<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SDG&E-1
(ISSUER OF SECURITIES)
SDG&E FUNDING LLC
(DEPOSITOR OF THE TRUST DESCRIBED HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF FORMATION)
<TABLE>
<S> <C>
DELAWARE 33-0762746
(STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
SDG&E FUNDING LLC
101 ASH STREET, ROOM 111, SAN DIEGO, CALIFORNIA 92101, (619) 696-2328
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GARY PERLMUTTER
VICE PRESIDENT & COUNSEL
SDG&E FUNDING LLC
101 ASH STREET, ROOM 111, SAN DIEGO, CALIFORNIA 92101, (619) 696-2328
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
<TABLE>
<S> <C> <C>
GILBERT T. RAY ERIC D. TASHMAN GREGORY M. SHAW
JOHN D. HARDY, JR. CATHY M. KAPLAN CRAVATH, SWAINE & MOORE
O'MELVENY & MYERS LLP BROWN & WOOD LLP WORLDWIDE PLAZA
400 SOUTH HOPE STREET 555 CALIFORNIA STREET, 50TH FLOOR 825 EIGHTH AVENUE
LOS ANGELES, CALIFORNIA 90071 SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10019
</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>
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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
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<S> <C> <C> <C> <C>
Rate Reduction Pass-Through Certificates.. $1,000,000 100%(1) $1,000,000(1) $303.03
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SDG&E Funding LLC Notes................... $1,000,000 (2) (2) None
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) No additional consideration will be paid by the purchasers of the Rate
Reduction Certificates for the Notes which secure the Rate Reduction
Certificates.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[FORM OF PROSPECTUS SUPPLEMENT]
SUBJECT TO COMPLETION DATED JULY 3, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SDG&E-1
RATE REDUCTION CERTIFICATES, SERIES 199 -
[$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES
$ CLASS % CERTIFICATES]
SDG&E FUNDING LLC
(ISSUER OF THE NOTES)
SAN DIEGO GAS & ELECTRIC COMPANY
(SELLER AND SERVICER)
The California Infrastructure and Economic Development Bank Special Purpose
Trust SDG&E-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 SDG&E Funding LLC Notes, Series 199 - (the "Underlying
Notes"), issued by SDG&E Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer"). Each Underlying Note will be secured
primarily by the Transition Property owned by the Note Issuer, as described
under "Description of the Transition Property" herein and in the Prospectus.
The Underlying Notes, 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 SDG&E-1 (the "Trust").
(Continued on following page)
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES, AND
THERE IS NO ASSURANCE THAT ONE WILL DEVELOP. PROSPECTIVE INVESTORS SHOULD
CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH UNDER THE CAPTION "RISK
FACTORS," WHICH BEGINS ON PAGE 18 IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT TRUST(1)(2)
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<S> <C> <C> <C>
Per Class [ ] Certificate........................ % % %
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Per Class [ ] Certificate........................ % % %
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Total.............................................. $ $ $
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</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].
[UNDERWRITER]
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
January, April, July and October 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. TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT CONFLICT WITH STATEMENTS IN THE PROSPECTUS, THE STATEMENTS IN THIS
PROSPECTUS SUPPLEMENT SHALL CONTROL.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND ANY OTHER ASSETS OF THE
NOTE ISSUER ARE THE SOLE SOURCE OF DISTRIBUTIONS ON THE OFFERED CERTIFICATES.
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 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. NONE OF SUCH ENTITIES WILL HAVE ANY OBLIGATIONS IN RESPECT
OF THE OFFERED CERTIFICATES, 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 OR AGENCY OF THE STATE OF CALIFORNIA
IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, PURCHASE PRICE
OF, OR INTEREST ON, THE UNDERLYING NOTES, THE OFFERED CERTIFICATES OR THE
TRANSITION PROPERTY NOR IS THE STATE OF CALIFORNIA OR ANY POLITICAL
SUBDIVISION THEREOF IN ANY MANNER OBLIGATED TO MAKE ANY APPROPRIATION FOR THE
PAYMENT THEREOF.
Prospective investors should refer to the "Index of Principal Definitions"
herein and in the Prospectus for the location of the definitions of
capitalized terms that appear in this Prospectus.
S-2
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered 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 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.
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT OR IN DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, THE WORDS "EXPECTS," "INTENDS,"
"ANTICIPATES," "ESTIMATES" AND ANALOGOUS EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE SECURITIES ACT OF 1933, AS
AMENDED. ANY SUCH STATEMENTS, WHICH MAY INCLUDE STATEMENTS CONTAINED IN "RISK
FACTORS," "DESCRIPTION OF THE TRANSITION PROPERTY," "CERTAIN YIELD AND
MATURITY CONSIDERATIONS," "THE SELLER AND THE SERVICER" AND "SERVICING" HEREIN
AND IN THE PROSPECTUS, INHERENTLY ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, COMPETITION, CHANGES IN POLITICAL, SOCIAL
AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH
GOVERNMENTAL REGULATIONS, LITIGATION AND VARIOUS OTHER EVENTS, CONDITIONS AND
CIRCUMSTANCES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE NOTE ISSUER AND THE
TRUST AND THE SERVICER, THE SELLER, THE NOTE TRUSTEE, THE CERTIFICATE TRUSTEE
AND THE INFRASTRUCTURE BANK. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF
THE DATE OF THIS PROSPECTUS SUPPLEMENT. THE NOTE ISSUER AND THE TRUST
EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE NOTE ISSUER'S OR THE TRUST'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
S-3
<PAGE>
TRANSACTION OVERVIEW
The following summary is qualified by reference to the detailed information
appearing elsewhere herein and in the Prospectus.
Offered Certificates. The Offered Certificates represent the indirect right
to receive distributions of payments made in respect of certain nonbypassable
charges assessed in the regular utility bills of residential and small
commercial customers located in the historical service territory of the
Seller. These charges are designed to be sufficient to pay principal of and
interest on the Certificates, all related fees and expenses and the
Overcollateralization Amount described herein. These charges will be subject
to adjustment over the term of the Offered Certificates to enhance the
likelihood of timely recovery of such amounts and to reflect other factors
affecting the ultimate recovery of such amounts including changes in the
amount of electricity sold to such customers.
Other Series of Notes and Certificates. The Trust is authorized to issue
other Series of Certificates in addition to the Series comprised of the
Offered Certificates[, and has issued other Series in an aggregate
initial principal amount of $ prior to the issuance of the Offered
Certificates]. On each Payment Date, the Note Issuer will allocate amounts
received with respect to the FTA Charges, after payment of interest on the
Notes and related fees and expenses, pro rata (by principal amount) among the
outstanding Series of Notes. Distributions with respect to each Class of
Certificates will be solely from amounts received in payments on the related
Class of Notes. The outstanding principal amount of all Series of Notes
should, at any time, equal the outstanding principal amount of all Series of
Certificates.
Statutory Background. The nonbypassable charges were authorized by the State
of California pursuant to A.B. 1890, Chapter 854, California Statutes of 1996
(as amended, the "Statute") which permits the California investor-owned
utilities (collectively, the "Utilities"), including SDG&E, to finance the
recovery of a portion of their respective "Transition Costs" through the
issuance of the Certificates, in conjunction with a reduction in electricity
rates for residential and small commercial customers. Transition Costs consist
generally 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.
Trust. The Trust has been established by the Infrastructure Bank, the
Certificate Trustee and the Delaware Trustee. The assets of the Trust consist
of the Notes, which are secured primarily by the Transition Property. The
Certificates of any Series will be issued by the Trust and sold to
underwriters by the Trust. The Notes will be issued to the Trust by the Note
Issuer in exchange for the proceeds of the sale of the Certificates. The
Seller will sell the Transition Property to the Note Issuer in exchange for
the proceeds of the Notes. The Transition Property sold to the Note Issuer in
connection with any Series of Certificates is a separate property right
created upon the entry of the Financing Order by the CPUC and effectiveness of
the related Issuance Advice Letter.
S-4
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This 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 sets forth the pages on which the definitions of
certain principal terms appear.
The Offered Certificates.... The California Infrastructure and Economic
Development Bank Special Purpose Trust SDG&E-1
Rate Reduction Certificates, Series 199 - (the
"Offered Certificates"). The 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 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 or
credit nor taxing power of the State of
California is pledged to the payment of principal
of or interest on the Offered Certificates.
Seller and Servicer......... San Diego Gas & Electric Company, a California
corporation ("SDG&E" or, in its capacity as
seller of the Transition Property, the "Seller"
or, in its capacity as servicer, the "Servicer").
For a more complete discussion of SDG&E and its
roles as Seller and Servicer, see "The Seller and
Servicer" herein and in the Prospectus.
Issuer of Certificates...... "California Infrastructure and Economic
Development Bank Special Purpose Trust SDG&E-1"
(the "Trust") established by the California
Infrastructure and Economic Development Bank (the
"Infrastructure Bank"). 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......... , a (the "Certificate
Trustee").
Delaware Trustee............ , a (the "Delaware
Trustee").
Note Issuer................. SDG&E Funding LLC, a Delaware special purpose
limited liability company whose single member is
SDG&E (the "Note Issuer").
The principal executive office of the Note Issuer
is located at 101 Ash Street, Room 111, San
Diego, California 92101, and its telephone number
is (619) 696-2328.
S-5
<PAGE>
The Underlying Notes........ SDG&E Funding LLC Notes, Series 199 - (the
"Underlying Notes"), issued by the Note Issuer.
The Underlying Notes are comprised of
classes (each, a "Class"). As of the Series
Issuance Date for the Underlying Notes, the
aggregate principal balance thereof (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................ , 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 Charge,
as adjusted from time to time, (ii) to be paid
the FTA Payments, and (iii) to obtain adjustments
to the FTA Charge as provided in the PU Code.
FTA Charge.................. As more fully described under "Description of the
Transition Property" herein and in the
Prospectus, the amount permitted to be recovered
from the Customers which is 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 January 25, April 25, July 25 and October 25
(or, if any such date is not a Certificate
Business Day, the next succeeding Certificate
Business Day), commencing , 1998,
the dates on which distributions will be made to
holders of Offered Certificates (each, a
"Distribution Date"). Each Distribution Date with
respect to the Certificates will also be a date
on which payments are made with respect to the
Notes (each, a "Payment Date").
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
S-6
<PAGE>
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.
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. 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. 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, at any time on or after the Payment
Date on which the Outstanding Note Principal
Balance has been reduced to five percent of the
Original Note Principal Balance. See "Description
of the Certificates--Optional Redemption" herein.
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 full by
their respective Scheduled Final Distribution
Dates, the Financing Order and the Issuance
Advice Letter relating to the Offered
Certificates permit the Seller to recover
$ through FTA Payments in excess of the
amount expected to be required to pay interest on
and principal of all outstanding Classes of
Offered
S-7
<PAGE>
Certificates and related fees and expenses. Such
excess is the Overcollateralization Amount
related to the Offered Certificates. See
"Description of the Notes--Overcollateralization
Amount" herein and in the Prospectus.
Other. See "Description of the Certificates--
Other Credit Enhancement" herein and in the
Prospectus.
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 with respect to the Offered
Certificates for each Collection Period in an
amount equal to the sum of [ ] percent per annum
of the Original Note Principal Balance (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 Collections prior to
remittance thereof to the Collection Account and
the portion of late fees, if any, paid by
Customers relating to the Offered Certificates.
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.
Yield Considerations........ The yield on each Class of Offered Certificates
will be affected by, among other things, the
amount and timing of receipt of FTA Collections.
Since the FTA Charge will consist of a charge per
kilowatt hour of usage by Customers, the
aggregate amount of FTA Collections and the
amount and timing of principal amortization on
the Certificates will depend, in part, on actual
usage of electricity by Customers and the amount
of delinquencies and charge-offs. Although the
amount of the FTA Charge will adjust 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 actual energy
usage and obtain adjustments to the FTA Charge
that would cause FTA Collections to be received
at any particular rate. See "Certain Yield and
Maturity Considerations" and "Description of the
Transition Property--Adjustments to the FTA
Charge" herein and in the Prospectus.
A higher rate of FTA Collections than anticipated
is likely to have an adverse effect on the yield
of any Class of Offered Certificates that is
purchased at a premium and a lower rate of FTA
Collections than anticipated is likely to have an
adverse effect on the yield of any Class of
Offered Certificates that is purchased at a
discount from its principal amount.
Denominations............... Each Class of Offered Certificates will be issued
in minimum initial denominations of [$1,000] and
in integral multiples thereof.
Registration of the The [Offered] [Class ] Certificates will
Certificates................ initially be represented by one or more
certificates registered in the name of
S-8
<PAGE>
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. 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 and
" " by (each of , and
, a "Rating Agency") and that the
Class Certificates be rated " " by
, " " by and " " by .
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--Yield
Considerations" and "Ratings" in the Prospectus.
Tax Status of the
Certificates................ The Offered Certificates will be treated as
representing ownership of debt for federal income
tax purposes. Interest on the Offered
Certificates will be included in gross income for
federal income tax purposes. See "Certain Federal
Income Tax Consequences" in the Prospectus.
Interest 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
and Local Taxation" in the Prospectus.
ERISA Considerations........ Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus, the
Offered Certificates are eligible for purchase
with "plan assets" of any Plan (as defined below)
("Plan Assets"). A fiduciary or other person
contemplating purchasing the Offered Certificates
on behalf of or with Plan Assets of any employee
benefit plan or other plan or arrangement
(including but not limited to an insurance
company general account) that is subject to Title
I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code") (collectively, "Plans"), should
carefully review with its legal advisors whether
the purchase or holding of the Offered
Certificates could give rise to a transaction
prohibited or not otherwise permissible under
ERISA or Section 4975 of the Code.
S-9
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust SDG&E-1 Rate Reduction Certificates, Series 199 - (the "Offered
Certificates") together with the Certificates of other Series issued by the
Trust (collectively, the "Certificates"), will be issued by the Trust pursuant
to the Trust Agreement and the Series 199 - Supplement thereto. Pursuant to
the Trust Agreement, the Infrastructure Bank and the Certificate Trustee may
execute further series supplements in order to issue additional Series of
Certificates. This summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the terms and provisions of the
Trust Agreement.
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) . %
</TABLE>
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 January 25, April 25,
July 25 and October 25 (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--Distributions of Interest."
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of 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--Distributions of 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 redeem the Offered Certificates if the Note Issuer elects to
redeem the Underlying Notes, which the Note Issuer may elect to do at any time
on or after the Payment Date on which the Outstanding Note
S-10
<PAGE>
Principal Balance has been reduced to 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.
DESCRIPTION OF THE NOTES
GENERAL
The SDG&E Funding LLC Notes, Series 199 - (the "Underlying Notes"), will be
issued by the Note Issuer to the Trust on (the "Series Issuance
Date"), pursuant to the Note Indenture and the Series 199 - Supplement
thereto. Pursuant to the Note Indenture, the Note Issuer and the Note Trustee
may execute further series supplements in order to issue additional Series of
Notes. This summary 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.
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, as holder of the Notes (the
"Noteholder"), 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 January 25, April 25, July 25 and October 25
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "Payment Date"), commencing
, to the persons in whose names the Underlying Notes are registered at
the close of business on the related Record Date.
On each Payment Date, Noteholders of each Class will be entitled to receive
an amount equal to one-fourth of the product of (a) the applicable Note
Interest Rate and (b) the applicable Class Principal Balance as of the close
of business on the preceding 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.
S-11
<PAGE>
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 expected
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 purchased on the
Series Issuance Date, (ii) payments on the Offered Certificates are made on
the day of each month, commencing , 199 , (iii) the
initial Class Principal Balance is $ and the initial Class
Principal Balance is $ , (iv) all FTA Collections are received 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>
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 ......................................
[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 faster or 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, at any time on
or after the Payment Date on which the Outstanding Note Principal Balance has
been reduced to five percent 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 full by their respective Scheduled Final
Distribution Dates, the Financing Order and the Issuance Advice Letter
relating to the Offered Certificates permit the recovery of $ through
FTA Payments in excess of the
S-12
<PAGE>
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 not bear interest. For a further discussion of the
Overcollateralization Amount, see "Description of the Notes--
Overcollateralization Amount" in the Prospectus.
OTHER CREDIT ENHANCEMENT
[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]
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 Charge pursuant to which nonbypassable
charges will be billed to Customers in an amount sufficient to recover, within
the time period specified in the Issuance Advice Letter, 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 charge-offs. [Subsequent Issuance Advice Letters have
modified the FTA Charge 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 for each of the periods
shown below:
RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
FTA CHARGE
CALENDAR PER KILOWATT
YEAR HOUR
-------- ------------
<S> <C>
</TABLE>
SMALL COMMERCIAL CUSTOMERS
<TABLE>
<CAPTION>
FTA CHARGE
CALENDAR PER KILOWATT
YEAR HOUR
-------- ------------
<S> <C>
</TABLE>
Initially, the FTA Charge will amount to approximately $ per month for
an average residential customer, and approximately $ per month for an
average small commercial customer. The average monthly bill, excluding local
taxes, during 1996 was for a SDG&E residential customer and for a
SDG&E small commercial customer.
S-13
<PAGE>
ADJUSTMENTS TO THE FTA CHARGE
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, the Servicing Agreement and the
Financing Order require the Servicer to seek periodic adjustments to the FTA
Charge based on actual FTA Collections and updated assumptions by the Servicer
as to, among other factors, the electricity usage by Customers and the rate of
delinquencies and charge-offs. The date as of which any calculation is
performed which forms the basis for a requested adjustment to the FTA Charge
is referred to as a "Calculation Date." The adjustments to the FTA Charge 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 following table reflects information regarding the changes to the FTA
Charge which have been requested through Advice Letters since the Financing
Order was issued:
<TABLE>
<CAPTION>
REQUESTED ADJUSTMENT RESULTING
ADJUSTMENT TO FTA CHARGE AGGREGATE
CALCULATION TO FTA CHARGE GRANTED BY CPUC FTA CHARGE EFFECTIVE DATE OF
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 Charge."
CERTAIN YIELD AND MATURITY CONSIDERATIONS
The rate of principal distributions on the Offered Certificates, the
aggregate amount of each interest distribution on the Offered Certificates and
the yield to maturity of the Offered Certificates are related to the amount
and timing of FTA Collections.
In addition, the Note Issuer may, at its option, redeem the Underlying
Notes, and thus effect the early retirement of the Offered Certificates, on
any Distribution Date [(but in no event earlier than the Distribution Date
occurring )] following the first date on which the outstanding
principal balance of the Underlying Notes (as of any date, the "Outstanding
Note Principal Balance") is less than five percent of the Original Note
Principal Balance. See "Description of the Certificates--Optional Redemption"
herein.
A higher rate of FTA Collections than anticipated is likely to have an
adverse effect on the yield of any Class of Offered Certificates that is
purchased at a premium and a lower rate of FTA Collections than anticipated is
likely to have an adverse effect on the yield of any Class of Offered
Certificates that is purchased at a discount from its principal amount. The
effect on an investor's yield due to FTA Collections occurring at a rate that
is faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Offered Certificates will not be
offset entirely by a subsequent like reduction (or increase) in the rate of
FTA Collections. The weighted average life of the Offered Certificates will
also be affected by the amount and timing of defaults by Customers.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life
of the Offered Certificates will be influenced by, among other factors, the
rate at which FTA Collections are received.
S-14
<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.
San Diego Gas & Electric 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
Collection Period, in an amount equal to the sum of percent per annum of
the Original Note Principal Balance, together with net investment income on
the portion of FTA Collections prior to remittance thereof to the Collection
Account and the portion of late fees, if any, paid by Customers related to the
Offered Certificates. The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
solely to the extent funds are available therefor as described under
"Description of the Notes--Allocations; Payments" herein. The Servicing Fee
will be paid prior to the distribution of any amounts in respect of interest
on and principal of the Underlying Notes.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described in
the Prospectus, there will be an unbundling of generation, transmission,
distribution and billing services. A recent decision of the CPUC allows
alternative energy service providers ("ESPs") to elect to present a
consolidated bill to their retail customers, including the FTA Charge. Any ESP
who elects consolidated billing will be responsible for paying the Servicer
monthly amounts payable by customers of the ESP, including monthly FTA
Payments. Neither the Seller nor the Servicer will pay any shortfalls
resulting from the failure of any ESPs to forward FTA Payments to SDG&E, as
Servicer, which may result in delays in distributions to Certificateholders.
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.
S-15
<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 or 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 SDG&E, the Certificate Trustee, the Underwriters or their respective
affiliates may be deemed to be benefiting from the issuance of the Offered
Certificates and is a Party in Interest with respect to the investing Plan. In
particular, the Offered Certificates may not be purchased with Plan Assets of
any Plan if any of SDG&E, the Certificate Trustee, the Underwriters or their
respective affiliates (a) has investment or administrative discretion with
respect to the Plan Assets used to effect such purchase; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan Assets, for a fee and pursuant to an agreement or understanding that
such advice (1) will serve as a primary basis for investment decisions with
respect to such Plan Assets, and (2) will be based on the particular
investment needs of such Plan; or (c) 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 SDG&E, the
Certificate Trustee, the
S-16
<PAGE>
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. Moreover, an exception may
apply under the Plan Asset Regulation with respect to Class [ ] Offered
Certificates offered hereby.
Before purchasing any Class of Offered Certificates of this Series,
including the Class [ ] Offered Certificates, 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 SDG&E,
the Certificate Trustee, the Underwriters or their respective affiliates and
consult its legal advisors regarding the purchase in light of the
considerations described herein and in the Prospectus. The DOL has issued 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,
particularly if the "publicly-offered securities" exception is not available
under the Plan Asset Regulation.
CONCLUSION
In light of the foregoing, fiduciaries or other Plan investors considering
whether to purchase the Offered Certificates with Plan Assets of any Plan
should consult their own legal advisors regarding whether the Trust assets
would be considered Plan Assets of Plan investors, the consequences that would
apply if the Trust's assets were considered Plan Assets, and the availability
of exemptive relief from the prohibited transaction rules or an exception
under the Plan Asset Regulation. Fiduciaries and other Plan investors should
also consider the fiduciary standards under ERISA or other applicable law in
the context of the Plan's particular circumstances before authorizing an
investment of a Plan Assets in the Offered Certificates. Among other factors,
such persons should consider whether the investment (a) satisfies the
diversification requirement of ERISA or other applicable law, (b) is in
accordance with the Plan's governing instruments, and (c) is prudent in light
of the "Risk Factors" and other factors discussed herein and in the
Prospectus.
For further information see "ERISA Considerations" in the Prospectus.
S-17
<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].................................................
----------
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 Trust 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 and " " by
(each of , and , a "Rating Agency") and that
the Class Certificates be rated " " by , " " by and
" " by .
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-18
<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 O'Melveny & Myers LLP, counsel to the Seller. 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 Brown & Wood LLP, counsel to the Trust. 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-19
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Book-Entry Certificates.......................................... S-9
Calculation Date................................................. S-14
Cede............................................................. S-19
Certificate Interest Rate........................................ S-10
Certificate Trustee.............................................. S-5
Certificateholders............................................... S-3
Certificates..................................................... S-10
Class............................................................ S-5, S-6
Class Principal Balance.......................................... S-5
Distribution Date................................................ S-2, S-6, S-10
DTC.............................................................. S-3, S-9
Exchange Act..................................................... S-3
Infrastructure Bank.............................................. S-5
Note Issuer...................................................... S-1, S-5
Note Trustee..................................................... S-6
Noteholder....................................................... S-11
Notes............................................................ S-11
Offered Certificates............................................. S-1, S-5, S-10
Original Certificate Principal Balance........................... S-5
Original Note Principal Balance.................................. S-6
Outstanding Note Principal Balance............................... S-14
Payment Date..................................................... S-6, S-11
Rating Agency.................................................... S-9, S-18
Record Date...................................................... S-6
SDG&E............................................................ S-5
Seller........................................................... S-5
Series Issuance Date............................................. S-11
Servicer......................................................... S-5
Servicing Fee.................................................... S-8
Statute.......................................................... S-4
Trust............................................................ S-5
Underlying Notes................................................. S-1, S-6, S-11
Underwriters..................................................... S-18
Utilities........................................................ S-4
</TABLE>
S-20
<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 JULY 3, 1997
PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SDG&E-1
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
-----------
SDG&E FUNDING LLC
(ISSUER OF THE NOTES)
-----------
SAN DIEGO GAS & ELECTRIC COMPANY
(SELLER AND SERVICER)
The California Infrastructure and Economic Development Bank Special Purpose
Trust SDG&E-1 Rate Reduction Certificates (the "Certificates") offered hereby
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 SDG&E-1 (the "Trust") established by the California Infrastructure and
Economic Development Bank (the "Infrastructure Bank").
(Continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 18 HEREIN.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND ANY 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. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK OR THE SELLER. 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. NONE OF SUCH ENTITIES 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 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.
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.
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"
herein for the location of the definitions of capitalized terms that appear in
this Prospectus.
, 1997
<PAGE>
(Continued from previous page)
The assets of the Trust will consist solely of the SDG&E Funding LLC Notes
(the "Notes") issued by SDG&E Funding LLC, a Delaware special purpose limited
liability company (the "Note Issuer"), and the proceeds thereof. The sole
member of the Note Issuer is San Diego Gas & Electric Company, a California
corporation ("SDG&E"). The Notes will be secured primarily by the Transition
Property, as described under "Prospectus Summary--Transition Property" and
"Description of the Transition Property" herein.
SDG&E 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.
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. The
Note Issuer generally 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 and the proceeds thereof. 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 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
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering made hereby
shall be deemed to be incorporated by reference in this Prospectus and to be
part hereof. Any statement contained herein or in a Prospectus Supplement, or
in a document incorporated or deemed to be incorporated by reference herein or
therein shall be deemed to be modified or superseded for purposes of this
Prospectus and any Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document that also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
or any Prospectus Supplement.
The Note Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any of or all the documents incorporated herein by reference
(other than exhibits to such documents). Requests for such copies should be
directed to SDG&E Funding LLC at P.O. Box 1831, Room 111, San Diego,
California 92112 or by telephone at (619) 696-2328.
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS AND ANY RELATED "PROSPECTUS
SUMMARY," PROSPECTUS SUPPLEMENT OR IN DOCUMENTS INCORPORATED HEREIN BY
REFERENCE, THE WORDS "EXPECTS," "INTENDS," "ANTICIPATES," "ESTIMATES" AND
ANALOGOUS EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS AS
DEFINED IN THE SECURITIES ACT. ANY SUCH STATEMENTS, WHICH MAY INCLUDE
STATEMENTS CONTAINED IN THIS PROSPECTUS AND ANY RELATED "PROSPECTUS SUMMARY,"
"RISK FACTORS," "DESCRIPTION OF THE TRANSITION PROPERTY," "CERTAIN YIELD AND
MATURITY CONSIDERATIONS," "THE SELLER AND SERVICER" AND "SERVICING" HEREIN AND
IN SECTIONS INDICATED IN THE RELATED PROSPECTUS SUPPLEMENT, INHERENTLY ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS,
COMPETITION, CHANGES IN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS, REGULATORY
INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, LITIGATION AND
VARIOUS OTHER EVENTS, CONDITIONS AND CIRCUMSTANCES, MANY OF WHICH ARE BEYOND
THE CONTROL OF THE NOTE ISSUER AND THE TRUST AND THE SERVICER, THE SELLER, THE
NOTE TRUSTEE, THE CERTIFICATE TRUSTEE AND THE INFRASTRUCTURE BANK. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS AND
THE RELATED PROSPECTUS SUPPLEMENT. THE NOTE ISSUER AND THE TRUST EXPRESSLY
DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR
REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO REFLECT ANY
CHANGE IN THE NOTE ISSUER'S OR THE TRUST'S EXPECTATIONS WITH REGARD THERETO OR
ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT
IS BASED.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING STATEMENTS................................................. 4
TRANSACTION OVERVIEW....................................................... 7
PROSPECTUS SUMMARY......................................................... 8
RISK FACTORS............................................................... 18
Transition Property........................................................ 18
Servicing.................................................................. 19
Risks Related to the Electric Industry Generally........................... 20
Bankruptcy; Creditors' Rights.............................................. 20
The Certificates........................................................... 22
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE.................... 24
DESCRIPTION OF THE TRANSITION PROPERTY..................................... 24
General.................................................................... 24
Financing Order and Advice Letters......................................... 25
Transition Property........................................................ 26
Nonbypassable FTA Charge................................................... 26
Adjustments to the FTA Charge.............................................. 26
Sale and Assignment of Transition Property................................. 27
Seller Representations and Warranties...................................... 28
CERTAIN YIELD AND MATURITY CONSIDERATIONS.................................. 29
THE TRUST.................................................................. 29
THE INFRASTRUCTURE BANK.................................................... 30
THE NOTE ISSUER............................................................ 30
THE SELLER AND SERVICER.................................................... 30
General.................................................................... 30
SDG&E Customer Base and Electric Energy Consumption........................ 31
Forecasting Consumption.................................................... 31
Forecast Variance.......................................................... 32
Credit Policy; Billing; Collections; Restoration of Service................ 32
Delinquency and Loss Experience............................................ 34
Customers.................................................................. 34
SERVICING.................................................................. 34
Servicing Procedures....................................................... 34
Servicing Standards and Covenants.......................................... 34
Remittances to Collection Account.......................................... 35
No Servicer Advances....................................................... 35
Servicing Compensation..................................................... 35
Aggregators and Other Suppliers............................................ 36
Servicer Representations and Warranties.................................... 36
Statements by Servicer..................................................... 36
Evidence as to Compliance.................................................. 36
Certain Matters Regarding the Servicer..................................... 37
Servicer Defaults.......................................................... 37
Rights Upon Servicer Default............................................... 38
Waiver of Past Defaults.................................................... 38
Amendment.................................................................. 38
Termination................................................................ 39
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE NOTES.................................................... 39
General..................................................................... 39
Security.................................................................... 39
Interest and Principal...................................................... 40
Optional Redemption......................................................... 40
Overcollateralization Amount................................................ 40
Other Credit Enhancement.................................................... 41
Collection Account.......................................................... 41
Allocations; Payments....................................................... 42
Actions by Noteholders...................................................... 43
Note Events of Default; Rights Upon Note Event of Default................... 44
Certain Covenants of the Note Issuer........................................ 45
Reports to Noteholders...................................................... 46
Annual Compliance Statement................................................. 47
DESCRIPTION OF THE CERTIFICATES............................................. 47
General..................................................................... 47
Payments and Distributions.................................................. 47
Voting of the Notes......................................................... 49
Events of Default........................................................... 49
Optional Redemption......................................................... 51
Reports to Certificateholders............................................... 51
Amendments.................................................................. 51
List of Certificateholders.................................................. 52
Registration and Transfer of the Certificates............................... 52
Book-Entry Registration..................................................... 52
Definitive Certificates..................................................... 55
Conditions of Issuance of Additional Series................................. 56
FEDERAL INCOME TAX CONSEQUENCES............................................. 56
General..................................................................... 56
Treatment of the Certificates as Debt....................................... 57
Taxation of Interest Income of U.S. Certificateholders...................... 57
Sale or Exchange of Certificates............................................ 58
Non-U.S. Certificateholders................................................. 58
Information Reporting and Backup Withholding................................ 59
STATE AND LOCAL TAXATION.................................................... 60
California Taxation......................................................... 60
Other States................................................................ 60
ERISA CONSIDERATIONS........................................................ 60
USE OF PROCEEDS............................................................. 61
PLAN OF DISTRIBUTION........................................................ 61
RATINGS..................................................................... 61
LEGAL MATTERS............................................................... 62
INDEX OF PRINCIPAL DEFINITIONS.............................................. 63
</TABLE>
6
<PAGE>
TRANSACTION OVERVIEW
The following summary is qualified by reference to the detailed information
appearing elsewhere herein and by reference to the information with respect to
each Series of Certificates contained in the related Prospectus Supplement to
be prepared and delivered in connection with the offering of such Series of
Certificates.
Certificates. The Certificates of each Class represent an undivided interest
in the related Class of Notes and the proceeds thereof. The Trust's assets are
comprised of the Notes issued by the Note Issuer (the "Notes"). The Notes are
secured by the Note Issuer's 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 designed to be sufficient to pay
principal and interest on the Certificates, all related fees and expenses and
the Overcollateralization Amount described herein. These charges will be
subject to adjustment over the term of each Series of Certificates to enhance
the likelihood of timely recovery of such amounts.
Statutory Background. The nonbypassable charges were authorized by the State
of California pursuant to Assembly Bill 1890, Chapter 854, California Statutes
of 1996 (as amended, the "Statute"), which permits the California investor-
owned utilities (collectively, the "Utilities"), including SDG&E, to finance
the recovery of a portion of their respective "Transition Costs" through the
issuance of the Certificates, in conjunction with a reduction in electricity
rates for residential and small commercial customers. Transition Costs consist
generally 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.
Trust. The Trust is being established by the Infrastructure Bank, the
Delaware Trustee and the Certificate Trustee. The assets of the Trust consist
of the Notes, which are secured primarily by the Transition Property. The
Certificates of any Class will be issued by the Trust and sold to underwriters
named in the related Prospectus Supplement by the Trust. The Notes will be
issued to the Trust by the Note Issuer in exchange for the proceeds of the
sale of the Certificates. The Seller will sell the Transition Property to the
Note Issuer in exchange for the proceeds of the Notes. The Transition Property
sold to the Note Issuer in connection with any Series of Certificates is a
separate property right created upon the entry of the Financing Order and
effectiveness of the related Issuance Advice Letter by the CPUC. A schematic
of the structure of the transaction is shown below.
[CHART DESCRIBES STRUCTURE OF TRANSACTION]
7
<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 included in
this Prospectus sets forth the pages on which the definitions of certain
principal terms appear.
Seller and Servicer......... San Diego Gas & Electric Company, a California
corporation ("SDG&E"). SD&E will sell the
Transition Property (in its capacity as seller,
the "Seller") to SDG&E Funding LLC, a Delaware
limited liability company of which the Seller is
the sole member (the "Note Issuer"), pursuant to
a Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer (the "Sale
Agreement"). SDG&E is a public utility primarily
engaged in the business of supplying (i) electric
energy to customers in San Diego County and
adjacent portions of Orange County, California
and (ii) natural gas to customers in San Diego
County.
The Seller will also act as the servicer of the
Transition Property (in its capacity as servicer,
the "Servicer") pursuant to a Transition Property
Servicing Agreement between the Note Issuer and
the Servicer (the "Servicing Agreement").
See "The Seller and Servicer" herein.
Issuer of Certificates...... A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust
SDG&E-1" (the "Trust") to be established by the
California Infrastructure and Economic
Development Bank (the "Infrastructure Bank"). 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. See "The
Infrastructure Bank" herein.
Certificate Trustee......... The entity named as co-trustee under the Trust
Agreement in each Prospectus Supplement (the
"Certificate Trustee").
Delaware Trustee............ The Delaware entity named as co-trustee under the
Trust Agreement in each Prospectus Supplement
(the "Delaware Trustee").
The Certificates............ The California Infrastructure and Economic
Development Bank Special Purpose Trust SDG&E-1
Rate Reduction Certificates (the "Certificates"),
issuable in Series. The Certificates will be
issuable under the terms of the Trust Agreement.
The Certificates of each Series will represent an
undivided interest in the related Series of
8
<PAGE>
Notes and the proceeds thereof. The Certificates
are entitled to all of the benefits accorded to
"rate reduction bonds" by the Statute.
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.
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 the Transition Property
and the other Note Collateral.
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.
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 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
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.
9
<PAGE>
See "Description of the Certificates" and
"Description of the Notes" herein.
Note Issuer................. SDG&E Funding LLC, a Delaware special purpose
limited liability company whose single member is
SDG&E. The assets of the Note Issuer will consist
of the Transition Property and a limited amount
of capital contributed by SDG&E. The Note Issuer
will either lend the contributed capital to an
affiliate of SDG&E in exchange for an affiliate
demand note or invest such contributed capital in
financial instruments that can be converted to
cash no later than the next scheduled Payment
Date.
The principal executive office of the Note Issuer
is located at 101 Ash Street, Room 111, San
Diego, California 92101, and its telephone number
is (619) 696-2328.
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.
The Note Issuer will use all collections received
with respect to the Transition Property (FTA
Collections, as more specifically defined below)
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 Prospectus
Supplement, until each outstanding Series and
Class of Notes is retired. 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 in each Prospectus Supplement.
FTA Charge/Transition
Property.................... 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 as
"Transition Costs", consist generally 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.
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Under Section 840 of the PU Code, the Seller has
obtained from the CPUC a Financing Order (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. In order to enable the
Seller to recover these amounts, the CPUC will
authorize, in the Financing Order, the imposition
of a nonbypassable, usage-based, per kilowatt
hour charge (the "FTA Charge"). The FTA Charge
will be imposed upon existing and future
residential and small commercial consumers of
electricity in the service territory in which the
Seller provided electricity services as of
December 20, 1995 (the "Customers").
The FTA Charge will be calculated 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 amounts described herein
and fees and expenses related to the issuance and
servicing of the Certificates. Calculation of the
FTA Charge is based on certain assumptions,
including but not limited to projected usage of
electricity by Customers and expected
delinquencies and charge-offs. The FTA Charge
specifically identifies, for each class of
Customers, a charge that will be assessed on
behalf of the Note Issuer to each Customer based
on such Customer's 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 on each
Remittance Date (as defined below).
The Financing Order requires a notification
letter (each, an "Issuance Advice Letter") to be
submitted to the CPUC prior to the issuance of
each Series of Certificates. The first Issuance
Advice Letter will establish the initial FTA
Charge. Subsequent Issuance Advice Letters may
modify the FTA Charge to support the issuance of
additional Series of Certificates. The Issuance
Advice Letters and the True-Up Mechanism Advice
Letters (as defined below) are collectively
referred to as "Advice Letters."
The right to collect payments made by residential
and small commercial consumers of electricity
based on the FTA Charge ("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 to be remitted
to the Collection Account are referred to
generally herein as the "FTA Collections."
"Transition Property" is defined more
specifically in Section 840(g) of the PU Code as
the property right created under the PU Code
including, without limitation, the right, title
and interest of an electrical corporation or its
transferee (i) in and to the FTA Charge, as
adjusted from time to time, (ii) to be paid the
FTA Payments, and (iii) to obtain adjustments to
the FTA Charge as provided in the PU Code.
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Adjustments to FTA Charge... In order to enhance the likelihood that the
actual FTA Collections are neither more nor less
than the amount scheduled to amortize the
Certificates in accordance with the Expected
Amortization Schedules, 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 Charge
based on actual distributions on the Certificates
and updated assumptions by the Servicer as to,
among other factors, projected usage of
electricity by Customers and expected
delinquencies and charge-offs. Each Advice Letter
relating to an adjustment to the FTA Charge is
referred to as a "True-Up Mechanism Advice
Letter". The adjustments to the FTA Charge 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 Charge. Calculations of
appropriate modifications to the FTA Charge will
be made based on the Base Calculation Model, with
certain exceptions. The Servicer will also file a
routine True-Up Mechanism Advice Letter
quarterly, if actual payments on any Series of
Notes cause the outstanding principal balance of
the related Series of Certificates to vary from
the related Expected Amortization Schedule as of
any Calculation Date by more than an amount to be
specified in the related Prospectus Supplement.
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 forecasts required
collections.
See "Description of the Transition Property--
Adjustments to the FTA Charge" herein.
Customers................... The Customers consist of residential and small
commercial consumers of electricity in the
service territory in which the Seller provided
electricity services as of December 20, 1995. The
primary source of payments on the Certificates
will be amounts collected from the Customers. Of
amounts collected from the Customers, only the
portion of amounts collected attributable to the
FTA Charge, 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 January 25, April 25,
July 25 and October 25 (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").
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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 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 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. Since each Series of Certificates will be
secured by the Transition Property, a Certificate
Event of Default with respect to one Series of
Certificates (or one or more Classes thereof) may
adversely affect other outstanding Classes or
Series of Certificates.
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 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 FTA
Collections not applied to the payment of
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certain fees and expenses or to the distribution
of interest on the Certificates are available
therefor. 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. However,
principal of any Series or Class of Certificates
may be distributed earlier or later than
reflected in the related Expected Amortization
Schedule, as described herein and in the related
Prospectus Supplement. See "Risk Factors--Yield
Considerations" herein.
If an event of default under the Trust Agreement
(a "Certificate Event of Default") 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. A Certificate Event of Default is
defined as the occurrence and continuance of an
Event of Default under the Notes (a "Note Event
of Default," and together with a Certificate
Event of Default, an "Event of Default"). See
"Description of the Certificates--Events of
Default" herein.
Optional Redemption......... The Note Issuer may redeem any Class of Notes
relating to a Class of Certificates, and
accordingly cause the Trust to redeem the related
Class of Certificates, to the extent and in the
manner specified in the related Prospectus
Supplement. See "Description of the
Certificates--Optional Redemption" herein.
Overcollateralization....... In order to enhance the likelihood that
distributions on each Series of the Certificates
will be made in full by their respective
Scheduled Final Distribution Dates, the Financing
Order permits the Servicer to set the FTA Charge
at a level that will produce FTA Collections in
an amount that exceeds the amount expected to be
required to make all distributions on the related
Series of Certificates in a timely manner and to
pay all related fees and expenses. The amount of
such excess will be specified in the related
Prospectus Supplement. See "Description of the
Notes--Overcollateralization Amount" herein.
Other Credit Enhancement.... In addition to overcollateralization, other types
of credit enhancement may be provided with
respect to one or more Series or Classes of
Notes. Credit enhancement may be provided in one
or more forms including, but not limited to,
letters of credit, credit or liquidity
facilities, third party payments or other
support, cash deposits, surety bonds, insurance
policies, subordination and reserve funds. The
coverage of any credit enhancement may be limited
or have exclusions from coverage and may decline
over time or under certain circumstances, all as
specified in the related Prospectus Supplement.
See "Description of the Notes--Other Credit
Enhancement" herein.
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<PAGE>
Collections; Allocations;
Distributions.............. Except as otherwise specified herein or any
Prospectus Supplement, on the twentieth day of
each month (or, if such day is not a Servicer
Business Day, the following Servicer Business
Day), the Servicer will remit Estimated FTA
Collections with respect to the prior calendar
month (the "Collection Period"), increased or
reduced as described herein under "Servicing--
Remittances to Collection Account," to the
Collection Account. Any day other than a
Saturday, a Sunday or a day on which the
Servicer's offices are not open for business is a
"Servicer Business Day."
On each Distribution Date, amounts in the
Collection Account 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 prior Collection Periods will be paid
to the Servicer; (3) the Quarterly Administration
Fee payable under the Administrative Services
Agreement between the Note Issuer and SDG&E, as
administrator (the "Administrator"), and all
unpaid Quarterly Administration Fees from prior
Distribution 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) the excess of Estimated FTA
Collections remitted to the Collection Account
over Actual FTA Collections will be paid to the
Servicer to the extent that the Servicer has not
previously withheld or been paid such excess; (6)
Quarterly Interest and any overdue Quarterly
Interest with respect to each Series of Notes
will be transferred to the Certificate Trustee
for payment to the Certificateholders;
(7) 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 for
payment to the Certificateholders; (8) net
earnings on amounts in the Collection Account
previously invested in Eligible Investments will
be paid to the Note Issuer; (9) the balance, if
any, will be transferred to the Certificate
Trustee for payment to the Certificateholders in
respect of Quarterly Principal and any overdue
Quarterly Principal, if any, for each Series of
Notes based on priorities described in each
Prospectus Supplement; and (10) following the
repayment of each outstanding Series of Notes,
the balance, if any, will be released to the Note
Issuer. See "Description of the Notes--
Allocations; Payments" herein.
On each Payment Date for any Series of Notes, the
amounts available for payment with respect to
such Series will be paid as described in the
Prospectus Supplement for the related Series of
Certificates.
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<PAGE>
Servicing................... The Servicer is responsible for servicing,
managing and receiving FTA Collections in respect
of the Transition Property in the same manner
that it services and administers bill collections
for its own account. On each Remittance Date, the
Servicer will deposit Estimated FTA Collections
for the previous Collection Period (or, if
Remittance Dates are daily, for the previous
day), increased or reduced as described under
"Servicing--Remittances to Collection Account"
herein, into the Collection Account. Subject to
certain conditions described herein, pending
deposit into the Collection Account, the FTA
Collections 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 Collection Period in an
amount equal to the percent per annum specified
in the related Prospectus Supplement of the
original 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 Collections prior to remittance thereof to
the Collection Account and the portion of late
fees, if any, paid by Customers relating to the
FTA Collections. 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, except as
otherwise provided in the related Prospectus
Supplement, in integral multiples thereof.
Registration of the
Certificates............... Each Class of Certificates may be issued in
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
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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 from one or more nationally
recognized statistical rating agencies (each, a
"Rating Agency") specified therein. 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--Yield Considerations" and
"Ratings" herein.
Tax Status of the
Certificates............... The Certificates will be treated as representing
ownership of 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 "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 and Local 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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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
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 Charge to reflect the actual rate of
FTA Collections, which will vary from projections upon which the FTA Charge
was based, primarily as a result of variations from projected electricity
usage by Customers and expected delinquencies and charge-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 in accordance with the related Expected
Amortization Schedule of, and the costs of issuance of, the Certificates.
Despite the Statute and the Financing Order, there can be no assurance that
the CPUC will approve such requests in a timely manner. In the event of any
delay in adjustments to the FTA Charge, costly and time consuming litigation
might ensue. Any such litigation might adversely affect both the price and
liquidity of the Certificates.
State Amendment or Repeal of the Statute. 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 provisions
would not adversely affect the price of the Certificates, or the timing of
payments with respect to the Certificates.
Under applicable United States and State of California Constitutional
principles relating to the impairment of contracts, the State of California
could not repeal or amend the Statute (by way of either legislative process or
California voter initiative) or take, or refuse to take, any action required
by the State of California under its pledge and agreement with the
Certificateholders (described above) if such 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, 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 Certificateholders.
Nonetheless, no assurance can be given that a repeal 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 both the price and liquidity of the Certificates. 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.
Federal Preemption of the Statute. At least one bill has been introduced in
the current session of Congress prohibiting the recovery of stranded costs
such as the FTAs, which would negate the existence of the Transition Property
that is the source of payments on the Notes and the Certificates. No
prediction can be made as to
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whether this bill, or any future proposed bill which would prohibit the
recovery of stranded costs, will become law or, if it becomes law, what its
final form or effect will be. See "Energy Deregulation and the New California
Market Structure" herein.
Legal Challenges and Voter Initiatives. 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. 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, the Seller
believes that the FTA Charge is not a "local" tax, assessment, fee, or charge
to which Proposition 218 applies, and that the local initiative power is
therefore inapplicable to the Transition Property, the Notes and the
Certificates.
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. Furthermore, the Servicer does not have
any experience administering this specific type of regulatory asset. See "--
Servicing" herein. In addition, in the event of a foreclosure, there is likely
to be a limited market, if any, for the Transition Property.
SERVICING
Reliance on Servicer. The Trust relies on the Servicer for the determination
of any adjustments to the FTA Charge 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, SDG&E were to cease servicing the
Transition Property, determining any adjustments to the FTA Charge 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. See "Servicing" herein.
Usage and Credit Projections. The ability of the Servicer to forecast
accurately the electricity usage of Customers and the delinquency and charge-
off experience relating to FTA Payments will affect significantly whether
Certificateholders will receive timely distributions on the Certificates. The
adjustment mechanism for the FTA Charge described under "Description of the
Transition Property--Adjustments to the FTA Charge" is intended to mitigate
these risks, although the frequency of such adjustments is limited. See "The
Seller and Servicer--Credit Policy and Procedures" herein.
Changes in Payment Terms. The Servicer is permitted to alter the terms of
billing arrangements and modify amounts due by Customers. While SDG&E has no
current intention of taking actions that would change the payment or other
terms of any billed item constituting FTA Charges, there can be no assurance
that changes in SDG&E's customary and usual practices for comparable assets it
services for itself might not result in a determination to do so or that a
successor Servicer may not make such 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 in full by the applicable Scheduled Final
Distribution Dates. See "Certain Yield and Maturity Considerations" herein.
Credit Policy and Procedures. The ability of the Servicer to collect amounts
billed to Customers under the FTA Charge, as adjusted from time to time, will
depend in part on the creditworthiness of the Customers. SDG&E generally is
obligated to provide service to new Customers under California law. SDG&E
relies on the information provided by Customers and its customer information
system to indicate whether a new Customer has had previous service from SDG&E.
See "Servicing--Credit Policy and Procedures" herein.
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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
recent decision of the CPUC allows alternative energy service providers
("ESPs") to elect to present a consolidated bill to their retail customers
including the FTA Charge. Any ESP who elects consolidated billing will be
responsible for paying the Servicer monthly amounts payable by customers of
the ESP, including monthly FTA Payments. Neither the Seller nor the Servicer
will pay any shortfalls resulting from the failure of any ESPs to forward FTA
Payments to SDG&E, as Servicer, which may result in delays in distributions to
Certificateholders.
RISKS RELATED TO THE ELECTRIC INDUSTRY GENERALLY
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 manage 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 for other reasons.
Regulatory Environment. As described under "Energy Deregulation and New
California Market Structure" herein, the California electric industry will
change dramatically as a result of the Statute. However, 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"). As described above under "--
Transition Property--Federal Preemption of the Statute," at least five bills
have been introduced recently into Congress 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.
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.
General Economic Conditions and Changes in 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 historic service area, weather,
occurrence of natural disasters such as earthquakes and floods, implementation
of energy conservation efforts and increased efficiency of equipment all
affect energy usage. If a sufficient number of Customers reduce significantly
their electricity consumption or cease consuming electricity altogether, the
FTA Charges, as adjusted from time to time through True-Up Mechanism Advice
Letters, as described herein, required to be paid by each remaining Customer
could become burdensome. See "--Transition Property--Reliance on FTA
Adjustments" herein.
BANKRUPTCY; CREDITORS' RIGHTS
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
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each take the appropriate actions under the PU Code to perfect this sale. The
Statute provides that the transactions described in the Sale Agreement shall
constitute a sale of the Transition Property to the Note Issuer, and the
Seller and the Note Issuer will treat the transactions as a sale under
applicable law, although for financial reporting purposes the transactions
will be treated as debt of the Seller. If the Seller were to become a debtor
in a bankruptcy case and a creditor or bankruptcy trustee of the Seller or the
Seller itself as debtor in possession were to take the position that the sale
of the Transition Property to the Note Issuer should be recharacterized as a
pledge of such Transition Property to secure a borrowing of the Seller, and a
court were to adopt such position, then delays or reductions in distributions
on the Certificates could result.
The Seller and the Note Issuer have taken steps to ensure that in the event
the Seller or an affiliate of the Seller were to become the debtor in a
bankruptcy case, a court would not 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 provides 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 covenants that the appropriate actions will be
taken to perfect such security interest.
The Seller believes and 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 Charge are usage-based charges,
Transition Property comes into existence only as Customers use electricity. If
a court were to adopt this position, no assurances can be given that either
the statutory lien created by the Statute or the security interest purported
to be granted in the Sale Agreement would attach to collections of 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 purported to be granted in
the Sale Agreement do not attach to collections of FTA Payments made in
respect of electricity consumed after the commencement of a bankruptcy case
for the Seller, then the holders of the Certificates would be unsecured
creditors of the Seller, and delays or reductions in distributions on the
Certificates could result. The Seller believes that the collections of the FTA
Payments should be transferred to the Note Issuer as required by the Sale
Agreement and that the FTA Payments should not become part of the Seller's
bankruptcy estate or subject to the automatic stay created by Section 362(a)
of the United States Bankruptcy Code (Title 11, U.S.C.) (the "Bankruptcy
Code"). Nonetheless, 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 Charge are usage-based charges, if the
Seller were to become the debtor in a bankruptcy case, a creditor of, or a
bankruptcy trustee for, the Seller, or the Seller itself as debtor in
possession could take 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
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Certificates. The FTA Charge may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in
receipt of scheduled distributions.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the arguments of a creditor of the Seller that Transition
Property comes into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transition Property came into existence may have priority over the
Note Issuer's interest in such Transition Property, thereby possibly initially
resulting in a reduction of amounts distributed to the holders of the
Certificates. The FTA Charge may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in
receipt of scheduled distributions.
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 Collections 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.
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 determined that the Infrastructure Bank was 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 ensure 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 substantially
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.
THE CERTIFICATES
Limited Liquidity. There is no assurance that a secondary market for any of
the Certificates will develop or, if one does develop, that it will provide
the Certificateholders with liquidity of investment or that it will continue
for the life of such Certificates. It is not anticipated that any Certificates
will be listed on any securities exchange.
Restrictions of 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
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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 any
other assets of the Note Issuer, which are expected to be minimal, are the
sole source of payments on the Notes and, as a result, distributions on the
Certificates. None of the Notes, the Certificates or the underlying Transition
Property will be guaranteed or insured by the State of California, the
Infrastructure Bank or any other governmental agency or instrumentality or by
the Seller. Neither the full faith and credit nor the taxing power of the
State of California is pledged to the payment of principal of or interest on
the Certificates or the Notes or the payments in respect of the Transition
Property.
Issuance in Series. The Note Issuer expects to issue new Series of Notes
from time to time, and accordingly the Trust is expected to issue new
corresponding Series of Certificates from time to time. While the terms of any
Series of Notes and the corresponding Series of Certificates will be specified
in supplements to the Note Indenture and the Trust Agreement, respectively,
and described in the related Prospectus Supplement, the provisions of
supplements to the Note Indenture and the Trust Agreement and, therefore, the
terms of any new Series, will not 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.
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. 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.
Yield Considerations. The yield on each Class of Certificates will be
affected by, among other things, the amount and timing of FTA Collections and
the timing of receipt of such FTA Collections. Since the FTA Charge will
consist of a charge per kilowatt hour of usage by the Customers in the
Seller's historical geographic service territory, the aggregate amount of FTA
Collections, and the amount and timing of principal amortization on the
Certificates, will depend, in part, on actual usage of electricity by
Customers and the rate of delinquencies and charge-offs. Actual energy usage
is influenced by a number of factors that are difficult to predict, including
weather conditions, natural disasters, technological changes and local and
regional economic conditions. The rate of FTA Collections will also be
influenced by the timing of approvals of adjustments to the FTA Charge.
Although the amount of the FTA Charge will adjust from time to time based on
the actual rate of FTA Collections, no assurances can be given that the
Servicer will be able to forecast actual Customer energy usage and the rate of
delinquencies and charge-offs and obtain adjustments to the FTA Charge that
would cause FTA Payments to be made at any particular rate. See "Certain Yield
and Maturity Considerations" and "Description of the Transition Property--
Adjustments to the FTA Charge" herein.
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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 their rates were set by the CPUC based upon the utilities'
cost of providing services and a reasonable return on their capital
investments. 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.
At least five bills have been introduced in the current session of Congress
which would mandate the deregulation of the electric industry on the state
level. 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 prohibits the recovery of stranded
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.
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 wholesale power pool 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 through the pool 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 changes which are occurring at both the federal and the California
levels will have a significant impact on SDG&E and the other Utilities, as
well as other entities in the industry. SDG&E faces greater competition for
resources and for customers. Competitors include privately owned independent
power producers, exempt wholesale power generators, industrial customers
developing their own generation resources, suppliers of natural gas and other
fuels, other investor-owned electric utilities and municipal generators. There
can be no assurance that such trends will not have a significant adverse
impact on SDG&E's business in the future.
DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, the California Legislature approved legislation
implementing an electric industry restructuring program for the State of
California. The legislation was adopted to provide, among other things,
subject to the timely and sufficient issuance of rate reduction bonds, a 10
percent reduction in rates for services charged to residential 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 this legislation,
Sections 367 and 369 of the PU Code generally provide the Seller an
opportunity to recover the Transition Costs. The Transition Costs consist
generally 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.
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FINANCING ORDER AND ADVICE LETTERS
The Statute authorizes the CPUC to issue the Financing Order, a regulatory
order which allows the Seller to reduce electricity rates for the Customers by
10 percent, and approves the amount of the Seller's Transition Costs which the
Seller wishes to finance through the issuance of rate reduction bonds. On May
6, 1997, SDG&E filed its application for the Financing Order with the CPUC.
The CPUC issued the Financing Order on , 1997. The Financing Order also
permits the sale of Certificates in an aggregate principal amount not to
exceed $800,000,000. As issued, the Financing Order requires the Seller to
reduce electricity rates for the Customers by 10 percent through the Rate
Freeze Period, conditional upon the issuance of the Certificates. 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 finance the ten percent rate reduction. The principal
amount of the Certificates was derived based upon a number of variables,
including sales forecasts and the 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 issuance of additional
Certificates to finance the rate reduction resulting from this increased
usage. See "Description of the Certificates--Conditions of Issuance of
Additional Series" herein.
The Financing Order establishes, among other things, a tariff pursuant to
which the Seller will impose nonbypassable charges upon residential and small
commercial customers in an amount sufficient to repay in full the rate
reduction bonds and associated costs and fees. The charges are stated to be
nonbypassable on the basis that the Statute authorizes the Seller to continue
to collect the charges (or termination or disconnection charges) from all
Customers notwithstanding any of the circumstances described under "--
Nonbypassable FTA Charge" below. The Statute provides that the right to
collect the FTA Charges is a property right which may be pledged, assigned or
sold in connection with the issuance of the Certificates.
The Financing Order entitles the Note Issuer, as the owner of the Transition
Property, to receive FTA Payments from all Customers, which consist of all (i)
residential customers and (ii) small commercial customers. Small commercial
customers are defined as customers whose maximum billing demand does not
exceed 20 kilowatts and who have elected to receive services under the
Seller's Rate Schedule A ("Small Commercial Customers").
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 FTA Charge pursuant to which
nonbypassable charges will be imposed upon the Customers. 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 Charge 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 Charge 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 Charge" herein.
The initial FTA Charge will be calculated by determining (i) projected
monthly electricity sales for the Customers and the timing and extent of
receipt of payments therefor and (ii) the 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; based on the figures determined for the two
foregoing amounts, the lowest aggregate charge which will be adequate to cover
all of the amounts to be covered by FTA Collections will be calculated (the
"Base Calculation Model"). This charge, expressed on a per unit of electricity
basis, will be the FTA Charge.
The Prospectus Supplement related to a Series of Certificates will specify,
based on the applicable Issuance Advice Letter, the amount of the FTA Charge
as of the date thereof.
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TRANSITION PROPERTY
The right to receive FTA Collections under the Financing Order and related
Advice Letters 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 Charge, as adjusted from time to time, (ii) to be paid the
Fixed Transition Amounts, and (iii) to obtain adjustments to the FTA Charge 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 primarily by Transition
Property sold to the Note Issuer at the time such Note is issued, and the
aggregate amount of Transition Property will increase as additional Issuance
Advice Letters become effective.
NONBYPASSABLE FTA CHARGE
The Financing Order provides that the FTA Charge is nonbypassable, meaning
that Customers will still be required to make payments with respect to the FTA
Charge, even if another entity takes over a portion of SDG&E's existing
service territory or a Small Commercial Customer's load increases so that such
Customer is no longer a Small Commercial Customer. The Financing Order
provides that each Customer who leaves SDG&E's system during the Rate Freeze
Period through annexation by another electricity supplier will pay an ongoing
charge based on the electricity usage of such Customer prior to annexation.
The Financing Order provides that each Customer who ceases to be a Small
Commercial Customer as a result of increased electricity usage will continue
to pay FTA Charges, based on either (i) the last twelve months of the
Customer's recorded pre-departure use, (ii) an average derived from the last
three years of recorded use or (iii) actual use; provided, however, that any
such Customer will have the opportunity to continue to pay for electricity
based on the Small Commercial Customer rates, including the FTA Charge.
ADJUSTMENTS TO THE FTA CHARGE
In order to enhance the likelihood that the actual FTA Collections are
neither more nor less than the amount scheduled to amortize the Certificates
in accordance with the Expected Amortization Schedule, the Servicing Agreement
and the Financing Order require the Servicer to seek periodic adjustments to
the FTA Charge based on actual FTA Collections and updated assumptions by the
Servicer as to, among other factors, usage of electricity by Customers and the
rate of delinquencies and charge-offs. The date as of which any calculation is
performed and which forms the basis for a requested adjustment to the FTA
Charge is referred to as a "Calculation Date." The adjustments to the FTA
Charge 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 Charge
which are intended to return the projected principal balance of the
Certificates to the Expected Amortization Schedule within a twelve month
period. Calculations of appropriate modifications to the FTA Charge will be
made based on the Base Calculation Model, except that (i) the amount of debt
service and related expenses 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 methodology described in the Financing Order,
(iii) estimated transaction expenses will be modified to reflect changed
circumstances, (iv) assumed delinquencies and charge-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 Charge becomes effective (the "True-Up
Mechanism Calculation Model").
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The Financing Order also provides that the Servicer is required to file a
routine True-Up Mechanism Advice Letter quarterly, if, after giving effect to
the actual distributions of interest and principal balance outstanding on any
Series of Certificates, the outstanding principal balance of the related
Series of Certificates varies from the amount provided for in the related
Expected Amortization Schedule as of any Calculation Date by more than an
amount to be specified in the related Prospectus Supplement. Furthermore, the
Financing Order provides that the Servicer may file a non-routine True-Up
Mechanism Advice Letter as often as quarterly, to reflect any changes to the
Base Calculation Model or True-Up Mechanism Calculation Model which are
necessary to meet any Expected Amortization Schedule. 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").
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 15 days before the end
of each calendar year, with resulting adjustments to the FTA Charge to become
effective at the beginning of the next calendar year, (ii) routine True-Up
Mechanism Advice Letters may be filed with the CPUC quarterly at least 15 days
before the end of each calendar quarter, with resulting adjustments to the FTA
Charge 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 Charge to become effective at the beginning
of the next calendar quarter, and (iv) True-Up Mechanism Advice Letters shall
be filed with the CPUC at least 15 days before each Financing Order
Anniversary, with resulting adjustments to the FTA Charge, 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 from the sale of the Notes will be applied to the purchase
of the Initial Transition Property. In addition, 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.
To promote uniform quality in servicing the Transition Property and to
reduce administrative costs, the Note Issuer will appoint the Servicer as
custodian of the documentation relating to the Transition Property. The
Seller's computer 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.
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;
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(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 Charge related to
any Initial Transition Property or Subsequent Transition Property are or will
be, at the time made, 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 any of its representations and
warranties described in the preceding paragraph, the Seller will 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 thereof.
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<PAGE>
CERTAIN YIELD AND MATURITY 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 yield to maturity of each Class of Certificates will be related to the
rate and timing of FTA Payments.
The yield on each Class of Certificates will be affected by, among other
things, the rate of FTA Collections and the timing of receipt of such FTA
Collections. Since the FTA Charge will consist of a charge per kilowatt hour
of usage by the 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 charge-
offs. Although the amount of the FTA Charge 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 actual energy usage and the rate of
delinquencies and charge-offs and obtain adjustments to the FTA Charge that
would cause FTA Collections to be received at any particular rate.
No representation is made as to the particular factors that will affect the
rate of FTA Collections, as to the relative importance of such factors, as to
the percentage of the principal balance of the Certificates that will be
distributed as of any date or as to the overall rate of FTA Collections.
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 have no assets other than the Notes. 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, 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. See "The Certificates--Payments and
Distributions" herein.
The Fee and Indemnity Agreement among the Note Issuer, the Delaware Trustee
and the Certificate Trustee (the "Fee Agreement") will provide that the Note
Issuer will pay the Certificate Trustee's and the Delaware Trustee's fees and
expenses. The Fee Agreement will further provide that the Certificate Trustee
will be entitled to indemnification by the Note Issuer for, and will be held
harmless against, any loss, liability or expenses incurred by the Certificate
Trustee (other than through its own wilful misconduct, bad faith or negligence
or by reason of a breach of any of its representations or warranties set forth
in the Trust Agreement).
The fiscal year of the Trust will be the calendar year.
29
<PAGE>
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,
the Infrastructure Bank or the Seller. None of the Certificates, the Notes or
the underlying Transition Property will be guaranteed or insured by the State,
the Infrastructure Bank, or any other governmental agency or instrumentality
or by the Seller or 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 101 Ash Street, Room 111, San Diego, California 92101.
The mailing address of SDG&E Funding LLC is P.O. Box 1831, Room 111, San
Diego, California 92112 and its phone number is (619) 696-2328. 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 will be restricted by
its organizational documents from engaging in other activities. In addition,
its organizational documents require it to operate in a manner such that it
should not be consolidated in the bankruptcy estate of SDG&E in the event
SDG&E becomes subject to such a proceeding.
THE SELLER AND SERVICER
GENERAL
The Seller is engaged in the business of generating, transmitting and
distributing electric power to residential, commercial, industrial and
governmental customers within its electric service territory. SDG&E's electric
service territory currently consists of San Diego County and adjacent portions
of Orange County, California with an estimated population of 2.7 million.
During 1996, SDG&E provided a total of 16,046 million kilowatt-hours of
electricity to 1.2 million customers, including 7,822 million kilowatt-hours
of electricity provided to its approximately 1.14 million residential and
small commercial customers.
As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
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<PAGE>
SDG&E CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
SDG&E's customer base is divided into several categories, including the two
categories covered by the Statute: residential and small commercial.
Residential customers use electricity for lighting, operating household
appliances and other domestic purposes. The primary factor influencing the
number of residential customers is the number of housing starts, which is a
measure of the strength of the economy. The primary factors influencing short-
term energy consumption are weather and electricity prices. Long-term factors
would include the availability of more energy efficient appliances, new energy
consuming technologies and the customer's ability to acquire these new
products. Small commercial customers use electricity for lighting, operating
appliances and operating equipment in office and retail settings. The primary
factor influencing the number of commercial customers is commercial
employment, which is also a measure of the strength of the economy. The
factors influencing the energy consumption of a small commercial customer
would include those of the residential customers, but would also include the
level of business activity associated with the particular commercial customer.
The table below sets forth the number of customers and electric energy
consumption for the two categories.
CUSTOMERS AND ENERGY CONSUMPTION
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average Number of Customers:
Residential..............................
Small Commercial.........................
Energy Consumption (GWh):
Residential..............................
Small Commercial.........................
------ ------ ------ ------ ------
Total..................................
====== ====== ====== ====== ======
Average Annual Consumption per Customer
(KWh):
Residential..............................
Small Commercial.........................
</TABLE>
FORECASTING CONSUMPTION
SDG&E has developed sales and load forecasts since its inception. The only
things that have changed over the years have been the length of the forecast
horizon and the methods of forecasting. Sales forecasts have always had a
short horizon since they are used for rate making and budgeting purposes. Load
forecast horizons have varied over the years, depending on the lead time
necessary to construct new resources. In the early years, the horizon was as
few as four or five years, but since then it has been twelve to twenty years.
Forecasts developed in the early years used simple trending techniques.
Forecasts produced more recently have been done using more sophisticated
statistical techniques. These models produce quarterly estimates, which are
then spread to the months using recorded monthly sales data as allocation
factors.
SDG&E's electric sales forecast was last updated in November 1996 and is
based on a combination of short-term and long-term forecasting models. The
short-term forecasting models are econometric models used to project sales for
the first three years after the base year. SDG&E develops econometric models
to forecast electric sales for the residential and small commercial customer
classes.
The long-term models are used to forecast sales for years three through five
after the base year. They are end-use models as required by the California
Energy Commission's Common Forecasting Methodology process. Such models
explicitly forecast energy consumption by end-uses such as lighting and
heating.
For the residential sector, energy consumption is the product of the total
number of households in the SDG&E service area, average appliance saturations,
and average unit energy consumption by end-use. Adjustments for additional
conservation savings and appliance utilization are also accounted for in the
model.
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<PAGE>
For the small commercial sector, energy consumption is the product of floor
space (organized by building type and climate area), average end-use equipment
saturation and average unit energy consumption by end-use. Equipment
replacement rates and efficiency rates of new equipment are accounted for in
the calculations. Adjustments for additional conservation savings and equipment
utilization are also accounted for in the model.
The short-and long-term models have been in use for more than twenty years
and have undergone extensive review by the California Public Utilities
Commission and the California Energy Commission, respectively. Each year SDG&E
updates these models with the most recent recorded data, and conducts thorough
testing to ensure that model statistics meet the highest standards possible.
SDG&E utilizes DRI/McGraw Hill (DRI) to produce economic and demographic
forecasts. The most recent DRI regional economic forecast (August 1996) was
used to drive SDG&E's electric sales forecast of both the short-term and long-
term models of the residential and commercial sectors.
The forecasted weather related drivers assume normal weather conditions.
Normal weather conditions imply a fifteen year average for such weather drivers
as heating and cooling degree days.
FORECAST VARIANCE
SDG&E conducts sales forecast variance analyses on a regular basis to monitor
how well forecasts track recorded consumption. This is important for short-term
resource procurement functions as well as budgeting and financial reporting.
Since SDG&E updates its forecast on an annual basis, the table below shows
annual variance for forecasts prepared for one year in the future. For example,
the annual 1992 variance is based on a forecast prepared in 1991. The variances
range from a low of % to a high of % in absolute terms.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Annual Forecast Variance..........................
</TABLE>
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
Credit Policy. SDG&E is obligated to provide service to all customers under
California law. SDG&E relies on the information provided by the customer and
its customer information system to indicate whether the customer has been
previously served by SDG&E.
Certain accounts are secured with deposits or guarantees to prevent losses.
The amount of the deposit reflects the potential 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.
As a rule, residential customers may establish credit by depositing cash
equal to twice the average monthly bill or by furnishing a satisfactory
guarantee or bond. Deposits or guarantees may not be required if the applicant
has previously been a customer of SDG&E and has paid all bills for service for
a period of 12 consecutive months immediately prior to the date when the
customer previously ceased SDG&E service; provided such service occurred within
two years from the date of the new application for service. Further, SDG&E uses
a positive identification and credit scoring system to determine the
creditworthiness of its new customers. This system has proven to be an
effective method for further reducing SDG&E's uncollectible amounts.
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 SDG&E.
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<PAGE>
Deposits or guarantees for small commercial customers may not be required if
the applicant has been a SDG&E customer during the past two years with like
service, during the past 12 consecutive months of that prior service has not
had any past due bills, and the customer has paid all prior SDG&E bills.
SDG&E may change its credit policies and procedures from time to time. It is
expected that any such changes would be designed to enhance SDG&E's ability to
make timely recovery of amounts billed to customers.
Billing Process. SDG&E bills its customers once every 27 to 33 days, with
approximately an equal number of bills being distributed each Servicer
Business Day. For the year ending December 31, 1996, SDG&E mailed out an
average of 59,000 bills daily to 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.
SDG&E may change its billing policies and procedures from time to time. It
is expected that any such changes would be designed to enhance SDG&E's ability
to make timely recovery of amounts billed to customers.
Collection Process. SDG&E receives approximately 84 percent of total bill
payments via the U.S. mail. Approximately 12 percent of bill payments are
received at local offices and other pay offices. SDG&E receives the remainder
of payments via automatic payment service, electronic funds transfer and
electronic data interchange.
Either the night after the day the meter is read or the next business day,
bills are processed and mailed to customers. Bills are due on presentation,
and are considered past due after 15 calendar days for small commercial
accounts, and after 19 days for residential accounts. Timing and collection
follow-up is based on customer type, as follows.
For residential customers, a past due reminder notice is sent with the
residential bill if payment has not been received by the time of the second
month's billing. Two to four business days after the past due bill is issued,
a "first call" is made to the account address to deliver a notice to either
pay or face potential disconnection. If payment is not received, approximately
9 to 11 business days later another field call is made to the residential
customer and if payment is not made to the collector making the visit, the
service may be terminated at that time.
For small commercial customers, a past due notice is mailed if the account
remains unpaid seventeen days after the original bill date. Such past due
notice provides seven additional days for the small commercial customer to
pay. If payment is not received after the seventh day, a field call is
arranged two to four days later to request payment. If payment is not made
four days thereafter, another field call is arranged and the commercial
account may be disconnected.
SDG&E may change its collection policies and procedures from time to time.
It is expected that any such changes would be designed to enhance SDG&E's
ability to make timely recovery of amounts billed to customers.
Restoration of Service. Once service has been shut-off for non-payment,
SDG&E has the right to require the payment of all of the following charges:
(i) the total amount owing on an account including any past-due balance, the
current billing, and a credit deposit, if requested; (ii) any miscellaneous
charges associated with the reconnection of service (i.e., reconnection
charges, field collection charges, and/or returned item 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.
SDG&E may change its restoration of service policies and procedures from
time to time. It is expected that any such changes would be designed to
enhance SDG&E's ability to make timely recovery of amounts billed to
customers.
33
<PAGE>
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth information relating to the delinquency and
loss experience of the Servicer for residential and small commercial customers
for each of the five preceding years.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
............................................
</TABLE>
CUSTOMERS
The following table indicates the total billed revenue from electricity
sales to each of residential and small commercial customers during the last
five years:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
............................................
</TABLE>
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.
Except to the extent that alternative energy service providers elect to engage
in consolidated billing (as described herein under "Risk Factors--Servicing--
Aggregators and Other Suppliers"), the Servicer's duties generally will
include calculation and billing of all amounts based on the FTA Charge,
receipt and posting of all FTA Collections, responding to inquiries of
Customers and the CPUC with respect to the Transition Property and the FTA
Charge, 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 Charge as described below.
The FTA Charge will be expressed as an amount per kilowatt hour of
electricity usage by the applicable Customer, regardless of whether the
Customer receives its electricity from the Servicer or from another
electricity provider. The Servicer generally expects the total amount of the
FTA Charge to included as a separate line item on each Customer's bill, when
technically practicable, with an aggregate amount to be paid to the Servicer
for all services provided by the Servicer. Bills are sent to Customers 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 SDG&E based on the portion of the amount billed which is based on the FTA
Charge and the total charges due to SDG&E.
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 the Servicing Agreement, the Servicer will covenant that, in servicing
the Transition Property: (a) it will manage, service, administer and make
collections in respect of the Transition Property with reasonable care and
34
<PAGE>
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) it
will follow customary standards, policies and procedures for the industry in
performing its duties as Servicer; (c) it will use all reasonable efforts,
consistent with its customary servicing procedures, to enforce, and maintain
rights in respect of, the Transition Property; (d) it will comply with all
laws applicable to and binding on it relating to the Transition Property; and
(e) it will submit True-Up Mechanism Advice Letters to the CPUC seeking
adjustments to the FTA Charge 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.
REMITTANCES TO COLLECTION ACCOUNT
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 (the
"Estimated FTA Collections") to the Collection Account on or before the
twentieth day of each calendar month (or, if such twentieth day is not a
Servicer Business Day, the Servicer Business Day immediately preceding such
twentieth day). Pending remittance to the Collection Account, such collections
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 within two Servicer
Business Days of receipt thereof to the Collection Account all Estimated FTA
Collections. The date on which FTA Collections with respect to the FTA Charge
are required to be deposited in the Collection Account is referred to herein
as the "Remittance Date."
Six months after each monthly Collection Period, the Servicer will compare
actual FTA Collections received with respect to that Collection Period (the
"Actual FTA Collections") to the Estimated FTA Collections for that Collection
Period previously remitted to the Collection Account. If Estimated FTA
Collections remitted for a Collection Period exceed Actual FTA Collections for
such Collection Period (such excess, an "Excess Remittance"), the Servicer
shall be entitled to reduce the amount which the Servicer remits to the
Collection Account on the following Remittance Date by the amount of such
Excess Remittance, the amount of such reduction becoming the property of the
Servicer. If Estimated FTA Collections remitted for a Collection Period are
less than Actual FTA Collections for such Collection Period (such deficiency,
a "Remittance Shortfall"), the amount which the Servicer remits to the
Collection Account on the following Remittance Date will be increased by the
amount of such Remittance Shortfall, such increase coming from the Servicer's
own funds. The Estimated FTA Collections 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
Collection Period, in an amount equal to the percent per annum specified in
the related Prospectus Supplement of the original principal amount of the
Notes. The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Distribution 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 Collections prior to remittance thereof to the
Collection Account and the portion of late fees, if any, paid by Customers
relating to the FTA Collections.
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<PAGE>
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 recent decision of the CPUC allows ESPs
to elect to present a consolidated bill to their retail customers, including
the FTA Charge. Any ESP who elects consolidated billing will be responsible
for paying the Servicer monthly amounts payable by customers of the ESP,
including monthly FTA Payments. Neither the Seller nor the Servicer will pay
any shortfalls resulting from the failure of any ESPs to forward FTA Payments
to SDG&E, as Servicer, which may result in delays in distributions to
Certificateholders.
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 do 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 related Collection Period (the "Monthly
Servicer's Certificate") setting forth the aggregate amount remitted. In
addition, the Servicer will prepare, and the Note Trustee will furnish to the
Noteholders on each Payment Date the report 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 January 31 of each year, beginning
January 31, 1998, a statement as to compliance by the Servicer during the
preceding twelve months ended [October] [December] 31 with certain standards
relating to the servicing of the Transition Property. This report (the
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"Annual Accountant's Report") shall state that such firm has performed certain
procedures in connection with the Servicer's compliance with the servicing
procedures of the Servicing Agreement, identifying the results of such
procedures and including any exceptions noted. The Annual Accountant's Report
will also indicate that the accounting firm providing such report is
independent of the Servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
The Servicing Agreement will also provide for delivery to the Note Issuer,
the Infrastructure Bank, the Note Trustee and the Certificate Trustee, on or
before 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 SDG&E may not resign from its
obligations and duties as Servicer thereunder, except upon either (a) a
determination that SDG&E's performance of such duties is no longer permissible
under applicable law or (b) the Rating Agency Condition is satisfied and there
is no increase in the Servicing Fee. No such resignation will become effective
until a successor Servicer has assumed SDG&E's servicing obligations and
duties under the Servicing Agreement.
The Financing Order provides that the CPUC will not approve or require any
third party to act as a servicer of the Transition Property if the ratings on
the Certificates will be reduced as a result.
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 Trust, the Noteholders,
the Delaware Trustee, the Certificate Trustee, the Certificateholders or any
other person, except as provided under the Servicing Agreement, for taking any
action or for refraining from taking any action pursuant to the Servicing
Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of willful misfeasance, 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 deposit in the Collection Account any required
payment, which failure continues unremedied for three Servicer Business Days
after written notice from the Note Issuer 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
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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 by the Note
Issuer or the Note Trustee or (ii) to the Servicer by holders of Notes
evidencing not less than 25 percent in principal amount of the outstanding
Notes of all Series; (c) any representation or warranty made by the Servicer
in the Servicing Agreement shall prove to have been incorrect when made, which
has a material adverse effect on the Note Issuer or the Certificateholders and
which material adverse effect continues unremedied for a period of 60 days
after the giving of notice to the Servicer by the Note Issuer or the Note
Trustee; and (d) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings with respect to
the Servicer or the Seller and certain actions by the Servicer or the Seller
indicating its insolvency, reorganization pursuant to bankruptcy proceedings,
or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Servicing Agreement remains
unremedied, either the Note Trustee or holders of Notes evidencing not less
than 25 percent in principal amount of then outstanding Notes of all Series
may terminate all the rights and obligations of the Servicer (other than the
Servicer's indemnity obligation) under the Servicing Agreement, whereupon a
successor servicer appointed by the Note Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to similar compensation arrangements. In
addition, upon a Servicer Default, each of the following shall be entitled to
apply to the CPUC for sequestration and payment of revenues arising with
respect to the Transition Property: (1) the Certificateholders and the
Certificate Trustee as beneficiary of any statutory lien permitted by the PU
Code; (2) the Note Issuer or its assignees; or (3) pledgees or transferees,
including transferees under PU Code (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. 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.
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TERMINATION
The obligations of the Servicer and the Note Issuer pursuant to the
Servicing Agreement will terminate upon the payment to the Noteholders and
corresponding distribution to the Certificateholders of all amounts required
to be paid or distributed to them pursuant to the Servicing Agreement, the
Notes, the Note Indenture, the Certificates and the Trust Agreement.
DESCRIPTION OF THE NOTES
The Notes of any Class will be issued by the Note Issuer to the Trust (as
such, the "Noteholder") pursuant to the terms of an Indenture (the "Note
Indenture") between the Note Issuer and the Note Trustee, in a principal
amount equal to the initial aggregate principal amount of the related Class of
Certificates. The following summary describes certain general 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 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.
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
terms, if any, on which any Class of Notes will be subordinated to any other
Class of Notes, (m) the FTA Charge as of the date of issuance of such Series
of Notes, and the portion of the FTA Charge attributable to such Series or
Class of Notes and (n) 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) the Transition Property and
all proceeds thereof, (b) the Sale Agreement, (c) the Servicing Agreement, (d)
the Collection Account and all amounts of 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, (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 (collectively, the "Note Collateral").
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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 minimal equity contributed to the Note Issuer by SDG&E,
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 FTA Collections not applied to pay interest on the Notes or other
amounts having a higher priority are available therefor. 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. However, principal of any Class of Notes may be
payable earlier or later than expected as described herein. See "Risk
Factors--Risks of the Transition Property" and "--Yield Considerations"
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 Notes of a Class and
accordingly cause the Trust to redeem the related Certificates to the extent
and in the manner specified in the related Prospectus Supplement. 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.
OVERCOLLATERALIZATION AMOUNT
The Financing Order and Advice Letters give the Seller (or its assignee) the
right to recover from Customers an amount equal to the aggregate Transition
Costs together with designated amounts included therewith, including without
limitation 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") that will be specified in the Prospectus Supplement. The
Overcollateralization Amount will not bear interest.
On each Payment Date, all FTA Collections will be applied first to pay or
provide for fees and expenses and interest on each Series of Notes at the
applicable Note Interest Rate. All other FTA Collections will be applied to
pay or provide for principal of the Notes, with a corresponding reduction in
the aggregate recoverable amount payable with respect to the FTA Charge. See
"-- Allocations; Payments" herein. Accordingly, the aggregate recoverable
amount should always exceed the aggregate principal and interest due with
respect to the Notes, together with all related fees and expenses, by the
Overcollateralization Amount. The Overcollateralization Amount is intended to
cover any shortfall in FTA Collections that might otherwise occur at the
Scheduled Final Distribution Date. Any FTA Collections 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."
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OTHER CREDIT ENHANCEMENT
For any Class of Notes, credit enhancement in addition to the FTA Charge
adjustments and the Overcollateralization Amount may be provided with respect
thereto. The amounts and types of credit enhancement, and the provider of any
credit enhancement, if any, with respect to each Class of Notes will be
described in the related Prospectus Supplement. Credit enhancement may be in
the form of a reserve account, overcollateralization, financial guaranty
insurance policy, letter of credit, credit or liquidity facility,
subordination, third party payment or other support, cash deposit or such
other arrangement, or any combination of two or more of the foregoing, as may
be described in the related Prospectus Supplement for a Series. If specified
in the related Prospectus Supplement, credit enhancement for a Class of Notes
may cover one or more other Class of Notes.
If any such additional credit enhancement is provided with respect to a
Class of Notes offered hereby, the related Prospectus Supplement will include
a description of (a) the amount payable under such credit enhancement, (b) any
conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such credit
enhancement may be reduced and under which such credit enhancement may be
terminated or replaced, (d) the priority of reimbursement to the provider of
the credit enhancement of amounts paid pursuant to the credit enhancement and
(e) any material provisions of any applicable agreement relating to such
credit enhancement. Additionally, in certain cases, the related Prospectus
Supplement may set forth certain information with respect to the provider of
any third-party credit enhancement, including (i) a brief description of its
principal business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to
do business, (iii) if applicable, the identity of regulatory agencies which
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' equity or policyholders' surplus, if
applicable, as of a date specified in the related Prospectus Supplement.
The presence of any such additional credit enhancement is intended to
enhance the likelihood of receipt by the credit enhanced Noteholders of the
full amount of principal and interest due thereon in a timely manner and to
decrease the likelihood that such Noteholders will experience losses or delays
in payment. Any such additional credit enhancement for a Class of Notes will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal and interest thereon. If losses occur which
exceed the amount covered by any credit enhancement or which are not covered
by any credit enhancement, Noteholders will bear their allocable share of
deficiencies. In addition, if a form of additional credit enhancement covers
more than one Class of Notes, Noteholders of any such Class will be subject to
the risk that such credit enhancement will be exhausted by the claims of
Noteholders of other Classes or Notes.
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.
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.
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 banker's acceptances of certain
depository institutions or trust companies, (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
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Rating Agency, (e) repurchase obligations with respect to any security that is
a direct obligation of, or fully guaranteed by, the United States of America,
entered into with certain depository institutions or trust companies, or (f)
any other investment permitted by each Rating Agency (collectively, the
"Eligible Investments"), in each case which mature (i) on or before the
Certificate Business Day preceding the next Distribution Date. The Note Issuer
will provide the Note Trustee and the Certificate Trustee with access to the
Collection Account for the purpose of making deposits in and withdrawals from
the Collection Account in accordance with the Notes.
The Servicer will remit to the Collection Account, on each Remittance Date,
the Estimated FTA Collections, modified by the Excess Remittance or Remittance
Shortfall, if any, as described under "Servicing--Remittances to Collection
Account" herein.
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 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 prior Collection
Periods will be paid to the Servicer;
(c) the Quarterly Administration Fee and all unpaid Quarterly Administration
Fees from prior Distribution 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) the excess of Estimated FTA Collections remitted to the Collection
Account over Actual FTA Collections will be paid to the Servicer to the extent
that the Servicer has not previously withheld or been paid such excess;
(f) Quarterly Interest and any overdue Quarterly Interest (together with, to
the extent lawful, interest on such overdue Quarterly Interest at the
applicable Note Interest Rate) with respect to each Series of Notes will be
transferred to Certificate Trustee for payment to the Certificateholders;
(g) principal on the Notes payable as a result of a Note Event of Default or
on the Final Maturity Date for any Notes will be transferred to the
Certificate Trustee for payment to the Certificateholders;
(h) net earnings on Eligible Investments will be paid to the Note Issuer;
(i) the balance, if any, will be transferred to the Certificate Trustee for
payment to Certificateholders in respect of Quarterly Principal and overdue
Quarterly Principal, if any, for each Series of Notes based on priorities
described in each Prospectus Supplement; and
(j) following the repayment of each outstanding Series of Notes, the
balance, if any, will be released to the Note Issuer.
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 (f) and (g) above, such funds will
be allocated among the various Series based on priorities described in each
Prospectus Supplement.
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For purposes of the foregoing allocations:
"Quarterly Administration Fee" means the quarterly fee payable to SDG&E
as the Administrator under the Administrative Services Agreement between
SDG&E and the Note Issuer, which will be specified in each Prospectus
Supplement.
"Quarterly Interest" means, with respect to any Payment Date and any
Series of Notes, the quarterly interest for such date and Series as
specified in the related Prospectus Supplement.
"Quarterly Principal" means, with respect to any Distribution Date and
any Series of Notes, the quotient obtained by dividing (a) the amount of
principal shown for the next Payment Date for such Series on the Expected
Amortization Schedule therefor or, if less, the unpaid principal amount of
such Series, by (b) four or, if such Payment Date is on or prior to the
first Payment Date for such Series, the lesser of four and the number of
Payment Dates from and including the Series Issuance Date for such Series
to and including such first Payment Date. For any Series of Notes, the
related Prospectus Supplement will indicate the frequency of Payment Dates.
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 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.
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NOTE EVENTS OF DEFAULT; RIGHTS UPON NOTE EVENT OF DEFAULT
An "Event of Default" with respect to any Series of Notes (a "Note Event of
Default") is defined in the Note Indenture as being: (a) a default for five
days or more in the payment of any interest on any Note; (b) a default in the
payment of the then unpaid principal of any Note of any Series on the Final
Maturity Date for such Series; (c) a default in the payment of the redemption
price for any Note on the redemption date therefor; (d) a default in the
observance or performance of any covenant or agreement of the Note Issuer made
in the Note Indenture and the continuation of any such default for a period of
30 days after notice thereof is given to the Note Issuer by the Note Trustee
or to the Note Issuer and the Note Trustee by the holders of at least
25 percent in principal amount of the Notes of such Series then outstanding;
(e) any representation or warranty made by the Note Issuer in the Note
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within 30 days after notice thereof is given
to the Note Issuer by the Note Trustee or to the Note Issuer and the Note
Trustee by the holders of at least 25 percent in principal amount of the Note
Indenture of such Series then outstanding; or (f) certain events of
bankruptcy, insolvency, receivership or liquidation of the Note Issuer.
If a Note Event of Default should occur and be continuing with respect to
any Series of Notes, the Note Trustee or holders of not less than a majority
in principal amount of the Notes of all Series then outstanding may declare
the principal of the Notes of all Series to be immediately due and payable.
Such declaration may, under certain circumstances set forth in the Note
Indenture, be rescinded by the holders of a majority in principal amount of
the Notes of all Series then outstanding.
If the Notes of all Series have been declared to be due and payable
following a Note Event of Default, the Note Trustee may, in its discretion,
either sell the Transition Property or elect to have the Note Issuer maintain
possession of the Transition Property and continue to apply FTA Collections as
if there had been no declaration of acceleration. There is likely to be a
limited market, if any, for the Transition Property following a foreclosure
thereon, in light of the preceding default, the unique nature of the
Transition Property as an asset and other factors discussed herein. In
addition, the Note Trustee is prohibited from selling the Transition Property
following a Note Event of Default with respect to any Series, other than a
default in the payment of any principal or redemption price or a default for
five days or more in the payment of any interest on any Note of any Series
unless (a) the holders of all the outstanding Notes of all Series consent to
such sale, (b) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes of all Series
or (c) the Note Trustee determines that the proceeds of the Transition
Property would not be sufficient on an ongoing basis to make all payments on
the Notes of all Series as such payments would have become due if the Notes
had not been declared due and payable, and the Note Trustee obtains the
consent of the holders of 66 2/3 percent of the aggregate outstanding amount
of the Notes of all Series.
Subject to the provisions of the Note Indenture relating to the duties of
the Note Trustee, in case a Note Event of Default will occur and be
continuing, the Note Trustee will be under no obligation to exercise any of
the rights or powers under the Notes at the request or direction of any of the
holders of Notes of any Series if the Note Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities
which might be incurred by it in complying with such request. Subject to such
provisions for indemnification and certain limitations contained in the Note
Indenture, the holders of a majority in principal amount of the outstanding
Notes of all Series (or, if less than all Classes are affected, the affected
Class or Classes) will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Note Trustee and the
holders of a majority in principal amount of the Notes of all Series then
outstanding may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a 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
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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 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,
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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 (the "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 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 securities or notes issued by an
affiliate and 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
0.5% of the original aggregate principal amount of all Series of Notes which
remain outstanding.
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
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(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 "Federal Income Tax Consequences" and "State and
Local Taxation" herein.
ANNUAL COMPLIANCE STATEMENT
The Note Issuer will be required to file annually with the Note Trustee, the
Certificate Trustee and the Rating Agencies a written statement as to the
fulfillment of its obligations under the Notes.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust will issue the Certificates pursuant to the Trust Agreement, the
form of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Each Series of Certificates will be issued under
the terms of a supplement to the Trust Agreement, as 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 and funds from time to time deposited with the
Trustee in certain amounts 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. 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 are not obligations of, or guaranteed by, the Certificate
Trustee, SDG&E, the Infrastructure Bank or any affiliate of any of the
foregoing. 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.
PAYMENTS AND DISTRIBUTIONS
The Certificate Trustee is scheduled to receive payments of interest on and
principal of the Notes (in each case, the amounts paid to any Series or Class
of the Notes will be determined from time to time in accordance with the
provisions described under "Description of the Notes--Allocations; Payments"
herein) on each Payment Date.
The Certificate Trustee will distribute on each Distribution Date to the
holders of each Class of Certificates all payments of principal and interest
with respect to the corresponding Class of Notes (other than payments received
following a payment default in respect of such Class of Notes), the receipt of
which is confirmed by the
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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 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 Business Day,
distributions scheduled to be made on such Special Distribution Date or other
date may be made on the next succeeding Certificate Business Day and no
interest shall accrue upon such distribution during the intervening period.
"Certificate Business Day" means any day other than a Saturday, a
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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.
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; (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. 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. 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 Certificate Event of Default shall
have occurred and be continuing with respect to any Class of Certificates, the
Certificate Trustee (i) may vote all the Notes of all Series to declare the
unpaid principal amount of all Series of Notes and accrued interest thereon to
be due and payable and (ii) upon the written direction of holders of the
corresponding Class of Certificates, will vote a corresponding percentage of
the corresponding Class of Notes in favor of so declaring. In addition, the
Trust Agreement provides that, if a Certificate Event of Default with respect
to any Class of Certificates shall have occurred and be continuing, the
Trustee (i) may 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 and (ii) upon the
written direction of holders of the corresponding Class of Certificates, will
vote a corresponding percentage of the corresponding Class of Notes in favor
of so directing the Note Trustee.
As an additional remedy, if a Certificate 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 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 without
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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 Certificate Events of Default unless (x)
the Certificate Trustee determines that the amounts receivable from the Note
Collateral with respect to each Class of Notes are not sufficient to pay in
full the principal of and accrued interest on the Notes of each such Class and
to pay all sums due to the Certificate Trustee and other administrative
expenses specified in the Trust Agreement and the Certificate Trustee obtains
the written consent of holders of Certificates of each such Class representing
66 2/3% of the aggregate outstanding principal amount of each such Class of
Certificates or (y) the Certificate Trustee obtains the consent of 100% of the
aggregate outstanding principal amount of each such Class of Certificates. Any
proceeds received by the Certificate Trustee upon any such sale will be
deposited in the Certificate Account for such Class and will be distributed to
the holders of Certificates of such Class on a Special Distribution Date.
Any funds representing payments received with respect to any Series or Class
of Notes in default, or the proceeds from the sale by the Certificate Trustee
of any Class of Notes, 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 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.
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OPTIONAL REDEMPTION
The Trust may redeem, at its option, any Certificates of a Class if the
related Class of Notes is redeemed and otherwise to the extent and in the
manner specified in the related Prospectus Supplement. 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 45
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 "Federal Income Tax
Consequences" and "State and Local 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; or (4) to modify, eliminate or add
to the provisions of the Trust Agreement to such extent as shall be necessary
to continue the qualification of the Trust Agreement (including any
supplemental agreement) under the Trust Indenture Act, and to add to the Trust
Agreement certain other provisions as may be expressly permitted by the Trust
Indenture Act.
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) 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, (c) permit the disposition of any Note held by the Trust except as
permitted by the Trust
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Agreement, or otherwise deprive any Certificateholder of the benefit of the
ownership of the related Notes held by the Trust, or (d) cause the Trust to be
treated as an association or publicly traded partnership taxable as a
corporation for federal income tax purposes. Promptly following the execution
of any amendment to the Trust Agreement (other than an amendment described in
the preceding paragraph), the Certificate Trustee will furnish written notice
of the substance of such amendment to each Certificateholder.
Any supplement to the Trust Agreement executed in connection with the
issuance of one or more new Series of Certificates will not be considered an
amendment to the Trust Agreement.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder or group of Certificateholders
of any Series or of all outstanding Series of record holding Certificates
evidencing not less than 10 percent of the aggregate outstanding principal
amount of the Certificates of such Series or all Series, as applicable, the
Certificate Trustee will afford such Certificateholder or Certificateholders
access during business hours to the current list of Certificateholders of such
Series or of all outstanding Series, as the case may be, for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Agreement.
The Trust Agreement does not provide for any annual or other meetings of
Certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates will be issued in definitive form and will be transferable and
exchangeable at the office of the registrar identified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no service charge will be made for any such registration or
transfer of such Certificates, but the owner may be required to pay a sum
sufficient to cover any tax or other governmental charge.
Each Class of Certificates will be issued in the minimum initial
denominations set forth in the related Prospectus Supplement and, except as
otherwise provided in the related Prospectus Supplement, in integral multiples
thereof.
Distributions of interest and principal will be made on each Distribution
Date to the Certificateholders in whose names the Certificates were registered
on the related Record Date.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, one or more Classes of
Certificates initially may be Book-Entry Certificates, which are initially
represented by one or more certificates registered in the name of Cede, as
nominee of DTC, or another securities depository, and are available only in
the form of book-entries. Any Book-Entry Certificates will initially be
registered in the name of Cede, the nominee of DTC. Holders may also hold
Certificates of a Class through Centrale de Livraison de Valeurs Mobilieres
S.A. ("CEDEL") or the Euroclear System ("Euroclear") (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems.
Cede, as nominee for DTC, will hold the global Certificate or Certificates.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective Depositaries (as defined herein) which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York will act as depositary
for Euroclear (in such capacities, the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform
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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 CEDEL, as nominee for DTC, on each such date, DTC will forward
such distributions to its Participants, which thereafter will be required to
forward them to Indirect Participants or holders of beneficial interests in
the Certificates. The Certificate Trustee, the Seller, the Servicer and any
paying agent, transfer agent or registrar may treat the registered holder in
whose name any Certificate is registered (expected to be Cede) as the absolute
owner thereof (whether or not such Certificate is overdue and notwithstanding
any notice of ownership or writing thereon or any notice to the contrary) for
the purpose of making distributions and for all other purposes.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Certificateholders will only be permitted to
exercise their rights as Certificateholders indirectly through Participants
and DTC. All references herein to actions by Certificateholders thus refer to
actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders refer to distributions, notices, reports and statement to
Cede, as the registered holder of the Certificates, for distribution to the
beneficial owners of the Certificate in accordance with DTC procedures.
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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 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.
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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 "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 generally will include,
except if otherwise provided therein, if (a) DTC advises 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 Note Issuer is unable to locate a qualified
successor, (b) the Note Issuer, at its sole option, elects 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 advise DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) to
the exclusion of any physical certificates being issued to Certificateholders
is no longer in the best interests of Certificateholders. Upon issuance of
Definitive Certificates of a Class, such Certificates will be transferable
directly (and not exclusively on a book-entry basis) and registered holders
will deal directly with the Certificate Trustee with respect to transfers,
notices and distributions.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive securities representing the Certificates and instructions for
registration, the Certificate Trustee will issue the Certificates in the form
of Definitive Certificates, and thereafter the Certificate Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Trust Agreement and the related Prospectus Supplement.
Distribution of principal 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
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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 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.
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 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. 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.
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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 fiduciaries 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
The Seller has obtained from the Internal Revenue Service (the "IRS") a
letter ruling to the effect that securities such as the Notes will be treated
as debt for federal income tax purposes. 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
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. 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.
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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 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. 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.
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 Certificate 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 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 10 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), (iv) such interest is contingent
interest described in Code Section 871(h)(4), or (v) the non-U.S.
Certificateholder bears certain relationships to any holder of either the
Notes other than the transferor or any other interest in the Trust not
properly characterized as debt. 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
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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 Note Issuer nor a paying agent has actual knowledge
that the holder is a United States 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 United
States Person, a controlled foreign corporation for United States federal
income tax purposes or a foreign person 50% or more of whose gross income is
effectively connected with the conduct of a trade or business within the
United States for 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
United States 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-United States 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.
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STATE AND LOCAL 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.
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.
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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. The Seller will use such proceeds for general corporate purposes.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters named
in the related Prospectus Supplement (the "Underwriters") by a negotiated firm
commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Note Issuer and the Trust intend that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession
to certain other dealers. Underwriters, dealers and agents that participate in
the distribution of the Certificates of a Series may be deemed to be
underwriters and any discounts or commissions received by them from the Trust
and any profit on the resale of the Certificates by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from the Trust will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Trust, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Trust 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 from at least one Rating Agency.
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.
61
<PAGE>
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 O'Melveny &
Myers LLP, 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.
62
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Act...................................................................... 30
Actual FTA Collections................................................... 35
Administrator............................................................ 15
Advice Letters........................................................... 11
Annual Accountant's Report............................................... 37
Bankruptcy Code.......................................................... 21
Base Calculation Model................................................... 25
Basic Documents.......................................................... 46
Book-Entry Certificates.................................................. 16
Calculation Date......................................................... 26
Cede..................................................................... 16
CEDEL.................................................................... 52
CEDEL Participants....................................................... 54
Certificate Account...................................................... 48
Certificate Business Day................................................. 48
Certificate Event of Default............................................. 14, 49
Certificate Trustee...................................................... 8
Certificateholders....................................................... 3
Certificates............................................................. 1, 8
Class.................................................................... 1, 9
Closing Date............................................................. 27
Code..................................................................... 17
Collateral............................................................... 46
Collection Account....................................................... 41
Collection Period........................................................ 15
Commission............................................................... 3
Cooperative.............................................................. 54
Customers................................................................ 11
Default.................................................................. 50
Definitive Certificates.................................................. 65
Delaware Business Trust Act.............................................. 22
Delaware Trustee......................................................... 8
Depositaries............................................................. 52
Distribution Date........................................................ 12
DTC...................................................................... 3, 17
Eligible Institution..................................................... 41
Eligible Investments..................................................... 42
ERISA.................................................................... 17
Estimated FTA Collections................................................ 35
Euroclear................................................................ 52
Euroclear Operator....................................................... 54
Euroclear Participants................................................... 54
Event of Default......................................................... 14
Excess Remittance........................................................ 35
Exchange Act............................................................. 3
Fee Agreement............................................................ 29
FERC..................................................................... 20
Final Maturity Date...................................................... 39
</TABLE>
63
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Financing Order.......................................................... 11
Financing Order Anniversary.............................................. 27
FTA Charge............................................................... 11
FTA Collections.......................................................... 11
FTA Payments............................................................. 11
holder................................................................... 53
Indirect Participants.................................................... 16
Infrastructure Bank...................................................... 1, 8
Initial Transition Property.............................................. 27
IRS...................................................................... 57
ISO...................................................................... 20
Issuance Advice Letter................................................... 11
Monthly Servicer's Certificate........................................... 36
Moody's.................................................................. 22
Non-U.S. Certificateholder............................................... 57
Note Collateral.......................................................... 39
Note Event of Default.................................................... 14, 44
Note Indenture........................................................... 39
Note Interest Rate....................................................... 39
Note Issuer.............................................................. 2, 8
Noteholder............................................................... 39
Notes.................................................................... 2, 7
OID...................................................................... 57
Operating Expenses....................................................... 15
Overcollateralization Amount............................................. 40
Participants............................................................. 16
Parties in Interest...................................................... 60
Payment Date............................................................. 12
Plan Assets.............................................................. 60
Plans.................................................................... 60
Proposition 218.......................................................... 19
PU Code.................................................................. 10
PX....................................................................... 20
Quarterly Administration Fee............................................. 43
Quarterly Interest....................................................... 43
Quarterly Principal...................................................... 43
Quarterly Servicer's Certificate......................................... 46
Rate Freeze Period....................................................... 24
Rating Agency............................................................ 17
Rating Agency Condition.................................................. 39
Record Date.............................................................. 13
Registration Statement................................................... 3
Remittance Date.......................................................... 35
Remittance Shortfall..................................................... 35
Rules.................................................................... 54
S&P...................................................................... 22
Sale Agreement........................................................... 8
Scheduled Final Distribution Date........................................ 13
Scheduled Maturity Date.................................................. 39
</TABLE>
64
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SDG&E...................................................................... 2, 8
Securities Act............................................................. 3
Seller..................................................................... 2, 8
Series..................................................................... 2, 9
Series Issuance Date....................................................... 39
Servicer................................................................... 2, 8
Servicer Defaults.......................................................... 37
Servicing Agreement........................................................ 8
Servicing Fee.............................................................. 16
Small Commercial Customers................................................. 25
Special Counsel............................................................ 56
Special Distribution Date.................................................. 48
Special Payments........................................................... 48
Statute.................................................................... 7
Subsequent Transfer Date................................................... 27
Subsequent Transition Property............................................. 27
Termination Date........................................................... 13
Terms and Conditions....................................................... 55
Transition Costs........................................................... 10
Transition Property........................................................ 11
True-Up Mechanism Advice Letter............................................ 12
True-Up Mechanism Calculation Model........................................ 26
Trust...................................................................... 1, 8
Trust Agreement............................................................ 8
U.S. Certificateholder..................................................... 57
U.S. Person................................................................ 57
Underwriters............................................................... 61
Utilities.................................................................. 7
Withholding Agent.......................................................... 58
</TABLE>
65
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK, THE UNDER-
WRITER 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 SUPPLE-
MENT OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICI-
TATION.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Holders......................................................... S-3
Forward-Looking Statements................................................. S-3
Transaction Overview....................................................... S-4
Prospectus Supplement Summary.............................................. S-5
Description of the Certificates............................................ S-10
Description of the Notes................................................... S-11
Description of the Transition Property..................................... S-13
Certain Yield and Maturity Considerations.................................. S-14
The Seller and Servicer.................................................... S-15
Servicing.................................................................. S-15
ERISA Considerations....................................................... S-16
Underwriting............................................................... S-18
Ratings.................................................................... S-18
Legal Matters.............................................................. S-19
Index of Principal Definitions............................................. S-20
<CAPTION>
PROSPECTUS
Transaction Overview....................................................... 7
Prospectus Summary......................................................... 8
Risk Factors............................................................... 18
Energy Deregulation and New California Market Structure.................... 24
Description of the Transition Property..................................... 24
Certain Yield and Maturity Considerations.................................. 29
The Trust.................................................................. 29
The Infrastructure Bank.................................................... 30
The Note Issuer............................................................ 30
The Seller and Servicer.................................................... 30
Servicing.................................................................. 34
Description of the Notes................................................... 39
Description of the Certificates............................................ 47
Federal Income Tax Consequences............................................ 56
State and Local Taxation................................................... 60
ERISA Considerations....................................................... 60
Use of Proceeds............................................................ 61
Plan of Distribution....................................................... 61
Ratings.................................................................... 61
Legal Matters.............................................................. 62
Index of Principal Definitions............................................. 63
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CALIFORNIA
INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT
BANK SPECIAL PURPOSE
TRUST SDG&E-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 17 of the Limited
Liability Company Agreement of the Registrant provides that, to the full
extent permitted by applicable law, the Registrant shall indemnify any member
or officer of the Registrant for any loss, damage or claim incurred by such
member or officer by reason of any act or omission performed or omitted in
good faith on behalf of the Registrant in a manner reasonably believed to be
within the scope of the authority conferred on such member or officer by the
Limited Liability Company Agreement, except that the Registrant shall not
indemnify any such member or officer for any loss, act or omission incurred by
such member or officer by reason of 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. 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.
The Articles of Incorporation of San Diego Gas and Electric Company (the
"Member") authorizes the Member to provide indemnification of agents (as
defined in Section 317 of the California Law) through bylaw provision,
agreements with agents, vote of shareholders or disinterested directors, or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Law, subject only to the applicable limits set forth in
Section 204 of the California Law. The Registrant believes that the officers
of the Registrant are serving at the request of the Member and are therefore
entitled to such indemnity from the Member.
Section 2 of Article 7 of the Bylaws of the Member provides for the Member
to indemnify any person who is or was a party, or is threatened to be made a
party, to any proceeding (other than an action by or in the right of the
Member to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of the Member against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the Member and, in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful. Further, Section 3 of Article 7 of the
Bylaws provides
II-1
<PAGE>
for the Member to indemnify any person who is or was a party, or is threatened
to be made a party, to any threatened, pending or completed action by or in
the right of the Member to procure a judgment in its favor by reason of the
fact that such person is or was an agent of the Member against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith and in a
manner such person believed to be in the best interests of the Member and its
shareholders. However, no indemnification shall be made (a) in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the member in the performance of such person's duty to the Member
and its shareholders, unless and only to the extent that the court in which
such proceeding is or was pending shall determine upon application that, in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for expenses and then only to the extent that
the court shall determine; (b) of amounts paid in settling or otherwise
disposing of a pending action without court approval; or (c) of expenses
incurred in defending a pending action which is settled or otherwise disposed
of without court approval. Notwithstanding any other provision of Article 7,
to the extent that an agent of the Member has been successful on the merits or
otherwise (including the dismissal of an action without prejudice or the
settlement of a proceeding or action without admission of liability) in
defense of any proceeding referred to above, or in defense of any claim, issue
or matter therein, Section 4 of Article 7 provides that he or she shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
Except as provided in Section 4 of Article 7 of the Bylaws of the Member,
Section 5 of Article 7 provides that any indemnification under Section 3 of
Article 7 shall be made by the Member only if authorized in the specific case,
upon a determination that indemnification of the agent is proper in the
circumstances because the agent has met the applicable standard of conduct set
forth in Section 3, by (a) a majority vote of a quorum consisting of directors
who are not parties to such proceeding, (b) if such a quorum of directors is
not obtainable, by independent legal counsel in a written opinion, (c)
approval by the affirmative vote of a majority of the shares of the Member
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute at least a majority of the
required quorum) or by the written consent of holders of a majority of the
outstanding shares which would be entitled to vote at such meeting and, for
such purpose, the shares owned by the person to be indemnified shall not be
considered outstanding or entitled to vote; or (d) the court in which such
proceeding is or was pending, upon application made by the corporation, the
agent or the attorney or other person rendering services in connection with
the defense whether or not such application by said agent, attorney or other
person is opposed by the Member. Section 6 of Article 7 of the Bylaws permits
the advancement of expenses incurred in defending any proceeding by the Member
prior to the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of the agent to repay such amount if it shall be
determined ultimately that the agent is not entitled to be indemnified as
authorized in Article 7 of the Bylaws.
Section 7 of Article 7 of the Bylaws of the Member prohibits indemnification
or advancement, except as provided in Sections 4 and 6, as described above, in
any circumstance where it appears (a) that it would be inconsistent with a
provision of the Articles of Incorporation or Bylaws, a resolution of the
shareholders or an agreement in effect at the time of the accrual of the
alleged cause of action asserted in the proceeding in which the expenses were
incurred or other amounts were paid which prohibits or otherwise limits
indemnification or (b) that it would be inconsistent with any condition
expressly imposed by a court in approving a settlement. Section 8 of Article 7
of the Bylaws permits the Member to indemnify an agent in the absence of any
other basis for indemnification pursuant to Article 7. Further, the
indemnification provided by this Article 7 is not deemed to be exclusive of
any other rights to which those seeking indemnification may be entitled under
any statute, bylaw, agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in an official capacity and as to action in
another capacity while holding such office. The rights to indemnification
under Article 7 continues as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person. Finally, to the extent that any
agent of the Member is by reason of such position, or a position with another
entity at the request of the Member, a witness in any action, suit or
proceeding, Section 9 of Article 7 provides indemnification against all costs
and expenses actually and reasonably incurred by such agent in connection
therewith.
II-2
<PAGE>
The Member has directors' and officers' liability insurance policies in
force insuring directors and officers of the Member and its subsidiaries.
ITEM 16. EXHIBITS.
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation.
3.2 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 O'Melveny & Myers LLP with respect to legality of the Notes.
Opinion of Brown & Wood LLP with respect to legality of the Rate
*5.2 Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to 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 O'Melveny & Myers LLP (included in its opinion filed as
Exhibit 5.1).
*23.2 Consent of Brown & Wood LLP (included in its opinions filed as Exhibits
5.2 and 8.1).
*99.1 Application for Financing Order.
*99.2 Financing Order.
*99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank.
*99.5 Order of Infrastructure Bank.
- --------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of the California Infrastructure and
Economic Development Bank Special Purpose Trust SDG&E (the "Trust") hereby
undertakes as follows:
(a)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement
(Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.); (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration
II-3
<PAGE>
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 each issue.
(d) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection(a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
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 REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAN DIEGO, STATE OF CALIFORNIA, ON JULY 3, 1997.
SDG&E FUNDING
as Registrant
By: /s/ Charles A. McMonagle
__________________________________
Name: Charles A. McMonagle
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON BEHALF OF SDG&E FUNDING LLC ON JULY
3, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ Charles A. McMonagle Principal and Chief Executive Officer
________________________________________ (Principal Executive Officer)
Charles A. McMonagle
/s/ James P. Trent Chief Financial Officer and
________________________________________ Chief Accounting Officer
James P. Trent (Principal Financial and Accounting
Officer)
/s/ David R. Kuzma Member
________________________________________
David R. Kuzma
as Chief Financial Officer of
San Diego Gas & Electric Company
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<S> <C> <C>
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation.
3.2 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 O'Melveny & Myers LLP with respect to legality
of the Notes.
*5.2 Opinion of Brown & Wood LLP with respect to legality of
the Rate Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to 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 O'Melveny & Myers LLP (included in its opinion
filed as Exhibit 5.1).
*23.2 Consent of Brown & Wood LLP (included in its opinions
filed as Exhibits 5.2
and 8.1).
*99.1 Application for Financing Order.
*99.2 Financing Order.
*99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank.
*99.5 Order of Infrastructure Bank.
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
Exhibit 3.1
CERTIFICATE OF FORMATION
OF
SDG&E FUNDING LLC
This Certificate of Formation of SDG&E Funding LLC (the "LLC"), dated
as of July 1, 1997, is being duly executed and filed by James G. Leyden, Jr., as
an authorized person, to form a limited liability company under the Delaware
Limited Liability Company Act (6 Del. C. (S) 18-101, et seq.)
---- -- -- ---
FIRST. The name of the limited liability company formed hereby is
SDG&E Funding LLC.
SECOND. The address of the registered office of the LLC 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.
THIRD. The name and address of the registered agent for service of
process on the LLC 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.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation as of the date first above written.
/s/ James G. Leyden, Jr.
--------------------------
Name: James G. Leyden, Jr.
Authorized Person
<PAGE>
Exhibit 3.2
LIMITED LIABILITY COMPANY AGREEMENT
OF
SDG&E FUNDING LLC
This Limited Liability Company Agreement (this "Agreement") of SDG&E
Funding LLC (the "Company"), is entered into by San Diego Gas & Electric
Company, a California corporation, as the sole member (the "Initial Member").
As used in this Agreement, the term "Member" means the Initial Member, and
includes any person or entity admitted as an additional member of the Company or
a substitute member of the Company pursuant to the provisions of this Agreement.
The Initial Member, by execution of this Agreement, hereby forms 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 hereby agrees as follows:
1. Name. The name of the limited liability company formed hereby is
----
SDG&E Funding LLC.
2. Certificates. James G. Leyden, Jr., as an authorized person
------------
within the meaning of the Act, shall execute, deliver and file 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 shall cease and the Member shall
thereafter be designated as an authorized person within the meaning of the Act.
The Member or an Officer (as hereinafter defined) 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 a jurisdiction in which
the Company may wish to conduct business.
3. Purpose. The Company is formed for the object and purpose of,
-------
and the nature of the business to be conducted and promoted by the Company is,
engaging in any lawful act or activity for which limited liability companies may
be formed under the Act.
4. Powers. In furtherance of its purposes, but subject to all of
------
the provisions of this Agreement, the Company shall have the power and is hereby
authorized to:
a. acquire by purchase, lease, contribution of property or
otherwise, own, hold, sell, convey, transfer or dispose of any real or personal
property
<PAGE>
which may be necessary, convenient or incidental to the accomplishment of the
purpose of the Company;
b. act as a trustee, executor, nominee, bailee, director,
officer, agent or in some other fiduciary capacity for any person or entity and
to exercise all of the powers, duties, rights and responsibilities associated
therewith;
c. take any and all actions necessary, convenient or
appropriate as trustee, executor, nominee, bailee, director, officer, agent or
other fiduciary, including the granting or approval of waivers, consents or
amendments of rights or powers relating thereto and the execution of appropriate
documents to evidence such waivers, consents or amendments;
d. operate, purchase, maintain, finance, improve, own, sell,
convey, assign, mortgage, lease or demolish or otherwise dispose of any real or
personal property which may be necessary, convenient or incidental to the
accomplishment of the purposes of the Company;
e. borrow money and issue evidences of indebtedness in
furtherance of any or all of the purposes of the Company, and secure the same by
mortgage, pledge or other lien on the assets of the Company;
f. invest any funds of the Company pending distribution or
payment of the same pursuant to the provisions of this Agreement and open and
maintain checking and saving acounts with banking and savings institutions;
g. prepay in whole or in part, refinance, recast, increase,
modify or extend any indebtedness of the Company and, in connection therewith,
execute any extensions, renewals or modifications of any mortgage or security
agreement securing such indebtedness;
h. enter into, perform and carry out contracts of any kind,
including, without limitation, contracts with any Member or any person or entity
affiliated with the Member, necessary to, in connection with, convenient to, or
incidental to the accomplishment of the purposes of the Company;
i. employ or otherwise engage employees, managers, contractors,
advisors, attorneys and consultants and pay reasonable compensation for such
services;
j. enter into partnerships, limited liability companies,
trusts, associations, corporations or other ventures with other persons or
entities in furtherance of the purposes of the Company; and
2
<PAGE>
k. do such other things and engage in such other activities related
to the foregoing as may be necessary, convenient or incidental to the conduct of
the business of the Company, and have and exercise all of the powers and rights
conferred upon limited liability companies formed pursuant to the Act.
5. Principal Business Office. The principal business office of the
-------------------------
Company shall be located at such location as may hereafter be determined by the
Member.
6. 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.
7. 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.
8. Members. The name and the mailing address of the Initial Member
-------
are set forth on Schedule A attached hereto.
9. Limited Liability. Except as otherwise provided by the Act, the
-----------------
debts, obligations and liabilities of the Company, whether arising in contract,
tort or otherwise, shall be solely the debts, obligations and liabilities of the
Company, and the Member shall not be obligated personally for any such debt,
obligation or liability of the Company solely by reason of being a member of the
Company.
10. Capital Contributions. The Initial Member is deemed admitted as
---------------------
the Member of the Company upon its execution and delivery of this Agreement.
The Initial Member has contributed the amount of cash to the Company as listed
on Schedule A attached hereto.
11. 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. To the extent
the Member makes an additional capital contribution to the Company, the Member
shall revise Schedule A of this Agreement.
12. Allocation of Profits and Losses. The Company's profits and
--------------------------------
losses shall be allocated to the Member.
13. Distributions. Distributions shall be made to the Member at the
-------------
times and in the aggregate amounts determined by the Member. Notwithstanding
any provision to the contrary contained in this Agreement, the Company shall not
make a
3
<PAGE>
distribution to any Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or other applicable law.
14. Management. In accordance with Section 18-402 of the Act,
----------
management of the Company shall be vested in the Member. The Member 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, possessed by members of a limited liability company
under the laws of the State of Delaware. The Member has the authority to bind
the Company. The Member may act by written consent.
15. Officers. The Member may, from time to time as it deems
--------
advisable, appoint officers of the Company (the "Officers") and assign in
writing titles (including, without limitation, President, Vice President,
Secretary, and Treasurer) to any such person. Unless the Member decides
otherwise, if the title is one commonly used for officers of a business
corporation formed under the Delaware General Corporation Law, the assignment of
such title shall constitute the delegation to such person of the authorities and
duties that are normally associated with that office. Any delegation pursuant
to this Section 15 may be revoked at any time by the Member. An Officer may be
removed with or without cause by the Member.
16. Other Business. 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.
17. Exculpation and Indemnification. No Member or Officer shall be
-------------------------------
liable to the Company, any other person or entity who has an interest in the
Company for any loss, damage or claim incurred by reason of any act or omission
performed or omitted by such Member or Officer 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 Member or Officer by this Agreement, except that a
Member or Officer shall be liable for any such loss, damage or claim incurred by
reason of such Member's or Officer's willful misconduct. To the full extent
permitted by applicable law, a Member or Officer shall be entitled to
indemnification from the Company for any loss, damage or claim incurred by such
Member or Officer by reason of any act or omission performed or omitted by such
Member or Officer 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
Member or Officer by this Agreement, except that no Member or Officer shall be
entitled to be indemnified in respect of any loss, damage or claim incurred by
such Member or Officer by reason of willful misconduct with respect to such acts
or omissions; provided, however, that any indemnity under this Section 17 shall
-------- -------
be provided
4
<PAGE>
out of and to the extent of Company assets only, and no Member shall have
personal liability on account thereof.
18. Assignments. A Member may assign in whole or in part its limited
-----------
liability company interest in the Company with the written consent of the
Member. If a Member transfers all of its interest in the Company pursuant to
this Section, the transferee shall be admitted to the Company upon its execution
of an instrument signifying its agreement to be bound by the terms and
conditions of 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.
19. Resignation. A 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, an additional member of the Company shall be admitted
to the Company, subject to Section 20, upon its execution of an instrument
signifying its agreement to be bound by the terms and conditions of this
Agreement. Such admission shall be deemed effective immediately prior to the
resignation, and, immediately following such admission, the resigning Member
shall cease to be a member of the Company.
20. Admission of Additional Members. One (1) or more additional
-------------------------------
members of the Company may be admitted to the Company with the written consent
of the Member.
21. Dissolution.
-----------
a. The Company shall dissolve, and its affairs shall be wound
up upon the first to occur of the following: (i) the written consent of the
Member, (ii) 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 (iii) the entry of a decree of judicial
dissolution under Section 18-802 of the Act.
b. The bankruptcy of the Member will 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.
22. Separability of Provisions. Each provision of this Agreement
--------------------------
shall be considered separable 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
5
<PAGE>
invalidity, unenforceability or illegality shall not impair the operation of or
affect those portions of this Agreement which are valid, enforceable and legal.
23. Entire Agreement. This Agreement constitutes the entire
----------------
agreement of the Member with respect to the subject matter hereof.
24. 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.
25. Amendments. This Agreement may not be modified, altered,
----------
supplemented or amended except pursuant to a written agreement executed and
delivered by the Member.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Agreement as of the 1st day of July, 1997.
SAN DIEGO GAS & ELECTRIC COMPANY
By: /s/ David R. Kuzma
-----------------------------
Name: David R. Kuzma
Title: Chief Financial Officer
6
<PAGE>
Schedule A
to SDG&E Funding LLC Limited Liability Company Agreement
MEMBER
- ------
<TABLE>
<CAPTION>
Agreed Value
of Capital Percentage
Name Mailing Address Contribution Interest
- ---- --------------- ------------ ----------
<S> <C> <C> <C>
SAN DIEGO GAS & P.O. Box 1831 $5,000.00 100%
ELECTRIC San Diego, California 92112
COMPANY
</TABLE>
7
