum of the then outstanding principal balance of the Underlying 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" 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 the other charges, including the
applicable FTA Charge. Any ESP that elects consolidated billing, including
monthly amounts with respect to the FTA Charges, will be responsible for
paying the utility amounts billed by the utility to the ESP regardless of the
ESP's ability to collect such amounts, including the FTA Charges, from its
customers. The CPUC has not yet made a final determination regarding the
appropriate credit standards to be required of ESPs, or the appropriate form
of the necessary agreement between Edison and each ESP. 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 the same manner that the
Servicer will pursue any failure by a Customer to remit FTA Charges. The
Servicer has the right to revert to separate billing upon certain payment
defaults by an ESP. Neither the Seller nor the Servicer will pay any
shortfalls resulting from the failure of any ESPs to forward FTA Payments to
Edison, as Servicer. The true-up adjustment mechanism for the FTA Charges, as
well as the collection of the
S-21
<PAGE>
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 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 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 ADVISOR 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 a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or 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 (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). 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, has all payments denominated in U.S. dollars and not determined by
reference to the value of any other currency and has a term that exceeds one
year. Moreover, the discussion assumes that any original issue discount
("OID") on the Offered Certificate (i.e., any excess of the stated redemption
price at maturity of the Offered Certificate 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 Offered Certificate's weighted average maturity),
all within the meaning of the OID regulations. Moreover,
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<PAGE>
the discussion assumes that the Offered Certificates are of a type, as set
forth below, which Special Counsel is of the opinion will represent ownership
of debt for federal income tax purposes.
TREATMENT OF THE OFFERED CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Offered Certificates will represent ownership of debt
and the Trust will not be treated as an association or publicly traded
partnership taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. OFFERED CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Offered Certificates represent ownership of debt obligations for federal
income tax purposes, stated interest on a beneficial interest in an Offered
Certificate 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 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. Offered 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. Offered 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. Offered 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. Offered 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. Offered 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 after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
Internal Revenue Service (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. Offered 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
S-23
<PAGE>
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 OF EXCHANGE OF OFFERED CERTIFICATES
Upon a disposition of an interest in an Offered 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 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. 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 actually
or constructively owns ten percent or more of the total combined voting power
of all classes of stock of the Seller entitled to vote (or of a profits or
capital interest of the Trust characterized as a partnership), (ii) the non-
U.S. Offered Certificateholder is a controlled foreign corporation that is
related to the Seller (or the Trust treated as a partnership) through stock
ownership, (iii) the non-U.S. Offered Certificateholder is a bank which
receives interest as described in Code Section 881(c)(3)(A), or (iv) such
interest is contingent interest described in Code Section 871(h)(4). 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 advisor.
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
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<PAGE>
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) investor 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 percent 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 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.
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 advisor
regarding state and local tax consequences.
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<PAGE>
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 Edison, 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 Edison, 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) 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 Edison, the
Certificate Trustee, the
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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 Edison, 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 six 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), 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers), and 75-1 (Part III) (Class
Exemption for Certain Underwriting Transactions). 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 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.
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<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 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>
PRINCIPAL
AMOUNT OF
NAME CERTIFICATES
---- ------------
<S> <C>
[Underwriter]................................................. $
[Underwriter].................................................
[Underwriter].................................................
[Others]......................................................
-----------
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 percent of the
principal amount of the Offered Certificates. The Underwriters may allow and
such dealers may reallow a concession not in excess of percent of the
principal amount of the Offered Certificates to certain brokers and dealers.
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 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 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 Class
Certificates be rated " " by , " " by , " " by
and " " by (each of , and , a
"Rating Agency") and that the Class Certificates be rated " " by
, " " by , " " by and " " by . 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
FTA Payments.
S-28
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Underlying Notes and certain federal
income tax consequences of the issuance of the Underlying Notes will be passed
upon by Latham & Watkins, Los Angeles, California, counsel to the Seller and
the Note Issuer. Certain legal matters relating to the Offered Certificates
and certain federal income tax consequences of the issuance of the Offered
Certificates will be passed upon by Special Counsel. Certain legal matters
relating to the Offered Certificates will be passed upon by Cravath, Swaine &
Moore, New York, New York, counsel to the Underwriters.
S-29
<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-
Book-Entry Certificates........................................ S-
Calculation Date............................................... S-
Capital Subaccount.............................................
Cede........................................................... S-
Certificate Interest Rate...................................... S-
Certificate Trustee............................................ S-
Certificateholders............................................. S-
Certificates................................................... S-
Class.......................................................... S- , S-
Class Principal Balance........................................ S-
Code...........................................................
CPUC........................................................... S-
Distribution Date.............................................. S- , S- , S-
DTC............................................................ S- , S-
Edison......................................................... S-
Exchange Act................................................... S-
Floating Rate.................................................. S-
General Subaccount.............................................
Infrastructure Bank............................................ S-
Interest Accrual Period........................................
Interest Determination Date....................................
IRS............................................................
Non-U.S. Certificateholder.....................................
Note Issuer.................................................... S- , S-
Note Trustee................................................... S-
Noteholder..................................................... S-
Notes.......................................................... S-
Offered Certificates........................................... S- , S-
OID............................................................
Original Certificate Principal Balance......................... S-
Original Note Principal Balance................................ S-
Overcollateralization Subaccount............................... S-
Payment Date................................................... S- , S-
Rating Agency.................................................. S- , S-
Record Date.................................................... S-
Reserve Fund...................................................
Seller......................................................... S-
Series Issuance Date........................................... S-
Servicer....................................................... S-
Servicing Fee.................................................. S-
Special Counsel................................................
Swap Agreement.................................................
Swap Counterparty..............................................
Statute........................................................ S-
Telerate Page..................................................
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Trust.......................................................... S-
U.S. Certificateholder.........................................
U.S. Person....................................................
Underlying Notes............................................... S- , S- , S-
Underwriters................................................... S-
Utilities...................................................... S-
Variance Trigger...............................................
Withholding Agent..............................................
</TABLE>
S-31
<PAGE>
FINANCIAL STATEMENTS
SCE FUNDING LLC
BALANCE SHEET
, 1997
[TO BE PREPARED UPON ISSUANCE]
<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 , 1997
PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SCE-1
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
-----------
SCE FUNDING LLC
(ISSUER OF THE NOTES)
-----------
SOUTHERN CALIFORNIA EDISON 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 SCE-1 Rate Reduction Certificates (the "Certificates") offered hereby in
an aggregate principal amount of up to $ 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 SCE-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 SCE Funding LLC Notes (the
"Notes") issued by SCE Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer"), and the proceeds thereof. The sole
member of the Note Issuer is Southern California Edison Company, a California
corporation ("Edison"). 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 the TRANSITION PROPERTY PURCHASE AND SALE AGREEMENT BETWEEN EDISON AND THE
NOTE ISSUER, THE TRANSITION PROPERTY SERVICING AGREEMENT BETWEEN EDISON 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.
Edison will sell the Transition Property (in such capacity, the "Seller") to
the Note Issuer pursuant to the 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.
(Continued on following page)
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 25 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 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
ANY OF THE SELLER OR ITS AFFILIATES (OTHER THAN THE NOTE ISSUER)
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 DISTRIBUTIONS OF PRINCIPAL OF, PREMIUM, IF ANY, ON,
PURCHASE PRICE 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 OR 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 82 herein for the location of the definitions of
capitalized terms that appear in this Prospectus.
, 1997
<PAGE>
(Continued from previous page)
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 undivided 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 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.
2
<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.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Note Issuer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering 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 2244 Walnut Grove Avenue, Room 180, Rosemead,
CA 91770 or by telephone at (626) 302-1850.
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, and the portion of the FTA
Charges attributable to 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 interest rate exchange
agreement executed solely to permit the issuance of variable rate
Certificates.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... 3
REPORTS TO HOLDERS......................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 4
PROSPECTUS SUPPLEMENT...................................................... 4
PROSPECTUS SUMMARY......................................................... 7
RISK FACTORS............................................................... 25
Unusual Nature of the Transition Property................................ 25
Potential Servicing Issues............................................... 27
Uncertainties Related to the Electric Industry Generally................. 29
Bankruptcy and Creditors' Rights Issues.................................. 30
Nature of the Certificates............................................... 32
Additional Risks of Floating Rate Certificates........................... 34
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE.................... 35
DESCRIPTION OF THE TRANSITION PROPERTY..................................... 36
General.................................................................. 36
Financing Order and Advice Letters....................................... 36
Transition Property...................................................... 37
Nonbypassable FTA Charges................................................ 38
Adjustments to the FTA Charges........................................... 38
Sale and Assignment of Transition Property............................... 39
Seller Representations and Warranties.................................... 40
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS....... 41
THE TRUST.................................................................. 42
THE INFRASTRUCTURE BANK.................................................... 42
THE NOTE ISSUER............................................................ 43
Officers................................................................. 43
THE SELLER AND SERVICER.................................................... 44
General.................................................................. 44
Edison Customer Base and Electric Energy Consumption..................... 44
Forecasting Consumption.................................................. 45
Forecast Variance........................................................ 45
Credit Policy; Billing; Collections; Restoration of Service.............. 46
Loss Experience.......................................................... 48
Aging.................................................................... 48
Delinquencies............................................................ 49
Revenue.................................................................. 49
SERVICING.................................................................. 50
Servicing Procedures..................................................... 50
Servicing Standards and Covenants........................................ 50
Remittances to Collection Account........................................ 51
No Servicer Advances..................................................... 51
Servicing Compensation................................................... 51
Aggregators and Other Suppliers.......................................... 51
Servicer Representations and Warranties.................................. 52
Statements by Servicer................................................... 52
Evidence as to Compliance................................................ 52
Certain Matters Regarding the Servicer................................... 53
Servicer Defaults........................................................ 53
Rights Upon Servicer Default............................................. 54
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Waiver of Past Defaults.................................................. 54
Amendment................................................................ 54
Termination.............................................................. 54
DESCRIPTION OF THE NOTES................................................... 55
General.................................................................. 55
Security................................................................. 55
Collection Account....................................................... 55
Interest and Principal................................................... 56
Optional Redemption...................................................... 57
Capital Subaccount....................................................... 57
Overcollateralization Amount............................................. 57
Reserve Subaccount....................................................... 58
Allocations; Payments.................................................... 58
Actions by Noteholders................................................... 59
Note Events of Default; Rights Upon Note Event of Default................ 60
Certain Covenants of the Note Issuer..................................... 61
Reports to Noteholders................................................... 63
Annual Compliance Statement.............................................. 63
DESCRIPTION OF THE CERTIFICATES............................................ 64
General.................................................................. 64
State Pledge............................................................. 64
Payments and Distributions............................................... 64
Floating Rate Certificates............................................... 66
Voting of the Notes...................................................... 68
Events of Default........................................................ 68
Optional Redemption...................................................... 70
Reports to Certificateholders............................................ 70
Amendments............................................................... 70
List of Certificateholders............................................... 71
Registration and Transfer of the Certificates............................ 71
Book-Entry Registration.................................................. 71
Definitive Certificates.................................................. 74
Conditions of Issuance of Additional Series.............................. 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 76
General.................................................................. 76
Treatment of the Certificates as Debt.................................... 76
Taxation of Interest Income of U.S. Certificateholders................... 76
Sale or Exchange of Certificates......................................... 77
Non-U.S. Certificateholders.............................................. 78
Information Reporting and Backup Withholding............................. 78
STATE TAXATION............................................................. 79
California Taxation...................................................... 79
Other States............................................................. 79
ERISA CONSIDERATIONS....................................................... 79
USE OF PROCEEDS............................................................ 80
PLAN OF DISTRIBUTION....................................................... 80
RATINGS.................................................................... 81
LEGAL MATTERS.............................................................. 81
INDEX OF PRINCIPAL DEFINITIONS............................................. 82
</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 82 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
Edison, 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 (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 an undivided interest 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 will also be
secured by the 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
7
<PAGE>
of any or all of the foregoing. See "Description
of the Notes--Security" herein.
The charges represented by the Transition
Property are calculated to be sufficient over
time to pay principal of and interest on the
Notes and, in turn, the Certificates, all related
fees and expenses and the Overcollateralization
Amount 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.
[The omitted graphic reflects the various parties
to the transaction, their roles and their
contractual relationships to various other
parties.]
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 timely payments on the Notes
could be affected by: a legal challenge
8
<PAGE>
to the validity or enforceability of the Statute,
the Financing Order or the Advice Letters; the
resignation or removal of the Servicer; the
ability of the Servicer to forecast accurately
the electricity usage of Customers and the
delinquency and write-off experience relating to
FTA Payments; any alteration by the Servicer or
any successor thereto of its billing and
collection practices; the implementation of the
new California electricity market system; changes
in the regulatory framework applicable to the
electricity industry; socio-economic factors
affecting electricity consumption; the bankruptcy
or insolvency of the Seller, the Servicer or the
Infrastructure Bank; 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 or a delay or failure by the Servicer or
a third-party energy service provider to remit
FTA Payments; any attempted limitation or
alteration of the Statute, the Transition
Property or related matters, or amendment or
repeal of the Statute, whether by the State of
California, voter initiative or legal challenge;
or incorrect evaluation by the Servicer of the
creditworthiness of a significant number of the
Customers.
The Statute could be preempted by federal
legislation.
There are 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, in the event of a
foreclosure, there is likely to be a limited
market, if any, for the Transition Property.
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 25.
Seller and Servicer......... Southern California Edison Company, a California
corporation ("Edison"). Edison will sell the
Transition Property (in its capacity as seller,
the "Seller") to SCE 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").
Edison will also act as the servicer of the
Transition Property (in its capacity as servicer,
the "Servicer") pursuant to a Transition
9
<PAGE>
Property Servicing Agreement between the Note
Issuer and the Servicer (the "Servicing
Agreement").
Edison is a public utility primarily engaged in
the business of supplying electric energy to
customers in an approximately 50,000 square-mile
area of central and southern California,
excluding the City of Los Angeles and certain
other cities.
See "The Seller and Servicer" herein.
Issuer of Certificates......
A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
SCE-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 SCE-1 Rate
Reduction Certificates (the "Certificates"),
issuable in Series. The Certificates will be
issuable under the terms of the Trust Agreement.
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 undivided 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 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
10
<PAGE>
and the other Note Collateral described under
"Description of the Notes--General" 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 which 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 an adjustable 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.
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 issued by the
Note Issuer (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 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.
11
<PAGE>
See "Description of the Certificates" and
"Description of the Notes" herein.
Note Issuer.................
SCE Funding LLC, a Delaware special purpose
limited liability company whose single member is
Edison. The assets of the Note Issuer will
consist of the Transition Property and the other
Note Collateral, including capital contributed by
Edison in an amount specified in each Prospectus
Supplement, which will equal 0.50 percent of the
initial principal amount of all Notes issued and
outstanding pursuant to the Indenture.
The principal executive office of the Note Issuer
is located at 2244 Walnut Grove Avenue, Room 180,
Rosemead, CA 91770, and its telephone number is
(626) 302-1850.
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 all 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, other 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 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").
12
<PAGE>
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 which may be financed, including
associated costs, is $3,000,000,000. 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 commercial consumers whose
peak demand did not exceed 20 kilowatts for any
three of the twelve billing periods prior to
October 1, 1997 and new commercial customers
since that time whose peak demand is
13
<PAGE>
estimated not to exceed 20 kilowatts for any
three of the twelve billing periods since that
time ("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 83 percent and 17 percent,
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 write-off rates.
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,
together with the Overcollateralization Amount
described herein and fees and expenses related to
the issuance and servicing of the Certificates.
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 Charges will be
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 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 herein).
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
herein) are collectively referred to as "Advice
Letters." The Servicing Agreement requires the
Servicer to calculate adjustments to the FTA
Charges and to file the 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 being
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
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<PAGE>
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 Certificates
in accordance with the Expected Amortization
Schedules, replenish the Capital Subaccount up to
the Required Capital Level and fund the
Overcollateralization Subaccount up to the
Required Overcollateralization 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 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. 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 will also file a routine True-Up
Mechanism Advice Letter quarterly if as of any
Distribution Date (i) the sum of (a) the amount
(positive or negative) by which the aggregate
outstanding principal balance of the
Certificates, determined without including
amounts withdrawn from the Overcollateralization
Subaccount and the Capital Subaccount, varies
from the Expected Amortization Schedule for all
outstanding Certificates, plus (b) the amount by
which the Required Overcollateralization Level
exceeds the amount actually on deposit in the
Overcollateralization Subaccount, plus (c) the
amount, if any, by which the Required Capital
Level exceeds the amount actually on deposit in
the Capital Subaccount, less (ii) the amount on
deposit in the Reserve Subaccount, exceeds an
amount specified in the Prospectus Supplement
(the "Variance Trigger"). The Servicer may also
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
15
<PAGE>
Subaccount and Reserve Subaccount, and amounts
necessary to replenish the Capital Subaccount and
fund the Overcollateralization Subaccount to
required levels, in addition to amounts payable
on the Notes.
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 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 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 holders (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
substantial). Amounts billed to Customers will
include amounts owing to Edison and others, in
addition to FTA Charges owing to the Note Issuer.
Of amounts collected from the Customers, only the
portion of amounts collected that is attributable
to the FTA Charges, as adjusted from time to
time, will be available for distributions on the
Certificates.
Distribution and Payment
Dates...................... Unless otherwise specified in the related
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 last
day of the preceding calendar month (each, a
"Record Date").
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 and interest on the
related Class of Certificates is expected to be
distributed in full, based on various assumptions
described herein. Failure to pay principal of and
interest on any Class of Certificates in full by
the "Termination Date," which will
16
<PAGE>
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 an interest in payments to be made on a
Series of Notes, which in turn will be secured by
the Transition Property 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
17
<PAGE>
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" 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--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, "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 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--Optional Redemption" herein.
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<PAGE>
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" herein.
Overcollateralization.......
In order to enhance the likelihood that
distributions on each Series of the Certificates
will be made in accordance with their Expected
Amortization Schedules, the Financing Order
permits the Servicer to set the FTA Charges at
levels that are expected to produce FTA
Collections in amounts that exceed the amounts
expected to be required to make all payments on
the Notes and distributions on the related Series
of Certificates in turn in a timely manner and to
pay all related fees and expenses. The required
amount of such excess, as of any Payment Date
(the "Required Overcollateralization Level"),
will be specified in the related Prospectus
Supplement. Any such excess amount 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.
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 percent of the
initial principal amount of each 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. If
amounts on deposit in the Capital Subaccount are
used to pay such amounts, on subsequent Payment
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
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<PAGE>
"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;
Distributions.............. Except as otherwise specified herein, on the
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 Statistical Month (each such
Statistical Month preceding a monthly Remittance
Date being a "Collection Period"). Because the
Servicer does not track cash collections on bills
rendered within a particular Statistical Month
(each such Statistical Month during which bills
are rendered being a "Billing Period"), the
amount remitted will be based on estimates using
the model described herein under "Servicing--
Remittances to Collection Account." A
"Statistical Month" is a period created by
dividing the calendar year into twelve
consecutive periods of 21 Servicer Business Days
each.
On each Payment Date, amounts in the Collection
Account (subject to the priority of withdrawals
described in the following paragraph), including
net earnings thereon, will be allocated to the
following (in the priority indicated): (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 Edison, as
administrator (the "Administrator"), 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; (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
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 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; (10) the
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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; (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 on 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.
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<PAGE>
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.
[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.]
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 and the accounts
it services for others. On each Remittance Date,
the Servicer will remit FTA Payments expected to
have been received during the preceding
Collection Period (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 during
each Billing Period, the amounts remitted will be
based on estimates using the model described
under "Servicing--Remittances to Collection
Account" herein. 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 for each calendar quarter in an
amount equal to one-fourth of the percent per
annum 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
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<PAGE>
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.
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 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 FTA Collections. See
"Risk Factors--Uncertain Distribution Amounts and
Weighted Average Life,"
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<PAGE>
"Certain Distribution, Weighted Average Life and
Yield Considerations" and "Ratings" herein.
Tax Status of the
Certificates............... The Certificates will be treated as representing
ownership interests in debt for federal income
tax purposes. Interest and original issue
discount, if any, on the Certificates generally
will be included in gross income for federal
income tax purposes. See "Certain Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
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 as often as quarterly, seeking adjustments to
the FTA Charges to reflect amounts available in the General Subaccount and
Reserve Subaccount and amounts required to replenish the Capital Subaccount
and fund the Overcollateralization Subaccount to required levels, as well as
the actual rate of FTA Collections, which 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 and
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
undertake 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
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 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; however, the Note
Issuer has not yet received notice of the commencement of any such litigation.
In addition, opponents have announced their intention to draft a ballot
initiative to eliminate the recoveries of stranded costs, including the FTA
Charges. To date no such initiative measure has been submitted to the State
Attorney General, the first step in commencing the initiative qualification
process.
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
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<PAGE>
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 action or inaction would
substantially impair the rights of the Certificateholders, unless such action
or inaction would constitute a reasonable and necessary exercise of the
State's sovereign powers. 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 may fail to receive
distributions of principal and interest.
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 current session of 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 the New
California Market Structure" herein.
POSSIBLE 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. If the relevant
provisions of the PU Code, the Financing Order or any such Advice Letters were
challenged in a lawsuit and determined to be invalid or unenforceable in whole
or in part, such determination could adversely affect the ability of the Note
Issuer to make timely payments on the Notes, and the Certificateholders could
suffer a loss on their investment.
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<PAGE>
UNCERTAINTIES ASSOCIATED WITH NEW ASSET TYPE
There are 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. In addition, in the event of a foreclosure, there is likely
to be a limited market, if any, for the Transition Property.
LIMITED RIGHTS AND REMEDIES
Under the terms of the Sale Agreement, Edison, 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 repurchase date, if 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. A nonappealable 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. No assurances are given that
Edison will be able to repurchase the Transition Property in a timely manner.
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.
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 occurring after the date the Transition Property is sold. 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 such changes. If any such event were to occur, the Servicer or the
Certificate Trustee, on behalf of the Certificateholders at the expense of the
Trust, would be required to bring legal action seeking to overturn any such
change in law. 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, Edison 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. Furthermore,
any successor servicer may experience difficulties in collecting FTA Payments
and determining appropriate adjustments to FTA Charges. 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 averaged a 0.3 percent
overestimate of usage for Residential Customers and a 2.7 percent
underestimate of usage for Small Commercial Customers. See "The Seller and
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<PAGE>
Servicer--Forecast Variance" herein. The accuracy of the Servicer's historical
forecasts is 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 Overcollateralization Amount and the 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 the
Servicer--Credit Policy; Billing; Collections; Restoration of Service" herein.
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 Edison 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 Edison'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 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. Edison generally is obligated to provide
service to new Customers under California law, and generally no outside credit
investigations are performed on new Customers. Edison's information regarding
the credit status of new Customers is limited to information regarding prior
service, if any, by Edison to such Customers. Edison relies on the information
provided by Customers and its customer information system audits to indicate
whether a new Customer has had previous service from Edison. If Edison
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. It is expected
that in late 1997, the creditworthiness of new Customers will be verified
using an on-line credit bureau database. If a Customer falls below a specific
credit score, a security deposit will be required. 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 services 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, will be responsible for
paying the utility periodic amounts billed by the utility to the ESP
regardless of the ESP's ability to collect such amounts, including the FTA
Charges, from its
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<PAGE>
customers. The CPUC has not yet made a final determination regarding the
appropriate credit standards to be required of ESPs, or the appropriate form of
the necessary agreement between Edison and each ESP. 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 the same manner that the Servicer will pursue any
failure by a Customer to remit FTA Charges. The Servicer has the right to
revert to separate billing upon certain payment defaults by an ESP. Neither the
Seller nor the Servicer will pay any shortfalls resulting from the failure of
any ESPs to forward FTA Payments to Edison, as Servicer. The true-up adjustment
mechanism for the FTA Charges, as well as the Overcollateralization Amount and
the 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.
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
Collection Period. 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
Overcollateralization Amount and the 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 the Billing Period during
which bills are rendered, the Actual FTA Payments with respect to such Billing
Period 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 "--Transition
Property--Federal Preemption of the Statute," at least one of the bills may
prohibit the recovery of FTA Charges; however; none of the bills has 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 may become burdensome. See "--
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. The Note Issuer expects that the
applicable FTA Charge (which will be based on historic usage) will be imposed
on Customers who self-generate; however, the ability of the Servicer to
collect such FTA Charges may be limited because the Servicer will not have
ready access to usage data and will not be able to exercise shut-off rights as
an enforcement tool against a self-generator. Nevertheless, 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.
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 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
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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.
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. The Note Issuer is a separate, limited 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, and pursuant to the Trust Agreement, each holder of a
Certificate agrees that it will not commence an involuntary bankruptcy case
against the Note Issuer. Nonetheless, 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 the appropriate actions will be taken to
perfect such security interest.
The Statute provides that any Transition Property constitutes a current
property right on the date that the Financing Order and the related Issuance
Advice Letter have become effective and that it thereafter exists continuously
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 granted in the Sale Agreement would attach to FTA
Payments in respect of electricity consumed after the commencement of a
bankruptcy case for 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 granted in the Sale Agreement
do not attach to FTA Payments in respect of electricity consumed after the
commencement of a bankruptcy case of 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 payments based on the FTA Charges arise from 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 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 delays or reductions in receipt of scheduled distributions.
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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 will likely 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. See "--Servicing--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. 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
not 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.
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.
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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 limited
exceptions specified therein constitute the Note Issuer's only asset. The Note
Issuer's organizational documents will restrict its right to acquire other
assets unrelated to the transaction 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
undivided interests in the Trust, and the sole source of distributions thereon
is the payments on the Notes and, in the event of variable-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. 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. 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
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 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.
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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) could depend,
in part, on actual usage of electricity by Customers and the rate
delinquencies and write-offs. See "--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 in accordance with 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 OPTIONAL 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 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. 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 will also adversely
affect the yield to maturity of Certificates purchased at par or at a premium.
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.
ADDITIONAL RISKS OF FLOATING RATE CERTIFICATES
As described herein under "Description of the Certificates--Floating Rate
Certificates," upon the occurrence of certain events of default or termination
events, the Swap Agreement pursuant to which interest will be paid on any
Floating Rate Certificates will terminate or may be terminated. Such
termination events include the right of the Infrastructure Bank and the
Certificate Trustee to terminate the Swap Agreement if the long-term unsecured
debt rating of the Swap Counterparty is withdrawn or suspended by either S&P
or Moody's or falls below the rating of "A" or either such Rating Agency. If
the Swap Agreement is terminated, the Infrastructure Bank will use its best
efforts to find a successor swap counterparty satisfying the qualifications
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described in the Trust Agreement. If, upon or prior to such termination, the
Infrastructure Bank is unable to find such a successor swap counterparty, the
interest rate payable with respect to the Floating Rate Certificates will
convert to a fixed rate equal to the interest rate on the related Class of
Notes, which may be substantially below the rate otherwise payable on the
Floating Rate Certificates. Distributions of interest with respect to the
Floating Rate Certificates will continue at this fixed interest rate until a
successor swap counterparty has been found, and no assurances are given that a
successor swap counterparty will be found. In such event, 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 Transaction 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 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 power issues.
Edison is in the process of undertaking to divest all twelve of its natural
gas-fired generating stations.
The changes which are occurring at both the federal and the California
levels will have a significant impact on Edison and the other Utilities, as
well as other entities in the industry. Edison 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 Edison's business in the future.
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DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, legislation implementing an electric industry
restructuring program for the State of California became law. 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 generally 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 the Statute,
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 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 the 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 as much as $12 billion, and the Financing Order
authorizes the issuance of up to $3 billion of Certificates.
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 the 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, Edison filed its application for the Financing Order
with the CPUC. The CPUC issued the Financing Order as of September 3, 1997.
The Financing Order also permits the sale of Certificates in an aggregate
principal amount not to exceed $3,000,000,000. 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. 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 effectiveness of 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 and associated costs and fees. The FTA Charges
are stated to be nonbypassable on the basis that the Statute
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authorizes the Note Issuer, as 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 the 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 Customers consist of those persons whose
service falls under the tariffs described below in "The Seller and Servicer--
Edison Customer Base and Electric Energy Consumption."
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 for the first year following its creation, 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
Residential Customers and Small Commercial Customers representing
approximately 83 percent and 17 percent, 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 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
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<PAGE>
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 still will be required to make payments with respect to the
applicable FTA Charges even if the Customer purchases power from a third party
or generates its own power or if another entity takes over a portion of
Edison's existing service territory. Each Customer who leaves Edison'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. In such events the applicable FTA Charge will be based on (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.
The Note Issuer expects that the applicable FTA Charge (which will be based on
historic usage) will be imposed on Customers who self-generate their
electricity; however, the ability of the Servicer to collect such FTA Charges
may be limited because the Servicer will not have ready access to usage data
and will not be able to exercise shut-off rights as an enforcement tool against
a self-generator. Nevertheless, 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.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the actual FTA Collections are
neither more nor less than the amount necessary to amortize the Certificates in
accordance with the Expected Amortization Schedule, fund the
Overcollateralization Subaccount as scheduled and replenish the Capital
Subaccount, 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
Scheduled Final Distribution 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: (i)
to fund the Overcollateralization Subaccount up to the Required
Overcollateralization Level and (ii) 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 shall be increased or decreased to reflect the amount by
which actual FTA Collections remitted to the Collection Account through the end
of the month preceding the month of calculation was 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 methodologies described
in "The Seller and Servicer--Forecasting Consumption" herein, (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 tariff rate from the end of
the month preceding the month of calculation through the end of the month in
which the new FTA Charges become effective (the "True-Up Mechanism Calculation
Model").
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<PAGE>
The Servicer will also file a routine True-Up Mechanism Advice Letter
quarterly if as of any Distribution Date (i) the sum of (a) the amount
(positive or negative) by which the aggregate outstanding principal balance of
the Certificates, determined without including amounts withdrawn from the
Overcollateralization Subaccount and the Capital Subaccount, varies from the
Expected Amortization Schedule for all outstanding Certificates, plus (b) the
amount by which the Required Overcollateralization Level exceeds the amount
actually on deposit in the Overcollateralization Subaccount, plus (c) the
amount, if any, by which the Required Capital Level exceeds the amount
actually on deposit in the Capital Subaccount less (ii) the amount on deposit
in the Reserve Subaccount, exceeds the Variance Trigger specified in the
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 Capital Subaccount and
Overcollateralization Subaccount as described above. 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"). True-Up Mechanism Advice Letters will take
into account amounts available in the General Subaccount and Reserve
Subaccount, and amounts necessary to fund the Capital Subaccount and
Overcollateralization 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.
The Financing Order provides that (i) routine True-Up Mechanism Advice
Letters shall be filed with the CPUC annually at least fifteen 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
fifteen 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 fifteen 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 which 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 to the purchase of the Initial Transition Property. Thereafter, in
order to finance the cost of the ten percent rate reduction 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
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<PAGE>
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.
SELLER REPRESENTATIONS AND WARRANTIES
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 Closing 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 Closing 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) the Financing Order and each Issuance Advice Letter pursuant to which any
applicable Transition Property has been created are valid, binding and
irrevocable; (e) the assumptions used in calculating the FTA Charges related
to the applicable Transition Property are reasonable and made in good faith;
(f) 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; (g) the
execution, delivery and performance of the Sale Agreement have been duly
authorized by the Seller by all necessary corporate action; (h) the Sale
Agreement constitutes a legal, valid and binding obligation of the Seller,
enforceable against the Seller in accordance with its terms; (i) 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; (j) 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 (k) 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 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.
In the event of a breach by the Seller of the representation specified in
clause (d) above as evidenced by a nonappealable determination by a court, the
Seller shall 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 repurchase date (the "Repurchase
Price").
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<PAGE>
In the event of a breach by the Seller of any other representation or
warranty specified above, the Seller shall, at its option, either (A)
repurchase the Transition Property for the Repurchase Price or (B) indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Delaware Trustee, the Certificate Trustee, the Certificateholders
and the Infrastructure Bank against any costs, expenses, losses, claims,
damages and liabilities incurred as a result of such breach.
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.
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. Since the FTA
Charges 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 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 energy 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--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 in accordance with the Expected Amortization
Schedules, except in the event of an early redemption, 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
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. 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 will adversely affect the yield to maturity of Certificates
purchased at par or at a premium. 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.
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<PAGE>
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 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 "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 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 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 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 willful 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 (S) 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 the benefit of the Statute.
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
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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.
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 2244 Walnut Grove Avenue, Room 180, Rosemead, CA 91770.
The telephone number of the Note Issuer is (626) 302-1850. 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 capital contributed by Edison 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 Edison in the event Edison
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. Because the Note Issuer does
not have any operating history, this Prospectus does not include any income
statements, selected financial data or historical or pro forma ratio of
earnings to fixed charges for the Note Issuer, although a balance sheet will
be included in any Prospectus Supplement.
OFFICERS
The following is a list of the principal officers of the Note Issuer. All
such persons have served in the capacities set forth below since July 1, 1997.
The officers will devote such time as is necessary to the affairs of the Note
Issuer. The Note Issuer will have sufficient officers and employees to carry
on its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Theodore F. Craver, Jr. .... 46 President
Mary C. Simpson............. 46 Vice President and Treasurer
Kenneth S. Stewart.......... 46 Secretary
George T. Tabata............ 39 Assistant Treasurer and Assistant Secretary
</TABLE>
Theodore F. Craver, Jr., is President of the Note Issuer. Mr. Craver has
served as Vice President and Treasurer of Edison and its parent Edison
International since he joined Edison on September 3, 1996. Previously, Mr.
Craver served as executive vice president and corporate treasurer of First
Interstate Bancorp from 1991 to 1996. In this role, he was responsible for
corporate development, treasury, and sales and trading of investment and
insurance products. Mr. Craver also served as executive vice president and
chief financial officer of First Interstate's wholesale banking subsidiary
from 1986 to 1991.
Mary C. Simpson is Vice President and Treasurer of the Note Issuer. Dr.
Simpson has served as an Assistant Treasurer of Edison and its parent Edison
International since July 18, 1996 and has served as Director of Treasury
Operations and Regulatory Finance of Edison since October 6, 1997, with
responsibility for cash
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management, long-term finance, pension investments, and regulatory finance.
Previously, Dr. Simpson has held various positions as director and manager of
these functions.
Kenneth S. Stewart is Secretary of the Note Issuer. Mr. Stewart has served
as Assistant General Counsel of Edison and its parent Edison International
since March 1, 1992. In addition, Mr. Stewart served as Secretary of both
companies from November 19, 1992 until January 1, 1996 and has served as an
Assistant Secretary of both companies since January 1, 1996.
George T. Tabata is Assistant Treasurer and Assistant Secretary of the Note
Issuer. Mr. Tabata has served as Project Manager of Long-Term Finance at
Edison since October 6, 1997. Previously, Mr. Tabata has held various project
manager, supervisor and analyst positions in business planning, cash
management, and corporate financing planning and analysis.
No compensation has been paid by the Note Issuer to any officer of the Note
Issuer since the Note Issuer was formed. The officers of the Note Issuer will
not be compensated by the Note Issuer for their services on behalf of the Note
Issuer. Each officer serves in such capacity at the discretion of the Note
Issuer's sole member, Edison. Edison 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 of the Note Issuer to the
Note Issuer for monetary damages resulting from breaches of such officer's
duty of care. The Note Issuer's organizational documents provide that officers
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 was incorporated under California law in 1909. The Seller is a
public utility primarily engaged in the business of supplying electric energy
to an approximately 50,000 square-mile area of central and southern
California, excluding the City of Los Angeles and certain other cities. This
area includes some 800 cities and communities and a population of more than
11,000,000 people. During 1996, 39 percent of the Seller's total operating
revenue was derived from residential customers, 37 percent from commercial
customers, twelve percent from industrial customers, seven percent from public
authorities, four percent from agricultural and other customers and one
percent from resale customers. The Seller comprises the major portion of the
assets and revenues of Edison International, its parent holding company.
As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
EDISON CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
Edison's customer base is divided into several categories, including the
residential and small commercial categories covered by the Statute.
Residential Customers are all customers served on rate schedules in Edison's
"Domestic" rate group, including all customers on Schedules D, D-APS, D-CARE,
DE, DM, DMS-1, DMS-2, DMS-3, DS, TOU-D-1, TOU-D-2, TOU-EV-1 and TOU-EV-2.
These rates are available for residential uses such as lighting, heating,
cooking and other domestic purposes. Small Commercial Customers are all
customers on Edison's rate schedules GS-1, TOU-GS-1, TOU-EV-3 and GS-1
customers taking service on GS-APS. These rates are available to general
service customers whose monthly maximum demand does not exceed twenty
kilowatts for any three billing periods during the preceding twelve month
period. General service usage is service to any lighting or power installation
except those eligible for service on single-family and multi-family domestic,
street lighting, outdoor area lighting, traffic control, resale or standby
schedules.
Factors influencing the number of customers and kilowatt-hour consumption
include the general economic climate in Edison's service territory as it
impacts net migration of Residential Customers and Small Commercial Customers.
Another factor influencing kilowatt-hour sales is temperature through its
impact on air conditioning
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and cooling usage. The number of Small Commercial Customers and kilowatt-hour
consumption would also be influenced by the level of business activity
associated with the particular Small Commercial Customer. Other factors
impacting the kilowatt-hour consumption of both Residential Customers and
Small Commercial Customers, primarily over the longer term, would include the
availability of more energy efficient appliances, new energy consuming
technologies and the customer's ability to acquire these new products.
For each of the two categories of Customers specified by the Statute, the
table below sets forth the number of Customers and electric energy consumption
in recent years.
CUSTOMERS AND ENERGY CONSUMPTION
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average Number of Customers:
Residential............... 3,527,410 3,546,065 3,560,951 3,586,918 3,618,734
Small Commercial.......... 380,104 389,917 394,992 400,824 404,577
Energy Consumption (GWh):
Residential............... 22,136 21,375 22,163 22,070 22,751
Small Commercial.......... 4,048 3,866 3,965 4,000 4,142
--------- --------- --------- --------- ---------
Total................... 26,184 25,241 26,128 26,070 26,893
========= ========= ========= ========= =========
Average Revenue per Customer
(c/kWh) :
Residential............... 12.061 12.029 12.264 12.833 12.402
Small Commercial.......... 13.264 13.171 13.387 14.065 13.379
</TABLE>
FORECASTING CONSUMPTION
The Base Calculation Model and the True-Up Mechanism Calculation Model rely
on Edison's electric sales forecast. The short-term forecast uses statistical
methods to relate kilowatt-hour sales growth by customer class to key economic
and demographic variables. The statistical method used is multiple linear
regression. The customer classes included in the forecast are residential,
commercial, industrial, public authorities and agricultural. The key variables
used have included: number of customers, employment, personal income, price of
electricity and weather (temperature and rainfall). The economic variables
used are developed specific to the Edison service territory by using county
employment data. The forecast of California economic growth is based upon the
forecasts provided by the UCLA Economic Forecasting Project. Other factors
which are included in the forecast are the effects of military base shutdowns,
the effects of energy conservation programs (including Edison programs,
Federal appliance and lighting standards, and State building standards),
specific trends in certain industries, and bypass cogeneration (self-
generation). Data on a quarterly basis are used in the model. These short-term
models are relatively easy to implement and can be updated more than once a
year if needed. These forecasts also will be used in calculating the FTA
Charges for any given period, in order to determine the revenues required (in
the form of FTA Payments) to meet the Expected Amortization Schedules.
FORECAST VARIANCE
Edison conducts sales forecast variance analyses on a regular basis to
monitor the accuracy of forecasts against recorded consumption. This is
important for short-term resource procurement functions as well as budgeting
and financial reporting.
45
<PAGE>
The table below presents the forecasts of retail sales of Edison for the
years 1992 through 1996. Each forecast was made in the prior year. For
example, the annual 1992 variance is based on a forecast prepared in 1991.
<TABLE>
<CAPTION>
ANNUAL FORECAST VARIANCES (GWH)
--------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
Forecast............................. 22,298 22,389 22,021 22,111 22,068
Actual............................... 22,136 21,375 22,163 22,070 22,751
Variance........................... 0.7% 4.5% -0.6% 0.2% -3.1%
SMALL COMMERCIAL
Forecast............................. 4,330 3,851 3,591 3,780 4,002
Actual............................... 4,048 3,866 3,965 4,000 4,142
Variance........................... 6.5% -0.4% -10.4% -5.8% -3.5%
</TABLE>
During the last five years, no discernible trend is apparent with respect to
the historical forecast variance relating to the Residential Customers or the
Small Commercial Customers. With respect to the Residential Customers, the
variance has ranged from a 4.5 percent overestimate of usage to a 3.1 percent
underestimate of usage, with an average 0.3 percent overestimate of usage.
With respect to the Small Commercial Customers the variance has ranged from a
6.5 percent overestimate of usage to a 10.4 percent underestimate of usage,
with an average 2.7 percent underestimate of usage.
Actual usage depends on several factors, including weather and economic
conditions. For example, while Edison's forecast methodology assumes normal
conditions, abnormally hot summers can add an extra 2 percent in sales. In
addition, regional economic conditions, like the recent Southern California
recession, can affect sales. Accordingly, variations in conditions will affect
the accuracy of a forecast.
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
The credit, billing, collections and restoration of service policies and
procedures of Edison are subject to CPUC guidelines which may, from time to
time, change. In addition, Edison may change such policies and procedures from
time to time. It is expected that any such change would be designed to enhance
Edison's ability to make timely recovery of amounts billed to Customers. Under
the Servicing Agreement, the changes so instituted by Edison will also apply
to the servicing by Edison, as the Servicer, of the Transition Property.
Credit Policy. Edison is obligated to provide service to all customers in
its historical service territory under California law. Edison relies on the
information provided by the customer and its customer information system
audits to indicate whether the customer has been previously served by Edison.
It is expected that in late 1997, the creditworthiness of new Customers will
be verified using an on-line credit bureau database. If a Customer falls below
a specific credit score, a security deposit will be required.
Certain accounts are secured with deposits or guarantees to reduce losses.
The amount of the deposit reflects the expected average use over a two-month
period, which is the average time period required to take billing action on
past-due billings. 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, furnishing a satisfactory guarantor,
or owning the premises to be served or other property in the service
territory. Deposits or guarantees may not be required if the applicant has
been an Edison customer during the past two years, and (a) the applicant has
not had more than two past-due billings during the last twelve consecutive
months, (b) the applicant has paid all bills for domestic service previously
supplied to the applicant
46
<PAGE>
and has proof of payment, or (c) the applicant's credit is otherwise
established to the satisfaction of Edison. Credit that is "established to the
satisfaction of Edison" is a broad category that includes options such as
acceptable payment records with other utilities, credit scoring, and other
factors that would establish creditworthiness.
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 Edison.
Deposits or guarantees may not be required if the applicant has been an
Edison customer during the past two years with like service, during the past
twelve 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 Edison bills.
Billing Process. Edison 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 open for business is a "Servicer Business Day." For the
year ending December 31, 1996, Edison mailed out an average of 200,000 bills
daily 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.
Collection Process. Edison receives approximately 76 percent of total bill
payments via the U.S. mail. Approximately nineteen percent are received at
authorized payment agencies and one percent of bill payments are received at
local offices. Edison receives the remainder of payments via electronic
payment options, 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 nineteen calendar days for both small commercial and residential
accounts. Timing and collection follow-up is based on customer type, as
follows.
For Residential Customers, an overdue notice is sent with the second month's
bill if a payment has not been received by the time the second month's bill is
prepared for presentation to the Customer on a monthly basis. Eight days after
the overdue notice is issued, a final call notice is mailed directly to the
Customer if the past due amount is still outstanding. The due date on the
final call is approximately 50 days after the initial bill is presented to the
Customer. The Customer is subject to service disconnection if the amount owing
is unpaid upon expiration of the final call notice. A telephone contact, or
reasonable attempt at making a telephone contact, is made to all Residential
Customers prior to service shut off as required by the PU Code.
For Small Commercial Customers, twenty calendar days after the first
billing, a fifteen 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
after service termination. Unpaid closed accounts are written-off six months
after the closing bill is issued.
Restoration of Service. Before restoring service that has been shut-off for
non-payment, Edison has the right to require the payment of all of the
following charges: (i) certain amounts owing on an account including the
amount of any past-due balance for disconnectible charges for which legal
noticing requirements were met prior to service termination, 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
47
<PAGE>
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.
LOSS EXPERIENCE
The following table sets forth information relating to the historical net
write-offs of the Servicer for Residential Customers and Small Commercial
Customers for each of the five preceding years. Such historical information is
presented herein because Edison's actual experiences with respect to write-offs
may be indicative of the timing of FTA Payments.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997(2)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Residential(1)......................... 0.60% 0.82% 0.55% 0.51% 0.55% 0.67%
Small Commercial(1).................... 0.33% 0.54% 0.39% 0.36% 0.39% 0.49%
</TABLE>
- --------
(1) Edison has not historically maintained information regarding write-offs by
customer group, but has maintained such information in the aggregate for
all customers and at the individual account level. The percentages
disclosed in this table are Edison's best estimate based on available
information.
(2) The information for 1997 is based on loss experience for the period
beginning January 1997 through June 1997.
During the last five years, the historical net write-offs for both
Residential Customers and Small Commercial Customers have remained relatively
constant with no discernible trend upwards or downwards. The historical net
write-offs for both categories of Customers are statistically insignificant.
AGING
The following table sets forth information relating to the average number of
days bills remain outstanding, measured from the midpoint of customer usage
(rather than when the bill is rendered) with respect to Residential Customers
and commercial customers (including Small Commercial Customers).
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997(2)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Residential................................. 41.3 40.9 39.8 39.9 40.9 41.8
Commercial(1)............................... 43.0 42.3 42.2 42.5 41.0 40.4
</TABLE>
- --------
(1) Commercial customers include both large commercial customers and Small
Commercial Customers. Small Commercial Customers constitute approximately
19.6 percent (based on revenues) of the commercial customer class.
(2) The information for 1997 is based on the aging of bills for the period
beginning January 1997 through July 1997.
During the last five years, the aging of billings for both Residential
Customers and commercial customers has remained relatively constant with no
discernible trend upwards or downwards.
48
<PAGE>
DELINQUENCIES
The following table sets forth information relating to the delinquency
experience of Edison for (i) Residential Customers and (ii) commercial
customers for each of the five preceding years. Such historical information is
presented herein because Edison's actual experience with respect to
delinquencies may be indicative of the timing of FTA Payments.
RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997(2)
----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Percentage Outstanding After:
30 days........................ 22.25% 22.55% 20.98% 21.56% 21.92% 21.32%
60 days........................ 6.67% 5.98% 3.90% 4.32% 6.63% 8.43%
120 days....................... 0.60% 0.82% 0.55% 0.51% 0.55% 0.65%
COMMERCIAL CUSTOMERS(1)
<CAPTION>
1992 1993 1994 1995 1996 1997(2)
----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Percentage Outstanding After:
30 days........................ 16.42% 16.39% 16.52% 17.28% 12.39% 10.69%
60 days........................ 3.93% 3.55% 3.94% 4.74% 4.37% 4.80%
120 days....................... 0.16% 0.22% 0.13% 0.13% 0.15% 0.19%
</TABLE>
- --------
(1) Commercial customers include both large commercial customers and Small
Commercial Customers. Small Commercial Customers constitute approximately
19.6 percent (based on revenues) of the commercial customer class.
(2) The information for 1997 is based on collections for the period beginning
January 1997 through May 1997.
During the last five years, the delinquency experience for both Residential
Customers and commercial customers have remained relatively constant with no
discernible trend upwards or downwards. The Note Issuer does not believe that
the delinquency experience with respect to FTA Payments will differ
substantially from the approximate rates indicated above.
REVENUE
The following table indicates the total revenues from electricity sales to
each of Residential Customers and Small Commercial Customers during the last
five years:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential.......... $2,669,818 $2,571,229 $2,718,206 $2,832,280 $2,821,633
Small Commercial..... 536,912 509,237 530,856 562,549 554,213
---------- ---------- ---------- ---------- ----------
Total.............. $3,206,730 $3,080,466 $3,249,062 $3,394,829 $3,375,846
========== ========== ========== ========== ==========
</TABLE>
49
<PAGE>
SERVICING
SERVICING PROCEDURES
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.
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.
Any amounts collected by the Servicer that represent partial payments of the
total amount billed will be proportionately allocated between the Note Issuer
and Edison based on the portion of the amount billed which is based on the
applicable FTA Charge and the charges due to Edison. If such amounts are billed
and collected for an ESP or the Servicer pursuant to a consolidated billing
arrangement, the total charges due to the ESP will also be included in the
proportional location of any partial payment.
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 and for
others.
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 and for others, (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 and for others; (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 and the Infrastructure Bank against any costs,
expenses, losses, claims, damages and liabilities incurred as a result thereof.
50
<PAGE>
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
each of the following six 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 Collection Period, based on the Collections Curve then in
effect, 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 remitted with respect to a Billing Period during the six
months following such Billing Period based on the Collections Curve is
referred to as the "Estimated FTA Payments" herein. Pending remittance to the
Collection Account, 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 funds of the Servicer. If any of the conditions described
above are not satisfied, the Servicer will remit to the Collection Account
within two Servicer Business Days of receipt thereof all Estimated FTA
Payments. 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 seventh month following each
Billing Period, the Servicer will compare actual FTA Payments received with
respect to that Billing Period (the "Actual FTA Payments") to the Estimated
FTA Payments for that Billing Period previously remitted to the Collection
Account. If Estimated FTA Payments remitted with respect to a Billing Period
exceed Actual FTA Payments attributable to such Billing Period (such excess,
an "Excess Remittance"), the Servicer shall be entitled to 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. If Estimated FTA Payments remitted with respect
to a Billing Period are less than Actual FTA Payments attributable to such
Billing Period (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.
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 one-fourth of the percent
per annum 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 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 elects
consolidated billing will be responsible for paying the utility amounts billed
by the utility to the ESP
51
<PAGE>
regardless of the ESP's ability to collect such amounts, including the FTA
Charges, from its customers. The Servicer has the right to revert to separate
billing upon certain payment defaults by an ESP. Neither the Seller nor the
Servicer will pay any shortfalls resulting from the failure of any ESPs to
forward FTA Payments to Edison, as Servicer, which may result in delays in
distributions to Certificateholders. See "Risk Factors--Potential Servicing
Issues--Reliance on Aggregators and Other Suppliers" herein.
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
and the Infrastructure Bank against any costs, expenses, losses, claims,
damages and liabilities incurred as a result thereof.
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 Collection Period (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 Note Trustee and the
Certificate Trustee on or before a date specified in each Prospectus
Supplement a statement as to compliance by the Servicer during the preceding
twelve months ended December 31 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.
52
<PAGE>
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 January 31 of each year, commencing January 31, 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 December 31 (or in the case of the first such certificate, the
period from the Closing Date to December 31, 1997) 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 Edison may not resign from its
obligations and duties as Servicer thereunder, except upon either (a) a
determination that Edison's performance of such duties is no longer
permissible under applicable law or (b) satisfaction of the Rating Agency
Condition, consent of the CPUC and an arrangement with a successor servicer
which provides that there is no increase in the Servicing Fee. No such
resignation will become effective until a successor Servicer has assumed
Edison'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 Certificate Trustee, the Delaware 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.
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 (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 60 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
53
<PAGE>
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 (S) 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, which in no event may be greater than the servicing compensation to the
Servicer under the Servicing Agreement.
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.
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.
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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.
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 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
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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"). 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 "A" by S&P and 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 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 Collection
Period, 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 Notes 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
and, if necessary, the amounts on deposit in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital 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 "Description of the Notes--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
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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 "--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 made on such
date, the outstanding principal balance of the Series of Notes has been
reduced to 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.
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 percent of the initial principal amount of
each 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 "Description of the
Notes--Allocations; Payments" herein.
OVERCOLLATERALIZATION AMOUNT
The Financing Order and Advice Letters give the Seller (or its assignee) the
right to recover from Customers amounts necessary to pay principal of and
interest on each Series of Notes at the applicable Note Interest Rate and all
related fees and expenses, and an additional amount (for any Series, the
"Overcollateralization Amount"). The required amount of such excess, as of any
Payment Date (the "Required Overcollateralization Level"), will be specified
in the related Prospectus Supplement. The Required Overcollateralization Level
will increase ratably over the life of the Certificates according to the
schedule described in the related Prospectus Supplement. The portion of FTA
Collections relating to the Overcollateralization Amount received with respect
to any Payment Date is referred to as the "Quarterly Overcollateralization
Collection" herein.
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 the Quarterly Overcollateralization Collection and amounts remaining
after payment of scheduled amounts due on the Notes, related fees and expenses
and amounts necessary to replenish the Capital Subaccount to the Required
Capital Level will be deposited in the Overcollateralization Subaccount up to
the amount, if any, by which the Required Overcollateralization Level exceeds
the amount 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
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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."
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, replenish the Capital
Subaccount up to the Required Capital Level and fund the Overcollateralization
Subaccount up to the Required Overcollateralization Level. 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;
(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 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
Certificates 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 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;
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(j) 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;
(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;
(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 pro rata, as specified in the related Prospectus
Supplement.
For purposes of the foregoing allocations:
"Quarterly Administration Fee" means the quarterly fee payable to Edison
as the Administrator under the Administrative Services Agreement between
Edison 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 thereunder 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
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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 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 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
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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 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, the Note Trustee, each Noteholder, the
Certificate Trustee and the Certificateholders will covenant that they 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
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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 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
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 Transition Property and the other 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 Collection Period 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 percent of the initial principal amount of all Notes issued and
outstanding pursuant to the Indenture.
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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:
(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.
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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 interest in
the corresponding Class of Notes, all monies due and to become due under such
corresponding Class of Notes, payments pursuant to any related Swap Agreement
and funds from time to time deposited with the Trustee in certain accounts
relating to the Trust. 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 a Series or 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 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. The Certificates represent beneficial interests in the Trust
only.
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 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 interest thereon, are fully paid and discharged,
provided nothing contained in this pledge and agreement shall preclude such
limitation or alteration if and when adequate provision shall be made by law
for the protection of the holders (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
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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 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 on 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 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 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.
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
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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 dated the Closing Date (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 Floating Rate
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.
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 Supplements. If, upon or prior to the termination of the Swap
Agreement, the Infrastructure Bank, using its best efforts, is unable to find
a successor swap counterparty satisfying the requirements specified in the
Trust Agreement, 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, which may be substantially less
than the rate otherwise payable on the Floating Rate Certificates. See "Risk
Factors--Additional Risks of the Floating Rate Certificates" herein.
The amount of interest payable on the Floating Rate Certificates from time
to time will be determined as follows.
(i) Determination of LIBOR. The Agent Bank named in the Trust Agreement
(together with any successor Agent Bank under the Trust Agreement the "Agent
Bank") will determine the interest rate payable under the Swap Agreement in
accordance with the following provisions:
(a) On the second 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 (after consultation with the
Infrastructure 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 that is
representative for a
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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 (after consultation with
the Infrastructure 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 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 rate of interest in
effect on such Interest Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or minimum
Floating Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, 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 immediately preceding the
termination of the Swap Agreement.
(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 Floating Rate Principal Balance (as
defined herein) as of the close of business day 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 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 may (with the prior written approval of the
Certificate Trustee) terminate the appointment of the Agent Bank for any
reason. Notice of any such termination will be given 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
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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, with the approval of the Certificate Trustee, appoint a successor
Agent Bank to act as such in its place, provided that neither the resignation
nor removal of the Agent Bank shall take effect until a successor approved by
the Certificate Trustee has been appointed. Notice of any such appointment of
a successor Agent Bank will be given to the Certificateholders within ten days
of such appointment.
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.
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.
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
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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 percent of the aggregate outstanding principal amount of each such
Class of Certificates or (y) the Certificate Trustee obtains the consent of
100 percent 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 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
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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.
OPTIONAL REDEMPTION
The Trust shall redeem any Series of Certificates if the related of Series
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;
(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.
AMENDMENTS
The Infrastructure Bank (with the prior written approval of the Note Issuer)
and the Certificate Trustee may amend the Trust Agreement from time to time,
without the consent of the Certificateholders of any Series, (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.
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In addition, the Infrastructure Bank (with the prior written approval of the
Note Issuer) and the Certificate Trustee may amend the Trust Agreement with
the consent of Certificateholders holding not less than a majority of the
aggregate outstanding principal amount of the Certificates of all affected
Classes. 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 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 ten percent of the aggregate outstanding principal
amount of the Certificates of such Series or all Series, as applicable, the
Certificate Trustee will afford 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
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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.
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 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
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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 herein) 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 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.
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
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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.
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.
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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.
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 result in an adverse tax consequence to the Trust
or the Certificateholders;
(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, 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.
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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 a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or 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 (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). 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, has
all payments denominated in U.S. dollars and not determined by reference to
the value of any other currency and has a term that exceeds one year.
Moreover, the discussion assumes that any original issue discount ("OID") on
the Certificate (i.e., any excess of the stated redemption price at maturity
of the Certificate 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 Certificate's weighted average maturity), all within the meaning of the
OID regulations. Moreover, the discussion assumes that the Certificates are of
a type, as set forth below, which Special Counsel is of the opinion will
represent ownership of debt for federal income tax purposes. 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 AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Certificates will represent ownership of debt and the
Trust will not be treated as an association or publicly traded partnership
taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Certificates represent ownership of debt obligations for federal income tax
purposes, stated interest on a beneficial interest in a Certificate will be
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taxable as ordinary income when received or accrued by U.S. Certificateholders
in accordance with their method of accounting. Generally, interest received on
the 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 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 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 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
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 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 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 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 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 Certificate until the holder disposes of the Certificate
in a taxable transaction.
A U.S. Certificateholder who acquired a 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 Internal
Revenue Service (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 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 Certificate at a premium may elect to offset the premium against interest
income under the constant yield method over the remaining term of the
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 Certificate by the amount of bond premium used to offset interest
income. If a 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 Certificates over the
greater of the redemption price or the amount payable on maturity.
SALE OR EXCHANGE OF CERTIFICATES
Upon a disposition of an interest in a 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
Certificate. The adjusted basis in the interest in the Certificate will equal
its cost, increased by any OID or market discount included in income with
respect to the interest in the Certificate prior to its disposition and
reduced by any payments reflecting principal or OID previously received with
respect to the interest in the 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 Certificate was
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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 a
Certificate unless (i) the non-U.S. Certificateholder actually or
constructively owns ten percent or more of the total combined voting power of
all classes of stock of the Seller entitled to vote (or of a profits or
capital interest of the Trust characterized as a partnership), (ii) the non-
U.S. Certificateholder is a controlled foreign corporation that is related to
the Seller (or the Trust treated as a partnership) through stock ownership,
(iii) the non-U.S. Certificateholder is a bank which receives interest as
described in Code Section 881(c)(3)(A) or (iv) such interest is contingent
interest described in Code Section 871(h)(4). 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 penalties 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.
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) investor 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 percent or more of whose gross income is
effectively connected with the conduct of a trade or business within the
United States for a 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
78
<PAGE>
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 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.
RECENTLY, THE TREASURY DEPARTMENT HAS PROMULGATED FINAL REGULATIONS
REGARDING THE WITHHOLDING AND INFORMATION REPORTING RULES DISCUSSED ABOVE. IN
GENERAL, THE PROPOSED REGULATIONS DO NOT SIGNIFICANTLY ALTER THE SUBSTANTIVE
WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS BUT UNIFY CURRENT
CERTIFICATION PROCEDURES AND FORMS AND CLARIFY RELIANCE STANDARDS. UNDER THE
FINAL REGULATIONS, SPECIAL RULES APPLY WHICH PERMIT THE SHIFTING OF PRIMARY
RESPONSIBILITY FOR WITHHOLDING TO CERTAIN FINANCIAL INTERMEDIARIES ACTING ON
BEHALF OF BENEFICIAL OWNERS. THE FINAL REGULATIONS WOULD GENERALLY BE
EFFECTIVE FOR PAYMENTS MADE AFTER DECEMBER 31, 1998, SUBJECT TO CERTAIN
TRANSITION RULES.
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.
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.
79
<PAGE>
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.
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.
80
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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 FTA Collections.
LEGAL MATTERS
Certain legal matters relating to the Notes and certain federal income tax
consequences of the issuance of the Notes will be passed upon by Latham &
Watkins, Los Angeles, California, counsel to the Seller and the Note Issuer.
Certain legal matters relating to the Certificates and certain federal 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 Cravath,
Swaine & Moore, New York, New York, counsel to the Underwriters.
81
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Act...................................................................... 42
Actual FTA Payments...................................................... 51
Administrator............................................................ 20
Advice Letters........................................................... 14
Agent Bank............................................................... 66
Annual Accountant's Report............................................... 52
Base Calculation Model................................................... 37
Basic Documents.......................................................... 62
Billing Period........................................................... 20
Book-Entry Certificates.................................................. 23
Calculation Date......................................................... 38
Capital Subaccount....................................................... 19, 56
Cede..................................................................... 23
CEDEL.................................................................... 71
CEDEL Participants....................................................... 73
Certificate Account...................................................... 65
Certificate Business Day................................................. 66
Certificate Event of Default............................................. 18, 68
Certificate Trustee...................................................... 10
Certificateholders....................................................... 3
Certificates............................................................. 1, 10
Class.................................................................... 1, 10
Closing Date............................................................. 39
Code..................................................................... 24, 76
Collection Account....................................................... 55
Collection Period........................................................ 20
Collections Curve........................................................ 51
Commission............................................................... 3
Cooperative.............................................................. 74
CPUC..................................................................... 13
Customers................................................................ 13
Default.................................................................. 69
Definitive Certificates.................................................. 74
Delaware Business Trust Act.............................................. 32
Delaware Trustee......................................................... 10
Depositaries............................................................. 72
Distribution Date........................................................ 16
DTC...................................................................... 3, 23
Edison................................................................... 1, 9
Eligible Institution..................................................... 56
Eligible Investments..................................................... 56
ERISA.................................................................... 24
ESPs..................................................................... 28
Estimated FTA Payments................................................... 51
Euroclear................................................................ 72
Euroclear Operator....................................................... 74
Euroclear Participants................................................... 73
Event of Default......................................................... 18, 60
Excess Remittance........................................................ 51
</TABLE>
82
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Exchange Act........................................................... 3
Expected Amortization Schedule......................................... 18
FDIC................................................................... 56
Fee Agreement.......................................................... 42
FERC................................................................... 29
Final Maturity Date.................................................... 55
Financing Order........................................................ 13
Financing Order Anniversary............................................ 39
Floating Rate.......................................................... 66
Floating Rate Certificates............................................. 11
FTA Charges............................................................ 13
FTA Collections........................................................ 15
FTA Payments........................................................... 14
General Subaccount..................................................... 19, 56
H.R. 1230.............................................................. 26
holders................................................................ 23
Indirect Participants.................................................. 23
Infrastructure Bank.................................................... 1, 10
Initial Transition Property............................................ 39
Interest Accrual Period................................................ 67
Interest Determination Date............................................ 66
IRS.................................................................... 77
ISO.................................................................... 29
Issuance Advice Letter................................................. 14
Monthly Servicer's Certificate......................................... 52
Moody's................................................................ 32
non-U.S. Certificateholder............................................. 76
Note Collateral........................................................ 55
Note Event of Default.................................................. 18, 60
Note Indenture......................................................... 55
Note Interest Rate..................................................... 55
Note Issuer............................................................ 1, 9
Note Trustee........................................................... 12
Noteholder............................................................. 55
Notes.................................................................. 1, 7, 11
OID.................................................................... 76
Operating Expenses..................................................... 20
Overcollateralization Amount........................................... 57
Overcollateralization Subaccount....................................... 19, 56
Participants........................................................... 23
Parties in Interest.................................................... 80
Payment Date........................................................... 16
Plan Assets............................................................ 79
Plans.................................................................. 79
Proposition 218........................................................ 26
PU Code................................................................ 13
PX..................................................................... 29
Quarterly Administration Fee........................................... 59
Quarterly Interest..................................................... 59, 67
Quarterly Overcollateralization Collection............................. 57
</TABLE>
83
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INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Quarterly Principal.................................................. 59
Quarterly Servicer's Certificate..................................... 63
Rate Freeze Period................................................... 36
Rating Agency........................................................ 23
Rating Agency Condition.............................................. 55
Record Date.......................................................... 16
Registration Statement............................................... 3
Remittance Date...................................................... 51
Remittance Shortfall................................................. 51
Repurchase Price..................................................... 40
Required Capital Level............................................... 19, 57
Required Overcollateralization Level................................. 19, 57
Reserve Subaccount................................................... 19, 56
Residential Customers................................................ 13
Rules................................................................ 73
S&P.................................................................. 32
Sale Agreement....................................................... 9
Scheduled Final Distribution Date.................................... 16
Scheduled Maturity Date.............................................. 55
Securities Act....................................................... 3
Seller............................................................... 1, 9
Series............................................................... 1, 10
Series Issuance Date................................................. 55
Servicer............................................................. 1, 9
Servicer Business Day................................................ 47
Servicer Defaults.................................................... 53
Servicing Agreement.................................................. 10
Servicing Fee........................................................ 22
Small Commercial Customers........................................... 14
Special Counsel...................................................... 25
Special Distribution Date............................................ 65
Special Payments..................................................... 65
State Pledge......................................................... 16, 64
Statistical Month.................................................... 20
Statute.............................................................. 7
Subsequent Transfer Date............................................. 39
Subsequent Transition Property....................................... 39
Swap Agreement....................................................... 7, 66
Swap Counterparty.................................................... 66
Telerate Page........................................................ 66
Termination Date..................................................... 16
Terms and Conditions................................................. 74
Territory............................................................ 13
Transition Costs..................................................... 7, 13
Transition Property.................................................. 14, 15, 37
True-Up Mechanism Advice Letter...................................... 15
True-Up Mechanism Calculation Model.................................. 35
Trust................................................................ 1, 10
Trust Agreement...................................................... 10
U.S. Certificateholder............................................... 76
U.S. Person.......................................................... 76
Underwriters......................................................... 80
</TABLE>
84
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Utilities.................................................................. 7
Variance Trigger........................................................... 15
Withholding Agent.......................................................... 78
</TABLE>
- --------
1. The "CPUC" is referred to as the "Commission" in the Financing Order.
2. The "Statute" is referred to as "AB 1890" in the Financing Order.
3. The "Note Issuer" is referred to as the "SPE" in the Financing Order.
4. The "Trust" is referred to either as the "Issuer" or the "SPT" in the
Financing Order.
5. The "Certificates" are referred to as the "Rate Reduction Bonds" in the
Financing Order.
85
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 ANY OFFER
TO BUY ANY SECURITY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Holders......................................................... S-3
Prospectus Supplement Summary.............................................. S-4
[Additional Risk Factors Relating to the Class Certificates]............ S-13
Description of the Certificates............................................ S-13
Summary of Certain Provisions of the Series Supplement..................... S-16
Summary of Certain Provisions of the Swap Agreement........................ S-16
The Swap Counterparty...................................................... S-16
Description of the Notes................................................... S-16
Description of the Transition Property..................................... S-19
Certain Distribution, Weighted Average Life and Yield Considerations....... S-20
The Seller and Servicer.................................................... S-21
Servicing.................................................................. S-21
Certain Federal Income Tax Consequences.................................... S-22
State Taxation............................................................. S-25
ERISA Considerations....................................................... S-26
Underwriting............................................................... S-28
Ratings.................................................................... S-28
Legal Matters.............................................................. S-29
Index of Principal Definitions............................................. S-30
Financial Statements....................................................... F-1
<CAPTION>
PROSPECTUS
<S> <C>
Available Information...................................................... 3
Reports to Holders......................................................... 3
Incorporation of Certain Documents by Reference............................ 4
Prospectus Supplement...................................................... 4
Table of Contents.......................................................... 5
Prospectus Summary......................................................... 7
Risk Factors............................................................... 25
Energy Deregulation and New California Market Structure.................... 35
Description of the Transition Property..................................... 36
Certain Distribution, Weighted Average Life and Yield Considerations....... 41
The Trust.................................................................. 42
The Infrastructure Bank.................................................... 42
The Note Issuer............................................................ 43
The Seller and Servicer.................................................... 44
Servicing.................................................................. 50
Description of the Notes................................................... 55
Description of the Certificates............................................ 64
Certain Federal Income Tax Consequences.................................... 76
State Taxation............................................................. 79
ERISA Considerations....................................................... 79
Use of Proceeds............................................................ 80
Plan of Distribution....................................................... 80
Ratings.................................................................... 81
Legal Matters.............................................................. 81
Index of Principal Definitions............................................. 82
</TABLE>
UNTIL (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT), ALL
DEALERS EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CALIFORNIA
INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE
TRUST SCE-1
$ (APPROXIMATE)
RATE REDUCTION CERTIFICATES
SERIES 199 -
----------------
PROSPECTUS SUPPLEMENT
----------------
[NAME OF UNDERWRITER(S)]
, 199
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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....................................... $303.03
Printing and Engraving Expenses.................................. *
Trustees' Fees and Expenses...................................... *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... *
Accountants' Fees and Expenses................................... *
Rating Agency Fees............................................... *
Miscellaneous Fees and Expenses.................................. *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
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 will
provide 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 other 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 Eighth of the Articles of Incorporation of Southern California
Edison Company (the "Member") authorizes the Member to provide indemnification
of directors, officers, employees, and other agents through bylaw provisions,
agreements with agents, votes 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.
Article VI of the Bylaws of the Member contains provisions implementing the
authority granted in Article Eighth of the Articles of Incorporation. The
Bylaws provide for the indemnification of any director or officer of the
Member, or any person acting at the request of the Member as a director,
officer, employee or agent of another corporation or other enterprise, 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
II-1
<PAGE>
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
officer is paid pursuant to any director's or officer's liability insurance
policy maintained by the Member; (ii) on account of any suit in which judgment
is rendered for an accounting of profits made from 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 finally 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 (ix) above shall apply only to
indemnification with regard to any action brought by or in the right of the
Member for breach of duty to the Member or its shareholders. The Bylaws also
provide 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 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. The
Member has also entered into written agreements with each of its directors
incorporating the indemnification provisions of the Bylaws.
II-2
<PAGE>
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
*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 Latham & Watkins with respect to legality of the Notes.
*5.2 Opinion of Richards, Layton & Finger with respect to legality of the
Rate Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
*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 Latham & Watkins (included in its opinion filed as Exhibit
5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as Exhibits
5.2 and 8.1).
25.1 Statement of Eligibility and Qualification of Note Trustee on Form T-1
+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).
*99.5 Issuance Resolution of Infrastructure Bank.
99.6 Interim Opinion of CPUC
*99.7 Opinion of Brown & Wood LLP with respect to impairment of contracts.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of the California Infrastructure and
Economic Development Bank Special Purpose Trust SCE-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 twenty
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
II-3
<PAGE>
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.
(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 Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rosemead, State of California, on
October 22, 1997.
SCE FUNDING LLC
as Registrant
By /s/ Theodore F. Craver, Jr.
___________________________________
Theodore F. Craver, Jr.
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED ON OCTOBER 22, 1997 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Theodore F. Craver, Jr. President (Principal Executive
___________________________________________ Officer)
Theodore F. Craver, Jr.
/s/ Mary C. Simpson Treasurer (Principal Financial
___________________________________________ and Accounting Officer)
Mary C. Simpson
Southern California Edison Company, Member
as Member
</TABLE>
By /s/ Theodore F. Craver, Jr.
___________________________________
Theodore F. Craver, Jr.
Vice President & Treasurer
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<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.
*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 Latham & Watkins with respect to legality of the Notes.
*5.2 Opinion of Richards, Layton & Finger with respect to legality of the
Rate Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
*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 Latham & Watkins (included in its opinion filed as Exhibit
5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as
Exhibits 5.2 and 8.1).
25.1 Statement of Eligibility and Qualification of Note Trustee on Form T-
1.
+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).
*99.5 Issuance Resolution of Infrastructure Bank.
99.6 Interim Opinion of CPUC.
*99.7 Opinion of Brown & Wood LLP with respect to impairment of contracts.
</TABLE>
- --------
*To be filed by amendment.
+Previously filed.
<PAGE>
EXHIBIT 3.3
FORM OF
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
SCE FUNDING LLC
This Amended and Restated Limited Liability Company Agreement (together
with the schedules attached hereto, this "Agreement") of SCE Funding LLC (the
"Company"), is entered into by Southern California Edison Company, a California
corporation, as the sole member (the "Initial Member"). Capitalized terms used
herein and not otherwise defined have the meanings set forth on Schedule A
----------
hereto.
The Initial Member, by execution of this Agreement, (i) hereby
continues the Company as a limited liability company pursuant to and in
accordance with the Delaware Limited Liability Company Act (6 Del.C. (S)18-101,
------
et seq.), as amended from time to time (the "Act"), and this Agreement, (ii)
- -- ---
hereby amends and restates in its entirety the initial Limited Liability Company
Agreement of the Company, dated as of July 1, 1997 (the "Initial LLC
Agreement"), and (iii) hereby agrees as follows:
1. Name.
----
The name of the limited liability company formed hereby is SCE
Funding LLC.
2. Principal Business Office.
-------------------------
The principal business office of the Company shall be located at 2244
Walnut Grove Avenue, Room 180, Rosemead, California 91770, or such other
location as may hereafter be determined by the Member.
3. Registered Office.
-----------------
The address of the registered office of the Company in the State of
Delaware is c/o RL&F Service Corp., One Rodney Square, 10th Floor, Tenth and
King Streets, Wilmington, New Castle County, Delaware 19801.
4. Registered Agent.
----------------
The name and address of the registered agent of the Company for
service of process on the Company in the State of Delaware is RL&F Service
Corp., One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington, New
Castle County, Delaware 19801.
-1-
<PAGE>
5. Members.
-------
a. The name and the mailing address of the Initial Member are set
forth on Schedule B attached hereto.
----------
b. Subject to Section 9j, the Member may act by written consent.
6. Certificates.
------------
James G. Leyden, Jr., as an "authorized person" within the meaning of
the Act, has executed, delivered and filed the Certificate of Formation with the
Secretary of State of the State of Delaware. Upon the filing of the Certificate
of Formation with the Secretary of State of the State of Delaware, his powers as
an "authorized person" ceased, and the Member thereupon became the designated
"authorized person" and shall continue as the designated "authorized person"
within the meaning of the Act. The Member or an Officer shall execute, deliver
and file any other certificates (and any amendments and/or restatements thereof)
necessary for the Company to qualify to do business in California and in any
other jurisdiction in which the Company may wish to conduct business.
7. Purposes.
--------
Subject to Section 9j, the purposes of the Company are to engage in the
following activities:
a. (i) to acquire, own, hold, administer, service, or enter into
agreements for the servicing of, finance, manage, sell, assign, pledge, collect
amounts due on and otherwise deal with the Transition Property and other assets
to be acquired pursuant to the Basic Documents and any proceeds or rights
associated therewith;
(ii) to issue, sell, authorize and deliver the Notes and other
evidences of the Indebtedness and to enter into any agreement or document
providing for the authorization, issuance, sale and delivery of the Notes;
(iii) to sell, exchange, pledge, encumber or otherwise dispose of
all or any part of the Transition Property and its other assets and property
and, in connection therewith, to accept, collect, hold, sell, exchange or
otherwise dispose of evidences of indebtedness or other property received
pursuant thereto, including the encumbrance of all of the Transition Property
and its other assets and property as collateral security for the Indebtedness;
(iv) to execute, deliver and perform the Basic Documents;
(v) to invest proceeds from the Transition Property and its
other assets and any capital and income of the Company in accordance with the
Basic
-2-
<PAGE>
Documents or as otherwise determined by the Board and not inconsistent with this
Section 7 or the Basic Documents; and
(vi) to do such other things and carry on any other activities
which the Board determines to be necessary, convenient or incidental to any of
the foregoing purposes, and have and exercise all of the power and rights
conferred upon limited liability companies formed pursuant to the Act.
b. The Company, by or through any Officer on behalf of the Company,
may enter into and perform the Basic Documents, including the Note Issuance
Documents, the Notes, the Sale Documents, the Servicing Agreement and all
documents, agreements, certificates, or financing statements contemplated
thereby or related thereto, all without any further act, vote or approval of the
Member or any Director or Officer notwithstanding any other provision of this
Agreement, the Act or applicable law, rule or regulation. The foregoing
authorization shall not be deemed a restriction on the powers of any Officer to
enter into other agreements on behalf of the Company.
8. Powers.
------
Subject to Section 9j, the Company (i) shall have and exercise all
powers necessary, convenient or incidental to accomplish its purposes as set
forth in Section 7 and (ii) shall have and exercise all of the powers and rights
conferred upon limited liability companies formed pursuant to the Act.
9. Management.
----------
a. Board of Directors. Subject to Section 9j, the business and
------------------
affairs of the Company shall be managed by or under the direction of a Board of
one or more Directors. Subject to Section 10, the Member may determine at any
time in its sole and absolute discretion the number of Directors to constitute
the Board. The authorized number of Directors may be increased or decreased by
the Member at any time in its sole and absolute discretion, subject in all cases
to Section 10. The initial number of Directors shall be three, one of which
shall be an Independent Director pursuant to Section 10. Each Director elected,
designated or appointed shall hold office until a successor is elected and
qualified or until such Director's earlier death, resignation or removal. Each
Director shall execute and deliver the Management Agreement. Directors need not
be Members.
b. Powers. Subject to Section 9j, the Board of Directors shall have
------
the power to do any and all acts necessary, convenient or incidental to or for
the furtherance of the purposes described herein, including all powers,
statutory or otherwise. Subject to Section 9j, the Board of Directors has the
authority to bind the Company.
c. Meeting of the Board of Directors. The Board of Directors of the
---------------------------------
Company may hold meetings, both regular and special, within or outside the State
of Delaware. Regular meetings of the Board may be held without notice at such
time and at such place as shall from time to time be determined by the Board.
Special meetings of the
-3-
<PAGE>
Board may be called by the President on not less than one day's notice to each
Director by telephone, facsimile, mail, telegram or any other means of
communication, and special meetings shall be called by the President or
Secretary in like manner and with like notice upon the written request of any
one or more of the Directors.
d. Quorum; Acts of the Board. At all meetings of the Board, a
-------------------------
majority of the Directors shall constitute a quorum for the transaction of
business and, except as otherwise provided in any other provision of this
Agreement, the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board. If a quorum shall not be
present at any meeting of the Board, the Directors present at such meeting may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
e. Electronic Communications. Members of the Board, or any committee
-------------------------
designated by the Board, may participate in meetings of the Board, or any
committee, by means of telephone conference or similar communications equipment
that allows all persons participating in the meeting to hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting. If all the participants are participating by telephone conference or
similar communications equipment, the meeting shall be deemed to be held at the
principal place of business of the Company.
f. Committees of Directors.
-----------------------
(i) The Board may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Company. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
(ii) In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such members constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
(iii) Any such committee, to the extent provided in the resolution
of the Board, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Company. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board. Each committee shall keep
regular minutes of its meetings and report the same to the Board when required.
-4-
<PAGE>
g. Compensation of Directors; Expenses. The Board shall have the authority
-----------------------------------
to fix the compensation of Directors. The Directors may be paid their expenses,
if any, of attendance at meetings of the Board, which may be a fixed sum for
attendance at each meeting of the Board or a stated salary as Director. No such
payment shall preclude any Director from serving the Company in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
h. Removal of Directors. Unless otherwise restricted by law, any Director
--------------------
or the entire Board of Directors may be removed, with or without cause, by the
Member, and, subject to Section 10, any vacancy caused by any such removal may
be filled by action of the Member.
i. Directors as Agents. To the extent of their powers set forth in this
-------------------
Agreement and subject to Section 9j, the Directors are agents of the Company for
the purpose of the Company's business, and the actions of the Directors taken in
accordance with such powers set forth in this Agreement shall bind the Company.
j. Limitations on the Company's Activities.
---------------------------------------
(i) This Section 9j is being adopted in order to comply with certain
provisions required in order to qualify the Company as a "special purpose
entity" for the purpose of the Indebtedness.
(ii) The Member shall not, so long as any Indebtedness is outstanding,
amend, alter, change or repeal the definition of "Independent Director" or
Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26 or 31 or Schedule A of this
----------
Agreement without the unanimous written consent of the Board (including the
Independent Director). Subject to this Section 9j, the Member reserves the right
to amend, alter, change or repeal any provisions contained in this Agreement in
accordance with Section 31.
(iii) Notwithstanding any other provision of this Agreement and any
provision of law that otherwise so empowers the Company, the Member or the
Board, so long as any Indebtedness is outstanding none of the Company, the
Member or the Board shall be authorized or empowered, nor shall they permit the
Company, without the prior unanimous written consent of the Member and the Board
(including the Independent Director), to institute proceedings to have the
Company be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against the Company or file a petition
seeking, or consent to, reorganization or relief with respect to the Company
under any applicable federal or state law relating to bankruptcy, or consent to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or a substantial part of its property, or
make any assignment for the benefit of creditors of the Company, or admit in
writing the Company's inability to pay its debts generally as they become due,
or, to the fullest extent permitted by law, take action in furtherance of any
such action, or dissolve or liquidate the Company, or consolidate or merge the
Company with or into any Person, or sell all or substantially all of
-5-
<PAGE>
the assets of the Company; provided, however, that the foregoing is subject in
-------- -------
all cases to Section 843(e) of the Statute.
(iv) Unless otherwise provided in the Note Issuance Documents, so long
as any Indebtedness is outstanding, the Board and the Member shall cause the
Company to do or cause to be done all things necessary to preserve and keep in
full force and effect its existence, rights (charter and statutory) and
franchises; provided, however, that the Company shall not be required to
-------- -------
preserve any such right or franchise if: (A) the Board shall determine that the
preservation thereof is no longer desirable for the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
holders of the Indebtedness and the Company shall deliver to the Note Trustee an
Officer's Certificate to that effect and (B) the Rating Agency Condition is
satisfied. The Board also shall cause the Company to:
(1) maintain its own separate books and records and bank accounts;
(2) at all times hold itself out to the public as a legal entity
separate from the Member and any other Person;
(3) have a Board composed differently from that of the Member and
any other Person;
(4) file its own tax returns, if any, as may be required under
applicable law, to the extent not part of a consolidated group
filing a consolidated return or returns, and pay any taxes
required to be paid under applicable law;
(5) not commingle its assets with assets of any other Person
(except as contemplated by the Basic Documents);
(6) conduct its business in its own name;
(7) maintain separate financial statements;
(8) pay its own liabilities only out of its own funds;
(9) maintain an arm's length relationship with its Affiliates and
its Member;
(10) pay the salaries of its own employees, if any;
-6-
<PAGE>
(11) not hold out its credit as being available to satisfy the
obligations of others;
(12) allocate fairly and reasonably any overhead for shared office
space;
(13) use separate stationery, invoices and checks;
(14) not pledge its assets for the benefit of any other Person;
(15) correct any known misunderstanding regarding its separate
identity;
(16) maintain adequate capital in light of its contemplated business
purposes;
(17) cause its Board of Directors to meet at least annually or act
pursuant to written consent and keep minutes of such meetings
and actions and observe all other Delaware limited liability
company formalities; and
(18) not acquire any obligations or securities of a Member.
(v) So long as any Indebtedness is outstanding, the Board shall not
cause or permit the Company to:
(1) guarantee any obligation of any Person, including any
Affiliate;
(2) engage, directly or indirectly, in any business other than that
arising out of the issuance of the Indebtedness or the actions
required or permitted to be performed under Section 7, the Note
Issuance Documents or this Section 9j;
(3) incur, create or assume any indebtedness other than the
Indebtedness or as otherwise expressly permitted under the Note
Issuance Documents;
(4) make or permit to remain outstanding any loan or advance to, or
own or acquire any stock or securities of, any Person other
than the instruments constituting part of the Collateral,
except that the Company may invest in those investments
permitted under the Note
-7-
<PAGE>
Issuance Documents and may make any advance required or
expressly permitted to be made pursuant to any provisions of
the Note Issuance Documents and permit the same to remain
outstanding in accordance with such provisions;
(5) to the fullest extent permitted by law, engage in any
dissolution, liquidation, consolidation, merger, asset sale or
transfer of ownership interests other than such activities as
are expressly permitted pursuant to any provision of the Note
Issuance Documents; or
(6) form, acquire or hold any subsidiary (whether corporate,
partnership, limited liability company or other).
10. Independent Director.
--------------------
As long as any Indebtedness is outstanding, the Member shall cause the
Company at all times to have at least one Independent Director who will be
appointed by the Member. To the fullest extent permitted by Section 18-1101(c)
of the Act, the Independent Director shall consider only the interests of the
Company, including its respective creditors, in acting or otherwise voting on
the matters referred to in Section 9j(iii). No resignation or removal of an
Independent Director, and no appointment of a successor Independent Director,
shall be effective until the successor Independent Director shall have accepted
his or her appointment by a written instrument, which may be a counterpart
signature page to the Management Agreement. All right, power and authority of
the Independent Directors shall be limited to the extent necessary to exercise
those rights and perform those duties specifically set forth in this Agreement.
Except as provided in the second sentence of this Section 10, in exercising
their rights and performing their duties under this Agreement, the Independent
Directors shall have a fiduciary duty of loyalty and care similar to that of a
director of a business corporation organized under the General Corporation Law
of the State of Delaware.
11. Officers.
--------
a. Officers. The Officers of the Company shall be chosen by the Board
--------
and shall consist of at least a President, a Secretary and a Treasurer. The
Board of Directors may also choose one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person. The Board shall choose a President, a Secretary and a Treasurer.
The Board may appoint such other Officers and agents as it shall deem necessary
or advisable who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board. The salaries of all Officers and agents of the Company shall be fixed by
or in the manner prescribed by the Board. The Officers of the Company shall hold
office until their successors are chosen and qualified. Any Officer elected or
-8-
<PAGE>
appointed by the Board may be removed at any time, with or without cause, by the
affirmative vote of a majority of the Board. Any vacancy occurring in any office
of the Company shall be filled by the Board.
b. President. The President shall be the chief executive officer of
---------
the Company, shall preside at all meetings of the Members, if any, and the
Board, shall be responsible for the general and active management of the
business of the Company and shall see that all orders and resolutions of the
Board are carried into effect. The President shall execute all bonds, mortgages
and other contracts, except: (i) where required or permitted by law or this
Agreement to be otherwise signed and executed, including Section 7b; (ii) where
signing and execution thereof shall be expressly delegated by the Board to some
other Officer or agent of the Company; and (iii) as otherwise permitted in
Section 11c.
c. Vice President. In the absence of the President or in the event
--------------
of the President's inability to act, the Vice President, if any (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Directors, or in the absence of any designation, then in the
order of their election), shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. The Vice Presidents, if any, shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
d. Secretary and Assistant Secretary. The Secretary shall be
---------------------------------
responsible for filing legal documents and maintaining records for the Company.
The Secretary shall attend all meetings of the Board and all meetings of the
Members, if any, and record all the proceedings of the meetings of the Company
and of the Board in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. The Secretary shall give, or
cause to be given, notice of all meetings of the Members, if any, and special
meetings of the Board, and shall perform such other duties as may be prescribed
by the Board or the President, under whose supervision the Secretary shall
serve. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there be no such
determination, then in order of their election), shall, in the absence of the
Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
e. Treasurer and Assistant Treasurer. The Treasurer shall have the
---------------------------------
custody of the Company funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Company and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President and to the Board, at its regular meetings or when the Board so
requires, an account of all of the Treasurer's transactions and of the financial
condition of the Company. The Assistant Treasurer, or if there shall be more
than
-9-
<PAGE>
one, the Assistant Treasurers in the order determined by the Board (or if there
be no such determination, then in the order of their election), shall, in the
absence of the Treasurer or in the event of the Treasurer's inability to act,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
f. Officers as Agents. The Officers, to the extent of their powers
------------------
set forth in this Agreement or otherwise vested in them by action of the Board
not inconsistent with this Agreement, are agents of the Company for the purpose
of the Company's business, and, subject to Section 9j, the actions of the
Officers taken in accordance with such powers shall bind the Company.
g. Duties of Board and Officers. Except to the extent otherwise
----------------------------
provided herein, each Director and Officer shall have a fiduciary duty of
loyalty and care similar to that of directors and officers of business
corporations organized under the General Corporation Law of the State of
Delaware.
12. Limited Liability.
-----------------
Except as otherwise expressly provided by the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be the debts, obligations and liabilities solely of the
Company, and neither any Member nor any Director shall be obligated personally
for any such debt, obligation or liability of the Company solely by reason of
being a Member or Director of the Company.
13. Capital Contributions.
---------------------
The Initial Member was deemed admitted as the Member of the Company
upon the execution and delivery of the Initial LLC Agreement. The Initial
Member has contributed the amount of cash to the Company listed on Schedule B
----------
attached hereto.
14. Additional Contributions.
------------------------
The Initial Member is not required to make any additional capital
contribution to the Company. However, a Member may make additional capital
contributions to the Company at any time upon the written consent of such
Member. To the extent that the Member makes an additional capital contribution
to the Company, the Member shall revise Schedule B of this Agreement. The
----------
provisions of this Agreement, including this Section 14, are intended solely to
benefit the Member and, to the fullest extent permitted by law, shall not be
construed as conferring any benefit upon any creditor of the Company (and no
such creditor of the Company shall be a third-party beneficiary of this
Agreement) and no Member shall have any duty or obligation to any creditor of
the Company to make any contribution to the Company or to issue any call for
capital pursuant to this Agreement.
-10-
<PAGE>
15. Allocation of Profits and Losses.
--------------------------------
The Company's profits and losses shall be allocated to the Member.
16. Distributions.
-------------
Distributions shall be made to the Member at the times and in the
aggregate amounts determined by the Board. Notwithstanding any provision to the
contrary contained in this Agreement, the Company shall not be required to make
a distribution to any Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or any other applicable law
or the Basic Documents.
17. Books and Records.
-----------------
The Board shall keep or cause to be kept complete and accurate books of
account and records with respect to the Company's business. The books of the
Company shall at all times be maintained by the Board. Each Member and its duly
authorized representatives shall have the right to examine the Company books,
records and documents during normal business hours. The Company, and the Board
on behalf of the Company, shall not have the right to keep confidential from the
Member any information that the Board would otherwise be permitted to keep
confidential from the Member pursuant to Section 18-305(c) of the Act. The
Company's books of account shall be kept using the method of accounting
determined by the Member. The Company's independent auditor shall be an
independent public accounting firm selected by the Member.
18. Reports.
-------
a. Within 60 days after the end of each fiscal quarter, the Board
shall cause to be prepared an unaudited report setting forth as of the end of
such fiscal quarter:
(i) unless such quarter is the last fiscal quarter, a balance
sheet of the Company; and
(ii) unless such quarter is the last fiscal quarter, an income
statement of the Company for such fiscal quarter.
b. The Board shall use diligent efforts to cause to be prepared and
mailed to the Members, within 90 days after the end of each fiscal year, an
audited or unaudited report setting forth as of the end of such fiscal year:
(i) a balance sheet of the Company;
(ii) an income statement of the Company for such fiscal year; and
(iii) a statement of such Member's capital account.
-11-
<PAGE>
c. The Board shall, after the end of each fiscal year, use reasonable
efforts to cause the Company's independent accountants to prepare and transmit
to each Member as promptly as such tax information as may be reasonably
necessary to enable such Member to prepare its federal, state and local income
tax returns relating to such fiscal year.
19. Other Business.
--------------
The Member and any Affiliate of the Member may engage in or possess an
interest in other business ventures (unconnected with the Company) of every kind
and description, independently or with others. The Company shall not have any
rights in or to such independent ventures or the income or profits therefrom by
virtue of this Agreement.
20. Exculpation and Indemnification.
-------------------------------
a. No Member, Officer, Director, employee or agent of the Company and
no employee, representative, agent or Affiliate of the Member (collectively, the
"Covered Persons") shall be liable to the Company or any other Person who has an
interest in or claim against the Company 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 Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Covered Person by this
Agreement, except that a Covered Person shall be liable for any such loss,
damage or claim incurred by reason of such Covered Person's gross negligence or
willful misconduct.
b. To the fullest extent permitted by applicable law, a Covered
Person shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Covered Person by reason of any act or omission
performed or omitted by such Covered Person in good faith on behalf of the
Company and in a manner reasonably believed to be within the scope of the
authority conferred on such Covered Person by this Agreement, except that no
Covered Person shall be entitled to be indemnified in respect of 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; provided, however, that any indemnity under this Section 20
-------- -------
shall be provided out of and to the extent of Company assets only, and no Member
shall have personal liability on account thereof.
c. To the fullest extent permitted by applicable law, expenses
(including legal fees) incurred by a Covered Person defending any claim, demand,
action, suit or proceeding shall, from time to time, be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of an undertaking by or on behalf of the Covered
Person to repay such amount if it shall be determined that the Covered Person is
not entitled to be indemnified as authorized in this Section 20.
-12-
<PAGE>
d. A Covered Person shall be fully protected in relying in good faith
upon the records of the Company and upon such information, opinions, reports or
statements presented to the Company by any Person as to matters the Covered
Person reasonably believes are within such other Person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Company, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, or any other facts pertinent to the
existence and amount of assets from which distributions to the Member might
properly be paid.
e. To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating thereto to the
Company or to any other Covered Person, a Covered Person acting under this
Agreement shall not be liable to the Company or to any other Covered Person for
its good faith reliance on the provisions of this Agreement or any approval or
authorization granted by the Company or any other Covered Person. The provisions
of this Agreement, to the extent that they restrict the duties and liabilities
of a Covered Person otherwise existing at law or in equity, are agreed by the
Member to replace such other duties and liabilities of such Covered Person.
f. The foregoing provisions of this Section 20 shall survive any
termination of this Agreement.
21. Assignments.
-----------
Subject to Section 23, the Member may assign in whole or in part its
limited liability company interest in the Company. If the Member transfers all
of its limited liability company interest in the Company pursuant to this
Section 21, the transferee shall be admitted to the Company as a member of the
Company upon its execution of an instrument signifying its agreement to be bound
by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the transfer, and, immediately following such
admission, the transferor Member shall cease to be a member of the Company.
Notwithstanding anything in this Agreement to the contrary, any successor to a
Member by merger or consolidation in compliance with the Basic Documents shall,
without further act, be a Member hereunder, and such merger or consolidation
shall not constitute an assignment for purposes of this Agreement.
22. Resignation.
-----------
So long as any Indebtedness is outstanding, the Initial Member may not
resign unless the Rating Agency Condition is satisfied. A Member (other than the
Initial Member) may resign from the Company with the written consent of the
Initial Member. If a Member is permitted to resign pursuant to this Section 22,
an additional member of the Company shall be admitted to the Company, subject to
Section 23, upon its execution of an instrument signifying its agreement to be
bound by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the resignation, and,
-13-
<PAGE>
immediately following such admission, the resigning Member shall cease to be a
member of the Company.
23. Admission of Additional Members.
-------------------------------
One or more additional members of the Company may be admitted to the
Company with the written consent of the Member; provided that, notwithstanding
--------
the foregoing, so long as any Indebtedness remains outstanding, no additional
Members may be admitted to the Company unless the Initial Member retains a
majority interest in the Company and the Rating Agency Condition is satisfied.
24. Dissolution.
-----------
a. Subject to Section 9j, the Company shall be dissolved, and its
affairs shall be wound up upon the first to occur of the following: (i) the
retirement, resignation or dissolution of the Member or the occurrence of any
other event which terminates the continued membership of the Member in the
Company unless the business of the Company is continued in a manner permitted by
the Act or (ii) the entry of a decree of judicial dissolution under Section 18-
802 of the Act.
b. The bankruptcy (as defined in Section 18-101(1) of the Act) of the
Member shall not cause the Member to cease to be a member of the Company and
upon the occurrence of such an event, the business of the Company shall continue
without dissolution.
c. In the event of dissolution, the Company shall conduct only such
activities as are necessary to wind up its affairs (including the sale of the
assets of the Company in an orderly manner), and the assets of the Company shall
be applied in the manner, and in the order of priority, set forth in Section 18-
804 of the Act.
25. Waiver of Partition; Nature of Interest.
---------------------------------------
Except as otherwise expressly provided in this Agreement, to the
fullest extent permitted by law, each Member hereby irrevocably waives any right
or power that such Member might have to cause the Company or any of its assets
to be partitioned, to cause the appointment of a receiver for all or any portion
of the assets of the Company, to compel any sale of all or any portion of the
assets of the Company pursuant to any applicable law or to file a complaint or
to institute any proceeding at law or in equity to cause the dissolution,
liquidation, winding up or termination of the Company. No Member shall have any
interest in any specific assets of the Company, and no Member shall have the
status of a creditor with respect to any distribution pursuant to Section 16
hereof. The interest of the Members in the Company is personal property.
-14-
<PAGE>
26. Benefits of Agreement; No Third-Party Rights.
--------------------------------------------
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditor of the Company or by any creditor of any Member.
Nothing in this Agreement shall be deemed to create any right in any Person
(other than Covered Persons) not a party hereto, and this Agreement shall not be
construed in any respect to be a contract in whole or in part for the benefit of
any third Person.
27. Severability of Provisions.
--------------------------
Each provision of this Agreement shall be considered severable and if
for any reason any provision or provisions herein are determined to be invalid,
unenforceable or illegal under any existing or future law, such invalidity,
unenforceability or illegality shall not impair the operation of or affect those
portions of this Agreement which are valid, enforceable and legal.
28. Entire Agreement.
----------------
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof.
29. Binding Agreement.
-----------------
Notwithstanding any other provision of this Agreement, the Member
agrees that this Agreement, including, without limitation, Sections
7,8,9,10,20,21,22,23,24,26 and 31, constitutes a legal, valid and binding
agreement of the Member, and is enforceable against the Member by the
Independent Director, in accordance with its terms.
30. Governing Law.
-------------
This Agreement shall be governed by and construed under the laws of the
State of Delaware (without regard to conflict of laws principles), all rights
and remedies being governed by said laws.
31. Amendments.
----------
Subject to Section 9j, this Agreement may not be modified, altered,
supplemented or amended except pursuant to a written agreement executed and
delivered by the Member. Notwithstanding anything to the contrary in this
Agreement, so long as any Indebtedness is outstanding, this Agreement may not be
modified, altered, supplemented or amended unless the Rating Agency Condition is
satisfied, except: (i) to cure any ambiguity or (ii) to correct or supplement
any provision in a manner consistent with the intent of this Agreement.
32. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original of this Agreement and all of which together
shall constitute one and the same instrument.
-15-
<PAGE>
33. Notices.
-------
Any notices required to be delivered hereunder shall be in writing and
personally delivered, mailed or sent by telecopy or other similar form of rapid
transmission, and shall be deemed to have been duly given upon receipt (a) in
the case of the Company, to the Company at its address in Section 2, (b) in the
case of a Member, to such Member at its address as listed on Schedule B attached
----------
hereto and (c) in the case of either of the foregoing, at such other address as
may be designated by written notice to the other party.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Agreement as of the ____ day of _________, 1997.
MEMBER:
SOUTHERN CALIFORNIA EDISON
COMPANY
By:________________________________
Name:
Title:
-16-
<PAGE>
SCHEDULE A
Definitions
-----------
A. Definitions
-----------
When used in this Agreement, the following terms not otherwise defined
herein have the following meanings:
"Act" has the meaning set forth in the preamble to this Agreement.
---
"Affiliate" means, with respect to any Person, any other Person
---------
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such Person.
"Agreement" means this Amended and Restated Limited Liability Company
---------
Agreement, together with the schedules attached hereto, as amended, restated or
supplemented from time to time.
"Basic Documents" has the meaning assigned to that term in the
---------------
Indenture.
"Board" or "Board of Directors" means the Board of Directors of the
----- ------------------
Company.
"Certificate of Formation" means the Certificate of Formation of the
------------------------
Company filed with the Secretary of State of the State of Delaware on July 1,
1997, as amended or amended and restated from time to time.
"Class" has the meaning assigned to that term in the Indenture.
-----
"Collateral" has the meaning assigned to that term in the Indenture.
----------
"Company" means SCE Funding LLC, a Delaware limited liability company.
-------
"Control" means the possession, directly or indirectly, or the power to
-------
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities or general partnership or managing
member interests, by contract or otherwise. "Controlling" and "Controlled" shall
have correlative meanings. Without limiting the generality of the foregoing, a
Person shall be deemed to Control any other Person in which it owns, directly or
indirectly, a majority of the ownership interests.
"Covered Persons" has the meaning set forth in Section 20a.
---------------
"Directors" means the directors elected to the Board of Directors from
---------
time to time by the Member, including the Independent Director. A Director is
hereby
A-1
<PAGE>
designated as a "manager" of the Company within the meaning of Section 18-
101(10) of the Act.
"Indebtedness" means the obligations of the Company arising under all
------------
Series of Notes.
"Indenture" means the Indenture dated as of __________ between the
---------
Company, as issuer, and the Note Trustee, as trustee, as the same may be
amended, supplemented or otherwise modified from time to time.
"Independent Director" means a natural person who, for the five-year
--------------------
period prior to his or her appointment as Independent Director has not been, and
during the continuation of his or her service as Independent Director is not:
(i) an employee, director, stockholder, partner or officer of the Company or any
of its Affiliates (other than his or her service as an Independent Director of
the Company); (ii) a customer or supplier that derives more than ten percent of
its revenues from the Company or any of its Affiliates; or (iii) any member of
the immediate family of a person described in (i) or (ii).
"Initial LLC Agreement" has the meaning set forth in the preamble to
---------------------
this Agreement.
"Initial Member" means Southern California Edison Company, a California
--------------
corporation, as the sole member of the Company.
"Management Agreement" means the agreement of the Directors in the form
--------------------
attached hereto as Schedule C.
----------
"Member" means the Initial Member and includes any Person admitted as
------
an additional member of the Company or a substitute member of the Company
pursuant to the provisions of this Agreement.
"Note Issuance Documents" means the collective reference to the
-----------------------
Indenture and the other governing documents relating to the Indebtedness, as the
same may be amended, supplemented or otherwise modified from time to time.
"Notes" means the SCE Funding LLC Notes at any time issued pursuant to
-----
the Indenture or any indenture supplemental thereto.
"Note Trustee" means ________, as trustee under the Indenture.
------------
"Officer" means an officer of the Company described in Section 11.
-------
"Officer's Certificate" has the meaning assigned to that term in the
---------------------
Indenture.
A-2
<PAGE>
"Person" means any individual, corporation, partnership, joint venture,
------
limited liability company, limited liability partnership, association, joint-
stock company, trust, unincorporated organization, or other organization,
whether or not a legal entity, and any governmental authority.
"Rating Agency" has the meaning assigned to that term in the Indenture.
-------------
"Rating Agency Condition" means, with respect to any action, that each
-----------------------
Rating Agency shall have been given ten days prior notice thereof and that each
of the Rating Agencies shall have notified the Company in writing that such
action will not result in a reduction or withdrawal of the then current rating
by such Rating Agency of any Series or Class of the Notes.
"Sale Agreement" means the Transition Property Purchase and Sale
--------------
Agreement dated as of __________ between the Company and the Initial Member, as
seller.
"Sale Documents" means the collective reference to the Sale Agreement,
--------------
any Subsequent Sale Agreements and the agreements, instruments and documents
contemplated thereby, as the same may be amended, supplemented or otherwise
modified from time to time.
"Series" has the meaning assigned to that term in the Indenture.
------
"Servicing Agreement" means the Transition Property Servicing Agreement
-------------------
dated as of __________ between the Company and the Initial Member, as servicer,
as the same may be amended, supplemented or otherwise modified from time to
time.
"Statute" has the meaning assigned to that term in the Servicing
-------
Agreement.
"Subsequent Sale Agreement" has the meaning assigned to that term in
-------------------------
the Servicing Agreement.
"Transition Property" has the meaning assigned to that term in the
-------------------
Sale Agreement and also includes any "Transition Property" as defined in any
Subsequent Sale Agreement.
B. Rules of Construction
---------------------
Definitions in this Agreement apply equally to both the singular and plural
forms of the defined terms. The words "include" and "including" shall be deemed
to be followed by the phrase "without limitation." The terms "herein," "hereof"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Section, paragraph or subdivision. The Section
titles appear as a matter of convenience only and shall not affect the
interpretation of this Agreement. All Section, paragraph,
A-3
<PAGE>
clause, Exhibit or Schedule references not attributed to a particular document
shall be references to such parts of this Agreement.
A-4
<PAGE>
SCHEDULE B
Members
-------
<TABLE>
<CAPTION>
Agreed Value of Percentage
Name Mailing Address Capital Contribution Interest
- ---- --------------- -------------------- --------
<S> <C> <C> <C>
Southern California Edison 2244 Walnut Grove Avenue $5,000.00 100%
Company Rosemead, California 91770
</TABLE>
B-1
<PAGE>
SCHEDULE C
Management Agreement
--------------------
________________________, 1997
SCE Funding LLC
2244 Walnut Grove Avenue, Room 180
Rosemead, CA 91770
Re: Management Agreement
SCE Funding LLC
--------------------
Ladies and Gentlemen:
For good and valuable consideration, each of the undersigned persons,
who have been designated as managers of SCE Funding LLC, a Delaware limited
liability company (the "Company"), in accordance with the Amended and Restated
Limited Liability Company Agreement of the Company, dated as of
________________, 1997, as it may be amended or restated from time to time (the
"LLC Agreement"), hereby agree as follows:
1. Each of the undersigned accepts such person's rights and authority as
a Director (as defined in the LLC Agreement) under the LLC Agreement and agrees
to perform and discharge such person's duties and obligations as a Director
under the LLC Agreement, and further agrees that such rights, authorities,
duties and obligations under the LLC Agreement shall continue until such
person's successor as a Director is designated or until such person's
resignation or removal as a Director in accordance with the LLC Agreement. Each
of the undersigned agrees and acknowledges that it has been designated as a
"manager" of the Company within the meaning of the Delaware Limited Liability
Company Act.
2. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES
SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Management
Agreement as of the day and year first above written.
__________________________________
Name:
__________________________________
Name:
__________________________________
Name:
3
<PAGE>
-----------------------------------------------------------------------
UNITED STATES EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT
OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) ___________
==============================
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
=================================
SCE FUNDING LLC
(Depositor of the Trust)
Exact name of obligor as specified in its charter)
DELAWARE 95-4640661
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification Number)
2244 WALNUT GROVE AVENUE, ROOM 180
ROSEMEAD, CALIFORNIA 91770
(Address, including zip code
of principal executive offices)
NOTES
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3.-15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment
of the Organization Certificate of Bankers Trust Company
dated June 21, 1995 - Incorporated herein by reference
to Exhibit 1 filed with Form T-1 Statement, Registration
No. 33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
March 20, 1996, incorporated by referenced to Exhibit 1
filed with Form T-1 Statement, Registration No. 333-
25843 and Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated June 19,
1997, incorporated by reference to Exhibit 1 filed with
Form T-1 Statement, Registration No. 333-32935.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed with
Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate trust
powers - Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No. 33-
21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as amended on
February 18, 1997, Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 333-24509-01.
-2-
<PAGE>
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust Company
dated as of June 30, 1997, incorporated by reference to
Exhibit 2 filed with Form T-1 Statement, Registration
No. 333-32935.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 20th day
of October, 1997.
BANKERS TRUST COMPANY
By: _______________________________
Jenna Kaufman
Vice President
-4-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 20th day
of October, 1997.
BANKERS TRUST COMPANY
By: Jenna Kaufman
-------------
Jenna Kaufman
Vice President
-5-
<PAGE>
EXHIBIT 99.3
FORM OF
ISSUANCE
ADVICE LETTER
[date]
ADVICE______-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION
SUBJECT: Issuance Advice Filing for Rate Reduction Bonds
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-056
(Decision), Ordering Paragraph No. 4, Southern California Edison Company
(Edison) hereby transmits for filing, on the pricing date of this series of Rate
Reduction Bonds, the initial FTA charges for the series. This Issuance Advice
Filing is for the Rate Reduction Bonds series ________ class(es)_________.
PURPOSE
- -------
This filing establishes initial FTA charges for rate schedules for residential
and eligible small commercial customers. This filing also establishes the
Transition Property to be sold to the Transition Property Owner (SPE).
BACKGROUND
- ----------
In Decision No. 97-09-056, the Commission authorized Edison to file Issuance
Advice Letters when pricing terms for Rate Reduction Bonds have been
established. Issuance Advice Letter filings are those in which Edison uses the
bond sizing methodology and FTA charge formulas found reasonable by the
Commission in Decision No. 97-09-056 to establish initial FTA charges for a
series of Rate Reduction Bonds. Using the methodology approved by the
Commission in Decision No. 97-09-056, this filing establishes FTA charges.
Because this series of Rate Reduction Bonds is being issued prior to January 1,
1998, to preserve the rate freeze mandated by AB 1890, concurrent with the
implementation of the FTA charges, the Energy Cost Adjustment Clause rate
component will be reduced by an amount equal to the FTA charges so that total
rates remain frozen.
-1-
<PAGE>
ISSUANCE INFORMATION
- --------------------
Rate Reduction Bond Name:_________
Rate Reduction Bond Issuer:_________
Transition Property Owner (SPE):_________
Trustee(s):_________
Closing Date:_________
Bond Rating:________
Amount Issued:_________
Issuance Costs:_________
Issuance Costs Approved by Infrastructure Bank or STO:_________
Issuance Costs as a Percent of Amount Issued:_________
Cumulative Aggregate Cumulative Issuance Costs for all Series:_________
Transition Costs Financed:_________
Coupon Rate(s):_________
Call Features:_________
California Tax Exempt (yes/no):_________
Expected Principal Amortization Schedule: See Attachment 1
Expected Final Maturity:_________
Legal Final Maturity:_________
Distributions to Investors (monthly or quarterly):_________
Annual Servicing Fee as a percent of the issuance amount:_________
Overcollateralization amount for the series:_________
Pledges by Issuer of SPE Debt Securities and all security therefor:______
Quarterly Variance Trigger Mechanism
- ------------------------------------
Each quarter the servicer will compare the actual FTA outstanding balance with
the expected FTA outstanding balance as set forth in Attachment 2. If the
variance is greater than_______%, a change to the FTA charges will be requested
via a True-Up Mechanism Advice Letter in accordance with Decision No. 97-09-056.
Confirmation of Ratepayer Benefits
- ----------------------------------
Decision No. 97-09-056 requires Edison to demonstrate, using the bond sizing
model found reasonable in that Decision, that the actual pricing terms of the
Rate Reduction Bonds result in net present value benefits. Attached to this
Advice Filing is a spreadsheet calculation which shows expected net present
value benefits of $___million for this series of Rate Reduction Bonds.
-2-
<PAGE>
FTA Charges
___________
Table I below shows the current assumptions for each of the variables used in
the FTA charges calculation.
TABLE I
INPUT VALUES FOR FTA CHARGES
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible small commercial
customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent of small commercial customers' billed amounts expected to be uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
Table II shows the initial FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 3.
<TABLE>
<CAPTION>
TABLE II
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial Customer
FTA Charge c/kWh
</TABLE>
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<PAGE>
Attached are proposed changes to Part I of Edison Preliminary Statement to show
FTA charges to be effective__________ [year].
Transition Property
- -------------------
Transition property is the property described in Public Utilities Code (S)840(g)
relating to the FTA charges set forth herein, including, without limitation, all
of the following:
(1) The right, title and interest in and to the FTA charges set forth herein,
as adjusted from time to time.
(2) The right to be paid the total amounts shown on Attachment 2.
(3) 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
herein.
(4) All rights to obtain adjustments to the FTA charges under the True-Up
Mechanism.
These FTA charges, as adjusted from time to time, shall remain in place until
the total amounts in Attachment 2 are paid in full to the owner of the
transition property, or its assignee(s).
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-056, these FTA charges shall be effective
five business days after filed and will continue to be effective, unless they
are changed by subsequent FTA Charge Issuance Advice Letter, or an FTA Charge
True-Up Mechanism Advice Letter.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-018. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this filing
open for public inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF-Attn: Paul Clanon, Energy Division
CPUC, SF-Attn: Elena Schmid, ORA
CPUC, SF-Attn: Juanita Porter, Energy Division
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<PAGE>
ATTACHMENT I
EXPECTED PRINCIPAL AMOUNT AMORTIZATION
SERIES_______, CLASS_______
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<PAGE>
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____principal amount, plus
interest on such the principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-056.
The FTA charges shall be adjusted from time to time, at least annually,
via the FTA Charge True-Up Mechanism in accordance with D. 97-09-056.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Payment Date Receipt Amount Payment Amount Outstanding Principal
- ------------ -------------- -------------- ---------------------
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
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<PAGE>
EXHIBIT 99.6
[LETTERHEAD OF STATE OF CALIFORNIA APPEARS HERE]
September 11, 1997
TO: PARTIES OF RECORD IN APPLICATION 97-05-006 ET AL.
Decision 97-09-054 was signed on September 3, 1997 with a concurrence from
Commissioners Neeper, Knight, Duque, and Bilas. However, the concurrence is not
available at the time of mailing the enclosed decision. It will be mailed at a
later date.
/s/ Lynn T. Carew
- -----------------
Lynn T. Carew, Chief
Administrative Law Judge
LTC:jac
Enclosure
<PAGE>
Decision 97-09-054 September 3, 1997
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Application of Pacific Gas and Electric Company for: (1)
Authority to Reduce Rates Effective January 1, 1998; (2) Authority to Sell or
Assign Transition Property to One or More Financing Entities; (3) Authority to
Service Rate Reduction Bonds on Behalf of Financing Entities; (4) Authority to
Establish Charges Sufficient to Recover Fixed Transition Amounts; and (5) Such
Further Authority Necessary for PG&E to Carry Out the Transactions Described in
this Application.
(U 39 E)
Application 97-05-006
(Filed May 6, 1997)
In the Matter of the Application of the Southern California Edison Company (U
338-E) for: (1) Authority to Reduce Rates Effective January 1, 1998; (2)
Authority to Sell or Assign Transition Property to One or More Financing
Entities; (3) Authority to Service Rate Reduction Bonds on Behalf of Financing
Entities; (4) Authority to Establish Charges Sufficient to Recover Fixed
Transition Amounts; and (5) Such Further Authority Necessary for Edison to Carry
Out the Transactions Described in this Application.
Application 97-05-018
(Filed May 6, 1997)
In the Matter of the Application of San Diego Gas and Electric Company for:
Authority to Reduce Rates Effective January 1, 1998; (2) Authority to Sell or
Assign Transition Property to One or More Financing Entities; (3) Authority to
Service Rate Reduction Bonds on Behalf of Financing Entities; (4) Authority to
Establish Charges Sufficient to Recover Fixed Transition Amounts; and (5) Such
Further Authority Necessary for PG&E to Carry Out the Transactions Described in
this Application.
Application 97-05-022
(Filed May 6, 1997)
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INTERIM OPINION............................................................. 3
SUMMARY..................................................................... 3
PROCEDURAL HISTORY.......................................................... 3
BACKGROUND.................................................................. 4
DESCRIPTION OF THE APPLICATIONS............................................. 6
Structure Of The Transactions............................................. 6
Size Of The Transactions.................................................. 7
Other Issuance-related Authority Requested................................ 8
Transition Property....................................................... 8
Mechanisms To Set Fixed Transition Amounts................................ 9
Setting Fixed Transition Amounts Initially..............................10
Adjusting Fixed Transition Amounts Periodically.........................10
RATE REDUCTION AUTHORIZATION..............................................11
RATEMAKING TREATMENT......................................................13
SERVICING.................................................................14
DISCUSSION..................................................................14
Rates That Apply In Absence Of Financing Orders...........................14
Whether Designation Of Fixed Transaction Amounts And Issuance Of Rate
Reduction Bonds Would Reduce Rates........................................18
Determination Of Fixed Transition Amounts.................................21
Other Issues..............................................................23
Whether PU Code section 367(E)(1) Precludes Financing Orders............24
Whether PU Code section 367(E)(2) Precludes Financing Orders............26
Whether PU Code Section 371 Precludes Financing Orders..................26
Whether PU Code Section 779.2 Precludes Financing Orders................27
Whether D,97-05-039 CREDIT STANDARDS SHOULD BE TIGHTENED................28
Application Of PROCEEDS.................................................29
Modification Of Structure Of Transaction To Achieve Desired
Tax Treatment...........................................................31
Additional Issuance of Rate Reduction Bonds.............................32
Need for Some
Issues Raised in the Applications to be Determined in Other Proceedings.....33
FINDINGS OF FACT............................................................34
CONCLUSIONS OF LAW..........................................................34
INTERIM OFFER...............................................................36
</TABLE>
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<PAGE>
INTERIM OPINION
SUMMARY
Pacific Gas & Electric Company (PG&E), Southern California Edison Company
(Edison), and San Diego Gas & Electric Company (SDG&E) (collectively, the
Applicants, each an electrical corporation within the meaning of Public
Utilities (PU) Section 218) separately apply for financing orders, as required
by PU Code Section 841(a). The Office of Ratepayer Advocates (ORA) gives its
qualified support to the applications. The Utility Reform Network (TURN) and the
California City-County Street Light Association (CAL-SLA) oppose the
applications. The California Farm Bureau Federation (Farm Bureau) briefed a
statutory interpretation issue and a specific proposal in Edison's application
regarding limitations on changing schedules, which Farm Bureau opposes. The
California Industrial Users (CIU) briefed a statutory interpretation issue.
Consistent with Decision (D) 96-12-077, the Commission will find, in
separate financing orders for each of the Applicants, that the designation of
fixed transition amounts as requested by each of the Applicants, and issuance of
rate reduction bonds in connection with some or all of the fixed transition
amounts would reduce rates that residential and small commercial customers would
have paid if the related financing order were not adopted.
In the event that any Applicant concludes that rates reduction bonds cannot
be issued in time to commence the rate reduction on January 1, 1998, we expect
to be so advised and that the Applicant will submit a revised application
pursuant to PU Code Section 368 that accomplishes the 10% rate reduction.
PROCEDURAL HISTORY
Applicants filed separate applications on May 6, 1997. On May 16, 1997,
the assigned administrative law judge (ALJ) issued a ruling consolidating the
applications, which present identical questions of law. TURN filed its protest
on May 20, 1997, and ORA filed its response to the applications on the same
date. A prehearing conference was held on May 27, 1997 and June 3, 1997, at
which it was determined that no disputed
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<PAGE>
issues of material fact existed requiring an evidentiary hearing. The
applications were ordered submitted on the concurrent opening briefs and reply
briefs filed June 16, 1997 and June 25, 1997, respectively. A draft of this
interim opinion, and drafts of separate financing orders, were served on the
parties on August 5, 1997, by an Assigned Commissioners' Ruling (ACR) that
invited comment. An ALJ ruling, filed August 12, 1997, asked parties to comment
upon the status of pending legislation that would amend several relevent
sections of the PU Code. Comments were received from Applicants, TURN, and ORA
on August 20, 1997, and reply comments were received from the Applicants and
TURN on August 27, 1997.
BACKGROUND
PU Code Section 841(a)/1/ provides as follows:
An electrical corporation shall, by June 1, 1997, and may from time to
time thereafter apply to the commission for a determination that
certain transition costs may be recovered through fixed transition
amounts, which would therefore constitute transition property under
this article. An electrical corporation may request this determination
by the commission in separate proceedings or in an order instituting
investigation or order instituting rulemaking, or both. The electrical
corporation shall in its application specify that the residential and
small commercial customers as defined in subdivision (h) of Section
331 would benefit from reduced rates through the issuance of rate
reduction bonds. The commission shall designate fixed transition
amounts as recoverable in one or more financing orders if the
commission determines, as part of its findings in connection with the
financing order, that the designation of the fixed transition amounts,
and issuance of rate reduction bonds in connection with some or all of
the fixed transition amounts would reduce rates that residential and
small commercial customers would have paid if the financing order were
not adopted. These customers shall continue to pay fixed transition
amounts after December 31, 2001, until the bonds are paid in full by
the financing entity. No electrical corporation shall be found to have
acted imprudently or unreasonably for failing to amend a
____________________
/1/ PU Code Section 841(a) was amended after the draft of this interim opinion
was served for comment. (See 1997 stats. Ch. 275) (SB 477).) SB 477 also amended
PU Code Sections 367, 840, other parts of Section 841, 842 and 843.
-4-
<PAGE>
power purchase contract where the amendment would modify or waive an
existing requirement that the seller be a qualifying facility pursuant to
federal law.
PU Code Section 841(a) directed Applicants to apply to the Commission, by June
1, 1997, for a determination that certain transition costs (as defined in PU
Code Section 840(f)) may be recovered through fixed transition amounts (as
defined in PU Code Section 840(d)), which would therefore constitute transition
property (as defined in PU Code Section 840(g)). We must designate fixed
transition amounts as recoverable in one or more financing orders (as defined in
PU Code Section 840(c)) if we determine, as part of our findings in connection
with the financing order, that the designation of the fixed transition amounts,
and issuance of rate reduction bonds (as defined in PU Code Section 840(e)) by a
financing entity (as defined in PU Code Section 840(b)) in connection with some
or all of the fixed transition amounts, would reduce rates that residential and
small commercial customers/2/ would have paid if the financing order were not
adopted (PU Code (S) 841(a)). As required by PU Code Section 841(e), we have
adopted procedures, in Resolution ALJ-173, which require us to approve or deny
the applications not later than 120 days after the date of filing.
We may set aside various defined terms in PU Code Section 841(a)
temporarily. For present purposes, it may simply be noted that the proposed
transactions are intended to substitute lower-interest, longer-term, secured
obligations for higher-interest, shorter-term, unsecured obligations./3/ Rate
reduction bonds are secured by (or represent the right to, depending on the
specific structure of the transaction) transition property, which is a new
species of property that is created by a financing order issued by the
Commission.
_________________
/2/ PU Code Section 331(h) defines a small commercial customer as "a customer
that has a maximum peak demand of less than 20 kilowatts."
/3/ For purposes of discussion, it can be assumed that rate reduction bonds bear
interest at approximately 7.5% and that the carrying costs that would otherwise
be applicable to the underlying obligations bear interest at approximately 9.5%.
This difference of approximately 2% is what gives rise to the potential savings
in an NPV basis.
-5-
<PAGE>
DESCRIPTION OF THE APPLICATIONS
STRUCTURE OF THE TRANSACTIONS
Applicants will each create a wholly-owned subsidiary, which is
intended to be a separate legal entity whose only business is to own transition
property. Applicants refer to this entity as a special purpose entity (SPE). In
the shorthand of commercial law, the SPE is said to be "bankruptcy-remote" in
relation to its related utility, meaning that its assets would not be available
to satisfy the claims of the utility's creditors. This technique is common in
securitization of cash flows. It permits the credit of the SPE (backed by its
ownership of transition property, which is the right to receive certain rates
and charges) to be considered independently of the credit of the utility.
Each of the applicants would capitalize the related SPE with equity in
an amount equal to approximately 1/2% of the principal amount of rate reduction
bonds to be issued and would transfer the transition property to it in exchange
for the proceeds from sale of rate reduction bonds.
The SPE would issue its own securities, either in the form of rate
reduction bonds, should the SPE qualify as a financing entity pursuant to PU
Code Section 840(b), as determined by the California Infrastructure and Economic
Development Bank (Infrastructure Bank), or other debt securities to which the
SPE's equity and the transition property would be pledged. It is expected that
the SPE debt securities would closely resemble the financial terms and
conditions of the rate reduction bonds./4/ Applicants request that we determine
that the SPEs qualify as financing entities to the extent approved by the
Infrastructure Bank.
Rate reduction bonds, whether issued by the SPE or a different
financing entity, would be issued to investors in the form of notes or
certificates representing beneficial ownership interests in transition property
or debt securities of the SPE. The
_______________________
/4/ However, the debt securities might be fixed-rate obligations while the rate
reduction bonds could be variable-rate obligations, in which case the difference
would be covered by an interest rate swap agreement.
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<PAGE>
rate reduction bonds may be secured by a statutory lien on transition property.
Rate reduction bonds would be issued in a few large transactions, and each issue
might have several classes. The rate reduction bonds are expected to be
outstanding approximately 10 years until repaid, but legal maturity dates may be
set up to three years later.
The rate reduction bonds would be issued during the fourth quarter of
1997 or thereafter. Proceeds of the rate reduction bonds are deemed to reduce
the revenue requirements of the Applicants, with the results that rates for
residential and small commercial customers may be reduced by 10%.
The Applicants each anticipate that changes in the details of the
structure of the transaction will be made at the direction of the Infrastructure
Bank and the financing entity in response to the requirements of the
underwriters in marketing the rate reduction bonds and the rating agencies to
obtain a favorable rating for the rate reduction bonds.
One of the credit enhancements that applicants contemplate would be
used to improve the credit rating (and thus minimize the interest charges) of
the rate reduction bonds is overcollateralization. For each dollar of rate
reduction bonds issued, more than a dollar in transition property would be
created. The proceeds of this excess transition property would be available for
the benefit of bond holders to support cash flow requirements in the event that
the amounts realized from fixed transition amounts during any period varied from
the forecast amounts. The amount of overcollateralization is determined by
negotiation with the rating agencies.
In addition, currently pending legislation and pending requests of the
Applicants to the Internal Revenue Service (IRS) for favorable tax treatment may
make more substantial changes in the structure of the transaction necessary.
However, the Applicants did not indicate what the nature of those changes might
be.
SIZE OF THE TRANSACTIONS
PG&E requests authority for the issuance by its related financing
entity of up to $3.5 billion aggregate principal amount of rate reduction bonds.
Edison requests authority for the issuance by its related financing entity of up
to $3.0 billion aggregate
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<PAGE>
principal amount of rate reduction bonds. SDG&E requests authority for the
issuance by its related financing entity of up to $800 million aggregate
principal amount of rate reduction bonds. In each case, a bond sizing model
would be applied, as described in the related application, to determine the
precise amount of rate reduction bonds needed to finance a 10% rate reduction
for residential and small commercial customers, compared to the rates in effect
immediately prior to January 1, 1998, as described below.
OTHER ISSUANCE-RELATED AUTHORITY REQUESTED
Applicants request approval of the issuance by their related SPEs of
such debt securities to the issues of such rate reduction bonds, which will
substantially mirror the terms of the related rate reduction bonds. These debt
securities would include such terms as may be approved by the Infrastructure
Bank, as specified in an advice letter to be filed not later than five business
days prior to the closing of the sale or rate reduction bonds. Applicants also
request that we approve the pledge by any financing entity of its right, title,
and interest in any SPE debt securities as may be issued as security for rate
reduction bonds.
TRANSITION PROPERTY
PU Code Section 840(g)(1) defines "transition property" as follows:
... the property right created pursuant to this article [PU Code (S)(S)
840-847] including, without limitation, the right, title, and interest of
an electrical corporation or its transferee: (A) In and to the tariff
established pursuant to a financing order, as adjusted from time to time in
accordance with subdivision (c) of Section 841 and the financing order. (B)
To be paid the amount that is determined in a financing order that the
electrical corporation or its transferee is lawfully entitled to recover
pursuant to the provisions of this article and the proceeds thereof, in and
to all revenues, collections, claims, payments, money, or proceeds of or
arising from the tariff or constituting fixed transition amounts that are
the subject of a financing order including those nonbypassable rates and
other charges referred to in subdivision (d). (c) In and to all rights to
obtain adjustments to the tariff pursuant to the terms of subdivision (c)
of Section 841 and the financing order.
PU Code Section 841(a) describes the applications as involving "a determination
that certain transition costs may be recovered through fixed transition amounts,
which would
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<PAGE>
therefore constitute transition property under this article" [emphasis added].
In addition, PU Code Section 841(g)(2) states that transition property shall
constitute a current property right notwithstanding the fact that the value of
the property will depend on consumers using electricity or, in those instances
where consumers are customers of a particular electrical corporation, the
electrical corporation performing certain services. Applicants seek the
additional comfort of having the Commission formally confirm in financing orders
of what the transition property consists and set forth with specificity when
transition property comes into legal existence. In addition, Applicants request
that we approve the sale to the related SPE of such transition property and to
confirm the scope of the rights of ownership of transition property of each such
SPE vis-a-vis its related electrical corporation
MECHANISMS TO SET FIXED TRANSITION AMOUNTS
Fixed transition amounts (defined by PU Code (S)840(d) are the
source of repayment of the costs involved with the rate reduction bonds,
including principal, interest, costs of issuance, and the costs of administering
the collection (from residential and small commercial customers) and payments
(of principal and interest, to the holders of rate reduction bonds). Fixed
transition amounts would be collected through a charge on the bills of
residential and small commercial customers, generally based on current
consumption./5/ That charge is to be stated separately, if practicable, but will
otherwise be stated in like manner to the other charges set forth in PU Code
Section 367(a)(1)-(6). Because consumption is variable, however, and because of
the potential for uncollectable amounts, receipts of fixed transition amounts
will not usually match obligations and expenses for rate reduction bonds
precisely. Therefore, mechanisms are needed to set fixed transition amounts for
each issuance of rate reduction bonds initially and to make adjustments, from
time to time.
__________________________
/5/ In some circumstances, to make fixed transition amounts nonbypassable,
departing customers could pay based upon historical consumption, rather than
current consumption.
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<PAGE>
SETTING FIXED TRANSITION AMOUNTS INITIALLY
Because the actual amount of rate reduction bonds will not be
known until they are sold, the corresponding fixed transition amounts cannot be
set until that time. Applicants have proposed to file advice letters five
business days prior to issuance of the rate reduction bonds to describe the
final approved structure for the issuance of rate reduction bonds, the total
principal amount and pricing of the rate reduction bonds, their scheduled
amortization and costs of issuance, and the estimated post-issuance expenses
involved in collecting and administering the fixed transition amounts and
disbursing and administering proceeds to the holders of the rate reduction
bonds. Such advice letter filings would also include an NPV calculation, in
accordance with the model described in each application, that shows benefit.
In order that the transition property represented by the fixed
transition amounts be a current property right, as is required as a condition of
issuance of rate reduction bonds for various tax and legal reasons, Applicants
request that the issuance advice letters should become effective, without
further action of the Commission, five business days after filing.
ADJUSTING FIXED TRANSITION AMOUNTS PERIODICALLY
As mentioned earlier, variations in electrically consumption
compared to forecasts are practically assured to result in proceeds from fixed
transition amounts being either greater than or less than required for rate
reduction bonds. Moreover, because rate reduction bonds will be issued with
level principal amortization, the interest component of rate reduction bonds
declines over time. All other things being equal, this will result in an
expected decline in fixed transition amounts over time. This necessarily results
in the need to adjust fixed transition amounts. These facts require adjustments
quarterly, should fixed transition amounts depart too sharply compared to the
tolerance planned/4/ or annually, otherwise, in
________________
* As determined in accordance with criteria established at the time of issuance
of the rate reduction bonds.
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<PAGE>
accordance with the methodologies described in the applications. Applicants
request that such "routine true-ups" be implemented by advice letter filed at
least 15 days before the end of each calendar quarter, optionally, or year, in
any event, to become effective without further Commission action on the first
day of the following quarter.
Applicants also anticipate that circumstances now unforeseen
could arise that require adjustment of fixed transition amounts in a way that
the methodologies described in the applications do not accommodate. In that
event, Applicants request permission to file advice letters at least 90 days
before the end of a calendar quarter, to become effective on the first day of
the following quarter. Applicants request that the Commission's Energy Division
determine whether modifications to the calculation methodology are required and,
in such event, to inform the requesting Applicant within 45 days of filing. The
Commission would resolve any outstanding issues by adopting a resolution prior
to the first day of the next calendar quarter.
Finally, to comply with the requirement for an anniversary review
imposed by PU Code Section 841(e), Applicants propose to file an advice letter
15 days prior to the anniversary of the financing order stating whether any
change to the then-current fixed transition amounts is required. It is
anticipated that in light of the other adjustments being made on a quarterly and
annual basis that no such adjustments would be required.
RATE REDUCTION AUTHORIZATION
Applicants request permission to implement rate reductions/7/ of 10%
for residential and small commercial customers as of January 1, 1998 to remain
in effect until March 31, 2002, or until the recovery of authorized uneconomic
costs pursuant to D.96-12077 and Section 367.
____________________
/7/PG&E and Edison propose, for administrative convenience, to implement the
reduction through a bill credit. SDG&E proposes that each applicant rate be
reduced.
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<PAGE>
Small commercial customers whose load grows beyond a peak demand of 20
kilowatts(kW) would be permitted to continue service on the existing schedule or
would be permitted to change to the otherwise applicable schedule, subject to
payment of fixed transition amounts based on historical usage data. Departing
customers (those who discontinue or reduce purchases of electricity and
distribution services from Applicants or their respective successor distribution
utilities and who purchase or consume electricity from other sources while
remaining at the same physical location or within the historical service
territory) would continue to be responsible for paying the fixed transaction
amounts, in order to make them nonbypassable. PG&E requests authority to include
tariff provisions similar to those in proposes in Application (A) 96-08-070 for
collecting other charges that are intended to be nonbypassable. Edison requests
authority to include tariff provisions similar to those it proposes in
A.96-08-071 for collecting other charges intended to be nonbypassable. SDG&E
requests authority to include tariff provisions similar to those its proposes in
A.96-08-072.
PG&E requests that its small commercial customers who take service
under its Schedule A-10 or E-19 have eligibility determined on a one-time basis.
Customers with peak demand of less than 20 kW in at least 9 of the 12
most-recent billing periods prior to October 1, 1997 would be eligible for the
10% rate reduction.
Edison requests that its small commercial customers who no longer meet
the service criteria (because, for example, usage grows beyond 20kW) be
permitted to migrate to an Edison schedule that includes neither a bill credit
(to implement the 10% rate reduction) nor the related fixed transition amounts
charge. However, to prevent a customer from taking unfair advantage of the 10%
rate reduction during the rate-freeze period' by voluntarily switching to
another schedule to avoid the fixed transition amounts charges after the
rate-freeze, Edison proposes that the fixed transition amounts charge should
apply to the agricultural and pumping, GS-2, and TOU-GS-2 schedules
____________________
* The earlier of March 31, 2002 or the date on which the costs identified in PU
Code Section 367 have been recovered.
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<PAGE>
for customers who were served on a rate schedule in Edison's GS-1 rate group as
of January 1, 1998.*
SDG&E proposes that its small commercial customers whose loads grow
such that they would not otherwise be eligible for service on its Rate Schedule
A be given the option of continuing to take service under Rate Schedule A or the
schedule that matches their new load. In either case, however, the customer
would continue to pay fixed transition amounts charges.
RATEMAKING TREATMENT
During the rate-freeze period, the revenues of Applicants will be
applied to the costs of energy purchased from the Power Exchange, to the
authorized costs of Applicants with respect to non-energy production activities,
generally, to certain other programs, and to fixed transition amounts. Any
residual amount will be applied to the Applicants' uneconomic costs of
generation-related assets described in PU Code Section 367 and to other
recoverable costs described in PU Code Sections 368, 375, and 376. Applicants
propose ratemaking treatment to achieve results that neutralize the effect of
issuance of rate reduction bonds on the duration of the rate-freeze period,
prevent cost shifting or excess recovery of uneconomic costs, deal with possible
issuance of rate reduction bonds less than or more than the amount actually
required to finance a 10% rate reduction over the rate-freeze period, flow the
servicing fees for collecting fixed transition amounts to ratepayers, to the
extent that such fees are in excess of Applicants' costs, and account for
amounts held by the SPEs.
______________
* In its application, Edison proposed that customers who were served on a rate
schedule in the GS-1 rate group as of January 1, 1998 should not be permitted
voluntarily to switch to service on another rate schedule (where charges for
fixed transition amounts did not apply) until the repayment obligations of the
rate reduction bonds had been discharged. In response to a concern raised by the
Farm Bureau, Edison revised its position as described.
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<PAGE>
SERVICING
PU Code Section 842(c) requires Commission authority for Applicants to
perform servicing/10/ of fixed transition amounts on behalf of the related
financing entity, and Applicants have requested that authority. PU Code Section
843(e) permits the pledgees of transition property who have perfected a security
interest in the transition property to foreclose or otherwise enforce their
security interest by application to this Commission for an order for the
sequestration and payment to the pledgees or their authorized transferees of
revenues arising with respect to the transition property. Applicants ask us to
confirm that upon proper application, we will do so.
DISCUSSION
RATES THAT APPLY IN ABSENCE OF FINANCING ORDERS
The central contested issue presented by these applications is what
rates residential and small commercial customers would have paid if the
financing orders are not issued. The Applicants, CIU, and Farm Bureau argue that
the rates that will apply
_______________________
/10/ In asset-backed securitization, "servicing" is a term that refers to the
billing of an obligation, such as a home loan, to the customer, its collection,
forwarding of the amount received to the holder of the right to receive payment,
the related accounting and reporting, and invoking the remedies provided by law
on behalf of the holder to enforce its rights against the consumer in the event
of nonpayment or other breach of the obligation. Thus, the bank that originates
a home loan may sell it, together will a pool of similar loans, to investors.
Under the typical structure, the pool of loans would be owned by an
institutional trustee who, in that capacity, would contract with the bank to
continue its former activities of sending monthly statements, receiving payment,
and carrying out the other tasks that are required to assure that proceeds of
the home loans match the amounts provided for in the underlying notes. The bank
no longer has an economic interests in the home loans, aside from the
contractual interest of earning a fee for administering the loans. Sometimes, a
bank will sell a pool of loans without retaining the right to service them. In
that case, the new owner will arrange for a firm (which is often an affiliate,
but may be a third-party) to take over the servicing function. Whoever is
performing the servicer role, however, is subject to replacement for failure to
perform its duties. Since the servicer has no economic interest in the
underlying obligations, other than its right to earn a fee for administering
them; the fee must be set at a level that covers the costs of performing the
servicing functions and provides a reasonable profit. Otherwise, it would prove
difficult to attract a successor firm interested in assuming the servicer
function.
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otherwise will be the "frozen" rates provided in PU Code Section 368(a). ORA,
TURN, and CAL-SLA argue that PU Code Section 368(a) unconditionally requires
that the frozen rates be reduced by 10% for residential and small commercial
customers as of January 1, 1998 and, therefore, the rates that would otherwise
apply, if the applications are denied, are the frozen rates less 10%
PG&E cites Assembly Bill 1890 (1995 stats. Ch. 854) (AB 1890) Section
1(b) (Legislature contemplated an immediate 10% reduction and its financing
through rate reduction bonds), AB 1890 Section 1(e) (intent to require
applications for financing orders) and PU Code Section 330(w) (intent to require
and enable monetization of competition transition charge as means to achieve
rate reductions for such customers of no less than 10%).
Edison points to the parallel references to 10% rate reductions in AB
1890 Section 1(b) and PU Code 368(a) in conjunction with the intent language of
PU Code Section 330(w), the Senate Conference Committee on Electric Industry
Restructuring Conference Report Committee Analysis of AB 1890, and PU Code
Section 365, which requires consistency of Commission action with PU Code
Section 330.
SDG&E interprets PU Code Section 368 as a requirement that the
Commission must freeze rates (subject to the residential and small commercial
consumer reduction of 10%) and concedes that PU Code Section 368(a) does not
"explicitly recognize the means by which rate reduction would be financed."
SDG&E traces the legislative history of AB 1890 to demonstrate the "linkage"
between the 10% rate reduction and its financing through securitization.
CIU cites AB 1890 Section 1(e) (intent of Legislature to require
electrical corporations to apply for financing orders in an amount sufficient to
achieve the rate reduction).
The Farm Bureau observes that AB 1890 Section 1(b) and PU Code Section
330(w) so clearly set out legislative intent, that it would be unreasonable to
expect the linkage between the 10% rate reduction and its financing through the
issuance of rate reduction bonds to be repeated in Section 368(a), which deals
specifically with rates.
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ORA recommends that to the extent the Commission wishes to reconsider
D.96-12-077 here, we should seek guidance from the Legislature.
TURN points to the omission in PU Code Section 368(a) of any mention
of financing of the 10% rate reduction as proof that the Legislature intended
that the rate reduction be absolutely independent of rate reduction bonds.
CAL-SLA observes that nothing in AB 1890 or PU Code Sections 840-847
precludes the 10% rate reduction in the event that rate reduction bonds are not
issued.
The parties re-argue a point that we addressed in D 96-12-077 (see
mimeo. at 9, where we observed that AB 1890 allows the utilities the option of
accomplishing the required rate reduction by issuing rate reduction bonds) and
on which we are now considering a petition for modification: Does PU Code
Section 368(a) permit, but not require, Applicants to implement a 10% rate
reduction for residential and small commercial customers through the issuance of
rate reduction bonds? However, that is a different question (which we will not
revisit here) than the one before us. In D.96-12-077, we were considering the
Applicants' cost recovery plans under PU Code Section 368(a).
Section 368(a) provides in part
The cost recovery plan shall set rates for each customer class, rate
schedule, contract, or tariff option, at levels equal to the level as
shown on electric rate schedules as of June 10, 1996 [the so-called
"freeze"], provided that rates for residential and small commercial
customers shall be reduced so that these customers shall receive rate
reductions of no less than 10 percent for 1998 continuing through
2002.
Thus, the Applicants were required to prepare a cost recovery plan,
which had to freeze rates, except in the case of residential and small
commercial customers, for whom the cost recovery plan was to provide a 10% rate
reduction beginning January 1, 1998. In approving the cost recovery plans
pursuant to PU Code Section 368, we authorized Applicants to recover the
uneconomic costs of their generation-related assets and obligations identified
in PU Code Section 367 pursuant to their respective cost recovery plans. The
cost recovery plan for each of the Applicants provides for
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frozen rates and, in the case of residential and small commercial customers, a
reduction of 10%, upon issuance of rate reduction bonds in an amount sufficient
to finance the cost of the 10% reduction.
The parties all overlook the central role of the cost recovery plan.
One key observation will help put the contentions of the parties in
proper perspective: PU Code Section 368(a) does not establish rates/11/;
rather, it establishes criteria for cost recovery plans that permit Applicants
to recover certain costs through rates. Nor do the cost recovery plans
themselves establish rates. Rates are established through tariffs. As a
consequence, we look to the cost recovery plans (the framework of which we have
already approved) to determine whether a particular rate that may be proposed in
a tariff from time to time is one which is consistent with that plan. Applicants
are now requesting to change rates, as of January 1, 1998, from the frozen
levels to a rate that is 10% less for residential and small commercial
customers. As this change is consistent with what the cost recovery plans
contemplate and the requirements of PU Code Section 368, no question arises
directly as to whether the Applicants should be permitted to recover the costs
specified in PU Code Section 368(a) through rates./12/
___________________
/11/ The proviso ("provided that rates for residential and small commercial
customers shall be reduced so that these customers shall receive rate reductions
of no less than 10 percent for 1998 continuing through 2002") is a subordinate
clause that qualifies the main clause of PU Code Section 368(a). The rates that
the proviso refers to are the rates that the cost recovery plan is required to
set. If the Legislature had intended to set rates more directly, under its
plenary authority pursuant to Article XII, Section 5 of the California
Constitution, it could have done so. Rather, consistent with its constitutional
power to confer additional authority upon the Commission, it chose to require
cost recovery plans, to set criteria related to rates as an incentive to
Applicants to reduce rates, and to make such a reduction a prerequisite to the
approval of plans for the recovery of the uneconomic costs described in PU Code
Section 367. (See also SB 477 (S)(setting of utility rates, as well as
modifications to existing rates, must be approved by Commission); D.96-12-077,
Conclusion of Law 7.)
/12/ Another way of looking at this issue is that under the transition period
fixed-rate regime (whether at 100% or 90% of frozen rates), rates are not so
much a question of how much is collected, as of how much is to be applied,
ultimately, to which accounts.
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In the event of a failure to implement a 10% rate reduction for
residential and small commercial customers, we should have to consider whether
the Applicants would be barred from recovering the costs specified in PU Code
Section 368(a) through rates. In the event that any Applicant concludes that
rate reduction bonds cannot be issued in time to commence the rate reduction on
January 1, 1998, we expect to be so advised and that the Applicant will submit a
revised application pursuant to PU Code Section 368 that accomplishes the 10%
rate reduction.
The cost recovery plans we approved in D.96-12-077 provided for the
10% rate reduction called for in PU Code Section 368(a), with that reduction to
be financed by issuance of rate reduction bonds by the Applicants. Given that it
is only appropriate-for the purpose of calculating the ratepayer benefits from
the issuance of the bonds-to include in that calculation the benefit of reducing
rates 10% from the frozen levels also mandated by PU Code Section 368(a). In
other words, for the ratepayer benefit calculation in, and the standard required
by, PU Code Section 841(a), the rates that would otherwise apply ("the rates
that residential and small commercial customers would have paid if the financing
order were not adopted" referred to in PU Code (S) 841(a)) are the frozen rates
before the 10% rate reduction.
At the same time, we note that if for any reason, Applicants could not
issue the rate reduction bonds that are part of our approved cost recovery
plans, we would expect the Applications to propose alternative cost recovery
plans that would accomplish the 10% rate reduction and which, if approved, would
provide the applicants with a reasonable opportunity to recover their uneconomic
costs described in PU Code Section 367(a).
WHETHER DESIGNATION OF FIXED TRANSITION AMOUNTS AND ISSUANCE OF RATE
REDUCTION BONDS WOULD REDUCE RATES
The Applicants' cost recovery plans each provided for a 10% reduction
(upon issuance of rate reduction bonds) in the frozen rates (as adjusted in
SDG&E's case, on February 1, 1997) paid by residential and small commercial
customers. Therefore, it follows that the designation of fixed transition
amounts (a precondition of the rate reduction bonds) and the issuance of rate
reduction bonds would reduce rates
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during the rate-freeze period ending when each applicant has recovered its
uneconomic costs on March 31, 2002, whichever occurs earlier. After the
rate-freeze period, all other things being equal, rates will be higher/19/ than
they would have been in the absence of rate reduction bonds and the fixed
transition amounts that will be required to retire them. What is needed is a
single method of evaluating the rate reduction (during the freeze period) in
conjunction with the rate increase (after the freeze period, compared to rates
that would otherwise apply). This is provided by the requirement that Applicants
must state in their applications that residential and small commercial customers
"would benefit from reduced rates." (PU Code (S) 841(a).)
None of the parties dispute that each of the Applicants has shown
substantial net present value benefits to residential and small commercial
customers over the approximate 10-year period beginning January 1, 1998,
compared to frozen rates./14/ If the net present value of benefits had been
negative or nominal, we would have been concerned with whether the proposals
actually represented a rate reduction. But that is not the case. Instead, the
parties dispute whether the Applicants should be required to maximize the net
present value of benefits by restructuring their proposals.
TURN argues that greater benefits, including a larger rate reduction,
are available by (1) issuing a greater principal amount of rate reduction bonds,
(2) retiring the rate reduction bonds over a longer maturity, or (3) amortizing
the rate reduction bonds mortgage-style, rather than with fixed principal
payments. The Applicants respond that (1) trying to achieve a rate reduction of
greater than 10% cuts too close to the estimated amount of transition costs
allocable to residential and small commercial
________________
/19/Fixed transition amounts do not affect residential and small commercial
customer rates during the rate-freeze period. Following the rate-freeze period,
fixed transition amounts will add 1-2c/kWh to rates, declining over time.
/14/The calculation of net present value depends upon many assumptions that were
made regarding the final structure of the rate reduction bonds, and will be
subject to a final confirmation prior to the issuance of the rate reduction
bonds through an advice letter filing. For PG&E, the net present value of the
savings due to the 10% rate reduction combined with the added costs due to fixed
transition amounts over the approximate 10-year life of the rate
Footnote continued on next page
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<PAGE>
customers, (2) a maturity of 20-30 years would not be as well received by rating
agencies and investors and could result in higher debt services costs than a 10-
year maturity, and (3) fixed principal payments will help to assure that fixed
transition amounts decline, which minimizes the difference between what rates
would have been in the post-freeze period and the rates that will occur as a
result of financing orders.
The proposed structure results in net present value benefits that are
substantial enough to withstand the risk of misanalysis, yet still result in a
rate reduction, for purposes of PU Code Section 841(a). We agree with
Applicants that there might not be sufficient transition costs available to
support more than a 10% rate reduction for residential and small commercial
customers and that much longer maturities for the rate reduction bonds present
an investment risk factor that is best avoided for the initial issuance of this
novel type of utility-related security. We also agree with Applicants that
mortgage-style amortization increases the risk that the fixed transition amount
would increase due to forecasting errors and that level principal payment
amortization provides a margin that lessens the likelihood of an increase in the
fixed transition amounts.
The only remaining issue concerning the rate reduction is whether the
means by which PG&E and Edison/13/ have chosen to implement the rate reduction,
a 10% bill credit, conflicts with the notion of a "rate" reduction. As a bill
credit is mathematically equivalent to reducing individual rates and because it
would be implemented through tariff, we conclude that it constitutes a rate
reduction for these purposes./14/ (See D.97-08-056, mimeo., at 50-51.)
________________________________________________________________________________
reduction bonds would be approximately $470 million; for Edison, approximately
$400 million; and for SD&E, approximately $100 million.
/15/ SD&E, proposes to reduce each tariffed rate individually for affected
customers by 10%.
/14/ ORA notes that in the event that we order a future one-time rebate that the
rebate should be applied after the bill credit to assure that customers receive
100% of the adopted rebate. We will rely upon ORA to bring this issue to our
attention in connection with any rebate that may be considered, as we would
prefer to implement this principle directly.
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DETERMINATION OF FIXED TRANSITION AMOUNTS
PU Code Section 840(d) defines "fixed transition amounts" as "those
nonbypassable rates and other charges... that are authorized by the [C]ommission
in a financing order to recover (1) transition costs, and (2) the costs of
providing, recovering, financing or refinancing the transition costs through a
plan approved by the [C]ommission in a financing order, including the costs of
issuing, servicing, and retiring rate reduction bonds." The components of fixed
transition amounts can thus be thought of as a principal amount (the transition
costs), an interest amount (part of the cost of retiring rate reduction bonds),
and an amount in respect of initial and ongoing transaction costs. Only the
principal component can be fixed in advance; the interest component and the
transaction component (collectively, financing costs) are fixed pursuant to a
plan, as their determinants become known.
DETERMINATION OF TRANSITION COSTS
It will be recalled that the definition of transition costs contained
in PU Code Section 840(f) has two parts. The first part is similar to the
description contained in PU Code Section 367 (with a minor variation in a
illustrative example, but without the detailed allocation, calculation, and
limitation rules), and the second part refers to the costs of retiring debt and
equity. None of the Applicants rely on the second part of the definition; each
presents an estimate of its total transition costs based on the first part and
requests that a portion of that total be designated as fixed transition amounts
on the grounds that in the proceedings in which PU Code Section 367 uneconomic
costs are being determined (A.96-08-011 et al.) such estimates are neither in
dispute nor sensitive to market prices.
Nothing is inherently wrong about using estimates when measurements
are not available. What gives us pause is that our usual way of correcting for
errors in estimating, directly adjusting utility rates or requiring surcharges
or surcredits, is foreclosed by PU Code Section 841(c), which makes the
"principal" portion of fixed transition amounts and their underlying transition
costs immutable. This immutability is necessary, of course, in order to
vindicate the right in "transition property" as defined
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in PU Code Section 840(g) and to induce investors in rate reduction bonds to pay
to acquire the right to the proceeds of fixed transition amounts. Investors in
rate reduction bonds who are asked to pay money today for the right to receive
an amount tomorrow that depends on the accuracy of an estimate of the principal
amount to be returned could demand a considerable risk premium, negating the
premise behind rate reduction bonds./17/
Fortunately, the simple and effective ratemaking approach/18/ that
Applicants propose addresses this question, and makes ratepayers indifferent to
the possibility that transition costs may have been overestimated. The
ratemaking treatment also deals with the contingency that the rate-freeze period
might otherwise end before March 31, 2002. The two issues are related, because
the rate-freeze period may end before that date and the uneconomic costs
identified by PU Code Section 367 to be recovered by the end of the rate-freeze
period have been recovered. One reason that might happen is if a sufficiently
large amount of transition costs is deducted from uneconomic costs. Also, the
amount of transition property reserved for overcollateralization might not all
be required. The parties do not disagree about the ratemaking treatment
proposed, except with respect to the interest that should be imputed to certain
memorandum accounts that would be established./19/
_______________________
/17/ The premise is that rate reduction bonds, because they are secured by fixed
transition amounts are low-risk instruments that command a low rate of interest
and, therefore, reduce costs compared to shorter-term, higher-rate alternatives.
/18/ This approach is described in the related financing orders. It is designed
to remove any effect of the rate reduction bonds on the timing of when the
rate-freeze period ends, prevent shifting of costs between residential and small
commercial customers, on one hand, and large commercial customers, and on the
other, and to ensure that residential and small commercial customers receive the
benefits of the rate reduction bond financing even if the rate-freeze period
ends earlier than expected.
/19/ We agree with ORA that these mechanisms are intended to implement two
undisputed principles: that rate reduction bonds should not result in cost
shifting among consumer classes and should not increase the amount of uneconomic
costs that would otherwise be recovered by Applicants, and we will observe these
principles in future decisions regarding mechanisms for cost allocation and
tracking.
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TURN and ORA recommend that the appropriate interest rate for excess
proceeds be the authorized rate return for each utility's rate base, because
otherwise Applicants would otherwise be unduly enriched by the proceeds of rate
reduction bonds, which reduce their need for other financing./20/ Applicants,
who modified their original proposal that the appropriate interest rate should
be the short-term commercial rate, recommend that the appropriate rate interest
rate should be the rate of interest borne by the rate reduction bonds.
Requiring Applicants to bear full rate of return interest rates on
unneeded rate reduction bonds issuance proceeds, rather than the rate of
interest for the rate reduction bonds, is necessary to prevent a windfall to
Applicants./21/ The risk that Applicants might have to repay a short-term loan
at long-term rates has the beneficial effect of making Applicants careful in
sizing the transaction. Such proceeds will be required to bear interest at each
Applicant's respective authorized rate of return.
OTHER ISSUES
The conclusion that the designation of fixed transition amounts and
issuance of rate reduction bonds would reduce rates completely determines our
decision under PU Code Section 841(a), which provides:
The [C]ommission shall designate fixed transition amounts as recoverable in
one or more financing orders if the [C]ommission determines, as part of its
findings in connection with the financing order, that the designation of
the fixed transition amounts, and issuance of rate reduction bonds in
connection with some or all of the fixed transition amounts would reduce
rates that residential and small commercial customers would have paid if
the financing order were not adopted.
_____________________
/20/ The analysis that TURN and ORA propose is more appropriate to traditional
ratesetting than to electrical industry restructuring as required by AB 1890 and
SB 477.
/21/ Using the rate of interest borne by the rate reduction bonds makes it
unnecessary to consider whether any special rate of return applicable to
uneconomic costs pursuant to PU Code Section 367 should be applied to the
unneeded proceeds of the rate reduction bonds.
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We will issue financing orders for each of the Applicants in companion
orders; but parties have raised other issues, and the Applicants have made other
requests, each of which we will take up in this interim opinion.
WHETHER PU CODE SECTION 367(E)(1) PRECLUDES FINANCING ORDERS.
PU Code Section 367(e)(1) requires that uneconomic costs,/22/
which include, since the passage of SB 477, transition costs as defined in PU
Code Section 840(f), be recovered from all customers or, in the case of fixed
transition amounts, from residential and small commercial customers, on a
nonbypassable basis and be
allocated among the various classes of customers, rate, schedules, and
tariff options to ensure that costs are recovered from these classes, rate
schedules, contract rates, and tariff options, including self-generation
deferral, interruptible, and standby rate options in substantially the same
proportion as similar costs are recovered as of June 10, 1996, through the
regulated retail rates of the relevant electric utility, provided that
there shall be a firewall segregating the recovery of the costs of
competition transition charge exemptions such that the costs of competition
transition charge exemptions granted to members of the combined class of
residential and small commercial customers shall be recovered only from
these customer and the costs of competition transition charge exemptions
granted to members of the combined class of customers, other than
residential and small commercial customers, shall be recovered only from
these customers.
_________________
/22/ Referring to "generation-related assets and obligations, consisting of
generation facilities, generation-related regulatory assets, nuclear
settlements, and power purchase contracts ... that may become uneconomic as a
result of a competitive generation market." (PU Code (S) 367.) SB 477 amended
the forepart of PU Code Section 367 to include "transition costs" as defined in
PU Code Section 840(f).
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TURN argues that the issuance of rate reduction bonds violates
this stricture because, in the case of Edison, to the extent that post rate-
freeze period sales to small commercial customers decline, the fixed transition
amounts will be allocated to residential customers, and vice versa, However, PU
Code Section 367(e)(1) does not require that fixed transition amounts be
allocated in the identical proportion as similar costs were recovered as of June
10, 1996. Instead, fixed transition amounts must be allocated in "substantially
the same proportion" as similar costs were being recovered on such date. TURN
presented no evidence to show why we should expect a sufficient decline in sales
to one or the other class of customers to cause the allocation of fixed
transition amounts to be no longer in substantially the same proportion as
similar costs were recovered as of June 10, 1996.
TURN also argues that to the extent the Applicants use proceeds
to retire debt, cost shifting could result because more or less of the
uneconomic costs would be collected from classes other than residential and
small commercial customers than would otherwise be the case. To prevent such
shifting, TURN recommends that the proceeds be traced and reductions in the
embedded cost of debt be allocated to the residential and small commercial
customers, as a class, rather than being flowed through to all customers. This
argument is inconsistent, however, with TURN's position in its brief that the
Applicants' proposals respect the firewall required by PU Code Section 367(e)(1)
between residential and small commercial customers, on the one hand, and the
class of all other customers, on the other. As TURN correctly observed in its
brief, Applicants propose to impute the revenue that would be been received but
for the 10% rate reduction to the Transition Cost Balancing Accounts. "As a
result," TURN concludes," customers in other classes are assured that the rate
freeze will end at the same time, whether or not there is a reduction of not
less than 10%, and whether or not [r]ate [r]eduction [b]onds are issued."
Because the class of customers other than residential and small commercial
customers pay frozen rates during the rate freeze period, if TURN is correct,
which we believe to be the case, if there is no effect on the date on which the
rate freeze ends, there can be no possibility of shifting.
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WHETHER PU CODE SECTION 367(E)(2) PRECLUDES FINANCING ORDERS
PU Code Section 367(e)(2) requires that "individual customers
shall not experience rate increases as result of the allocation of transition
costs" as described in PU Code Section 367(a). TURN argues that the issuance of
rate reduction bonds, which permits deferred recovery of what would otherwise be
transition costs within the meaning of PU Code Section 367(e)(2), violates this
stricture because the rates that individual customers pay after the rate-freeze
period would be higher than the rates that they would pay at that time without
the fixed transition amounts that are required to retire the rate reduction
bonds.
We think that this interpretation misconstrues the language of
the statute. By its terms, PU Code Section 367(e)(2) prohibits "rate increases"
without specifying the base to which the increase is to be compared. The most
straightforward interpretation, therefore, is to compare the rates on two
different dates to see if they differ, and, if so, whether the difference
represents an increase. The Legislature knows how to specify a rate comparison
that depends on rates that would have otherwise been in effect on a given date.
(See PU Code (S) 841(a), which uses "rates that residential and small commercial
customers would have paid".) Therefore, the fixed transition amounts do not
represent a rate increase within the meaning of PU Code Section 367(e)(2).
WHETHER PU CODE SECTION 371 PRECLUDES FINANCING ORDERS
PU Code Section 371(a) makes the uneconomic costs (which, with
the passage of SB 477, includes transition costs, as well) provided in PU Codes
Sections 367, 368, 375, and 376 applicable to each customer based on the amount
of electricity purchased, subject to changes in usage occurring in the normal
course of business. TURN argues that once the rate-freeze period ends, changes
in the fixed transition amounts will be harder for customers to avoid by
reducing usage, and, therefore, the financing orders should not be issued.
As fixed transition amounts are allocated based upon usage,
however, any customer who changes consumption patterns will experience a
corresponding increase or decrease in the associated fixed transition amount
currently,
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which is all that PU Code Section 371(a) requires. If a reduction in usage in
year 5 contributes to the necessity of increasing the per-kWh charge in year 6,
the customer remains able to reduce consumption further to avoid any increase in
the amount paid in respect of fixed transition amounts.
WHETHER PU CODE 779.2 PRECLUDES FINANCING ORDERS
PU Code Section 779.2 prohibits an "electrical ... corporation from
terminating residential service for nonpayment of any delinquent account or
other indebtedness owed by the customer ... to any other person or corporation
or when the obligation represented by the delinquent account or other
indebtedness was incurred with a person or corporation other than the electrical
... corporation demanding payment therefor. "TURN argues that this statute would
prohibit applicants from terminating service in the event of nonpayment of fixed
transition amounts, since an entity other than the electric utility would own
the right to receive payment.
The statute predates AB 1890 by several years, and it is designed to
address problems not relevant here. Rather than speculating on why the
Legislature may not have thought it necessary to amend PU Code Section 779.2, we
observe that fixed transition amounts are "nonbypassable rates and other
charges" that we authorize in a financing order to be collected. (PU Code (S)
849(d).) We have the authority to "specify how amounts collected from a
customer shall be allocated between fixed transition amounts and other charges."
(PU Code(S) 841(b).) We will specify that amounts collected be allocated
between fixed transition amounts and other charges on a pro rata basis.
Accordingly, to the extent that a customer withholds fixed transition amounts
from payment, a portion of the shortfall will be allocable to charges for which
it is undisputed that Applicants may disconnect service for nonpayment.
Therefore, no conflict with PU Code Section 779.2 arises, since disconnection
for failure to make payment would not be attributable solely to fixed transition
amounts.
It is theoretically possible that certain small commercial customers
might be obligated to pay fixed transition amounts at times when they had no
other utility charges. In that contingency, however, there would be nothing to
disconnect.
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WHETHER D.97-05-039 CREDIT STANDARDS SHOULD BE TIGHTENED
In D.97-05-039, we took several steps to promote retail
competition for the provision of electric services to all customers, including
permitting competing energy service providers to present consolidated bills. We
made those energy service providers responsible for all payments, regardless of
whether they receive payment from their end-use customer, and we permitted the
utility serving as the related distribution company to impose reasonable
creditworthiness requirements on energy service providers utilizing bill
consolidation. By that, we meant the same creditworthiness requirements that
would be imposed on similarly sized and situated customers of the utility.
Utilities were to file their credit requirements by advice letter.
Applicants note that competing energy service providers should
not be authorized to bill and collect charges for fixed transition amounts
unless such providers meet rating agency standards governing billing,
collecting, and reporting for servicers in similar asset-backed securities
transactions. In the case of providers that are not rated as investment grade,
this might include the requirement for forwarding charges for fixed transition
amounts within two days of receipt or that the obligations of the providers be
secured by credit enhancement, which might include a letter of credit. The
Applicants propose that we articulate a policy to address rating agency concerns
with respect to issuance of the rate reduction bonds:
* The obligation to pay charges for fixed transition amounts is an
obligation of the customer, and that obligation is unaffected by the
use of a third-party energy services provider who bills and collects
such charges.
* Applicants should have access to information on kilowatt-hour billing
and usage in order properly to discharge their obligations as
servicers.
* Current policies should be maintained to permit shut-off of customers
by the utility in the event of non-payment of charges for fixed
transition amounts.
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* In the event of default of the third-party energy services provider,
billing responsibilities must be transferred promptly to another party
to minimize losses.
TURN argues that we should reaffirm our decision in D.97-05-039
and refuse to adopt any more stringent requirement.
This is not the proceeding in which to deal with the
creditworthiness question in detail. We recognize that success of asset
securitization of fixed transition amounts depends upon the degree to which
rating agencies and investors can look to the large number of individual
obligations (residential and small commercial customers) and derive comfort from
historical statistical payment patterns to predict the likelihood of the timely
receipt of revenue in the amount due. We also recognize that even though
third-party energy service providers may have better credit than customers
individually, that they nonetheless present potential points of failure in the
chain of obligations, and that makes their creditworthiness important. We
recognize, further, that the importance of timeliness of payment to investors in
rate reduction bonds may make different creditworthiness standards applicable
for purposes of fixed transition amounts than for purposes of payment of the
utilities' charges. But we cannot set standards in a vacuum. Rating agencies
undoubtedly have criteria, such as market presence and diversity, supply assets,
physical liquidity, competitiveness, risk management operations, control
systems, pretax interest coverage, free operating cash flow, and other financial
parameters that they will apply to gauge the default risk percentage represented
by participation of energy service providers in the payment chain. We need to
better understand what those criteria are and how they apply to electric service
providers in California before we are in a position to take more definite steps.
We observe that the proposed policies appear reasonable, but we are not prepared
to adopt them on this record.
APPLICATION OF PROCEEDS
Applicants propose to use the proceeds of rate reduction bonds to
retire existing debt and equity in proportions that would maintain current
debt/equity ratios. As a result, the Applicants' respective costs of capital
would not change. ORA
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and TURN argue, however, that there is unlikely to be enough existing debt with
high interest rates to make it economically feasible to replace existing debt
with new rate reduction bond debt, and it makes little sense for ratepayers to
incur an approximate 7.5% interest rate on new rate reduction bonds in order to
obtain funds to retire existing debt that may have a lower rate.
ORA recommends that Applicants should be required to apply a
greater proportion of the proceeds of rate reduction bonds to equity retirement
than to debt for any debt that bears an interest rate lower the rate reduction
bonds. ORA suggests limiting such application, however, such that the overall
debt/equity ratio not change by more than 5%, initially.
TURN would go further, by limiting the amount of rate reduction
bonds that can be issued to the amount of existing debt that bears a higher
interest rate than the rate reduction bonds. If that means that the issuance of
rate reduction bonds would not finance a 10% rate reduction of residential and
small commercial customers, TURN suggests that the shortfall should be made up
by reduced recovery by Applicants of uneconomic costs pursuant to PU Code
Section 367.
PG&E opposes decreasing its existing 48% common equity ratio
because doing so may affect existing bond ratings on other outstanding debt, and
the appropriate balance between debt and equity ought be addressed in PG&E's
cost of capital proceeding. ORA dismisses PG&E's concerns about ratings.
Edison argues that the comparison of the interest rate on the
rate reduction bonds, which is based on a 10-year maturity, with the cost of
retired debt is inappropriate because rate reduction bonds simply accelerate
the reduction in capitalization to a one-year time frame from a four-year time
frame. ORA finds Edison's position to be absurd.
SDG&E disagrees with ORA'S position because there may be
instances in which SDG&E may need to retire lower-cost tax-exempt debt and
because SDG&E has a high proportion of variable-rate debt in relation to its
total outstanding debt. To address its situation, SDG&E proposes to invest
proceeds of unutilized rate reduction bonds proceeds in short-and intermediate-
term investments to offset the
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variable-rate interest paid to holders of tax-exempt debt. This will keep
low-cost tax-exempt debt outstanding and avoid the issuance of taxable debt, the
cost of which would be higher than the interest rate borne by the rate reduction
bonds, and SDG&E would remove the cost of variable-rate, tax-exempt debt in an
amount equal to its short-and intermediate-term investment balances. In
addition, SDG&E commits to making monthly adjustments to its balancing account
for uneconomic costs recovered pursuant to PU Code Section 367 that fully
reflect the impacts on embedded cost of debt from retiring existing debt with
rate reduction bond proceeds. ORA acknowledges that SDG&E's approach mitigates
the retirement of low-cost debt, but argues that it does not do as much good as
retiring a greater proportion of equity.
We agree with PG&E that this is not the proper forum for
redesigning capital structures of Applicants. Moreover, we are unconvinced that
it is necessary to attempt to trace the use of proceeds, in light of the fact
that ratepayer benefits are calculated assuming that utility debt, preferred
stock, and common equity are reduced in proportions that will maintain the
authorized capital structure. Following issuance of rate reduction bonds, the
issues associated with use of proceeds can be considered in our transition cost
proceeding, A.96-08-001 et al. (See D.96-12-077, mimeo. at 9.)
MODIFICATION OF STRUCTURE OF TRANSACTION TO ACHIEVE DESIRED TAX
TREATMENT
Applicants have each assumed that proceeds of rate reduction
bonds will not be taxed as current income when received but will, instead, be
taxed ratably as fixed transition amounts are earned through the provision of
electric service over time. Applicants have pending requests for private letter
rulings with the IRS in which they ask confirmation of their proposed tax
treatment. It is not known when, or if, the IRS will give a definitive response.
None of the Applicants request a tax change memorandum account or other
ratemaking mechanism that would permit recording the difference in tax liability
associated with the alternative outcomes of the IRS requests. In their briefs,
Applicants assume the risk of adverse tax treatment on behalf of their
respective shareholders if they proceed with the transaction and the IRS should
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later assert that proceeds of rate reduction bonds are recognizable as taxable
income when received./23/
ORA suggests that in the event any modification to the proposed
structure of the transaction is made in order to qualify for the desired tax
treatment, Applicants should be required to return to the Commission for
approval if such modification resulted in a decrease by 10% or more of ratepayer
benefits on an NPV basis. TURN would not permit any latitude in changes to the
proposed structure without prior Commission review and approval.
We cannot speculate on what the changes to accommodate the
requested tax treatment might involve. To the extent that a changes involves a
"minor" adjustment, such as increasing the equity contribution by Applicants to
their related SPEs from 1/2% to 1%, we suppose that it would be substantially
the transaction described by the Applicants in their applications, and should
not require our further review. On the other hand, if the change were somehow to
require that rate reduction bonds be issued in the form of equity of the SPE,
for example, we would want to know how that change comported with the
requirements of PU Code Section 840(e). It is impossible to set down a fixed
rule as to what changes might constitute a change to the structure as described
by the Applicants that is sufficiently significant to call the validity of the
financing order into doubt. If Applicants accept the terms and conditions of
their financing orders before they are satisfied that they have received the tax
treatment requested, they proceed at their own risk, and they have accepted this
risk.
ADDITIONAL ISSUANCE OF RATE REDUCTION BONDS
Applicants state that in the event of higher sales to residential
and small commercial customers than forecast, it will be necessary to issue more
rate reduction bonds to cover the actual revenue reduction associated with the
10% rate reduction. In this case, the Applicants request authorization to issue
such additional rate reduction bonds. TURN opposes the request, calling it a
"blank check." The
__________________
/23/ Whether or not Applicants rely upon an opinion of tax counsel, reasonably,
or otherwise.
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Applicants respond that objective standards are provided by the requirement for
a showing of positive NPV using the methodology proposed for initial issuance,
the same transaction structure, and the cap on total issuance provided in their
respective applications.
There is no distinction, in principle, between issuance of rate
reduction bonds in a series all at the end of 1997 and in a series that spans
1997 through 2001./24/ However, the important limiting factor is the amount of
transition property that we authorize to be created and how that property is
applied. If Applicants size the initial issuance of rate reduction bonds based
upon some estimate of what is required to support a 10% rate reduction, some
portion of the authorized total amount of transition property must be set aside
to satisfy the direct claims of the holders of rate reduction bonds and their
indirect claims through that portion, if any, which is to be devoted to
overcollateralization. To the extent that authorized amounts of transition
property remain available, future series of rate reduction bonds could be issued
in the same structure, subject to the same method of determining positive NPV,
to the extent supported by the remaining authorized amount of transition
property. To the extent that authorized amounts of transition property are
insufficient to support future issuance of rate reduction bonds, Applicants are
required to make further application for financing orders to create new
transition property, as required by PU Code Section 841(a)
NEED FOR SOME ISSUES RAISED IN THE APPLICATIONS TO BE DETERMINED IN
OTHER PROCEEDINGS
ORA recommends that charges in Applicants' embedded debt cost
resulting from application of proceeds of rate reduction bonds and other cost of
capital issues be addressed and resolved through embedded cost studies. Although
PG&E has a current cost of capital proceeding, Edison and SDG&E do not have
annual cost of capital proceedings. Accordingly, it will be appropriate to
consider Applicants' revenue
________________________
/24/ Timing of issuance may affect NPV calculations, however.
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requirements in the light of any changes to their respective costs of capital
and changes, if any, in their average cost of debt. This may be done for PG&E in
its current cost of capital application and, for Edison and SDG&E, in the
applications for 1999 required by D.97-08-056.
FINDINGS OF FACT
1. Applicants propose to enter into separate transactions for the
issuance of rate reduction bonds.
2. No disputed issues of material fact were identified.
3. The applications of Applicants were consolidated by the assigned ALJ
for the purposes of hearing and briefing.
4. PU Code Section 841(a) provides that the Commission shall designate
fixed transition amounts as recoverable in one or more financing orders if the
Commission determines, as part of its findings in connection with the financing
order, that the designation of the fixed transition amounts, and issuance of
rate reduction bonds in connection with some or all of the fixed transition
amounts would reduce rates that residential and small commercial customers would
have paid if the financing order were not adopted.
CONCLUSIONS OF LAW
1. Based on the applications, the protests, responses, and briefs of the
parties, it is a legal question whether the designation of the fixed transition
amounts, and issuance of rate reduction bonds in connection with some or all of
the fixed transition amounts would reduce rates that residential and small
commercial customers would have paid if the respective financing order were not
adopted.
2. The rates that residential and small commercial customers would have
paid if the respective financing order is not adopted are the frozen rates
described in D.96-12-077 (as adjusted in SDG&E's case, on February 1, 1997).
3. Because Applicants would use financing orders as the bases for
separate rate reduction bond transactions, a separate financing order should be
prepared for each application.
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4. PU Code Section 367(e)(1) does not preclude the issuance of financing
orders.
5. PU Code Section 367(e)(2) does not preclude the issuance of financing
orders.
6. PU Code Section 371(a) does not preclude the issuance of financing
orders.
7. PU Code Section 779.2 does not prevent disconnection of service for
nonpayment of fixed transition amounts.
8. No changes should be made in this proceeding to the credit standards
for third-party services that were adopted in D.97-05-039.
9. No changes should be made in this proceeding to the capital structure
of applicants.
10. Applicants have assumed the risk of adverse tax treatment on behalf of
their respective shareholders if they proceed with the transactions and the IRS
should later assert that proceeds of rate reduction bonds are recognizable as
taxable income when received.
11. Rate reduction bonds should be permitted to be issued in one or more
series, up to the aggregate maximum amount of transition property created by
each financing order.
INTERIM ORDER
IT IS ORDERED that Application (A.) 97-05-006, (A.) 97-05-018, and A.97-05-
022 shall be unconsolidated so that separate financing orders may be issued. The
service list
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for each application shall be the service list that was in effect for the
consolidated applications.
This order is effective today.
Date September 3, 1997, at San Francisco, California.
P.GREGORY CONLON
President
JESSIE J. KNIGHT, JR.
HENRY M.DUQUE
JOSIAH L. NEEPER
RICHARD A. BILAS
Commissioners
Commissioner Josiah L. Neeper will file a concurring opinion, joined in
part by Commissioners Jessie J. Knight, Jr., Henry M. Duque, and Richard
A. Bilas.
/s/ JOSIAH L. NEEPER
Commissioner
/s/ JESSIE J. KNIGHT, JR.
Commissioner
/s/ HENRY M. DUQUE
Commissioner
/s/ RICHARD A. BILAS
Commissioner
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