<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1999
REGISTRATION NO. 333-74671
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MASSACHUSETTS RRB
SPECIAL PURPOSE TRUST BEC-1
(ISSUER OF SECURITIES)
BEC FUNDING LLC
(DEPOSITOR OF THE TRUST DESCRIBED HEREIN)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF FORMATION)
<TABLE>
<S> <C>
DELAWARE 04-3454484
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
BEC FUNDING LLC
800 BOYLSTON STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02199
TELEPHONE: (617) 369-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT J. WEAFER, JR.
BEC FUNDING LLC
800 BOYLSTON STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02199
TELEPHONE: (617) 369-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
HEMMIE CHANG, ESQ. STANLEY KELLER, ESQ. ERIC TASHMAN, ESQ.
ROPES & GRAY PALMER & DODGE LLP BROWN & WOOD LLP
ONE INTERNATIONAL PLACE ONE BEACON STREET 555 CALIFORNIA STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02108 SAN FRANCISCO, CALIFORNIA 94104
(617) 951-7000 (617) 573-0100 (415) 772-1200
</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. [ ]
------------------------
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> 2
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES
NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated [ ], 1999.
Prospectus Supplement to Prospectus dated [ ], 1999.
$[ ] RATE REDUCTION CERTIFICATES
MASSACHUSETTS RRB
SPECIAL PURPOSE TRUST BEC-1
ISSUER OF THE CERTIFICATES
BEC FUNDING LLC
ISSUER OF THE NOTES
BOSTON EDISON COMPANY
SELLER AND SERVICER
<TABLE>
<CAPTION>
INITIAL SCHEDULED FINAL FINAL
CERTIFICATE PRINCIPAL UNDERWRITING PROCEEDS TO DISTRIBUTION TERMINATION
RATE AMOUNT PRICE(%) PRICE($) DISCOUNT TRUST DATE DATE
----------- --------- -------- -------- ------------ ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
List Classes.........
*The total price to the public is $ , the total amount of the underwriting discount is $ .
The total amount of proceeds plus accrued interest and before deduction of Expenses is $ .
</TABLE>
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THE PROSPECTUS TO READ ABOUT FACTORS
YOU SHOULD CONSIDER BEFORE BUYING THE CERTIFICATES.
EACH CERTIFICATE REPRESENTS AN INTEREST IN THE RELATED CLASS OF BEC FUNDING LLC
NOTES, WHICH ARE OWNED BY THE TRUST.
NEITHER THE CERTIFICATES, THE NOTES OR THE PROPERTY SECURING THE NOTES IS AN
OBLIGATION OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY GOVERNMENTAL AGENCY,
AUTHORITY OR INSTRUMENTALITY OF THE COMMONWEALTH OR OF BOSTON EDISON OR ANY OF
ITS AFFILIATES.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF
MASSACHUSETTS NOR ANY POLITICAL SUBDIVISION, AGENCY, AUTHORITY OR
INSTRUMENTALITY OF THE COMMONWEALTH IS PLEDGED TO THE PAYMENT OF PRINCIPAL OF,
OR INTEREST ON, THE CERTIFICATES OR THE NOTES, OR THE PAYMENTS SECURING THE
NOTES. FURTHERMORE, NEITHER THE COMMONWEALTH OF MASSACHUSETTS NOR ANY POLITICAL
SUBDIVISION, AGENCY, AUTHORITY OR INSTRUMENTALITY OF THE COMMONWEALTH WILL
APPROPRIATE ANY FUNDS FOR THE PAYMENT OF ANY OF THE CERTIFICATES OR NOTES.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
LEHMAN BROTHERS GOLDMAN, SACHS & CO.
[ ], 1999
<PAGE> 3
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Risk Factors................................................ S-3
Description of the Certificates............................. S-3
Description of the Notes.................................... S-3
Transition Property......................................... S-6
Underwriting................................................ S-7
Ratings..................................................... S-8
PROSPECTUS
Prospectus Summary.......................................... 4
Risk Factors................................................ 16
Defined Terms............................................... 24
Available Information....................................... 24
Reports to Holders.......................................... 24
Incorporation of Documents by Reference..................... 24
Energy Deregulation and New Massachusetts
Market Structure.......................................... 26
Description of the Transition Property...................... 28
The Trust................................................... 36
The Agencies................................................ 37
The Note Issuer............................................. 38
The Seller and Servicer..................................... 40
Servicing................................................... 46
Description of the Notes.................................... 53
Description of the Certificates............................. 64
Federal Income Tax Consequences............................. 73
State Taxation.............................................. 77
ERISA Considerations........................................ 77
Use of Proceeds............................................. 79
Plan of Distribution........................................ 79
Legal Matters............................................... 80
Glossary.................................................... 81
Financial Statements........................................ 83
</TABLE>
----------------------------
Through and including , 1999 (the 90th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and when offering an unsold allotment or
subscription.
<PAGE> 4
This prospectus supplement does not contain all of the information that you
should know about this offering. You will find additional information in the
accompanying prospectus. The prospectus for this offering of certificates
consists of both this prospectus supplement and the accompanying prospectus. You
should read both of these documents in full before buying the certificates.
No dealer, salesperson, or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the securities offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
The underwriters expect to deliver the certificates through the facilities
of The Depository Trust Company against payment in New York, New York on [
], 1999.
----------------------------
S-2
<PAGE> 5
RISK FACTORS
You should consider carefully the risks of investing in the certificates.
The section entitled "Risk Factors," which begins on page 16 of the prospectus,
discusses material risks of investing in the certificates.
DESCRIPTION OF THE CERTIFICATES
The trust will issue the certificates in minimum denominations of $1,000
and in integral multiples of that amount. The certificates will consist of
[ ] classes, in the initial principal amounts, bearing the interest rates
and having the scheduled final distribution dates and final termination dates
set forth below:
<TABLE>
<CAPTION>
SCHEDULED
INITIAL CERTIFICATE FINAL FINAL
PRINCIPAL INTEREST DISTRIBUTION TERMINATION
CLASS AMOUNT RATE DATE DATE
- ----- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
</TABLE>
The scheduled final distribution date for a class of certificates is the
date by which the trust expects to distribute in full all interest on and
principal of that class of certificates. The final termination date for a class
of certificates is the legal maturity date of that class. The failure to
distribute principal of any class of certificates in full by the final
termination date for that class is an event of default, and the certificate
trustee may, and with the written direction of the holders of at least a
majority in principal amount of all outstanding certificates shall, declare the
unpaid principal amount of all outstanding notes and accrued interest to be due
and payable. See "Description of the Certificates -- Events of Default" in the
prospectus.
DISTRIBUTIONS OF INTEREST
Interest on each class of certificates will accrue from its issuance date
at the interest rate set forth in the table above. Beginning March 15, 2000, the
trust is required to distribute interest semiannually on March 15 and September
15 (or, if any distribution date is not a business day, the following business
day) of each year. On each distribution date, the certificate trustee will
distribute interest to the extent paid on the related class of notes to the
holders of each class of certificates as of the close of business on the record
date. The record date for any distribution of interest on and principal of the
certificates will be the business day immediately before the distribution date.
Each distribution date will also be a payment date for interest on and principal
of the notes.
DISTRIBUTIONS OF PRINCIPAL
On each distribution date, the certificate trustee will distribute
principal as paid on the related class of notes to the holders of each class of
certificates as of the close of business on the record date.
DESCRIPTION OF THE NOTES
BEC Funding LLC, the note issuer, will issue and sell the BEC Funding LLC
notes to the trust in exchange for the net proceeds from the sale of the
certificates by the Trust. Each class of notes secures the payment of the
related class of certificates and has the same principal balance, interest rate,
amortization schedule and legal maturity date as its related class of
certificates.
S-3
<PAGE> 6
The notes will consist of [ ] classes, in the initial principal amounts
and bearing the interest rates and having the scheduled maturity dates and final
maturity dates set forth below:
<TABLE>
<CAPTION>
INITIAL NOTE SCHEDULED FINAL
PRINCIPAL INTEREST FINAL DISTRIBUTION TERMINATION
CLASS AMOUNT RATE DATE DATE
- ----- --------- -------- ------------------ -----------
<S> <C> <C> <C> <C>
</TABLE>
The scheduled maturity date for a class of notes is the date by which the
note issuer expects to distribute in full all interest on and principal of that
class of notes. The final maturity date for a class of notes is the legal
maturity date of that class.
INTEREST
Interest on each class of notes will accrue from its issuance date at the
interest rate set forth in the table above. Beginning March 15, 2000, the note
issuer is required to pay interest semiannually on March 15 and September 15
(or, if any payment date is not a business day, the following business day) of
each year, to the trust. The note issuer will pay interest on the notes prior to
paying principal of the notes. See "Description of the Notes -- Allocations and
Payments" in the prospectus.
On each payment date, the note issuer will pay interest as follows:
- if there has been a payment default, any unpaid interest payable on any
prior payment dates, together with interest on any of this unpaid
interest; and
- accrued interest on the principal balance of each class of notes as of
the close of business on the preceding payment date, or the date of the
original issuance of the class of notes if applicable, after giving
effect to all payments of principal made on the preceding payment date,
or the date of the original issuance of the class of notes if applicable.
If there is a shortfall in the amounts necessary to make these interest
payments, the note trustee will distribute interest pro rata to each class of
notes based on the outstanding principal amount of that class and the applicable
interest rate. The note issuer will calculate interest on the basis of a 360-day
year of twelve 30-day months.
PRINCIPAL
The note issuer will pay any principal on each payment date as follows:
(1) to the holders of the [ ] notes, until the principal balance of
that class has been reduced to zero;
(2) [Add other classes]
The note issuer will not, however, pay principal on a payment date on any
class of notes if making the payment would reduce the principal balance of a
class to an amount lower than that specified in the expected amortization
schedule for that class on that payment date. If an event of default under the
note indenture has occurred and is continuing, the note trustee may declare the
unpaid principal amount of all outstanding notes and accrued interest to be due
and payable.
The following expected amortization schedule sets forth the scheduled
outstanding principal balance for each class of notes on each payment date,
after giving effect to the payments expected to
S-4
<PAGE> 7
be made on the payment date. In preparing the following table, we have assumed,
among other things, that:
- the certificates are issued on [ ];
- payments on the certificates are made on each distribution date,
commencing March 15, 2000;
- the servicing fee equals 0.05 percent of the initial principal amount of
the notes;
- there are no net earnings on amounts on deposit in the collection
account;
- operating expenses, the administration fee (which will be $75,000 per
year, payable semiannually) and amounts owed to the note trustee, the
Delaware trustee and the certificate trustee are in the aggregate
$[ ] per [ ], and these amounts are payable in arrears; and
- payments arising from the property securing the notes are received as
expected.
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PAYMENT CLASS
DATE BALANCE TOTAL
------- ------------ -------
<S> <C> <C>
List Classes
</TABLE>
We cannot assure you that the principal balances of the classes of notes
and the related classes of certificates will be reduced at the rates indicated
in the table above. The actual rates of reduction in class principal balances
may be slower (and cannot be faster) than those indicated in the table.
COLLECTION ACCOUNT AND SUBACCOUNTS
The note trustee will establish a collection account to hold amounts
remitted by the servicer of the property securing the notes. The collection
account will consist of four subaccounts:
- a general subaccount;
- a reserve subaccount;
- an overcollateralization subaccount; and
- a capital subaccount.
Withdrawals from and deposits to these subaccounts will be made as described
under "Description of the Notes -- Allocations and Payments" in the prospectus.
S-5
<PAGE> 8
OVERCOLLATERALIZATION AMOUNT
The note trustee will collect amounts arising from the property securing
the notes exceeding those that are necessary to pay interest on and principal of
the notes and fees and expenses of servicing and retiring the notes and the
certificates, which are intended to enhance the likelihood that payments on the
notes will be made on a timely basis. These amounts will fund the required
overcollateralization amount. The overcollateralization amount for the notes
will be $[ ], which is 0.50 percent of the initial principal amount of
the notes. The note trustee will collect the overcollateralization amount
ratably over the life of the certificates in equal increments of $[ ]
and will deposit these amounts on each payment date into the
overcollateralization subaccount as set forth below:
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
<TABLE>
<CAPTION>
REQUIRED REQUIRED
PAYMENT OVERCOLLATERALIZATION PAYMENT OVERCOLLATERALIZATION
DATE LEVEL DATE LEVEL
- ------- --------------------- -------- ---------------------
<S> <C> <C> <C>
</TABLE>
OTHER CREDIT ENHANCEMENT
CAPITAL SUBACCOUNT. Before the issuance of the notes, Boston Edison
Company will contribute capital of $[ ] to the note issuer. This amount
is equal to 0.50 percent of the initial principal amount of the notes and is the
capital level required to be maintained under the note indenture. The note
trustee will deposit the capital into the capital subaccount. The note trustee
will draw on amounts in the capital subaccount, to the extent amounts available
in the general subaccount, reserve subaccount and overcollateralization
subaccount are insufficient to pay interest on and principal of the notes and
fees and expenses of servicing and retiring the notes and the certificates.
RESERVE SUBACCOUNT. The note trustee will allocate to the reserve
subaccount any amounts remitted to the collection account exceeding amounts
necessary to:
- pay fees and expenses related to the servicing and retirement of the
notes and certificates;
- pay interest on and principal of the notes;
- fund the capital subaccount to the required capital level; and
- fund the overcollateralization subaccount to the required
overcollateralization level.
The note trustee will draw on amounts in the reserve subaccount, to the extent
amounts available in the general subaccount are insufficient to pay the amounts
listed above.
TRANSITION PROPERTY
The notes are secured primarily by the transition property, which is the
right to assess and collect all revenues arising from a portion, which may
become all, of the transition charge included in the bills of all classes of
retail users of Boston Edison's distribution system within its geographic
service territory as in effect on July 1, 1997. This portion of the transition
charge, which is a usage-based, per kilowatt-hour charge, is referred to as the
"RTC charge."
As of the date of this prospectus supplement, the RTC charge is expected to
be approximately [ ] cents per kilowatt-hour.
S-6
<PAGE> 9
UNDERWRITING
The note issuer, Boston Edison, the trust and the underwriters for the
offering named below have entered into an underwriting agreement relating to the
certificates. Assuming that conditions in the underwriting agreement are met,
each underwriter has severally agreed to purchase the respective principal
amount of certificates indicated in the following table.
<TABLE>
<CAPTION>
NAME CLASS[ ] TOTAL
- ---- -------- -------
<S> <C> <C>
Lehman Brothers Inc. .......................................
Goldman, Sachs & Co. .......................................
</TABLE>
Certificates sold by the underwriters to the public will be initially
offered at the initial public offering prices set forth on the cover of this
prospectus supplement. The trust has been advised that the underwriters propose
initially to offer the certificates to dealers at the initial public offering
prices, less a selling concession not to exceed the percentage of the
certificate denomination set forth below, and that the underwriters may allow
and dealers may reallow a discount not to exceed the percentage of the
certificate denomination set forth below:
<TABLE>
<CAPTION>
CLASS SELLING CONCESSION REALLOWANCE DISCOUNT
- ----- ------------------ --------------------
<S> <C> <C>
Class [ ]...................................................
[Add other classes].........................................
</TABLE>
After the initial public offering, the public offering prices, selling
concessions and reallowance discounts may change as a result of market trading.
The certificates are a new issue of securities with no established trading
market. The trust has been advised by the underwriters that the underwriters
intend to make a market in the certificates but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the ability of holders of the certificates to resell the
certificates.
In connection with the offering, the underwriters may purchase and sell
certificates in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of certificates than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the certificates while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because these underwriters have repurchased certificates
sold by or for the account of an underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the certificates. As a result, the price of the
certificates may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These activities may be effected in the
over-the-counter market or otherwise.
The note issuer estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $[ ].
The note issuer and Boston Edison have agreed to indemnify the several
underwriters, the Massachusetts Development Finance Agency, the Massachusetts
Health and Educational Facilities Authority and the trust against certain
liabilities, including liabilities under the Securities Act of 1933.
Goldman, Sachs & Co., as financial advisor to Boston Edison, has rendered
certain financial advisory services to Boston Edison in respect of the note
issuer and the trust and has received from it a customary fee for such services.
S-7
<PAGE> 10
RATINGS
The certificates will not be issued unless at closing at least two
nationally recognized statistical rating organizations have rated the
certificates in a category signifying investment grade (i.e., the equivalent of
BBB- or higher). Each nationally recognized statistical rating organization that
rates the certificates will give each class of notes the same rating as the
related class of certificates.
S-8
<PAGE> 11
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED [ ], 1999.
PROSPECTUS
MASSACHUSETTS RRB
SPECIAL PURPOSE TRUST BEC-1
ISSUER OF THE CERTIFICATES
RATE REDUCTION CERTIFICATES
ISSUABLE IN CLASSES
BEC FUNDING LLC
ISSUER OF THE NOTES
BOSTON EDISON COMPANY
SELLER AND SERVICER
SEE "RISK FACTORS" BEGINNING ON PAGE 16 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING THE CERTIFICATES.
THE TRUST MAY SELL ONE OR MORE CLASSES OF CERTIFICATES AS DESCRIBED IN THE
PROSPECTUS SUPPLEMENT. EACH CERTIFICATE REPRESENTS AN INTEREST IN THE RELATED
CLASS OF BEC FUNDING LLC NOTES. THE ASSETS OF THE TRUST WILL CONSIST SOLELY OF
THE NOTES.
NEITHER THE CERTIFICATES, THE NOTES OR THE PROPERTY SECURING THE NOTES IS AN
OBLIGATION OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY GOVERNMENTAL AGENCY,
AUTHORITY OR INSTRUMENTALITY OF THE COMMONWEALTH OR OF BOSTON EDISON OR ANY OF
ITS AFFILIATES.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF
MASSACHUSETTS NOR ANY POLITICAL SUBDIVISION, AGENCY, AUTHORITY OR
INSTRUMENTALITY OF THE COMMONWEALTH IS PLEDGED TO THE PAYMENT OF PRINCIPAL OF,
OR INTEREST ON, THE CERTIFICATES OR THE NOTES, OR THE PAYMENTS SECURING THE
NOTES. FURTHERMORE, NEITHER THE COMMONWEALTH OF MASSACHUSETTS NOR ANY POLITICAL
SUBDIVISION, AGENCY, AUTHORITY OR INSTRUMENTALITY OF THE COMMONWEALTH WILL
APPROPRIATE ANY FUNDS FOR THE PAYMENT OF ANY OF THE CERTIFICATES OR NOTES.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
[DATE]
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 4
RISK FACTORS........................... 16
DEFINED TERMS.......................... 24
AVAILABLE INFORMATION.................. 24
REPORTS TO HOLDERS..................... 24
INCORPORATION OF DOCUMENTS BY
REFERENCE............................ 24
ENERGY DEREGULATION AND NEW
MASSACHUSETTS MARKET STRUCTURE....... 26
Statutory Overview................... 26
Settlement Agreement................. 26
Exit Charge.......................... 27
Reconciliation....................... 27
Third Party Billing Options.......... 28
Federal Initiatives.................. 28
DESCRIPTION OF THE TRANSITION
PROPERTY............................. 28
Financing Order and Issuance Advice
Letter............................ 28
Transition Property.................. 29
Transition Charge.................... 29
Adjustments to the RTC Charge........ 30
Pledge by The Commonwealth of
Massachusetts..................... 31
Sale and Assignment of Transition
Property.......................... 32
Seller Representations and Warranties
and Repurchase Obligation......... 32
Bankruptcy and Creditors' Rights
Issues............................ 35
THE TRUST.............................. 36
THE AGENCIES........................... 37
THE NOTE ISSUER........................ 38
Officers and Directors............... 38
THE SELLER AND SERVICER................ 40
Boston Edison Revenues, Customer Base
and Energy Consumption............ 40
Estimated Consumption and Estimated
Variance.......................... 41
Billing and Collections.............. 42
Year 2000 Computer Issue............. 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICING.............................. 46
Servicing Procedures................. 46
Servicing Standards and Covenants.... 46
Remittances to Collection Account.... 47
Servicing Compensation............... 48
Third Party Suppliers................ 48
Servicer Representations and
Warranties........................ 49
Statements by Servicer............... 50
Evidence as to Compliance............ 50
Matters Regarding the Servicer....... 51
Servicer Defaults.................... 51
Rights When Servicer Defaults........ 52
Waiver of Past Defaults.............. 52
Successor Servicer................... 52
Amendment............................ 53
DESCRIPTION OF THE NOTES............... 53
Security............................. 53
Collection Account................... 54
Interest and Principal............... 55
Optional Redemption.................. 55
Mandatory Redemption................. 56
Overcollateralization Subaccount..... 56
Capital Subaccount................... 56
Reserve Subaccount................... 56
Allocations and Payments............. 57
Actions by Noteholders............... 58
Note Events of Default; Rights Upon
note Event Of Default............. 59
Covenants of the Note Issuer......... 60
Reports to Noteholders............... 62
Annual Compliance Statement.......... 63
DESCRIPTION OF THE CERTIFICATES........ 64
Payments and Distributions........... 64
Voting of the Certificates........... 65
Events of Default.................... 66
Redemption........................... 68
Reports to Certificateholders........ 68
Supplemental Certificate
Indentures........................ 68
</TABLE>
2
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
List of Certificateholders........... 69
Registration and Transfer of the
Certificates...................... 69
Book-Entry Registration and
Definitive Certificates........... 69
FEDERAL INCOME TAX CONSEQUENCES........ 73
General.............................. 73
Treatment of the Certificates........ 73
Taxation of U.S.
Certificateholders................ 74
Sale or Other Taxable Disposition of
Certificates...................... 75
Non-U.S. Certificateholders.......... 75
Information Reporting and Backup
Withholding....................... 76
STATE TAXATION......................... 77
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ERISA CONSIDERATIONS................... 77
USE OF PROCEEDS........................ 79
PLAN OF DISTRIBUTION................... 79
LEGAL MATTERS.......................... 80
GLOSSARY............................... 81
FINANCIAL STATEMENTS................... 83
</TABLE>
3
<PAGE> 14
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because this
is a summary, it does not contain all of the information that may be important
to you. You should read both this prospectus and the prospectus supplement
before you buy the certificates.
Transaction Overview............ Massachusetts law permits electric
companies, such as Boston Edison Company, to
recover the costs of investments and
obligations that cannot be recouped through
market-based rates in a competitive
electricity generation market. These costs
are known as "transition costs." An electric
company recovers transition costs through a
charge called a "transition charge" that is
assessed on ratepayers. Massachusetts law
permits special purpose entities formed by
electric companies to issue securities
secured by the right to receive a portion,
which may become all, of the revenues
arising from the transition charge, if doing
so would save money for the electric
company's ratepayers. This right is referred
to as the "transition property." See
"Description of the Transition Property."
The following sets forth the primary steps
of the transaction underlying the offering
of the certificates:
- Boston Edison will sell the transition
property to the note issuer in exchange
for the proceeds from the sale of the
notes.
- The note issuer will sell the notes to the
trust in exchange for the proceeds from
the sale of the certificates.
- The trust, whose sole assets are the
notes, will sell the certificates to the
underwriters named in the prospectus
supplement.
- Boston Edison will act as the servicer of
the transition property and as the
administrator of the note issuer.
Neither the certificates, the notes or the
property securing the notes is an obligation
of The Commonwealth of Massachusetts or any
governmental agency, authority or
instrumentality of the Commonwealth or of
Boston Edison or any of its affiliates.
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The following diagram shows the parties to the transactions related to this
offering and summarizes their roles and their relationships to each other:
[The omitted graphic reflects the various
parties to the transaction, their
roles and their contractual relationships
to various other parties.]
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Risk Factors.................... You should consider, among other things, the
following material risks of investing in the
certificates. These risks may delay the
distribution of interest on and principal of
the certificates or cause you to suffer a
loss on your investment.
- Payments on the notes are the sole source
of distributions on the certificates.
- There may be challenges that attempt to
limit, alter or amend either the
Massachusetts Department of
Telecommunications and Energy's order
creating the transition property or the
provisions of Chapter 164 of the
Massachusetts Acts of 1997 that make the
order irrevocable.
- Since the rate of collections arising from
the transition property is based on the
amount of electricity consumed by
customers, these collections may be
insufficient to pay required distributions
on the certificates.
- The charge assessed to ratepayers to
collect amounts sufficient to pay required
distributions on the certificates may not
exceed the cap of 3.35 cents/kilowatt-hour
on Boston Edison's transition charge.
- If there is an event of default on the
notes and the certificates, the note
trustee is unlikely to be able to resell
the transition property.
- If Boston Edison were to cease servicing
the transition property, it may be
difficult to find a suitable successor
servicer.
- If Boston Edison were to become a debtor
in a bankruptcy case, a court may hold
that the transition property is Boston
Edison's property and may be reached by
its creditors.
For a more detailed discussion of the
material risks of investing in the
certificates, you should carefully read the
discussion under "Risk Factors," which
begins on page 16.
Seller and Servicer............. Boston Edison is an electric company that
primarily distributes electric energy to
retail customers in the City of Boston
and 39 surrounding cities and towns. See
"The Seller and Servicer."
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The Certificates................ Massachusetts RRB Special Purpose Trust
BEC-1 Rate Reduction Certificates.
The trust may issue the certificates in one
or more classes under the certificate
indenture between the trust and the
certificate trustee. Each class of
certificates will represent fractional
undivided beneficial interests in the
related class of notes and the proceeds of
that class of notes. Holders of each class
of certificates will receive payments
received by the trust on the related class
of notes. These payments will be the only
source of distributions on a class of
certificates.
Issuer of Certificates.......... Massachusetts RRB Special Purpose Trust
BEC-1.
Certificate Trustee............. The Bank of New York.
The Notes....................... BEC Funding LLC notes.
Each class of notes and the related class of
certificates will have the same aggregate
principal amount and interest rate, as
described in the prospectus supplement. The
notes will be secured primarily by the
transition property.
See "Description of the Notes."
Note Issuer..................... BEC Funding LLC.
Note Trustee.................... The Bank of New York.
Interest........................ Interest on each class of certificates will
accrue at the interest rate specified in the
prospectus supplement. The certificate
trustee will distribute interest accrued on
each class of certificates on each
distribution date, to the extent of interest
paid on the related class of notes.
Principal....................... The certificate trustee will distribute
principal of each class of certificates in
the amounts and on the distribution dates
specified in the prospectus supplement, but
only to the extent of principal paid on the
related class of notes. See "Description of
the Notes -- Allocations and Payments" and
"Description of the Certificates -- Payments
and Distributions."
On any payment date, the note issuer will
pay principal of the notes only until the
outstanding principal balances of the
various classes of notes have been reduced
to the principal balances specified for
those classes in the expected amortization
schedule. If cash is not available, however,
the certificate
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trustee will pay principal of a class of
certificates later than set forth in the
expected amortization schedule. If an event
of default under the certificate indenture
has occurred and is continuing for any class
of certificates, the certificate trustee
may, and with the written direction of the
holders of at least a majority in principal
amount of the outstanding certificates will,
declare the unpaid principal amount of the
outstanding notes and accrued interest to be
due and payable. See "Description of the
Certificates -- Events of Default."
RTC charge...................... Boston Edison has obtained from the
Massachusetts Department of
Telecommunications and Energy, which
regulates electric companies in
Massachusetts, an order designating the
transition costs and approving the costs of
issuing, servicing and retiring the notes
and the certificates to be financed through
this transaction. This order is known as a
"financing order." To enable Boston Edison
to recover its transition costs and
associated costs, the financing order
authorizes the billing and collection of
the RTC charge (as defined in the glossary
on page 81).
The RTC charge is nonbypassable in that
customers must pay it whether or not they
purchase electricity from Boston Edison or a
third party supplier of electricity, and
whether or not their distribution system is
being operated by Boston Edison or a
successor distribution company.
See "Description of the Transition
Property -- Financing Order and Issuance
Advice Letter."
Customers....................... All classes of retail users of Boston
Edison's distribution system within its
geographic service territory as in effect on
July 1, 1997.
Adjustments to the RTC charge... The servicer will calculate and set the RTC
charge at least annually at a level
estimated to generate sufficient revenues:
- to pay fees and expenses related to the
servicing and retirement of the notes and
certificates;
- to pay interest on the notes;
- to pay principal of each class of notes
according to its expected amortization
schedule; and
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- to fund the overcollateralization
subaccount to the required
overcollateralization level and to
replenish the capital subaccount to the
required capital level.
Adjustments to the RTC charge are limited by
Boston Edison's maximum permitted transition
charge. The transition charge may not exceed
3.35 cents/kilowatt-hour. At the time of the
issuance of the certificates, Boston Edison's
transition charge is expected to be [ ]
cents/kilowatt-hour. This includes a
projected RTC charge of [ ]
cents/kilowatt-hour.
The servicer will base adjustments to the
RTC charge on updated assumptions as to
various factors, including electricity usage
by customers and the rate of charge-offs.
These adjustments will continue until
interest on and principal of all classes of
notes and related classes of certificates
have been paid or distributed in full. See
"Description of the Transition Property --
Adjustments to the RTC charge."
The servicer will file a request referred to
as a true-up advice letter, annually before
the anniversary date of the financing order,
for an increase or decrease in the RTC
charge. The servicer may also file true-up
advice letters before the end of any
calendar quarter or payment date to adjust
the RTC charge. In addition, the servicer
may file a non-routine true-up advice letter
to revise its method for calculating the RTC
charge.
See "Description of the Transition
Property -- Adjustments to the RTC charge."
Commonwealth Pledge............. The Commonwealth of Massachusetts has
pledged and agreed with the note issuer, the
trust and the certificateholders that it
will not alter the provisions of the statute
that make the RTC charge irrevocable and
binding or limit or alter the transition
property or the financing order until the
certificates are fully paid and discharged.
Optional Redemption............. The note issuer may redeem the notes and
cause the trust to redeem the certificates
on any payment date if the outstanding
principal balance of the notes (after giving
effect to payments that would otherwise be
made on a payment date) is less than five
percent of the initial principal balance of
the notes. Upon redemption, the note issuer
will pay an aggregate amount equal to the
outstanding
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principal amount of the notes and accrued
but unpaid interest as of the redemption
date. See "Description of the
Certificates -- Redemption."
Mandatory Redemption............ If the seller is required to, or elects to,
repurchase the transition property under the
circumstances described under "Description
of the Transition Property -- Seller
Representations and Warranties and
Repurchase Obligation," the note issuer will
be required to redeem the notes on or before
the fifth business day following the date of
repurchase and the trust will be required to
redeem the certificates on the same day.
Upon redemption, the note issuer will pay an
aggregate amount equal to the outstanding
principal amount of the notes and accrued
but unpaid interest as of the redemption
date.
Collection Account and
Subaccounts................... The note issuer will establish a collection
account to hold payments arising from the
RTC charge. The collection account will
consist of four subaccounts:
- a general subaccount;
- a reserve subaccount;
- an overcollateralization subaccount for
the overcollateralization amount; and
- a capital subaccount for capital
contributions to the note issuer.
All amounts in the collection account not
allocated to any other subaccount will be
allocated to the general subaccount.
Withdrawals from and deposits to these
subaccounts will be made as described under
"Description of the Notes -- Allocations and
Payments."
Overcollateralization
Subaccount...................... The note trustee will collect the
overcollateralization amount specified in
the prospectus supplement to enhance the
likelihood that payments on the notes will
be made on a timely basis.
The note trustee will hold the
overcollateralization amount for all classes
of certificates in the overcollateralization
subaccount. The overcollateralization amount
will be available to pay any periodic
shortfalls in amounts available to pay the
fees and expenses of servicing and retiring
the notes and the certificates and to make
scheduled payments on the notes after
withdrawals from the general subaccount and
reserve subaccount.
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Capital Subaccount.............. Prior to the issuance of the notes, Boston
Edison will contribute capital to the note
issuer in the amount specified in the
prospectus supplement. The note issuer will
deposit the capital into the capital
subaccount. The note trustee will draw on
amounts in the capital subaccount to the
extent amounts available in the general
subaccount, the reserve subaccount and the
overcollateralization subaccount are
insufficient to pay interest on and
principal of the notes and the fees and
expenses of servicing and retiring the notes
and the certificates. If the note trustee
uses amounts on deposit in the capital
subaccount, on subsequent payment dates the
capital subaccount will be replenished to
the extent the servicer remits payments
arising from the RTC charge exceeding the
amounts required to pay amounts having a
higher priority of payment. See "Description
of the Notes -- Allocations and Payments."
Reserve Subaccount.............. The note trustee will allocate to the
reserve subaccount any amounts remitted to
the collection account exceeding the amounts
necessary to:
- pay fees and expenses related to the
servicing and retirement of the notes and
certificates;
- pay interest on and principal of the
notes;
- fund the capital subaccount to the
required capital level; and
- fund the overcollateralization subaccount
to the required overcollateralization
level.
The note trustee will draw on amounts in the
reserve subaccount, to the extent amounts
available in the general subaccount are
insufficient to pay the amounts listed
above.
Collections; Allocations;
Distributions................. Starting with the first deemed collection
date after the closing, the servicer will
remit daily to the collection account an
amount equal to the actual RTC charges
billed, less an allowance for estimated
charge-offs, within two business days after
the day payments arising from the RTC charge
are deemed to be collected. See "Servicing
-- Remittances to Collection Account."
On each payment date, or for any amount
payable under clauses (1) through (4) below,
on any business day, the note trustee will
allocate amounts in the collection account,
including net earnings on
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these amounts (other than on amounts in the
capital subaccount), as follows:
(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;
(2) the servicing fee and all unpaid
servicing fees from any prior payment
dates will be paid to the servicer;
(3) the administration fee and all unpaid
administration fees from any prior
payment dates will be paid to the note
issuer's administrator;
(4) so long as no event of default has
occurred or would be caused by payment,
all other fees, expenses and
indemnities payable by the note issuer
will be paid to the persons entitled
thereto, provided that the total amount
paid since the previous payment date
and on the current payment date may
not, in the aggregate, exceed $100,000;
(5) first, any overdue semiannual interest
and second, semiannual interest will be
transferred to the certificate trustee,
as noteholder, for distribution to the
certificateholders;
(6) first, funds necessary to pay any
principal in default or, on the final
maturity date of a class of notes, the
outstanding principal balance of such
class, and second, principal based on
priorities described in the prospectus
supplement will be transferred to the
certificate trustee, as noteholder, for
distribution to the applicable
certificateholders according to the
expected amortization schedule for each
class;
(7) unpaid operating expenses and
indemnities payable by the note issuer
will be paid to the persons entitled
thereto;
(8) allocate to the capital subaccount the
amount, if any, by which the capital
subaccount needs to be funded to equal
the required capital level as of that
payment date;
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(9) allocate to the overcollateralization
subaccount the amount, if any, by which
the overcollateralization subaccount
needs to be funded to equal the
required overcollateralization level as
of a payment date;
(10) the balance, if any, will be allocated
to the reserve subaccount for
distribution on subsequent payment
dates; and
(11) following the repayment of all notes
and certificates, the balance, if any,
will be released to the note issuer.
If on any payment date, or for any amounts
payable under clauses (1) through (4) above,
on any business day, funds on deposit in the
general subaccount are insufficient to make
the transfers contemplated by clauses (1)
through (6) above, the note trustee will
first, draw from amounts on deposit in the
reserve subaccount, second, draw from
amounts on deposit in the
overcollateralization subaccount and third,
draw from amounts on deposit in the capital
subaccount, up to the amount of the
shortfall, in order to make the transfers
described above. In addition, if on any
payment date funds on deposit in the general
subaccount are insufficient to make the
transfers described in clauses (7), (8) and
(9) above, the note trustee will draw from
amounts on deposit in the reserve subaccount
to make the required transfers. See
"Description of the Notes--Allocations and
Payments."
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The following diagram provides a general summary of the flow of funds from
the customers through the servicer to the collection account, and the various
allocations from the collection account:
[The omitted graphic depicts the flow of funds
from the Customers through the Servicer to the collection
account, and the various allocations from the collection account.]
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Servicing....................... The servicer will service and manage the
transition property and receive payments
arising from the RTC charge in the same
manner that it services bill collections for
its own account and the accounts it services
for others, if any.
Servicing Compensation.......... The servicer will be entitled to receive an
annual servicing fee in an amount equal to:
- 0.05 percent of the initial principal
balance of the notes for so long as the
servicer bills the RTC charge concurrently
with other charges for services; or
- up to 1.25 percent of the initial
principal balance of the notes if the RTC
charge is being billed separately to
customers.
The note trustee will pay the servicing fee
semiannually on each payment date.
Tax Status of the
Certificates.................... For federal income tax purposes, the trust
will be treated as a "grantor trust", and
thus not taxable as a corporation, and each
class of certificates will be treated as
representing ownership of a fractional
undivided beneficial interest in the related
class of notes. Interest and original issue
discount, if any, on the certificates, and
any gain on the sale of the certificates,
generally will be included in gross income
of certificateholders for federal income tax
purposes. See "Federal Income Tax
Consequences." Interest on the certificates
and any profit on the sale of the
certificates are exempt from Massachusetts
personal income taxes, and the certificates
are exempt from Massachusetts personal
property taxes. See "State Taxation."
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RISK FACTORS
You should consider carefully the following factors before you decide
whether to buy the certificates:
CERTIFICATEHOLDERS COULD EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
LIMITED SOURCES OF PAYMENT FOR THE CERTIFICATES AND LIMITED CREDIT ENHANCEMENT.
You could experience payment delays or losses on the certificates because
payments on the notes are the sole source of distributions on the certificates.
The notes are the sole assets of the trust. The transition property and the
other note collateral, which is expected to be of relatively small value, are in
turn the only sources of payments on the notes.
There will be no forms of credit enhancement for the certificates except
for the right to adjust the RTC charge and amounts held in the
overcollateralization subaccount, capital subaccount and reserve subaccount. We
do not anticipate that the certificates will have the benefit of any liquidity
facility or of any third-party credit enhancement, such as guarantees, letters
of credit or insurance.
If distributions are not made on the certificates in a timely manner as a
result of nonpayment of the related notes, the holders of at least a majority of
the outstanding principal amount of the certificates may direct the certificate
trustee to bring an action against the note issuer to foreclose on the
transition property and the other note collateral securing the notes. There is
not likely to be a market, however, for the sale of the transition property and
the other note collateral.
CERTIFICATEHOLDERS COULD EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
AMENDMENT, REPEAL OR INVALIDATION OF THE RESTRUCTURING STATUTE OR BREACH OF THE
COMMONWEALTH PLEDGE.
Although, under the Massachusetts restructuring statute, The Commonwealth
of Massachusetts has pledged that it will not alter the provisions of the
statute that make the RTC charge irrevocable and binding, or limit or alter the
transition property or the financing order, it is possible that actions could be
taken (even if such actions were ultimately found to be unlawful) to alter the
transition property or the financing order.
LEGISLATIVE ACTIONS
Under Massachusetts law, citizens have the ability to submit laws enacted
by the Massachusetts legislature for approval or rejection directly by the
voters by means of referendum petitions. In November 1998, the voters approved
the restructuring statute by referendum. Massachusetts law does not provide for
any additional referendum on the restructuring statute.
In addition, under Massachusetts law, citizens have the ability to propose
laws (and constitutional amendments) for approval or rejection by the voters by
means of initiative petitions. Generally, any matter that is a proper subject of
legislation can become the subject of an initiative. Among other procedural
requirements, in order to qualify for submission to the electorate, an
initiative petition must be submitted to the Massachusetts Attorney General
signed by more than three percent of the total number of votes cast for governor
in the preceding election. Among other matters, the Attorney General must
certify that the initiative petition is not substantially the same as any
measure which has been qualified for submission or submitted to the voters at
either of the two preceding biennial state elections. The initiative petition
becomes law if it is approved by voters equal
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in number to at least thirty percent of the total number of ballots cast in the
election and also by a majority of voters voting on the petition.
We are not aware of any proposed or pending initiative petition or of any
proposed or pending legislation in the Massachusetts legislature that would
affect any of the provisions of the restructuring statute other than bills
proposing technical corrections, and we are not aware of any pending suit that
challenges any of the provisions of the statute, relating to the issuance by the
Massachusetts Department of Telecommunications and Energy of a financing order,
the creation or characterization of the transition property or the issuance of
"electric rate reduction bonds," such as the certificates.
In the opinion of Palmer & Dodge LLP, counsel to the trust, under
applicable constitutional principles relating to the impairment of contracts,
The Commonwealth of Massachusetts could not repeal or amend the statute, either
by means of the legislative process or the voter initiative process, or take or
refuse to take any action required under its pledge described above if the
repeal or amendment or the action or inaction would substantially impair the
rights of the owners of the transition property or the certificateholders,
absent a demonstration by The Commonwealth of Massachusetts that a "great public
calamity" justifies a contractual impairment.
There have been numerous cases in which legislative or popular concerns
with the burden of taxation or governmental charges have led to adoption of
legislation reducing or eliminating taxes or charges that supported bonds or
other contractual obligations entered into by public instrumentalities. Courts
have not considered these concerns by themselves to provide sufficient
justification for a substantial impairment of the pledged security provided by
the taxes or governmental charges for the bonds or obligations. Based on the
case law referred to above (which, however, does not address directly the
certificates and the pledge described above), it would appear unlikely that The
Commonwealth of Massachusetts could reduce, modify or alter the transition
property, or take or refuse to take any action regarding the transition property
in a manner that would substantially impair the rights of the owners of the
transition property or the certificateholders.
Nonetheless, we cannot assure you that a repeal or amendment of the
restructuring statute will not be adopted or sought or that any action or
refusal to act by The Commonwealth of Massachusetts will not occur, any of which
may constitute a violation of the Commonwealth's pledge with the owners of the
transition property and the certificateholders. If a violation of this pledge
occurred, costly and time consuming litigation might ensue. Any litigation might
adversely affect the price of the certificates and your ability to resell the
certificates and might delay the timing of distributions on the certificates.
Moreover, given the lack of controlling judicial precedent directly addressing
the certificates and the Commonwealth's pledge, we cannot predict the outcome of
any litigation with certainty, and, accordingly, you could experience a delay in
receipt of distributions on or incur a loss on your investment in the
certificates.
COURT DECISIONS
If a court were to determine that the relevant provisions of the
restructuring statute or the financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity of the
certificates or the trust's ability to make distributions on the certificates,
and would not trigger any requirement to repurchase the notes or indemnify you.
In either case, you could suffer a loss on your investment in the certificates.
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SHORTFALL IN RTC CHARGE PAYMENTS AS A RESULT OF INACCURATE FORECASTING OR
UNANTICIPATED DELINQUENCIES COULD LEAD TO PAYMENT DELAYS OR LOSSES.
Because the RTC charge is assessed based on kilowatt-hours of electricity
consumed by customers, a shortfall of payments arising from the RTC charge could
result if the servicer inaccurately forecasts electricity consumption or
underestimates Customer delinquencies or charge-offs when setting the RTC
charge. A shortfall could cause distributions on the certificates to be made
later than expected or not at all. As a result, principal of the certificates
may not be paid according to the expected amortization schedule, which would
lengthen the weighted average life of the certificates. In addition, a change in
energy consumption by customers may also result in principal of the certificates
not being paid by the final maturity date of the certificates or not being paid
at all. For the same reasons, payments of interest on the certificates could
also be delayed or not made.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
- warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
- general economic conditions being worse than expected, causing Customers
to migrate from Boston Edison's or a successor distribution company's
service territory or reduce their electricity consumption;
- the occurrence of a natural disaster, such as a hurricane or blizzard,
unexpectedly disrupting electrical service and reducing consumption;
- problems with energy generation, transmission or distribution resulting
from a change in the market structure of the electric industry;
- large customers ceasing business or departing Boston Edison's or a
successor distribution company's service territory;
- customers consuming less electricity because of increased conservation
efforts; or
- large customers switching to self-generation or co-generation of electric
power without being required to pay an exit charge to mitigate the
revenues lost by their reduced consumption of electricity delivered by
Boston Edison or a successor distribution company. See "Energy
Deregulation and New Massachusetts Market Structure."
Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
- unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater charge-offs than expected or forcing Boston
Edison or a successor distribution company to grant additional payment
relief to more customers;
- a change in law that makes it more difficult for Boston Edison or a
successor distribution company to disconnect nonpaying customers, or that
requires Boston Edison or a successor distribution company to apply more
lenient credit standards in accepting customers; or
- the introduction into the energy markets of less creditworthy third party
energy suppliers who collect and remit payments arising from the RTC
charge to the servicer on behalf of customers.
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CAP ON RTC CHARGE MAY LEAD TO INSUFFICIENT REVENUES TO MAKE PAYMENTS.
You may experience payment delays or defaults on the certificates because
the servicer will not be able to increase the RTC charge above Boston Edison's
maximum permitted transition charge. The transition charge may not exceed 3.35
cents/kilowatt-hour. At the time of the issuance of the certificates, Boston
Edison's transition charge is expected to be [ ] cents/kilowatt-hour. This
includes a projected RTC charge of [ ] cents/kilowatt-hour.
The financing order provides that the transition charge will not be reduced
below the RTC charge, although the RTC charge is still restricted by the
transition charge cap of 3.35 cents/kilowatt-hour. If the RTC charge needs to be
increased above the transition charge then in effect, the filing of a true-up
advice letter with the Department to increase the RTC charge will also effect an
increase in the transition charge, within the limits of the cap described above.
See "Description of the Transition Property -- Transition Charge."
LIMITED RIGHTS AND REMEDIES MAY IMPAIR ABILITY TO REALIZE ON COLLATERAL
If there is an event of default on the notes and the note trustee elects to
foreclose on the transition property, the note trustee is unlikely to be able to
resell the transition property because of its unique nature. In addition,
although the seller is required to repurchase the transition property for a
price equal to the outstanding principal amount of the notes and accrued
interest under the limited circumstances described in "Description of the
Transition Property -- Seller Representations and Warranties and Repurchase
Obligation," we cannot assure you that the seller would be able to repurchase
the transition property if it were required to do so.
The requirement to repurchase the transition property would arise if, among
other things, there has been a breach of the seller's representations and
warranties as of the closing date that:
- the financing order is in full force and effect and the issuance advice
letter has been filed in accordance with the financing order;
- the certificateholders are entitled to the protections of the statute
and, accordingly, the financing order is not revocable by the
Massachusetts Department of Telecommunications and Energy; or
- the transition property constitutes a property right,
but only if a breach continues beyond a 90-day grace period and has a material
adverse effect on certificateholders. See "Description of the Transition
Property -- Seller Representations and Warranties and Repurchase Obligation."
The seller will not be in breach of the representations and warranties in
the sale agreement as a result of a change in law by legislative enactment,
constitutional amendment or initiative petition. A repeal of the statute, an
amendment voiding the transition property or the adoption of a federal statute
prohibiting the recovery of transition costs are examples of changes in law. If
any change in law were to occur, the servicer, on behalf of the
certificateholders, would be required to bring legal action, at the note
issuer's expense, seeking to overturn the change.
ADDITIONAL ISSUANCES OF CERTIFICATES MAY AFFECT PAYMENTS ON OUTSTANDING
CERTIFICATES.
The issuance of other certificates by a separate trust might delay or
reduce the distributions that you receive on the certificates, because the
revenues arising from Boston
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Edison's transition charge will be shared among the various issuances of
certificates. As a result, if collections of the transition charge are
insufficient to pay interest on and principal of each series of outstanding
certificates, the certificates the trust is offering will only receive their pro
rata portion of the collections according to the ratio of the RTC charges
otherwise applicable to the separate series of certificates. The terms of any
new issuance of certificates secured by the remaining portion of Boston Edison's
transition charge will not require the prior review or consent of
certificateholders. The seller has, however, agreed in the transition property
sale agreement not to sell other transition property to secure another issuance
of notes and, in turn, another issuance of certificates if it would cause the
then existing ratings on the certificates to be downgraded. Further, the
servicer may not ultimately be able to increase the RTC charge for the
certificates to generate revenues sufficient to pay the fees and expenses of
servicing and retiring the notes and the certificates and interest on and
principal of the certificates.
LITIGATION AND OTHER EVENTS IN JURISDICTIONS OTHER THAN MASSACHUSETTS COULD
ADVERSELY AFFECT CERTIFICATEHOLDERS
A legal action successfully challenging under the U.S. Constitution or
other federal law a state restructuring statute similar to the Massachusetts
restructuring statute adopted by a jurisdiction other than Massachusetts could
establish legal principles that would serve as a basis to challenge the
restructuring statute. Whether or not a subsequent court challenge to the
restructuring statute would be successful would depend on the similarity of the
other statute and the applicability of the legal precedent to the restructuring
statute. Although the restructuring statute would not become invalid
automatically as a result of a court decision invalidating another state's
statute, such a decision could establish a legal precedent for a successful
challenge to the restructuring statute that could adversely affect
certificateholders. Accordingly, the market value of the certificates could be
reduced. In addition, legal challenges, legislative, administrative, political
or other actions in other states challenging stranded cost recovery or
securitization of stranded cost recovery could adversely affect the market for
certificates. Legal challenges brought in jurisdictions other than Massachusetts
would not, however, directly affect the restructuring statute or the interests
of the certificateholders. Similarly, legislative, administrative, political or
other actions in other states (such as California which has already implemented
a competitive market structure for its electric generation industry) would not
directly impact the restructuring statute or the interests of certificateholders
but could heighten awareness of the political and other risks associated with
these types of securities as perceived by the capital markets, and in that way,
limit the ability of certificateholders to resell the certificates and impair
their value. We cannot assure you that future challenges to stranded cost
recovery or stranded cost securitizations in other states will not significantly
impair your ability to resell the certificates and the value of the
certificates.
PROBLEMS WITH THE SERVICING OF TRANSITION PROPERTY MAY CAUSE PAYMENT DELAYS OR
LOSSES.
CHANGE IN SERVICER MAY LEAD TO PAYMENT DELAYS OR LOSSES.
If, as a result of insolvency or liquidation or otherwise, Boston Edison
were to cease servicing the transition property, determining any adjustments to
the RTC charge or collecting payments arising from the RTC charge, it may be
difficult to find a suitable successor servicer. As a result, the timing of
recovery of payments arising from the RTC charge could be delayed. The note
issuer will rely on the servicer to determine any adjustments to the RTC charge
and for customer billing and collection. Any successor servicer may have less
experience than Boston Edison and less capable forecasting, billing
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and collection systems than those employed by Boston Edison. Given the
complexity of the tasks to be performed by the servicer and the expertise
required, a successor servicer may experience difficulties in collecting
payments arising from the RTC charge and determining appropriate adjustments to
the RTC charge.
The servicing fee would likely increase if the note issuer were to engage a
successor servicer. In addition, any successor servicer under current law may
not be able to invoke the remedy of shutting off service to a customer for
nonpayment of the RTC charge and thus may experience higher delinquencies. Also,
a change in the servicer will cause payment instructions to change, which may
lead to a period of disruption in which customers continue to remit payment
according to the former payment instructions, resulting in delays in collection
that could result in payment delays on the certificates.
BILLING OF THE RTC CHARGE BY THIRD PARTY SUPPLIERS MAY CAUSE DELAYS IN
REMITTANCES.
When a third party supplier bills, collects and remits the RTC charge to
the servicer, there is a greater risk that the servicer will receive payments
arising from the RTC charge later than it otherwise would. A third party
supplier is an entity that supplies energy to customers and has contracted with
the servicer to bill and collect the RTC charge. The risk of nonpayment due to
default, bankruptcy or insolvency of the third party supplier holding the funds
will increase the longer that the delay in receipt of payment lasts. Third party
supplier billing also places increased information requirements on the servicer.
The servicer has the responsibility of accounting for payments arising from the
RTC charge due to certificateholders regardless of which entity bills customers
for the RTC charge.
Any third party supplier that bills and collects payments arising from the
RTC charge will be required to pay these amounts, regardless of whether payments
are received from customers, within 15 days after the servicer's bill to the
third party supplier. The third party supplier will, in effect, replace the
customer as the obligor for these amounts, and the servicer, on behalf of the
note issuer, will have no right to collect the payments arising from the RTC
charge from the customer. Therefore, the servicer will be relying on the credit
of the third party supplier, rather than on the credit of the customers. In
addition, to the extent that a few third party suppliers bill and collect the
RTC charge, the note issuer may be relying on a small number of third party
suppliers, rather than a large number of customers, to remit payments arising
from the RTC charge. In this case, a default in the remittance of payments
arising from the RTC charge by a single third party supplier that bills and
collects the RTC charge from a large number of customers may adversely affect
the timing of distributions on the certificates. See "Servicing -- Third Party
Suppliers."
Neither Boston Edison nor the servicer will pay any shortfalls resulting
from the failure of any third party supplier to remit payments arising from the
RTC charge to the servicer. Although the servicer will take into account revenue
shortfalls arising from a default by a third party supplier when periodically
adjusting the RTC charge, any shortfalls that occur may cause delays in
distributions on the certificates.
POSSIBLE PAYMENT DELAYS MAY RESULT FROM THE YEAR 2000 COMPUTER ISSUE.
The year 2000 computer issue could cause significant delays in
distributions to certificateholders. The year 2000 computer issue is the result
of computer programs that were written using two digits rather than four to
define an applicable year. Boston Edison uses various software applications and
embedded chip technology that could be affected by
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the year 2000 computer issue. If computer programs with date-sensitive functions
are not year 2000 compliant, they may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations. Possible disruptions to
Boston Edison's operations, include, among other things, the inability of Boston
Edison, as servicer, to bill and collect the RTC charge, and the inability of
Boston Edison to meter electricity usage. In addition, the year 2000 computer
issue could cause Boston Edison or its suppliers to fail to deliver electricity.
In that event, revenues arising from the RTC charge may decrease because the RTC
charge is calculated based on electricity usage by customers. This also could
result in delays in distributions on the certificates. See "The Seller and
Servicer -- Year 2000 Computer Issue."
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
BANKRUPTCY OF SELLER COULD DELAY OR REDUCE PAYMENTS ON CERTIFICATES AND
ADVERSELY AFFECT THE ABILITY TO RESELL TRANSITION PROPERTY.
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 transition property constituted property of
the seller's bankruptcy estate, and a court were to adopt this position, then
delays or reductions in payments on the certificates could result. For example,
a creditor or bankruptcy trustee of the seller or the seller itself as debtor in
possession might argue that the sale of the transition property to the note
issuer was a loan to the note issuer from the seller, secured by a pledge of the
transition property. Regardless of any adverse determination in a seller
bankruptcy proceeding, the mere fact of a seller bankruptcy proceeding could
have an adverse effect on the resale market for the certificates and the market
value of the certificates.
Because the RTC charge is a usage-based charge, 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 argue that
the note issuer should pay a portion of the costs of the seller associated with
the generation, transmission or distribution of the electricity the price of
which gave rise to the payments arising from the RTC charge that are used to
make distributions on the certificates. If a court were to adopt this position,
the amounts paid to the note trustee, and thus to the holders of the
certificates, could be reduced.
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,
government lien or other lien on property of the seller arising before the
transition property came into existence may have priority over the note issuer's
interest in the transition property, which could reduce the amounts distributed
to certificateholders. See "Description of the Transition Property--Bankruptcy
and Creditors' Rights Issues".
BANKRUPTCY OF THE SERVICER OR A THIRD PARTY SUPPLIER COULD ALSO DELAY OR
REDUCE PAYMENTS.
The bankruptcy or insolvency of the servicer or a third party supplier
could result in delays or reductions in distributions on the certificates. Each
of the servicer and any third party supplier will remit payments arising from
the RTC charge out of its general funds and will not segregate these amounts
from its general funds. In the event of a bankruptcy of the servicer or a third
party supplier, the note trustee likely will not have a perfected interest in
commingled funds and the inclusion of the commingled funds in the bankruptcy
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estate of the servicer or third party supplier may result in delays in
distributions on the certificates. Furthermore, if the servicer is in
bankruptcy, it may stop performing its functions as servicer and it may be
difficult to find a third party to act as successor servicer. See "-- Problems
with the servicing of transition property may cause payment delays or
losses -- changes in servicer may lead to payment delays or losses."
POSSIBLE FEDERAL PREEMPTION OF THE STATUTE MAY PROHIBIT RECOVERY OF THE RTC
CHARGE.
Federal preemption of the statute could prevent certificateholders from
receiving distributions on the certificates, and cause a loss on their
investment in the certificates. The Massachusetts electric industry governed by
federal law and regulated by the Federal Energy Regulatory Commission. In the
past, bills have been introduced in Congress to prohibit the recovery of charges
similar to the RTC charge. Although Congress has not enacted any law that would
prohibit the recovery of charges similar to the RTC charge, it may do so in the
future. Enactment of a federal law prohibiting the recovery of charges similar
to the RTC charge might have the effect of preempting the statute and thereby
prohibiting the recovery of the RTC charge, which would cause delays and losses
on the payment of the certificates.
NATURE OF THE CERTIFICATES
RESALE MARKET IS LIMITED.
We cannot assure you that you will be able to resell the certificates or
that a trading market for the certificates will develop or, if one does develop,
that it will continue for the life of the certificates. We do not expect to list
the certificates on any securities exchange.
HIGH RATINGS DO NOT MEAN THAT PAYMENTS WILL BE MADE ON TIME.
You should understand that the ratings of the certificates issued by
nationally recognized statistical rating organizations address only the
likelihood of the ultimate distribution of principal by the legal maturity date
and the timely distribution of interest on the certificates. A rating is not an
indication that these rating organizations believe that principal payments are
likely to be distributed on time according to the expected amortization
schedule. You should not rely on ratings for that purpose.
POSSIBILITY OF EARLY REDEMPTION MAY LEAD TO LOWER RETURN ON INVESTMENT.
The note issuer has the option to redeem all of the outstanding notes on
any payment date if, after giving effect to the payments that would otherwise be
made on that payment date, the outstanding principal balance of the notes would
be less than five percent of the initial principal balance of the notes. In
addition, the note issuer may be required to redeem the notes if the seller is
required to repurchase the transition property as a result of a breach of the
seller's representations and warranties in the sale agreement as described under
"Description of the Transition Property -- Seller Representations and Warranties
and Repurchase Obligation." Redemption of the notes will require the certificate
trustee to redeem the certificates. Redemption will cause the certificates to be
retired earlier than would otherwise be expected. We cannot predict whether the
note issuer will redeem the notes, or whether you will be able to receive an
equivalent rate of return on reinvestment of the proceeds arising from any
redemption.
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DEFINED TERMS
Capitalized terms used in this prospectus are defined in the glossary,
which begins on page 81.
AVAILABLE INFORMATION
BEC Funding LLC, the note issuer, has filed a registration statement
relating to the certificates and the notes with the Securities and Exchange
Commission. This prospectus is a part of the registration statement. This
prospectus, together with the prospectus supplement, describes the material
terms of each material document filed as an exhibit to the registration
statement. This prospectus and the prospectus supplement do not, however,
contain all of the information contained in the registration statement and
related exhibits. You can inspect the registration statement and the related
exhibits 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. You
may obtain copies of the registration statement and related exhibits at the
above locations at prescribed rates. You may obtain information on the operation
of the public reference facilities by calling the Commission at 1-800-SEC-0330.
You can also inspect information filed electronically with the Commission,
including reports and proxy and information statements, at the Commission's site
on the World Wide Web at http://www.sec.gov.
The note issuer will file annual, quarterly and special reports and other
information with the Securities and Exchange Commission. The note issuer may
stop filing periodic reports with the Commission at the beginning of any fiscal
year following the issuance of the certificates if there are fewer than 300
holders of the certificates.
REPORTS TO HOLDERS
During any period when the trust issues the certificates in book-entry
form, Boston Edison Company, acting as the servicer of the property securing the
notes, or a successor servicer, will provide periodic reports concerning the
certificates. You may obtain copies of the periodic reports by requesting them
from your broker or dealer. If you are the registered holder of the
certificates, you will receive the reports from the certificate trustee. See
"Description of the Notes -- Reports to Noteholders" and "Description of the
Certificates -- Reports to Certificateholders."
INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents filed by the note issuer with the
Securities and Exchange Commission after the date of this prospectus and prior
to the termination of this offering will be incorporated by reference in this
prospectus and considered to be part of this prospectus. Any statement in this
prospectus or in the prospectus supplement, or in a document incorporated or
deemed to be incorporated by reference, will be deemed to be modified or
superseded if the note issuer files a document that modifies that statement. Any
statement as modified or superseded shall constitute a part of this prospectus
or the prospectus supplement.
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You can request from the note issuer a free copy of any document
incorporated by reference in the registration statement (except exhibits) by
writing to BEC Funding LLC at 800 Boylston Street, 35th Floor, Boston
Massachusetts 02199, or by calling (617) 369-6000.
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ENERGY DEREGULATION AND NEW MASSACHUSETTS MARKET STRUCTURE
The electric utility industry is experiencing intensifying competitive
pressures in the electricity generation market. Historically, electric utilities
operated as regulated monopolies in their service territories and were the
primary suppliers of electricity. In Massachusetts, the Massachusetts Department
of Telecommunications and Energy (formerly the Department of Public Utilities)
set electric companies' rates based upon their costs of providing services and
allowing for a reasonable return on their prudent capital investments. Changes
to the traditional legal and regulatory framework and market structure are
occurring at both the state and federal levels.
STATUTORY OVERVIEW
At the state level, we expect that the Massachusetts electric industry will
change dramatically in the near future because of the enactment of Chapter 164
of the Massachusetts Acts of 1997, referred to as the "restructuring statute"
and the completion of related restructuring settlement agreements between the
Department and Massachusetts electric companies. The restructuring statute was
enacted in November 1997 and established a comprehensive framework for the
restructuring of the Massachusetts electric industry. The restructuring statute
required that on or before January 1, 1998, electric companies file a plan for
restructuring their operations to allow for retail competition in electricity
generation supply. See "-- Settlement Agreement."
Under the restructuring statute, approval of an electric company's
restructuring plan permits an electric company to recover transition costs
through a transition charge, which is a separate charge assessed to ratepayers
based on consumption of electricity. Generally, transition costs consist of the
costs of prudently incurred investments and obligations that an electric company
may not be able to recover through market-based rates in a competitive
electricity generation market. The restructuring statute requires that an
electric company take reasonable steps to mitigate to the maximum extent
possible the total amount of its transition costs. Approval of a restructuring
plan by the Department means, among other things, that the Department has found
reasonable mitigation of transition costs by the electric company submitting the
plan. The restructuring statute also permits an electric company to cause a
special purpose entity to issue securities, such as the certificates, secured by
the revenues arising from a portion, which may become all, of its transition
charge, if doing so will result in savings to ratepayers.
The restructuring statute also contemplates that an electric company's
customers will be permitted to contract with third party suppliers of
electricity and that the company will continue to distribute electricity whether
generated by itself or a third party supplier on a regulated basis. The
restructuring statute provides that retail customers may choose their
electricity supplier as of March 1, 1998. Customers who do not choose another
electricity supplier may continue to buy electricity from the utility.
SETTLEMENT AGREEMENT
In January 1998, the Department determined that Boston Edison's
restructuring settlement agreement substantially complied with the provisions of
the restructuring statute. The settlement agreement provides for, among other
things, an accounting of Boston Edison's transition costs, efforts to mitigate
the transition costs and rates for Boston Edison's electricity generation,
transmission, distribution and other services. To meet rate reduction
requirements in its settlement agreement and to mitigate the amount of its
transition costs, Boston Edison has divested its fossil generating assets and
its nuclear
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generation assets. As part of its settlement agreement, Boston Edison's rates
include a transition charge designed to recover its transition costs.
EXIT CHARGE
Although the RTC charge is nonbypassable, meaning that customers must pay
it whether or not they purchase energy from Boston Edison or a third party
supplier of energy, and whether or not their distribution system is being
operated by Boston Edison or a successor distribution company, customers may
reduce their electricity usage through the use of on-site generation or
cogeneration equipment. As a result, revenues generated by the RTC charge may
decrease. The statute contemplates that a customer that reduces purchases of
electricity through the operation of, or purchases from operators of, on-site
generation or cogeneration equipment may be required to pay an exit charge. The
servicer would remit to the note trustee a pro rata portion of the exit charge
based on the amount attributable to the RTC charge. However, a customer will not
have to pay an exit charge if:
- the customer provided less than or equal to ten percent of the annual
gross revenues collected by Boston Edison (or a successor distribution
company) in the year prior to the customer leaving the distribution
system; provided, that if two or more customers who, at any time within a
36-month period, leave the distribution system, represent in the
aggregate ten percent or more of the annual gross revenues collected by
Boston Edison (or a successor distribution company) in the year prior to
exit from the distribution system, these customers will pay an exit
charge based upon that portion of the annual gross revenues that is above
ten percent;
- the customer reduces purchases through the operation of, or purchases
from, on-site renewable energy technologies, fuel cells or cogeneration
equipment with a combined heat and power system efficiency of at least
50%; or
- the customer reduces purchases through the operation of, or purchases
from, an on-site generation or cogeneration facility of 60 kilowatts or
less.
Any exit charge may be equal to but no greater than the expected value of
the transition charge payments the customer would have paid but for the
operation of on-site generation or cogeneration equipment. If the Department
determines that on-site generation and cogeneration activities will cause a
decrease in future purchases of electricity and transition charge payments and
that a decrease will have a significant adverse impact on electric bills to be
paid by other customers in Boston Edison's or a successor distribution company's
service territory during the remaining period of transition cost recovery, then
the Department may order an exit charge to be paid upon terms and criteria as it
determines, notwithstanding the exceptions listed above.
RECONCILIATION
The restructuring statute also provides that the Department will review, at
intervals of not less than every 18 months from the date of the financing order,
each financing order creating an irrevocable right for an electric company to
recover a portion, which may become all, of its transition charge to pay
interest on and principal of electric rate reduction bonds, such as the
certificates. The review will be limited to a comparison of assumed transition
costs based on assumed mitigation to the actual transition costs determined
through actual mitigation. If the amount of transition costs authorized to be
recovered through a financing order exceeds the actual amount of those
transition costs, then the electric company will pay ratepayers with a uniform
rate credit based on usage that in total equals the amount of the excess. The
financing order provides that any reconciliation or adjustment will not affect
the RTC charge.
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THIRD PARTY BILLING OPTIONS
The restructuring statute authorizes and directs the Department to commence
an investigation and study of consolidated billing options starting on or after
January 1, 2000. The investigation would consider the manner in which metering,
meter maintenance and testing, customer billing and information services have
been provided by distribution companies, such as Boston Edison, since March 1,
1998 to analyze and determine, among other things, whether those services should
be unbundled from other distribution services and provided through a competitive
market. The study would also include an investigation and review of whether the
exclusivity of electric company distribution service territories should be
terminated or altered in any manner. If the Department determines that those
services should be unbundled and subjected to competition, or that territorial
exclusivity should be terminated or altered in any manner, the Department must,
no later than January 1, 2001, file its recommendations, along with drafts of
legislation necessary to implement its recommendations, with the Massachusetts
legislature. The Department's financing order issued to Boston Edison provides
credit and remittance criteria for third party suppliers to accommodate the
billing of the RTC charge by third party suppliers. A third party supplier is an
entity that supplies energy to customers and has contracted with the servicer to
bill and collect the RTC charge. See "Risk Factors -- Problems with the
servicing of transition property may cause payment delays or losses -- Billing
of the RTC charge by third party suppliers may cause delays in remittances."
FEDERAL INITIATIVES
In addition to the changes occurring in the Massachusetts market and
regulatory environment discussed throughout this section, federal legislative
efforts may also significantly alter the national market for electricity. For
example, at the federal level, the National Energy Policy Act of 1992 was
designed to increase competition in the wholesale electric generation market by
easing regulatory restrictions on producers of wholesale power and by
authorizing the Federal Energy Regulatory Commission to mandate access to
electric transmission systems by wholesale power generators. See "Risk
Factors -- Possible federal preemption of the restructuring statute may prohibit
recovery of the RTC charge."
DESCRIPTION OF THE TRANSITION PROPERTY
The restructuring statute and Boston Edison's restructuring settlement
agreement with the Massachusetts Department of Telecommunications and Energy
permit Boston Edison to recover transition costs through the assessment of a
transition charge, although Boston Edison has a duty to mitigate its transition
costs. Examples of transition costs include the costs of electricity generation
facilities, power purchase contracts with third-party generators of electricity
and regulatory assets. Regulatory assets reflect incurred costs that otherwise
would have been expensed, but have been capitalized because those costs probably
would have been recovered in future rates under the traditional ratemaking
structure.
FINANCING ORDER AND ISSUANCE ADVICE LETTER
The restructuring statute authorizes the Department to issue a financing
order, which is a regulatory order that approves the amount of Boston Edison's
transition costs that it is permitted to finance through the issuance of
electric rate reduction bonds, such as the certificates. On December 3, 1998,
Boston Edison filed its application for a financing order with the Department.
The Department issued a financing order dated April 2, 1999, which
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authorizes the issuance of approximately $805 million aggregate principal amount
of the certificates, although Boston Edison must still demonstrate savings to
ratepayers.
The financing order, together with the issuance advice letter, establishes,
among other things, the RTC charge, to recover reimbursable transition costs
amounts specified in the financing order. The RTC charge is nonbypassable in
that customers must pay it whether or not they purchase energy from Boston
Edison or a third party supplier of energy, and whether or not their
distribution system is being operated by Boston Edison or a successor
distribution company. The restructuring statute provides that the right to
collect payments based on the RTC charge is a property right which may be
pledged, assigned or sold in connection with the issuance of the certificates.
Under the statute and the financing order, the owner of the transition property
is entitled to assess the RTC charge until it has received payments from
customers sufficient to retire all outstanding notes and certificates and to pay
fees and expenses of servicing and retiring the notes and the certificates. The
RTC charge, as adjusted from time to time, is a portion, which may become all,
of the transition charge and will be expressed as an amount per kilowatt-hour of
electricity usage by a customer. The RTC charge will not be separately
identified on customer bills, although customer bills will note that a portion
of the transition charge has been sold to the note issuer.
The financing order requires the seller to submit an issuance advice letter
relating to the certificates to the Department. The issuance advice letter will
establish the initial RTC charge and become effective when it is filed with the
Department. The financing order permits the Servicer to file requests, referred
to as true-up advice letters, to adjust up or down the RTC charge at various
times, to enhance the likelihood of retirement of each class of certificates on
a timely basis. See "-- Adjustments to the RTC charge."
TRANSITION PROPERTY
The transition property is a property right consisting of the right, title
and interest to all revenues, collections, claims, payments, money or proceeds
of or arising from the RTC charge. The notes will be secured by the transition
property, as well as the other note collateral described under "Description of
the Notes -- Security."
TRANSITION CHARGE
The transition charge is designed to recover on a fully reconciling basis
all of Boston Edison's transition costs. The transition charge is the rate
mechanism through which Boston Edison is allowed to recover its transition
costs. It is determined according to the methodology specified in Boston
Edison's settlement agreement and subsequent proceedings before the Department
under that settlement agreement. The transition charge may increase or decrease
as a result of the variable component described below, but may not exceed 3.35
cents/kilowatt-hour under the settlement agreement. The RTC charge is a portion,
which may become all, of the transition charge, established by the financing
order to recover reimbursable transition costs amounts specified in the order.
See "Risk Factors -- Cap on RTC charge may lead to insufficient revenues to make
payments."
The transition charge consists of both a fixed and variable component. The
fixed component consists of the portion of the transition costs whose amounts
have been set at the time of the settlement agreement or in subsequent
proceedings. In general, the dollar amounts of the fixed component do not
change. The following are examples of transition costs included in the fixed
component of the transition charge:
- the net balance of Boston Edison's unrecovered investment in its fossil
generation assets and related regulatory assets;
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- the retail share of the net balance of Boston Edison's unrecovered
investment in the Pilgrim nuclear power station and related regulatory
assets; and
- the prefunded balance of Boston Edison's portion of the decommissioning
trust being transferred to the buyer in connection with the sale of the
Pilgrim nuclear power station.
The financing order authorizes the recovery of the fixed component through the
RTC charge.
The variable component consists of the portion of the transition costs the
amount of which have been estimated in the settlement agreement. The amounts in
the variable component will be reconciled to the actual amounts and will vary
over time. The following are examples of transition costs included in the
variable component of the transition charge:
- Pilgrim nuclear power station fixed operating costs;
- above-market payments to power suppliers under Boston Edison's long-term
power purchase contracts;
- above-market fuel transportation costs;
- employee retraining and severance costs;
- damages, costs, or net recoveries from claims associated with Boston
Edison's generating business that accrued prior to sale that were not
assigned to the buyers; and
- payments by Boston Edison in lieu of property taxes to the Town of
Plymouth, Massachusetts to compensate the town for the loss of property
tax revenues.
The transition charge may increase or decrease while the certificates are
outstanding because the amount of the variable component will fluctuate. In
addition, Boston Edison will make payments to the Town of Plymouth and for
employee retraining and severance costs the amounts of which cannot be estimated
at this time. These payments will constitute transition costs and will increase
the transition charge.
The financing order provides that the transition charge will not be reduced
below the RTC charge, although the transition charge is still limited by the
transition charge cap of 3.35 cents/kilowatt-hour. If the RTC charge needs to be
increased above the transition charge then in effect, the filing of a true-up
advice letter with the Department to increase the RTC charge will also effect an
increase in the transition charge, within the limits of the cap described above.
The Massachusetts restructuring statute provides that Boston Edison must
meet the required rate reduction on or before September 1, 1999 and that the
rate reduction, adjusted up or down for inflation, will remain in effect through
December 31, 2004. If Boston Edison's rates, including the transition charge,
exceed the maximum total rate permitted during the required rate reduction
period, then the Department will adjust Boston Edison's rates and charges other
than the RTC charge to the extent necessary to achieve the required rate
reduction. To the extent that the Department adjusts these other charges, and
Boston Edison is not allowed to collect on a current basis any rate or charge
that it would otherwise be entitled to collect, the portion of these rates or
charges not collected on a current basis shall be deferred at the carrying
charge in effect for those charges.
ADJUSTMENTS TO THE RTC CHARGE
Initially and during the life of the certificates, at least annually the
servicer will calculate and set the RTC charge at a level estimated to generate
revenues sufficient to pay fees and expenses of servicing and retiring the notes
and the certificates, to pay
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interest on and principal of the certificates and to fund and replenish other
subaccounts as required for the upcoming year. The servicer will increase or
decrease the RTC charge over the life of the certificates as a result of several
factors, including:
- changes in electricity sales forecasts;
- changes in payment patterns and charge-off experience (including defaults
by third party suppliers);
- changes in any ongoing fees, costs and expenses related to the notes and
the certificates; and
- unpaid interest on or deferred principal of the notes.
If the servicer estimates that the RTC charge in effect at any given time will
collect payments in excess of that necessary to meet required payments, then the
servicer may reduce the RTC charge. The adjustments to the RTC charge will
continue until all interest on and principal of all classes of notes and related
classes of certificates have been paid or distributed in full.
The RTC charge will be a portion (which may be adjusted to be all) of
Boston Edison's transition charge. As a result, the RTC charge may be limited by
Boston Edison's maximum permitted transition charge, which in no event may
exceed 3.35 cents/kilowatt-hour. Therefore, the servicer may not always be able
to increase the RTC charge to meet anticipated payments of interest on and
principal of the certificates and as a result distributions on the certificates
may be delayed or you may suffer a loss on your investment.
The financing order provides that the servicer will file true-up advice
letters periodically as follows:
- the servicer will file a routine true-up advice letter with the
Department annually prior to each anniversary of the financing order,
with resulting adjustments up or down to the RTC charge to become
effective on the first day of the next succeeding calendar month, or the
date as may be specified in the true-up advice letter, so long as the
effective date is at least 15 days after the filing of the true-up advice
letter;
- the servicer may file a routine true-up advice letter with the Department
before the end of any calendar quarter or payment date, with resulting
adjustments up or down to the RTC charge to become effective on the first
day of the next succeeding calendar month, or the date as may be
specified in the true-up advice letter, so long as the effective date is
at least 15 days after the filing of the true-up advice letter; and
- the servicer will file a non-routine true-up advice letter with the
Department if the method it uses to calculate the RTC charge requires
modifications to more accurately project and generate adequate revenues,
with the modifications to become effective when reviewed and approved by
the Department within 60 days after filing.
True-up advice letters will take into account amounts available in the general
subaccount and reserve subaccount, and amounts necessary to fund the
overcollateralization subaccount and to replenish the capital subaccount to
their required levels, in addition to amounts payable on the notes and the
certificates and related fees and expenses.
PLEDGE BY THE COMMONWEALTH OF MASSACHUSETTS
The Commonwealth of Massachusetts has pledged and agreed with the note
issuer, the trust and the certificateholders that it will not alter the
provisions of the statute that
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<PAGE> 42
make the RTC charge irrevocable and binding or limit or alter the transition
property or the financing order until the certificates are fully paid and
discharged.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
The seller has agreed in the transition property sale agreement not to sell
transition property to secure another issuance of notes, and, in turn,
certificates, if it would cause the then existing ratings on the certificates to
be downgraded.
On the issuance date of the certificates, the seller will sell and assign
to the note issuer, without recourse, its entire interest in the transition
property. The note issuer will apply the net proceeds from the sale of the notes
to purchase the transition property. The seller's financial statements will
indicate that it is not the owner of the transition property, and for financial
reporting and tax purposes the seller will treat the notes as representing debt
of the seller.
SELLER REPRESENTATIONS AND WARRANTIES AND REPURCHASE OBLIGATION
In the transition property sale agreement, the seller will represent and
warrant to the note issuer, as of the closing date, among other things, that:
(a) the information describing the seller in "The Seller and Servicer"
section of the prospectus is correct in all material respects;
(b) the seller has transferred the transition property, free and clear of
all security interests, liens, charges and encumbrances (other than any
created by Section 1H(e) of Chapter 164 of the Massachusetts General
Laws and any in favor of the note issuer);
(c) the transition property has been validly transferred and sold to the
note issuer and all filings (including filings with the Massachusetts
Department of Telecommunications and Energy under the statute)
necessary in any jurisdiction to give the note issuer an ownership
interest in the transition property have been made (subject to any lien
created by Section 1H(e) of Chapter 164 of the Massachusetts General
Laws);
(d) under the laws of The Commonwealth of Massachusetts (including the
statute) and the United States in effect on the closing date:
- the financing order pursuant to which the transition property has been
created is in full force and effect;
- the certificateholders are entitled to the protections of the statute
and, accordingly, the financing order is not revocable by the
Department;
- The Commonwealth of Massachusetts may not alter the provisions of the
statute that make the RTC charge irrevocable and binding, limit or
alter the transition property, the financing order and all rights
thereunder, in a manner that would substantially impair the rights of
certificateholders, absent a demonstration by the Commonwealth that a
"great public calamity" justifies a contractual impairment, until the
certificates, together with accrued interest, are fully met and
discharged;
- the process by which the financing order was adopted and approved, and
the financing order and issuance advice letter, comply with all
applicable laws, rules and regulations;
- the issuance advice letter has been filed in accordance with the
financing order;
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<PAGE> 43
- the Department may not, either by rescinding, altering or amending the
financing order, in any way reduce or impair the value of the
transition property either directly or indirectly by taking
reimbursable transition costs amounts into account when setting other
rates for the seller, in a manner that would substantially impair the
rights of certificateholders, absent a demonstration by The
Commonwealth of Massachusetts that a "great public calamity" justifies
a contractual impairment, until the certificates, together with
accrued interest, are fully met and discharged; and
- no approval or filing with any other governmental body is required in
connection with the creation of the transition property, except those
that have been obtained or made;
(e) based on information available to the seller on the closing date, the
assumptions used in calculating the initial RTC charge are reasonable
and are made in good faith;
(f) on the effectiveness of the issuance advice letter:
- all of the transition property constitutes an existing property right;
- the transition property consists of the right, title and interest in
and to all revenues, collections, claims, payments, money, or proceeds
of or arising from the RTC charge, as adjusted from time to time, and
all rights to obtain adjustments to the RTC charge pursuant to the
financing order; and
- the owner of the transition property is legally entitled to collect
payments arising from the RTC charge in the aggregate sufficient to
pay the interest on and principal of the notes, to pay the fees and
expenses of servicing the notes and the certificates and to fund the
overcollateralization subaccount to the required overcollateralization
level until the notes and the certificates are paid in full.
(g) the seller is a corporation duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts, with
corporate power and authority to own its properties as owned on the
closing date and to conduct its business as conducted by it on the
closing date and to execute, deliver and perform the terms of the sale
agreement;
(h) the execution, delivery and performance of the sale agreement have been
duly authorized by all necessary corporate action on the part of the
seller;
(i) the sale agreement constitutes a legal, valid and binding obligation of
the seller, enforceable against it in accordance with its terms,
subject to applicable insolvency, reorganization, moratorium,
fraudulent transfer and other laws relating to or affecting creditors'
or secured parties' rights generally from time to time in effect and to
general principles of equity, regardless of whether considered in a
proceeding in equity or law;
(j) the consummation of the transactions contemplated by the sale agreement
do not conflict with the seller's articles of organization or by-laws
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 pursuant to the terms of a material agreement (other than
any that may be granted under the transaction documents or any lien
created by Section 1H(e) of Chapter 164 of the Massachusetts General
Laws) or violate any existing law or any existing order, rule or
regulation applicable to the seller;
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<PAGE> 44
(k) no governmental approvals, authorizations or filings are required for
the seller to execute, deliver and perform its obligations under the
sale agreement except those which have previously been obtained or
made; and
(l) except as disclosed to the note issuer, no court or administrative
proceeding is pending and, to the seller's knowledge, no court or
administrative proceeding is threatened and, to the seller's knowledge,
no investigation is pending or threatened:
- asserting the invalidity of, or seeking to prevent the consummation of
the transactions contemplated by, the sale agreement;
- seeking a determination that might materially and adversely affect the
performance by the seller of its obligations under the sale agreement;
or
- which might adversely affect the federal or state income tax
classification of the notes or the certificates as debt.
Notwithstanding the above, the seller makes no representation or warranty
that any amounts actually collected arising from the RTC charge will in fact be
sufficient to meet payment obligations on the notes or that assumptions made in
calculating the RTC charge will in fact be realized.
If either a court of competent jurisdiction shall by final order determine
or the seller shall admit that, as of the closing date, there existed a breach
by the seller of any representation specified in clause (d) or clause (f) above
that has a material adverse effect on the certificateholders, the seller will be
obligated to repurchase the transition property from the note issuer at a
purchase price equal to the outstanding principal amount of the notes and all
accrued and unpaid interest, excluding any premium or penalty of any kind;
provided, however, that the seller shall not be obligated to repurchase the
transition property if:
(a) within 90 days after the date of determination or admission of breach,
the breach is cured or the seller takes remedial action so that there
is not and will not be a material adverse effect on the
certificateholders as a result of the breach; and
(b) the seller either:
- if the seller had, immediately prior to the date of determination or
admission of breach, a long term debt rating of at least "A3" by
Moody's Investors Service, Inc. and "BBB" by Standard & Poor's or the
equivalent by each of the other nationally recognized statistical
rating organizations, enters into a binding agreement with the note
issuer to pay any amounts necessary so that all interest payments due
on the notes during the 90-day period will be paid in full; or
- if the seller does not have these long term debt ratings immediately
prior to the date of determination or admission of breach, and, within
two business days after the date of determination or admission of
breach, deposits an amount in escrow with the note trustee sufficient
to pay all interest payments, taking into account amounts available in
the collection account, which will become due on the notes during the
90-day period.
Any escrowed amounts will be used by the note trustee to make interest payments
if there are not sufficient funds otherwise available. The sale agreement
provides that any change in the law by legislative enactment, constitutional
amendment or initiative petition that renders any of the representations and
warranties untrue would not constitute a breach under the sale agreement.
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<PAGE> 45
If either a court of competent jurisdiction shall by final order determine
or the seller shall admit that, as of the closing date, there existed a breach
by the seller of any other representation or warranty specified in clauses (b),
(c), (g), (h), (i) or (j) above that has a material adverse effect on the
certificateholders, if, within 90 days after the date of determination or
admission of breach, the breach has not been cured and the seller has not taken
remedial action so that there is not and will not be a material adverse effect
on the certificateholders as a result of the breach, then the seller shall be
required to repurchase the transition property for the repurchase price
described above. After the payment by the seller of the repurchase price, no
person or entity shall have any other claims, rights or remedies against the
seller under or arising from the sale agreement, except for the indemnity rights
of the indemnified persons described below.
In the event of a breach of any representation or warranty in the sale
agreement other than those that trigger the seller's repurchase obligation, the
seller shall be required to indemnify, defend and hold harmless the note issuer
against any costs, expenses, losses, claims, damages and liabilities incurred as
a result of the breach; provided, however, the seller may, at its election and
in full satisfaction of its indemnity obligation, repurchase the transition
property at the repurchase price described above, in which case no person or
entity shall have any claims, rights or remedies against the seller under or
arising from the sale agreement, except for the indemnity rights of the
indemnified persons described below. The remedies provided for in the sale
agreement are the note issuer's sole and exclusive remedies against the seller
for breach of its representations and warranties in the sale agreement.
In addition, the seller shall indemnify and hold harmless the note trustee,
the Delaware trustee, the certificate trustee, the state agencies and any of
their respective affiliates, officers, directors, employees and agents against
any expenses (including legal fees and expenses), losses, claims, taxes, damages
and liabilities incurred by any of these persons as a result of a breach by the
seller of its representations and warranties in the sale agreement, except to
the extent of amounts either resulting from the willful misconduct or gross
negligence of the indemnified person or resulting from a breach of a
representation or warranty made by the indemnified person in the transaction
documents that gives rise to the seller's breach.
The seller will also agree to take any legal or administrative action,
including defending against or instituting and pursuing legal actions, as may be
reasonably necessary to protect the note issuer and the certificateholders from
claims, state actions or other actions or proceedings of third parties which, if
successfully pursued would result in a breach of any representation described
above. The seller shall be reimbursed by the servicer for the costs and expenses
of taking these actions. The seller will also agree that it will not at any time
assert any security interest, lien, charge or encumbrance against the transition
property.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
TRUE SALE
The seller will represent and warrant in the sale agreement that the
transfer of the transition property to the note issuer is a valid sale and
assignment of the transition property from the seller to the note issuer. The
seller will also represent and warrant that it will take the appropriate actions
under the statute 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
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<PAGE> 46
transactions as a sale under applicable law, although for financial reporting
and federal income tax purposes the transactions will be treated as debt of the
seller.
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 certificateholders. In addition, in the sale
agreement, the seller grants to the note issuer a security interest in the
transition property and covenants that it will take appropriate actions to
perfect the security interest, although the seller takes the position that it
has no rights in the transition property to which a security interest could
attach.
Under the statute and the financing order, on the effective date of the
issuance advice letter, the transition property identified in the issuance
advice letter constitutes a property right that continuously exists as property
for all purposes. Nonetheless, 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, may attempt to take the position that,
because the payments based on the RTC charge are usage-based charges, transition
property comes into existence only as customers use electricity. If a court were
to adopt this position, we cannot assure you that either the statutory lien
created by the statute or the security interest granted in the sale agreement
would be valid as to electricity consumed after the commencement of a bankruptcy
case by or against the seller.
If a court were to determine that the transition property has not been sold
to the note issuer, and that the statutory lien created by the statute and the
security interest granted in the sale agreement are invalid against payments
arising from the RTC charge that become collectible as a result of the
consumption of electricity consumed after the commencement of a bankruptcy case
of the seller, then the certificate trustee, as 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, the court may rule that any payments arising from the
RTC charge that become collectible as a result of the consumption of electricity
after the commencement of the seller's bankruptcy cannot be transferred to the
note trustee or the certificate trustee, thus resulting in delays or reductions
of distributions on the certificates.
SUBSTANTIVE CONSOLIDATION
The seller and the note issuer have taken steps to reduce the risk that in
the event the seller or an affiliate of the seller were to become the debtor in
a bankruptcy case, a court would order that the assets and liabilities of the
note issuer be substantively consolidated with those of the seller or an
affiliate. These steps include the fact that the note issuer is a separate,
special purpose limited liability company, the organizational documents of which
provide that it shall not commence a voluntary bankruptcy case without the
unanimous affirmative vote of all of its directors, including two directors
independent of the seller. Nonetheless, these steps may not be completely
effective, and thus if the seller or an affiliate of the seller were to become a
debtor in a bankruptcy case, a court may order that the assets and liabilities
of the note issuer be consolidated with those of the seller or an affiliate,
thus resulting in delays or reductions in distributions on the certificates.
Other factors that may tend to support consolidation include the ownership of
the note issuer by the seller, the designation of officers or employees of the
seller as directors, other than independent directors, of the note issuer and
the existence of indemnities by the seller for some liabilities of the note
issuer.
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<PAGE> 47
THE TRUST
The Massachusetts Development Finance Agency and the Massachusetts Health
and Educational Facilities Authority will form the trust prior to the offering
of the certificates specifically for the purpose of acquiring the notes from the
note issuer. The trust will be a Delaware business trust. The Massachusetts
Development Finance Agency, the Massachusetts Health and Educational Facilities
Authority and The Bank of New York, a [Delaware banking corporation], acting as
the Delaware trustee, not acting in its individual capacity but acting as
trustee on behalf of certificateholders, will enter into a declaration of trust
to form the trust. The trust will not be an agency or instrumentality of The
Commonwealth of Massachusetts. The trust will have no assets other than the
notes. The declaration of trust will not permit the trust to engage in any
activities other than holding the notes, issuing the certificates, acting as
paying agent and engaging in other related activities.
Each class of certificates will represent a fractional undivided beneficial
interest in the related class of notes, including all amounts due and to become
due under the related class of notes, and will represent the right to receive
the payments on the related class of notes. See "Description of the
Certificates -- Payments and Distributions."
The note issuer, the Massachusetts Development Finance Agency, the
Massachusetts Health and Educational Facilities Authority, the Delaware trustee
and the certificate trustee will enter into a fee and indemnity agreement under
which the note issuer will pay the Delaware trustee's and the certificate
trustee's reasonable compensation and reasonable fees and expenses. The fee and
indemnity agreement will further provide that the note issuer will indemnify the
Delaware trustee, the certificate trustee, the Massachusetts Development Finance
Agency and the Massachusetts Health and Educational Facilities Authority for,
and hold them harmless against, any loss, liability or expense incurred by them
arising from the failure of the note issuer to perform its obligations under
various transaction documents.
The fiscal year of the trust will be the calendar year.
As of the date of this prospectus, the trust has not carried on any
business activities and has no operating history. Because the trust does not
have any operating history, we have not included any financial statements or
related information for the trust.
THE AGENCIES
The Massachusetts Development Finance Agency is a body politic and
corporate and a public instrumentality of The Commonwealth of Massachusetts. It
is responsible for providing bond issuance, lending and real estate development
services to promote economic development throughout Massachusetts. This agency
was formally created in September 1998 by a legislative merger of the former
Massachusetts Industrial Finance Agency and the Massachusetts Government Land
Bank. The Massachusetts Health and Educational Facilities Authority is an
independent public authority created by the Massachusetts legislature in 1968 to
assist nonprofit health, educational and cultural institutions to borrow funds
at tax-exempt rates, providing access to low-cost capital for those
institutions.
The statute contemplates state sponsorship of individual utility rate
reduction bond issuances through the Massachusetts Development Finance Agency
and the Massachusetts Health and Educational Facilities Authority. These state
entities have participated in the structuring of the transaction relating to the
issuance of the certificates and related matters.
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<PAGE> 48
The certificates do not represent an interest in, or an obligation of, The
Commonwealth of Massachusetts, any governmental agency, authority or
instrumentality of The Commonwealth or Boston Edison Company or any of its
affiliates. None of these entities or the trust will guarantee or insure the
certificates, the notes or the property securing the notes.
Neither The Commonwealth of Massachusetts nor any governmental agency,
authority or instrumentality of The Commonwealth nor Boston Edison Company or
any of its affiliates will have any obligation relating to the certificates, the
notes or the property securing the notes, except for Boston Edison's duties and
obligations as the seller and the servicer of the transition property.
Neither the full faith and credit nor the taxing power of The Commonwealth
of Massachusetts nor any political subdivision, agency, authority or
instrumentality of The Commonwealth is pledged to the payment of principal of,
or interest on, the certificates or the notes, or the payments securing the
notes. Furthermore, neither The Commonwealth of Massachusetts nor any political
subdivision, agency, authority or instrumentality of The Commonwealth will
appropriate any funds for the payment of any of the certificates or the notes.
THE NOTE ISSUER
The note issuer is a 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 800 Boylston Street,
35th Floor, Boston, Massachusetts 02199. The telephone number of the note issuer
is (617)369-6000. The seller organized the note issuer 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.
The note issuer's organizational documents restrict it from engaging in other
activities. The assets of the note issuer will consist primarily of the
transition property and the other collateral for the notes. In addition, the
note issuer's organizational documents require it to operate in a manner
intended to reduce the likelihood that it would be consolidated in the seller's
bankruptcy estate if the seller becomes involved in a bankruptcy proceeding.
The note issuer is a recently formed entity and, as of the date of this
prospectus, has not carried on any business activities and has no operating
history. We have included audited financial statements of the note issuer as an
exhibit to this prospectus.
OFFICERS AND DIRECTORS
The directors of the note issuer oversee the management of its property and
business. The following is a list of the officers and directors of the note
issuer:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----------------------------------
<S> <C> <C>
James J. Judge.......... 43 Director
Robert J. Weafer,
Jr. .................. 52 President, Director
Emilie G. O'Neil........ 38 Vice President, Treasurer, Director
Theodora S. Convisser... 51 Secretary
Andrew L. Stidd......... 42 Director
Kevin P. Burns.......... 30 Director
</TABLE>
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<PAGE> 49
All of the note issuer's officers and directors, other than those directors
who are independent of Boston Edison and its affiliates, have served in their
capacities since February 11, 1999. The independent directors have served in
their capacities since May [ ], 1999. The officers and directors will devote as
much time as is necessary to the affairs of the note issuer. The note issuer
will have sufficient officers, directors and employees to carry on its business.
Robert J. Weafer, Jr. is President and a director of the note issuer. Mr.
Weafer has been the Vice President -- Finance and Controller of Boston Edison
since 1995, and he has been a Vice President, the Controller and the Chief
Accounting Officer of Boston Edison since 1991.
James J. Judge is a director of the note issuer. Mr. Judge has served as
Senior Vice President -- Corporate Services and Treasurer of Boston Edison since
1995. Previously, Mr. Judge served Boston Edison as Assistant Treasurer from
1989 to 1995 and as Director of Corporate Planning from 1993 to 1995.
Emilie G. O'Neil is Vice President, Treasurer and a director of the note
issuer. Ms. O'Neil has been the Manager of Corporate Finance for Boston Edison
since 1991.
Theodora S. Convisser is the Secretary of the note issuer. Ms. Convisser
has served as the Clerk of Boston Edison since 1986 and as Assistant General
Counsel since 1984.
Andrew L. Stidd is an independent director of the note issuer. Mr. Stidd
has held the position of President of Global Securitization Services, LLC since
January 1998. He served as Managing Director of Global Securitization Services,
LLC between December 1996 and December 1997. Prior to joining Global
Securitization Services, LLC, Mr. Stidd was Vice President and Director of Lord
Securities Corporation, where he was employed since 1992.
Kevin P. Burns is an independent director of the note issuer. Mr. Burns has
been a Vice President of Global Securitization Services, LLC since December
1996. Prior to joining Global Securitization Services, LLC, Mr. Burns served as
a Director at Lord Securities Corporation from 1992 to 1996.
The note issuer will not compensate its officers and will not compensate
its directors, other than the two directors that are independent of Boston
Edison and its affiliates, for their services on behalf of the note issuer. The
initial aggregate annual compensation for both of the independent directors will
be $3,500. Any officer will serve at the discretion of the note issuer's
directors. The note issuer's organizational documents provide that it will
indemnify its officers and directors against liabilities incurred in connection
with their services on behalf of the note issuer.
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<PAGE> 50
THE SELLER AND SERVICER
Boston Edison was incorporated under Massachusetts law in 1886. Boston
Edison is an electric company primarily engaged in the business of supplying
electricity at retail to an area of approximately 590 square miles, including
the City of Boston and 39 surrounding cities and towns. In 1998, Boston Edison
served an average of approximately 660,000 customers. Boston Edison comprises
the major portion of the assets and revenues of BEC Energy, its parent holding
company.
As an investor-owned electric company, Boston Edison is regulated by the
Massachusetts Department of Telecommunications and Energy and the Federal Energy
Regulatory Commission. The seller is also regulated by the Nuclear Regulatory
Commission because of its ownership of nuclear generation assets.
BOSTON EDISON REVENUES, CUSTOMER BASE AND ENERGY CONSUMPTION
Several factors influence the number of Boston Edison's retail customers
and their electric energy consumption. One of these factors is the general
economic climate in Boston Edison's service territory, which affects migration
of residential, commercial and industrial customers into or out of the service
territory. Another factor influencing sales of electricity is temperature.
Boston Edison's electricity sales are typically higher in the winter and summer
when heating or cooling demands are highest than in the spring and fall when
temperatures tend to be more moderate. The level of business activity of
commercial and industrial customers also tends to influence their electricity
consumption. Other factors affecting the electricity consumption of retail
customers, primarily over the longer term, include the availability of more
energy-efficient appliances and other products and retail customers' ability to
acquire these products.
The table below sets forth Boston Edison's total billed retail revenues
from retail sales of electrical energy for the years 1994 to 1998:
BILLED RETAIL REVENUES
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Billed Retail
Revenues ($ in
000's):
Residential.......... 425,591 441,088 454,393 473,450 437,032
Commercial........... 760,010 804,378 824,862 880,959 826,294
Industrial........... 142,538 147,739 148,111 148,453 137,818
Street Lighting...... 23,487 24,167 24,431 24,811 22,742
--------- --------- --------- --------- ---------
Total...... 1,351,626 1,417,372 1,451,797 1,527,673 1,423,886
</TABLE>
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<PAGE> 51
The table below sets forth the number of Boston Edison's retail customers
by class for the years 1994-1998:
RETAIL CUSTOMERS
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Number of Retail
Customers:
Residential................. 570,340 569,710 572,816 576,576 576,535
Commercial.................. 80,756 79,313 79,964 81,006 78,835
Industrial.................. 1,634 1,599 1,552 1,527 1,492
Street lighting............. 2,951 3,094 3,131 3,219 3,144
------- ------- ------- ------- -------
Total............. 655,681 653,716 657,463 662,328 660,006
</TABLE>
The table below sets forth Boston Edison's billed retail energy sales for
the years 1994 to 1998:
BILLED RETAIL ENERGY SALES (GIGAWATT-HOURS)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Billed Retail Energy Sales
(Gigawatt-hours):
Residential................. 3,524 3,516 3,590 3,590 3,624
Commercial.................. 7,451 7,578 7,798 8,038 8,267
Industrial.................. 1,537 1,534 1,539 1,474 1,493
Street lighting............. 131 132 131 131 132
------- ------- ------- ------- -------
Total............. 12,643 12,760 13,058 13,233 13,516
</TABLE>
ESTIMATED CONSUMPTION AND ESTIMATED VARIANCE
Boston Edison's calculation of the initial RTC charge and subsequent
adjustments are based on electricity sales estimates. The servicer will use
these estimates to calculate and set the RTC charge at a level intended to
generate revenues sufficient to pay interest on and principal of the
certificates, to pay fees and expenses of servicing and retiring the notes and
the certificates, to replenish the capital subaccount and to fund the
overcollateralization amount.
Boston Edison conducts sales estimate variance analyses on a regular basis
to monitor the accuracy of energy estimates against recorded consumption. The
table below presents the estimates of Boston Edison's billed retail energy sales
in gigawatt-hours for the years 1994 through 1998. There are 1,000,000
kilowatt-hours in a gigawatt-hour. Each estimate was made in the prior year. For
example, the 1994 estimate of 12,678 gigawatt-hours was prepared in 1993.
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ANNUAL ESTIMATED VARIANCES
BILLED RETAIL ENERGY SALES (GIGAWATT-HOURS)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Estimate......................... 12,678 12,732 12,635 13,152 13,427
Actual........................... 12,643 12,760 13,058 13,233 13,516
Variance......................... -35 28 423 81 89
Percentage Variance.............. -0.28% 0.22% 3.35% 0.62% 0.66%
</TABLE>
Actual usage depends on several factors, including temperatures and
economic conditions. For example, while Boston Edison's methodology for
estimating usage assumes normal conditions, abnormally hot summers can add an
extra 1.5 to 2.5% in electricity sales. Regional economic conditions can also
affect sales as retail customers curb electricity usage to save money,
businesses close and retail customers migrate from Boston Edison's service
territory. Accordingly, variations in conditions will affect the accuracy of any
estimate.
BILLING AND COLLECTIONS
CREDIT POLICY
Boston Edison's credit and collections policies are regulated by the
Massachusetts Department of Telecommunications and Energy. Under the
Department's regulations, Boston Edison is obligated to provide service to all
customers within its service territory.
On application for service, the identification and credit standing of all
residential customers is verified through the use of a major credit-reporting
bureau. In instances where nonresidential customers do not meet minimum credit
standards, credit must be established. This can be done through providing a
security deposit (normally twice the average monthly bill), furnishing a surety
bond and/or a bank letter of credit. The Department does not permit Boston
Edison to obtain security deposits from its residential customers.
According to the Department's regulations, Boston Edison may refuse to
provide service, at any location, to an applicant who is indebted to it for any
service previously furnished to the applicant. Boston Edison will commence
service, however, if a reasonable payment plan for the indebtedness is first
made between a residential applicant and Boston Edison, and it may likewise
commence service for an industrial or commercial applicant.
BILLING PROCESS
Boston Edison bills its customers once every 26 to 34 days, with
approximately an equal number of bills being distributed each business day. For
the year ending December 31, 1998, Boston Edison mailed out an average of 33,000
bills on each business day to customers in its various customer categories.
Approximately 7,200 residential and small business customers, which
constitute approximately one percent of Boston Edison's retail customers, choose
to be billed using Boston Edison's budget billing program. For these customers
Boston Edison determines and bills a monthly budget amount based on the last
twelve months of billing history for each account. The budget amount is
recalculated each March and September, if necessary. Overpayments or
underpayments for actual usage during the prior year are reconciled on each
customer's September bill.
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<PAGE> 53
For accounts with potential billing errors exception reports are generated
for manual review. This review examines accounts that have abnormally high or
low bills, potential meter-reading errors and possible meter malfunctions.
COLLECTION PROCESS
Boston Edison receives the majority of its payments via the U.S. mail;
however, other payment options are also available. These options include
electronic payments, electronic fund transfers, as well as direct payment at
Boston Edison's payment agency network and field office locations.
Boston Edison considers residential customer bills to be delinquent if they
are unpaid 45 days after the billing date. Boston Edison considers
nonresidential customer bills to be delinquent if they are unpaid 25 days after
the billing date. In general, Boston Edison's collection process begins when
balances are unpaid for 45 days or more from the billing date. At that time
Boston Edison begins collection activities ranging from delinquency notice
mailings, to telephone calls, to personal collection and ending with electricity
shut-off. Boston Edison also uses collection agencies and legal collection
experts as needed throughout this process.
RESTORATION OF SERVICE
Before restoring service that has been shut-off for non-payment, Boston
Edison has the right to require the payment of all of the following charges:
- amounts owing on an account including the amount of any past-due balance
for charges for which Boston Edison may disconnect service if they are
unpaid and legal noticing requirements were met prior to service
termination, the current billing and a credit deposit, if applicable;
- any miscellaneous charges associated with the reconnection of service
(i.e., reconnection charges, field collection charges and/or returned
check charges);
- 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
- any unpaid closing bills from other accounts in the name of the customer
of record.
LOSS EXPERIENCE
The following table sets forth information relating to Boston Edison's
annual net charge-offs for retail customers for the years 1994 to 1998 and net
charge-offs for the fiscal quarter ended March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Charge-Offs
($):............... $14,797,853 $14,241,497 $14,168,852 $14,640,534 $15,093,674 $2,728,586
Percentage of Billed
Revenues:.......... 1.1% 1.0% 1.0% 1.0% 1.1% 0.8%
</TABLE>
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<PAGE> 54
Boston Edison determines a customer's account to be inactive (or finaled)
on the date:
- the customer gives notice requesting discontinuance of service,
- a new customer applies for service at a location where the customer of
record has not yet discontinued service, or
- the customer's service has been shut off due to non-payment.
Boston Edison's policy is to charge-off a finaled account to bad debt
expense 120 days after the date the account is determined to be finaled if
payment has not been received.
DAYS REVENUE OUTSTANDING
The following table sets forth information relating to the average number
of days retail customer bills remained outstanding for the years 1994 to 1998
and for the fiscal quarter ended March 31, 1999.
<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Average number of days
outstanding............... 46 46 46 44 45 44
</TABLE>
YEAR 2000 COMPUTER ISSUE
The year 2000 computer issue is the result of computer programs that were
written using two digits rather than four to define an applicable year. If
computer programs with date-sensitive functions are not year 2000 compliant,
they may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions and engage in other normal business activities. Boston Edison has a
year 2000 program in place that has been addressing the risk of non-compliant
internal business software, internal non-business software and embedded chip
technology and external noncompliance of third parties.
Boston Edison is addressing the year 2000 issue on a coordinated basis.
Boston Edison has inventoried and assessed all date-sensitive information and
transaction processing computer systems and has determined that approximately
one-third of business critical systems software needs modification or
replacement. Boston Edison defines its business critical systems as those which
are necessary for the delivery of and billing and accounting for electricity to
its customers. Plans have been developed and are being implemented to correct
and test all affected systems, with priorities assigned based on the importance
of the supported activity. As systems are being remediated or replaced, they are
tested for operational and year 2000 compliance in their own environment. After
completion of implementation, the systems are then tested for their integration
and compliance with other interactive systems. Boston Edison estimates that
approximately 70% of the efforts necessary to implement and test its critical
computer systems to alleviate the year 2000 issue are complete and expects to
complete all efforts by the end of the second quarter of 1999. In addition, all
other non-critical systems have been inventoried and assessed. Approximately
one-third of these systems require modification or replacement. Under the year
2000 plan, each non-critical system has a form of readiness acceptance
commensurate with its business importance. The more important and complex
systems are being tested as a means of acceptance. Less important and
non-complex systems may refer to industry test results, vendor test results
and/or vendor statements of readiness as a means of acceptance.
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Boston Edison expects to complete the remediation, replacement and testing of at
least 95% of its non-critical computer systems by the end of the second quarter
of 1999. All non-critical systems are scheduled for completion by the third
quarter of 1999.
Boston Edison has also inventoried its non-information technology systems
that may be date-sensitive and that use embedded technology such as
micro-controllers or micro-processors. Approximately 27% of these systems
require modification or replacement. The three categories of these systems are
(1) telecommunications, (2) distribution system controls and (3) other
distribution equipment. Boston Edison is 55%, 100% and 80% complete,
respectively, with its efforts to resolve and remediate the systems that have
been identified as year 2000 non-compliant within each category. Boston Edison
expects completion of resolution and testing by the end of the second quarter of
1999.
In addition to its internal efforts, Boston Edison has initiated formal
communications with its significant suppliers, service providers and other
vendors to determine the extent to which Boston Edison may be vulnerable to
their failure to correct their own year 2000 issues. Boston Edison has received
responses from over 500 third party vendors including all business critical
vendors. Approximately 40% of the vendors indicated their systems would not be
adversely impacted by year 2000 issues. All of these vendors contacted have
indicated that they will be year 2000 compliant by the end of the fourth quarter
of 1999. In addition, Boston Edison has contacted all of its significant power
suppliers. Each has indicated that they either are or will be year 2000
compliant by the end of the fourth quarter of 1999. In addition to the risk
faced from its dependence on third party suppliers for year 2000 compliance,
Boston Edison has a risk that power will not be available from the New England
Power Pool (NEPOOL) for the purchase and distribution to Boston Edison's
customers. Should NEPOOL fail to resolve its year 2000 issues as planned, there
would be an adverse impact on Boston Edison and its customers. To mitigate this
risk, efforts are being coordinated with NEPOOL to establish inter-utility
testing guidelines to determine year 2000 readiness. Boston Edison is also a
participant in the NEPOOL/ISO New England Year 2000 Joint Oversight Committee
which has responsibility for the operational reliability of NEPOOL. Overall
regional activities, including those of NEPOOL/ISO New England, will be
coordinated by the Northeast Power Coordinating Council, whose activities will
be incorporated into the interregional coordinating effort by the North American
Electric Reliability Council. The target for the completion of this effort is
mid-1999.
In addition, parts of the global infrastructure, including national banking
systems, electrical power grids, gas pipelines, transportation facilities,
communications and government activities, may not be fully functional after 1999
due to the year 2000 issue. Infrastructure failures could significantly reduce
Boston Edison's ability to acquire energy and its ability to serve its customers
as effectively as they are now being served.
Boston Edison believes that its efforts to address the year 2000 issue will
allow it to successfully avoid any material adverse effect on its operations or
financial condition. However, it recognizes that failing to resolve year 2000
issues on a timely basis would, in a most reasonable worst case scenario,
significantly limit its ability to acquire and distribute energy or process its
daily business transactions for a period of time, especially if such failure is
coupled with third party or infrastructure failures. Similarly, Boston Edison
could be significantly affected by the failure of one or more significant
suppliers, customers or components of the infrastructure to conduct their
respective operations normally after 1999. Adverse effects on Boston Edison
could include, among other things, business disruption, increased costs, loss of
business and other similar risks.
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<PAGE> 56
Boston Edison's year 2000 program includes contingency plans. If required,
these plans are intended to address both internal risks as well as potential
external risks related to vendors, customer and energy suppliers. Plans have
been developed in conjunction with available national and regional guidance and
are based on system emergency plans that were developed and successfully tested
over the past several years. Included within its contingency plans are
procedures for the procurement of short-term power supplies and emergency
distribution system restoration procedures. The contract with ISO New England
requires that ISO New England dispatch at all times sufficient resources to meet
total New England load requirements. ISO New England has the responsibility and
authority to dispatch all regional generation sources including maintaining
sufficient operating reserves to respond to unanticipated system conditions. ISO
New England, in conjunction with the New England Power Pool has an extensive
year 2000 readiness program underway to ensure that it will have sufficient
generation and transmission resources to reliably serve load. In addition, ISO
New England plans to increase its operating reserves during the early year 2000
period from approximately 15% to 40%.
The foregoing discussion regarding year 2000 project timing, effectiveness,
implementation and costs includes forward-looking statements that are based on
Boston Edison's current evaluation using available information. Factors that
might cause material changes include, but are not limited to, the availability
of key year 2000 personnel, the readiness of third parties and Boston Edison's
ability to respond to unforeseen year 2000 complications.
SERVICING
SERVICING PROCEDURES
The servicer, on behalf of the note issuer, will manage, service and
administer, and bill and collect payments arising from, the transition property
according to the terms of the servicing agreement between the servicer and the
note issuer. The servicer's duties will include responding to inquiries of
customers and the Massachusetts Department of Telecommunications and Energy
regarding the transition property and the RTC charge, calculating electricity
usage, accounting for collections, furnishing periodic reports and statements to
the note issuer, the note trustee and the certificate trustee and periodically
adjusting the RTC charge.
In addition, the servicer will take legal or administrative actions,
including defending against or instituting and pursuing legal actions and
appearing or testifying in hearings or similar proceedings, as may be reasonably
necessary to block or overturn any attempts to cause a repeal of, modification
of or supplement to the statute or the financing order or the rights of holders
of transition property by legislative enactment, initiative petition or
constitutional amendment that would be adverse to certificateholders. The cost
of any action will be payable from payments arising from the RTC charge as an
expense of the note issuer.
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 or cause to be exercised the same care it customarily
employs and exercises in servicing and administering bill collections for its
own account and for others.
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<PAGE> 57
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 the waiver or action:
- would comply with the servicer's customary practices or those of any
successor servicer for comparable assets that it services for itself and
for others;
- would not materially adversely affect the certificateholders; and
- would comply in all material respects with applicable law.
In addition, the servicer may write off any amounts that it deems uncollectible
according to its customary practices.
In the servicing agreement, the servicer will covenant that, in servicing
the transition property it will:
- manage, service, administer and make collections of payments arising from
the transition property with reasonable care and in compliance with
applicable law, including all applicable guidelines of the Massachusetts
Department of Telecommunications and Energy, using the same degree of
care and diligence that the servicer exercises for bill collections for
its own account and for others;
- follow customary standards, policies and procedures for the industry in
performing its duties as servicer;
- use all reasonable efforts, consistent with its customary servicing
procedures, to bill and collect the RTC charge;
- comply in all material respects with laws applicable to and binding on it
relating to the transition property; and
- submit at least annually a true-up advice letter to the Department
seeking an adjustment, if any, of the RTC charge.
REMITTANCES TO COLLECTION ACCOUNT
The servicer will remit daily to the note trustee an amount equal to the
actual RTC charges billed, less an allowance for estimated RTC charge
charge-offs, within two business days after the day payments arising from the
RTC charge are deemed to be collected. The deemed collection date for payments
arising from the RTC charge payments will be the weighted average number of
days, based on Boston Edison's historical collections experience, that a monthly
bill for services remains outstanding before payment. Currently, Boston Edison
estimates the deemed collection date to occur, on average, 45 days after the
date RTC charges are billed. The servicer expects to review the deemed
collection date not less than annually and may adjust the deemed collection date
based on actual payment patterns.
Each year, the servicer will reconcile remittances of estimated payments
arising from RTC charges with the note trustee to more accurately reflect the
amount of billed RTC charges that should have been remitted, based on the actual
system-wide charge-off percentage, as reduced for estimates of partially paid
bills (which are deemed to have paid the RTC charge in full). To the extent the
remittances of estimated payments arising from the RTC charge exceed the actual
payments arising from the RTC charge collected by the servicer, the servicer
will be entitled to receive a payment from the note trustee in an amount equal
to the excess remittance, or to withhold the excess amount from any
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<PAGE> 58
subsequent remittance to the note trustee. To the extent the remittances of
estimated payments arising from the RTC charge are less than the actual payments
arising from the RTC charge collected, the servicer will remit the amount of the
shortfall to the note trustee on the next remittance date following the
determination. Although the servicer will remit estimated payments arising from
the RTC charge to the note trustee, the servicer is not obligated to make any
payments on the notes or the certificates.
SERVICING COMPENSATION
The servicer will be entitled to receive an annual servicing fee in an
amount equal to:
- 0.05 percent of the initial principal amount of the notes for so long as
the servicer bills the RTC charge concurrently with other charges for
services; or
- up to 1.25 percent of the initial principal balance of the notes if the
RTC charge is being billed separately to customers.
The note trustee will pay the servicing fee semiannually (together with any
portion of the servicing fee that remains unpaid from prior payment dates) to
the extent of available funds prior to the distribution of any interest on and
principal of the notes. See "Description of the Notes -- Allocations and
Payments."
THIRD PARTY SUPPLIERS
As part of the deregulation of the Massachusetts electric industry, the
statute contemplates that electricity metering and billing services may be
unbundled from distribution services. See "Energy Deregulation and New
Massachusetts Market Structure -- Third Party Billing Options." As a result,
third party suppliers may bill, collect and remit the RTC charge in the future.
When a third party supplier bills, collects and remits billed amounts arising
from the RTC charge, there is a greater risk that the servicer will receive
payments arising from the RTC charge later than it otherwise would. The greater
the delay in receipt of payment, the larger the amount of payments that bear the
risk of non-payment due to default, bankruptcy or insolvency of the third party
supplier holding the funds. Third party supplier billing also places increased
information requirements on the servicer. The servicer will have the
responsibility of accounting for payments arising from the RTC charge due to
certificateholders regardless of which entity provides a Customer's electric
power.
Any third party supplier that bills and collects the RTC charge will be
required to pay all amounts arising from the RTC charge billed by the third
party supplier, regardless of whether payments are received from Customers,
within 15 days of the servicer's bill to the third party supplier for amounts
arising from the RTC charge. The third party supplier will, in effect, replace
the customer as the obligor for these amounts, and the servicer, on behalf of
the note issuer, will have no right to collect payments arising from the RTC
charge from the Customer.
To mitigate the risks associated with a third party supplier, if and so
long as a third party supplier does not maintain at least a 'BBB' (or the
equivalent) long-term unsecured credit rating from Moody's and S&P, a third
party supplier will be required to maintain with the servicer, or as directed by
the servicer, a deposit or comparable security equal to one month's maximum
estimated collections of payments arising from the RTC charge, as agreed upon by
the servicer and the third party supplier. In the event of a default in the
remittance of payments arising from the RTC charge by a third party supplier,
the servicer will take these amounts into account in adjusting the RTC charge.
The servicer will also
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<PAGE> 59
have access to information from the third party supplier regarding kilowatt-hour
billing and electricity usage by customers to provide proper reporting and to
fulfill its obligations under the servicing agreement. The servicer will be
entitled, within seven days after a default by a third party supplier in
remitting to the servicer any amounts arising from the RTC charge, to assume
responsibility for billing the RTC charge to the customers of the third party
supplier or to assign that responsibility to a third party.
Neither Boston Edison nor the servicer will pay any shortfalls resulting
from the failure of any third party supplier to remit payments arising from the
RTC charge to the servicer. The true-up adjustment mechanism for the RTC charge,
as well as the overcollateralization amount and the amounts deposited in the
capital subaccount, are intended to mitigate the risk of shortfalls. Any
shortfalls that occur will delay the distribution of interest on and principal
of the certificates.
SERVICER REPRESENTATIONS AND WARRANTIES
In the servicing agreement, the servicer will represent and warrant to the
note issuer, as of the closing of the issuance of the certificates, among other
things, that:
- the servicer is a corporation duly organized and in good standing under
the laws of The Commonwealth of Massachusetts, with corporate power and
authority to own its properties as owned by it on the issuance date and
to conduct its business as its business is conducted by it on the
issuance date and to execute, deliver and carry out the terms of the
servicing agreement;
- the execution, delivery and carrying out of the terms of the servicing
agreement have been duly authorized by all necessary corporate action on
the part of the servicer;
- the servicing agreement constitutes a legal, valid and binding obligation
of the servicer, enforceable against it in accordance with its terms,
subject to insolvency, reorganization, moratorium, fraudulent transfer
and other laws relating to or affecting creditors' rights generally from
time to time in effect and to general principles of equity, regardless of
whether considered in a proceeding in equity or at law;
- the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's articles of organization
or by-laws or any material agreement to which the servicer is a party or
bound, result in the creation or imposition of any lien on the servicer's
properties pursuant to a material agreement or violate in any material
respect any existing law or any existing order, rule or regulation
applicable to the servicer;
- the servicer has all material licenses necessary for it to perform its
obligations under the servicing agreement;
- 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
- except as disclosed to the note issuer, no court or administrative
proceeding is pending and, to the servicer's knowledge, no court or
administrative proceeding is threatened and, to the seller's knowledge,
no investigation is pending or threatened, asserting the invalidity of,
or seeking to prevent the consummation of the transactions contemplated
by, the servicing agreement or seeking a determination
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<PAGE> 60
that might materially and adversely affect the performance by the servicer of
its obligations under the servicing agreement.
In the event of willful misconduct or gross negligence by the servicer
under the servicing agreement or in the event of the servicer's breach in any
material respect of any of the representations and warranties in the preceding
paragraph, as determined by a final order of a court of competent jurisdiction
or by admission of the servicer, the servicer will indemnify, defend and hold
harmless the note issuer against any costs, expenses, losses, claims, damages
and liabilities incurred as a result of these events; provided, however, that
the servicer shall not be liable for any costs, expenses, losses, claims,
damages or liabilities resulting from the willful misconduct or gross negligence
of the note issuer; and, provided, further, that the servicer shall not be
liable for any costs, expenses, losses, claims, damages or liabilities,
regardless of when incurred, after the notes and the certificates have been
discharged in full.
STATEMENTS BY SERVICER
On or before March 31 of each year, the servicer will prepare and furnish
annually to the note trustee, the certificate trustee and the note issuer a
statement for the previous year setting forth either the amount of any excess
payments arising from the RTC charge remitted by the servicer to the note
trustee or the amount of any shortfall in remittances.
In addition, the servicer will prepare, and the note trustee will furnish
to the noteholders on each payment date the semiannual 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 a distribution date the report described under
"Description of the Certificates -- Reports to Certificateholders."
EVIDENCE AS TO COMPLIANCE
The servicing agreement will provide that a firm of independent public
accountants, at the note issuer's expense, will furnish to the note issuer, the
note trustee and the certificate trustee on or before [March 31] of each year,
beginning [March 31, 2000], a statement as to compliance by the servicer with
standards relating to the servicing of the transition property during the
preceding twelve months ended [December 31] (or preceding period since the
closing date of the issuance of the certificates in the case of the first
statement). This report will state that the accounting firm has performed agreed
upon procedures in connection with the servicer's compliance with the servicing
procedures of the servicing agreement, identifying the results of the procedures
and including any exceptions noted. The report will also indicate that the
accounting firm providing the 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 note trustee and the certificate trustee, on or before [March 31] of each
year, beginning [March 31, 2000], 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 preceding period since the closing date of the issuance of the certificates
in the case of the first certificate) or, if there has been a default in the
fulfillment of any obligation under the servicing agreement, describing each
default. The servicer has agreed to give the note issuer, the note trustee and
the certificate trustee notice of servicer defaults under the servicing
agreement.
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You may obtain copies of the statements and certificates by sending a
written request addressed to the certificate trustee.
MATTERS REGARDING THE SERVICER
The servicing agreement will provide that Boston Edison may not resign from
its obligations and duties as servicer thereunder, except when either:
- a determination that Boston Edison's performance of its duties is no
longer permissible under applicable law; or
- notice from the nationally recognized statistical rating organizations
rating the certificates that Boston Edison's resignation will not result
in a reduction or withdrawal of the then current ratings on any class of
certificates and consent of the Massachusetts Department of
Telecommunications and Energy.
No resignation of the initial servicer will become effective until a successor
servicer has assumed Boston Edison's servicing obligations and duties under the
servicing agreement.
The servicing agreement will further provide that neither the servicer nor
any of its directors, officers, employees, and agents will be liable to the note
issuer, the note trustee, the trust, the noteholders, the certificate trustee,
the Delaware trustee, the certificateholders or any other person or entity,
except as provided under the servicing agreement, for taking any action or for
refraining from taking any action under the servicing agreement or for errors in
judgment; provided, however, that neither the servicer nor any person or entity
will be protected against any liability that would otherwise be imposed by
reason of willful misconduct or gross negligence in the performance of duties.
In addition, the servicing agreement will provide that the servicer is under no
obligation to appear in, prosecute, or defend any legal action, except as
provided in the servicing agreement at the note issuer's expense.
Under the circumstances specified in the servicing agreement, any entity
into which the servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the servicer is a party, or any entity
succeeding to the business of the servicer or its obligations as servicer, which
corporation or other entity in each of the foregoing cases assumes the
obligations of the servicer, will be the successor of the servicer under the
servicing agreement.
SERVICER DEFAULTS
Servicer defaults under the servicing agreement will include, among other
things:
- any failure by the servicer to remit payments arising from the RTC charge
into the collection account as required under the servicing agreement,
which failure continues unremedied for five business days after written
notice from the note issuer or the note trustee is received by the
servicer;
- any failure by the servicer duly to observe or perform in any material
respect any other covenant or agreement in the servicing agreement, which
failure materially and adversely affects the rights of noteholders and
which continues unremedied for 60 days after the giving of notice of a
failure (a) to the servicer by the note issuer or the note trustee or (b)
to the servicer by holders of notes evidencing not less than 25 percent
in principal amount of the outstanding notes;
- any representation or warranty made by the servicer in the servicing
agreement shall prove to have been incorrect in a material respect when
made, which has a material
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<PAGE> 62
adverse effect on the noteholders 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
- events of bankruptcy, insolvency, receivership or liquidation of the
servicer.
RIGHTS WHEN SERVICER DEFAULTS
In the event of a servicer default that remains unremedied, either the note
trustee or holders of notes evidencing not less than 25 percent in principal
amount of then outstanding notes 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. In addition, when a servicer defaults,
each of the following shall be entitled to apply to the Massachusetts Department
of Telecommunications and Energy for sequestration and payment of revenues
arising from the transition property:
- the certificateholders (subject to the provisions of the certificate
indenture) and the certificate trustee as beneficiary of any statutory
lien permitted by the statute;
- the note issuer or its assignees; or
- pledgees or transferees, including transferees under the statute of the
transition property.
If, however, a bankruptcy trustee or similar official has been appointed for the
servicer, and no servicer default other than an appointment of a bankruptcy
trustee or similar official has occurred, that trustee or official may have the
power to prevent the 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 nationally recognized statistical rating organizations
rating the certificates. The note trustee may make arrangements for compensation
to be paid to the successor servicer.
WAIVER OF PAST DEFAULTS
Holders of notes evidencing at least a majority in principal amount of the
then outstanding notes, 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 remittances to the
collection account under the servicing agreement. The servicing agreement
provides that no waiver will impair the noteholders' rights relating to
subsequent defaults.
SUCCESSOR SERVICER
If for any reason a third party assumes the role of the servicer under the
servicing agreement, the servicing agreement will require the servicer to
cooperate with the note issuer, the note trustee and the successor servicer in
terminating the servicer's rights and responsibilities under the servicing
agreement, including the transfer to the successor servicer of all cash amounts
then held by the servicer for remittance or subsequently acquired. The servicing
agreement will provide that the note issuer shall be liable for its reasonable
costs and expenses incurred in transferring servicing responsibilities (which
shall not include any set-up costs for the successor) to the successor servicer.
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AMENDMENT
The servicing agreement may be amended by the parties thereto, without the
consent of the noteholders or 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 the certificateholders, provided
that the 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. 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 for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the agreement
or of modifying in any manner the rights of the noteholders; provided that an
amendment of the provisions of the servicing agreement relating to the
servicer's remittance and RTC charge adjustment obligations will not result in a
reduction or withdrawal of the then existing rating of the certificates by a
nationally recognized statistical rating organization that rates the
certificates.
Each nationally recognized statistical rating organization that rates the
certificates will be given 10 business days' prior notice of any amendment to
any of the note indenture and the other financing documents relating to the
issuance of the notes and certificates. Each rating organization will also
receive a copy of any notice, filing or report distributed by the servicer, the
note issuer's independent accountants, the note issuer, the note trustee or the
certificate trustee.
DESCRIPTION OF THE NOTES
The note issuer will issue the notes to the trust under the terms of a note
indenture between the note issuer and The Bank of New York, a [national banking
association], acting as the note trustee. Each class of notes will be in an
aggregate 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 the note indenture. This summary is not
complete. You should read this summary together with the prospectus supplement
and the terms and provisions of the note indenture, a form of which is filed as
an exhibit to the registration statement relating to this prospectus, prior to
buying the certificates.
The note issuer may issue the notes in one or more classes. All notes of
the same class will be identical in all respects except for their denominations.
The note issuer may not issue any additional notes under the note indenture.
SECURITY
To secure the payment of interest on and principal of 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:
- the transition property;
- the transition property sale agreement;
- the transition property servicing agreement;
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- the collection account and all amounts or investment property on deposit
in the collection account;
- all other property of whatever kind owned from time to time by the note
issuer;
- all present and future claims, demands, causes and choses in action on
account of any or all of the foregoing and all payments on or under the
foregoing; and
- all proceeds on account of any or all of the foregoing.
We refer to the assets in which the note issuer will grant the note trustee a
security interest as the "note collateral."
The note collateral will not cover, however, the following:
- amounts in the collection account released as permitted under the note
indenture including net investment earnings on the capital subaccount
that have been released to the note issuer by the note trustee under the
terms of the note indenture; and
- proceeds from the sale of the notes required to pay costs of issuance of
the notes and the certificates.
COLLECTION ACCOUNT
The note issuer will establish, in the name of the note trustee, a
segregated identifiable account with an eligible institution (as described in
the next paragraph). The note trustee will hold the collection account for the
benefit of the noteholders. The collection account will consist of four
subaccounts:
- a general subaccount;
- a reserve subaccount;
- an overcollateralization subaccount for the overcollateralization amount;
and
- a capital subaccount for capital contributions to the note issuer.
All amounts in the collection account not allocated to any other subaccount will
be allocated to the general subaccount. Unless the context indicates otherwise,
all references to the collection account include each of the four subaccounts.
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 state or the District of Columbia (or any
domestic branch of a foreign bank), which has either a long-term unsecured debt
rating of 'AA' by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("S&P"), and 'Aa2' by Moody's Investors Service, Inc. ("Moody's") or 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 S&P
and Moody's and whose deposits are insured by the Federal Deposit Insurance
Corporation.
Funds in the collection account may be invested in any of the following:
- direct obligations of, or obligations fully and unconditionally
guaranteed as to timely payment by, the United States of America;
- demand deposits, time deposits, certificates of deposit or bankers'
acceptances of eligible institutions;
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- commercial paper (other than commercial paper issued by Boston Edison)
having, at the time of investment, a rating in the highest investment
category from each of the rating agencies;
- money market funds having a rating in the highest investment category
from each of the ratings agencies;
- repurchase obligations for any security that is a direct obligation of,
or fully guaranteed by, the United States of America or its approved
agencies or instrumentalities, entered into with depository institutions;
or
- any other investment permitted by each of the rating agencies,
in each case which mature on or before the business day preceding the next
payment date. We refer to each of the investments listed above as the "eligible
investments." The note trustee will have access to the collection account for
the purpose of making deposits and withdrawals under the note indenture.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of a class of notes at the
per annum rate specified in the prospectus supplement and will be payable on the
payment dates specified in the prospectus supplement. Collections arising from
the RTC charge held by the note trustee in the general subaccount and any
amounts that are available in the reserve subaccount, the overcollateralization
subaccount and capital subaccount will be used to make interest payments to the
noteholders of each class on each payment date.
Principal of each class of notes will be payable in the amounts and on the
payment dates specified in the prospectus supplement to the extent of available
cash, and with the other limitations described below. The prospectus supplement
will set forth the expected amortization schedule for the various classes of
notes. On any payment date, the note issuer will pay principal of a class of
notes only until the outstanding principal balance of that class has been
reduced to the principal balance specified in the expected amortization
schedule.
However, if insufficient collections arising from the RTC charge are in the
collection account on any payment date, principal of any class of notes may be
paid later than expected. The entire unpaid principal amount of the 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 the holders of at least a majority in
principal amount of the outstanding notes have declared the notes to be
immediately due and payable. See "-- Note Events of Default; Rights Upon Note
Event of Default."
OPTIONAL REDEMPTION
The note issuer may redeem the notes, at its option, on any payment date
and cause the trust to redeem the certificates on any payment date if the
outstanding principal balance of the notes (after giving effect to payments that
would otherwise be made on that payment date) is less than five percent of the
initial principal balance of the notes. In the case of redemption, the note
issuer will pay the outstanding principal amount of the notes and accrued but
unpaid interest as of the redemption date. Unless otherwise specified in the
prospectus supplement, the note issuer will give notice of the redemption to the
trust by first-class mail, postage prepaid, mailed not less than five days nor
more than 25 days prior to the redemption date.
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MANDATORY REDEMPTION
If the seller is required to, or elects to, repurchase the transition
property as described under "Description of the Transition Property -- Seller
Representations and Warranties and Repurchase Obligation," the note issuer will
be required to redeem the notes on or before the fifth business day following
the date of repurchase at a price equal to the principal amount of the notes
together with any accrued but unpaid interest thereon.
OVERCOLLATERALIZATION SUBACCOUNT
The note trustee will collect amounts arising from the transition property
exceeding that necessary to pay interest on and principal of the notes and
related fees and expenses, which are intended to enhance the likelihood that
payments on the notes will be made in a timely manner. The servicer will
calculate and set the RTC charge at a level that is intended to collect the
overcollateralization amount ratably over the life of the notes according to a
schedule set forth in the prospectus supplement.
On each payment date, all payments arising from the RTC charge remitted to
the collection account will be deposited in the respective subaccounts,
including the overcollateralization subaccount, as described under "--
Allocations and Payments." Amounts in the overcollateralization subaccount will
be invested in eligible investments.
The servicer will, through a separate non-cash memorandum account, account
for and ultimately credit to ratepayers, any amounts remaining in the collection
account after the certificates are paid in full, such as any
overcollateralization amounts, including interest earnings. These amounts will
be released to the note issuer when the certificates are retired. These amounts
will inure to the benefit of ratepayers through a credit to their transition
charge or if there is no transition charge, through a credit to other rates.
CAPITAL SUBACCOUNT
Before the issuance of the notes, Boston Edison will contribute capital to
the note issuer in the amount specified in the prospectus supplement. The note
trustee will deposit the capital into the capital subaccount. On each payment
date, the note trustee will draw on amounts in the capital subaccount, if any,
to the extent amounts available in the general subaccount, the reserve
subaccount and the overcollateralization subaccount are insufficient to make
scheduled payments on the notes and pay fees and expenses. Deposits to the
capital subaccount will be made as described under "-- Allocations and
Payments." Amounts in the capital subaccount will be invested in eligible
investments. Boston Edison will be entitled to the earnings on amounts in the
capital subaccount.
RESERVE SUBACCOUNT
The note trustee will allocate to the reserve subaccount any amounts
remitted to the collection account exceeding amounts necessary to:
- pay fees and expenses related to the servicing and retirement of the
notes;
- pay interest on and principal of the notes;
- fund the capital subaccount up to the required capital level; and
- fund the overcollateralization subaccount up to the required
overcollateralization level.
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The note trustee will draw on amounts in the reserve subaccount, to the extent
amounts available in the general subaccount are insufficient to pay the amounts
listed above. Amounts in the reserve subaccount will be invested in eligible
investments.
ALLOCATIONS AND PAYMENTS
On any business day that the note trustee receives a written request from
the servicer requesting repayment for any excess remittances to the collection
account, the note trustee shall make payment of the amount due from amounts on
deposit in the general subaccount, the reserve subaccount, the
overcollateralization subaccount and the capital subaccount, in that order and
only to the extent required to make the payment. See "Servicing -- Remittances
to Collection Account."
On any business day that the note trustee receives a written request from
the note issuer's administrator stating that any fees, costs, expenses and
indemnities payable by the note issuer, as described in clauses (1) through (4)
below, will become due and payable prior to the next succeeding payment date,
and setting forth the amount and nature of the expense, as well as any
supporting documentation that the note trustee may reasonably request, the note
trustee, after receiving the information, will make payment of the expense on or
before the date the payment is due from amounts on deposit in the general
subaccount, the reserve subaccount, the overcollateralization subaccount and the
capital subaccount, in that order and only to the extent required to make the
payment.
On each payment date, or for any amount payable under clauses (1) through
(4) below, on any business day, the note trustee will apply, all amounts on
deposit in the collection account, including net earnings on those amounts
(other than on amounts in the capital subaccount) to pay the following amounts
in the following priority:
(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;
(2) the servicing fee and all unpaid servicing fees from any prior payment
dates will be paid to the servicer;
(3) the administration fee and all unpaid administration fees from prior
payment dates will be paid to the note issuer's administrator;
(4) so long as no event of default has occurred or would be caused by a
payment, all other fees, expenses and indemnities payable by the note
issuer will be paid to the persons entitled thereto, provided that the
total amount paid since the previous payment date and on the current
payment date may not, in the aggregate, exceed $100,000;
(5) first, any overdue interest after a payment default (together with, to
the extent lawful, interest on overdue interest at the applicable note
interest rate) and second, interest currently due and payable will be
transferred to the certificate trustee, as noteholder, for
distribution to the certificateholders;
(6) first, funds necessary to pay any principal payable as a result of a
note event of default or on the final maturity date of a class of
notes and second, principal based on priorities described in the
prospectus supplement will be transferred to the certificate trustee,
as noteholder, for distribution to the applicable certificateholders
according to the expected amortization schedule for each class;
(7) unpaid operating expenses and indemnities payable by the note issuer
will be paid to the persons entitled thereto;
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(8) the amount, if any, by which the capital subaccount needs to be funded
to equal the required capital level as of a payment date will be
allocated to the capital subaccount;
(9) the amount, if any, by which the overcollateralization subaccount
needs to be funded to equal the required overcollateralization level
as of a payment date will be allocated to the overcollateralization
subaccount;
(10) the balance, if any, will be allocated to the reserve subaccount for
distribution on a subsequent payment date; and
(11) following the repayment of all notes and certificates, the balance, if
any, will be released to the note issuer.
If on any payment date, or for any amounts payable under clauses (1)
through (4) above, on any business day, funds on deposit in the general
subaccount are insufficient to make the transfers contemplated by clauses (1)
through (6) above, the note trustee will:
- first, draw from amounts on deposit in the reserve subaccount;
- second, draw from amounts on deposit in the overcollateralization
subaccount; and
- third, draw from amounts on deposit in the capital subaccount,
up to the amount of the shortfall, in order to make the transfers described
above. In addition, if on any payment date funds on deposit in the general
subaccount are insufficient to make the transfers described in clauses (7), (8)
and (9)above, the note trustee will draw from amounts on deposit in the reserve
subaccount to make the required transfers. If on any payment date funds on
deposit in the collection account are insufficient to make the transfers
contemplated by clause (5) above, the note trustee will allocate the funds in
the collection account among the classes pro rata, as specified in the
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 for modifications
to any class of notes and to the provisions of other agreements under the note
indenture. With some exceptions, the holders of a majority of the outstanding
principal amount of the notes shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the note
trustee, or exercising any trust or power conferred on the note trustee under
the note indenture, provided that:
- the direction shall not be in conflict with any rule of law or with the
note indenture;
- other than in the case of a default in the payment of any principal or
redemption price or a default in the payment of interest on any note, any
direction to the note trustee to sell or liquidate the note collateral
shall be by the holders of 100% of the outstanding principal amount of
the notes;
- if the note trustee elects to maintain possession of the note collateral
in compliance with the note indenture, then any direction to the note
trustee by holders of notes representing less than 100% of the
outstanding principal amount of the notes to sell or liquidate the note
collateral shall be of no force and effect; and
- the note trustee may take any other action deemed proper by the note
trustee that is not inconsistent with the direction.
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NOTE EVENTS OF DEFAULT; RIGHTS ON NOTE EVENT OF DEFAULT
An event of default on the notes is defined in the note indenture as being:
- a default in the payment of interest on any note that is not cured within
five business days after the payment date;
- a default in the payment of the then unpaid principal of any note on the
final maturity date;
- a default in the payment of the redemption price for any note on a
redemption date;
- a default in the observance or performance in any material respect of any
covenant or agreement of the note issuer made in the note indenture, and
which continues unremedied for 30 days after notice 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 then
outstanding;
- any representation or warranty made by the note issuer in the note
indenture or in any certificate delivered by the note issuer in
connection with the note indenture proving to have been incorrect in a
material respect when made and which continues unremedied for a period of
30 days after notice 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 then outstanding; or
- events of bankruptcy, insolvency, receivership or liquidation of the note
issuer.
If a note event of default should occur and be continuing on the notes, the
note trustee or holders of not less than a majority in principal amount of the
notes then outstanding may declare the notes to be immediately due and payable.
Under circumstances set forth in the note indenture, the holders of a majority
in principal amount of notes then outstanding may rescind the declaration.
If the notes 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 maintain possession of the transition property
and continue to apply payments arising from the RTC charge remitted to the note
trustee as if there had been no declaration of acceleration. We expect that
there will be a limited resale market, if any, for the transition property
following a foreclosure because of the unique nature of the transition property
as an asset and other factors discussed in this prospectus.
In addition, the note trustee is prohibited from selling the transition
property following a note event of default, other than a default in the payment
of any principal or redemption price or a default in the payment of interest on
any note, unless:
- the holders of all the outstanding notes consent to the sale;
- the proceeds of the sale are sufficient to pay in full the accrued
interest on and the principal of the outstanding notes; or
- 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 as those 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 outstanding amount of the notes.
In case a note event of default occurs and is continuing, the note trustee
will be under no obligation to exercise any of the rights or powers under the
notes at the request or
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direction of any of the holders of notes if the note trustee reasonably believes
it will not be adequately indemnified against the costs, expenses and
liabilities that it might incur in complying with the request. The holders of a
majority in principal amount of the outstanding notes 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 outstanding notes may, in some cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
arising from a covenant or provision of the note indenture that cannot be
modified without the consent of all of the holders of the outstanding notes of
all classes affected.
No holder of any note will have the right to institute any proceeding on
the notes, unless:
- the holder previously has given to the note trustee written notice of a
continuing event of default;
- the holders of not less than 25 percent in principal amount of the
outstanding notes have made written request of the note trustee to
institute the proceeding in its own name as note trustee;
- the holder or holders have offered the note trustee reasonable indemnity;
- the note trustee has failed for 60 days after receipt of notice to
institute a proceeding; and
- no direction inconsistent with the written request has been given to the
note trustee during the 60-day period by the holders of a majority in
principal amount of the outstanding notes.
In addition, the servicer will covenant that it will not at any time
institute against the note issuer or the trust any bankruptcy, reorganization or
other proceeding under any federal or state bankruptcy or similar law.
COVENANTS OF THE NOTE ISSUER
The note issuer may not consolidate with or merge into any other entity,
unless:
- the entity formed by or surviving a consolidation or merger of the note
issuer is organized under the laws of the United States, any state or the
District of Columbia;
- the entity expressly assumes by an indenture supplemental to the note
indenture the note issuer's obligation to make due and punctual payments
on the notes and the performance or observance of every agreement and
covenant of the note issuer under the note indenture;
- no event of default will have occurred and be continuing immediately
after the merger or consolidation of the note issuer;
- the transaction will not result in a reduction or withdrawal of the then
current ratings on any class of notes or certificates;
- the note issuer has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax consequence to
the note issuer, the trust, any noteholder or any certificateholder and
the consolidation or merger complies with the note indenture and all
conditions precedent relating to the transaction have been complied with;
and
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- 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 any of its properties or assets
to any person or entity, unless:
(a) the person or entity acquiring the properties and assets:
- is a United States citizen or an entity organized under the laws of
the United States, any state or the District of Columbia;
- expressly assumes by an indenture supplemental to the note indenture
the note issuer's obligation to make due and punctual payments on the
notes and the performance or observance of every agreement and
covenant of the note issuer under the note indenture;
- expressly agrees by a supplemental indenture that all right, title and
interest so conveyed or transferred will be subject and subordinate to
the rights of noteholders;
- unless otherwise expressly waived by the note issuer, 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
- expressly agrees by means of a supplemental indenture that the person
(or if a group of persons, then one specified person) shall make all
filings with the Securities and Exchange Commission (and any other
appropriate person) required by the Securities Exchange Act of 1934 in
connection with the notes;
(b) no event of default under the note indenture will have occurred and be
continuing immediately after the transaction;
(c) the transaction will not result in a reduction or withdrawal of the
then current ratings on any class of certificates;
(d) the note issuer has received an opinion of counsel to the effect that
the transaction will not have any material adverse tax consequence to the note
issuer, the trust, any noteholder or any certificateholder and the conveyance or
transfer complies with the note indenture and all conditions precedent relating
to the 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:
- 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;
- claim any credit on, or make any deduction from the principal or interest
payable on, the notes (other than amounts properly withheld under the
Internal Revenue Code of 1986) or assert any claim against any present or
former noteholder because of the payment of taxes levied or assessed on
any part of the note collateral;
- terminate its existence, dissolve or liquidate in whole or in part;
- permit the validity or effectiveness of the note indenture to be
impaired;
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- 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 arising from the notes except
as may be expressly permitted by the note indenture;
- permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance, other than the lien and security interest created by
the note indenture or the statutory lien under the statute, to be created
on or extend to or otherwise arise on or burden the note collateral or
any part of it or any interest in it or the proceeds from it; or
- except for the statutory lien under the statute, permit the lien of the
note indenture not to constitute a valid first priority security interest
in the note collateral.
The note issuer may not engage in any business other than financing,
purchasing, owning and managing the transition property in the manner
contemplated by the note indenture and the other financing documents relating to
the issuance of the notes and certificates and related activities. 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 note indenture and the other financing documents relating to
the issuance of the notes and certificates, 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, other than expenditures in an annual
amount not to exceed $[25,000], make any expenditure (by long-term or operating
lease or otherwise) for capital assets (either real or personal property). The
note issuer will not, directly or indirectly, make payments to or distributions
from the collection account except in compliance with the note indenture and the
other financing documents relating to the issuance of the notes and the
certificates.
The note issuer will not make any payments, distributions or dividends to
any owner of beneficial interests in the note issuer arising from the beneficial
interests in the note issuer if any note event of default has occurred and is
continuing or if distributions cause the book value of the remaining equity in
the note issuer to decline below 0.50 percent of the initial principal amount of
the notes outstanding under the note indenture.
The note issuer will deliver to, among others, 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
On or prior to each payment date, the servicer will prepare and provide to
the note issuer, the note trustee and the certificate trustee a statement to be
delivered to the noteholders on the payment date. Each statement will include
(to the extent applicable) the following information for a payment date or the
period since the previous payment date, as applicable:
- the amount of the distribution to noteholders allocable to principal;
- the amount of the distribution to noteholders allocable to interest;
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- the outstanding principal balance of the notes, after giving effect to
payments allocated to principal reported above; and
- the difference, if any, between the outstanding principal balance of the
notes and the principal amount scheduled to be outstanding on a payment
date according to the expected amortization schedule.
The note trustee will deliver to each holder of the notes information in
the note trustee's possession that may be required to enable the holder to
prepare its federal and state income tax returns. See "Federal Income Tax
Consequences" and "State Taxation."
ANNUAL COMPLIANCE STATEMENT
The note issuer will file annually with the note trustee, the certificate
trustee, the state agencies and the nationally recognized statistical rating
organizations rating the certificates a written statement as to whether it has
fulfilled its obligations under the note indenture.
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DESCRIPTION OF THE CERTIFICATES
The trust will issue the certificates under the certificate indenture
between the trust and The Bank of New York, a national banking association,
acting as the certificate trustee. The following summary describes the material
terms and provisions of the certificate indenture. The particular terms of the
certificates of any class will be established in the certificate indenture. This
summary is not complete. You should read this summary together with the
prospectus supplement and the terms and provisions of the certificate indenture,
a form of which is filed as an exhibit to the registration statement relating to
this prospectus, before buying the certificates.
Each class of certificates will represent a fractional undivided beneficial
interest in the related class of notes and the proceeds thereof. Each
certificate will be issued in the minimum denominations specified in the
prospectus supplement. The trust may not issue any additional certificates under
the certificate indenture.
Each class of certificates will bear interest at the rate per annum borne
by the related class of notes. See "Description of the Notes -- Interest and
Principal." Payments of interest and principal made on any class of notes are
required to be passed through to holders of the related class of certificates at
the times and in the manner described below. See "-- Payments and Distributions"
below and "Description of the Notes -- Interest and Principal."
PAYMENTS AND DISTRIBUTIONS
The certificate trustee is scheduled to receive payments of interest on and
principal of the notes on each payment date. The note trustee will make payments
on the notes on any payment date as described under "Description of the Notes --
Allocations and Payments."
The certificate trustee will distribute on each distribution date to the
holders of each class of certificates all payments of interest on and principal
of the related class of notes, other than payments received following a payment
default on a class of notes, the receipt of which is confirmed by the
certificate trustee by 1:00 p.m. New York City time on a distribution date or,
if receipt is confirmed after 1:00 p.m. New York City time on a distribution
date, then on the following business day. Each distribution, other than the
final distribution for 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 for a distribution date. If a payment of principal or interest on
any class of the notes, other than a payment received following a payment
default on a 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 the holders of record on the date receipt is confirmed by the
certificate trustee, if receipt is confirmed by the certificate trustee by 1:00
p.m. New York City time or, if receipt is confirmed after 1:00 p.m. New York
City time, then on the following business day. If payment is received by the
certificate trustee after the five-day period, it will be treated as a payment
received following a payment default on a class of notes and distributed as
described below.
Any payment received by the certificate trustee following a payment default
on any class of notes ("Special Payments") will be distributed on the later of
the date receipt is confirmed by the certificate trustee and 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 Special Payment
receipt of which is confirmed after 1:00 p.m. New York City time, a Special
Payment will be distributed on the following business day.
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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 for certificates of a class stating the
anticipated Special Distribution Date. Each distribution of any Special Payment
will be made by the certificate trustee on the Special Distribution Date to the
holders of record of the certificates of a class as of the most recent record
date. See "-- Events of Default" below.
The certificate indenture requires the certificate trustee to establish and
maintain for each class of certificates, for the trust, and on behalf of the
certificateholders, one or more non-interest bearing certificate accounts for
the deposit of payments on the related class of notes. The certificate trustee
is required to deposit any payments received by it arising from the notes in the
appropriate certificate account. The certificate trustee will distribute all
amounts so deposited to holders of the certificates on a distribution date or a
Special Distribution Date, as appropriate, unless a different date for
distribution of the amount is specified in the certificate indenture.
At a time, if any, that the certificates are issued in registered form and
not to the Depository Trust Company ("DTC") or its nominee, distributions by the
certificate trustee from the certificate accounts on a distribution date or a
Special Distribution Date will be made by check mailed to each holder of record
of a certificate on the applicable record date at its address appearing on the
register maintained for the certificates, or, on application by a holder of any
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 the certificates, however, will be made only on presentation and surrender
of the certificates at the office or agency of the certificate trustee specified
in the notice given by the certificate trustee of the final distribution. The
certificate trustee will mail notice of the final distribution to the
certificateholders, specifying the date set for the final distribution and the
amount of the final distribution.
If any Special Distribution Date or other date specified in this prospectus
for distribution of any distributions to certificateholders is not a business
day, distributions scheduled to be made on a Special Distribution Date or other
date may be made on the following business day and no interest shall accrue on
the distribution during the intervening period.
VOTING OF THE CERTIFICATES
The nominee for DTC as sole initial holder of the certificates, has the
right to vote and give consents and waivers relating to any modifications to any
class of certificates. With some exceptions, the holders of at least a majority
of the outstanding principal amount of the certificates 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 certificate indenture, including any right
of the certificate trustee as holder of the notes, in each case unless a
different percentage is specified in the certificate indenture; provided,
however, that, among other things:
- the direction shall not be in conflict with any rule of law or with the
certificate indenture and would not involve the certificate trustee in
personal liability or expense;
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- the certificate trustee shall not have determined that the action so
directed would be unjustly prejudicial to the certificateholders not
taking part in the direction; and
- the certificate trustee may take any other action deemed proper by the
certificate trustee that is not inconsistent with the direction.
If the certificate trustee is required to seek instructions from the holders of
the certificates regarding any action or vote, the certificate trustee will take
the action or vote for or against any proposal in proportion to the principal
amount of the certificates taking the corresponding position.
EVENTS OF DEFAULT
An event of default on the certificates under the certificate indenture is
defined as the occurrence and continuance of a note event of default. For a
description of the note events of default, see "Description of the Notes -- Note
Events of Default; Rights On Note Event of Default."
The certificate indenture provides that, if a note event of default occurs
and is continuing, the certificate trustee may and, with the written direction
of holders representing not less than a majority of the outstanding principal
amount of the certificates, shall vote all the notes in favor of declaring the
unpaid principal amount of the notes and accrued interest to be due and payable.
In addition, the certificate indenture provides that, if a note event of default
occurs and is continuing, the certificate trustee may and, with the written
direction of holders representing not less than a majority of the outstanding
principal amount of the certificates, shall vote all the notes 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, including the sale of
any or all of the notes, without recourse to or warranty by the certificate
trustee or any certificateholder, to any person or entity, or of exercising any
trust or power conferred on the note trustee under the note indenture.
Notwithstanding the foregoing, the certificate trustee may, but shall not
be obligated to, refrain, in its sole discretion, from liquidating any notes if
the certificate trustee determines that amounts receivable from the note
collateral for the applicable class of notes will be sufficient to pay (a) all
interest on and principal of that class of notes according to its terms without
regard to any declaration of acceleration and (b) all sums due to the
certificate trustee and any other administrative expenses specified in the
certificate indenture.
In addition, the certificate trustee is prohibited from selling any notes
following note events of default, other than payment defaults, unless (x) the
certificate trustee determines that the amounts receivable from the note
collateral are not sufficient to pay in full the principal of and accrued
interest on the notes and to pay all sums due to the certificate trustee and
other administrative expenses specified in the certificate indenture and the
certificate trustee obtains the written consent of holders of certificates
representing 66 2/3 percent of the outstanding principal amount of certificates
or (y) the certificate trustee obtains the written consent of holders of 100
percent of the outstanding principal amount of certificates. Any proceeds
received by the certificate trustee on any sale will be deposited in the
certificate account and will be distributed to the certificateholders on a
Special Distribution Date.
If a breach by The Commonwealth of Massachusetts of its pledge under the
statute has occurred, then 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,
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entitled and empowered to institute any suits, actions or proceedings at law, in
equity or otherwise, to enforce the pledge and to collect any monetary damages
as a result of a breach, and may prosecute any of these suits, actions or
proceedings to final judgment or decree.
Any funds (a) representing payments received arising from notes in default,
(b) representing the proceeds from the sale by the certificate trustee of any
notes or (c) otherwise arising from a certificate event of default, held by the
certificate trustee in the certificate account shall, to the extent practicable,
be invested and reinvested by the certificate trustee in eligible investments
permitted under the certificate indenture maturing in not more than 60 days or a
lesser time as is required for the distribution of any funds on a Special
Distribution Date, pending the distribution of the funds to certificateholders
as described in this prospectus.
The certificate indenture provides that, for 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 for a class
of certificates, the certificate trustee will give to the trust, note trustee
and the certificateholders notice, transmitted by mail, of all uncured or
unwaived defaults known to it. Except in the case of a default relating to the
payment of principal of or interest on any of the notes, however, the
certificate trustee will be protected in withholding notice if in good faith it
determines that the withholding of notice is in the interests of the
certificateholders.
The certificate indenture contains a provision entitling the certificate
trustee to be indemnified by the certificateholders before proceeding to
exercise any right or power under the certificate indenture at the request or
direction of certificateholders.
In some cases, the holders of certificates representing not less than a
majority of the outstanding principal amount of the certificates may waive any
certificate event of default and thereby annul any previous direction given by
the certificate trustee with respect thereto, except a default:
- in the deposit or distribution of any payment on the notes or Special
Payment required to be made on any class of certificates;
- in the payment of principal of or interest on any of the notes; or
- arising from any covenant or provision of the certificate indenture that
cannot be modified or amended without the consent of the holders of each
certificate affected by a default.
With this direction, the certificate trustee shall vote a corresponding
percentage of the notes in favor of the waiver. The notes provide that, with
some exceptions, the holders of not less than a majority of the outstanding
principal amount of the notes 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, a different or potentially different schedule for the
repayment of principal and different rights in the security for the notes.
Accordingly, the certificateholders of one class may have divergent or
conflicting interests from the certificateholders of other classes. As a result,
the note trustee and the certificate trustee may be required to seek the
appointment of additional trustee(s) to represent the interests of one or more
classes with divergent or conflicting interests.
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REDEMPTION
The trust will redeem the certificates if the notes are redeemed. The trust
will give notice of redemption to each certificateholder to be redeemed by
first-class mail, postage prepaid, mailed not less than five days nor more than
25 days prior to the redemption date.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, Special Distribution Date or any other date
specified in the certificate indenture for distribution of any payments on any
class of certificates, the certificate trustee will include with each
distribution a statement setting forth the following information, in each case,
to the extent received by the certificate trustee from the note trustee, no
later than two business days prior to a distribution date, Special Distribution
Date or other date specified herein for distribution:
- the amount of the distribution to certificateholders allocable to
principal and interest, in each case per $[1,000] original principal
amount of each class of certificates;
- the aggregate outstanding principal balance of the certificates, after
giving effect to distributions allocated to principal reported above; and
- the difference, if any, between the aggregate outstanding principal
balance of the certificates and the principal amount scheduled to be
outstanding on a distribution date according to the expected amortization
schedule.
So long as the note trustee and the certificate trustee are the same, the note
trustee will agree to prepare and provide the statements to the certificate
trustee.
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 or entity who at any time during a calendar year has
been a certificateholder and received any distribution on the certificates, a
statement containing information for the purposes of a certificateholder's
preparation of federal and state income tax returns. See "Federal Income Tax
Consequences" and "State Taxation."
SUPPLEMENTAL CERTIFICATE INDENTURES
The certificate trustee and the Delaware trustee, on behalf of the trust,
will, from time to time, and without the consent of the certificateholders,
enter into one or more agreements supplemental to the certificate indenture to:
- add to the covenants of the trust for the benefit of the
certificateholders, or to surrender any right or power in the certificate
indenture conferred on the trust;
- correct or supplement any provision in the certificate indenture or in
any supplemental certificate indenture that may be defective or
inconsistent with any other provision in the certificate indenture or in
any supplemental agreement or to make any other provisions regarding
matters or questions arising under the certificate indenture; provided
that none of these actions shall adversely affect in any material respect
the interests of the certificateholders;
- cure any ambiguity or correct any mistake; or
- qualify, if necessary, the certificate indenture, including any
supplemental certificate indenture, under the Trust Indenture Act of
1939.
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In addition, the certificate trustee and the Delaware trustee will, with
the consent of certificateholders holding not less than a majority of the
outstanding principal amount of the certificates of all affected classes, enter
into one or more certificate indentures supplemental to the certificate
indenture for the purpose of, among other things, adding any provisions to or
changing in any manner or eliminating any of the provisions of the certificate
indenture. However, no supplemental certificate indenture may, among other
things, without the consent of each certificateholder affected thereby:
- change any date of payment on any certificate, or change the place of
payment where, or the currency in which, any certificate is payable, or
impair the right to sue for the enforcement of any payment or
distribution on or after the distribution date, Special Distribution Date
or other date specified in the prospectus;
- permit the disposition of any note held by the trust except as permitted
by the certificate indenture, or otherwise deprive any certificateholder
of the benefit of the ownership of the related notes held by the trust;
- modify the provisions in the certificate indenture 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
- adversely affect the status of the trust as a grantor trust not taxable
as a corporation for federal income tax purposes.
Promptly following the execution of any amendment to the certificate indenture
(other than an amendment described in the preceding paragraph), the certificate
trustee will furnish written notice of the substance of an amendment to each
certificateholder.
LIST OF CERTIFICATEHOLDERS
With the written request of any certificateholder or group of
certificateholders of record holding certificates evidencing not less than ten
percent of the outstanding principal amount of the certificates, the certificate
trustee will give a certificateholder or certificateholders access during
business hours to the current list of certificateholders for purposes of
communicating with other certificateholders about their rights under the
certificate indenture.
Neither the declaration of trust nor the certificate indenture provides for
any annual or other meetings of certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the prospectus supplement, the certificates will be
issued in definitive form and will be transferable and exchangeable at the
office of the registrar identified in the prospectus supplement. No service
charge will be made for any registration or transfer of the certificates, but
the owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
One or more classes of the certificates will be issued as book-entry
certificates, and these classes will be represented by one or more certificates
registered in the name of a nominee for the depository, DTC.
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 Uniform Commercial Code and a "clearing
agency" registered under the
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provisions of Section 17A of the Securities Exchange Act. DTC was created to
hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
book-entry certificates may do so only through Participants and Indirect
Participants. In addition, these beneficial owners will receive all
distributions on the book-entry certificates through DTC and its Participants.
Under a book-entry format, beneficial owners will receive payments after a
distribution date because, while payments are required to be forwarded to Cede &
Co., as nominee for DTC, on a distribution date, DTC will forward the payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or beneficial owners. The only registered
certificateholder will be Cede & Co., as nominee of DTC, and the beneficial
owners will not be recognized by the certificate trustee as certificateholders
under the certificate indenture. Beneficial owners will be permitted to exercise
the rights of certificateholders under the certificate indenture, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among participants
on whose behalf it acts regarding the book-entry certificates and is required to
receive and transmit distributions of interest on and principal of the
book-entry certificates. Participants and Indirect Participants with which
beneficial owners have accounts for book-entry certificates similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective beneficial owners.
Because DTC can act only on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a beneficial owner to
pledge its interest in the book-entry certificates to persons or entities that
do not participate in the DTC system, or otherwise take actions arising from its
interest in the book-entry certificates, may be limited due to the lack of a
physical certificate evidencing its interest.
DTC has advised the certificate trustee that it will take any action
permitted to be taken by a certificateholder under the certificate indenture
only at the direction of one or more participants to whose account with DTC
interests in the book-entry certificates are credited.
CEDEL holds securities for the 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 certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its 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 regulated
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 other
organizations and may
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include the underwriters. 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.
The Euroclear System was created in 1968 to hold securities for 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 certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in Euroclear in any of 32 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. The
Euroclear System is operated by the Euroclear Operator (or Euroclear), under
contract with the Cooperative. All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters. Indirect access to the Euroclear System 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 which 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. The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipt of payments for
securities in the Euroclear System. All securities in the Euroclear System are
held on a fungible basis without attribution of specific certificates 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 for certificates held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
compliance with the relevant system's rules and procedures. These distributions
will be subject to tax reporting in compliance with relevant United States tax
laws and regulations. See "Federal Income Tax Consequences." CEDEL will take any
other action permitted to be taken by a certificateholder under the certificate
indenture on behalf of a CEDEL Participant and the Euroclear Operator will take
any other action permitted to be taken by a certificateholder under the
certificate indenture on behalf of a Euroclear Participant only under its
relevant rules and procedures and limited by its depositary's ability to effect
these actions on its behalf through DTC.
Cede, as nominee for DTC, will hold the certificates. CEDEL will hold
omnibus positions in the certificates on behalf of the CEDEL Participants and
Euroclear will hold omnibus positions in the certificates on behalf of the
Euroclear Participants, in each case through customers' securities accounts in
their names on the books of their respective depositaries, which in turn will
hold positions in customers' securities accounts in the depositaries' names on
the books of DTC.
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Transfers between the Participants will comply with DTC rules. Transfers
between CEDEL Participants and Euroclear Participants will comply with their
applicable 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
Participants or Euroclear Participants, on the other, will be effected in DTC
under DTC rules on behalf of the relevant European international clearing system
by its depositary; however, these cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in the system according to its rules and procedures and
within its established deadlines. 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 securities in DTC, and making or receiving
payment under normal procedures for same-day funds settlement applicable to DTC.
CEDEL Participants and Euroclear Participants may not deliver instructions
directly to their depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and the credit or any transactions in the
securities settled during the processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on that business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a 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 business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
these procedures and these procedures may be discontinued at any time.
If any of DTC, Cedel or Euroclear should discontinue its services, the
certificate trustee would seek an alternative depository, if available, or cause
the issuance of definitive certificates to the owners of certificates or their
nominees in the manner described below.
Definitive certificates initially issued in book-entry form will be issued
to beneficial owners or their nominees, rather than to DTC or its nominee only
if:
- the DTC advises the certificate trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as depository
for the certificates and the certificate trustee is unable to locate a
qualified successor; or
- after the occurrence of an event of default under the certificate
indenture, holders of certificates representing not less than 50 percent
of the outstanding principal amount of certificates advise DTC in writing
that the continuation of a book-entry system through DTC is no longer in
the best interests of certificateholders.
If either of the events described in the immediately preceding paragraph
occurs, DTC is required to notify all Participants of the availability through
DTC of definitive certificates for the beneficial owners. With the surrender by
DTC of the certificate or certificates representing the book-entry certificates,
together with instructions for reregistration, the certificate trustee will
issue (or cause to be issued) to the beneficial owners identified in the
instructions the definitive certificates to which they are entitled, and
thereafter the certificate trustee will recognize the holders of the Definitive
Certificates as certificateholders under the certificate indenture.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material federal income tax consequences
to certificateholders, and is based on the opinion of Palmer & Dodge LLP. Palmer
& Dodge LLP has advised the Trust that the description of those material federal
income tax consequences in this summary is accurate in all material respects.
The opinion of Palmer & Dodge LLP is based on some assumptions and is limited by
some qualifications stated in this discussion or in that opinion. This
discussion is based on current provisions of the Code, currently applicable
Treasury regulations, and judicial and administrative rulings and decisions.
Legislative, judicial or administrative changes could alter or modify the
statements and conclusions in this discussion. Any legislative, judicial or
administrative changes or new interpretations may be retroactive and could
affect tax consequences to certificateholders.
This discussion applies to certificateholders who acquire the certificates
at original issue for cash equal to the issue price of those certificates and
hold the certificates as capital assets. This 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, dealers in
securities, S corporations, taxpayers subject to the alternative minimum tax
provisions of the Code, broker-dealers, and persons who hold the certificates as
part of a hedge, straddle, "synthetic security", or other integrated investment,
risk reduction or constructive sale transaction). This discussion also does not
address the tax consequences to nonresident aliens, foreign corporations,
foreign partnerships or foreign trusts that are subject to U.S. federal income
tax on a net basis on income with respect to a certificate because that income
is effectively connected with the conduct of a U.S. trade or business. Those
holders generally are taxed in a manner similar to U.S. Certificateholders;
however, special rules not applicable to U.S. Certificateholders may apply. In
addition, except as described below, this discussion does not address any tax
consequences under state, local or foreign tax laws. CONSEQUENTLY, YOU ARE URGED
TO CONSULT YOUR TAX ADVISER TO DETERMINE THE FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE CERTIFICATES.
In addition, as provided in Treasury regulations, some trusts in existence on
August 20, 1996, and treated as U.S. Persons prior to that date, may elect to
continue to be treated for federal income tax purposes as U.S. Persons.
This discussion assumes that each certificate is issued in registered form.
Moreover, this discussion assumes that any original issue discount on the
certificates (i.e., any excess of the stated redemption price at maturity of the
certificate over its issue price) is less than a statutory minimum amount (equal
to 0.25 percent of its stated redemption price at maturity multiplied by the
certificate's weighted average maturity), all as provided in the Treasury's
original issue discount regulations.
TREATMENT OF THE CERTIFICATES
The seller has received a ruling from the Internal Revenue Service holding
that the notes are obligations of the seller for federal income tax purposes.
Palmer & Dodge LLP will opine that the trust will not be a business entity
classified as a corporation or a publicly traded partnership treated as a
corporation, but will be treated as a grantor trust.
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Further, Palmer & Dodge LLP will opine that each class of certificates will
evidence ownership of a fractional undivided beneficial interest in the related
class of notes.
TAXATION OF U.S. CERTIFICATEHOLDERS
PAYMENTS OF INTEREST
Assuming, according to Palmer & Dodge LLP's opinion, that the certificates
represent ownership of undivided interests in the related notes for federal
income tax purposes, stated interest on the certificates will be taxable as
ordinary interest income when received or accrued by U.S. Certificateholders
under their method of accounting. Generally, interest received on the
certificates will constitute "investment income" for purposes of Code
limitations on the deductibility of investment interest expense.
ORIGINAL ISSUE DISCOUNT
As noted above, this discussion assumes that any original issue discount on
the certificates is less than the statutory minimum amount. Accordingly, unless
a special election is made to treat all interest on a certificate as original
issue discount, any original issue discount generally will be taken into income
by a U.S. Certificateholder as gain from the retirement of a certificate (as
described below under "-- Sale or Other Taxable Disposition of Certificates")
ratably as principal payments are made on the Certificates.
MARKET DISCOUNT AND PREMIUM
If a U.S. Certificateholder purchases (including a purchase at original
issuance for a price less than the issue price) a certificate for an amount that
is less than the principal balance of the certificate, the difference will be
treated as "market discount" unless it is less than a statutory minimum amount.
This market discount will generally be treated as accruing ratably on the
certificate during the period from the date of acquisition to the maturity date
of the certificate, unless the U.S. Certificateholder makes an election to
accrue the market discount on a constant yield to maturity basis. The U.S.
Certificateholder will be required to treat any principal payment on, or any
gain realized on the sale, exchange, retirement or other disposition of the
certificate as ordinary income to the extent of the lesser of:
- the amount of the payment or gain; or
- the market discount which is treated as having accrued on the Certificate
at the time of the payment or disposition and which has not previously
been included in income.
In addition, a U.S. Certificateholder may be required to defer the deduction of
all or a portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a certificate with market discount, until the
maturity of the certificate or its earlier disposition in a taxable transaction.
In the alternative, a U.S. Certificateholder may elect to include market
discount in income currently as it accrues on either a ratable or semiannual
compounding basis, in which case the rules described above will not apply. The
election to include market discount in income as it accrues will apply to all
market discount instruments acquired by the U.S. Certificateholder on or after
the first day of the taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service. Generally,
currently included market discount is treated as ordinary interest for United
States federal income tax purposes.
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<PAGE> 85
A purchaser who acquires a certificate at a premium (i.e., at a purchase
price greater than the principal balance) may elect to offset the premium
against interest income on the certificate on a constant yield to maturity
basis. Any amortized premium will reduce the adjusted basis of the certificate.
If the certificate is redeemed before maturity for a price less than the
adjusted basis of the certificate, a U.S. Certificateholder will be allowed an
ordinary loss deduction for the unamortized premium. An election to amortize
bond premium applies to all bonds acquired by a U.S. Certificateholder on or
after the first day of the taxable year to which the election applies and can be
revoked only with the consent of the Internal Revenue Service.
SALE OR OTHER TAXABLE DISPOSITION OF CERTIFICATES
If there is a sale, exchange, redemption, retirement or other taxable
disposition of a certificate, a U.S. Certificateholder generally will recognize
gain or loss equal to the difference between (a) 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 (b) the U.S. Certificateholder's
adjusted tax basis in the certificate. The adjusted tax basis in the certificate
generally will equal its cost, increased by any original issue discount or
market discount included in income with respect to the certificate prior to its
disposition and reduced by any payments reflecting principal or original issue
discount previously received with respect to the certificate and any amortized
premium. Although the market discount rules may apply, gain or loss generally
will be capital gain or loss if the certificate was held as a capital asset.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S.
federal income or withholding tax on interest (including original issue
discount) on a certificate unless:
- the non-U.S. Certificateholder is a controlled foreign corporation that
is related to the seller through stock ownership;
- the non-U.S. Certificateholder is a bank which receives interest as
described in Code Section 881(c)(3)(A); or
- the non-U.S. Certificateholder actually or constructively owns 10% or
more of the total combined voting power of all classes of stock of the
seller entitled to vote.
In order for interest payments to qualify for the exemption from U.S. taxation
described above, 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:
- is signed by the non-U.S. Certificateholder under penalty of perjury;
- certifies that the non-U.S. Certificateholder is not a U.S. Person; and
- 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 other
financial institution, the organization or institution may provide a signed
statement to the Withholding Agent certifying under penalties of perjury that
the Form W-8 (or suitable substitute) has been received by it from the
Certificateholder or from another qualifying financial institution. However, in
that case, the signed statement must be accompanied by a copy of the Form W-8 or
substitute
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<PAGE> 86
form provided by the non-U.S. Certificateholder to the organization or
institution holding the certificate on behalf of the non-U.S. Certificateholder.
Generally, any gain or income realized by a non-U.S. Certificateholder from
the sale, exchange, redemption, retirement or other disposition of a certificate
(other than gain attributable to accrued interest or original issue discount,
which is addressed above) will not incur U.S. federal income tax liability,
provided, in the case of a certificateholder who is an individual, that the
certificateholder is not present in the United States for 183 or more days
during the taxable year in which a disposition of a certificate occurs.
Exceptions may be applicable, and non-U.S. Certificateholders should consult a
tax adviser regarding the tax consequences of a disposition of a certificate.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Some certificateholders may be subject to backup withholding at the rate of
31% on interest (including original issue discount) and proceeds received from
the disposition of a certificate. Generally, backup withholding will apply if
the certificateholder fails to provide identifying information (such as the
payee's taxpayer identification number) in the manner required, or if the payee
has failed to report properly the receipt of reportable interest or dividend
payments and the Internal Revenue Service has notified the payor that backup
withholding is required. Some certificateholders (including, among others,
corporations and some tax-exempt organizations) generally are not subject to
backup withholding.
Backup withholding and information reporting generally will not apply to a
certificate issued in registered form that is beneficially owned by a non-U.S.
Certificateholder if the certification of non-U.S. status is provided to the
Withholding Agent as described above in "-- Non-U.S. Certificateholders," as
long as the payor does not have actual knowledge that the certificateholder is a
U.S. Person. The Withholding Agent may be required to report annually to the
Internal Revenue Service and to each non-U.S. Certificateholder the amount of
interest paid to, and the tax withheld, if any, for each non-U.S.
Certificateholder.
If payments of principal and interest are made to the beneficial owner of a
certificate by or through the foreign office of a custodian, nominee or other
agent of that beneficial owner, or if the proceeds of the sale of certificates
are made to the beneficial owner of a certificate through a foreign office of a
"broker" (as defined in the pertinent Treasury regulations), the proceeds will
not be subject to backup withholding (absent actual knowledge that the payee is
a U.S. Person). Information reporting (but not backup withholding) will apply,
however, to a payment by a foreign office of a custodian, nominee, agent or
broker that:
- is a U.S. Person;
- is a controlled foreign corporation for U.S. federal income tax purposes;
or
- derives 50% or more of its gross income from the conduct of a U.S. trade
or business for a specified three-year period, unless the broker has in
its records documentary evidence that the holder is a non-U.S.
Certificateholder and other conditions are met (including that the broker
has no actual knowledge that the certificateholder is a U.S.
Certificateholder) or the certificateholder otherwise establishes an
exemption.
Payment through the U.S. office of a custodian, nominee, agent or broker is
subject to both backup withholding at a rate of 31% and information reporting,
unless the
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<PAGE> 87
certificateholder certifies that it is a non-U.S. Person under penalties of
perjury or 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 that
certificateholder's U.S. federal income tax, provided that the required
information is furnished to the Internal Revenue Service.
Regulations regarding the withholding and information reporting rules
discussed above were issued by the Treasury Department in October 1997. In
general, the regulations did not significantly alter the substantive withholding
and information reporting requirements but rather unified the prior
certification procedures and forms and clarified reliance standards. In
addition, the regulations permit the shifting of primary responsibility for
withholding to financial intermediaries acting on behalf of beneficial owners.
The regulations are generally effective for payments made after December 31,
2000, although there are transition rules. Under the regulations, new forms
generally will have to be solicited from U.S. Certificateholders earlier than
replacements for expiring existing forms otherwise would have been solicited.
You should consult your tax adviser about the impact, if any, of the
regulations.
STATE TAXATION
In the opinion of Palmer & Dodge LLP, interest on the certificates and any
profit on the sale of the certificates are exempt from Massachusetts personal
income taxes, and the certificates are exempt from Massachusetts personal
property taxes. Palmer & Dodge LLP has not opined and will not opine as to other
Massachusetts tax consequences arising with respect to the certificates. You
should be aware, however, that the certificates are included in the measure of
Massachusetts estate and inheritance taxes and the certificates and the interest
on the certificates are included in the measure of Massachusetts corporate
excise and franchise taxes. This discussion does not address the taxation of the
trust or the tax consequences of the purchase, ownership or disposition of the
certificates under any state or local tax law other than that of The
Commonwealth of Massachusetts. You should consult your tax adviser regarding
state and local tax consequences.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose restrictions and requirements
on Plans, and on persons who are fiduciaries for Plans in connection with the
investment of Plan Assets. Generally, any person who has discretionary authority
or control over the management or disposition of Plan Assets, and any person who
provides investment advice about Plan Assets for a fee or other consideration,
is a fiduciary for those Plan Assets. For those Plans that are governed by
ERISA, ERISA imposes on Plan fiduciaries specific fiduciary responsibilities,
including investment prudence, diversification and investing according to the
documents governing the Plan.
PROHIBITED TRANSACTIONS
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and Parties in Interest, unless a statutory or
administrative exemption applies. Parties in Interest and Plan fiduciaries that
participate in a prohibited transaction may be liable for penalties under ERISA
and/or excise taxes imposed under Section 4975 of the
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<PAGE> 88
Code. These prohibited transactions generally are described in Section 406 of
ERISA and Section 4975 of the Code.
Some governmental and church plans are not governed by ERISA or Section
4975 of the Code. The prohibited transaction provisions described above do not
apply to these plans. If a plan is exempt from taxation under Section 501(a) of
the Code as a plan described in Section 401(a) of the Code, however, it may lose
its tax exemption if it engages in a prohibited transaction described in Section
503 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
certificates on behalf of a Plan or with Plan Assets should determine whether
the purchase is consistent with its fiduciary duties and whether the purchase
would constitute or result in a non-exempt prohibited transaction under ERISA
and/or Section 4975 of the Code because Boston Edison, the certificate trustee,
the underwriters or any of their affiliates is a Party in Interest under the
investing plan and may be deemed to be benefiting from the issuance of the
certificates. In particular, the certificates may not be purchased with Plan
Assets if any of Boston Edison, the certificate trustee, the underwriters or any
of their affiliates:
- has investment or administrative discretion over the Plan Assets used to
effect the purchase;
- has authority or responsibility to give, or regularly gives, investment
advice regarding the Plan Assets, for a fee and under an agreement or
understanding that the advice will serve as a primary basis for
investment decisions for the Plan Assets, and will be based on the
particular investment needs of the Plan; or
- unless exemptive relief applies under a Department of Labor Prohibited
Transaction Exemption, is an employer maintaining or contributing to the
Plan.
Each purchaser of the certificates will be deemed to have represented and
warranted that its purchase of the certificates or any interest in the
certificates does not violate the limitations described above.
PLAN ASSET REGULATION
The certificates are likely to be treated as "equity interests" in the
trust under a plan asset regulation issued by the Department of Labor, which
provides that beneficial interests in a trust are equity interests. Generally,
the plan asset regulation provides that if Plans acquire a "significant" equity
interest in an entity, the entity may be considered to hold Plan Assets.
Therefore, if the certificates are purchased with Plan Assets, the assets of the
trust may be deemed Plan Assets of the investing Plans 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. Even though only minimal administrative activity is expected at the trust
level, it is likely that the trust will interact with Boston Edison, the
certificate trustee, the underwriters and their affiliates. If Boston Edison,
the certificate trustee, the underwriters or any of their affiliates is a Party
in Interest to a Plan that purchases certificates, violations of the prohibited
transaction rules could occur at the trust level, unless a statutory or
administrative exemption applies or an exception applies under the plan asset
regulation.
Before purchasing any certificates, a Plan fiduciary, other Plan investor
or Party in Interest should consider whether a prohibited transaction might
arise by reason of any relationship between the investing Plan and Boston
Edison, the certificate trustee, the underwriters or any of their affiliates.
The Department of Labor has issued some class exemptions that may afford
exemptive relief for otherwise prohibited transactions arising
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<PAGE> 89
from the purchase or holding of the certificates, including Department of Labor
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); and 84-14 (Class Exemption for Plan Assets
Transactions Determined by Independent Qualified Professional Asset Managers). A
purchaser of the 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.
Plans would not have a "significant" equity interest in the trust, and
application of the plan asset regulation would be avoided, if Benefit Plan
Investors (as defined in the plan asset regulation) own less than 25% of each
class of equity in the trust. However, there is no commitment to limit purchases
of certificates by Benefit Plan Investors in this manner.
CONCLUSION
In light of the foregoing, Plan fiduciaries or other Plan investors
considering whether to purchase the certificates with Plan Assets of any Plan
and Parties in Interest should consult their own legal advisors regarding
whether the trust assets would be considered Plan Assets, the consequences that
would apply if the trust assets were considered Plan Assets, and the
availability of exemptive relief from the prohibited transaction rules or an
exception under the Plan Asset Regulation. Fiduciaries and other Plan investors
should also consider the fiduciary standards under ERISA or other applicable law
in the context of the Plan's particular circumstances before authorizing an
investment of Plan Assets in the certificates. Among other factors, fiduciaries
and other Plan investors should consider whether the investment:
- satisfies the diversification requirement of ERISA or other applicable
law;
- complies with the Plan's governing instruments; and
- is prudent in light of the "Risk Factors" and other factors discussed in
this prospectus.
USE OF PROCEEDS
The trust will use the net proceeds received from the sale of the
certificates to purchase the notes from the note issuer. The note issuer will
use the net proceeds from the sale of the notes to purchase the transition
property from the seller and to pay the costs of issuing the notes and the
certificates. The seller will use the net proceeds from the sale of the
transition property for general corporate purposes and to repay outstanding debt
and reduce the amount of outstanding equity.
PLAN OF DISTRIBUTION
The trust may sell the certificates to or through the underwriters named in
the prospectus supplement by a negotiated firm commitment underwriting and
public reoffering by the underwriters or another underwriting arrangement that
may be specified in the prospectus supplement or the trust may offer or place
the certificates either directly or through agents. The note issuer and the
trust intend that certificates will be offered through these various methods
from time to time and that offerings may be made
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<PAGE> 90
concurrently through more than one of these methods or that an offering of the
certificates may be made through a combination of these methods.
The distribution of certificates may be effected 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 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 dealers at prices less a concession.
Underwriters may allow, and the dealers may reallow, a concession to other
dealers. Underwriters, dealers and agents that participate in the distribution
of the certificates 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. We will identify any of these underwriters or agents,
and describe any compensation we give them, in the prospectus supplement.
LEGAL MATTERS
Certain legal matters relating to the notes will be passed on by Ropes &
Gray, Boston, Massachusetts, counsel to the seller and the note issuer. Certain
legal matters relating to the certificates and certain federal and state income
tax consequences of the issuance of the certificates will be passed upon by
Palmer & Dodge LLP, Boston, Massachusetts, counsel to the trust, and Krokidas &
Bluestein LLP, Boston, Massachusetts, co-counsel to the trust. Certain legal
matters relating to the certificates will be passed upon by [ ],
Wilmington, Delaware, Delaware counsel to the trust, and by Brown & Wood LLP,
San Francisco, California, counsel to the underwriters.
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<PAGE> 91
GLOSSARY
As used in this prospectus the terms below have the following meanings:
CEDEL -- Cedel Bank, a societe anonyme incorporated under the laws of
Luxembourg as a professional directory
CEDEL Participants -- participating organizations in CEDEL
Code -- The Internal Revenue Code of 1986
Cooperative -- Euroclear Clearance System, S.C., a Belgium cooperative
corporation
Definitive Certificates -- certificates issued in fully registered,
certificated form
DTC -- The Depository Trust Company
ERISA -- the Employee Retirement Income Security Act of 1974
Euroclear Operator or Euroclear -- Morgan Guaranty Trust Company of New
York, Brussels, Belgium office
Euroclear Participants -- participants of the Euroclear System
Indirect Participants -- banks, brokers, dealers, trust companies and other
entities that clear through or maintain a custodial relationship with a DTC
participant either directly or indirectly
Moody's -- Moody's Investors Service, Inc.
Non-U.S. Certificateholder -- a beneficial owner of a certificate that is
not a U.S. Certificateholder
Participant -- an organization that participates in DTC
Parties in Interest -- "parties in interest" under ERISA and "disqualified
persons" under the Code
Plan Assets -- assets of Plans
Plans -- employee benefit plans and other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and some collective
investment funds and insurance company general or separate accounts in which the
assets of these plans, accounts or arrangements are invested
RTC charge -- a portion, which may become all, of Boston Edison's
transition charge, authorized by the financing order to recover the transition
costs specified in the financing order
Special Distribution Date -- the later of the date on which any Special
Payment is confirmed to be received by the certificate trustee, or the date the
Special Payment is scheduled to be delivered to the certificate trustee
Special Payment -- any payment received by the certificate trustee
following a payment default on any class of notes
S&P -- Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
Terms and Conditions -- the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgium law
U.S. Certificateholder -- a beneficial owner of a certificate that is a
U.S. Person
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<PAGE> 92
U.S. Person --
- a citizen or resident of the Unites States;
- a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States, or under the laws of the
United States or of any state (including the District of Columbia);
- a partnership (or entity treated as a partnership for tax purposes)
organized in the United States, or under the laws of the United States
or of any state (including the District of Columbia) unless provided
otherwise by future Treasury regulations;
- 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 U.S. Persons have the authority to control all substantial
decisions of the trust.
Withholding Agent -- the last U.S. Person in the chain of payment of
interest payments prior to payment to a non-U.S. Certificateholder
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<PAGE> 93
[INDEX TO FINANCIAL STATEMENTS]
83
<PAGE> 94
[WATERMARK]
$[ ] RATE REDUCTION CERTIFICATES
MASSACHUSETTS RRB
SPECIAL PURPOSE TRUST BEC-1
Issuer of the Certificates
[LIST CLASSES]
BEC FUNDING LLC
Issuer of Notes
BOSTON EDISON COMPANY
Seller and Servicer
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- -------
<S> <C>
Securities and Exchange Commission Registration Fee... $
Blue Sky Fees and Expenses............................
Printing and Engraving Expenses.......................
Trustees' Fees and Expenses...........................
Accountants' Fees and Expenses........................
Legal Fees and Expenses...............................
Rating Agency Fees....................................
Public Agency Fees....................................
Miscellaneous Fees and Expenses.......................
-------
Total....................................... $
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may and has the
power to indemnify and hold harmless any member or other person from and against
any and all claims and demands whatsoever.
Sections 10.01 and 10.02 of the Limited Liability Company Agreement of the
note issuer provide that, to the fullest extent permitted by applicable law, the
note issuer shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (including
actions by or in the right of the note issuer to procure a judgment in its
favor) by reason of the fact that he is or was a director, manager, officer,
employee or agent of the note issuer, or is or was serving at the request of the
note issuer as a manager, director, officer, employee or agent of another
company, partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit,
proceeding or in enforcing such person's right to indemnification hereunder, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the note issuer, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, provided that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the note issuer unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of
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<PAGE> 96
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the Court of
Chancery or such other court shall deem proper. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interests of the note issuer, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
Section 67 of the Massachusetts Business Corporation Law provides that a
corporation may indemnify its directors, officers, employees and other agents
and persons who serve at its request as directors, officers, employees or other
agents of another organization to the extent specified in the corporation's
Articles of Organization, or in a Bylaw or vote adopted by a majority of the
stockholders.
BEC Funding LLC has directors' and officers' liability insurance policies
in force insuring directors and officers of BEC Funding LLC.
Under Section 9 of its Bylaws, Boston Edison Company indemnifies, to the
extent legally permissible, each of its directors and officers (including
persons who serve at its request as directors, officers or trustees of another
organization in which it has any interest, as a shareholder, creditor or
otherwise) against all liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees, reasonably incurred by such person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which such person may be involved or with which such person may be
threatened, while in office or thereafter, by reason of such person's being or
having been such a director, officer or trustee, except with respect to any
matter as to which such person shall have been adjudicated in any proceeding not
to have acted in good faith in the reasonable belief that his or her action was
in the best interests of the corporation. The note issuer believes that the
officers and the non-independent directors of the note issuer are serving at the
request of Boston Edison Company and are therefore entitled to such indemnity
from Boston Edison Company.
Boston Edison Company has directors' and officers' liability insurance
policies in force insuring directors and officers of Boston Edison Company and
its subsidiaries.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Formation of the Registrant.+
3.2 Limited Liability Company Agreement of the Registrant.+
4.1 Form of Note Indenture.*
4.2 Form of Certificate Indenture.*
4.3 Form of Declaration of Trust.
4.4 Form of Note.*
4.5 Form of Rate Reduction Certificate.*
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
5.1 Opinion of Ropes & Gray with respect to legality of the
Notes.*
5.2 Opinion of [ ] with respect to legality of the
Rate Reduction Certificates.*
8.1 Opinion of Palmer & Dodge LLP with respect to federal and
state tax matters and certain constitutional law 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 Administration Agreement.*
10.5 Form of Fee and Indemnity Agreement.
23.1 Consent of Ropes & Gray (contained in its opinion to be
filed as Exhibit 5.1).*
23.2 Consent of Palmer & Dodge LLP (contained in its opinion to
be filed as Exhibit 8.1).*
23.3 Consent of PricewaterhouseCoopers LLP.*
25.1 Statement of Eligibility and Qualification of Note Trustee
on Form T-1.*
25.2 Statement of Eligibility and Qualification of Certificate
Trustee on Form T-1.*
27.1 Financial Data Schedule.*
99.1 Application for Financing Order.+
99.2 Financing Order.
</TABLE>
- -------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant, on behalf of Massachusetts RRB Special Purpose
Trust BEC-1, hereby undertakes as follows:
(a)(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a twenty percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and (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
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<PAGE> 98
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 the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities 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 its is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-4
<PAGE> 99
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 Pre-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, The Commonwealth
of Massachusetts, on this 26 day of May, 1999.
BEC FUNDING LLC,
as Registrant
By: EMILIE G. O'NEIL
---------------------------------------
Name: Emilie G. O'Neil
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
ROBERT J. WEAFER, JR. President and Director (principal May 26, 1999
- ------------------------------------------ executive officer)
Robert J. Weafer, Jr.
EMILIE G. O'NEIL Vice President, Treasurer and Director May 26, 1999
- ------------------------------------------ (principal financial and accounting
Emilie G. O'Neil officer)
JAMES JUDGE Director May 26, 1999
- ------------------------------------------
James Judge
</TABLE>
II-5
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.3 Form of Declaration of Trust
10.5 Form of Fee and Indemnity Agreement
99.2 Financing Order
</TABLE>
<PAGE> 1
Exhibit 4.3
================================================================================
MASSACHUSETTS DEVELOPMENT FINANCE AGENCY
ACTING JOINTLY WITH
MASSACHUSETTS HEALTH AND EDUCATIONAL FACILITIES AUTHORITY,
AS SETTLORS,
AND
THE BANK OF NEW YORK (DELAWARE),
AS DELAWARE TRUSTEE
----------------------------
DECLARATION OF TRUST
DATED AS OF [ ], 1999
----------------------------
================================================================================
<PAGE> 2
DECLARATION OF TRUST dated as of [ ], 1999 (as amended or restated from
time to time, the "Declaration"), by the Massachusetts Development Finance
Agency and the Massachusetts Health and Educational Facilities Authority, acting
jointly hereunder as Settlors pursuant to Chapter 164 of the Massachusetts Acts
of 1997 (the "Statute") (each an "Agency," and, collectively, the "Agencies")
and The Bank of New York (Delaware), a Delaware banking corporation, acting
hereunder not in its individual or corporate capacity but solely as trustee
under the laws of the State of Delaware (the "Delaware Trustee").
RECITALS
Pursuant to the Statute, an electric company in The Commonwealth of
Massachusetts may obtain from the Massachusetts Department of Telecommunications
and Energy (the "DTE") a financing order (as defined in the Statute) permitting
such utility to recover a portion of its transition costs (as defined in the
Statute) through the issuance of electric rate reduction bonds (as defined in
the Statute). The Statute further empowers a special purpose trust (as defined
in the Statute) established by the Agencies to issue such electric rate
reduction bonds.
Boston Edison Company, a Massachusetts corporation ("Boston Edison"), has
applied for and received a financing order from the DTE, and has requested the
Agencies to establish a special purpose trust to issue electric rate reduction
bonds.
The Trust created hereby (the "Trust") shall constitute a special purpose
trust and shall be empowered to issue one series with one or more classes of
certificates constituting Massachusetts RRB Special Purpose Trust BEC-1 Rate
Reduction Certificates (the "Certificates"). All such Certificates shall be
issued pursuant to an indenture (the "Certificate Indenture"), by and between
the Trust and a trustee (the "Certificate Trustee"), initially designated as The
Bank of New York, and shall represent fractional undivided beneficial interests
in a corresponding series and corresponding classes of BEC Funding LLC Notes
(the "Notes") issued by BEC Funding LLC, a special purpose limited liability
company (the "Note Issuer") created by Boston Edison. The Trust shall purchase
the Notes from the Note Issuer pursuant to a note purchase agreement (a "Note
Purchase Agreement") relating to the Notes. The Notes will be issued pursuant to
an indenture (the "Note Indenture"), by and between the Note Issuer and a
trustee (the "Note Trustee"), initially designated as The Bank of New York, and
secured by a pledge of and lien upon transition property (as defined in the
Statute) purchased by the Note Issuer from Boston Edison together with any other
assets of the Note Issuer. Boston Edison will service such transition property
for the benefit of the Note Issuer pursuant to a transition property servicing
agreement (the "Servicing Agreement"), between Boston Edison as servicer (in
such capacity, together with any successor servicer, the "Servicer") and the
Note Issuer. The Certificate Indenture, the Note Purchase Agreement, the Note
Indenture, the Servicing Agreement, the Fee and Indemnity Agreement defined and
described in Section 2.7 hereof, the Transition Property Purchase and Sale
Agreement between the Note Issuer and Boston Edison, as seller, relating to the
purchase and sale of the transition property described above, the Administration
Agreement between the Note Issuer and Boston Edison, as administrator, relating
to the administration of such transition property, and the Underwriting
1
<PAGE> 3
Agreement among the Trust, the Note Issuer, Boston Edison and certain
underwriters, relating to the underwriting of the Certificates, are herein
collectively referred to as the "Basic Documents."
THE AGENCIES AND THE DELAWARE TRUSTEE AGREE AS FOLLOWS:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS. All references herein to "the Declaration" or
"this Declaration" are to this Declaration of Trust, all references herein to
the "Trust" are to the trust created hereunder, and all references herein to
Articles, Sections, subsections, Schedules and Exhibits are to Articles,
Sections, subsections, Schedules and Exhibits of this Declaration, unless
otherwise specified. All capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Recitals hereto.
ARTICLE 2
ORGANIZATION
SECTION 2.1 CREATION OF TRUST. The Trust created hereby shall be known as
the "Massachusetts RRB Special Purpose Trust BEC-1," in which name the Delaware
Trustee may conduct the business of the Trust, make and execute contracts and
other instruments on behalf of the Trust and sue and be sued on behalf of the
Trust. In addition, the Delaware Trustee may conduct the business of the Trust
in its own name, as trustee hereunder, to the extent deemed necessary or
appropriate by the Delaware Trustee, in its sole discretion. It is the intention
that the Trust shall constitute a not-for-profit business trust under the
Delaware Business Trust Act (being Chapter 38 of Title 12 of the Delaware Code,
12 DEL. C., ss. 3801 eT Seq., as the same may be amended from time to time and
any successor statute) (the "Business Trust Act") and that this Declaration
shall constitute the governing instrument of such business trust. The Delaware
Trustee agrees to file the Certificate of Trust, substantially in the form
attached hereto as Exhibit A, pursuant to ss. 3810 eT Seq. of the Business Trust
Act in connection with the formation of the Trust as a not-for-profit business
trust under the Business Trust Act. The fiscal year of the Trust shall be the
calendar year.
SECTION 2.2 TRUST AS FINANCING ENTITY. The Agencies hereby find and
determine, and hereby represent and warrant, that the Trust constitutes a
"special purpose trust" and a "financing entity" within the meaning of the
Statute, and that the Trust is being established to issue "electric rate
reduction bonds" within the meaning of the Statute.
SECTION 2.3 SITUS OF THE TRUST. The office of the Trust shall be in care of
the Delaware Trustee at the corporate trust office (the "Office") at White Clay
Center, Route 273, Newark, Delaware 19711 (although any notice, direction,
consent or waiver given to the Delaware Trustee hereunder may be given in care
of the address set forth in Section 7.3(a) hereof), which
2
<PAGE> 4
Office shall be located in Delaware, or at such other address in Delaware as the
Delaware Trustee may designate by written notice to the Agencies, the
Certificate Trustee, the Note Issuer, the Note Trustee, the Servicer, and the
holders of the Certificates, and the Trust shall conduct its business in such
Office, separate and apart from that of the Agencies and their affiliates. To
the extent required pursuant to the provisions of the Business Trust Act, all
bank accounts of the Trust maintained by the Delaware Trustee, except those bank
accounts maintained by the Certificate Trustee, shall be located in the State of
Delaware. The Trust shall not have any employees in any state other than
Delaware; PROVIDED, HOWEVER, that nothing herein shall restrict or prohibit the
Delaware Trustee (in its individual capacity but not as Delaware Trustee) from
having employees within or without the State of Delaware. Payments shall be
received by the Trust only in Delaware, and payments shall be made by the Trust
only from Delaware, except as otherwise provided in the Basic Documents and as
otherwise permitted pursuant to the provisions of the Business Trust Act. To the
extent required pursuant to the provisions of the Business Trust Act, the
Delaware Trustee shall conduct the Trust's activities from Delaware, sign
documents on behalf of the Trust in Delaware and maintain bank accounts (other
than those accounts maintained under the Certificate Indenture) and business
records on behalf of the Trust in Delaware.
SECTION 2.4 PURPOSES AND POWERS. (a) The Trust is constituted solely for
the purpose of acquiring and holding the Notes and issuing the Certificates,
applying the proceeds of the Notes to the payment of the Certificates and
entering into and performing its obligations under each of the Basic Documents
to which it is a party (which functions the Delaware Trustee shall perform or
cause to be performed on behalf of the Trust), and, except as set forth herein,
the Delaware Trustee is not authorized or empowered to acquire any other
investments or engage in any other activities on behalf of the Trust and, in
particular, the Delaware Trustee is not authorized or empowered to do anything
that would cause the Trust to fail to qualify as a "grantor trust" for federal
income tax purposes.
(b) The Delaware Trustee shall have all rights and powers set forth herein
and, to the extent not inconsistent herewith, in the Business Trust Act with
respect to accomplishing the purposes of the Trust.
SECTION 2.5 TRUST PROPERTY.
(a) The Agencies hereby assign, transfer, convey and set over to the
Trustee the sum of $1.00. The Trustee hereby acknowledges receipt of such amount
in trust from the Agencies, which amount shall constitute the initial trust
property.
(b) Upon issuance of the Certificates and purchase of the Notes, the
holders of the Certificates shall become the sole and exclusive beneficial
owners of the Trust estate established hereby. The Delaware Trustee hereby
declares that it shall hold the Notes, the security interest in the transition
property (as defined in the Statute) securing the Notes, any other assets
acquired directly or indirectly from the Note Issuer and the proceeds therefrom
(the "Trust Property") in trust as herein provided for the benefit of the
holders of the Certificates, subject to the rights of such holders under the
Certificate Indenture, from and after such date until termination of the Trust
as herein provided, or under the Basic Documents.
3
<PAGE> 5
(c) Legal title to the Trust Property shall be vested at all times in
the Trust as a separate legal entity except where applicable law in any
jurisdiction requires title to any part of the Trust Property to be vested in a
trustee or trustees, in which case title shall be deemed to be vested in the
Delaware Trustee, a co-trustee and/or a separate trustee, as the case may be.
SECTION 2.6 ISSUANCE OF CERTIFICATES. The Trust shall execute and deliver
the Certificates only upon satisfaction of the terms of the Certificate
Indenture.
SECTION 2.7 ORGANIZATIONAL EXPENSES. The Delaware Trustee shall be
reimbursed, but solely from amounts payable by the Note Issuer under a fee and
indemnity agreement (the "Fee and Indemnity Agreement"), for organizational
expenses of the Trust as they may arise. The Delaware Trustee shall have no
recourse against the Agencies or the Trust for the reimbursement of such
expenses.
SECTION 2.8 NO LIABILITY OF THE AGENCIES OR AGENCY PERSONNEL. No recourse
shall be had by the Delaware Trustee for any claim based on this Declaration,
the Certificates, the Notes or the Basic Documents against any member, director,
officer, employee, agent or attorney of the Agencies unless such claim is based
upon the bad faith, fraud or deceit of such person. No covenant, stipulation,
obligation or agreement of the Agencies contained in this Declaration shall be
deemed to be a covenant, stipulation, obligation or agreement of any present or
future member, director, officer, employee or agent of the Agencies in his or
her individual capacity, and any member, director, officer, employee, agent or
attorney of the Agencies executing and delivering or directing the execution and
delivery of the Certificates shall not be liable personally thereon or be
subject to any personal liability or accountability by reason of the issuance of
the Certificates.
SECTION 2.9 INDEPENDENT STATUS. The Trust and each of the Agencies each
covenant and agree to hold itself out to the public under its own name as a
separate and distinct entity and will each conduct its business so as not to
mislead others as to its identity. The Trust shall cause those financial
statements and other records required by law, or otherwise required, to be
prepared and maintained separate and apart from those of the Agencies.
SECTION 2.10 TAX TREATMENT; CONSTRUCTION.
(a) It is the intention of the parties hereto that the Trust shall be
treated as a "grantor trust" for federal income tax purposes and all
transactions contemplated by this Declaration will be reported consistently with
such treatment.
(b) The provisions of this Declaration shall be construed, and the
affairs of the Trust shall be conducted, so as to achieve treatment of the Trust
as a "grantor trust" for federal income tax purposes. Accordingly,
notwithstanding any other provision hereof to the contrary, this Declaration
shall be construed to establish a class or classes of ownership interests, with
each class representing undivided beneficial interests in a separate specified
asset or set of assets of the Trust and facilitating the direct investment in
such assets by the holders of the Certificates. The assets of the Trust shall
consist of the Notes and other assets described in this Declaration, and the
Delaware Trustee shall have no power hereunder to vary the investment of the
holders of the Certificates.
4
<PAGE> 6
ARTICLE 3
DELIVERY OF CERTAIN DOCUMENTS
SECTION 3.1 DOCUMENTS RELATING TO ISSUANCE OF CERTIFICATES. The Delaware
Trustee is hereby directed to execute and deliver on behalf of the Trust from
time to time and as instructed in writing by the Agencies, all Basic Documents
to which the Trust or the Delaware Trustee may be a party, including the
Certificate Indenture, and any amendment or supplement thereto, a Note Purchase
Agreement, the Fee and Indemnity Agreement, the Underwriting Agreement, and all
other documents and instruments as may be necessary or desirable to issue the
Certificates pursuant to the provisions of the Certificate Indenture and to
purchase the Notes pursuant to the Note Purchase Agreement.
SECTION 3.2 DOCUMENTS RELATING TO REGISTRATION OF CERTIFICATES. To the
extent instructed in writing by the Agencies, the Delaware Trustee is hereby
authorized to:
(a) execute and file on behalf of the Trust with the Securities and
Exchange Commission (the "SEC") a registration statement on Form S-3, including
any pre-effective or post-effective amendments to such registration statement
(including the prospectus, the prospectus supplement and the exhibits contained
therein), relating to the Certificates;
(b) determine the states in which to qualify or register for sale all
or part of the Certificates and to take any and all such acts deemed necessary
or advisable to comply with the applicable laws of any of those states,
including the execution and filing on behalf of the Trust of such applications,
reports, surety bonds, irrevocable consents, appointments of attorney for
service of process and other papers and documents as shall be necessary or
desirable in connection therewith; and
(c) to do or cause to be done all such other acts or things and to
execute and deliver all such instruments and documents as the Agencies shall
deem necessary or appropriate to carry out the intent of this Section 3.2.
In the event that any filing referred to above is required, by the rules and
regulations of the SEC or any state securities or "Blue Sky" laws, to be
executed on behalf of the Trust by the Delaware Trustee, then the Delaware
Trustee, not in its individual capacity, but solely in its capacity as trustee
of the Trust, is hereby authorized and directed to join in any such filing and
to execute on behalf of the Trust any and all of the foregoing.
ARTICLE 4
THE DELAWARE TRUSTEE
SECTION 4.1 APPOINTMENT. For valuable consideration received, it is
mutually covenanted and agreed that the Delaware Trustee has been and by this
document is, appointed to serve as the trustee of the Trust in the State of
Delaware pursuant to Section 3807 of the Business Trust Act.
5
<PAGE> 7
SECTION 4.2 DUTIES AND RESPONSIBILITIES. It is understood and agreed that,
except as provided in Section 2.4 hereof, the duties and responsibilities of the
Delaware Trustee shall be limited to (a) executing and delivering on behalf of
the Trust all Basic Documents to which the Trust or the Delaware Trustee may be
a party and, to the extent required by Article 3 hereof or deemed appropriate by
the Delaware Trustee, all other documents and instruments referred to in Article
3 hereof, (b) accepting legal process served on the Trust in the State of
Delaware and (c) the execution and delivery of all certifications required to be
filed with the Secretary of State of the State of Delaware in order to form,
maintain and terminate the existence of the Trust under the Business Trust Act.
No implied covenants or obligations shall be read into this Declaration against
the Delaware Trustee.
SECTION 4.3 PROHIBITED ACTIONS. Except as otherwise expressed herein and as
permitted under the Basic Documents, the Delaware Trustee shall not (i) take any
action with respect to any election by the Trust to file an amendment to this
Declaration, (ii) amend, change, modify or terminate any Basic Document, or
(iii) sell the Notes, any other Trust Property or any interest therein.
SECTION 4.4 ACCEPTANCE OF THE TRUSTS. By the execution hereof, the Delaware
Trustee accepts the trusts created hereinabove.
SECTION 4.5 LIMITATION OF LIABILITY. Except as otherwise expressly required
by this Declaration, the Delaware Trustee shall not have any duty or liability
with respect to the administration of the Trust, the investment of the Trust's
property or the payment of dividends or other distributions of income or
principal to the holders of the Certificates. The Delaware Trustee shall not be
liable for the acts or omissions of the Certificate Trustee, nor shall the
Delaware Trustee be liable for supervising or monitoring the performance of the
duties and obligations of the Certificate Trustee. The Delaware Trustee shall
not be personally liable under any circumstances, except for its own willful
misconduct or gross negligence. In particular, but not by way of limitation:
(a) the Delaware Trustee shall not be personally liable for any error
of judgment made in good faith by any officer within the corporate trust
department of the Delaware Trustee who has been assigned to perform or provide
trustee functions or services on behalf of the Trust;
(b) no provision of this Declaration shall require the Delaware
Trustee to expend or risk its personal funds or otherwise incur any financial
liability in the performance of its rights or powers hereunder, if the Delaware
Trustee shall have reasonable grounds for believing that repayment of such funds
or indemnity satisfactory to it against such risk or liability is not reasonably
assured or provided to it;
(c) it is expressly understood and agreed by the parties hereto that
(i) this Declaration is executed and delivered by The Bank of New York, not
individually or personally but solely as Delaware Trustee of the Trust, in the
exercise of the powers and authority conferred and vested in it, (ii) the
representations, undertakings and agreements herein made on the part of the
Trust are made and intended not as personal representations, undertakings and
agreements by The Bank of New York, but are made and intended for the purpose of
binding only the Trust, (iii) nothing herein contained shall be construed as
creating any liability of The Bank of New
6
<PAGE> 8
York, individually or personally, to perform any covenant either expressed or
implied contained herein, all such liability, if any, being expressly waived by
the parties who are signatories to this Declaration and by any person claiming
by, through or under such parties and (iv) under no circumstances shall The Bank
of New York be personally liable for the payment of any indebtedness or expenses
of the Trust or be liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by or on behalf of the
Trust under this Declaration;
(d) the Delaware Trustee shall not be personally responsible for the
validity or sufficiency of this Declaration or the Certificates or for the due
execution hereof by the Agencies;
(e) in the exercise or administration of the trusts hereunder, the
Delaware Trustee (i) may act directly or through agents (including affiliates,
such as The Bank of New York), attorneys, custodians or nominees pursuant to
agreements entered into with any of them, and the Delaware Trustee shall not be
liable for the default or misconduct or supervision of such agents, attorneys,
custodians or nominees if such agents, attorneys, custodians or nominees shall
have been selected by the Delaware Trustee in good faith and (ii) may consult
with attorneys, accountants and other skilled persons to be selected in good
faith and employed by it, and it shall not be liable for anything done, suffered
or omitted in good faith by it in accordance with the advice or opinion of any
such attorneys, accountants or other skilled persons;
(f) except as expressly provided in this Section 4.5, in accepting and
performing the trusts hereby created, the Delaware Trustee acts solely as
trustee for the Trust and not in its individual capacity, and all persons having
any claim against the Delaware Trustee by reason of the transactions
contemplated by this Declaration shall look only to the Trust's property for
payment or satisfaction thereof;
(g) the Delaware Trustee's sole duty with respect to the custody,
safekeeping and physical preservation of the Trust Property shall be to deal
with such property in a manner similar to the manner in which the Delaware
Trustee deals with similar property for its own account, subject to the
protections and limitations on liability afforded to the Delaware Trustee under
this Declaration;
(h) the Delaware Trustee shall have no duty or liability for or with
respect to the value, genuineness, existence or sufficiency of the Trust
Property or the payment of any taxes or assessments levied thereon or in
connection therewith;
(i) the Delaware Trustee shall not be liable for any interest on any
moneys received by it on behalf of the Trust except as the Delaware Trustee may
otherwise agree with the Agencies;
(j) moneys held by the Delaware Trustee on behalf of the Trust need
not be segregated from other moneys except as the Delaware Trustee may otherwise
agree with the Agencies or as otherwise required by law; and
(k) the Delaware Trustee shall have the right at any time to seek
instructions concerning the administration of the Trust from any court of
competent jurisdiction.
7
<PAGE> 9
SECTION 4.6 COMPENSATION AND REIMBURSEMENT; INDEMNIFICATION.
(a) Pursuant to a Fee and Indemnity Agreement, the Note Issuer has
agreed to pay, or cause to be paid, to the Delaware Trustee from time to time
compensation for its services and to reimburse it for its reasonable expenses
hereunder. The Delaware Trustee shall have no recourse against the Agencies or
the Trust Property for the payment of such compensation or for the reimbursement
of such expenses.
(b) The Agencies shall, but solely from amounts payable to the
Delaware Trustee under the Fee and Indemnity Agreement, indemnify, defend and
hold harmless the Delaware Trustee and any of the affiliates, officers,
directors, employees and agents of the Delaware Trustee (the "Delaware Trustee
Indemnified Persons") from and against any and all losses, claims, taxes,
damages, expenses and liabilities (including liabilities under state or federal
securities laws) of any kind and nature whatsoever (collectively, "Delaware
Trustee Expenses"), to the extent that such Delaware Trustee Expenses arise out
of or are imposed upon or asserted against such Delaware Trustee Indemnified
Persons with respect to the creation, operation or termination of the Trust, the
execution, delivery or performance of this Declaration or the transactions
contemplated hereby; PROVIDED, HOWEVER, that the Agencies shall not be required
to indemnify any Delaware Trustee Indemnified Person for any Delaware Trustee
Expenses that result from the willful misconduct or negligence of such Delaware
Trustee Indemnified Person. The obligations of the Trust to indemnify the
Delaware Trustee Indemnified Persons in this Declaration shall survive the
termination of this Declaration and the resignation or removal of the Delaware
Trustee. The Delaware Trustee is hereby authorized to execute the Fee and
Indemnity Agreement on behalf of the Trust and to enforce the terms thereof.
(c) Notwithstanding anything to the contrary in this Declaration, the
Delaware Trustee shall have no recourse against the Agencies or the Trust
Property for payment of any amounts required to be paid to the Delaware Trustee
under this Section 4.6.
SECTION 4.7 RESIGNATION. The Delaware Trustee may resign upon 30 days'
prior written notice to the Certificate Trustee, the Agencies and the Trust;
provided, however, that a successor Delaware Trustee satisfactory to the
Agencies shall have been appointed and agreed to serve. If a successor Delaware
Trustee shall not have been appointed within such 30-day period, the Delaware
Trustee may apply to the Court of Chancery of the State of Delaware for the
appointment of a successor Delaware Trustee. Any successor Delaware Trustee must
satisfy the requirement of Section 3807(a) of the Business Trust Act.
SECTION 4.8 REPRESENTATIONS AND WARRANTIES OF DELAWARE TRUSTEE. The Bank of
New York (Delaware) hereby represents and warrants to the other parties hereto
that:
(a) It is a banking corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(b) It has full power, authority and legal right to execute, deliver
and perform this Declaration, and has taken all necessary action to authorize
the execution, delivery and performance by it of this Declaration.
8
<PAGE> 10
(c) The execution, delivery and performance by it of this Declaration
(i) do not violate any requirement of federal law or the law of the State of
Delaware governing its banking and trust powers or any order, writ, judgment or
decree of any court, arbitrator or governmental authority applicable to it or
any of its assets, (ii) do not violate any provision of its charter or by-laws,
and (iii) do not violate any provision of, or constitute, with or without notice
or lapse of time, a default under, or result in the creation or imposition of
any Lien on any properties included in the Trust pursuant to the provisions of
any mortgage, indenture, contract, agreement or other undertaking to which it is
a party, which violation, default or Lien could reasonably be expected to have a
materially adverse effect on its performance or its ability to perform its
duties as a Trustee under this Declaration or on the transactions contemplated
in this Declaration.
(d) Its execution, delivery and performance of this Declaration shall
not require the authorization, consent or approval of, the giving of notice to,
the filing or registration with, or the taking of any other action in respect
of, any governmental authority or agency regulating the banking and corporate
trust activities of banks or trust companies in the jurisdiction in which the
Trust was formed (except for the filing of the Declaration with the Secretary of
State of the State of Delaware).
(e) This Declaration has been duly executed and delivered by it and
constitutes the legal, valid and binding agreement of it, enforceable against it
in accordance with the terms of this Declaration, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, and other similar laws
affecting the enforcement of creditors' rights in general and by general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in equity or at law.
SECTION 4.9 RELIANCE; ADVICE OF COUNSEL.
(a) The Delaware Trustee shall incur no liability to anyone in acting
upon any signature, instrument, notice, resolution, request, consent, order,
certificate, report, opinion, bond or other document or paper reasonably
believed by it to be genuine and reasonably believed by it to be signed by the
proper party or parties and need not investigate any fact or matter pertaining
to or in any such document. The Delaware Trustee may accept a certified copy of
a resolution of the board of directors or other governing body of any corporate
party as conclusive evidence that such resolution has been duly adopted by such
body and that the same is in full force and effect unless and until the Delaware
Trustee receives a certified copy of a resolution of such board of directors or
other body revoking the same. As to any fact or matter the method of the
determination of which is not specifically prescribed herein, the Delaware
Trustee may for all purposes hereof rely on a certificate, signed by the
president or any vice president or by the treasurer or other authorized officers
of the relevant party, as to such fact or matter, and such certificate shall
constitute full protection to it for any action taken or omitted to be taken by
it in good faith in reliance thereon.
(b) In the exercise or administration of the trusts hereunder and in
the performance of its duties and obligations under this Declaration and the
Basic Documents, the Delaware Trustee: (i) may, at the expense of the Note
Issuer or any other party, to the extent provided in the Fee and Indemnity
Agreement, act directly or through its agents, attorneys, custodians or nominees
(including, if necessary, the granting of a power of attorney to any of its
9
<PAGE> 11
officers not otherwise authorized to execute and deliver any Basic Document,
Certificate or other documents related thereto and to take any action in
connection therewith on behalf of the Delaware Trustee) pursuant to agreements
entered into with any of them, and the Delaware Trustee shall not be liable for
the conduct or misconduct of such agents, attorneys, custodians or nominees if
such agents, attorneys, custodians or nominees shall have been selected by the
Delaware Trustee with reasonable care; and (ii) may, at the expense of the Note
Issuer or any other party, to the extent provided in the Fee and Indemnity
Agreement, consult with counsel, accountants and other professionals to be
selected with reasonable care by it. The Delaware Trustee shall not be liable
for anything done, suffered or omitted in good faith by it in accordance with
the opinion or advice of any such counsel, accountant or other such persons
reasonably relied on and which, according to such opinion or advice, is not
contrary to this Declaration or any other Basic Document.
SECTION 4.10 DELAWARE TRUSTEE MAY OWN CERTIFICATES. The Delaware Trustee in
its individual or any other capacity may become the owner or pledgee of
Certificates and may deal with Boston Edison, the Note Issuer, the Note Trustee,
the Certificate Trustee, the Servicer, the Agencies and their respective
affiliates and with the holders of the Certificates in transactions in the same
manner as the Delaware Trustee would have if it were not a trustee under this
Declaration.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE AGENCIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF AGENCIES. Each Agency as a
settlor of the Trust will represent and warrant, as of the issuance date of the
Certificates, the following:
(a) such Agency has full power, authority and legal right, and has
taken all action necessary, to execute and deliver this Declaration and to
fulfill its obligations under, and to consummate the transactions contemplated
by, this Declaration;
(b) the making and performance by such Agency of this Declaration and
all documents required to be executed and delivered by it hereunder do not and
will not violate any law or regulation of the jurisdiction of its organization
or any other law or regulation applicable to it or violate any provision of, or
constitute, with or without notice or lapse of time, a default under, or result
in the creation or imposition of any lien on any properties included in the
Trust Property pursuant to, any mortgage, indenture, contract, agreement or
other undertaking to which such Agency is a party;
(c) this Declaration has been duly executed and delivered by such
Agency and constitutes its legal, valid and binding obligation, enforceable in
accordance with its terms; and
(d) to the best knowledge of such Agency, all consents, licenses,
approvals, authorizations, exemptions, registrations, filings, opinions and
declarations from or with any agency, department, administrative authority,
statutory corporation or judicial entity necessary for the validity or
enforceability of such Agency's obligations under this Declaration have been
10
<PAGE> 12
obtained, and no governmental authorizations other than any already obtained are
required in connection with the execution, delivery and performance of this
Declaration by such Agency.
ARTICLE 6
TERMINATION OF DECLARATION
SECTION 6.1 TERMINATION OF THE TRUST. The respective obligations and
responsibilities of the Agencies, the Delaware Trustee and the Trust created
hereby shall terminate with respect to any class of Certificates one year and
one day following the distribution to all holders of the Certificates of such
class of all amounts required to be distributed to them pursuant to the
Certificate Indenture and the disposition of all property held as part of the
Trust Property with respect to such class of Certificates. Upon the redemption
of all classes of Certificates and at the election of the Agencies, the Trust
shall dissolve. The Agencies shall pay or provide for the payment of all
remaining liabilities of the Trust and the Delaware Trustee, but solely from
amounts payable to the Agencies under the Fee and Indemnity Agreement, and
thereupon the Delaware Trustee shall file a certificate of cancellation under
the Business Trust Act and the Trust shall terminate, and any fees associated
with such filing shall be paid from amounts payable to the Agencies under the
Fee and Indemnity Agreement.
Notice of any termination of the Trust shall be mailed promptly in
accordance with the Certificate Indenture.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 NO LEGAL TITLE TO TRUST PROPERTY. As provided in Section 2.5(c)
hereof, the Agencies shall not have legal title to any part of the Trust
Property.
SECTION 7.2 LIMITATIONS ON RIGHTS OF OTHERS. Except as otherwise provided
herein, the provisions of this Declaration are solely for the benefit of the
Agencies, the Delaware Trustee, the Certificate Trustee and the holders of the
Certificates, and nothing in this Declaration, whether express or implied, shall
be construed to give to any other person any legal or equitable right, remedy or
claim in the Trust Property or under or in respect of this Declaration or any
covenants, conditions or provisions contained herein.
SECTION 7.3 NOTICES. (a) Unless otherwise specifically provided herein, all
notices, directions, consents and waivers required under the terms and
provisions of this Declaration shall be in English and in writing, and any such
notice, direction, consent or waiver may be given by United States mail, courier
service, facsimile transmission or electronic mail (confirmed by telephone,
United States mail or courier service in the case of notice by facsimile
transmission or electronic mail) or any other customary means of communication,
and any such notice, direction, consent or waiver shall be effective when
delivered, or if mailed, three days after deposit in the United States mail with
proper postage for ordinary mail prepaid,
11
<PAGE> 13
if to the Trust, to:
The Bank of New York (Delaware), as Delaware Trustee for the
Massachusetts
RRB Special Purpose Trust BEC-1
c/o The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
with copies to:
Massachusetts Development Finance Agency
75 Federal Street
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 727-8741
Telephone: (617) 451-2477
and
Massachusetts Health and Educational Facilities Authority
99 Summer Street
10th Floor
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 737-8366
Telephone: (617) 737-8377
if to the Agencies, to:
Massachusetts Development Finance Agency
75 Federal Street
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 727-8741
Telephone: (617) 451-2477
and
12
<PAGE> 14
Massachusetts Health and Education Facilities Authority
99 Summer Street
10th Floor
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 737-8366
Telephone: (617) 737-8377
if to the Delaware Trustee, to:
The Bank of New York (Delaware)
c/o The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
(b) The Trust, the Agencies or the Delaware Trustee, by notice to
the others, may designate additional or different addresses for subsequent
notices or communications.
(c) If a notice or communication is mailed in the manner provided
above within the time prescribed, it is conclusively presumed to have been duly
given, whether or not the addressee receives it.
SECTION 7.4 SEVERABILITY. If any one or more of the covenants, agreements,
provisions or terms of this Declaration shall be for any reason whatsoever held
invalid, then such covenants, agreements, provisions or terms shall be deemed
severable from the remaining covenants, agreements, provisions or terms of this
Declaration and shall in no way affect the validity or enforceability of the
other provisions of this Declaration.
SECTION 7.5 AMENDMENTS WITHOUT CONSENT OF HOLDERS. This Declaration may be
amended by the Delaware Trustee and the Agencies with the prior written consent
of the Certificate Trustee but without the consent of any of the holders of the
Certificates (but with prior notice to the rating agencies named in the
Certificate Indenture) to (i) cure any ambiguity; (ii) correct or supplement any
provision in this Declaration that may be defective or inconsistent with any
other provision in this Declaration; (iii) add to the covenants, restrictions or
obligations of the Delaware Trustee for the benefit of the holders of the
Certificates; (iv) evidence and provide for the acceptance of the appointment of
a successor trustee with respect to the Trust Property and add to or change any
provisions as shall be necessary to facilitate the administration of the trusts
hereunder by more than one trustee; or (v) add, change or eliminate any other
provision of this Declaration in any manner that shall not, as evidenced by an
opinion of counsel to the Agencies, adversely affect in any material respect the
interests of the holders of the Certificates; PROVIDED, HOWEVER, that this
Declaration shall not be amended in any manner which (i) would cause the Trust
to be characterized as other than a "grantor trust" for federal income
13
<PAGE> 15
tax purposes or (ii) would affect the rights of the Agencies hereunder or under
the Basic Documents without the prior written consent of the Agencies or receipt
of an opinion of counsel to the Agencies to the effect that such amendment does
not adversely affect, in any manner, the interests of the Agencies under this
Declaration.
SECTION 7.6 AMENDMENTS WITH CONSENT OF HOLDERS. This Declaration may be
amended from time to time by the Delaware Trustee and the Agencies with the
consent of the Certificate Trustee and the holders of Certificates whose
Certificates evidence not less than a majority of the outstanding principal
amount of each affected class of the Certificates as of the close of business on
the preceding Certificate payment date (which consent, whether given pursuant to
this Section 7.6 or pursuant to any other provision of this Declaration or the
Certificate Indenture, shall be conclusive and binding on such Certificate
holder and on all future holders of such Certificates and of any Certificates
issued upon the transfer thereof or in exchange thereof or in lieu thereof
whether or not notation of such consent is made upon the Certificates) for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Declaration, or of modifying in any manner the rights
of the holders of the Certificates; PROVIDED, HOWEVER, that no such amendment
shall (a) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, payments that shall be required to be made on any Certificate
without the consent of the holder thereof; (b) adversely affect the rating of
any of the Certificates without the consent of the holders of all of the
outstanding principal amount of such affected Certificates; or (c) reduce the
aforesaid majority required to consent to any such amendment, without the
consent of all of the holders of the Certificates then outstanding. Prior to the
execution of any such amendment, supplement or consent, the Delaware Trustee
shall furnish written notification of the substance of such amendment,
supplement or consent to the rating agencies named in the Certificate Indenture.
SECTION 7.7 FORM OF AMENDMENTS.
(a) Promptly after the execution of any amendment, supplement or
consent pursuant to Sections 7.5 and 7.6, the Delaware Trustee shall furnish
written notification of the substance of such amendment or consent to the
Certificate Trustee and the Agencies.
(b) The manner of obtaining such consents (and any other consents of
holders of the Certificates provided for in this Declaration or in any other
Basic Document) and of evidencing the authorization of the execution thereof by
holders of the Certificates shall be subject to such reasonable requirements as
the Delaware Trustee may prescribe to the extent not inconsistent with the
provisions of the Basic Documents.
(c) Promptly after the execution of any amendment to this Declaration,
the Delaware Trustee shall cause the filing of such amendment with the Secretary
of State of the State of Delaware.
(d) Prior to the execution of any amendment to this Declaration, the
Delaware Trustee shall receive an opinion of counsel to the effect that (i) the
execution of such amendment is authorized or permitted by this Declaration and
(ii) such execution will not adversely affect the treatment of the Trust as a
"grantor trust" for federal income tax purposes.
14
<PAGE> 16
(e) The Delaware Trustee may, but shall not be obligated to, enter
into any such amendment that affects and only affects the Delaware Trustee's own
rights, duties or immunities under this Declaration or otherwise.
SECTION 7.8 COUNTERPARTS. This Declaration may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
SECTION 7.9 SUCCESSORS. All covenants and agreements contained herein shall
be binding upon, and inure to the benefit of the Agencies, the Trust and the
Delaware Trustee and their respective successors and permitted assigns, all as
herein provided.
SECTION 7.10 NO PETITION COVENANT. Notwithstanding any other provision of
this Declaration or any Basic Document and notwithstanding any prior termination
of this Declaration, the Trust (or the Delaware Trustee on behalf of the Trust)
and the Agencies shall not, prior to the date which is one year and one day
after the termination of this Declaration, acquiesce, petition or otherwise
invoke or cause the Trust to invoke the process of any governmental authority
for the purpose of commencing or sustaining a case against the Trust under any
federal or state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Trust or any substantial part of its property, or ordering the winding up
or liquidation of the affairs of the Trust.
SECTION 7.11 HEADINGS. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
SECTION 7.12 GOVERNING LAW. This Declaration shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference to its conflict of law provisions, and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance with such
laws.
15
<PAGE> 17
IN WITNESS WHEREOF, the Delaware Trustee and the Agencies have caused
this Declaration of Trust to be duly executed by duly authorized officers, all
as of the day and year first above written.
MASSACHUSETTS DEVELOPMENT FINANCE
AGENCY, as a Settlor
By:
------------------------------
Name:
Title:
MASSACHUSETTS HEALTH AND
EDUCATION FACILITIES AUTHORITY,
as a Settlor
By:
------------------------------
Name:
Title:
THE BANK OF NEW YORK (DELAWARE),
as Delaware Trustee
By:
------------------------------
Name:
Title:
S-1
<PAGE> 18
EXHIBIT A TO THE
DECLARATION OF TRUST
CERTIFICATE OF TRUST OF
MASSACHUSETTS RRB SPECIAL PURPOSE TRUST BEC-1
THIS CERTIFICATE OF TRUST of Massachusetts RRB Special Purpose Trust BEC-1
(the "Trust"), dated as of [ ], 1999, is being duly executed and filed by the
undersigned, as trustee, to form a not-for-profit business trust under the
Delaware Business Trust Act (12 Del. C., ss. 3801 eT Seq.) (the "Act").
(i) NAME. The name of the not-for-profit business trust formed hereby
is "Massachusetts RRB Special Purpose Trust BEC-1."
(ii) DELAWARE TRUSTEE. The name and business address of the trustee of
the Trust in the State of Delaware is The Bank of New York (Delaware), c/o
The Bank of New York, Attention: Asset Backed Finance Unit, 101 Barclay
Street, Floor 12 East, New York, NY 10286.
(iii) EFFECTIVE DATE. This Certificate of Trust shall be effective as
of the date filed.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust,
has executed this Certificate of Trust in accordance with Section 3811(a) of the
Act.
THE BANK OF NEW YORK (DELAWARE), not in
its individual capacity but solely as
Delaware Trustee
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
A-1
<PAGE> 1
Exhibit 10.5
================================================================================
BEC FUNDING LLC,
AS NOTE ISSUER
THE BANK OF NEW YORK,
IN ITS SEPARATE CAPACITY AS CERTIFICATE TRUSTEE
THE BANK OF NEW YORK (DELAWARE),
IN ITS SEPARATE CAPACITY AS DELAWARE TRUSTEE
AND
MASSACHUSETTS DEVELOPMENT FINANCE AGENCY
ACTING JOINTLY WITH
MASSACHUSETTS HEALTH AND EDUCATIONAL FACILITIES AUTHORITY
AS SETTLORS
--------------------------------------------------
FEE AND INDEMNITY AGREEMENT
DATED AS OF [ ], 1999
--------------------------------------------------
================================================================================
<PAGE> 2
FEE AND INDEMNITY AGREEMENT dated as of [ ], 1999 (as amended or
restated from time to time, the "Agreement"), between THE BANK OF NEW YORK
(DELAWARE), in its separate capacity as Delaware Trustee (the "Delaware
Trustee") under the Declaration of Trust (the "Declaration of Trust"), dated as
of [ ], 1999, the Massachusetts Development Finance Agency and the Massachusetts
Health and Educational Facilities Authority (collectively herein, the
"Agencies"), acting jointly pursuant to Chapter 164 of the Massachusetts Acts of
1997 (the "Statute") as Settlors under the Declaration of Trust, THE BANK OF NEW
YORK, in its separate capacity as Certificate Trustee (the "Certificate
Trustee") under the Certificate Indenture (the "Certificate Indenture") of even
date herewith, and BEC Funding LLC, as Note Issuer (the "Note Issuer") under the
Note Indenture (the "Note Indenture") of even date herewith. All capitalized
terms used herein and not otherwise defined herein shall have the meanings
attributed to them in the Certificate Indenture.
Section 1. PAYMENT OF FEES AND EXPENSES OF CERTIFICATE TRUSTEE;
AUTHORIZED AGENTS.
(a) Subject to Section 4 hereof, the Note Issuer hereby covenants and
agrees to pay to the Certificate Trustee (or any successor trustee) from time to
time reasonable compensation for its services under the Certificate Indenture
and to reimburse it for its expenses (including, without limitation, reasonable
legal fees and expenses) incurred in connection therewith, it being understood
that the Certificate Trustee shall have no recourse against the Agencies or the
Trust Property for payment of such amounts.
(b) Subject to Section 4 hereof, the Note Issuer further covenants and
agrees to pay, or cause to be paid, from time to time to each Authorized Agent
reasonable compensation for its services and to reimburse it for its expenses
incurred in connection with such service, and no Authorized Agent shall have any
recourse against the Agencies or the Trust Property for payment of such amounts.
The appointment of any Authorized Agent shall be subject to the approval of the
Agencies and the Note Issuer.
(c) Notwithstanding anything herein to the contrary, if the Certificate
Trustee shall have entered into a fee agreement in writing with the Certificate
Issuer with respect to the Certificate Trustee's compensation for services under
the Certificate Indenture, the terms of such fee agreement shall control and the
provisions of this Agreement shall not entitle the Certificate Trustee to
greater compensation than that due and owing pursuant to such fee agreement.
Section 2. PAYMENT OF FEES AND EXPENSES OF DELAWARE TRUSTEE.
(a) The Note Issuer covenants and agrees to pay to the Delaware Trustee
(or any successor trustee) from time to time reasonable compensation for its
services under the Declaration of Trust and the Certificate Indenture and to
reimburse it for its reasonable expenses (including, without limitation,
reasonable legal fees and expenses) incurred in connection therewith, it being
understood that the Delaware Trustee shall have no recourse against the Agencies
or the Trust Property for payment of such amounts.
(b) In addition, subject to Section 4 hereof, the Note Issuer covenants
and agrees to reimburse the Delaware Trustee for any tax incurred other than
through gross negligence, bad
<PAGE> 3
faith or willful misconduct on the part of the Delaware Trustee, arising out of
or in connection with the acceptance or administration of the Trust Property
under the Declaration of Trust (other than any tax attributable to the Delaware
Trustee's compensation for serving as such), including any costs and expenses
incurred in contesting the imposition of any such tax.
(c) Notwithstanding anything herein to the contrary, if the Delaware
Trustee shall have entered into a fee agreement in writing with the Certificate
Issuer with respect to its compensation for services under the Declaration of
Trust and the Certificate Indenture, the terms of such other fee agreement shall
control and the provisions of this Agreement shall not entitle the Delaware
Trustee to greater compensation than that due and owing pursuant to such fee
agreement.
Section 3. INDEMNITY; CONTRIBUTION.
(a) The Note Issuer hereby covenants and agrees to indemnify, defend
and hold harmless the Delaware Trustee, the Certificate Trustee, the Agencies
and any of their respective affiliates, officers, directors, employees and
agents (the "Indemnified Persons") from and against any and all losses, claims,
taxes, damages, expenses (including, without limitation, legal fees and
expenses) and liabilities (including liabilities under state or federal
securities laws) of any kind and nature whatsoever (collectively, "Expenses"),
to the extent that such Expenses arise out of or are imposed upon or asserted
against such Indemnified Persons with respect to the creation, operation or
termination of the Certificate Issuer, the execution, delivery or performance of
the Declaration of Trust or the Certificate Indenture, as the case may be, or
the transactions contemplated thereby, or the failure of the Note Issuer or any
other person (other than the person being indemnified) to perform its
obligations hereunder; PROVIDED, HOWEVER, that the Note Issuer is not required
to indemnify any Indemnified Person for any Expenses that result from the
willful misconduct or gross negligence of such Indemnified Person. The
obligations of the Note Issuer to indemnify the Indemnified Persons as provided
herein shall survive the termination of the Declaration of Trust, the
termination, satisfaction or discharge of the Certificate Indenture and the
resignation or removal of the Delaware Trustee or the Certificate Trustee.
(b) [Contribution language to come.]
Section 4. PAYMENT. All amounts owed by the Note Issuer to the
Certificate Trustee, the Delaware Trustee, any Authorized Agent or the Agencies
under the Declaration of Trust or the Certificate Indenture, as the case may be,
shall be paid to the Certificate Trustee, the Delaware Trustee, any Authorized
Agent or the Agencies, as appropriate, pursuant to the Declaration of Trust or
the Certificate Indenture, as the case may be, or, if a fee agreement or fee
schedule has been provided to the Note Issuer, payment shall be made in
accordance with said agreement or schedule until the Note Issuer is otherwise
notified by the Certificate Trustee, the Delaware Trustee, such Authorized Agent
or such Agency; PROVIDED, HOWEVER, that notwithstanding anything to the contrary
in this Agreement or in any fee agreement or fee schedule, not later than 30
days following the selection of a successor Delaware Trustee pursuant to the
provisions of Section 4.7 of the Declaration of Trust, the Note Issuer shall pay
to the appropriate parties all amounts described in this Section 4 which have
accrued through the date of selection of such successor Delaware Trustee; and,
PROVIDED, FURTHER, that notwithstanding anything to the contrary in this
Agreement or in any fee agreement or fee schedule, each of the parties to this
Agreement
2
<PAGE> 4
agrees that the Note Issuer's obligations to make payments to it shall be
subject to the priorities set forth in Section 8.02 of the Note Indenture and
the Note Issuer shall have no obligation to make any payment except to the
extent consistent with Section 8.02 of the Note Indenture. The Note Issuer
hereby irrevocably directs the Note Trustee to pay such amounts from monies on
deposit in the Collection Account as provided pursuant to Section 8.02(d) of the
Note Indenture.
Section 5. NOTICES. Unless otherwise specifically provided herein, all
notices, directions, consents and waivers required under the terms and
provisions of this Agreement shall be in English and in writing, and any such
notice, direction, consent or waiver may be given by United States mail, courier
service, telegram, telex, telemessage, telecopy, telefax, cable or facsimile
(confirmed by telephone or in writing in the case of notice by telegram, telex,
telemessage, telecopy, telefax, cable or facsimile) or any other customary means
of communication, and any such notice, direction, consent or waiver shall be
effective when delivered,
if to the Agencies, to:
Massachusetts Development Finance Agency
75 Federal Street
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 727-8741
Telephone: (617) 451-2477
and
Massachusetts Health and Educational Facilities Authority
99 Summer Street
10th Floor
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 737-8366
Telephone: (617) 737-8377
if to the Certificate Issuer, to:
The Bank of New York (Delaware), as Delaware Trustee for the
Massachusetts RRB Special Purpose Trust BEC-1
c/o The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
with copies to:
3
<PAGE> 5
Massachusetts Development Finance Agency
75 Federal Street
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 727-8741
Telephone: (617) 451-2477
and
Massachusetts Health and Educational Facilities Authority
99 Summer Street
10th Floor
Boston, MA 02110
Attention: General Counsel
Facsimile: (617) 737-8366
Telephone: (617) 737-8377
if to the Delaware Trustee, to:
The Bank of New York (Delaware)
c/o The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
if to the Certificate Trustee, to:
The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
if to the Note Issuer, to:
BEC Funding LLC
800 Boylston Street, 35th Floor
Boston, Massachusetts 02199
Attention: Treasurer
Facsimile: (617) 424-2605
Telephone: (617) 369-6000
4
<PAGE> 6
if to the Note Trustee, to:
The Bank of New York
101 Barclay Street
Floor 12 East
New York, NY 10286
Attention: Asset Backed Finance Unit
Facsimile: (212) 815-5544
Telephone: (212) 815-5286
Section 6. SURVIVAL OF AGREEMENTS. This Agreement shall terminate upon
the termination of the Certificate Issuer and the payment and discharge of all
Certificates; PROVIDED, HOWEVER, that the agreements of the Note Issuer set
forth in Section 3 hereof shall survive the termination of this Agreement or the
resignation or removal of the Delaware Trustee, the Certificate Trustee or the
Note Trustee.
Section 7. NONPETITION COVENANT. Notwithstanding any prior termination
of this Agreement, but subject to the Massachusetts Department of Transportation
and Energy's right to order the sequestration and payment of revenues arising
with respect to the Transition Property notwithstanding any bankruptcy,
reorganization or other insolvency proceedings with respect to the debtor,
pledgor or transferor of the Transition Property pursuant to the Statute, the
Agencies, the Certificate Issuer, the Delaware Trustee and the Certificate
Trustee agree that they shall not, prior to the date which is one year and one
day after the termination of the Note Indenture with respect to the Note Issuer,
acquiesce, petition or otherwise invoke or cause the Note Issuer to invoke the
process of any court or government authority for the purpose of commencing or
sustaining a case against the Note Issuer under any federal or state bankruptcy,
insolvency or similar law, appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Note Issuer or any
substantial part of the property of the Note Issuer, or ordering the winding up
of the affairs of or the liquidation of the Note Issuer.
Section 8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
Section 9. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REFERENCE
TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF
THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10. NON-CONSOLIDATION. The parties hereby acknowledge and agree
that the Note Issuer and Boston Edison Company shall not be substantively
consolidated, and that Boston Edison Company shall have no liability or
obligation of any kind with respect to this Agreement.
[SIGNATURE PAGE FOLLOWS]
5
<PAGE> 7
IN WITNESS WHEREOF, the Agencies, the Delaware Trustee, the Certificate
Trustee and the Note Issuer have caused this Agreement to be duly executed by
duly authorized officers, all as of the day and year first above written.
MASSACHUSETTS DEVELOPMENT FINANCE
AGENCY, as a Settlor
By: ________________________________________________
Name:
Title:
MASSACHUSETTS HEALTH AND EDUCATIONAL FACILITIES
AUTHORITY, as a Settlor
By: ________________________________________________
Name:
Title:
THE BANK OF NEW YORK (DELAWARE),
in its separate capacity as Delaware Trustee
By: ________________________________________________
Name:
Title:
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
S-1
<PAGE> 8
THE BANK OF NEW YORK,
in its separate capacity as Certificate Trustee
By: ________________________________________________
Name:
Title:
BEC FUNDING LLC,
as Note Issuer
By: ________________________________________________
Name:
Title:
S-2
<PAGE> 1
EXHIBIT 99.2
THE COMMONWEALTH OF MASSACHUSETTS
----------
DEPARTMENT OF
TELECOMMUNICATIONS AND ENERGY
April 2, 1999
D.T.E. 98-118
Application of Boston Edison Company, an electric company under G.L. c. 164,
Section
1, for Approval of Rate Reduction Bonds under the terms of the Electric
Restructuring Act, St. 1997, c. 164.
- ------------------------------------------------------------------------------
APPEARANCES: William S. Stowe, Esq.
Catherine J. Keuthen, Esq.
Boston Edison Company
800 Boylston Street
Boston Massachusetts 02199
and
Robert K. Gad, Esq.
Colleen M. Granahan, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
FOR: BOSTON EDISON COMPANY
Petitioner
Thomas J. Reilly, Attorney General
BY: Joseph W. Rogers
Rebecca Perez
Assistant Attorneys General
Regulated Industries Division
200 Portland Street, 4th Floor
Boston, Massachusetts 02114
Intervenor
<PAGE> 2
Robert F. Sydney, Esq.
Vincent DeVito, Esq.
Division of Energy Resources
100 Cambridge Street, Room 1500
Boston, Massachusetts 02202
FOR: COMMONWEALTH OF MASSACHUSETTS
DIVISION OF ENERGY RESOURCES
Intervenor
Paul R. Gauron, Esq.
Goodwin, Procter & Hoar, LLP
Exchange Place
Boston, Massachusetts 02109
FOR: ENTERGY NUCLEAR GENERATION COMPANY
Intervenor
Burton E. Rosenthal, Esq.
Segal, Roitman & Coleman
11 Beacon Street, Suite 500
Boston, MA 02108
FOR: LOCALS 369 and 387, AFL-CIO
Intervenor
Maria Krokidas, Esq.
Krokidas & Bluestein
141 Tremont Street
Boston, MA 02111-1209
FOR: MASSACHUSETTS DEVELOPMENT FINANCE AGENCY
and
FOR: MASSACHUSETTS HEALTH &
EDUCATIONAL FACILITIES AUTHORITY
Intervenors
<PAGE> 3
Michael B. Meyer, Esq.
Meyer, Connolly, Sloman & MacDonald, LLP
12 Post Office Square
Boston, MA 02109
FOR: TOWN OF PLYMOUTH
Intervenor
David S. Rosenzweig, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02110
and
John Cope-Flanagan, Esq.
COM/Energy Services Company
One Main Street
P.O. Box 9150
Cambridge, MA 02142-9150
FOR: COMMONWEALTH ELECTRIC COMPANY
Limited Participant
Laura S. Olton, Esq.
McDermott, Will & Emery
28 State Street
Boston, MA 02109
FOR: MONTAUP ELECTRIC COMPANY
and
FOR: EASTERN EDISON COMPANY
Limited Participants
Stephen Klionsky, Esq.
260 Franklin Street, 21st Floor
Boston, MA 02110
FOR: WESTERN MASSACHUSETTS ELECTRIC
COMPANY
Limited Participant
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. INTRODUCTION..........................................................................................1
II. STANDARD OF REVIEW....................................................................................3
III. BOSTON EDISON'S SECURITIZATION PROPOSAL...............................................................6
A. Introduction...............................................................................6
1. Boston Edison...................................................................10
2. Attorney General................................................................10
3. The Agencies....................................................................11
4. Plymouth........................................................................11
C. Analysis and Findings.....................................................................11
1. Introduction....................................................................11
a. Mitigation of Transition Costs........................................12
b. Savings to Ratepayers.................................................14
c. Employee Commitments..................................................16
d. Order of Preference for Use of Proceeds...............................17
e. Tax Agreement.........................................................17
IV. AMOUNTS TO BE SECURITIZED............................................................................19
A. Introduction..............................................................................19
B. Positions of the Parties..................................................................21
1. Attorney General................................................................21
2. Agencies........................................................................23
3. Boston Edison...................................................................23
C. Analysis and Findings.....................................................................25
V. PROPOSED FINANCING ORDER.............................................................................28
A. Standards Governing Third Party Suppliers.................................................31
1. Introduction....................................................................31
2. Positions of the Parties........................................................32
a. Attorney General......................................................32
b. The Agencies..........................................................33
c. Boston Edison.........................................................33
3. Analysis and Findings...........................................................34
B. Statement Regarding Reimbursable Transition Costs on Customers' Bills.....................35
1. Introduction....................................................................35
2. Positions of the Parties........................................................35
a. The Agencies..........................................................35
b. Boston Edison.........................................................36
3. Analysis and Findings...........................................................36
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
C. Ancillary Agreements......................................................................37
1. Boston Edison=s Proposal........................................................37
2. Positions of the Parties........................................................37
a. Attorney General......................................................37
b. Boston Edison.........................................................38
3. Analysis and Findings...........................................................38
D. Adjustments to the RTC Charge.............................................................39
1. Introduction....................................................................39
2. Positions of the Parties........................................................39
a. Agencies..............................................................39
b. Boston Edison.........................................................40
3. Analysis and Findings...........................................................40
VI. EXEMPTIONS...........................................................................................42
A. Exemption from Competitive Bidding Requirements...........................................42
1. Introduction....................................................................42
2. Analysis and Findings...........................................................42
B. Exemption from Par Value Debt Issuance Requirements.......................................44
1. Introduction....................................................................44
2. Analysis and Findings...........................................................44
VII. ORDER................................................................................................45
</TABLE>
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I. INTRODUCTION
On December 3, 1998, Boston Edison Company ("Boston Edison" or "Company")
filed an application for approval of rate reduction bonds ("RRBs") pursuant to
G.L. c. 164, Section 1H(b). Boston Edison proposes to securitize approximately
$805 million of transition costs, the majority of which are associated with the
sale of its Pilgrim Nuclear Power Station and related assets ("Pilgrim"), to
Entergy Nuclear Generation Company ("Entergy"). This application was docketed as
D.T.E. 98-118. Boston Edison also submitted a proposed financing order (Exh.
BE-1) for issuance by the Department.
Pursuant to notice duly published, public hearings were held in Plymouth,
Massachusetts on December 21, 1998, and January 5, 1999, and at the Department's
offices in Boston on December 22, 1998. The Attorney General of the Commonwealth
("Attorney General") filed a notice of intervention pursuant to G.L. c. 12,
Section 11E. The Department allowed the petitions to intervene of the
Commonwealth of Massachusetts Division of Energy Resources ("DOER"), Entergy,
Locals 369 and 387 of the Utility Workers Union of America - American Federation
of Labor/Congress of Industrial Organizations (UWUA, AFL-CIO) ("Locals 369 and
387"), and the Massachusetts Development Finance Agency and Massachusetts Health
and Educational Facilities Authority (collectively, the "Agencies"). The
petition of the town of Plymouth ("Plymouth") to intervene was allowed, but
limited to the issue of whether a tax agreement between Boston Edison and
Plymouth had been executed pursuant to the provisions of G.L. c. 59, Section
38(H)(c). The petitions to intervene of Commonwealth Electric Company
("Commonwealth Electric"), Montaup Electric Company ("Montaup") and Eastern
Edison
<PAGE> 7
Company ("Eastern") were denied, but each was allowed limited participant
status. Western Massachusetts Electric Company ("WMECo") was also allowed
limited participant status.(1)
The Department granted a motion to consolidate Boston Edison=s petition for
approval of the Pilgrim divestiture transaction, D.T.E. 98-119, and Commonwealth
Electric=s petition for approval of the termination and buyout of its
Pilgrim-related purchase power agreement ("PPA"), D.T.E. 98-126, and denied a
motion to consolidate D.T.E. 98-118 with D.T.E. 98-119/126.(2) The Department
coordinated hearings for the purposes of establishing an evidentiary record
common to both proceedings (Tr. 1, at 5).
Evidentiary hearings were held on January 20, 21, 22, 25, and 26, and
February 12, 1999. In support of its petition, Boston Edison presented the
testimony of Geoffrey Lubbock, the director of generation divestiture for Boston
Edison; Emilie O=Neil, the manager of corporate finance for Boston Edison; and
Elliot Alchek, the managing director and co-head of the
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(1) The petitions to intervene of Citizens Urging Responsible Energy
("CURE"), John T. O'Connor, and Massachusetts Citizens for Safe Energy
("MCSE") were denied (Hearing Officer's Ruling on Petitions to
Intervene (December 23, 1998)). MCSE's and CURE's appeals of the
hearing officer ruling were also denied. D.T.E. 98-118, Interlocutory
Order on Appeal of Hearing Officer Rulings Regarding Petitions to
Intervene) (March 19, 1999).
(2) On March 22, 1999, in a consolidation proceeding in D.T.E. 98-119-126,
the Department approved (1) the sale of Pilgrim to Entergy; (2) the
adjustment of Boston Edison's transition charge after the divestiture
to reflect the proceeds of the sale through a residual value credit;
and (3) the purchase of Pilgrim-generated power by Boston Edison from
Entergy under two purchase power agreements and the recovery of any
above-market costs associated therewith in the transition charge.
Boston Edison Company, D.T.E. 98-119/126 (1999). The Department also
approved (1) the termination and buyout of Commonwealth Electric
Company's existing obligation with Boston Edison to purchase power from
Pilgrim; (2) the inclusion of the buyout amount as an adjustment to
Commonwealth Electric Company's transition charge; (3) the purchase by
Commonwealth Electric Company of power from Pilgrim under a new
purchase power agreement with Entergy; and (4) the recovery of any
above-market costs of the purchase power agreement with Entergy as an
adjustment to its transition charge. Id.
<PAGE> 8
asset-backed securities group at Goldman, Sachs & Co. The Attorney General
presented the testimony of Timothy Newhard, a financial analyst with the
Regulated Industries Division of the Office of the Attorney General. Briefs were
filed by Boston Edison, Commonwealth Electric, DOER, the Agencies, Entergy,
Plymouth, and the Attorney General. Reply briefs were filed by Boston Edison,
Entergy, the Attorney General, the Agencies and Commonwealth Electric. The
record consists of 346 exhibits and the responses to 75 record requests.(3)
II. STANDARD OF REVIEW
The Legislature has vested broad authority in the Department to regulate
the ownership and operation of electric utilities in the Commonwealth. See,
e.g., G.L. c. 164, Section 76. The Department's authority was most recently
amended by the Acts of 1997, c. 164 (the "Restructuring Act" or "Act").(4)
Boston Edison Company, D.P.U./D.T.E. 96-23, at 9 (1998). The Act authorizes the
Department to issue a financing order allowing a company to securitize its
reimbursable transition costs amounts (both debt and equity) through the
issuance of electric
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(3) On March 18, Boston Edison Filed a motion for the Department to update
the record in D.T.E. 98-118 and D.T.E. 98-119/126, reopen the
evidentiary record, and admit two additional exhibits. The motion was
granted in D.T.E. 98-119/126 and the exhibits (the Fourth Amendment to
the Pilgrim Power Sale Agreement between Boston Edison and Montaup and
the Agreement between Boston Edison and Plymouth concerning property
taxes were marked as BE-5B, Tab 11R and BE-17, respectively. The
Department notes that Exh. BE-17 already existed and on its own motion
now changes the number of Exh. BE-17 to BE-18.
(4) An Act relative to Restructuring the Electric Utility Industry in the
Commonwealth, Regulating the Provisions of Electricity and Other
Services, and Promoting Enhanced Consumer Protections Therein, signed
by the governor on November 25, 1997. St. 1997, c. 164.
<PAGE> 9
RRBs. (5) A financing order may be issued by the Department to facilitate the
provision, recovery, financing or refinancing of transition costs. G.L. c. 164,
Section 1H(b)(1).
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(5) "Electric rate reduction bonds" are defined as, "bonds, notes,
certificates of participation or beneficial interest, or other
evidences of indebtedness or ownership, issued pursuant to an executed
indenture, financing document, or other agreement of the financing
entity, secured by or payable from transition property, the proceeds of
which are used to provide recover, finance or refinance transition
costs or to acquire transition property and that are secured by or
payable from transition property." G.L. c.164, Section 1(H)(a).
"Financing order" is defined as, "an order of the Department. . .
approving a plan, which shall include, without limitation, a procedure
to review and approve periodic adjustments to transition charges to
include recovery of principal and interest and the costs of issuing,
servicing, and retiring electric rate reduction bonds contemplated by
the financing order." G.L. c. 164, Section 1(H)(a).
"Reimbursable transition costs amounts" are defined as, "the total
amount authorized by the Department in a financing order to be
collected through the transition charge, as defined pursuant to G.L. c.
164, Section 1, and allocated to an electric company in accordance with
a financing." G.L. c. 164, Section 1(H)(a).
"Securitization" is defined as, the use of rate reduction bonds to
refinance debt and equity associated with transition costs pursuant to
G.L. c. 164, Section 1H.
"Transition costs" are defined as, "the costs determined pursuant to
G.L. c. 164, Section 1G which remain after accounting for maximum
possible mitigation, subject to determination by the Department."
G.L. c. 164, Section 1(H)(a).
"Transition charge" is defined as, "the charge to the customers which
provides the mechanism for the recovery of an electric company's
transition costs." G.L. c. 164, Section 1(H)(a).
"Transition property" is defined as, "the property right created
pursuant to this section, including, without limitation, the right,
title and interest of an electric company or a financing entity to all
revenues, collections, claims, payments, money, or proceeds of or
arising from or constituting reimbursable transition costs amounts
which are the subject of a financing order, including those
non-bypassable rates and other charges that are authorized by the
department in the financing order to recover transitions costs and the
costs of providing, recovering, financing, or refinancing the
transition costs, including the costs of issuing, servicing and
retiring electric rate reduction bonds." G.L. c. 164, Section 1(H)(a).
<PAGE> 10
Prior to issuing a financing order, the Department must have approved an
electric company=s restructuring plan.(6) G.L. c. 164, Section 1(A)(a). The
restructuring plan must include, among other things, a company's strategy to
mitigate the transition costs it seeks to recover through a non-bypassable
transition charge. In order to issue a financing order, the Department must find
that a company has demonstrated that the issuance of electric RRBs to refinance
reimbursable transition costs will reduce the rates that a company's customers
would have paid without the issuance of electric RRBs, and that the reduction in
rates to customers equals the savings obtained by the company. G.L. c. 164,
Section 1(H)(b)(2). The company must establish, and the Department must approve,
an order of preference for use of bond proceeds such that transition costs
having the greatest impact on customer rates will be the first to be reduced by
those proceeds. G.L. c. 164, Section 1G(d)(4).
In order to approve an application for a financing order, the Department
must also be satisfied that a company has (1) fully mitigated the related
transition costs (including, but not limited to, as applicable, divestiture of
its non-nuclear generation assets,(7) renegotiation of
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(6) The Act requires that a company's restructuring plan or settlement
contain the following key features: (1) an estimate and detailed
accounting of total transition costs eligible for recover; (2) a
description of the strategy to mitigate transition costs; (3)
unbundled prices or rates for generation, distribution transmission
and other services; (4) proposed charges for the recovery of
transition costs; (5) proposed programs to provide universal service
for all customers' (6) proposed programs and recovery mechanisms to
promote energy conservation and demand-side management; (7)
procedures for ensuring direct retail access to all communities
served by the company; and (8) a discussion of the impact of the plan
on the company's employees and the communities served by the company.
G.L. c. 164 Section 1A9a). See Boston Edison Company, D.P.U./D.T.E.
96-23, at 10-11 (1998).
(7) The Act prescribes that a company that fails to divest its
non-nuclear generation assets is not eligible to benefit from
securitization and the issuance of electric RRBs. G.L. c. 164 Section
1(G)(d)(3). However, the Act also provides that an electric company
that has not divested its non-nuclear generation facilities may be
able to securitize its transition costs if it is not able to meet the
15 percent rate reduction required by the Act. G.L. c. 164,
<PAGE> 11
existing power purchase contracts, and the valuation of assets of the company);
and (2) obtained written commitments that purchasers of divested assets will
offer employment to any affected non-managerial employees who were employed at
any time during the three-month period prior to the divestiture, at levels of
wages and overall compensation no lower than the employees' prior levels. G.L.
c. 164, Section 1G(d)(4). In addition, the Department cannot approve a company's
application for securitization if the company owns, in whole or in part as of
July 1, 1997, a nuclear-powered generation facility located in the Commonwealth
that exceeds 250 megawatts in size, unless the company has executed a tax
agreement with the plant's host community. G.L. c. 59, Section 38H(c).
III. BOSTON EDISON'S SECURITIZATION PROPOSAL
A. Introduction
Securitization is a method for a company to refinance transition costs. The
Restructuring Act authorizes an electric company to securitize its transition
costs by issuing RRBs to investors that will be repaid through a portion of the
transition charge. G.L. c. 164, Section 1H. The RRBs, if assigned a high credit
rating(8), will have an interest rate lower than the carrying charge paid by
ratepayers as part of the transition charge, thereby generating savings to
ratepayers.
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Section 1(G)(c)(2).
(8) The rating of bonds relates to the likelihood of timely payment of
interest and ultimate repayment of principle by the final legal
maturity date. Credit enhancements are intended to reinforce the
likelihood that payments on the SPE debt securities will be made in
accordance with the expected amortization schedule. Typical examples
of credit enhancements include true-up adjustments,
overcollateralization, capital accounts (equity contribution), and
reserve accounts. Other forms of credit enhancement may include
additional reserve accounts, sureties, guarantees, letters of credit,
liquidity reserves, repurchase obligations, cash collateral accounts,
third party supports, or other similar arrangements.
<PAGE> 12
Boston Edison ratepayers currently pay a carrying charge of 10.88 percent
for all unrecovered transition costs (Exh. BE-1 ("Settlement Agreement") at Att.
3, Sch.1, at 14). Boston Edison proposes to securitize approximately $805
million of transition costs (and related costs of issuance) by issuing RRBs
(Boston Edison Reply Brief at 21-22). The proposed estimated principal amount of
the RRBs is composed of (1) approximately $691 million representing the net
present value of the fixed component of Boston Edison's transition charge after
all Pilgrim divestiture related adjustments have been made, (2) $68 million for
the L'Energia contract buyout (Boston Edison Company, D.T.E. 99-16, now pending
before the Department), (3) approximately $36 million in transaction costs, and
(4) $10 million for delivery requirements related to materials contracts with
General Electric (Boston Edison Reply Brief at 22). The amount to be securitized
is discussed in section IV, below.
After the enactment of the Restructuring Act, the Department, the Agencies,
the Massachusetts-based electric companies and other interested parties, such as
investment bankers and statistical rating organizations ("rating
organizations"), developed a structure for an RRB transaction (Boston Edison
Brief at 3-4). As part of its application, Boston Edison submitted a proposed
financing order prepared in consultation with the Agencies, Lehman Brothers, and
Goldman, Sachs & Co. ("the Underwriters"), the Commonwealth of Massachusetts
Executive Office for Administration and Finance, and three rating organizations
(Boston Edison Brief at 4, citing RR-DTE-29).(9)
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(9) Boston Edison submitted a revised proposed financing order with its
initial brief, arguing that it has been revised to reflect the
discussion, comments and concerns raised during the course of this
investigation (Boston Edison Brief at 4. Tab 1).
<PAGE> 13
Boston Edison seeks to recover through the RRBs, a portion of its
transition costs, together with the transaction costs of issuing RRBs, ongoing
transaction costs, and the costs of providing credit enhancement. Boston Edison
also seeks an exemption from the competitive bidding requirements of G.L. c.
164, Section 15 in connection with the sale of the RRBs, and from the par value
debt issuance requirements of G.L. c. 164, Section 15A. The request for these
exemptions is discussed below. If approved by the Department, the amounts Boston
Edison seeks to recover will constitute reimbursable transition costs amounts
and will be financed through the issuance of RRBs, and a portion of Boston
Edison's transition charge, the reimbursable transition cost ("RTC") charge,
will be used to repay these amounts. The RRBs will be backed by collateral,
including the right to all collections or proceeds arising from (1) recoverable
transition costs, (2) RTC charge, and (3) adjustments to the RTC charge
(collectively, the "Transition Property") as set forth in the financing order
(Boston Edison Brief at 65).
Boston Edison will sell the Transition Property to a special purpose entity
("SPE") (id.). The SPE will be a bankruptcy-remote entity owned and initially
capitalized by Boston Edison (id.). To raise the funds to buy the Transition
Property from Boston Edison, the SPE will issue and sell SPE debt securities to
a special purpose trust established by the Agencies (id.). This special purpose
trust will then issue RRBs, the proceeds of which will be remitted to the SPE
and ultimately to Boston Edison (id.). Once a financing order is issued, neither
the Department nor the Commonwealth of Massachusetts (pursuant to G.L. c. 164,
Section 1H(b)(3)) can alter or revoke the transfer of Transition Property, or
the RTC Charges.
In order to maximize the savings obtainable from securitization, the RRBs
must achieve the highest possible rating. The RRBs will receive ratings from
national rating organizations. The
<PAGE> 14
rating of debt instruments backed by regulatory assets such as the RRBs is not
tied to the rating of the distribution company; instead, it is based on an
analysis of the underlying collateral and the specific transaction structure. A
credit rating analysis takes into account elements that are customary in an
asset securitization and combines them with a detailed analysis of the
regulatory and legal foundation of the asset account and the collection
mechanisms. Rating organizations will consider the following characteristics of
RRBs (1) bankruptcy-remoteness of seller, (2) predictability and
nonbypassability of the RTC charge, (3) standards governing a third party
supplier ("TPS"), (4) credit enhancement, and (5) the Commonwealth's assurance
of irrevocability; and other statutory safeguards (Exh. BE-2, at 4).
The Restructuring Act establishes the Agencies as a financing entity for
RRBs. In this capacity, the goal of the Agencies is to protect the interests of
Boston Edison's ratepayers by (1) ensuring the lowest all-in cost pricing
reasonably obtainable for RRBs,(10) (2) streamlining the administrative
processes and thereby minimizing the costs of issuing the RRBs, and
(3) providing consulting services to the Department (G.L. c. 164,
Section 1H(b)(2)). The Agencies also have a number of other responsibilities
under the Act, including the issuance of the RRBs. The Agencies also will
approve the final terms and conditions of the RRBs, including structure,
pricing, credit enhancement, relevant issuance costs and manner of sale. In
addition, in order to minimize the all-in costs of the RRBs and associated
administrative expenses, the Agencies will coordinate with Boston Edison on the
marketing of the RRBs, the procurement of bond trustees
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(10) The all-in cost of the RRBs is an effective interest rate that
includes the stated interest rate of the RRBs, i.e., the interest rate
paid to investors, and the transaction costs of the securitization
(Exh. BE-3, at 13).
<PAGE> 15
and related services, and the selection of rating organizations and the
underwriting syndicate
(Agencies' Brief at 3).
B. Positions of the Parties
1. Boston Edison
Boston Edison argues that the structure of the RRB transaction, as
described above, satisfies all statutory and rating organizations requirements,
as well as the requirements of the Agencies (Boston Edison Brief at 61, 93).
Boston Edison argues that the proposed financing order complies with the
relevant provisions of the Restructuring Act, as well as other provisions
governing the operation of electric companies (id. at 62, citing G.L. c. 164,
Sections 1G and 1H). Finally, Boston Edison argues that it has drafted the
proposed financing order to obtain the "lowest pricing for the RRBs and the most
efficient cost structure for the transaction as a whole" (id. at 62). For these
reasons, Boston Edison argues that the issuance of RRBs is in the public
interest and should be approved by the Department (id. at 93).
2. Attorney General
The Attorney General does not disagree about whether the issuance of RRBs
by Boston Edison is in the public interest and should be approved by the
Department. However, the Attorney General urges that the Department's approval
of Boston Edison's application should incorporate certain changes to the
financing order. The Attorney General's proposed changes, together with findings
thereon, are discussed below.
3. The Agencies
The Agencies urge the Department to approve the proposed financing order
and argue that, in general, it incorporates all of the characteristics
considered significant by rating
<PAGE> 16
organizations in establishing the highest possible credit rating of the RRBs
(Agencies Brief at 4). However, the Agencies suggest some changes to the
proposed financing order which are discussed in section V, below.
4. Plymouth
The town of Plymouth argues that Boston Edison cannot securitize unless and
until Boston Edison has executed an agreement to make payments in addition to
and payments in lieu of taxes to Pilgrim's host community, the town of Plymouth.
The status of the host community tax agreement is discussed below.
C. Analysis and Findings
1. Introduction
The Act requires the Department to find that specific conditions have been
met in order for a company to be eligible to issue electric RRBs. Consistent
with the standard of review, the Department's analysis of Boston Edison's
proposed securitization transaction will focus on (1) mitigation of transition
costs, (2) savings to ratepayers, (3) employee commitments, (4) order of
preference for use of proceeds, and (5) host community tax agreement.
a. Mitigation of Transition Costs
An electric company seeking to recover transition costs must mitigate such
costs. G.L. c. 164, Section 1G(d)(1). Before approving the recovery of
transition costs through the transition charge, the Department must find that a
company has taken all reasonable steps to mitigate to the maximum extent
possible, the total amount of transition costs that will be recovered from
ratepayers. G.L. c. 164, Section 1G(d)(1).
<PAGE> 17
The Act requires a company to have an approved restructuring plan that
establishes its overall mitigation strategy and to divest it non-nuclear
generation assets in order to be able to securitize its reimbursable transition
costs. G.L. c. 164, Sections 1A(a), 1(G)(d)(3). Boston Edison filed a
restructuring Settlement Agreement with the Department on July 8, 1997, which
contained a detailed accounting of Boston Edison's transition costs and
mitigation strategy (Settlement Agreement at Att. 3). The Department approved
the mitigation strategy proposed in the Settlement Agreement and authorized
Boston Edison to recover its associated transition costs. Boston Edison Company,
D.P.U./D.T.E. 96-23, at 46-47 (1998).
The Settlement Agreement required Boston Edison to divest its non-nuclear
generation business, to endeavor to sell, assign or otherwise dispose of its
PPAs, and to file a market valuation plan for Pilgrim on or before January 1,
1999.(11) In May, 1998, Boston Edison divested its non-nuclear generation
assets, as required by the Settlement Agreement. With respect to PPAs, in Boston
Edison Company, D.T.E. 98-119/126, at 49 (1999), the Department found that
Boston Edison "has made and continues to make a reasonable attempt to mitigate
the costs related to the municipal contracts through attempted renegotiations of
the PPAs and through seeking recovery through its ongoing filing at FERC." In
addition, in a letter order issued on February 19, 1999, in D.T.E. 98-62, the
Department found that Boston Edison made a good faith effort to renegotiate its
above-market PPAs within the meaning of G.L. c. 164, Section 1G(d)(2)(i).
Boston Edison has received Department approval to divest Pilgrim pursuant
to D.T.E. 98-119/126 (1999), although such divestiture is not required by either
the Act or the Settlement Agreement. In approving the proposed sale, the
Department found that the divestiture transaction
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(11) Settlement Agreement at Section V.C.
<PAGE> 18
provided both direct and indirect benefits to Boston Edison ratepayers through
the mitigation of Pilgrim-related transition costs. Further, the Department
found that the divestiture of Pilgrim is consistent with the mitigation
requirements of the Act. D.T.E. 98-119/126, at 24 (1999).
Boston Edison contends that, because the Department has approved or will
approve the recovery of all transition costs (including the renegotiated PPAs)
that the Company seeks to securitize in the RRB transaction, it has mitigated
its transition costs (Boston Edison Brief at 94, citing D.P.U./D.T.E. 96-23, at
73; D.T.E. 97-113 (non-nuclear generating asset divestiture approval); D.T.E.
98-119 (Pilgrim divestiture); and D.T.E. 99-16 (L'Energia buyout)). The
Department approved recovery of transition costs through Boston Edison's
transition charge in (1) the Settlement Agreement approved by the Department in
D.T.E. 96-23, (2) the approval of Boston Edison's non-nuclear generation asset
divestiture in D.P.U./D.T.E. 97-113, and (3) the approval of Boston Edison's
Pilgrim divestiture in D.T.E. 98-119/126. In each case, the Department found
that Boston Edison had taken all reasonable steps to mitigate, to the maximum
extent possible, such transition costs. G.L. c. 164, Section 1G(d)(1).
Accordingly, the Department finds that Boston Edison has met its obligation to
mitigate the transition costs it seeks to securitize as approved in
D.P.U./D.T.E. 96-23, D.P.U./D.T.E. 97-113 and D.T.E. 98-119/126 for the purposes
of G.L. c. 164, Section 1G(d)(4)(i). The Department has not yet issued a
decision regarding the L'Energia contract buyout; therefore, the Department
makes no finding regarding mitigation related to the L'Energia contract buyout.
The exact costs, including the L'Energia buyout, are discussed in Section IV,
below.(12)
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(12) The Attorney General argues that approximately $50 million in costs
the company seeks to securitize have not been mitigated and are
therefore not eligible to be securitized. The specific costs are
discussed in section IV below.
<PAGE> 19
b. Savings to Ratepayers
Before approving a financing order, the Department must find that savings
to ratepayers will result from securitization and that all such savings derived
from securitization will inure to the benefit of ratepayers. G.L. c. 164,
Sections 1G(d)(4)(ii)-(iii). Under the Settlement Agreement, Boston Edison's
ratepayers pay a carrying charge of 10.88 percent for all unrecovered transition
costs (Settlement Agreement at Att. 3, Sch. 1, at 14). Boston Edison argues that
its ratepayers will benefit from securitization if the effective all-in cost of
the approved transition costs is lower than the current 10.88 percent carrying
charge. Based on current market conditions, Boston Edison anticipates that the
carrying charge rate of 10.88 percent will be reduced to approximately 7.50
percent through securitization (Tr. 3, at 283-284). Boston Edison estimates that
the total net present value of savings to its ratepayers, as a result of
securitization, will be $89 million (Boston Edison Brief at 95).(13)
Although no party disputed the conclusion that securitization will yield
ratepayer savings as long as the interest rate on the RRBs is less than 10.88
percent, the Attorney General cautions that "the bonds must, of course, result
in savings" and the Agencies must "ensure the lowest all-in cost pricing
reasonably obtainable on the RRBs" (Attorney General Reply Brief at 9). The
Agencies support approval of Boston Edison's request to securitize its
transition costs stating that, in their capacity as the "financing entity,"
their goal is to protect the interests of Boston Edison's ratepayers by ensuring
the lowest all-in cost pricing reasonably obtainable for the RRBs (Agencies
Brief at 2). The Agencies state that in approving specified transaction costs,
they
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(13) Boston Edison's savings estimate assumes a reduction in the interest
rate paid by Boston Edison to 7.50 percent. The actual interest rate
will be determined upon issuance of the RRBs.
<PAGE> 20
would seek to avoid unnecessary or excessive costs in order to obtain maximum
ratepayer savings, while at the same time obtaining the highest possible bond
ratings (id. at 13).
Neither Boston Edison nor the Agencies, as the financing entity, will
authorize a bond issuance unless there will be demonstrated ratepayer savings
(Exh. BE-4, at 14-15; Agencies Brief at 2). Boston Edison states that it will
not issue RRBs unless the all-in cost of issuance of the RRBs results in a
carrying charge of less than the current carrying charge of 10.88 percent
(Exh. BE-4, at 14-19). Because securitizing at an all-in cost of less than
10.88 percent will result in Boston Edison's ratepayers paying a transition
charge that is lower than what they would have paid without securitization, the
Department finds that savings to ratepayers will result from securitization.
Therefore, Boston Edison should proceed with securitization and ensure that all
such savings will inure to the benefit of ratepayers, in accordance with
G.L. c. 164, Sections 1G(d)(4)(ii)-(iii). While Boston Edison anticipates that
securitization will result in savings to ratepayers of approximately
$89 million, the Department notes that the amount of ratepayer savings is
predicated on market conditions at the time of bond issuance. Upon issuance, a
financing order is irrevocable and may not be altered by the Department.
G.L. c. 164, Section 1H(b)(3). The Department must, therefore, rely on the
Agencies, as the financing entity, to ensure that the maximum possible level of
ratepayer savings is obtained.
c. Employee Commitments
Before the Department may approve a financing order, the Department must be
satisfied that Boston Edison has obtained a written commitment from Entergy
which provides that Entergy, as the purchaser of Pilgrim, will offer employment
to any affected non-managerial employees who were employed at any time during
the three-month period prior to the divestiture,
<PAGE> 21
at levels of wages and overall compensation no lower than the employees' prior
levels. G.L. c. 164, Section 1G (d)(4)(iv).
The Purchase and Sale Agreement between Boston Edison and Entergy contains
a written commitment stating that Entergy, as the buyer, "is required to
offer employment to those employees of [Boston Edison] who were employed in
non-managerial positions and whose employment relates primarily to providing
services for operation of [Pilgrim] at any time during the three-month period
prior to the closing date, at levels of wages and overall compensation not lower
than the employees' prior levels, for a period of six months beginning at the
section closing date" (Exh. BE-5A, Tab 1, at Section 5.7(a)).
Accordingly, the Department finds that Boston Edison has satisfied the
requirements of G.L. c. 164, Section 1(g)(d)(4)(iv) relating to employee
commitments.
d. Order of Preference for Use of Proceeds
In its application, Boston Edison states that it expects to use the
proceeds from the sale of transition property, net of transaction costs, for the
following purposes: (1) to return the securitized portion of the Pilgrim and
non-nuclear unrecovered plant balances and related regulatory assets; (2) to
fund the unrecovered prefunded balance of the securitized portion of the
decommissioning fund and any additional transition costs arising in connection
with the Pilgrim divestiture; and (3) to provide any credit enhancement required
for the RRBs (Exh. BE-4, at 12). Before the Department may approve a financing
order, Boston Edison must show that it has established an order of preference
for use of the RRB proceeds that first reduces transition costs having the
greatest effect on customer rates. G.L. c. 164, Section 1G(d)(4)(v). Boston
Edison states that the order of preference for the use of RRB proceeds meets the
requirements of the Act because all of its transition costs have the same
carrying charge of 10.88 percent and, therefore,
<PAGE> 22
have the same effect on customer rates (Boston Edison Brief at 97). Because all
of Boston Edison's reimbursable transition costs have the same carrying charge,
the reduction of any cost has the same customer rate impact. The Department
therefore finds that Boston Edison's proposal satisfies the requirements of the
Act relative to the order of preference for use of the bond proceeds, and thus
complies with G.L. c. 164, Section 1G(d)(4)(v).
e. Tax Agreement
The Department cannot approve an electric company's plan to securitize its
transition costs without an executed tax agreement if the electric company owns
a nuclear-powered generation facility in the Commonwealth that exceeds 250
megawatts and that was owned in whole or in part by said company as of July 1,
1997. G.L. c. 59, Section 38H(c). Boston Edison owned Pilgrim (whose output
exceeds 250 megawatts) as of July 1, 1997; therefore, Boston Edison must
demonstrate to the Department that it has executed an agreement with the town of
Plymouth (Pilgrim's host community) to make payments in addition to and payments
in lieu of taxes before the Department can approve its securitization plan. G.L.
c. 59, Section 38H(c).
On March 18, 1999, Boston Edison and the town of Plymouth presented to the
Department an executed agreement (Exh. BE-17) which requires Boston Edison to
make payments in addition to and payments in lieu of taxes to the town of
Plymouth. There are additional requirements that are conditions of the executed
agreement.(14) Because Boston Edison
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(14) The Department notes that the agreement, although executed by Boston
Edison and the town of Plymouth, is conditioned upon (1) the
enactment of legislation which "authorizes, ratifies, validates and
confirms" that Boston Edison has satisfied all of its tax
requirements and (2) findings by the Department that (1) [the]
Agreement constitutes an agreement with respect to property taxes
which satisfies the requirements of M.G.L. c. 59, Section 38H(c) with
respect to agreements relating to property taxes, payments in
addition to property taxes and payments in lieu of property taxes for
Pilgrim Nuclear Power Stations and which is (i) sufficient to find
Boston Edison to be eligible to collect the full
<PAGE> 23
has executed an agreement pursuant to G.L. c. 59, Section 38H(c), these
requirements do not prohibit the Department from approving a plan submitted
by Boston Edison to utilize the provisions of securitization pursuant to
G.L. c. 164, Section 1H.(15) Therefore, the Department finds that Boston
Edison has complied with the requirements of the Restructuring Act relative
to executing an agreement to make payments in addition to and payments in
lieu of taxes pursuant to G.L. c. 59, Section 38H(c).
IV. AMOUNTS TO BE SECURITIZED
A. Introduction
After the divestiture of Pilgrim, Boston Edison will credit customers with
the sale proceeds after making adjustments for several items, such as materials
and supplies, nuclear refueling outage costs, and other costs. D.T.E.
98-119/126, at 40-69. The Company will also reduce the sale proceeds by $466
million for the Decommissioning Trust being transferred to Entergy, the
purchaser of Pilgrim, less the amount already paid by ratepayers for
decommissioning. D.T.E. 98-119/126, at 69. After providing for these
adjustments, Boston Edison estimates that customers will have a liability of
$264 million, based on a closing date of
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amount of transition costs as approved by the DTE pursuant to
M.G.L. c. 164 Section 1G, and (ii) sufficient to permit Boston Edison
to securitize its transition costs, and (2) that the amounts to be
paid hereunder are transition costs recoverable from Boston Edison's
retail customers under applicable laws and precedent, including
M.G.L. c. 164, Section 1G(b)(2)(ii) and the DTE order in DPU/DTE
96-23." Boston Edison Company and Town of Plymouth Joint Motion to
Approve the Tax Agreement, D.T.E. 98-53, and D.T.E. 99-33.
(15) On March 22, 1999, Boston Edison and the town of Plymouth filed a
Joint Motion To Approve The Tax Agreement. D.T.E. 98-53, and D.T.E.
99-33. Approval of the Agreement is under review by the Department.
<PAGE> 24
March 31, 1999, for the sale. (16) D.T.E. 98-119/126, at 69, n.39. This
liability of $264 million results in a Pilgrim residual value credit ("RVC")
annualized at $29 million per year(17) (Exh. BE-7, Att. GOL-3, at 2).
Subtracting the $29 million annual payments from the $57 million for the
non-nuclear units' divestiture annual RVC credit, Boston Edison calculates a net
annual RVC of $27 million. D.T.E. 98-119/126, at 69, n.39. Boston Edison
estimates that after the implementation of this net RVC, the fixed component of
its transition charge will be $692 million, on a net present value basis,
assuming a closing date of March 31, 1999 (Exh. BE-7, Att. GOL-3, at 2).
Similarly, for closing dates of June 30, 1999, and December 31, 1999, Boston
Edison estimates the fixed component of the transition charge will be $653
million and $611 million, respectively (Exh. BE-7, Att. GOL-4, at 2, GOL-5,
at 2).
Boston Edison proposes to securitize the following costs: (1) the updated
fixed component of its transition charge (approximately $692 million, assuming a
March 31, 1999 closing, less the $800,000 balance for the LaGrange Street
Property);(18) (2) transaction costs of
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(16) While the ratepayers have a liability of $264 million for the
divestiture of Pilgrim, the sale reduces the transition charge paid
by them. On a net present value basis, Boston Edison calculates that
the Pilgrim divestiture would serve to reduce its total transition
charge by $15 million to $29 million, depending on the closing date.
D.T.E. 119/126, at 70.
(17) The annual RVC credit represents a yearly credit to ratepayers that
is calculated as an annuity based on the amortization and the pre-tax
carrying charge of 10.88 percent on the credit balance. In this case,
the net balance of negative $264 million results in an annual amount
of $29 million that ratepayers will pay Boston Edison over the period
from 1999 to 2009.
(18) In its initial filing, Boston Edison included $800,000 for the
LaGrange Street Property, a large tract of land in Newton owned by
the Company that it states was never used for the utility business
(Tr. 3, at 405-406). Boston Edison has withdrawn its request to
include the $800,000 amount with respect to the LaGrange Street
property as a reimbursable transition costs amount in response to
objections raised by the Attorney General and DOER (Boston Edison
Reply Brief at 20, n.16).
<PAGE> 25
approximately $36 million; (3) a $10 million delivery requirement related to a
materials contract with General Electric; and (4) $68 million for the buyout of
the contract with L'Energia Limited Partnership(19) upon a favorable ruling by
the Department in Boston Edison Company, D.T.E. 99-16 (Exh. BE-3, Sch. BEB3B;
Boston Edison Reply Brief at 22, n.17). The amounts the Company proposes to
securitize total $805 million, and might be increased by any credit enhancement
included upon issuance (Boston Edison Reply Brief at 22, n.17).
B. Positions of the Parties
1. Attorney General
The Attorney General argues that Boston Edison is seeking to securitize
costs that are not eligible for recovery or have not been fully mitigated
(Attorney General Brief at 22). Further, the Attorney General argues that Boston
Edison seeks to securitize costs that are not yet sufficiently final to permit
any determination that they are eligible for recovery or fully mitigated (id.).
The Attorney General recommends that the Department limit the amount to be
securitized to those costs that have been shown to be both recoverable and fully
mitigated (id.). To this end, the Attorney General recommends that the amount to
be securitized be capped at $710 million (id.).(20)
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(19) Boston Edison has a purchase power agreement pursuant to which Boston
Edison purchases 73 percent of the capacity and associated electric
energy produced by the L'Energia generation facility. Boston Edison
states that the cost of capacity and associated energy under the
L'Energia Agreement is now above the market price for power. In
D.T.E. 99-16, Boston Edison requests that the Department approve the
buyout of all obligations of Boston Edison under the L'Energia
agreement. In addition, in D.T.E. 99-16, Boston Edison requests that
the Department approve the full recovery of the buyout amount in its
retail rates through the fixed component of Boston Edison's
transition charge.
(20) The cap of $710 million recommended by the Attorney General assumes
that the total securitization amount requested by the Company is $730
million per Boston Edison's initial filing.
<PAGE> 26
The Attorney General argues that the amount that Boston Edison proposes
to securitize includes approximately $50 million of costs that are not
transition property because they have not been shown to be both recoverable and
fully mitigated (id. at 22-23). This $50 million in costs includes the
following: (1) $800,000 in costs for the LaGrange Street property; (2) $15
million in capital additions related to Pilgrim that have not been shown to be
prudently incurred; (3) $5 million of estimated transaction costs(21) related to
the Pilgrim divestiture; and (4) $26 million of estimated refinancing costs(22)
(id. at 23). The Attorney General argues that the Agencies "have not reviewed,
much less offered any opinion on the costs" that Boston Edison estimates it will
incur to refinance existing securities, and thus argues that there is no
evidence that these estimates are reasonable (Attorney General Reply Brief at
8-9).
The Attorney General acknowledges that even though the Company has not
yet shown that these costs are recoverable and fully mitigated, ultimately more
than half of these contested or unknown costs will be found to be appropriately
included in transition property for the purposes of securitization (Attorney
General Brief at 23). The Attorney General does not wish to
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(21) There are two types of transaction costs that are discussed in this
proceeding. The first type of transaction costs, which is the one
referred to here, represents those costs associated with the
divestiture of Pilgrim, and which the Company estimates to be $5
million. These transaction costs consist primarily of legal and
consulting fees (Exh. DTE-BECo 49). The second type of transaction
costs are those associated with securitization and consist of
underwriting fees, rating agency fees, accounting fees, SEC
registration fees, Department filing fees, printing and marketing
fees, trustees' fees, legal fees and expenses, the Agencies' fees,
servicing set-up costs and SPE set-up costs, original issue discount,
and refinancing costs (Exh. BE-3, at 22). The Company estimates these
transaction costs associated with the securitization to be about $35
million (Exh. BE-3, Sch. BE-3B).
(22) Refinancing costs refer to expenses that Boston Edison is expected to
incur to reduce its capitalization, including payment of call
premiums and prepayments (Exh. BE-3, Sch. BE-3B).
<PAGE> 27
forego cost savings that result from securitization (id.). Therefore, the
Attorney General recommends that the Department approve all but $20 million of
the amounts Boston Edison proposes to securitize, but further recommends that
the Department not specify which costs make up the $20 million (id.). According
to the Attorney General, as long as the amount approved by the Department does
not exceed the amount that will ultimately be found to be securitizable, his
recommendation is consistent with the Restructuring Act (id. at 23-24). The
Attorney General states that the Department can defer the specification of which
costs are included in the transition property for securitization until after the
closing date when any reconciliation and other necessary proceedings take place
(id. at 24).
2. Agencies
The Agencies do not make a recommendation on the size of the RTC
amounts (Agencies Reply Brief at 3). However, the Agencies recommend that the
Department "make clear that any limitation relates to the transition costs to be
securitized and not to credit enhancement or costs of issuance to be funded with
bond proceeds" (id. at 3).
3. Boston Edison
Boston Edison agrees with the Attorney General=s argument that only
costs that have been shown to be both recoverable and fully mitigated can be
securitized (Boston Edison Reply Brief at 19). However, Boston Edison argues
that it proposes to securitize only those transition costs that have been
determined by the Department to be reimbursable transition costs (id.).
Boston Edison argues that all the costs objected to by the Attorney
General are indeed reimbursable transition costs, with the exception of the
LaGrange Street Property (id.).(23) Boston
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(23) As noted above, Boston Edison withdrew the LaGrange Street property
from consideration for securitization.
<PAGE> 28
Edison asserts that refinancing costs are not transition costs that need to be
mitigated (id.). Boston Edison states that the Restructuring Act permits
recovery of refinancing costs as transition property (id. at 20, citing G.L. c.
164, Section 1H(a)). Furthermore, Boston Edison maintains that the recovery of
call premiums is provided for in the Settlement Agreement (id. at 20).
Boston Edison claims that any imposition of a cap on the securitizable
amount will unnecessarily deprive ratepayers of savings that can be achieved by
securitizing at an interest rate lower than the 10.88 percent carrying charge
rate (id. at 21). Boston Edison asserts that the higher the principal amount of
the RRBs, the greater the savings to ratepayers (id.).
Boston Edison argues that the Attorney General's method of setting a
cap is "imprecise to the point of being arbitrary" (id.). Boston Edison states
that if the Department ultimately determines in D.T.E. 99-16 that the L'Energia
buyout costs can be included in the transition charge, then the amount Boston
Edison proposes to securitize would exceed the cap recommended by the Attorney
General and would deprive ratepayers of additional savings (id. at 21-22).
In addition, Boston Edison argues that the proposed cap would not
accommodate any additional credit enhancement required by the rating
organizations in order to obtain the highest rating for the RRBs (id. at 22).
While Boston Edison does not anticipate that the rating organizations will
require additional credit enhancement, it cannot precisely predict the magnitude
of these costs if further enhancement is required. Boston Edison states that
certain forms of credit enhancement could increase the principal amount of the
RRBs substantially (id. at 22).(24)
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(24) For example, if the rating organizations were to require liquidity
reserves representing six months of debt service, Boston Edison
argues that this would add about $75 million to
<PAGE> 29
C. Analysis and Findings
Because the bonds issued pursuant to this order will be without
recourse to the credit of Boston Edison or any assets of Boston Edison, and will
constitute irrevocable obligations of the ratepayers of Boston Edison, the
Department must scrutinize all amounts that will be included in the
securitization total to ensure that only those costs that have been shown to be
both recoverable and mitigated are securitized. The Attorney General identifies
approximately $50 million in costs that he argues have not been shown to be both
recoverable and mitigated. The components of this $50 million include capital
additions, transaction costs related to the divestiture transaction, and
refinancing costs.
The Attorney General opposes the inclusion of certain capital addition
costs related to Pilgrim, arguing that they have not been shown to be prudently
incurred.(25) In D.T.E. 98-119/126, at 62-64, the Department allowed the capital
additions questioned by the Attorney General. Therefore, consistent with the
earlier finding in D.T.E. 98-119/126, at 62-64, the Department finds these costs
are recoverable, and can be included in the transition costs to be securitized.
The Attorney General objects to the inclusion of the transaction costs
related to the Pilgrim divestiture because they are estimates. Although the
transaction costs in question are estimated, Boston Edison will update the
estimates based on the actual closing statements, and, therefore, the Department
expects that the transaction costs for the divestiture transaction that Boston
Edison includes in the securitization amount will more closely approximate the
actual amounts. Furthermore, in D.T.E. 98-119/126, the Department directed
Boston Edison to file the
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the RRB principal amount (Boston Edison Reply Brief at 22-23).
(25) The Attorney General's arguments regarding prudence are discussed in
detail in D.T.E. 98-119/126, at 60-64.
<PAGE> 30
actual transaction costs, which will then be reconciled in the next transition
charge reconciliation proceeding. Therefore, the Department approves the
inclusion of the transaction costs estimates in the securitization amount, but
directs Boston Edison to use the most current estimates available for these
costs at the time of securitization.
The refinancing costs, which Boston Edison estimates to be about $26
million, constitute the largest component of the $50 million of costs that the
Attorney General objects to being included in the securitization amount.(26) The
Attorney General argues that these costs are estimates and that there is no
evidence that these estimates are reasonable (Attorney General Reply Brief at
8-9). The Act allows the inclusion of refinancing costs in the transition
property. G.L. c. 164, Section 1H(a). In addition, the Settlement Agreement
contemplated the inclusion of refinancing costs in the transition property, as
it requires that net savings from securitization be calculated using all
transaction costs including refinancing costs. Settlement Agreement at Att. 3
Section 1.7(a). Because refinancing will occur after securitization, the amount
included for refinancing costs in the securitization amount must necessarily be
an estimate.
Regarding the Attorney General's argument about the reasonableness of the
estimate for the refinancing costs, the Department acknowledges that while the
Agencies will approve most of the other transaction costs of the securitization,
they will not monitor the refinancing costs. Because the refinancing costs form
the largest component of the transaction costs, it is particularly important
that the Department ensure that the refinancing costs ultimately paid by
ratepayers are reasonable.
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(26) The refinancing costs also form the largest component of the total
transaction costs for securitization, estimated to be $35 million
(Exh. BE-3, Sch. BE-3B).
<PAGE> 31
Because the Restructuring Act permits recovery of refinancing costs as
Transition Property, the Department will allow Boston Edison to securitize the
refinancing costs associated with the securitization. However, the Department
will review the reasonableness of these costs in Boston Edison's next transition
charge reconciliation proceeding, and may, at that time, disallow the recovery
of any costs that are found to be unreasonable. (27) Furthermore, if Boston
Edison's actual refinancing costs are lower than the securitized amount, the
Department directs Boston Edison to return to ratepayers any amounts in excess
of its actual costs. Any such disallowance or return to ratepayers of an
overcollection will be carried out through a RVC established at the Company's
next transition charge reconciliation proceeding.
Regarding the Attorney General's recommendation for the imposition of a
cap, the Department notes that the imposition of an arbitrary cap on the amounts
to be securitized would prohibit Boston Edison from securitizing other costs,
such as the L'Energia buyout costs, if the Department approves the inclusion of
those costs as a transition charge. In addition, the imposition of a cap might
prevent Boston Edison from meeting any additional credit enhancement
requirements that the rating organizations may impose.
Although we will not impose a cap on the total amounts to be securitized,
the Department will specify which costs Boston Edison may securitize. Boston
Edison may include any amount from the L'Energia buyout in the amounts to be
securitized only if and when such amounts are
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(27) Any disallowance of the refunancing costs will not affect the RTC
charge. Boston Edison states that if the transition costs included in
the financing order exceed the correct amount, it will provide
ratepayers with a uniform rate credit using a RVC established during
a transition charge reconciliation proceeding (Exh. BE-4, at 11).
Further, the Company states that such a uniform rate credit will not
diminish the right to collect the RTC charge, and will not affect the
status of the transfer of the Transition Property as a true sale
(id. at 11-12).
<PAGE> 32
approved by the Department as transition costs in D.T.E. 99-16. Further, Boston
Edison may securitize amounts associated with the General Electric materials
contract or other costs not approved in the Divestiture Order only upon a
finding by the Department that such costs are a) reasonable and necessary costs
incurred in order to finalize the Pilgrim divestiture transaction, and
b) qualify as transition costs. See D.T.E. 98-119/126, at 67-69.
Based on the foregoing analysis and findings, the Department will allow
Boston Edison to securitize the following costs: (1) costs representing the
fixed component of the transition charge, which include the net balance of the
unrecovered plant balances for Pilgrim and related regulatory assets and the
unrecovered prefunded balance of Boston Edison's portion of the decommissioning
fund being transferred to Energy, and the municipal contract customers' portion
of such balances, less the investment in the LaGrange Street property; (2) the
transaction costs of approximately $35 million for issuing RRBs, providing any
credit enhancement, and including refinancing costs; (3) the costs of the buyout
of the L'Energia contract to the extent these costs are approved as transition
costs in D.T.E. 99-16; and (4) the costs associated with the General Electric
materials contracts, or other costs necessary to finalize the divestiture
transaction, to the extent they are approved by the Department as transition
costs. See D.T.E. 98-119/126 at 67-69.
V. PROPOSED FINANCING ORDER
As discussed above, Boston Edison, in consultation with the Agencies,
submitted a proposed financing order for the Department's consideration with its
petition and a revised proposed financing order with its initial brief
(Exh. BE-1; Boston Edison Brief, App. 1). The Department has reviewed the
proposed financing order as modified by the recommended
<PAGE> 33
revisions. The revisions resulted from discussions with certain rating agencies
as well as input from underwriters' bankruptcy and bond counsel. In addition,
the Department has incorporated Boston Edison's recommendation to add a
provision to the Financing Order (See Appendix 1, Paragraph 45) to protect the
RTC revenue stream if Boston Edison, as the initial servicer, seeks to resign
voluntarily as the servicer (Exh. BE-2 at 12). The revisions do not change the
structure or nature of the original application. The following is a summary of
changes in the proposed financing order:
* Revised the amount to be securitized including potential adjustments,
Paragraphs 3, 56, 59;
* Revised for clarification of RTC charges and Boston Edison's
capitalization of each SPE, Paragraphs 3, 22;
* Revised for inclusion of costs associated with the L'Energia PPA
buyout and a reference to its separate proceeding, Paragraphs 4, 56;
* Revised for clarification of the collection of RTC charges from all
classes of retail users, Paragraph 5;
* Revised for clarification of credit enhancement, Paragraphs 11, 16,
41;
* Revised for clarification of contingent indemnity obligations,
Paragraphs 4, 5, 8;
* Revised to reflect proper use of the terms "Transition Property" and
"Reimbursable Transition Costs," Paragraphs 17, 60;
* Revised for clarification of accounting of amounts in the reserve
account to be credited to ratepayers, Paragraph 62;
<PAGE> 34
* Revised to add that synthetic floating rate bonds will not be issued
unless it will result in a lower net interest cost on the RRBs,
Paragraph 64.
The Agencies contend that the proposed financing order meets the legal
requirements to issue the RRBs (Exh. BE-15, at 2). In addition, the Agencies
state that the proposed financing order incorporates the requisite provisions
necessary to achieve the highest possible credit rating and thus the lowest
possible interest rate for the RRBs (Agencies Brief at 4). The Agencies are not
aware of any provision in the proposed financing order, as revised, "beyond
that required for the necessary legal opinions or which exceeds the requirements
of the rating organizations in prior RRB transactions" (RR-DTE-29).(28)
Certain issues regarding the provisions contained in the proposed financing
order were raised during the proceeding and are discussed below.
The Department has included an attachment (Appendix 1) to this order which
incorporates the Department's findings herein. Appendix 1, which is part of the
Department's financing order, contains additional terms for the issuance of
bonds, which we adopt here today. Appendix 1 also includes reporting forms
(Appendix A, Attachments 1-4, and Appendix B) which shall be filed by the
Agencies with the Department upon bond issuance. In the following sections, the
Department reviews and analyzes the following provisions in the proposed
financing order: (1) standards governing TPS; (2) a statement regarding
reimbursable transition costs on customers' bills; (3) Ancillary Agreements and
(4) adjustments to the RTC charge. Pursuant to such review, the Department
approves the proposed financing order attached hereto as Appendix 1.
A. Standards Governing Third Party Suppliers
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(28) The cirteria and concerns of rating organizations are from previously
offered RRBs in other states including California and Illinois (Tr. 4,
at 464-466, 478-479).
<PAGE> 35
1. Introduction
Boston Edison defines a TPS as an entity that will provide electric
generation service to a customer and that could bill and collect from a customer
(1) all charges for transmission, distribution and transition charges, including
the RTC, (2) transmission and distribution charges, but not transition charges,
or (3) no charges, as Boston Edison would bill and collect all charges directly
from the customer even though a customer has chosen a TPS as its electric
supplier (Tr. 4, at 509). The standards governing the TPS collection and
remittance procedures are viewed by rating organizations as major criteria in
evaluating the creditworthiness of the RRBs (Exh. BE-2, at 4). Therefore, both
Boston Edison and the Agencies strongly recommend that the Department include
specific standards in the financing order to govern TPS collection and
remittance procedures.
Boston Edison included the following standards governing TPS collection and
remittance procedures in the proposed financing order: (1) a TPS will remit
reimbursable transition costs charges, regardless of whether payments are
received from end users, within 15 days of Boston Edison's, or any successor
servicer's,(29) bill for such charges; (2) a TPS will provide Boston Edison, or
any successor servicer, with total monthly KWH usage information, as such
information serves as the basis of RTC remittance;(30) (3) Boston Edison, or any
successor servicer, will be entitled, within seven days after default by a TPS
in remitting RTC charges
- -------------------------
(29) Servicer is defined as an entity acting as servicer of the Transition
Property, responsible for customer KWH billing and usage data, and
for billing, collecting and remitting RTC charges.
(30) This provision is required in the event an entity other than Boston
Edison performs metering services. RTC charges are assessed on a per
KWH basis usage and therefore the information is needed to forecast
any necessary RTC adjustment.
<PAGE> 36
billed, to assume responsibility for billing all charges for services provided,
or to switch responsibility to a third party; and (4) if a TPS does not maintain
at least a "BBB" long term unsecured credit rating, such TPS shall maintain,
with the servicer, a cash deposit or comparable security equal to one month's
maximum estimated collection of RTC charges, as agreed upon by Boston Edison, or
any successor servicer, and the TPS (Exh. BE-1, at 52).
2. Positions of the Parties
a. Attorney General
The Attorney General initially argued that the Department should not
approve policies or procedures regarding TPS billing, collection and remittance
procedures as they have not been reviewed by interested parties, or the
Department (Attorney General Brief at 25). In addition, the Attorney General
asserted that the Department should not delegate to any private entity its
authority over terms and conditions relative to third party billing (id. at 25).
The Attorney General acknowledged that the legislative scheme does not
contemplate that the Department approve TPS procedures, and that the Agencies
will have final approval over such procedures for purposes of securitization
(Attorney General Reply Brief at 9).
b. The Agencies
The Agencies argue that to obtain the highest possible bond rating, a
financing order must establish (1) stringent credit requirements to reduce risk
of TPS insolvency, (2) provisions to permit swift assumption of billing and
collection responsibilities by the servicer if the TPS fails to perform its
duties, and (3) requirements for sufficient information to be provided to the
servicer by the TPS to enable the servicer to calculate necessary adjustments to
the RTC charge and to perform other relevant functions (Agencies Brief at 9). In
addition, the Agencies claim
<PAGE> 37
that at least one rating organization has publicly stated that minimum standards
for TPS billing should be imposed in a financing order if a TPS is contemplated
in a state's restructuring statute (DTE-RR-20; Agencies Brief at 9). The
Agencies argue that the establishment of standards for TPS in documents other
than the proposed financing order would be an insufficient alternative because
only a financing order incorporates standards of finality and incontestability
(Agencies Brief at 9). The Agencies contend that failure to include TPS billing
standards in the proposed financing order would likely result in a lower rating
or require greater credit enhancement to compensate for any potential TPS
deficiencies (id. at 8). Based on TPS standards in other states in which the
highest ratings were obtained for similar bonds, the Agencies argue that the TPS
standards included in the proposed financing order are necessary as they include
the minimum requirements sufficient to achieve the highest ratings for the RRBs
(id. at 8-9).
c. Boston Edison
Boston Edison maintains that rating organizations view TPS standards as
major criteria in evaluating the creditworthiness of the RRBs (Boston Edison
Brief at 108). To achieve the highest possible credit rating and thereby
maximize the benefit to ratepayers, Boston Edison argues that the proposed
financing order requires a TPS to comply with specified billing, collection and
remittance procedures and credit requirements for the collection of RTC charges
(Boston Edison Brief at 108). Boston Edison contends that the approval of these
TPS standards is appropriate as the standards are designed to reduce risks of
delays or non-payment of RTC charges and the costs of TPS default, which would
ultimately be passed on to ratepayers (Exh. BE-1, at 52, Paragraphs 39, 40;
Boston Edison Brief at 108).
3. Analysis and Findings
<PAGE> 38
The record contains sufficient evidence to show that billing, collection,
remittance provisions, and creditworthiness criteria may affect the RRB credit
rating and that TPS provisions are critical to the way credit rating
organizations view the securities (DTE-RR-19; Tr. 4, at 509-513). Billing,
collection and remittance of RTC charges by a TPS may increase the risk of
shortfalls in the RTC charge collections by exposing the cash flow to potential
interruption due to the default, bankruptcy or insolvency of the TPS. The risk
of interruption increases risks to investors, potentially reducing the credit
rating and increasing the rate of interest on the RRBs. The Department
recognizes that the absence of TPS standards would reduce savings from
securitization by diminishing the creditworthiness of the RRBs. Lack of
standards would disadvantage ratepayers as the savings from securitization may
be diminished. Accordingly, the Department finds that the proposed standards
governing TPS in this instance should be included in the financing order.
B. Statement Regarding Reimbursable Transition Costs on Customers' Bills
1. Introduction
Boston Edison initially proposed to include on each customer's bill, a
statement that the "...RTC charge as a component of the transition charge is
being collected on behalf of an SPE, as owner of the transition property" (Exh.
BE-1, at 54). Boston Edison revised its proposal so that the bill statement
would read "a portion of [the transition charge] has been sold to the SPE"
(Boston Edison Brief at 79).
2. Positions of the Parties
a. The Agencies
<PAGE> 39
The Agencies argue that a statement regarding the RTC charge is needed on
each customer's bill in order for a "true sale" opinion of the transition
property.(31) Absent such a statement, the Agencies argue that the credit risk
of the transaction as perceived by rating organizations would be adversely
affected (Agencies Brief at 11). Furthermore, the Agencies assert that in the
event of a bankruptcy, a court will consider whether steps were taken to assure
that creditors were not misled as to the separate existence of the company and
the SPE with respect to the transition property (RR-DTE-22). The Agencies argue
that an RTC statement, as part of the tariff filing alone and not on a
customer's bill, is insufficient to render a "true sale" opinion because it is
unlikely that it would be seen by creditors of Boston Edison (id.).
b. Boston Edison
Boston Edison argues that a bill statement regarding the RTC charge is
necessary for bankruptcy counsel to render a true sale opinion of the transition
property (Tr. 4, at 529-533). Boston Edison maintains that it is necessary to
highlight publicly that the RTC charges are not owned by Boston Edison, but are
instead the property of the SPE (Boston Edison Brief at 79, n.94). Boston Edison
argues that the proposed wording appearing in a footnote to the existing
transition charge line item is the least obtrusive method to identify the
ownership interest of the SPE (Boston Edison Reply Brief at 79).
3. Analysis and Findings
- ------------------------
(31) The Agencies contend that the sale of the property right by Boston Edison
to a bankruptcy-remote SPE must be treated as a "true-sale". A
"true-sale" is the transfer of transition property and not a secured
borrowing. A "true-sale" designation prevents the assets from becoming
part of any bankruptcy of Boston Edison. It is this feature of the
transaction that permits the RRBs to be assigned a credit rating above
that of Boston Edison's. Without this designation, the transactino could
be viewed as a general collateralized borrowing.
<PAGE> 40
The evidentiary record, which was uncontradicted, shows that the notation
on each customer's bill of the SPE's interest in the transition property is
necessary to achieve the highest possible credit rating of the bonds. When
reviewing proposed wording for inclusion as a statement on customer bills, the
Department seeks to minimize any potential customer confusion. Boston Edison has
revised the proposed wording in response to the Department's concern about
clarity. However, the Department finds the original wording to be more
understandable. Therefore, the Department directs the Company to include the
following statement in a footnote on customers' bills: "The reimbursable
transition cost ("RTC") charge as a component of the transition charge is being
collected on behalf of a special purpose entity ("SPE"), as the owner of the
transition property."
C. Ancillary Agreements
1. Boston Edison's Proposal
Boston Edison seeks Department approval to enter into a Servicing
Agreement, an Administration Agreement and other RRB Transaction documents with
one or more SPEs (collectively "Ancillary Agreements") (Exh. BE-1, at 58). (32)
While Boston Edison has provided
- -----------------------
(32) According to Boston Edison, the Administration Agreement is "[t]he
agreement that each SPE is anticipated to enter into with Boston
Edison pursuant to which Boston Edison shall perform ministerial
services and provide facilities for each SPE to enable each SPE to
perform such day-to-day operations as are necessary to maintain its
existence and perform its obligations under the RRB Transaction
documents" (Boston Edison Brief, App. 3 at 1).
The Servicing Agreement is the agreement under which an entity will
act as servicer of the Transition Property and be responsible for
customer billing and usage information, and for billing, collecting,
and remitting the RTC charges (See Boston Edison Brief, App. 3 at 3).
<PAGE> 41
drafts of these documents, it states that the documents cannot be finalized
until after the Department approves the proposed financing order (Tr. 5, at
635-636).
2. Positions of the Parties
a. Attorney General
The Attorney General advocates that the Department include language in the
proposed financing order requiring that the terms of any Ancillary Agreement
shall be consistent with the financing order and terms of the Restructuring Act
(Attorney General Reply Brief at 9). The Attorney General argues, however, that
the Act does not contemplate that the Department will approve such ancillary
documents and therefore Boston Edison is incorrectly seeking Department approval
of such Ancillary Agreements (Attorney General Reply Brief at 9, n.3, citing
Exh. BE-1, Paragraph 61).
b. Boston Edison
Boston Edison states that it seeks Department approval of the proposed
financing order and its ability to enter into the proposed various agreements,
but that it is not seeking Department approval of the agreements themselves
(Boston Edison Reply Brief at 26, n.22, citing Exh. BE-1, Paragraph 61).
3. Analysis and Findings
The Restructuring Act provides that if a company securitizes its transition
costs, the Department shall require an electric company to contract with a
financing entity (the SPE in this case) to collect the RTC charges, and that any
contract with the SPE "shall not impair or negate the characterization of the
sale, assignment or pledge as an absolute transfer, a true sale, or security
interest, as applicable" G.L. c. 164, Section 1H(c)(3). The Act does not require
Department
<PAGE> 42
approval of such contracts, only that the Department require such contracts and
ensure such contracts do not change the nature of the proposed financing order.
The Agencies will approve the final Ancillary Agreements after review of
the financing order and all Ancillary Agreements by the rating organizations,
the Internal Revenue Service and the Securities and Exchange Commission (Tr. 4,
at 505; Agencies Brief at 11). The proposed financing order does not ensure that
the Ancillary Agreements comply with the proposed financing order and are
consistent with the Act. Accordingly, the Department adds the following language
to the financing order at Paragraph 62: "Such Agreements and RRB Transaction
documents shall comply with this financing order and the Act and shall not
impair or negate the characterization of the sale, assignment or pledge as an
absolute transfer, a true sale, or security interest, as applicable."
Consistent with the Act, the Department approves the ability of Boston
Edison to enter into a Servicing Agreement. The Department need not approve the
actual Ancillary Agreements, except to direct that such agreements shall be
consistent with the financing order and the Act.
D. Adjustments to the RTC Charge
1. Introduction
Boston Edison proposes to periodically adjust the RTC charge to ensure that
it remains sufficient to generate an amount equal to the sum of the periodic RRB
payment requirements for the upcoming year (Boston Edison Brief at 12). Further,
in the proposed financing order, Boston Edison includes a requirement that in no
event shall the RTC charge exceed the transition charge, as approved by the
Department pursuant to the Settlement Agreement, and as may be in effect from
time to time (Exh. BE-1, at 56).
<PAGE> 43
2. Positions of the Parties
a. Agencies
The Agencies state that they must be able to represent to the rating
organizations and investors that more stringent limits on the RTC Charge
adjustment mechanism will not be imposed after the time of pricing the RRBs
(Agencies Reply Brief at 5). The Agencies contend that without such assurance,
the value of the true-up mechanism, which is an essential basis for the highest
bond rating for the RRBs, will be in doubt (Agencies Reply Brief at 5).
Therefore, the Agencies propose in their Reply Brief the following revision to
the wording of the section of the financing order that deals with the
relationship between the RTC charge and the transition charge:
In no event shall the RTC Charge exceed the transition charge from time to
time in effect as approved by the Department in accordance with the
Settlement Agreement's methodology and as may be revised by this Financing
Order, the Pilgrim Order, or in an order arising from a Separate Proceeding
(Agencies Reply Brief at 5).
On March 29, 1999, the Agencies filed a Motion for Leave to Make
Supplemental Filing and a Supplemental Filing.(33) The Supplemental Filing
includes proposed additions to the financing order to address "circumstances
where the RTC Charge, which is a component of the transition charge, would
exceed the then current transition charge until an adjustment of the transition
charge is made" (Supplemental Filing at 2). The Agencies offer two alternative
mechanisms to apply in the above described circumstances. The first alternative
would provide
- -----------------------
(33) The Motion for Leave to Make Supplemental Filing is approved.
<PAGE> 44
that the statutory rate reduction cap would be increased to permit an RTC charge
adjustment (id. at 3-4). The second alternative would not affect the statutory
rate reduction cap, but would provide that the Company would defer collection of
the increase in the standard offer rate so long as the deferred amount earns a
carrying charge of 10.88% (id. at 4-5).
b. Boston Edison
Boston Edison argues that the periodic adjustment mechanism is an important
aspect of credit enhancement necessary for the RRBs to receive the highest
possible credit rating from the rating organizations (Boston Edison Brief at
82). On March 31, 1999, the Company filed comments in support of the Agencies'
Supplemental Filing.
3. Analysis and Findings
The Department recognizes that the RTC charge adjustment mechanism is an
essential feature of the proposed securitization. The rating organizations will
expect the RTC charge to be sufficient to cover the expected amortization of the
principal amount and interest of the RRBs, together with fees and expenses. If
the RTC charge initially established is not sufficient to cover these payments,
then the rating organizations will expect to see a true-up mechanism that would
adjust the RTC charge on a timely basis. Under all circumstances, the Department
will ensure that the RTC charge is sufficient to cover the expected amortization
of the principal amount and interest of the RRBs, together with fees and
expenses, in order to protect the credit-worthiness of the RRBs. Therefore, the
Department will include the Agencies suggested revision for Paragraph 55 of the
financing order, as modified below.
The Agencies correctly note in their Supplemental Filing that there could
be circumstances where changes in other rate components cause the RTC charge to
exceed the
<PAGE> 45
transition charge. However, the Department cannot approve the Agencies'
proposed first alternative to address such circumstances because it may violate
the statutory requirements pertaining to rate reductions. Instead, in such
circumstances, the Department will adjust other components of the Company's
rates. The Department does not approve the Agencies' second alternative because
it would be premature to determine here exactly which component of the Company's
rates to adjust. As noted, the Department will include the Agencies' suggested
revision for Paragraph 55 of the financing order, but with modifications that
should address the Agencies' concerns expressed in their Supplemental Filing:
In no event shall the transition charge from time to time in effect as
approved by the Department in accordance with the Settlement Agreement's
methodology and as may be revised by this Financing Order, the Pilgrim
Order, or in an order arising from a Separate Proceeding be adjusted below
the RTC. If adjustments to the transition charge to meet the required rate
reduction would cause the transition charge to fall below the RTC charge,
the Department shall adjust other components of the Company's rates.
Conversely, if the RTC charge, as adjusted, would exceed the then current
transition charge, the Department also shall adjust other components of the
Company's rates.
VI. EXEMPTIONS
A. Exemption from Competitive Bidding Requirements
1. Introduction
Boston Edison requests an exemption from the competitive bidding
requirements of G.L. c. 164, Section 15 (Exh. BE-1, at 10). Boston Edison states
that competitive bidding would not be
<PAGE> 46
feasible for a complicated securitization transaction, and it considers a
negotiated process to be more cost effective than a competitive bid
(Exh. AG-2-17; Tr. 4, at 477). Boston Edison argues that the main advantage of a
negotiated process comes from the use of an underwriter (Tr. 4, at 477). Boston
Edison also argues that, without an underwriter, the effective cost of the
transaction would be higher in light of the complicated securitization
transaction (id.). Boston Edison relies on the underwriters' expertise developed
through prior securitizations to achieve the lowest all-in financing cost for
the securitized bonds and thus produce the greatest possible savings for
ratepayers (Exh. AG-2-17; Tr. 4, at 477).
2. Analysis and Findings
An electric or gas company offering long-term bonds or notes with a face
amount in excess of $1 million and payable at periods of more than five years
after the date thereof must invite purchase proposals through newspaper
advertisements. G.L. c. 164, Section 15. The Department may grant an exemption
from this competitive bidding requirement if the Department finds that an
exemption is in the public interest. G.L. c. 164, Section 15.
The Department has allowed an exemption from the advertising requirement
where there has been a measure of competition in private placement. See, e.g.,
Western Massachusetts Electric Company, D.P.U. 88-32, at 5 (1988); Eastern
Edison Company, D.P.U. 97-76 D.P.U. 88-127, at 11-12 (1988); Berkshire Gas
Company, D.P.U. 89-12, at 11 (1989). The Department also has found that it is in
the public interest to grant an exemption from the advertising requirement when
a measure of flexibility is necessary in order for a company to enter the bond
market in a timely manner. See, e.g., Western Massachusetts Electric Company,
D.P.U. 88-32, at
<PAGE> 47
5 (1988). However, G.L. c. 164, Section 15 requires advertising as the general
rule; and waiver cannot be automatic but must be justified whenever requested.
The Department recognizes that this securitization transaction is
complicated and that this is the first electric RRB transaction in the
Commonwealth. The ability to obtain services at the most competitive prices and
from able, experienced entities is limited. Other securitizations will follow
both in the Commonwealth and in other states and for now, at least, a negotiated
placement is a sufficient substitute for a competitive sale for these
securities.
With the flexibility offered by a negotiated process, Boston Edison can
take advantage of the knowledge and experience of the underwriters and
individuals in the utility asset-backed securities group to achieve the lowest
all-in financing cost for the securitized bonds. Use of a negotiated process
will produce the greatest possible savings for ratepayers and is therefore in
the public interest. Accordingly, the Department allows Boston Edison's request
for an exemption from the advertisement and competitive bidding requirements of
G.L. c. 164, Section 15.
B. Exemption from Par Value Debt Issuance Requirements
1. Introduction
Boston Edison requests an exemption from the par value debt issuance
requirements of G.L. 164, Section 15(a) (Exh. BE-1, at 10). Boston Edison states
that the bonds may be sold to investors at original issue discount, in
accordance with normal financial practices relating to market pricing mechanics
(Tr.4, at 480-481).(34)
2. Analysis and Findings
- -------------------------
(34) The discount is the difference between the par value of a bond, note,
or other debt security and the actual issue price when the actual issue
price is less than par value.
<PAGE> 48
An electric or gas company offering long-term bonds, debentures, notes, or
other evidences of indebtedness may not issue these securities at less than par
value. The Department may grant an exemption from this par value requirement if
the Department finds that an exemption is in the public interest. G.L. c. 164,
Section 15A.
The Department has found that it is in the public interest to grant an
exemption from the par value requirement where market conditions make it
difficult at times for a company to price a particular issue at par value and
simultaneously offer an acceptable coupon rate to prospective buyers. Bay State
Gas Company, D.P.U. 91-25, at 10 (1991).
The Department also found that it is in the public interest to authorize
the issuance of securities below par value where this technique offers a company
enhanced flexibility in entering the market quickly to take advantage of
prevailing interest rates, particularly if this benefits the company's
ratepayers in the form of lower interest rates and a lower cost of capital
(id.). See also, Boston Gas Company, D.P.U. 92-127, at 8 (1992); Boston Edison
Company, D.P.U. 91-47, at 12-13 (1991).
The Department finds that the ability to issue debt securities below par
value offers Boston Edison increased flexibility in placing its issuances with
the prospective investors. We find that this increased flexibility translates
into an ability to issue debt securities in a timely manner to take advantage of
favorable market conditions. The Department finds that Boston Edison's request
for an exemption from G.L. c. 164, Section 15A is in the public interest and
approves it.
VII. ORDER
Accordingly, after due notice, hearing and consideration, it is hereby
<PAGE> 49
ORDERED: That the issuance of rate reduction bonds by Boston Edison Company to
securitize reimbursable transition costs amounts pursuant to this Financing
Order and Appendix 1, which contains additional terms for the issuance of bonds,
is hereby approved; and it is
FURTHER ORDERED: That the amount which Boston Edison may securitize is comprised
of the costs associated with (1) the fixed component of the transition charge
(including the net balance of the unrecovered plant balances for Pilgrim and
related regulatory assets) and the unrecovered prefunded balance of Boston
Edison's portion of the decommissioning fund being transferred to Entergy and
the municipal contract customers' portion of such balances, (2) the transaction
costs (approximately $35 million) of issuing the RRBs and providing credit
enhancement, (3) the L'Energia contract buyout costs to the extent that the
Department may later approve these costs for inclusion as transition costs in
D.T.E. 99-16, (4) the General Electric materials contract costs to the extent
that the Department may later approve these costs for inclusion as transition
costs, and (5) other costs necessary to finalize the Pilgrim divestiture
transaction, to the extent that the Department may later approve these costs for
inclusion as transition costs; and it is
FURTHER ORDERED: That Boston Edison's request for an exemption from the
competitive bidding requirements of G.L. c. 164, Section 15 is approved; and
it is
FURTHER ORDERED: That Boston Edison's request for an exemption from the par
value debt issuance requirements of G.L. c. 164, Section 15(a) is approved;
and it is
<PAGE> 50
FURTHER ORDERED: That Boston Edison Company comply with all other orders and
directives contained herein.
By Order of the Department,
------------------------------
Janet Gail Besser, Chair
------------------------------
James Connelly, Commissioner
------------------------------
A true copy Paul B. Vasington, Commissioner
Attest:
------------------------------
MARY L. COTTRELL Eugene J. Sullivan, Jr., Commissioner
Secretary
<PAGE> 51
Appeal as to matters of law from any final decision, order or ruling of the
Commission may be taken to the Supreme Judicial Court by an aggrieved party in
interest by the filing of a written petition praying that the Order of the
Commission be modified or set aside in whole or in part.
Such petition for appeal shall be filed with the Secretary of the Commission
within twenty days after the date of service of the decision, order or ruling of
the Commission or within such further time as the Commission may allow upon
request filed prior to the expiration of twenty days after the date of service
of said decision, order or ruling. Within ten days after such petition is filed,
the appealing party shall enter the appeal in the Supreme Judicial Court sitting
in Suffolk County by filing a copy thereof with the Clerk of said Court. (Sed.
5, Chapter 25, G.L. Ter. Ed., as most recently amended by Chapter 485 of the
Acts of 1971).
<PAGE> 52
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<PAGE> 53
APPENDIX 1
THE COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
- ------------------------
)
BOSTON EDISON COMPANY ) D.T.E. 98-118
)
- ------------------------
APPENDIX TO FINANCING ORDER
The Department has considered the proposed issuance of electric rate
reduction bonds ("RRBs") by Boston Edison Company (together with any legal
successors thereto, "Boston Edison") to securitize (as such term is used in G.L.
c. 164, Sections 1G and 1H) reimbursable transition costs amounts of
approximately $800 million (the "RRB Transaction") represented by the fixed
component, net as of the date of issuance of RRBs, of the transition charge
(which includes the net balance of its Pilgrim unrecovered plant balances and
related regulatory assets and the unrecovered prefunded balance of its portion
of the decommissioning fund being transferred to the buyer in connection with
the divestiture of Pilgrim Nuclear Power Station and associated generation
assets ("Pilgrim")), the municipal contract customers' portion of such balances,
any additional transition costs arising in connection with the Pilgrim
divestiture or approved pursuant to any other proceeding in an order that
becomes final and no longer subject to appeal prior to the filing with the
Securities Exchange Commission ("SEC") of the preliminary prospectus to be
distributed to prospective investors (a "Separate Proceeding"), and the
transaction costs of issuing RRBs and providing any credit enhancement as
described below (other than approximately 0.50% of the initial principal balance
of RRBs to be contributed by the Company
<PAGE> 54
as the initial capitalization of each SPE (as defined below)). The principal
amount of RRBs is subject to adjustment (which may be significant) based on the
timing of the Pilgrim divestiture, additional transition costs in connection
with the Pilgrim divestiture or approved pursuant to a Separate Proceeding,
prevailing market conditions, input on credit enhancement from nationally
recognized statistical rating organizations (the "rating agencies") selected by
Boston Edison with the approval of the Massachusetts Development Finance Agency
and Massachusetts Health and Educational Facilities Authority (together, the
"Agencies") to rate the RRBs, tax authorities and underwriters, or changes in
the proposed transaction not now anticipated by Boston Edison. The Department
finds the RRB Transaction will result in net savings for the benefit of Boston
Edison's customers reflected in lower transition charges than would be required
to recover the approved transition costs if this Financing Order was not adopted
and otherwise satisfies the requirements of G.L. c. 164, Sections 1G and 1H.
Therefore, pursuant to this Financing Order, the Department authorizes the RRB
Transaction as described in Boston Edison's Application.
<PAGE> 55
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. STATUTORY AND REGULATORY OVERVIEW .................................................................................1
II. RRB TRANSACTION ...................................................................................................2
A. Proposed Structure ............................................................................2
B. Recovery of Transition Costs...................................................................5
C. Ongoing Transaction Costs .....................................................................8
D. RTC Charge ....................................................................................8
E. Periodic Adjustments to the RTC Charge .......................................................12
F. Formation of SPE .............................................................................13
G. Transition Property ..........................................................................15
H. Sale of Transition Property to SPE ...........................................................16
I. Issuance and Transfer of SPE Debt Securities and Issuance of RRBs.............................16
J. Nonbypassable RTC Charge .....................................................................18
III. RATEPAYER BENEFITS ...............................................................................................18
IV. USE OF PROCEEDS ..................................................................................................19
V. RELATED ISSUES ...................................................................................................19
A. Tax Considerations ...........................................................................19
B. Accounting and Financial Reporting ...........................................................21
C. Rating Agency Considerations .................................................................21
D. Allocation of Collection Shortfalls ..........................................................25
E. Servicing ....................................................................................27
F. Accounting for Certain Benefits. .............................................................28
G. SPE Administration and Other Transactions with each SPE. ....................................29
FINDINGS....................................................................................................................30
ORDERS......................................................................................................................40
Appendix A ISSUANCE ADVICE LETTER..........................................................................................A-1
Appendix B ROUTINE TRUE-UP LETTER..........................................................................................B-1
</TABLE>
i
<PAGE> 56
1. STATUTORY AND REGULATORY OVERVIEW
On November 25, 1997, Governor Cellucci signed into law a comprehensive
electric industry restructuring law, Chapter 164 of the Acts of 1997 (the
"Act"), which authorizes electric companies to securitize all or a portion of
their transition costs through the issuance of RRBs to provide savings to
ratepayers.
In the Restructuring Settlement Agreement approved by the Department in
D.P.U. Docket No. 96-23 and subsequent filings pursuant thereto (collectively,
the "Settlement Agreement"), the Department approved Boston Edison's retail
distribution rates, including its transition charge to recover on a fully
reconciling basis all of Boston Edison's transition costs which include the
reimbursable transition costs amounts being securitized. In either an order
issued pursuant to D.T.E. 98-119 (the "Pilgrim Order") or in another Separate
Proceeding, the Department has approved Boston Edison's divestiture of Pilgrim,
the recovery of the prefunded decommissioning fund being transferred to the
buyer in connection with the divestiture, additional transition costs arising in
connection with the divestiture transaction or approved pursuant to a Separate
Proceeding, and the costs associated with the L'Energia, Limited Partnership
power purchase agreement ("L'Energia") to the extent the Department approves
these costs as transition costs in D.T.E 99-16. In accordance with G.L. c. 164,
Section 1G(d)(3), Boston Edison has completed the divestiture of its non-nuclear
generation assets and thus is eligible to benefit from securitization.
Subsequent to the enactment of the Act, Boston Edison, together with other
electric companies, has been working with the staffs of the Agencies to develop
the structure for the RRB Transaction and the process for approval by the
Department. The Agencies have reviewed
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and commented on the Application, the exhibits thereto and this proposed
Financing Order, as updated from the draft Financing Order submitted with the
Application as Exhibit BE-1. The Agencies have indicated that the proposed
transaction satisfies all statutory and rating agency requirements and that the
transaction costs are reasonable.
II. RRB TRANSACTION
A. Proposed Structure
Boston Edison has provided a general description of the RRB Transaction
structure in its testimony and discovery conducted during the proceedings. This
proposed structure is subject to modification, depending upon marketing of RRBs
and negotiations with the rating agencies selected by Boston Edison (subject to
approval by the Agencies) to assign credit ratings to the RRBs. The final
structure will be determined by Boston Edison at the time RRBs are priced, with
the approval of the Agencies as provided herein, and after input from the rating
agencies, tax authorities and the underwriters.
Pursuant to this Financing Order, Boston Edison will securitize a portion
of its transition costs (as defined in G.L. c. 164, Sections 1G and 1H),
together with the transaction costs of issuing RRBs and providing credit
enhancement (including an overcollateralization account, additional
capitalization and liquidity reserves, if any). These amounts constitute
reimbursable transition costs amounts (as defined in G.L. c. 164, Section 1H(a))
and shall be financed through the issuance of notes (the "SPE Debt Securities")
and RRBs. The repayment of such amounts shall be effected through the assessment
and collection of a portion of Boston Edison's transition charge (the "RTC
Charge") from which SPE Debt Securities and RRBs to be issued will be repaid.
The transition charge, a component of which will be the RTC Charge, is a
separate, nonbypassable
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charge assessed and collected from all classes of retail users of Boston
Edison's distribution system within the geographic service territory as in
effect on July 1, 1997, whether or not energy is purchased from Boston Edison or
any third party supplier (each, a "TPS"), and whether or not such distribution
system is being operated by Boston Edison or a successor distribution company.
The transition charge, including the RTC Charge, is a usage-based tariff on each
retail user's monthly bill and may include in the future any exit fee collected
pursuant to G.L. c. 164, Section 1G(g) until the Total RRB Payment Requirements
(as defined below) are discharged in full.
As described in the Application, the principal asset to be used to support
RRBs is transition property (the "Transition Property"). The Transition Property
represents a continuously existing property right created pursuant to G.L. c.
164, Section 1H, including, without limitation, the right, title, and interest
in and to all revenues, collections, claims, payments, money, or proceeds of or
arising from or constituting (a) the reimbursable transition costs amounts
established by this Financing Order, including such amounts established in an
issuance advice letter (the "Issuance Advice Letter"), (b) the RTC Charge
authorized by this Financing Order, including the initial RTC Charge set forth
in the Issuance Advice Letter, as may be adjusted from time to time in order to
generate amounts sufficient to discharge an amount equal to the sum of the
Periodic RRB Payment Requirements for the upcoming year, and (c) all rights to
obtain periodic adjustments and non-routine adjustments to the RTC Charge.
Pursuant to this Financing Order, the Transition Property and the RTC Charges
are irrevocable, and cannot be reduced, rescinded, altered, amended or impaired
by either the Department (or any successor entity) or The Commonwealth of
Massachusetts through its pledge contained in G.L. c. 164, Section 1H(b)(3).
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Boston Edison will form one or more special purpose entities (each, an
"SPE"), each a bankruptcy-remote entity, wholly owned by Boston Edison, and
provide the initial capitalization of each SPE (currently estimated to be
approximately 0.50% of the initial RRB principal balance). Any other credit
enhancement is either part of the periodic adjustment to the RTC Charge or will
be included in the principal balance of RRBs. Boston Edison will sell the
Transition Property to one or more SPEs in transactions, each of which, under
G.L. c. 164, Section 1H(f)(1) will be intended and treated, as a legal true sale
and absolute transfer to such SPE. Each such SPE will constitute a financing
entity for purposes of G.L. c. 164, Section 1H.
To raise the funds to pay the purchase price of the Transition Property to
Boston Edison, such SPE will issue and sell SPE Debt Securities to a special
purpose trust established by the Agencies. Such special purpose trust, which
will constitute a financing entity for purposes of G.L. c. 164, Section 1H, will
sell interests in the SPE Debt Securities by issuing and selling RRBs, the
proceeds of which will be remitted to such SPE and ultimately to Boston Edison.
All of the assets of such SPE, including, without limitation, the Transition
Property and the other collateral of the SPE (the "Other SPE Collateral"), will
be pledged as collateral to secure SPE Debt Securities. The Other SPE Collateral
will include without limitation, the rights of each SPE under the RRB
Transaction documents including the purchase agreement by which each SPE
acquires the Transition Property, the servicing agreement (the "Servicing
Agreement") by which Boston Edison acts as initial servicer of the Transition
Property (the "Servicer") or any successor Servicer, acts as Servicer of the
Transition Property, the Administration Agreement (as defined below), the
collection account and any other accounts of such SPE contained in such SPE's
collection account including the overcollateralization account and the reserve
account, any
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investment earnings on amounts (other than the earnings on the initial capital
contributed by Boston Edison, which earnings are to be returned as a
distribution of capital by such SPE to Boston Edison) held by such SPE and the
capital of such SPE.
RRBs sold to investors will take the form of pass-through certificates
representing undivided beneficial interests in SPE Debt Securities in the manner
permitted by G.L. c. 164, Section 1H(c). SPE Debt Securities will take the form
of notes secured by a first priority statutory lien on all Transition Property
as provided in G.L. c. 164, Section 1H(e), together with a pledge of the Other
SPE Collateral.
It is anticipated that RRBs may be issued in multiple series or classes
depending upon market conditions. The longest term RRBs will have expected
repayment terms of approximately 11 years, with legal maturities up to 2 years
beyond the longest expected repayment term or longer if required by the rating
agencies, in accordance with 1H(b)(4)(vi).
B. RECOVERY OF TRANSITION COSTS
G.L. c. 164, Section 1H(b)(1) provides that the Department may issue a
financing order "to facilitate the provision, recovery, financing, or
refinancing of transition costs." Transition costs are "the embedded costs"
which are determined to be recoverable through a transition charge pursuant to
G.L. c. 164, Section 1. In the Settlement Agreement, the Department approved
Boston Edison's transition costs and transition charges (referred to as access
charges in the Settlement Agreement) which Boston Edison may collect. The
Department has further approved, under G.L. c. 164, Sections 1G(e) and H(b)(2),
that these transition charges be nonbypassable by ratepayers. The Department can
authorize an electric company to securitize reimbursable transition costs
amounts, as provided in G.L. c. 164, Section 1H. Pursuant to this Financing
Order, the Department
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authorizes Boston Edison's securitization through the RRB Transaction of the
reimbursable transition costs amounts recoverable through RTC Charges. Boston
Edison currently estimates that the principal amount of RRBs to be issued will
be approximately $800 million as described below subject to adjustment based on
the timing of the closing of the Pilgrim divestiture, the actual transaction
costs (including any credit enhancement), additional transition costs arising in
connection with the Pilgrim divestiture, prevailing market conditions, input
from rating agencies, tax authorities and underwriters, or changes in the
proposed RRB Transaction not now anticipated by Boston Edison.
1. Fixed Component Transition Costs
The Department has approved as transition costs in the Settlement
Agreement, the Pilgrim Order or pursuant to a Separate Proceeding, the fixed
component of Boston Edison's transition charge (which includes the Pilgrim
unrecovered balances, as defined below), the municipal contract customers'
portion of such balances, other transition costs, and may approve as additional
transition costs the cost of the buyout of the L'Energia power purchase contract
(collectively, the "Fixed Component Transition Costs"), presently considered by
the Department in D.T.E. 99-16. The "Pilgrim unrecovered balances" include the
net balance of the Pilgrim unrecovered plant balances and related regulatory
assets and the unrecovered prefunded balance of the decommissioning fund being
transferred to the buyer in connection with the Pilgrim divestiture. Pursuant to
this Financing Order, the Department approves the Fixed Component Transition
Costs as reimbursable transition costs amounts and the right to recover such
amounts shall constitute Transition Property.
2. Transaction Costs of Issuance
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In order to issue RRBs to achieve net savings for the benefit of its
customers, Boston Edison will incur transaction costs related to issuance of
RRBs. G.L. c. 164, Section 1H(a) specifically provides that a financing order
shall include recovery of the costs of issuing RRBs and defines transition
property to include the costs of issuing, servicing and retiring RRBs. Based on
the currently estimated initial offering of $800 million of RRBs, Boston Edison
estimates that such amount will include the transaction costs to be
approximately $36 million which may vary, in part, based on the factors
described below. These transaction costs will include, among other items, the
underwriting spread, rating agency fees, accounting fees, Securities and
Exchange Commission registration fees ("SEC fees"), Department registration
fees, printing and marketing expenses, trustees' fees, legal fees, the Agencies'
fees, the servicing set-up fee and the administrative cost to set up each SPE.
The costs may also include original issue discount and redemption costs
including call provisions and prepayments required to reduce existing
capitalization of Boston Edison. Certain fees, such as underwriters' spread,
rating agency fees, SEC fees, Department registration fees, trustees' fees,
Agencies' fees, original issue discount and redemption costs will vary,
depending on the actual principal amount of RRBs to be issued, market conditions
and the amount of securities to be repurchased to be determined at the time of
RRB pricing or the reduction of capitalization. Other fees are based on market
rates charged for similar transactions.
The Department authorizes Boston Edison, with approval of the Agencies to
the extent provided in the testimony, to recover the transaction costs of
issuing RRBs described above out of the proceeds of the RRB Transaction and to
include such costs as reimbursable transition costs
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amounts and the right to recover such amounts shall constitute Transition
Property. To the extent prior payment is required, such costs will be paid by
Boston Edison and reimbursed from the proceeds of the RRB Transaction.
C. Ongoing Transaction Costs
The Department approves Boston Edison's recovery of ongoing transaction
costs through the RTC Charge. The primary ongoing transaction costs will be the
servicing fee (the "Servicing Fee") paid to Boston Edison, as initial servicer
(the "Servicer") of the Transition Property, or any successor Servicer and the
ongoing cost of credit enhancement.
It is anticipated that there will be additional, ongoing costs associated
with the RRB Transaction, such as the Administration Fee (as defined below),
legal and accounting fees, directors fees, rating agency fees, fees for the
trustees, and any indemnity obligations of the SPE in the RRB Transaction
documents for SPE officers and directors, trustee fees, liabilities of the
special purpose trust, and liabilities to the underwriters related to the
underwriting of the RRBs. These costs will also be reimbursable transition costs
amounts and will be recovered through the RTC Charge in accordance with G.L. c.
164, Section 1H and the right to recover these costs as reimbursable transition
costs amounts will constitute Transition Property.
D. RTC Charge
To facilitate the RRB Transaction, this Financing Order provides a
procedure to establish the RTC Charges necessary to amortize SPE Debt Securities
and RRBs in accordance with the expected amortization schedule, and provide for
the payment of all ongoing transaction costs associated with the RRB
Transaction. The Department understands that the RTC Charge will vary over the
life of the RRB Transaction as a result of several factors, including, without
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limitation, changes in the principal balance of RRBs, changes in the weighted
average interest cost of RRBs as the relative principal balance outstanding
changes, the impact of the variability of energy sales and changes in payment
and charge-off patterns, and changes in ongoing costs of RRBs. Prior to the
issuance of RRBs, Boston Edison is authorized to file the Issuance Advice Letter
with the Department. The Issuance Advice Letter will confirm the final structure
and repayment terms of the RRB Transaction, the total principal amount and
pricing of RRBs, and the actual transaction costs. Such filing will also
describe the initial RTC Charge associated with the RRB Transaction which will
be calculated using the methodology described in Boston Edison's testimony and
adopted in this Financing Order. The transition charge will also be adjusted in
revised tariffs to reflect the divestiture of Pilgrim and the issuance of RRBs.
To confirm that the actual terms of the RRB Transaction will result in
savings for ratepayers, the Department will require Boston Edison to provide in
the Issuance Advice Letter a calculation of projected savings to ratepayers,
using the methodology contained in Boston Edison's testimony, applied to the
actual structure and terms of RRBs. So long as the terms and structure result in
net savings to Boston Edison's customers in accordance with this approved
methodology, Boston Edison is authorized to undertake the RRB Transaction.
The RTC Charge for customers established by this Financing Order and
calculated using the methodology contained in Boston Edison's testimony, shall
become effective automatically when the Issuance Advice Letter is filed. The RTC
Charge calculations have been examined and found reasonable and Boston Edison
will use the Issuance Advice Letter substantially in the form of Appendix A to
this Financing Order.
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As more fully described in the testimony, Boston Edison, or any successor
Servicer, is expected to remit to the trustee of the SPE on a daily basis an
amount equal to the actual RTC Charges billed, less an allowance for estimated
charge-offs as more fully described in the testimony, on or about the day such
amounts are deemed to be collected. The deemed collection date of such amounts
will be the weighted average number of days, based on Boston Edison's historical
collections experience, that a monthly bill for services remains outstanding
before payment. On the basis of these remittances on or about the deemed
collection date, collections of RTC Charges will be deemed paid within one
calendar month of collection for purposes of G.L. c. 164, Section 1H(b)(8). The
Servicer then will reconcile such remittances at least once annually for all
remittances made in the previous year as more fully described in the testimony.
Boston Edison's establishment of the deemed collection date, based on its
historical collections experience, and its remittance and reconciliation
procedure is an economical and cost effective method of identifying to a useful
degree of certainty the actual RTC Charge collections in accordance with the
provisions of G.L. c. 164, Section 1H(b)(8), given Boston Edison's current
accounting and billing information systems capabilities. On each semi-annual
payment date for the RRBs, or more frequently depending on market conditions at
the time of RRB pricing, the trustee for the SPE will release money from the
collection account to a trustee for the special purpose trust appointed under an
indenture in connection with the RRB Transaction who will pay interest and
principal on RRBs to RRB holders.
RTC Charges will be set at a level intended to recover the principal
balance of (in accordance with the expected amortization schedule), and interest
on, SPE Debt Securities authorized under this Financing Order, together with the
costs of servicing SPE Debt Securities
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and RRBs, including the Servicing Fee, the Administration Fee (as defined
below), fees for the trustees, rating agency fees, legal and accounting fees,
directors' fees, contingent indemnity obligations in the RRB Transaction
documents, other fees and expenses and the cost of creating and maintaining any
credit enhancement required for SPE Debt Securities and RRBs (the required
periodic payment of such, including deficiencies on past due principal and
interest for any reason, the "Periodic RRB Payment Requirement" and
collectively, the "Total RRB Payment Requirements"), based on assumptions set
forth in the testimony including sales forecasts, payment and charge-off
patterns, and lags between RTC Charge billing and collection. RTC Charges shall
remain in effect until the owner of the Transition Property has received RTC
Charges sufficient to discharge the Total RRB Payment Requirements as described
in G.L. c. 164, Section 1H(b)(2). Payments on the SPE Debt Securities and RRBs
will be semi-annual or more frequent, depending upon market conditions at the
time of RRB pricing.
Under G.L. c. 164, Section 1H(b)(6), the right to collect these RTC Charges
becomes Transition Property when and to the extent that the Financing Order is
entered authorizing such RTC Charges. The amounts of the reimbursable transition
costs amounts determined
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hereby are irrevocable, and the Department or any successor entity does not have
authority to, and shall not, rescind, reduce, alter, amend or impair this
Financing Order, determine that the reimbursable transition costs amounts or the
RTC Charges established hereby are unjust or unreasonable or in any way reduce
or impair the value of the Transition Property by taking reimbursable transition
costs amounts into account in setting other rates of Boston Edison. Nor shall
the amounts of revenues under the RTC Charges be subject to reduction,
impairment, postponement or termination. See G.L. c. 164, Section 1H(b)(3).
While not separately identified on each retail user's monthly bill, each
monthly bill will note that the RTC Charge, as a component of the transition
charge, is being collected on behalf of an SPE, as owner of the Transition
Property.
E. Periodic Adjustments to the RTC Charge
Although this Financing Order, the Transition Property and the RTC Charges
are each irrevocable, the Department or any successor entity must approve
adjustments to the RTC Charge as necessary to ensure timely recovery of all
reimbursable transition costs amounts that are the subject of this Financing
Order, including the ongoing costs of the RRB Transaction. The Department must
establish a procedure for the expeditious approval of periodic adjustments to
the RTC Charge. See G.L. c. 164, Section 1H(b)(5).
Boston Edison will establish an adjustment mechanism (the "RTC Charge
True-Up Mechanism") to periodically adjust the RTC Charge, up or down, to ensure
that it remains sufficient to generate an amount equal to the sum of the
Periodic RRB Payment Requirements for the upcoming year. Adjustments to the RTC
Charge pursuant to the RTC Charge True-Up Mechanism shall include, without
limitation, the effect of under estimates of required collections,
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customer defaults, any contingent obligations of the SPE arising from indemnity
provisions in the transaction documents, customers exiting Boston Edison's
distribution system and defaults by Servicers in the remittance of collections.
Boston Edison proposes to adjust the RTC Charge by the RTC Charge True-Up
Mechanism, at least annually, to keep actual principal amortization in line with
the expected amortization schedule which is established after the RRBs are
priced. The forms of advice letters for periodic RTC Charge True-Ups are
substantially in the form of Appendix B to this Financing Order.
Boston Edison shall file periodic RTC Charge True-Up advice letters
("Routine True-Up Letters") annually, prior to the anniversary of this Financing
Order, and if necessary, more frequently. In either case, the resulting upward
or downward adjustments to the RTC Charge will be effective on the first day of
the succeeding calendar month, or such date as may be specified in the Routine
True-Up Letter, as long as such effective date is at least 15 days after the
filing of such Routine True-Up Letter. For these adjustments, the adjusted RTC
Charge will be calculated using the methodology set forth in Boston Edison's
testimony.
Whenever Boston Edison determines that the RTC Charge True-Up Mechanism
used to calculate RTC Charge adjustments requires modification to more
accurately project and generate adequate revenues, a non-routine RTC Charge
True-Up advice letter ("Non-Routine True-Up Letter") may be filed with the
resulting adjustments to the RTC Charge (reflecting such modification to the
methodology or model) to be effective upon review and approval by the Department
within 60 days of such filing.
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F. Formation of SPE
The Department authorizes Boston Edison to form and capitalize one or more
SPEs to engage in the RRB transaction as described herein. The Department hereby
determines that each SPE constitutes a financing entity, as defined in G.L. c.
164, Section 1H(a), which is authorized to acquire the Transition Property. Each
SPE will be a Delaware limited liability company, wholly owned by Boston Edison
and, if so, may constitute an "affiliated company" under G.L. c. 164, Section
85, clause (a) or (b), subject to supervision of the Department in certain
respects under G.L. c. 164, Sections 17A and 76A by reason thereof. The
Department finds that each SPE is not an "affiliated company" for purposes of
clause (c) of the said Section 85.
The fundamental organizational documents of each SPE will impose
significant limitations upon the activities of such SPE and the ability of
Boston Edison to take actions as the holder of the equity interest therein. For
example, each SPE will be formed for the limited purpose of acquiring the
Transition Property and Other SPE Collateral and issuing and selling the SPE
Debt Securities. It will not be permitted to engage in any other activities, and
will have no assets other than the Transition Property and Other SPE Collateral.
Each SPE will be managed by a Management Committee, which will have rights
and authority similar to that of a board of directors for a corporation. As long
as the SPE Debt Securities and the RRBs remain outstanding, Boston Edison shall
be required to cause each SPE to have at least two independent directors.
Without the consent of these independent directors, each SPE will be unable (a)
to amend provisions of fundamental organizational documents which ensure the
bankruptcy-remoteness of such SPE, (b) to institute bankruptcy or insolvency
proceedings or to consent to the institution of bankruptcy or insolvency
proceedings against it, or
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(c) to dissolve, liquidate or wind up the Company. Other provisions may also be
included to support the bankruptcy-remote character of each SPE as required by
the rating agencies.
G. Transition Property
Under G.L. c. 164, Section 1H(a) of the Act, Transition Property is
"the property right created pursuant to G.L. c. 164, Section 1H,
including, without limitation, the right, title and interest of an
electric company or a financing entity to all revenues, collections,
payments, money, or proceeds or arising from or constituting
reimbursable transition costs amounts which are the subject of a
financing order, including those nonbypassable rates and other charges
that are authorized by the department in the financing order to
recover the transition costs and the costs of providing, recovering,
financing, or refinancing the transition costs, including the costs of
issuing, servicing, and retiring electric rate reduction bonds."
The Transition Property thereafter continuously exists as property for all
purposes as provided in this Financing Order, but in any event until any RRBs
issued and sold in the RRB Transaction are paid in full. G.L. c. 164, Section
1H(b)(6). Transition Property shall constitute property for all purposes whether
or not the revenues or proceeds with respect to RTC Charges have accrued. See
G.L. c. 164, Section 1H(d)(3).
The foregoing structural elements, including, without limitation, the legal
true sale and absolute transfer of the Transition Property by Boston Edison to
an SPE, and the bankruptcy-remote status of such SPE, should enable RRBs to
receive a credit rating superior to that of Boston Edison. The Department finds
that upon the filing of the Issuance Advice Letter,
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automatically effective as of such filing, all of the Transition Property
identified in the Issuance Advice Letter constitutes a property right and shall
thereafter continuously exist as property for all purposes.
H. Sale of Transition Property to SPE
The Department approves the sale by Boston Edison of the Transition
Property identified in the Issuance Advice Letter to one or more SPEs in one or
more transactions which, under G.L. c. 164, Section 1H(f)(1), will be intended,
and treated, as a legal true sale and absolute transfer to each SPE,
notwithstanding any other characterization for tax, accounting or other
purposes. Upon the sale of the Transition Property identified in the Issuance
Advice Letter to such SPE, such SPE will have all of the rights originally held
by Boston Edison with respect to the Transition Property and Other SPE
Collateral, including without limitation, the right to exercise any and all
rights and remedies to collect any amounts payable by any customer in respect of
the Transition Property and Other SPE Collateral, including the right to
authorize the Servicer to shut-off electric power to the extent permitted in
accordance with G.L. c. 164, Sections 116, 124-124I and any applicable
regulations. Any payment by any such customer to any SPE shall discharge the
customer's obligations in respect of such Transition Property to the extent of
the payment, notwithstanding any objection or direction to the contrary by
Boston Edison, as initial Servicer, or any successor Servicer.
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I. Issuance and Transfer of SPE Debt Securities and Issuance of RRBs
The Department approves the issuance by one or more SPEs of SPE Debt
Securities with the terms to mirror substantially the terms of RRBs, to one or
more special purpose trusts formed or otherwise approved by the Agencies and
identified in the Issuance Advice Letter. The Department also approves each
SPE's pledge of its right, title and interest in and to the Transition Property
and Other SPE Collateral as security for SPE Debt Securities. The SPE Debt
Securities and RRBs (being undivided beneficial interests in the SPE Debt
Securities) will, by their terms, be non-recourse to Boston Edison or its
assets, but will be secured by a pledge of all of the right, title and interest
of each SPE in its Transition Property and Other SPE Collateral. The Department
approves the issuance by such special purpose trust of RRBs on terms
substantially described herein and finalized by Boston Edison in the Issuance
Advice Letter. To the extent provided in this Financing Order, the final terms
and conditions of the SPE Debt Securities and RRBs shall be approved by the
Agencies.
Pursuant to G.L. c. 164, Section 1H(e), upon the effective date of this
Financing Order there shall exist a statutory first priority lien on all
Transition Property then existing or thereafter arising pursuant to the terms of
this Financing Order. Such lien shall secure all obligations, then existing or
subsequently arising, to the holders of RRBs, the trustee or representative for
such holders, and each special purpose trust and shall arise by operation of law
automatically without any action on the part of Boston Edison or any other
person. Such lien shall be valid, perfected, and enforceable upon the
effectiveness of the Financing Order without any further public notice. Boston
Edison does expect to file a financing statement with respect to the Transition
Property which will constitute a protective filing pursuant to G.L. c. 164,
Section 1H(e).
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If the Transition Property subject to this Financing Order is transferred
and sold to more than one SPE, any collections in respect of the undivided
beneficial interests in RTC Charges related to such Transition Property will be
allocated pro rata among such undivided beneficial interests to give effect to
the pari passu first priority statutory liens on each SPE's portion of the
Transition Property subject to this Financing Order.
J. Nonbypassable RTC Charge
To ensure credit risks are minimized, it is necessary that the RTC Charge
be nonbypassable. Under G.L. c. 164, Section 1H(b)(2), "nonbypassable" means the
RTC Charge will be assessed and collected from all classes of retail users of
Boston Edison's distribution system within the geographic service territory as
in effect on July 1, 1997, whether or not energy is purchased from Boston Edison
or any TPS, and whether or not such distribution system is being operated by
Boston Edison or a successor distribution company. The RTC Charge is a
usage-based component of the transition charge on each retail user's monthly
bill and may in the future include a pro rata component of any exit fee
collected pursuant to G.L. c. 164, Section 1G(g) by Boston Edison and any
successor distribution company, including any TPS, until the Total RRB Payment
Requirements are discharged in full.
III. RATEPAYER BENEFITS
Boston Edison evaluated whether the RRB Transaction would result in net
savings to its customers. Based upon the methodology established and approved by
the Department in the Settlement Agreement and assumptions set forth in the
testimony, Boston Edison estimates the RRB Transaction to result in net savings
reflected in lower transition charges to its customers than would be required to
recover the approved transition costs if this Financing Order were not
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adopted. The actual savings and lower transition charges resulting from the RRB
Transaction will depend upon the actual amount of RRBs issued, market conditions
at the time of RRB pricing, the actual amount of transition costs, the actual
amount of transaction costs and the amount of credit enhancement.
Based on this evidence, the Department finds that the RRB Transaction will
result in savings for customers as is contemplated by the Settlement Agreement
and G.L. c. 164, Sections 1G(d)(4) and 1H(b)(2). To confirm this finding after
RRB pricing, the Issuance Advice Letter shall include a calculation in
accordance with Boston Edison's testimony indicating that, based on the actual
structure and pricing terms, the RRB Transaction is expected to result in net
savings and such savings will inure to the benefit of Boston Edison's customers.
IV. USE OF PROCEEDS
The proceeds from the sale of RRBs will ultimately be remitted to Boston
Edison in consideration of Boston Edison's sale of the Transition Property.
Boston Edison expects to use such proceeds, net of transaction costs, for one or
more of the following purposes: (a) to return the securitized portion of the
Pilgrim and fossil unrecovered plant balances and related regulatory assets; (b)
to fund the unrecovered prefunded balance of the securitized portion of the
decommissioning fund and additional transition costs arising in connection with
the Pilgrim divestiture or approved pursuant to another Separate Proceeding; and
(c) to provide any credit enhancement required for the RRBs. Boston Edison may
apply such proceeds to the reduction of its capitalization and for general
corporate purposes.
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V. RELATED ISSUES
As Boston Edison describes in its testimony, there are several related
issues that have a potentially significant impact on the RRB transaction as
described below.
A. Tax Considerations
The possibility that the Internal Revenue Service ("IRS") would assess
income taxes when this Financing Order is issued or when Boston Edison receives
the initial proceeds from SPE Debt Securities, rather than when RTC Charge
revenues are collected, is an issue to Boston Edison associated with financing
the reimbursable transition costs amounts. In addition to having tax
consequences, this would also affect the economics of issuing SPE Debt
Securities and RRBs, as the benefits of the RRB Transaction depend in large part
on recognizing taxable income in respect of reimbursable transition costs
amounts as RTC Charges are paid by customers, rather than it being accelerated
into current income upon issuance of SPE Debt Securities.
As a result, on January 19, 1999, Boston Edison submitted a ruling request
to the IRS seeking confirmation that (a) the issuance of this Financing Order by
the Department will not result in gross income to Boston Edison; (b) the
issuance of the SPE Debt Securities and the issuance of RRBs will not result in
gross income to Boston Edison; and (c) SPE Debt Securities will be treated as
obligations of Boston Edison for tax purposes. An IRS ruling is expected within
one month after the issuance of this Financing Order.
If the RRB Transaction results in current income taxation of the proceeds
of such transaction, the benefits of the RRB Transaction would be substantially
reduced. Should the IRS
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choose not to provide a ruling, or rule adversely, Boston Edison would have to
reassess the RRB Transaction and, if possible, modify it to eliminate the risk
of current taxation.
The interest paid to holders of RRBs will be exempt from income taxes
imposed in The Commonwealth of Massachusetts but will not be exempt from federal
income taxes or taxes imposed in any other state. See G.L. c. 164, Section
1H(b)(4)(iii).
B. Accounting and Financial Reporting
The amount financed is expected to be recorded in accordance with generally
accepted accounting principles ("GAAP") as long term debt on the balance sheet
of each SPE for financial reporting purposes. Boston Edison, each SPE, each
special purpose trust and the holders of RRBs will expressly agree pursuant to
the terms of the applicable documents to treat SPE Debt Securities as debt of
such SPE secured by, among other things, the Transition Property and the Other
SPE Collateral for this purpose. Because such SPE will be a wholly owned
subsidiary of Boston Edison, it is required that such SPE be consolidated with
Boston Edison for financial reporting purposes under GAAP. Therefore, such SPE's
debt will appear on the consolidated balance sheet of Boston Edison in its
annual and quarterly financial filings to the Securities and Exchange
Commission. For purposes of financial reporting to the Department, Boston Edison
will exclude such SPE's debt from its capital structure. The RRB Transaction is
not expected to impact Boston Edison's credit ratings, as it is expected that
the rating agencies will determine that RRBs, which are not supported by Boston
Edison's general revenue stream, and not collateralized by the assets of Boston
Edison, do not affect Boston Edison's creditworthiness. Therefore, it is
anticipated that the rating agencies will exclude the RRBs as debt for purposes
of calculating financial ratios.
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C. Rating Agency Considerations
1. True-sale Opinion
Rating agencies will require acceptable opinions of bankruptcy counsel at
the time SPE Debt Securities and RRBs are issued for assurance that the
Transition Property will be bankruptcy-remote from Boston Edison. To obtain such
opinions, the transfer of the Transition Property from Boston Edison to an SPE
must constitute a legal "true sale" such that if Boston Edison were to become
the subject of a bankruptcy or insolvency case, the Transition Property would
not be part of Boston Edison's bankruptcy estate and therefore would not be
subject to the claims of Boston Edison's creditors.
G.L. c. 164, Section 1H(f)(1) expressly provides that certain transfers of
Transition Property as described in G.L. c. 164, Section 1H(f)(1) approved in a
financing order shall be so treated for all purposes as an absolute transfer and
true sale, other than for federal and state income tax purposes. In addition,
SPE Debt Securities and RRBs will be non-recourse to Boston Edison and its
assets, other than the Transition Property sold to an SPE and the Other SPE
Collateral. See G.L. c. 164, Section 1H(c)(1).
Another element of the bankruptcy analysis focuses on the separate legal
status of Boston Edison and each SPE. Although Boston Edison will wholly own
each SPE, the RRB Transaction will be structured so that, in the event of a
bankruptcy of Boston Edison, each SPE's separate legal existence would be
respected and the assets and liabilities of each SPE would remain separate from
the estate of Boston Edison. The structural elements supporting such separate
existence include, without limitation, requirements that each SPE be adequately
capitalized, that Boston Edison be adequately compensated on an arms-length
basis for the servicing functions it
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performs in billing, collecting and remitting the RTC Charges and that Boston
Edison and each SPE take certain steps to ensure that creditors are not mislead
as to their separate existence. These structural protections are very important
because, without such protections, a bankruptcy court might invoke the doctrine
of "substantive consolidation" and disregard each SPE's separate existence.
Substantive consolidation is an equitable doctrine in bankruptcy cases that
allows courts to disregard the separate existence of two or more affiliated
entities to ensure the equitable treatment of all creditors and to maximize
creditor recoveries. When entities are "substantively consolidated" in a
bankruptcy proceeding, their assets and liabilities are pooled, thereby
eliminating intercompany claims, and claims of third-party creditors against any
of those entities are generally treated as claims against the common pool of
assets created by consolidation.
2. Credit Enhancement
Credit enhancements are mechanisms that provide investors with added
assurance that they will recover their investment. Examples of credit
enhancement provided by the seller of transition property or from proceeds of
the RRBs include the initial capitalization of each SPE, true-up mechanisms,
overcollateralization amounts and liquidity reserves. It is expected that the
RRB Transaction will incorporate the RTC Charge True-Up Mechanism authorized by
G.L. c. 164, Section 1H(b)(5) as described above and overcollateralization
amounts or other means of credit enhancement as required by the rating agencies
or taxing authorities.
The purpose of the overcollateralization amount is to provide security to
investors and to enhance the credit rating of RRBs by providing an additional
amount to cover shortfalls in RTC Charge collections. As a result, the RTC
Charge will be set to collect an overcollateralization amount over time in
addition to the principal balance of (in accordance with the expected
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amortization schedule), and interest on (including deficiencies on past due
principal and interest for any reason), SPE Debt Securities authorized under
this Financing Order, together with the costs of servicing SPE Debt Securities
and RRBs, including the Servicing Fee, the Administration Fee, fees for the
trustees, rating agency fees, legal and accounting fees, directors' fees,
contingent liabilities of the SPE arising from indemnity obligations in the RRB
Transaction documents, other fees and expenses required for SPE Debt Securities
and RRBs. The overcollateralization amount needed to satisfy the rating agencies
will be determined by Boston Edison, subject to approval by the Agencies, with
input from the rating agencies and tax authorities prior to the time RRBs are
priced. As with other components of the RTC Charge, the overcollateralization
component, any deficiencies in the capital account and any excess in the reserve
account will be incorporated into each periodic adjustment to the extent
necessary using the RTC Charge True-Up Mechanism adopted in this Financing
Order, in accordance with Section 1H(b)(7).
Retail customers obligated to pay the RTC Charge in their rates should
receive credit equal to the amount of any overcollateralization and any
investment earnings thereon (other than the earnings on the initial capital
contributed by Boston Edison to the SPE, which earnings will be returned as a
distribution of capital by the SPE to Boston Edison) not used to discharge the
Total RRB Payment Requirements. As a result, overcollateralization will not
reduce customer benefits from the RRB Transaction.
3. Sequestration
The Department agrees that, in the event of a default by Boston Edison or
any successor Servicer in payment of the RTC Charges to an SPE, the Department
will, upon application by (1)
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the holders of RRBs or the trustee for the special purpose trust, (2) such SPE
or its assignees or (3) pledgees or transferees of the Transition Property and
Other SPE Collateral, order the sequestration and payment to or for the benefit
of such SPE or such other party of revenues arising with respect to the
Transition Property and Other SPE Collateral. This will provide additional
certainty that the RTC Charges will benefit the owner of the Transition
Property, and should serve to enhance the credit quality of RRBs.
4. Third Party Supplier Concerns
Each TPS, if any, shall comply with the billing, collection and remittance
procedures and information access requirements set forth in Boston Edison's
testimony, or such other policies or procedures as the rating agencies may
require. Billing, collection and remittance of RTC Charges by a TPS may increase
the risk of shortfalls in RTC Charge collections by exposing the cashflow to
potential interruption due to the default, bankruptcy or insolvency of the TPS.
This risk of interruption will increase risks to investors, potentially reducing
the credit rating and increasing the rate of interest on RRBs that would be
required by investors. Such TPS billing may increase the RTC Charge component of
the transition charge resulting from such interruption or delay in payment.
Therefore, the Department approves such procedures.
D. Allocation of Collection Shortfalls
In order to preserve the bankruptcy-remote status of the Transition
Property and Other SPE Collateral once it is transferred to each SPE, Boston
Edison cannot have any claim on the RTC Charges. In its capacity as Servicer,
Boston Edison will bill RTC Charges along with other charges for services
rendered to customers obligated to pay such charges. If Boston Edison collects
less than the full amount that is billed to such customers, it is not permitted
to favor itself
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over each SPE, as owner of the Transition Property. In accordance with M.G.L.
c. 164, Section 1H(b)(1), this Financing Order requires that upon the issuance
of RRBs, transition charges collected shall be allocated first to transition
property and second to transition charges, if any, that are not subject to this
or any other financing order.
In the event that more than one SPE issues SPE Debt Securities in respect
of transition property created under this Financing Order or subsequent
financing orders, any payment which is not sufficient to pay all RTC Charges
imposed on the ratepayer will be allocated pro rata among each SPE based on the
relative size of each SPE's undivided beneficial interest in the transition
property. The Department approves of such allocation because such proceeds of
the transition property created by this Financing Order and subsequent financing
orders constitute a fungible fund consisting of non-identifiable proceeds of
such portions of the transition property, each of which has the benefit of first
priority contractual and statutory liens. A pro rata allocation among these pari
passu interests and liens on each SPE's portion of such transition property is
therefore appropriate.
As described earlier, it is expected that Boston Edison, or any successor
Servicer, will remit to the SPE trustee on a daily basis, an amount equal to the
actual RTC Charges billed, less an allowance for estimated charge-offs, on or
about the day such amounts are deemed to be collected. Boston Edison's allowance
for estimated RTC Charge charge-offs is its system-wide allowance for
charge-offs, adjusted to take into consideration estimates of partially paid
bills. Given the relative size of the RTC Charge to the overall tariff rates for
services, partially paid bills are deemed to have satisfied the RTC Charge
amount in full. Boston Edison will reconcile such remittances at least once
annually for all remittances made in the previous year with the
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SPE trustee to more accurately reflect the amount of RTC Charges that should
have been remitted, based on the actual system-wide charge-off percentage, which
is adjusted again for estimates of partially paid bills. The Department approves
Boston Edison's remittance procedure, with estimated charge-offs relating to RTC
Charges and reconciliation of remittances, and finds that such remittance
procedure, based on Boston Edison's accounting and billing information systems
capabilities, is an economical and cost effective method of identifying to a
useful degree of certainty the actual RTC Charge collections and complies with
the provisions of G.L. c. 164, Section 1H(b)(1).
E. Servicing
To the extent that any interest in Transition Property is transferred by
Boston Edison to one or more SPEs, the Department authorizes Boston Edison to
enter into a Servicing Agreement, in accordance with G.L. c. 164, Section 1H(c)
(3), with one or more SPEs to perform servicing functions on behalf of each SPE.
Pursuant to the Servicing Agreement with each SPE, Boston Edison will act
as Servicer of the Transition Property. Boston Edison will be responsible for
customer kWh billing and usage information, and for billing, collecting and
remitting the RTC Charges as described earlier and in the testimony. The
Department authorizes Boston Edison to contract with each SPE to collect amounts
in respect of the RTC Charges for the benefit and account of such SPE, and to
account for and remit these amounts to or for the account of such SPE. The
Servicing Agreement will provide that Boston Edison, as initial Servicer, may
not voluntarily resign its duties as Servicer without obtaining the prior
approval of the Department, or if such resignation will result in the reduction
or withdrawal of the credit ratings of RRBs.
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In order to support each SPE's legal status separate and apart from Boston
Edison, the Servicing Fee paid to Boston Edison must be market-based. The annual
Servicing Fee, payable semi-annually or more frequently, will be a part of the
Servicing Agreement and will be based upon a percentage of the initial principal
balance of RRBs and will be included in the reimbursable transition costs
constituting Transition Property that is sold to an SPE. The Servicing Fee
represents a reasonable good faith estimate of an arm's length, market-based fee
for servicing RRBs. Such servicing responsibilities include without limitation,
billing, monitoring, collecting and remitting RTC Charges, systems modifications
to bill, monitor, collect and remit RTC Charges, reporting requirements imposed
by the Servicing Agreement, procedures required to coordinate with each TPS,
required audits related to Boston Edison's role as Servicer, and legal and
accounting functions related to the servicing obligation. The Servicing Fee paid
to Boston Edison will be lower than the Servicing Fee paid to a successor
Servicer that does not concurrently bill the RTC Charge with charges for other
services to reflect the higher costs related thereto.
F. Accounting for Certain Benefits.
Any amounts accounted for in the reserve account, which represents
collections in excess of the fully funded credit enhancement reserves, at the
time that Boston Edison calculates a periodic RTC Charge adjustment will be
incorporated in such adjustment, in accordance with G.L. c. 164, Section
1H(b)(7). Boston Edison, as initial Servicer (or any successor Servicer)
intends, through a separate non-cash memorandum account, to account for, and
ultimately credit to ratepayers, any amounts remaining in the collection account
after the RRBs are paid in full, such as any overcollateralization amounts,
including interest earnings thereon, or RTC Charge
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collections that remain after the Total RRB Payment Requirements have been
discharged. Such amounts will be released to the SPE in accordance with G.L. c.
164, Section 1H(b)(7), upon retirement of the RRBs and discharge of the Total
RRB Payment Requirements. These benefits will inure to the benefit of ratepayers
through a credit to their transition charge, or if there is no transition
charge, through a credit to other rates.
G. SPE Administration and Other Transactions with each SPE.
Because each SPE will be a special-purpose, bankruptcy-remote entity with
limited business activities, it is anticipated that each SPE will need to enter
into an administration agreement (the "Administration Agreement") with Boston
Edison pursuant to which Boston Edison shall perform ministerial services and
provide facilities for each SPE to ensure that it is able to perform such
day-to-day operations as are necessary to maintain its existence and perform its
obligations under the RRB Transaction documents. The Administration Agreement
incorporates provisions to ensure that Boston Edison will be paid a fee (the
"Administration Fee") in an amount commensurate with its costs of performing
such services and providing such facilities.
The Department authorizes Boston Edison to enter into the Administration
Agreement and other agreements as well as any other transactions with one or
more SPEs as may be necessary to carry out the RRB Transaction.
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FINDINGS
1. In the Settlement Agreement and subsequent filings pursuant thereto,
the Department approved Boston Edison's retail distribution rates, including its
transition charge, to recover on a fully reconciling basis all of Boston
Edison's transition costs, including the reimbursable transition costs amounts
being securitized.
2. Boston Edison currently has a carrying charge of 10.88% as approved in
the Settlement Agreement, Section 1.7(b) of Attachment 3 (adjusted for changes
in the federal and state tax rates) and applicable to all of Boston Edison's
transition costs that are subject to a carrying charge.
3. The actual amounts of the Fixed Component Transition Costs were
approved as transition costs by the Department either in the Pilgrim Order,
pursuant to the Settlement Agreement or approved pursuant to any other
proceeding in an order that becomes final and no longer subject to appeal
prior to the filing, with the Securities Exchange Commission ("SEC"), of the
preliminary prospectus to be distributed to prospective investors (a "Separate
Proceeding").
4. Pursuant to the Settlement Agreement and the Pilgrim Order, the actual
amounts of the Pilgrim and fossil unrecovered plant balances, generation related
regulatory asset balances, Pilgrim decommissioning funding, the cost associated
with the buyout of the L'Energia, Limited Partnership ("L'Energia") power
purchase agreement (to the extent approved by the Department in D.T.E. 99-16)
and any additional transition costs arising in connection with the Pilgrim
divestiture or approved pursuant to a Separate Proceeding have been approved by
the Department and determined to be actual and fully mitigated for purposes of
G.L. c. 164, Section 1G(a). No audit of such amounts for purposes of G.L. c.
164, Section 1G(a) is necessary. Pursuant to this Financing Order, the actual
amounts of the transaction costs of issuance (other than the costs of reducing
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capitalization) and ongoing transaction costs (other than legal and accounting
fees and other miscellaneous fees), each of which will be set forth in the
Issuance Advice Letter and fixed at the time of RRB pricing, are hereby approved
by the Department and determined as actual for purposes of G.L. c. 164, Section
1G(a), and no audit of such amounts for purposes of G.L. c. 164, Section 1G(a)
is necessary.
5. This Financing Order approves as reimbursable transition costs amounts
the Fixed Component Transition Costs, any transition costs approved in a
Separate Proceeding including the buyout of the L'Energia power purchase
contract, the transaction costs of issuance, the ongoing transaction costs and
the cost of any credit enhancement associated with the RRB Transaction.
6. Boston Edison has or will have proved to the Department's satisfaction
that it has fully mitigated the transition costs sought to be securitized by
Boston Edison pursuant to this Financing Order for purposes of G.L. c. 164,
Section 1G(d)(4)(i). Boston Edison has complied with G.L. c. 164, Section
1G(d)(1), which requires an electric company to take all reasonable steps to
mitigate to the maximum extent possible the total amount of transition costs the
Company seeks to recover through securitization.
7. The amount of SPE Debt Securities and RRBs to be issued as described in
Boston Edison's Application and testimony is reasonable. 1.
8. The amount of necessary credit enhancement and any necessary
adjustments thereto as described in Boston Edison's testimony or required by
the rating agencies or tax authorities is reasonable.
9. So long as the effective all-in-cost of RRBs is less than 10.88%, the
RRB Transaction approved by this Financing Order will result in net savings to
Boston Edison's customers in
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compliance with G.L. c. 164, Section 1G(d)(4)(ii). The net savings will be
reflected in lower transition charges to Boston Edison's customers than would
otherwise be required to recover the approved transition costs if the RRB
Transaction did not occur in accordance with G.L. c. 164, Section 1H(b)(2). The
methodology to calculate savings described in the testimony implements Section
1.7(b) of Attachment 3 to the Settlement Agreement. All such savings will inure
to the benefit of its ratepayers as demonstrated in such testimony in compliance
with G.L. c. 164, Section 1G(d)(4)(iii). Such savings to ratepayers will result
regardless of the amount of reimbursable transition costs amounts being
securitized or the initial principal balance of RRBs.
10. Boston Edison, to the satisfaction and approval of the Department, has
established an order of preference as described in its testimony such that the
transition costs having the greatest impact on customer rates will be the first
to be reduced by securitization in compliance with G.L. c. 164, Section
1G(d)(4)(iv).
11. In the event one or more SPEs issues SPE Debt Securities in respect of
transition property created under this Financing Order or subsequent financing
orders, such proceeds of the transition property created by this Financing Order
and any subsequent financing orders constitutes a fungible fund consisting of
non-identifiable proceeds of such portions of the transition property, each of
which has the benefit of first priority contractual and statutory liens. A pro
rata allocation among these pari passu interests and liens on each SPE's portion
of such transition property is reasonable in accordance with G.L. c. 164,
Section 1H(b)(1).
12. The proposed structure of the RRB Transaction contemplates that RTC
Charge remittances will be paid over to the SPE trustee daily, on or about the
deemed collection date.
13. The Department finds that Boston Edison's methodology for calculating
the deemed collection date of RTC Charges is an economical and cost effective
method of identifying to a
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useful degree of certainty the actual RTC Charge collections in accordance with
the provisions of G.L. c. 164, Section 1H(b)(8) based upon Boston Edison's
accounting and billing information systems capabilities and finds that RTC
Charges are deemed to be paid within one calendar month of collection.
14. Boston Edison's procedure of remitting to the SPE trustee actual RTC
Charges billed less an allowance for estimated charge-offs as described in the
testimony, along with a periodic reconciliation of such remittances as described
in the testimony, is an economical and cost effective method of identifying to a
useful degree of certainty the actual RTC Charge collections and complying with
G.L. c. 164, Sections 1H(b)(1) and 1H(b)(8).
15. The RTC Charge billing, collection and remittance procedures imposed
upon any successor Servicer and any TPS as set forth in Boston Edison's
testimony are reasonable.
16. In accordance with G.L. c. 164, Section 1H(b)(2), the owner of the
Transition Property will have the right to recover an aggregate amount equal to
the Total RRB Payment Requirements until such amounts have been discharged in
full through continued assessment, collection and remittance of RTC Charges from
all classes of retail users of Boston Edison's distribution system within the
geographic service territory as in effect on July 1, 1997, whether or not energy
is purchased from Boston Edison or any TPS, and whether or not such distribution
system is being operated by Boston Edison or a successor distribution company.
The RTC Charge will be a usage-based component of retail users' monthly
transition charge and may in the future include a pro rata component of any exit
fee collected pursuant to G.L c.164, Section 1G(g).
17. The methodology used to calculate the RTC Charge associated with the
RRB Transaction and the periodic adjustments thereto as described in Boston
Edison's testimony is reasonable and complies with G.L. c. 164,
Section 1H(b)(5).
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18. Boston Edison's plan to account through a non-cash memorandum
account, and ultimately credit ratepayers, for amounts remaining in the
collection account after the RRBs are paid in full is reasonable and in
compliance with G.L. c. 164, Section 1H(b)(7).
19. The sale of the Transition Property by Boston Edison to an SPE shall
be treated as an absolute transfer of all of Boston Edison's right, title, and
interest, as in a legal true sale, and not as a pledge or other financing, of
the Transition Property, in each case notwithstanding the following, which are
hereby determined not to effect such absolute transfer and legal true sale: (i)
any contrary treatment of such transfer for accounting, tax or other purposes,
(ii) certain indemnities (including mandatory redemption or repurchase
obligations related thereto) provided for in SPE Debt Securities or in the
transaction documents which do not constitute recourse in violation of G.L. c.
164, Section 1H(c)(1), (iii) Boston Edison's continued collection of RTC Charges
pursuant to the Servicing Agreement authorized by this Financing Order, or (iv)
Boston Edison's providing any credit enhancement to such SPE as described in the
testimony. 1.
20. SPE Debt Securities and RRBs will be non-recourse to Boston Edison
and its assets, but will be secured by a pledge of all right, title and interest
of each SPE in its Transition Property and Other SPE Collateral in accordance
with G.L. c. 164, Section 1H(c)(1), (2).
21. The formation of one or more SPEs by Boston Edison, the
capitalization of each SPE by Boston Edison with an amount equal to
approximately 0.50% of the initial principal balance of the RRBs, and entering
into the Servicing Agreement, the Administration Agreement, other agreements and
transactions by Boston Edison and each SPE are necessary for the consummation of
the RRB Transaction.
22. Pursuant to G.L. c. 164, Section 1H(b)(3), the Commonwealth has
pledged and agreed that it shall not: (i) alter the provisions of G.L. c. 164
which make the RTC Charge imposed by
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this Financing Order irrevocable and binding or (ii) limit or alter the
reimbursable transition costs amounts, Transition Property, Financing Order, and
all rights thereunder until the RRBs, together with the interest thereon, are
fully discharged.
23. Pursuant to G.L. Section 1H(b)(3), the Transition Property created by
and subject to this Financing Order, and the RTC Charge authorized hereby shall
be irrevocable, and the Department (or any successor thereto) does not have
authority to revalue or revise for ratemaking purposes the reimbursable
transition costs amounts, or determine that the reimbursable transition costs
amounts or the RTC Charge is unjust or unreasonable, or in any way reduce or
impair the value of the Transition Property either directly or indirectly by
taking into account the RTC Charge when setting rates for Boston Edison, nor
should the amount of revenues arising with respect thereto be subject to
reduction, impairment, postponement, or termination.
24. Except to the extent that such matters are provided for in collective
bargaining agreements or asset purchase agreements negotiated prior to the
effective date of the Restructuring Act, or amendments to such previously
negotiated asset purchase agreements, Boston Edison has obtained written
commitments that purchasers of its divested operations will offer employment to
the impacted employees who were employed in non-managerial positions to provide
services for the divested operations at any time during the three month period
prior to the divestiture, at levels of wages and overall compensation no lower
than the employees' prior levels in compliance with G.L. c. 164,
Section 1G(d)(4)(iv).
25. The Department has received full and satisfactory documentation that
with respect to this Financing Order, Boston Edison has proved to the
Department's satisfaction that it has complied with each requirement of G.L. c.
164, Section 1G(d)(4) and each other requirement of G.L. c. 164, Sections 1G
and 1H.
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26. Boston Edison has satisfied the requirements of G.L. c. 59,
Section 38H(c).(1)
27. The annual Servicing Fee, payable semi-annually or more frequently,
is a reasonable good faith estimate of an arms-length, market-based fee for
servicing RRBs pursuant to the Servicing Agreement, as described in Boston
Edison's testimony.
28. The Department finds that each SPE formed by Boston Edison in
connection with the RRB Transaction is not an "affiliated company" for purposes
of clause (c) of G.L. c. 164, Section 85.
- ----------------------------
(1) This provision has been satisfied by an executed property tax
agreement between Boston Edison and the Town of Plymouth pursuant to
G.L. c. 59, Section 38H(c).
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29. The Settlement Agreement in Section 2.9(g) of Attachment 3 provides
that Boston Edison's transition charge shall not exceed 3.51 cents/kWh in 1998
or 3.35 cents/kWh in later years.
30. The Department finds that in the event that an audit pursuant to G.L.
c. 164, Section 1G(a)(2) results in excess reimbursable transition costs
amounts, Boston Edison's providing a uniform rate credit through a residual
value credit to its ratepayers rather than remitting payment to a financing
entity with respect to such excess is reasonable.
31. The Department finds an exemption from the competitive bidding
requirements of G.L. c. 164, Section 15 in connection with the sale of RRBs is
in the public interest.
32. The Department finds an exemption from the par value debt issuance
requirements of G.L. c. 164, Section 15A is in the public interest.
33. The Department finds that to the extent that Boston Edison
securitizes more than 75% of the decommissioning trust fund being transferred to
Entergy at closing pursuant to this Financing Order, the securitization of such
amount does not constitute a subsidy or benefit to any electric company or the
customers thereof other than Boston Edison and its customers.
34. The Department's review and approval of the Settlement Agreement in
D.P.U. Docket No. 96-23 satisfies the audit requirement under G.L. c. 164,
Section 1G(a)(1).
35. Upon completion of the fossil divestiture, Boston Edison completed
the divestiture of all non-nuclear generation assets as required by G.L. c. 164,
Section 1G(d)(3). 1.
36. The RRBs will be used to pay for mitigated transition costs related
to G.L. c. 164, Section 1G(b), in accordance with G.L. c. 164, Section
1H(b)(4)(iv). To the extent the Department has approved or will approve the
recovery of any transition costs, including the Fixed Component
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Transition Costs and the buyout of the L'Energia power purchase contract, these
costs constitute mitigated transition costs.
37. The Agencies have reviewed the Company's Application and this
Financing Order and have indicated that the RRB Transaction satisfies all
statutory requirements and contains provisions that should permit the RRBs to
achieve the highest feasible credit ratings. The Agencies have indicated that
they are not aware of any provision in the revised Financing Order beyond that
required for the necessary legal opinions or which exceeds the requirements of
the rating agencies in prior RRB transactions. The Agencies have also indicated
that the estimated transaction costs as described in Boston Edison's testimony
are reasonable and that they will also approve certain costs incurred after
issuance of the Financing Order, but before the pricing of the RRBs.
38. The final terms and conditions of SPE Debt Securities and RRBs,
including the schedule of principal amortization, credit enhancement, the
frequency of principal or interest payments, the interest rates on SPE Debt
Securities and RRBs, and manner of setting such interest rates (fixed or
variable), the manner of sale of the RRBs, the number and determination of
credit ratings and the approval of final transaction documents, will, to the
extent consistent with the provisions of this Financing Order, be determined by
Boston Edison and approved by the Agencies on behalf of the special purpose
trust at the time RRBs are priced and after input from the rating agencies, tax
authorities and the underwriters.
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ORDERS
1. The Application of Boston Edison Company (together with any legal
successors thereto, "Boston Edison") for this Financing Order pursuant to G.L.
c. 164, Section 1H is approved subject to the terms and conditions stated in the
following paragraphs.
2. The findings included in the introduction to this Financing Order are
adopted as findings by the Department and made a part of this Financing Order.
Creation of Transition Property and Reimbursable Transition Costs Amounts
3. Boston Edison is authorized to finance an aggregate total principal
amount equal to the amount required to provide, recover, finance or refinance a
portion of Boston Edison's transition costs (as defined in G.L. c. 164, Sections
1G and 1H) represented by the fixed component, net as of the date of issuance of
RRBs, of Boston Edison's transition charge (which includes the net balance of
its Pilgrim unrecovered plant balances and related regulatory assets and the
unrecovered prefunded balance of its portion of the decommissioning fund being
transferred to the buyer in connection with the divestiture of Pilgrim Nuclear
Power Station and associated generation assets ("Pilgrim")), the municipal
contract customers' portion of such balances, any additional transition costs
arising in connection with the Pilgrim divestiture or approved pursuant to any
other proceeding in an order by the Department that becomes final and no longer
subject to appeal prior to the filing with the Securities Exchange Commission
("SEC") of the preliminary prospectus to be distributed to prospective investors
(a "Separate Proceeding"), the transaction costs of issuing (as described in the
testimony) the notes ("SPE Debt Securities") of one or more SPEs (as defined
below) and the electric rate reduction bonds ("RRBs") and providing credit
enhancement (as hereinafter described, other than approximately 0.50% of the
initial principal balance of RRBs to be contributed by Boston Edison as the
initial capitalization of each SPE (as
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defined below)). These amounts constitute reimbursable transition costs amounts
(as defined in G.L. c. 164, Section 1H(a)) and shall be financed through the
issuance of SPE Debt Securities and RRBs (the "RRB Transaction"). Boston Edison
currently estimates that the principal amount of RRBs to be issued will be $800
million, subject to adjustment (which may be significant) based on the timing of
the Pilgrim divestiture, additional transition costs in connection with the
Pilgrim divestiture or approved pursuant to a Separate Proceeding, prevailing
market conditions, input on credit enhancement from nationally recognized
statistical rating organizations (the "rating agencies") selected by Boston
Edison with the approval of the Massachusetts Development Finance Agency and
Massachusetts Health and Educational Facilities Authority (together, the
"Agencies") to rate the RRBs, tax authorities and underwriters, or changes in
the proposed transaction not now anticipated by Boston Edison. The repayment of
such amounts shall be effected through the assessment and collection of a
portion of Boston Edison's transition charge (the "RTC Charge") from which SPE
Debt Securities and RRBs to be issued will be repaid.
4. The actual amounts of the fixed component of Boston Edison's transition
charge (which includes the Pilgrim unrecovered balances, as defined below), the
municipal contract customers' portion of such balances and other transition
costs (collectively, the "Fixed Component Transition Costs"), have been approved
by the Department as transition costs in Boston Edison's Restructuring
Settlement Agreement, D.P.U. Docket No. 96-23 and subsequent filings with the
Department pursuant thereto (collectively, the "Settlement Agreement"), an order
issued in connection with D.T.E. 98-119 (the "Pilgrim Order"), or in any other
Separate Proceeding and the costs associated with the L'Energia, Limited
Partnership power purchase agreement ("L'Energia") to the extent the Department
approves these costs as transition costs in D.T.E 99-16. Such transition costs,
together with the transaction costs of issuing RRBs, the
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ongoing transaction costs and the provision of credit enhancement (other than
Boston Edison's initial capital contribution), represent the reimbursable
transition costs amounts subject to this Financing Order. The "Pilgrim
unrecovered balances" include the net balance of Pilgrim unrecovered plant
balances and related regulatory assets and the unrecovered prefunded balance of
the decommissioning fund in connection with the divestiture of Pilgrim.
5. In the Settlement Agreement, the Department previously approved Boston
Edison's retail distribution rates, including its transition charge (referred to
as an "access charge" in the Settlement Agreement) to recover on a fully
reconciling basis all of Boston Edison's transition costs (including the
reimbursable transition costs amounts being securitized), the methodology to
determine if savings will result from the RRB Transaction, the application of a
carrying charge of 10.88% to all unrecovered transition costs and the amount of
Boston Edison's transition charge, and such approval is hereby reaffirmed by the
Department.
6. The transition charge, a component of which will be the RTC Charge,
shall be assessed and collected from all classes of retail users of Boston
Edison's distribution system within the geographic service territory as in
effect on July 1, 1997, whether or not energy is purchased from Boston Edison or
any TPS, and whether or not such distribution system is being operated by Boston
Edison or a successor distribution company. The transition charge, including the
RTC Charge, is a usage-based tariff on each retail user's monthly bill and may
in the future include any exit fee collected pursuant to G.L. c. 164, Section
1G(g). The RTC Charge will be sufficient in the aggregate to pay the principal
balance of (in accordance with the expected amortization schedule), and interest
on, SPE Debt Securities authorized for issuance pursuant to this Financing
Order, together with the costs of servicing SPE Debt Securities and RRBs
(including the Servicing Fee, trustee fees, rating agency fees, administration
fees, contingent
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indemnity obligations in the RRB Transaction documents (as described below) and
other fees and expenses) and the cost to Boston Edison of creating and
maintaining any credit enhancement required for SPE Debt Securities and RRBs
(the required periodic payment of such, including deficiencies on past due
principal and interest for any reason, a "Periodic RRB Payment Requirement" and
collectively, the "Total RRB Payment Requirements").
7. As of the effective date of this Financing Order, there is created and
established for the benefit of Boston Edison (or any assignee in accordance with
the terms hereof) Transition Property which represents a continuously existing
property right created pursuant to G.L. c. 164, Section 1H, including, without
limitation, the right, title, and interest in and to all revenues, collections,
claims, payments, money, or proceeds of or arising from or constituting (a) the
reimbursable transition costs amounts established by this Financing Order
including such amounts established in the Issuance Advice Letter, (b) the RTC
Charge authorized by this Financing Order including the initial RTC Charge set
forth in the Issuance Advice Letter as may be adjusted from time to time in
order to generate amounts sufficient to discharge an amount equal to the sum of
the Periodic RRB Payment Requirements for the upcoming year as authorized by
paragraph 6 of this Financing Order, and (c) all rights to obtain periodic
adjustments and non-routine adjustments to the RTC Charge.
8. The RRB Transaction will result in net savings for Boston Edison
customers reflected in lower transition charges than Boston Edison's customers
would have paid if this Financing Order were not adopted, in accordance with
G.L. c. 164, Section 1H(b)(2).
9. Boston Edison has proved to the Department's satisfaction that in
accordance with G.L. c. 164, Section 1G(d)(4): (i) Boston Edison has fully
mitigated the transition costs related to this Financing Order; (ii) savings to
Boston Edison's customers will result from the RRB
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Transaction; (iii) all such savings derived from the RRB Transaction shall
inure to the benefit of Boston Edison's customers; (iv) Boston Edison has
obtained written commitments that purchasers of divested operations will offer
employment to impacted employees; and (v) Boston Edison has established, with
the approval of the Department, an order of preference such that transition
costs having the greatest impact on customer rates will be the first to be
provided, recovered, financed or refinanced by the RRB Transaction.
Establishment of SPE
10. The establishment by Boston Edison of one or more wholly owned special
purpose entities (each, an "SPE") described in the testimony to which the
Transition Property subject to this Financing Order is to be sold is authorized
pursuant to G.L. c. 164, Sections 17A and 76A, and in accordance with all
applicable Massachusetts law, rules and regulations.
11. The capitalization by Boston Edison of each SPE with approximately
0.50% of the initial principal balance of RRBs, subject to prevailing market
conditions at the time of RRB pricing, is authorized pursuant to G.L. c. 164,
Sections 17A and 76A, and in accordance with all applicable Massachusetts law,
rules and regulations. Any other credit enhancement is either part of the
periodic adjustment to the RTC Charge or will be included in the principal
balance of RRBs.
Sale of Transition Property
12. In accordance with G.L. c. 164, Section 1H(c)(2), Boston Edison is
authorized to sell or assign all of its interest in Transition Property that
arises from this Financing Order to one or more SPEs. Each SPE is authorized to
acquire the Transition Property and is designated as a "financing entity" (as
defined in G.L. c. 164, Section 1H(a)) for such purpose, and for the purpose of
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pledging such Transition Property (and such other assets of such SPE as are
pledged under the transaction documents) to the payment of SPE Debt Securities
and RRBs.
13. Upon the sale by Boston Edison of the Transition Property to each SPE
as described in paragraph 15 of this Financing Order, (i) such SPE shall have
all of the rights originally held by Boston Edison with respect to such
Transition Property, including, without limitation, the right to exercise any
and all rights and remedies, including the right to authorize the Servicer to
shut-off electric power to the extent permitted by G.L. c. 164, Sections 116,
124-124I and applicable regulations, to assess and collect any amounts payable
by any customer in respect of such Transition Property, notwithstanding any
objection or direction to the contrary by Boston Edison, as initial servicer
(the "Servicer"), or any successor Servicer, and (ii) 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 the Servicer. 1.
14. Upon the sale by Boston Edison of the Transition Property to an SPE,
Boston Edison or any successor Servicer shall not be entitled to recover RTC
Charges other than for the benefit of the holders of SPE Debt Securities and the
related RRBs in accordance with Boston Edison's duties as Servicer of such
Transition Property as authorized in paragraphs 33 et seq. of this Financing
Order.
15. The sale by Boston Edison of the Transition Property to an SPE in
accordance with G.L. c. 164, Section 1H(f)(1) and in a manner described in such
section shall be treated as an absolute transfer of all of Boston Edison's
rights, title and interest, as a legal true sale, and not as a pledge or other
financing, of the Transition Property, in each case notwithstanding the
following, which are hereby determined not to effect such absolute transfer and
legal true sale: (i) any contrary
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treatment of such transfer for accounting, tax or other purposes, (ii) certain
indemnities (including mandatory redemption or repurchase obligations related
thereto) provided for in SPE Debt Securities or in the transaction documents
which do not constitute recourse in violation of G.L. c. 164, Section 1H(c)(1),
(iii) Boston Edison's continued collection of the RTC Charge pursuant to a
servicing agreement (the "Servicing Agreement") authorized in paragraphs 33 et
seq. of this Financing Order, or (iv) Boston Edison's providing any credit
enhancement to such SPE as described in the testimony.
16. In accordance with G.L. c. 164, Section 1H(b)(2) and paragraph 6 of
this Financing Order, the RTC Charge and its imposition, collection and payment
as provided in this Financing Order shall be assessed and collected from all
classes of retail users of Boston Edison's distribution system within the
geographic service territory as in effect on July 1, 1997, whether or not energy
is purchased from Boston Edison or any TPS, and whether or not such distribution
system is being operated by Boston Edison or a successor distribution company.
The RTC Charge is a usage-based component of the transition charge on each
retail user's monthly bill and may in the future include a pro rata component of
any exit fee collected pursuant to G.L. c. 164, Section 1G(g) until the Total
RRB Payment Requirements are discharged in full.
17. In accordance with G.L. c. 164, Section 1H(b)(3), this Financing
Order, the reimbursable transition costs amounts arising from this Financing
Order, and the RTC Charge authorized shall be irrevocable, and the Department
(or any successor entity) shall not have authority to revalue or revise for
ratemaking purposes the reimbursable transition costs amounts, or determine that
such reimbursable transition costs amounts or the RTC Charge associated
therewith is unjust or unreasonable, or in any way reduce or impair the value of
Transition Property either directly or indirectly by taking into account the
reimbursable transition costs amounts when setting rates for
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Boston Edison, nor shall the amount of revenues arising with respect thereto be
subject to reduction, impairment, postponement, or termination.
18. Each SPE, as owner of the Transition Property, and the holders of SPE
Debt Securities and RRBs, or any trustee acting therefor, shall be entitled to
the benefit of the pledge and agreement of the Commonwealth contained in G.L. c.
164, Section 1H(b)(3), and each special purpose trust referred to in paragraph
23 hereof, as a financing entity under G.L. c. 164, Section 1H, and as agent for
the Commonwealth, is authorized to include this pledge and undertaking in any
contracts with the holders of RRBs, or any trustees acting therefor.
19. In accordance with G.L. c. 164, Section 1H(d)(3) and paragraph 7 of
this Financing Order, the Transition Property created and established by this
Financing Order shall constitute property from the effective date of this
Financing Order for all purposes, including for the purpose of contracts
relating to or securing SPE Debt Securities and RRBs, whether or not the
revenues and proceeds arising with respect to RTC Charges have accrued at the
time of this Financing Order.
20. In accordance with G.L. c. 164, Section 1H(b)(6) and paragraph 7 of
this Financing Order, the Transition Property created and established by this
Financing Order shall constitute a current property right of the owner thereof
or its assignee or transferee, which continuously exists for all purposes with
all of the rights and privileges as provided in G.L. c. 164, Section 1H, from
the effective date of this Financing Order until the owner or its assignee or
transferee has received RTC Charges sufficient to discharge the Total RRB
Payment Requirements in full. In accordance with G.L. c. 164, Section 1H(b)(3),
such property right may not be limited, altered, impaired or reduced or
otherwise terminated by any subsequent actions of Boston Edison or any third
party and shall, to the fullest extent permitted by law, be enforceable against
Boston Edison, its successors and
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assigns, and all other third parties, including judicial lien creditors,
claiming an interest therein by or through Boston Edison or its successors or
assigns.
21. Pursuant to G.L. c. 164, Section 1H(e), upon the effective date of
this Financing Order there shall exist a statutory first priority lien on all
Transition Property then existing or thereafter arising pursuant to the terms of
this Financing Order. Such lien shall secure all obligations, then existing or
subsequently arising, to the holders of RRBs, the trustee or representative for
such holders, each SPE and special purpose trust and shall arise by operation of
law automatically without any action on the part of Boston Edison or any other
person. Such lien shall be valid, perfected, and enforceable upon the
effectiveness of the Financing Order without any further public notice. Boston
Edison does expect to file a financing statement with respect to the Transition
Property which will constitute a protective filing pursuant to G.L. c. 164,
Section 1H(e). If the Transition Property subject to this Financing Order is
transferred and sold to more than one SPE, any collections in respect of the
undivided beneficial interests in RTC Charges related to such Transition
Property will be allocated pro rata among such undivided beneficial interests to
give effect to the pari passu first priority statutory liens on each SPE's
portion of the Transition Property subject to this Financing Order.
SPE Debt Securities and RRBs
22. Each SPE is authorized to issue SPE Debt Securities and to pledge (i)
all of its interest in Transition Property, and (ii) any other contract rights,
other assets or collateral of the SPE (the "Other SPE Collateral") which shall
include without limitation, the rights of each SPE under the RRB Transaction
documents including the purchase agreement by which each SPE acquires the
Transition Property, and the Servicing Agreement by which Boston Edison or any
successor Servicer, acts as Servicer of the Transition Property, the collection
account and any
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other account of such SPE contained in such SPE's collection account including
the overcollateralization account and the reserve account, any investment
earnings on amounts (other than earnings on the initial capital provided by
Boston Edison, which earnings are to be returned as a distribution of capital by
such SPE to Boston Edison) held by such SPE, and the capital of such SPE, to
secure RRBs or SPE Debt Securities that are not themselves RRBs, but
substantially are mirrored by the financial terms and conditions of the RRBs
issued in connection with such pledge.
23. Each SPE and one or more special purpose trusts authorized and created
by the Agencies are each determined to be a financing entity for the purposes of
G.L. c. 164, Section 1H, and each special purpose trust is authorized to issue
RRBs evidencing undivided beneficial interests in SPE Debt Securities, the
expected and final legal maturity of the RRBs are expected to be 11 and 13
years, respectively (or longer, if required) in accordance with G.L. c. 164,
Section 1H(b)(4)(vi), the principal of the RRBs will be paid in substantially
equal annual amounts. The effective all-in-cost of the RRBs, as described in the
testimony, will not exceed the Carrying Charge of 10.88% (as defined in the
Settlement Agreement).
24. The final terms and conditions of SPE Debt Securities and RRBs
authorized by this Financing Order, including, without limiting the foregoing,
the schedule of principal amortization, credit enhancement, frequency of
principal or interest payments, the interest rates on SPE Debt Securities and
RRBs and manner of setting such interest rates (fixed or variable), the manner
of sale of the RRBs, the number and determination of credit ratings, the
approval of final transaction documents and certain transaction costs as set
forth in the testimony, shall, to the extent consistent with the provisions of
this Financing Order, be determined by Boston
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Edison and approved by the Agencies on behalf of the special purpose trust at
the time RRBs are priced and after input from the rating agencies, tax
authorities and the underwriters.
25. The amount of SPE Debt Securities and RRBs to be issued shall be
determined as described in Boston Edison's testimony; and the net proceeds of
SPE Debt Securities or RRBs shall be used to pay for mitigated transition costs,
in accordance with G.L. c. 164, Section 1H(b)(4)(iv).
26. A special purpose trust shall remit the proceeds from the issuance of
the RRBs authorized by this Financing Order, less underwriters' discount and
original issue discount, to an SPE, which shall, in turn, remit such net
proceeds, less certain transaction costs of issuing SPE Debt Securities and RRBs
to Boston Edison.
27. Boston Edison may apply the net proceeds of RRBs as described in the
testimony (and as set forth in paragraphs 60 et seq. of this Financing Order).
28. The amounts necessary for credit enhancement for SPE Debt Securities
and RRBs and any subsequent adjustments thereto should be determined as
described in Boston Edison's testimony, subject to the requirements of rating
agencies and tax authorities and approval by the Agencies on behalf of the
special purpose trust.
29. The net savings and lower transition charges resulting from the RRB
Transaction should be calculated in accordance with the methodology set forth in
Boston Edison's testimony and such savings will inure to the benefit of
ratepayers, directly or indirectly as described in the testimony. 1.
30. In accordance with G.L. c. 164, Section 1H(c)(1), RRBs and SPE Debt
Securities shall be non-recourse to Boston Edison and its assets, other than the
Transition Property sold to the SPE and Other SPE Collateral subject to this
Financing Order, provided nothing herein shall prevent
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Boston Edison or its successors or assigns from (a) entering into the Servicing
Agreement authorized pursuant to G.L. c. 164, Section 1H(c)(3) and paragraphs 33
and 62 of this Financing Order, which arrangements may include the making of
representations, warranties and agreements and the providing of covenants and
indemnities, not amounting to recourse, for the benefit of the holders of RRBs
and SPE Debt Securities, and the making of remittances of amounts representing
deemed collections of RTC Charges, (b) entering into agreements in connection
with the sale and transfer of the Transition Property to an SPE and sale of the
SPE Debt Securities, which agreements may include representations and warranties
with respect to, among other things, the validity of the Transition Property and
the title thereto, and providing specific covenants, indemnities and repurchase
obligations, not amounting to recourse, in connection with such transfer for the
benefit of the holders of RRBs and SPE Debt Securities, (c) entering into an
administration agreement (the "Administration Agreement") with each SPE as
further described in the testimony and authorized in paragraph 62 of this
Financing Order and (d) capitalizing each SPE as described in paragraph 11 of
this Financing Order.
Reports
31. Upon the issuance of RRBs and SPE Debt Securities, Boston Edison shall
file with the Department, for informational purposes, an issuance advice letter,
substantially in the form of Appendix A hereto (the "Issuance Advice Letter"),
setting forth the final structural details of RRBs and SPE Debt Securities,
including the repayment terms (in accordance with the expected amortization
schedule), the initial RTC Charge, the amount necessary for credit enhancement,
the identification of each SPE and a special purpose trust, the transaction
costs of issuance and a calculation confirming net savings to ratepayers as a
result of the RRB Transaction. Such filing
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shall not be a condition to the effectiveness of this Financing Order or the
issuance of RRBs or SPE Debt Securities and shall be automatically effective
upon filing. 1.
32. Within 90 days following the closing of the RRB Transaction, and
within 60 days of the end of each fiscal quarter thereafter until the proceeds
have been applied in full, Boston Edison shall file with the Department a report
showing the use of RRB proceeds in compliance with paragraphs 60 et seq. of this
Financing Order. Such filing shall not be a condition to the effectiveness of
this Financing Order or the issuance of RRBs or SPE Debt Securities.
Servicing of SPE Debt Securities and RRBs
33. Boston Edison, as Servicer, or any successor Servicer is required, in
accordance with G.L. c. 164, Section 1H(c)(3), to enter into a servicing
agreement (the "Servicing Agreement") with an SPE pursuant to which it agrees to
continue to operate its distribution system to provide service to its customers,
to bill and collect RTC Charges for the benefit and account of such SPE or its
assigns, and to account for and remit these amounts to or for the account of
such SPE or its assigns. These components of the Servicing Agreement as further
described in the testimony are authorized and approved.
34. Given Boston Edison's current accounting and billing information
systems capabilities, Boston Edison's establishment of the deemed collection
date, based on its historical collections experience, and its remittance and
reconciliation procedure as more fully described in the testimony is in
compliance with the provisions of G.L. c. 164, Sections 1H(b)(1), (8).
35. In the event of a default by a Servicer in remittance of RTC Charges,
the Department will, in accordance with G.L. c. 164, Sections 1H(d)(5) and (e),
upon application by (i) the holders of SPE Debt Securities or RRBs, or the
trustees or representatives therefor as beneficiaries of any statutory lien
provided by G.L. c. 164, Section 1H(e), (ii) an SPE or its assignees,
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(iii) a special purpose trust, or (iv) other pledgees or transferees of the
Transition Property and Other SPE Collateral, order the sequestration and
payment to or for the benefit of the pledgees or transferees of the revenues
arising with respect to the Transition Property.
36. In the event of a default by a Servicer under any Servicing Agreement
with respect to RRBs, each special purpose trust or the trustees or
representatives of the holders of SPE Debt Securities or RRBs, may immediately
appoint a successor Servicer for the Transition Property, subject to the
approval of the Department, who shall promptly assume billing responsibilities
for RTC Charges. The Department shall act on an expedited basis within 30 days
to approve such successor Servicer. Such successor Servicer shall assume all
rights and obligations under G.L. c. 164, Section 1H and this Financing Order as
though it were the Servicer at the time such SPE Debt Securities and RRBs were
issued.
37. In accordance with G.L. c. 164, Section 1H(b)(1), amounts collected
from a customer of Boston Edison shall be allocated first, pro rata based on the
relative size of applicable RTC Charges, to the RTC Charges and other portions
of the transition charge subject to other subsequent financing orders, and
second, to any remaining portion of the transition charge not the subject of a
financing order, provided, however, as set forth in G.L. c. 164, Section
1H(f)(1), such preferred right to revenues of Boston Edison shall not impair or
negate the characterization of the transfer of the Transition Property as a
legal true sale as set forth in paragraph 15 of this Financing Order. The
Department approves Boston Edison's remittance procedure, with estimated
charge-offs relating to RTC Charges and reconciliation of remittances, as more
fully described in the testimony and finds that such remittance procedure based
on Boston Edison's accounting and billing information systems capabilities is in
compliance with G.L. c. 164, Section 1H(b)(1).
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38. The Department will not approve or require any Servicer to replace
Boston Edison as Servicer in any of its servicing functions with respect to the
RTC Charges and the Transition Property authorized by this Financing Order
without determining that approving or requiring such successor Servicer will not
cause the then current credit ratings on RRBs to be withdrawn or downgraded.
39. Any TPS that proposes to collect RTC Charges shall (i) meet the
creditworthiness criteria to be established by the Department, and at a minimum,
the criteria set forth and approved in paragraph 40 of this Financing Order; and
(ii) comply with the billing, collection and remittance procedures and
information access requirements set forth in the testimony, or such other
procedures as the rating agencies may require.
40. The Department will not authorize a TPS to bill and collect the RTC
Charge for remittance to Boston Edison as Servicer (or any successor Servicer),
unless (i) such TPS agrees to remit the full amount of RTC Charges it bills to
retail end-users, regardless of whether payments are received from such
end-users, within 15 days of Boston Edison's (or any successor Servicer's) bill
for such charges, (ii) such TPS shall provide Boston Edison (or any successor
Servicer) with total monthly kWh usage information in a timely manner for the
Servicer to fulfill its obligations, as such information is the basis of such
remittance and (iii) Boston Edison (or any successor Servicer) will be entitled,
within seven days after a default by the TPS in remitting any RTC Charges
billed, to assume responsibility for billing all charges for services provided
by Boston Edison (or any successor Servicer), including the RTC Charges, or to
switch responsibility to a third party. In addition, if and so long as such TPS
does not maintain at least a 'BBB' (or the equivalent) long term unsecured
credit rating from Moody's Investors Service or Standard & Poor's Rating
Services, such TPS shall maintain, with the Servicer or as directed by
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the Servicer, a cash deposit or comparable security equal to one months'
maximum estimated collections of RTC Charges, as agreed upon by Boston Edison
(or any successor Servicer) and the TPS. In the event of a default in the
remittance of RTC charges by a TPS, such amount will be included in the periodic
adjustment of the RTC Charge as described in the testimony.
41. Regardless of who is responsible for billing of the transition charge,
such transition charge, a component of which will be the RTC Charge, will be
assessed and collected from all classes of retail users of Boston Edison's
distribution system within the geographic service territory as in effect on July
1, 1997 whether or not energy is purchased from Boston Edison or any TPS, and
whether or not such distribution system is being operated by Boston Edison or a
successor distribution company. Such users will continue to be responsible for
payment of the transition charge, a component of which will be the RTC Charge,
billed, but not yet remitted, to the Servicer to the extent such user has not
paid RTC Charges billed to it.
42. In the event of a failure of any retail user to pay the RTC Charge,
the Servicer is authorized to shut-off power of such retail user in accordance
with G.L. c. 164, Sections 116, 124-124I and applicable regulations, at the
direction of Boston Edison or any successor Servicer.
43. The Servicer is authorized to implement the rate collection methods
described in the testimony to ensure that the RTC Charge is nonbypassable
pursuant to G.L. c. 164, Section 1H(b)(2).
44. The Servicer shall be entitled to a servicing fee (the "Servicing
Fee"). The Department approves the Servicing Fee as follows: A Servicer which
bills the RTC Charge concurrently with other service charges is entitled to
receive an annual Servicing Fee, payable semi-annually or more frequently, of
approximately 0.05% of the initial principal balance of RRBs and a Servicer that
does not concurrently bill the RTC Charge with other service charges is
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entitled to receive a higher Servicing Fee of up to approximately 1.25% of such
initial principal balance.
45. Boston Edison, as initial Servicer, may not voluntarily resign its
duties as Servicer without prior written approval of the Department. Boston
Edison shall remain as Servicer if such resignation will result in the reduction
or withdrawal of the credit rating of the RRBs.
The RTC Charge: Establishment and Adjustment
46. The methodology used to calculate the RTC Charge associated with SPE
Debt Securities and RRBs, and to periodically adjust such RTC Charge, was
described in the testimony, which methodology is approved.
47. The RTC Charge, which will constitute Transition Property, will be
filed initially with the Department in the Issuance Advice Letter and adjusted
up or down, as necessary, in Routine True-Up Letters or Non-Routine True-Up
Letters (each, as defined below). While not separately identified on each retail
user's monthly bill, each monthly bill will indicate in a footnote that the
reimbursable transition cost ("RTC") Charge, as a component of the transition
charge, is being collected on behalf of a special purpose entity ("SPE"), as
owner of the Transition Property.
48. The initial RTC Charge shall be filed in the Issuance Advice Letter,
as provided in paragraph 31 of this Financing Order, which RTC Charge shall be
effective upon filing.
49. In accordance with G.L. c. 164, Section 1H(b)(5), Boston Edison, or a
successor Servicer, on behalf of the pledgees or transferees of the Transition
Property, is authorized to file periodic RTC Charge adjustments to the extent
necessary to ensure the timely recovery of revenues sufficient to provide for
the payment of an amount equal to the sum of the Periodic RRB Payment
Requirements for the upcoming year, which may include indemnity obligations of
the
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SPE in the RRB transaction documents for SPE officers and directors, trustee
fees, liabilities of the special purpose trust and liabilities to the
underwriters related to the underwriting of the RRBs. The Transition Property
includes the right to obtain such adjustments.
50. Periodic RTC true-up advice letters ("Routine True-Up Letters"), shall
be filed in substantially the form attached to this Financing Order as Appendix
B and shall be completed in accordance with the methodology described in the
testimony, which methodology is approved.
51. Annual RTC Charge adjustments shall be filed with the Department in
Routine True-Up Letters. Adjustments to the RTC Charge proposed by Routine
True-Up Letters shall be filed with the Department each year prior to the
anniversary of the date of effectiveness of this Financing Order, and resulting
adjustments to the RTC Charge shall become effective the first day of the
succeeding month, or such date as may be specified in the Routine True-Up
Letter, as long as such effective date is at least 15 days after the filing of
such Routine True-Up Letter.
52. Routine True-Up Letters may also be filed more frequently before the
end of any calendar quarter or payment date (as defined in the RRB Transaction
documents) and the resulting adjustments to RTC Charges will be effective the
first day of the succeeding month, or such date as may be specified in the
Routine True-Up Letter, as long as such effective date is at least 15 days after
the filing of such Routine True-Up Letter.
53. So long as Routine True-Up Letters are filed in accordance with the
adjustment calculation methodology approved in this Financing Order and use the
Routine True-Up Letters attached substantially in the form of Appendix B to this
Financing Order, no hearing or other action by the Department regarding such
Routine True-Up Letter filings shall be required, and the resulting RTC Charge
adjustments will be effective as provided herein and in such filings.
56
<PAGE> 112
54. In the event that Boston Edison determines that the methodology used
to calculate the RTC Charge described in the testimony requires adjustment to
more accurately project and generate adequate RTC Charge revenues, a non-routine
RTC true-up advice letter ("Non-Routine True-Up Letter") may be filed. Any
Non-Routine RTC True-Up Letter and resulting adjustments to RTC Charges shall be
effective within 60 days of such filing. Non-Routine True-Up Letters are subject
to the review and approval of the Department.
55. In no event shall the transition charge from time to time in effect as
approved by the Department in accordance with the Settlement Agreement's
methodology and as may be revised by this Financing Order, the Pilgrim Order, or
in an order arising from a Separate Proceeding be adjusted below the RTC. If
adjustments to the transition charge to meet the required rate reduction would
cause the transition charge to fall below the RTC charge, the Department shall
adjust other components of the Company's rates. Conversely, if the RTC charge,
as adjusted, would exceed the then current transition charge, the Department
also shall adjust other components of the Company's rates.
Advice Filings for Tariff Language
56. Boston Edison is authorized to establish by the Issuance Advice Letter
filing the initial RTC Charge and by the true-up letter filings, subsequent
adjustments, up or down, to the RTC Charge. The RTC Charge will represent a
component of the transition charge.
Reconciliation of the RTC Charge
57. As required by G.L. c. 164, Section 1G(a)(2), Boston Edison shall
permit the Department, at Boston Edison's expense, to audit, review and
reconcile the difference, if any, between assumed reimbursable transition costs
amounts, with the actual reimbursable transition costs amounts not less often
than once during each 18 month period following the effective date of this
57
<PAGE> 113
Financing Order. Such audit, review and reconciliation shall not include the
actual amounts approved in the findings of this Financing Order and known at the
time of pricing of the RRBs and filing of the Issuance Advice Letter. Through
the Settlement Agreement, the subsequent filings pursuant thereto, the Pilgrim
Order or a Separate Proceeding, the Department has established and authorized as
actual and fully mitigated for purposes of G.L. c. 164, Section 1G(a)(2), the
amounts of the Pilgrim and fossil unrecovered plant balances, generation related
regulatory assets balances, Pilgrim decommissioning funding and any additional
costs arising in connection with the Pilgrim divestiture or approved pursuant to
a Separate Proceeding. In this Financing Order, the Department has established
and authorized as actual for purposes of G.L. c. 164, Section 1G(a)(2), the
transaction costs of issuance (other than the costs of reducing capitalization),
ongoing transaction costs (other than legal and accounting fees and other
miscellaneous fees) and any credit enhancement (collectively with the above
transition costs, the "actual reimbursable transition costs amounts"). No audit
of Boston Edison pursuant to G.L. c. 164, Section 1G(a)(2) is necessary with
respect to such actual reimbursable transition costs amounts and the Department
shall not conduct or require any audit of such amounts.
58. To the extent that an audit under G.L. c. 164, Section 1G(a)(2) is
required subject to paragraph 57 of this Financing Order, if the amount of
reimbursable transition costs amounts, other than actual reimbursable transition
costs amounts (as defined in paragraph 57 of this Financing Order), exceeds the
actual amount of such reimbursable transition costs amounts as shown by the
audit, then Boston Edison, upon order of the Department, shall provide
ratepayers with a uniform rate credit through the mechanism of its residual
value credit and annual transition charge update as described in the Settlement
Agreement.
58
<PAGE> 114
59. No such uniform rate credit shall in any way diminish or affect the
right of Boston Edison or its assignee or pledgee to collect RTC Charges in
amounts necessary to provide for the payment of an amount equal to the sum of
the Periodic RRB Payment Requirements for the upcoming year as the same become
due, nor shall any such rate credit impair or negate the characterization of the
transfer of the Transition Property as a true sale as set forth in paragraph 15
of this Financing Order nor shall any such rate credit reduce or impair the
value of the Transition Property as proscribed by paragraph 17 of this Financing
Order.
Use of RRB Proceeds
60. Boston Edison expects to use such proceeds, net of transaction costs
described in paragraph 3 of this Financing Order, for the following purposes:
(a) to return the securitized portion of the Pilgrim and fossil unrecovered
plant balances and related regulatory assets; (b) to fund the unrecovered
prefunded balance of the securitized portion of the decommissioning fund and
recover other transition costs arising in connection with the Pilgrim
divestiture or approved pursuant to a Separate Proceeding; and (c) to provide
any credit enhancement required for the RRBs. Boston Edison may also apply such
proceeds to the reduction of its capitalization and for general corporate
purposes.
61. Boston Edison's use of the net RRB proceeds is authorized and
approved. Boston Edison has proved to the Department's satisfaction that it has
established an order of preference such that the transition costs having the
greatest impact on customer rates will be the first to be provided, recovered,
financed or refinanced by the RRB Transaction in accordance with G.L. c. 164,
Section 1G(d)(4)(v).
Approval of Servicing Agreement, Administration Agreement and Other
Agreements or Transactions
59
<PAGE> 115
62. Boston Edison's entering into the Servicing Agreement, the
Administration Agreement and other RRB Transaction documents with one or more
SPEs as described herein and other transaction documents and other dealings
between Boston Edison and each SPE contemplated by the RRB Transaction are
authorized pursuant to G.L. c. 164, Sections 17A and 76A and in accordance with
all applicable Massachusetts law, rules and regulations. Such Agreements and RRB
Transaction documents shall comply with this Financing Order and shall not
impair or negate the characterization of the sale, assignment or pledge as an
absolute transfer, a true sale, or security interest as applicable.
Accounting for Certain Benefits
63. Any amounts accounted for in the reserve account, which represents
collections in excess of the fully funded credit enhancement reserves, at the
time that Boston Edison calculates a periodic RTC Charge adjustment will be
incorporated in such adjustment, in accordance with G.L. c. 164, Section
1H(b)(7). Boston Edison, as initial Servicer (or any successor Servicer)
intends, through a separate non-cash memorandum account, to account for, and
ultimately credit to ratepayers, any amounts remaining in the collection account
after the RRBs are paid in full, such as any overcollateralization amounts,
including interest earnings thereon, or RTC Charge collections that remain after
the Total RRB Payment Requirements have been discharged. Such amounts will be
released to the SPE in accordance with G.L. c. 164, Section 1H(b)(7), upon
retirement of the RRBs and discharge of the Total RRB Payment Requirements.
These benefits will inure to the benefit of ratepayers through a credit to their
transition charge or if there is no transition charge, through a credit to other
rates.
60
<PAGE> 116
64. The Department confirms that as provided in the Settlement Agreement,
Boston Edison's transition charge shall not exceed 3.51 cents/kWh in 1998 or
3.35 cents/kWh thereafter and that this cap is not subject to reduction.
65. Synthetic floating rate RRBs (RRBs representing an interest in fixed
rate SPE Debt Securities and the floating rate side of a swap transaction) will
not be issued unless such issuance, as determined by the Company and approved by
the Agencies, on behalf of the special purpose trust will result in a lower net
interest cost on the RRBs.
66. The Department grants an exemption from the competitive bidding
requirements of G.L. c. 164, Section 15 in connection with the sale of RRBs.
67. The Department grants an exemption from the par value debt issuance
requirements of G.L. c. 164, Section 15.
68. This order hereby incorporates those findings and determinations that
transition costs are securitizable as defined in G.L. c. 164, as reached by the
Department in an order, including D.T.E. 98-119 and 99-16, that becomes final
and no longer subject to appeal prior to the filing with the SEC of the
preliminary prospectus to be distributed to prospective investors.
61
<PAGE> 117
Appendix A
ISSUANCE ADVICE LETTER
[date]
ADVICE______
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY (THE
"DEPARTMENT") OF THE COMMONWEALTH OF MASSACHUSETTS
SUBJECT: Issuance Advice Letter for Electric Rate Reduction Bonds ("RRBs")
Pursuant to D.T.E. Docket No. 98-118 (the "Financing Order"), Boston Edison
Company ("Boston Edison") hereby transmits for filing, on the pricing date of
this series of RRBs, the initial RTC Charge for such series. This Issuance
Advice Letter is for the RRB series _______ class(es)_________. Any capitalized
terms not defined herein shall have the meanings ascribed thereto in the
Financing Order.
PURPOSE
This filing establishes the following:
(a) the actual terms of the RRBs being issued;
(b) confirmation of ratepayer savings;
(c) the initial RTC Charge for retail users;
(d) the identification of the Transition Property to be sold to a special
purpose entity (the "SPE"); and
(e) the identification of the SPE;
BACKGROUND
In the Financing Order, the Department authorized Boston Edison to file an
Issuance Advice Letter when pricing terms for a series of RRBs have been
established. This Issuance Advice Letter filing incorporates the methodology for
determining the RTC Charge approved and authorized by the Department in the
Financing Order to establish the initial RTC Charge for a series of RRBs and
establishes the initial RTC Charge to be assessed and collected from all classes
of retail users of Boston Edison's distribution system within the geographic
service territory as in effect on July 1, 1997, whether or not energy is
purchased from Boston Edison or any TPS, and whether or not such distribution
system is being operated by Boston Edison or a successor distribution company.
The RTC Charge is a usage-based component of the transition
A-1
<PAGE> 118
charge on each retail user's monthly bill, and may include in the future a
component of any exit fee collected pursuant to G.L. c. 164, Section 1G(g) until
the Total RRB Payment Requirements are discharged in full.
ACTUAL TERMS OF ISSUANCE
RRB Name:_________
RRB Issuer:_________
Trustee(s):_________
Closing Date:_________
Bond Rating:________
Amount Issued:_________
Transaction costs of issuance: See Attachment 1
Ongoing transaction costs: See Attachment 2
Coupon Rate(s):_________
Call Features:_________
Massachusetts Tax Exempt (yes/no):_________
Expected Principal Amortization Schedule: See Attachment 3
Expected Final Maturity:_________
Legal Final Maturity:_________
Distributions to Investors (quarterly or semi-annually):_________
Annual Servicing Fee as a percent of the initial RRB principal
balance:_________
Overcollateralization amount for the RRBs:_________
Confirmation of Ratepayer Savings
The Financing Order requires Boston Edison to demonstrate, using the savings
methodology approved in that Docket, that the actual terms of the RRB
Transaction result in net savings. Attached to this Issuance Advice Letter is a
spreadsheet calculation which shows expected net savings of $___ million for
this series of RRBs. See Attachment 4.
A-2
<PAGE> 119
Initial RTC Charge
Table I below shows the current assumptions for each of the variables used in
the RTC Charge calculation.
TABLE I
INPUT VALUES FOR RTC CHARGES
Forecasted annual retail kWh sales
Percent of billed amounts expected to be charged-off:________
Weighted average days sales outstanding:_____
(calculated as follows)
Percent of billed amounts collected in current month:_____
Percent of billed amounts collected in second month after billing:_____
Percent of billed amounts collected in third month after billing:_____
Percent of billed amounts collected in fourth month after billing:_____
Percent of billed amounts collected in fifth month after billing:_____
Forecasted annual ongoing transaction expenses:_____
Required annual overcollateralization amount:_____
Current RRB outstanding balance:_____
Expected RRB outstanding balance as of ___/___/___:_____
The initial RTC Charge calculated for retail users is as follows:
_____cent/kWh
Transition Property
Transition Property is the property described in G.L. c. 164, Section 1H(a)
relating to the RTC Charge set forth herein, including, without limitation, the
right, title, and interest in and to all revenues, collections, claims,
payments, money, or proceeds of or arising from or constituting (a) the
reimbursable transition costs amounts established by the Financing Order
including such amounts established in the Issuance Advice Letter, (b) the RTC
Charge authorized by the Financing Order including the initial RTC Charge set
forth in the Issuance Advice Letter, as may be adjusted from time to time in
order to generate amounts sufficient to discharge the Total RRB Payment
Requirements, and (c) all rights to obtain periodic adjustments and non-routine
adjustments to the RTC Charge.
This RTC Charge, as adjusted from time to time, shall remain in place until the
Total RRB Payment Requirements are discharged in full.
Identification of SPE
The owner of the Transition Property (the "SPE") will be: ____________________.
The SPE shall be considered a financing entity for purposes of G.L. c. 164,
Section 1H.
A-3
<PAGE> 120
EFFECTIVE DATE
In accordance with the Financing Order, the RTC Charge shall be automatically
effective when filed and will continue to be effective, unless it is changed by
subsequent Issuance Advice Letter, Routine True-Up Letter, or Non Routine
True-Up Letter.
NOTICE
Copies of this filing are being furnished to the parties on the attached service
list. Notice to the public is hereby given by filing and keeping this filing
open for public inspection at the Company's corporate headquarters.
Enclosures
A-4
<PAGE> 121
ATTACHMENT 1
TRANSACTION COSTS OF ISSUANCE
<TABLE>
<S> <C>
Amount
------
Underwriting spread
Rating agency fees
Accounting fees
SEC registration fee (.0278%)
D.T.E. filing fee ($750 for first million plus $150
for each additional million)
Printing and marketing expenses
Trustee fees and counsel
Company legal fees and expenses
Underwriters' legal fees and expenses
Bond counsel legal fees and expenses
Mass Development/HEFA fees
Original issue discount
Servicing set-up costs
SPE set-up costs
Miscellaneous costs
Expenses in connection with reducing capitalization
(including call provisions and prepayments) ----------
Total transaction costs of issuance $
==========
</TABLE>
A-5
<PAGE> 122
ATTACHMENT 2
ONGOING TRANSACTION COSTS
<TABLE>
<S> <C>
Ongoing Costs Amount
- ------------- ------
Administration fee
Rating agency fees
Accounting, legal and trustees' fees
Servicing fee (approximately .05% of initial
principal balance)(2)
Overcollateralization amount
Miscellaneous(3)
------
Total estimated costs $
======
</TABLE>
- ----------------------
(2) These costs will include:
- Billing, collecting and remitting the RTC Charges;
- Calculate daily amount of remittances to the SPE trustee;
- Wire transfer daily remittances to the SPE trustee;
- Prepare monthly servicer report for trustee and rating agencies;
- Prepare semi-annual servicer report for trustee;
- Manage and invest the various SPE cash accounts;
- Reflect all transactions on the financial statements;
- Perform periodic reconciliations with the trustee;
- Perform annual true-up and adjust RTC Charge, as necessary; and
- Maintain memorandum account, if any.
(3) These costs would include any contingent liabilities arising in
connection with indemnity provisions in the RRB Transaction documents.
A-6
<PAGE> 123
ATTACHMENT 3
EXPECTED AMORTIZATION SCHEDULE
SERIES_______, CLASS_______
A-7
<PAGE> 124
ATTACHMENT 4
RATEPAYER SAVINGS
A-8
<PAGE> 125
Appendix B
ROUTINE TRUE-UP LETTER
[date]
ADVICE________
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY (THE "DEPARTMENT") OF THE
COMMONWEALTH OF MASSACHUSETTS
SUBJECT: Periodic RTC Charge True-Up Mechanism Advice Filing
Pursuant to D.T.E. Docket No. 98-118 (the "Financing Order"), Boston Edison
Company ("Boston Edison") as servicer of the RRBs or any successor Servicer and
on behalf of the trustee as assignee of the special purpose entity (the "SPE")
may apply for adjustment to the RTC Charge on each anniversary of the date of
the Financing Order and at such additional intervals as may be provided for in
the Financing Order. Any capitalized terms not defined herein shall have the
meanings ascribed thereto in the Financing Order.
PURPOSE
This filing establishes the revised RTC Charge to be assessed and collected from
all classes of retail users of Boston Edison's distribution system within the
geographic service territory as in effect on July 1, 1997, whether or not energy
is purchased from Boston Edison or any TPS, and whether or not such distribution
system is being operated by Boston Edison or a successor distribution company.
The RTC Charge is a usage-based component of the transition charge on each
retail user's monthly bill and may include in the future a component of any exit
fee collected pursuant to G.L. c. 164, Section 1G(g) until the Total RRB Payment
Requirements are discharged in full. In the Financing Order, the Department
authorized Boston Edison to file Routine True-Up Letters prior to each
anniversary of the date of the Financing Order and at such additional intervals,
if necessary, as provided for in the Financing Order. Boston Edison, or a
successor Servicer, is authorized to file periodic RTC Charge adjustments to the
extent necessary to ensure the timely recovery of revenues sufficient to provide
for the payment of an amount equal to the sum of the Periodic RRB Payment
Requirements (as defined in the Financing Order for the upcoming year, which may
include indemnity obligations of the SPE in the RRB transaction documents for
SPE officers and directors, trustee fees, liabilities of the special purpose
trust and liabilities to the underwriters related to the underwriting of the
RRBs.
B-1
<PAGE> 126
Routine True-Up Letter filings are those where Boston Edison uses the
methodology approved by the Department in the Financing Order to adjust upward
or downward the existing RTC Charge.
Using the methodology approved by the Department in the Financing Order, this
filing modifies the variables used in the RTC Charge calculation and provides
the resulting modified RTC Charge. Table I shows the revised assumptions for
each of the variables used in calculating the RTC Charge for retail users. The
assumptions underlying the current RTC Charges were filed in an Issuance Advice
Letter, dated _____________.
Table I below shows the current assumptions for each of the variables used in
the RTC Charge calculation.
TABLE I
INPUT VALUES FOR RTC CHARGE
Forecasted annual retail kWh sales:_____
Forecasted percent of retail users' billed amounts charged-off:_____
Percent of retail users' billed amounts charged-off:_____
Weighted average days sales outstanding:_____
(calculated as follows)
Percent of billed amounts collected in current month:_____
Percent of billed amounts collected in second month after billing:_____
Percent of billed amounts collected in third month after billing:_____
Percent of billed amounts collected in fourth month after
billing:_____
Percent of billed amounts collected in fifth month after billing:_____
Annual ongoing transaction expenses:_____
Current RRB outstanding balance:_____
Expected RRB outstanding balance as of ___/___/___:_____
Deferred unpaid RRB principal:_____
Accrued but unpaid RRB interest:_____
Unpaid ongoing transaction costs:_____
Required annual overcollateralization amount:_____
Deficiency in capital account:_____
Deficiency in overcollateralization account:_____
Amount in reserve account:_____
The adjusted RTC Charge calculated for retail users is as follows: _____cent/kWh
EFFECTIVE DATE
In accordance with the Financing Order, Routine True-Up Letters for annual RTC
Charge adjustments shall be filed prior to the anniversary of the Financing
Order or more frequently, if necessary, with the resulting changes to be
effective no sooner than 15 days after the filing of this
B-2
<PAGE> 127
Routine True-Up Letter. No resolution by the Department is required. Therefore,
these RTC Charges shall be effective as of __________.
NOTICE
Copies of this filing are being furnished to the parties on the attached service
list. Notice to the public is hereby given by filing and keeping this filing
open for public inspection at Boston Edison's corporate headquarters.
Enclosures
B-3
<PAGE> 128
THE COMMONWEALTH OF MASSACHUSETTS
----------
DEPARTMENT OF
TELECOMMUNICATIONS AND ENERGY
May 21, 1999
D.T.E. 98-118-A
Application of Boston Edison Company, an electric company under G.L. c. 164,
Section 1, for Approval of Rate Reduction Bonds under the terms of the Electric
Restructuring Act, St. 1997, c. 164.
- --------------------------------------------------------------------------------
APPEARANCES: William S. Stowe, Esq.
Catherine J. Keuthen, Esq.
Boston Edison Company
800 Boylston Street
Boston, Massachusetts 02199
and
Robert K. Gad, Esq.
Colleen M. Granahan, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
FOR: BOSTON EDISON COMPANY
Petitioner
Thomas J. Reilly, Attorney General
BY: Joseph W. Rogers
Rebecca Perez
Assistant Attorneys General
Regulated Industries Division
200 Portland Street, 4th Floor
Boston, Massachusetts 02114
Intervenor
<PAGE> 129
Robert F. Sydney, Esq.
Vincent DeVito, Esq.
Division of Energy
Resources 100 Cambridge Street, Room 1500
Boston, Massachusetts 02202
FOR: COMMONWEALTH OF MASSACHUSETTS
DIVISION OF ENERGY RESOURCES
Intervenor
Paul R. Gauron, Esq.
Goodwin, Procter & Hoar, LLP
Exchange Place
Boston, Massachusetts 02109
FOR: ENTERGY NUCLEAR GENERATION
COMPANY
Intervenor
Burton E. Rosenthal, Esq.
Segal, Roitman & Coleman
11 Beacon Street, Suite 500
Boston, MA 02108
FOR: LOCALS 369 and 387, AFL-CIO
Intervenor
Maria Krokidas, Esq.
Krokidas & Bluestein
141 Tremont Street
Boston, MA 02111-1209
FOR: MASSACHUSETTS DEVELOPMENT
FINANCE AGENCY
and
FOR: MASSACHUSETTS HEALTH &
EDUCATIONAL FACILITIES AUTHORITY
Intervenors
Michael B. Meyer, Esq.
Meyer, Connolly, Sloman & MacDonald, LLP
12 Post Office Square
Boston, MA 02109
FOR: TOWN OF PLYMOUTH
Intervenor
<PAGE> 130
David S. Rosenzweig, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02110
and
John Cope-Flanagan, Esq.
COM/Energy Services Company
One Main Street
P.O. Box 9150
Cambridge, MA 02142-9150
FOR: COMMONWEALTH ELECTRIC COMPANY
Limited Participant
Laura S. Olton, Esq.
McDermott, Will & Emery
28 State Street
Boston, MA 02109
FOR: MONTAUP ELECTRIC COMPANY
and
FOR: EASTERN EDISON COMPANY
Limited Participants
Stephen Klionsky, Esq.
260 Franklin Street, 21st Floor
Boston, MA 02110
FOR: WESTERN MASSACHUSETTS ELECTRIC
COMPANY
Limited Participant
<PAGE> 131
ORDER ON MASSACHUSETTS DEVELOPMENT FINANCE AGENCY'S AND
MASSACHUSETTS HEALTH AND EDUCATIONAL FACILITY AUTHORITY'S
MOTION FOR CLARIFICATION
1. INTRODUCTION
On December 3, 1998, Boston Edison Company ("Boston Edison" or "Company")
filed with the Department of Telecommunications and Energy ("Department") an
application to issue rate reduction bonds ("RRBs") pursuant to G.L. c. 164,
Section 1.H(b). On April 2, 1999, the Department issued an order approving
Boston Edison's application. Boston Edison Company, D.T.E. 98-118 ("D.T.E.
98-118"). On March 29, 1999, the Massachusetts Development Finance Agency and
Massachusetts Health and Educational Facilities Authority (collectively, the
"Agencies") requested that the Department include language in the Order to
address "circumstances where the [reimbursable transition cost charge ("RTC
Charge")], which is a component of the transition charge, would exceed the then
current transition charge until an adjustment of the transition charge is made"
(Supplemental Filing of the Agencies at 2 (March 29, 1999) "Supplemental
Filing"). The Agencies requested this change to satisfy the bond rating agencies
that the RTC Charge will be sufficient to cover the payments on the bonds (id.).
In their Supplemental Filing, the Agencies offered two alternative mechanisms to
satisfy their concern in the above described circumstances. The first
alternative would provide an increase in the statutory rate reduction cap to
permit an RTC Charge adjustment (id. at 3-4). The second alternative would not
affect the statutory rate reduction cap, but would provide that the Company
would defer collection of the increase in the standard offer rate so long as the
deferred amount earns a carrying charge of 10.88% (id. at 4-5). On March 31,
1999, Boston Edison filed comments in support of the Agencies' Supplemental
Filing.
<PAGE> 132
In D.T.E. 98-118, the Department acknowledged that there could be
circumstances where changes in other rate components would cause the transition
charge to go below the RTC Charge. D.T.E. 98-118 at 40. However, the Department
did not adopt the Agencies' first proposed alternative stating "it may violate
the statutory requirements pertaining to rate reductions." Id. Instead, the
Department stated that in such circumstances, it will adjust other components of
the Company's rates. Id. The Department also did not adopt the Agencies' second
proposed alternative stating "it would be premature to determine here exactly
which component of the Company's rates to adjust." Id. Instead, to address the
Agencies concerns, the Department did include the following language in D.T.E.
98-118:
In no event shall the transition charge from time to time in effect as
approved by the Department in accordance with the Settlement Agreement's
methodology and as may be revised by this Financing Order, the Pilgrim
Order, or in an order arising from a Separate Proceeding be adjusted below
the RTC. If adjustments to the transition charge to meet the required rate
reduction would cause the transition charge to fall below the RTC Charge,
the Department shall adjust other components of the Company's rates.
Conversely, if the RTC Charge, as adjusted, would exceed the then current
transition charge, the Department also shall adjust other components of the
Company's rates. D.T.E. 98-118, at 40-41, Appendix 1 at Paragraph 55.
On April 16, 1999, the Agencies filed a Motion for Clarification of D.T.E.
98-118 ("Motion"). The Agencies seek to clarify what adjustments would happen in
the event the transition charge is increased to cover the RTC Charge as well as
the timing of any such adjustments (Motion at 2-3). Specifically, the Agencies
seek to clarify whether other rates would be deferred and if so, at what
carrying charge rate (id.). In addition, the Agencies request some minor
clarification edits, and a small change to the language that would be required
on the
<PAGE> 133
customers' bills regarding the RTC Charge.(1) On May 3, 1999, Boston Edison
filed comments in support of the Motion ("Company Comments").
II. POSITION OF THE PARTIES
A. Agencies
1. RTC Charge Adjustment
The Agencies state that in D.T.E. 98-118 the Department recognized that
there may be circumstances when the RTC Charge would exceed the transition
charge and that under such circumstances the transition charge would have to be
increased (Motion at 2). According to the Agencies, D.T.E. 98-118 recognizes
that under such circumstances, adjustments to the other rates may be necessary
to provide the legislatively mandated rate reductions (Motion at 2). However,
the Agencies state that the Department's order does not make clear that
adjustments to the other rate components would result in deferrals in the
collection of those rate components (Motion at 2). Further the Agencies state
that D.T.E. 98-118 does not identify the carrying charge rate that would apply
if such deferrals occur (Motion at 2).
The Agencies argue that clarification of these RTC Charge issues is
necessary to ensure the nonrecourse nature of the RRBs, and will help in
providing the opinions on true sale and non-consolidation that are necessary to
achieve the highest possible rating for the RRBs (Motion at 2-3). According to
the Agencies, if Boston Edison's revenues are reduced to support the RTC Charge
without the payment of an appropriate carrying charge, then there is a link
between
- ------------------------
(1) Although not characterized in this way by the Agencies,
many of the requested "clarification edits" are more
properly treated as requests for reconsideration.
<PAGE> 134
Boston Edison and the separate special purpose entity set up to own the
transition property. In case of a bankruptcy of the Company, resources of the
post-petition bankruptcy estate would be subject to depletion to support the RTC
Charge (Motion at 2-3, n. 2). The Agencies contend that such depletion could
create significant difficulties for bankruptcy counsel in the issuance of
true-sale and non-consolidation opinions (Motion at 2-3, n. 2).
To clarify these issues, the Agencies ask the Department to substitute the
following language for the language currently contained in Paragraph 55 of
D.T.E.98-118:
If, as a result of a true-up calculation, the RTC Charge would be increased
above the transition charge then in effect, the transition charge shall, on
the effective date of the RTC Charge adjustment, be increased to the amount
of the RTC Charge, as so adjusted, subject to the 3.35 cents/kWh cap on the
transition charge. If adjustments to the transition charge necessary to
meet the required rate reduction in effect through December 31, 2004 would
cause the transition charge to fall below the required RTC Charge, the
Department shall instead, effective as of the time of the RTC Charge
adjustment, adjust components of Boston Edison's rates and charges, other
than the RTC Charge, as necessary to satisfy such rate reduction
requirement. If, as a result of such adjustment, Boston Edison is not
allowed to collect on a current basis any rate or charge which it would be
allowed to collect but for the adjustment of such rate or charge required
to maintain the RTC Charge, the portion of such other rate or charge that
is not collected on a current basis shall be deferred at the carrying
charge from time to time in effect applicable to that portion of the
transition charge not constituting the RTC Charge; provided, however, that
this provision for deferral of uncollected rates or charges shall apply
solely to adjustments required to maintain the RTC Charge as provided
herein and nothing in this Order 55 shall affect the Department's legal
authority to make a separate determination to adjust Boston Edison's rates
and charges on any other basis (Motion at 3-4).
2. Minor Clarification Edits
The Agencies provide an appendix to their motion that contains an "errata
sheet" with proposed corrections to D.T.E. 98-118 (Motion at 4; Appendix A).
Eight of these proposed
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corrections are to update the approximate amount of transactions costs and
total securitization amounts, which the Agencies argue is necessary for
"accuracy" (Motion, Appendix A). Two corrections are proposed to clarify that
the estimated amounts for transaction costs do not include any amount for any
additional credit enhancements which may be necessary (id.). In addition, the
Agencies propose to modify a finding and the corresponding ordering clause to
clarify that the Department may change the otherwise irrevocable value of the
transition property in the event the transition charge goes above the transition
charge cap in Boston Edison's Settlement Agreement. Finally, the Agencies
propose to substitute the word "affect" for "effect" in one paragraph of the
Order to prevent an "unintended meaning" (id.).
In addition, the Agencies propose a change to the text that is to be placed
on the customers' bills regarding ownership of the transition charge. Pursuant
to the Department's order in D.T.E. 98-118, the text is to read, "The
reimbursable transition cost ("RTC") charge as a component of the transition
charge is being collected on behalf of a special purpose entity (SPE), as the
owner of the transition property" (Motion at 4, citing D.T.E. 98-118, at 36).
The Agencies propose to replace this text with "Therefore, the Department
directs the Company to include the following statement (or, alternatively,
language of substantially the same effect as shall be approved by the
Department's Consumer Division) in a footnote on customers' bills: 'The
reimbursable transition cost ("RTC") charge as a component of the transition
charge is being collected on behalf of a special purpose entity ("SPE"), as the
owner of the transition property.'" (Motion at 4-5, n. 3) The Agencies assert
that this proposed change clarifies the instruction, and leaves open the
possibility of minor changes to the wording subject to the approval of the
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Department's Consumer Division (Motion at 4). According to the Agencies, these
changes may be necessary to provide the legal name of the special purpose entity
or to accommodate bill formatting issues faced by Boston Edison (Motion at 4-5).
The Agencies state that in any case, all modifications to the language will
reflect the substance of the Department's proposed language, seek to minimize
customer confusion, and be subject to the approval of the Department's Consumer
Division (Motion at 5). The Agencies state that they have "consulted with Boston
Edison with respect to this filing and it has authorized the Agencies to
indicate that Boston Edison has no objection to the clarifications and
corrections requested herein" (Motion at 1).
B. Boston Edison
1. RTC Charge Adjustment
Boston Edison argues that the requested clarification is necessary in order
for bankruptcy counsel to issue the appropriate opinions critical to the overall
securitization transaction (Company Comments at 1). Boston Edison states that
the Agencies' request ensures that the future operations of the Company,
especially during a hypothetical bankruptcy case, will not be "burdened by
reductions in rates and charges for future services or other impacts imposed on
Boston Edison's assets (other than access charges that have been sold) to
provide a stream of revenue to pay the RTC Charge" (id. at 2). Boston Edison
argues that this clarification is necessary to ensure that the bonds receive the
highest feasible credit rating which will, in turn, translate into greater
savings for Company ratepayers (id.).
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2. Minor Clarification Edits
With respect to the footnote to be included on customers' bills, the
Company argues that space limitations on the front of the bill necessitate a
minor change in the language (id.). The Company proposes that the following
language be included on the bills:
"Part of the transition charge which we collect is owned by BEC Funding
LLC." Boston Edison states that this proposed language has been approved by its
bankruptcy counsel and will satisfy any bankruptcy opinion considerations
(id. at 2-3). Boston Edison's position on this issue is slightly different from
the Agencies' who propose to leave open the possibility of minor changes to the
quoted language which would be subject to approval by the Department's Consumer
Division. Boston Edison states that the Agencies approach would also be
acceptable provided that the final language is also approved by bankruptcy
counsel.
III. STANDARD OF REVIEW
Clarification of previously issued orders may be granted when an order is
silent as to the disposition of a specific issue requiring determination in the
order, or when the order contains language that is so ambiguous so as to leave
doubt as to its meaning. Boston Edison Company, D.P.U. 92-1A-B at 4 (1993);
Whitinsville Water Company, D.P.U. 89-67-A at 1-2 (1989). Clarification does not
involve reexamining the record for the purpose of substantively modifying a
decision. Boston Edison Company, D.P.U. 90-335-A at 3 (1992), citing Fitchburg
Gas & Electric Light Company, D.P.U. 18296/18297, at 2 (1976).
The Department's policy on reconsideration is well settled. Reconsideration
of previously decided issues is granted only when extraordinary circumstances
dictate that we take a
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fresh look at the record for the express purpose of substantively modifying a
decision reached after review and deliberation. North Attleboro Gas Company,
D.P.U. 94-130-B at 2 (1995); Boston Edison Company, D.P.U. 90-270-A at 2-3
(1991); Western Massachusetts Electric Company, D.P.U. 558-A at 2 (1987).
A motion for reconsideration should bring to light previously unknown or
undisclosed facts that would have a significant impact upon the decision already
rendered. It should not attempt to reargue issues considered and decided in the
main case. Commonwealth Electric Company, D.P.U. 92-3C-1A at 3-6 (1995); Boston
Edison Company, D.P.U. 90-270-A at 3 (1991); Boston Edison Company, D.P.U.
1350-A at 4 (1983). The Department has denied reconsideration when the request
rests on an issue or updated information presented for the first time in the
motion for reconsideration. Western Massachusetts Electric Company, D.P.U.
85-270-C at 18-20 (1987); but see Western Massachusetts Electric Company, D.P.U.
86-280-A at 16-18 (1987). Alternatively, a motion for reconsideration may be
based on the argument that the Department's treatment of an issue was the result
of mistake or inadvertence. Massachusetts Electric Company, D.P.U. 90-261-B at 7
(1991); New England Telephone and Telegraph Company, D.P.U. 86-33-J at 2 (1989);
Boston Edison Company, D.P.U. 1350-A at 5 (1983).
IV. ANALYSIS AND FINDINGS
A. RTC Charge Adjustment
In response to the Agencies' Motion for Clarification, we first assess
whether the Department's order was, in fact, silent on a central issue and
whether that issue "requir[es] determination" in accordance with our standard of
review. The Agencies argue that D.T.E. 98-
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118 is ambiguous as to whether, in circumstances when adjustments to the other
rate components are necessary, deferrals in the collection of those rate
components would result. Further, the Agencies argue that D.T.E. 98-118 is
silent as to the carrying charge rate that would apply if such deferrals occur.
Both the Agencies and Boston Edison argue that determination of these issues is
required to provide the opinions on true sale and non-consolidation that are
necessary to achieve the highest possible rating for the RRBs. The Department's
Order in D.T.E. 98-118 is silent on this issue and determination is necessary to
effect the true-sale opinion and ultimately the rating of the RRBs.
Despite the Order's silence, if Boston Edison is not allowed to collect on
a current basis any rate or charge which it would be allowed to collect but for
the adjustment of such rate or charge required to maintain the RTC Charge, such
amounts would necessarily be deferred at an appropriate carrying charge.
Deferral at an appropriate carrying charge is necessary to ensure that the
Company neither gains nor loses from the deferrals. While the language proposed
by the Agencies appropriately clarifies the necessity of deferrals when
adjustments to rate components are necessary, we do not agree that the
appropriate carrying charge for all costs deferred to protect the RTC Charge is
"the carrying charge rate from time to time in effect applicable to that portion
of the transition charge not constituting the RTC Charge" which is currently
10.88 percent. The actual costs of deferral may be different from 10.88 percent
depending on which rates are reduced. As we stated in D.T.E. 98-118, it is
premature to determine here exactly which component of the Company's rates to
adjust. The Agencies proposed clarification specifies the same carrying charge
rate without regard to which rate is reduced. Under this proposal, Boston
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Edison may potentially gain (or lose) depending on what rate the Department
later selects for reduction.
To remedy the Department's silence with respect to the deferrals and
carrying charge, we will adopt the Agencies' proposed clarification, modified to
link the carrying charge rate for the deferred amounts should to the rate that
is being reduced.(2)
If, as a result of a true-up calculation, the RTC Charge would be increased
above the transition charge then in effect, the transition charge shall, on
the effective date of the RTC Charge adjustment, be increased to the amount
of the RTC Charge, as so adjusted, subject to the 3.35 cents/kWh cap on
the transition charge. If adjustments to the transition charge necessary to
meet the required rate reduction in effect through December 31, 2004, would
cause the transition charge to fall below the required RTC Charge, the
Department shall instead, effective as of the time of the RTC Charge
adjustment, adjust components of Boston Edison's rates and charges, other
than the RTC Charge, as necessary to satisfy such rate reduction
requirement. If, as a result of such adjustment, Boston Edison is not
allowed to collect on a current basis any rate or charge which it would be
allowed to collect but for the adjustment of such rate or charge required
to maintain the RTC Charge, the portion of such other rate or charge that
is not collected on a current basis shall be deferred at the carrying
charge from time to time in effect applicable to that rate or charge which
is being reduced; provided, however, that this provision for deferral of
uncollected rates or charges shall apply solely to adjustments required to
maintain the RTC Charge as provided herein and nothing in this Order 55
shall affect the Department's legal authority to make a separate
determination to adjust Boston Edison's rates and charges on any other
basis.
- --------------------------
(2) On May 20, 1999, the Department requested comment on this modified
language. On May 21, 1999, the Agencies' responded that the language
is satisfactory as it: (a) should be sufficient to permit bankruptcy
counsel to issue the appropriate opinions on true sale and
non-consolidation; (b) will address the concerns of the bond rating
agencies so as to enable the RRBs to achieve the highest ratings; and
(c) is consistent with the non-recourse provisions of G.L. c. 164,
Section 1H (Agencies' Response to Request for Comments, May 21, 1999,
at 1).
<PAGE> 141
B. Minor Clarification Edits
Both the Agencies and the Company request that the Department change the
language to be included on the customer bills regarding the ownership of the RTC
Charge due to space limitations on the front of the bill. The change in billing
language is a request for reconsideration rather than clarification as the
parties are asking the Department to reconsider an earlier finding based on
previously unknown concerns of bill formatting. Because the language adopted by
the Department in D.T.E. 98-118 will not fit the format of the Company's current
customer bills we reconsider our earlier finding and direct the Company to
include the following statement on customer bills: "Part of the transition
charge which we collect is owned by BEC Funding LLC." This language will satisfy
any bill formatting and bankruptcy opinion considerations as well as minimize
any potential customer confusion.
The other clarification (or reconsideration) edits fall into four
categories: 1) word and punctuation changes, 2) modifications to one finding and
a corresponding ordering clause regarding the irrevocable value of the
transition property, 3) clarification of what amounts are included in
transaction costs, and 4) corrections to estimated numbers. The Department
allows the Agencies' motion to change the word "effect" to "affect" (Appendix at
35, Paragraph 19, line 4) and the addition of a comma after the word "documents"
(Appendix at 36, Paragraph 19, line 7), finding that our treatment these issues
was the result of inadvertence. Making these corrections will prevent unintended
meaning. The Department also allows the Agencies' motion to modify a finding and
the corresponding ordering clause to clarify that the Department may change the
otherwise irrevocable value of the transition property in the event the
transition charge goes above the
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transition charge cap in Boston Edison's Settlement Agreement (Appendix at 36,
last line, at 47, line 10). Without this clarification, the Order may
incorrectly imply that the RTC Charge can exceed the transition charge cap
imposed by the Settlement Agreement. The Department also approves the Agencies'
motion to clarify that any amount for additional credit enhancements which may
be necessary are in addition to estimated transaction costs (D.T.E. 98-118 at
28, line 6; at 44, last line). As currently written, the language incorrectly
implies that the estimated transaction costs includes amounts for credit
enhancements.
Finally, the Department rejects the Agencies' proposed corrections to the
estimated transaction costs and total amount to be securitized. In each case the
numbers cited are clearly approximations which were taken from the Company's
prefiled testimony or draft financing order proposed by the Company. Updating
these numbers to reflect more recent estimates would have no effect on the
transaction costs or final amounts to be securitized.
V. ORDER
Accordingly, after due notice, hearing and consideration, it is hereby
ORDERED: That the Massachusetts Development Finance Agency's and the
Massachusetts Health and Educational Facility Authority's Motion for
Clarification is APPROVED in part and DENIED in part as described herein; and it
is
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FURTHER ORDERED: That the Department's Order of April 2, 1999, in Boston
Edison Company, D.T.E. 98-118, be and hereby is supplemented by, and clarified
in accordance with the terms set forth herein.
By Order of the Department,
--------------------------------
Janet Gail Besser, Chair
--------------------------------
James Connelly, Commissioner
--------------------------------
W. Robert Keating, Commissioner
--------------------------------
Paul B. Vasington, Commissioner
--------------------------------
Eugene J. Sullivan, Jr., Commissioner
