<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1997
Registration No. 333-30761
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
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 (I.R.S. Employer
of Organization) 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 825 EIGHTH AVENUE
LOS ANGELES, CALIFORNIA 90071 50TH FLOOR NEW YORK, NEW YORK 10019
SAN FRANCISCO, CALIFORNIA 94104
</TABLE>
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
TITLE OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED AGGREGATE PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE/(1)/
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate Reduction Certificates $1,000,000 100%/(2)/ $1,000,000/(2)/ $303.03
- -------------------------------------------------------------------------------------------------------------------------------
SDG&E Funding LLC Notes $1,000,000/(3)/ /(3)/ /(3)/ None
==============================================================================================================================
</TABLE>
(1) Fee of $303.03 paid in connection with original Registration Statement
filed on July 3, 1997.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) 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.
===============================================================================
<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 _________ __, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1997)
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST SDG&E-1
RATE REDUCTION CERTIFICATES, SERIES 199 -
$________ ORIGINAL PRINCIPAL BALANCE
[$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ FLOATING RATE CERTIFICATES]
SDG&E FUNDING LLC
(Issuer of the Notes)
SAN DIEGO GAS & ELECTRIC COMPANY
(Seller and Servicer)
The Offered Certificates do not represent an interest in or obligation of
the State of California, the Infrastructure Bank, any other governmental agency
or instrumentality or the Seller or any of its affiliates other than the Note
Issuer. None of the Offered Certificates, the Underlying Notes or the
Transition Property will be guaranteed or insured by the State of California,
the Infrastructure Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or its affiliates.
The California Infrastructure and Economic Development Bank Special Purpose
Trust 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") [and, with respect to the Class ____
Certificates, payments pursuant to the Swap Agreement]. Each Underlying Note
will be secured primarily by the Transition Property owned by the Note Issuer,
as described under "Description of the Transition Property" herein and in the
Prospectus; the Underlying Notes will also be secured by the other Note
Collateral described under "Description of the Notes -- Security" in the
Prospectus. The Underlying Notes, together with other Series of notes issued
from time to time by the Note Issuer under the Note Indenture (together with the
Underlying Notes, the "NOTES"), are owned by the California Infrastructure and
Economic Development Bank Special Purpose Trust 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 23 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>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT TRUST(1)(2)
<S> <C> <C> <C>
Per Class [___] % % %
Certificate......
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Per Class [___] % % %
Certificate......
Total............. $ $ $
</TABLE>
- --------------
(1) Plus accrued interest, if any, at the applicable Certificate Interest Rate
from ________ __, 199_.
(2) Before deduction of expenses estimated to be $__________.
____________________
The Offered Certificates are offered by the Underwriters when, as and if
issued by the Trust and accepted by the Underwriters and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Offered Certificates will be delivered on or about ______________, 199__, in
book-entry form through the facilities of The Depository Trust Company[, Cedel
Bank, societe anonyme, and the Euroclear System].
____________________
[Underwriters]
The date of this Prospectus Supplement is _____, 199_
S-2
<PAGE>
Interest on each Class of Offered Certificates at the applicable Certificate
Interest Rate will be distributable quarterly on or about the 25th day of March,
June, September and December or, if any such day is not a Certificate Business
Day, the next succeeding Certificate Business Day (each, a "DISTRIBUTION DATE")
commencing _________, 199_. INTEREST AND PRINCIPAL ON ANY CLASS OF OFFERED
CERTIFICATES WILL BE DISTRIBUTABLE ONLY TO THE EXTENT OF PAYMENTS RECEIVED BY
THE TRUST ON THE RELATED CLASS OF UNDERLYING NOTES. See "Description of the
Notes" herein.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF THE
NOTE ISSUER ARE THE SOLE SOURCE OF PAYMENTS ON THE UNDERLYING NOTES. PAYMENTS
ON THE UNDERLYING NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF
DISTRIBUTIONS ON THE OFFERED CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE
INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES OTHER THAN THE NOTE
ISSUER WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE OFFERED CERTIFICATES, THE
UNDERLYING NOTES OR THE TRANSITION PROPERTY, EXCEPT AS EXPRESSLY SET FORTH
HEREIN AND IN THE PROSPECTUS.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY AGENCY OR INSTRUMENTALITY THEREOF IS PLEDGED TO THE PAYMENT OF
THE PRINCIPAL OF, OR INTEREST ON, THE UNDERLYING NOTES OR THE OFFERED
CERTIFICATES OR TO THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY NOR IS THE
STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN ANY MANNER OBLIGATED
TO MAKE ANY APPROPRIATION FOR THE PAYMENT THEREOF.
Prospective investors should refer to the "Index of Principal Definitions" which
begins on page S-31 herein and which begins on page 86 in the Prospectus for the
location of the definitions of capitalized terms that appear in the Prospectus
and this Prospectus Supplement.
S-3
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Servicer indirectly will provide to Cede & Co., as nominee of The
Depository Trust Company ("DTC") and registered holder of the Offered
Certificates and, upon request, to Participants of DTC, periodic reports
concerning the Offered Certificates. See "Description of the Certificates--
Reports to Certificateholders" herein. Such reports may be made available to
the holders of interests in the Offered Certificates (the "CERTIFICATEHOLDERS")
upon request to their Participants. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
The financial information provided to Certificateholders will not be examined
and reported upon, nor will an opinion thereon be provided by, any independent
public accountant.
The Note Issuer will file with the Securities and Exchange Commission (the
"COMMISSION") such periodic reports as are required by the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), and the rules, regulations or
orders of the Commission thereunder. Copies of the Registration Statement and
exhibits thereto may be obtained at the locations specified in the Prospectus
under "Available Information" at prescribed rates. Information filed with the
Commission can also be inspected at the Commission's site on the World Wide Web
at http://www.sec.gov. The Note Issuer may discontinue filing periodic reports
under the Exchange Act at the beginning of the fiscal year following the
issuance of the Offered Certificates if there are fewer than 300 holders of such
Offered Certificates.
S-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 which begins on page S-31 sets forth the pages on which
the definitions of certain principal terms appear.
Transaction Overview For a brief summary of the statutes and proceedings
which form the basis for the issuance and sale of the
Offered Certificates by the Trust, investors are
directed to the discussion under the heading
"Prospectus Summary--Transaction Overview" in the
Prospectus.
The Note Issuer will issue the Underlying Notes, which
will be secured by the Transition Property and the
other Note Collateral described under "Description of
the Notes--Security" herein, and sell the Underlying
Notes to the Trust in exchange for the proceeds of the
sale of the Offered Certificates. The Trust has been
established by the Infrastructure Bank. The Trust,
whose sole assets will be the Underlying Notes and
other Notes issued under the Indenture [and its rights
under the Swap Agreement (and any other comparable
interest rate swap agreements) to which it is a party],
will issue the Offered Certificates, which will be sold
to the Underwriters. The Offered Certificates of each
Class represent an undivided interest in the related
Class of Underlying Notes and the proceeds thereof[,
together with the proceeds of the Swap Agreement].
The charges included in the Transition Property
described in the Prospectus are calculated to be
sufficient over time to pay principal and interest on
the Offered Certificates, all related fees and expenses
and the Overcollateralization Amount described herein.
These charges will be subject to adjustment pursuant to
the true-up mechanism described in the Prospectus over
the life of the Offered Certificates to enhance the
likelihood of timely recovery of such amounts, although
there can be no assurance that the true-up mechanism
will operate as intended or that any of the Offered
Certificates will mature as scheduled.
Risk Factors Investors should consider the risks associated with an
investment in the Offered Certificates. For a
discussion of certain material risks associated
therewith, investors should review the discussion under
"Risk Factors" which begins on page 23 of the
Prospectus.
[In addition, an investment in the Class ___
Certificates involves the additional risks discussed
herein under "Additional Risk Factors Relating to the
Class __ Certificates."]
S-5
<PAGE>
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 Offered Certificates are comprised
of the following _____ classes (each, a "CLASS"):
_____. As of the Series Issuance Date for the Offered
Certificates, the aggregate principal balance thereof
(the "ORIGINAL CERTIFICATE PRINCIPAL BALANCE") will be
$___________. Each Class of Offered Certificates will
have a principal balance (the "CLASS PRINCIPAL
BALANCE") equal to the initial amount of principal
allocable to such Class, reduced by principal
distributed to such Class in accordance with the terms
of the Trust Agreement. See "Description of the
Certificates" herein and in the Prospectus.
None of the Offered Certificates, the Underlying Notes
or the Transition Property will be guaranteed or
insured by the State of California, the Infrastructure
Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or any of its
affiliates other than the Note Issuer. Neither the
full faith and credit nor the taxing power of the State
of California or any agency or instrumentality thereof
is pledged to the distributions of principal of, or
interest on, the Offered Certificates or the Underlying
Notes or to the payments in respect of the Transition
Property. The issuance and sale of the Offered
Certificates is contingent upon the effectiveness of
the Issuance Advice Letter related thereto.
Seller and Servicer 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 of the Transition Property, 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").
The Trust will not be an agency or instrumentality of
the State of California. The Infrastructure Bank will
not guarantee or insure the Offered Certificates, the
Underlying Notes or the Transition Property. For a
more complete discussion of the Trust, see "The Trust"
in the Prospectus, and for a more complete discussion
of the Infrastructure Bank, see "The Infrastructure
Bank" in the Prospectus.
Certificate Trustee ____________, a _________ (the "CERTIFICATE TRUSTEE").
Delaware Trustee ____________, a _________ (the "DELAWARE TRUSTEE").
S-6
<PAGE>
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.
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 Charges, as adjusted from time to time, (ii) to
be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges as provided in the PU
Code.
FTA Charges As more fully described under "Description of the
Transition Property" herein and in the Prospectus, the
amounts permitted to be recovered from the Customers
which are necessary to provide for the amortization of
all Certificates in accordance with the applicable
Expected Amortization Schedules, together with all
costs and expenses related thereto and the
Overcollateralization Amount.
Distribution Dates Each March 25, June 25, September 25 and December 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").
S-7
<PAGE>
Final Distribution Date The Scheduled Final Distribution Date for each Class of
the Offered Certificates, which is the date when all
principal and interest on such Class of Offered
Certificates is expected to be distributed in full,
based on certain assumptions described herein, and the
Termination Date for each Class of Offered Certificates
are specified herein under "Description of the
Certificates."
Failure to pay principal of and interest on any Class
of Offered Certificates in full by the related
Termination Date shall constitute an Event of Default,
and the Certificate Trustee may and, upon the written
direction of the holders of a majority in principal
amount of all Certificates of all Series then
outstanding, shall declare the unpaid principal amount
of all the Notes of all Series then outstanding to be
due and payable. See "Description of the Certificates-
-Certificate Events of Default; Rights Upon Certificate
Event of Default" and "Ratings" in the Prospectus.
Issuance of New Series The Trust may issue new Series of Certificates from
time to time. A new Series may be issued only upon
satisfaction of the conditions described under
"Description of the Certificates--Conditions of
Issuance of Additional Series" herein.
[Swap Agreement The Trust will enter into a swap agreement dated the
Closing Date (the "SWAP AGREEMENT") with ____________,
as swap counterparty (the "SWAP COUNTERPARTY").
Pursuant to the Swap Agreement, on each Distribution
Date, the Trust will be obligated to pay to the Swap
Counterparty, solely from payments received with
respect to the Class ___ Notes, an amount equal to the
interest due on the Class ___ Notes on such
Distribution Date, and the Swap Counterparty will be
obligated to pay to the Trust an amount equal to the
product of the (a) Floating Rate and (b) the Class ___
Principal Balance as of the close of business on the
preceding Distribution Date after giving effect to all
payments of principal made to the Class ___
Certificateholders on such preceding Distribution
Date.]
The Swap Agreement will terminate or may be terminated
upon the occurrence of certain events of default or
termination events as described herein under "Summary
of Certain Provisions of the Swap Agreement." If, upon
or prior to the termination of the Swap Agreement, the
Infrastructure Bank, using its best efforts, is unable
to find a successor swap counterparty satisfying the
requirements specified in the Trust Agreement, the
Certificate Interest Rate payable with respect to the
Class ___ Certificates will automatically convert to a
fixed rate equal to the interest rate payable on the
Class ___ Notes. See "Description of the Certificates--
Floating Rate on Class ___ Certificates" and
"Additional Risk Factors Relating to the Class ___
Certificates."]
S-8
<PAGE>
Interest On each Distribution Date, the Certificate Trustee
shall distribute pro rata to the Certificateholders of
each Class as of the related Record Date interest in an
amount equal to one-fourth of the product of (a) the
applicable Certificate Interest Rate and (b) the
applicable Class Principal Balance as of the close of
business on the preceding Distribution Date after
giving effect to all payments of principal made to the
Certificateholders on such preceding Distribution Date;
provided, however, that with respect to the initial
Distribution Date, interest on each outstanding Class
Principal Balance will accrue from and including the
Series Issuance Date to, but excluding, the following
Distribution Date. Interest will be calculated on the
basis of a 360-day year of twelve 30-day months [except
that with respect to the Class ___ Certificates
interest will be calculated as described under
"Description of the Certificates -- Floating Rate on
Class ___ Certificates."] Interest on any Class of
Offered Certificates will be payable only to the extent
interest has been paid on the related Class of
Underlying Notes [and, in the case of the Class ___
Certificates, interest will be paid based upon the
variable rate payable pursuant to the Swap Agreement
(the "FLOATING RATE") so long as payments are received
under the terms of the Swap Agreement]. See Description
of the Certificates--Distributions of Interest" herein
and "Description of the Certificates--Interest and
Principal" in the Prospectus.
Principal On each Distribution Date, the Certificate Trustee
shall distribute to the Certificateholders as of the
related Record Date amounts distributable as principal,
in the following order and priority: [TO BE DETERMINED
UPON ISSUANCE]. The principal amounts payable with
respect to any Class of Offered Certificates will be
payable only to the extent of payments of principal
made on the related Class of Underlying Notes. See
Description of the Certificates--Distributions of
Principal" herein and "Description of the Certificates-
-Interest and Principal" in the Prospectus.
Optional Redemption The Note Issuer may redeem the Underlying Notes
relating to the Offered Certificates, and accordingly
cause the Trust to redeem the Offered Certificates, if
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.
Collection Account
and Subaccounts Upon issuance of the initial Series of Notes, the Note
Issuer will establish the Collection Account, which
will be held by the Note Trustee for the benefit of the
Noteholders. The Collection Account will consist of
four subaccounts: a general subaccount (the "GENERAL
SUBACCOUNT"), a reserve subaccount (the "RESERVE
S-9
<PAGE>
SUBACCOUNT"), a subaccount for the
Overcollateralization Amount (the
"OVERCOLLATERALIZATION SUBACCOUNT") and a capital
subaccount (the "CAPITAL SUBACCOUNT"). Unless the
context indicates otherwise, references herein to the
Collection Account include each of the subaccounts
contained therein. Withdrawals from and deposits to
these subaccounts will be made as described under
"Description of the Notes --Allocations; Payments" in
the Prospectus.
Credit Enhancement The Offered Certificates will benefit from the
following forms of credit enhancement:
Overcollateralization. In order to enhance the
likelihood that distributions on each Class of the
Offered Certificates will be made in accordance with
their Expected Amortization Schedules, the Financing
Order permits the Servicer to set the FTA Charges at
levels that are expected to produce FTA Collections in
amounts that exceed the amounts expected to be required
to make all distributions on the related Series of
Certificates in a manner and to pay all related fees
and expenses. Such excess is the Overcollateralization
Amount related to the Offered Certificates and will be
allocated to the Overcollateralization Subaccount. See
also "Description of the Notes--Overcollateralization
Amount" herein and in the Prospectus.
Capital Subaccount. Upon the issuance of the
Underlying Notes, the Seller will make a capital
contribution of $____________ to the Note Issuer. Such
amount is equal to 0.50% of the initial principal
amount of the Underlying Notes. Such amount, less
$100,000 in the aggregate for all Series of Notes, is
the Required Capital Level with respect to the
Underlying Notes and will be deposited into the Capital
Subaccount. Withdrawals from and deposits to the
Capital Subaccount will be made as described under
"Description of the Notes--Allocations; Payments" in
the Prospectus.
Reserve Subaccount. FTA Collections available with
respect to any Payment Date in excess of amounts
payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the
Underlying Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to
the Capital Subaccount (all as described under
"Description of the Notes--Allocations; Payments" in
the Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will
draw on amounts in the Reserve Subaccount, to the
extent amounts available in the General Subaccount are
insufficient to make scheduled payments on the
Underlying Notes.
Other. See "Description of the Certificates--Other
Credit Enhancement" herein and in the Prospectus.
S-10
<PAGE>
Collections; Allocations;
Distributions On each Distribution Date, amounts on deposit in the
Collection Account will be applied in the manner
described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Servicing Compensation The Servicer will be entitled to receive a Servicing
Fee for each calendar quarter with respect to the
Offered Certificates in an amount equal to one-fourth
of [ ] percent per annum of the then outstanding
principal balance of the Underlying Notes (the
"SERVICING FEE"). The Servicing Fee will be paid prior
to the distribution of any amounts in respect of
interest on and principal of the Underlying Notes. The
Servicer will be entitled to retain as additional
compensation net investment income on FTA Payments
received by the Servicer prior to remittance thereof to
the Collection Account and the portion of late fees, if
any, paid by Customers relating to the 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.
Maturity and Weighted
Average Life
Considerations The actual dates on which principal is distributed
on each Class of Certificates will be affected by,
among other things, the amount and timing of receipt of
FTA Collections. Since each FTA Charge will consist of
a charge per kilowatt hour of usage by the applicable
class of Customers in the Territory, the aggregate
amount and timing of FTA Collections (and the resulting
amount and timing of principal amortization on the
Offered Certificates) could depend, in part, on actual
usage of electricity by Customers and the rate of
delinquencies and charge-offs. Although the amount of
the FTA Charges will adjust from time to time based in
part on the actual rate of FTA Collections during prior
Billing Periods, no assurances can be given that the
Servicer will be able to forecast accurately actual
Customer energy usage and the rate of delinquencies and
charge-offs and implement adjustments to the FTA
Charges that will cause FTA Payments to be made at any
particular rate.
If FTA Collections are received at a slower rate than
expected, distributions on a Certificate may be made
later than expected. Because principal will only be
distributed in accordance with the Expected
Amortization Schedules, except in the event of an early
redemption, the Certificates are not expected to be
retired earlier than scheduled. See "Certain
Distribution and Weighted Average Life Considerations"
and "Description of the Transition Property--
Adjustments to the FTA Charges" in the Prospectus.
S-11
<PAGE>
Denominations Each Class of Offered Certificates will be issued in
minimum initial denominations of [$1,000] and in
integral multiples thereof.
Registration of the
Certificates The [Offered] [Class ______] Certificates will
initially be represented by one or more certificates
registered in the name of Cede & Co. ("CEDE") ("BOOK-
ENTRY CERTIFICATES"), the nominee of The Depository
Trust Company ("DTC"), and available only in the form
of book-entries on the records of DTC, its Participants
and its Indirect Participants. 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 _______. Each Class of Underlying Notes will
receive the same rating from each Rating Agency as the
corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Offered Certificate and,
accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon
initial issuance thereof will not be revised or
withdrawn by a Rating Agency at any time thereafter.
If a rating of any Class of Offered Certificates is
revised or withdrawn, the liquidity of such Class of
Offered Certificates may be adversely affected. In
general, the ratings address credit risk and do not
represent any assessment of the rate of FTA
Collections. See "Risk Factors--Uncertain Distribution
Amounts and Weighted Average Life Considerations" in
the Prospectus, "Certain Distribution and Weighted
Average Life Considerations" herein and in the
Prospectus and "Ratings" herein and in the Prospectus.
Tax Status of the
Certificates The Offered Certificates will be treated as
representing ownership of debt for federal income tax
purposes. Interest and original issue discount, if any,
on the Offered Certificates generally will be included
in gross income for federal income tax purposes. See
"Certain Federal Income Tax Consequences" in the
Prospectus and herein.
Interest and original issue discount, if any, on the
Offered Certificates will be exempt from California
personal income tax, but not exempt from the California
franchise tax applicable to
S-12
<PAGE>
banks and corporations. See "State Taxation" in the
Prospectus and herein.
ERISA Considerations Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus, the
Offered Certificates are eligible for purchase with
"plan assets" of any Plan (as defined below)
("PLAN ASSETS"). A fiduciary or other person
contemplating purchasing the Offered Certificates on
behalf of or with Plan Assets of any employee benefit
plan or other plan or arrangement (including but not
limited to an insurance company general account) that
is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986, as amended
(the "CODE") (collectively, "PLANS"), should carefully
review with its legal advisors whether the purchase or
holding of the Offered Certificates could give rise to
a transaction prohibited or not otherwise permissible
under ERISA or Section 4975 of the Code.
[ADDITIONAL RISK FACTORS RELATING TO THE CLASS ___ CERTIFICATES
As described herein under "Summary of Certain Provisions of the Swap
Agreement," upon the occurrence of certain events of default or termination
events, the Swap Agreement will terminate or may be terminated. Such
termination events include the right of the Infrastructure Bank and the
Certificate Trustee to terminate the Swap Agreement if the long-term unsecured
debt rating of the Swap Counterparty is withdrawn or suspended by either S&P or
Moody's or falls below the rating of "A" of either such Rating Agency. If the
Swap Agreement is terminated, the Infrastructure Bank will use its best efforts
to find a successor swap counterparty satisfying the qualifications described in
the Trust Agreement. If, upon or prior to such termination, the Infrastructure
Bank is unable to find such a successor swap counterparty, the Certificate
Interest Rate payable with respect to the Class ___ Certificates will convert to
a fixed rate equal to the interest rate on the Class ___ Notes, which is ____%.
Distributions of interest with respect to the Class ___ Certificates will
continue at this fixed interest rate until a successor swap counterparty has
been found, and no assurances are given that a successor swap counterparty will
be found. In such event, both the liquidity and the market value of the Class
___ Certificates may be adversely affected.]
S-13
<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 should be read together with the material under the
heading "Description of the Certificates" in the Prospectus.
GENERAL
The Offered Certificates will be issued on the Series Issuance Date. The
Offered Certificates will be comprised of the following _____ Classes:
<TABLE>
<CAPTION>
Certificate
Scheduled Final Interest
Class Distribution Date Termination Date Rate
- -------- ------------------------- ----------------------- ------------
<S> <C> <C> <C>
__.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%/(1)/
</TABLE>
/(1)/ Calculated as described under "Floating Rate on Class ___ Certificates."
[Floating Rate on Class ___ Certificates
(i) Determination of Class ___ Certificate Interest Rate. The
Certificate Interest Rate applicable from time to time to Class ___ Certificates
will be determined by the _____________ (together with any successor Agent Bank
under the Trust Agreement the "AGENT BANK") in accordance with the following
provisions.
(a) On the second London banking day immediately preceding the first
day of each Interest Accrual Period (as defined below) and on the Closing
Date with respect to the first Interest Accrual Period (each such day, an
"INTEREST DETERMINATION DATE"), the Agent Bank will determine "LIBOR" based
on the offered rate for deposits in U.S. dollars for a period of [three
months] commencing on the first day of such Interest Accrual Period that
appears on the display page of the Dow Jones Telerate Service for the
purpose of displaying the London Interbank offered rate of major banks for
U.S. Dollars as of 11:00 a.m., London time, on such Interest Determination
Date (such display page being the "TELERATE PAGE"). Notwithstanding the
foregoing, if no offered rate appears, LIBOR for such Interest Accrual
Period will be determined as if the parties had specified the rate
described in clause (b) below. The Certificate Interest Rate applicable to
the Class ___ Certificates for the Interest Accrual Period relating to an
Interest Determination Date shall be the sum of LIBOR as determined by the
Agent Bank on the most recent Interest Determination Date plus ____%.
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the London interbank
market, selected by the Agent Bank (after consultation with the
S-14
<PAGE>
Infrastructure Bank), to provide the Agent Bank with its offered quotation
for deposits in U.S. Dollars for a period of three months, commencing on
the second London banking day immediately following such Interest
Determination Date, to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on such Interest Determination Date
and in a principal amount that is representative for a single transaction
in U.S. Dollars in such market at such time. If at least two such
quotations are provided, LIBOR for the relevant Interest Accrual Period
will be the arithmetic mean of such quotations. If fewer than two
quotations are provided, LIBOR for such Interest Accrual Period will be the
arithmetic mean of the rates quoted at approximately 11:00 a.m. in The City
of New York, on such Interest Determination Date by three major banks in
The City of New York selected by the Agent Bank (after consultation with
the Infrastructure Bank) for loans in U.S. Dollars to leading European
banks, for the period of three months, commencing on the second London
banking day immediately following such Interest Determination Date and in a
principal amount that is representative for a single transaction in U.S.
Dollars in such market at such time; provided, however, that if any of the
banks so selected by the Agent Bank are not quoting as mentioned in this
sentence, the Certificate Interest Rate in effect for such Interest Accrual
Period will be the rate of interest in effect on such Interest
Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or
minimum Certificate Interest Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, the
interest rate with respect to the Class ___ Certificates shall be ___% per annum
(calculated on the basis of a 360-day year consisting of twelve 30-day months),
effective as of the first day of the Interest Accrual Period immediately
preceding the termination of the Swap Agreement.
(ii) Calculation of Quarterly Interest. The Agent Bank will, as soon
as practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the Certificate Interest Rate applicable to, and calculate the
amount of interest payable on, each of the Class ___ Certificates for the
relevant Interest Accrual Period. Interest payments will be made in an amount
equal to the product of (a)(1) the actual number of days in the related Interest
Accrual Period (as defined herein) divided by 360, multiplied by (2) the
applicable Certificate Interest Rate and (b) the Class ___ Principal Balance (as
defined herein) as of the close of business day on the preceding Distribution
Date after giving effect to all payments of principal made to the Class ___
Certificateholders on such preceding Distribution Date (or, in the case of the
first Distribution Date, as of the Closing Date) (such amount, the "Quarterly
Interest" with respect to such Class). The "Interest Accrual Period" with
respect to any Distribution Date shall be the period from and including the
preceding Distribution Date (or, in the case of the first Distribution Date,
from and including the Closing Date) to and excluding such Distribution Date.
The determination of the Certificate Interest Rate and the Quarterly Interest by
the Agent Bank shall (in the absence of manifest error) be final and binding
upon all parties.
(iii) Notice of Certificate Interest Rate and Interest Payments. The
Agent Bank will notify the Infrastructure Bank, the Certificate Trustee and any
Paying Agents of the Certificate Interest Rate and the Quarterly Interest due on
the Class ___ Certificates for each Interest Accrual Period and the relevant
Distribution Date as soon as possible after their determination but in no event
later than the [first] business day of any Interest Accrual Period.
(iv) Determination or Calculation by Certificate Trustee. If the
Agent Bank fails to determine a Certificate Interest Rate or calculate Quarterly
Interest in accordance with paragraph (ii) above at any time or for any reason,
the Certificate Trustee shall determine the Certificate Interest Rate
S-15
<PAGE>
and calculate the Quarterly Interest in accordance with paragraph (ii) above,
and each such determination or calculation shall be deemed to have been made by
the Agent Bank. The determination by the Agent Bank or the Certificate Trustee
(as the case may be) of any Certificate Interest Rate and calculation thereby of
any Quarterly Interest shall, in the absence of manifest error, be final and
binding on all parties.
(v) Agent Bank. The Infrastructure Bank will agree that, so long as
any of the Certificates remain outstanding, there will at all times be an Agent
Bank. The Infrastructure Bank may (with the prior written approval of the
Certificate Trustee) terminate the appointment of the Agent Bank for any reason.
Notice of any such termination will be given to Certificateholders within ten
days of such termination. If (a) any person is unable or unwilling to continue
to act as the Agent Bank, (b) the appointment of the Agent Bank is terminated or
(c) the Agent Bank fails duly to determine the Certificate Interest Rate and/or
the Quarterly Interest for any Interest Accrual Period, then the Infrastructure
Bank will, with the approval of the Certificate Trustee, appoint a successor
Agent Bank to act as such in its place, provided that neither the resignation
nor removal of the Agent Bank shall take effect until a successor approved by
the Certificate Trustee has been appointed. Notice of any such appointment of a
successor Agent Bank will be given to the Certificateholders within ten days of
such appointment.]
DISTRIBUTIONS OF INTEREST
Interest on each Class of the Offered Certificates will accrue from the
Series Issuance Date at the rates indicated above (each, a "CERTIFICATE INTEREST
RATE"), in each case distributable quarterly on March 25, June 25, September 25
and December 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" or, with respect to the
Class ___ Certificates, payments received from the Swap Counterparty pursuant to
the Swap Agreement.
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the related Record Date principal
to the extent paid on such date with respect to the Class of Underlying Notes
with the same alphabetical or alphanumeric designation, as described below under
"Description of the Notes--Principal."
The entire unpaid principal amount of the Offered Certificates will be due
and distributable on the date on which a Certificate Event of Default has
occurred and is continuing, if the Certificate Trustee or holders of a majority
in principal amount of the Offered Certificates of all Series then outstanding
have declared the Certificates to be immediately due and payable. See
"Description of the Certificates--Certificate Events of Default; Rights Upon
Certificate Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Trust shall be required to redeem the Offered Certificates if the Note
Issuer elects to redeem the Underlying Notes, which the Note Issuer may elect to
do 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. 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
S-16
<PAGE>
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.
SUMMARY OF CERTAIN PROVISIONS OF THE SERIES ___
SUPPLEMENT TO THE TRUST AGREEMENT
[TO BE PREPARED UPON ISSUANCE]
[SUMMARY OF CERTAIN PROVISIONS OF THE SWAP AGREEMENT]
[TO BE PREPARED UPON ISSUANCE]
[THE SWAP COUNTERPARTY]
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE NOTES
GENERAL
The 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 should be read together with the material under the heading
"Description of the Notes" in the Prospectus.
The Underlying Notes, together with the Notes of other Series issued by the
Note Issuer (collectively, the "NOTES"), will be issued pursuant to the Note
Indenture. The Underlying Notes will be comprised of the following _____
Classes:
<TABLE>
<CAPTION>
Note
Scheduled Interest
Class Maturity Date Final Maturity Date Rate
- -------- ------------------------- ----------------------- ---------
<S> <C> <C> <C>
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
</TABLE>
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer has granted to the Note Trustee, for the benefit of the holders of the
Notes (the "NOTEHOLDERS"), a security interest in all of the Note Issuer's
right, title and interest in and to the Note Collateral. The Note Collateral is
described more specifically under "Description of the Notes--Security" in the
Prospectus.
INTEREST
Interest on each Class of the Underlying Notes will accrue from the Series
Issuance Date at the rates indicated above (each, a "NOTE INTEREST RATE"), in
each case payable quarterly on March 25, June 25, September 25 and December 25
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "PAYMENT DATE"),
S-17
<PAGE>
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.
PRINCIPAL
On each Payment Date, each Class of the Underlying Notes will be entitled
to receive payments of principal as follows: [TO BE PREPARED AT ISSUANCE].
Principal will be payable at the Corporate Trust Office of the Note Trustee in
the City of _______, or at the office or agency of the Note Issuer maintained
for such purposes in the Borough of Manhattan, the City of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding percentage of the initial Class Principal Balance for each Class of
the Underlying Notes at each Payment Date from the Series Issuance Date to the
Scheduled Maturity Date for such Class. In preparing the following table, it
has been assumed that (i) the Offered Certificates are issued on the Series
Issuance Date, (ii) payments on the Offered Certificates are made on each
Distribution Date, commencing _______________, 199_, (iii) the initial Class
____ Principal Balance is $_____ and the initial Class ____ Principal Balance is
$______, (iv) all FTA Collections are deposited in the Collection Account in
accordance with the Seller's forecasts, (v) the Note Issuer does not redeem the
Underlying Notes and ( ) [other assumptions].
EXPECTED AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS
PAYMENT DATE PRINCIPAL BALANCE OUTSTANDING
- ------------ ---------------------------------------------------------------
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 slower than those indicated in the chart. See
"Risk Factors" in the Prospectus for a discussion of various factors which may,
individually or in the aggregate, affect the rate of reductions of the Class
Principal Balances of the Underlying Notes and the Offered Certificates.
The entire unpaid principal amount of the Underlying Notes will be due and
payable on the date on which a Note Event of Default has occurred and is
continuing, if the Note Trustee or holders of a majority in principal amount of
the Notes of all Series then outstanding have declared the Underlying Notes to
be immediately due and payable. See "Description of the Notes--Note Events of
Default; Rights Upon Note Event of Default" in the Prospectus.
S-18
<PAGE>
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 accordance with their Expected Amortization
Schedules, the Financing Order and the Issuance Advice Letter relating to the
Offered Certificates permit the recovery of $_______ through FTA Payments in
excess of the amount expected to be required to pay interest on and principal of
all outstanding Classes of Offered Certificates and related fees and expenses.
Such excess is the Overcollateralization Amount related to the Offered
Certificates and will be allocated to the Overcollateralization Subaccount, as
described further under "Description of the Notes--Overcollateralization Amount"
in the Prospectus, to be available to pay any periodic shortfalls in amounts
available for scheduled payments on the Notes.
OTHER CREDIT ENHANCEMENT
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization Subaccount and (d) allocations to the
Capital Subaccount (all described under "Description of the Notes--Allocations;
Payments" in the Prospectus), will be allocated to the Reserve Subaccount. On
each Payment Date, the Note Trustee will draw on amounts in the Reserve
Subaccount, to the extent amounts available in the General Subaccount are
insufficient to make scheduled payments on the Underlying Notes.
Capital Subaccount. Upon the issuance of the Underlying Notes, the Seller
will make a capital contribution of $__________ to the Note Issuer. Such amount
is equal to 0.50% of the initial principal amount of the Underlying Notes. Such
amount, less $100,000, is the Required Capital Level with respect to the
Underlying Notes and in the aggregate for all Series of Notes, will be deposited
into the Capital Subaccount. Withdrawals from and deposits to the Capital
Subaccount will be made as described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
[OTHER TO BE PREPARED AT ISSUANCE]
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will at the direction of the
Servicer apply all amounts on deposit in the Collection Account with respect to
the prior Billing Period in the manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
The Certificate Trustee will then apply all amounts paid by the Note
Trustee on the related Payment Date with respect to the Underlying Notes in the
following priority:
[TO BE PREPARED AT ISSUANCE]
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<PAGE>
DESCRIPTION OF THE TRANSITION PROPERTY
FINANCING ORDER AND ADVICE LETTERS
The Financing Order requires the Seller to submit an Issuance Advice Letter
to the CPUC with respect to each Series of Certificates issued. The first
Issuance Advice Letter [, which was filed in connection with the Offered
Certificates,] established the FTA Charges pursuant to which nonbypassable
charges will be billed to the applicable classes of 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. These charges are
nonbypassable in that applicable consumers cannot avoid paying them if they
purchase electricity from a supplier other than the Seller. [Subsequent Issuance
Advice Letters have modified the FTA Charges to support the issuance of ______
additional Series of Certificates, including the Offered Certificates.]
The Issuance Advice Letter which was filed in connection with the Offered
Certificates establishes the following FTA Charges:
<TABLE>
<CAPTION>
Class of Customers FTA Charge Per Kilowatt Hour
- --------------------- ----------------------------
<S> <C>
Residential
Small Commercial
</TABLE>
As of the date hereof, the FTA Charge for an average Residential Customer
will amount to approximately $____ per month, and the FTA Charge for an average
Small Commercial Customer will amount to approximately $____ per month. The
average monthly bill, excluding local taxes, during 1996 was ______ for a
Residential Customer and _____ for a Small Commercial Customer.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the FTA Collections are neither
more nor less than the amount necessary to amortize the Certificates in
accordance with the Expected Amortization Schedule, the Servicing Agreement and
the Financing Order require the Servicer to seek periodic adjustments to the FTA
Charges based on actual FTA Collections and updated assumptions by the Servicer
as to, among other factors, the electricity usage by Customers and the rate of
delinquencies and charge-offs. The date as of which any calculation is
performed which forms the basis for a requested adjustment to the FTA Charges is
referred to as a "CALCULATION DATE." The adjustments to the FTA Charges will
continue until all interest and principal on all Series of Notes and
corresponding Series of Certificates have been paid or distributed in full.
[The following table reflects information regarding the changes to the FTA
Charges which have been requested through Advice Letters since the Financing
Order was issued:
FTA CHARGE FOR RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
Requested Adjustment Resulting
Adjustment to FTA Charge Aggregate
Calcu- to FTA Charge Granted by CPUC FTA Charge Effective
lation per per per Date of
Date Kilowatt Hour Kilowatt Hour Kilowatt Hour Adjustment
- --------------------------------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
</TABLE>
S-20
<PAGE>
FTA CHARGE FOR SMALL COMMERCIAL CUSTOMERS
<TABLE>
<CAPTION>
Requested Adjustment Resulting
Adjustment to FTA Charge Aggregate
Calcu- to FTA Charge Granted by CPUC FTA Charge Effective
lation per per per Date of
Date Kilowatt Hour Kilowatt Hour Kilowatt Hour Adjustment
- --------------------------------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
</TABLE>
See "Description of the Transition Property -- Adjustments to the FTA Charges"
in the Prospectus.
CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The rate of principal distributions on each Class of Offered Certificates,
the aggregate amount of each interest distribution on each Class of Offered
Certificates and the actual maturity date of each Class of Offered Certificates
will be related to the rate and timing of FTA Collections.
The actual distributions on each date for each Class of Offered
Certificates and the weighted average life thereof will be affected primarily by
the rate of FTA Collections and the timing of receipt of such FTA Collections.
Since the FTA Charges will consist of a charge per kilowatt hour of usage by the
applicable classes of Customers, the aggregate amount of FTA Collections and the
rate of principal amortization on the Offered Certificates will depend, in part,
on actual energy usage by Customers and the rate of delinquencies and charge-
offs. Although the amounts of the FTA Charges will be adjusted from time to time
based in part on the actual rate of FTA Collections, no assurances are given
that the Servicer will be able to forecast accurately actual energy usage and
the rate of delinquencies and charge-offs or implement adjustments to the FTA
Charges that will cause FTA Collections to be received at any particular rate.
If FTA Collections are received at a slower rate than expected an Offered
Certificate may be retired later than expected. Because principal will only be
distributed in accordance with the Expected Amortization Schedules, except in
the event of an early redemption, the Offered Certificates are not expected to
mature earlier than scheduled. A distribution on a date that is earlier than
forecasted will result in a shorter weighted average life, and a distribution on
a date that is later then forecasted will result in a longer weighted average
life. In addition, if a larger portion of the delayed distributions on the
Offered Certificates are received in later years, this will result in a longer
weighted average life of the Offered Certificates.
No 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 Offered Certificates that will be
distributed as of any date or as to the overall rate of FTA Collections.
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
S-21
<PAGE>
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 Billing
Period, in an amount equal to one-fourth of ___ percent per annum of the
Outstanding Note Principal Balance. 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" in the Prospectus. The
Servicing Fee will be paid prior to the distribution of any amounts in respect
of interest on and principal of the Underlying Notes. The Servicer will be
entitled to retain as additional compensation net investment income on FTA
Payments received by the Servicer prior to remittance thereof to the Collection
Account and the portion of late fees, if any, paid by Customers relating to the
FTA Payments.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described
in the Prospectus, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPS") to elect to present a consolidated bill to
their retail customers, including the FTA Charges. Any ESP who elects
consolidated billing, including monthly amounts with respect to the FTA Charges,
will be responsible for paying the Servicer periodic amounts payable by
customers of the ESP. 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. See "Risk Factors--Potential Servicing Issues--Reliance on
Aggregators and Other Suppliers" in the Prospectus.
STATEMENTS BY SERVICER
For each Remittance Date and each Distribution Date, the Servicer will
provide the statements and reports described under "Servicing--Statements by
Servicer" in the Prospectus.
S-22
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Offered Certificates will be included in gross income for
federal income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Offered
Certificate, and is based on the opinion of Brown & Wood LLP, counsel to the
Trust ("SPECIAL COUNSEL"). This discussion represents the opinion of Special
Counsel, subject to the qualifications set forth therein or herein. This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "CODE"), currently applicable Treasury regulations and judicial
and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax consequences
to Offered Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Offered Certificateholder in light of that Offered
Certificateholder's circumstances, and some Offered Certificateholders may be
subject to special tax rules and limitations not discussed below (e.g., life
insurance companies, tax-exempt organizations, financial institutions or broker-
dealers). CONSEQUENTLY, EACH PROSPECTIVE OFFERED CERTIFICATEHOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISER IN DETERMINING THE FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF AN OFFERED CERTIFICATE.
For purposes of this discussion, "U.S. Person" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). The term "U.S. Offered Certificateholder" means any U.S. Person
and any other person to the extent that income attributable to its interest in
an Offered Certificate is effectively connected with that person's conduct of a
U.S. trade or business. The term "non-U.S. Offered Certificateholder" means any
person other than a U.S. Offered Certificateholder.
The discussion assumes that an Offered Certificate is issued in registered
form, has all payments denominated in U.S. dollars and not determined by
reference to the value of any other currency and has a term that exceeds one
year. Moreover, the discussion assumes that any original issue discount ("OID")
on the Offered Certificate (i.e., any excess of the stated redemption price at
maturity of the Offered Certificate over its issue price) is less than a de
minimis amount (i.e., 0.25 percent of its stated redemption price at maturity
multiplied by the Offered Certificate's weighted average maturity), all within
the meaning of the OID regulations. Moreover, the discussion assumes that the
Offered Certificates are of a type, as set forth below, which Special Counsel is
of the opinion will represent ownership of debt for federal income tax purposes.
TREATMENT OF THE OFFERED CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Offered Certificates will represent ownership of debt
S-23
<PAGE>
and the Trust will not be treated as an association or publicly traded
partnership taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. OFFERED CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
Offered Certificates represent ownership of debt obligations for federal income
tax purposes, stated interest on a beneficial interest in an Offered Certificate
will be taxable as ordinary income when received or accrued by U.S. Offered
Certificateholders in accordance with their method of accounting. Generally,
interest received on the Offered Certificates will constitute "investment
income" for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
Market Discount. A U.S. Offered Certificateholder who purchases (including
a purchase at original issuance for a price less than the issue price) an
interest in an Offered Certificate at a discount that exceeds any unamortized
OID may be subject to the "market discount" rules of sections 1276 through 1278
of the Code. These rules generally provide that, subject to a statutorily-
defined de minimis exception, if a U.S. Offered Certificateholder acquires an
Offered Certificate at market discount (i.e., at a price below its stated
redemption price at maturity or its revised issue price if it was issued with
OID) and thereafter recognizes gain upon a disposition of the Offered
Certificate (or disposes of it in certain non-recognition transactions,
including by gift), the lesser of such gain (or appreciation, in the case of an
applicable non-recognition transaction) or the portion of the market discount
that accrued while the Offered Certificate was held by such holder will be
treated as ordinary interest income at the time of the disposition. In addition,
a U.S. Offered Certificateholder who acquired an Offered Certificate at a market
discount would be required to treat as ordinary interest income the portion of
any principal payment attributable to accrued market discount on such Offered
Certificate. Generally, market discount accrues ratably over the life of a debt
instrument unless the debt holder elects to accrue market discount on a constant
yield to maturity basis. It is not clear how either the ratable accrual or
constant yield accrual methodologies apply to instruments such as the Offered
Certificates where the timing of principal payments is uncertain. Investors
should consult their own tax advisors concerning the accrual of market discount.
The market discount rules also provide that a U.S. Offered Certificateholder who
acquires an Offered Certificate at a market discount may be required to defer a
portion of any interest expense that otherwise may be deductible on any
indebtedness incurred or maintained to purchase or carry the Offered Certificate
until the holder disposes of the Offered Certificate in a taxable transaction.
A U.S. Offered Certificateholder who acquired an Offered Certificate at a
market discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
Internal Revenue Service (the "IRS"). If a holder elects to include market
discount in income in accordance with the preceding sentence, the foregoing
rules with respect to the recognition of ordinary income on sales, principal
payments and certain other dispositions of the Offered Certificates and the
deferral of interest deductions on indebtedness related to the investor
certificates will not apply.
Amortizable Bond Premium. A U.S. Offered Certificateholder who purchases
an interest in an Offered Certificate at a premium may elect to offset the
premium against interest income under the constant yield method over the
remaining term of the Offered Certificate in accordance with the provisions of
section 171 of the Code. A holder that elects to amortize bond premium must
reduce the tax basis in the related Offered Certificate by the amount of bond
premium used to offset interest income. If an Offered Certificate purchased at
a premium is redeemed in full prior to its maturity,
S-24
<PAGE>
a holder who has elected to amortize bond premium should be entitled to a
deduction in the taxable year of redemption in an amount equal to the excess, if
any, of the adjusted basis of the Offered Certificate over the greater of the
redemption price or the amount payable on maturity.
SALE OR EXCHANGE OF OFFERED CERTIFICATES
Upon a disposition of an interest in an Offered Certificate, a U.S. Offered
Certificateholder generally will recognize gain or loss equal to the difference
between (i) the amount of cash and the fair market value of any other property
received (other than amounts attributable to, and taxable as, accrued stated
interest) and (ii) the U.S. Offered Certificateholder's adjusted basis in its
interest in the Offered Certificate. The adjusted basis in the interest in the
Offered Certificate will equal its cost, increased by any OID or market discount
included in income with respect to the interest in the Offered Certificate prior
to its disposition and reduced by any payments reflecting principal or OID
previously received with respect to the interest in the Offered Certificate and
any amortized premium. Subject to the OID and market discount rules, gain or
loss will generally be capital gain or loss if the interest in the Offered
Certificate was held as a capital asset. Capital losses generally may be used
by a corporate taxpayer only to offset capital gains and by an individual
taxpayer only to the extent of capital gains plus $3,000 of other income.
NON-U.S. OFFERED CERTIFICATEHOLDERS
In general, a non-U.S. Offered Certificateholder will not be subject to
U.S. federal income tax on interest (including OID) on a beneficial interest in
an Offered Certificate unless (i) the non-U.S. Offered Certificateholder
actually or constructively owns 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.
Offered Certificateholder is a controlled foreign corporation that is related to
the Seller (or the Trust treated as a partnership) through stock ownership,
(iii) the non-U.S. Offered Certificateholder is a bank which receives interest
as described in Code Section 881(c)(3)(A), (iv) such interest is contingent
interest described in Code Section 871(h)(4), or (v) the non-U.S. Offered
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. Offered
Certificateholder (the "WITHHOLDING AGENT") must have received (in the year in
which a payment of interest or principal occurs or in either of the two
preceding years) a statement that (i) is signed by the non-U.S. Offered
Certificateholder under penalties of perjury, (ii) certifies that the non-U.S.
Offered Certificateholder is not a U.S. Person and (iii) provides the name and
address of the non-U.S. Offered Certificateholder. The statement may be made on
a Form W-8 or substantially similar substitute form, and the non-U.S. Offered
Certificateholder must inform the Withholding Agent of any change in the
information on the statement within 30 days of the change. If an Offered
Certificate is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the non-U.S.
Offered Certificateholder to the organization or institution holding the Offered
Certificate on behalf of the non-U.S. Offered Certificateholder. The U.S.
Treasury Department is considering implementation of further certification
requirements aimed at determining whether the issuer of a debt obligation is
related to holders thereof.
Generally, any gain or income realized by a non-U.S. Offered
Certificateholder upon retirement or disposition of an interest in an Offered
Certificate (other than gain attributable to accrued interest or OID, which is
addressed in the preceding paragraph) will not be subject to U.S. federal income
tax, provided that in the case of an Offered Certificateholder that is
S-25
<PAGE>
an individual, such Offered Certificateholder is not present in the United
States for 183 days or more during the taxable year in which such retirement or
disposition occurs. Certain exceptions may be applicable, and an individual
non-U.S. Offered Certificateholder should consult a tax adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of an Offered Certificate to a registered
owner who is not an "exempt recipient" and who fails to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the manner required. Generally, individuals are not exempt
recipients whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a U.S. Offered Certificateholder must
be reported to the IRS, unless the U.S. Offered Certificateholder is an exempt
recipient or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Offered
Certificateholders, temporary Treasury regulations provide that backup
withholding and information reporting will not apply to payments with respect to
which either requisite certification has been received or an exemption has
otherwise been established (provided that neither the Certificate Trustee nor a
paying agent has actual knowledge that the holder is a United States Person or
that the conditions of any other exemption are not in fact satisfied). Payments
of the proceeds of the sale of an Offered Certificate to or through a foreign
office of a broker that is a U.S. Person, a controlled foreign corporation for
United States federal income tax purposes or a foreign person 50% or more of
whose gross income is effectively connected with the conduct of a trade or
business within the United States for a specified three-year period are
currently subject to certain information reporting requirements, unless the
payee is an exempt recipient or such broker has evidence in its records that the
payee is not a U.S. Person and no actual knowledge that such evidence is false
and certain other conditions are met. Temporary Treasury regulations indicate
that such payments are not currently subject to backup withholding. Under
current Treasury regulations, payments of the proceeds of a sale to or through
the United States office of a broker will be subject to information reporting
and backup withholding unless the payee certifies under penalties of perjury as
to his or her status as a non-U.S. Person and certain other qualifications (and
no agent of the broker who is responsible for receiving or reviewing such
statement has actual knowledge that it is incorrect) and provides his or her
name and address or the payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to
an Offered Certificateholder would be allowed as a refund or a credit against
such Offered Certificateholder's U.S. federal income tax, provided that the
required information is furnished to the IRS.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Offered
Certificates will be exempt from California personal income tax, but not exempt
from the California franchise tax applicable to banks and corporations. Gain or
loss, if any, resulting from an exchange or redemption of Offered Certificates
will be recognized in the year of the exchange or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. Interest on indebtedness incurred or continued
by an Offered Certificateholder in connection with the purchase of Offered
Certificates will not be deductible for California personal income tax purposes.
S-26
<PAGE>
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Offered Certificates under any state or local tax law other than that of the
State of California. Each investor should consult its own tax adviser regarding
state and local tax consequences.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or Section 4975 of the Code impose certain requirements on employee benefit
plans and certain other plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and certain collective investment funds or
insurance company general or separate accounts in which such plans, accounts or
arrangements are invested, that are subject to the fiduciary responsibility and
prohibited transaction provisions of ERISA and/or Section 4975 of the Code
(collectively, "PLANS"), and on persons who are fiduciaries with respect to
Plans, in connection with the investment of assets that are treated as "plan
assets" of any Plan for purposes of applying Title I of ERISA and Section 4975
of the Code ("PLAN ASSETS"). ERISA imposes on Plan fiduciaries certain general
fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
Subject to the considerations described below, the Offered Certificates are
eligible for purchase with Plan Assets of any Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "PARTIES IN INTEREST")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transaction rules generally are set forth in Section 406 of
ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Offered Certificates of any Class on behalf of or with Plan Assets of any Plan
should determine whether such purchase is consistent with its fiduciary duties
and whether such purchase would constitute or result in a non-exempt prohibited
transaction under ERISA and/or Section 4975 of the Code because any of 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
S-27
<PAGE>
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
Underwriters or their respective affiliates is a Party in Interest with respect
to such Plan, unless a statutory or administrative exemption is available or an
exception applies under the Plan Asset Regulation. However, the possibility
that prohibited transactions may occur by reason of the operation of the Trust
is substantially less than in other pass-through trusts because each Class of
Offered Certificates represents an interest in the corresponding Class of
Underlying Notes and only minimal administrative activity is expected to occur
at the Trust level.
Before purchasing any Class of Offered Certificates of this Series, a
fiduciary or other Plan investor should consider whether a prohibited
transaction might arise by reason of any such relationship between the investing
Plan and any of 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.
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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Trust has agreed to sell to each of the Underwriters named below
(the "UNDERWRITERS"), and each of the Underwriters, for whom ___________ are
acting as representatives, has severally agreed to purchase, the respective
principal amounts of the Offered Certificates set forth opposite its name below.
<TABLE>
<CAPTION>
Principal
Amount of
Name Certificates
- ---- ------------
<S> <C>
[Underwriter] $
[Underwriter] $
[Underwriter] $
[Others] $
----------
Total $
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered
Certificates offered hereby, if any are taken.
The Underwriters propose to offer the Offered Certificates in part directly
to retail purchasers at the initial public offering price set forth on the cover
page of this Prospectus Supplement, and in part to certain securities dealers at
such price less a concession not in excess of _____ percent of the principal
amount of the Offered Certificates. The Underwriters may allow and such dealers
may reallow a concession not in excess of _____ percent of the principal amount
of the Offered Certificates to certain brokers and dealers. After the Offered
Certificates are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Offered Certificates are a new issue of securities with no established
trading market. [The Certificates will not be listed on any securities
exchange.] The Trust has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Offered Certificates.
The Note Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of issuance of the Offered Certificates that the Class
____ Certificates be rated "____" by _______, "____" by _______ and "____" by
_______ (each of _______, ________ and _________, a "RATING AGENCY") and that
the Class _____ Certificates be rated "____" by _______, "____" by _______ and
"____" by _______. Each Class of Underlying Notes will receive the same ratings
from each Rating Agency as the corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Offered
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon initial issuance
S-29
<PAGE>
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.
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 and the Note Issuer.
Certain legal matters relating to the Offered Certificates and certain federal
income tax consequences of the issuance of the Offered Certificates will be
passed upon by Special Counsel. Certain legal matters relating to the Offered
Certificates will be passed upon by Cravath, Swaine & Moore, New York, New York,
counsel to the Underwriters.
S-30
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
------------------------------
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Agent Bank............................... S-14
Book-Entry Certificates.................. S-12
Calculation Date......................... S-20
Capital Subaccount....................... S-10
Cede..................................... S-12
Certificate Interest Rate................ S-16
Certificate Trustee...................... S-6
Certificateholders....................... S-4
Certificates............................. S-14
Class.................................... S-6, S-7
Class Principal Balance.................. S-6
Code..................................... S-13, S-23
Commission............................... S-4
Delaware Trustee......................... S-6
Distribution Date........................ S-3, S-7, S-16
DOL...................................... S-28
DTC...................................... S-4, S-12
ERISA.................................... S-13
ESPs..................................... S-22
Exchange Act............................. S-4
Floating Rate............................ S-9
General Subaccount....................... S-9
Infrastructure Bank...................... S-6
Interest Accrual Period.................. S-15
Interest Determination Date.............. S-14
IRS...................................... S-24
Non-U.S. Offered Certificateholder....... S-24
Note Interest Rate....................... S-17
Note Issuer.............................. S-1, S-7
Note Trustee............................. S-7
Noteholder............................... S-17
Notes.................................... S-17
Offered Certificates..................... S-1, S-6, S-14
OID...................................... S-23
Original Certificate Principal Balance... S-6
Original Note Principal Balance.......... S-7
Overcollateralization Subaccount......... S-10
Parties in Interest...................... S-27
Payment Date............................. S-7, S-17
Plan Asset Regulation.................... S-28
Plan Assets.............................. S-13, S-27
Plans.................................... S-13, S-27
Rating Agency............................ S-12, S-29
Record Date.............................. S-7
Reserve Subaccount....................... S-9
SDG&E.................................... S-6
Seller................................... S-6
Series Issuance Date..................... S-17
Servicer................................. S-6
Servicing Fee............................ S-11
Special Counsel.......................... S-23
Swap Agreement........................... S-8
</TABLE>
S-31
<PAGE>
<TABLE>
<S> <C>
Swap Counterparty........................ S-8
Telerate Page............................ S-14
Trust.................................... S-6
U.S. Offered Certificateholder........... S-24
U.S. Person.............................. S-24
Underlying Notes......................... S-1, S-7, S-17
Underwriters............................. S-29
Withholding Agent........................ S-25
</TABLE>
S-32
<PAGE>
FINANCIAL STATEMENTS
--------------------
F-1
<PAGE>
SDG&E FUNDING LLC
BALANCE SHEET
________________, 1997
[TO BE PREPARED UPON ISSUANCE]
F-2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of the securities in
any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of such
jurisdiction.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED _______ __, 1997
PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST 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 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 other than the Note
Issuer. None of the Certificates, the Notes or the underlying Transition
Property will be guaranteed or insured by the State of California, the
Infrastructure Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or its affiliates.
The California Infrastructure and Economic Development Bank Special Purpose
Trust SDG&E-1 Rate Reduction Certificates (the "CERTIFICATES") offered hereby in
an aggregate principal amount of up to $__________________ may be sold from time
to time in series (each, a "SERIES"), each of which may be comprised of one or
more classes (each, a "CLASS"), as described in the related Prospectus
Supplement. Each Series of Certificates will be issued by the California
Infrastructure and Economic Development Bank Special Purpose Trust SDG&E-1 (the
"TRUST") established by the California Infrastructure and Economic Development
Bank (the "INFRASTRUCTURE BANK").
The assets of the Trust will consist solely of the 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; the Notes will also be secured by the other
Note Collateral described under "Description of the Notes -- Security" 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. As more
specifically described under "Description of the Notes -- Allocations; Payments"
herein, the Note Issuer will use all payments made with respect to Transition
Property to pay certain expenses described herein, interest due on the Notes and
principal payable on the Notes, allocated among the Series and Classes of Notes
based on the priorities described herein and in the related Prospectus
Supplement. All principal not previously paid, if any, on any Note is due and
payable on the Final Maturity Date of such Note. Each Class of Certificates will
correspond to
<PAGE>
a Class of Notes and will represent undivided interests in such underlying Class
of Notes, the proceeds thereof and payments pursuant to any related Swap
Agreement. As such each Class of Certificates will entitle the holders thereof
to receive the payments received by the Trust in respect of the corresponding
Class of Notes. The funds received by the Trust from the payments on each Class
of Notes will be the only source of distributions on the Certificates of the
corresponding Class. While the specific terms of any Series of Certificates (and
the Classes, if any, thereof) will be described in the related Prospectus
Supplement, the terms of such Series and any Classes thereof will not be subject
to prior review by, or consent of, the holders of the Certificates of any
previously issued Series.
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described under
"Plan of Distribution" herein and "Underwriting" in the related Prospectus
Supplement. There will have been no secondary market for the Certificates of
any Series prior to the offering thereof. There can be no assurance that a
secondary market for any Series of Certificates will develop or, if one does
develop, that it will continue. It is not anticipated that any of the
Certificates will be listed on any securities exchange.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE 23 HEREIN.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS
OF THE NOTE ISSUER WILL BE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. PAYMENTS
ON THE NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF DISTRIBUTIONS ON THE
CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER OR
ITS AFFILIATES, OTHER THAN THE NOTE ISSUER, WILL HAVE ANY OBLIGATIONS IN RESPECT
OF THE CERTIFICATES, THE NOTES OR THE TRANSITION PROPERTY, EXCEPT AS EXPRESSLY
SET FORTH HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY 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 NOR IS THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN ANY MANNER OBLIGATED TO MAKE
ANY APPROPRIATION FOR THE PAYMENT THEREOF.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED
HEREBY UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
Prospective investors should refer to the "Index of Principal Definitions"
which begins on page 86 herein for the location of the definitions of
capitalized terms that appear in this Prospectus.
__________ __, 1997
2
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Seller, the Note Issuer, the Trust, the Infrastructure Bank or any
dealer, salesperson, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement do not constitute an offer to
sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Note Issuer has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (as amended, the "REGISTRATION
STATEMENT") under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
with respect to the Certificates and the Notes. This Prospectus, which forms a
part of the Registration Statement, and any Prospectus Supplement describe the
material terms of each document filed as an exhibit to the Registration
Statement; however, this Prospectus and any Prospectus Supplement do not contain
all of the information contained in the Registration Statement and the exhibits
thereto. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance reference
is made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference. For further information, reference is made
to the Registration Statement and the exhibits thereto, which are available for
inspection without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices located as follows: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of the Registration Statement and exhibits thereto may be obtained at the
above locations at prescribed rates. Information filed with the Commission can
also be inspected at the Commission's site on the World Wide Web at
http://www.sec.gov.
The Note Issuer will file with the Commission such periodic reports with
respect to each Series of Certificates as are required by the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules,
regulations or orders of the Commission thereunder. The Note Issuer may
discontinue filing periodic reports under the Exchange Act at the beginning of
any 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
3
<PAGE>
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.
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.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Certificates will describe the
following terms of such Series and, if applicable, the Classes thereof: (a) the
designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues, or if the Trust
has entered into a Swap Agreement with respect to such Series, the index on
which a variable rate of interest will be based, (d) the dates on which
distributions of interest and principal will occur, (e) the Scheduled Final
Distribution Date, (f) the Termination Date of the Series, (g) the issuance date
of the Series, (h) the place or places for the payment of principal and
interest, (i) the authorized denominations, (j) the provisions for redemption by
the Trust as a result of an optional redemption by the Note Issuer of the
underlying Notes which will, in no event, be permitted unless the outstanding
principal balance thereof is less than five percent of the initial principal
balance thereof, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the terms, if any, on which
any Class of Certificates will be subordinated to any other Class of
Certificates, (m) the FTA Charges as of the date of issuance of such Series of
Certificates, and the portion of the FTA Charges attributable to such Series of
Certificates, (n) any other terms of such Series and any Class thereof that are
not inconsistent with the provisions of the Certificates and that will not
result in any Rating Agency reducing or withdrawing its then current rating of
any outstanding Series or Class of Notes or Certificates, (o) the identity of
the Certificate Trustee and the Delaware Trustee and (p) the terms of any
interest rate exchange agreement executed solely to permit the issuance of
variable rate Certificates.
4
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION............................................ 3
REPORTS TO HOLDERS............................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................. 4
PROSPECTUS SUPPLEMENT............................................ 4
PROSPECTUS SUMMARY............................................... 7
RISK FACTORS..................................................... 23
Unusual Nature of the Transition Property..................... 23
Potential Servicing Issues.................................... 25
Uncertainties Related to the Electric Industry Generally...... 27
Bankruptcy and Creditors' Rights Issues....................... 28
Nature of the Certificates.................................... 30
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE.......... 33
DESCRIPTION OF THE TRANSITION PROPERTY........................... 34
General....................................................... 34
Financing Order and Advice Letters............................ 34
Transition Property........................................... 35
Nonbypassable FTA Charges..................................... 36
Adjustments to the FTA Charges................................ 36
Sale and Assignment of Transition Property.................... 37
Seller Representations and Warranties......................... 38
CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS.... 40
THE TRUST........................................................ 41
THE INFRASTRUCTURE BANK.......................................... 42
THE NOTE ISSUER.................................................. 43
Officers...................................................... 43
THE SELLER AND SERVICER.......................................... 45
General....................................................... 45
SDG&E Customer Base and Electric Energy Consumption........... 45
Forecasting Consumption....................................... 46
Forecast Variance............................................. 46
Credit Policy; Billing; Collections; Restoration of Service... 47
Loss and Delinquency Experience............................... 49
Delinquencies................................................. 50
SERVICING........................................................ 51
Servicing Procedures.......................................... 51
Servicing Standards and Covenants............................. 51
Remittances to Collection Account............................. 52
No Servicer Advances.......................................... 52
Servicing Compensation........................................ 52
Aggregators and Other Suppliers............................... 53
Servicer Representations and Warranties....................... 53
Statements by Servicer........................................ 53
Evidence as to Compliance..................................... 54
Certain Matters Regarding the Servicer........................ 54
Servicer Defaults............................................. 55
Rights Upon Servicer Default.................................. 55
Waiver of Past Defaults....................................... 55
Amendment..................................................... 56
Termination................................................... 56
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
DESCRIPTION OF THE NOTES......................................... 57
General....................................................... 57
Security...................................................... 57
Collection Account............................................ 58
Interest and Principal........................................ 58
Optional Redemption........................................... 59
Overcollateralization Amount.................................. 59
Other Credit Enhancement...................................... 60
Allocations; Payments......................................... 61
Actions by Noteholders........................................ 62
Note Events of Default; Rights Upon Note Event of Default..... 63
Certain Covenants of the Note Issuer.......................... 64
Reports to Noteholders........................................ 66
Annual Compliance Statement................................... 67
DESCRIPTION OF THE CERTIFICATES.................................. 68
General....................................................... 68
State Pledge.................................................. 68
Payments and Distributions.................................... 68
Voting of the Notes........................................... 70
Events of Default............................................. 70
Optional Redemption........................................... 72
Reports to Certificateholders................................. 72
Amendments.................................................... 73
List of Certificateholders.................................... 73
Registration and Transfer of the Certificates................. 74
Book-Entry Registration....................................... 74
Definitive Certificates....................................... 77
Conditions of Issuance of Additional Series................... 78
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................... 79
General....................................................... 79
Treatment of the Certificates as Debt......................... 80
Taxation of Interest Income of U.S. Certificateholders........ 80
Sale or Exchange of Certificates.............................. 81
Non-U.S. Certificateholders................................... 81
Information Reporting and Backup Withholding.................. 81
STATE TAXATION................................................... 82
California Taxation........................................... 82
Other States.................................................. 82
ERISA CONSIDERATIONS............................................. 83
USE OF PROCEEDS.................................................. 84
PLAN OF DISTRIBUTION............................................. 84
RATINGS.......................................................... 84
LEGAL MATTERS.................................................... 85
INDEX OF PRINCIPAL DEFINITIONS................................... 86
</TABLE>
6
<PAGE>
PROSPECTUS SUMMARY
The following Prospectus Summary is qualified in its entirety by reference
to the detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Prospectus Summary have the meanings ascribed to such terms
elsewhere in this Prospectus. The Index of Principal Definitions which begins
on page 86 sets forth the pages on which the definitions of certain principal
terms appear.
Transaction Overview Assembly Bill 1890, Chapter 854, California Statutes of
1996 (as amended, the "STATUTE"), permits the
California investor-owned utilities (collectively, the
"UTILITIES"), including 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 Customers and Small Commercial Customers.
Transition Costs consist of the costs of generation-
related assets and obligations that may become
uneconomic as a result of a competitive generation
market, together with certain other costs associated
therewith.
The Seller will sell to the Note Issuer the Transition
Property, which represents the right to receive
payments made in respect of certain nonbypassable
charges included in the regular utility bills of
residential and small commercial consumers located in
the historical service territory of the Seller. These
charges are nonbypassable in that applicable consumers
cannot avoid paying them if they purchase electricity
from a supplier other than the Seller. The Seller will
sell the Transition Property to the Note Issuer in
exchange for the proceeds of the Notes.
The Note Issuer will issue the notes (the "NOTES"),
which will be secured by the Transition Property and
the other Note Collateral described under "Description
of the Notes -- Security" herein, and sell the Notes to
the Trust in exchange for the proceeds of the sale of
the Certificates. The Trust is being established by
the Infrastructure Bank. The Trust, whose sole assets
will be the Notes and any interest rate exchange
agreement executed solely to permit the issuance of
variable rate Certificates (a "SWAP AGREEMENT"), will
issue the Certificates, which will be sold to the
underwriters named in each Prospectus Supplement. The
Certificates of each Class represent an undivided
interest in the related Class of Notes, the proceeds
thereof and payments pursuant to any related Swap
Agreement.
The charges represented by the Transition Property are
calculated to be sufficient over time to pay principal
of and interest on the Notes and, in turn, the
Certificates, all related fees and expenses and the
Overcollateralization Amount described under
"Description of the Transition Property --Adjustments
to the FTA Charges" herein. These charges will be
subject to adjustment pursuant to the true-up
7
<PAGE>
mechanism described herein over the term of each Series
of Certificates to enhance the likelihood of timely
recovery of such amounts, although there can be no
assurance that the true-up mechanism will operate as
intended or that principal of and interest on any
Series or Class of Certificates will be paid as
scheduled.
Risk Factors Investors should consider the risks associated with an
investment in the Certificates. For a discussion of
certain material risks associated therewith, investors
should review the discussion under "Risk Factors" which
begins on page 23.
Seller and Servicer San Diego Gas & Electric Company, a California
corporation ("SDG&E"). SDG&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 (together with any subsequent sale agreement
relating to Subsequent Transition Property, the "SALE
AGREEMENT").
The Seller will also act as the servicer of the
Transition Property (in its capacity as servicer, the
"SERVICER") pursuant to a Transition Property
Servicing Agreement between the Note Issuer and the
Servicer (the "SERVICING AGREEMENT").
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.
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 not be an
agency or instrumentality of the State of California.
The Trust will be governed by an amended and restated
Declaration and Agreement of Trust among the
Infrastructure Bank, the Delaware Trustee and the
Certificate Trustee (the "TRUST AGREEMENT"). The
Certificateholders will be the beneficiaries of the
Trust upon the issuance of the Certificates. See "The
Trust" herein.
Infrastructure Bank A public body established within the state government
of the State of California. Under the Statute, the
Infrastructure Bank must approve the issuance of
Certificates by the Trust. However, the Infrastructure
Bank will not guarantee insure or otherwise support
payments or distributions on, as applicable, the
Certificates, the Notes or
8
<PAGE>
the Transition Property, nor will the Infrastructure
Bank have any other obligations with respect thereto.
See "The Infrastructure Bank" herein.
Certificate Trustee The entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus Supplement
(the "CERTIFICATE TRUSTEE").
Delaware Trustee The Delaware entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus Supplement
(the "DELAWARE TRUSTEE").
The Certificates The California Infrastructure and Economic Development
Bank Special Purpose Trust 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 may be issued in one or more series
(each, a "SERIES"), and the Certificates of each Series
may be issued in one or more classes (each, a "CLASS").
Each Class of Certificates will correspond to a Class
of Notes and will represent undivided interests in such
underlying Class of Notes, the proceeds thereof and
payments pursuant to any related Swap Agreement.
Accordingly, each Class of Certificates will entitle
the holders thereof to receive the payments received by
the Trust in respect of the corresponding Class of
Notes. The funds received by the Trust from the
payments on each Class of Notes will be the only source
of distributions on the Certificates of the
corresponding Class. Each Note will be secured by all
of the Transition Property owned by the Note Issuer and
the other Note Collateral described under "Description
of the Notes --General" herein. The Certificates are
entitled to all of the benefits accorded to "rate
reduction bonds" by the Statute. The issuance and sale
of any Series or Class of Certificates is contingent
upon the effectiveness of the Financing Order and the
applicable Issuance Advice Letter.
A Series may include two or more Classes of
Certificates which differ as to the interest rate,
timing, sequential order and amount of distributions of
principal or interest or both or otherwise.
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
9
<PAGE>
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 the taxing power of the State of
California is pledged to the payment of principal of or
interest on the Certificates or the Notes or to the
payments in respect of the Transition Property.
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 the other Note Collateral,
including capital contributed by SDG&E in an amount
specified in each Prospectus Supplement, which will
equal 0.50% of the initial principal amount of all
Notes issued and outstanding pursuant to the Indenture.
The principal executive office of the Note Issuer is
located at 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, unless a Swap
Agreement is entered into in connection with the
issuance of any Series or Class of Certificates,
10
<PAGE>
as described in the related Prospectus Supplement.
The Note Issuer will use all collections received with
respect to the Transition Property (FTA Collections, as
more specifically defined below) to pay fees payable to
the Note Trustee, the Certificate Trustee, the Delaware
Trustee, the Servicer and the Administrator, other
Operating Expenses, interest due on the Notes and
principal payable on the Notes, allocated among the
Series and Classes of Notes based on the priorities
described herein and in the Prospectus Supplement,
until each outstanding Series and Class of Notes is
retired. However, as described under "Description of
the Notes -- Interest and Principal" herein, principal
of any Series or Class of Notes on any Payment Date
will only be paid until the outstanding principal
balance of such Series or Class has been reduced to the
principal balance specified in the applicable Expected
Amortization Schedule for such Distribution Date. Any
FTA Collections remaining with respect to such
Distribution Date will be allocated to the various
subaccounts of the Collection Account, as described
below. All principal not previously paid, if any, on a
Note is due and payable on the Final Maturity Date of
such Note, which will correspond with the Termination
Date of the related Class of Certificates.
Each Series of Notes represents a non-recourse
obligation of the Note Issuer, and will be secured only
by Transition Property owned by the Note Issuer,
together with the other Note Collateral.
See "Description of the Notes" herein.
Note Trustee The entity named as trustee under the Note Indenture,
as set forth in each Prospectus Supplement (the "Note
Trustee").
Transition Costs In connection with the restructuring of the electric
utility industry in California to facilitate increased
competition among providers of electricity, Sections
367 and 369 of the California Public Utilities Code
(the "PU CODE") provide the Seller, as well as the
other Utilities providing electricity to consumers in
California, with an opportunity to recover certain
costs. These costs, commonly known as stranded costs
and referred to herein and in the Statute as
"TRANSITION COSTS", consist of the costs of generation-
related assets and obligations that may become
uneconomic as a result of a competitive generation
market, together with certain other costs associated
therewith. Examples of generation-related assets
include electric generating facilities, amounts
recoverable in electric rates pursuant to settlement
agreements approved by the California Public Utilities
Commission (the "CPUC"), and power purchase contracts
with third-party
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<PAGE>
generators of electricity (including voluntary
restructuring, renegotiations or terminations thereof).
These assets may become uneconomic in a competitive
generation market, since they are obligations that were
undertaken either pursuant to legal requirements or
with the understanding that they would be recoverable
in rates approved by the CPUC. Since other participants
in a competitive market, unburdened by these uneconomic
assets, may be able to offer electricity at lower
rates, the costs relating to these uneconomic assets
may not be recoverable in a competitive market.
FTA Charges Under Section 840 of the PU Code, the Seller has
obtained from the CPUC a Financing Order (the
"FINANCING ORDER") designating the amount of the
Seller's Transition Costs to be financed, along with
the costs of providing, recovering, financing or
refinancing the Transition Costs, including the costs
of issuing, servicing and retiring the Certificates.
The total amount specified in the Financing Order which
may be financed, including associated costs, is
$800,000,000. In order to enable the Seller to recover
the Transition Costs and associated costs, the CPUC has
authorized, in the Financing Order, the establishment
of nonbypassable, usage-based, per kilowatt hour
charges on designated consumers of electricity (the
"FTA CHARGES"). The FTA Charges will be payable by
existing and future Residential Customers and Small
Commercial Customers (each, as defined below and
collectively, the "CUSTOMERS") of electricity in the
territory of the Seller specified by the Statute. The
territory specified by the Statute is the territory in
which the Seller provided electricity services as of
December 20, 1995 (the "TERRITORY"). The two defined
classes of consumers comprising the Customers are (i)
residential consumers (the "RESIDENTIAL CUSTOMERS") and
(ii) small commercial consumers, which are defined as
commercial consumers whose peak demand, determined on a
one-time basis, was less than 20 kilowatts in at least
nine of the twelve billing periods prior to October 1,
1997, and new commercial customers since that time
whose peak demand, estimated on a one-time basis, is
less than 20 kilowatts ("Small Commercial Customers").
Because of differences in the tariff rate for each
class of Customers, the FTA Charge payable by
Residential Customers is expected to be different from
the FTA Charge payable by Small Commercial Customers;
the initial FTA Charges will result in FTA Payments by
the Residential Customers and Small Commercial
Customers representing approximately ___% and ___%,
respectively, of the aggregate FTA Payments. The
foregoing percentages may change from time to time
based on fluctuations in Customer composition.
The FTA Charges will be calculated and adjusted from
time to time to generate projected revenues
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sufficient to provide for the amortization of each
Series of Certificates in accordance with the related
Expected Amortization Schedule, together with the
Overcollateralization Amount described herein and fees
and expenses related to the issuance and servicing of
the Certificates. The FTA Charges are, specifically,
separate charges that will be assessed on (i) the class
of electricity consumers comprised of Residential
Customers and (ii) the class of electricity consumers
comprised of Small Commercial Customers. In each case,
the FTA Charge will be assessed for the benefit of the
Note Issuer as owner of the Transition Property based
on the applicable Customer's actual consumption of
electricity. Such amounts will be collected by the
Servicer as part of its normal collection activities
and will be deposited into the Collection Account under
the terms of the Note Indenture on each Remittance Date
(as defined below).
The Financing Order requires a notification letter
(each, an "ISSUANCE ADVICE LETTER") to be submitted to
the CPUC prior to the issuance of each Series of
Certificates. The first Issuance Advice Letter will
establish the initial FTA Charges, calculated using the
Base Calculation Model which is described under
"Description of the Transition Property -- Financing
Order and Advice Letters" herein. Subsequent Issuance
Advice Letters may modify the FTA Charges to support
the issuance of additional Series of Certificates. The
Issuance Advice Letters and the True-Up Mechanism
Advice Letters (as defined below) are collectively
referred to as "ADVICE LETTERS." The Servicing
Agreement requires the Servicer to calculate
adjustments to the FTA Charges and to file True-Up
Mechanism Advice Letters from time to time as
needed.
Transition Property The right to collect payments based on the FTA Charges
from the Customers (such payments being the "FTA
Payments") gives rise to a separate property right
under California law and is referred to herein
generally as the "TRANSITION
PROPERTY." FTA Payments received by the Servicer and
remitted to the Collection Account are referred to
generally herein as the "FTA COLLECTIONS." "Transition
Property" is defined more specifically in Section
840(g) of the PU Code as the property right created
under the PU Code including, without limitation, the
right, title and interest of an electrical corporation
or its transferee (i) in and to the FTA Charges, as
adjusted from time to time, (ii) to be paid the FTA
Payments, and (iii) to obtain adjustments to the FTA
Charges as provided in the PU Code.
Adjustments to
FTA Charges In order to enhance the likelihood that the actual FTA
Collections are neither more nor less than the amount
necessary to amortize the Certificates in accordance
with the Expected Amortization Schedules and fund the
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<PAGE>
Overcollateralization Subaccount, the Servicing
Agreement requires the Servicer to seek, and the
Statute and the Financing Order require the CPUC to
approve, periodic adjustments to the FTA Charges based
on actual FTA Collections and updated assumptions by
the Servicer as to, projected future usage of
electricity by Customers, future expenses relating to
the Transition Property, the Notes and the
Certificates, 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 Charges will
continue until all interest on and principal of all
Series of Notes and corresponding Series of
Certificates have been paid or distributed in full.
The Servicer will file a routine True-Up Mechanism
Advice Letter annually, requesting modifications to the
FTA Charges. Calculations of appropriate modifications
to the FTA Charges will be made based on the True-Up
Mechanism Calculation Model, which is described under
"Description of the Transition Property --Adjustments
to the FTA Charges" herein. The Servicer will also file
a routine True-Up Mechanism Advice Letter quarterly, if
the amount of FTA Payments causes the aggregate
outstanding principal balance of the Certificates to
vary from the Expected Amortization Schedule for all
outstanding Certificates as of any Distribution Date by
more than an amount to be specified in each Prospectus
Supplement or if amounts on deposit in the Collection
Account vary from amounts specified in each 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.
True-Up Mechanism Advice Letters will take into account
amounts available in the General Subaccount and Reserve
Subaccount, and amounts necessary to replenish the
Overcollateralization Subaccount and Capital Subaccount
to required levels, in addition to amounts payable on
the Notes.
See "Description of the Transition Property --
Adjustments to the FTA Charges" herein.
State Pledge Pursuant to Section 841(c) of the PU Code, the
Infrastructure Bank, on behalf of the State of
California, pledges and agrees with the Trust and the
Holders of the Certificates that the State of
California shall neither limit nor alter the FTA
Charges, the Transition Property, or the Financing
Order or Advice Letters relating thereto, or any rights
thereunder, until the Certificates, together with
interest thereon, are fully paid and discharged,
providing nothing contained in this pledge and
agreement shall preclude such limitation or alteration
if and when adequate
14
<PAGE>
provision shall be made by law for the protection
of the Holders (the "State Pledge").
Customers The Customers consist of Residential Customers and
Small Commercial Consumers in the Territory. The sole
source of payments on the Certificates will be payments
on the Notes and payments pursuant to any related Swap
Agreement; the sole sources of payments on the Notes
will be FTA Charges collected from the Customers and
amounts available or realized from the other Note
Collateral (which is not expected to be substantial).
Of amounts collected from the Customers, only the
portion of amounts collected attributable to the FTA
Charges, as adjusted from time to time, will be
available for distributions on the Certificates.
Distribution and
Payment Dates Unless otherwise specified in the related Prospectus
Supplement, each March 25, June 25, September 25 and
December 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").
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
of 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 not less
than a majority in principal amount of all Certificates
of all Series then outstanding shall, declare the
unpaid principal amount of all the Notes of all Series
then outstanding to be due and payable. The Scheduled
Final Distribution Date and the Termination Date for
any Class of Certificates will coincide with the
Scheduled Maturity Date and Final Maturity Date,
respectively, for the related Class of Notes. See
"Description of the Certificates--Events of Default"
and "Ratings" herein.
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<PAGE>
Issuance of New Series The Trust is authorized to issue new Series of
Certificates from time to time. See "Description of
the Transition Property -- Financing Order and Advice
Letters." A new Series may be issued only upon
satisfaction of the conditions described under
"Description of the Certificates --Conditions of
Issuance of Additional Series" herein. Each Series of
Certificates will represent an interest in payments to
be made on a Series of Notes, which in turn will be
secured by the Transition Property and the other Note
Collateral. Because the Transition Property will
secure each Series or Class of Notes ratably, 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 or
any related Swap Agreement on the Payment Date for the
Notes occurring on the same day as such Distribution
Date. Note Events of Default will include failure to
make any payment of interest within five days after the
Payment Date on which such payment is due.
Principal Principal of each Class of Certificates will be
distributed to the Certificateholders of such Class in
the amounts and on the Distribution Dates specified in
the related Prospectus Supplement, but only to the
extent that amounts in the Collection Account are
available therefor, and subject to the other
limitations described below. See "Description of the
Notes --Allocations; Payments" and "Description of the
Certificates --Payments and Distributions" herein. The
related Prospectus Supplement will set forth a schedule
of the expected amortization of principal of the
related Series of Certificates and, if applicable, the
Classes thereof (for any Series or Class, the "Expected
Amortization Schedule"). On any Payment Date, the Note
Issuer will make principal payments on the Notes only
until the outstanding principal balances thereof have
been reduced to the principal balances specified in the
applicable Expected Amortization Schedules for such
Payment Date; accordingly, on the related Distribution
Date, the Trust similarly will only make principal
distributions on the Certificates in such amounts. Any
FTA Collections in excess of amounts payable as (a)
expenses of the Note
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<PAGE>
Issuer and the Trust, (b) payments of interest on and
principal of the Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to
the Capital Subaccount (all as described herein under
"Description of the Notes--Allocations; Payments:
herein) will be retained by the Note Trustee in the
Reserve Subaccount for payment on subsequent Payment
Dates. However, if insufficient FTA Collections are
received with respect to any Payment Date, and amounts
in the Collection Account are not sufficient to make up
the shortfall, principal of any Series or Class of
Certificates may be distributed later than reflected in
the related Expected Amortization Schedule, as
described herein and in the related Prospectus
Supplement. See "Risk Factors --Uncertain Distribution
Amounts and Weighted Average Life" and "Certain
Distribution and Weighted Average Life 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")
or a breach by the State of California of the State
Pledge (collectively, a "Certificate Event of Default,"
and, together with a Note Event of Default, an "EVENT
OF DEFAULT"). See "Description of the Certificates --
Events of Default" herein.
Optional Redemption The Note Issuer may redeem any Series of Notes relating
to a Series of Certificates, and accordingly cause the
Trust to redeem the related Series of Certificates, if
the outstanding principal balance of such Series of
Notes has been reduced to less than five percent of the
initial principal balance thereof. See "Description of
the Certificates -- Optional Redemption" herein.
Collection Account
and Subaccounts Upon issuance of the initial Series of Notes, the Note
Issuer will establish the Collection Account, which
will be held by the Note Trustee for the benefit of the
Noteholders. The Collection Account will consist of
four subaccounts: a general subaccount (the "General
Subaccount"), a reserve subaccount (the "Reserve
Subaccount"), a subaccount for the
Overcollateralization Amount (the
"Overcollateralization Subaccount") and a capital
subaccount (the "Capital Subaccount). Unless the
context indicates otherwise, references herein to the
Collection Account include each of
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<PAGE>
the subaccounts contained therein. Withdrawals from and
deposits to these subaccounts will be made as described
under "Description of the Notes--Allocations; Payments"
herein.
Overcollateralization In order to enhance the likelihood that distributions
on each Series of the Certificates will be made in
accordance with their Expected Amortization Schedules
the Financing Order permits the Servicer to set the FTA
Charges at levels that are expected to produce FTA
Collections in amounts that exceed the amounts expected
to be required to make all 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. Any such excess amount will be held in the
Overcollateralization Subaccount, as described further
under "Description of the Notes --
Overcollateralization Amount" herein, and will be
available to pay any periodic shortfalls in amounts
available for scheduled payments on the Notes.
Capital Subaccount Upon the issuance of each Series of Notes, the Seller
will contribute capital to the Note Issuer in an amount
specified in each Prospectus Supplement, which will
equal 0.50% of the initial principal amount of each
such Series of Notes. Such amount, less $100,000 in
the aggregate for all Series of Notes (with respect to
each Series, the "Required Capital Level"), will be
deposited into the Capital Subaccount. Withdrawals from
and deposits to the Capital Subaccount will be made as
described under "Description of the Notes--Allocations;
Payments" herein.
Reserve Subaccount FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of
the Note Issuer and the Trust, (b) payments of
principal of and interest on the Notes, (c) allocations
to the Overcollateralization Subaccount and (d)
allocations to the Capital Subaccount (all as described
under "Description of the Notes -- Allocations;
Payments" herein), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will
draw on amounts in the Reserve Subaccount, to the
extent amounts available in the General Subaccount are
insufficient to make scheduled payments on the
Notes.
Other Credit Enhancement Although the true-up adjustment mechanism, and amounts
available in the Reserve Subaccount, the
Overcollateralization Subaccount and the Capital
Subaccount are expected to provide sufficient credit
enhancement for the Notes, other types of credit
enhancement may be provided with respect to one or more
Series or Classes of Notes 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, on the twentieth
calendar day of each calendar month (or, if such day is
not a Certificate Business Day, the following
Certificate Business Day), the Servicer will remit to
the Collection Account FTA Payments expected to have
been received during the preceding calendar month (the
"BILLING PERIOD"). Because of billing system
limitations, the amounts remitted will be based on the
Collections Curve, increased or reduced as described
herein under "Servicing -- Remittances to Collection
Account."
On each Payment Date, amounts in the Collection Acount,
including net earnings thereon (subject to the priority
of withdrawals described in the following paragraph),
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 Billing 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 Payment Dates will be
paid to the Administrator; (4) so long as no Event of
Default has occurred or would be caused by such
payment, all other fees, costs, expenses and
indemnities of the Note Issuer and the Trust
("Operating Expenses") will be paid to the persons
entitled thereto; (5) Quarterly Interest and any
overdue Quarterly Interest with respect to each Series
of Notes will be transferred to the Certificate
Trustee, as Noteholder, for distribution to the
Certificateholders; (6) principal on any Series of
Notes payable as a result of a Note Event of Default or
on the Final Maturity Date for such Series of Notes
will be transferred to the Certificate Trustee, as
Noteholder, for distribution to the Certificateholders;
(7) funds necessary to pay Quarterly Principal for any
Series of Notes based on priorities described in each
Prospectus Supplement will be transferred to the
Certificate Trustee, as Noteholder, for distribution to
the applicable Certificateholders; (8) unpaid Operating
Expenses will be paid to the persons entitled thereto;
(9) an amount up to the sum of the Quarterly
Overcollateralization Collection and any unfunded
Quarterly Overcollateralization Collections from prior
Payment Dates will be allocated to the
Overcollateralization Subaccount; (10) an amount up to
the excess of the Required Capital Level with respect
to all outstanding Series of Notes over the amount in
the Capital Subaccount as of such Payment Date will be
allocated to the Capital Subaccount; (11) funds up to
the net earnings on amounts in the Collection Account
for the prior quarters without cumulation will be
released to the Note Issuer; (12) if any Series
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<PAGE>
of Notes has been retired as of such Payment Date, the
excess of the amount in the Overcollateralization
Subaccount over the aggregate Overcollateralization
Amount with respect to all Series of Notes remaining
outstanding will be released to the Note Issuer; (13 if
any Series of Notes has been retired as of such Payment
Date, the excess of the amount in the Capital
Subaccount over the aggregate Required Capital Level
with respect to all Series of Notes remaining
outstanding will be released to the Note Issuer; (14)
the balance, if any, will be allocated to the Reserve
Subaccount for distribution on subsequent Payment
Dates; and (15) following the repayment of all
outstanding Series of Notes, the balance, if any, will
be released to the Note Issuer.
If on any Payment Date funds on deposit in the General
Subaccount are insufficient to make the transfers
contemplated by clauses (1) through (7) above, the Note
Trustee will (i) first, draw from amounts on deposit in
the Reserve Subaccount, (ii) second, draw from amounts
on deposit in the Overcollateralization Subaccount, and
(iii) third, draw on amounts on deposit in the Capital
Subaccount, up to the amount of such shortfall, in
order to make the transfers described above. See
"Description of the Notes --Allocations; Payments"
herein.
Servicing The Servicer is responsible for servicing, managing and
receiving FTA Payments in the same manner that it
services and administers bill collections for its own
account. On each Remittance Date, the Servicer will
remit FTA Payments expected to have been received
during the preceding Billing Period (or, if Remittance
Dates are more frequent. Because of billing system
limitations, the amounts remitted will be for the
period since the preceding Remittance Date). Because of
billing system limitations, the amounts remitted will
be based on the Collections Curve, increased or reduced
as described under "Servicing --Remittances to
Collection Account" herein. Subject to certain
conditions described herein, pending deposit into the
Collection Account, actual FTA Payments received by the
Servicer may be invested by the Servicer at its own
risk and for its own benefit, and will not be
segregated from other funds of the Servicer. See
"Servicing -- Remittances to Collection Account"
herein.
Servicing Compensation The Servicer will be entitled to receive a Servicing
Fee for each calendar quarter in an amount equal to
one-fourth of the percent per annum specified in the
related Prospectus Supplement of the then outstanding
principal amount of the Notes (the "SERVICING FEE").
The Servicing Fee will be paid prior to the
distribution of any amounts in respect of interest on
and principal of the Notes. The Servicer will be
entitled to retain as additional compensation net
investment income on FTA Payments received by the
Servicer prior to
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<PAGE>
remittance thereof to the Collection Account and the
portion of late fees, if any, paid by Customers
relating to the FTA Payments. See "Servicing --
Servicing Compensation" herein.
No Servicer Advances The Servicer will not make any advances of interest or
principal on the Notes.
Denominations Each Class of Certificates will be issued in the
minimum initial denominations set forth in the related
Prospectus Supplement and in integral multiples
thereof.
Registration of the
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 exercise such
rights through DTC and Participants, except as
otherwise specified herein. See "Risk Factors" and
"Description of the Certificates--Book-Entry
Registration" herein.
Ratings It is a condition of issuance of each Class of
Certificates that at the time of issuance such Class
receive the rating indicated in the related Prospectus
Supplement, which will be in one of the four highest
categories, from one or more nationally recognized
statistical rating agencies (each, a "RATING AGENCY")
specified therein. Each Class of Notes will receive
the same rating from the applicable Rating Agencies as
the corresponding Class of Certificates. See "Ratings"
in the related Prospectus Supplement.
A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Certificate and,
accordingly, there can be no assurance that the ratings
assigned to any Class of Certificates upon initial
issuance thereof
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<PAGE>
will not be revised or withdrawn by a Rating Agency at
any time thereafter. If a rating of any Class of
Certificates is revised or withdrawn, the liquidity of
such Class of Certificates may be adversely affected.
In general, the ratings address credit risk and do not
represent any assessment of the rate of FTA
Collections. See "Risk Factors -- Uncertain
Distribution Amounts and Weighted Average Life,"
"Certain Distribution and Weighted Average Life
Considerations" and "Ratings" herein.
Tax Status of the
Certificates The Certificates will be treated as representing
ownership interests in debt for federal income tax
purposes. Interest and original issue discount, if any,
on the Certificates generally will be included in gross
income for federal income tax purposes. See "Certain
Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
Interest and original issue discount, if any, on the
Certificates will be exempt from California personal
income tax, but not exempt from the California
franchise tax, but not exempt from the California
franchise tax applicable to banks and corporations. See
"State Taxation" herein.
ERISA Considerations A fiduciary of any employee benefit plan or other plan
or arrangement that is subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "CODE"), should carefully
review with its legal advisors whether the purchase or
holding of the Certificates of any Class or Series
could give rise to a transaction prohibited or not
otherwise permissable under ERISA or the Code. See
"ERISA Considerations" herein and in the related
Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
UNUSUAL NATURE OF THE TRANSITION PROPERTY
Reliance on FTA Adjustments.
---------------------------
The Servicer will be obligated to submit True-Up Mechanism Advice Letters
to the CPUC at least annually and as often as quarterly, seeking adjustments to
the FTA Charges to reflect amounts available in the General Subaccount and
Reserve Subaccount and amounts required to replenish the Overcollateralization
Subaccount and Capital Subaccount to required levels, as well as the actual rate
of FTA Collections, which will vary from projections upon which the FTA Charges
were based, primarily as a result of variations from projected electricity usage
by Customers and expected delinquencies and 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. Any delay in adjustments to the FTA Charges,
and any lititagtion that might ensue as a consequence, might adversely affect
the price and liquidity of the Certificates and the dates of maturity thereof,
and, accordingly, the weighted average lives thereof.
Possible State Amendment or Repeal of the Statute.
-------------------------------------------------
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 California law, the electorate has the right, through its initiative
powers, to propose statutes as well as amendments to the California
Constitution. Generally, any matter that is a proper subject of legislation can
become the subject of an initiative. Among other procedural requirements, in
order for an initiative measure to qualify for an election, the initiative
measure must be submitted to the State Attorney General and a petition signed by
electors constituting five percent, in the case of a statutory initiative, and
eight percent, in the case of a constitutional initiative, of the votes cast at
the last gubernatorial election must be submitted to the Secretary of State. To
become effective, the initiative must then be approved by a majority vote of the
electors voting at the next general election.
Consumer advocacy groups have publicly announced their opposition to
certain elements of the restructuring plan embodied in the Statute, including
the ability of the Utilities to recover fully their stranded costs and the
issuance of the Certificates. These opponents have indicated their intent to
commence litigation to prevent the sale of the Certificates. In addition,
opponents have announced their intention to draft a ballot initiative to
eliminate the Utilities' ability to recover fully stranded costs, including the
cost of nuclear plants. To date no such initiative measure has been submitted to
the State
23
<PAGE>
Attorney General, the first step in commencing the initiative qualification
process.
In the opinion of Brown & Wood LLP, counsel to the Trust ("Special
Counsel"), under applicable United States and State of California Constitutional
principles relating to the impairment of contracts, the State of California
could not repeal or amend the Statute (by way of either legislative process or
California voter initiative) or take, or refuse to take, any action required by
the State of California under its pledge and agreement with the
Certificateholders (described above) if such action or inaction would
substantially impair the rights of the Certificateholders, unless such action or
inaction would constitute a reasonable and necessary exercise of the State's
sovereign powers. There have been numerous cases in which legislative or
popular concerns with the burden of taxation or governmental charges have led to
adoption of legislation reducing or eliminating taxes or charges which supported
bonds or other contractual obligations entered into by public instrumentalities.
However, such concerns have not been considered by the courts to provide
sufficient justification for a substantial impairment of the security for such
bonds or obligations provided by the taxes or governmental charges involved.
Based upon such analogous case law (which, however, does not address these
particular circumstances directly), it would appear unlikely that the State
could reduce, modify or alter the Transition Property, or take, or refuse to
take, any action with respect to the Transition Property in a manner which would
substantially impair the rights of the Note Issuer, as owner of Transition
Property, or of Certificateholders. Nonetheless, no assurance can be given that
a repeal of or amendment to the Statute will not be sought or adopted or that
any action, or refusal to act, by the State may not occur, any of which might
constitute a violation of the State's pledge and undertaking with the
Certificateholders. In any such event, costly and time consuming litigation
might ensue. Any such litigation might adversely affect the price and liquidity
of the Certificates and the dates of maturity thereof, and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point, and the novelty of the security for the Certificates, the
outcome of any such litigation cannot be predicted with certainty and,
accordingly, Certificateholders may fail to receive distributions of principal
and interest.
Furthermore, Section 3 of Article XIIIC of the California Constitution
("Proposition 218") provides that the initiative process shall not be prohibited
or otherwise limited in matters of reducing or repealing any "local" tax,
assessment, fee or charge. There is no controlling precedent interpreting
Proposition 218, given its recent adoption. However, in the opinion of Special
Counsel, the FTA Charges are not a "local" tax, assessment fee or charge to
which Proposition 218 applies, and the initiative power described in Proposition
218 is therefore inapplicable to the FTA Charges, the Transition Property, the
Notes and the Certificates.
Possible Federal Preemption of the Statute.
------------------------------------------
At least one bill was introduced in the 105th Congress, First Session
prohibiting the recovery of stranded costs such as the Transition Costs, which
could negate the existence of the Transition Property that is the source of
payments on the Notes and the Certificates. The bill is H.R. 1230 (The Consumers
Electric Power Act of 1997) ("H.R. 1230"), which was introduced on April 8,
1997, and has been referred to the House Commerce Committee, where no further
action has been taken. However, the entire California delegation is on record
opposing any federal bill that does not grandfather the provisions of the
Statute. No prediction can be made as to whether H.R. 1230, or any future
proposed bill 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.
Possible Legal Challenges.
-------------------------
The existence of the Transition Property and its adequacy as a source of
distributions on the Certificates are dependent on relevant provisions of the PU
24
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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.
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.
POTENTIAL SERVICING ISSUES
Reliance on Servicer.
--------------------
The Trust relies on the Servicer for the determination of any adjustments
to the FTA Charges and for the Customer billing and collection that is necessary
to recover the FTA Payments and, therefore, necessary to make distributions on
the Certificates. If, as a result of its insolvency or liquidation or
otherwise, SDG&E were to cease servicing the Transition Property, determining
any adjustments to the FTA Charges or collecting FTA Payments, it may be
difficult to find a substitute Servicer. In such an event, the timing of
recovery of payment on the Transition Property could be delayed. See
"Servicing" herein.
Inaccurate Usage and Credit Projections.
---------------------------------------
The ability of the Servicer to forecast accurately the electricity usage of
Customers and the delinquency and charge-off experience relating to FTA Payments
will affect significantly whether Certificateholders will receive timely
distributions on the Certificates. Actual energy usage may differ from
projections as a result of weather during the relevant period that is warmer or
cooler than expected. In addition, actual energy usage, delinquencies and
charge-offs may differ from projections as a result of general economic
conditions, trends in demographics that are not precisely as predicted,
unexpected catastrophes, and other causes. During the past five years, the
Servicer's forecasts for energy consumption have been quite accurate, with an
average of a 1.4% underestimate of usage for Residential Customers and an
average of a 0.8% underestimate of usage for Small Commercial Customers. See
"The Seller and Servicer -- Forecast Variance" herein. The accuracy of the
Servicer's historical forecasts are not necessarily indicative of the accuracy
of the Servicer's future forecasts and there can be no assurances that actual
usage, delinquenciesand charge-offs will not be significantly different from
future forecasts thereof. The adjustment mechanism for the FTA Charges
described under "Description of the Transition Property -- Adjustments to the
FTA Charges," as well as the collection of the Overcollateralization Amount and
the pledge of amounts deposited in the Capital Subaccount, are intended to
mitigate these risks, although the frequency of the adjustments to the FTA
Charges is limited and accordingly delays in distributions to Certificateholders
might result. See "The Seller and Servicer -- Credit Policy; Billing;
Collections; Restoration of Service" herein.
Delays Caused by Changes in Payment Terms.
-----------------------------------------
The Servicer is permitted to alter the terms of billing and collection
arrangements and modify amounts due from Customers. While SDG&E has no current
intention of taking actions that would change the billing and collection
arrangements in a manner which would affect adversely the collection of FTA
Payments, there can be no assurance that changes in SDG&E's customary and usual
practices for comparable assets it services for itself might not result in a
25
<PAGE>
determination to do so or that a successor Servicer may not make such a
determination. It is possible that any such changes could delay collections from
Customers or result in lower collections, and accordingly could adversely affect
the distribution of interest on the Certificates on a timely basis or the
distribution of the principal of the Certificates pursuant to the Expected
Amortization Schedules or in full by the applicable Scheduled Final Distribution
Dates. See "Certain Distribution and Weighted Average Life Considerations"
herein.
Limited Credit Policy and Procedures.
------------------------------------
The ability of the Servicer to collect amounts billed to Customers under
the FTA Charges, as adjusted from time to time, will depend in part on the
creditworthiness of the Customers. 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. If SDG&E evaluates
the creditworthiness of a significant number of its Customers incorrectly,
resulting in significant increases in delinquencies and write-offs, delays in
distributions to Certificateholders may occur. See "The Seller and Servicer--
Credit Policy; Billing; Collections; Restoration of Service" herein.
Reliance on Aggregators and Other Suppliers.
-------------------------------------------
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPs") to elect to present a consolidated bill, to
their retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and the applicable FTA Charge. Any ESP
who elects consolidated billing will be responsible for paying the Servicer
monthly amounts payable by customers of the ESP regardless of the ESPs ability
to collect the FTA Charges from its customers, including monthly FTA Payments.
The CPUC has not yet made a final determination regarding the appropriate credit
standards to be required of ESPs, or the appropriate form of the necessary
agreement between SDG&E and each ESP. There can be no assurance that each ESP
will have the same credit standards as the Servicer, or that the Servicer will
be able to mitigate credit risks relating to ESPs in the same manner in which it
mitigates such risks relating to its Customers. 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. The true-up adjustment mechanism for
the FTA Charges, as well as the collection of the Overcolleralization Amount and
the pledge of amounts deposited in the Capital Subaccount are intended to
mitigate this risk. However, delays in distributions to Certificateholders might
occur as a result of delays in implementation of the adjustment mechanism.
Commingling of FTA Payments with Servicer's Other Funds; Investment of FTA
--------------------------------------------------------------------------
Payments for Servicer's Account.
- -------------------------------
Except as described under "Servicing -- Remittances to Collection Account"
herein, on each Remittance Date the Servicer will remit to the Collection
Account FTA Payments expected to have been received during the preceding
calendar month. Accordingly, FTA Payments received by the Servicer will not be
segregated from the Servicer's general funds until they are remitted to the
Collection Account, and the Servicer will invest FTA Payments received but not
yet remitted for its own account. A failure or inability of the Servicer to
remit the full amount of the estimated FTA Payments on any Remittance Date,
whether voluntary or involuntary, might result in delays in distributions to
Certificateholders. The true-up adjustment mechanism, as well as the collection
of the Overcolleralization Amount and the pledge of amounts deposited in the
Capital Subaccount, are intended to mitigate this risk. However, delays in
distributions to Certificateholders may occur as a result of delays in
implementation of the adjustment mechanism.
26
<PAGE>
UNCERTAINTIES RELATED TO THE ELECTRIC INDUSTRY GENERALLY
Untried New California Market Structure.
---------------------------------------
The California electric industry will change dramatically in the near
future, as a result of recent decisions by the CPUC and enactment of the
Statute. See "Energy Deregulation and New California Market Structure" herein.
The new California electric market structure, scheduled to begin January 1,
1998, has neither been tested nor implemented. Many elements of the new market
structure present novel regulatory issues yet to be resolved as well as many
practical issues of implementation such as the development of systems, software
and procedures for each of (a) the independent power exchange (the "PX"), which
will 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.
Changing Regulatory Environment.
-------------------------------
In addition to actions taken by the California Legislature and regulation
by the CPUC, the electric industry is also subject to federal law and regulation
by the Federal Energy Regulatory Commission (the "FERC"). At least five bills
were introduced into the 105th Congress, First Session mandating the
deregulation of the electric utility industry on the state level. In general,
the bills provide for open competition in the furnishing of electricity to all
retail customers. As described above under "--Transition Property -- Federal
Preemption of the Statute," at least one of the bills may prohibit the recovery
of FTA Charges; however, none of the bills have passed in committee. No
prediction can be made as to whether these bills, or any future proposed bills
to mandate the deregulation of the electric industry, will become law or, if
they become law, what their final form or effect would be. Any changes in the
existing legal structure regulating the electric industry might have an impact
on the manner in which electricity is distributed and payments therefor are
collected, or on the Servicer and its business, and thus the likelihood that
Certificateholders will receive distributions in the amounts and at the times
scheduled.
Changes in General Economic Conditions and Electricity Usage.
------------------------------------------------------------
General economic conditions and technological changes that would
significantly alter power consumption or reduce the residential and small
commercial consumer base in the Seller's historical service area may affect
payments on the Notes and, accordingly, distributions on the Certificates.
Changes in business cycles, departures of Customers from the Seller's 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.
Reliance on Broad Base of Customers.
-----------------------------------
The FTA Charges are relatively modest in amount on an individual Customer
basis, when imposed on the Seller's current base of Customers. However, if one
or more of the risks described under the heading "-- Uncertainties Relating to
the Electric Industry Generally" or an unforeseen catastrophe were to occur, the
number of Customers on whom the FTA Charges would be levied might be reduced
significantly. Such a reduction would increase the amount of the applicable FTA
Charge for each Customer, which might cause more Customers to avoid paying the
27
<PAGE>
applicable FTA Charge after the Rate Freeze Period by leaving the Territory. If
the number of Customers were to be substantially reduced, the remaining
Customers might be unable or unwilling to pay the FTA Charges. Alternatively, a
reduced number of Customers and corresponding higher per kilowatt hour FTA
Charges might increase the reluctance of the CPUC to allow adjustments to the
FTA Charges or provide greater incentive for the California legislature to amend
the Statute in a manner intended to reduce or eliminate the FTA Charges in
respect of the Transition Property. Although the Note Issuer believes that the
likelihood of this scenario occurring is remote, this result might cause
Certificateholders to fail to receive the full amount of distributions to which
they are entitled.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
Potential Bankruptcy of Seller.
------------------------------
The Seller will represent and warrant in the Sale Agreement that the
transfer of the Transition Property pursuant thereto to the Note Issuer is a
valid sale and assignment of such Transition Property from the Seller to the
Note Issuer. The Seller and the Note Issuer will also represent and warrant that
they will each take the appropriate actions under the PU Code to perfect this
sale. The Statute provides that the transactions described 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 Statute provides that any Transition Property constitutes a current
property right on the date that the Financing Order and the related Issuance
Advice Letter have become effective and that it thereafter exists continuously
for all purposes. Nonetheless, no assurances can be given that if the Seller
were to become the debtor in a bankruptcy case, a creditor of, or a bankruptcy
trustee for, the Seller or the Seller itself as debtor in possession would not
attempt to take the position that, because the payments based on the FTA Charges
are usage-based charges, Transition Property comes into existence only as
Customers use electricity. If a court were to adopt this position, no assurances
can be given that either the statutory lien created by the Statute or the
28
<PAGE>
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 Certificate Trustee, as Noteholder and for the benefit of
holders of the Certificates, would be an unsecured creditor of the Seller, and
delays or reductions in distributions on the Certificates could result. Whether
or not the court determined that the Transition Property had been sold to the
Note Issuer, no assurances can be given that the court would not rule that any
FTA Payments relating to electricity consumed after the commencement of the
Seller's bankruptcy cannot be transferred to the Note Issuer or the Certificate
Trustee, thus resulting in delays or reductions of distributions on the
Certificates.
Because the payments based on the FTA Charges 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 Certificates. The FTA
Charges may be adjusted through True-Up Mechanism Advice Letters, although
delays in implementation thereof may cause a delay in receipt of scheduled
distributions.
Regardless of whether the Seller is the debtor in a bankruptcy case, if a
court were to accept the arguments of a creditor of the Seller that Transition
Property comes into existence only as Customers use electricity, a tax or
government lien or other nonconsensual lien on property of the Seller arising
before the Transition Property came into existence may have priority over the
Note Issuer's interest in such Transition Property, thereby possibly initially
resulting in a reduction of amounts distributed to the holders of the
Certificates. The FTA Charges may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in receipt
of scheduled distributions.
Potential Bankruptcy of Servicer.
--------------------------------
For so long as the Servicer maintains a short-term debt rating of at least
"A-1" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and "P-1" by Moody's Investors Service, Inc. ("MOODY'S") or certain
other conditions are satisfied, the Servicer is entitled to commingle FTA
Payments with its own funds until the relevant Remittance Date. In the event of
a bankruptcy of the Servicer, the Note Trustee will likely not have a perfected
interest in such commingled funds and the inclusion thereof in the bankruptcy
estate of the Servicer may result in delays in distributions due on the
Certificates. See "--Servicing -- Reliance on Servicer" herein.
Potential Bankruptcy of Infrastructure Bank.
-------------------------------------------
The Infrastructure Bank is a public body established within the state
government of the State of California. The State of California cannot be a
debtor in a case under the Bankruptcy Code. If a court were to determine that
the Infrastructure Bank is an "instrumentality" of the State, rather than an
integral part of the State, then the Infrastructure Bank could become a debtor
in a case commenced under Chapter 9 of the Bankruptcy Code if the requirements
set forth in the Bankruptcy Code for the commencement of a voluntary case under
Chapter 9 were met. An involuntary case cannot be commenced against the
Infrastructure Bank under Chapter 9, and neither a voluntary nor an involuntary
29
<PAGE>
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 substantively consolidated with
those of the Infrastructure Bank. These steps include (a) creating the Trust as
a separate business trust under the Delaware Business Trust Act which includes
provisions preventing creditors of the Infrastructure Bank from having any right
to the assets of the Trust, (b) limiting interaction between the Infrastructure
Bank and the Trust, (c) maintaining accounting, bookkeeping, business forms and
financial statements for the Trust separate from those of the Infrastructure
Bank, and (d) restricting the nature of the Trust's business and its ability to
commence a voluntary case under the Bankruptcy Code.
NATURE OF THE CERTIFICATES
Limited Liquidity.
-----------------
There is no assurance that a secondary market for any of the Certificates
will develop or, if one does develop, that it will provide the
Certificateholders with liquidity of investment or that it will continue for the
life of such Certificates. It is not anticipated that any Certificates will be
listed on any securities exchange.
Restrictions on Book-Entry Registration.
---------------------------------------
The Certificates will be initially represented by one or more Certificates
registered in Cede's name, as nominee for DTC, and will not be registered in the
names of the Certificateholders or their nominees. Therefore, unless and until
Definitive Certificates are issued, Certificateholders will not be recognized
by the Certificate Trustee as Certificateholders. Hence, until such time,
Certificateholders will only be able to receive distributions from, and exercise
the rights of Certificateholders indirectly through, DTC and participating
organizations, and, unless a Certificateholder requests a copy of any such
report from the Certificate Trustee or the Servicer, will receive reports and
other information provided for under the Servicing Agreement only if, when and
to the extent provided to Certificateholders by DTC and its participating
organizations. In addition, the ability of Certificateholders to pledge
Certificates to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such Certificates, may be limited due to
the lack of physical certificates for such Certificates. See "Description of
the Certificates --Book-Entry Registration" herein.
Limited Obligations.
-------------------
Neither the Notes nor the Certificates will represent an interest in or
obligation of the Seller, the State of California or the Infrastructure Bank.
The Transition Property owned by the Note Issuer and the other Note Collateral,
which is expected to be relatively small, are the sole source of payments on the
Notes. It is anticipated that the Note Collateral, which is described under
"Description of the Notes -- Security" herein, will with limited exceptions
specified therein constitute the Note Issuer's only assets. The Note Issuer's
organizational documents will restrict its right to acquire other assets
unrelated to the transaction described herein. The Notes are limited obligations
of the Note Issuer, and are the sole assets of the Trust other than the Trust's
rights under any Swap Agreement. The Certificates represent undivided interests
in the Trust, and the sole source of distributions thereon is the payments on
the
30
<PAGE>
Notes and, in the event of variable-rate Certificates, the proceeds of any
Swap Agreement. If distributions are not made on the Certificates in a timely
manner as a result of nonpayment of the related Notes, the Certificateholders
may direct the Certificate Trustee to bring an action against the Note Issuer to
foreclose upon the Transition Property and the other Note Collateral securing
the Notes and, if the Certificate Trustee fails to bring such action, the
Certificateholders may bring such an action themselves, as described under
"Description of the Certificates -- Events of Default" herein. None of the
Certificates, the Notes or the underlying Transition Property will be guaranteed
or insured by the State of California, the Infrastructure Bank or any other
governmental agency or instrumentality or by the Seller or its affiliates.
Neither the full faith and credit nor the taxing power of the State of
California is pledged to the payment of principal of or interest on the
Certificates or the Notes or the payments in respect of the Transition Property.
Issuance in Series.
------------------
The Note Issuer expects to issue new Series of Notes from time to time, and
accordingly the Trust is expected to issue new corresponding Series of
Certificates from time to time. While the terms of any Series of Notes and the
corresponding Series of Certificates will be specified in supplements to the
Note Indenture and the Trust Agreement, respectively, and described in the
related Prospectus Supplement, the provisions of supplements to the Note
Indenture and the Trust Agreement and, therefore, the terms of any new Series,
will not 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. The ratings do not represent an assessment of
the likelihood that the rate of FTA Collections might differ from that
originally anticipated; as a result of such differences, any Series or Class of
Certificates might mature later than scheduled, resulting in a weighted average
life of such Certificates which is more than expected. A security rating is not
a recommendation to buy, sell or hold securities. There can be no assurance
that a rating will remain in effect for any given period of time or that a
rating will not be revised or withdrawn entirely by a Rating Agency if, in its
judgment, circumstances so warrant.
Uncertain Distribution Amounts and Weighted Average Life.
---------------------------------------------------------
The actual dates on which principal is paid on each Class of Certificates
might be affected by, among other things, the amount and timing of receipt of
FTA Collections. Since each FTA Charge will consist of a charge per kilowatt
hour of usage by the applicable class of Customers in the Territory, the
aggregate amount and timing of FTA Collections (and the resulting amount and
timing of principal amortization on the Certificates) could depend, in part, on
actual usage of electricity by Customers and the rate of delinquencies and
charge-offs. See "-- Inaccurate Usage and Credit Projections" herein. Although
the amount of the FTA Charges will adjust from time to time based in part on the
actual rate of FTA Collections during prior Billing Periods, no assurances can
31
<PAGE>
be given that the Servicer will be able to forecast accurately actual Customer
energy usage and the rate of delinquencies and charge-offs and implement
adjustments to the FTA Charges that will cause FTA Payments to be made at any
particular rate. If FTA Collections are received at a slower rate than expected,
distributions on a Certificate may be made later than expected. Because
principal will only be distributed in accordance with the Expected Amortization
Schedules, except in the event of an early redemption, the Certificates are not
expected to be retired earlier than scheduled. A distribution on a date that is
earlier than forecasted will result in a shorter weighted average life, and a
distribution on a date that is later than forecasted will result in a longer
weighted average life. See "Certain Distribution and Weighted Average Life
Considerations" and "Description of the Transition Property -- Adjustments to
the FTA Charges" herein.
Effect of Optional Redemption on Weighted Average Life.
------------------------------------------------------
As described more fully under "Description of the Notes -- Optional
Redemption" herein, the Note Issuer has the option to redeem all of the
outstanding Notes of any Series at any time after the outstanding principal
balance thereof has been reduced to less than five percent of the initial
outstanding principal balance. Redemption of a Series of Notes will require the
Certificate Trustee to redeem the related Series of Certificates. Redemption
will cause such Certificates to be retired earlier than would otherwise be
expected, and if the payment schedule otherwise does not differ from that
originally anticipated, will result in a shorter than expected weighted average
life for such Certificates. There can be no assurance as to whether the Note
Issuer will exercise the option to redeem any Series of Notes, or as to whether
Certificateholders will be able to receive an equally attractive rate of return
upon reinvestment of the proceeds resulting from any such redemption.
Limitations, Reduction and Substitution of Credit Enhancements.
--------------------------------------------------------------
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of shortfalls or losses.
Credit enhancement will be provided in one or more forms, including but not
limited to subordination of other Classes of Certificates of the same Series, a
letter of credit or any combination thereof. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of shortfalls, losses or risks, and may provide no
coverage as to certain other types of shortfalls, losses or risks. All or a
portion of the credit enhancement for any Series or Class of Certificates will
generally be permitted to be reduced, terminated or substituted for, if the
Rating Agency Condition is satisfied. The rating of any Series or Class of
Certificates by any applicable Rating Agency may be lowered following the
initial issuance thereof as a result of the downgrading of the obligations of
any applicable credit support provider, or as a result of shortfalls or losses
on the Transition Property in excess of the levels contemplated by such Rating
Agency at the time of its initial rating analysis. Neither the Seller, the
Servicer, the Note Issuer, the Infrastructure Bank, the Trust nor any of their
affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any Series or
Class of Certificates. In the event shortfalls or losses exceed the amount of
coverage provided by any credit enhancement or shortfalls or losses of a type
not covered by any credit enhancement occur, such shortfalls or losses will be
borne by the holders of the related Certificates (or certain Classes thereof).
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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 in California their rates were set by the CPUC based upon the
utilities' cost of providing services and a reasonable return on their capital
investments. 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 105th Congress, First
Session which would mandate the deregulation of the electric industry on the
state level; however none of these bills have passed in committee. In their
current forms, some but not all of the bills contain provisions recognizing the
validity of prior state actions relating to deregulation. At least one of the
bills, H.R. 1230, prohibits the recovery of stranded costs such as the
Transition Costs. The entire California delegation to Congress has signed a
letter to the chairman of the House Subcommittee responsible for holding
hearings regarding the bills, which expresses the shared concern that the effect
of the Statute should not be impacted by federal legislation. No prediction can
be made as to whether any of these bills, or any future proposed bills to
deregulate the electric industry, will become law or, if they become law, what
their final form or effect will be.
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.
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DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, legislation implementing an electric industry
restructuring program for the State of California became law. The legislation,
which as amended is referred to herein as the Statute, was adopted to provide,
among other things, subject to the timely and sufficient issuance of rate
reduction bonds, a ten percent reduction in rates for services charged to
Residential Customers and Small Commercial Customers, effective as of January 1,
1998 and generally continuing until the earlier of March 31, 2002 or the date on
which transition costs have been fully recovered (the "RATE FREEZE PERIOD"). As
part of 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 of the costs of generation-related assets and obligations that may
become uneconomic as a result of a competitive generation market, together with
costs for capital additions to generating facilities that the CPUC determines to
be reasonable, costs of refinancing or retiring of debt or equity capital, and
associated federal and state tax liabilities. Examples of generation-related
assets include electric generating facilities, amounts recoverable in electric
rates pursuant to settlement agreements approved by the CPUC, and power purchase
contracts with third-party generators of electricity (including voluntary
restructuring, renegotiations or terminations thereof). These assets may become
uneconomic in a competitive generation market, since they are obligations that
were undertaken either pursuant to legal requirements or with the understanding
that they would be recoverable in rates approved by the CPUC. Since other
participants in a competitive market, unburdened by these uneconomic assets, may
be able to offer electricity at lower rates, the costs relating to these
uneconomic assets may not be recoverable in market prices in a competitive
market.
The Statute created the Transition Property, which is the right to be paid
the FTA Payments based on the FTA Charges in order to recover the Transition
Costs.
FINANCING ORDER AND ADVICE LETTERS
The Statute authorizes the CPUC to issue the Financing Order, a regulatory
order which allows the Seller to reduce electricity rates for the Customers by
ten percent, and approves the amount of the Seller's Transition Costs which the
Seller is permitted to finance through the issuance of rate reduction bonds. On
May 6, 1997, SDG&E filed its application for the Financing Order with the CPUC.
The CPUC issued the Financing Order as of September 3, 1997. The Financing Order
also permits the sale of Certificates in an aggregate principal amount not to
exceed $800,000,000. As issued, the Financing Order also requires the Seller to
reduce electricity rates for the Customers by ten percent through the Rate
Freeze Period. The principal amount of the Certificates approved in the
Financing Order was calculated so as to result in a reduction in revenue
requirements for the Seller sufficient to 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 expected interest rate
and amortization schedule for the Certificates. If estimated usage exceeds the
assumptions used in the Financing Order, the Seller intends to request the
issuance of additional Certificates to finance the rate reduction resulting from
this increased usage. The issuance of additional Certificates will result in a
corresponding increase in the FTA Charges, and thus in the amounts payable with
respect thereto by Customers. See "Description of the Certificates -- Conditions
of Issuance of Additional Series" herein.
The Financing Order provides for the establishment, among other things, of
tariffs referred to as the FTA Charges, which constitute separate nonbypassable
charges upon Residential Customers and Small Commercial Customers in an
aggregate amount sufficient to repay in full the Certificates and associated
costs and fees. The FTA Charges are stated to be nonbypassable on the basis that
the Statute authorizes the Seller to continue to collect payments based on the
FTA
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Charges from all Customers notwithstanding any of the circumstances described
under "--Nonbypassable FTA Charges" below. The Statute provides that the right
to collect payments based on the FTA Charges is a property right which may be
pledged, assigned or sold in connection with the issuance of the Certificates.
The Financing Order entitles the Note Issuer, as the owner of the
Transition Property, to receive the payments made pursuant to the FTA Charges,
from all Residential Customers and Small Commercial Customers. Such payments
are referred to herein as the FTA Payments. The Financing Order requires the
Seller to submit an Issuance Advice Letter to the CPUC with respect to each
Series of Certificates issued. The first Issuance Advice Letter will establish
the initial FTA Charges. The Financing Order provides that Issuance Advice
Letters become effective five business days after filing with the CPUC.
Subsequent Issuance Advice Letters may increase the FTA Charges to support the
issuance of additional Series of Certificates. The Financing Order permits the
Servicer to file True-Up Mechanism Advice Letters to modify the FTA Charges from
time to time, in order to enhance the likelihood of retirement of each Series
and Class of Certificates on a timely basis. See "-- Adjustments to the FTA
Charges" herein.
The initial FTA Charges will be calculated by determining (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 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"). Because of differences in the tariff rate for each class of Customers,
the FTA Charge payable by Residential Customers is expected to be different from
the FTA Charge payable by Small Commercial Customers; the initial FTA Charges
will result in FTA Payments by the Residential Customers and Small Commercial
Customers representing approximately _____% and _____%, respectively, of the
aggregate FTA Payments. The foregoing percentages may change from time to time
based on fluctuations in Customer composition.
The Prospectus Supplement related to a Series of Certificates will specify,
based on the applicable Issuance Advice Letter, the amount of each of the FTA
Charges as of the date thereof.
TRANSITION PROPERTY
The right to be paid the FTA Payments gives rise to a separate property
right under California law and is referred to herein generally as the
"TRANSITION PROPERTY." "Transition Property" is defined more specifically in
Section 840(g) of the PU Code as the property right created under the PU Code
including, without limitation, the right, title and interest of an electrical
corporation or its transferee (i) in and to the FTA Charges, as adjusted from
time to time, (ii) to be paid the FTA Payments, and (iii) to obtain adjustments
to the FTA Charges, as provided in the PU Code.
Each Class of Notes will be issued in connection with a specific issuance
of a Class of Certificates. Each Note will be secured by Transition Property, as
well as the other Note Collateral described under "Description of the Notes --
Security" herein. Following the initial Issuance Advice Letter, each subsequent
Issuance Advice Letter will authorize the creation of additional Transition
Property to support payments on the related Series or Class of Notes. Any
additional Transition Property acquired by the the Note Issuer pursuant to a
Sale Agreement will be combined into a single asset with all other Transition
Property acquired by the Note Issuer pursuant to a previous Sale Agreement.
Accordingly, the aggregate amount of Transition Property will increase as
additional Issuance Advice Letters become effective.
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NONBYPASSABLE FTA CHARGES
The Financing Order provides that the FTA Charges are nonbypassable,
meaning that Customers will still be required to make payments with respect to
the applicable FTA Charges, even if a Customer elects to purchase electricity
from another supplier, another entity takes over a portion of 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 the
applicable FTA Charge, based on either (i) the last twelve months of the
Customer's recorded pre-departure use, (ii) an average derived from the last
three years of recorded use or (iii) actual use; provided, however, that any
such Customer will have the opportunity to continue to pay for electricity based
on the Small Commercial Customer rates, including the applicable FTA Charge.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the actual FTA Collections are
neither more nor less than the amount necessary to amortize the Certificates in
accordance with the Expected Amortization Schedule and fund the
Overcollateralization Subaccount, the Servicing Agreement requires the Servicer
to seek, and the Financing Order and the Statute require the CPUC to approve,
periodic adjustments to the FTA Charges based on actual FTA Collections and
updated assumptions by the Servicer as to future usage of electricity by
Customers, future expenses relating to the Transition Property, the Notes and
the Certificates, and the rate of delinquencies and charge-offs. The date as of
which any calculation is performed and which forms the basis for a requested
adjustment to the FTA Charges is referred to as a "CALCULATION DATE." The
adjustments to the FTA Charges will continue until all interest and principal on
all Series of Notes and corresponding Series of Certificates have been paid or
distributed in full.
The Financing Order provides that the Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting modifications to the FTA Charges
which are intended to return the projected principal balance of each oustanding
Series of Certificates to the amount provided for in the Expected Amortization
Schedule within a twelve month period or, if earlier, by the Scheduled Final
Distribution Date and to fund the scheduled Overcollateralization Subaccount.
Calculations of appropriate modifications to the FTA Charges will be made based
on the Base Calculation Model, except that (i) the amount of debt service and
related expenses including funding of the Overcollateralization Subaccount for
the following year shall be increased or decreased to reflect the amount by
which actual FTA Collections remitted to the Collection Account through the end
of the month preceding the month of calculation was less than or exceeded the
aggregate actual portion of the debt service on the Certificates and related
expenses for such period, (ii) forecasted electricity sales for the remaining
period of the transaction will be revised based on the 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 Charges become effective (the "TRUE-UP
MECHANISM CALCULATION MODEL").
The Servicer will also file a routine True-Up Mechanism Advice Letter
quarterly, if, the amount of FTA Payments causes the aggregate outstanding
principal balance of the Certificates to vary from the amount provided for in
the Expected Amortization Schedule for all oustanding Certificates as of any
Calculation Date by more than an amount to be specified in each Prospectus
Supplement or the Collection Account varies from the amounts specified in
each
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Prospectus Supplement. Furthermore, the Financing Order provides that the
Servicer may file a non-routine True-Up Mechanism Advice Letter as often as
quarterly, to reflect any changes to the Base Calculation Model or True-Up
Mechanism Calculation Model which are necessary to meet any Expected
Amortization Schedule and fund the Collection Account as scheduled. Finally, the
Statute requires the Servicer to file a True-Up Mechanism Advice Letter with the
CPUC annually, prior to each anniversary of the issuance of the Financing Order
(a "FINANCING ORDER ANNIVERSARY").
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 Charges to become
effective at the beginning of the next calendar year, (ii) routine True-Up
Mechanism Advice Letters may be filed with the CPUC quarterly at least 15 days
before the end of each calendar quarter, with resulting adjustments to the FTA
Charges to become effective at the beginning of the next calendar quarter, (iii)
non-routine True-Up Mechanism Advice Letters may be filed with the CPUC
quarterly at least 90 days before the end of each calendar quarter, with
resulting adjustments to the FTA Charges to become effective at the beginning of
the next calendar quarter, and (iv) True-Up Mechanism Advice Letters shall be
filed with the CPUC at least 15 days before each Financing Order Anniversary,
with resulting adjustments to the FTA Charges, if necessary, to become effective
within 90 days of such Financing Order Anniversary.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
On the date on which the initial Series of Certificates is issued and sold
(the "CLOSING DATE"), pursuant to the Sale Agreement the Seller will sell and
assign to the Note Issuer, without recourse, its entire interest in the
Transition Property which is described in the first Issuance Advice Letter
submitted by the Servicer (the "INITIAL TRANSITION PROPERTY"). The net proceeds
received by the Note Issuer from the sale of the Notes will be applied to the
purchase of the Initial Transition Property. Thereafter, in order to finance
the cost of the ten percent rate reduction the Seller may agree with the Note
Issuer to sell additional Transition Property ("SUBSEQUENT TRANSITION PROPERTY")
to the Note Issuer, subject to the satisfaction of certain conditions. Such
Subsequent Transition Property will be sold to the Note Issuer effective on a
date (a "SUBSEQUENT TRANSFER DATE") specified in the written agreement between
the Seller and the Note Issuer. The Note Issuer will issue and sell additional
Notes to the Trust, and the Trust will issue and sell additional Certificates,
in connection therewith.
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, although for financial reporting purposes the Seller
will treat the Transition Property as representing debt of the Seller.
Subsequent Transition Property may be sold by the Seller to the Note Issuer
from time to time, solely in connection with the issuance and sale of additional
Notes by the Note Issuer and of corresponding additional Certificates by the
Trust.
Any conveyance of Subsequent Transition Property is subject to the
following conditions, among others:
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(a) the Seller shall have entered into a written sale agreement with
the Note Issuer;
(b) the Seller shall have filed an Issuance Advice Letter with the
CPUC relating to such Subsequent Transition Property, which Issuance Advice
Letter shall have become effective;
(c) as of the applicable Subsequent Transfer Date, the Seller shall
not be insolvent and shall not be made insolvent by such conveyance;
(d) the Rating Agency Condition shall have been satisfied with respect
to such conveyance;
(e) such conveyance will not result in an adverse tax consequence to
the Trust or the Certificateholders;
(f) as of the applicable Subsequent Transfer Date, no breach by the
Seller of its representations, warranties or covenants in the applicable
Sale Agreement shall exist; and
(g) as of the applicable Subsequent Transfer Date, the Note Issuer
shall have sufficient funds available to pay the purchase price for the
Subsequent Transition Property to be transferred on such date and all
conditions to the issuance of new series of Notes and Certificates shall
have been satisfied or waived.
SELLER REPRESENTATIONS AND WARRANTIES
In the initial Sale Agreement and each subsequent Sale Agreement, the
Seller will make representations and warranties to the Note Issuer to the
effect, among other things, that: (a) the information provided by the Seller to
the Note Issuer with respect to the applicable Transition Property is correct in
all material respects; (b) at the Closing Date, the applicable Transition
Property is owned by the Seller and is free and clear of all security interests,
liens, charges and encumbrances, no offsets, defenses or counterclaims exist or
have been asserted or threatened with respect thereto and the Seller, in its
capacity as Seller or Servicer, will not at any time assert any security
interest, lien, charge or encumbrance against or with respect to any applicable
Transition Property; (c) at the Closing Date, the applicable Transition Property
has been validly transferred and sold to the Note Issuer and all filings
(including filings with the CPUC under the PU Code) necessary in any
jurisdiction to give the Note Issuer a first perfected ownership interest in the
applicable Transition Property shall have been made; (d) the Financing Order and
each Issuance Advice Letter pursuant to which any applicable Transition Property
has been created are valid, binding and irrevocable; (e) the assumptions used in
calculating the FTA Charges related to the applicable Transition Property are
reasonable and made in good faith; (f) the Seller is a corporation duly
organized and in good standing under the laws of the State of California, with
power and authority to own its properties and conduct its business as currently
owned or conducted and to execute, deliver and perform the terms of the Sale
Agreement; (g) the execution, delivery and performance of the Sale Agreement
have been duly authorized by the Seller by all necessary corporate action; (h)
the Sale Agreement constitutes a legal, valid and binding obligation of the
Seller, enforceable against the Seller in accordance with its terms; (i) the
consummation of the transactions contemplated by the Sale Agreement do not
conflict with the Seller's articles of incorporation or bylaws or any material
agreement to which the Seller is a party or bound, result in the creation or
imposition of any lien upon the Seller's properties or violate any law or any
order, rule or regulation applicable to the Seller; (j) no governmental
approvals, authorizations or filings are required for the Seller to execute,
deliver and perform its obligations under the Sale Agreement except those which
have previously been obtained or made; and (k) except as disclosed to the Note
Issuer, no court or administrative proceeding or investigation is pending or, to
the Seller's knowledge, threatened (i) asserting the invalidity of, or seeking
to prevent the consummation of the transactions contemplated by, the Sale
Agreement, the Note
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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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CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The rate of principal distributions on each Class of Certificates, the
aggregate amount of each interest distribution on each Class of Certificates and
the actual maturity date of each Class of Certificates will be related to the
rate and timing of FTA Collections.
The actual distributions on each date for each Class of Certificates and
the weighted average life thereof will be affected primarily by the rate of FTA
Collections and the timing of receipt of such FTA Collections. Since the FTA
Charges will consist of a charge per kilowatt hour of usage by the applicable
classes of Customers, the aggregate amount of FTA Collections and the rate of
principal amortization on the Certificates will depend, in part, on actual
energy usage by Customers and the rate of delinquencies and charge-offs.
Although the amounts of the FTA Charges will be adjusted from time to time based
in part on the actual rate of FTA Collections, no assurances are given that the
Servicer will be able to forecast accurately actual energy usage and the rate of
delinquencies and charge-offs or implement adjustments to the FTA Charges that
will cause FTA Collections to be received at any particular rate. If FTA
Collections are received at a slower rate than expected a Certificate may be
retired later than expected. Because principal will only be distributed in
accordance with the Expected Amortization Schedules, except in the event of an
early redemption, the Certificates are not expected to mature earlier than
scheduled. A distribution on a date that is earlier than forecasted will result
in a shorter weighted average life, and a distribution on a date that is later
than forecasted will result in a longer weighted average life. In addition, if a
larger portion of the delayed distributions on the Certificates are received in
later years, this will result in a longer weighted average life of the
Certificates.
No 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.
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THE TRUST
The Trust will be specifically created for the purpose of acquiring the
Notes. The Trust will be formed under the laws of the State of Delaware pursuant
to the Trust Agreement to be entered into among the Infrastructure Bank, the
Delaware Trustee and the Certificate Trustee, each such trustee not in its
individual capacity but acting as trustee on behalf of the holders of the
Certificates. The Trust will not be an agency or instrumentality of the State of
California. The Trust will have no assets other than the Notes and the Trust's
rights under any Swap Agreement. The Trust Agreement will not permit the Trust
to engage in any activities other than holding such assets, issuing the
Certificates, acting as paying agent and engaging in certain other activities
related thereto.
Each Class of Certificates offered hereby will represent a fractional
undivided interest in the corresponding Class of Notes, including all monies due
and to become due under such corresponding Class of Notes, and will represent
the right to receive a portion of the payments of principal of and interest on
the corresponding Class of Notes, together with payments pursuant to any related
Swap Agreement. See "The Certificates -- Payments and Distributions" herein.
The Fee and Indemnity Agreement among the Note Issuer, the Note Trustee,
the Infrastructure Bank, the Delaware Trustee and the Certificate Trustee (the
"FEE AGREEMENT") will provide that the Note Issuer will pay the Delaware
Trustee's and the Certificate Trustee's fees and expenses. The Fee Agreement
will further provide that the Delaware Trustee, the Certificate Trustee and the
Infrastructure Bank will be entitled to indemnification by the Note Issuer for,
and will be held harmless against, any loss, liability or expense incurred by
the Delaware Trustee, the Certificate Trustee and the Infrastructure Bank, as
applicable, arising from the issuance of the Certificates and any ongoing
responsibilities associated therewith (other than through such party's own
wilful misconduct, bad faith or negligence or by reason of a breach of any of
its representations or warranties set forth in the Trust Agreement).
The fiscal year of the Trust will be the calendar year.
The Trust will be formed shortly prior to the first offering of
Certificates as a special purpose Delaware business trust and, as of the date of
this Prospectus, has not carried on any business activities and has no operating
history. Because the Trust does not have any operating history, this Prospectus
does not include any financial statements or related information for the Trust.
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THE INFRASTRUCTURE BANK
The Infrastructure Bank is a public body organized within the government of
the State of California and created pursuant to the Bergeson-Peace
Infrastructure and Economic Development Bank Act, codified at (S)63000 et seq.
of the California Government Code, as amended (the "ACT"). The Infrastructure
Bank is governed, and its corporate powers are exercised by, a Board of
Directors consisting of the State Director of Finance, the State Treasurer and
the State Secretary of Trade and Commerce.
Pursuant to the Act and the Statute, the Infrastructure Bank may authorize
a "special purpose trust" created by the Bank to issue "rate reduction bonds"
and to purchase with the proceeds of such "rate reduction bonds" notes issued by
the Utilities or their affiliates secured by Transition Property. For the
purposes of the Act and the Statute, the Trust will constitute a "special
purpose trust" and each Series of Certificates issued by the Trust will
constitute "rate reduction bonds" entitled to the benefit of the Statute.
Pursuant to the Act, the Infrastructure Bank has no authority to alter or
modify any term or condition related to the Transition Costs or the Transition
Property as set forth in the Financing Order, and has no authority over any
matter that is subject to the approval of the CPUC.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates other than the Note
Issuer. None of the Certificates, the Notes or the underlying Transition
Property will be guaranteed or insured by the State of California, the
Infrastructure Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or any of its affiliates. None of such entities
will have any obligations in respect of the Certificates, except as expressly
set forth herein or in the related Prospectus Supplement.
Neither the full faith and credit nor the taxing power of the State of
California or any agency or instrumentality thereof is pledged to the
distributions of principal of, or interest on, the Certificates or the Notes or
to the payments in respect of the Transition Property.
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THE NOTE ISSUER
The Note Issuer is a special purpose, single member limited liability
company organized under the laws of the State of Delaware. The Seller is the
sole member of the Note Issuer. The principal executive office of the Note
Issuer is located at 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 is restricted by its organizational
documents from engaging in other activities. The assets of the Note Issuer will
consist primarily of the Transition Property and the other Note Collateral,
including capital contributed by SDG&E as described under "Description of the
Notes--Other Credit Enhancement--Capital Subaccount." In addition, the Note
Issuer's organizational documents require it to operate in a manner such that it
should not be consolidated in the bankruptcy estate of SDG&E in the event SDG&E
becomes subject to such a proceeding.
The Note Issuer is a recently formed special purpose limited liability
company and, as of the date of this Prospectus, has not carried on any business
activities and has no operating history. Because the Note Issuer does not have
any operating history, this Prospectus does not include income statements,
selected financial data or historical or pro forma ratio of earnings to fixed
charges for the Note Issuer, although a balance sheet will be included in the
Prospectus Supplement.
OFFICERS
The following is a list of the principal officers of the Note Issuer (ages
as of August 29, 1997). All such persons have served in the capacities set
forth below since July 1, 1997. The officers will devote such time as is
necessary to the affairs of the Note Issuer. The Note Issuer will have
sufficient officers and employees to carry on its business.
<TABLE>
<CAPTION>
Name Age Title
<S> <C> <C>
Charles A. McMonagle 47 President and Chief Executive
Officer
James P. Trent 53 Chief Financial Officer and
Chief
Accounting Officer
Gary A. Perlmutter 33 Vice President and Counsel
Christian P. Fonss 50 Vice President and Chief
Taxation
Officer
</TABLE>
Charles A. McMonagle is President and Chief Executive Officer of the Note
Issuer. Mr. McMonagle has served as manager of financial services of SDG&E for
the past five years.
James P. Trent is Chief Financial Officer and Chief Accounting Officer of
the Note Issuer. Mr. Trent has served as manager of accounting operations of
SDG&E since January 1996. From December 1991 to December 1995, Mr. Trent served
as manager of accounting services for SDG&E.
Gary A. Perlmutter is Vice President and Counsel of the Note Issuer. Mr.
Perlmutter has also served as corporate counsel to SDG&E since April 1996. From
1988 to 1996, Mr. Perlmutter practiced general corporate law as an associate
with various law firms.
43
<PAGE>
Christian P. Fonss is Vice President and Chief Taxation Officer of the Note
Issuer. Mr. Fonss also served as corporate tax director of SDG&E for the past
five years. Mr. Fonss has also served as vice president of corporate development
of two subsidiaries of SDG&E, Califia Company and ENOVA Financial, Inc. for
the past five years.
No compensation has been paid by the Note Issuer to any officer of the Note
Issuer since the Note Issuer was formed. The officers of the Note Issuer will
not be compensated by the Note Issuer for their services on behalf of the Note
Issuer. The Note Issuer's organizational documents limit, to the extent
permitted by Delaware law, the personal liability of each officer of the Note
Issuer to the Note Issuer for monetary damages resulting from breaches of such
officer's duty of care. The Note Issuer's organizational documents provide that
officers of the Note Issuer shall be indemnified against liabilities incurred in
connection with their services on behalf of the Note Issuer, including
liabilities under applicable securities laws.
44
<PAGE>
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 Customers and
Small Commercial Customers.
As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
SDG&E CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
SDG&E's customer base is divided into several categories, including the
residential and small commercial categories covered by the Statute. Residential
Customers use electricity for lighting, operating household appliances and other
domestic purposes. The primary factor influencing the number of Residential
Customers is the number of housing starts, which is a measure of the strength of
the economy. The primary factors influencing short-term energy consumption are
weather and electricity prices. Long-term factors would include the availability
of more energy efficient appliances, new energy consuming technologies and the
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 Small
Commercial Customers is commercial employment, which is also a measure of the
strength of the economy. The factors influencing the energy consumption of a
Small Commercial Customer would include those of the Residential Customers, but
would also include the level of business activity associated with the particular
Small Commercial Customer. The table below sets forth the number of customers,
electric energy consumption and billed revenues for the two categories.
<TABLE>
<CAPTION>
CUSTOMERS AND ENERGY CONSUMPTION
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
AVERAGE NUMBER OF CUSTOMERS:
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential 998 1,005 1,012 1,021 1,032
Small Commercial 98 99 101 102 104
---------------------------------------------
Total 1,096 1,104 1,113 1,123 1,136
=============================================
ENERGY CONSUMPTION (GWH):
Residential 5,611 5,550 5,731 5,736 5,936
Small Commercial 1,828 1,795 1,831 1,833 1,904
---------------------------------------------
Total 7,439 7,345 7,562 7,569 7,840
=============================================
BILLED REVENUES:
(IN MILLIONS)
Residential $ 605 $ 600 $ 632 $ 635 $ 647
Small Commercial 188 189 208 210 216
---------------------------------------------
Total $ 793 $ 789 $ 840 $ 845 $ 863
=============================================
</TABLE>
45
<PAGE>
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 classes of Residential Customers and Small
Commercial Customers. These forecasts also will be used in calculating the FTA
charges for any given period, in order to determine the revenue required (in the
form of FTA Payments) to meet the Expected Amortization Schedules.
The long-term models are used to forecast sales for years three through
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.
For the small commercial sector, energy consumption is the product of floor
space (organized by building type and climate area), average end-use equipment
saturation and average unit energy consumption by end-use . Equipment
replacement rates and efficiency rates of new equipment are accounted for in the
calculations. Adjustments for additional conservation savings and equipment
utilization are also accounted for in the model.
The short- and long-term models have been in use for more than twenty
years and have undergone extensive review by the CPUC and the California Energy
Commission, respectively. Each year 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.
46
<PAGE>
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 3.7% underestimate to a 0.5% overestimate of usage.
<TABLE>
<CAPTION>
ANNUAL FORECAST VARIANCES
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
RESIDENTIAL:
<S> <C> <C> <C> <C> <C>
Actual(1) 5,611 5,550 5,731 5,736 5,936
Forecast(1) 5,425 5,519 5,610 5,724 5,882
Variance -3.3% -0.6% -2.1% -0.2% -0.9%
SMALL
COMMERCIAL:
Actual(1) 1,828 1,795 1,831 1,833 1,904
Forecast(1) 1,760 1,792 1,832 1,843 1,892
Variance -3.7% -0.2% 0.1% 0.5% -0.6%
------------
</TABLE>
(1) In Giga Watt hours.
During the last five years, a trend of slight underestimating is apparent
with respect to the historical forecast variance relating to the Residential
Customers. The variance has ranged from a 3.3% underestimate of usage to a 0.2%
underestimate of usage, with an average 1.4% underestimate of usage. With
respect to the historical forecast variances relating to the Small Commercial
Customers, there has been a trend towards improvement in forecasting in recent
years.
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.
47
<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. Any day other than a Saturday, a Sunday or a day on which the Servicer's
offices are not open for business is a "Servicer Business Day." For the year
ending December 31, 1996, 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
48
<PAGE>
(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.
LOSS AND DELINQUENCY EXPERIENCE
The following table sets forth information relating to the total billed
revenues and write-off experience of SDG&E for (i) residential and (ii)
commercial and industrial customers for each of the five preceding years.
<TABLE>
<CAPTION>
TOTAL ELECTRIC & GAS BILLED REVENUES
(in millions)
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL $ 681 $ 724 $ 771 $ 772 $ 798
COMMERCIAL AND INDUSTRIAL (1) 1,045 1,049 1,096 1,121 1,070
---------------------------------------------
TOTAL $1,726 $1,773 $1,867 $1,893 $1,868
=============================================
</TABLE>
NET ELECTRIC & GAS WRITE-OFFS(2)
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL $4,338 $5,183 $4,330 $4,204 $2,139
COMMERCIAL AND INDUSTRIAL (1) 684 834 610 838 385
---------------------------------------------
TOTAL $5,022 $6,017 $4,940 $5,042 $2,523
=============================================
</TABLE>
NET WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE(2)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996(3)
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RESIDENTIAL 0.64% 0.72% 0.56% 0.54% 0.27%
COMMERCIAL AND INDUSTRIAL (1) 0.07% 0.08% 0.06% 0.07% 0.04%
---------------------------------------
TOTAL 0.29% 0.34% 0.26% 0.27% 0.14%
=======================================
</TABLE>
_____________________________
(1) SDG&E has not historically maintained separate information regarding
write-offs for the Small Commercial Customers. Revenues for small Commercial
Customers constituted approximately 20% of revenues for the commercial and
industrial class of electricity consumers in 1996. Thus, the data in this table
is in a slightly different form than the write-off data in the table on the
previous page.
(2) Net write-offs include any amounts recovered by SDG&E from deposits,
bankruptcy proceedings and payments received after an account has been closed.
(3) Due to certain one-time events, the 1996 loss data is lower than would
normally be expected
49
<PAGE>
Historical trends towards slightly decreasing net write-offs are apparent
with respect to both the Residential Customers and the commercial and industrial
users. Such net write-offs continue to be very small.
DELINQUENCIES
The following tables sets forth information relating to the delinquency
experience of SDG&E for (i) residential and (ii) commercial and industrial
customers for each of the five preceding years:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential(1)
Amount Collected
After:
30 days 79.63% 80.88% 82.68% 82.85% 84.52%
60 days 95.52 95.99 97.67 97.59 97.93
90 days 99.43 99.53 99.78 99.78 99.82
120+ days 99.86 99.90 99.94 99.93 99.94
Commercial and
Industrial(1)(2)
Amount Collected
After:
30 days 83.09% 86.51% 89.39% 89.90% 87.38%
60 days 99.57 99.64 99.56 99.37 99.29
90 days 99.90 99.94 99.90 99.88 99.83
120+ days 99.88 99.94 99.94 99.92 99.88
- --------------------
</TABLE>
(1) Excluded are open accounts for which extended payment terms are in
effect.
(2) SDG&E has not historically maintained separate information relating to
delinquencies for the Small Commercial Customers. Revenues for small Commercial
Customers constituted approximately 20% of the commercial and industrial class
of electricity consumers in 1996.
No discernable trends are apparent with respect to SDG&E's delinquency
experiences with respect to the Residential Customers and the commercial and
industrial customers. The Note Issuer does not believe that the delinquency
experience with respect to the FTA Payments will differ substantially from the
approximate rates indicated above.
50
<PAGE>
SERVICING
SERVICING PROCEDURES
GENERAL. The Servicer, as agent for the Note Issuer, will manage, service
and administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
Except to the extent that alternative energy service providers elect to engage
in consolidated billing (as described herein under "Risk Factors -- Potential
Servicing Issues -- Reliance on -- Aggregators and Other Suppliers"), the
Servicer's duties will include calculation and billing of all amounts based on
the FTA Charges, receipt and posting of all FTA Payments, responding to
inquiries of Customers and the CPUC with respect to the Transition Property and
the FTA Charges, obtaining usage calculations, accounting for collections and
furnishing monthly, quarterly and annual statements to the Note Issuer, the Note
Trustee and the Certificate Trustee and taking action in connection with
periodic revisions to the FTA Charges as described below.
Each FTA Charge will be expressed as an amount per kilowatt hour of
electricity usage by the applicable Customer, regardless of whether the Customer
receives its electricity from the Servicer or from another electricity provider.
The Servicer expects the applicable FTA Charge to be separately identified on
each Customer's bill, 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
applicable FTA Charges and the total charges due to SDG&E. If such amounts are
billed and collected by an alternative energy service provider pursuant to a
consolidated billing arrangement, the total charges due to the alternative
energy service provider will also be included in the proportionate allocation of
any partial payment.
SERVICING STANDARDS AND COVENANTS
The Servicing Agreement will require the Servicer, in servicing and
administering the Transition Property, to employ or cause to be employed
procedures and exercise the same care it customarily employs and exercises in
servicing and administering bill collections for its own account and for others.
Consistent with the foregoing, the Servicer may in its own discretion waive
any late payment charge or any other fee or charge relating to delinquent
payments, if any, and may waive, vary or modify any terms of payment of any
amounts payable by a Customer, in each case, if such waiver or action (a) would
be in accordance with the Servicer's customary practices or those of any
successor Servicer with respect to comparable assets that it services for itself
and for others, (b) would not materially adversely affect the Certificateholders
and (c) would comply with applicable law.
In the Servicing Agreement, the Servicer will covenant that, in servicing
the Transition Property it will: (a) manage, service, administer and make
collections in respect of the Transition Property with reasonable care and in
accordance with applicable law, including all applicable guidelines of the CPUC,
using the same degree of care and diligence that the Servicer exercises with
respect to bill collections for its own account and for others; (b) follow
customary standards, policies and procedures for the industry in performing its
duties as Servicer; (c) use all reasonable efforts, consistent with its
customary servicing procedures, to enforce, and maintain rights in respect of,
the Transition Property; (d) comply with all laws applicable to and binding on
it relating to the Transition Property; and (e) submit True-Up Mechanism Advice
Letters to the CPUC seeking adjustments to the FTA Charges as described herein.
51
<PAGE>
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
Periodically, the Servicer will prepare a forecast of the percentages of
amounts billed in a particular month that are expected to be received during
each of the following six months (the "Collections Curve"). For so long as (a)
no Servicer Default shall have occurred and be continuing and (b) the Rating
Agency Condition shall have been satisfied (and any conditions or limitations
imposed by the Rating Agencies in connection therewith are complied with), the
Servicer is required to remit FTA Payments expected to have been received during
the preceding Billing Period, based on the Collections Curve then in effect, to
the Collection Account on or before the twentieth day of each calendar month
(or, if such twentieth day is not a Certificate Business Day, the Certificate
Business Day immediately following such twentieth day). The sum of the amounts
remitted with respect to a Billing Period during the six months following such
Billing Period based on the Collections Curve is referred to as the "Estimated
FTA Payments" herein. Pending remittance to the Collection Account, FTA Payments
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
Payments. The date on which FTA Payments received by the Servicer with respect
to the FTA Charges are required to be deposited in the Collection Account is
referred to herein as the "REMITTANCE DATE."
On or prior to the Remittance Date in the seventh month following a monthly
Billing Period, the Servicer will compare actual FTA Payments received with
respect to that Billing Period (the "ACTUAL FTA PAYMENTS") to the Estimated FTA
Payments for that Billing Period previously remitted to the Billing Account. If
Estimated FTA Payments remitted with respect to a Billing Period exceed Actual
FTA Payments attributable to such Billing Period (such excess, an "EXCESS
REMITTANCE"), the Servicer shall be entitled to either (a) reduce the amount
which the Servicer remits to the Billing Account on such Remittance Date by the
amount of such Excess Remittance, the amount of such reduction becoming the
property of the Servicer or (b) immediately be paid from the Collection Account
or any subaccount therein the amount of such Excess Remittance, such payment
becoming the property of the Servicer. If Estimated FTA Payments remitted with
respect to a Billing Period are less than Actual FTA Payments attributable to
such Billing Period (such deficiency, a "REMITTANCE SHORTFALL"), the amount
which the Servicer remits to the Billing Account on such Remittance Date will be
increased by the amount of such Remittance Shortfall, such increase coming from
the Servicer's own funds. The Estimated FTA Payments calculated for any
Remittance Date shall not be affected by any Excess Remittance or Remittance
Shortfall which modifies the actual amount remitted by the Servicer on such
Remittance Date.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each
calendar quarter, in an amount equal to one-fourth the percent per annum
specified in the related Prospectus Supplement of the then outstanding principal
amount of the Notes. The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Payment Dates) will be paid solely
to the extent funds are available therefor as described under "Description of
the Notes -- Allocations; Payments." The Servicing Fee will be paid prior to the
52
<PAGE>
distribution of any amounts in respect of interest on and principal of the
Notes. The Servicer will be entitled to retain as additional compensation net
investment income on FTA Payments received by the Servicer prior to remittance
thereof to the Collection Account and the portion of late fees, if any, paid by
Customers relating to the FTA Payments.
AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows ESPs to elect
to present a consolidated bill to their retail customers covering amounts owed
the ESP for electricity, amounts owed to the utilities for distribution and the
applicable FTA Charge. Any ESP who elects consolidated billing, including
monthly amounts with respect to the FTA Charges, will be responsible for paying
the Servicer periodic amounts payable by customers of the ESP regardless of the
ESP's ability to collect the FTA Charges from its customers. 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. See "Risk Factors -- Potential Servicing
Issues -- Reliance on Aggregators and Other Suppliers" herein.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the Servicer will make representations and
warranties to the Note Issuer to the effect, among other things, that: (a) the
Servicer is a corporation duly organized and in good standing under the laws of
the State of California, with power and authority to own its properties and
conduct its business as currently owned or conducted and to execute, deliver and
carry out the terms of the Servicing Agreement; (b) the execution, delivery and
carrying out of the Servicing Agreement have been duly authorized by the
Servicer by all necessary corporate action; (c) the Servicing Agreement
constitutes a legal, valid and binding obligation of the Servicer, enforceable
against the Servicer in accordance with its terms; (d) the consummation of the
transactions contemplated by the Servicing Agreement does not conflict with the
Servicer's articles of incorporation or bylaws or any agreement to which the
Servicer is a party or bound, result in the creation or imposition of any lien
upon the Servicer's properties or violate any law or any order, rule or
regulation applicable to the Servicer; (e) the Servicer has all licenses
necessary for it to perform its obligations under the Servicing Agreement; (f)
no governmental approvals, authorizations or filings are required for the
Servicer to execute, deliver and perform its obligations under the Servicing
Agreement except those which have previously been obtained or made; and (g)
except as disclosed to the Note Issuer, no court or administrative proceeding or
investigation is pending or, to the Servicer's knowledge, threatened (i)
asserting the invalidity of, or seeking to prevent the consummation of the
transactions contemplated by, the Servicing Agreement or (ii) seeking a
determination that might materially and adversely affect the performance by the
Servicer of its obligations thereunder.
In the event of a breach by the Servicer of any of its representations and
warranties described in the preceding paragraph, the Servicer will indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Certificate Trustee, the Delaware Trustee, the Certificateholders
and the Infrastructure Bank against any costs, expenses, losses, claims, damages
and liabilities incurred as a result thereof.
STATEMENTS BY SERVICER
On or before each Remittance Date, the Servicer will prepare and furnish to
the Note Trustee, the Certificate Trustee, the Infrastructure Bank and the Note
Issuer a statement for the applicable Billing Periods (the "MONTHLY SERVICER'S
CERTIFICATE") setting forth the aggregate amount remitted, the FTA Collections
and the Excess Remittance or the Remittance Shortfall. In addition, the
Servicer will prepare, and the Note Trustee will furnish to the Noteholders on
each Payment Date the Quarterly Servicer's Certificate described under
"Description of the Notes -- Reports to Noteholders." The Servicer will also
prepare and the Certificate Trustee will furnish to the Certificateholders on
each Payment Date the report described under
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"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 March 30 of each year, beginning March 30,
1998, a statement as to compliance by the Servicer during the preceding twelve
months ended December 31 with certain standards relating to the servicing of the
Transition Property. This report (the "ANNUAL ACCOUNTANT'S REPORT") shall state
that such firm has performed certain procedures in connection with the
Servicer's compliance with the servicing procedures of the Servicing Agreement,
identifying the results of such procedures and including any exceptions noted.
The Annual Accountant's Report will also indicate that the accounting firm
providing such report is independent of the Servicer within the meaning of the
Code of Professional Ethics of the American Institute of Certified Public
Accountants.
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 February 15 of each year, commencing February 15, 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) satisfaction of the Rating Agency Condition, consent
of the CPUC and an arrangement with a successor servicer which provides that
there is no increase in the Servicing Fee. No such resignation will become
effective until a successor Servicer has assumed SDG&E's servicing obligations
and duties under the Servicing Agreement.
The Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees, and agents will be under any
liability to the Note Issuer, the Note Trustee, the Infrastructure Bank, the
Trust, the Noteholders, the Delaware Trustee, the Certificate Trustee, the
Certificateholders or any other person, except as provided under the Servicing
Agreement, for taking any action or for refraining from taking any action
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any liability that would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement will provide that the Servicer is under no obligation to
appear in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under the Servicing Agreement and that, in its
opinion, may cause it to incur any expense or liability.
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
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succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor of the Servicer
under the Servicing Agreement.
SERVICER DEFAULTS
"SERVICER DEFAULTS" under the Servicing Agreement will include (a) any
failure by the Servicer to make any required deposit into the Collection
Account, which failure continues unremedied for three Servicer Business Days
after written notice from the Note Issuer is received by the Servicer or after
discovery by the Servicer; (b) any failure by the Servicer or the Seller, as the
case may be, duly to observe or perform in any material respect any other
covenant or agreement in the Servicing Agreement, the Sale Agreement or any
other Basic Document to which it is a party, which failure materially and
adversely affects the rights of Noteholders and which continues unremedied for
60 days after the giving of notice of such failure (i) to the Servicer 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. The Servicing Agreement provides that no such waiver will impair the
Noteholders' rights with respect to subsequent defaults.
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AMENDMENT
The Servicing Agreement may be amended by the parties thereto, without the
consent of the Noteholders (or, accordingly, the Certificateholders), but with
the consent of the Note Trustee, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of that agreement or
of modifying in any manner the rights of the Noteholders (or, accordingly, the
Certificateholders), provided that such action will not, as certified in a
certificate of an officer of the Servicer delivered to the Note Trustee and the
Note Issuer, materially and adversely affect the interest of any Noteholder (or,
accordingly, any Certificateholder). The Servicing Agreement may also be
amended by the Servicer and the Note Issuer with the consent of the Note Trustee
and the holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes of all Series and Classes for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such agreement or of modifying in any manner the rights of the Noteholders or
the Certificateholders; provided, however, that no such amendment may (i)
-------- -------
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, FTA Collections or (ii) reduce the aforesaid percentage of the Notes
the holders of which are required to consent to any such amendment, without the
consent of the holders of all the outstanding Notes.
TERMINATION
The obligations of the Servicer and the Note Issuer pursuant to the
Servicing Agreement will terminate upon the payment to the Noteholders and
corresponding distribution to the Certificateholders of all amounts required to
be paid or distributed to them pursuant to the Servicing Agreement, the Notes,
the Note Indenture, the Certificates and the Trust Agreement.
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DESCRIPTION OF THE NOTES
The Notes of any Class will be issued by the Note Issuer to the Trust (as
such, the "NOTEHOLDER") pursuant to the terms of an Indenture (the "NOTE
INDENTURE") between the Note Issuer and the Note Trustee, in a principal amount
equal to the initial aggregate principal amount of the related Class of
Certificates. The following summary describes the material terms and provisions
of the Note Indenture. The particular terms of the Notes of any Class will be
established in a supplement to the Note Indenture and the material terms thereof
will be described in the Prospectus Supplement for the related Series of
Certificates. This summary does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the terms and provisions of
the Note Indenture and related supplements thereto, forms of which are filed as
exhibits to the Registration Statement.
GENERAL
The Notes may be issued in one or more Series, any one or more of which may
be comprised of one or more Classes. All Notes of the same Series will be
identical in all respects except for the denominations thereof, unless such
Series is comprised of more than one Class, in which case all Notes of the same
Class will be identical in all respects except for the denominations thereof.
The Prospectus Supplement for a Series of Certificates will describe the
following terms of the related Series of Notes and, if applicable, the Classes
thereof: (a) the designation of the Series and, if applicable, the Classes
thereof, (b) the principal amount, (c) the annual rate at which interest accrues
(the "NOTE INTEREST RATE"), (d) the Payment Dates, (e) the scheduled maturity
date (the "SCHEDULED MATURITY DATE"), (f) the final termination date of the
Series (the "FINAL MATURITY DATE"), (g) the issuance date of the Series (the
"SERIES ISSUANCE DATE"), (h) the place or places for the payment of principal,
(i) the authorized denominations, (j) the provisions for optional redemption by
the Note Issuer, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the terms, if any, on which
any Series or Class of Notes will be subordinated to any other Series or Class
of Notes, (m) the FTA Charges as of the date of issuance of such Series of
Notes, and the portion of the FTA Charges attributable to such Series 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) all of the Transition Property
and all proceeds thereof, (b) the Sale Agreement, (c) the Servicing Agreement,
(d) the Collection Account and all amounts or investment property on deposit
therein or credited thereto from time to time, (e) all other property of
whatever kind owned from time to time by the Note Issuer which such other
property is expected to be relatively small, (f) all present and future claims,
demands, causes and choses in action in respect of any or all of the foregoing
and all payments on or under and (g) all proceeds in respect of any or all of
the foregoing; provided, however, that (1) the cash contributed to the Note
-----------------
Issuer by the seller which is not held in the Capital Subaccount, including cash
that has been released to the Note Issuer following retirement of a related
Series of Certificates (2) net investment earnings which have been released to
the Note Issuer by the Note Trustee pursuant to the terms of the Indenture and
(3) the Overcollateralization Amount with respect to a Series of Certificates
that has been released to the Note Issuer
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following retirement of such Series will not be covered by the foregoing
security interest. The foregoing assets to which the Note Issuer will grant the
Note Trustee a security interest are referred to collectively as the "NOTE
COLLATERAL" herein.
COLLECTION ACCOUNT
The Note Issuer will establish, in the name of the Note Trustee, a
segregated identifiable account (the "COLLECTION ACCOUNT") with an Eligible
Institution. The Collection Account will be held by the Note Trustee for the
benefit of the Noteholders. The Collection Account will consist of four
subaccounts: a general subaccount (the "General Subaccount"), a reserve
subaccount (the "Reserve Subaccount"), a subaccount for the
Overcollateralization Amount ( the "Overcollateralization Subaccount") and a
capital subaccount (the "Capital Subaccount"). All amounts in the Collection
Account not allocated to any other subaccount will be allocated to the General
Subaccount. Unless the context indicated otherwise, references herein to the
Collection Account include each of the subaccounts contained therein.
An "ELIGIBLE INSTITUTION" means (a) the corporate trust department of the
Note Trustee or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) has either (A) a
long-term unsecured debt rating of "A" by S&P and Moody's or (B) a certificate
of deposit rating of "A-1" by S&P and "P-1" by Moody's, or any other long-term,
short-term or certificate of deposit rating acceptable to the Rating Agencies
and (ii) whose deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC").
Funds in the Collection Account may be invested in any of the following:
(a) direct obligations of, or obligations fully and unconditionally guaranteed
as to timely payment by, the United States of America, (b) demand deposits, time
deposits, certificates of deposit or bankers' acceptances of 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 Rating Agency, (e)
demand deposits, time deposits and certificates of deposit which are fully
insured by the FDIC, (f) repurchase obligations with respect to any security
that is a direct obligation of, or fully guaranteed by, the United States of
America or certain agencies or instrumentalities thereof, entered into with
certain depository institutions or trust companies, or (g) any other investment
permitted by each Rating Agency (collectively, the "ELIGIBLE INVESTMENTS"), in
each case which mature on or before the Certificate Business Day preceding the
next Payment Date. The Note Trustee and the Certificate Trustee will have access
to the Collection Account for the purpose of making deposits in and withdrawals
from the Collection Account in accordance with the Indenture.
The Servicer will remit to the Collection Account, on each Remittance Date,
FTA Payments expected to have been received during the preceding Billing
Period, based on the Collections Curve, modified by the Excess Remittance or
Remittance Shortfall, if any, as described under "Servicing --Remittances to
Collection Account" herein.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of Notes of a Class of Notes
at the per annum rate either specified in or determined in the manner specified
in the related Prospectus Supplement and will be payable on the Payment Dates
specified in the related Prospectus Supplement. FTA Collections, and, if
necessary, the relatively small 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.
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Principal of the Notes of each Class will be payable in the amounts and on
the Payment Dates specified in the related Prospectus Supplement, but only to
the extent that amounts in the Collection Account are available therefor, and
subject to the other limitations described below. See "--Allocations;
Payments" herein. Each Prospectus Supplement will set forth the Expected
Amortization Schedule for the related Series of Notes and, if applicable, the
Classes of such Series. On any Payment Date, the Note Issuer will make payments
on the Notes only until the outstanding principal balances thereof have been
reduced to the principal balances specified in the applicable Expected
Amortization Schedule for such Distribution Date. Any FTA Collections in excess
of amounts payable as (a) expenses of the Note Issuer and the Trust, (b)
payments of interest on and principal of the Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to the Capital Subaccount
(all as described herein under "Description of the Notes--Allocations; Payments"
herein) will be retained by the Note Trustee in the Reserve Subaccount for
payment on subsequent Payment Dates. However, if insufficient FTA Collections
are received with respect to any Payment Date, and amounts in the Collection
Account are not sufficient to make up the shortfall, principal of any Class of
Notes may be payable later than expected as described herein. See "Risk
Factors--Risks of the Transition Property" and "-- Uncertain Distribution
Amounts and Weighted Average Life" herein. The entire unpaid principal amount of
the Notes of a Class will be due and payable on the date on which a Note Event
of Default has occurred and is continuing with respect to such Class, if the
holders of a majority in principal amount of the Notes of all Series then
outstanding have declared the Notes to be immediately due and payable. See "--
Note Events of Default; Rights Upon Note Event of Default" herein.
Unless the context requires otherwise, all references in this Prospectus to
principal of the Notes of a Series includes any premium that might be payable
thereon if Notes of such Series are redeemed, as described in the related
Prospectus Supplement.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, any Series of Notes and
accordingly cause the Trust to redeem the related Series of Certificates if the
outstanding principal balance of the Series of Notes has been reduced to less
than five percent of the initial principal balance thereof. 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 related Prospectus Supplement. The
Overcollateralization Amount will be collected ratably over the life of the
Certificates. The portion of FTA Collections relating to the
Overcollateralization Amount received with respect to any Payment Date is
referred to as the "Quarterly Overcollateralization Collection" herein.
On each Payment Date, all FTA Collections will be applied 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 Charges. See "--
Allocations; Payments" herein. On any Payment Date, an amount equal to
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the lesser of the Quarterly Overcollateralization Collection and amounts
remaining after payment of scheduled amounts due on the Notes will be deposited
in the Overcollateralization Subaccount. Amounts in the Overcollateralization
Subaccount will be invested in Eligible Investments, and the Note Issuer will be
entitled to earnings thereon, subject to the limitations described under "--
Allocations; Payments" herein. Amounts in the Overcollateralization Subaccount
are intended to cover any shortfall in FTA Collections that might otherwise
occur on any Payment Date or at the last Scheduled Maturity Date for any Series
or Class of Notes. Any amounts remaining in the Overcollateralization Subaccount
with respect to a particular Series of Notes in excess of the amounts required
to make distributions on the related Series of Certificates in full at the
Termination Date will be returned to the Note Issuer, which may distribute such
amounts to its members under the circumstances described under "-- Certain
Covenants of the Note Issuer."
OTHER CREDIT ENHANCEMENT
Capital Subaccount. Upon the issuance of each Series of Notes, the Seller
will contribute capital to the Note Issuer in an amount specified in each
Prospectus Supplement, which will equal 0.50% of the initial principal amount of
each such Series of Notes. Such amount, less $100,000 in the aggregate for all
Series of Notes (with respect to each Series, the "Required Capital Level"),
will be deposited into the Capital Subaccount. On each Payment Date, the Note
Trustee will draw on amounts in the Capital Subaccount, if any, to the extent
amounts available in the General Subaccount, the Overcollateralization
Subaccount and the Reserve Subaccount are insufficient to make scheduled
payments on the Notes and pay expenses of the Note Issuer and the Trust.
Deposits to the Capital Subaccount will be made as described under "Description
of the Notes--Allocations; Payments" herein.
Reserve Subaccount. FTA Collections available with respect to any Payment
Date in excess of amounts payable as expenses of the Note Issuer and the Trust,
as payments of interest and principal on the Notes, as allocations to the
Overcollateralization Subaccount and as allocations to the Capital Subaccount
(all as described under "-- Allocations; Payments" herein), will be allocated to
the Reserve Subaccount. On each Payment Date, the Note Trustee will draw on
amounts in the Reserve Subaccount, if any, to the extent amounts available in
the General Subaccount are insufficient to make scheduled payments on the Notes
and pay expenses of the Note Issuer and the Trust. Amounts in the Reserve Fund
will be invested in Eligible Investments, and the Note Issuer will be entitled
to earnings thereon, subject to the limitations described under "-- Allocations;
Payments" herein.
Other. For any Class of Notes, credit enhancement in addition to the true-
up adjustment mechanism, the Overcollateralization Amount, the Reserve
Subaccount and the Capital Subaccount 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. If specified in the related Prospectus
Supplement, credit enhancement for a Class of Notes may cover one or more other
Classes 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
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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.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will apply, at the direction of the
Servicer, all amounts on deposit in the Collection Account, including net
earnings thereon (subject to the priority of withdrawals described in the
following paragraph), to pay the following amounts in the following priority:
(a) all amounts owed by the Note Issuer or the Trust to the Note
Trustee, the Delaware Trustee and the Certificate Trustee will be paid to such
persons;
(b) the Servicing Fee and all unpaid Servicing Fees from prior Payment
Dates will be paid to the Servicer;
(c) the Quarterly Administration Fee and all unpaid Quarterly
Administration Fees from prior Payment Dates will be paid to the Administrator;
(d) so long as no Event of Default has occurred or would be caused by
such payment, all other Operating Expenses will be paid to the persons entitled
thereto;
(e) 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, as Noteholder, for distribution to the
Certificateholders;
(f) principal on the Notes payable as a result of a Note Event of
Default or on the Final Maturity Date for any Notes will be transferred to the
Certificate Trustee, as Noteholder, for distribution to the Certificateholders;
(g) funds necessary to pay Quarterly Principal for any Series of
Notes based on priorities described in each Prospectus Supplement will be
transferred to the Certificate Trustee, as Noteholder, for distribution to the
applicable Certificateholders;
(h) unpaid Operating Expenses will be paid to the persons entitled
thereto;
(i) an amount up to the sum of the Quarterly Overcollateralization
Collection and any unfunded Quarterly
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Overcollateralization Collections from prior Payment Dates will be allocated
to the Overcollateralization Subaccount;
(j) an amount up to the excess of the Required Capital Level with
respect to all outstanding Series of Notes over the amount in the Capital
Subaccount as of such Payment Date will be allocated to the Capital Subaccount;
(k) funds up to the net earnings on amounts in the Collection Account
for the prior quarter without cumulation will be released to the Note Issuer;
(l) if any Series of Notes has been retired as of such Payment Date,
the excess of the amount in the Overcollateralization Subaccount over the
aggregate Overcollateralization Amount with respect to all Series of Notes
remaining outstanding will be released to the Note Issuer;
(m) if any Series of Notes has been retired as of such Payment Date,
the excess of the amount in the Capital Subaccount over the aggregate Required
Capital Level with respect to all Series of Notes remaining outstanding will be
released to the Note Issuer;
(n) the balance, if any, will be allocated to the Reserve Subaccount
for distribution on subsequent Payment Dates; and
(o) following the repayment of all outstanding Series of Notes, the
balance, if any, will be released to the Note Issuer.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the transfers contemplated by clauses (a) through (g)
above, the Note Trustee will (x) first, draw from amounts on deposit in the
Reserve Subaccount, (y) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (z) third, draw from amounts on deposit in
the Capital Subaccount, up to the amount of such shortfall, in order to make
the transfers described above. If on any Payment Date when there is more than
one Series of Notes outstanding, funds on deposit in the Collection Account are
insufficient to make the transfers contemplated by clauses (e) and (f) above,
such funds will be allocated among the various Series pro rata as specified
in the related Prospectus Supplement.
For purposes of the foregoing allocations:
"QUARTERLY ADMINISTRATION FEE" means the quarterly fee payable to
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 Payment Date and any
Series of Notes, the excess, if any, of the then-outstanding principal
balance of such Series of Notes over the outstanding principal balance
specified for such Payment Date on the applicable Expected Amortization
Schedule.
Payments to the Noteholders of a Series will be made to such holders as
specified in the related Prospectus Supplement.
ACTIONS BY NOTEHOLDERS
The Certificate Trustee, on behalf of the Trust as sole initial holder of
the Notes, has the right to vote and give consents and waivers in respect of
modifications to any Class or Series of Notes thereunder and to the
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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
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rule of law or with the Trust Agreement and would not involve the Certificate
Trustee in personal liability or expense; (2) the Certificate Trustee shall not
have determined that the action so directed would be unjustly prejudicial to the
holders of Certificates of such Series or Class or Classes not taking part in
such direction; (3) the Certificate Trustee may take any other action deemed
proper by the Certificate Trustee which is not inconsistent with such direction;
and (4) if a Note Event of Default with respect to such Series or Class or Notes
shall have occurred and be continuing, such direction shall not obligate the
Certificate Trustee to vote more than a corresponding majority of the related
Notes held by the Trust in favor of declaring the unpaid principal amount of the
Notes of all Series and accrued interest thereon to be due and payable or
directing any action by the Note Trustee with respect to such Note Event of
Default. In circumstances under which the Certificate Trustee is required to
seek instructions from the holders of the Certificates of any Class with respect
to any such action or vote, the Certificate Trustee will take such action or
vote for or against any proposal in proportion to the principal amount of the
corresponding Class, as applicable, of Certificates taking the corresponding
position. See "Description of the Certificates -- Voting of Notes" herein.
NOTE EVENTS OF DEFAULT; RIGHTS UPON NOTE EVENT OF DEFAULT
An "EVENT OF DEFAULT" with respect to any Series of Notes (a "NOTE EVENT OF
DEFAULT") is defined in the Note Indenture as being: (a) a default for five
days or more in the payment of any interest on any Note; (b) a default in the
payment of the then unpaid principal of any Note of any Series on the Final
Maturity Date for such Series; (c) a default in the payment of the redemption
price for any Note on the redemption date therefor; (d) a default in the
observance or performance of any covenant or agreement of the Note Issuer made
in the Note Indenture and the continuation of any such default for a period of
30 days after notice thereof is given to the Note Issuer by the Note Trustee or
to the Note Issuer and the Note Trustee by the holders of at least 25 percent in
principal amount of the Notes of such Series then outstanding; (e) any
representation or warranty made by the Note Issuer in the Note Indenture or in
any certificate delivered pursuant thereto or in connection therewith having
been incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Note
Issuer by the Note Trustee or to the Note Issuer and the Note Trustee by the
holders of at least 25 percent in principal amount of the Note Indenture of such
Series then outstanding; or (f) certain events of bankruptcy, insolvency,
receivership or liquidation of the Note Issuer.
If a Note Event of Default should occur and be continuing with respect to
any Series of Notes, the Note Trustee or holders of not less than a majority in
principal amount of the Notes of all Series then outstanding may declare the
principal of the Notes of all Series to be immediately due and payable. Such
declaration may, under certain circumstances set forth in the Note Indenture, be
rescinded by the holders of a majority in principal amount of the Notes of all
Series then outstanding.
If the Notes of all Series have been declared to be due and payable
following a Note Event of Default, the Note Trustee may, in its discretion,
either sell the Transition Property or elect to have the Note Issuer maintain
possession of the Transition Property and continue to apply FTA Collections as
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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 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.
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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, the Notes (other than amounts properly withheld
under the Code) or assert any claim against any present or former Noteholder
because of the payment of taxes levied or assessed upon any part of the
Transition Property and the other Note Collateral, (c) terminate its existence,
dissolve or liquidate in whole or in part; (d) permit the validity or
effectiveness of the Notes to be impaired, (e) permit the lien of the Note
Indenture to be amended, hypothecated, subordinated, terminated or discharged or
permit any person to be released from any covenants or obligations with respect
to the Notes except as may be expressly permitted by the Indenture, (f) permit
any lien, charge, excise, claim, security interest, mortgage or other
encumbrance, other than the lien and security interest created by the Indenture,
to be created on or extend to or otherwise arise upon or burden the Collateral
or any part thereof or any interest therein or the proceeds thereof
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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 Eligible Investments as
contemplated by the Basic Documents, make any loan or advance or credit to, or
guarantee, endorse or otherwise become contingently liable in connection with
the obligations, stocks or dividends of, or own, purchase, repurchase or acquire
(or agree contingently to do so) any stock, obligations, assets or securities
of, or any other interest in, or make any capital contribution to, any other
person. The Note Issuer will not, except as contemplated by the Basic Documents,
make any expenditure (by long-term or operating lease or otherwise) for capital
assets (either realty or personalty). The Note Issuer will not, directly or
indirectly, make payments to or distributions from the Collection Account except
in accordance with the Basic Documents.
The Note Issuer will not make any payments, distributions or dividends to
any holder of beneficial interests in the Note Issuer in respect of such
beneficial interest for any Billing Period unless no Note Event of Default shall
have occurred and be continuing and any such distributions do not cause the book
value of the remaining equity in the Note Issuer to decline below 0.50% of the
initial principal amount of all Notes issued and outstanding pursuant to the
Indenture.
The Note Issuer will cause the Servicer to deliver to the Note Trustee and
the Certificate Trustee the annual accountant's certificates, compliance
certificates, reports regarding distributions and statements to Noteholders and
the Certificateholders required by the Servicing Agreement.
REPORTS TO NOTEHOLDERS
With respect to each Series of Notes, on or prior to each Payment Date, the
Servicer will prepare and provide to the Note Issuer, the Infrastructure Bank,
the Note Trustee and the Certificate Trustee a statement (the "QUARTERLY
SERVICER'S CERTIFICATE") to be delivered to the Noteholders on such Payment
Date. With respect to each Series of Notes, each such statement to be delivered
to Noteholders will include (to the extent applicable) the following information
(and any other information so specified in the related Prospectus Supplement) as
to the Notes of such Series with respect to such Payment Date or the period
since the previous Payment Date, as applicable:
(a) the amount of the distribution to Noteholders allocable to
principal;
(b) the amount of the distribution to Noteholders allocable to
interest;
(c) the aggregate outstanding principal balance of the Notes, after
giving effect to payments allocated to principal reported under (a) above; and
(d) the difference, if any, between the amount specified in (c) above
and the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
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Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Note Trustee will
mail to each person who at any time during such calendar year has been a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of Federal and
state income tax returns. See "Certain Federal Income Tax Consequences" and
"State Taxation" herein.
ANNUAL COMPLIANCE STATEMENT
The Note Issuer will be required to file annually with the Note Trustee,
the Certificate Trustee and the Rating Agencies a written statement as to the
fulfillment of its obligations under the Notes.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust will issue the Certificates pursuant to the Trust Agreement, the
form of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary describes the material terms and
provisions of the Trust Agreement. The particular terms of the Certificates of
any Class will be established in a supplement to the Trust Agreement, and the
material terms thereof will be described in the related Prospectus Supplement.
The following summary description of the Certificates is subject to, and is
qualified in its entirety by reference to, all the provisions of the Trust
Agreement and the Certificates, a form of which is also filed as an exhibit to
the Registration Statement.
The Certificates will be issued in fully registered form only. Each Class
of Certificates offered hereby will represent a fractional undivided interest in
the corresponding Class of Notes, all monies due and to become due under such
corresponding Class of Notes, payments pursuant to any related Swap Agreement
and funds from time to time deposited with the Trustee in certain accounts
relating to the Trust. Each Certificate of each Class will correspond to a pro
rata share of the outstanding principal amount of the corresponding Class of the
Notes held in the Trust and will be issued in minimum denominations specified in
the applicable Prospectus Supplement.
Each Class of Certificates will bear interest at the rate per annum borne
by the corresponding Class of the Notes, unless a Swap Agreement is entered into
in connection with the issuance of any Class of Certificates, as described in
the related Prospectus Supplement, in which case a Series or Class of
Certificates may bear interest at a variable rate. See "Description of the
Notes -- Interest and Principal" herein. Payments of interest and principal
made in respect of any Class of Notes are required to be passed through to
holders of the corresponding Class of Certificates at the times and in the
manner described herein. See "-- Payments and Distributions" below and
"Description of the Notes -- Interest and Principal" herein.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates other than the Note
Issuer. The Certificates will not be guaranteed or insured by the State of
California, the Infrastructure Bank, the Trust or any other governmental agency
or instrumentality or by the Seller or any of its affiliates. Neither the full
faith and credit nor the taxing power of the State of California or any agency
or instrumentality thereof is pledged to the distributions of principal of, or
interest on, the Certificates. The Certificates represent beneficial interests
in the Trust only.
STATE PLEDGE
Pursuant to Section 841(c) of the PU Code, the Infrastructure Bank, on
behalf of the State of California, pledges and agrees with the Trust and the
Holders of the Certificates that the State of California shall neither limit nor
alter the FTA Charges, the Transition Property, or the Financing Order or Advice
Letters relating thereto, or any rights thereunder, until the Certificates,
together with interest thereon, are fully paid and discharged, provided nothing
contained in this pledge and agreement shall preclude such limitation or
alteration if and when adequate provision shall be made by law for the
protection of the Holders (the "State Pledge").
PAYMENTS AND DISTRIBUTIONS
The Certificate Trustee is scheduled to receive payments of interest on and
principal of the Notes (in each case, the amounts paid to any Series or Class of
the Notes will be determined from time to time in accordance with the
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provisions described under "Description of the Notes -- Allocations; Payments"
herein) on each Payment Date.
The Certificate Trustee will distribute on each Distribution Date to the
holders of each Class of Certificates all payments of principal and interest
with respect to the corresponding Class of Notes (other than payments received
following a payment default in respect of such Class of Notes), or, in lieu of
such interest, payments under the related Swap Agreement with respect to
interest, the receipt of which is confirmed by the Certificate Trustee by 1:00
p.m. (New York City time) on such Distribution Date or, if such receipt is
confirmed after 1:00 p.m. (New York City time) on such Distribution Date, then
on the following business day. Each such distribution other than the final
distribution with respect to any Certificate will be made by the Certificate
Trustee to the holders of record of the Certificates of the applicable Class on
the Record Date in respect of such Distribution Date. If a payment of principal
or interest on any Class of the Notes (other than a payment received following a
payment default in respect of such Class of Notes) is not received by the
Certificate Trustee on a Distribution Date but is received within five days
thereafter, it will be distributed to such holders of record on the date receipt
thereof is confirmed by the Certificate Trustee, if such receipt is confirmed by
the Certificate Trustee by 1:00 p.m. (New York City time) or, if such receipt is
confirmed after 1:00 p.m. (New York City time), then on the following business
day. If such payment is received by the Certificate Trustee after such five-day
period, it will be treated as a payment received following a payment default in
respect of such Class of Notes and distributed as described below. The final
distribution with respect to any Certificate, however, will be made only upon
presentation and surrender of such Certificate at the office or agency of the
Certificate Trustee specified in the notice given by the Certificate Trustee
with respect to such final distribution.
Any payment received by the Certificate Trustee following a payment default
in respect of any Class of the Notes ("SPECIAL PAYMENTS") will be distributed on
the later of (i) the date such receipt is confirmed by the Certificate Trustee
and (ii) the date on which any Special Payment is scheduled to be distributed by
the Certificate Trustee (a "SPECIAL DISTRIBUTION DATE"). However, in the case
of any such Special Payment receipt of which is confirmed after 1:00 p.m. (New
York City time), such Special Payment will be distributed on the following day.
The Certificate Trustee will mail notice to the holders of record of
Certificates of the applicable Class as of the most recent Record Date not less
than 20 days prior to the Special Distribution Date on which any Special Payment
is scheduled to be distributed in respect of Certificates of such Class stating
such anticipated Special Distribution Date. Each distribution of any such
Special Payment will be made by the Certificate Trustee on the Special
Distribution Date to the holders of record of the Certificates of such Class as
of the most recent Record Date. See "-- Events of Default" below.
The Trust Agreement requires that the Certificate Trustee establish and
maintain, for the Trust and for the benefit of the holders of each Class of
Certificates, one or more non-interest bearing accounts (a "CERTIFICATE
ACCOUNT") for the deposit of payments on the Notes corresponding to such Class.
Pursuant to the terms of the Trust Agreement, the Certificate Trustee is
required to deposit any payments received by it with respect to any Class of
Notes in the corresponding Certificate Account. All amounts so deposited will
be distributed by the Certificate Trustee to holders of the applicable Class of
Certificates on a Distribution Date or a Special Distribution Date, as
appropriate, unless a different date for distribution of such amount is
specified herein.
At such time, if any, as the Certificates of any Class are issued in the
form of Definitive Certificates and not to DTC or its nominee, distributions by
the Certificate Trustee from the Certificate Account with respect to such Class
on a Distribution Date or a Special Distribution Date will be made by check
mailed to each holder of a Definitive Certificate of such Class of record on the
applicable Record Date at its address appearing on the register
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maintained with respect to the Certificates of such Series, or, upon application
by a holder of any Class of Certificates in the principal amount of $1,000,000
or more to the Certificate Trustee not later than the applicable Record Date, by
wire transfer to an account maintained by the payee in New York, New York. The
final distribution for each Class of Certificates, however, will be made only
upon presentation and surrender of the Certificates of such Class at the office
or agency of the Certificate Trustee specified in the notice or agency given by
the Certificate Trustee of such final distribution. The Certificate Trustee will
mail such notice of the final distribution to the Certificateholders of such
Class, specifying the date set for such final distribution and the amount of
such distribution.
If any Special Distribution Date or other date specified herein for
distribution of any distributions to Certificateholders is not a Certificate
Business Day, distributions scheduled to be made on such Special Distribution
Date or other date may be made on the next succeeding Certificate Business Day
and no interest shall accrue upon such distribution during the intervening
period. "CERTIFICATE BUSINESS DAY" means any day other than a Saturday, a Sunday
or a day on which banking institutions or trust companies in New York, New York
or San Francisco, California are authorized or obligated by law, regulation or
executive order to remain closed.
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
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direction shall not be in conflict with any rule of law or with the Trust
Agreement and would not involve the Certificate Trustee in personal liability or
expense; (2) the Certificate Trustee shall not have determined that the action
so directed would be unjustly prejudicial to the holders of Certificates of such
Series or Class or Classes not taking part in such direction; and (3) the
Certificate Trustee may take any other action deemed proper by the Certificate
Trustee which is not inconsistent with such direction. If the Certificate
Trustee is required to seek instructions from the holders of the Certificates of
any Class with respect to any such action or vote, the Certificate Trustee will
take such action or vote for or against any proposal in proportion to the
principal amount of the corresponding Class, as applicable, or Certificates
taking the corresponding position.
EVENTS OF DEFAULT
An event of default with respect to any Class of Certificates under the
Trust Agreement (a "CERTIFICATE EVENT OF DEFAULT") is defined as the occurrence
and continuance of a Note Event of Default or a breach by the State of
California of the State Pledge. For a description of the Note Events of
Default, see "Description of the Notes -- Note Events of Default; Rights Upon
Note Event of Default" herein.
The Trust Agreement provides that, if a Note Event of Default shall have
occurred and be continuing with respect to any Class of Certificates, the
Certificate Trustee may and, upon the written direction of holders representing
not less than a majority of the aggregate outstanding principal amount of the
Certificates of all Series, shall vote all the Notes of all Series in favor of
declaring the unpaid principal amount of all Series of Notes and accrued
interest thereon to be due and payable. In addition, the Trust Agreement
provides that, if a Note Event of Default with respect to any
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Class of Certificates shall have occurred and be continuing, the Certificate
Trustee may and, upon the written direction of holders representing not less
than a majority of the aggregate outstanding principal amount of the
Certificates of all Series, shall vote all the Notes of all Series in favor of
directing the Note Trustee as to the time, method and place of conducting any
proceeding for any remedy available to the Note Trustee or of exercising any
trust or power conferred on the Note Trustee under the Note Indenture.
As an additional remedy, if a Note Event of Default shall have occurred and
be continuing with respect to a particular Series or Class of Certificates, the
Trust Agreement provides that the Certificate Trustee may and, upon the written
direction of the holders of Certificates representing not less than a majority
of the aggregate outstanding principal amount of the Certificates of such Series
or Class, will sell any Note or Notes, without recourse to or warranty by the
Certificate Trustee or any Certificateholder, to any person for cash. The
Certificate Trustee may, but shall not be obligated to refrain, in its sole
discretion, from liquidating any Notes if (i) the Certificate Trustee determines
that amounts receivable from the Note Collateral with respect to the applicable
Class of Notes will be sufficient to pay (a) all principal of and interest on
that Class of Notes in accordance with its terms without regard to any
declaration of acceleration thereof and (b) all sums due to the Certificate
Trustee and any other administrative expenses specified in the Trust Agreement,
and (ii) holders of Certificates representing not less than a majority of the
aggregate outstanding principal amount of the Certificates of all Series have
not directed the Certificate Trustee to sell any Note or Notes. In addition, the
Certificate Trustee is prohibited from selling any Notes following certain
nonpayment Note Events of Default unless (x) the Certificate Trustee determines
that the amounts receivable from the Note Collateral with respect to each Class
of Notes are not sufficient to pay in full the principal of and accrued interest
on the Notes of each such Class and to pay all sums due to the Certificate
Trustee and other administrative expenses specified in the Trust Agreement and
the Certificate Trustee obtains the written consent of holders of Certificates
of each such Class representing 66 2/3% of the aggregate outstanding principal
amount of each such Class of Certificates or (y) the Certificate Trustee obtains
the 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.
If a Certificate Event of Default in the form of a breach by the State of
California of the State Pledge has occurred, then, as the sole and exclusive
remedy for such breach, the Certificate Trustee, in its own name and as trustee
of an express trust, as holder of the Notes, shall be, to the extent permitted
by State and Federal law, entitled and empowered to institute any suits, actions
or proceedings at law, in equity or otherwise, to enforce the State Pledge and
to collect any monetary damages as a result of a breach thereof, and may
prosecute any such suit, action or proceeding to judgment or final decree.
Any funds (a) representing payments received with respect to any Series or
Class of Notes in default, (b) representing the proceeds from the sale by the
Certificate Trustee of any Class of Notes, or (c) otherwise arising from a
Certificate Event of Default held by the Certificate Trustee in a Certificate
Account shall, to the extent practicable, be invested and reinvested by the
Certificate Trustee in Eligible Investments permitted under the Trust Agreement
maturing in not more than 60 days or such lesser time as is required for the
distribution of any such funds on a Special Distribution Date, pending the
distribution of such funds to Certificateholders as described herein.
The Trust Agreement provides that, with respect to the Certificates of any
Class, within 30 days after the occurrence of any event that is, or after notice
or lapse of time or both would become, a Certificate Event of Default with
respect to such Class of Certificates (a "DEFAULT"), the Certificate
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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.
OPTIONAL REDEMPTION
The Trust shall redeem any Series of Certificates if the related Series of
Notes is redeemed. Unless otherwise specified in the related Prospectus
Supplement, notice of such redemption will be given by the Trust to each holder
of Certificates to be redeemed by first-class mail, postage prepaid, mailed not
less than five days nor more than 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;
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(b) the aggregate outstanding principal balance of the Certificates,
after giving effect to distributions allocated to principal reported under (a)
above; and
(c) the difference, if any, between the amount specified in (b) above
and the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Certificate Trustee
will mail to each person who at any time during such calendar year has been a
Certificateholder and received any distribution thereon, a statement containing
certain information for the purposes of such Certificateholder's preparation of
Federal and state income tax returns. See "Certain Federal Income Tax
Consequences" and "State Taxation" herein.
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
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shall not adversely affect the interests of the Certificateholders; (3) to cure
any ambiguity or correct any mistake; (4) to qualify, if necessary, the Trust
Agreement (including any supplement thereto) under the Trust Indenture Act of
1939, as amended or (5) to provide for the issuance of the Certificates of any
Series or Class, or to provide for the execution and delivery of any Swap
Agreement.
In addition, the Infrastructure Bank (with the prior written approval of
the Note Issuer) and the Certificate Trustee may amend the Trust Agreement with
the consent of Certificateholders holding not less than a majority of the
aggregate outstanding principal amount of the Certificates of all affected
Classes. No amendment, however, may, without the consent of each
Certificateholder affected thereby, (a) reduce in any manner the amount of, or
delay the timing of, deposits or distributions on any Certificate, (b) permit
the disposition of any Note held by the Trust except as permitted by the Trust
Agreement, or otherwise deprive any Certificateholder of the benefit of the
ownership of the related Notes held by the Trust, (c) reduce the aforesaid
percentage of the aggregate outstanding principal amount of the Certificates the
holders of which are required to consent to any such amendment, (d) modify the
provisions in the Trust Agreement relating to amendments with the consent of
Certificateholders, except to increase the percentage vote necessary to approve
amendments or to add further provisions which cannot be modified or waived
without the consent of all Certificateholders, or (e) adversely affect the
status of the Trust as a grantor trust taxable as a corporation for federal
income tax purposes. Promptly following the execution of any amendment to the
Trust Agreement (other than an amendment described in the preceding paragraph),
the Certificate Trustee will furnish written notice of the substance of such
amendment to each Certificateholder.
Any supplement to the Trust Agreement executed in connection with the
issuance of one or more new Series of Certificates will not be considered an
amendment to the Trust Agreement.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder or group of
Certificateholders of any Series or of all outstanding Series of record
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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 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,
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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 of
and interest on the Certificates from the Certificate Trustee through DTC and
its Participants. Under a book-entry format, Certificateholders will receive
distributions after the related Distribution Date, as the case may be, because,
while distributions are required to be forwarded to Cede, as nominee for DTC, on
each such date, DTC will forward such distributions to its Participants, which
thereafter will be required to forward them to Indirect Participants or holders
of beneficial interests in the Certificates. The Certificate Trustee, the
Seller, the Servicer and any paying agent, transfer agent or registrar may treat
the registered holder in whose name any Certificate is registered (expected to
be Cede) as the absolute owner thereof (whether or not such Certificate is
overdue and notwithstanding any notice of ownership or writing thereon or any
notice to the contrary) for the purpose of making distributions and for all
other purposes.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "HOLDER" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Certificateholders will only be permitted to
exercise their rights as Certificateholders indirectly through Participants and
DTC. All references herein to actions by Certificateholders thus refer to
actions taken by DTC upon instructions from its Participants, and all references
herein to distributions, notices, reports and statements to Certificateholders
refer to distributions, notices, reports and statement to Cede, as the
registered holder of the Certificates, for distribution to the beneficial owners
of the Certificate in accordance with DTC procedures.
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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
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policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Trust Agreement or the relevant
Prospectus Supplement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates of a Class will be issued in registered form to
Certificateholders, or their nominees, rather than to DTC (such Certificates
being referred to herein as "DEFINITIVE CERTIFICATES") only under the
circumstances provided in the Trust Agreement, which will include, 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 Certificate Trustee
or the Infrastructure Bank is unable to locate a qualified successor, (b) the
Infrastructure Bank (with the prior written approval of the Note Issuer) 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
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book-entry basis) and registered holders will deal directly with the Certificate
Trustee with respect to transfers, notices and distributions.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive securities representing the Certificates and instructions for
registration, the Certificate Trustee will issue the Certificates in the form of
Definitive Certificates, and thereafter the Certificate Trustee will recognize
the holders of such Definitive Certificates as Certificateholders under the
Trust Agreement and the related Prospectus Supplement.
Distribution of principal of and interest on the Certificates will be made
by the Certificate Trustee directly to Certificateholders in accordance with the
procedures set forth herein and in the Trust Agreement and the related
Prospectus Supplement. Interest distributions and principal distributions will
be made to Certificateholders in whose names the Definitive Certificates were
registered at the close of business on the related Record Date. Distributions
will be made by check mailed to the address of such Certificateholder as it
appears on the register maintained by the Certificate Trustee. The final
distribution on any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificate on the final distribution date at such office
or agency as is specified in the notice of final distribution to
Certificateholders. The Certificate Trustee will provide such notice to
registered Certificateholders not later than the fifth day of the month of the
final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the transfer agent and registrar, which initially will be the
Certificate Trustee. No service charge will be imposed for any registration of
transfer or exchange, but the transfer agent and registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES
The issuance of any additional Series of Certificates is subject to the
following conditions, among others:
(a) appropriate documentation required by the Note Indenture and Trust
Agreement, including supplements thereto, shall have been authorized,
executed and delivered by all parties required to do so by the terms of the
relevant documents;
(b) an Issuance Advice Letter shall have been submitted to the CPUC
and shall have become effective;
(c) the Rating Agency Condition shall have been satisfied with respect
to such issuance;
(d) such issuance will not result in an adverse tax consequence to the
Trust or the Certificateholders;
(e) no Event of Default shall have occurred and be continuing under
the Note Indenture or the Trust Agreement;
(f) as of the date of issuance, the Trust shall have sufficient funds
available to pay the purchase price for the related Series of Notes, and
all conditions to the issuance of a new series of Notes and Certificates
shall have been satisfied or waived; and
(g) delivery by the Note Issuer to the Note Trustee of certain
certificates and opinions specified in the Note Indenture.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Certificates will be included in gross income for federal
income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of a
Certificate, and is based on the opinion of Special Counsel. This discussion
represents the opinion of Special Counsel, subject to the qualifications set
forth therein or herein. Additional federal income tax considerations relevant
to a particular Series may be set forth in the related Prospectus Supplement.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax consequences
to Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Certificateholder in light of that Certificateholder's circumstances,
and some Certificateholders may be subject to special tax rules and limitations
not discussed below (e.g., life insurance companies, tax-exempt organizations,
financial institutions or broker-dealers). CONSEQUENTLY, EACH PROSPECTIVE
CERTIFICATEHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER IN DETERMINING THE
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF A CERTIFICATE.
For purposes of this discussion, "U.S. PERSON" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source). The term "U.S. CERTIFICATEHOLDER" means any U.S. Person and any
other person to the extent that income attributable to its interest in a
Certificate is effectively connected with that person's conduct of a U.S. trade
or business. The term "NON-U.S. CERTIFICATEHOLDER" means any person other than a
U.S. Certificateholder.
The discussion assumes that a Certificate is issued in registered form, has
all payments denominated in U.S. dollars and not determined by reference to the
value of any other currency and has a term that exceeds one year. Moreover, the
discussion assumes that any original issue discount ("OID") on the Certificate
(i.e., any excess of the stated redemption price at maturity of the Certificate
over its issue price) is less than a de minimis amount (i.e., 0.25 percent of
its stated redemption price at maturity multiplied by the Certificate's weighted
average maturity), all within the meaning of the OID regulations. Moreover, the
discussion assumes that the Certificates are of a type, as set forth below,
which Special Counsel is of the opinion will represent ownership of debt for
federal income tax purposes. The applicable Prospectus Supplement will set
forth a discussion of any additional material tax consequences with respect to
Certificates not conforming to the foregoing assumptions.
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TREATMENT OF THE CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Certificates will represent ownership of debt and the
Trust will not be treated as an association or publicly traded partnership
taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
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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
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purchase at original issuance for a price less than the issue price) an interest
in a Certificate at a discount that exceeds any unamortized OID may be subject
to the "market discount" rules of sections 1276 through 1278 of the Code. These
rules generally provide that, subject to a statutorily-defined de minimis
exception, if a U.S. Certificateholder acquires a Certificate at a market
discount (i.e., at a price below its stated redemption price at maturity or its
revised issue price if it was issued with OID) and thereafter recognizes gain
upon a disposition of the Certificate (or disposes of it in certain non-
recognition transactions, including by gift), the lesser of such gain (or
appreciation, in the case of an applicable non-recognition transaction) or the
portion of the market discount that accrued while the Certificate was held by
such holder will be treated as ordinary interest income at the time of the
disposition. In addition, a U.S. Certificateholder who acquired a Certificate
at a market discount would be required to treat as ordinary interest income the
portion of any principal payment attributable to accrued market discount on such
Certificate. Generally, market discount accrues ratably over the life of a debt
instrument unless the debt holder elects to accrue market discount on a constant
yield to maturity basis. It is not clear how either the ratable accrual or
constant yield accrual methodologies apply to instruments such as the
Certificates where the timing of principal payments is uncertain. Investors
should consult their own tax advisors concerning the accrual of market discount.
The market discount rules also provide that a U.S. Certificateholder who
acquires a Certificate at a market discount may be required to defer a portion
of any interest expense that otherwise may be deductible on any indebtedness
incurred or maintained to purchase or carry the Certificate until the holder
disposes of the Certificate in a taxable transaction.
A U.S. Certificateholder who acquired a Certificate at a market discount
may elect to include market discount in income as the discount accrues, either
on a ratable basis or, if elected, on a constant yield basis. The current
inclusion election, once made, applies to all market discount obligations
acquired on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the Internal
Revenue Service (the "IRS"). If a holder elects to include market discount in
income in accordance with the preceding sentence, the foregoing rules with
respect to the recognition of ordinary income on sales, principal payments and
certain other dispositions of the Certificates and the deferral of interest
deductions on indebtedness related to the investor certificates will not apply.
Amortizable Bond Premium. A U.S. Certificateholder who purchases an
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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
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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), or (iv) such interest is contingent interest described in Code
Section 871(h)(4). To qualify for the exemption from taxation, the last U.S.
Person in the chain of payment prior to payment to a non-U.S. Certificateholder
(the "WITHHOLDING AGENT") must have received (in the year in which a payment of
interest or principal occurs or in either of the two preceding years) a
statement that (i) is signed by the non-U.S. Certificateholder under penalties
of perjury, (ii) certifies that the non-U.S. Certificateholder is not a U.S.
Person and (iii) provides the name and address of the non-U.S.
Certificateholder. The statement may be made on a Form W-8 or substantially
similar substitute form, and the non-U.S. Certificateholder must inform the
Withholding Agent of any change in the information on the statement within 30
days of the change. If a Certificate is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in that case, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the non-U.S. Certificateholder to the organization
or institution holding the Certificate on behalf of the non-U.S.
Certificateholder. The U.S. Treasury Department is considering implementation
of further certification requirements aimed at determining whether the issuer of
a debt obligation is related to holders thereof.
Generally, any gain or income realized by a non-U.S. Certificateholder upon
retirement or disposition of an interest in a Certificate (other than gain
attributable to accrued interest or OID, which is addressed in the preceding
paragraph) will not be subject to U.S. federal income tax, provided that in the
case of a Certificateholder that is an individual, such Certificateholder is not
present in the United States for 183 days or more during the taxable year in
which such retirement or disposition occurs.
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Certain exceptions may be applicable, and an individual non-U.S.
Certificateholder should consult a tax adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of a Certificate to a registered owner who is
not an "exempt recipient" and who fails to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the manner required. Generally, individuals are not exempt recipients whereas
corporations and certain other entities are exempt recipients. Payments made in
respect of a U.S. Certificateholder must be reported to the IRS, unless the U.S.
Certificateholder is an exempt recipient or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Certificateholders,
temporary Treasury regulations provide that backup withholding and information
reporting will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been established
(provided that neither the Certificate Trustee nor a paying agent has actual
knowledge that the holder is a U.S. Person or that the conditions of any other
exemption are not in fact satisfied). Payments of the proceeds of the sale of a
Certificate to or through a foreign office of a broker that is a U.S. Person, a
controlled foreign corporation for United States federal income tax purposes or
a foreign person 50% or more of whose gross income is effectively connected with
the conduct of a trade or business within the United States for a specified
three-year period are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is not a U.S. Person and no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury regulations, payments of
the proceeds of a sale to or through the United States office of a broker will
be subject to information reporting and backup withholding unless the payee
certifies under penalties of perjury as to his or her status as a non-U.S.
Person and certain other qualifications (and no agent of the broker who is
responsible for receiving or reviewing such statement has actual knowledged 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.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Certificates
will be exempt from California personal income tax, but not exempt from the
California franchise tax applicable to banks and corporations. Gain or loss, if
any, resulting from an exchange or redemption of Certificates will be recognized
in the year of the exchange or redemption. Present California law taxes both
long-term and short-term capital gains at the rates applicable to ordinary
income. Interest on indebtedness incurred or continued by a Certificateholder
in connection with the purchase of Certificates will not be deductible for
California personal income tax purposes.
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in
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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 and to pay issuance costs related to the Notes. The Seller will use such
proceeds to repay outstanding debt and reduce the amount of outstanding equity
generally in proportion to its existing capital structure.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters
named in the related Prospectus Supplement (the "UNDERWRITERS") by a negotiated
firm commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Note Issuer and the Trust intend that Certificates will be offered through such
various methods from time to time and that offerings may be made concurrently
through more than one of such methods or that an offering of a particular Series
of Certificates may be made through a combination of such methods.
The distribution of Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession to
certain other dealers. Underwriters, dealers and agents that participate in the
distribution of the Certificates of a Series may be deemed to be underwriters
and any discounts or commissions received by them from the Trust and any profit
on the resale of the Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act. Any such Underwriters or
agents will be identified, and any such compensation received from the Trust
will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, the Note Issuer
and the Trust, Underwriters and agents who participate in the distribution of
the Certificates may be entitled to indemnification by the Seller and Note
Issuer against certain liabilities, including liabilities under the Securities
Act.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any such market, if established, will continue.
RATINGS
It is a condition of issuance of each Class of Certificates that at the
time of issuance such Class receive the rating indicated in the related
Prospectus Supplement, which will be in one of the four highest categories, from
at least one Rating Agency. Each Class of Notes will receive the same rating
from the applicable Rating Agencies as the corresponding Class of Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings
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assigned to any Class of Certificates upon initial issuance will not be lowered
or withdrawn by a Rating Agency at any time thereafter. If a rating of any Class
of Certificates is revised or withdrawn, the liquidity of such Class of
Certificates may be adversely affected. In general, ratings address credit risk
and do not represent any assessment of the rate of FTA Collections.
LEGAL MATTERS
Certain legal matters relating to the Notes and certain federal income tax
consequences of the issuance of the Notes will be passed upon by 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.
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INDEX OF PRINCIPAL DEFINITIONS
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Act................................................................ 35
Actual FTA Payments................................................ 45
Administrator...................................................... 12
Advice Letters..................................................... 7
Annual Accountant's Report......................................... 47
Base Calculation Model............................................. 28
Basic Documents.................................................... 58
Billing Period..................................................... [19]
Book-Entry Certificates............................................ 14
Calculation Date................................................... 29
Capital Subaccount.................................................[17, 56]
Cede............................................................... 14
CEDEL.............................................................. 66
CEDEL Participants................................................. 68
Certificate Account................................................ 61
Certificate Business Day........................................... 62
Certificate Event of Default....................................... 11, 62
Certificate Trustee................................................ 3
Certificateholders................................................. 3
Certificates....................................................... 1, 3
Class.............................................................. 1, 3
Closing Date....................................................... 30
Code............................................................... 15
Collection Account................................................. 53
Collections Curve.................................................. [50]
Commission......................................................... 3
Cooperative........................................................ 68
CPUC............................................................... 6
Customers.......................................................... 6
Default............................................................ 63
Definitive Certificates............................................ 69
Delaware Business Trust Act........................................ 22
Delaware Trustee................................................... 3
Depositaries....................................................... 66
Distribution Date.................................................. 9
DRI................................................................ 39
DTC................................................................ 3, 14
Eligible Institution............................................... 53
Eligible Investments............................................... 53
ERISA.............................................................. 15
ESP................................................................ [26]
Estimated FTA Payments............................................. [50]
Euroclear.......................................................... 66
Euroclear Operator................................................. 68
Euroclear Participants............................................. 68
Event of Default................................................... 11
Excess Remittance.................................................. 45
Exchange Act....................................................... 3
Expected Amortization Schedule..................................... [17]
FDIC............................................................... 53
Fee Agreement...................................................... 34
FERC............................................................... 20
Final Maturity Date................................................ 50
Financing Order.................................................... 6
Financing Order Anniversary........................................ 29
FTA Charge......................................................... 6
FTA Collections.................................................... 8
FTA Payments....................................................... 7
General Subaccount................................................. [58]
H.R. 1230.......................................................... 17
holder............................................................. 67
</TABLE>
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<TABLE>
<S> <C>
Indirect Participants.............................................. 14
Infrastructure Bank................................................ 1, 2
Initial Transition Property........................................ 30
IRS................................................................ 72
ISO................................................................ 19
Issuance Advice Letter............................................. 7
Monthly Servicer's Certificate...................................... 46
Moody's............................................................. 22
Non-U.S. Certificateholder.......................................... 71
Note Collateral..................................................... 50
Note Event of Default............................................... 11, 56
Note Indenture...................................................... 50
Note Interest Rate.................................................. 50
Note Issuer......................................................... 1, 2
Note Trustee........................................................ [12]
Noteholder.......................................................... 50
Notes............................................................... 1
OID................................................................. 71
Operating Expenses.................................................. 13
Overcollateralization Subaccount....................................
Overcollateralization Amount........................................ 51
Participants........................................................ 14
Parties in Interest................................................. 75
Payment Date........................................................ 9
Plan Assets......................................................... 75
Plans............................................................... 75
Proposition 218..................................................... 17
PU Code............................................................. 6
PX.................................................................. 19
Quarterly Administration Fee........................................ 55
Quarterly Interest.................................................. 55
Quarterly Overcollateralization Collection.......................... [56]
Quarterly Principal................................................. 55
Quarterly Servicer's Certificate.................................... 59
Rate Freeze Period.................................................. 27
Rating Agency....................................................... 15
Rating Agency Condition............................................. 50
Record Date......................................................... 9
Registration Statement.............................................. 3
Remittance Date..................................................... 45
Remittance Shortfall................................................ 45
Required Capital Level.............................................. [10]
Reserve Subaccount.................................................. [18]
Residential Customers............................................... 6
Rules............................................................... 67
S&P................................................................. 22
Sale Agreement...................................................... [8]
Scheduled Final Distribution Date................................... 9
Scheduled Maturity Date............................................. 50
SDG&E............................................................... 1, 2
Securities Act...................................................... 3
Seller.............................................................. 1, 2
Series.............................................................. 1, 3
Series Issuance Date................................................ 50
Servicer............................................................ 1, 2
Servicer Business Day............................................... [45]
Servicer Defaults................................................... 48
Servicing Agreement................................................. 2
Servicing Fee....................................................... 14
Small Commercial Customers.......................................... 28
Special Counsel..................................................... 71
Special Distribution Date........................................... 61
Special Payments.................................................... 61
State Pledge........................................................ [63]
Statute............................................................. [7]
Subsequent Transfer Date............................................ 30
</TABLE>
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<TABLE>
<S> <C>
Subsequent Transition Property...................................... 30
Swap Agreement...................................................... [7]
Termination Date.................................................... 9
Terms and Conditions................................................ 68
Territory........................................................... 6
Transition Costs.................................................... 6
Transition Property................................................. 7
True-Up Mechanism Advice Letter..................................... 8
True-Up Mechanism Calculation Model................................. 29
Trust............................................................... 1, 2
Trust Agreement..................................................... 2
U.S. Certificateholder.............................................. 71
U.S. Person......................................................... 71
Underwriters........................................................ 76
Utilities........................................................... [7]
Withholding Agent................................................... [77]
</TABLE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK, THE UNDERWRITERS OR
ANY DEALER, SALESPERSON OR OTHER PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUPPLEMENT
REPORTS TO HOLDERS......................... S-4
PROSPECTUS SUPPLEMENT SUMMARY.............. S-5
ADDITIONAL RISK FACTORS RELATING TO
THE CLASS ___ CERTIFICATES................. S-13
DESCRIPTION OF THE CERTIFICATES............ S-14
SUMMARY OF CERTAIN PROVISIONS OF THE
SERIES ___ SUPPLEMENT TO THE TRUST
AGREEMENT.................................. S-17
SUMMARY OF CERTAIN PROVISIONS OF THE SWAP
AGREEMENT.................................. S-17
THE SWAP COUNTERPARTY...................... S-17
DESCRIPTION OF THE NOTES................... S-17
DESCRIPTION OF THE TRANSITION PROPERTY..... S-20
CERTAIN DISTRIBUTION AND WEIGHTED AVERAGE
LIFE CONSIDERATIONS........................ S-21
THE SELLER AND SERVICER.................... S-21
SERVICING.................................. S-22
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.... S-23
STATE TAXATION............................. S-26
ERISA CONSIDERATIONS....................... S-27
UNDERWRITING............................... S-29
RATINGS.................................... S-29
LEGAL MATTERS.............................. S-30
INDEX OF PRINCIPAL DEFINITIONS............. S-31
FINANCIAL STATEMENTS....................... F-1
PROSPECTUS
AVAILABLE INFORMATION...................... 3
REPORTS TO HOLDERS......................... 3
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.............................. 4
PROSPECTUS SUPPLEMENT...................... 4
PROSPECTUS SUMMARY......................... 7
RISK FACTORS............................... 23
ENERGY DEREGULATION AND NEW
CALIFORNIA MARKET STRUCTURE.............. 33
DESCRIPTION OF THE TRANSITION PROPERTY..... 34
CERTAIN DISTRIBUTION AND WEIGHTED
AVERAGE LIFE CONSIDERATIONS.............. 40
THE TRUST.................................. 41
THE INFRASTRUCTURE BANK.................... 42
THE NOTE ISSUER............................ 43
THE SELLER AND SERVICER.................... 45
SERVICING.................................. 51
DESCRIPTION OF THE NOTES................... 57
DESCRIPTION OF THE CERTIFICATES............ 68
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES......................... 79
STATE TAXATION............................. 82
ERISA CONSIDERATIONS....................... 83
USE OF PROCEEDS............................ 84
PLAN OF DISTRIBUTION....................... 84
RATINGS.................................... 84
LEGAL MATTERS.............................. 85
INDEX OF PRINCIPAL DEFINITIONS............. 86
</TABLE>
CALIFORNIA
INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT
BANK SPECIAL PURPOSE
TRUST SDG&E-1
$_______________
RATE REDUCTION CERTIFICATES
SERIES 199_-_
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
[NAME OF UNDERWRITER(S)]
<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.
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 ............................................ $ *
=======
________________
* 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.
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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 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
II-2
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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.
The Member has directors' and officers' liability insurance policies in
force insuring directors and officers of the Member and its subsidiaries.
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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.
*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 Consents 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.
**Previously filed.
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
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.
II-4
<PAGE>
(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-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF SAN DIEGO, STATE OF CALIFORNIA, ON SEPTEMBER 17,
1997.
SDG&E FUNDING LLC,
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
SEPTEMBER 17, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
--------- -----
/s/ Charles A. McMonagle President 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.
**Previously filed.
<PAGE>
EXHIBIT 99.1
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the Matter Of The )
Application of San Diego Gas & )
Electric Company (U 902-E) For: (1) )
Authority to Reduce Rates Effective ) Application No. ____________
January 1, 1998, (2) Authority To Sell )
Or Assign Transition Property To One )
or More Financing Entities; (3) )
Authority To Service Rate Reduction )
Bonds On Behalf Of Financing Entities; )
(4) Authority To Establish Charges )
Sufficient To Recover Fixed Transition )
Amounts; and (5) Such Further )
Authority Necessary For SDG&E To Carry )
Out The Transactions Described In This )
Application )
----------------------------------------
APPLICATION OF SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E)
FOR AUTHORITY TO FINANCE A 10% RATE REDUCTION THROUGH THE
ISSUANCE OF RATE REDUCTION BONDS
STEVEN C. NELSON
Attorney for:
SAN DIEGO GAS & ELECTRIC COMPANY
101 Ash Street
Post Office Box 1831
San Diego, California 92112
Phone: (619) 699-5136
Fax: (619) 699-5027
May 6, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. INTRODUCTION AND PROCEDURAL HISTORY................................................... 2
II. SUMMARY OF TRANSACTION................................................................ 4
III. STANDARD OF REVIEW.................................................................... 7
IV. SUMMARY OF TESTIMONY.................................................................. 8
V. REQUEST FOR PROCEDURAL SCHEDULE AND EX PARTE CONSIDERATION............................ 9
VI. STATUTORY AUTHORITY, CORPORATE AND FINANCIAL INFORMATION.............................. 10
A. STATUTORY AUTHORITY - RULE 15...................................................... 10
B. LEGAL NAME - RULE 15(A)............................................................ 11
C. CORRESPONDENCE OR COMMUNICATIONS - RULE 15(B)...................................... 11
D. EX PARTE ACTION - RULE 15(D)....................................................... 12
E. ARTICLES OF INCORPORATION - RULE 16(A)............................................. 12
F. FINANCIAL STATEMENT, BALANCE SHEET AND INCOME STATEMENT - RULE 23(A)............... 12
G. PRESENT AND PROPOSED RATES - RULE 23(B) AND 23(C).................................. 12
H. DESCRIPTION OF PROPERTY AND EQUIPMENT - RULE 23(D)................................. 13
I. SUMMARY OF EARNINGS - RULE 23(E) AND 23(F)......................................... 13
J. INDEX TO ATTACHMENTS AND EXHIBITS TO THIS APPLICATION - RULE 23(G)................. 13
K. DEPRECIATION - RULE 23(H).......................................................... 14
L. PROXY STATEMENT - RULE 23(I)....................................................... 14
M. SERVICE OF NOTICE OF APPLICATION - RULE 24......................................... 15
N. FORM OF FINANCING ORDER - COMMISSION RESOLUTION 173................................ 16
IV. CONCLUSION............................................................................ 16
A. GENERAL AUTHORIZATION.............................................................. 17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
B. THE FIXED TRANSITION AMOUNTS AND THE FTA CHARGES................................... 18
C. THE FTA CHARGES TRUE-UP MECHANISM.................................................. 19
D. TRANSITION PROPERTY................................................................ 20
E. STEPS IN THE RATE REDUCTION BOND TRANSACTION....................................... 21
1. Transfer of Transition Property to the SPE...................................... 21
2. Transfer of SPE Debt Securities to the Issuer................................... 22
3. Issuance of the Rate Reduction Bonds............................................ 22
F. RATE REDUCTION BOND SERVICING...................................................... 23
G. RATE REDUCTION AUTHORIZATION....................................................... 25
H. RATEMAKING MECHANISM AUTHORIZATIONS................................................ 25
I. ADDITIONAL AUTHORIZATIONS AND APPROVALS............................................ 25
</TABLE>
-ii-
<PAGE>
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the Matter Of
The Application of San Diego Gas & )
Electric Company (U 902-E) For: (1) )
Authority to Reduce Rates Effective )
January 1, 1998, (2) Authority To Sell )
Or Assign Transition Property To One )
or More Financing Entities; (3) ) Application No. ____________
Authority To Service Rate Reduction )
Bonds On Behalf Of Financing Entities; )
(4) Authority To Establish Charges )
Sufficient To Recover Fixed Transition )
Amounts; and (5) Such Further )
Authority Necessary For SDG&E To Carry )
Out The Transactions Described In This )
Application )
----------------------------------------
APPLICATION OF SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E)
FOR AUTHORITY TO FINANCE A 10% RATE REDUCTION THROUGH THE
ISSUANCE OF RATE REDUCTION BONDS
Pursuant to Sections 1(e), 330(w) and 841(a) of AB 1890, the California
Public Utilities Commission's ("Commission") Rules of Practice and Procedure and
the Administrative Law Judge's March 4, 1997 Ruling, San Diego Gas & Electric
Company ("SDG&E") respectfully submits this Application for authority to finance
a rate reduction through the issuance of Rate Reduction Bonds./1/
In this Application, SDG&E first provides a brief introduction and
procedural history (Section I) describing the requirements of AB 1890 to provide
residential and small
- ------------------
/1/ The terms "Financing Entity," "Financing Order," "Fixed Transition Amounts,"
"Rate Reduction Bonds," "Transition Costs" and "Transition Property", shall have
the respective meanings given them in P.U.Code Section 840.
<PAGE>
commercial customers with a 10% rate reduction and to provide utilities with the
means to finance this rate reduction through the issuance of Rate Reduction
Bonds. Section I also summarizes the efforts the Commission, the utilities and
interested parties have made to date to facilitate the Commission's processing
of the utilities' Rate Reduction Bond applications.
In Section II of the Application, SDG&E describes the proposed transaction.
Section III of the Application sets forth the applicable standard of review, per
the requirements of AB 1890. Section IV summarizes SDG&E's prefiled testimony.
Section V describes the statutory authority upon which SDG&E is filing this
Application and it lists the corporate and financial information required by
Commission rules. Finally, in Section VI, SDG&E identifies the findings SDG&E is
asking the Commission to make in its Financing Order.
I.
INTRODUCTION AND PROCEDURAL HISTORY
AB 1890 requires electric utilities to provide residential and small
commercial customers with a 10% rate reduction for the period 1998 through March
31, 2002, assuming the rate freeze does not end earlier. P.U.Code (S) 368(a).
AB 1890 also establishes the means for utilities to finance this rate reduction
through the issuance of Rate Reduction Bonds. P.U.Code (S) 330(w)./2/
- ------------------
/2/ SDG&E believes that under AB 1890, the 10% rate reduction is contingent upon
issuance of Rate Reduction Bonds in sufficient amounts to provide for the rate
reduction.
-2-
<PAGE>
Under AB 1890, utilities must file their rate reduction financing
applications by June 1, 1997. P.U.Code (S) 330(w). The legislation requires the
Commission to act upon the utilities' applications within 120 days after filing.
P.U.Code (S) 841(e). AB 1890 states that the Commission "shall" approve the
utilities' applications if "issuance of rate reduction bonds . . . would reduce
rates that residential and small commercial customers would have paid if the
financing order were not adopted." P.U.Code (S) 841(a).
On March 4, 1997, Administrative Law Judge Richard Careaga issued a ruling
scheduling workshops to discuss implementation of AB 1890's Rate Reduction Bond
requirements. In his ruling, the ALJ also directed utilities to prepare and
submit comments regarding the utilities financing applications "[t]o provide a
basis for workshop discussion." Ruling, p. 1. SDG&E was an active participant
at the March 20-21, 1997 workshops and, per the ALJ's ruling, filed joint
comments on March 14, 1997 regarding AB 1890's Rate Reduction Bond
requirements./3/
The ALJ indicated that one of the purposes of the workshop was to "enhance
and focus the Commission's review of utility applications for financing
authority." Ruling, p. 4. The ALJ also stated that:
"Parties are encouraged to work together both
before and after the workshop to reach agreement
on issues. Utilities
- -------------
/3/ "Joint Comments of Pacific Gas and Electric Company (U 39 M), San Diego Gas
and Electric Company (U 902-E), and Southern California Edison (U 338-E)
Regarding ALJ's Ruling on Rate Reduction Bond Workshop" (March 14, 1997).
-3-
<PAGE>
are encouraged to work together to achieve
uniformity in their applications for financing
authority and incorporate any agreements that
can be achieved among a broad representation
of parties."
Id.
- --
In recognition of the ALJ's admonitions and the short period of time in
which the Commission has to process this Application, SDG&E has endeavored to
work with other parties and with the other utilities to achieve as much
consensus and uniformity of approach as possible. SDG&E also has endeavored to
work proactively with the Commission staff and other parties to solicit and
address concerns as early as practicable in this proceeding. In addition to
actively participating in the March workshops, SDG&E has participated in other
pre-filing briefings with parties and has provided its Application in draft form
to several parties for their review prior to filing. SDG&E hopes these efforts
will facilitate the Commission's review of its Application.
II.
SUMMARY OF TRANSACTION
AB 1890 requires utilities to provide residential and small commercial
customers with a 10% rate reduction and provides utilities with the means to
finance this rate reduction through the issuance of Rate Reduction Bonds. In
consideration of the rate reduction, residential and small commercial customers
will provide the source of payment of principal of and interest on the bonds
through separate, nonbypassable charges designated Fixed Transition Amount
("FTA") charges. Pursuant to the legislation, such FTA
-4-
<PAGE>
charges are to be authorized by the Commission in connection with this
proceeding and will be subject to an adjustment procedure on at least an annual
basis over the term of the bonds. The net effect of the transaction will be to
provide SDG&E's residential and small commercial customers with the required 10%
rate reduction and to provide net present value benefits to these customers of
approximately $100 million over the term of the bonds.
SDG&E's proposed structure of the Rate Reduction Bond transaction is
illustrated in Figure II-1.
Figure II-1
Rate Reduction Bonds
Transaction Structure
[Chart describes structure of transaction]
Step 1 of this process involves the formation by SDG&E of a Special Purpose
Entity ("SPE"). Step 1 also involves the transfer by SDG&E of all of its
rights, title and interest in and to the Transition Property (which is defined
by AB 1890 to include all rights in and to the FTA charges and any revenues
therefrom) to the SPE.
-5-
<PAGE>
In Step 2 of this process, the SPE will raise the necessary funds for its
purchase of the Transition Property from SDG&E by issuing its own secured debt
(the "SPE Debt") to the entity through which the Rate Reduction Bonds will be
issued. The SPE Debt will be secured by the Transition Property (including the
FTA charges and the right to receive all revenue therefrom) transferred by SDG&E
to the SPE in Step 1 discussed above. As called for in AB 1890, the Rate
Reduction Bonds will be issued through the California Infrastructure and
Economic Development Bank ("Infrastructure Bank"), a Special Purpose Trust
formed by the Infrastructure Bank, or another Financing Entity approved by the
Infrastructure Bank (collectively the "SPT").
Step 3 of this process is the issuance through the SPT of the Rate
Reduction Bonds to investors. As contemplated by AB 1890, the Rate Reduction
Bonds may be in the form of bonds, notes, certificates of participation or
beneficial interest, or other evidences of indebtedness or ownership.
SDG&E proposes to transfer Transition Property to the SPE in an amount
sufficient to provide for the 10% rate reduction to residential and small
commercial customers. It is currently anticipated that this will be an amount
of Transition Property sufficient to support the issuance of an aggregate amount
of up to $800 million of Rate Reduction Bonds by financing a portion of its
Transition Costs. Thus, SDG&E will receive up to $800 million (less the amount
of certain transaction costs) in consideration for the sale of
-6-
<PAGE>
the Transition Property to the SPE at the time the Rate Reduction Bonds are
issued.
SDG&E anticipates based on current estimates that the issuance of Rate
Reduction Bonds will result in net present value benefits to its residential and
small commercial customers of approximately $100 million. The estimated $100
million net present value savings will be achieved (i) by replacing existing
debt and equity carrying costs for the financed Transition Costs with the lower-
cost, all-debt structure of the Rate Reduction Bonds and (ii) by recovering
these Transition Costs over the anticipated 10-year life of the Rate Reduction
Bonds, rather than the 4-year rate freeze period available under AB 1890 in the
absence of the issuance of Rate Reduction Bonds.
III.
STANDARD OF REVIEW
AB 1890 states that "[t]he electrical corporation shall in its application
specify that the residential and small commercial customers as defined in
subdivision (h) of Section 331 would benefit from reduced rates through the
issuance of rate reduction bonds." P.U.Code (S) 841(a). Section 841(a) further
states that the Commission "shall" approve the utilities' applications if
"issuance of rate reduction bonds . . . would reduce rates that residential and
small commercial customers would have paid if the financing order were not
adopted."
As summarized in Section II above, and as explained further in SDG&E's
attached prefiled testimony, SDG&E's
-7-
<PAGE>
residential and small commercial customers will benefit from issuance of Rate
Reduction Bonds in two ways. First, issuance of the bonds will enable the
implementation of a 10% rate reduction for such customers beginning January 1,
1998 through the end of the rate freeze period. Second, issuance of the Rate
Reduction Bonds will produce net present value savings to these SDG&E customers
of approximately $100 million. SDG&E and Edison estimate that the issuance of
Rate Reduction bonds will produce net present value savings to their residential
and small commercial customers of approximately $850 million. The three utility
combined total estimated net present value savings of approximately $950 million
constitutes a compelling justification for the issuance of the Rate Reduction
Bonds requested by the three utilities.
Thus, under Section 841(a), the Commission should authorize SDG&E to issue
the requested Rate Reduction Bonds.
IV.
SUMMARY OF TESTIMONY
SDG&E's testimony supporting this Application is contained in SDG&E
Exhibit-1, which is appended to this Application. SDG&E Exhibit-1 has six
chapters, with Chapter I constituting an executive summary and addressing
general policy issues.
In Chapter II of its prefiled testimony, SDG&E provides an overview of the
structure of the Rate Reduction Bond transaction.
-8-
<PAGE>
In Chapter III, SDG&E describes in greater detail the financing
considerations associated with the financing transaction, including a
description of the asset-backed securities market in which the bonds will be
issued. SDG&E also describes in greater detail the accounting, bankruptcy and
tax considerations associated with the transaction.
In Chapter IV, SDG&E describes the economic benefits to residential and
small commercial customers of issuing Rate Reduction Bonds. SDG&E also presents
in this Chapter (and Appendix B) its detailed bond sizing analysis.
In Chapter V, SDG&E describes the tariff and ratemaking issues associated
with the transaction.
Finally, in Chapter VI, SDG&E describes the qualifications of the SDG&E
witnesses sponsoring this testimony.
V.
REQUEST FOR PROCEDURAL SCHEDULE AND EX PARTE CONSIDERATION
In accordance with P.U.Code (S) 841(e), the Commission is to establish
procedures for the expeditious processing of applications for Financing Orders,
including a decision on such applications within 120 days of the filing. SDG&E
therefore requests that the Commission consider this Application ex parte,
without hearings, because prompt action is mandated by AB 1890 to enable the
Commission to issue its Financing Order and SDG&E to complete the issuance of
Rate Reduction Bonds in time to implement the 10% rate reduction on January 1,
1998.
-9-
<PAGE>
SDG&E's prepared testimony, SDG&E Exhibit-1, supports SDG&E's request for
ex parte action. If the Commission denies this request for ex parte action,
SDG&E is prepared to commence hearings on Rate Reduction Bonds immediately.
SDG&E's proposed schedule for this proceeding, based on Commission Resolution
173 (April 23, 1997), is shown below:
PROPOSED SCHEDULE FOR RATE REDUCTION BOND
APPLICATION AND 10 PERCENT RATE REDUCTION
<TABLE>
<CAPTION>
-----------------------------------------------------------
EVENT DATE
-----------------------------------------------------------
<S> <C>
Application Filed 5/6/97
-----------------------------------------------------------
Response or Protest To Applications 5/20/97
-----------------------------------------------------------
Prehearing Conference 5/27/97
-----------------------------------------------------------
Utilities' Replies To Responses/Protests 5/27/97
-----------------------------------------------------------
Hearings, if needed 5/28/97 - 6/3/97
-----------------------------------------------------------
Opening Briefs 6/13/97
-----------------------------------------------------------
Reply Briefs 6/25/97
-----------------------------------------------------------
Draft or ALJ Proposed Decision 8/4/97
-----------------------------------------------------------
Comments on PD 8/25/97
-----------------------------------------------------------
Reply Comments on PD 9/2/97
-----------------------------------------------------------
Commission Financing Order 9/3/97
-----------------------------------------------------------
Rate Reduction Bonds Issued/FTA Charges 10/97 -- 12/97
Implemented
-----------------------------------------------------------
Ten Percent Rate Reduction 1/1/98
-----------------------------------------------------------
</TABLE>
VI.
STATUTORY AUTHORITY, CORPORATE AND FINANCIAL INFORMATION
A. STATUTORY AUTHORITY - RULE 15.
This Application is made pursuant to Sections 451, 454, 701, 728, 729 and
840-847 of the Public Utilities Code of the State of California, the
Commission's Rules of Practice
-10-
<PAGE>
and Procedure and prior decisions, orders and resolutions of this Commission.
B. LEGAL NAME - RULE 15(A).
SDG&E is a public utility corporation organized and existing under, and by
virtue of, the laws of the State of California, and is engaged principally in
the business of providing electric service in a portion of Orange County and
electric and gas service in San Diego County. SDG&E's principal place of
business is located at 101 Ash Street, San Diego, California, and its mailing
address is Post Office Box 1831, San Diego, California 92112.
C. CORRESPONDENCE OR COMMUNICATIONS - RULE 15(B).
All correspondence or communications regarding this Application should be
addressed to:
Steven C. Nelson
Senior Attorney
San Diego Gas & Electric Company
101 Ash Street
San Diego, CA 92101
619/699-5136 (phone)
619/699-5027 (facsimile)
[email protected] (e-mail)
And to:
Joseph A. Vaccaro, Jr.
Principal Regulatory Project Manager
San Diego Gas & Electric Company
101 Ash Street
San Diego, CA 92101
619/696-1853 (phone)
619/696-4027 (facsimile)
[email protected] (e-mail)
-11-
<PAGE>
D. EX PARTE ACTION - RULE 15(D).
For the reasons discussed in Section V above, SDG&E requests that the
Commission consider this Application ex parte, without hearings.
E. ARTICLES OF INCORPORATION - RULE 16(A).
SDG&E is a corporation created under the laws of the State of California.
A certified copy of the Restated Articles of Incorporation of San Diego Gas &
Electric Company as amended through April 26, 1994, presently in effect and
certified by the California Secretary of State, was filed with the Commission on
April 25, 1995 in connection with SDG&E's Application 95-04-046 and is
incorporated herein by reference.
F. FINANCIAL STATEMENT, BALANCE SHEET AND INCOME STATEMENT - RULE 23(A)./4/
SDG&E's Financial Statement and Balance Sheet as of December 31, 1996, and
Income Statement for the period ended December 31, 1996, are attached to this
Application as Attachment A.
G. PRESENT AND PROPOSED RATES - RULE 23(B) AND 23(C).
SDG&E's rates and charges for electric service are contained in SDG&E's
electric tariffs and schedules on file with the Commission. A summary of
current rates is contained in Attachment B to this Application. SDG&E's
proposed residential and small commercial rates are described in SDG&E Exhibit
1, Appendices C and D.
- --------------------
/4/ Although this Application requests a rate decrease, SDG&E routinely provides
with its applications the information listed in Rules 23 and 24, which are
by their own terms only applicable to rate increases.
-12-
<PAGE>
H. DESCRIPTION OF PROPERTY AND EQUIPMENT - RULE 23(D).
A general description of SDG&E's property and equipment was previously
filed with the Commission in connection with SDG&E's Application No. 96-03-053
and is incorporated herein by reference. A statement of account of the original
cost and depreciation reserve attributable thereto is attached to this
Application as Attachment C.
I. SUMMARY OF EARNINGS - RULE 23(E) AND 23(F).
A summary of forecasted earnings for the 1997 attrition year on a combined
basis and by department is included herein as Attachment D.
J. INDEX TO ATTACHMENTS AND EXHIBITS TO THIS APPLICATION - RULE 23(G).
SDG&E's submission in support of this Application includes the following,
which are incorporated herein by reference.
Attachments to Application:
- --------------------------
Attachment A - Financial Statement, Balance Sheet and Income Statement.
Attachment B - Statement of Current Rates.
Attachment C - Statement of Original Cost and Depreciation Reserve.
Attachment D - Summary of Earnings.
Attachment E - Service List of City, County and State Officials.
Exhibits to Application:
- -----------------------
SDG&E-1 - Prepared Direct Testimony
-13-
<PAGE>
K. DEPRECIATION - RULE 23(H).
For financial statement purposes, depreciation of utility plant has been
computed on a straight-line remaining life basis at rates based on the estimated
useful lives of plant properties. For federal income tax accrual purposes, the
Company generally computes depreciation using the straight-line method for tax
property additions prior to 1954 and liberalized deprecation, which includes
Class Life and Asset Depreciation Range Systems, on tax property additions after
1954 and prior to 1981. For financial reporting and rate-setting purposes,
SDG&E uses "flow through accounting" for such properties. For tax property
additions in years 1981 through 1986, the Company computes its tax depreciation
using the Accelerated Cost Recovery System. For additions after 1986, the
Company computes its tax depreciation using the Modified Accelerated Cost
Recovery System and, since 1982, has normalized the effects of the depreciation
difference in accordance with the Economic Recovery Tax Act of 1981 and the Tax
Reform Act of 1986.
L. PROXY STATEMENT - RULE 23(I).
A copy of SDG&E's latest proxy statement sent to its shareholders dated
April 22, 1997 was provided to the Commission on May 1, 1997 in SDG&E's Annual
Earnings Assessment Proceeding application and is incorporated by reference
herein.
-14-
<PAGE>
M. SERVICE OF NOTICE OF APPLICATION - RULE 24.
Consistent with Commission Rule 24, SDG&E will mail a copy of its notice of
availability of this Application to the affected governmental entities listed in
Attachment E and the parties of record in the Commission's Electric Industry
Restructuring Proceeding OIR/OII 94-04-031/94-04-032. The notice will state
that a copy of this Application and related attachments and exhibits will be
furnished by SDG&E upon written request./5/ The State of California also is a
customer of SDG&E whose rates may be affected by the proposed revisions.
Within ten days following the filing of this Application, SDG&E will
publish at least once in a newspaper of general circulation in each county in
which the changes proposed here will become effective, a notice, in general
terms, of the changes proposed in this Application. This notice will state that
a copy of this Application and related attachments and exhibits may be examined
at the Commission's offices and such offices of SDG&E as are specified in its
notice. A similar notice will be included in the regular bills mailed to all
customers within 45 days of the filing date of this Application.
- -------------------
/5/ Rule 4 ("Service of Applications") of Commission Resolution 173 (April 23,
1997) states that: "Any person wishing to become an interested party in any
financing order application may serve a notice to that effect on the electrical
corporation at any time prior to the date on which such electrical corporation
files an application. The electrical corporation shall serve a copy of its
application on such person at the time the electrical corporation files such
application and, if requested in such notice, the electrical corporation shall
also serve a copy of any subsequent financing order application on such person;
provided, that the electrical corporation need not serve a copy of any
subsequent application on such person if the electrical corporation is notified
that such person does not wish to receive service of subsequent applications."
-15-
<PAGE>
N. FORM OF FINANCING ORDER - COMMISSION RESOLUTION 173
The recommended findings, approvals and authorizations set out in Section
VII of this Application represent the form of Financing Order SDG&E is
requesting.
IV.
CONCLUSION
AB 1890 is comprised of a complex set of interdependent provisions that
together authorize, permit and in some instances mandate certain actions by
SDG&E, the Commission and the Infrastructure Bank, among others, in order to
implement and maintain the Legislature's intended balance among electric
industry deregulation, rate reduction and transition cost recovery. In order
that the Fixed Transition Amounts, FTA charges and related Transition Property
be established, the Rate Reduction Bonds be issued, and the residential and
small commercial rate reduction be implemented as intended, AB 1890 contemplates
that certain findings, approvals and authorizations be included in the Financing
Order. Transactional constraints, such as legal considerations and rating
agency concerns, give rise to the need for additional findings, approvals and
authorizations in the Financing Order.
Therefore, in addition to the duties, obligations, rights and remedies
provided for by AB 1890 and other applicable laws, and in addition to seeking
general authority to enter into and perform the transactions described in this
Application, SDG&E and Electric Company respectfully requests that the
Commission in the Financing
-16-
<PAGE>
Order specifically make the following findings, approvals and authorizations:
A. GENERAL AUTHORIZATION
1. Find that SDG&E may recover a portion of its Transition Costs and the
costs of providing, recovering, financing and refinancing Transition Costs in an
aggregate principal amount of up to $800 million from proceeds of SPE Debt
Securities and Rate Reduction Bonds, which shall include all costs of issuance
approved by the Infrastructure Bank, and that the owner of the Transition
Property may recover principal, interest and related costs associated with the
SPE Debt Securities and the Rate Reduction Bonds through Fixed Transition
Amounts, as described in this application;
2. Find, as required by AB 1890, that the designation of the Fixed
Transition Amounts and the issuance of up to $800 million of SPE Debt Securities
and Rate Reduction Bonds in connection with such Fixed Transition Amounts will
reduce rates that residential and small commercial customers of SDG&E would have
paid if the Financing Order were not adopted;
3. Find that the amount of SPE Debt Securities and Rate Reduction Bonds
shall be as determined using the sizing methodology described in this
Application, based on market conditions at the time the Rate Reduction Bonds are
priced; that the principal on the SPE Debt Securities and the Rate Reduction
Bonds shall be repaid in substantially equal annual amounts; that the final
expected maturity of the SPE
-17-
<PAGE>
Debt Securities and the Rate Reduction Bonds shall be no later than ten years
from the date of issuance, with a final legal maturity to be determined by the
Infrastructure Bank; and that the Infrastructure Bank shall have the authority
to determine the overcollateralization amount required;
B. THE FIXED TRANSITION AMOUNTS AND THE FTA CHARGES
4. Determine that the methodology to calculate the FTA charges associated
with Rate Reduction Bond issuance shall be as described in this Application, and
that these FTA charges shall be filed with the Commission in Advice Letters (the
"Issuance Advice Letters"); and find that FTA charges may be included as a
separate line on customers' bills;
5. Find that each Issuance Advice Letter associated with the Financing
Order shall be effective five business days after filing, upon which it shall be
deemed a part of this Financing Order for purposes of AB 1890, and that the FTA
charges established thereby constitute Fixed Transition Amounts;
6. Require that, to the extent feasible, if residential and small
commercial customers fail to pay their utility bills in full, any shortfall in
revenues received shall be allocated between the FTA charges and all other
components of the customers' bills based on the ratio of the amount of the bills
relating to the FTA charges and the amount relating to all other components of
the bills;
-18-
<PAGE>
C. THE FTA CHARGES TRUE-UP MECHANISM
7. Establish that the procedures for the expeditious approval by the
Commission of periodic adjustments (the "True-up Mechanisms") to the FTA charges
(as may be necessary to ensure timely recovery of all Transition Costs that are
the subject of the Financing Order, and the costs of capital associated with the
provision, recovery, financing, or refinancing thereof, including the costs of
issuing, servicing and retiring the SPE Debt Securities and the Rate Reduction
Bonds contemplated by the Financing Order) shall be as described in this
Application, and find that such True-up Mechanisms shall continue until the SPE
Debt Securities and the Rate Reduction Bonds are paid in full;
8. Determine that the methodology to calculate routine FTA charge
adjustments shall be as described in this Application, and that such adjustments
shall be filed with the Commission in routine True-up Mechanism Advice Letters;
determine that such routine True-up Mechanism Advice Letters shall be filed with
the Commission annually at least 15 days before the end of each calendar year
and the resulting adjustments to the FTA charges shall be implemented at the
beginning of the next calendar year; and determine that additionally such
routine True-up Mechanism Advice Letters may be filed at least 15 days before
the end of any calendar quarter and the resulting adjustments to the FTA charges
shall be implemented at the beginning of the next calendar quarter;
-19-
<PAGE>
9. Find that a non-routine True-up Mechanism Advice Letter may be filed
at least 90 days before the end of any calendar quarter and the resulting
adjustments to the FTA charges shall be implemented at the beginning of the next
calendar quarter;
10. Find that a True-up Mechanism Advice Letter shall be filed at least 15
days before each anniversary of the issuance of the Financing Order, and that
the Commission shall determine, on the Finance Order issuance anniversary as
required by AB 1890, whether adjustments to the FTA charges are required, with
the resulting adjustments to the FTA charges, if necessary, to be implemented
within 90 days of the Finance Order issuance anniversary;
D. TRANSITION PROPERTY
11. Find that upon the effective date of each Issuance Advice Letter
associated with the Financing Order, all of the Transition Property identified
in such Advice Letter constitutes a current property right and shall thereafter
continuously exist as property for all purposes;
12. Find that the Transition Property identified in an Issuance Advice
Letter associated with the Financing Order shall include, without limitation (1)
the right, title and interest in and to the FTA charges set forth in such Advice
Letter, as adjusted from time to time, (2) the right to be paid the total
amounts set forth in such Advice Letter, (3) the right, title and interest in
and to all revenues, collections, claims, payments, money, or proceeds of or
-20-
<PAGE>
arising from such FTA charges, and (4) all rights to obtain adjustments to such
FTA charges under the True-up Mechanism;
13. Find that the holders of the Transition Property are entitled to
recover Fixed Transition Amounts in the aggregate amount equal to the principal
amount of the SPE Debt Securities and the Rate Reduction Bonds, all interest
thereon, the overcollateralization amount and all related fees, costs and
expenses in regard of the SPE Debt Securities and the Rate Reduction Bonds until
they have been paid in full;
E. STEPS IN THE RATE REDUCTION BOND TRANSACTION
1. TRANSFER OF TRANSITION PROPERTY TO THE SPE
14. Approve the sale by SDG&E of the Transition Property identified in an
Issuance Advice Letter to one or more SPEs, as identified in such Advice Letter;
15. Find that, upon the sale by SDG&E of the Transition Property to one or
more SPEs, (1) such SPE(s) shall have all of the rights originally held by SDG&E
with respect to such Transition Property, including, without limitation, the
right to exercise any and all rights and remedies to collect any amounts payable
by any customer in respect of such Transition Property, notwithstanding any
objection or direction to the contrary by SDG&E, and (2) any payment by any
customer to such SPE shall discharge such customer's obligations in respect of
such Transition Property to the extent of such payment, notwithstanding any
objection or direction to the contrary by SDG&E;
-21-
<PAGE>
16. Find that, upon the sale by SDG&E of the Transition Property to one or
more SPEs, SDG&E shall not be entitled to recover the FTA charges associated
with such Transition Property other than for the benefit of the holders of the
SPE Debt Securities and the Rate Reduction Bonds in accordance with SDG&E's
duties as servicer;
17. Find that the SPE(s) identified in an Issuance Advice Letter, if so
approved by the Infrastructure Bank, constitute Financing Entities;
2. TRANSFER OF SPE DEBT SECURITIES TO THE ISSUER
18. Approve the issuance by the SPE(s), identified in an Issuance Advice
Letter and approved by the Infrastructure Bank, of SPE Debt Securities, to one
or more Financing Entities, as identified in such Advice Letter, on terms to be
approved by the Infrastructure Bank; provided, however, that the aggregate
amount of SPE Debt Securities related to all such SDG&E Advice Letters
associated with the Financing Order shall not exceed $800 million;
19. Approve the pledging by the SPE(s), identified in an Issuance Advice
Letter, as security for the SPE Debt Securities, of such SPE's right, title and
interest in and to the Transition Property, and of such SPE's other assets;
3. ISSUANCE OF THE RATE REDUCTION BONDS
20. Approve the issuance by the Financing Entity identified in an Issuance
Advice Letter and approved by the Infrastructure Bank, of Rate Reduction Bonds,
on terms to be approved by the Infrastructure Bank; provided, however, that the
aggregate amount of Rate Reduction Bonds related to all
-22-
<PAGE>
such SDG&E Advice Letters associated with the Financing Order shall not exceed
$800 million;
21. Approve, to the extent stated in an Issuance Advice Letter, the
pledging by the Financing Entity, as security for the Rate Reduction Bonds, of
such Financing Entity's right, title and interest in and to the SPE Debt
Securities and all security therefor;
22. Find that any default under the documents relating to the SPE Debt
Securities or the Rate Reduction Bonds shall entitle the holders of the SPE Debt
Securities or the Rate Reduction Bonds or the trustees or representatives for
such holders to exercise any and all rights or remedies such holders or such
trustees or representatives therefor may have pursuant to any statutory lien on
the Transition Property;
F. RATE REDUCTION BOND SERVICING
23. Authorize SDG&E to contract with one or more SPEs and/or Financing
Entities to collect amounts in respect of the FTA charges for the benefit and
account of such SPEs and/or Financing Entities, and to account for and remit
these amounts to or for the account of such SPEs and/or Financing Entities;
24. Provide that, in the event of default by SDG&E in payment to or for
the benefit of the SPE of the FTA charges, the Commission, upon the application
by (1) the holders of the SPE Debt Securities or the Rate Reduction Bonds and
the trustees or representatives therefor as beneficiaries of any statutory lien
permitted by the Public Utilities Code, (2)
-23-
<PAGE>
the SPE or its assignees, (3) the Financing Entity, or (4) pledgees or
transferees, including transferees under Public Utilities Code Section 844, of
the Transition Property, shall order the sequestration and payment to or for the
benefit of the SPE or such other party of revenues arising with respect to the
Transition Property;
25. Find that the Commission shall not approve or require any third party
servicer(s) to replace SDG&E in any of its servicing functions in whole or in
part without first determining that approving or requiring such third party
servicer(s) to replace SDG&E will not cause the then-current rating of the Rate
Reduction Bonds to be withdrawn or downgraded;
26. Find that regardless of who is responsible for billing, residential
and small commercial customers shall continue to be responsible for FTA charges;
27. Find that if a third party meters and bills for the FTA charges, SDG&E
must have access to information on kilowatt-hour billing and usage by customers
to provide for proper reporting to the SPE and to perform its obligations as
servicer;
28. Find that in the case of a third party servicer default, billing
responsibilities must be promptly transferred to another party to minimize
losses;
29. Find that the failure of customers to pay FTA charges shall allow
shut-off by SDG&E on behalf of the SPE of the customers failing to pay FTA
charges, in accordance with Commission-approved shut-off policies;
-24-
<PAGE>
G. RATE REDUCTION AUTHORIZATION
30. Conditioned on the timely and sufficient issuance of Rate Reduction
Bonds, authorize, as required by AB 1890, SDG&E to provide the 10 percent rate
reduction to eligible customers effective January 1, 1998;
31. Find that for purposes of eligibility to receive the rate reduction
and responsibility to pay for FTA charges, SDG&E's residential and small
commercial customers shall be as described in this Application;
H. RATEMAKING MECHANISM AUTHORIZATIONS
32. Authorize SDG&E to establish by Advice Letter filing(s), the Rate
Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to SDG&E's Preliminary Statement and Transition Cost Balancing
Account as described in this Application;
33. Adopt the provisions described in this Application to ensure that the
FTA charges are non-bypassable, and authorize the rate collection methods
relating thereto;
I. ADDITIONAL AUTHORIZATIONS AND APPROVALS
34. Provide that this Financing Order shall become effective in accordance
with its terms only when SDG&E files with the Commission its written consent to
all terms and conditions of the Order; and
-25-
<PAGE>
35. Provide such additional authorizations and approvals as may be
necessary for SDG&E to carry out the transactions described in this Application.
Respectfully submitted
SAN DIEGO GAS & ELECTRIC COMPANY
By: /s/ William Reed
-----------------------------------
William L. Reed
Vice President - Regulatory Affairs
/s/ Steven Nelson
_____________________
Steven C. Nelson
Attorney for:
SAN DIEGO GAS & ELECTRIC
COMPANY
101 Ash Street
Post Office Box 1831
San Diego, California 92101
Phone: (619) 699-5136
Fax: (619) 699-5027
May 6, 1997
-26-
<PAGE>
VERIFICATION
I, William L. Reed, am an officer of the applicant corporation herein, to
wit: Vice President - Regulatory Affairs, and am authorized to make this
verification on its behalf. The content of this document is true, except as to
matters that are stated on information and belief. As to those matters, I
believe them to be true.
I declare under penalty of perjury that the foregoing is true and correct.
Executed on May 6, 1997, at San Diego, California.
/s/ William Reed
___________________________________
William L. Reed
Vice President - Regulatory Affairs
<PAGE>
CERTIFICATE OF SERVICE
I hereby certify that copies of the attached APPLICATION OF SAN DIEGO GAS &
ELECTRIC COMPANY (U 902-E) have been served on all parties of record in this
proceeding by mailing a copy thereof to each such party or to his attorney of
record, properly stamped and addressed.
By: /s/ Jackie de Boer Date: May 6, 1997
------------------
Jackie de Boer
<PAGE>
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
In the Matter Of The )
Application of San Diego Gas & )
Electric Company (U 902-E) )
For: (1) Authority to Reduce )
Rates Effective January 1, )
1998, (2) Authority to Sell Or)
Assign Transition Property To )
One or More Financing )
Entities; (3) Authority To ) Application No. ____________________
Service Rate Reduction Bonds )
On Behalf Of Financing )
Entities; (4) Authority to )
Establish Charges Sufficient )
To Recover Fixed Transition )
Amounts; and (5) Such Further )
Authority Necessary For SDG&E )
To Carry Out The Transactions )
Described In This Application )
- -------------------------------
NOTICE OF AVAILABILITY OF APPLICATION
OF SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E)
TO: All Parties of Record in R.94-04-031/I.94-04-032
All Parties of Record in A.96-08-001 et al.
Please be advised that on May 6, 1997, San Diego Gas & Electric Company
("SDG&E") filed with the California Public Utilities Commission a document
entitled "Application of SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E) For
Authority to Finance a 10% Rate Reduction Through the Issuance of the Rate
Reduction Bonds" ("Rate Reduction Bond Application") Pursuant to Rule 4
("Service of Application") of Commission Resolution 173 issued on April 23,
1997, a copy of SDG&E's Rate Reduction Bond Application will be mailed to you
upon your request. Your request should be directed to:
Steve C. Nelson
Senior Attorney
San Diego Gas & Electric Company
101 Ash Street
San Diego, CA 92101
619/699-5136 (phone)
619/699-5027 (facsimile)
[email protected] (e-mail)
<PAGE>
SDG&E's Rate Reduction Bond Application respectfully requests that the
Commission issue an order granting SDG&E authority to finance a 10% rate
reduction for residential and small commercial customers through the issuance of
Rate Reduction Bonds.
2
<PAGE>
ATTACHMENT A
FINANCIAL STATEMENT,
BALANCE SHEET,
AND INCOME STATEMENT
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
1. UTILITY OPERATING INCOME
<S> <C> <C>
400 OPERATING REVENUES $1,938,917,281
401 OPERATING EXPENSES $1,011,280,601
402 MAINTENANCE EXPENSES 57,651,558
403-7 DEPRECIATION AND AMORTIZATION EXPENSES 314,277,702
408.1 TAXES OTHER THAN INCOME TAXES 44,760,598
409.1 INCOME TAXES 151,398,421
410.1 PROVISION FOR DEFERRED INCOME TAXES 173,332,807
411.1 PROVISION FOR DEFERRED INCOME TAXES - CREDIT (116,361,228)
411.4 INVESTMENT TAX CREDIT ADJUSTMENTS (6,185,000)
--------------
1,630,155,459
TOTAL OPERATING REVENUE DEDUCTIONS --------------
NET OPERATING INCOME 308,761,822
2. OTHER INCOME AND DEDUCTIONS
415 REVENUE FROM MERCHANDISING, JOBBING AND CONTRACT WORK 559
417.1 EXPENSES OF NONUTILITY OPERATIONS (514,445)
418 NONOPERATING RENTAL INCOME 1,524,281
418.1 EQUITY IN EARNINGS OF SUBSIDIARIES -
419 INTEREST AND DIVIDEND INCOME 6,817,369
419.1 ALLOWANCE FOR OTHER FUNDS USED DURING CONSTRUCTION 5,898,095
421 MISCELLANEOUS NONOPERATING INCOME 2,934,439
--------------
TOTAL OTHER INCOME AND DEDUCTIONS 16,660,298
--------------
426 MISCELLANEOUS OTHER INCOME DEDUCTIONS 15,754,427
--------------
408.2 TAXES OTHER THAN INCOME TAXES 438,733
409.2 INCOME TAXES 6,607,000
410.2 PROVISION FOR DEFERRED INCOME TAXES 2,001,000
411.2 PROVISION FOR DEFERRED INCOME TAXES - CREDIT (12,835,000)
--------------
TOTAL TAXES ON OTHER INCOME AND DEDUCTIONS (3,788,267)
--------------
TOTAL OTHER INCOME AND DEDUCTIONS 4,694,138
--------------
INCOME BEFORE INTEREST CHARGES 313,455,960
NET INTEREST CHARGES* 90,691,188
--------------
NET INCOME $222,764,772
==============
</TABLE>
*NET OF ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION. ($3,287,950).
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
- ----------------------------------------------------------------------------------------
3. RETAINED EARNINGS
<S> <C>
RETAINED EARNINGS AT BEGINNING OF PERIOD, AS PREVIOUSLY REPORTED $662,566,242
NET INCOME (FROM PRECEDING PAGE) 222,764,772
DIVIDEND TO PARENT COMPANY (331,934,763)
DIVIDENDS DECLARED - PREFERRED STOCK (6,582,168)
ADJUSTMENT DUE TO LOSS ON REACQUISITION OF PREFERRED STOCK (369,243)
------------
RETAINED EARNINGS AT END OF PERIOD $546,444,840
============
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
BALANCE SHEET
ASSETS AND OTHER DEBITS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. UTILITY PLANT
<TABLE>
<S> <C>
101 UTILITY PLANT IN SERVICE $ 5,170,521,472
102 UTILITY PLANT PURCHASED OR SOLD -
105 PLANT HELD FOR FUTURE USE 255,160
106 COMPLETED CONSTRUCTION NOT CLASSIFIED 135,624,783
107 CONSTRUCTION WORK IN PROGRESS 68,026,109
108 ACCUMULATED PROVISION FOR DEPRECIATION OF UTILITY PLANT (2,456,688,194)
111 ACCUMULATED PROVISION FOR AMORTIZATION OF UTILITY PLANT (114,615,297)
118 OTHER UTILITY PLANT 275,861,497
119 ACCUMULATED PROVISION FOR DEPRECIATION AND
AMORTIZATION OF OTHER UTILITY PLANT (38,865,743)
120 NUCLEAR FUEL UNDER CAPITAL LESES - NET 34,251,112
------------------
TOTAL NET UTILITY PLANT 3,074,370,899
------------------
2. OTHER PROPERTY AND INVESTMENTS
121 NONUTILITY PROPERTY 5,895,055
122 ACCUMULATED PROVISION FOR DEPRECIATION AND
AMORTIZATION OF NONUTILITY PROPERTY (907,468)
123 INVESTMENTS IN SUBSIDIARY COMPANIES -
124 OTHER INVESTMENTS 4,792,760
125 SINKING FUNDS -
128 OTHER SPECIAL FUNDS 327,739,469
------------------
TOTAL OTHER PROPERTY AND INVESTMENTS 337,519,816
------------------
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
BALANCE SHEET
ASSETS AND OTHER DEBITS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
3. CURRENT AND ACCRUED ASSETS
<TABLE>
<S> <C>
131 CASH $12,156,872
132 INTEREST SPECIAL DEPOSITS -
134 OTHER SPECIAL DEPOSITS 15,420,519
135 WORKING FUNDS 139,408
136 TEMPORARY CASH INVESTMENTS 69,113,138
141 NOTES RECEIVABLE -
142 CUSTOMER ACCOUNTS RECEIVABLE 117,158,884
143 OTHER ACCOUNTS RECEIVABLE 19,078,237
144 ACCUMULATED PROVISION FOR UNCOLLECTIBLE ACCOUNTS (2,187,962)
145 NOTES RECEIVABLE FROM ASSOCIATED COMPANIES -
146 ACCOUNTS RECEIVABLE FROM ASSOCIATED COMPANIES 1,892,786
151 FUEL STOCK 8,464,184
152 FUEL STOCK EXPENSE UNDISTRIBUTED -
154 PLANT MATERIALS AND OPERATING SUPPLIES 40,863,125
156 OTHER MATERIALS AND SUPPLIES 145,010
163 STORES EXPENSE UNDISTRIBUTED (981,954)
164 GAS STORED 14,732,563
165 PREPAYMENTS 6,306,533
171 INTEREST AND DIVIDENDS RECEIVABLE 308,639
173 ACCRUED UTILITY REVENUES 53,627,650
174 MISCELLANEOUS CURRENT AND ACCRUED ASSETS 69,508,194
--------------
TOTAL CURRENT AND ACCRUED ASSETS 425,745,826
--------------
4. DEFERRED DEBITS
181 UNAMORTIZED DEBT EXPENSE 14,594,714
182 UNRECOVERED PLANT AND OTHER REGULATORY ASSETS 554,931,346
183 PRELIMINARY SURVEY & INVESTIGATION CHARGES 3,108,557
184 CLEARING ACCOUNTS 6,883,949
185 TEMPORARY FACILITIES (77,888)
186 MISCELLANEOUS DEFERRED DEBITS 32,121,697
189 UNAMORTIZED LOSS ON REACQUIRED DEBT 63,142,076
190 ACCUMULATED DEFERRED INCOME TAXES 356,378,710
--------------
TOTAL DEFERRED DEBITS 1,031,083,161
--------------
TOTAL ASSETS AND OTHER DEBITS $4,868,719,702
==============
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
BALANCE SHEET
LIABILITIES AND OTHER CREDITS
DECEMBER 31, 1996
<TABLE>
- ---------------------------------------------------------------------------------------
5. PROPRIETARY CAPITAL
<S> <C>
201 COMMON STOCK ISSUED $ 291,458,395
204 PREFERRED STOCK ISSUED 103,475,400
207 PREMIUM ON CAPITAL STOCK 592,222,753
210 GAIN ON RETIRED CAPITAL STOCK -
214 CAPITAL STOCK EXPENSE (25,990,045)
216 UNAPPROPRIATED RETAINED EARNINGS 546,444,840
--------------
TOTAL PROPRIETARY CAPITAL 1,507,611,343
--------------
6. LONG-TERM DEBT
221 BONDS 986,020,000
224 OTHER LONG-TERM DEBT 229,247,780
225 UNAMORTIZED PREMIUM ON LONG-TERM DEBT 561,453
226 UNAMORTIZED DISCOUNT ON LONG-TERM DEBT (4,385,093)
--------------
TOTAL LONG-TERM DEBT 1,211,444,140
--------------
7. OTHER NONCURRENT LIABILITIES
227 OBLIGATIONS UNDER CAPITAL LEASES - NONCURRENT 84,722,694
228.2 ACCUMULATED PROVISION FOR INJURIES AND DAMAGES 17,733,958
228.3 ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS 4,439,589
228.4 ACCUMULATED MISCELLANEOUS OPERATING PROVISIONS 95,680,838
--------------
TOTAL OTHER NONCURRENT LIABILITIES 202,577,079
--------------
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
BALANCE SHEET
LIABILITIES AND OTHER CREDITS
DECEMBER 31, 1996
<TABLE>
- ------------------------------------------------------------------------------------------------------------
8. CURRENT AND ACCRUED LIABILITIES
<S> <C>
231 NOTES PAYABLE $ -
232 ACCOUNTS PAYABLE 174,884,478
233 NOTES PAYABLE TO ASSOCIATED COMPANIES -
234 ACCOUNTS PAYABLE TO ASSOCIATED COMPANIES 9,107,141
235 CUSTOMER DEPOSITS 21,976,115
236 TAXES ACCRUED 8,371,168
237 INTEREST ACCRUED 12,824,475
238 DIVIDENDS DECLARED 47,130,749
241 TAX COLLECTIONS PAYABLE 1,665,164
242 MISCELLANEOUS CURRENT AND ACCRUED LIABILITIES 286,886,200
243 OBLIGATIONS UNDER CAPITAL LEASES - CURRENT 25,610,449
--------------
TOTAL CURRENT AND ACCRUED LIABILITIES 588,455,939
--------------
9. DEFERRED CREDITS
252 CUSTOMER ADVANCES FOR CONSTRUCTION 23,888,864
253 OTHER DEFERRED CREDITS 254,549,398
254 OTHER REGULATORY LIABILITIES 158,382,000
255 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 98,040,509
257 UNAMORTIZED GAIN ON REACQUIRED DEBT -
281 ACCUMULATED DEFERRED INCOME TAXES - ACCELERATED 3,509,000
282 ACCUMULATED DEFERRED INCOME TAXES - PROPERTY 471,231,195
283 ACCUMULATED DEFERRED INCOME TAXES - OTHER 349,030,235
--------------
TOTAL DEFERRED CREDITS 1,358,631,201
--------------
TOTAL LIABILITIES AND OTHER CREDITS $4,868,719,702
==============
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
FINANCIAL STATEMENT
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
(a) Amounts and Kinds of Stock Authorized:
-------------------------------------
Preferred Stock 1,375,000 shares Par Value $27,500,000
Preferred Stock 10,000,000 shares Without Par Value
Common Stock 255,000,000 shares Without Par Value
Amounts and Kinds of Stock Outstanding:
--------------------------------------
PREFERRED STOCK
5.0% 375,000 shares $7,500,000
4.50% 300,000 shares 6,000,000
4.40% 325,000 shares 6,500,000
4.60% 373,770 shares 7,475,400
$1.7625 1,000,000 shares 25,000,000
$1.70 1,400,000 shares 35,000,000
$1.82 640,000 shares 16,000,000
COMMON STOCK 116,583,358 shares 291,458,395
</TABLE>
(b) Terms of Preferred Stock:
------------------------
Full information as to this item is given in connection with Application
No. 53104, to which reference is hereby made.
(c) Brief Description of Mortgage:
-----------------------------
Full information as to this item is given in Application No. 23638, to
which reference is hereby made.
(d) Number and Amount of Bonds Authorized and Issued:
------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Nominal -------------------------------
Date of Authorized Interest Paid
First Mortgage Bonds Issue and Issued Outstanding in 1995
- -------------------- ------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
5.5% Series I, due 1997 03-01-67 $ 25,000,000 $ 25,000,000 $ 1,375,000
4.00% Series CC, due 2008 05-01-84 53,000,000 - 2,252,500
4.00% Series DD, due 2008 12-01-84 27,000,000 - 1,147,500
9.25% Series EE, due 2020 09-01-85 100,000,000 - 6,877,375
3.95% Series FF, due 2007 12-01-85 35,000,000 - 1,487,500
7.625% Series GG, due 2021 07-01-86 44,250,000 - 3,374,062
7.375% Series HH, due 2021 12-01-86 81,350,000 - 5,999,563
8.75% Series II, due 2023 09-01-87 25,000,000 25,000,000 2,187,500
9.625% Series JJ, due 2020 04-15-90 100,000,000 100,000,000 9,625,000
6.8% Series KK, due 2015 12-01-91 14,400,000 14,400,000 979,200
8.5% Series LL, due 2022 04-01-92 60,000,000 60,000,000 5,100,000
7.625% Series MM, due 2002 06-15-92 80,000,000 80,000,000 6,100,000
Var% Series NN, due 2018 & 2019 09-01-92 118,615,000 118,615,000 7,547,513
Var% Series OO, due 2027 12-01-92 250,000,000 250,000,000 12,053,151
5.9% Series PP, due 2018 04-29-93 70,795,000 70,795,000 4,176,905
Var% Series QQ, due 2018 04-29-93 14,915,000 14,915,000 1,010,862
5.85% Series RR, due 2021 06-29-93 60,000,000 60,000,000 3,510,000
5.9% Series SS, due 2018 07-29-93 92,945,000 92,945,000 5,483,755
Var% Series TT, due 2020 06-06-95 57,650,000 57,650,000 963,260
Var% Series UU, due 2020 06-06-95 16,700,000 16,700,000 563,600
<CAPTION>
Pollution Control Revenue Bonds:
- -------------------------------
<S> <C> <C> <C> <C>
6.375%, due 2007 04-01-77 9,575,000 - 581,719
7.2%, due 2009 04-01-79 5,700,000 - 406,440
<CAPTION>
Unsecured Bonds:
- ---------------
<S> <C> <C> <C> <C>
5.9% CPCFA96A, due 2014 06-01-96 129,820,000 129,820,000 -
Var% CV96A, due 2021 08-02-96 38,900,000 38,900,000 -
Var% CV96B, due 2021 11-21-96 60,000,000 60,000,000 -
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
FINANCIAL STATEMENT
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Date of Date of Interest Interest Paid
Other Indebtedness: Issue Maturity Rate Outstanding in 1995
- ------------------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Commercial Paper & ST Bank Loans Various Various Various $ - $ 537,600
Long-term Bank Loans
Mellon Bank 01-03-95 06-15-00 Various - 1,179,680
First Interstate Bank 01-03-95 01-03-00 Various - 1,845,596
Sundesert Properties:
FLBA of Riverside 1976 [1] 12-01-03 Variable 18,330 2,202
FLBA of Blythe 1976 [1] 12-01-03 Variable 509,449 59,329
Capitalized Leases - - - 110,333,143 -
</TABLE>
Amounts and Rates of Dividends Declared:
- ----------------------------------------
The amounts and rates of dividends during the past five fiscal years are as
follows:
<TABLE>
<CAPTION>
Dividends Declared
Shares ----------------------------------------------------------------------------------
Preferred Outstanding
Stock @ 12-31-96 1991 1992 1993 1994 1995
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.0% 375,000 $ 375,000 $ 375,000 $ 375,000 $ 375,000 $ 375,000
4.50% 300,000 270,000 270,000 270,000 270,000 270,000
4.40% 325,000 286,000 286,000 286,000 286,000 286,000
4.60% [2] 373,770 344,678 344,678 344,678 344,678 344,273
$ 7.80 [3] - 1,560,000 1,560,000 1,005,340 - -
$ 7.20 [4] - 1,080,000 1,080,000 1,080,000 1,080,000 1,080,000
$ 2.475 [5] - 2,475,000 1,794,379 - - -
$ 8.25 [6] - 474,375 289,781 - - -
$ 9.125 [7] - 486,667 244,432 - - -
$ 7.05 [8] - 3,172,500 3,115,043 2,335,493 - -
$ 1.7625 [9] 1,000,000 - 176,250 1,762,500 1,762,500 1,762,500
$ 1.70 [10] 1,400,000 - - 892,500 2,380,000 2,380,000
$ 1.82 [11] 640,000 - - 171,456 1,164,800 1,164,800
-----------------------------------------------------------------------------------------------
4,413,770 $10,524,220 $9,532,563 $8,522,967 $7,662,978 $7,662,573
===============================================================================================
<CAPTION>
Common Stock
- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Amount $155,435,381 $164,042,932 $171,845,666 $177,066,579 $181,808,114
Rate per share $1.3875 $1.44 $1.48 $1.52 $1.56
</TABLE>
A balance sheet and a statement of income and retained earnings of Applicant
for the twelve months ended December 31, 1996, are attached hereto.
<TABLE>
<S> <C>
[1] Year assumed from subsidiary.
[2] 880 shares were retired in 1995.
[3] 200,000 shares were retired in 1993.
[4] 150,000 shares were retired in 1996.
[5] 1,000,000 shares were retired in 1992.
[6] 10,000 shares were retired in 1991 and 55,000 shares in 1992.
[7] 20,000 shares were retired in 1991 and 45,000 shares in 1992.
[8] 16,300 shares were retired in 1992 and 433,700 shares in 1993.
[9] 1,000,000 shares were issued in December 1992.
[10] 1,400,000 shares were issued in August 1993.
[11] 640,000 shares were issued in November 1993.
</TABLE>
<PAGE>
Attachment B
Summary of Current Rates
<PAGE>
ELECTRIC DEPARTMENT
STATEMENT OF PRESENTLY EFFECTIVE RATES
--------------------------------------
The following sheets contain all the effective rates and rules affecting rates,
service and information relating thereto, in effect on the date indicated
herein.
<TABLE>
<CAPTION>
Cal. P.U.C. Sheet No.
---------------------
<S> <C>
TITLE PAGE..................................................................................... 4812-E
TABLE OF CONTENTS...................................................... 9709, 9707, 9631, 9708, 8404-E
9126, 8942, 9132, 9636, 8827-E
PRELIMINARY STATEMENT:
I. General Information...................................................... 8274, 8275, 8276-E
II. Balancing Accounts................................................. 8951, 8278, 8279, 8280-E
8281, 8282, 8283, 8284, 8285, 8286-E
8287, 8288, 8456, 8975, 9540, 8977-E
8978, 8813, 8979, 8980, 8981, 8982-E
8983, 8815, 8534, 8535, 8536, 8537-E
8984, 8816, 8540, 8541, 8542, 8543-E
8895, 8896, 8897, 9542, 9543-E
III. Memorandum Accounts.................................... 9535, 8324, 8325, 8326, 8327, 8328-E
8442, 8443, 8444, 8445, 8446, 8447-E
8448, 8727, 9175, 9176, 9179, 9536-E
9537, 9538-E
IV. Performance Based Ratemaking
(PBR) Base Rate Mechanism.............................................. 8340, 8341, 8342-E
8343, 8344, 8345, 8346, 8347, 8348-E
8349, 8350, 8351, 8352, 8353, 8354-E
8355, 8356, 8357, 8358, 8359, 8360-E
8361, 8362, 8363, 8364, 8365, 8366-E
V. SONGS 1 Ratemaking Procedure............................................. 8367, 8368, 8369-E
8370, 8371, 8372, 8373, 8374, 8375-E
8376, 8377, 8378-E
VI. SONGS 2 & 3 Ratemaking Procedure......................................... 8954, 8955, 8956-E
8957, 8958, 8959, 8960, 8961, 8962-E
8963, 8964, 8965, 8966-E
VII. Miscellaneous............................................................ 8944, 8380, 8381-E
8382, 8383, 8384, 8385, 8843, 8387-E
8388, 8389, 8390, 8391, 8392, 8393-E
8394, 8395, 8945-E
INDEX OF RATE AREA MAPS.........................................................................9134-E
Map 1 - Territory Served......................................................................5120-E
Map 1-A - Territory Served....................................................................4916-E
Map 1-B - Territory Served....................................................................7295-E
Map 1-C - Territory Served....................................................................9135-E
Map 1-D - Territory Served....................................................................9136-E
Map 2 - Territory Served......................................................................8048-E
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule
Number Service Cal. P.U.C. Sheet No.
- -------- ------- ---------------------
RESIDENTIAL RATES
-----------------
<C> <S> <C>
DR Domestic Service............................ 9559, 7066, 8848, 8849-E
DR-LI Domestic Service - CARE Program............. 9560, 9648, 8852, 8853-E
8854-E
E-LI Service to Qualified Living Facilities...... 8870, 9649, 8872, 8873-E
8874-E
DM Multi-Family Service........................ 9561, 8856, 8857, 8858-E
8859-E
DS Submetered Multi-Family Service................... 9562, 9398, 8466-E
9650, 9651, 8862-E
DT Submetered Multi-Family Service -................. 9563, 9399, 8470-E
Mobilehome Park.................................. 9652, 9653, 8865-E
DT-RV Submetered Service - Recreational Vehicle......... 9564, 9400, 8086-E
Parks and Residential Marinas.............. 8473, 9654, 9655, 8866-E
D-SMF Cogeneration or Small Power Production............ 9693, 9566, 8553-E
Assist........................................... 8835, 8836, 8556-E
9656, 8558-E
EV-TOU Domestic Time-of-Use for Electric
Vehicle Charging....................................... 9567, 8899-E
EV-TOU-2 Domestic Time-of-Use for Households with
Electric Vehicles................................ 9568, 8901, 8902-E
DE Domestic Service to Utility Employee.......................... 4524-E
COMMERCIAL/INDUSTRIAL RATES
---------------------------
A General Service......................................... 9569, 9405-E
A-TC Traffic Control Service................................. 9694, 9144-E
AD General Service - Demand Metered.................. 9571, 9572, 9573-E
AL-TOU General Service - Large-Time Metered.............. 9574, 9575, 9576-E
9577, 9696-E
AL-TOU-C General Service - Large-Time Metered -............ 9578, 9005, 9579-E
Group Load Curtailment 9580, 9008, 9009-E
AY-TOU General Service - Large-Time Metered-Optional..... 9697, 9415, 9582-E
AO-TOU General Service - Large-Time Metered-Optional..... 9698, 9416, 9584-E
9016-E
A6-TOU General Service - Very Large-Time Metered......... 9699, 9418, 9589-E
9026-E
A-V1 General Service - Variable Time-of-Use 1.......... 9700, 9420, 9034-E
9035-E
A-V2 General Service - Variable Time-of-Use 2.......... 9701, 9421, 9038-E
9039-E
A-V3 General Service - Variable Time-of-Use 3.......... 9596, 9423, 9424-E
9425-E
A-V6-C General Service - Variable Time-of-Use 6-C........ 9597, 9426, 9048-E
9049, 8615-E
NJ New Job Incentive Rate............................ 9598, 9051, 9599-E
9600, 9128-E
I-2 General Service - Interruptible................... 9601, 9602, 8623-E
8624, 8625-E
I-3 General Service - Interruptible................... 9603, 9604, 9605-E
9430, 8630, 9548-E
8832-E
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule
Number Service Cal. P.U.C. Sheet No.
- -------- ------- --------------------
LIGHTING RATES
--------------
<S> <C>
LS-1 Lighting - Street and Highway -....................................... 9506, 9507, 8635-E
Utility-Owned Installations................................................ 8636, 8637-E
LS-2 Lighting - Street and Highway -....................................... 9608, 9609, 8640-E
Customer-Owned Installations............................................... 8641-E
LS-3 Lighting - Street and Highway -
Customer-Owned Installations............................................... 9610, 4533-E
OL-1 Outdoor Area Lighting Service................................................9611, 9435-E
DWL Residential Walkway Lighting................................................ 9612, 4537-E
MISCELLANEOUS
-------------
PA Power - Agricultural....................................................... 9613, 8648-E
PG-QF Parallel Generation - Cogeneration
or Power Production................................................. 6314, 6315, 6080-E
S Standby Service...................................................... 9614, 8650, 8651-E
S-I Standby Service - Interruptible...................................... 6804, 6805, 6317-E
SE Service Establishment Charge............................................... 5598, 8729-E
RCM Rate Cap Mechanism......................................................... 9615, 9440-E
E-PUC Surcharge to Fund Public Utilities Commission
Reimbursement Fee............................................................... 5214-E
EXPERIMENTAL RATES
------------------
DR-TOU Experimental Domestic................................................ 9702, 9442, 8837-E
Time-of-Use Service............................................................. 8655-E
DR-TOU-2 Experimental Domestic
Time-of-Use Service................................................. 9703, 9444, 9445-E
A-TOU Experimental General Service
Small - Time Metered................................................ 9704, 9448, 8662-E
PG Experimental Parallel Generation..................................... 6356, 8677, 8678-E
PA-TOU Experimental Power - Agricultural -
Optional Time-of-Use...................................................... 9625, 8680-E
PA-T-1 Experimental Power - Agricultural - ................................. 9626, 9627, 8683-E
Optional Time-of-Use.................................................8684, 8685, 8686-E
RTP-1 Experimental General Service - ...................................... 9705, 9454, 9089-E
Day Ahead Price Signals................................................... 9090, 9091-E
RTP-2 Experimental General Service - ...................................... 9706, 9455, 9094-E
Day Ahead Price Signals................................................... 9095, 9096-E
LIST OF CONTRACTS AND DEVIATIONS.................................. 5487, 5488, 5489, 6205, 6206-E
5492, 6207, 6439, 5495, 6208-E
6209, 8845, 6109, 5902, 5750-E
8808, 8809, 6011, 8001, 8891-E
</TABLE>
<PAGE>
Attachment C
Statement of Original Cost
and
Depreciation Reserve
<PAGE>
SAN DIEGO GAS & ELECTRIC COMPANY
COST OF PROPERTY AND
DEPRECIATION RESERVE APPLICABLE THERETO
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account cost Amortization
- ------ ------- -------- -------------
ELECTRIC DEPARTMENT
<C> <S> <C> <C>
302 Franchises and Consents $ 222,841 $ 202,900
303 Misc. Intangible Plant 1,172,226 223,372
-------------- --------------
TOTAL INTANGIBLE PLANT 1,395,067 426,272
-------------- --------------
310.1 Land 5,755,246 0
310.2 Land Rights 37,580 24,034
311 Structures and Improvements 130,884,754 96,997,006
312 Boiler Plant Equipment 138,916,213 107,563,627
314 Turbogenerator Units 97,426,460 65,307,348
315 Accessory Electric Equipment 20,767,247 14,407,222
316 Miscellaneous Power Plant Equipment 7,364,600 3,396,793
-------------- --------------
TOTAL STEAM PRODUCTION 401,152,100 287,696,030
-------------- --------------
320.1 Land 0 0
320.2 Land Rights 283,677 76,862
321 Structures and Improvements 261,681,276 120,753,605
322 Boiler Plant Equipment 390,635,531 156,314,972
323 Turbogenerator Units 131,208,833 63,045,078
324 Accessory Electric Equipment 165,943,506 72,716,812
325 Miscellaneous Power Plant Equipment 141,710,305 54,265,459
-------------- --------------
TOTAL NUCLEAR PRODUCTION 1,091,463,128 467,172,788
-------------- --------------
340.1 Land 85,901 0
340.2 Land Rights 2,428 2,428
341 Structures and Improvements 1,906,638 1,947,542
342 Fuel Holders, Producers &
Accessories 4,969,283 3,846,377
343 Prime Movers 0 0
344 Generators 38,426,592 38,329,631
345 Accessory Electric Equipment 968,783 829,439
-------------- --------------
TOTAL OTHER PRODUCTION 46,362,625 44,955,417
-------------- --------------
TOTAL ELECTRIC PRODUCTION 1,538,977,853 799,824,235
-------------- --------------
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account Cost Amortization
- ----- ------- ---------- ------------
<S> <C> <C> <C>
350.1 Land $ 17,122,086 $ 0
350.2 Land Rights 42,596,551 4,720,841
352 Structures and Improvements 48,766,994 12,617,278
353 Station Equipment 243,057,860 71,122,612
354 Towers and Fixtures 90,411,177 43,482,414
355 Poles and Fixtures 60,323,717 31,685,361
356 Overhead Conductors and Devices 120,620,854 77,526,431
357 Underground Conduit 15,700,183 2,704,876
358 Underground Conductors and Devices 17,297,869 6,284,176
359 Roads and Trails 10,679,564 2,384,772
-------------- ------------
TOTAL TRANSMISSION 666,576,855 252,528,761
-------------- ------------
360.1 Land 7,764,986 0
360.2 Land Rights 49,166,485 12,892,094
361 Structures and Improvements 1,793,186 1,904,524
362 Station Equipment 138,582,512 37,857,592
364 Poles, Towers and Fixtures 217,091,878 107,858,099
365 Overhead Conductors and Devices 176,486,396 44,827,641
366 Underground Conduit 442,102,974 138,204,058
367 Underground Conductors and Devices 478,042,934 205,173,164
368.1 Line Transformers 219,942,716 61,936,686
368.2 Protective Devices and Capacitors 24,545,069 4,565,312
369.1 Services Overhead 62,577,031 74,306,214
369.2 Services Underground 150,048,598 62,176,297
370.1 Meters 60,618,225 19,057,946
370.2 Meter Installations 27,231,279 7,897,627
371 Installations on Customers' Premises 4,974,444 4,372,213
373.1 St. Lighting & Signal Sys.-Transformers 0 0
373.2 Street Lighting & Signal Systems 18,949,734 16,540,960
-------------- ------------
TOTAL DISTRIBUTION PLANT 2,079,918,447 799,570,427
-------------- ------------
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account Cost Amortization
- ------- ------- -------------- --------------
<C> <S> <C> <C>
389.1 Land $ 416,599 $ 0
389.2 Land Rights 0 0
390 Structures and Improvements 14,924,139 3,163,612
392.1 Transportation Equipment - Autos 89,394 139,162
392.2 Transportation Equipment - Trailers 212,633 110,637
393 Stores Equipment 97,127 38,772
394.1 Portable Tools 5,837,717 1,644,880
394.2 Shop Equipment 486,093 260,921
395 Laboratory Equipment 1,141,839 609,749
396 Power Operated Equipment 119,348 175,860
397 Communication Equipment 61,736,832 17,009,492
398 Miscellaneous Equipment 264,267 33,674
-------------- --------------
TOTAL GENERAL PLANT 85,325,988 23,186,759
-------------- --------------
101 TOTAL ELECTRIC PLANT 4,372,194,210 1,875,536,454
-------------- --------------
GAS PLANT
302 Franchises and Consents 86,104 86,104
303 Miscellaneous Intangible Plant 696,434 530,792
-------------- --------------
TOTAL INTANGIBLE PLANT 782,538 616,896
-------------- --------------
360.1 Land 122,606 0
361 Structures and Improvements 412,998 339,008
362.1 Gas Holders 989,283 996,411
362.2 Liquefied Natural Gas Holders 0 0
363 Purification Equipment 0 0
363.1 Liquefaction Equipment 0 0
363.2 Vaporizing Equipment 0 0
363.3 Compressor Equipment 558,651 518,638
363.4 Measuring and Regulating Equipment 0 0
363.5 Other Equipment 0 0
363.6 LNG Distribution Storage Equipment 407,546 164,634
-------------- --------------
TOTAL STORAGE PLANT 2,491,084 2,018,691
-------------- --------------
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account Cost Amortization
- -------- --------- -------- ------------
<S> <C> <C> <C>
365.1 Land $ 1,234,570 $ 0
365.2 Land Rights 2,942,975 536,545
366 Structure and Improvements 9,871,178 3,159,916
367 Mains 91,539,938 16,849,921
368 Compressor Station Equipment 45,838,355 14,258,127
369 Measuring and Regulating 8,421,383 3,417,721
Equipment
371 Other Equipment 261,536 156,893
----------- ------------
TOTAL TRANSMISSION PLANT 160,109,935 38,379,123
----------- ------------
374.1 Land 102,187 0
374.2 Land Rights 7,244,620 2,475,792
375 Structures and Improvements 193,651 220,586
376 Mains 335,956,492 150,866,215
378 Measuring & Regulating 4,546,558 2,866,215
380 Services 187,255,080 133,877,829
381 Meters and Regulators 50,139,119 20,504,203
382 Meter and Regulator 41,608,281 13,938,687
Installations
385 Ind. Measuring & Regulating 675,429 687,123
Station Equipment
386 Other Property On Customers' 0 0
Premises
387 Other Equipment 10,077,440 3,316,031
----------- ------------
TOTAL DISTRIBUTION PLANT 637,798,857 328,752,944
----------- ------------
392.1 Transportation Equipment - 677 26,117
Autos
392.2 Transportation Equipment - 3,453 (26,549)
Trailers
394.1 Portable Tools 3,924,051 607,387
394.2 Shop Equipment 183,146 111,726
395 Laboratory Equipment 601,538 270,225
396 Power Operated Equipment 230,777 (25,918)
397 Communication Equipment 2,431,576 429,687
398 Miscellaneous Equipment 642,814 199,085
----------- ------------
TOTAL GENERAL PLANT 8,018,032 1,591,760
----------- ------------
101 TOTAL GAS PLANT 809,200,446 371,359,414
----------- ------------
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account Cost Amortization
- ----- ------- -------- ------------
COMMON PLANT
<C> <S> <C> <C>
303 Miscellaneous Intangible Plant $ 27,992,481 $ 17,714,449
350.1 Land 0 0
360.1 Land 0 0
389.1 Land 7,519,709 0
389.2 Land Rights 1,704,163 20,104
390 Structures and Improvements 70,536,546 18,151,244
391 Office Furniture and 34,321,985 4,343,591
Equipment
392.1 Transportation Equipment - 143,341 (230,365)
Autos
392.2 Transportation Equipment - 99,885 (130,914)
Trailers
393 Stores Equipment 519,213 (41,331)
394.1 Portable Tools 913,294 773,048
394.2 Shop Equipment 1,237,729 371,523
394.3 Garage Equipment 3,468,550 373,862
395 Laboratory Equipment 1,705,972 588,864
396 Power Operated Equipment 0 (193,587)
397 Communication Equipment 54,932,071 14,992,519
398 Miscellaneous Equipment 2,821,979 (126,663)
--------------- ---------------
118.1 TOTAL COMMON PLANT 207,916,918 56,606,344
--------------- ---------------
TOTAL ELECTRIC PLANT 4,372,194,210 1,875,536,454
TOTAL GAS PLANT 809,200,446 371,359,414
TOTAL COMMON PLANT 297,916,918 56,606,344
--------------- ---------------
101 &
118.1 TOTAL 5,389,311,574 2,303,502,212
--------------- ---------------
102 Plant Purchased or Sold
Electric 0 0
Gas 0 0
--------------- ---------------
TOTAL PLANT PURCHASED OR SOLD 0 0
--------------- ---------------
105 Plant Held for Future Use
Electric 255,160 0
Gas 0 0
--------------- ---------------
TOTAL PLANT HELD FOR
FUTURE USE 255,160 0
--------------- ---------------
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
Reserve for
Depreciation
Original and
No. Account Cost Amortization
- -------- ------- --------- ------------
<C> <S> <C> <C>
107 Construction Work in $ $
Progress
Electric 65,822,085 (2,231,475)
Gas 10,518,796 (396,804)
118.3 Common 38,208,382 (6,048)
-------------- -------------
TOTAL CONSTRUCTION WORK
IN PROGRESS 114,549,263 (2,634,327)
-------------- -------------
108.5 Accumulated Nuclear
Decommissioning
Electric 0 234,192,352
-------------- --------------
TOTAL ACCUMULATED NUCLEAR
DECOMMISSIONING 0 234,192,352
-------------- --------------
111.3 Capitalized Leases
Electric 124,751,597 66,150,731
Gas 0 0
Common 21,421,426 8,958,265
-------------- --------------
TOTAL CAPITALIZED
LEASES 146,173,023 75,108,996
-------------- --------------
114 ELECTRIC PLANT
ACQUISITION ADJUSTMENT 0 0
-------------- --------------
120 NUCLEAR FUEL
FABRICATION 54,174,656 19,923,544
-------------- --------------
UTILITY PLANT TOTAL $5,704,463,676 $2,630,092,777
============== ==============
</TABLE>
Book cost is calculated by taking Original Cost less Reserve for Depreciation
and Amortization.
Page 6
<PAGE>
ATTACHMENT D
SUMMARY OF EARNINGS
<PAGE>
Attachment E
Service List of City, County and
State Officials
<PAGE>
Governmental Entities
STATE OF CALIFORNIA STATE OF CALIFORNIA
ATTORNEY GENERAL CALIFORNIA PUBLIC UTILITIES
1515 K ST STE 511 107 S BROADWAY
SACRAMENTO CA 94244 LOS ANGELES CA 90012
STATE OF CALIFORNIA-ATTN DIRECTOR CITY OF CARLSBAD
DEPT OF GENERAL SERVICES ATTN CITY CLERK
915 CAPITOL MALL 1200 ELM AVE
OFFICE BLDG CARLSBAD CA 92008
SACRAMENTO CA 95814
CITY OF CARLSBAD CITY OF CHULA VISTA
ATTN CITY ATTORNEY ATTN CITY ATTORNEY
1200 ELM AVE PO BOX 1087
CARLSBAD CA 92008 CHULA VISTA CA 92102
CITY OF CHULA VISTA CITY OF CORONADO
ATTN CITY CLERK ATTN CITY ATTORNEY
PO BOX 1087 1825 STRAND WAY
CHULA VISTA CA 92102 CORONADO CA 92118
CITY OF CORONADO CITY OF DANA POINT
ATTN CITY CLERK ATTN CITY ATTORNEY
1825 STRAND WAY 33282 GOLDEN LANTERN
CORONADO CA 92118 DANA POINT CA 92629
<PAGE>
CITY OF DANA POINT CITY OF DEL MAR
ATTN CITY CLERK ATTN CITY ATTORNEY
33282 GOLDEN LANTERN 1050 CAMINO DEL MAR
DANA POINT CA 92629 DEL MAR CA 92014
CITY OF DEL MAR CITY OF EL CAJON
ATTN CITY CLERK ATTN CITY ATTORNEY
1050 CAMINO DEL MAR 200 E MAIN ST.
DEL MAR CA 92104 EL CAJON CA 92020
CITY OF EL CAJON CITY OF ENCINITAS
ATTN CITY CLERK ATTN CITY ATTORNEY
200 E MAIN ST. 505 S VULCAN AVE
EL CAJON CA 92020 ENCINITAS CA 92024
CITY OF ENCINITAS CITY OF ESCONDIDO
ATTN CITY CLERK ATTN CITY ATTORNEY
505 S VULCAN AVE 201 N BROADWAY
ENCINITAS CA 92024 ESCONDIDO CA 92025
CITY OF ESCONDIDO LISA J. HUBBARD
ATTN CITY CLERK SAN DIEGO GAS & ELECTRIC CO.
201 N BROADWAY 801 VAN NESS AVE STE 2060
ESCONDIDO CA 92025 SAN FRANCISCO CA 94102
<PAGE>
CITY OF IMPERIAL BEACH CITY OF IMPERIAL BEACH
ATTN CITY CLERK ATTN CITY ATTORNEY
825 IMPERIAL BEACH BLVD 825 IMPERIAL BEACH BLVD
IMPERIAL BEACH CA 92032 IMPERIAL BEACH CA 92032
CITY OF LA MESA CITY OF LA MESA
ATTN CITY ATTORNEY ATTN CITY CLERK
PO BOX 937 PO BOX 937
LA MESA CA 92041 LA MESA CA 92041
CITY OF LAGUNA BEACH CITY OF LAGUNA BEACH
ATTN CITY ATTORNEY ATTN CITY CLERK
505 FOREST AVE 505 FOREST AVE
LAGUNA BEACH CA 92651 LAGUNA BEACH CA 92651
CITY OF LAGUNA NIGUEL CITY OF LAGUNA NIGUEL
ATTN CITY ATTORNEY ATTN CITY CLERK
22781 LA PAZ STE B 22781 LA PAZ STE B
LAGUNA NIGUEL CA 92656 LAGUNA NIGUEL CA 92656
CITY OF LEMON GROVE CITY OF LEMON GROVE
ATTN CITY ATTORNEY ATTN CITY CLERK
3232 MAIN ST 3232 MAIN ST
LEMON GROVE CA 92045 LEMON GROVE 92045
<PAGE>
CITY OF MISSION VIEJO CITY OF MISSION VIEJO
ATTN CITY ATTORNEY ATTN CITY CLERK
25909 PALA SUITE 150 25909 PALA SUITE 150
MISSION VIEJO CA 92691-2778 MISSION VIEJO CA 92691-2778
CITY OF MORENO VALLEY CITY OF MORENO VALLEY
ATTN CITY CLERK ATTN CITY ATTORNEY
23119 COTTONWOOD BLDG B 23119 COTTONWOOD BLDG B
MORENO VALLEY CA 92388 MORENO VALLEY CA 92388
CITY OF NATIONAL CITY CITY OF NATIONAL CITY
ATTN CITY ATTORNEY ATTN CITY CLERK
1243 NATIONAL CITY BLVD 1243 NATIONAL CITY BLVD
NATIONAL CITY CA 92050 NATIONAL CITY CA 92050
NAVAL FACILITIES ENGINEERING CITY OF OCEANSIDE
WESTERN DIVISION ATTN CITY ATTORNEY
ATTN UTILITIES MANAGEMENT 704 THIRD ST
SAN BRUNO CA 94066 OCEANSIDE CA 92054
CITY OF OCEANSIDE COUNTY OF ORANGE
ATTN CITY CLERK ATTN COUNTY CLERK
704 THIRD ST. PO BOX 838
OCEANSIDE CA 92054 SANTA ANA CA 92702
<PAGE>
COUNTY OF ORANGE CITY OF POWAY
ATTN COUNTY COUNSEL ATTN CITY ATTORNEY
PO BOX 1379 PO BOX 789
SANTA ANA CA 92702 POWAY CA 92064
CITY OF POWAY CITY OF SAN CLEMENTE
ATTN CITY CLERK ATTN CITY ATTORNEY
PO BOX 789 100 AVENIDA PRESIDIO
POWAY CA 92064 SAN CLEMENTE CA 92672
CITY OF SAN CLEMENTE CITY OF SAN DIEGO
ATTN CITY CLERK ATTN CITY ATTORNEY
100 AVENIDA PRESIDIO 202 C ST
SAN CLEMENTE CA 92672 SAN DIEGO CA 92101
CITY OF SAN DIEGO CITY OF SAN DIEGO
ATTN CITY CLERK ATTN CITY MANAGER
202 C ST 202 C ST
SAN DIEGO CA 92101 SAN DIEGO CA 92101
CITY OF SAN DIEGO COUNTY OF SAN DIEGO
ATTN MAYOR ATTN COUNTY CLERK
202 C ST 220 W BROADWAY
SAN DIEGO CA 92101 SAN DIEGO CA 92101
<PAGE>
<TABLE>
<S> <C>
COUNTY OF SAN DIEGO CITY OF SAN MARCOS
ATTN COUNTY COUNSEL ATTN CITY ATTORNEY
1600 PACIFIC HWY 105 RICHMAR AVE
SAN DIEGO CA 92101 SAN MARCOS CA 92069
CITY OF SAN MARCOS CITY OF SANTEE
ATTN CITY CLERK ATTN CITY ATTORNEY
105 W RICHMAR AVE 10601 MAGNOLIA AVENUE
SAN MARCOS CA 92069 SANTEE CA 92071
CITY OF SANTEE CITY OF SOLANA BEACH
ATTN CITY CLERK ATTN CITY ATTORNEY
10601 MAGNOLIA AVENUE 635 S HIGHWAY 101
SANTEE CA 92071 SOLANA BEACH CA 92075
CITY OF SOLANA BEACH UNITED STATES GOVERNMENT
ATTN CITY CLERK GENERAL SERVICES ADMINISTRATION
635 S HIGHWAY 101 300 N LOS ANGELES
SOLANA BEACH CA 92075 LOS ANGELES CA 90012
CITY OF VISTA CITY OF VISTA
ATTN CITY ATTORNEY ATTN CITY CLERK
PO BOX 1988 PO BOX 1988
VISTA CA 92083 VISTA CA 92083
</TABLE>
<PAGE>
APPLICATION NO. 97-05________
EXHIBIT NO. SDG&E - 1__________
DATE _____________
APPLICATION OF SAN DIEGO GAS & ELECTRIC COMPANY (U 902-E)
FOR AUTHORITY TO FINANCE A 10% RATE REDUCTION THROUGH THE
ISSUANCE OF RATE REDUCTION BONDS
PREPARED TESTIMONY
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
MAY _____, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
I. EXECUTIVE SUMMARY (AULT)...............................................1
II. OVERVIEW OF PROPOSED RATE REDUCTION BOND
TRANSACTION (MONTGOMERY)...............................................6
A. PROPOSED STRUCTURE OF RATE REDUCTION BOND
TRANSACTION (MONTGOMERY).....................................6
B. ROLES OF THE CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK AND THE STATE
TREASURER'S OFFICE (MONTGOMERY).............................10
C. ASSET-BACKED SECURITIES MARKET (MONTGOMERY)...................12
III. FINANCING AND OTHER CONSIDERATIONS ASSOCIATED WITH
THE PROPOSED RATE REDUCTION BOND TRANSACTION
(MONTGOMERY, TRENT AND HITT)..........................................14
A. FINANCING CONSIDERATIONS (MONTGOMERY).........................14
1. Terms of SDG&E's Rate Reduction Bonds....................14
2. Rating Agency Considerations.............................16
a. Credit and Legal Issues 16
b. Credit Enhancement 16
c. Impact on SDG&E's Existing Debt
Ratings 17
3. Servicing Bond Payments from Customers...................18
4. Use of Proceeds..........................................22
5. Issuance Costs and Ongoing Expenses......................25
6. Commission Financing Issues..............................26
a. Competitive Bidding Requirements. 26
b. Commission Financing Fee. 26
B. ACCOUNTING CONSIDERATIONS (TRENT).............................27
C. BANKRUPTCY CONSIDERATIONS (MONTGOMERY)........................28
D. INCOME TAX CONSIDERATIONS (HITT)..............................28
IV. ECONOMIC BENEFITS AND BOND SIZING (HITT AND MONTGOMERY)...............30
A. ECONOMIC BENEFITS OF ISSUING RATE REDUCTION
BONDS (HITT AND MONTGOMERY)...................................30
B. BOND SIZING (HITT AND MONTGOMERY).............................31
V. TARIFF AND RATEMAKING ISSUES (HANSEN AND WHELAN).......................33
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A. TARIFF ISSUES (HANSEN)........................................33
1. Customers Eligible for 10% Rate Reduction................33
a. Applicable Rate Schedules for
Residential Customers. 33
b. Applicable Rate Schedules for Small
Commercial Customers. 33
2. Fixed Transition Amount ("FTA")..........................35
a. General Overview. 35
b. True-Up Mechanism for FTA Charges. 37
c. Bypass of the FTA Via Change of
Schedule. 39
d. Other Forms of Bypass. 40
B. RATEMAKING ISSUES (WHELAN)....................................40
1. The Transition Cost Balancing Account....................41
a. Overview 41
b. Proposed Modification to the
Transition Cost Balancing Account
to Incorporate Issuance of the Rate
Reduction Bonds and the 10 Percent
Rate Reduction and to Prevent Cost
Shifting. 43
2. Rate Reduction Bond Memorandum Account...................44
a. Additional Bond Issuance 45
b. Post-Transition Period Credits to
Residential and Small Commercial
Customers 46
3. Proposed Tariff Changes..................................47
VI. WITNESS QUALIFICATIONS................................................50
QUALIFICATIONS OF FRANK H. AULT.................................50
QUALIFICATIONS OF WAYNE M. HITT.................................53
QUALIFICATIONS OF DOUGLAS P. HANSEN.............................54
QUALIFICATIONS OF JAMES H. MONTGOMERY...........................56
QUALIFICATIONS OF JAMES P. TRENT................................57
QUALIFICATIONS OF THOMAS L. WHELAN..............................58
Appendices
A. Issuance Costs and Ongoing Expenses (Estimates)
B. Economic Benefits and Bond Sizing Analysis
C. Changes in Language to Existing Tariffs
D. Proposed New Fixed Transition Amount Rate Schedule
</TABLE>
-ii-
<PAGE>
CPUC APPLICATION - RATE REDUCTION BONDS
TESTIMONY
I.
EXECUTIVE SUMMARY (AULT)
On August 31, 1996, Assembly Bill ("AB") 1890 was passed and on September
23, 1996, Governor Wilson signed this bill into law. AB 1890, in conjunction
with the Commission's Preferred Policy Discussion, provides the master plan for
restructuring California's electric utility industry. A critical element of AB
1890's restructuring plan is the provision for utilities to issue up to $10
billion of securities, known as Rate Reduction Bonds, to finance a portion of
their Transition Costs./1/ The issuance of Rate Reduction Bonds is necessary to
enable utilities to reduce rates for residential and small commercial customers
by 10% for the period from 1998 through March 31, 2002. SDG&E believes that
under AB 1890, the 10% rate reduction is contingent upon issuance of Rate
Reduction Bonds in sufficient amounts to provide for the rate reduction.
Pursuant to AB 1890, San Diego Gas & Electric ("SDG&E") is requesting in
this Application that the Commission approve the issuance of an aggregate amount
of up to $800 million of Rate Reduction Bonds in one or more series. The
determination of the actual amount of such bonds to be issued depends on factors
that will not be known until the time of issuance. The current estimate of the
aggregate
- --------------------------
/1/ Most definitions for capitalized terms are contained in P.U.Code (S) 840,
unless otherwise noted.
<PAGE>
principal amount of such bonds to be issued on behalf of SDG&E is $710 million.
SDG&E currently estimates that issuance of Rate Reduction Bonds will result
in net present value benefits to its residential and small commercial customers
of approximately $100 million. The estimated $100 million net present value
savings will be achieved by replacing existing debt and equity carrying costs
for the financed Transition Costs with the lower-cost, all-debt structure of the
Rate Reduction Bonds and by recovering these Transition Costs over the
anticipated 10-year life of the Rate Reduction Bonds, rather than the 4-year
rate freeze period available under AB 1890 in the absence of the issuance of
Rate Reduction Bonds.
In consideration of the rate reduction, residential and small commercial
customers will provide the source of payment of principal and interest on the
bonds and any related fees or expenses through the separate, nonbypassable
charges called Fixed Transition Amount ("FTA") charges. Pursuant to AB 1890,
such FTA charges are to be authorized by the Commission in connection with this
proceeding and will be subject to an adjustment procedure on at least an annual
basis over the term of the bonds.
SDG&E also is filing, concurrent with this Application, an application with
the California Infrastructure and Economic Development Bank ("Infrastructure
Bank"), a State agency, for the issuance of the Rate Reduction Bonds. AB 1890
contemplates that Rate Reduction Bonds will be issued
2
<PAGE>
through the Infrastructure Bank, a Special Purpose Trust authorized by the
Infrastruture Bank or another Financing Entity approved by the Infrastructure
Bank.
SDG&E will use the net proceeds from the Rate Reduction Bond financing
principally to reduce SDG&E's capitalization. This reduction will occur for
debt, preferred stock and common equity in amounts approximately proportionate
to the Company's current debt and equity percentages.
In the testimony that follows, SDG&E first provides (in Chapter II) an
overview of the structure of the transaction. As the testimony indicates, SDG&E
proposes to create a Special Purpose Entity that will be consolidated with the
utility for financial reporting and tax purposes, but will be a legally separate
entity for all business and commercial law purposes. The separate legal entity
is designed to keep the SPE and its assets separate from SDG&E in the event of a
bankruptcy of the utility. This bankruptcy remoteness is a key element in
enabling the bonds to be issued at a higher credit rating than that of SDG&E,
anticipated as high as AAA. A higher bond rating will benefit residential and
small commercial customers because it will lower the interest payments on the
bonds payable through the FTA charges assessed these customers.
In Chapter III, SDG&E describes in greater detail the financing
considerations associated with the transaction, including a description of the
asset backed securities market in which the bonds will be issued. SDG&E also
3
<PAGE>
describes in greater detail the accounting, bankruptcy and tax considerations
associated with the transaction.
In Chapter IV, SDG&E describes the economic benefits to residential and
small commercial customers of issuing Rate Reduction Bonds. SDG&E also presents
in this Chapter (and Appendix B) its detailed bond sizing analysis.
In Chapter V, SDG&E describes the tariff and ratemaking issues associated
with the transaction.
Finally, in Chapter VI, SDG&E describes the qualifications of the SDG&E
witnesses sponsoring this testimony.
SDG&E recognizes that AB 1890 requires the Commission to act on its
Application in a limited period of 120 days. In recognition of this short
period of time, SDG&E has endeavored to work proactively with the Commission
staff and other parties to solicit and address concerns at the front end of this
proceeding. For example, SDG&E was an active participant at the March workshops
sponsored by the Energy Division, has participated in other pre-filing briefings
with parties, and has provided its draft Application to several parties for
their review in advance of filing with the Commission. SDG&E hopes these
efforts will facilitate the Commission's review of its Application in this very
important proceeding.
It is crucial that SDG&E receive a Commission decision in a timely manner
to enable the Company to issue its Rate Reduction Bonds prior to January 1, 1998
as part of the
4
<PAGE>
10% rate reduction process. The issuance of Rate Reduction Bonds is currently
planned for the fourth quarter of 1997.
5
<PAGE>
II.
OVERVIEW OF PROPOSED RATE REDUCTION BOND TRANSACTION
(MONTGOMERY)
A. PROPOSED STRUCTURE OF RATE REDUCTION BOND TRANSACTION (MONTGOMERY).
AB 1890 requires utilities to provide residential and small commercial
customers with a 10% rate reduction and provides utilities with the means to
finance this rate reduction through the issuance of Rate Reduction Bonds. In
consideration of the rate reduction, residential and small commercial customers
will provide the source of payment of principal and interest on the bonds and
any related fees or expenses through separate, nonbypassable charges designated
Fixed Transition Amount ("FTA") charges. Pursuant to the legislation, such FTA
charges are to be authorized by the Commission in connection with this
proceeding and will be subject to an adjustment procedure (see Section V.A.2.b)
on at least an annual basis over the term of the bonds. The net effect of the
transaction will be to provide SDG&E's residential and small commercial
customers with the required 10% rate reduction and to provide net present value
benefits to these customers of approximately $100 million over the term of the
bonds.
SDG&E's proposed structure of the Rate Reduction Bond transaction is
illustrated in Figure II-1, which follows on the next page.
6
<PAGE>
Figure II-1
Rate Reduction Bonds
Transaction Structure
[Chart describes structure of transaction]
Step 1 of this process involves the formation by SDG&E of a Special Purpose
Entity ("SPE"). Although consolidated with the utility for certain financial
reporting and tax purposes, the SPE will be a legally separate entity for all
business and commercial law purposes. Thus creditors of the utility will have no
rights in or to the assets or property of the SPE, and creditors of the SPE will
have no rights in or to the assets or property of the utility, except only as
the utility and the SPE shall elect by contract. This structure is intended to
cause the SPE assets to be removed from the risk of any bankruptcy of the
utility (such structure being sometimes referred to as "bankruptcy remote") in
order that the Rate Reduction Bonds be assigned a higher credit rating, and
therefore bear a lower interest rate, thus maximizing their benefit to
residential and small commercial customers.
Step 1 also involves the transfer by SDG&E of all of its rights, title and
interest in and to the Transition Property (which is defined by AB 1890 to
include all rights
7
<PAGE>
in and to the FTA charges and any revenues therefrom) to the SPE. This transfer
is structured to be a "true sale" for bankruptcy purposes, meaning that for such
purposes the SPE will be the sole owner of all of the Transition Property and
related revenues collected through the FTA charges, and such property and
revenues will not be available for satisfaction of SDG&E's creditors. The true
sale nature of the transfer is an element of making the SPE's assets bankruptcy
remote from SDG&E as mentioned above. In order to obtain from the credit rating
agencies a higher credit rating on the Rate Reduction Bonds than on SDG&E's
debt, we anticipate that the credit rating agencies will expect to receive an
opinion of counsel at the time the Rate Reduction Bonds are issued confirming
that (i) the SPE is a separate legal entity from SDG&E for bankruptcy purposes,
and (ii) the transfer of the Transition Property from SDG&E to the SPE
constitutes a true sale.
SDG&E will acquire an ownership interest in the SPE by contributing equity
to the SPE in an amount of approximately 0.5%/2/ of the total principal amount
of the Rate Reduction Bonds to be issued. The SPE will likely invest SDG&E's
equity contribution in another affiliate of SDG&E in the form of a demand loan
to such affiliate.
In Step 2 of this process, the SPE will raise the necessary funds for its
purchase of the Transition Property from SDG&E by issuing its own secured debt
(the "SPE Debt")
- ----------------------
/2/ The O.5% amount represents a balance between a meaningful contribution
versus minimizing the dollar amount.
8
<PAGE>
to the entity through which the Rate Reduction Bonds will be issued. The SPE
Debt will be secured by the Transition Property (including the FTA charges and
the right to receive all revenue therefrom) transferred by SDG&E to the SPE in
Step 1 discussed above. As called for in AB 1890, the Rate Reduction Bonds will
be issued through the California Infrastructure and Economic Development Bank
("Infrastructure Bank"), a Special Purpose Trust formed by the Infrastructure
Bank, or another Financing Entity approved by the Infrastructure Bank
(collectively the "SPT").
Step 3 of this process is the issuance through the SPT of the Rate
Reduction Bonds, directly or indirectly to investors. The Rate Reduction Bonds
may be debt secured by, and payable solely from, the SPE Debt or may be
certificates of interest or participation in the SPE Debt. All significant
terms of the Rate Reduction Bonds, including timing and amount of principal and
interest payments, will mirror the corresponding terms of the SPE Debt. In
fact, the Rate Reduction Bonds may be in the form of certificates representing
undivided interests in the SPE Debt.
SDG&E proposes to transfer Transition Property to the SPE in an amount
sufficient to provide for the 10% rate reduction to residential and small
commercial customers. It is currently anticipated that this will be an amount
of Transition Property sufficient to support the issuance of up to $800 million
of Rate Reduction Bonds. Thus, SDG&E will receive up to $800 million (less the
amount of certain
9
<PAGE>
transaction costs) in consideration for the sale of the Transition Property to
the SPE at the time the Rate Reduction Bonds are issued.
SDG&E anticipates based on current estimates that the issuance of Rate
Reduction Bonds will result in net present value benefits to its residential and
small commercial customers of approximately $100 million. The estimated $100
million net present value savings will be achieved (i) by replacing existing
debt and equity carrying costs for the financed Transition Costs with the lower-
cost, all-debt structure of the Rate Reduction Bonds and (ii) by recovering
these Transition Costs over the anticipated 10-year life of the Rate Reduction
Bonds, rather than the 4-year rate freeze period available under AB 1890 in the
absence of the issuance of Rate Reduction Bonds.
B. ROLES OF THE CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK AND
THE STATE TREASURER'S OFFICE (MONTGOMERY).
Pursuant to AB 1890, SDG&E will file, concurrent with this Application, a
separate application (Part One) with the California Infrastructure and Economic
Development Bank ("Infrastructure Bank") to authorize the issuance of the Rate
Reduction Bonds. The Infrastructure Bank will not give its final approval of the
transaction until the Commission issues a Financing Order, SDG&E files a Part
Two application with the bank, and the terms of the Rate Reduction Bonds have
been finalized.
The State Treasurer's office will act as agent for sale of the Rate
Reduction Bonds since the bonds will be issued
10
<PAGE>
through the Infrastructure Bank. Accordingly, the Infrastructure Bank and/or the
State Treasurer's office will approve the pricing, timing and other terms of the
Rate Reduction Bonds. SDG&E is not asking the Commission to approve the specific
terms of the bonds at this time. Rather, as SDG&E has done with its own
Commission-approved financings, SDG&E is seeking to maintain flexibility to
determine such matters in light of then-current market conditions. Thus, as each
series or class of Rate Reduction Bonds is priced, SDG&E proposes to file
Issuance Advice Letters with the Commission to establish the initial levels of
FTA charges. Those filings will reflect the amount, pricing and other terms of
the Rate Reduction Bonds as approved by the Infrastructure Bank.
In addition to determining the issuer and the pricing, timing and other
terms and conditions of the Rate Reduction Bonds, SDG&E anticipates that the
Infrastructure Bank and the State Treasurer's office will participate in the
following aspects of the transaction:
. Selection and approval of certain other participants in the
transaction, including the selection of bond counsel, approval of
the bond trustee, bond underwriters (including managing and co-
managing underwriters) and underwriters' legal counsel and
approval of bond rating agencies.
. Review and approval of transaction documentation, including such
principal documents as a Pooling and Servicing Agreement with
SDG&E, Trust Indenture, Bond Purchase Agreement, SPE Debt
documentation and SEC Registration Statement and other
governmental filings.
11
<PAGE>
. Participation in various aspects of the issuance of the Rate
Reduction Bonds, including approval of the marketing plan for the
bonds prepared by the managing underwriter, participating in
meetings or phone calls with rating agencies and potential
investors, and conduct of its own due diligence to the extent it
considers necessary or appropriate.
. Preparation and review of reports to the Legislature or other
governmental bodies concerning the transaction, to the extent
considered necessary or appropriate.
C. ASSET-BACKED SECURITIES MARKET (MONTGOMERY).
Securitization essentially is the raising of money through the issuance and
sale of securities backed by the cash flow derived from specified financial or
other assets. The securitized assets are pledged directly to secure the payment
of the related debt instruments and are isolated from the other property of the
issuer (often by transfer to an affiliated single purpose entity) in order to
achieve the necessary level of bankruptcy and credit protection to merit higher
credit ratings, and lower interest costs, for securitized debt. Issuers have
embraced securitization as a source of lower cost financing compared to
traditional corporate debt.
A variety of assets have been securitized by the sale of Asset Backed
Securities ("ABS") in the public markets since the inception of the ABS market,
including credit card receivables, automobile loans, automobile leases, student
loans, home equity loans, home equity lines of credit, equipment leases,
manufactured housing contracts, unsecured consumer loans and a number of other
assets. The ABS market is characterized by strong investor demand for ABS
issues,
12
<PAGE>
which offer a slight premium to treasuries and corporates within rating
categories, as well as high credit quality and strong market liquidity. Total
issuance in the market has grown steadily since the market's inception and has
increased from approximately $76 billion in 1994 to $108 billion in 1995 to $150
billion in 1996. During 1997, we expect total market issuance to exceed $180
billion.
For purposes of the proposed Rate Reduction Bond transaction, the
securitized asset is the Transition Property, as that term is defined in
P.U.Code (S) 840(g).
13
<PAGE>
III.
FINANCING AND OTHER CONSIDERATIONS ASSOCIATED WITH THE
PROPOSED RATE REDUCTION BOND TRANSACTION (MONTGOMERY, TRENT
AND HITT)
A. FINANCING CONSIDERATIONS (MONTGOMERY).
1. TERMS OF SDG&E'S RATE REDUCTION BONDS.
SDG&E anticipates that the Rate Reduction Bonds issued on its behalf will
have a scheduled repayment term of approximately 10 years (maturities could
range from one to 15 years) and pay a fixed cost of interest at about .5 - .6%
above the 5-year U.S. Treasury rate. The expected principal payment dates
generally will be up to three years shorter than the final legal maturity dates
of each of the bonds to ensure that all of the principal payments are made prior
to ultimate maturity. We anticipate that interest payments will constitute
taxable income for federal income tax purposes, but will be exempt from
California personal income tax. The issuance of Rate Reduction Bonds is planned
for the fourth quarter of 1997.
The final transaction structure and terms of the Rate Reduction Bonds will
be determined in collaboration with the Infrastructure Bank and the Treasurer's
Office at the time the Rate Reduction Bonds are marketed and after input from
rating agencies and the underwriters. SDG&E also expects, to achieve the most
economic pricing, that the Rate Reduction Bonds may be issued in one or more
series or classes, each of which may be in a different form and have different
terms, including fixed or variable interest rates.
14
<PAGE>
Accordingly, SDG&E is requesting Commission approval of the issuance of up to
$800 million of Rate Reduction Bonds with the form and terms of each series or
class of the Rate Reduction Bonds to be determined at the time of offering. As
discussed below in Section V.A.2.a, SDG&E will notify the Commission by Issuance
Advice Letter filing when pricing and other terms are established for the
offering of each series or class of Rate Reduction Bonds. This filing will
report the specific costs of, and the amounts financed by the Rate Reduction
Bonds, and the manner in which such costs are reflected in the initial FTA
charges implemented at that time.
SDG&E expects the market receptivity for the Rate Reduction Bonds to be
extremely high. Asset-Backed Security investors will be attracted by the
anticipated AAA ratings and comparatively stable cashflow of the transaction.
The periodic true-up mechanism required by the enabling legislation (discussed
further at Section V.A.2.b below) will contribute to investor comfort with
respect to the credit quality and stability of the bonds. We also expect the
transaction to generate significant crossover interest from traditional
corporate utility investors. These buyers have a high familiarity with utility
credit which, in combination with the relative lack of recent new issue supply
in the corporate utility market, will make the bonds extremely attractive to
this class of investors. The market regularly absorbs multi-billion dollar
transactions at competitive interest rates and there have been a number of
15
<PAGE>
occasions when the asset backed market issuance in a given week has exceeded $10
billion.
2. RATING AGENCY CONSIDERATIONS.
A. CREDIT AND LEGAL ISSUES.
The rating agency process for the Rate Reduction Bond issuance will entail
an in-depth analysis of both the credit and legal structure of the transaction.
The legal analysis will focus on the degree of bankruptcy protection afforded by
the structure, which must be sufficient to separate the credit profile of the
Rate Reduction Bonds from that of SDG&E in order to achieve a higher credit
rating, and consequent lower interest cost, than that of SDG&E's corporate debt.
The transaction's expected structure is intended to provide the level of
bankruptcy protection required to achieve the desired AAA ratings. We anticipate
the rating agencies will rely on a bankruptcy opinion to be delivered when the
Bonds are issued in their evaluation of the transaction's level of bankruptcy
protection. The structure also must result in a credit profile for the Rate
Reduction Bonds that is separate from the credit of the Infrastructure Bank for
the same reasons.
B. CREDIT ENHANCEMENT.
The rating agencies will focus on a number of factors in evaluating the
credit quality and determining the sizing of any necessary credit enhancement
for the bonds. Any such credit enhancements will be established at a later
date. The sizing of the credit enhancement for the transaction will be based on
the predictability of the collection of the
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FTA charges, which will depend upon the credit performance of the receivables
and the divergence from forecasted customer usage. The estimated base
collectibility performance of the FTA charges will be projected from an analysis
of SDG&E's historical charge-off experience and the historical relationship of
actual usage to projected usage.
Typical forms of credit enhancement include the legislatively mandated
true-up mechanism (discussed further in Section V.A.2.b. below), which adjusts
customer rates at least annually for sales, and overcollateralization, which
provides for a cushion of additional cash flow during the life of the bonds to
ensure sufficient amounts are available to pay all principal and interest on the
bonds. Other possible credit enhancement mechanisms include a debt service
reserve fund, bank letters of credit and surety bonds or similar insurance
policies.
C. IMPACT ON SDG&E'S EXISTING DEBT RATINGS.
The credit rating agencies have preliminary indicated that they will view
the Rate Reduction Bonds as a securitization, the principal and interest
obligations of which should not be added to other SDG&E debt in calculating debt
ratios and evaluating credit ratings. Such analysis is dependent on the rating
agencies concluding that holders of the bonds will have no claim on the assets
or revenues of SDG&E. From an economic perspective, the reduction in revenue
available to satisfy SDG&E debt service and equity return caused by the transfer
of the Transition Property to the SPE will be offset by the reductions in
outstanding
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SDG&E debt and equity, the redemption or defeasance of which will be financed
with the proceeds of the Rate Reduction Bond issuance. Although the SPE is
expected to be consolidated with SDG&E for financial reporting and tax purposes,
the overall structure of the securitization transaction (expected to be
described in a footnote in SDG&E's financial statements) should not result in
any change to the credit ratings of existing SDG&E debt.
3. SERVICING BOND PAYMENTS FROM CUSTOMERS.
SDG&E requests Commission authority to contract with the SPE to function as
the servicing agent ("Servicer") for the Rate Reduction Bonds. In such capacity
the Company on behalf of the SPE would collect the FTA charges from residential
and small commercial customers and forward these collected amounts to the SPT,
on account of and as security for amounts payable on the SPE Debt held by the
SPT, which SPE Debt amounts will mirror amounts payable by the SPT on the Rate
Reduction Bonds. SDG&E's duties as Servicer would include: billing the
appropriate FTA charges to residential and small commercial customers,
collecting the FTA charges from such customers, tracking billed versus collected
FTA charges, remitting collections on a monthly basis to the SPT, preparing a
monthly service report and preparing, at least annually, filings with the
Commission to make any necessary adjustments to the FTA charges to reflect
actual FTA collection experience as contemplated by AB 1890. It is anticipated
that the monthly remission of the FTA charge collections from customers to the
SPT will be based on a
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statistical analysis of SDG&E's historical collection experience regarding such
class of customers.
Prior to making the expected monthly deposits to the SPT, SDG&E will treat
the FTA charges it collects as Servicer as it treats other collections from
customers. Thus, any investment income earned on these amounts is intended to
benefit residential and small commercial customers, through the proposed
ratemaking mechanism discussed in Section V.B.2.
Prior to making the payments on the Rate Reduction Bonds, to bond holders,
it is anticipated that the monthly remissions of FTA charges received from the
Servicer will be invested by the SPT in high quality short-term instruments.
Investment earnings not used to make payments on the Rate Reduction Bonds may be
remitted to the SPE, in which event the benefit thereon will be returned to
customers through an entry in the proposed ratemaking account discussed in
Section V.B.2. below. Alternatively, investment earnings applied to payments on
the Rate Reduction Bonds will also benefit customers through operation of the
FTA true-up mechansim (described in Section V.A.2.b below), which would result
in a reduction in future FTA charges.
Entities that act as servicer for asset-backed securities typically receive
servicing fees. SDG&E proposes to charge customers only for any incremental
costs not currently included in rates that are incurred in connection with
performing the duties of Servicer, such as paying outside firms to perform
special audits. It may be
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necessary for SDG&E to agree that it will collect servicer fees at levels
typical in the asset-backed market in order to support the bankruptcy analysis
(e.g., 1.5-2.0%). In such an event any amounts collected in excess of SDG&E's
incremental costs will be returned to residential and small commercial customers
through rate adjustments in the rate setting process. Similarly, as mentioned
above, any investment earnings on funds held prior to making payments on the
bonds will be credited to customers at an appropriate short-term investment rate
or will be used to make bond payments with a resulting reduction in FTA charges.
Also, any overcollateralization amounts remaining after the legal maturity of
the bonds also will be credited to customers.
If an entity other than SDG&E or a successor local distribution company
acts as servicer, customers would likely be charged the full servicing fee
amount. Such increased costs would be added to the customer FTA charges at the
time of issuance or subsequently through the true-up mechanism.
If third-party entities are allowed to bill customers, such billers would
need to be sub-servicers to SDG&E for the purposes of collecting FTA charges
related to the Rate Reduction Bonds. SDG&E would need to be the master servicer
and would remit all required payments to the SPE, which payments in turn flow to
the SPT and to the bond holders. In its role as master servicer, SDG&E will
need access to information from third party billers on kilowatt-hour
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billing and usage by customer to be able to provide the required reports.
If third-party entities are allowed to bill customers, careful
consideration must be given to minimum requirements for the financial strength
of these other entities. The rating agencies have expressed concerns about the
financial strength of servicer entities other than utilities which bill and
collect from customers. Such concerns could impact the rating on the Rate
Reduction Bonds. SDG&E requests that the Commission shall not approve or
require any third-party servicer(s) to replace SDG&E as servicer without
determining that approving or requiring such third party servicer(s) to replace
SDG&E will not cause the then current rating of the Rate Reduction Bonds to be
withdrawn or downgraded.
To further strengthen the credit situation for the Rate Reduction Bonds, it
will be necessary for residential and small commercial customers to continue to
be responsible for payment of FTA charges to the master servicer, even if their
bill payment is being handled by a third-party entity. Further, appropriate
shut-off policies must be maintained, and appropriate standards, procedures, and
credit policies need to be established. For example, to obtain a AAA credit the
rating agencies may require third-party billers to remit FTA charges in 1 to 2
days rather than 30 days, and may require deposits, letters of credit, or other
assurances.
The specific resolution of these credit concerns related to third-party
billing entities will likely be addressed in the Commission's Direct Access and
Ratesetting
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<PAGE>
proceedings. At that time, full consideration needs to be given to possible
impacts on the AAA credit rating being sought for the Rate Reduction Bonds.
4. USE OF PROCEEDS.
SDG&E currently estimates that it will receive approximately $710 million,
less certain transaction costs, from the issuance of the Rate Reduction Bonds.
Upon the receipt of these bond proceeds, SDG&E will cease to collect the costs
associated with a corresponding amount of assets (i.e., debt and equity
financing costs, depreciation and taxes), which will now be collected as part of
the FTAs.
SDG&E will use the net bond proceeds to reduce its capitalization. To
maintain its currently authorized capital structure, SDG&E will reduce its debt
by about half of the bond proceeds and its equity by about half of the proceeds,
less Rate Reduction Bond issuance costs and less any redemption costs for debt
and preferred stock.
SDG&E plans to reduce its debt through either calls, open market purchases,
tenders, or defeasance. Because AB 1890 allows utilities to collect such
redemption costs from customers, SDG&E proposes to include these costs in its
CTC balancing account for all its customers. All customers should bear the
costs due to capitalization reductions since all customers are paying for CTCs
over the rate freeze period.
Under defeasance, an amount of U.S. Treasury securities is purchased
sufficient to pay interest and principal on a targeted amount of bonds until the
first call
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date is reached. Per a recent accounting change, defeased bonds must remain on
SDG&E's balance sheet as a liability. If the Company does defease any of its
bonds, the Commission will need to "adjust out" defeased debt when determining
SDG&E's capital structure for cost of capital purposes because such debt has
been "economically redeemed" and is no longer available to fund utility
construction (i.e., rate base).
SDG&E plans to reduce its common equity through distributions to its
parent, Enova Corporation. SDG&E also may redeem a relatively small amount of
preferred stock. The only means available to SDG&E to reduce common equity is
by distributions of common equity to its parent. Once Enova receives this SDG&E
common equity, it can choose to use the equity for purposes such as redeeming
shares of Enova common stock or investing in other ventures. As required by the
SDG&E holding company decision approving the creation of Enova Corporation
(D.95-12-018): "SDG&E's equity shall be retained such that the Commission's
adopted capital structure shall be maintained ... on average over the period the
capital structure is in effect for ratemaking purposes."
The redemption of debt, preferred stock, and common equity may result in
minor changes to SDG&E's currently authorized cost of capital in the area of
embedded costs for debt and preferred stock. Under the Market-Indexed Capital
Adjustment Mechanism ("MICAM") currently in place for SDG&E, the Company's
authorized embedded costs would not be updated for actuals until the minimum
target change in utility A
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bond rates is exceeded or the initial MICAM period expires at December 31, 2000.
Prior to such MICAM adjustment, SDG&E will make adjustments to its CTC
balancing account to pass the impact of embedded cost changes through to its
customers. Such embedded cost changes will be applied to all of SDG&E's
customers, not just residential and small commercial customers, as part of the
total impacts from collecting transition costs from all customers through March
31, 2002.
However, in the calculation of embedded cost charges SDG&E will net any
SDG&E short or intermediate-term investment balances against like amounts of
existing variable rate, long-term debt. This netting will reflect actions by
SDG&E to keep some variable rate, tax-exempt debt series outstanding for a short
or intermediate period of time when not needed for cash flow purposes. By
keeping such tax-exempt series outstanding, SDG&E maintains the lower, tax-
exempt interest rates over the life of the long-term debt to benefit its
customers.
As discussed earlier, it will be necessary for SDG&E to show the Rate
Reduction Bonds on its balance sheet as a liability. When the Commission is
determining SDG&E's capital structure for cost of capital purposes, it will need
to "adjust out" the Rate Reduction Bonds since this debt is not being used to
fund the Company's capital construction (i.e., rate base).
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5. ISSUANCE COSTS AND ONGOING EXPENSES.
AB 1890 authorizes utilities to collect from customers the costs associated
with the Rate Reduction Bonds. SDG&E anticipates that at the time the Bonds are
issued these costs will include items such as underwriter fees and expenses,
legal counsel fees (SDG&E counsel, underwriter's counsel, and bond counsel), SEC
registration fees, rating agency fees, outside accounting fees, Infrastructure
Bank fees, other miscellaneous expenses, and possibly credit enhancement costs.
SDG&E currently estimates these issuance costs to be approximately $7 million,
or about 1% of the issue price of the Rate Reduction Bonds SDG&E is requesting
in this proceeding (see Appendix A). SDG&E will have more precise amounts at
the time the bonds are issued.
There will also be ongoing expenses associated with the Rate Reduction
Bonds which will be charged to customers annually over the life of the Bonds as
part of the annual FTA charge. These ongoing expenses fall into two categories:
refundable and non-refundable. The refundable category covers servicer fees
that SDG&E may be entitled to collect, but which it will pass back to customers.
Such servicer fees will probably be 1.5 - 2.0% annually of the original
principal amount. On a net basis SDG&E will only charge its customers any
modest incremental costs it incurs as servicer, such as outside audit expenses.
The non-refundable category of ongoing expenses includes items such as fees
for the bond trustee, SPE, and
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Infrastructure Bank. A current estimate for these expense is about $50,000
annually (see Appendix A).
The manner for including the issuance costs and ongoing expenses in the
determination of the amount of Rate Reduction Bonds to be issued is discussed in
further detail in Appendix B.
6. COMMISSION FINANCING ISSUES.
A. COMPETITIVE BIDDING REQUIREMENTS.
Commission competitive bidding requirements do not apply to the Rate
Reduction Bond issuance since the bonds are being issued through the
Infrastructure Bank, and not by SDG&E. The California Treasurers Office already
has selected Morgan Stanley to be the lead underwriter for SDG&E, and the
Infrastructure Bank is in the process of selecting a co-lead manager and co-
managers for SDG&E.
B. COMMISSION FINANCING FEE.
SDG&E proposes not to pay a Commission financing fee for the issuance of
these bonds. The bonds will be issued through the Infrastructure Bank and not
by SDG&E. Indeed, the bonds are to be non-recourse and bankruptcy remote from
SDG&E. Further, we believe this transaction constitutes a "special"
circumstance due to the relatively large principal amount of bonds compared to
the Company's financings over the last several years (e.g., for utility
construction). SDG&E's request is consistent with the Commission's current
practice not to charge fees for bonds which are issued to refinance existing
utility debt.
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B. ACCOUNTING CONSIDERATIONS (TRENT).
In the course of structuring the Rate Reduction Bond transaction, the
utilities hoped, consistent with other asset-backed securitizations, that the
obligations represented by the bonds would not have to be reflected on their
respective balance sheets. This approach is justified because, as with other
securitizations, the Rate Reduction Bonds would not be an obligation of the
utilities and should have no impact on each utility's respective financial
condition. Unfortunately, the Securities and Exchange Commission ("SEC") has
decided that it will be necessary to report the bond obligation on the balance
sheets.
The utilities are permitted, however, to add footnotes to the utilities'
financial statements explaining that the Rate Reduction Bonds are non-recourse
to the utilities and are bankruptcy remote, as currently anticipated. Therefore
financial evaluations of the utilities by outside entities such as rating
agencies should exclude the bonds.
Regarding a related accounting item, the cash and ratemaking recovery of
certain Transition Costs is projected to occur during the 4-year rate recovery
period under SDG&E's current proposal in the CTC filing. SDG&E plans to defer
for financial reporting purposes amortization of the portion of Transition costs
that relates to the securitization of the Transition Property. These deferred
costs will be amortized to expense over the 10-year period of the Rate Reduction
Bonds, and will result in a matching
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for financial reporting purposes of the effects of the securitization
transaction.
C. BANKRUPTCY CONSIDERATIONS (MONTGOMERY).
As discussed in Section II.A., the utilities are proposing to structure the
Rate Reduction Bond transaction so that the SPE is "bankruptcy remote." Such a
structure will benefit residential and small commercial customers because a
bankruptcy remote transaction will lower the interest rate on the bonds. The
benefit of lower interest rates will be passed on to the residential and small
commercial customers in the form of lower FTA charges.
D. INCOME TAX CONSIDERATIONS (HITT).
It is critical that SDG&E's income tax liability associated with the Rate
Reduction Bonds, particularly the transfer of the Transition Property, be
payable over the life of the bonds as FTA charges are collected from customers,
rather than all at once when the Transition Property is transferred and the
bonds are issued. This deferral of tax payments is necessary to produce the
desired economic benefits for customers and neutral effect for shareholders.
There are two key elements to receiving the desired tax treatment: (1) the Rate
Reduction Bonds must be treated, for tax purposes, as debt of the SPE rather
than the transaction constituting a sale of Transition Property from the SPE to
the SPT and (2) the customer revenue needed to cover debt service on the bonds
must be taxable to SDG&E in the year(s) the services are provided rather than
fully taxable at the time the bonds are issued.
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In order to ensure favorable tax consequences for both tax issues of the
proposed transaction, SDG&E, Edison and PG&E have each requested rulings from
the Internal Revenue Service ("IRS"). SDG&E, Edison and PG&E met with the IRS
on December 19, 1996 at a pre-submission conference in anticipation of filing a
ruling request. Each utility filed a separate, but essentially identical ruling
request on about February 25, 1997. SDG&E hopes that the IRS will issue
favorable rulings no later than the third quarter of 1997.
It is possible that a favorable ruling will not be received by the time the
Commission issues its decision on this Application. If an unfavorable ruling is
received or if the IRS refuses to rule, SDG&E will attempt to make necessary
changes to mitigate these problems. In addition, efforts are being made to
assure that the transaction does not generate adverse California Corporation
franchise tax consequences. It may be necessary to significantly modify the
transaction to mitigate unfavorable tax consequences, in which case SDG&E will
present the modifications to the Commission for approval.
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IV.
ECONOMIC BENEFITS AND BOND SIZING (HITT AND MONTGOMERY).
A. ECONOMIC BENEFITS OF ISSUING RATE REDUCTION BONDS (HITT
AND MONTGOMERY).
SDG&E anticipates that issuance of Rate Reduction Bonds will result in net
present value benefits to its residential and small commercial customers of
approximately $100 million. The net present value savings will be achieved by
(i) replacing existing debt and equity carrying costs for the financed
Transition Costs with the lower-cost, all-debt structure of the Rate Reduction
Bonds and (ii) by recovering these Transition Costs over the anticipated 10-
year life of the Rate Reduction Bonds, rather than the 4-year rate freeze
recovery period available under AB 1890 in the absence of the issuance of Rate
Reduction Bonds.
The estimated customer benefit of about $100 million on a net present value
basis is a considerable saving to be enjoyed by residential and small commercial
customers due to issuing the Bonds. This result provides ample justification to
the Commission for authorizing SDG&E to issue the bonds as requested in this
Application.
The net present value savings may vary from the $100 million SDG&E
currently estimates depending upon such factors as the interest rate for the
Rate Reduction Bonds at the time of issuance. SDG&E's detailed analysis
supporting its estimate of approximately $100 million in benefits from issuance
of Rate Reduction Bonds is included in Appendix B.
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B. BOND SIZING (HITT AND MONTGOMERY).
SDG&E is asking the Commission for authority to issue an aggregate amount
of up to $800 million of Rate Reduction Bonds. SDG&E currently estimates,
however, that a Rate Reduction Bond financing of $710 million, assuming an
average expected repayment schedule of approximately 10 years and a coupon rate
of 7.5 percent, will provide savings sufficient for the 10% rate reduction
(assuming sales forecasts are accurate) -- and the estimated $100 million in net
present value benefits. SDG&E's detailed bond sizing analysis is included in
Appendix B, as referenced above.
To facilitate the Advice Letter filing process at the time of issuance (see
Section V.A.2.a), SDG&E is requesting that the Commission approve as part of
this Application the methodology set forth in Appendix B for determining the
amount of Rate Reduction Bonds to be issued. Thus the Issuance Advice Letter
will contain the model shown in Appendix B with inputs to match the actual terms
of the Rate Reduction Bonds being issued.
Even at the time the Rate Reduction Bonds are issued, SDG&E will not be
able to exactly match the amount financed to the required savings necessary to
produce the 10% rate reduction. This inability to accurately size the issuance
arises because the actual amount of required savings will vary depending upon
actual sales during the rate freeze period to eligible customers. For example,
if actual sales to residential and small commercial customers exceed our
forecast, this sales variation will result in the need for
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additional bond issuance to support the 10% rate reduction associated with these
additional sales.
If the amount financed is inadequate to provide the required savings for
the 10% rate reduction, SDG&E will request authority from the Commission to
issue additional Rate Reduction Bonds. If the amount financed provides savings
greater than required for the 10% rate reduction, the additional savings will be
returned to residential and small commercial customers through the proposed
ratemaking mechanisms discussed below in Section V-B.
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V.
TARIFF AND RATEMAKING ISSUES (HANSEN AND WHELAN)
A. TARIFF ISSUES (HANSEN).
1. CUSTOMERS ELIGIBLE FOR 10% RATE REDUCTION.
AB 1890 requires electric utilities to provide residential and small
commercial customers with a 10% rate reduction for 1998 through March 31, 2002,
assuming the rate freeze does not end earlier. P.U.Code (S) 368(a).
If an existing, or new, residential or small commercial customer receives
service from SDG&E after January 1, 1998, but before the end of the rate freeze
period, that customer will receive the 10% rate reduction. Correspondingly,
these existing or new, customers will be obligated to pay the FTA tariff.
A. APPLICABLE RATE SCHEDULES FOR RESIDENTIAL
CUSTOMERS.
All of SDG&E's residential customers are served on one of the following
rate schedules:
Rate Schedule DR Rate Schedule DR-LI
Rate Schedule E-LI Rate Schedule DM
Rate Schedule DS Rate Schedule DT
Rate Schedule DT-RV Rate Schedule D-SMF
Rate Schedule EV-TOU Rate Schedule EV-TOU-2
Rate Schedule DR-TOU Rate Schedule DR-TOU-2
SDG&E proposes to provide the 10% rate reduction to all customers on the
above rate schedules.
B. APPLICABLE RATE SCHEDULES FOR SMALL
COMMERCIAL CUSTOMERS.
AB 1890 defines "small commercial customers" to "mean[] a customer that has
a maximum peak demand of less than 20
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kilowatts." P.U.Code (S) 331(h). Customers that meet this definition are served
on one of the following rate schedules:
Rate Schedule A Rate Schedule A-TC
Rate Schedule AD Rate Schedule AL-TOU
Rate Schedule AL-TOU-C Rate Schedule AY-TOU
Rate Schedule AV-TOU Rate Schedule AV-1
Rate Schedule A-2 Rate Schedule AV-3
Rate Schedule A-TOU
The above rate schedules serve not only "small commercial customers," as
that term is defined by AB 1890, but also some commercial and industrial
customers, who do not meet the definition of "small commercial customers." In
other words, some customers who are served on the above rate schedules have
maximum peak demands in excess of 20 kilowatts, some far in excess of 20 kW.
To avoid providing the 10% rate reduction to ineligible customers, SDG&E
proposes to provide the 10% rate reduction to all customers on Rate Schedule A
only. Rate Schedule A is the rate schedule on which SDG&E normally would serve
a small commercial customer with a maximum peak demand of less than 20 kW.
SDG&E would place all new small commercial customers on Schedule A absent that
customer selecting another rate option. Those customers on the other, optional
rate schedules that wish to take service under Schedule A and thus receive the
10% rate reduction would be permitted to do so under the provisions of Rule 12.
Rule 12 generally allows a customer to switch to a different schedule at the
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next regular meter reading following notice from the customer to the utility
requesting a change./3/
The proposed tariff language changes necessary to effect the 10% rate
reduction for both residential and small commercial customers is contained in
Appendix C.
2. FIXED TRANSITION AMOUNT ("FTA").
A. GENERAL OVERVIEW.
In conjunction with issuance of the Rate Reduction Bonds, SDG&E will
establish nonbypassable Fixed Transition Amount ("FTA") charges to recover the
Fixed Transition Amounts associated with issuance of the bonds. The FTA charges
will be added to the charges for PX energy, transmission, distribution, public
benefit programs and nuclear decommissioning costs before these charges are
subtracted from total rate levels to determine the Competition Transition Charge
("CTC") applicable to residential and small commercial customers. Thus, the FTA
charges will not change the total rate paid by residential and small commercial
customers during the rate freeze period because reductions in the residually
determined CTC revenues will exactly offset the FTA charge collections (see
Figure V-1).
- ---------------
/3/ The option to switch to Schedule A and obtain the 10% rate reduction would
not apply to those customers who SDG&E does not consider "small commercial
customers" (e.g., street lighting, traffic control or agricultural customers).
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Figure V-1
Components of Residential and Small Commercial Revenue Requirements
-------------------------------------------------------------------
____________________________________
AB 1890 10% Rate Reduction
Rate Freeze - - - - - ___________________
Residual CTC FTA
_____________________ ___________________
Distribution Distribution
_____________________ ___________________
Transmission Transmission
_____________________ ___________________
Power Exchange Power Exchange
_____________________ ___________________
Nuclear Nuclear
Decommissioning Decommissioning
_____________________ ___________________
Public Purpose Public Purpose
Programs Programs
_____________________ ___________________
At Frozen Rate Levels With 10% Rate
Reduction & Rate
Reduction Bond
Payment (FTA)
SDG&E proposes to implement the 10% rate reduction on January 1, 1998
contingent upon the timely and sufficient issuance of Rate Reduction Bonds. The
10% rate reduction will remain in effect for the duration of the rate freeze
period and the FTA charges will remain in effect until the Rate Reduction Bonds
are paid off, which is expected to occur not later than 15 years after issuance.
Because the Rate Reduction Bonds likely will be issued a month or two prior
to January 1, 1998, SDG&E proposes to implement FTA charges as a component of
rates prior to January 1, 1998 by advice letter filing(s) to become effective on
five days notice. While SDG&E proposes that the Rate Schedule become effective
on a five-day notice, SDG&E proposes that the rates on the approved Rate
Schedule
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<PAGE>
not be billed until January 1, 1998. It is imperative that the FTA tariff be in
place and approved within five days of the advice letter filing so that the Rate
Reduction Bonds receive a higher credit rating. Any delay in implementing the
initial tariff would be detrimental to a high credit rating for the Rate
Reduction Bonds.
To facilitate the advice letter filing process at the time of issuance,
SDG&E is requesting that the Commission approve the methodology for determining
the amount of Rate Reduction Bonds to be issued as part of this Application.
The requested methodology is discussed in Section IV.B.
B. TRUE-UP MECHANISM FOR FTA CHARGES.
Due to differences between forecasted and actual kWh sales to residential
and small commercial customers and forecast and actual write-off percentages and
the timing of the collections, the revenues collected through the FTA charges
will differ from the Fixed Transition Amounts targeted for collection. In other
words, the actual amortization will differ from the targeted amortization.
To ensure recovery of all costs associated with the Rate Reduction Bonds,
and to enhance the credit rating of the bonds, SDG&E proposes to adjust the FTA
charges at least annually and as often as quarterly with a trigger mechanism
based on a specified variance from scheduled collections of principal. The
actual criteria for the true-up trigger are to be established in the servicing
agreement, based on input from rating agencies, but would at a minimum require
an annual adjustment to track the expected decline in FTA
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charges over time as interest charges decrease with declining amounts of
principal outstanding.
The new FTA charges will be determined using the process as described in
Schedule FTA set forth in Attachment D. This process involves the updating of
sales, charge-offs and customer payment pattern if necessary. The calculation
will reflect the debt service revenue requirement and account for previous over-
or under-collections compared to the amortization schedule. The new FTA charges
will be established for the next forecast 12-month period. SDG&E requests that
the Commission authorize SDG&E to make such routine adjustments by Advice Letter
filings using the model described in SDG&E's workpapers. Such filings will be
made no later than 15 days before the end of each calendar quarter, if required
by the trigger mechanism, or at least on an annual basis, if not required by the
trigger mechanism. For administrative ease, SDG&E proposes to link the true-up
dates to each calendar quarter. The revised FTA charges provided by these
Advice Letter filings would then be effective on the first day of the following
calendar quarter.
In some instances SDG&E may wish to propose changes to the recommended
model for periodic FTA adjustments. In such an instance, SDG&E will file a non-
routine adjustment Advice Letter at least 90 days before the end of any calendar
quarter on which the adjustments are to go into effect. No changes should be
made in the model except as requested by SDG&E.
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The proposed tariff language additions necessary to make the FTA
adjustments described above are contained in Appendix D.
In addition to the routine and non-routine true-ups stated above, AB 1890
states that the Commission shall determine, on each Finance Order issuance
anniversary, whether adjustments to the FTA charge are required, with any
resulting adjustments to the FTA charge to be implemented within 90 days of
issuance anniversary (P.U.Code (S)841(e)). SDG&E expects to comply with the
statute by filing an advice letter 15 days before each Finance Order issuance
anniversary but expects to state that these true-ups are unnecessary given the
annual and quarterly true-up approaches stated above.
C. BYPASS OF THE FTA VIA CHANGE OF SCHEDULE.
During the term of the Rate Reduction Bonds, customers may switch to and
from any applicable rate schedule within the residential and small commercial
groups in accordance with existing tariff provisions. However, to ensure credit
risks are minimized, it is necessary to take measures to prevent "gaming" by
customers who would take advantage of the 10% rate reduction but avoid the
repayment period for the bonds by switching to a schedule outside the
residential or small commercial rate groups. For example, a customer might take
service on the small commercial rate schedule during the rate reduction period
and then switch to an ineligible agricultural rate schedule to avoid the FTA
charge once the rate reduction period has ended.
39
<PAGE>
To address this concern, SDG&E proposes to include language in its tariffs
that indicate that the Schedule FTA charges are not avoidable. This can be seen
in the proposed tariff provisions set forth in Appendix C and Appendix D.
D. OTHER FORMS OF BYPASS.
Customers subject to the FTA charge who subsequently leave the utility
system but remain at the same physical location within the utility's service
territory remain responsible for paying the FTA charge. P.U.Code (S)840(d). In
assessing the FTA charge for these departing customers, SDG&E proposes to apply
the same nonbypassability provisions as applicable to CTC.
Thus, each customer's FTA charge payment will be based on that customer's
consumption of electricity. Electricity consumption will include both the
electricity delivered to customers via utility transmission and distribution
facilities and electricity provided off-system, e.g., by on-site generation,
cogeneration, or "over-the-fence" generation. Where SDG&E is no longer able to
meter or obtain the customer's electricity consumption, the FTA charge will be
based on the customer's historical usage. The definition of bypass does not
include a customer who relocates outside of SDG&E's service territory to a new
location or a customer who no longer is served electricity from any supplier.
B. RATEMAKING ISSUES (WHELAN)
In this section, SDG&E proposes that the Commission adopt two ratemaking
mechanisms to address Rate Reduction
40
<PAGE>
Bonds (RRB) issues. These proposed mechanisms -- a revised Transition Cost
Balancing Account and a Rate Reduction Bond Memorandum Account -- will: (1)
prevent cost shifting between residential/small commercial customers and all
other customers, and (2) ensure that the rate reduction provided to residential
and small commercial customers during the transition period is commensurate with
the amount of transition costs financed by the Rate Reduction Bonds and
describes the treatment of any credits due to residential and small commercial
customers during the post-transition period as a result of the RRB increase.
1. THE TRANSITION COST BALANCING ACCOUNT.
SDG&E's proposal, described below, will ensure that all customers other
than residential and small commercial customers will pay the same amount of
transition costs that they would have, absent issuance of the Rate Reduction
Bonds and the 10 percent rate reduction. This means that the rate freeze period
will end at the same time as it otherwise would have. The following section
describes the Transition Cost Balancing Account, as proposed in SDG&E's
transition cost filing (A.96-08-072), then explains how SDG&E proposes to
incorporate the Rate Reduction Bonds and the 10 percent rate reduction into the
Transition Cost Balancing Account to prevent cost shifting between residential
and small commercial customers and all other customers.
A. OVERVIEW
In the transition cost proceeding, SDG&E proposed to establish a Transition
Cost Balancing Account which consists
41
<PAGE>
of a CTC revenue component and a transition cost component. Each month during
the transition period, the CTC revenue component would be credited with residual
CTC revenues billed to all appropriate customers. As proposed in SDG&E's
Unbundling Filing (A.96-12-011), billed revenues under the rate freeze will
first be used to recover all of SDG&E's non-transition costs (e.g., distribution
revenue requirements, Public Purpose Programs, etc.). Any remaining revenue
would be considered residual CTC revenues, available to recover the transition
cost revenue requirements. As these revenue requirements are recovered,
depreciation expense is recovered.
Due to the manner in which CTC revenues are calculated residually under the
rate freeze, if the Transition Cost Balancing Account were not modified (as
described below), the imposition of an FTA Tariff on residential and small
commercial customers would decrease the residual amount of CTC revenues
available to recover CTC revenue requirements. In addition, the 10 percent rate
reduction would directly reduce the CTC revenues. (The rest of this chapter
will refer to this combined reduction in revenues as "CTC revenue reduction.")
All else being equal, the result of this CTC revenue reduction would be that
certain CTC revenue requirements that could have been recovered would not now be
recovered, but would remain as a debit balance in the Transition Cost Balancing
Account. On a forecast basis the transition costs associated with this revenue
requirement
42
<PAGE>
reduction are equivalent to the financed Transition Costs that are financed
through Rate Reduction Bonds.
B. PROPOSED MODIFICATION TO THE TRANSITION COST BALANCING ACCOUNT TO
INCORPORATE ISSUANCE OF THE RATE REDUCTION BONDS AND THE 10
PERCENT RATE REDUCTION AND TO PREVENT COST SHIFTING.
To incorporate the 10 percent rate reduction and issuance of the Rate
Reduction Bonds into the Transition Cost Balancing Account, SDG&E proposes that
each month during the transition period, in addition to the actual residual CTC
revenues received, the Transition Cost Balancing Account be credited with an
imputed revenue amount equal to the CTC revenue reduction due to the FTA Tariff
and 10 percent reduction for residential and small commercial customers. This
total additional credit amount is the amount of revenue that would have been
collected from residential and small commercial customers and used to recover
the CTC approved costs, absent the 10 percent rate reduction and the FTA Tariff.
On a monthly basis, these imputed revenues will be used to credit or be applied
to transition costs as part of the monthly Transition Cost Balancing Account
adjustments.
Based on these entries, the balance in the Transition Cost Balancing
Account may reach zero at some time during the rate freeze period. This
determines the point at which all transition cost revenue requirements would
have been recovered (except those recoverable after December 31, 2001), absent
the 10 percent rate reduction and the FTA
43
<PAGE>
Tariff. At this point, the rate freeze will end for all customers./4/
This approach ensures that the rate freeze ends at the same time as it
otherwise would have, regardless of the 10 percent rate reduction and issuance
of the Rate Reduction Bonds. Thus, large customers' responsibility for paying
transition costs is unaffected by the 10 percent discount and issuance of the
Rate Reduction Bonds.
In addition, this approach ensures that the actual CTC revenue reduction
that residential and small commercial customers receive must be commensurate
with the amount of transition costs financed by the Rate Reduction Bonds, the
financed Transition Costs. The Rate Reduction Bond Memorandum Account described
in Section 2 below, ensures that this is the case.
2. RATE REDUCTION BOND MEMORANDUM ACCOUNT
The function of the Rate Reduction Bond Memorandum Account is twofold:
1) to determine the need to issue additional bonds, and
2) to track other credits that may be given to residential and small
commercial customers in the post-rate freeze period. The ending balance in the
Rate Reduction bond Memorandum Account will either be debited or credited
- -----------------
/4/ The rate freeze may be further extended for customers to recover
exemptions, mandated by AB 1890 as described in SDG&E's transition cost filing.
The firewall mandated by AB 1890 (P.U. Code, Section 330(v)(2)) ensures that the
two categories of customers pay only for their own CTC exemptions. The two
categories of customers are residential/small commercial customers and all other
customers. CTC collection and the rate freeze would only continue for a
category of customers in order to pay for their own exemptions. Once these are
recovered the rate freeze for that customer category would end.
44
<PAGE>
to residential and small commercial customers' revenue requirements in the post-
rate freeze period.
A. ADDITIONAL BOND ISSUANCE
When the Rate Reduction Bonds are sized, the transition costs associated
with the forecast reduction in CTC revenues received from residential and small
commercial customers due to the 10 percent rate reduction and FTA Tariff are
exactly equal to the financed Transition Costs. The bonds are sized by setting
these two amounts equal to each other. However, the actual residential and
small commercial customer CTC revenue reduction may end up being more or less
than forecast, depending on whether actual sales to these customers are higher
or lower than was forecast when the Rate Reduction Bonds were sized.
If sales are higher than was originally forecast, the reduction in the CTC
revenue actually received also will be higher than was expected when the bonds
were sized. In this case, the amount of transition costs financed in the
original financing will not be sufficient to cover actual revenue reduction
provided to residential and small commercial customers. If this is the case,
SDG&E requests authorization to issue additional Rate Reduction Bonds to finance
the necessary additional amount of transition costs to make up for the
additional CTC revenue reduction./5/
If, on the other hand, sales are lower than was originally forecast, the
reduction in the CTC revenue will
- ----------------------
/5/ The decision to issue additional RRBs will be based on a threshold amount
of the size of the issuance.
45
<PAGE>
also be lower than was expected when the bonds were sized. In this case, not all
of the revenue reduction associated with the Rate Reduction Bonds will have been
provided to residential and small commercial customers during the rate freeze
period. In this case, the remainder of the savings to which they are entitled
will be passed on to these customers after the rate freeze period.
Similarly, if transition costs are recovered early, thereby ending the rate
freeze early, the reduction in CTC revenue may be lower than was expected when
the bonds were sized. As in the case where sales are lower than expected, not
all of the revenue reduction associated with the Rate Reduction Bonds will have
been provided to residential and small commercial customers. The remainder of
the savings to which they are entitled will be passed on to them after the rate
freeze period.
B. POST-TRANSITION PERIOD CREDITS TO RESIDENTIAL AND SMALL
COMMERCIAL CUSTOMERS
This section describes the treatment of any credits due to residential and
small commercial customers during the post-rate freeze period as a result of the
RRB issuance. Adjustments may be necessary due to: (1) the refund of servicing
fees after the rate freeze period, (2) the carrying cost earned on the
difference in timing from when SDG&E receives FTA Tariff revenue from ratepayers
and when SDG&E actually remits the funds to the Bond Trustee, (3) the investment
earnings on the funds held by the Bond Trustee in the collection account between
distribution dates, and (4)
46
<PAGE>
any overcollateralization of FTA Tariff collections that are in excess of total
debt service. In addition, credits due to ratepayers may be necessary due to (5)
sizing of the RRBs and (6) post-transition period savings from the RRBs, which
would include benefits due to carrying cost savings of the financed taxes that
occur after the rate freeze period. In each of these cases, the credit to
ratepayers will be given after the transition period to the residential and
small commercial customers.
3. PROPOSED TARIFF CHANGES
The purpose of this section is to provide SDG&E's proposed tariffs which
are needed to enable the issuance of the Rate Reduction Bonds and the 10 percent
rate reduction.
Proposed Tariff for Rate Reduction Bond Memorandum
--------------------------------------------------
Account
-------
The following tariff language would be inserted into SDG&E's current
tariffs as part of SDG&E's Preliminary Statement.
Rate Reduction Bond Memorandum Account ("RRB Memorandum Account")
The Company shall maintain a RRB Memorandum Account to record the
difference between the Rate Reduction Bond Savings Amount and the Ten Percent
Rate Reduction Amount provided to residential and small commercial customers in
accordance with AB 1890. This RRB Memorandum Account will also be used to
record other credit amounts for financed tax credits, overcollateralization not
needed to discharge the Rate Reduction Bonds, servicing fees, and interest
earned on
47
<PAGE>
cash flow timing differences, less incremental costs associated with
servicing activities, and any other related costs.
a. Definitions
1. "Rate Reduction Bonds":
Rate Reduction Bonds shall be authorized by the Commission in its Financing
Order to allow for the ten percent rate reduction in accordance with AB 1890.
2. "Rate Reduction Bond Savings Amount":
The Rate Reduction Bond Savings Amount shall include items such as the avoided
revenue requirement of the transition cost financed tax credit,
overcollateralization not needed to discharge the Rate Reduction Bonds,
servicing fees, interest earnings on FTA charges held prior to remittance to
bondholders, less the principal and interest payments and other related fees
(including FF&Us) associated with the repayment of the Rate Reduction Bonds and
other related costs.
3. "Ten Percent Rate Reduction Amount":
The Ten Percent Rate Reduction Amount shall be the difference between the
residential and small commercial customer revenues actually billed and the
residential and small commercial customer revenues that would have been billed
absent the rate reduction in accordance with AB 1890.
Entries shall be made to the Rate Reduction Bond Memorandum Account at the end
of each month and shall be the result of the following calculation:
(a) The Ten Percent Rate Reduction Amount (defined above).
(b) Less: The Rate Reduction Bond Savings Amount (defined above).
If the resulting amount is positive, a debit entry shall be recorded in the RRB
Memorandum Account. If the resulting
48
<PAGE>
amount is a negative amount, a credit entry shall be recorded in the Rate
Reduction Bond Memorandum Account.
The Company shall maintain the Rate Reduction Bond Memorandum Account until the
Rate Reduction Bond obligations are discharged. At that time, if a credit
balance exists in the RRB Memorandum Account, the Company shall propose a credit
adjustment to return the additional savings to residential and small commercial
customers. To the extent a credit or debit balance exists in the RRB Memorandum
at the end of any year following the rate freeze period until the Rate Reduction
Bond obligations are discharged, SDG&E shall request inclusion of that amount in
rates for residential and small commercial customers along with other revenue
changes in the annual RAP, or successor proceeding authorized by the commission.
Interest shall accrue monthly by applying the Interest Rate to the average of
the beginning and ending month balance in the RRB Memorandum Account.
49
<PAGE>
VI.
WITNESS QUALIFICATIONS
QUALIFICATIONS OF
FRANK H. AULT
My name is Frank H. Ault. My business address is 101 Ash Street, San
Diego, California 92101. I am the Vice President and Controller of San Diego
Gas & Electric Company. I received my Bachelor of Arts from Stanford University
in 1966, with a major in economics and a minor in statistics. Following
graduation I served for three years in the United States Army as a battalion
operations officer.
I was hired by San Diego Gas & Electric Company ("SDG&E") in 1969 and
worked in various roles in the Accounting Departments. I earned a Master in
Business Administration degree with an emphasis in accounting and finance, and
attended United States International University in 1972.
In November 1981, I became SDG&E's Director of Internal Auditing, assuming
responsibility for reviewing internal controls throughout the corporation. My
responsibilities included the auditing of computerized systems, gas procurement
and transmission contracts and the performance of various operational audits. I
also responded to special requests from the Company's Board of Directors and
Audit Committee.
I became SDG&E's Controller, my current position, in May 1986. In this
position, I have responsibility for the
50
<PAGE>
Company's accounting functions. I establish and enforce SDG&E's accounting
policies and practices, including the system of internal controls which assures
the reliability of the Company's financial statements and other data provided to
the Securities and Exchange Commission ("SEC") and the investing public. I am
responsible for recording the transactions of the Company, issuing external
financial reports, and researching special accounting issues. I play a
significant role in controlling the Company's overall expenditures of capital
and operating funds. I also interpret and implement the accounting rules and
decisions established by the California Public Utilities Commission and the
Federal Energy Regulatory Commission.
In 1992, I was promoted to Vice President and Controller which added the
responsibility of overseeing the procurement and material warehousing functions.
I ensure the Company's procurement and material handling practices are
consistent with our business needs and run as efficiently as possible. I review
our inventory practices and utilization and ensure inventories are maintained at
the lowest practical level. I approve all major contracts of the Company and
administer our Emerging Business Enterprises program, which encourages doing
business with minority, woman, and disabled veteran-owned vendors.
In 1994, I added oversight of all of the information systems and
telecommunications operations to my responsibilities. In this capacity I
oversee the operations of the computer and telecommunications infrastructure for
51
<PAGE>
the Company. I ensure the existing systems' reliability as well as direct the
development of computer systems needed to meet the Company's business
requirements. I also oversee the procurement and maintenance of the Company's
workstation environment and the reliability of our local and wide-area networks.
I have represented the Edison Electric Institute and the American Gas
Association at FASB, FERC, and SEC. I am also a member of the Board of
Directors of the San Diego Community Foundation, where I serve as Vice
President-Finance. I also serve as Chairman of the San Diego Regional Fire and
Emergency Services Foundation.
This concludes my statement of qualifications.
The purpose of my testimony is to sponsor Chapter I
("Executive Summary")
52
<PAGE>
QUALIFICATIONS OF
WAYNE M. HITT
My name is Wayne M. Hitt and my business address is 101 Ash Street, San
Diego, CA 92101.
I am a Corporate Tax Principal in the Corporate Tax Services Department. I
am responsible for the development and analysis of income tax estimates and
other tax estimates for use in SDG&E's ratemaking proceedings.
I received a Bachelor of Science in Business Administration/Accounting
degree with Honors from Southern Illinois University. Prior to joining SDG&E in
1996, I was Tax Planning and Regulatory Tax Manager for Pacific Enterprises and
Southern California Gas Company. I have testified before the California Public
Utilities Commission at various times in the past regarding tax issues.
The purpose of my testimony is to sponsor Section D ("Income Tax
Considerations") of Chapter III and co-sponsor Chapter IV ("Economic Benefits
and Bond Sizing").
53
<PAGE>
QUALIFICATIONS OF
DOUGLAS P. HANSEN
My name is Douglas P. Hansen. I am employed by San Diego Gas & Electric
Company ("SDG&E") as a Principal Pricing Analyst in the Pricing Services
Department. My Business address is 101 Ash Street, San Diego, California,
92101.
My present responsibilities include the leadership of numerous pricing
issues of SDG&E. These activities generally include the development of price for
SDG&E's gas and electric services including the development of billing units,
marginal and embedded costs, revenues allocation, rate design, terms and
conditions of service and prices. These activities also include the evaluation
and interpretation of regulatory agency rulings, review and analysis of reports
and actions of other utilities, and review of articles in various trade journals
related to my areas of responsibility. I am also responsible for the
preparation of exhibits and proposals for regulatory proceedings related to my
areas of responsibility.
I received a Bachelor Degree in Public Administration from San Diego State
University. In addition, I have participated in several courses and seminars
associated with cost of service, revenue requirements, revenue allocation and
rate design.
I have been employed by SDG&E since 1972 and have held various positions
subsequent to that time. In 1977, I was promoted to Gas Regulatory Analyst with
responsibility for
54
<PAGE>
analyzing and directing action in SDG&E's gas supplier applications before
various regulatory agencies. In 1978, I was promoted to Supervising Rate Analyst
and assigned responsibility for gas and steam rate design, revenue forecasting
and gas offset revenue requirements. In 1982, I was promoted to Rate Development
Supervisor, which involved rate design, revenue allocation, rate and load
research, cost of service and revenue forecasting. In 1983, I was promoted to
Acting Manager - Rate Department. In 1987, I was promoted to Manager - Pricing
Department and in August 1994, I was given my current position.
I have previously testified before the California Public Utilities
Commission.
The purpose of my testimony is to sponsor Section A ("Tariff Issues") of
Chapter V.
55
<PAGE>
QUALIFICATIONS OF
JAMES H. MONTGOMERY
My name is James H. Montgomery. I am a Principal Financial Analyst for San
Diego Gas & Electric Company ("SDG&E"). My business address is 101 Ash Street,
San Diego, California 92101.
I received a Bachelor and Masters degree in Electrical Engineering from
Purdue University, and a Masters in Business Administration in Finance from San
Diego State University. Prior to joining SDG&E, I was employed as a mechanical
engineer with the U.S. Navy.
I joined SDG&E in 1977 as an Engineer. Subsequently I held various other
engineering positions. In 1993 I joined the finance division as a Senior
Analyst. I have held various financial positions in the areas of financial
planning, cost of capital, and financial analyses. My current responsibilities
as a Principal Financial Analyst include long-term financing.
I have previously testified before the California Public Utilities
Commission.
The purpose of my testimony is to sponsor Chapter II ("Overview of Proposed
Rate Reduction Bond Transaction"), Section A ("Financing Considerations") and
Section C ("Bankruptcy Considerations") of Chapter III and co-sponsor Chapter IV
("Economic Benefits and Bond Sizing").
56
<PAGE>
QUALIFICATIONS OF
JAMES P. TRENT
My name is James P. Trent. I am the Manager of the Accounting Operations
Department for San Diego Gas & Electric Company ("SDG&E"). My business address
is 101 Ash Street, San Diego, California 92101.
I received a Bachelor of Science degree in Accounting from Canisius College
in Buffalo, New York and a Masters Degree in Business Administration from the
State University of New York at Buffalo. Prior to joining SDG&E, I was employed
as a Certified Public Accountant by two of the "Big 6" international accounting
firms. I am a Certified Public Accountant.
I joined SDG&E in 1985 as a Research Accountant. I have held various
positions in the accounting departments of the Company. My current
responsibilities as Manager of the Accounting Operations Department include
management and external financial reporting, cost/fixed asset accounting,
accounts payable, and payroll.
I have previously testified before the California Public Utilities
Commission. The purpose of my testimony is to sponsor Section B ("Accounting
Considerations") of Chapter III.
57
<PAGE>
QUALIFICATIONS OF
THOMAS L. WHELAN
My name is Thomas L. Whelan. My business address is 101 Ash Street, San
Diego, California 92101.
I analyze tariff proposals and California Public Utility Commission rulings
to determine their impact on Company revenues and expenses. I develop revisions
to rate schedules and prepare related data and exhibits for presentation to
government regulatory agencies.
I attended San Diego State University where I received a Bachelor of
Science Degree in Marketing. In 1969 I joined SDG&E. Since that time, I have
held positions of increasing responsibility leading to my present position of
Project Administrator I.
The purpose of my testimony is to sponsor Section B ("Ratemaking Issues")
of Chapter V of this application. I have previously testified before the
Commission.
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<PAGE>
APPENDIX A
<PAGE>
APPENDIX A
ISSUANCE COSTS AND ONGOING EXPENSES (ESTIMATES)
<TABLE>
<CAPTION>
ISSUANCE COSTS (ESTIMATES)
- --------------------------
<S> <C>
Underwriting Fees (.625% of principal) $ 4.38 million
Underwriters' Expenses .04
Legal Fees (SDG&E Counsel, Underwriters'
Counsel, Bond Counsel) 1.5
SEC Registration Fees .21
Rating Agency Fees .3
Outside Accounting Fees .2
Infrastructure Bank Fees .1
Other (Trustee, Printer, SPE MetWest
miscellaneous) .27
------
Total $ 7.0 million
<CAPTION>
ONGOING ANNUAL EXPENSES (ESTIMATES)
- -----------------------------------
<S> <C>
REFUNDABLE/1/
- -------------
Servicer (at 1.75% of original principal) $12.25 million
NON REFUNDABLE
- --------------
Bond Trustee $15 thousand
SPE 15
SPE Manager 15
Infrastructure 5
------
Total $50 thousand
</TABLE>
- -----------------------
/1/ During time SDG&E acts as servicer, these expenses will not be charged to
customers.
A-1
<PAGE>
APPENDIX B
<PAGE>
APPENDIX B
ECONOMIC BENEFITS AND BOND SIZING ANALYSIS
SDG&E is asking the Commission for authority to issue an aggregate amount
of up to $800 million of Rate Reduction Bonds. SDG&E currently estimates,
however, that a Rate Reduction Bond financing of $710 million, assuming the
bonds have an average repayment schedule of 10 years and coupon rate of 7.5
percent, will provide savings sufficient for the 10% rate reduction -- and an
estimated $100 million in net present value benefits to residential and small
commercial customers.
The following discussion explains in detail how SDG&E intends to determine
the size of the Rate Reduction Bonds needed to produce the 10% rate reduction
with actual Bond terms used at the time of issuance. The discussion also
explains how SDG&E calculated the net present value benefits to residential and
small commercial customers.
A. BOND SIZING MODEL
The key to the methodology for calculating the amount of Rate Reduction
Bonds to issue is to determine the Bond size necessary to equate to a 10% rate
reduction for residential and small commercial customers. This calculation is
done by comparing over the rate freeze period two sets of revenue requirements:
1) as if the Rate Reduction Bonds had not been issued and 2) with the issuance
of Rate Reduction Bonds.
B-1
<PAGE>
This approach is shown in Figure APP-1. The solid line gives annual
revenue requirements on the $710 million of transition costs being financed
assuming revenue is collected under typical ratemaking treatment over the rate
freeze period. In comparison, the dashed line shows annual principal and
interest payments on $710 million of Rate Reduction Bonds over an assumed
10-year Bond life. The amount of Rate Reduction Bonds is varied until the
difference between the solid line and the dashed line over the 4-year rate
freeze period equals the 10% reduction (about $95 million annually).
Table APP-1 shows the detailed Bond sizing model. Table APP-1 is organized
as follows: page 1 lays out several assumptions, page 2 calculated the revenue
requirements as it the Rate Reduction Bonds were not issued, pages 3 - 5
calculate the revenue requirements with the Bond issuance, and pages 6 - 8 show
the differences between the revenue requirements. Calculations of revenue
requirements have been performed on a quarterly basis since interest will be
paid to holders of the Bonds quarterly.
1. MODEL PAGE 1
On Table APP-1, page 1, lines 3 and 4 show the amount of revenue reduction
which equates to a 10% rate reduction. In 1998 the revenue reduction needed is
$91.8 million (based on a 10% reduction for rates currently in place/2/), and
this
- -----------------------
/2/ The 10% reduction is for rates in place January 1, 1998. Current rates are
a good estimate for January 1, 1998 rates. SDG&E has the
B-2
<PAGE>
amount is forecasted to increase by 2.5% per year as sales increase over the
period. The total revenue reduction over the period is $406 million.
Line 12 and 13 on page 1 gives the amortization period for transition
costs without Rate Reduction Bonds as 4 years and 1 quarter, or 1/1/98 -
3/31/02. Line 15 shows SDG&E's authorized return on transition costs of
9.52% /3/ pre-tax. Franchise fees are applied at 1.93% and uncollectibles at
.274%, as authorized for SDG&E in its last applicable rate case (D. 92-12-019),
producing a "gross up" amount of 2.2537% as shown in line 17.
In lines 21-25 it is assumed for now that the Bonds will have a 10 year
life and a AAA interest rate of 7.5%. These amounts will need to be updated at
the time the Bonds are issued for actual values. Line 27 shows an estimate for
refundable ongoing expenses of 1.75% of original principal, and line 29 has non-
refundable ongoing expenses of $50,000 annually. SDG&E's cost of capital for
1997 of 13.61% pre-tax, or 9.35% weighted, is listed on line 31 (D. 96-11-060).
SDG&E has assumed in this model that the Bonds will be issued with a
constant principal amortization over the Bond life, as shown in line 33. Under
this assumption the total payments for principal and interest will decrease
over the
______________________________________________________________________________
authorization to make specified adjustments to its rate freeze level based on
fuel prices.
/3/The rate of 9.52% is the simple average of two authorized rates: 9.78% for
SONGS assets and 9.25% for all other transition cost assets. SDG&E's transition
cost assets are very roughly half SONGS and half other. The proportion assumed
has only a minor impact on the Bond sizing and customer benefits calculation.
B-3
<PAGE>
10-year period, and thus rates will be lower for residential and small
commercial customers toward the end of the 10-year period. Bond issue expenses,
as discussed in Section III.A.5, are estimated at $7 million in line 37.
Line 41 shows the amount of transition costs and income taxes that will be
financed through the Bond issuance, and these two amounts are summed in line 43.
These two amounts are varied until the targeted 10%, or $406 million, revenue
reduction is achieved. The income tax amount is a full tax gross up on the
transition costs. Thus the income tax amount is the transition cost value times
.68765./4/
This approach for income taxes assumes that the transition costs being
financed are "generic" and can come from any of the following categories of
transition costs associated with residential and small commercial customers:
rate base amounts, regulatory costs, or purchased power/QF expenses. Customers
are not impacted by this generic asset approach since the specific transition
costs being financed will be carefully tracked in the CTC balancing account,
along with the appropriate income tax effects./5/ Further, the determination of
the amount of bonds necessary to provide the 10% rate reduction is not affected
by the
- ------------------------
/4/ (1/(1-tax rate))-1 = .68765, where the combined federal and state tax rate =
.40746.
/5/ Entries in the CTC balancing account will include actual amounts on a
monthly basis for specific transition cost items and related income taxes,
including all deferred taxes and an appropriate gross-up on deferred taxes.
B-4
<PAGE>
generic asset assumption. Finally, use of a generic asset in the Bond sizing
model simplifies the analysis.
2. MODEL PAGE 2
Page 2 gives the calculation of revenue requirements for the targeted
transition costs as if the Bonds were not issued. Line 4 begins at year end
1997 with the amount of rate base assets to be financed: $417 million (see
page 1, line 41), and then amortizes this amount over the 1/1/98 - 3/31/02
period. Line 5 gives the annual depreciation, line 6 the annual, average rate
base balance from line 4, and line 7 the annual rate base return (line 6 times
9.52%).
The calculations on page 2 include the impacts of income taxes in lines 12
and 13. The basis for these calculations is that SDG&E will be required to pay
these taxes to the IRS over the four year and one quarter time period and thus
customers would need to pay for these income taxes. Line 12 shows the unpaid
balance of these income taxes, starting with the $287 million shown on line 41
of page 1, and line 13 provides the annual tax payments from the $287 million
tax total.
The total revenue requirement for the no Bonds case is shown in lines
18-23. First is the depreciation of the targeted assets, as listed in line 18.
Line 19 provides return on rate base, and line 20 the income tax payments. The
revenue requirement is sub-totaled in line 21, franchise fees and
uncollectibles are added in line 22, and the total revenue requirement is found
in line 23.
B-5
<PAGE>
3. MODEL PAGES 3-5
Pages 3-5 provide the details for the determination of the revenue
requirement for the issuance of the Rate Reduction Bonds. Line 4 shows the
principal payments each quarter for 10 years, which total to the amount financed
of $711 million (i.e., net assets and financed income taxes of $704 million plus
issue expenses of $7 million). Interest payments at the assumed 7.5% rate are in
line 5 refundable ongoing costs are in line 6, non-refundable ongoing costs are
in line 7, and the total debt service and fees is in line 8. Line 12 shows the
customer credit for refundable ongoing costs.
Lines 16-21 give the benefits to customers of carrying costs on
unamortized income tax amounts. This adjustment recognizes that SDG&E will be
receiving the financed income tax amounts when the Bonds are issued, but will
pay these taxes over the 10 year period. Thus customers deserve the benefit of
carrying costs on the unamortized amounts. The appropriate rate of return is
the CTC authorized amount of 9.52% during the 1/1/98 - 3/31/02 period, and
SDG&E's full authorized cost of capital thereafter. This full cost of capital
is assumed to be the 1997 amount authorized for SDG&E, or 13.61% pre-tax.
The total revenue requirement for the issuing Bonds case is depicted in
line 25-32. Line 25 shows the Bonds principal payments, line 26 the Bonds
interest payment, line 27 the total ongoing costs, line 28 the refundable
ongoing
B-6
<PAGE>
cost credit, and line 29 the carrying cost credit for financed income taxes.
These three amounts are sub-totaled on line 30, line 31 adds the franchise fees
and uncollectibles, and line 32 shows the total revenue requirement.
4. MODEL PAGES 6-8
Pages 6-8 of Table APP-1 provides the differences in revenue requirements
for the two cases: as if the Bonds were not issued (line 4), and with the Bond
issuance (line 5). The revenue differences by quarter for the 10 year period
are given in line 6. Line 8 shows the amount of the 10% rate reduction by
quarter (page 1, line 7). The sum of line 6 equals the sum of line 8 over the
1/1/98 - 3/31/02 period. The difference between line 6 and 8, line 7, will be
tracked in the Rate reduction Bond Account.
Line 12 provides the total revenue requirement differences shown in line 6
for the period 1/1/98 - 3/1/02. The model iterates on the amount of financed
transition costs (page 1, line 41) until the value on line 12 equals the
targeted 10% reduction amount of $406 million of revenue. Line 14 shows the
bond proceeds, or financed transition costs, of $704 million, and line 15 has
the assumed issuance expenses of $7 million. Thus the total Bond size is $711
million as listed on line 16.
B-7
<PAGE>
B. CUSTOMER BENEFITS
AB 1890 states that a major item for review by the CPUC is to ensure
that there are customer benefits provided by issuing the Rate Reduction Bonds.
Line 20 on page 6 of the Table App-1 shows that customers will benefit form the
issuance of bonds by $104 million, on a present value basis, given the
assumptions currently in the model. This level of Benefits should not change
significantly when the actual values are experienced at the time the bonds are
issued.
The calculation of customer benefits is based on a 10% discount rate.
This value comes from SDG&E's currently authorized cost of capital,rounded up to
the nearest whole percentage amount. While it is not clear what the discount
rate is for customers, the assumed approach provides a good estimate for these
purposes.
The estimated customer benefit of $104 million on a net present value
basis is a considerable savings to be enjoyed by residential and small
commercial customers due to issuing the Rate Reduction Bonds. This result
provides ample justification to the CPUC for authorizing SDG&E to issue the
bonds as requested in this application.
B-8
<PAGE>
FIGURE APP-1
Bond Sizing Model
[LINE GRAPH SHOWING REVENUE PER YEAR FOR 4-YEAR
COLLECT AND ISSUE BONDS]
<PAGE>
SAN DIEGO GAS & ELECTRIC
RATE REDUCTION BONDS--SIZING CALCULATIONS
INPUT PAGE ($ in Millions)
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Target revenue reduction, 1/1/1998-3/3/2002:
-------------------------------------------
2 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
3 Annual revenue reduction with 10% rate reduction $92 $94 $96 $99 $25
4 Total revenue reduction $406
5
6 3/3/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
------ ------- ------- -------- ------- ------- ------- --------
7 Quarterly revenue reduction with 10%
rate reduction $23 $23 $23 $23 $24 $24 $24 $24
(continued) 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02
------- ------- ------- -------- ------- ------- ------- ------- --------
$24 $24 $24 $24 $25 $25 $25 $25 $25
8 Total revenue reduction $406
9
10 Transition cost amortization without
------------------------------------
debt financing:
--------------
11
12 Amortization period 4 years 1 quarter(s)
13 Number of amortization periods 17 quarters
14
15 Annual authorized pretax transition
cost return 9.52% Reduced authorized return for CTC's
16
17 Franchise fees & uncollectibles 2.2537%
18
19 Transition cost amortization with
---------------------------------
debt financing:
--------------
20
21 Amortization Period 10 years 0 quarter(s)
22 Number of amortization periods 40 quarters
23
24 Annual Quarterly
------ -------
25 Interest (pre-tax carrying cost) 7.59% 1.88% (percent of outstanding principal)
26
27 Refundable costs/fees 1.75% 0.44% (percent of initial principal)
28
29 Non-refundable costs/fees ($ millions) $0.05 $0.01 (fixed dollar amount)
30
31 Annual authorized pre-tax rate of return 13.61%
32
33 Rate reduction bond type 2 (constant-principal)
34 (Enter 1 for mortgage-style, 2 for constant-principal)
35
36
37 Bond issuance expense ($ million) $7.0
38
39 Transition cost amounts financed:
---------------------------------
40 Net assets Financed Taxes
---------- --------------
41 Generic Assets 417 Plant 287 Income Taxes
42 ---------- --------------
43 Total Net Assets plus financed Taxes 704
</TABLE>
<PAGE>
Table APP-1
Page 2
San Diego Gas & Electric
RATE REDUCTION BONDS-SIZING CALCULATIONS
17-QUARTER AMORTIZATION CASE
($ in millions)
Assumptions: 17-quarter amortization
- -----------
9.52% pre-tax carrying cost
<TABLE>
<CAPTION>
1 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Rate-Base Balances
------------------
3
4 EOY Transition Cost-Rate Base Balance 417 - - - 319 - - -
5 Annual Transition Cost-Rate Base Depreciation - - - 98 - - -
6 Average Transition Cost-Rate Base Balance - - - 368 - - -
7 Annual Pre-tax Return on Average Balance - - - 35 - - -
8
9
10 Financed Taxes:
---------------
11
12 EOY Financed Taxes Balance 287 - - - 219 - - -
13 Annual Financed Taxes Amortization - - - 67 - - -
14
15
16 Quarterly Revenue Requirement, 17-quarter Amortization
------------------------------------------------------
17
18 Transition Cost-Rate Base Depreciation (ln 5 + 4) 25 25 25 25 25 25 25
19 Pre-tax Return on Transition Cost-Rate Base (ln 7 + 4) 9 9 9 9 6 6 6
20 Financed Tax (ln 13 + 4) 17 17 17 17 17 17 17
---------------------------------------------------------------------
21 Subtotal (ln 18 + ln 19 + ln 20) 50 50 50 50 48 48 48
22 Franchise Fees & Uncollectibles 1 1 1 1 1 1 1
---------------------------------------------------------------------
23 Total Revenue Requirement, 1/1/1998 - 3/31/2002 51 51 51 51 49 49 49
collection if no financing from ratepayers
=====================================================================
<CAPTION>
1 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Rate-Base Balances
------------------
3
4 EOY Transition Cost-Rate Base Balance 221 - - - 123 - - -
5 Annual Transition Cost-Rate Base Depreciation 98 - - - 98 - - -
6 Average Transition Cost-Rate Base Balance 270 - - - 172 - - -
7 Annual Pre-tax Return on Average Balance 26 - - - 16 - - -
8
9
10 Financed Taxes:
---------------
11
12 EOY Financed Taxes Balance 152 - - - 84 - - -
13 Annual Financed Taxes Amortization 67 - - - 67 - - -
14
15
16 Quarterly Revenue Requirement, 17-quarter Amortization
------------------------------------------------------
17
18 Transition Cost-Rate Base Depreciation (ln 5 + 4) 25 25 25 25 25 25 25 25
19 Pre-tax Return on Transition Cost-Rate Base (ln 7 + 4) 6 4 4 4 4 2 2 2
20 Financed Tax (ln 13 + 4) 17 17 17 17 17 17 17 17
-----------------------------------------------------------------------------
21 Subtotal (ln 18 + ln 19 + ln 20) 48 45 45 45 45 43 43 43
22 Franchise Fees & Uncollectibles 1 1 1 1 1 1 1 1
-----------------------------------------------------------------------------
23 Total Revenue Requirement, 1/1/1998 - 3/31/2002 49 47 47 47 47 44 44 44
collection if no financing from ratepayers
=============================================================================
<CAPTION>
1 12/31/01 3/31/02
------------------
<S> <C> <C>
2 Rate-Base Balances
------------------
3
4 EOY Transition Cost-Rate Base Balance 25 -
5 Annual Transition Cost-Rate Base Depreciation 98 25
6 Average Transition Cost-Rate Base Balance 74 12
7 Annual Pre-tax Return on Average Balance 7 1
8
9
10 Financed Taxes:
---------------
11
12 EOY Financed Taxes Balance 17 (0)
13 Annual Financed Taxes Amortization 67 17
14
15
16 Quarterly Revenue Requirement, 17-quarter Amortization
------------------------------------------------------
17
18 Transition Cost-Rate Base Depreciation (ln 5 + 4) 25 25
19 Pre-tax Return on Transition Cost-Rate Base (ln 7 + 4) 2 1
20 Financed Tax (ln 13 + 4) 17 17
--------------
21 Subtotal (ln 18 + ln 19 + ln 20) 43 43
22 Franchise Fees & Uncollectibles 1 1
--------------
23 Total Revenue Requirement, 1/1/1998 - 3/31/2002 44 44
collection if no financing from ratepayers
==============
</TABLE>
EOY = End Of Year
<PAGE>
SAN DIEGO GAS & ELECTRIC Table APP-1
Page 3
RATE REDUCTION BONDS--SIZING CALCULATIONS
BOND-ISSUANCE CASE
($ in millions)
Assumptions: 10-year amortization
- -----------
7.5% pre-tax carrying cost
<TABLE>
<CAPTION>
1 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3
------------------------------
4 Principal Payment Sum of payments = $ 711 MM 18 18 18 18 18 18 18
------------------------------
5 Interest Payment 13 13 13 12 12 12 11
6 Refundable Ongoing Costs/Fees 3 3 3 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0 0 0 0
---------------------------------------------------------------------
8 Quarterly Total Debt Service & Fees Total FTA 34 34 34 33 33 33 32
=====================================================================
9
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing Costs/Fees Credit (3) (3) (3) (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 287 280 272 265 258 251 244 237
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7 7 7 7
18 Average Balance of Financed Taxes - - - 272 - - -
19 Carrying Cost on Balance of Financed Taxes - - - 9.52% - - -
20 Annual Financed Taxes Carrying Cost Credit - - - (26) - - -
21 Quarterly Financed Taxes Carrying Cost Credit (6) (6) (6) (6) (6) (6) (6)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 18 18 18 18 18 18 18
26 Interest Payment (ln 5) 13 13 13 12 12 12 11
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (6) (6) (6) (6) (6) (6) (6)
---------------------------------------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 + ln 29) 25 24 24 24 24 24 23
31 Franchise Fees & Uncollectibles 1 1 1 1 1 1 1
---------------------------------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 25 25 25 24 25 24 24
=====================================================================
<CAPTION>
1 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3
------------------------------
4 Principal Payment Sum of payments = $ 711 MM 18 18 18 18 18 18 18 18
------------------------------
5 Interest Payment 11 11 10 10 10 9 9 9
6 Refundable Ongoing Costs/Fees 3 3 3 3 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0 0 0 0 0
-----------------------------------------------------------------------------
8 Quarterly Total Debt Service & Fees Total FTA 32 32 31 31 31 30 30 30
=============================================================================
9
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing Costs/Fees Credit (3) (3) (3) (3) (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 229 222 215 208 201 193 186 179
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7 7 7 7 7
18 Average Balance of Financed Taxes 244 - - - 215 - - -
19 Carrying Cost on Balance of Financed Taxes 9.52% - - - 9.52% - - -
20 Annual Financed Taxes Carrying Cost Credit (23) - - - (20) - - -
21 Quarterly Financed Taxes Carrying Cost Credit (6) (5) (5) (5) (5) (4) (4) (4)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 18 18 18 18 18 18 18 18
26 Interest Payment (ln 5) 11 11 10 10 10 9 9 9
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (6) (5) (5) (5) (5) (4) (4) (4)
-----------------------------------------------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 + ln 29) 23 23 23 23 22 23 22 22
31 Franchise Fees & Uncollectibles 1 1 1 1 1 1 1 1
-----------------------------------------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 24 24 24 23 23 23 23 23
=============================================================================
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC
TABLE APP-1
PAGE 4
RATE REDUCTION BONDS - SIZING CALCULATIONS
BOND - ISSUANCE CASE
($ in millions)
Assumptions: 10-year amortization
- ------------ 7.5% pre-tax carrying cost
<TABLE>
<CAPTION>
1 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 3/31/03
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3 --------------------------
4 Principal Payment Sum of payments= $ 711 18 18 18 18 18 18
--------------------------
5 Interest Payment 8 8 8 7 7 7
6 Refundable Ongoing Costs/Fees 3 3 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0 0 0
-----------------------------------------------------------
8 Quarterly Total Debt Service & Fees 29 29 29 28 28 28
===========================================================
9
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing Costs/Fees Credit (3) (3) (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 172 165 158 150 143 136
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7 7 7
18 Average Balance of Financed Taxes 186 168 - - 154 -
19 Carrying Cost on Balance of Financed Taxes 9.52% 9.52% - - 13.61% -
20 Annual Financed Taxes Carrying Cost Credit (18) (4) - - (16) -
21 Quarterly Financed Taxes Carrying Cost Credit (4) (4) (5) (5) (5) (4)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 18 18 18 18 18 18
26 Interest Payment (ln 5) 8 8 8 7 7 7
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (4) (4) (5) (5) (5) (4)
-----------------------------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 + ln 29) 22 22 20 20 20 20
31 Franchise Fees & Uncollectibles 0 1 0 0 0 0
-----------------------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 22 22 21 20 20 21
<CAPTION> ===========================================================
1 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3 --------------------------
4 Principal Payment Sum of payments= $ 711 18 18 18 18 18 18
--------------------------
5 Interest Payment 6 6 6 5 5 5
6 Refundable Ongoing Costs/Fees 3 3 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0 0 0
-----------------------------------------------------------
8 Quarterly Total Debt Service & Fees 27 27 27 26 26 26
===========================================================
9
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing Costs/Fees Credit (3) (3) (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 129 122 115 107 100 93
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7 7 7
18 Average Balance of Financed Taxes - - 129 - - -
19 Carrying Cost on Balance of Financed Taxes - - 13.61% - - -
20 Annual Financed Taxes Carrying Cost Credit - - (18) - - -
21 Quarterly Financed Taxes Carrying Cost Credit (4) (4) (4) (3) (3) (3)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 18 18 18 18 18 18
26 Interest Payment (ln 5) 6 6 6 5 5 5
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (4) (4) (4) (3) (3) (3)
-----------------------------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 + ln 29) 20 19 19 20 19 19
31 Franchise Fees & Uncollectibles 0 0 0 0 0 0
-----------------------------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 20 20 19 20 20 19
===========================================================
</TABLE>
<TABLE>
<CAPTION>
1 12/31/04 3/31/05 6/30/05 9/30/05
---------------------------------------
<S> <C> <C> <C> <C>
2 Debt Service
------------
3 --------------------------
4 Principal Payment Sum of payments= $ 711 18 18 18 18
--------------------------
5 Interest Payment 4 4 4 3
6 Refundable Ongoing Costs/Fees 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0
---------------------------------------
8 Quarterly Total Debt Service & Fees 25 25 25 24
=======================================
9
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing Costs/Fees Credit (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 86 79 72 64
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7
18 Average Balance of Financed Taxes 100 - - -
19 Carrying Cost on Balance of Financed Taxes 13.61% - - -
20 Annual Financed Taxes Carrying Cost Credit (14) - - -
21 Quarterly Financed Taxes Carrying Cost Credit (3) (2) (2) (2)
22
23 Quarterly Revenue Requirement on Rate Reduction Bonds
-----------------------------------------------------
24
25 Principal Payment (ln 4) 18 18 18 18
26 Interest Payment (ln 5) 4 4 4 3
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (3) (2) (2) (2)
---------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 + ln 29) 19 19 19 19
31 Franchise Fees & Uncollectibles 0 0 0 0
---------------------------------------
32 Total Revenue Requirement, 12/31/98 - 12/31/07 19 20 19 19
=======================================
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC
Table APP-1
Page 5
RATE REDUCTION BONDS - SIZING CALCULATIONS
BOND-ISSUANCE CASE
($ in millions)
Assumptions: 10-year amortization
- ----------- 7.5% pre-tax carrying cost
<TABLE>
<CAPTION>
1 12/31/05 3/31/06 6/30/06 9/30/06 12/31/06 3/31/07 6/30/07 9/30/07 12/31/07
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2 Debt Service
------------
3
----------------------
4 Principal Payment Sum of payments = $711 18 18 18 18 18 18 18 18 18
----------------------
5 Interest Payment 3 3 2 2 2 1 1 1 0
6 Refundable Ongoing Costs/Fees 3 3 3 3 3 3 3 3 3
7 Non-refundable Ongoing Costs/Fees 0 0 0 0 0 0 0 0 0
----------------------------------------------------------------------------------
8 Quarterly Total Debt Service & Fees 24 24 23 23 23 22 22 22 21
==================================================================================
10 Refundable Ongoing Costs/Fees Credit
------------------------------------
11
12 Quarterly Total Refundable Ongoing
Costs/Fees Credit (3) (3) (3) (3) (3) (3) (3) (3) (3)
13
14 Financed Taxes Carrying Cost Credit
-----------------------------------
15
16 EOQ Balance of Financed Taxes 57 50 43 36 29 21 14 7 (0)
17 Financed Taxes Amortization (reduce per ln 1) 7 7 7 7 7 7 7 7 7
18 Average Balance of Financed Taxes 72 - - - 43 - - - 14
19 Carrying Cost on Balance of Financed Taxes 13.61% - - - 13.61% - - - 13.61%
20 Annual Financed Taxes Carrying Cost Credit (10) - - - (6) - - - (2)
21 Quarterly Financed Taxes Carrying Cost Credit (2) (1) (1) (1) (1) (0) (0) (0) (0)
22
23 Quarterly Revenue Requirement on
--------------------------------
Rate Reduction Bonds
--------------------
24
25 Principal Payment (ln 4) 18 18 18 18 18 18 18 18 18
26 Interest Payment (ln 5) 3 3 2 2 2 1 1 1 0
27 Total Ongoing Costs/Fees (ln 6 + ln 7) 3 3 3 3 3 3 3 3 3
28 Refundable Ongoing Costs/Fees Credit (ln 12) (3) (3) (3) (3) (3) (3) (3) (3) (3)
29 Financed Taxes Carrying Cost Credit (ln 21) (2) (1) (1) (1) (1) (0) (0) (0) (0)
----------------------------------------------------------------------------------
30 Subtotal (ln 25 + ln 26 + ln 27 + ln 28 +ln 29) 18 19 19 18 18 19 18 18 18
31 Franchise Fees & Uncollectibles 0 0 0 0 0 0 0 0 0
----------------------------------------------------------------------------------
32 Total Revenue Requirement, 12/31/98-12/31/07 19 19 19 19 18 19 19 18 18
==================================================================================
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC
Table APP-1
Page 6
RATE REDUCTION BONDS - SIZING CALCULATIONS
BOND-ISSUANCE CASE
($ millions)
<TABLE>
<CAPTION>
1 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
------------------------------
3
4 Revenue Requirement, 17-quarter Transition
Cost Amortization 51 51 51 51 49 49 49
5 Revenue Requirement, RRBs (25) (25) (25) (24) (25) (24) (24)
--------------------------------------------------------------
6 Subtotal Calculated Difference 26 26 27 27 24 25 25
7 Timing Adjustment (3) (4) (4) (4) (1) (1) (2)
--------------------------------------------------------------
8 Difference Savings 23 23 23 23 24 24 24
==============================================================
9
10 Sizing Calculation:
-------------------
11
12 Total Calculated Difference, 1/1/1998-3/31/2002 (ln 6) 406 (Model iterates on amount financed on page 1, line 39, until
this figure equals total target revenue reduction on page 1,
line 8).
13
14 Proceeds on Bonds Issued 704
------------------------
15 Bond Issuance Expense 7
--------
16 Face Value of Bonds Issued 711
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 1/1/98-12/31/2007 (ln 8) 104
21 Annual Discount Rate 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<TABLE>
<CAPTION>
1 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
------------------------------
3
4 Revenue Requirement, 17-quarter Transition
Cost Amortization 49 47 47 47 47 44 44 44
5 Revenue Requirement, RRBs (24) (24) (24) (23) (23) (23) (23) (23)
------------------------------------------------------------------------
6 Subtotal Calculated Difference 25 23 23 23 24 21 21 22
7 Timing Adjustment (2) 1 1 1 0 4 3 3
------------------------------------------------------------------------
8 Difference Savings 24 24 24 24 24 24 25 25
========================================================================
9
10 Sizing Calculation:
-------------------
11
12 Total Calculated Difference, 1/1/1998-3/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
------------------------
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 1/1/98-12/31/2007 (ln 8)
21 Annual Discount Rate 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC Table APP-1
Page 7
RATE REDUCTION BONDS--SIZING CALCULATIONS
REVENUE REQUIREMENT DIFFERENCES
($ MILLIONS)
<TABLE>
<CAPTION>
1 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 3/31/03
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
------------------------------
3
4 Revenue Reguirement, 17-quarter Transition Cost Amortization 44 44 - - - -
5 Revenue Reuirement, RRBs (22) (22) (21) (20) (20) (21)
------------------------------------------------------------
6 Subtotal Calculated Difference 22 21 (21) (20) (20) (21)
7 Timing Adjustment 3 4 - - - -
------------------------------------------------------------
8 Difference 25 25 (21) (20) (20) (21)
============================================================
9
10 Sizing Calculation
------------------
11
12 Total Calculated Difference, 1/1/1998 - 3/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
------------------------
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 1/1/98 - 12/31/2007 (ln 8)
21 Annual Discout Rate 10.0%
22 Quarterly Discount Rate 2.5%
<CAPTION>
1 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
-------------------------------
3
4 Revenue Reguirement, 17-quarter Transition Cost Amortization - - - - - -
5 Revenue Reuirement, RRBs (20) (20) (19) (20) (20) (19)
---------------------------------------------------------------
6 Subtotal Calculated Difference (20) (20) (19) (20) (20) (19)
7 Timing Adjustment - - - - - -
---------------------------------------------------------------
8 Difference (20) (20) (19) (20) (20) (19)
===============================================================
9
10 Sizing Calculation
------------------
11
12 Total Calculated Difference, 1/1/1998 - 3/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
------------------------
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 1/1/98 - 12/31/2007 (ln 8)
21 Annual Discout Rate 10.0%
22 Quarterly Discount Rate 2.5%
<CAPTION>
1 12/31/04 3/31/05 6/30/05 9/30/05
----------------------------------------
<S> <C> <C> <C> <C>
2 Revenue Requirement Difference
-------------------------------
3
4 Revenue Reguirement, 17-quarter Transition Cost Amortization - - - -
5 Revenue Reuirement, RRBs (19) (20) (19) (19)
----------------------------------------
6 Subtotal Calculated Difference (19) (20) (19) (19)
7 Timing Adjustment - - - -
----------------------------------------
8 Difference (19) (20) (19) (19)
========================================
9
10 Sizing Calculation
------------------
11
12 Total Calculated Difference, 1/1/1998 - 3/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
------------------------
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference, 1/1/98 - 12/31/2007 (ln 8)
21 Annual Discout Rate 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<PAGE>
SAN DIEGO GAS & ELECTRIC TABLE APP-1
PAGE 8
RATE REDUCTION BONDS--SIZING CALCULATIONS
REVENUE REQUIREMENT DIFFERENCES
($ MILLIONS)
<TABLE>
<CAPTION>
1 12/31/05 3/31/06 6/30/06 9/30/06 12/31/06 3/31/07 6/30/07 9/30/07 12/31/07
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2 Revenue Requirement Difference
------------------------------
3
4 Revenue Requirement, 17-quarter
Transition Cost Amortization - - - - - - - - -
5 Revenue Requirement, RRBs (19) (19) (19) (19) (18) (19) (19) (18) (18)
------------------------------------------------------------------------------------------
6 Subtotal Calculated Difference (19) (19) (19) (19) (18) (19) (19) (18) (18)
7 Timing Adjustment - - - - - - - - -
------------------------------------------------------------------------------------------
8 Difference (19) (19) (19) (19) (18) (19) (19) (18) (18)
9 ==========================================================================================
10 Sizing Calculation:
-------------------
11
12 Total Calculated Difference,
1/1/1998 - 3/31/2002 (ln 6)
13
14 Proceeds on Bonds Issued
------------------------
15 Bond Issuance Expense
16 Face Value of Bonds Issued
17
18 Customer Benefits Calculation:
------------------------------
19
20 NPV of Quarterly Difference,
1/1/98 - 12/31/2007 (ln 8)
21 Annual Discount Rate 10.0%
22 Quarterly Discount Rate 2.5%
</TABLE>
<PAGE>
APPENDIX C
<PAGE>
APPENDIX C
CHANGES IN LANGUAGE TO EXISTING TARIFFS
Add the following language to Schedules DR, DR-LI, E-LI, DM, DS, DT, DT-RV,
D-SMF, EV-TOU, EV-TOU-2, Dr-TOU, DR-TOU-2, and A just after the language
discussing the Rate Cap Mechanism:
Rate Reduction Adjustment
Effective from January 1, 1998 until March 31, 2002*, the above rates will be
adjusted downward by 10%. After March 31, 2002*, the above rates shall be
adjusted to reflect the Schedule FTA rate in all billings. A customer once
billed at rates reflecting the 10% adjustment in rates will continue to have
their rates adjusted by the Schedule FTA rate as long as Schedule FTA exists,
regardless of the Schedule the customer receives service on.
*Note: The March 31, 2002 date is subject to change as set forth in Assembly
Bill 1890.
C-1
<PAGE>
APPENDIX D
<PAGE>
APPENDIX D
PROPOSED NEW FIXED TRANSITION AMOUNT RATE SCHEDULE
SCHEDULE FTA
FIXED TRANSITION AMOUNT
-----------------------
APPLICABILITY
- -------------
This schedule is applicable to all residential and small commercial customers as
defined in AB 1890. This schedule is also applicable to all customers that have
taken service on this schedule previously. The rates on this schedule are to be
added to the rates from the otherwise applicable schedule(s).
TERRITORY
- ---------
Within the entire territory served by the utility.
<TABLE>
<CAPTION>
RATES $/kWh
<S> <C>
Energy rate, per kWh
Residential Rate Schedules........ xxx
Small Commercial Rate Schedules... xxx
</TABLE>
Franchise Fee Differential:
A Franchise Fee Differential of 1.9% will be applied to the monthly
billings calculated under this schedule for all customers within the corporate
limits of the City of San Diego. Such Franchise Fee Differential shall be so
indicated and added as a separate item to bills rendered to such customers.
SPECIAL CONDITIONS
- -----------------
1. Definitions: The Definitions of principal terms used in this schedule are
found either herein or in Rule 1, Definitions.
2. Rate Changes: The Rates shall change at least annually after the utility
files an advice letter in conformance with the procedures defined in this Rate
Schedule. The Commission will approve the advice letter filing within 15 days of
the filed date. The utility shall file an advice letter to be approved by the
Commission on 15 day notice, at an interval of up to one each quarter, if a 1%
threshold is exceeded as addressed herein.
3. Annual Average Rate Change: In the annual advice letter filing, to be made
15 days prior to the end of a
D-1
<PAGE>
quarter, the utility shall report the amount of revenues paid to the Special
Purpose Entity to date, which reflects that amount collected form the billing of
Schedule FTA, less the amount that it would have paid to the Special Purpose
Entity to date if the utility had paid exactly what is required to pay the
scheduled interest and principle will be then added to the mount that the
utility is forecasted to owe the Special Purpose Entity the ensuing year. This
total amount will then be divided by the last adopted sales forecast to the sum
of the residential and small commercial classes of customers to arrive at a new
average rate.
4. Quarterly Average Rate Change: In the utility's quarterly filed advice
letter, to be made 15 days prior to the end of the quarter if the threshold is
exceeded, the utility shall report the amount of revenues paid to the Special
Purpose Entity to date, which reflects that amount collected from the billing of
Schedule FTA, less the amount that it would have paid to the Special Purpose
Entity to date if the utility had paid exactly what was required to pay the
scheduled interest and principle on the Rate Reduction Bonds. If the difference
in the foregoing exceeds a threshold of 1% of the total scheduled payments to
the Special Purpose Entity for the quarter then the utility shall file an advice
letter to amortize that difference. The change to the average rate shall be
determined by dividing the difference by the last adopted sales forecast to the
sum of the residential and small commercial classes of customers for the period
up to the next annual rate change to arrive at a change to the average rate. The
change to the average rate will then be added to the last filed average rate for
a new average rate.
5. Average Rate Split to Class: Once an average rate for the residential and
small commercial customers has been calculated, the average rate will be
multiplied by .98674 to derive the residential FTA rate and the average rate
will be multiplied by 1.0426 to derive the small commercial FTA rate. This
calculation will cause each of these classes FTA rate to be adjusted in
proportion to their June 10, 1996 average rates.
6. Payment to Special Purpose Entity: The utility shall make payments to the
Special Purpose Entity of all funds collected under the terms of this tariff
within the first 15 days of each month. On an annual basis the utility will
adjust for any difference between the actual amount of uncollectibles and the
amount embedded in the distribution on the table below. Unless the utility has
in place procedures that will exactly determine the amount of collections, the
utility will pay the Special Purpose Entity on the following schedule each
month:
D-2
<PAGE>
<TABLE>
<CAPTION>
15 days after the close of the month
relative to the rendering Small
of bills to the customer Residential Commercial
------------------------- ----------- ----------
<S> <C> <C>
Month 1 28.00% 31.00%
Month 2 68.00% 66.00%
Month 3 1.00% 0.90%
Month 4 1.00% 0.80%
Month 5 1.75% 1.15%
</TABLE>
7. Collection of Rates: The rates on this schedule will be subject to
collection not only by the utility but also by the Special Purpose Entity, or
subsequent servicer, through which the utility has financed Rated Reduction
Bonds.
8. Termination of Rates: This tariff shall remain in effect until the earlier
of either when the bond legal maturity is reached or all legal obligations of
the utility to the Special Purpose Entity have been met.
9. Non-bypassable: Where a customer has previously taken service and been
billed on this schedule and then subsequently is served electricity from on-site
generation, cogeneration, or "over-the-fence" generation the FTA rules shall
apply to all generated power used by the customer. Should a customer's energy
consumption no longer be available, the FTA rates will be billed based on the
last twelve months of recorded usage available.
D-3
