AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999
REGISTRATION NO. 333-[ ]
----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PSE&G TRANSITION FUNDING LLC
(Issuer with respect to the Bonds)
(Exact name as specified in registrant's Certificate of Formation)
DELAWARE -----------------
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
PSE&G TRANSITION FUNDING LLC,
80 PARK PLAZA
SUITE [ ]
NEWARK, NEW JERSEY 07102
(973) 430-7000
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
JAMES T. FORAN ROBERT E. BUSCH
VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT AND
80 PARK PLAZA, T-5B CHIEF FINANCIAL OFFICER
NEWARK, NEW JERSEY 07102 80 PARK PLAZA, T-8E
(973) 430-6131 NEWARK, NEW JERSEY 07102
(973) 430-7761
(Name, address, including zip code, and telephone number
including area code, of agents for service)
-----------
Copies to:
CHRISTOPHER J. KELL ERIC TASHMAN
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BROWN & WOOD LLP
919 THIRD AVENUE 555 CALIFORNIA STREET
NEW YORK, NEW YORK 10022 SAN FRANCISCO, CALIFORNIA 94104
(212) 735-2160 (415) 772-1214
Approximate date of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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, 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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds Issuable $ 1,000,000 __% $_______ $278
in Series
===================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON ANY 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 THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON A DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
[FLAG]
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
Subject to Completion. Dated [ ], 1999
Prospectus Supplement to Prospectus dated [ ], 1999
$______ TRANSITION BONDS, SERIES 1999-
PSE&G TRANSITION FUNDING LLC
Issuer of the Transition Bonds
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Seller and Servicer
<TABLE>
<CAPTION>
Underwriting Expected
Discounts Final Final
Principal and Net Interest Payment Maturity
Amount: Price: Commissions: Proceeds: Rate: Date: Date:
--------- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class [ ] Transition
Bonds
Class [ ] Transition
Bonds
Class [ ] Transition
Bonds
</TABLE>
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 $___________.
Consider carefully the risk factors beginning on page of the prospectus.
The transition bonds represent obligations of PSE&G Transition Funding LLC,
which is the issuer, and are backed only by the assets of the issuer.
Neither PSE&G, its parent, Public Service Enterprise Group Incorporated,
nor any of their affiliates, other than the issuer, are liable for payments
on the transition bonds.
There currently is no secondary market for the transition bonds, and there
is no assurance that one will develop.
This prospectus supplement does not contain complete information about the
offering of the transition bonds. Additional information is contained in
the prospectus. Prospective investors are urged to read both this
prospectus supplement and the prospectus in full. Sales of the transition
bonds may not be consummated unless the purchaser has received both this
prospectus supplement and the prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus supplement. Any representation to
the contrary is a criminal offense.
LEHMAN BROTHERS
September __, 1999
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the attached prospectus provide
information about the issuer and PSE&G, including terms and conditions that
apply to the transition bonds. The specific terms of this series of
transition bonds, the series 1999-_ transition bonds, are contained in this
prospectus supplement. The terms that apply to all series of transition
bonds appear in the prospectus which follows this prospectus supplement.
We have included cross-references to captions in these materials
where you can find further related discussions. Cross references may be
contained in the introductory sections which will direct you elsewhere in
this prospectus supplement or the attached prospectus for more detailed
description of a particular topic. You can also find references to key
topics in the Table of Contents on the next page.
You should rely only on information on the transition bonds
provided in this prospectus supplement and the attached prospectus. We have
not authorized anyone to provide you with different information.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<S> <C>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS...............................................S-3
RISK FACTORS...............................................................................S-5
THE SERIES 1999-__ TRANSITION BONDS........................................................S-5
Principal Payments.................................................................S-5
Interest Payments..................................................................S-7
Optional Redemption................................................................S-7
CREDIT ENHANCEMENT.........................................................................S-7
Periodic Adjustment of the Transition Bond Charge..................................S-7
Collection Account and Subaccounts.................................................S-8
THE TRANSITION BOND CHARGE................................................................S-10
UNDERWRITING THE SERIES 1999-__ BONDS.....................................................S-10
The Underwriters' Sales Price for the Transition Bonds............................S-10
No Assurance as to Resale Price or Resale Liquidity for the Transition Bonds......S-11
Various Types of Underwriter Transactions Which May Affect the Price of the
Transition Bonds..................................................................S-11
RATINGS FOR THE SERIES 1999-__ BONDS......................................................S-12
</TABLE>
RISK FACTORS
Consider carefully the risk factors beginning on page [ ] of the
prospectus.
THE SERIES 1999-__ TRANSITION BONDS
The transition bonds will be issued under and secured pursuant to
the indenture between the issuer and the trustee, as supplemented for each
series of transition bonds. The following summary does not purport to be
complete and is qualified by reference to the terms and provisions of the
indenture and the transition bonds.
The transition bonds will be issued in minimum denominations of
$1,000 and in integral multiples of that amount. The transition bonds will
consist of [ ] classes, in the initial principal amounts, bearing the
interest rates and having the expected final payment dates and final
maturity dates set forth below:
<TABLE>
<CAPTION>
TABLE 1
Initial Class Expected Final Final
Class Principal Balance Payment Date Maturity Date Interest Rate
----- ----------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
$____________ ____________ ___________ [________%]
(________) (______)
$____________ _____________ ___________ [________%]
(_______) (_____)
$____________ _____________ ___________ [________%]
(______) (_____)
</TABLE>
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the
transition bonds to the transition bondholders, to the extent funds are
available, in the following order:
(1) to the holders of the class [__] transition bonds, until the
principal balance of that class has been reduced to zero;
(2) [Add other classes]
The issuer will not, however, pay principal on a payment date of any class
of transition bonds if making such 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. The entire
unpaid principal amount of each class of the transition bonds will be due
and payable on the final maturity date for the class. If an event of
default under the indenture has occurred and is continuing, the trustee may
declare the unpaid principal amount of all outstanding transition bonds
together with accrued interest to be due and payable.
The following table sets forth the principal balance from the
issuance date to the expected final payment date that is scheduled to
remain outstanding for each class of the transition bonds. The table
reflects the principal balance at each payment date after the payments
scheduled to be made on that date for each class. In preparing the table,
it has been assumed, among other things, that:
1. the transition bonds are issued on ________,
2. payments on the transition bonds are made on each payment
date, commencing on --------,
3. the servicing fee for the transition bonds equals [0.05%] of
the initial outstanding principal balance of the transition
bonds,
4. there are no net earnings on amounts on deposit in the
collection account,
5. operating expenses, including all fees, costs and charges of
the issuer and the trustee, are paid in the amount of $_____
in the aggregate for all series on each payment date, and
6. all transition bond charge collections are received in
accordance with PSE&G's forecasts and deposited in the
collection account.
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Class Payment Dates Scheduled Outstanding
Principal Balance
There can be no assurance that the principal balance of any class
of the transition bonds will be reduced to the amounts indicated in the
foregoing table. The actual rates of reduction in class principal balances
may be slower than those indicated in Table 2. The transition bonds will
not be in default if not paid on the dates specified above in Table 2
unless the final outstanding principal balance is not paid on the final
maturity date.
INTEREST PAYMENTS
Interest on each class of transition bonds will accrue from the
date of issuance at the interest rate indicated in Table 1. Beginning
_____________, the issuer is required to pay interest [quarterly] on
_______________, ________, _____, and ______ for each year, or, if such day
is not a business day, the following business day.
The issuer will pay interest on the transition bonds prior to paying
principal of the transition bonds. See "THE TRANSITION BONDS--PAYMENTS OF
INTEREST AND PRINCIPAL ON THe TRANSITION BONDS" in the prospectus. If there
is a shortfall in the amounts necessary to make interest payments, the
trustee will distribute interest pro rata to each series and class of
transition bonds based on the outstanding principal amount of that series
or class and the applicable interest rate. The issuer will calculate
interest on the basis of a 360-day year of twelve 30-day months. Interest
on each class of transition bonds will accrue from its issuance date at the
interest rate set forth above in Table 1.
Interest on the transition bonds, class ___ will be calculated as
follows:
[To be provided at issuance for any class with a floating interest
rate]
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding transition bonds, at
its option, on any payment date if the outstanding principal balance of the
transition bonds (after giving effect to payments scheduled to be made on
that payment date) is less than 5% of the initial principal balance of the
transition bonds. In the case of redemption, the issuer will pay the
outstanding principal amount of the transition bonds and interest accrued
and unpaid up to the redemption date. The trustee will give notice of the
redemption to transition bondholders not less than five days nor more than
45 days prior to the redemption date. The transition bonds will not be
redeemed in any other circumstances.
CREDIT ENHANCEMENT
Credit enhancement for the transition bonds is intended to protect
you against losses or delays in scheduled payments on your transition
bonds.
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the transition bonds includes mandatory
periodic adjustments by the New Jersey Board of Public Utilities, referred
to as the BPU, to the transition bond charge to be billed to customers,
upon the petition of PSE&G, as servicer. PSE&G, as servicer, is required to
petition for an adjustment at least annually. The amount of the adjustment
will be set based on a formula approved by the BPU in its order approving
issuance of the transition bonds. The formula will be designed to ensure,
among other things, sufficient funds for payments on the transition bonds
in accordance with the expected amortization schedule set forth in Table 2
above. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE - THE
BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in the prospectus. The
adjustments will be made if there are excess collections or if the
transition bond charge does not produce sufficient revenues:
(1) to make timely payments on the transition bonds;
(2) to pay transaction fees and expenses; and
(3) to fund any of the subaccounts, including the capital
subaccount and overcollateralization subaccount, to
their required level.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold amounts
remitted by the servicer of the property securing the transition bonds. The
collection account will consist of subaccounts including the following:
o the general subaccount;
o the capital subaccount;
o the overcollateralization subaccount; and
o the reserve subaccount.
Withdrawals from and deposits to these subaccounts will be made as
described under "THE INDENTURE--THE COLLECTION ACCOUNT FOR THE TRANSITION
BONDS" and "--HOW FUNDS in THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the
prospectus.
The Capital Subaccount. Upon the issuance of the transition bonds,
PSE&G will deposit $______ in the capital subaccount, which represents the
required capital amount for the series. If amounts available in the general
subaccount, the reserve subaccount and the overcollateralization subaccount
are not sufficient on any payment date to make scheduled payments to the
transition bondholders and to pay the expenses, fees and charges specified
in the indenture, the trustee will draw on amounts in the capital
subaccount to make those payments. The required capital amount has been set
at a level sufficient to obtain the ratings on the transition bonds
described below under "RATINGS FOR THE SERIES 1999-_______ BONDS."
The Overcollateralization Subaccount. The overcollateralization
amount for the series 1999-_____ transition bonds is $_____ million or [ ]%
of the initial outstanding balance of that series. The trustee will deposit
in the overcollateralization subaccount transition bond charge collections
up to an amount which is referred to as the scheduled overcollateralization
level. The scheduled overcollateralization level for each payment date is
set forth below. The overcollateralization levels have been set at amounts
sufficient to obtain the ratings on the transition bonds which are
described below under "RATINGS FOR THE SERIES 1999- _______ BONDS." See
also "THE TRANSITION BONDS--CREDIT ENHANCEMENT FOR THe TRANSITION BONDS" in
the prospectus.
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
Payment Date Required Over- Payment Date Required Over-
Collateralization Level Collateralization level
If amounts available in the general subaccount and the reserve
subaccount are not sufficient on any payment date to make scheduled
payments to the transition bondholders and to pay the expenses, fees and
charges specified in the indenture, the trustee will draw on amounts in the
overcollateralization subaccount to make those payments.
The Reserve Subaccount. The reserve subaccount will be funded with
the transition bond charge collections and earnings on amounts in the
collection account, other than the capital subaccount, in excess of the
amount necessary to pay on any payment date:
1. expenses of the trustee and the servicer and other fees,
costs and charges,
2. scheduled principal of and interest on the transition bonds
payable on that payment date,
3. any amount required to replenish the capital subaccount, and
4. the amounts payable to the overcollateralization subaccount.
The transition bond charge will be adjusted to eliminate any excess amounts
required to be deposited into the reserve subaccount.
On any payment date, if amounts available in the general subaccount
are not sufficient to make scheduled payments to the transition bondholders
and to pay the expenses, fees and charges specified in the indenture, the
trustee will draw on any amounts in the reserve subaccount to make those
payments.
THE TRANSITION BOND CHARGE
The bondable stranded costs authorized in the BPU financing order
are to be recovered from customers of PSE&G through the transition bond
charge. PSE&G, in its capacity as servicer of the bondable transition
property under the servicing agreement, will bill the transition bond
charge to each customer. Initially, the transition bond charge will be
approximately $0.00836 per kilowatt hour for all customers, beginning on
the issuance date for the transition bonds. See "THE COMPETITION ACT" and
"THE BPU FINANCING ORDER AND THE TRANSMISSION BOND CHARGE" in the
prospectus.
UNDERWRITING THE SERIES 1999-__ BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among the issuer, PSE&G and the underwriters for whom Lehman
Brothers is acting as the representative, the issuer has agreed to sell to
the underwriters, and the underwriters have severally agreed to purchase,
the principal amount of transition bonds set forth opposite each
underwriter's name below:
NAME CLASS TOTAL
Lehman Brothers Inc.
Under the underwriting agreement, the underwriters will take and
pay for all of the transition bonds offered hereby, if any are taken.
THE UNDERWRITERS' SALES PRICE FOR THE TRANSITION BONDS.
Series 1999-__ transition bonds 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 underwriters propose
initially to offer the transition bonds to dealers at the initial public
offering prices, less a selling concession not to exceed the percentage set
forth below, and the underwriters may allow and dealers may reallow a
discount not to exceed the percentage set forth below.
CLASS SELLING REALLOWANCE
CONCESSION DISCOUNT
Class [ ]......................
[Add other classes]..............
After the initial public offering, the public offering prices,
selling concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE TRANSITION BONDS.
The series 1999- transition bonds are a new issue of securities
with no established trading market. They will not be listed on any
securities exchange. The issuer has been advised by the underwriters that
they intend to make a market in the transition bonds but they are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the transition bonds.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS WHICH MAY AFFECT THE PRICE OF
THE TRANSITION BONDS.
The underwriters may engage in overallotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids
with respect to the transition bonds in accordance with Regulation M under
the Exchange Act. Overallotment transactions involve syndicate sales in
excess of the offering size, which create a syndicate short position.
Stabilizing transactions are bids to purchase the transition bonds which
are permitted, so long as the stabilizing bids do not exceed a specified
maximum price. Syndicate covering transactions involve purchases of the
transition bonds in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit
the underwriters to reclaim a selling concession from a syndicate member
when the transition bonds originally sold by the syndicate member are
purchased in a syndicate covering transaction. These overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the prices of the transition bonds to be higher than
they would otherwise be. None of the seller, the issuer or the trustee or
any of the underwriters represent that the underwriters will engage in any
of these transactions or that these transactions, once commenced, will not
be discontinued without notice at any time.
In the ordinary course of business, each underwriter and its
affiliates have engaged and may engage in transactions with the issuer and
its affiliates, including PSE&G. In addition, each underwriter may from
time to time take positions in the transition bonds.
Under the terms of the underwriting agreement, the issuer and PSE&G
have agreed to reimburse the underwriters for some expenses. The issuer and
the seller have agreed to indemnify the underwriters against some
liabilities, including liabilities under the Securities Act.
RATINGS FOR THE SERIES 1999-__ BONDS
It is a condition of any underwriter's obligation to purchase the
series 1999-_ transition bonds that the series 1999-_ transition bonds be
rated "_" by S&P, "_" by Moody's , "_" by Fitch and "_" by Duff & Phelps.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
rating agency. No person is obligated to maintain the rating on the
transition bonds, and, accordingly, there can be no assurance that the
ratings assigned to any class of the transition bonds upon initial issuance
will not be revised or withdrawn by a rating agency at any time thereafter.
If a rating of any class of the transition bonds is revised or withdrawn,
the liquidity of that class may be adversely affected. In general, ratings
address credit risk and do not represent any assessment of any particular
rate of principal payments on the transition bonds other than payment in
full of each class of the transition bonds by the applicable final maturity
date.
Subject to Completion. Dated [ ], 1999
PROSPECTUS
PSE&G TRANSITION FUNDING LLC
Issuer of the Transition Bonds
TRANSITION BONDS
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Seller and Servicer
Consider carefully the risk factors beginning on page of this
Prospectus.
The transition bonds represent obligations of PSE&G Transition Funding LLC,
which is the issuer, and are backed only by the assets of the issuer.
Neither PSE&G, its parent, Public Service Enterprise Group Incorporated,
nor any of their affiliates are liable for payments on the transition
bonds.
There currently is no secondary market for the transition bonds, and there
is no assurance that one will develop.
This prospectus does not contain complete information about the offering of
the transition bonds. Additional information is contained in the applicable
prospectus supplement. Prospective investors are urged to read both this
prospectus and the prospectus supplement in full. Sales of the transition
bonds may not be consummated unless the purchaser has received both this
prospectus and the prospectus supplement.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THESE SECURITIES, NOR HAVE THEY DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
September __, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS
Page
<S> <C>
PROSPECTUS...................................................................................1
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS...............................................1
SUMMARY OF TERMS.............................................................................2
RISK FACTORS................................................................................11
Judicial, Legislative or Regulatory Action That May Adversely Affect Your
Investment..........................................................................11
Servicing Risks.....................................................................14
Inability to Terminate Service to Certain Delinquent Customers in Winter............18
The Risks Associated With Potential Bankruptcy Proceedings..........................18
Other Risks Associated With An Investment In The Transition Bonds...................21
FORWARD-LOOKING STATEMENTS..................................................................22
PUBLIC SERVICE ELECTRIC AND GAS COMPANY.....................................................23
THE COMPETITION ACT.........................................................................23
Recovery of Stranded Costs is Allowed for PSE&G and Other New Jersey
Utilities...........................................................................24
PSE&G and Other Utilities May Securitize Stranded Costs.............................24
PSE&G'S RESTRUCTURING.......................................................................27
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE......................................28
The BPU Financing Order.............................................................28
The BPU's Transition Bond Charge Adjustment Process.................................30
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY.................................31
PSE&G .............................................................................31
Public Service Enterprise Group Incorporated........................................32
PSE&G's Customer Classes............................................................32
Credit Policy; Billing; Collections; Termination of Service.........................32
Loss and Delinquency Experience.....................................................34
How PSE&G Forecasts the Number of Customers and the Amount of
Electricity Usage...................................................................36
PSE&G Maintains Limited Information on its Customer's Creditworthiness..............37
PSE&G's Efforts to Deal With the Year 2000 Computer Issue...........................38
PSE&G TRANSITION FUNDING LLC, THE ISSUER....................................................40
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS................................42
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS.........................................42
THE TRANSITION BONDS........................................................................43
General Terms of the Transition Bonds ..............................................44
Payments of Interest and Principal on the Transition Bonds..........................44
Redemption of the Transition Bonds..................................................45
Credit Enhancement for the Transition Bonds.........................................46
Transition Bonds Will Be Issued in Book-Entry Form..................................47
Certificated Transition Bonds.......................................................51
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS....................................................................52
THE SALE AGREEMENT..........................................................................53
PSE&G's Sale and Assignment of Bondable Transition Property.........................53
PSE&G's Representations and Warranties..............................................53
PSE&G's Obligation to Indemnify the Issuer and the Trustee and to Take Legal
Action..............................................................................58
Successors to PSE&G.................................................................59
THE SERVICING AGREEMENT.....................................................................60
PSE&G's Servicing Procedures........................................................60
The BPU's Transition Bond Charge Adjustment Process.................................62
PSE&G's Transition Bond Charge Collections..........................................62
PSE&G's Compensation for Its Role as Servicer and Its Release of Other Parties......63
PSE&G's Duties as Servicer..........................................................63
PSE&G's Representations and Warranties as Servicer..................................64
PSE&G, as Servicer, Will Indemnify the Issuer and Other Related Entities............65
PSE&G, as Servicer, Will Provide Statements to the Issuer and to the Trustee........65
PSE&G to Provide Compliance Reports Concerning the Servicing Agreement..............66
Matters Regarding PSE&G as Servicer.................................................66
Events Constituting a Default by PSE&G in Its Role as Servicer......................68
The Trustee's Rights if PSE&G Defaults as Servicer..................................68
The Obligations of a Servicer That Succeeds PSE&G...................................69
THE INDENTURE...............................................................................69
The Security for the Transition Bonds...............................................69
Transition Bonds May Be Issued in Various Series or Classes.........................70
The Collection Account for the Transition Bonds.....................................71
How Funds in the Collection Account Will Be Allocated...............................76
Reports to Holders of the Transition Bonds..........................................78
The Issuer and the Trustee May Modify the Indenture.................................79
What Constitutes an Event of Default on the Transition Bonds........................83
Covenants of the Issuer.............................................................85
Access to the List of Holders of the Transition Bonds...............................87
The Issuer Must File an Annual Compliance Statement.................................87
The Trustee Must Provide a Report to All Transition Bondholders.....................87
What Will Trigger Satisfaction and Discharge of the Indenture.......................88
The Issuer's Legal Defeasance and Covenant Defeasance Options.......................88
The Trustee.........................................................................90
HOW A BANKRUPTCY OF THE ISSUER, SELLER OR SERVICER MAY
AFFECT YOUR INVESTMENT......................................................................91
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS........................................94
Income Tax Status of the Transition Bonds...........................................94
General.............................................................................94
Taxation of Non-U.S. Holders........................................................95
Backup Withholding..................................................................97
Material State of New Jersey Tax Matters............................................98
ERISA CONSIDERATIONS........................................................................98
Plan Asset Issues For an Investment in the Transition Bonds.........................99
Prohibited Transaction Exemptions...................................................99
Special Considerations Applicable to Insurance Company General Accounts............101
General Investment Considerations For Prospective Plan Investors in the
Transition Bonds...................................................................101
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS..............................................102
RATINGS FOR THE TRANSITION BONDS...........................................................103
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS.....................................104
EXHIBIT A
GLOSSARY OF DEFINED TERMS..................................................................A-1
</TABLE>
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information on the transition bonds
provided in this prospectus and in the related prospectus supplement. No
dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in
this prospectus and the prospectus supplement and, if given or made, the
information or representations must not be relied upon as having been
authorized by the issuer, PSE&G, the underwriters or any dealer,
salesperson or other person. Neither the delivery of this prospectus and
the prospectus supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein is correct as
of any time since the date of this prospectus or the prospectus supplement.
This prospectus and the prospectus supplement do not constitute an offer to
sell, or a solicitation of an offer to buy any security in any jurisdiction
in which it is unlawful to make any similar offer or solicitation.
We include cross-references to sections where you can find
additional information. Check the Table of Contents to locate these
sections. You can find a glossary of certain capitalized terms in Exhibit
A.
SUMMARY OF TERMS
This summary contains a brief description of the transition bonds
that applies to all series of transition bonds issued under this
prospectus. Information that relates to a specific series of transition
bonds can be found in the prospectus supplement related to that series. You
will find a detailed description of the terms of the offering of the
transition bonds in "THE TRANSITION BONDS" in this prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE [ ] OF THIS
PROSPECTUS.
The Issuer: PSE&G Transition Funding LLC, a
Delaware limited liability company,
wholly owned by PSE&G. The issuer was
formed solely to purchase bondable
transition property and to issue one or
more series of transition bonds secured
by the bondable transition property.
Issuer's Address: 80 Park Plaza, T-6, Newark, New Jersey
07102
Issuer's Telephone Number: (973) 430-6564
Seller of the Bondable PSE&G, an operating electric and gas
Transition Property to the utility, incorporated under the laws of
Issuer: the State of New Jersey in 1924. As of
July 1, 1999, PSE&G served
approximately 1.9 million electric
customers and 1.6 million gas
customers, covering areas in which
approximately 5.5 million people
reside. This amounted to about 70% of
the State's population and
approximately 2,600 square miles,
including New Jersey's six largest
cities.
Seller's Address: 80 Park Plaza, Newark, New Jersey 07102
Seller's Telephone Number: (973) 430-7000
Servicer of the Bondable PSE&G, acting as servicer, and any
Transition Property: successor servicer, will service the
transition bond charge pursuant to a
servicing agreement with the issuer.
Trustee: [ ]
The Assets of the Issuer: The issuer will own:
o the bondable transition property
transferred to the issuer (See
"THE SALE AGREEMENT --PSE&G'S SALE
AND ASSIGNMENT OF BONDABLe
TRANSITION PROPERTY" in this
prospectus);
o trust accounts held by the
trustee; and
o other credit enhancement acquired
or held to ensure payment of the
transition bonds.
Transaction Overview: New Jersey law permits electric public
utilities, such as PSE&G, to recover
the costs of generation-related
investments and other obligations that
cannot be recouped through market-based
rates in a competitive electricity
generation market. These costs are
commonly known as stranded costs. A
public utility may recover stranded
costs through an irrevocable
non-bypassable charge called a
transition bond charge that is assessed
on all retail electric customers. New
Jersey law permits special purpose
entities formed by electric public
utilities to issue debt securities
secured by the right to receive
revenues arising from the transition
bond charge. This right creates the
bondable transition property. See "THE
TRANSITION BONDS" in the prospectus.
The following sets forth the primary
steps of the transaction underlying the
offering of the transition bonds:
o PSE&G will sell the bondable
transition property to the issuer
in exchange for the net proceeds
from the sale of the transition
bonds.
o The issuer, whose primary asset is
the bondable transition property,
will sell the transition bonds to
the underwriters named in the
prospectus supplement.
o PSE&G will act as the servicer of
the bondable transition property
and as the administrator of the
issuer.
The transition bonds and the bondable
transition property securing the
transition bonds are not an obligation
of PSE&G or any of its affiliates. The
transition bonds and the bondable
transition property are also not an
obligation of the State of New Jersey
or any governmental agency, authority
or instrumentality of the State.
PARTIES TO THE TRANSACTION
[GRAPHIC OMITTED]
THE COLLATERAL
The transition bonds will be secured by bondable transition property,
a property right created under the Competition Act and the BPU financing
order. In general terms, the bondable transition property represents the
irrevocable right to recover, through a non-bypassable transition bond
charge payable by all of PSE&G's retail customers of electricity within its
service territory who access PSE&G's transmission and distribution system,
o the principal amount of and interest in the transition bonds, and
o the expenses, fees, charges and credit enhancement associated with
the transition bonds.
PSE&G will sell bondable transition property to the issuer. The
bondable transition property is described in more detail under "THE SALE
AGREEMENT --PSE&G'S SALE ANd ASSIGNMENT OF BONDABLE TRANSITION PROPERTY" in
this prospectus. PSE&G, as servicer of the bondable transition property,
will collect the transition bond charge from customers within its service
territory on behalf of the issuer. Third party suppliers of electricity to
PSE&G's customers may be allowed to collect the transition bond charge from
customers within PSE&G's service territory and they will be required to pay
the transition bond charge to the servicer. See "THE SELLER AND SERVICER OF
THE BONDABLE TRANSITION PROPERTY" in this prospectus.
The net proceeds from the transition bonds will be used to repay to
PSE&G a portion of its stranded costs. Stranded costs are the amount
determined by the BPU by which an electric utility's net electric
generation related costs which traditionally would be recoverable under a
regulated environment exceed those costs recoverable in a competitive
electric generation market.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the transition
bonds from
o transition bond charge collections remitted by the servicer to the
issuer during the prior [quarter]; and
o amounts available from trust accounts held by the trustee. These
accounts are described in greater detail under "THE INDENTURE--THE
COLLECTION ACCOUNT FOR THE TRANSITIOn BONDS" in this prospectus.
PRIORITY OF DISTRIBUTIONS
The trustee will apply transition bond charge collections allocable to
a series remitted by the servicer together with all investment earnings on
the trust accounts allocable to a series, to the extent funds are available
in the collection account, in the following order of priority:
(a) Monthly on each date specified for the payment of the monthly
servicing fee, other than a payment date referred to in (b) (2)
below, to the payment of the monthly servicing fee. So long as
PSE&G is the servicer, the monthly servicing fee will be a fixed
fee equal to one twelfth of 0.05% of the original principal amount
of each series of transition bonds.
(b) On each payment date specified in the related prospectus
supplement,
(1) payment of the trustee's fee, which will be a fixed fee in an
amount specified in the indenture, plus all expenses of the
trustee and indemnities payable to the trustee;
(2) payment of the monthly servicing fee,
(3) payment of the administration fee in an amount specified in the
administration agreement between the issuer and PSE&G
(4) payment of current operating expenses of the issuer, including
fees of the independent managers of the issuer, (up to an annual
aggregate of $100,000 for all series);
(5) payment of the interest then due on the transition bonds,
including payment of any amount payable to the swap counterparty
on any interest rate swap;
(6) payment of the principal then legally required to be paid on the
transition bonds as follows:
o the unpaid principal amount of any series due on the final
maturity date of that series; plus
o the unpaid principal amount of any transition bonds called for
redemption; plus
o the unpaid principal amount upon an acceleration following an
event of default;
(7) payment of the principal then scheduled to be paid on the
transition bonds;
(8) payment of any remaining unpaid operating expenses then owed by
the issuer;
(9) replenishment of any withdrawals from the capital subaccount;
(10) allocation of any required amount to the overcollateralization
subaccount;
(11) release of an amount equal to investment earnings on amounts in
the capital subaccount to the issuer;
(12) allocation of the remainder, if any, to the reserve subaccount.
See also "THE INDENTURE-HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in this prospectus. A diagram depicting how the transition bond
charge will be allocated may be found on page 9 of this prospectus.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any prospectus supplement, the primary
form of credit enhancement for the transition bonds will be mandatory
periodic adjustments to the transition bond charge. The BPU is required to
make periodic adjustments to the transition bond charge upon petition by
PSE&G, as servicer, or the issuer, to ensure receipt of revenues sufficient
to recover all ongoing transaction costs, including expected principal
amortization of, and interest on, the transition bonds and other ongoing
transaction costs as specified in items (1) through (10) above. For each
series of transition bonds, such adjustments will be designed to result in:
the outstanding principal balance of the transition bonds equaling the
expected amortization schedule; the amount in the overcollateralization
subaccount equaling the required overcollateralization amount; the capital
subaccount equaling the required capital level; and the reserve subaccount
equaling zero, by the earlier of (1) the payment date immediately preceding
the next adjustment and (2) the expected final payment date.
The servicer will petition the BPU to approve such adjustments to make
up for any shortfall or excess in transition bond charge collections. In
this way, the transition bond charge collections will be designed to
conform to the expected amortization schedule of payments of principal and
interest and the other costs associated with the transition bond financing.
The adjustments must be made at least annually. The transition bond charge
collections will fund the collection account and various subaccounts as set
forth below.
Collection Account - Under the indenture, the trustee will hold a single
collection account, divided into various subaccounts, some of which may be
series specific and some of which may be held for all series of transition
bonds. The primary subaccounts for credit enhancement purposes are:
(1) Capital Subaccount - An amount specified in the prospectus
supplement for each series of transition bonds will be deposited
into such series' capital subaccount on the date of issuance of
that series. Any shortfall in the capital subaccount for an
existing series will be replenished by adjustments to the
transition bond charge.
(2) Overcollateralization Subaccount - The prospectus supplement for
each series of transition bonds will specify a funding level for
such series' overcollateralization subaccount. That amount will be
funded over the term of the transition bonds.
(3) Reserve Subaccount - Any excess amount of transition bond charge
collections and investment earnings, other than earnings on the
capital account, after payments have been made on a payment date,
will be held in the reserve subaccount for all series of
transition bonds.
Each of the capital subaccount and the overcollateralization subaccount
for each series will be available to make payments for such series on each
payment date and other amounts through item (8) above for such series. The
reserve subaccount will be available to make payments for all series on
each payment date and other amounts through item (8) above for all series.
To the extent that amounts on deposit in the reserve account are needed for
more than one series, but are insufficient, the amounts on deposit will be
allocated to each series, in proportion to the outstanding principal amount
of such series.
Additional credit enhancement for any series may include surety bonds
or letters of credit. Additional forms of credit enhancement, if any, for
each series will be specified in the related prospectus supplement. Credit
enhancement for the transition bonds is intended to protect you against
losses or delays in scheduled payments on your transition bonds.
STATE PLEDGE
Under the Competition Act, the State of New Jersey pledges and agrees
with the holders of the transition bonds and with the issuer not to limit,
alter or impair the bondable transition property or the other rights vested
in an electric public utility or an assignee or pledgee of the utility or
any financing entity, such as the issuer, or vested in the holders of any
transition bonds pursuant to the bondable stranded cost rate order until
the transition bonds are fully paid and discharged. In addition, the State
will not in any way limit, alter, impair or reduce the value or amount of
the bondable transition property approved by a bondable stranded cost rate
order except as contemplated by the periodic adjustments to the transition
bond charge.
ALLOCATIONS AND DISTRIBUTIONS
[GRAPHIC OMITTED]
PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of transition bonds will accrue at the interest
rate specified in the related prospectus supplement. On each payment date,
the trustee will distribute interest accrued on each class of transition
bonds and the scheduled principal payment for such class, if any, to the
extent funds are available therefor, until the outstanding principal
balance of such class has been reduced to zero.
Failure to pay the entire outstanding amount of the transition bonds of
any class or series by the expected final payment date will not result in a
default with respect to that class or series until the final maturity date
for the class or series. The expected final payment date and the final
maturity date of each series and class of transition bonds are specified in
the related prospectus supplement.
OPTIONAL REDEMPTION
Provisions for optional redemption of the transition bonds, if any, are
specified in the related prospectus supplement.
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of transition bonds
are specified in the related prospectus supplement.
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT
OF THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS AND LIMITED
CREDIT ENHANCEMENT
You may suffer payment delays or losses on your transition bonds if the
assets of the issuer are insufficient to pay the principal amount of the
transition bonds in full. The only source of funds for payments on the
transition bonds will be the assets of the issuer. These assets are
limited to:
o the bondable transition property including the right to collect
the transition bond charge and to adjust the transition bond
charge at least annually,
o the funds on deposit in the trust accounts held by the trustee,
and
o contractual rights under various contracts.
The transition bonds will not be insured or guaranteed by PSE&G,
including in its capacity as servicer, or by its parent, Public Service
Enterprise Group Incorporated, any of its affiliates, the trustee or any
other person or entity. Furthermore, it is not anticipated that the
transition bonds will have the benefit of any liquidity facility or of any
third-party credit enhancement, such as letters of credit or insurance.
Thus, you must rely for payment of the transition bonds solely upon
collections of the transition bond charge, funds on deposit in the trust
accounts held by the trustee and any other credit enhancement described in
the related prospectus supplement. See "PSE&G TRANSITION FUNDING LLC, THE
ISSUER" in this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION THAT MAY ADVERSELY AFFECT
YOUR INVESTMENT
LEGAL ACTION MAY REDUCE THE VALUE OF YOUR INVESTMENT
The bondable transition property is the creation of the Competition Act
and a financing order issued by the BPU. A court decision or a federal or
state law might seek to overturn either the Competition Act or the BPU
financing order. If this occurs, you may lose some or all of your
investment or you may experience delays in recovering your investment.
The Competition Act may be directly contested in courts and, if
successful, a lawsuit could potentially affect its validity and thereby
diminish the value of your investment. To date there has been no lawsuit
which has challenged the validity of the Competition Act or the BPU
financing order. A future lawsuit may yet be filed and may be successful.
However, certain of the interested parties have resolved some of the issues
which could arise under the Competition Act to their satisfaction by
entering into a "stipulation" filed with the BPU. See "PSE&G'S
RESTRUCTURING."
If a court were to determine that the relevant provisions of the
Competition Act or the BPU financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity
of the transition bonds or the issuer's ability to make distributions on
the transition bonds, and may not trigger any requirement for PSE&G to
indemnify you. In that case, you could suffer a loss on your investment in
the transition bonds.
Electricity generation deregulation laws similar to the Competition Act
have been enacted in other states, including Pennsylvania, California,
Illinois, Massachusetts and Montana. The validity of similar legislation in
other states has been upheld in those states where judicial challenges were
made. However, a court might yet overturn a similar statute in another
state in response to a future or pending claim. Such a decision would not
automatically invalidate the Competition Act or the related BPU financing
order, but it might give rise to a challenge to the Competition Act.
Therefore, legal activity in other states may indirectly affect the value
of your investment.
POSSIBLE FEDERAL PREEMPTION OF THE COMPETITION ACT
At least one bill was introduced in the 105th Congress prohibiting the
recovery of stranded costs, and this prohibition could negate the existence
of bondable transition property. The 105th Congress adjourned without
taking any further action on that bill. As of the date hereof, no member of
Congress had introduced a bill in the 106th Congress that would affect the
existence or value of PSE&G's bondable transition property or the
imposition of the transition bond charge. No prediction can be made as to
whether any future bills, that prohibit the recovery of stranded costs, or
securitized financing for the recovery of these costs, will become law or,
if they become law, what their final form or effect will be. There is no
assurance that the courts would consider this preemption a "taking" from
the transition bondholders. Moreover, even if this preemption of the
Competition Act and/or the BPU financing order by the federal government
were considered a "taking" under the U.S. Constitution for which the
government had to pay the estimated market value of the transferred
bondable transition property at the time of the taking, there is no
assurance that this compensation would be sufficient to pay the full amount
of principal of and interest on the transition bonds or to pay such amounts
on a timely basis..
FUTURE STATE LEGISLATIVE ACTION MAY REDUCE THE VALUE OF YOUR INVESTMENT
Unlike other states, the citizens of the State of New Jersey do not
have the constitutional right to adopt or revise laws by initiative or
referendum. Thus the Competition Act cannot be amended or repealed by the
electorate.
Under the Competition Act, the State of New Jersey has pledged not to
diminish the value of the transition bond property. For a description of
this pledge, see "THE COMPETITION ACT-PSE&G AND OTHER UTILITIES MAY
SECURITIZE STRANDED COSTS" in this prospectus. Despite this pledge, the
legislature of the State of New Jersey may attempt in the future to repeal
or amend the Competition Act in a manner which might limit or alter the
bondable transition property so as to reduce its value.
In the opinion of [ ], counsel to PSE&G, under the contract clauses of
the United States and New Jersey constitutions, the State of New Jersey
could not repeal or amend the Competition Act or take any other action that
substantially impairs the rights of the transition bondholders, unless this
action is a reasonable exercise of the State of New Jersey's sovereign
powers and of a character appropriate to the public purpose justifying this
action. To date, no cases addressing these issues in the context of
transition bonds have been decided. There have been cases in which courts
have applied the contract clause of the United States Constitution and
parallel state constitutional provisions to strike down legislation,
reducing or eliminating taxes or public charges which supported bonds
issued by public instrumentalities, or otherwise reducing or eliminating
the security for the bonds. Based upon case law, in the opinion of [ ] it
would appear unlikely that the State of New Jersey could reduce, modify,
alter or take any other action with respect to the bondable transition
property which would substantially impair the rights of transition
bondholders, unless the action is reasonable and appropriate to further a
legitimate public purpose.
Moreover, in the opinion of [ ], under the taking clauses of the United
States and New Jersey Constitutions, the State of New Jersey could not
repeal or amend the Competition Act (by way of legislative process) or take
any action in contravention of its pledge and agreement (described above)
without paying just compensation to the transition bondholders if doing so
would constitute a permanent appropriation of the property interest of
transition bondholders in the bondable transition property and deprive the
transition bondholders of their reasonable expectations arising from their
investments in the transition bonds. There is no assurance, however, that,
even if a court were to award just compensation, it would be sufficient to
pay the full amount of principal of and interest on the transition bonds.
There can be no assurance that a repeal of or amendment to the
Competition Act will not be sought or adopted or that any action by the
State of New Jersey may not occur, any of which might constitute a
violation of the State of New Jersey's pledge and agreement with the
transition bondholders. In any event, costly and time-consuming litigation
might ensue. Any litigation might adversely affect the price and liquidity
of the transition bonds and the dates of payments of interest on and
principal thereof and, accordingly, the weighted average lives thereof.
Moreover, given the lack of judicial precedent directly on point, and the
novelty of the security for the transition bondholders, the outcome of any
litigation cannot be predicted with certainty, and accordingly, transition
bondholders could incur a loss of their investment.]
PSE&G will not indemnify you for any changes in the law that may affect
the value of your transition bonds.
POTENTIAL UNEXPECTED REGULATORY ACTION BY THE BPU
Pursuant to the Competition Act, the BPU financing order issued to
PSE&G is irrevocable upon issuance and the BPU may not directly or
indirectly, by any subsequent action, rescind or amend the BPU financing
order or reduce or impair the amount of bondable stranded costs authorized
under the BPU financing order. The BPU nevertheless might attempt to revise
or rescind any of its regulations or orders in ways that ultimately have an
adverse impact upon the bondable transition property or the transition bond
charge. Apart from the terms of the BPU financing order, the BPU retains
the power to adopt, revise or rescind rules or regulations affecting PSE&G
or a successor electric public utility. Any new or amended regulations or
orders by the BPU could have an effect on the transition bonds. PSE&G has
agreed to take legal or administrative actions, including instituting and
provoking legal actions, as may be reasonably necessary to block or
overturn any attempts to cause a repeal, modification or supplement to the
Competition Act, the BPU financing order or the bondable transition
property. PSE&G has also agreed to resist proceedings of third parties,
which, if successful, would result in a breach of its representations
concerning the bondable transition property, the BPU financing order or the
Competition Act. See "THE SALE AGREEMENT" in this prospectus. However,
there is no assurance that PSE&G would be able to take this action or that
any action PSE&G is able to take would be successful. Future BPU
regulations or orders may affect the rating of the transition bonds, their
price or the rate of transition bond charge collections and, accordingly,
the amortization of transition bonds and their weighted average lives. As a
result, transition bondholders could suffer a loss of their investment.
PSE&G, as servicer, is required to file with the BPU, on behalf of the
issuer, periodic adjustments of the transition bond charge. These
adjustments are intended to provide, among other things, for timely payment
of the transition bonds. The BPU may challenge PSE&G's calculation of its
proposed adjustments which may cause delay or refuse to permit an
adjustment to take effect on the grounds that the adjustment contains a
"manifest error." Any such delay in the implementation of the adjustment
could cause a delay in the payments on the transition bonds.
SERVICING RISKS
INACCURATE FORECASTING OR UNANTICIPATED DELINQUENCIES COULD RESULT IN
PAYMENT DELAYS OR LOSSES.
Because the transition bond charge is assessed based on kWhs of
electricity consumed by customers, a shortfall of payments arising from the
transition bond charge could result if the servicer inaccurately forecasts
electricity consumption or underestimates customer delinquencies or
charge-offs when setting the transition bond charge. A shortfall in
transition bond charge collections could result in payments of principal of
the transition bonds not being paid according to the expected amortization
schedule, lengthening the weighted average life of the transition bonds, or
payments of principal and interest not being made at all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from PSE&G's service territory or reduce
their electricity consumption;
o the occurrence of a natural disaster, such as a hurricane or
blizzard, unexpectedly disrupting electrical service and reducing
consumption;
o problems with energy generation, transmission or distribution
resulting from a change in the market structure of the electric
industry;
o large customers ceasing business or departing PSE&G's service
territory;
o customers consuming less electricity because of increased
conservation efforts; or
o large customers switching to self-generation of electric power
without being required to pay transition bond charges under the
Competition Act. See "THE COMPETITION ACT."
Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among things:
o unexpected deterioration of the economy or the occurrence of a
natural disaster, causing greater charge-offs than expected or
forcing PSE&G's or a successor electric public utility to grant
additional payment relief to more customers;
o a change in law that makes it more difficult for PSE&G's or a
successor electric public utility to disconnect nonpaying
customers, or that requires PSE&G's or a successor distribution
company to apply more lenient credit standards in accepting
customers; or
o the introduction into the energy markets of less creditworthy
third party energy suppliers who collect and remit payments
arising from the transition bond charge to the servicer. See "--IT
MAY BE MORE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM
THIRd PARTIES THAN FROM PSE&G'S RETAIL CUSTOMERS."
UNCERTAINTIES ASSOCIATED WITH COLLECTING THE TRANSITION BOND CHARGE
PSE&G has no historical performance data for the transition bond
charge, although customer and energy usage records are available. These
customer and energy usage records, however, do not reflect customers'
payment patterns or energy usage in a competitive market. These records
also do not reflect potential consolidated billing by third party suppliers
so these records may have limited predictive value with respect to the
transition bond charge. Furthermore, the servicer does not have any
experience administering the transition bond charge on behalf of an
independent issuer.
YOUR INVESTMENT RELIES ON PSE&G OR ITS SUCCESSOR ACTING AS SERVICER OF THE
BONDABLE TRANSITION PROPERTY
PSE&G, as servicer, will be responsible for billing and collecting the
transition bond charge and for filing with the BPU to adjust this charge.
If PSE&G ceased servicing the bondable transition property, it might be
hard to find a successor servicer. Upon a servicer default based upon the
commencement of a case by or against the servicer under the United States
Bankruptcy Code or similar laws, the trustee and the issuer may be
prevented from effecting a transfer of servicing. Upon a servicer default
because of a failure to make required remittances, the issuer or the
trustee would have the right to apply to the BPU for sequestration and
payment of revenues arising from the bondable transition property. However
federal bankruptcy law may prevent the BPU from issuing or enforcing this
order. See "THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS" in
this prospectus.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE VALUE OF YOUR INVESTMENT
The methodology of determining the amount of the transition bond charge
the issuer may impose on each customer is set by the BPU. Thus, PSE&G
cannot change this methodology. However, PSE&G, as servicer, may set its
own billing and collection arrangements with each customer. For example, to
recover part of an outstanding electricity bill, PSE&G may agree to extend
a customer's payment schedule or to write off the remaining portion of the
bill. Also, PSE&G, or a successor to PSE&G as servicer, may change billing
and collection practices. Similarly, the BPU may require changes to these
practices. These billing and collection adjustments may materially reduce
the value of your investment. See "THE SELLER AND SERVICER OF THE BONDABLE
TRANSITION PROPERTY--HOW PSE&G FORECASTS THE NUMBER OF CUSTOMERS AND THE
AMOUNT OF ELECTRICITY USAGE" in this prospectus.
IT MAY BE MORE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD
PARTIES THAN FROM PSE&G'S RETAIL CUSTOMERS
Customers may pay the transition bond charge to third parties who
supply them with electric power. These third parties are obliged to forward
the charge to PSE&G, as servicer. These entities must pay PSE&G the
transition bond charge even if they do not collect the charge from retail
customers. PSE&G will have limited rights to collect the transition bond
charge directly from those customers who receive their electricity bills
from a third party. If many customers within PSE&G's service territory
elect to receive their electricity bills from third parties, the issuer may
have to rely on a relatively small number of entities for the collection of
the bulk of the transition bond charge. This may adversely affect your
investment because third parties might use more permissive standards in
bill collection and credit appraisal than PSE&G uses towards its retail
customers or might be less effective in billing and collecting. A default
by a third party which collects from a large number of retail customers
would have a greater impact than a default by a single retail customer and
could affect the timing of receipt of payments on the transition bonds.
Neither the seller nor the servicer will pay any shortfalls resulting
from the failure of any third party supplier to forward transition bond
charge collections to PSE&G, as servicer. There can be no assurance that
third party suppliers will use the same customer credit standards as the
servicer. Also, there can be no assurance that the servicer will be able to
mitigate credit risks relating to these third party suppliers in the same
manner in or to the same extent to which it mitigates the risks relating to
its customers. Any changes in billing and collection regulation might
adversely affect the value of the transition bonds and their amortization
and, accordingly, their weighted average lives. These changes may adversely
affect the transition bonds by affecting billing terms and the terms of
remittances by third party suppliers to the servicer or by making it more
difficult for the servicer to collect the transition bond charge.
The adjustment mechanism and any other credit enhancement will be
available to compensate for a failure by a third party collector to pay the
transition bond charge over to the issuer. However, the amount of credit
enhancement funds may not be sufficient to prevent a delay in payments on
the transition bonds. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE" in this prospectus.
PSE&G'S CUSTOMERS HAVE LIMITED EXPERIENCE IN PAYING THE TRANSITION BOND CHARGE
Changes in customer billing and payment arrangements may result in
customer confusion and the misdirection or delay of payments, which could
have the effect of causing delays in transition bond charge collections.
Any problems arising from new and untested systems or any lack of
experience on the part of the third party suppliers or other third parties
with customer billing and collections could also cause delays in billing
and collecting the transition bond charge. These delays could result in
shortfalls in transition bond charge collections.
POTENTIAL DELAYS IN PAYMENTS ON TRANSITION BONDS DUE TO POTENTIAL COMPUTER
PROGRAM PROBLEMS BEGINNING IN THE YEAR 2000
Principal and interest payments on the transition bonds could be
delayed if PSE&G, in its capacity as servicer, or the trustee experiences
problems in its computer programs or in the computer programs of those
vendors on whom they rely relating to the year 2000. Many existing computer
programs use only two digits to identify a year. These programs could fail
or produce erroneous results during the transition from the year 1999 to
the year 2000 and afterwards. PSE&G has evaluated the impact of preparing
its systems for the year 2000. It has identified areas of potential impact
and is implementing conversion efforts. As of March 31, 1999 more than [ ]%
of PSE&G's critical systems were year 2000 compliant. [All critical systems
are expected to be year 2000 compliant by July 1999.]
PSE&G, or a third party on whom PSE&G relies for collection of the
transition bond charge, may not have a computer system that is year 2000
compliant by January 1, 2000. If this occurs, PSE&G's ability to service
the bondable transition property may be materially and adversely affected.
In addition, the trustee may not have a computer system that is year 2000
compliant by January 1, 2000. If this occurs the trustee's ability to make
distributions on the transition bonds may be materially and adversely
affected. See "THE SELLER AND SERVICER OF THE BONDABLE TRANSITION
PROPERTY--PSE&G'S EFFORTS TO DEAL WITH THE YEAR 2000 COMPUTER ISSUE" in
this prospectus.
PSE&G's customers may not all be year 2000 compliant by January 1,
2000. Some customers may experience financial difficulty because of
operational problems, whether stemming from their own systems or those of
their customers and service providers. Such difficulties may lead to
increased delinquencies and even to a reduction of the customer base.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS IN WINTER
A winter moratorium prevents PSE&G from terminating service to certain
delinquent residential customers without special approval from the BPU from
November 15 of each year until at least March 15 of the following year. See
"THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY--PSE&G
MAINTAINS LIMITED INFORMATION ON ITS CUSTOMERS' CREDITWORTHINESS."
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
PSE&G WILL COMMINGLE THE TRANSITION BOND CHARGE WITH OTHER REVENUES WHICH MAY
HARM YOUR INVESTMENT IN CASE OF BANKRUPTCY
PSE&G will not segregate the transition bond charge from the other
funds it collects from its customers. The transition bond charge will be
segregated only after PSE&G pays them to the trustee. PSE&G will be
permitted to remit collections on a monthly basis only if:
o at any time PSE&G has the requisite credit ratings from the rating
agencies or
o PSE&G provides credit enhancement satisfactory to the rating
agencies to assure remittance by PSE&G to the trustee of the
transition bond charge it collects.
Otherwise, PSE&G will be required to remit collections within two
business days of receipt. Despite these requirements, PSE&G might fail to
pay the full amount of the transition bond charges to the trustee or might
fail to do so on a timely basis. This failure could materially
reduce the value of your investment.
The Competition Act provides that the rights of the issuer to the
bondable transition property are not affected by the commingling of these
funds with PSE&G's other funds. In a bankruptcy of PSE&G, however, a
bankruptcy court might rule that federal bankruptcy law takes precedence
over the Competition Act and does not recognize the right of the issuer to
collections of the transition bond charge that are commingled with other
funds of PSE&G as of the date of bankruptcy. If so, the collections of the
transition bond charge held by PSE&G as of the date of bankruptcy would not
be available to pay amounts owing on the transition bonds. In this case,
the issuer would have a general unsecured claim against PSE&G for those
amounts. This decision could cause material delays in payment or losses on
your transition bonds and could materially reduce the value of your
investment.
BANKRUPTCY OF PSE&G COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
TRANSITION BONDS
The Competition Act and the BPU order provide that as a matter of New
Jersey state law
o bondable transition property constitutes presently existing
property of PSE&G for all purposes;
o PSE&G may sell, assign and otherwise transfer that property and
PSE&G or the issuer may pledge or grant a security interest in the
property as collateral for transition bonds; and
o a transfer of the bondable transition property from PSE&G to the
issuer is a sale or other absolute transfer of the bondable
transition property, not a pledge of the bondable transition
property to secure a financing by PSE&G.
See "THE COMPETITION ACT" in this prospectus. These three provisions are
important to maintaining payments on the transition bonds in accordance
with their terms during any bankruptcy of PSE&G. In addition, the
transaction has been structured with the objective of keeping the issuer
separate from PSE&G in the event of a bankruptcy of PSE&G.
A bankruptcy court generally follows state property law on issues such
as those addressed by the three provisions described above. However, a
bankruptcy court has authority not to follow state law if it determines
that the state law is contrary to a paramount federal bankruptcy policy or
interest. If a bankruptcy court in a PSE&G bankruptcy refused to enforce
one or more of the state property law provisions described above for this
reason, the effect of this decision on you as a transition bondholder would
be similar to the treatment you would receive in a PSE&G bankruptcy if the
transition bonds had been issued directly by PSE&G. A decision by the
bankruptcy court that, despite the separateness of PSE&G and the issuer,
the two companies should be consolidated, would have a similar effect on
you as a transition bondholder. That treatment could cause material delays
in payment of, or losses on, your transition bonds and could materially
reduce the value of your investment. For example:
o the trustee could be prevented from exercising any remedies
against PSE&G on your behalf, from recovering funds to repay the
transition bonds or from replacing PSE&G as servicer, without
permission from the bankruptcy court;
o the bankruptcy court could order the trustee to exchange the
bondable transition property for other property, which might be of
lower value;
o tax or other government liens on PSE&G's property that arose after
the transfer of the bondable transition property to the issuer
might nevertheless have priority over the trustee's lien and might
be paid from transition bond charge collections before payments on
the transition bonds;
o the trustee's lien might not be properly perfected in bondable
transition property collections that were commingled with other
funds PSE&G collects from its customers as of the date of PSE&G's
bankruptcy, or might not be properly perfected in all of the
bondable transition property, and the lien could therefore be set
aside in the bankruptcy, with the result that the transition bonds
would represent only general unsecured claims against PSE&G;
o the bankruptcy court might rule that the transition bond charge
collected by the issuer should be used to pay a portion of the
cost of providing electric service; or
o the bankruptcy court might rule that the remedy provisions of the
bondable transition property sale agreement are unenforceable,
leaving the issuer with a claim of actual damages against PSE&G,
which may be difficult to prove.
A BPU SEQUESTRATION ORDER FOR BONDABLE TRANSITION PROPERTY IN CASE OF
DEFAULT MIGHT NOT BE ENFORCEABLE IN BANKRUPTCY
If PSE&G defaults on its obligations as servicer, the Competition Act
allows the BPU or any court of competent jurisdiction to order the
sequestration and payment of all transition bond charge collections to the
transition bondholders. The Competition Act states that this BPU or court
order would be effective even if made while PSE&G or its successor is in
bankruptcy. However, federal bankruptcy law may prevent the BPU from
issuing or enforcing this order. The indenture requires the trustee to
request an order from the bankruptcy court to permit the BPU to issue and
enforce the order. However, the bankruptcy court may deny the request.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
ABSENCE OF SECONDARY MARKET FOR TRANSITION BONDS COULD LIMIT YOUR ABILITY
TO RESELL TRANSITION BONDS
The underwriters for the transition bonds may assist in resales of the
transition bonds but they are not required to do so. A secondary market for
the transition bonds may not develop. If it does develop, it may not
continue or it may not be sufficiently liquid to allow you to resell any of
your transition bonds.
THE ISSUER MAY ISSUE ADDITIONAL SERIES OF BONDS
The issuer may issue other series of transition bonds without your
prior review or approval. These series may include terms and provisions
which would be unique to that particular series. A new series of transition
bonds may not be issued if it would result in the credit ratings on any
outstanding series of transition bonds being reduced or withdrawn. See "THE
TRANSITION BONDS" and "THE INDENTURE" in this prospectus. In addition, some
matters may require the vote of the holders of all series and classes of
transition bonds. Your interests in these votes may conflict with the
interests of the transition bondholders of another series or of another
class. Thus, these votes could result in an outcome that is materially
unfavorable to you.
LIMITED NATURE OF RATINGS
The transition bonds will be rated by one or more established rating
agencies. The ratings merely analyze the probability that the issuer will
repay the total principal amount of the transition bonds at final maturity
and will make timely interest payments. The ratings do not assess the speed
at which the issuer will repay the principal of the transition bonds. Thus,
the issuer may repay the principal of your transition bonds earlier or
later than you expect, which may materially reduce the value of your
investment. A rating is not a recommendation to buy, sell or hold
transition bonds. The rating may change at any time. A rating agency has
the authority to revise or withdraw its bond rating based solely upon its
own judgment. See "RATINGS FOR THE TRANSITION BONDS" in this prospectus.
PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER FOR A BREACH OF A REPRESENTATION OR
WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
If PSE&G breaches a representation or warranty in the sale agreement,
it is obligated to indemnify the issuer and the trustee for any
liabilities, obligation, claims, actions, suit or payments resulting from
that breach, as well as any reasonable costs and expenses incurred. In
addition, PSE&G is obligated to indemnify the issuer and the trustee for
principal and interest on the transition bonds not paid when scheduled to
be paid in accordance with their terms and the amount of any deposits to
the issuer required to have been made which are not made when so required
as a result of a breach of a representation or warranty. However, the
amount of any indemnification paid by the servicer or the seller may not be
sufficient for you to recover your transition bond investment. See "THE
SALE AGREEMENT - PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE
AND TO TAKE LEGAL ACTION" in this prospectus.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related prospectus
supplement concerning expectations, beliefs, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts, are
forward-looking statements within the meaning of the federal securities
laws. Although PSE&G and the issuer believe that the expectations and the
underlying assumptions reflected in these statements are reasonable, there
can be no assurance that these expectations will prove to have been
correct. The forward-looking statements involve a number of risks and
uncertainties and actual results may differ materially from the results
discussed in the forward-looking statements. The following are among the
important factors that could cause actual results to differ materially from
the forward-looking statements:
1. state and federal legal or regulatory developments;
2. national or regional economic conditions;
3. market demand and prices for energy;
4. weather variations affecting customer energy usage;
5. the effect of continued electric industry restructuring;
6. operating performance of PSE&G's facilities;
7. the payment patterns of customers including the rate of
delinquencies and the accuracy of the collections curve; and
8. system conditions (including actual results in achieving year 2000
compliance by PSE&G, its subsidiaries, affiliates, customers,
vendors and others).
Any forward-looking statements should be considered in light of these
important factors and in conjunction with PSE&G's other documents on file
with the SEC.
New factors that could cause actual results to differ materially from
those described in forward-looking statements emerge from time to time. It
is not possible for PSE&G or the issuer to predict all of these factors, or
the extent to which any factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement.
Any forward-looking statement speaks only as of the date on which the
statement is made and neither PSE&G nor the issuer undertakes any
obligation to update the information contained in the statement to reflect
subsequent developments or information.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
PSE&G, a wholly-owned subsidiary of Public Service Enterprise Group
Incorporated ("Enterprise"), is an operating electric and gas public
utility incorporated under the laws of the State of New Jersey. Enterprise
is an exempt public utility holding company under the Public Utility
Holding Company Act of 1935. PSE&G supplies electric and gas service in
areas of New Jersey, including its principal cities, where approximately
5.5 million people or about 70% of the State's population reside. This area
covers approximately 2,600 square miles and contains a diversified mix of
commerce and industry. While PSE&G believes that it has all the franchises
and consents necessary for its electric and gas transmission and
distribution operations in the territory it serves, such franchises are not
exclusive. At March 31, 1999, PSE&G's assets comprised approximately 82% of
Enterprise's consolidated assets.
The electric utility industry is undergoing fundamental restructuring.
See "THE COMPETITION ACT" in this prospectus. As a result, in the fourth
quarter of this year, PSE&G expects to sell all of its generation-related
assets and transfer all of its electric trading and wholesale electric
marketing business to PSEG Power LLC, a Delaware limited liability company,
formed in 1999 as a wholly-owned direct subsidiary of Enterprise.
Where to Find Information About PSE&G. PSE&G files periodic reports
with the SEC as required by the Exchange Act. Reports filed with the SEC
are available for inspection without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located as follows: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of periodic reports
and exhibits thereto may be obtained at the above locations at prescribed
rates. Information filed with the SEC can also be inspected at the SEC site
on the World Wide Web at http://www.sec.gov.
THE COMPETITION ACT
The New Jersey Electric Discount and Energy Competition Act,
referred to as the Competition Act, signed into law in February 1999,
provides, among other things, for the restructuring of the electric utility
industry in New Jersey. The Competition Act requires the unbundling of
electric services into separate generation, transmission and distribution
services with open retail competition for generation services. While
electric utilities will continue to provide transmission and distribution
services, the Competition Act authorizes third party electric power
suppliers licensed by the BPU, referred to as third party suppliers, to
provide electric generation services to retail customers. Under the
Competition Act, third party suppliers are subject to some limited
financial and other requirements and some customer protection requirements,
but are generally not regulated by the BPU. Electric distribution and
transmission services will remain regulated. Customer choice of third party
suppliers for all customers will commence [August 1, 1999.]
Even with the enactment of the Competition Act, the BPU will continue
to regulate some aspects of the electric industry in New Jersey with
respect to electric distribution companies. The BPU will also establish
guidelines governing customer billing and collection, and metering and
disclosure requirements applicable to third party suppliers participating
in the new market in New Jersey.
RECOVERY OF STRANDED COSTS IS ALLOWED FOR PSE&G AND OTHER NEW JERSEY UTILITIES
The Competition Act allows utilities an opportunity to recover
their stranded costs. Stranded costs means the amount by which the net cost
of the electric public utility's electric generating assets or electric
power purchase commitments, as determined by the BPU, exceeds the market
value of those assets or contractual commitments in a competitive supply
marketplace and the costs of buydowns or buyouts of power purchase
contracts. The Competition Act also permits the recovery of restructuring
related costs which the BPU approves as appropriate for recovery. As a
mechanism to recover these stranded costs, the Competition Act provides for
the imposition and collection of a transition bond charge on customers'
bills. Because the transition bond charge is imposed based on access to the
utility's transmission and distribution system, the customers will be
assessed regardless of whether the customers purchase electricity from the
utility or a third party supplier.
PSE&G AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS
The Recovery of Stranded Costs May be Facilitated by the Issuance
of Transition Bonds. The Competition Act authorizes the BPU to issue
"bondable stranded cost rate orders" approving, among other things, the
issuance of transition bonds to recover bondable stranded costs and related
expenses of an electric public utility. A utility, a finance subsidiary of
a utility or a third-party assignee of a utility may issue transition
bonds. Under the Competition Act, proceeds of transition bonds are required
to be used to reduce the utility's stranded costs through the retirement of
its debt or equity, or both. Transition bonds are secured by and payable
from bondable transition property and may have an expected amortization
schedule of up to 15 years. The BPU financing order allows the final legal
maturity of the transition bonds issued by the issuer to extend to 17 years
from date of issuance of the transition bonds.
The Competition Act contains a number of provisions designed to
facilitate the securitization of stranded costs and related expenses.
A Bondable Stranded Cost Rate Order is Irrevocable. Under the
Competition Act, bondable transition property is created by the issuance by
the BPU of a bondable stranded cost rate order. The Competition Act
provides that each bondable stranded cost rate order will become
irrevocable upon issuance and effectiveness of the order. This includes the
BPU financing order issued to PSE&G. Upon the transfer of the bondable
transition property to an assignee, such as the issuer, and the receipt of
consideration for the sale of the transition bonds, the bondable stranded
cost rate order, the transition bond charge and the bondable transition
property become a vested, presently existing property right, vested ab
initio in the assignee.
Under the Competition Act, neither the BPU nor any other
governmental entity has the authority, directly or indirectly, legally or
equitably, to rescind, alter, repeal, modify or amend a bondable stranded
cost rate order, to revalue, re-evaluate or revise the amount of bondable
stranded costs, to determine that the transition bond charge or the
revenues required to recover bondable stranded costs are unjust or
unreasonable, or in any way to reduce or impair the value of bondable
transition property, nor will the amount of revenues from the transition
bond charge be subject to reduction, impairment, postponement or
termination. In addition, under the Competition Act, the State of New
Jersey pledges and agrees with the holders of the transition bonds, and
with any assignee or financing entity, such as the issuer, not to limit,
alter or impair the bondable transition property or the other rights vested
in an electric public utility or any assignee or pledgee of the utility or
any financing entity or vested in the holders of any transition bonds
pursuant to the bondable stranded cost rate order until the transition
bonds are fully paid and discharged. In addition, the State pledges and
agrees in the Competition Act that it will not in any way limit, alter,
impair or reduce the value or amount of the bondable transition property
approved by the bondable stranded cost rate order except as contemplated by
the periodic adjustments to the transition bond charge authorized by the
Competition Act. See "--The Transition Bond Charge is Adjusted
Periodically" below. See also "--JUDICIAL, LEGISLATIVE Or REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT" in this prospectus. A bondable
stranded cost rate order does not constitute a debt or liability of the
State, nor does it constitute a pledge of the full faith and credit of the
State. The issuance of transition bonds does not, directly, indirectly or
contingently, obligate the State to levy or pledge any form of taxation or
make any appropriation for their payment.
The Transition Bond Charge is Adjusted Periodically. The
Competition Act requires each bondable stranded costs order to provide for
mandatory adjustment of the transition bond charge, at least once a year,
upon petition of the electric public utility or its assignee or financing
party. Such adjustments are formula-based to ensure receipt of revenues
sufficient to provide for the full recovery of bondable stranded costs,
including, without limitation, the timely payment of the principal of, and
interest and acquisition or redemption premium on, the transition bonds in
accordance with the expected amortization schedule. PSE&G agrees in the
servicing agreement to file with the BPU each proposed adjustment
calculated in accordance with the formula.
Customers Cannot Avoid Paying the Transition Bond Charge. The
Competition Act provides that transition bond charge is "non-bypassable"
which means that the charge will be payable by retail consumers of
electricity within the utility's service territory who access a utility's
transmission and distribution system, even if those customers elect to
purchase electricity from a third party supplier. Also, if on-site
generation facilities that are connected to the utility's transmission and
distribution system produce power that is delivered to off-site retail
customers in New Jersey, the transition bond charge will apply to the sale
or delivery of that power. However, if consumers self-generate and are not
connected to the utility's transmission and distribution system, they will
not be obligated to pay the transition bond charge. If power from on-site
facilities is consumed by on-site consumers that are connected to the
utility's transmission and distribution system, the transition bond charge
will also not apply to that power unless the new on-site generation
facilities in the aggregate reduce the utility's energy distribution to
92.5% or below of its 1999 energy distribution. In that case, the
transition bond charge will be imposed on those on-site customers.
The Competition Act Protects the Transition Bonds' Lien on Bondable
Transition Property. The Competition Act provides that a transfer of
bondable transition property will be perfected against any third party
when:
1. the BPU has issued its bondable stranded cost rate order
with respect to such bondable transaction property,
2. the agreement to transfer the property has been executed and
delivered by the electric public utility or its assignee,
and
3. a financing statement with respect to the transfer has been
filed in accordance with the New Jersey Uniform Commercial
Code.
The Competition Act provides that security interests in the bondable
transition property are perfected only by means of a separate filing under
the Uniform Commercial Code of New Jersey. Upon perfection, a security
interest under the Uniform Commercial Code attaches to bondable transition
property, whether or not the revenues or proceeds thereof have accrued. The
Competition Act provides that priority of security interests in bondable
transition property will not be defeated or adversely affected by:
1. commingling of revenues received from transition bond charge
collections with other funds of the utility or its assignee
or
2. the periodic adjustment of the transition bond charge under
the Competition Act.
The Competition Act Characterizes the Transfer of Bondable
Transition Property as a Sale or Other Absolute Transfer. The Competition
Act provides that a transfer by the utility or an assignee of bondable
transition property will be treated as a sale or other absolute transfer of
the transferor's right, title and interest and not as a borrowing secured
by the bondable transition property, if the parties expressly state in
governing documents that a transfer is to be a sale or other absolute
transfer. The characterization of the transfer as a sale is not affected or
impaired by the fact that:
(a) the assignor retains or acquires a pari passu equity
interest in the bondable transition property or the fact that only
a portion of the bondable transition property is transferred;
(b) the assignor retains or acquires a subordinated equity
interest or other credit enhancement provisions or terms
commensurate with market practices;
(c) the electric public utility acts as collector or
servicer of the related transition bond charge;
(d) the assignor retains bare legal title to the bondable
transition property for servicing or supervising services and
collections relating to the bondable transition property; or
(e) the transfer is treated as a financing for Federal,
state or local tax purposes or financial accounting purposes.
See "RISK FACTORS--THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGS" in this prospectus.
PSE&G'S RESTRUCTURING
The Stipulation and Recovery Order. On March 17, 1999, PSE&G and a
number of other parties filed a stipulation with the BPU, detailing a
proposal for PSE&G's implementation of full customer choice under the
Competition Act. The parties to the stipulation agreed, among other things,
not to oppose a financing order to be issued by the BPU or the sale of
transition bonds to implement securitization in any judicial or regulatory
forum. An alternative joint proposal was submitted by the Division of the
Ratepayer Advocate in opposition to the stipulation. The BPU found the
stipulation, subject to certain modifications, to be a reasonable framework
for resolution of the proceedings and issued its summary order, dated April
21, 1999. Its final recovery order was issued on _____, 1999 and is
referred to as the recovery order.
The recovery order authorizes PSE&G to recover $2.940 billion of
its net of tax stranded costs. The BPU authorized the recovery of PSE&G's
bondable stranded costs in an amount of $2.525 billion through the issuance
of $2.525 billion in transition bonds and through the collection of a
transition bond charge designed to recover $2.400 billion net of tax
stranded costs plus $125 million in transaction costs and related expenses
of the financing. The BPU also authorized the recovery of $540 million of
unsecuritized generation-related net of tax stranded costs on a
present-value basis though a market transition charge. In addition, the BPU
authorized the recovery of a charge to recover federal and state taxes
associated with the collection of the transition bond charge.
PSE&G Will Unbundle its Electric Rates. PSE&G will unbundle its
retail electric rates on August 1, 1999 into distribution charges,
transmission charges, the market transition charge, the transition bond
charge and the societal benefits charge.
PSE&G Must Reduce its Electric Rates. Pursuant to the stipulation
and the BPU recovery order, PSE&G's current rates for generating,
transmitting and distributing electric power to its customers will be
reduced on August 1, 1999 by 5% from current rates which includes a 1%
reduction due to the savings from securitization. The second rate
reduction, which will take place at the time the transition bonds are sold,
will provide an additional estimated reduction of [2]%, so that customers
receive the full benefit of the securitization. A further rate reduction of
an additional 2% will take place on August 1, 2001, bringing the total
estimated reduction to 9% from current rates. In the event that the
securitization has not occurred by August 1, 2001, this reduction would be
reduced by 2%. The final rate reduction will take place on August 1, 2002,
providing an overall rate reduction from current rates of 13.9% (10% from
the rates as of April 30, 1997), regardless of the amount of reduction
achieved from securitization. PSE&G's rates will not be subject to any cap
after July 31, 2003.
Pursuant to the Competition Act and the BPU recovery order,
customers may choose to purchase power from alternative third party
suppliers and later return to PSE&G as their supplier of basic generation
service until the BPU determines that it is no longer necessary and in the
public interest for PSE&G to perform this service. Pursuant to the BPU
recovery order PSE&G is also authorized to transfer its generation assets
to a separate corporate entity as a "related competitive business segment
of a common public utility holding company". Any third party supplier will
be required to provide the servicer with total monthly kwh usage
information for each customer in a timely manner for the servicer to
fulfill its obligations.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
PSE&G's Petition and the BPU Financing Order. On June 8, 1999,
PSE&G filed a petition with the BPU requesting the issuance by the BPU of a
bondable stranded cost rate order under the Competition Act to allow PSE&G
to recover up to $2.4 billion of its bondable stranded costs, plus $125
million of associated transaction costs and the cost of retiring equity and
debt securities of PSE&G, through the issuance of up to $2.525 billion of
transition bonds and the imposition of a transition bond charge. In
response to the petition the BPU issued its financing order, on July ,
1999, referred to as the BPU financing order.
The BPU Authorized PSE&G to Issue Transition Bonds. Consistent with
the recovery order, the BPU financing order authorizes the issuance of
transition bonds in an aggregate principal amount not to exceed $2.525
billion, secured by bondable transition property. The transition bonds may
have a final legal maturity not later than 17 years from the date of
issuance.
The final structure, pricing and other terms of the transition
bonds will be subject to approval of the BPU board or its designee. This
approval will be obtained prior to the sale of the transition bonds.
The BPU Authorized PSE&G to Impose the Transition Bond Charge.
Under the BPU financing order, the BPU authorizes PSE&G to impose, meter,
charge, bill, collect and receive from customers, the transition bond
charge in an amount sufficient to recover the principal amount of
transition bonds in accordance with a scheduled amortization and interest
thereon, plus an amount sufficient to provide for any credit enhancement,
to fund any reserves, and to pay acquisition or redemption premiums, if
any, servicing fees and other expenses relating to the transition bonds.
The BPU also grants PSE&G, as servicer, the authority to make
"non-routine" filings for adjustments. This would permit filings to be made
to accommodate changes in the formula specified in the BPU financing order
for the mandatory periodic adjustments which PSE&G deems appropriate to
remedy a significant and recurring variance between actual and expected
transition bond charge collections. Any such filing is required to be made
at least 90 days prior to the proposed effective date and would be subject
to BPU approval.
PSE&G will set the initial per kWh transition bond charge, based
upon the formula approved in the BPU financing order. The transition bond
charge and the charge for related federal and state taxes associated with
the collection of the transition bond charge are intended to provide an
approximately level combined charge throughout the term of the transition
bonds. The transition bond charge and the related charge for taxes will be
reflected in each customer's bill in a single line item with an explanation
in the bill that the line item includes the transition bond charge.
The transition bond charge for each series of transition bonds will
be assessed on all customer bills and will be pro-rated in the case of the
first bill after issuance of a series of transition bonds to account for
any partial month since the date of issuance. For instance, if a particular
series issuance date is August 15, bills that include current charges for
services provided before August 15 will not be assessed the transition bond
charge for the period prior to August 15, with respect to that series. Upon
each adjustment of the transition bond charge or issuance of additional
series of transition bonds, the adjusted transition bond charge will be
assessed in the same manner.
PSE&G Must Allow Other Entities to Provide Metering and Billing
Services. Under the Competition Act, the BPU may establish specific
standards for metering, billing and other activities by third party
suppliers participating in the new market in New Jersey. In order to
qualify to serve as a third party supplier, an electric supplier must
maintain at least a "BBB" or the equivalent long term unsecured credit
rating from Moody's Investors Service or Standard & Poor's Ratings
Services, or lodge with the servicer a cash deposit or comparable security
equal to two months' maximum estimated collections of all charges payable
to PSE&G. The BPU financing order allows qualified third party suppliers to
bill and collect the transition bond charge on behalf of the issuer. In
doing so, third-party suppliers must comply with all applicable BPU billing
and collection requirements. Third party suppliers must also agree to remit
the full amount of all charges it bills to customers for the electric
generation, transmission and distribution services PSE&G or its successor
provides, together with the transition bond charge, regardless of whether
such payments are received from the customers, within 15 days of PSE&G's or
its successor's bill for such charges. If a third party supplier fails to
remit charges within a further 7 days, PSE&G, as servicer, or its successor
may assume responsibility for billing or transfer responsibility to another
qualified third party supplier. While a third party supplier collecting the
transition bond charge may request termination of service to delinquent
customers, only PSE&G or a successor electric public utility, may
disconnect or reconnect a customer's distribution service.
The BPU May Designate a Replacement Servicer. The Competition Act
provides that in the event of a default by the electric public utility in
respect of charging, collecting and receiving revenues derived from the
transition bond charge and upon the application of the secured party, such
as the trustee, or an assignee, such as the issuer, the BPU or any court of
competent jurisdiction will by order designate a trustee or other entity to
act in place of the electric public utility to impose, meter, charge, bill,
collect and receive the transition bond charge. The BPU may, in its
discretion establish criteria for the selection of any entity that may
become a servicer of bondable transition property upon the default or other
material adverse change in the financial condition of the electric public
utility. The appointment of a successor servicer must not result in the
downgrade or withdrawal of a rating on any outstanding transition bonds.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
In order to enhance the likelihood that actual transition bond
charge collections, net of any amounts on deposit in the reserve account,
are neither more nor less than the amount necessary to amortize the
transition bonds of each series in accordance with the related amortization
schedule, to pay interest, to fund the overcollateralization account to the
amount required to be on deposit in the overcollateralization account, to
replenish any shortfalls in the capital account, and to pay the trustee's
fee, the servicing fee and the other expenses and costs included in
bondable stranded costs, the servicing agreement requires the servicer to
seek adjustments to the transition bond charge. These adjustments are
formula based, incorporating actual transition bond charge collections as
well as updated assumptions by the servicer as to projected future usage of
electricity by customers, expected delinquencies and write-offs and future
expenses relating to bondable transition property and the transition bonds.
They are designed to achieve each of the above goals by the payment date
immediately preceding the next adjustment date or the expected final
payment date, as applicable, taking into account any amounts on deposit in
the reserve account. If at the time of issuance of a series, the servicer
determines any additional adjustments are required, the dates for these
adjustments will be specified in the prospectus supplement for the series.
The Schedule for Making Adjustments to the Transition Bond Charge.
The servicer will file an adjustment request with the BPU on December 1 of
each year and on any additional date or dates specified in the prospectus
supplement for any series of transition bonds. Each proposed adjustment
will become effective on an interim basis 30 days after filing, and final
after 60 days, in each case, absent a determination by the BPU of manifest
error. The adjustments to the transition bond charge will be filed on
December 1 of each year. Each adjustment will be effective on an interim
basis on January 1 of the following year and will be effective on a final
basis 30 days thereafter. The date on which an adjustment request is filed
is referred to as a calculation date.
The BPU Authorized PSE&G to Sell Bondable Transition Property to
the Issuer. Under the BPU financing order, the BPU authorized PSE&G to
assign, sell, transfer or pledge bondable transition property to the
issuer.
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY
PSE&G
PSE&G is an operating electric and gas public utility, incorporated
under the laws of the State of New Jersey in 1924. The equity of PSE&G is
held by Enterprise. PSE&G is engaged principally in the generation,
transmission, distribution and sale of electric energy service and in the
transmission, distribution and sale of gas service in New Jersey. PSE&G
supplies electric and gas service in areas of New Jersey in which
approximately 5.5 million people, about 70% of the State's population,
reside. PSE&G's electric and gas service area is a corridor of
approximately 2,600 square miles running diagonally across New Jersey from
Bergen County in the northeast to an area below the City of Camden in the
southwest. The greater portion of this area is served with both electricity
and gas, but some parts are served with electricity only and other parts
with gas only. This heavily populated, commercialized and industrialized
territory encompasses most of new Jersey's largest municipalities,
including its six largest cities, Newark, Jersey City, Paterson, Elizabeth,
Trenton and Camden, in addition to approximately 300 suburban and rural
communities. This service territory contains a diversified mix of commerce
and industry, including major facilities of many corporations of national
prominence. PSE&G believes that it has all the franchises and consents
necessary for its electric and gas distribution operations in the territory
it serves.
PSE&G reported net income of $604 million on revenue of $5,590
million for the year ended December 31, 1998 as compared with net income of
$528 million on revenue of $5,855 for the year ended December 31, 1997. For
the year ended December 31, 1998 approximately 72% and 28% of revenues were
derived from electricity and gas, respectively, of which 36% was derived
from residential customers, 37% was derived from commercial customers, 16%
was derived from industrial customers and 10% was derived from other
customers.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Enterprise, a holding company formed in 1985, has two principal,
direct, wholly owned subsidiaries, PSE&G and PSEG Energy Holdings Inc. The
assets of PSE&G comprise approximately 82% of Enterprise's consolidated
assets, and the financial condition and results of operation of PSE&G are
principal factors affecting the financial condition and results of
operations of Enterprise. PSEG Energy Holdings Inc., formerly Enterprise
Diversified Holdings Incorporated, is the parent of Enterprise's
non-utility businesses.
PSE&G'S CUSTOMER CLASSES
PSE&G's customer base is divided into three classes of business:
residential, commercial, and industrial. Several rate classes are included
within each category differentiated by type and level of service.
ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per
customer class for the past five years and the percentage of each customer
class of the total billed revenue:
<TABLE>
<CAPTION>
BILLED REVENUE ($000)
1994 % 1995 % 1996 % 1997 % 1998 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $1,198,007 32.50% $1,258,773 32.70% $1,255,691 32.80% $1,228,098 32.90% $1,266,508 33.40%
Commercial $1,796,557 48.80% $1,892,093 49.20% $1,904,274 49.70% $1,856,899 49.80% $1,904,794 50.20%
Industrial $689,600 18.70% $696,947 18.10% $670,884 17.50% $643,650 17.30% $625,974 16.50%
Total $3,684,164 100.00% $3,847,814 100.00% $3,830,849 100.00% $3,728,646 100.00% $3,797,277 100.00%
</TABLE>
The following table shows the average number of customers in each
customer class for the past five years and the percentage each customer
class bears to the total number of customers.
<TABLE>
<CAPTION>
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
1994 % 1995 % 1996 % 1997 % 1998 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1,666,598 86.50% 1,677,780 86.50% 1,683,208 86.50% 1,686,444 86.40% 1,701,066 86.30%
Commercial 250,312 13.00% 252,574 13.00% 253,611 13.00% 257,013 13.20% 260,957 13.20%
Industrial 9,630 0.50% 9,522 0.50% 9,300 0.50% 9,170 0.50% 9,101 0.50%
Total 1,926,540 100.00% 1,939,876 100.00% 1,946,119 100.00% 1,952,627 100.00% 1,971,124 100.00%
</TABLE>
The following table shows the total billed electric consumption in
mWh for the past five years for each customer class and the percentage each
customer class bears to the total consumption:
<TABLE>
<CAPTION>
BILLED ELECTRIC CONSUMPTION (MWH)
1994 % 1995 % 1996 % 1997 % 1998 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 10,708,914 27.50% 10,755,485 27.80% 10,736,855 28.00% 10,710,735 28.10% 11,091,537 28.40%
Commercial 19,007,330 48.80% 18,968,792 49.10% 18,990,242 49.50% 18,923,234 49.70% 19,509,283 50.00%
Industrial 9,243,537 23.70% 8,934,958 23.10% 8,625,133 22.50% 8,444,973 22.20% 8,440,088 21.60%
Total 38,959,781 100.00% 38,659,236 100.00% 38,352,230 100.00% 38,078,943 100.00% 39,040,908 100.00%
</TABLE>
PERCENTAGE CONCENTRATION WITHIN PSE&G'S
LARGE COMMERCIAL AND INDUSTRIAL CUSTOMERS
For the period ended December 1998, the ten largest single site
electric customers represented approximately 5.6% of PSE&G's kWh sales and
the ten largest multi-site electric customers represented approximately
6.9% of PSE&G's kWh sales. In both cases the customers are in the large
commercial and industrial customer class. There are no material
concentrations in the residential class.
HOW PSE&G FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY USAGE
Accurate projections of the number of customers, usage and retail
electric revenue are important in setting, maintaining and adjusting the
transition bond charge to sufficient levels. These levels must be
sufficient to recover interest on and principal of the transition bonds, to
maintain the scheduled overcollateralization level, to replenish any
withdrawals from the capital account and to pay the trustee's fee, the
servicing fee and the other expenses and costs included in bondable
stranded costs. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE--THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS" AND "RISK
FACTORS--SERVICING RISKS" in this prospectus.
The energy forecast process starts with a set of assumptions,
including economic, demographic, price, marketing, major customers,
demand-side management, private plant/co-generation and technology impact
assumptions.
The residential energy forecast is primarily based on a forecast of
New Jersey household growth. The use per customer forecast is developed
using variables representing growth in air conditioning stock, New Jersey
income per household, energy efficiency improvements and
PSE&G average electric price.
The commercial energy forecast is developed by reference to total
personal income and non-manufacturing employment for New Jersey, PSE&G's
average electric price, a forecast of floor space and the total number of
buildings stock for New Jersey.
The specific economic and demographic variables on which the
industrial energy forecast are based include manufacturing employment, the
industrial production index and employee productivity for New Jersey, the
average PSE&G electric and gas price and industrial fuel oil prices.
Natural gas and or fuel oil prices are used as a proxy for competitive
energy prices. The largest industrial customers are forecast individually.
The industrial forecast is further adjusted to account for major known
activities in the industrial market such as maintenance shutdowns,
co-generation and private plant installations and significant changes in
operating characteristics.
The short-term and long-term forecasting models have been reviewed
by the New Jersey Board of Public Utilities and by BPU hired auditors. All
classes of business forecasts assume normal weather and include the effects
of demand side management programs.
FORECAST VARIANCES
The table below compares actual usage in gWh for a particular year
to the related forecast prepared during the previous year. For example, the
annual 1994 variance is based on a forecast prepared in 1993. There can be
no assurance that the future variance between actual and expected
consumption will be similar to the historical experience set forth below.
VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
1994 1995 1996 1997 1998
FORECAST 37,570 38,201 37,804 38,217 38,716
ACTUAL 38,211 38,316 38,439 38,627 39,130
VARIANCE-% 1.7061 0.301 1.6797 1.0728 1.0693
CREDIT POLICY; BILLING; COLLECTIONS; TERMINATION OF SERVICE
Credit Policy
PSE&G is obligated to provide service to all customers under New
Jersey Law. PSE&G relies on the information provided by the customer and
its customer information system to determine whether PSE&G has previously
served a customer. Certain accounts are secured with deposits or guarantees
as a precautionary measure. The amount of the deposit reflects the
estimated use over a two-month period, which is the average time period
required to take collection action on past-due billings. Since the vast
majority of customers pay their bills within the allotted time, PSE&G does
not require deposits from all new customers.
PSE&G has developed certain criteria for establishing credit.
Industrial and commercial customers may establish credit by depositing cash
equal to twice the maximum monthly bills, by a satisfactory guarantor, or
otherwise establishing credit to the satisfaction of PSE&G. In general,
residential customers may establish credit by depositing cash equal to
twice the average monthly bill. Deposits may not be required if the
applicant has previously been a customer of PSE&G and has paid all bills
for service for a period of 12 consecutive months ending immediately before
the applicant ceased PSE&G service, or if the customer provides a letter of
credit from its previous utility showing no delinquencies in the past 12
months. Further, PSE&G uses a positive identification and credit scoring
system to determine creditworthiness of its new customers. This system has
proven to be an effective method for reducing PSE&G's delinquencies.
Billing Process
PSE&G bills its customers once every 27 to 33 days and distributes
approximately an equal number of bills each business day. For the year
ending 1998, PSE&G mailed out an average of 105,000 bills on each business
day to its customers. 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.
Collections Policy
PSE&G receives approximately 87% of its total bill payments via
U.S. mail. Approximately 9% of bill payments are received at local offices
and other third party pay offices. PSE&G receives the remainder of payments
via electronic payments and field collection. Bills are due on
presentation, and are considered past due 19 days after presentation.
Timing and collection follow-up is based on customer type as follows.
For residential customers, a past due reminder notice is sent with
the monthly bill if payment of the previous month's bill has not been
received. If payment is not received by the time of the third month's bill,
a shut-off notice is included in that monthly bill. A telephone contact is
attempted ten workdays after the shut-off notice is issued. Service is
terminated if payment is not made by the due date of the third bill. Once
service is terminated, the customer may be required to pay an amount up to
the total amount past due and to come to a deferred arrangement on any
balance not paid.
For industrial and commercial customers, a shut-off notice is sent
with the monthly bill if payment of the previous month's bill has not been
received. A telephone contact is attempted ten workdays after the shut-off
notice is issued. Service is terminated if payment is not made by the due
date on the second bill. Once service is terminated, the customer may be
required to pay an amount up to the total amount past due and to come to a
deferred arrangement on any balance not paid.
If service is terminated for a customer of any class, a charge of
$20 for gas and $15 for electric is required for service restoration. For
both industrial and commercial customers, a final bill including all unpaid
amounts is issued after service termination. Unpaid final bills are
written off approximately 80 days after the final bill is issued.
PSE&G may change its credit, billing, collections and
termination/restoration of service policies and procedures from time to
time. It is expected that any such changes would be designed to enhance
PSE&G's ability to bill and collect customer charges on a timely basis.
Under the servicing agreement, any changes to customary billing and
practices instituted by PSE&G will apply to collections of the transition
bond charge so long as PSE&G is the servicer.
Termination of Service for Residential Customers in the Winter. The
winter termination program is part of the New Jersey Administrative Code
and prevents discontinuance of electric and gas service to qualified
residential customers from November 15 through March 15. The BPU has
reserved the option of extending the program to the end of March, if
abnormally bad weather is forecasted. The program provides for the
requirement of good-faith payments equal to budget amounts and placement on
a 12-month system budget plan. However, averages will be taken into
consideration when calculating the 12-month budget plan amount.
The regulation also provides for restoration of service for
customers eligible to participate in the program who had service short off
for non-payment prior to November 15, if up to 25% of the outstanding
balance is paid. During the program period, service can be discontinued
when the customer has made no contact with PSE&G, however, all efforts are
made to contact the customer prior to discontinuance. The program requires
that a BPU-approved fact sheet accompany each discontinuance notice to
residential customers during the program period. The fact sheet is
distributed as a bill insert since discontinuance notices are issued on the
customer's bill.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth information relating to the total
billed revenues and write-off experience for the past several years. Such
historical information is presented herein because PSE&G's actual
experience with respect to write-offs and delinquencies may affect the
timing of transition bond charge collections. PSE&G does not expect, but
cannot assure, that the delinquency or write-off experience with respect to
transition bond charge collections will differ substantially from the rates
indicated. For example, changes in the retail electric market, including
but not limited to the introduction of third party suppliers who, beginning
in mid-1999, may be permitted to provide consolidated billing to PSE&G's
customers, could mean that historical delinquency and write-off ratios will
not be indicative of the future rates.
The following table shows total electric and gas billed revenue for
the past five years for each customer class:
<TABLE>
<CAPTION>
TOTAL ELECTRIC AND GAS BILLED REVENUES
(IN MILLIONS)
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Residential $2,104,795 $2,098,138 $2,306,281 $2,193,120 $2,102,802
Commercial $2,342,261 $2,387,105 $2,439,707 $2,358,069 $2,306,227
Industrial $1,028,396 $997,149 $1,013,170 $982,258 $912,081
Total $5,475,452 $5,482,392 $5,659,158 $5,533,446 $5,321,111
</TABLE>
Gross write-off has been tracked by class of business since
February 20, 1996. The following table shows gross write-off for the past
three years for each customer class:
<TABLE>
<CAPTION>
GROSS WRITE-OFF PER CUSTOMER CLASS
Residential Commercial Industrial
<S> <C> <C> <C>
1998 $31,418,333 $9,216,337 $701,550
1997 $39,858,956 $8,748,398 $558,760
1996 $27,009,186 $6,185,755 $522,273
</TABLE>
The following table shows gross write-off as a percentage of total
electric and gas billed revenue for the past three years for each customer
class:
<TABLE>
<CAPTION>
GROSS WRITE-OFF AS A PERCENTAGE OF BILLED REVENUE PER CUSTOMER CLASS
Residential Commercial Industrial
<S> <C> <C> <C>
1998 1.49% 0.40% 0.08%
1997 1.82% 0.37% 0.06%
1996 1.22% 0.25% 0.02%
</TABLE>
The following table shows total net write-offs and the
corresponding percentage of total billed revenue for the past five years
for all customers for electricity and gas:
TOTAL NET WRITE-OFF AND NET WRITE-OFF
AS A PERCENTAGE OF BILLED REVENUE
Net Write-Off as a
Net Write-Off % of Billed Revenue
1998 $37,793,000 0.74%
1997 $50,058,000 0.93%
1996 $35,807,000 0.66%
1995 $35,038,000 0.66%
1994 $37,157,000 0.71%
Net write-offs include amounts recovered by PSE&G from deposits, bankruptcy
proceedings and payments received after an account has been written off
either to PSE&G or one of its external collection agencies.
The following table sets forth information relating to PSE&G's rate
of delinquencies, as a percent of accounts receivable of all PSE&G
customers for the past five years:
<TABLE>
<CAPTION>
ELECTRIC AND GAS DELINQUENCIES
YEAR 1-30 31-60 61-120 OVER 120
<S> <C> <C> <C> <C>
1998 69% 15% 9% 7%
1997 73% 14% 7% 6%
1996 73% 14% 7% 7%
1995 76% 13% 6% 5%
1994 76% 12% 6% 6%
</TABLE>
Any account that has an unpaid balance at the time of the next
billing is considered to be delinquent. The delinquency data above
represents only active customer accounts as opposed to the write-off data
which reflects only customer accounts where service is no longer being
provided. PSE&G has not traced the rate of delinquencies by customer class.
HOW PSE&G WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS.
The BPU financing order requires that PSE&G allocate partial
payments of electricity bills for any period in the following order:
1. to sales taxes (which PSE&G collects as trustee for the
State of New Jersey and not for its own account or for that
of the issuer);
2. pro rata to the transition bond charge and PSE&G's other
charges and taxes, where any of such charges are in arrears,
based on their proportion to PSE&G's total charges assessed
for that period;
3. pro rata to the transition bond charge and PSE&G's other
charges and taxes, where any of such charges are current
charges, based on their proportion to PSE&G's total charges
assessed for that period.
PSE&G's other charges include gas charges which are often billed together
with electric charges. Partial payments will also be allocated among
different series of transition bonds, pro rata, based
on their respective outstanding principal balances.
PSE&G'S EFFORTS TO DEAL WITH THE YEAR 2000 COMPUTER ISSUE
[PSE&G is faced with the task of addressing the year 2000 issue.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year and other
programming techniques which limit date calculations or assign special
meanings to some dates. Any of PSE&G's computer systems that have
date-sensitive software or microprocessors may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to measure usage, read meters,
process transactions, send bills or operate electric generation stations.
In addition, the year 2000 issue could affect the ability of customers to
receive bills sent by PSE&G or make payments on these bills.
PSE&G has had a formal project in place since 1997 to address year
2000 issues. Based upon project progress to date, all mission critical
systems are expected to be ready by January 1, 2000. Future progress is
dependent on a wide number of variables, including the continued
availability of trained resources and vendors meeting commitments to PSE&G.
PSE&G has established a three-phase program to achieve year 2000
readiness. The initial phase (inventory) identifies systems having
potential year 2000 issues and sets priorities for assessing and
remediating those systems. The second phase (assessment) determines whether
systems are digital/date sensitive and the extent of date related issues.
The third phase (remediation/testing) repairs programming code, upgrades or
replaces systems and validates that code repairs were implemented as
intended.
Inventory is more than 99% complete for all information technology,
infrastructure and process control/monitoring systems. Substantial
assessment work has been completed on the information technology,
infrastructure systems and process control systems. Remediation/testing is
in progress on information technology, process control and infrastructure
systems.
PSE&G completed required year 2000 readiness work for more than 85%
of its critical systems as of March 31, 1999. The work required by the
remaining critical systems [is expected to be completed by July 1999],
except for certain systems operated by PSE&G's nuclear operations. The
majority of these systems are scheduled beyond July 1999 in order to
coincide with planned refueling outages at these facilities. By the end of
1999, a majority of PSE&G's non-critical systems are also expected to be
year 2000 ready with the remainder of such noncritical systems to be ready
in 2000.
"Year 2000 compliant" means that computer systems or equipment with
date-sensitive chips will accurately process date and time data. "Year 2000
ready" means that the computer systems or equipment with date-sensitive
chips can be used on January 1, 2000, and beyond, but are not fully year
2000 compliant.
PSE&G is continuing to work with its supplier base to assess the
year 2000 readiness status of vendors who provide critical materials and
services, referred to as key vendors. Sufficient information has not yet
been received from all key vendors to confirm their preparedness for year
2000. PSE&G is aggressively pursuing the key vendors who have been
unresponsive. However, PSE&G is not yet able to determine whether all of
its key vendors will be able to meet year 2000 requirements. Failure of key
vendors to meet these requirements could result in material adverse impacts
to PSE&G's operations, financial condition, results of operations and net
cash flows.
Based upon present assessments, Enterprise estimates that it will
incur approximately $[48] million in year 2000 related costs. Through
December 31, 1998, Enterprise spent approximately $[35] million in
remediation costs, which included assistance from outside consultants.
These costs are being funded through internally generated funds and are
being expensed as incurred. A portion of these costs is not likely to be
incremental to Enterprise or PSE&G, but rather, represents a redeployment
of existing personnel/resources.
The schedule to replace certain systems was accelerated for year
2000 purposes. Analysis of these systems is continuing and costs identified
to date are approximately $5 million, which are not included in the
estimates above. Additionally, PSE&G is continuing its installation of
programs from SAP America, Inc. to replace certain major business systems.
SAP America, Inc. has represented that it is year 2000 compliant, and thus,
its installation will eliminate the need to modify those business systems
for year 2000 compliance. The phased implementation of SAP is scheduled to
be completed before January 1, 2000. The cost of implementing SAP is not
included in the above cost estimates since SAP implementation has not been
accelerated for year 2000 purposes.]
PSE&G TRANSITION FUNDING LLC, THE ISSUER
PSE&G Transition Funding LLC, the issuer of the transition bonds,
was formed as a Delaware limited liability company, on July 21, 1999
pursuant to a limited liability company agreement of PSE&G as sole member
of the issuer. The assets of the issuer are limited to the bondable
transition property which was sold to the issuer, the trust funds held by
the trustee, rights of the issuer under the transaction documents, any
third-party credit enhancement and any money distributed to the issuer from
the collection account in accordance with the indenture and not distributed
to PSE&G. As of the date of this prospectus, the issuer has not carried on
any business activities and has no operating history. Audited financial
statements of the issuer are included as an exhibit to this prospectus.
The Issuer's Purpose. The issuer has been created for the
sole purpose of:
1. purchasing and owning the bondable transition property,
2. issuing one or more series of transition bonds, each of which
may be comprised of one or more classes, from time to time,
3. pledging its interest in the bondable transition property and
other collateral to the trustee under the indenture in order to
secure the transition bonds and
4. performing activities that are necessary, suitable or convenient
to accomplish these
purposes.
The Interaction Between PSE&G and the Issuer. On the issue date for
each series, except in the event of a refunding of outstanding transition
bonds, PSE&G will sell bondable transition property to the issuer pursuant
to an agreement between PSE&G, in this capacity, the seller, and the
issuer. PSE&G will service the bondable transition property pursuant to a
servicing agreement with the issuer. PSE&G and any successor in the
capacity of servicer are referred to as the servicer.
The Issuer's Management. The issuer's business will be managed by
five managers, referred to as the managers, appointed from time to time by
PSE&G or, in the event that PSE&G transfers its interest in the issuer, by
the new owner or owners. The issuer will have at all times following the
initial issuance of the transition bonds at least two independent managers
who, among other things, are not and have not been for at least three years
from the date of their appointment
1. a direct or indirect legal or beneficial owner of the issuer or
PSE&G or any of their respective affiliates,
2. a relative, supplier, employee, officer, director, manager,
contractor or material creditor of the issuer or PSE&G or any of
their respective affiliates, or
3. a person who controls PSE&G or its affiliates. The remaining
managers will be employees or officers of PSE&G.
The managers will devote the time necessary to conduct the affairs
of the issuer. The following are the managers as of the date of this
prospectus:
NAME AGE POSITION AT PSE&G
Robert E. Busch [ ] Senior Vice President and
Chief Financial Officer
Robert C. Murray [ ] Executive Vice President - Finance
R. Edwin Selover [ ] Senior Vice President and
General Counsel
None of the managers has been involved in any legal proceedings
which are specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The
issuer has not paid any compensation to any manager since the issuer was
formed. The managers other than the independent managers will not be
compensated by the issuer for their services on behalf of the issuer. The
independent managers will be paid quarterly fees from the revenues of the
issuer and will be reimbursed for their reasonable expenses. These expenses
include without limitation the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and counsel as the
independent managers may employ in connection with the exercise and
performance of their rights and duties under the issuer's limited liability
company agreement, the indenture, the sale agreement and the servicing
agreement. The limited liability company agreement provides that the
managers will not be personally liable under any circumstances except for
1. liabilities arising from their own willful misconduct
or gross negligence,
2. liabilities arising from the failure by any of the managers
to perform obligations expressly undertaken in the issuer's
limited liability company agreement or
3. taxes, fees or other charges, based on or measured by any
fees, commissions or compensation received by the managers
in connection with the transactions described in this
prospectus.
The limited liability company agreement further provides that, to the
fullest extent permitted by law, the issuer shall indemnify the managers
against any liability incurred in connection with their services as
managers for the issuer except in the cases described in clauses 1 through
3 above.
The Issuer is a Separate and Distinct Legal Entity. Under the
issuer's limited liability company agreement, the issuer may not file a
voluntary petition for relief under the Bankruptcy Code without a unanimous
vote of its managers, including the independent managers. PSE&G has agreed
that it will not cause the issuer to file a voluntary petition for relief
under the Bankruptcy Code. The limited liability company agreement requires
the issuer:
o to take all reasonable steps to continue its identity as a separate
legal entity,
o and to make it apparent to third persons that it is an entity with
assets and liabilities distinct from those of PSE&G, other
affiliates of PSE&G, the managers or any other person, and
o to make it apparent to third persons that, except for federal and
state tax purposes, it is not a division of PSE&G or any of its
affiliated entities or any other person.
The principal place of business of the issuer is 80 Park Plaza,
T-6, Newark, New Jersey 07102, and its telephone number is (973) 430-6564.
Administration Agreement. PSE&G will provide administrative
services for the issuer pursuant to an administration agreement between the
issuer and PSE&G. The issuer will pay PSE&G a market rate fee for
performing these services.
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS
As required by the Competition Act, the issuer will use the net
proceeds of the issuance of the transition bonds to purchase the bondable
transition property from PSE&G and to pay the expenses of issuance of the
transition bonds. PSE&G will use the proceeds it receives from the sale of
the bondable transition property principally to reduce stranded costs
through the retirement of debt or equity or both, including transactions
completed before the date of the sale of the transition bonds, and also to
pay related expenses.
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS
The issuer has filed with the SEC a registration statement under
the Securities Act, with respect to the transition bonds. This prospectus,
which forms a part of the registration statement, and any prospectus
supplement describe the material terms of some documents filed as exhibits
to the registration statement. However, this prospectus and any prospectus
supplement do not contain all of the information contained in the
registration statement and its exhibits. Any statements contained in this
prospectus or any prospectus supplement concerning the provisions of any
document filed as an exhibit to the registration statement or otherwise
filed with the SEC are not necessarily complete, and in each instance
reference is made to the copy of the document so filed. Each statement
concerning those provisions is qualified in its entirety by reference to
the complete document. For further information, reference is made to the
registration statement and the exhibits thereto, which are available for
inspection without charge at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices located as follows: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
and New York Regional Office, 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of the registration statement and exhibits thereto
may be obtained at the above locations at prescribed rates. Information
filed with the SEC can also be inspected at the SEC site on the World Wide
Web at http://www.sec.gov. The issuer will file with the SEC all periodic
reports as are required by the Exchange Act, and the rules, regulations or
orders of the SEC thereunder. The issuer may discontinue filing periodic
reports under the Exchange Act at the beginning of the fiscal year
following the issuance of the transition bonds of any series if there are
fewer than 300 holders of the transition bonds.
All reports and other documents filed by the issuer pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this prospectus and prior to the termination of the offering of the
transition bonds will be deemed to be incorporated by reference into this
prospectus and to be a part hereof. Any statement contained in this
prospectus, in a prospectus supplement or in a document incorporated or
deemed to be incorporated by reference in this prospectus will be deemed to
be modified or superseded for purposes of this prospectus and any
prospectus supplement to the extent that a statement contained in this
prospectus, in a prospectus supplement or in any separately filed document
which also is or is deemed to be incorporated by reference herein modifies
or supersedes that statement. Any statement so modified or superseded will
not be deemed, except as so modified or superseded, to constitute part of
this prospectus or any prospectus supplement. The issuer will provide
without charge to each person to whom a copy of this prospectus is
delivered, on the written or oral request of this person, a copy of any or
all of the documents incorporated herein by reference, except for the
exhibits which are not specifically incorporated by reference in the
documents. Written requests for these copies should be directed to the
issuer, c/o Brian Smith, Director of Investor Relations. Telephone requests
for these copies should be directed to the issuer at (973) 430-6564.
THE TRANSITION BONDS
The transition bonds will be issued under and secured by the
indenture between the issuer and the trustee substantially in the form
filed as an exhibit to the registration statement of which this prospectus
forms a part. The terms of each series of transition bonds will be provided
in a supplemental indenture. The following summary describes some general
terms and provisions of the transition bonds. The particular terms of the
transition bonds of any series offered by any prospectus supplement will be
described in the prospectus supplement. This summary does not purport to be
complete and is subject to, and is qualified by reference to, the terms and
provisions of the transition bonds and the indenture.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each made
up of one or more classes. The terms of a series may differ from the terms
of another series, and the terms of a class may differ from the terms of
another class of the same series. The terms of each series will
be specified in the related prospectus supplement.
The indenture requires, as a condition to the issuance of each
series of transition bonds, that such issuance will not result in any
rating agency reducing or withdrawing its then current rating of any
outstanding series or class of transition bonds. The notification in
writing by each rating agency to the seller, the servicer, the trustee and
the issuer that any action will not result in a reduction or withdrawal is
referred to as the rating agency condition.
The Issuer's Transition Bonds Will be Maintained in Book-Entry
Format. The related prospectus supplement will set forth the procedure for
the manner of the issuance of the transition bonds of each series.
Generally, each series of transition bonds will initially be represented by
one or more transition bonds registered in the name of Cede & Co., as the
nominee of DTC. The transition bonds will be available for purchase in
initial denominations specified in the related prospectus supplement which
will be not less than $1,000. Unless and until definitive transition bonds
are issued under the limited circumstances described in this prospectus, no
transition bondholder will be entitled to receive a physical bond
representing a transition bond. All references in this prospectus to
actions by transition bondholders will refer to actions taken by DTC upon
instructions from DTC participants. In addition, all references in this
prospectus to payments, notices, reports and statements to transition
bondholders will refer to payments, notices, reports and statements to DTC
or Cede, as the registered holder of each series of transition bonds. DTC
or Cede will receive these payments, notices, reports and statements for
distribution to the beneficial owners of the transition bonds in accordance
with DTC's procedures with respect thereto. See "--TRANSITION BONDS WILL BE
ISSUED In BOOK-ENTRY FORM" and "--CERTIFICATED TRANSITION BONDs" below.
PAYMENTS OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
Interest will accrue on the principal balance of transition bonds
of a series or class at the interest rate specified in or determined in the
manner specified in the related prospectus supplement. Interest will be
payable to the transition bondholders of the series or class on each
payment date, commencing on the payment date specified in the related
prospectus supplement. On any payment date with respect to any series, the
issuer will make principal payments on that series only until the
outstanding principal balance thereof has been reduced to the principal
balance specified for that payment date in the expected amortization
schedule for that series on that payment date, but only to the extent funds
are available for that series as described in this prospectus. Accordingly,
principal of the series or class of transition bonds may be paid later, but
not sooner, than reflected in the expected amortization schedule therefor,
except in a case of any applicable optional redemption. See "RISK
FACTORS--OTHER RISKS ASSOCIATED WITh AN INVESTMENT IN THE TRANSITION BONDS"
and "--SERVICING RISKs" in this prospectus.
The indenture provides that failure to pay the entire outstanding
principal amount of the transition bonds of any series or class by the
expected final payment date will not result in an event of default under
the indenture until after the final maturity date for the series or
class.
On each payment date, the amount required to be paid as principal
on the transition bonds, from transition bond collections allocable to such
series, the capital subaccount and overcollateralization subaccount for
such series, and the reserve subaccount for all series, will
equal:
o the unpaid principal amount of any series due on the final
payment date of that series; plus
o the unpaid principal amount of any transition bonds called
for redemption; plus
o the unpaid principal amount upon an acceleration following
an event of default; plus
o the principal scheduled to be paid on the transition bonds
on that payment date.
The entire unpaid principal amount of the transition bonds will be
due and payable if:
1. an event of default under the indenture occurs and is
continuing and
2. the trustee or the holders of a majority in principal amount
of the transition bonds of all series then outstanding,
voting as a group, have declared the transition bonds to be
immediately due and payable.
See "THE INDENTURE--WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION
BONDs" and "WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE
TRANSITION BONDS" in this prospectus.
REDEMPTION OF THE TRANSITION BONDS
Redemption provisions, if any, for any series will be specified in
the related prospectus supplement, including the premiums, if any, payable
upon redemption. Unless the context requires otherwise, all references in
this prospectus to principal of the transition bonds of a series insofar as
it relates to redemption includes any premium that might be payable thereon
if transition bonds of the series are redeemed, as described in the related
prospectus supplement. Notice of redemption of any series of transition
bonds will be given by the trustee to each registered holder of a
transition bond by first-class mail, postage prepaid, mailed not less than
five days nor more than 45 days prior to the date of redemption or in
another manner or at another time as may be specified in the related
prospectus supplement. Notice of redemption may be conditioned upon the
deposit of moneys with the trustee before the redemption date and this
notice will be of no effect unless these moneys are so deposited. All
transition bonds called for redemption will cease to bear interest on the
specified redemption date, provided funds for their redemption are on
deposit with the trustee at that time, and will no longer be considered
"outstanding" under the indenture. The transition bondholders will have no
further rights with respect thereto, except to receive payment of the
redemption price thereof and unpaid interest accrued to the date fixed for
redemption from the trustee.
CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement with respect to the transition bonds of each
series will be provided principally by adjustments to the transition bond
charge and amounts on deposit in the reserve account for all series and the
overcollateralization account and the capital account for such series. In
addition, for any series of transition bonds or one or more classes
thereof, additional credit enhancement, if any, may be provided. The
amounts and types of credit enhancement, if any, and the provider of any
such credit enhancement with respect to each series of transition bonds or
one or more classes thereof will be described in the related prospectus
supplement. Credit enhancement may be in the form of:
o an additional reserve account,
o subordination by one series for the benefit of another,
o additional overcollateralization,
o a financial guaranty insurance policy,
o a letter of credit,
o a credit or liquidity facility,
o a repurchase obligation,
o a third party payment or other support,
o a cash deposit or other credit enhancement, or
o any combination of the foregoing, as may be set forth in
the related prospectus supplement.
If specified in the related prospectus supplement, credit
enhancement for a series of transition bonds may cover one or more other
series of transition bonds.
TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement,
all classes of transition bonds will initially be represented by one or
more bonds registered in the name of DTC, or another securities depository.
The transition bonds will be available to investors only in the form of
book-entry transition bonds. Transition bondholders may also hold
transition bonds through CEDEL, or the Euroclear in Europe, if they are
participants in one of those systems or indirectly through participants.
The Role of Cede, CEDEL and Euroclear. DTC will hold the global
bond or bonds representing the transition bonds. CEDEL and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositories. These depositories will, in turn hold these
positions in customers' securities accounts in the depositories' names on
the books of DTC. Citibank, N.A. will act as depository for CEDEL and
Morgan Guaranty Trust Company of New York will act as depository for
Euroclear.
The Function of DTC. DTC is a limited purpose trust company
organized under the laws of the State of New York, and is a member of the
Federal Reserve System. DTC is a "clearing corporation" within the meaning
of the New York Uniform Commercial Code and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and
settlement of securities transactions between participants through
electronic book-entries, thereby eliminating the need for physical movement
of bonds. Direct participants of DTC include securities brokers and
dealers, banks, trust companies, clearing corporations and some other
organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the Nasdaq-Amex Market Group and the
National Association of Securities Dealers, Inc. Access to DTC's system is
also available to indirect participants.
The Function of CEDEL. CEDEL is incorporated under the laws of
Luxembourg. CEDEL holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic
book-entry transfers between their accounts. CEDEL provides various
services, including safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
CEDEL also deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. CEDEL has
established an electronic bridge with Morgan Guaranty Trust as the Operator
of the Euroclear system in Brussels to facilitate settlement of trades
between CEDEL and MGT/EOC. CEDEL currently accepts over 110,000 securities
issues on its books.
CEDEL customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies, and
clearing corporations and may include any underwriters, agents or dealers
with respect to a series of transition bonds offered hereby. CEDEL's U.S.
customers are limited to securities brokers and dealers and banks.
The Function of Euroclear. Euroclear 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. By performing these functions, Euroclear
eliminated the need for physical movement of securities and also eliminated
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 30 currencies, including Euros
and United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and arrangements with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described below. The Euroclear System
is operated by Euroclear Operator 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 Euroclear on behalf of Euroclear participants. Euroclear
participants include central banks, commercial banks, securities brokers
and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a
Federal Reserve System Member, 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.
Terms and Conditions of Euroclear. Securities clearance accounts
and cash accounts with the Euroclear Operator are governed by the Terms and
Conditions Governing Use of Euroclear and the related Operating Procedures
of Euroclear and applicable Belgian law which are referred to in this
prospectus as the Terms and Conditions. The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear participants and has no record of or
relationship with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, CEDEL or Euroclear Participants.
Transfers between participants will occur in accordance with DTC rules.
Transfers between CEDEL customers and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
customers or Euroclear participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European
international clearing system by its depository. Cross-market transactions
will require delivery of instructions to the relevant European
international clearing system by the counterparty in this system in
accordance with its rules and procedures and within its established
deadlines, in European time. The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its depository to take action to effect final settlement on
its behalf by delivering or receiving transition bonds in DTC, and making
or receiving payments in accordance with normal procedures for same-day
funds settlement applicable to DTC. CEDEL customers and Euroclear
participants may not deliver instructions directly to the depositories.
DTC Will be the Holder of the Issuer's Transition Bonds. Unless and
until definitive transition bonds are issued, it is anticipated that the
only "holder" of transition bonds of any series will be DTC. Transition
bondholders will only be permitted to exercise their rights as transition
bondholders indirectly through participants and DTC. All references herein
to actions by transition bondholders thus refer to actions taken by DTC
upon instructions from its participants. In addition, all references herein
to payments, notices, reports and statements to transition bondholders
refer to payments, notices, reports and statements to DTC, as the
registered holder of the transition bonds, for payments to the beneficial
owners of the transition bonds in accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a
series are outstanding, under DTC's rules, DTC is required to make
book-entry transfers among participants on whose behalf it acts with
respect to the book-entry transition bonds. In addition, DTC is required to
receive and transmit payments of principal of, and interest on, the
book-entry transition bonds. Participants with whom transition bondholders
have accounts with respect to book-entry transition bonds are similarly
required to make book-entry transfers and receive and transmit these
payments on behalf of their respective transition bondholders. Accordingly,
although transition bondholders will not possess physical bonds, DTC's
rules provide a mechanism by which transition bondholders will receive
payments and will be able to transfer their interests.
DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and some banks. Thus, the ability of
holders of beneficial interests in the transition bonds to pledge
transition bonds to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of these transition bonds, may
be limited due to the lack of definitive transition bonds.
DTC has advised the trustee that it will take any action permitted
to be taken by a transition bondholder under the indenture only at the
direction of one or more participants to whose account with DTC the
transition bonds are credited.
How Transition Bond Payments Will Be Credited by CEDEL and
Euroclear. Payments with respect to transition bonds held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL customers or
Euroclear participants in accordance with the relevant systems' rules and
procedures, to the extent received by its depository. These payments will
be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "MATERIAL INCOME TAX MATTERS FOR THE TRANSITION
BONDS" in this prospectus. CEDEL or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a transition
bondholder under the indenture on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and
procedures and subject to its depository's ability to effect these actions
on its behalf through DTC.
DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of transition bonds among participants of
DTC, CEDEL and Euroclear. However, they are under no obligation to perform
or continue to perform these procedures and these procedures
may be discontinued at any time.
Management of DTC is aware that some systems that are dependent
upon calendar dates, including dates before, on, and after January 1, 2000,
may encounter "year 2000 problems." DTC has informed the industry that it
has developed and is implementing a program so that its systems, as the
same relate to the timely payment of principal, payments, interest payments
and related distributions to security-holders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of
which is complete. Additionally, DTC's plan includes a testing phase, which
is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and
their agents, as well as DTC's direct participants and indirect
participants, third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting, and will continue to contact, third party vendors from whom DTC
acquires services to
1. impress upon them the importance of these services being
year 2000 compliant; and
2. determine the extent of their efforts for year 2000
remediation and testing of their services.
In addition, DTC is in the process of developing the contingency plans that
it deems appropriate.
According to DTC, the information in the preceding two paragraphs
with respect to DTC has been provided to the Industry for informational
purposes only and is not intended to serve as a representation, warranty,
or contract modification of any kind.
CERTIFICATED TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Transition Bonds. Unless otherwise specified in the related prospectus
supplement, each class of transition bonds will be issued in fully
registered, certificated form to transition bondholders or their nominees,
rather than to DTC, only if:
1. the issuer advises the trustee in writing that DTC is no
longer willing or able to discharge properly its
responsibilities as depository with respect to this class of
transition bonds and the issuer is unable to locate a
qualified successor;
2. the issuer, at its option, elects to terminate the
book-entry system through DTC; or
3. after the occurrence of an event of default under the
indenture, transition bondholders representing at least a
majority of the outstanding principal amount of the
transition bonds of all series advise the trustee through
DTC in writing that the continuation of a book-entry system
through DTC, or a successor thereto, is no longer in the
transition bondholders' best interest.
The Delivery of Certificated Transition Bonds. Upon the occurrence
of any event described in the immediately preceding paragraph, DTC will be
required to notify all affected beneficial owners of transition bonds
through participants of the availability of certificated transition bonds.
Upon surrender by DTC of the certificated bonds representing the applicable
transition bonds and receipt of instructions for re-registration, the
trustee will authenticate and deliver certificated transition bonds.
Thereafter the trustee will recognize the holders of these certificated
transition bonds as transition bondholders under the indenture.
The Payment Mechanism for Certificated Transition Bonds. Payments
of principal of, and interest on, certificated transition bonds will be
made by the trustee, as paying agent, in accordance with the procedures set
forth in the indenture. These payments will be made directly to holders of
certificated transition bonds in whose names the certificated transition
bonds were registered at the close of business on the related record date
specified in each prospectus supplement. These payments will be made by
check mailed to the address of the holder as it appears on the register
maintained by the trustee. The final payment on any transition bond,
however, will be made only upon presentation and surrender of the
transition bond at the office or agency specified in the notice of final
payment to transition bondholders.
The Transfer or Exchange of Certificated Transition Bonds.
Certificated transition bonds will be transferable and exchangeable at the
offices of the transfer agent and registrar, which will initially be the
trustee. No service charge will be imposed for any registration of transfer
or exchange, but the transfer agent and registrar may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS
The rate of principal payments, the amount of each interest payment
and the actual final payment date for each series or class of transition
bonds will be dependent on the rate and timing of receipt of transition
bond charge collections. Accelerated receipts of transition bond charge
collections will not, however, result in payment of principal on the
transition bonds earlier than the related expected final payment dates.
This is because receipts in excess of the amounts necessary to amortize the
transition bonds in accordance with the applicable expected amortization
schedule, to pay related expenses and to fund trust accounts, will be
allocated to the reserve account. However, delayed receipts of transition
bond charge collections may result in principal payments on the transition
bonds occurring more slowly than as reflected in the expected amortization
schedule or later than the related expected final payment dates. Redemption
of any class or series of transition bonds and acceleration of the final
maturity date after an event of default will result in payment of principal
earlier than the related expected final payment dates.
The Effect of Transition Bond Charge Collections on the Timing of
Transition Bond Payments. The actual payments on each payment date for each
series or class of transition bonds and the weighted average life thereof
will be affected primarily by the rate and the timing of receipt of
transition bond charge collections. Amounts available in the reserve
account, the overcollateralization account and the capital account will
also affect the weighted average life of the Transaction Bonds. The
aggregate amount of transition bond charge collections and the rate of
principal amortization on the transition bonds will depend, in part, on
actual energy usage by customers and the rate of delinquencies and
write-offs. This is because the transition bond charge will be calculated
based on estimates of usage and revenue. The transition bond charge will be
adjusted from time to time based in part on the actual rate of transition
bond charge collections. However, there can be no assurance that the
servicer will be able to forecast accurately actual electricity usage and
the rate of delinquencies and write-offs or implement adjustments to the
transition bond charge that will cause transition bond charge collections
to be received at any particular rate. See "RISK FACTORS--SERVICING RISKS"
AND "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S
TRANSITION BOND CHARGE ADJUSTMENT PROCESS" in this prospectus.
A payment on a date that is later than forecasted might result in a
longer weighted average life. In addition, if a larger portion of the
delayed payments on the transition bonds is received in later years, this
might result in a longer weighted average life of the transition bonds.
THE SALE AGREEMENT
The following summary describes particular material terms and
provisions of the sale agreement pursuant to which the seller is selling
and the issuer is purchasing the bondable transition property. The sale
agreement may be amended by the parties thereto, with the consent of the
trustee, if notice of the amendment is provided by the issuer to each
rating agency and the rating agency condition has been satisfied. The form
of the sale agreement has been filed as an exhibit to the registration
statement. This summary is not complete and is subject to the sale
agreement.
PSE&G'S SALE AND ASSIGNMENT OF BONDABLE TRANSITION PROPERTY
On the initial transfer date, pursuant to the sale agreement, the
seller will sell and assign to the issuer, without recourse, except as
provided therein, the initial bondable transition property. The bondable
transition property represents the irrevocable right to receive through the
transition bond charge amounts sufficient to recover bondable stranded
costs with respect to the related series of transition bonds. The net
proceeds received from the sale of the transition bonds will be applied to
the purchase of the bondable transition property. In addition, the seller
may from time to time offer to sell additional bondable transition property
to the issuer, subject to the satisfaction of the conditions specified in
the sale agreement and the indenture. Each subsequent sale will be financed
through the issuance of an additional series of transition bonds. If this
offer is accepted by the issuer, the subsequent sale will be effective on a
subsequent transfer date.
In accordance with the Competition Act, upon the issuance of the
BPU financing order, the execution and delivery of the sale agreement and
the related bill of sale and the filing of a financing statement under the
New Jersey Uniform Commercial Code, the transfer of the initial bondable
transition property will be perfected as against all third persons,
including judicial lien creditors. In addition, upon the execution of a
subsequent bill of sale and the filing of a financing statement under the
New Jersey Uniform Commercial Code, a transfer of subsequent bondable
transition property will also be perfected against all third persons,
including judicial lien creditors.
The initial bondable transition property is the bondable transition
property, as identified in the related bill of sale, sold to the issuer on
the initial transfer date pursuant to the sale agreement in connection with
the issuance of the initial series of transition bonds. The subsequent
bondable transition property is the bondable transition property, as
identified in the related bill of sale, sold to the issuer on any
subsequent transfer date pursuant to the sale agreement in connection with
the subsequent issuance of a series of transition bonds.
PSE&G'S REPRESENTATIONS AND WARRANTIES
In the sale agreement, the seller will make representations and
warranties to the issuer as of the initial transfer date and any subsequent
transfer date to the effect, among other things, that:
1. all information provided by the seller to the issuer with
respect to the bondable transition property is correct in
all material respects;
2. the transfers and assignments contemplated by the sale
agreement constitute sales of the initial bondable
transition property or the subsequent bondable transition
property, as the case may be, from the seller to the issuer,
and the beneficial interest in and title to the bondable
transition property would not be part of the debtor's estate
in the event of the filing of a bankruptcy petition by or
against the seller under any bankruptcy law;
3. a. the seller is the sole owner of the bondable
transition property being sold to the issuer on the
initial transfer date or subsequent transfer date, as
applicable,
b. the bondable transition property has been validly
transferred and sold to the issuer free and clear of
all liens other than liens created by the issuer
pursuant to the indenture and
c. all filings (including filings with the New Jersey
Secretary of State under the New Jersey Uniform
Commercial Code) necessary in any jurisdiction
(1) to give the issuer a valid, first perfected
ownership interest in the bondable transition
property free and clear of all liens of the
seller or anyone claiming through the seller
and
(2) to give the trustee a first priority perfected
security interest in the bondable transition
property
have been made;
4. the BPU financing order has been issued by the BPU in
accordance with the Competition Act, the BPU financing order
and the process by which it was issued comply with all
applicable laws, rules and regulations and the BPU financing
order is in full force and effect;
5. as of the date of issuance of any series of transition
bonds, the transition bonds are entitled to the protections
provided by the Competition Act and, in accordance with the
Competition Act, the provisions of the BPU financing order
relating to the bondable transition property and the
transition bond charge are not revocable by the BPU;
6. a. under the Competition Act, neither the BPU nor any
other governmental agency of the State of New Jersey
may rescind, alter, repeal, modify or amend the BPU
financing order or revalue, re-evaluate or revise the
value of bondable transition property or determine
that the transition bond charge or the revenue to
recover the bondable stranded costs are unreasonable;
b. under the laws of the State of New Jersey and the
United States, neither the State of New Jersey, the
BPU nor any other governmental entity can take any
action that impairs the rights of the transition
bondholders unless this action is a reasonable
exercise of the State of New Jersey's sovereign
powers and appropriate to further a legitimate public
purpose, and, under the New Jersey and United States
Constitutions, in the event this action constitutes a
permanent appropriation of the property interest of
transition bondholders in the bondable transition
property and deprives the transition bondholders of
their reasonable expectations arising from their
investments in transition bonds, this action cannot
be taken unless just compensation, as determined by a
court of competent jurisdiction, is provided to
transition bondholders;
7. there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the
Competition Act, the BPU financing order, the bondable
transition property or the transition bond charge or any
rights arising under any of them or that seeks to enjoin the
performance of any obligations under the BPU financing
order;
8. no other approval, authorization, consent, order or other
action of, or filing with any court, federal or state
regulatory body, administrative agency or other governmental
instrumentality is required in connection with the creation
or transfer of bondable transition property, except those
that have been obtained or made;
9. except as disclosed by the seller to the issuer, there are
no proceedings or investigations pending or, to the best of
the seller's knowledge, threatened before any court, federal
or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the
seller or its properties challenging the BPU financing order
or the Competition Act;
10. the assumptions used in calculating the transition bond
charge in the issuance advice letter delivered by the issuer
to the BPU pursuant to the BPU financing order are
reasonable and made in good faith;
11. a. bondable transition property constitutes a vested
presently existing property right upon the transfer
to the issuer pursuant to the sale agreement and the
receipt of consideration for such sale by the Seller;
b. bondable transition property includes, without
limitation;
(1) the irrevocable right of the issuer to receive
an amount sufficient to recover all of the
seller's bondable stranded costs and the other
required payments described in the BPU
financing order in an amount equal to the
aggregate principal amount of transition bonds
plus an amount sufficient to provide for any
credit enhancement (including the
overcollateralization amount relating to each
series of transition bonds), to fund any
reserves and to pay interest, premium, if any,
servicing fees and other expenses, including
indemnity obligations, relating to the
transition bonds,
(2) all right, title and interest of the seller or
the issuer applicable to the transition bonds
in the BPU financing order and in all
revenues, collections, claims, payments,
money, or proceeds of or arising from the
transition bond charge applicable to the
transition bonds set forth in the BPU
financing order, and
(3) the right to obtain adjustments to the
transition bond charge pursuant to the BPU
financing order; and
c. the BPU financing order, including the right to
collect the transition bond charge, are irrevocable
by the BPU;
12. the seller is a corporation duly organized and in good
standing under the laws of the State of New Jersey, with
corporate power and authority to own its properties and
conduct its business as currently owned or conducted;
13. the seller has the corporate power and authority to execute
and deliver the sale agreement and to carry out its terms,
the seller has full corporate power and authority to own the
bondable transition property and sell and assign the initial
bondable transition property, in the case of the initial
transfer date, and the subsequent bondable transition
property, in the case of each subsequent transfer date, as
applicable, and the seller has duly authorized this sale and
assignment to the issuer by all necessary corporate action
and the execution, delivery and performance of the sale
agreement have been duly authorized by the seller by all
necessary corporate action;
14. the sale agreement constitutes a legal, valid and binding
obligation of the seller, enforceable against the seller in
accordance with its terms, subject to customary exceptions
relating to bankruptcy and equitable principles;
15. the consummation of the transactions contemplated by the
sale agreement and the fulfillment of the terms thereof do
not conflict with, result in any breach of any of the terms
and provisions of, nor constitute (with or without notice or
lapse of time) a default under, the articles of
incorporation or by-laws of the seller, or any indenture,
agreement or other instrument to which the seller is a party
or by which it shall be bound; nor result in the creation or
imposition of any lien upon any of its properties pursuant
to the terms of any applicable indenture, agreement or other
instrument; nor violate any law or any order, rule or
regulation applicable to the seller of any court or of any
federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over
the seller or its properties;
16. no approval, authorization, consent, order or other action
of, or filing with, any court, federal or state regulatory
body, administrative agency or other governmental
instrumentality is required in connection with the execution
and delivery by the seller of the sale agreement, the
performance by the seller of the transactions contemplated
by the sale agreement or the fulfillment by the seller of
the terms of the sale agreement, except those which have
previously been obtained or made;
17. there are no proceedings or investigations pending or, to
the seller's best knowledge, threatened, before any court,
federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over
the seller or its properties
a. asserting the invalidity of the sale agreement, the
servicing agreement, any bills of sale for bondable
transition property, the issuer's limited liability
company agreement or the certificate of formation
filed with the State of Delaware to establish the
issuer , which are referred to together as the basic
documents, or the transition bonds,
b. seeking to prevent the issuance of transition bonds
or the consummation of the transactions contemplated
by the basic documents or the transition bonds,
c. seeking any determination or ruling that could be
reasonably expected to materially and adversely
affect the performance by the seller of its
obligations under, or the validity or enforceability
of, the basic documents or the transition bonds, or
d. challenging the seller's treatment of the transition
bonds as debt of the seller for federal and state
income, gross receipts or franchise tax purposes;
18. after giving effect to the sale of any bondable transition
property under the sale agreement, the seller:
a. is solvent and expects to remain solvent;
b. is adequately capitalized to conduct its business and
affairs considering its size and the nature of its
business and intended purposes;
c. is not engaged and does not expect to engage in a
business for which its remaining property represents
an unreasonably small portion of its capital; and
d. reasonably believes that it will be able to pay its
debts as they become due; and
19. the seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the
ownership or lease of property or the conduct of its
business require any qualifications, licenses or approvals
(except where the failure to so qualify would not be
reasonably likely to have a material adverse effect on the
seller's business, operations, assets, revenues, properties
or prospects).
PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE
AND TO TAKE LEGAL ACTION
Under the sale agreement, the seller is obligated to indemnify the
issuer and the trustee and related parties specified therein, against
1. any and all taxes, other than any taxes imposed on
transition bondholders solely as a result of their ownership
of transition bonds, that may at any time be imposed on or
asserted against any of those persons under existing law as
of the date of issuance of the transition bonds as a result
of the sale and assignment of the bondable transition
property by the seller to the issuer, the acquisition or
holding of bondable transition property by the issuer or the
issuance and sale by the issuer of transition bonds,
including any sales, gross receipts, general corporation,
personal property, privilege or license taxes, but excluding
any taxes imposed as a result of a failure of that person to
properly withhold or remit taxes imposed with respect to
payments on any transition bond; and
2. (a) any and all amounts of principal and interest on the
transition bonds not paid when due or when scheduled to be
paid in accordance with their terms and the amount of any
deposits to the issuer required to have been made in
accordance with the terms of the basic documents which are
not made when so required, in each case, as a result of the
seller's breach of its representation, warranties, covenants
or agreements contained in the sale agreement, and
(b) any and all liabilities, obligations, claims, actions,
suits or payments of any kind whatsoever that may be imposed
on or asserted against any such person, other than any
liabilities, obligations or claims for or payments of
principal of or interest on the transition bonds, together
with any reasonable costs and expenses incurred by that
person, as a result of the seller's breach of any of its
representations, warranties or covenants contained in the
sale agreement.
These indemnification obligations will rank pari passu with other general
unsecured obligations of the seller. The indemnities described above will
survive the termination of the sale agreement and include reasonable fees
and expenses of investigation and litigation (including reasonable
attorneys' fees and expenses).
PSE&G's Limited Obligation to Undertake Legal Action. The seller
and the servicer are required to institute any action or proceeding
necessary to compel performance by the BPU or the State of New Jersey of
any of their obligations or duties under the Competition Act or the BPU
financing order with respect to the bondable transition property. The cost
of any action reasonably allocated by the servicer or seller to the
serviced bondable transition property would be payable from transition bond
charge collections as an operating expense payable to the servicer and, in
the case of the seller, as reimbursed by the servicer to the seller. Except
for the foregoing and subject to the seller's further covenant to fully
preserve, maintain and protect the interests of the issuer in the bondable
transition property, the seller will not be under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its
obligations under the sale agreement.
SUCCESSORS TO PSE&G
The sale agreement provides that any person which succeeds to the
major part of the electric public utility business of the seller will be
the successor to the seller if this person is considered a "successor"
under the Competition Act. The sale agreement further requires that:
1. immediately after giving effect to any transaction referred
to in this paragraph, no representation or warranty made in
the sale agreement will have been breached and no servicer
default, and no event that, after notice or lapse of time,
or both, would become a servicer default will have occurred
and be continuing;
2. the rating agencies will have received prior written notice
of the transaction and the rating agency condition will have
been satisfied; and
3. officers' certificates and opinions of counsel specified in
the sale agreement will have been delivered to the issuer
and the trustee.
THE SERVICING AGREEMENT
The following summary describes the material terms of the servicing
agreement pursuant to which the servicer is undertaking to service bondable
transition property. The form of the servicing agreement has been filed as
an exhibit to the registration statement. This summary is not complete and
is subject to the provisions of the servicing agreement.
The servicing agreement may be amended by the parties thereto with
the consent of the trustee under the indenture, if the rating agency
condition has been satisfied.
PSE&G'S SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage,
service, administer and make collections in respect of bondable transition
property. The servicer's duties will include:
1. calculating and billing the transition bond charge and
collecting the transition bond charge from customers and
third party suppliers, as applicable;
2. responding to inquiries by customers and third party
suppliers, the BPU, or any federal, local or other state
governmental authority with respect to the bondable
transition property and the transition bond charge;
3. accounting for transition bond charge collections,
investigating delinquencies, processing and depositing
collections, making periodic remittances and furnishing
periodic reports to the issuer, the trustee and the rating
agencies;
4. selling, as agent for the issuer, defaulted or written-off
accounts in accordance with the servicer's usual and
customary practices; and
5. taking action in connection with adjustments to the
transition bond charge as described below.
The servicer is required to notify the issuer, the trustee and the rating
agencies in writing of any laws or BPU regulations promulgated after the
execution of the servicing agreement that have a material adverse effect on
the servicer's ability to perform its duties under the servicing agreement.
Collections Curve. [Periodically, the servicer will prepare a
forecast of the percentages of amounts billed in a particular calendar
month, which is referred to as a billing month, that are expected to be
received during each of the following seven months. These forecasts are
referred to as the collections curve.
The servicer will make periodic payments on account of transition
bond charge collections to the trustee for deposit in the collection
account as follows. For, so long as:
1. PSE&G or any successor to PSE&G's electric public utility
business remains the servicer,
2. no servicer default has occurred and is continuing, and
3. a. PSE&G, or any successor referred to in this
paragraph, maintains a short-term rating of "A-1" or
better by S&P, "P-1" or better by Moody's, "F-1" or
better by Fitch, or
b. the rating agency condition has been satisfied, and
any additional conditions or limitations imposed by
the rating agencies are complied with,
the servicer will remit to the trustee, on the [ ] day of each calendar
month, or if such [ ] day is not a business day, the next business day,
referred to as a monthly remittance date, for each of the seven preceding
billing months an amount equal to the amount of transition bond charge
collections estimated to have been received during the preceding calendar
month for those billing months, based on the collections curve then in
effect.
The sum of the amounts paid to the trustee over the seven-month
period following a particular billing month based on the collections curve
for that billing month, is referred to as the collections curve payment for
that billing month.
If the servicer has not satisfied the conditions specified above,
the servicer will remit collection curve payments to the trustee within two
business days.
On or before [January 2], or if that day is not a business day the
next business day, of each year, referred to as the reconciliation date,
the servicer will compare the actual transition bond charge collections to
the collections curve payments previously made to the trustee for the 12
billing months through the preceding [May] billing month. If the
collections curve payments previously made for those 12 billing months
exceed actual transition bond charge collections for those billing months,
this excess is referred to as an excess collections curve payment. In that
case, the servicer may either:
1. reduce the amount that the servicer remits to the trustee
for deposit in the collection account on the following
remittance date, and if necessary, succeeding remittance
dates, by the amount of the excess collections curve
payment, or
2. require the trustee to pay the servicer from the collection
account the amount of the excess collections curve payments,
which upon payment becomes property of the servicer.
If the collections curve payments previously made for those 12
billing months are less than actual transition bond charge collections for
those billing months, this deficiency is referred to as a collections curve
payment shortfall. In that case, the servicer must pay the collections
curve payment shortfall to the trustee on that reconciliation date for
deposit in the collection account.]
A business day is any day other than a Saturday or Sunday or a day
on which banking institutions in Newark, New Jersey or New York, New York
are required or authorized by law or executive order to close.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires the servicer
to file adjustment requests on each calculation date which will be December
1 of each year, at a minimum. The servicer is permitted under the
Competition Act to file adjustment requests more often than annually but
not more frequently than quarterly. These adjustment requests are based on
actual transition bond charge collections and updated assumptions by the
servicer as to projected future usage of electricity by customers, expected
delinquencies and write-offs and future payments and expenses relating to
bondable transition property and the transition bonds. The servicer agrees
to calculate these adjustments to result in the calculations specified in
"THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S
TRANSITION BOND CHARGE ADJUSTMENT PROCESS."
The servicer will file adjustment requests 30 days in advance of
the date on which the servicer requests the adjustment to be effective. In
the absence of a determination by the BPU finding a manifest error, the
adjustment request will become effective on an interim basis on each
January 1, and final 30 days thereafter.
PSE&G'S TRANSITION BOND CHARGE COLLECTIONS
The servicer is required to remit all transition bond charge
collections from whatever source, based on the collections curve, to the
trustee for deposit pursuant to the indenture on each remittance date.
Until transition bond charge collections are remitted to the collection
account, the servicer will not segregate them from its general funds.
Remittances of transition bond charge collections will not include interest
thereon prior to the remittance date or late fees from customers, which the
servicer may retain. See "RISK FACTORS--THE RISKS ASSOCIATEd WITH POTENTIAL
BANKRUPTCY PROCEEDINGS" in this prospectus.
PSE&G'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE
OF OTHER PARTIES
The issuer agrees to pay the servicer a monthly servicing fee, in
the amount specified in the related prospectus supplement. The servicing
fee for each series, together with any portion of the servicing fee that
remains unpaid from prior payment dates, will be paid solely to the extent
funds are available therefor as described under "THE INDENTURE--HOW FUNDS
IN THe COLLECTION ACCOUNT WILL BE ALLOCATED" in this prospectus. The
servicing fee will be paid prior to the payment of or provision for any
amounts in respect of interest on and principal of the transition bonds. In
the servicing agreement, the servicer releases the issuer and the trustee
from any and all claims whatsoever relating to bondable transition property
or the servicer's servicing activities with respect thereto.
PSE&G'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other
things, that, in servicing bondable transition property:
1. except where the failure to comply with any of the following
would not adversely affect the issuer's or the trustee's
respective interests in bondable transition property,
a. it will manage, service, administer and make
collections in respect of bondable transition
property with reasonable care and in material
compliance with applicable law and regulations, using
the same degree of care and diligence that the
servicer exercises with respect to billing and
collection activities that the servicer conducts for
itself and others;
b. it will follow customary standards, policies and
procedures;
c. it will use all reasonable efforts, consistent with
its customary servicing procedures, to enforce and
maintain rights in respect of bondable transition
property;
d. it will calculate the transition bond charge in
compliance with the Competition Act, the BPU
financing order and any applicable tariffs;
2. it will keep on file, in accordance with customary
procedures, all documents related to bondable transition
property and will maintain accurate and complete accounts
pertaining to bondable transition property; and
3. it will use all reasonable efforts consistent with its
customary servicing procedures to collect all amounts owed
in respect of bondable transition property as they
become due.
PSE&G'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations
and warranties as of the date the seller sells or otherwise transfers
bondable transition property to the issuer to the effect, among other
things, that:
1. the servicer is a corporation duly organized and in good
standing under the laws of the state of its incorporation,
with the corporate power and authority to own its properties
and conduct its business as its properties are currently
owned and its business is presently conducted and to
execute, deliver and carry out the terms of the servicing
agreement and has the power, authority and legal right to
service the bondable transition property;
2. the servicer is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which
it is required to do so;
3. the servicer's execution, delivery and performance of the
servicing agreement have been authorized by all necessary
corporate action;
4. the servicing agreement constitutes a binding obligation of
the servicer, enforceable against the servicer in accordance
with its terms, subject to customary exceptions relating to
bankruptcy and equitable principles;
5. the consummation of the transactions contemplated by the
servicing agreement does not conflict with the servicer's
articles of incorporation or by-laws or any material
agreement by which the servicer is bound, nor result in any
lien upon the servicer's properties or violate any law or
regulation applicable to the servicer or its properties;
6. except for filings under the New Jersey Uniform Commercial
Code, no governmental actions or filings are required for
the servicer to execute, deliver and perform its obligations
under the servicing agreement, except those which have been
taken or made; and
7. no proceeding is pending or, to the servicer's best
knowledge, threatened before any court or other governmental
instrumentality having jurisdiction over the
servicer or its properties:
a. except as disclosed by the servicer to the issuer,
seeking any ruling that might materially and
adversely affect the performance by the servicer of
its obligations under, or the enforceability against
the servicer of, the servicing agreement; or
b. relating to the servicer and which might adversely
affect the federal or state income, gross receipts or
franchise tax attributes of the transition bonds.
PSE&G, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify the
issuer, the trustee, for itself and on behalf of the transition
bondholders, and related parties specified in the servicing agreement,
against any liabilities of any kind that may be incurred by or asserted
against any of those persons as a result of:
1. the servicer's willful misfeasance, bad faith or gross
negligence in the performance of its duties under the
servicing agreement or the servicer's reckless disregard of
its duties under the servicing agreement;
2. the servicer's breach of any of its representations or
warranties under the servicing agreement; and
3. litigation and related expenses relating to its obligations
as servicer.
PSE&G, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the transition
bondholders a statement indicating, with respect to the bondable transition
property, among other things:
1. the amount to be paid to transition bondholders of that
series and class in respect of principal;
2. the amount to be paid to transition bondholders of that
series and class in respect of interest;
3. the projected transition bond balance and the transition
bond balance for that series and class as of that payment
date;
4. the amount on deposit in the overcollateralization
subaccount for such series and the scheduled
overcollateralization level for such series, as of that
payment date;
5. the amount on deposit in the capital subaccount for such
series as of that payment date; and
6. the amount, if any, on deposit in the reserve subaccount as
of that payment date.
On or before each remittance date, the servicer will furnish to the issuer
and the trustee a statement setting forth the aggregate amount remitted or
to be remitted by the servicer to the trustee for deposit on that
remittance date pursuant to the indenture. On or before each payment date,
the servicer will prepare and furnish to the issuer and the trustee a
statement setting forth the transfers and payments to be made on that
payment date and the amounts thereof. On or before each payment date for
each series of transition bonds, the servicer will prepare and furnish to
the issuer and the trustee a statement setting forth the amounts to be paid
to the holders of transition bonds of that series. On the basis of this
information, the trustee will furnish to the transition bondholders on each
payment date the report described under "THE INDENTURE --REPORTS TO HOLDERS
OF THE TRANSITION BONDS."
PSE&G TO PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
A firm of independent public accountants will furnish to the
issuer, the trustee and the rating agencies, on or before March 31 of each
year, a statement as to compliance by the servicer during the preceding
calendar year, or the relevant portion thereof, with procedures relating to
the servicing of bondable transition property. This report, which is
referred to as the annual accountant's report, will state that the firm has
performed the procedures in connection with the servicer's compliance with
the servicing obligations of the servicing agreement, identifying the
results of these procedures and including any exceptions noted. The
accounting firm providing the report will be 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 issuer and the trustee, on or before March
31 of each year, a certificate signed by an officer of the servicer. This
certificate will state that the servicer has fulfilled its obligations
under the servicing agreement for the preceding calendar year, or the
relevant portion thereof, or, if there has been a default in the
fulfillment of any relevant obligation, describing each default. The
servicer will give the issuer, each rating agency, and the trustee notice
of any servicer default under the servicing agreement.
MATTERS REGARDING PSE&G AS SERVICER
Pursuant to the servicing agreement, PSE&G may assign its
obligations under the servicing agreement to any electric public utility
which succeeds to the major part of PSE&G's electric distribution business.
The assignment must also satisfy the rating agency condition and other
conditions specified in the servicing agreement. Under the BPU financing
order, the BPU will permit a successor servicer to replace PSE&G, only if
it also determines that the current credit ratings on the transition bonds
will not be withdrawn or downgraded. Under the servicing agreement, any
person which succeeds to the major part of the electric distribution
business of the servicer and which assumes the obligations of the servicer,
will be the successor of the servicer under the servicing agreement. The
servicing agreement further requires that:
1. immediately after giving effect to the transaction referred
to in this paragraph, no representation or warranty made by
the servicer in the servicing agreement will have been
breached and no servicer default, and no event which, after
notice or lapse of time, or both, would become a servicer
default will have occurred and be continuing;
2. officers' certificates and opinions of counsel will have
been delivered to the issuer, the trustee, and the rating
agencies; and
3. prior written notice will have been received by the rating
agencies, and the rating agency condition will have been
satisfied.
Subject to the foregoing provisions, PSE&G may not resign from the
obligations and duties imposed on it as servicer. However, PSE&G may resign
as servicer upon a determination, communicated to the issuer, the trustee
and each rating agency and evidenced by an opinion of counsel, that the
performance of PSE&G's duties under the servicing agreement is no longer
legal. This resignation will not become effective until a successor
servicer has assumed the duties of PSE&G under the servicing agreement.
Until the transition bonds have been paid in full and all related
obligations have been satisfied, PSE&G is obligated by the Competition Act
to provide electricity through its transmission and distribution system to
its customers and, as servicer, will have the right to meter, charge, bill,
collect and receive the transition bond charge from its customers for the
account of the issuer and the trustee. These rights and obligations may be
assigned solely at the discretion of PSE&G. However, under the Competition
Act, if PSE&G defaults in respect of charging, collecting and receiving
revenues derived from transition bond charge, the trustee or the issuer may
apply to the BPU or any court of competent jurisdiction for an order
designating a trustee or other entity to act in place of PSE&G as the
servicer for the metering, charging, collecting and receiving the
transition bond charge for the account of the issuer and the trustee. Under
the Competition Act, the BPU or the court is required to issue the order.
The BPU may, at its discretion, establish criteria for the selection of any
entity that may become a successor servicer upon default or other adverse
material change in the financial condition of PSE&G.
Except as expressly provided in the servicing agreement, the
servicer will not be liable to the issuer for any action taken or not taken
pursuant to the servicing agreement or for errors in judgment. However, the
servicer will be liable to the extent this liability is imposed by reason
of the servicer's wilful misfeasance, bad faith or gross negligence or by
reason of reckless disregard of duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY PSE&G IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to deliver to the trustee, on
behalf of the issuer, any required remittance that continues
unremedied for a period of five business days after written
notice of such failure is received by the servicer from the
issuer or the trustee;
2. any failure by the servicer to perform in any material
respect any other agreement in the servicing agreement or
any other Basic Document to which it is a party, which
failure materially and adversely affects bondable transition
property and which continues unremedied for 60 days after
notice of this failure has been given to the servicer by the
issuer or the trustee, or after discovery of this failure by
an officer of the servicer, as the case may be;
3. any representation or warranty made by the servicer in the
servicing agreement proves to have been incorrect when made,
which has a material adverse effect on any of the transition
bondholders or the issuer and which continues unremedied for
60 days after notice of this failure has been given to the
servicer by the issuer or the trustee or after discovery of
this failure by an officer of the servicer, as the case may
be; or
4. an event of bankruptcy, insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar
proceedings with respect to the servicer or an action by the
servicer indicating its insolvency as specified in the
servicing agreement.
The trustee with the consent of the holders of the majority of the
principal amount of the transition bonds of all series and classes may
waive any default by the servicer, except a default in making any required
remittances to the trustee.
THE TRUSTEE'S RIGHTS IF PSE&G DEFAULTS AS SERVICER
As long as a servicer default remains unremedied, the trustee, with
the consent of the holders of a majority of the transition bonds of all
series, may terminate all the rights and obligations of the servicer under
the servicing agreement. However, the servicer's indemnification obligation
and obligation to continue performing its functions as servicer may not be
terminated until a successor servicer is appointed. Under the servicing
agreement, the trustee, with the consent of the holders of a majority of
the transition bonds of all series, may appoint a successor servicer. The
trustee may make arrangements for compensation to be paid to any successor
servicer. Only a successor servicer that is an electric public utility may
bring an action against a customer for nonpayment of the transition bond
charge, or terminate service for failure to pay the transition bond charge.
Upon a servicer default based upon the commencement of a case by or
against the servicer under the United States Bankruptcy Code or similar
laws, the trustee and the issuer may be prevented from effecting a transfer
of servicing. See "RISK FACTORS--THE RISKs ASSOCIATED WITH POTENTIAL
BANKRUPTCY PROCEEDINGS" in this prospectus. Upon a servicer default because
of a failure to make required remittances, the issuer or the trustee will
have the right to apply to the BPU for sequestration and payment of
revenues arising from the bondable transition property.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS PSE&G
In accordance with the BPU financing order and the servicing
agreement, if a third party succeeds to the role of the servicer, the
servicer will cooperate with the issuer, the trustee and the successor
servicer in terminating the servicer's rights and responsibilities under
the servicing agreement. This procedure includes the transfer to the
successor servicer of all related documentation and cash. The servicer will
be liable for all reasonable costs and expenses incurred in transferring
servicing responsibilities. A successor servicer may not resign unless it
is prohibited from serving by law. The predecessor servicer is obligated,
on an ongoing basis, to cooperate with the successor servicer and provide
whatever information is, and take whatever actions are, reasonably
necessary to assist the successor servicer in performing its obligations
under the servicing agreement.
THE INDENTURE
The following summary describes some of the terms of the indenture
pursuant to which transition bonds will be issued. The form of the
indenture, including the form of the supplemental indenture, has been filed
as an exhibit to the registration statement of which this prospectus forms
a part. This summary is not complete and is subject to the indenture.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal of and premium, if any, and
interest on, and any other amounts owing in respect of, the transition
bonds pursuant to the indenture, the issuer will grant to the trustee for
the benefit of the transition bondholders a security interest in all of the
issuer's right, title and interest in and to the following collateral:
1. the bondable transition property sold by the seller to the
issuer pursuant to the sale agreement and all proceeds
thereof;
2. the sale agreement;
3. all bills of sale delivered by the seller pursuant to the
sale agreement;
4. the servicing agreement;
5. the administration agreement;
6. the collection account, each subaccount therein and all
amounts on deposit therein from time to time, with the
exception of $100,000 to be held in the capital subaccount
free of the lien of the indenture to ensure that the issuer
has sufficient assets to pay its expenses as they come due;
7. any other property of whatever kind owned from time to time
by the issuer, other than cash or other property released to
the issuer from the capital account in accordance with the
indenture, which other property is not expected to be
substantial;
8. all present and future claims, demands, causes and choses in
action in respect of any or all of the foregoing; and
9. all payments on or under and all proceeds of every kind and
nature whatsoever in respect of any or all of the foregoing.
See "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATEd" below.
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Transition bonds may be issued under the indenture from time to
time in series, so long as the rating agency condition is satisfied, to
finance the purchase by the issuer of bondable transition property, which
is referred to as a financing issuance. Transition bonds may also be issued
to refund all or part of the transition bonds which is referred to as a
refunding issuance. The aggregate principal amount of transition bonds that
may be authenticated and delivered under the indenture may not exceed
$2.525 billion plus the amount of any refunding issuance. Any series of
transition bonds may include one or more classes which differ, among other
things, as to interest rate and amortization of principal. The terms of all
transition bonds of the same series will be identical, unless a series
includes more than one class, in which case the terms of all transition
bonds of the same class will be identical. The particular terms of the
transition bonds of any series and class will be set forth in the
supplemental indenture. The terms of this series and any classes thereof
will not be subject to prior review by, or consent of, the transition
bondholders of any previously issued series. See "RISK FACTORS--OTHER RISKS
ASSOCIATEd WITH AN INVESTMENT IN THE TRANSITION BONDS," "THE TRANSITION
BONDS" and "PSE&G'S RESTRUCTURING" in this prospectus.
The issuance of more than one series of transition bonds is not
expected to adversely affect collections of the transition bond charge to
make payments on the other series. This is because the transition bond
charge and adjustments thereof are generally based on the total
principal amount of all transition bonds outstanding.
Under the indenture, the trustee will authenticate and deliver an
additional series of transition bonds only upon receipt by the trustee of,
among other things, a certificate of the issuer that no event of default
has occurred and is continuing, an opinion of counsel to the issuer and
evidence of satisfaction of the rating agency condition.
Opinion of Independent Certified Public Accountants Required for
Each Series or Class. In addition, in connection with the issuance of each
new series, the trustee will have to receive a certificate or opinion of a
firm of independent certified public accountants of recognized national
reputation. This certificate will be based on the assumptions used in
calculating the initial transition bond charge with respect to the
transferred bondable transition property or, if applicable, the most recent
revised transition bond charge with respect to the transferred bondable
transition property. The certificate will state to the effect that, after
giving effect to the issuance of the new series and the application of the
proceeds therefrom, the transition bond charge will be sufficient:
1. to pay all expenses, fees and charges of the issuer,
2. to pay interest of each series of transition bonds when due,
3. to pay principal of each series of transition bonds in
accordance with the expected amortization schedule therefor,
and
4. to fund the overcollateralization subaccount for each series
to the scheduled overcollateralization level for each series
and replenish any withdrawals from the capital subaccount
for each series
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
If the issuance is a refunding issuance, the amount of money
necessary to pay premiums, if any, and the outstanding principal balance of
and interest on the transition bonds being refunded will be deposited into
a separate account with the trustee.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, the issuer will establish the collection
account, with the trustee or at another eligible institution as described
below. Funds received from collections of the transition bond charge will
be deposited into the collection account. The collection account will be
divided into the following subaccounts, which need not be separate bank
accounts:
1. the general subaccount;
2. one or more series subaccounts,
3. overcollateralization subaccount for each series,
4. the capital subaccount for each series,
5. if required by the indenture, one or more defeasance
subaccounts, and
6. the reserve subaccount.
All amounts in the collection account not allocated to any other
subaccount will be allocated to the general subaccount. Unless the context
indicates otherwise, references to the collection account include all of
the subaccounts contained therein. All money deposited from time to time in
the collection account, all deposits therein pursuant to the indenture, and
all investments made in eligible investments will be held by the trustee in
the collection account as part of the collateral, with the exception of
$100,000 in the capital subaccount.
The following institutions are eligible institutions for the
establishment of the collection account:
1. the corporate trust department of the trustee; or
2. a depositary institution organized under the laws of the
United States of America or any state or any domestic branch
of a foreign bank, which:
a. has either:
(1) a long-term unsecured debt rating of "AAA" by
S&P and Fitch and "A1" by Moody's; or
(2) a certificate of deposit rating of "A-1+" by
S&P and "P-1" by Moody's, or any other
long-term, short-term or certificate of
deposit rating acceptable to the rating
agencies; and
b. whose deposits are insured by the Federal Deposit
Insurance Corporation.
Appropriate Investments for Funds in the Collection Account. All
funds in the collection account shall be invested in any of the following
eligible investments:
1. direct obligations of, and obligations fully and
unconditionally guaranteed as to the timely payment by, the
United States of America;
2. demand deposits, time deposits, certificates of deposit of
depository institutions or trust companies specified in the
indenture;
3. commercial paper having, at the time of investment, a rating
in the highest rating category from each rating agency;
4. demand deposits, time deposits and certificates of deposit
which are fully insured by the Federal Deposit Insurance
Corporation;
5. money market funds which have the highest rating from each
rating agency, including funds for which the trustee or any
of its affiliates is investment manager or advisor,
6. banker's acceptances issued by any depository institution or
trust company referred to in clause 2 above;
7. repurchase obligations with respect to any security that is
a direct obligation of, or fully guaranteed by, the United
States of America or agencies or instrumentalities thereof,
entered into with depository institutions or trust companies
in each case as specified in the indenture; or
8. any other investment permitted by each rating agency; but:
a. any book-entry security, instrument or security
having a maturity of one month or less that would be
an eligible investment but for its failure, or the
failure of the obligor thereon, to have the rating
specified above shall be an eligible investment if
the book-entry security, instrument or security, or
the obligor thereon, has a long-term unsecured debt
rating of at least "A2" by Moody's, or the equivalent
thereof by the other rating agencies, or a short-term
rating of at least "P-1" by Moody's or the equivalent
thereof by the other rating agencies; and
b. any book-entry security, instrument or security
having a maturity of greater than one month that
would be an eligible investment but for its failure,
or the failure of the obligor thereon, to have the
rating specified above shall be an eligible
investment if this book-entry security, instrument or
security, or the obligor thereon, has a long-term
unsecured debt rating of at least "A1" by Moody's, or
the equivalent thereof by the other rating agencies,
and a short-term rating of at least "P-1" by Moody's
(or the equivalent thereof by the other rating
agencies).
These eligible investments may not:
1. be sold, liquidated or otherwise disposed of at a loss,
prior to the maturity thereof; or
2. mature later than the business day prior to the next payment
date, except for any funds in the collection account in
excess of the amount needed to make all required and
scheduled payments and deposits on the next payment date,
which may mature at any time before the second following
payment date.
In the case of a defeasance, the issuer will deposit U.S. Government
Obligations in the defeasance subaccount. No money held in the collection
account may be invested, and no investment held in the collection account
may be sold, unless the security interest in the collection account will
continue to be perfected in the investment or the proceeds of the sale.
Remittances to the Collection Account. On each remittance date, the
servicer will remit the [estimated] transition bond charge collections and
any indemnity amounts to the trustee under the indenture for deposit in the
collection account. An indemnity amount is any amount paid by PSE&G, as the
seller or the servicer, to the trustee, for the trustee itself or on behalf
of the transition bondholders, in respect of indemnification obligations
pursuant to the sale agreement or the servicing agreement. See "THE SALE
AGREEMENT" and "THE SERVICING AGREEMENT."
Collection Account. Transition bond charge collections will be
deposited into the collection account. On each payment date, the trustee
will allocate amounts in the collection account as described under "HOW
FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
General Subaccount. Transition bond charge collections will be
deposited into the general subaccount. On each payment date, the trustee
will allocate amounts in the general subaccount as described under "HOW
FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below.
Series Subaccount. Upon the issuance of each series of transition
bonds, a series subaccount will be established for that series. On the
business day preceding each payment date, the trustee will allocate from
amounts on deposit in the general subaccount account to each series
subaccount an amount sufficient to pay:
1. interest payable on that series on that payment date;
2. the principal of that series payable as a result of an
acceleration following the occurrence of an event of
default, the principal of that series payable on the final
maturity date of that series, or the principal payable on a
redemption date;
3. principal scheduled to be paid on that series on the next
payment date, excluding amounts provided for in clause 2
above;
On the business day preceding each payment date, allocations will be made
to each series subaccount as described under "HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" below. On each payment date, the trustee will
withdraw funds from the series subaccount to make payments on the related
series of transition bonds.
Capital Subaccount. Upon the issuance of each series of transition
bonds, PSE&G will make a capital contribution to the issuer of the required
capital amount. The issuer will pay this amount to the trustee for deposit
into the capital account for such series which will be invested in eligible
investments. The trustee will draw on amounts in the capital account for
such series to the extent that, after the allocation of funds in accordance
with clauses 1 through 7 for such series in "HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" below, amounts on deposit in the general
subaccount, the series subaccounts, the reserve account and the
overcollateralization account for such series are insufficient to make
scheduled distributions and to pay expenses of the issuer, the trustee and
the servicer and other fees, costs and charges specified in the indenture.
If any series of transition bonds has been retired as of any payment date,
the amounts on deposit in the capital account for such series will be
released to the issuer, free of the lien of the indenture.
Overcollateralization Subaccount. Transition bond charge
collections to the extent available as described in "HOW FUNDS IN THE
COLLECTION ACCOUNT WILL BE ALLOCATED" below will be allocated to the
overcollateralization account for any series on each payment date. Each
prospectus supplement will specify the scheduled overcollateralization
level on each payment date for the related series of transition bonds. The
overcollateralization amount for any series will be funded over the life of
the transition bonds of each series and in aggregate will equal the amount
stated in the related prospectus supplement for that series, which is
referred to as the overcollateralization amount.
Amounts in the overcollateralization account for any series will be
invested in eligible investments. On each payment date, the trustee will
draw on the overcollateralization account for any series to the extent
that, after allocation of funds to such series in accordance with clauses 1
through 7 in "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below,
amounts on deposit in the general subaccount, the series subaccounts and
the reserve account are insufficient to make scheduled distributions and to
pay expenses specified in the indenture. If any series of transition bonds
has been retired as of any payment date, the amounts on deposit in the
overcollateralization account for such series will be released to the
issuer, free of the lien of the indenture.
Reserve Subaccount. Transition bond charge collections available on
any payment date that are not necessary to pay clauses 1 to through 11 in
"HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below will be
allocated to the reserve account. Amounts in the reserve account will be
invested in eligible investments. On each payment date, the trustee will
draw on the reserve account, if any, to the extent that, after the
allocation of funds in accordance with clauses 1 through 7 in "HOW FUNDS IN
THE COLLECTION ACCOUNT WILL BE ALLOCATED" below, amounts on deposit in the
general subaccount and the series subaccounts are insufficient to make
scheduled distributions and pay expenses specified in the indenture.
Defeasance Account. In the event funds are remitted to the trustee
in connection with the exercise of the legal defeasance option or the
covenant defeasance option, the issuer will establish a defeasance account
for each series. If this occurs, funds set aside for future payment of the
transition bonds will be deposited into the defeasance account. All amounts
in a defeasance account will be applied by the trustee to the payment to
the holders of the particular transition bonds for the payment or
redemption of which these amounts were deposited with the trustee. These
amounts will include all sums due for principal, premium, if any, and
interest. These amounts will be applied in accordance with the provisions
of the transition bonds and the indenture. See "THE ISSUER'S LEGAL
DEFEASANCE AND COVENANT DEFEASANCE OPTIONS" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all
investment earnings on the subaccounts in the collections account, will be
deposited into the general subaccount of the collection account. Amounts on
deposit in the general subaccount will be allocated to each outstanding
series, pro rata, based upon the outstanding principal amount of each
series. The servicer will draw on the general subaccount for payment of the
monthly servicing fee. On the business day preceding each payment date, the
trustee will allocate all amounts in the general subaccount of the
collection account in the following priority:
1. all amounts owed to the trustee will be paid to the trustee;
drawn pro rata from each outstanding series;
2. the servicing fee and all unpaid servicing fees from prior
payment dates will be paid to the servicer; drawn pro rata
from each outstanding series;
3. the administration fee payable under the administration
agreement between the issuer and PSE&G will be paid to
PSE&G, drawn pro rata from each outstanding series;
4. so long as no event of default has occurred and is
continuing or would be caused by this payment, all operating
expenses of the issuer other than those specified in clauses
1, 2 and 3 above, including fees of the independent managers
of the issuer, will be paid to the persons entitled thereto,
provided that the amount paid on any payment date pursuant
to this clause 5 may not exceed [$ ] in the aggregate for
all series; drawn pro rata from each outstanding series;
5. an amount equal to interest payable on each series of
transition bonds for the payment date will be allocated to
the corresponding series subaccount or will be paid to the
counterparty on any interest rate swap between the issuer
and that counterparty if so specified in the related
prospectus supplement;
6. an amount equal to principal of each series or class of
transition bonds payable as a result of acceleration
triggered by an event of default, principal of any series or
class of transition bonds payable on the final maturity date
for that series or class, or the principal payable with
respect to a redemption date will be allocated to the
corresponding series subaccount;
7. an amount equal to principal scheduled to be paid on each
series of transition bonds on the next payment date,
excluding amounts provided for pursuant to clause 6 above
will be allocated to the corresponding series subaccount;
8. all remaining unpaid operating expenses and indemnity
amounts of the issuer will be paid to the persons entitled
thereto;
9. any amount necessary to replenish the capital account for
each series will be allocated to that subaccount;
10. an amount will be allocated to the overcollateralization
account for each series to cause the amount in the
overcollateralization account to equal the scheduled
overcollateralization level for such series
overcollateralization subaccount;
11. an amount equal to investment earnings on amounts in each
series capital account will be released to the issuer;
12. the balance, if any, will be allocated to the reserve
account; and
13. following repayment of all outstanding series of transition
bonds, the balance, if any, will be released to the issuer
free from the lien of the indenture.
Interest means, for any payment date for any series of transition
bonds, the sum, without duplication, of:
1. an amount equal to the amount of interest accrued at the
applicable interest rates from the prior payment date with
respect to that series;
2. any unpaid interest plus any interest accrued on this unpaid
interest;
3. if the transition bonds have been declared due and payable,
all accrued and unpaid interest thereon; and
4. with respect to a series to be redeemed prior to the next
payment date, the amount of interest that will be payable as
interest on the series on that redemption
date.
Principal means, with respect to any payment date and any series of
transition bonds:
1. the amount of principal scheduled to be paid on such payment
date;
2. the amount of principal due on the final maturity date of
any series;
3. the amount of principal due as a result of the occurrence
and continuance of an event of default and acceleration of
the transition bonds;
4. the amount of principal and premium, if any, due as a result
of a redemption of transition bonds prior to the next
payment date pursuant to the indenture; and
5. any overdue payments of principal.
If on any payment date funds in the general subaccount allocable to
any series are insufficient to make the allocations contemplated by clauses
1 through 7 above for such series, the trustee will draw from amounts on
deposit in the following subaccounts in the following order up to the
amount of the shortfall for such series:
1. from the reserve account (pro rata to the outstanding
principal balance of each series if the amount in the
reserve account is insufficient to cover the shortfalls for
all outstanding series),
2. from the overcollateralization account for such series, and
3. from the capital account for such series.
If on any payment date funds in the general subaccount allocable to
any series are insufficient to make the allocations contemplated by clauses
8 through 10 above for such series, the trustee will draw from any amounts
on deposit in the reserve account. If the amount in the reserve account is
insufficient to cover the shortfalls for all outstanding series, the
trustee will allocate funds in the reserve account pro rata to the
outstanding principal balance of each series.
REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to
each payment date, the trustee will deliver a statement prepared by the
trustee to each transition bondholder of that series. This statement will
include, to the extent applicable, the following information, as well as
any other information so specified in the related supplemental indenture,
as to the transition bonds of that series with respect to that payment date
or the period since the previous payment date:
1. the amount to be paid to transition bondholders of that
series and class as principal;
2. the amount to be paid to transition bondholders of that
series and class as interest;
3. the projected transition bond balance and the transition
bond balance for that series and class as of that payment
date;
4. the amount on deposit in the overcollateralization
subaccount and the scheduled overcollateralization level, as
of that payment date;
5. the amount on deposit in the capital subaccount as of that
payment date; and
6. the amount, if any, on deposit in the reserve subaccount as
of that payment date.
THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE
Modifications of the Indenture that Do Not Require Consent of
Transition Bondholders. Without the consent of any of the holders of the
outstanding transition bonds but with prior notice to the rating agencies,
the issuer and the trustee may execute a supplemental indenture for any of
the following purposes:
1. to correct the description of the collateral, or better to
confirm unto the trustee the collateral, or to subject to
the lien of the indenture additional property;
2. to evidence the succession, in compliance with the
indenture, of another person to the issuer, and the
assumption by the successor of the covenants of the issuer
in the indenture and in the transition bonds;
3. to add to the covenants of the issuer, for the benefit of
the holders of the transition bonds, or to surrender any
right or power conferred upon the issuer in the indenture;
4. to assign any property to or with the trustee;
5. to cure any ambiguity, to correct any inconsistent provision
of the indenture or any supplemental indenture or to make
any other provisions with respect to matters arising under
the indenture or in any supplemental indenture; but:
a. this action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any transition bondholder; and
b. the rating agency condition shall have been satisfied;
6. to provide for a successor trustee and to facilitate the
administration of the trusts under the indenture by more
than one trustee, pursuant to the indenture;
7. to modify the indenture to effect the qualification of the
indenture under the Trust Indenture Act or any similar
federal statute hereafter enacted and to add to the
indenture any other provisions as may be expressly required
by the Trust Indenture Act; or
8. to set forth the terms of any series that has not
theretofore been authorized by a supplemental indenture,
provided that the rating agency condition has been
satisfied.
Modifications That Require the Approval of the Transition
Bondholders. The issuer and the trustee also may, with prior notice to the
rating agencies and with the consent of the holders of not less than a
majority of the outstanding amount of the transition bonds of each series
or class to be affected thereby, execute a supplemental indenture to add
any provisions to, or change in any manner or eliminate any of the
provisions of, the indenture or modify in any manner the rights of the
transition bondholders under the indenture. However, this supplemental
indenture may not, without the consent of the holder of each outstanding
transition bond of each series or class affected thereby:
1. change the date of payment of any scheduled payment of
principal of or premium, if any, or interest on any
transition bond, or reduce the principal amount thereof, the
interest rate specified thereon or the redemption price or
the premium, if any, with respect thereto, change the
provisions of the indenture and the applicable supplemental
indenture relating to the application of collections on, or
the proceeds of the sale of, the collateral to payment of
principal of or premium, if any, or interest on the
transition bonds, or change the coin or currency in which
any transition bond or any interest thereon is payable;
2. impair the right to institute suit for the enforcement of
the provisions of the indenture regarding payment;
3. reduce the percentage of the aggregate amount of the
outstanding transition bonds, or of a series or class
thereof, the consent of the holders of which is required for
any supplemental indenture, or the consent of the holders of
which is required for any waiver of compliance with
specified provisions of the indenture or of defaults and
their consequences;
4. reduce the percentage of the outstanding amount of the
transition bonds required to direct the trustee to direct
the issuer to liquidate the collateral;
5. modify the section of the indenture relating to the consent
of transition bondholders with respect to supplemental
indentures, except to increase any percentage specified
therein or to provide that those provisions of the indenture
or the basic documents specified in the indenture cannot be
modified or waived without the consent of [each outstanding
transition bondholder affected thereby];
6. modify the indenture to affect the amount of any payment of
interest, principal or premium, if any, payable on any
transition bond on any payment date or change the redemption
dates, expected amortization schedules or series final
maturity dates or class final maturity dates of any
transition bonds;
7. decrease the required capital amount with respect to any
series, the overcollateralization amount or the scheduled
overcollateralization level with respect to any payment
date;
8. modify the indenture regarding the voting of transition
bonds held by the issuer, the seller, an affiliate of either
of them or any obligor on the transition bonds;
9. decrease the percentage of the aggregate principal amount of
the transition bonds required to amend the sections of the
indenture which specify the applicable percentage of the
aggregate principal amount of the transition bonds necessary
to amend the indenture or other related agreements specified
therein; or
10. permit the creation of any lien ranking prior to or on a
parity with the lien of the indenture with respect to any of
the collateral for the transition bonds or, except as
otherwise contemplated in the indenture, terminate the lien
of the indenture on any property or deprive the holder of
any transition bond of the security of the indenture.
Enforcement of the Sale Agreement and Servicing Agreement. The
indenture will provide that the issuer will take all lawful actions to
enforce its rights under the sale agreement and the servicing agreement.
The indenture will also provide that the issuer will take all lawful
actions to compel or secure the performance and observance by PSE&G and the
servicer of each of their respective obligations to the issuer under the
sale agreement and the servicing agreement. So long as no event of default
occurs and is continuing, the issuer may exercise any and all rights,
remedies, powers and privileges lawfully available to the issuer under or
in connection with the sale agreement and the servicing agreement. However,
if the issuer and PSE&G or the servicer propose to amend, modify, waive,
supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the process
for adjusting the transition bond charge, the issuer must notify the
trustee and the trustee must notify transition bondholders of this
proposal. In addition, the trustee may consent to this proposal only with
the consent of the holders of a majority of the principal amount of the
outstanding transition bonds of each series or class materially and
adversely affected thereby and only if the rating agency condition is
satisfied.
If an event of default occurs and is continuing, the trustee may,
and at the direction of the holders of a majority of the outstanding amount
of the transition bonds of all series shall, exercise all rights, remedies,
powers, privileges and claims of the issuer against the seller or the
servicer under or in connection with the sale agreement and the servicing
agreement, and any right of the issuer to take this action shall be
suspended. In the event of a foreclosure, there is likely to be a limited
market, if any, for the bondable transition property, and, therefore,
foreclosure may not be a realistic or practical remedy.
Modifications to the Sale Agreement and the Servicing Agreement.
With the consent of the trustee, the sale agreement and the servicing
agreement may be amended, so long as the rating agency condition is
satisfied, at any time and from time to time, without the consent of the
transition bondholders. However, this amendment may not adversely affect
the interest of any transition bondholder in any material respect without
the consent of the holders of a majority of the outstanding transition
bonds of each series or class materially and adversely affected thereby.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of any Modification. If the issuer, PSE&G or the servicer
1. proposes to amend, modify, waive, supplement, terminate or
surrender, or agree to any other amendment, modification,
waiver, supplement, termination or surrender of, the terms
of the sale agreement or the servicing agreement, or
2. waive timely performance or observance by PSE&G or the
servicer under the sale agreement or servicing agreement,
respectively,
in each case in a way which would materially and adversely affect the
interests of transition bondholders, the issuer must first notify the
rating agencies of the proposed amendment. Upon receiving notification
regarding the rating agency condition, the issuer must thereafter notify
the trustee and the trustee must notify the transition bondholders of the
proposed amendment and whether the rating agency condition has been
satisfied with respect thereto. The trustee will consent to this proposed
amendment, modification, supplement or waiver only with the consent of the
holders of a majority of the outstanding principal amount of the transition
bonds of each series or class materially and adversely affected thereby and
once the rating agency condition has been satisfied.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An "Event of Default" is defined in the indenture as:
1. a default for five business days in the payment of any
interest on any transition bond;
2. a default in the payment of the principal of any transition
bond of any series on the final maturity date for that
series or, if applicable, any class on the final
maturity date for that class;
3. a default in the payment of the redemption price for any
transition bond on the redemption date therefor;
4. a default in the observance or performance of any covenant
or agreement of the issuer made in the indenture (other than
those specifically dealt with in 1, 2 or 3 above) and the
continuation of that default for a period of 30 days after
the earlier of the date (a) notice is given to the issuer by
the trustee; (b) notice is given to the issuer and the
trustee by the holders of at least 25% in principal amount
of the transition bonds of any series or class, or (c) the
issuer has knowledge of the default; and
5. specified events of bankruptcy, insolvency, receivership or
liquidation of the issuer.
If an event of default occurs and is continuing, the trustee or holders of
a majority in principal amount of the transition bonds of all series then
outstanding may declare the principal of all series of the transition bonds
to be immediately due and payable. This declaration may, under the
circumstances specified in the indenture, be rescinded by the holders of a
majority in principal amount of all series of the transition bonds then
outstanding.
When the Trustee Can Sell the Collateral. If the transition bonds
of all series have been declared to be due and payable following an event
of default, the trustee may, in its discretion, either:
1. sell the collateral or
2. elect to have the issuer maintain possession of the
collateral and continue to apply distributions on the
collateral as if there had been no declaration of
acceleration.
The trustee is prohibited from selling the collateral following an event of
default other than a default in the payment of any principal, a default for
five days or more in the payment of any interest on any transition bond of
any series or a default in the payment of the redemption price for any
transition bond on the redemption date therefor unless:
1. the holders of 100% of the principal amount of all series of
transition bonds consent to this sale; or
2. the proceeds of this sale are sufficient to pay in full the
principal of and premium, if any, and accrued interest on
the outstanding transition bonds; or
3. the trustee determines that funds provided by the collateral
would not be sufficient on an ongoing basis to make all
payments on the transition bonds of all series as these
payments would have become due if the transition bonds had
not been declared due and payable, and the trustee obtains
the consent of the holders of 66 2/3% of the aggregate
principal outstanding amount of the transition bonds of all
series.
Right of Transition Bondholders to Direct Proceedings. Subject to
the provisions for indemnification and the limitations contained in the
indenture, the holders of a majority in principal amount of the outstanding
transition bonds of all series will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to
the trustee or exercising any trust or power conferred on the trustee;
provided that, among other things:
1. this direction shall not conflict with any rule of law or
with the indenture;
2. subject to the provisions specified in the indenture, any
direction to the trustee to sell or liquidate the collateral
shall be by the holders of 100% of the principal amount of
all series of transition bonds then outstanding; and
3. the trustee may take any other action deemed proper by the
trustee that is not inconsistent with this direction.
In case an event of default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the
indenture at the direction of any of the holders of transition bonds of any
series if it reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which might be incurred by it
in complying with this request. The trustee does not need to take any
action pursuant to the direction of the transition bondholders if it
determines that this action might materially adversely affect the rights of
any transition bondholder not consenting to this action.
Waiver of Default. The holders of a majority in principal amount of
the transition bonds of all series then outstanding may, in those cases
specified in the indenture, waive any default with respect thereto.
However, they may not waive a default in the payment of principal of or
premium, if any, or interest on any of the transition bonds or a default in
respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all of the holders of the outstanding
transition bonds of all affected series and classes.
No transition bondholder will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of the right to
foreclose on the bondable transition property or otherwise enforce the lien
in the bondable transition property, with respect to the indenture, unless:
1. the holder previously has given to the trustee written
notice of a continuing event of default;
2. the holders of not less than 25% in principal amount of the
outstanding transition bonds of all series have made written
request of the trustee to institute the
proceeding in its own name as trustee;
3. the holder or holders have offered the trustee security or
indemnity reasonably satisfactory to the trustee against the
liabilities to be incurred in complying with the request;
4. the trustee for 60 days after its receipt of the notice,
request and offer has failed to institute the proceeding;
and
5. no direction inconsistent with this written request has been
given to the trustee during the 60-day period referred to
above by the holders of a majority of the
outstanding transition bonds of all series.
COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability
company under Delaware law, provided that the issuer may consolidate with
or merge into another entity or sell substantially all of its assets to
another entity and dissolve if:
1. the entity formed by or surviving the consolidation or
merger or to whom substantially all of its assets are sold
is organized under the laws of the United States or any
state thereof and expressly assumes by a supplemental
indenture the due and punctual payment of the principal of
and premium, if any, and interest on all transition bonds
and the performance of the issuer's obligations under the
indenture;
2. the entity expressly assumes all obligations and succeeds to
all rights of the issuer under the sale agreement and the
servicing agreement pursuant to an assignment and assumption
agreement executed and delivered to the trustee;
3. no default or event of default will have occurred and be
continuing immediately after giving effect the merger,
consolidation or sale;
4. the rating agency condition will have been satisfied;
5. the issuer has received an opinion of counsel to the effect
that this consolidation or merger or sale would have no
material adverse tax consequence to the issuer or any
transition bondholder, the consolidation or merger or sale
complies with the indenture and all conditions precedent
therein provided relating to the consolidation or merger or
sale and will result in the trustee maintaining a continuing
valid first priority security interest in the collateral;
6. none of the bondable transition property, the BPU financing
order or the seller's, the servicer's or the issuer's rights
under the Competition Act or the BPU financing order are
impaired thereby; and
7. any action that is necessary to maintain the lien and
security interest created by the indenture will have been
taken.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the
lien and security interest, and priority thereof, of the indenture. The
issuer will not permit the validity of the indenture to be impaired, the
lien to be amended, subordinated or terminated or discharged, or any person
to be released from any covenants or obligations except as expressly
permitted by the indenture. The issuer will also not permit any lien,
charge, claim, security interest, mortgage or other encumbrance, other than
the lien and security interest created by the indenture, to be created on
or extend to or otherwise arise upon or burden the collateral or any part
thereof or any interest therein or the proceeds thereof. Finally, the
issuer will not permit the lien of the indenture not to constitute a
continuing valid first priority security interest in the collateral.
The issuer may not, among other things:
1. except as expressly permitted by the indenture dispose of
any of the collateral unless directed to do so by the
trustee in accordance with the indenture; or
2. claim any credit on, or make any deduction from the
principal or premium, if any, or interest payable in respect
of, the transition bonds, other than amounts properly
withheld under the Code, or assert any claim against any
present or former transition bondholder because of the
payment of taxes levied or assessed upon the issuer.
The issuer may not engage in any business other than purchasing and
owning the bondable transition property, issuing transition bonds from time
to time, pledging its interest in the collateral to the trustee to secure
the transition bonds, and performing activities that are
convenient to accomplish the foregoing.
The Issuer May Not Engage in Any Other Financial Transactions. The
issuer may not issue, incur, assume or guarantee any indebtedness except
for the transition bonds. Also, the issuer may not guarantee or otherwise
become contingently liable in connection with the obligations, stocks or
dividends of, or own, purchase, repurchase or acquire, or agree
contingently to acquire any stock, obligations, assets or securities of, or
any other interest in, or make any capital contribution to, any other
person, other than the eligible investments. The issuer may not, except as
contemplated by the indenture and related documents, including the limited
liability company agreement, make any loan or advance or credit to any
person. The issuer will not make any expenditure for capital assets or
lease any capital asset other than bondable transition property purchased
from the seller pursuant to, and in accordance with, the sale agreement.
The issuer may not make any payments, distributions or dividends to any
member of the issuer in respect of its membership interest in the issuer,
other than any amount released to the issuer by the trustee in accordance
with the indenture and except as otherwise provided in the indenture.
The servicer will deliver to the trustee the Annual Accountant's
Report, compliance certificates and monthly reports regarding distributions
and other statements required by the servicing agreement. See "THE
SERVICING AGREEMENT" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any transition bondholder may, by written request to the trustee,
obtain access to the list of all transition bondholders maintained by the
trustee for the purpose of communicating with other transition bondholders
with respect to their rights under the indenture or the transition bonds.
The trustee may elect not to afford a requesting transition bondholder
access to the list of transition bondholders if it agrees to mail the
desired communication or proxy, on behalf and at the expense of the
requesting transition bondholder, to all transition bondholders.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a
written statement as to the fulfillment of its obligations under the
indenture. In addition, the issuer will furnish to the trustee an opinion
of counsel concerning filings made by the issuer on an annual basis and
before the effectiveness of any amendment to the sale agreement or the
servicing agreement.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL TRANSITION BONDHOLDERS
If required by the Trust Indenture Act, the trustee will be
required to mail each year to all transition bondholders a brief report.
This report must state, among other items:
1. the trustee's eligibility and qualification to continue as
the trustee under the indenture,
2. any amounts advanced by it under the indenture,
3. the amount, interest rate and maturity date of specific
indebtedness owing by the issuer to the trustee in the
trustee's individual capacity,
4. the property and funds physically held by the trustee,
5. any additional issue of a series of transition bonds not
previously reported and
6. any action taken by it that materially affects the
transition bonds of any series and that has not been
previously reported.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition
bonds of any series upon the delivery to the trustee of funds sufficient
for the payment in full of all of the transition bonds of that series with
the trustee. In addition, the issuer must deliver to the trustee the
officer's certificate and opinion of counsel specified in the indenture.
The deposited funds will be segregated and held apart solely for paying the
transition bonds, and the transition bonds will not be entitled to any
amounts on deposit in the collection account other than amounts on deposit
in the defeasance subaccount for the transition bonds.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
The issuer may, at any time, terminate:
1. all of its obligations under the indenture with respect to
the transition bonds of any series; or
2. its obligations to comply with some of the covenants in the
indenture, including all of the covenants described under
"COVENANTS OF THE ISSUER" above.
The legal defeasance option is the right of the issuer to terminate
at any time its obligations under the indenture with respect to the
transition bonds of any series. The covenant defeasance option is the right
of the issuer at any time to terminate its obligations to comply with the
covenants in the indenture. The issuer may exercise the legal defeasance
option with respect to any series of transition bonds notwithstanding its
prior exercise of the covenant defeasance option with respect to that
series. If the issuer exercises the legal defeasance option with respect to
any series, that series will be entitled to payment only from the funds or
other obligations set aside under the indenture for payment thereof on the
expected final payment date or redemption date therefor as described below.
That series will not be subject to payment through redemption or
acceleration prior to the expected final payment date or redemption date,
as applicable. If the issuer exercises the covenant defeasance option with
respect to any series, the final payment of the transition bonds of that
series may not be accelerated because of an event of default relating to a
default in the observance or performance of any covenant or agreement of
the issuer made in the indenture.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
1. the issuer irrevocably deposits or causes to be deposited in
trust with the trustee cash or U.S. Government Obligations
for the payment of principal of and premium, if any, and
interest on that series to the expected final payment date
or redemption date therefor, as applicable, the deposit to
be made in the defeasance subaccount for that series;
2. the issuer delivers to the trustee a certificate from a
nationally recognized firm of independent accountants
expressing its opinion that the payments of principal and
interest on the U.S. Government Obligations when due and
without reinvestment plus any cash deposited in the
defeasance subaccount will provide cash at times and in
sufficient amounts to pay in respect of the transition bonds
of that series:
a. principal in accordance with the expected
amortization schedule therefor, and/or if that series
is to be redeemed, the redemption price on the
redemption date therefor, and
b. interest when due;
3. in the case of the legal defeasance option, 95 days pass
after the deposit is made and during the 95-day period no
default relating to events of bankruptcy, insolvency,
receivership or liquidation of the issuer occurs and is
continuing at the end of the period;
4. no default has occurred and is continuing on the day of this
deposit and after giving effect thereto;
5. in the case of the legal defeasance option, the issuer
delivers to the trustee an opinion of counsel stating that:
a. the issuer has received from, or there has been
published by, the Internal Revenue Service a ruling;
or
b. since the date of execution of the indenture, there
has been a change in the applicable federal income
tax law; and
in either case confirming that the holders of the transition
bonds of that series will not recognize income, gain or loss
for federal income tax purposes as a result of the exercise
of the legal defeasance option and will be subject to
federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if the
legal defeasance had not occurred;
6. in the case of the covenant defeasance option, the issuer
delivers to the trustee an opinion of counsel to the effect
that the holders of the transition bonds of that series will
not recognize income, gain or loss for federal income tax
purposes as a result of the exercise of the covenant
defeasance option and will be subject to federal income tax
on the same amounts, in the same manner and at the same
times as would have been the case if the covenant defeasance
had not occurred; and
7. the issuer delivers to the trustee a certificate of an
authorized officer of the issuer and an opinion of counsel,
each stating that all conditions precedent to the
satisfaction and discharge of the transition bonds of that
series have been complied with as required by the indenture.
There will be no other conditions to the exercise by the issuer of
its legal defeasance option or its covenant defeasance option.
THE TRUSTEE
[ ] will be the trustee under the indenture. The trustee may
resign at any time upon 30 days notice by so notifying the issuer. The
holders of a majority in principal amount of the transition bonds of all
series then outstanding may remove the trustee by so notifying the trustee
and may appoint a successor trustee. The issuer will remove the trustee if
the trustee ceases to be eligible to continue in this capacity under the
indenture, the trustee becomes insolvent, a receiver or other public
officer takes charge of the trustee or its property or the trustee becomes
incapable of acting. If the trustee resigns or is removed or a vacancy
exists in the office of trustee for any reason, the issuer will be
obligated promptly to appoint a successor trustee eligible under the
indenture. No resignation or removal of the trustee will become effective
until acceptance of the appointment by a successor trustee. The trustee
shall at all times satisfy the requirements of the Trust Indenture Act, as
amended, and have a combined capital and surplus of at least $50 million
and a long term debt rating of "Baa3" or better by Moody's. If the trustee
consolidates with, merges or converts into, or transfers all or
substantially all of its corporate trust business or assets to, another
entity, the resulting, surviving or transferee entity shall without any
further action be the successor trustee.
HOW A BANKRUPTCY OF THE ISSUER, SELLER OR SERVICER MAY AFFECT
YOUR INVESTMENT
Sale or Financing. PSE&G will represent and warrant in the sale
agreement that the transfer of the bondable transition property in
accordance with that agreement constitutes a valid sale and assignment by
PSE&G to the issuer of the bondable transition property. PSE&G will also
represent and warrant in the sale agreement, and it is a condition of
closing for the sale of bondable transition property, that it will take the
appropriate actions under the Competition Act and the New Jersey Uniform
Commercial Code, including filing a financing statement, to perfect this
sale. The Competition Act provides that a transfer of bondable transition
property by an electric utility to an assignee which the parties have in
the governing documentation expressly stated to be a sale or other absolute
transfer, in a transaction approved in a financing order, shall be treated
as an absolute transfer of all the transferor's right, title and interest,
as in a sale or other absolute transfer, and not as a pledge or other
financing, of the relevant bondable transition property. PSE&G and the
issuer will treat the transactions as a sale under applicable law, although
for financial reporting and federal and state income and franchise tax
purposes the transition bonds will be treated as a financing and not a
sale. See "THE COMPETITION ACT--PSE&G AND OTHER UTILITIES MAY SECURITIZE
STRANDED COSTS" in this prospectus. In the event of a bankruptcy of PSE&G,
if a party in interest in the bankruptcy were to take the position that the
sale of the bondable transition property to the issuer was a financing
transaction and not a "sale or other absolute transfer," there can be no
assurance that a court would not adopt this position. Even if a court did
not ultimately recharacterize the transaction as a financing transaction,
the mere commencement of a seller bankruptcy and the attendant possible
uncertainty surrounding the treatment of the transaction could result in
delays in payments on the transition bonds.
In order to mitigate the impact of the possible recharacterization
of a sale of bondable transition property as a financing transaction, the
Competition Act and the Uniform Commercial Code provide that if a financing
statement is filed and the transfer is thereafter held to constitute a
financing transaction and not a sale or other absolute transfer, this
notice will be deemed to constitute a filing with respect to a security
interest. The sale agreement requires that financing statements under the
Uniform Commercial Code executed by the issuer be filed in the appropriate
offices in New Jersey. The Competition Act further provides that any
relevant filing in respect of transition bonds takes precedence over any
other filings. As a result of these filings, the issuer would be a secured
creditor of PSE&G and entitled to recover against the security, which is
the collateral. None of this, however, mitigates the risk of payment delays
and other adverse effects caused by a seller bankruptcy. Further, if, for
any reason, a bondable transition property notice is not filed under the
Competition Act or the issuer fails to otherwise perfect its interest in
the bondable transition property, and the transfer is thereafter deemed not
to constitute a sale or other absolute transfer, the issuer would be an
unsecured creditor of PSE&G.
Consolidation of the Issuer and PSE&G. If PSE&G were to become a
debtor in a bankruptcy case, a party in interest in the bankruptcy may
attempt to substantively consolidate the assets and liabilities of the
issuer and PSE&G. PSE&G and the issuer have taken steps to attempt to
minimize this risk (as discussed in "PSE&G TRANSITION FUNDING LLC, THE
ISSUER" in this prospectus). However, no assurance can be given that if
PSE&G or an affiliate of PSE&G other than the issuer were to become a
debtor in a bankruptcy case, a court would not order that the assets and
liabilities of the issuer be consolidated with those of PSE&G or its
affiliate.
Claims in Bankruptcy; Challenge to Indemnity Claims. If PSE&G were
to become a debtor in a bankruptcy case, claims including indemnity claims
by the issuer against PSE&G under the sale agreement and the other
documents executed in connection therewith would be unsecured claims and
would be subject to being discharged in the bankruptcy case. In addition, a
party in interest in the bankruptcy may request that the Bankruptcy Court
estimate any contingent claims of the issuer against PSE&G. That party may
then take the position that these claims should be estimated at zero or at
a low amount because the contingency giving rise to these claims is
unlikely to occur. If PSE&G were to become a debtor in a bankruptcy case
and the indemnity provisions of the sale agreement were triggered, a party
in interest in the bankruptcy might challenge the enforceability of the
indemnity provisions. If a court were to hold that the indemnity provisions
were unenforceable, the issuer would be left with a claim for actual
damages against PSE&G based on breach of contract principles. The actual
amount of these damages would be subject to estimation and/or calculation
by the court.
No assurances can be given as to the result of any of the
above-described actions or claims. Furthermore, no assurance can be given
as to what percentage of their claims, if any, unsecured creditors would
receive in any bankruptcy proceeding involving PSE&G.
Status of Bondable Transition Property as Current Property. PSE&G
has represented in the sale agreement, and the Competition Act provides,
that the bondable transition property constitutes an existing property
right on the date that the BPU financing order became effective and that it
thereafter exists continuously for all purposes. Nevertheless, no assurance
can be given that in the event of a bankruptcy of PSE&G a party in interest
in the bankruptcy would not attempt to take the position that the bondable
transition property comes into existence only as customers use electricity.
If a court were to adopt this position, no assurance can be given that a
security interest in favor of the transition bondholders would attach to
transition bond charge in respect of electricity consumed after the
commencement of the bankruptcy case. If it were determined that the
bondable transition property had not been sold to the issuer, and the
security interest in favor of the transition bondholders did not attach to
transition bond charge in respect of electricity consumed after the
commencement of the bankruptcy case, then the issuer would be an unsecured
creditor of PSE&G. If so, there would be delays or reductions in payments
on the transition bonds. Whether or not a court determined that the
bondable transition property had been sold to the issuer, no assurances can
be given that a court would not rule that any transition bond charge
relating to electricity consumed after the commencement of the bankruptcy
cannot be transferred to the issuer or the trustee.
In addition, in the event of a bankruptcy of PSE&G, a party in
interest in the bankruptcy could assert that the issuer should pay a
portion of PSE&G's costs associated with the generation, transmission or
distribution of the electricity, consumption of which gave rise to the
transition bond charge collections used to make payments on the transition
bonds.
Regardless of whether PSE&G is the debtor in a bankruptcy case, if
a court were to accept the argument that the bondable transition property
comes into existence only as customers use electricity, a tax or government
lien or other nonconsensual lien on property of PSE&G arising before the
bondable transition property came into existence could have priority over
the issuer's interest in the bondable transition property. Adjustments to
the transition bond charge may be available to mitigate this exposure,
although there may be delays in implementing these Adjustments.
Enforcement of Rights by Trustee. Upon an event of default under
the indenture, the Competition Act permits the trustee to enforce the
security interest in the bondable transition property in accordance with
the terms of the indenture. In this capacity, the trustee is permitted to
request the BPU to order the sequestration and payment to transition
bondholders of all revenues arising with respect to the bondable transition
property. The Competition Act provides that this order will remain in full
force and effect notwithstanding bankruptcy, reorganization, or other
insolvency proceedings with respect to the utility or its assignee. There
can be no assurance, however, that the BPU would issue this order after a
PSE&G bankruptcy in light of the automatic stay provisions of Section 362
of the United States Bankruptcy Code or, alternatively, that a bankruptcy
court would lift the automatic stay to permit this action by the BPU. In
that event, the trustee may under the indenture seek an order from the
bankruptcy court lifting the automatic stay with respect to this action by
the BPU, and an order requiring an accounting and segregation of the
revenues arising from the bondable transition property. There can be no
assurance that a court would grant either order.
Bankruptcy of Servicer. The servicer is entitled to commingle
transition bond charge collections with its own funds until each remittance
date. The Competition Act provides that the relative priority of a lien
created under the Competition Act is not defeated or adversely affected by
the commingling of transition bond charge collections arising with respect
to the bondable transition property with funds of the electric utility.
However, in the event of a bankruptcy of the servicer, a party in interest
in the bankruptcy might assert, and a court might rule, that transition
bond charge collections commingled by the servicer with its own funds and
held by the servicer as of the date of bankruptcy were property of the
servicer as of that date and are therefore property of the servicer's
bankruptcy estate, rather than property of the issuer. If the court so
rules, then the court would likely rule that the trustee has only a general
unsecured claim against the servicer for the amount of commingled
transition bond charge collections held as of that date and could not
recover the commingled transition bond charge collections held as of the
date of bankruptcy.
However the court rules on the ownership of the commingled
transition bond charge collections, the automatic stay arising upon the
bankruptcy of the servicer could delay the trustee from receiving the
commingled transition bond charge collections held by the servicer as of
the date of the bankruptcy until the court grants relief from the stay. A
court ruling on any request for relief from the stay could be delayed
pending the court's resolution of whether the commingled transition bond
charge collections are property of the issuer or of the servicer, including
resolution of any tracing of proceeds issues.
The servicing agreement provides that the trustee, as assignee of
the issuer, together with the other persons specified therein, may vote to
appoint a successor servicer that satisfies the rating agency condition.
The servicing agreement also provides that the trustee, together with the
other persons specified therein, may petition the BPU or a court of
competent jurisdiction to appoint a successor servicer that meets this
criterion. However, the automatic stay might delay a successor servicer's
replacement of the servicer. Even if a successor servicer may be appointed
and may replace the servicer, a successor may be difficult to obtain and
may not be capable of performing all of the duties that PSE&G as servicer
was capable of performing.
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS
INCOME TAX STATUS OF THE TRANSITION BONDS
The issuer and PSE&G have received a private letter ruling from the
Internal Revenue Service, referred to as the IRS, to the effect that the
transition bonds will be classified as debt obligations of PSE&G. Based on
that private letter ruling and the assumptions contained therein, including
a representation by PSE&G that it will not make, or allow there to be made,
any election to the contrary, Skadden, Arps, Slate, Meagher & Flom LLP,
special federal income tax counsel to PSE&G and the issuer, will render its
opinion that the issuer will not be subject to United States federal income
tax as an entity separate from PSE&G.
GENERAL
The following is a summary of the material United States federal
income tax consequences of the purchase, ownership and disposition of the
transition bonds applicable to an initial purchaser of transition bonds
that, for U.S. federal income tax purposes, is a Non-U.S. Holder as defined
below. This summary has been prepared by Skadden, Arps, Slate, Meagher &
Flom, special federal income tax counsel to PSE&G and the issuer, which is
referred to in this prospectus as the special tax counsel. Special tax
counsel is of the opinion that its summary is correct in all material
respects. Special tax counsel will render no other opinions to the issuer
with respect to the transition bonds. This summary does not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an
investor's tax adviser. This summary also does not address the consequences
to holders of the transition bonds under state, local or foreign tax laws.
This summary is based upon current provisions of the Code, Treasury
Regulations thereunder, current administrative rulings, judicial decisions
and other applicable authorities in effect as of the date hereof, all of
which are subject to change, possibly with retroactive effect. Legislative,
judicial or administrative changes may occur, perhaps with retroactive
effect, which could affect the accuracy of the statements and conclusions
set forth herein as well as the tax consequences to holders of the
transition bonds.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES,
AS WELL AS THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
As used herein, a U.S. Holder of a transition bond means an
investor that is a U.S. Person and a Non-U.S. Holder of a transition bond
means an investor that is not a U.S. Person. For purposes of this
discussion, a U.S. Person means:
1. an individual, who is a citizen or resident of the United
States for U.S. federal income tax purposes,
2. a corporation, partnership or other entity (treated as a
corporation or a partnership for federal income tax
purposes) created or organized in or under the laws of the
United States, or any state or the District of Columbia,
(other than a partnership that is not treated as a U.S.
person under any applicable Treasury Regulations);
3. an estate, the net income of which is subject to United
States federal income taxation regardless of its source, or
4. a trust, if a court within the United States is able to
exercise primary supervision over the administration of each
trust and one or more United States persons have the
authority to control all substantial decisions of such
trust. Certain trusts in existence on or before August 20,
1996, that were treated as U.S. Persons under the law in
effect on such date that fail to quality as U.S. Persons
under current law, may elect to continue to be treated as
U.S. Persons to the extent prescribed in the Treasury
Regulations.
TAXATION OF NON-U.S. HOLDERS
Payments of interest income received by a Non-U.S. Holder generally
will not be subject to United States federal withholding tax, assuming that
the interest income is not effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States and provided that the
Non-U.S. Holder complies with the requirements listed below.
Withholding Taxation on Interest Received before 2001. Payments of
interest income on the transition bonds received by a Non-U.S. Holder that
does not hold its transition bonds in connection with the conduct of a
trade or business in the United States on or prior to December 31, 2000,
will not be subject to United States federal withholding tax, or to backup
withholding and information reporting, provided that:
1. a Non-U.S. Holder does not actually or constructively own
10% or more of the total combined voting power of all
classes of stock of PSE&G entitled to vote,
2. a Non-U.S. Holder is not a controlled foreign corporation
that is related to PSE&G through stock ownership, and
3. the issuer or the trustee receive:
a. From the Non-U.S. Holder, a properly completed Form
W-8, or substitute Form W-8, signed under penalties
of perjury, which provides its name and address and
certifies that it is a Foreign Person or
b. from a security clearing organization, bank or other
financial institution that holds the transition bonds
in the ordinary course of its trade or business,
which is referred to as a Financial Institution, on
behalf of a Non-U.S. Holder, certification signed
under penalties of perjury, that this Form W-8, or
substitute Form W-8 has been received by it, or by
another Financial Institution, from the Non-U.S.
Holder, and a copy of the Form W-8, or substitute
Form W-8, is furnished to the issuer or to the
trustee.
Withholding Taxation on Interest Received After December 31, 2000.
Payments of interest income on the transition bonds received by a Non-U.S.
Holder that does not hold its Transition Bonds in connection with the
conduct of a trade or business in the United States after December 31,
2000, will not be subject to United States federal withholding tax, or to
backup withholding and information reporting, provided that requirements 1
and 2 of the preceding paragraph are satisfied and, in general, PSE&G or
its paying agent must receive:
1. from a Non-U.S. Holder appropriate documentation to treat
the payment as made to a foreign beneficial owner under
Treasury regulations issued under Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a
foreign partnership and the foreign partnership has received
appropriate documentation to treat the payment as made to a
foreign beneficial owner in accordance with these Treasury
regulations;
3. a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary
withholding responsibility under these Treasury regulations
and the qualified intermediary has received appropriate
documentation from a foreign beneficial owner in accordance
with its agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized
representative of a Financial Institution, stating that the
Financial Institution has received from the beneficial owner
a withholding certificate described in these Treasury
regulations or that it has received a similar statement from
another Financial Institution acting on behalf of the
foreign beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish a United States taxpayer identification number to PSE&G or its
paying agent in order to claim any of the foregoing exemptions from United
States withholding tax on payments of interest. Interest paid to a Non-U.S.
Holder will be subject to a United States withholding tax of 30% upon the
actual payment of interest income, except as described above and except
where an applicable tax treaty provides for the reduction or elimination of
this withholding tax. A Non-U.S. Holder generally will be taxable in the
same manner as a United States corporation or resident with respect to
interest income if the income is effectively connected with the Non-U.S.
Holder's conduct of a trade or business in the United States. Effectively
connected income received by a Non-U.S. Holder that is a corporation may in
some circumstances be subject to an additional "branch profits tax" at a
30% rate, or if applicable, a lower rate provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be
subject to United States federal income or withholding tax on gain realized
on the sale or exchange of transition bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more during the taxable year
and this gain is from United States sources or
2. the gain is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States
and other requirements are satisfied.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of
31% may apply to payments made in respect of the bonds to registered owners
who are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number)
in the required manner. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the bonds to a U.S. Holder must be
reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. Compliance with the identification procedures
described in the preceding section would establish an exemption from backup
withholding for those Non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a bond to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i)
the broker determines that the seller is a corporation or other exempt
recipient or (ii) the seller provides, in the required manner, certain
identifying information and, in the case of a Non-U.S. Holder, certifies
that such seller is a Non-U.S. Holder (and certain other conditions are
met). Such a sale must also be reported by the broker to the IRS, unless
either (i) the broker determines that the seller is an exempt recipient or
(ii) the seller certifies its Non-U.S. status (and certain other conditions
are met). Certification of the registered owner's Non-U.S. status would be
made normally on an IRS Form W-8 under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit
against such beneficial owner's United States federal income tax provided
the required information is furnished to the IRS.
MATERIAL STATE OF NEW JERSEY TAX MATTERS
In the opinion of [ ], Special New Jersey tax counsel
to PSE&G and the issuer, interest from transition bonds received by a
person who is not otherwise subject to corporate or personal income tax in
the State of New Jersey will not be subject to these taxes. Neither the
State of New Jersey nor any of its political subdivisions presently impose
intangible personal property taxes and therefore New Jersey residents will
not be subject to these taxes.
ERISA CONSIDERATIONS
ERISA, and Section 4975 of the Code impose restrictions on:
1. employee benefit plans (as defined in Section 3(3) of ERISA)
that are subject to Title I of ERISA;
2. plans (as defined in Section 4975(e)(1) of the Code) that
are subject to Section 4975 of the Code, including
individual retirement accounts or Keogh plans;
3. any entities whose underlying assets include plan assets by
reason of a plan's investment in these entities, each of the
entities described in 1, 2 and 3, being referred to as a
Plan; and
4. persons who have specified relationships to Plans which are
"parties in interest" under ERISA and "disqualified persons"
under the Code which, collectively are referred to as
Parties in Interest.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86
(1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account, such as through the
purchase of an annuity contract. Thus, this insurance company might be
treated as a Party in Interest with respect to a Plan by virtue of this
investment. ERISA also imposes specific duties on persons who are
fiduciaries of Plans subject to ERISA, and ERISA and Section 4975 of the
Code prohibit specified transactions between a Plan and Parties in Interest
with respect to the Plan. Violations of these rules may result in the
imposition of excise taxes and other penalties and liabilities under ERISA
and Section 4975 of the Code.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE TRANSITION BONDS
The Plan Asset Regulation is a regulation issued by the United
States Department of Labor which states that if a Plan makes an "equity"
investment in a corporation, partnership, trust or other specified
entities, the underlying assets and properties of the entity will be deemed
for purposes of ERISA and Section 4975 of the Code to be assets of the
investing Plan unless those exceptions set forth in the regulation apply.
Although there is little statutory or regulatory guidance on this subject,
and there can be no assurances in this regard, it appears that the
transition bonds should not be treated as an equity interest for purposes
of the Plan Asset Regulation. Accordingly, the assets of the Borrower
should not be treated as the assets of Plans investing in the transition
bonds.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment
of the transition bonds as equity interests under the Plan Asset
Regulation, PSE&G and/or its affiliates, as a provider of services to
Plans, may be deemed to be Parties in Interest with respect to many Plans.
The purchase and holding of transition bonds by or on behalf of one or more
of these Plans could result in a prohibited transaction within the meaning
of Section 406 or 407 of ERISA or Section 4975 of the Code. However, the
purchase and holding of transition bonds may be subject to one or more
statutory or administrative exemptions from the prohibited transaction
rules of ERISA and Section 4975 of the Code.
Examples of Prohibited Transaction Class Exemptions. Potentially
applicable prohibited transaction class exemptions, which are referred to
as PTCE's, include the following:
1. PTCE 90-1, which exempts specific transactions involving
insurance company pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving
insurance company general accounts;
3. PTCE 91-38, which exempts specific transactions involving
bank collective investment funds;
4. PTCE 84-14, which exempts specific transactions effected on
behalf of a Plan by a "qualified professional asset manager"
as that term is defined in ERISA, and which is referred to
as a QPAM; or
5. PTCE 96-23, which exempts specific transactions effected on
behalf of a Plan by specific "in-house" asset managers.
It should be noted, however, that even if the conditions specified in one
or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Conditions That Would Allow the QPAM Exemption to Apply. Plan
fiduciaries intending to rely upon the QPAM exemption should consider the
following. As noted above, although the issuer believes that the transition
bonds should not constitute "equity interests" for purposes of the Plan
Asset Regulation, it is nonetheless possible that any class or series of
transition bonds could be treated as "equity interests" for purposes of the
Plan Asset Regulation, in which case the assets of the issuer would be
treated as the assets of any Plan purchasing that class or series unless
another exception were applicable. In this event, transition bond charge
collections would be deemed, for purposes of the prohibited transaction
rules, to flow indirectly from customers to Plans that own that class or
series of transition bonds. Thus, if one or more customers were Parties in
Interest with respect to a Plan that owned that class or series of
transition bonds, such holding could be deemed to constitute a prohibited
transfer of property between a Plan and any Party in Interest with respect
to the Plan. The QPAM exemption requires, among other things, that at the
time of the proposed transaction, the party in interest, or its affiliate,
does not have the authority to appoint or terminate the QPAM as a manager
of any of the Plan's assets. This means, however, that if a Party in
Interest with respect to a Plan that holds such class or series, is a
customer that has the authority to appoint or terminate the QPAM as a
manager of the Plan's assets (for example, the Plan's sponsor, a director
of the Plan sponsor), the holding of that class or series of transition
bonds by the Plan could be deemed to constitute a prohibited transaction to
which the QPAM exemption does not apply. Accordingly, fiduciaries intending
to rely upon the QPAM exemption should carefully discuss the effectiveness
of the QPAM exemption with their legal advisors before purchasing any class
or series of transition bonds.
PRIOR TO MAKING AN INVESTMENT IN THE TRANSITION BONDS OF ANY
SERIES, A PLAN INVESTOR MUST DETERMINE WHETHER, AND EACH FIDUCIARY CAUSING
THE TRANSITION BONDS TO BE PURCHASED BY, ON BEHALF OF OR USING PLAN ASSETS
OF A PLAN THAT IS SUBJECT TO THE PROHIBITED TRANSACTION RULES OF ERISA OR
SECTION 4975 OF THE CODE, INCLUDING WITHOUT LIMITATION AN INSURANCE COMPANY
GENERAL ACCOUNT, SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT, AN
EXEMPTION FROM THE PROHIBITED TRANSACTION RULES APPLIES, SO THAT THE USE OF
PLAN ASSETS OF THE PLAN TO PURCHASE AND HOLD THE TRANSITION BONDS DOES NOT
AND WILL NOT CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT PROHIBITED
TRANSACTION IN VIOLATION OF SECTION 406 OR 407 OF ERISA OR SECTION 4975 OF
THE CODE.
SPECIAL CONSIDERATIONS APPLICABLE TO INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of
1996 added new Section 401(c) of ERISA relating to the status of the assets
of insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the Department of Labor was required to
issue the General Account Regulations with respect to insurance policies
issued on or before December 31, 1998 that are supported by an insurer's
general account. The General Account Regulations are to provide guidance on
which assets held by the insurer constitute "plan assets" for purposes of
the fiduciary responsibility provisions of ERISA and Section 4975 of the
Code. Section 401(c) also provides that until the date that is 18 months
after the General Account Regulations become final, no liability under the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 may result on the basis of a claim that the assets of the
general account of an insurance company constitute the plan assets of any
Plan. This provision does not apply in cases of avoidance of the General
Account Regulations or actions brought by the Secretary of Labor relating
to particular breaches of fiduciary duties that also constitute breaches of
state or federal criminal law. The plan asset status of insurance company
separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any
Plan invested in a separate account.
Department Of Labor Proposed Regulations. As of the date hereof,
the Department of Labor has issued proposed regulations under Section
401(c). If the General Account Regulations are adopted substantially in the
form in which proposed, the General Account Regulations may not exempt the
assets of insurance company general accounts from treatment as "plan
assets" after December 31, 1998. The proposed regulations should not,
however, adversely affect the applicability of PTCE 95-60 to purchases of
transition bonds by insurance company general accounts.
GENERAL INVESTMENT CONSIDERATIONS FOR PROSPECTIVE PLAN INVESTORS IN THE
TRANSITION BONDS
Prior to making an investment in the transition bonds, prospective
Plan investors should consult with their legal advisors concerning the
impact of ERISA and the Code and the potential consequences of this
investment with respect to their specific circumstances. Moreover, each
Plan fiduciary should take into account, among other considerations,
1. whether the fiduciary has the authority to make the
investment;
2. whether the investment constitutes a direct or indirect
transaction with a Party in Interest;
3. the composition of the Plan's portfolio with respect to
diversification by type of asset;
4. the Plan's funding objectives;
5. the tax effects of the investment; and
6. whether under the general fiduciary standards of investment
prudence and diversification an investment in the transition
bonds is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
Governmental plans and some church plans are generally not subject
to the fiduciary responsibility provisions of ERISA or the provisions of
Section 4975 of the Code. However, these plans may be subject to
substantially similar rules under state or other federal law, and may also
be subject to the prohibited transaction rules of Section 503 of the Code.
The sale of transition bonds to a Plan shall not be deemed a
representation by PSE&G or the underwriters that this investment meets all
relevant legal requirements with respect to Plans
generally or any particular Plan.
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public
reoffering by the underwriters. The transition bonds may also be sold to or
through any other underwriting arrangement as may be specified in the
related prospectus supplement or may be offered or placed either directly
or through agents. The issuer and the trustee intend that transition bonds
will be offered through various methods from time to time. The issuer also
intends that offerings may be made concurrently through more than one of
these methods or that an offering of a particular series of transition
bonds may be made through a combination of these methods.
The distribution of transition bonds may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The transition bonds may be offered through one or more different
methods, including offerings through underwriters. It is not anticipated
that any of the transition bonds will be listed on any securities exchange.
There can be no assurance that a secondary market for any series of
transition bonds will develop or, if one does develop, that it will
continue.
Compensation to Underwriters. In connection with the sale of the
transition bonds, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions. Underwriters may sell
transition bonds to particular dealers at prices less a concession.
Underwriters may allow, and these dealers may reallow, a concession to
other dealers. Underwriters, dealers and agents that participate in the
distribution of the transition bonds of a series may be deemed to be
underwriters. Any discounts or commissions received by the underwriters
from the issuer and any profit on the resale of the transition bonds by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. These underwriters or agents will be identified, and any
compensation received from the issuer will be described, in the related
prospectus supplement.
Other Distribution Issues. Under agreements which may be entered
into by PSE&G, the issuer and the trustee, underwriters and agents who
participate in the distribution of the transition bonds may be entitled to
indemnification by PSE&G and the issuer against liabilities specified
therein, including under the Securities Act. The underwriters may, from
time to time, buy and sell the transition bonds, but there can be no
assurance that an active secondary market will develop and there is no
assurance that this market, if established will continue.
RATINGS FOR THE TRANSITION BONDS
It is a condition of any Underwriter's obligation to purchase the
transition bonds that each series or class receive the ratings indicated in
the related prospectus supplement.
Limitations of Security Ratings. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating agency. No
person is obligated to maintain the rating on any transition bonds, and,
accordingly, there can be no assurance that the ratings assigned to any
series or class of transition bonds upon initial issuance will not be
lowered or withdrawn by a rating agency at any time thereafter. If a rating
of any series or class of transition bonds is revised or withdrawn, the
liquidity of this class of transition bonds may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of
any particular rate of principal payments on the transition bonds other
than the payment in full of each series or class of transition bonds by the
applicable Termination Date for such series or class.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to the issuer and the issuance of the
transition bonds will be passed upon for the issuer by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York and for the Underwriters by
Brown & Wood LLP, San Francisco California. Some legal matters relating to
PSE&G will be passed upon for PSE&G by ____________, New Jersey. Some legal
matters relating to the federal tax consequences of the issuance of the
transition bonds will be passed upon for the issuer by Skadden, Arps,
Slate, Meagher & Flom LLP. Some legal matters relating to State of New
Jersey tax consequences of the issuance of the transition bonds will be
passed upon for the issuer by ______________. Some legal matters relating
to PSE&G Transition Funding LLC will be passed upon by ________________.
EXHIBIT A
GLOSSARY OF DEFINED TERMS
The following defined terms may be used in this prospectus and in any
accompanying prospectus supplement:
BPU means the State of New Jersey Board of Public Utilities.
CEDEL means Cedelbank, societe anonyme.
CEDEL CUSTOMERS means customers of Cedelbank, societe anonyme.
CODE means the Internal Revenue Code of 1986.
COMPETITION ACT means The New Jersey Electric Discount and Energy
Competition Act of 1999.
COOPERATIVE means Euroclear Clearance System S.C., a Belgian
cooperative corporation.
DEPOSITORIES means Citibank, N.A., as depository for CEDEL and
Morgan Guaranty Trust Company of New York as depository for
Euroclear.
DTC means the Depository Trust Company and its nominees.
EQUITY INTEREST means, pursuant to the Plan Asset Regulation, any
interest in an entity other than an instrument that is treated as
indebtedness under applicable law and which
has no substantial equity features.
ERISA means The Employee Retirement Income Security Act of 1974.
EUROCLEAR means the Euroclear System.
EUROCLEAR OPERATOR means the Morgan Guaranty Trust Company of New
York in its role as operator of Euroclear, which is based in its
Brussels, Belgium, office.
FITCH means Fitch IBCA, Inc.
GENERAL ACCOUNT REGULATIONS means final regulations, which are
required to be issued by the Department of Labor pursuant to
Section 401(c) of ERISA, with respect to insurance policies issued
on or before December 31, 1998 that are supported by an insurer's
general
account.
gWh means gigawatt-hours.
kWh means kilowatt-hours.
mWh means megawatt-hours.
MOODY'S means Moody's Investors Service Inc.
S&P means Standard and Poor's Ratings Services, a division of the
McGraw-Hill Companies.
TREASURY REGULATIONS means existing and proposed treasury
regulations promulgated under the Code.
TRUST INDENTURE ACT means the Trust Indenture Act of 1939.
U.S. GOVERNMENT OBLIGATIONS means direct obligations, or
certificates representing an ownership interest in those
obligations, of the United States of America, including any agency
or instrumentality thereof, for the payment of which the full faith
and credit of the United States of America is pledged and which are
not callable at the issuer's option.
INDEX TO FINANCIAL STATEMENTS OF PSE&G TRANSITION FUNDING LLC
Page
Report of Independent Accountants.......................................F-2
Statement of Net Assets Available for Issuer Activities.............F-3
Statement of Changes in Net Assets Available for Issuer
Activities.......................................................F-4
Notes to Financial Statements...........................................F-5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners
of PSE&G Transition Funding LLC
In our opinion, the accompanying statement of net assets available
for issuer activities of PSE&G Transition Funding LLC and related
statements of changes in net assets available for issuer activities
present, in all material respects, net asset available for issuer activity
of PSE&G Transition Funding LLC at , 1999 and the changes in its net assets
available for issuer activities for the period from (date of inception)
through (date) in conformity with generally accepted accounting principles.
These financial statements are the responsibility of PSE&G Transition
Funding LLC's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion
expressed above.
Deloitte & Touche
_________, 1999
_______________________
_________________, 1999
PSE&G Transition Funding LLC
Statement of Net Assets Available for Issuer Activities as of
________________, 1999
ASSETS
Cash $
Unamortized debt issuance costs $_______________
Total Assets $
Due to related party (Note ____) $_______________
Net Assets available for Issuer activities $
===============
See accompanying notes to financial statements.
PSE&G Transition Funding LLC
Statement of Changes in net assets available for Issuer activities for the
period from _________, 1999 (date of inception) to __________, 1999
Additions:
Contribution by Grantor $
Deductions:
Changes in Net Assets Available for Activities $
Net Assets Available for Activities at Inception ______, 1999 $_________
Net Assets Available for Activities at _______, 1999 $
=========
See accompanying notes to financial statements.
PSE&G Transition Funding LLC
Notes to Financial Statements
1. Nature of Operations
PSE&G Transition Funding LLC (the "Company"), a limited liability
company established by PSE&G under the laws of the State of Delaware, was
formed on [ ], 1999 pursuant to a limited liability company agreement of
PSE&G, as sole member of the Company. PSE&G is an operating electric and
gas utility and is a wholly owned subsidiary of Enterprise.
The Company was organized for the sole purpose of purchasing and
owning the bondable transition property (BTP), issuing transition bonds
(Bonds), pledging its interest in BTP and other collateral to the trustee
to collateralize the Bonds, and performing activities that are necessary,
suitable or convenient to accomplish these purposes. BTP represents the
irrevocable right of PSE&G, or its successor or assignee, to collect a
non-bypassable transition bond charge (TBC) from customers pursuant to
bondable stranded cost rate order (BPU financing order) issued July [ ],
1999 by the State of New Jersey Board of Public Utilities (BPU) in
accordance with the Electric Discount and Energy Competition Act enacted in
New Jersey in January 1999. The BPU financing order authorizes the TBC to
be sufficient to recover $2.525 billion aggregate principal amount of
Bonds, plus an amount sufficient to provide for any credit enhancement, to
fund any reserves and to pay interest, redemption premiums, if any,
servicing fees and other expenses relating to the Bonds. The Company's
organizational documents require it to operate in a manner so that it
should not be consolidated in the bankruptcy estate of PSE&G in the event
PSE&G becomes subject to a bankruptcy proceeding. Both PSE&G and the
Company will treat the transfer of BTP to the Company as a sale under
applicable law. The Bonds will be treated as debt obligations of the
Company.
For financial reporting and federal and State of New Jersey income
and franchise tax purposes, the transfer of BTP to the Company will be
treated as a financing arrangement and not as a sale. Furthermore, the
results of operations of the Company will be consolidated with
PSE&G for financial and income tax reporting purposes.
2. Significant Accounting Policies
BASIS OF PRESENTATION
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amount of revenues, expenses, assets, and liabilities and
disclosure of contingencies. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
UNAMORTIZED DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds
have been capitalized and will be amortized over the life of the Bonds
utilizing the effective interest method.
INCOME TAXES
The Company is a wholly owned subsidiary of PSE&G which has elected
not to be taxed as a corporation for federal income tax purposes. The
Company will be treated as a division of
PSE&G and will not be treated as a separate taxable entity.
3. The Bonds
The purpose of the Company is to issue Bonds pursuant to authority
granted by the BPU in the BPU financing order. The Company intends to issue
Bonds in series (Series) from time to time, the maturities and interest
rates of which will depend upon market conditions at the time of issuance.
The proceeds will be used to fund the purchase of BTP from PSE&G. The Bonds
will be collateralized by the BTP and other assets of the Company. Under
applicable law, the Bonds will not be an obligation of PSE&G or secured by
the assets of PSE&G. Also under applicable law, the Bonds will be recourse
to the Company and will be collateralized on a pro rata basis by the BTP
and the equity and assets of the Company. The source of repayment will be
the TBC authorized pursuant to a BPU financing order, which charges will be
collected from PSE&G customers by PSE&G, as servicer.
TBC collections will be deposited monthly by PSE&G with the
Company and used to pay the expenses of the Company, to pay debt service on
the Bonds and to fund credit enhancement for the Bonds. The Company will
also pledge the capital contributed by PSE&G to secure the debt service
requirements of the Bonds. The debt service requirements will include an
overcollateralization subaccount, a capital subaccount and a reserve
subaccount which will be available to bond holders. Any amounts
collateralizing the Bonds will be returned to the Company upon payment of
the Bonds.
4. Significant Agreements and Related Party Transactions
Under the servicing agreement to be entered into by the Company and
PSE&G concurrently with the issuance of the first Series of Bonds, PSE&G,
as servicer, will be required to manage and administer the BTP of the
Company and to collect the TBC on behalf of the Company. The Company will
pay an annual servicing fee equal to [$ ], which will be determined
when the Bonds are issued.
All debt issuance costs incurred to date have been or will be paid
by PSE&G and reimbursed by the Company upon issuance of the Bonds.
PART II
ITEM 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions.
Registration Fee................................................$ 278
Printing and Engraving Expenses.................................$ *
Trustee's Fees and Expenses.....................................$ *
Legal Fees and Expenses.........................................$ *
Blue Sky Fees and Expenses......................................$ *
Accountants' Fees and Expenses..................................$ *
Rating Agency Fees..............................................$ *
Miscellaneous Fees and Expenses.................................$ *
-----------
Total...........................................................$ *
===========
- -------------
* To be provided by amendment.
ITEM 15. Indemnification of Members and Mangers.
Section 18-108 of the Delaware limited liability Company Act
provides that, subject to specified standards and restrictions, if any, as
are set forth in the limited liability company agreement, a limited
liability company shall have the power to indemnify and hold harmless any
member or manager or other person from and against any and all claims and
demands whatsoever.
The limited liability company agreement (the "LLC Agreement") of
PSE&G Transition Funding LLC provides that, to the fullest extent permitted
by law, PSE&G Transition Funding LLC shall indemnify its members and
managers against any liability incurred in connection with any proceeding
in which any member or manager may be involved as a party or otherwise by
reason of the fact that the member or manager is or was serving in its
capacity as a member or manager, unless this liability is based on or
arises in connection with the member's or manager's own willful misconduct
or gross negligence, the failure to perform the obligations set forth in
the LLC Agreement, or taxes, fees or other charges on, based on or measured
by any fees, commissions or compensation received by the managers in
connection with any of the transactions contemplated by the LLC Agreement
and related agreements.
ITEM 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of PSE&G Transition Funding LLC.
4.2 Certificate of Formation of PSE&G Transition Funding LLC.
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, relating to
legality of the Transition Bonds.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with Respect to
Material Federal Tax Matters.*
8.2 Opinion of [ ] with respect to material State of New Jersey
tax matters*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of PSE&G to the New Jersey Board of Public Utilities,
dated June 8, 1999
10.4 Financing Order of the BPU issued July [ ], 1999.*
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its
opinion filed as Exhibits 5.1 and 8.1).*
23.1.2 Consent of [ ] (Included in its opinion filed as Exhibit 8.2).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of [ ], as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Recovery Order of the BPU issued July __, 1999.*
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.*
- -------------
* To be filed by amendment
ITEM 17. Undertakings
The undersigned Registrant on behalf of PSE&G Transition Funding
LLC (the "issuer") 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, as amended; (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) of the Securities Act of 1933, as amended, 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 in this information in the registration
statement; provided, however, that (a)(1)(i) and (a)(i)(ii) will not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, as amended, each relevant post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of these securities at
that time shall be deemed to be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
b. That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (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, as amended) with respect to the issuer 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 these 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, as amended, 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
this indemnification is against public policy as expressed in the Act and
is, theretofore, unenforceable. In the event that a claim for
indemnification against these liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by the 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 this indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of this issue.
d. That, for purposes of determining any liability under the
Securities Act of 1933, as amended, 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)(i) or (4) or 497(h) under the Securities Act of
1933, as amended, shall be deemed to be part of this registration statement
as of the time it was declared effective.
e. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, 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
these securities at that time shall be deemed to be the initial bona fide
offering thereof.
f. The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee
to act under subsection (a) of Section 310 of the Trust Indenture Act of
1939, as amended, in accordance with the rules and regulations prescribed
by the Commission under Section 305(b)(2) of the Trust Indenture Act of
1939, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and that the
security rating requirement of Form S-3 will be met by the time of sale,
and has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, State
of New Jersey, on July 23, 1999.
PSE&G Transition Funding LLC
By: /s/ Robert C. Murray
-------------------------------
Name: Robert C. Murray
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
July 23, 1999 /s/ Robert E. Busch
------------- --------------------------------
Date Name: Robert E. Busch
Title: Manager
July 23, 1999 /s/ Robert C. Murray
------------- --------------------------------
Date Name: Robert C. Murray
Title: Manager
July 23, 1999 /s/ R. Edwin Selover
------------- --------------------------------
Date Name: R. Edwin Selover
Title: Manager
INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of PSE&G Transition
Funding LLC.
4.2 Certificate of Formation of PSE&G Transition Funding LLC.
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
relating to legality of the Transition Bonds.*
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to material federal tax matters.*
8.2 Opinion of [ ] with respect to material State of
New Jersey tax matters*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of PSE&G to the New Jersey Board of Public
Utilities, dated June 8, 1999.
10.4 Financing Order of the BPU issued July [ ], 1999.*
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in its opinion filed as Exhibits 5.1 and 8.1).*
23.1.2 Consent of [ ] (included in its opinion filed as
Exhibit 8.2).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of [ ], as Trustee
under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Recovery Order of the BPU issued July [ ].*
99.2 Internal Revenue Service Private Letter Ruling pertaining
to Transition Bonds.*
- ---------------
* To be filed by amendment
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
WHERE TO FIND INFORMATION IN THESE DOCUMENTS..............................S-3
RISK FACTORS..............................................................S-4
THE SERIES 1999-__ TRANSITION BONDS.......................................S-4
Principal Payments................................................S-4
Interest Payments.................................................S-6
Optional Redemption...............................................S-6
CREDIT ENHANCEMENT........................................................S-6
Periodic Adjustment of the Transition Bond Charge.................S-6
Collection Account and Subaccounts................................S-7
THE TRANSITION BOND CHARGE................................................S-9
UNDERWRITING THE SERIES 1999-__ BONDS.....................................S-9
The Underwriters' Sales Price for the Transition Bonds............S-9
No Assurance as to Resale Price or Resale Liquidity
for the Transition Bonds......................................S-10
Various Types of Underwriter Transactions Which May
Affect the Price of the Transition Bonds......................S-10
RATINGS FOR THE SERIES 1999-__ BONDS.....................................S-11
PROSPECTUS..................................................................1
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS..............................1
SUMMARY OF TERMS............................................................2
RISK FACTORS...............................................................11
Judicial, Legislative or Regulatory Action That May
Adversely Affect Your Investment................................11
Servicing Risks....................................................14
Inability to Terminate Service to Certain Delinquent
Customers in Winter.............................................18
The Risks Associated With Potential Bankruptcy Proceedings.........18
Other Risks Associated With An Investment In The
Transition Bonds................................................21
FORWARD-LOOKING STATEMENTS.................................................22
PUBLIC SERVICE ELECTRIC AND GAS COMPANY....................................23
THE COMPETITION ACT........................................................23
Recovery of Stranded Costs is Allowed for PSE&G and Other
New Jersey Utilities............................................24
PSE&G and Other Utilities May Securitize Stranded Costs............24
PSE&G'S RESTRUCTURING......................................................27
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE.....................28
The BPU Financing Order............................................28
The BPU's Transition Bond Charge Adjustment Process................30
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY................31
PSE&G ............................................................31
Public Service Enterprise Group Incorporated.......................32
PSE&G's Customer Classes...........................................32
Credit Policy; Billing; Collections; Termination of Service........32
Loss and Delinquency Experience....................................34
How PSE&G Forecasts the Number of Customers and the Amount
of Electricity Usage.............................................36
PSE&G Maintains Limited Information on its Customer's
Creditworthiness.................................................37
PSE&G's Efforts to Deal With the Year 2000 Computer Issue..........38
PSE&G TRANSITION FUNDING LLC, THE ISSUER...................................40
HOW THE ISSUER WILL USE THE PROCEEDS OF THE TRANSITION BONDS...............42
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS........................42
THE TRANSITION BONDS.......................................................43
General Terms of the Transition Bonds .............................44
Payments of Interest and Principal on the Transition Bonds.........44
Redemption of the Transition Bonds.................................45
Credit Enhancement for the Transition Bonds........................46
Transition Bonds Will Be Issued in Book-Entry Form.................47
Certificated Transition Bonds......................................51
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION
BONDS...................................................................52
THE SALE AGREEMENT.........................................................53
PSE&G's Sale and Assignment of Bondable Transition
Property........................................................53
PSE&G's Representations and Warranties.............................53
PSE&G's Obligation to Indemnify the Issuer and the
Trustee and to Take Legal Action.................................58
Successors to PSE&G................................................59
THE SERVICING AGREEMENT....................................................60
PSE&G's Servicing Procedures.......................................60
The BPU's Transition Bond Charge Adjustment Process................62
PSE&G's Transition Bond Charge Collections.........................62
PSE&G's Compensation for Its Role as Servicer and Its
Release of Other Parties.........................................63
PSE&G's Duties as Servicer.........................................63
PSE&G's Representations and Warranties as Servicer.................64
PSE&G, as Servicer, Will Indemnify the Issuer and
Other Related Entities...........................................65
PSE&G, as Servicer, Will Provide Statements to the
Issuer and to the Trustee........................................65
PSE&G to Provide Compliance Reports Concerning the
Servicing Agreement..............................................66
Matters Regarding PSE&G as Servicer................................66
Events Constituting a Default by PSE&G in Its Role as
Servicer.........................................................68
The Trustee's Rights if PSE&G Defaults as Servicer.................68
The Obligations of a Servicer That Succeeds PSE&G..................69
THE INDENTURE..............................................................69
The Security for the Transition Bonds..............................69
Transition Bonds May Be Issued in Various Series or
Classes..........................................................70
The Collection Account for the Transition Bonds....................71
How Funds in the Collection Account Will Be Allocated..............76
Reports to Holders of the Transition Bonds.........................78
The Issuer and the Trustee May Modify the Indenture................79
What Constitutes an Event of Default on the Transition
Bonds............................................................83
Covenants of the Issuer............................................85
Access to the List of Holders of the Transition Bonds..............87
The Issuer Must File an Annual Compliance Statement................87
The Trustee Must Provide a Report to All Transition
Bondholders......................................................87
What Will Trigger Satisfaction and Discharge of the
Indenture........................................................88
The Issuer's Legal Defeasance and Covenant Defeasance
Options..........................................................88
The Trustee........................................................90
HOW A BANKRUPTCY OF THE ISSUER, SELLER OR SERVICER MAY AFFECT
YOUR INVESTMENT............................................................91
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS.......................94
Income Tax Status of the Transition Bonds..........................94
General............................................................94
Taxation of Non-U.S. Holders.......................................95
Backup Withholding.................................................97
Material State of New Jersey Tax Matters...........................98
ERISA CONSIDERATIONS.......................................................98
Plan Asset Issues For an Investment in the Transition
Bonds............................................................99
Prohibited Transaction Exemptions..................................99
Special Considerations Applicable to Insurance Company
General Accounts................................................101
General Investment Considerations For Prospective Plan
Investors in the Transition Bonds...............................101
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS.............................102
RATINGS FOR THE TRANSITION BONDS..........................................103
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS....................104
EXHIBIT A
GLOSSARY OF DEFINED TERMS.................................................A-1
Exhibit 4.1.1
Limited Liability Company Agreement of
PSE&G Transition Funding LLC
LIMITED LIABILITY COMPANY AGREEMENT
OF
PSE&G TRANSITION FUNDING LLC.
a Delaware Limited Liability Company
(the "Company")
ARTICLE I
General Provisions
1.01 Sole Member Registered Office. The initial sole member of
the Company (the "Member") shall be Public Service Electric and Gas
Company, a New Jersey corporation, or any successor as sole member pursuant
to Section 4.01. The registered office of the Company in the State of
Delaware shall be CT Corporation, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801. The Member may change said registered
office from one location to another in the State of Delaware.
1.02 Other Offices. The Company may have an office at 80 Park
Place, T-6, Newark, New Jersey 07102, or at any other offices that may at
any time be established by the Member at any place or places within or
outside the State of Delaware.
1.03 Purpose; Nature of Business Permitted; Powers. The Company
is organized primarily for the object and purpose of purchasing intangible
transition property, investing in investment securities, issuing transition
bonds and entering into related credit enhancement transactions. The
Company shall possess and may exercise all the powers and privileges
granted by the Delaware Limited Liability Company Act of the State of
Delaware (the "Act") or by any other law or by this Agreement, together
with any powers incidental thereto, insofar as such powers and privileges
are necessary or convenient to the conduct, promotion or attainment of the
business purposes or activities of the Company.
1.04 Limited Liability Company Agreement; Certificate of
Formation. This document (the "Agreement") shall constitute a "limited
liability company agreement" within the meaning of the Act. The
Certificate of Formation of this Company (the "Certificate of Formation")
was filed with the Secretary of State of the State of Delaware on July 21,
1999.
ARTICLE II
Capital
2.01 Initial Capital. The initial capital of the Company shall
be the sum of cash contributed to the Company by the Member in the amount
set out opposite the name of the Member on Schedule A hereto, as amended
from time to time and incorporated herein by this reference.
2.02 Capital Account. A Capital Account shall be established
and maintained for the Member on the Company's books (the "Capital
Account").
2.03 Interest. No interest shall be paid or credited to the
Member on its Capital Account or upon any undistributed profits left on
deposit with the Company.
ARTICLE III
Member
3.01 Powers. Subject to the provisions of the Certificate of
Formation, this Agreement and the Act, all powers shall be exercised by or
under the authority of, and the business and affairs of the Company shall
be controlled by, the Member pursuant to Section 3.05. The Member may
delegate any or all such powers to the Managers. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the Member shall have the following powers:
First - To select and remove the Managers and all officers,
agents and employees of the Company, prescribe such powers and duties for
them as may be consistent with the Act and other applicable law, the
Certificate of Formation and this Agreement, fix their compensation, and
require from them security for faithful service.
Second - To conduct, manage and control the affairs and business
of the Company, and to make such rules and regulations therefor consistent
with the Act and other applicable law, the Certificate of Formation and
this Agreement.
Third - To change the registered office of the Company in
Delaware from one location to another; to fix and locate from time to time
one or more other offices of the Company; and to designate any place within
or without the State of Delaware for the conduct of the business of the
Company.
3.02 Compensation of Member. The Company shall have authority
to pay to the Member reasonable compensation for the Member's services to
the Company. It is understood that the compensation paid to the Member
under the provisions of this Section shall be determined without regard to
the income of the Company, shall not be deemed to constitute distributions
to the recipient of any profit, loss or capital of the Company and shall be
considered as an operating expense of the Company.
3.03 Bank Accounts. From time to time, the Member may designate
a person or persons, whether such persons be the Member or not, to open and
maintain one or more bank accounts; rent safety deposit boxes or vaults;
sign checks, written directions or other instruments to withdraw all or any
part of the funds belonging to the Company and on deposit in any savings
account or checking account; negotiate and purchase certificates of
deposit, obtain access to the Company safety deposit box or boxes, and
generally sign such forms on behalf of the Company as may be required to
conduct the banking activities of the Company.
3.04 Other Ventures. It is expressly agreed that the Member and
any affiliates, officers, directors, managers, stockholders, partners or
employees of the Member, may engage in other business ventures of every
nature and description, whether or not in competition with the Company,
independently or with others, and the Company shall not have any rights in
and to any independent venture or activity or the income or profits derived
therefrom.
3.05 Actions by the Member. All actions of the Member may be
taken by written resolution of the Member which shall be signed on behalf
of the Member by an authorized officer of the Member and filed with the
records of the Company.
ARTICLE IV
OFFICERS
SECTION 4.01 Designation; Term; Qualifications. The Managers
may, from time to time, designate one or more Persons to be officers of the
Company. Any officer so designated shall have such title and authority and
perform such duties as the Managers may, from time to time, delegate to
them. Each officer shall hold office for the term for which such officer
is designated and until its successor shall be duly designated and shall
qualify or until its death, resignation or removal as provided in this
Agreement. Any Person may hold any number of offices. No officer need be a
Manager, the Member, a Delaware resident, or a United States citizen. The
Member hereby appoints the persons identified on Schedule D to be the
initial officers of the Company.
SECTION 4.02 Removal and Resignation. Any officer of the
Company may be removed as such, with or without cause, by the Managers at
any time. Any officer of the Company may resign as such at any time upon
written notice to the Company. Such resignation shall be made in writing
and shall take effect at the time specified therein or, if no time is
specified therein, at the time of its receipt by the Managers.
SECTION 4.3 Vacancies. Any vacancy occurring in any office of
the Company may be filled by the Managers.
SECTION 4.4 Compensation. The compensation, if any, of the
officers of the Company shall be fixed from time to time by the Managers.
ARTICLE V
Common Interest
5.01 General. "Common Interest" means the interest of the
Member in the Company. The Common Interest constitutes personal property
and shall be freely transferable and assignable in whole but not in part
upon registration of such transfer and assignment on the books of the
Company in accordance with the procedures established for such purpose by
the Managers of the Company. Upon registration of the transfer and
assignment of the Common Interest on the books of the Company, the
transferee/assignee shall be and become the sole Member of the Company and
shall have the rights and powers, and be subject to the restrictions and
liabilities, of the Member under this Agreement and the Act, and the
transferor/assignor shall cease to be the Member, each as of the date of
such registration. The Common Interest of the Member in the Company shall
be evidenced by a certificate in the form set forth in Schedule B hereto.
5.02 Distributions. The Member shall be entitled to receive,
out of the assets of the Company legally available therefor, when, as and
if declared by the Managers, distributions payable in cash in such amounts,
if any, as the Managers shall declare.
5.03 Rights on Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding
up of the Company, the Member shall be entitled to all remaining assets of
the Company available for distribution to the Member after payment of all
liabilities, debts and obligations of the Company.
(b) Neither the sale of all or substantially all of the
property or business of the Company, nor the merger or consolidation of the
Company into or with another Company or other entity, shall be deemed to be
a dissolution, liquidation or winding up, voluntary or involuntary, for the
purpose of this Section 4.03.
5.04 Redemption. The Common Interest shall not be redeemable.
5.05 Voting Rights. The Member shall have the sole right to
vote on all matters as to which members of a limited liability company
shall be entitled to vote pursuant to the Act and other applicable law.
ARTICLE VI
Managers
6.01 Managers.
(a) The management of the Company's business shall be
vested in the managers of the Company (the "Managers") who shall be
appointed by the Member. The Member hereby appoints the persons identified
on Schedule C to initially be the Managers of the Company.
(b) Each Manager shall be elected by the Member and shall
hold office for the term for which elected and until a successor has been
appointed and qualified.
(c) The Managers shall be obliged to devote only as much of
their time to the Company's business as shall be reasonably required in
light of the Company's business and objectives. A Manager shall perform
his or her duties as a Manager in good faith, in a manner he or she
reasonably believes to be in the best interests of the Company, and with
such care as an ordinarily prudent person in a like position would use
under similar circumstances.
(d) The Managers shall act by the affirmative vote of a
majority of the Managers. Each Manager shall have the authority to sign
agreements and other instruments on behalf of the Company without the
joinder of any other Manager.
(e) Any action may be taken by the Managers without a
meeting if authorized by the written consent of a majority of the Managers,
which written consent shall be filed with the records of the Company.
(f) Every Manager is an agent of the Company for the
purpose of its business, and the act of every Manager, including the
execution in the Company name of any instrument for carrying on the
business of the Company, binds the Company, unless such act is in
contravention of the Certificate of Formation or this Agreement or unless
the Manager so acting otherwise lacks the authority to act for the Company
and the person with whom he or she is dealing has knowledge of the fact
that he or she has no such authority.
6.02 Powers of the Managers. The Managers shall have the right
and authority to take all actions which the Managers deem necessary, useful
or appropriate for the day-to-day management and conduct of the Company's
business.
The Managers may exercise all powers of the Company and do all
such lawful acts and things as are not by the Act, other applicable law,
the Certificate of Formation or this Agreement directed or required to be
exercised or done by the Member. All instruments, contracts, agreements
and documents providing for the acquisition or disposition of property of
the Company shall be valid and binding on the Company if executed by one or
more of the Managers. All instruments, contracts, agreements and documents
of whatsoever type executed on behalf of the Company shall be executed in
the name of the Company by one or more Managers.
6.03 Compensation. The Company may pay to any Manager
compensation for such Manager's services rendered to the Company. Such
compensation shall be treated as expenses of the Company and shall not be
deemed to constitute distributions to the recipient of any profit, loss or
capital of the Company.
6.04 Removal of Managers.
(i) The Member may remove any Manager with or
without cause at any time.
(ii) Any removal of a Manager shall become
effective on such date as may be specified by the Member and in a
notice delivered to any remaining Managers or the Manager elected
to replace the removed Manager (except that it shall not be
effective on a date earlier than the date such notice is
delivered to the remaining or newly-elected Manager). Should a
Manager be removed who is also the Member, the Member shall
continue to participate in the Company as the Member and receive
its share of the Company's income, gains, losses, deductions and
credits pursuant to this Agreement.
6.05 Resignation of Manager. A Manager may resign as a Manager
at any time by notice to the Member. Such resignation shall be effective
as set forth in such notice.
6.06 Vacancies. Any vacancies among the Managers may be filled
by the Member.
ARTICLE VII
Allocations of Profits and Losses
All profits and losses of the Company for any fiscal period shall
be allocated and credited to the Member's Common Interest.
ARTICLE VIII
Expenses
Except as otherwise provided in this Agreement, the Company shall
be responsible for all expenses and the allocation thereof including
without limitation:
(a) all expenses incurred by the Member or its
affiliates in organizing the Company;
(i) all expenses related to the payment of the
principal of and interest on the transition bonds issued by the
Company;
(a) all expenses related to the business of the Company and
all routine administrative expenses of the Company, including the
maintenance of books and records of the Company, the preparation and
dispatch to the Member of checks, financial reports, tax returns and
notices required pursuant to this Agreement;
(b) all expenses incurred in connection with any litigation
or arbitration involving the Company (including the cost of any
investigation and preparation) and the amount of any judgment or
settlement paid in connection therewith;
(c) all expenses for indemnity or contribution payable
by the Company to any person;
(d) all expenses incurred in connection with the collection
of amounts due to the Company from any person;
(e) all expenses incurred in connection with the
preparation of amendments to this Agreement;
(f) all expenses incurred in connection with the
liquidation, dissolution and winding up of the Company; and
(g) all expenses otherwise allocated in good faith to the
Company by the Managers.
ARTICLE IX
Accounting and Records
9.01 Records and Accounting. The books and records of the
Company shall reflect all Company transactions and shall be appropriate and
adequate for the Company's business. The fiscal year of the Company for
financial reporting and for federal income tax purposes shall be the
calendar year.
9.02 Access to Accounting Records. All books and records of the
Company shall be maintained at any office of the Company or at the
Company's principal place of business, and the Member, and its duly
authorized representative, shall have access to them at such office of the
Company and the right to inspect and copy them at reasonable times.
9.03 Tax Elections. The Managers shall make the following
elections on behalf of the Company:
(a) To elect the calendar year as the Company's fiscal year
if permitted by applicable law;
(b) To elect the accrual method of accounting;
(c) To elect to treat all organization and start-up costs
of the Company as deferred expenses amortizable over 60 months under
Section 195 of the Code; and
(d) To elect with respect to such other federal, state and
local tax matters as the Managers shall agree from time to time.
9.04 Annual Tax Information. The Managers shall cause the
Company to deliver to the Member all information necessary for the
preparation of the Member's federal income tax return.
9.05 Tax Matters Member. The Member shall communicate and
negotiate with the Internal Revenue Service on any tax matter on behalf of
the Member and the Company.
ARTICLE X
Perpetual Existence
The Company shall have a perpetual existence. So long as any of
the Company's transition bonds shall remain outstanding, the Member shall
not be entitled to consent to the dissolution of the Company.
ARTICLE XI
Indemnification
11.01 Indemnity. Subject to the provisions of Section 10.04
hereof, the Company 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, except an action by or in the right of the Company, by
reason of the fact that such person is or was a Manager, Member, officer,
controlling person, employee, legal representative or agent of the Company,
or is or was serving at the request of the Company as a member, manager,
director, officer, partner, shareholder, controlling person, employee,
legal representative or agent of another limited liability company,
partnership, corporation, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with the action, suit or proceeding if such person acted in good faith and
in a manner which such person reasonably believed to be in or not opposed
to the best interests of the Company, and, with respect to a criminal
action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
11.02 Indemnity for Actions By or In the Right of the Company.
Subject to the provisions of Section 10.04 hereof, the Company 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 or suit by or in the
rights of the Company to procure a judgment in its favor by reason of the
fact that he is or was a Member, Manager, officer, controlling person,
employee, legal representative or agent of the Company, or is or was
serving at the request of the Company as a member, manager, director,
officer, partner, shareholder, controlling person, employee, legal
representative or agent of another limited liability company, corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by such person in connection with the defense or
settlement of the actions or suit if such person acted in good faith and in
a manner which such person reasonably believed to be in or not opposed to
the best interests of the Company. Indemnification may not be made for any
claim, issue or matter as to which such person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the Company or for amounts paid in settlement to the Company,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
11.03 Indemnity If Successful. The Company may indemnify a
Member, Manager, officer, employee or agent of the Company against
expenses, including attorneys' fees, actually and reasonably incurred by
him or her in connection with the defense of any action, suit or proceeding
referred to in Sections 10.01 and 10.02 or in defense of any claim, issue
or matter therein, to the extent that such person or entity has been
successful on the merits.
11.04 Expenses. Any indemnification under Sections 10.01 and
10.02, as well as the advance payment of expenses permitted under Section
10.05 unless ordered by a court or advanced pursuant to Section 10.05
below, must be made by the Company only as authorized in the specific case
upon a determination that indemnification of the Member, Manager, officer,
employee or agent is proper in the circumstances. The determination must
be made:
(a) By the Member if the Member was not a party to the act,
suit or proceeding; or
(b) If the Member was a party to the act, suit or
proceeding by independent legal counsel in a written opinion.
11.05 Advance Payment of Expenses. The expenses of the Member
and each Manager incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Company as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of
an undertaking by or on behalf of the Member or such Manager to repay the
amount if it is ultimately determined by a court of competent jurisdiction
that the Member or such Manager is not entitled to be indemnified by the
Company. The provisions of this subsection do not affect any rights to
advancement of expenses to which personnel other than the Member or the
Managers may be entitled under any contract or otherwise by law.
11.06 Other Arrangements Not Excluded. The indemnification and
advancement of expenses authorized in or ordered by a court pursuant to
this Article 10:
(a) Does not exclude any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under
the Certificate of Formation or any agreement, decision of the Member or
otherwise, for either an action of a Member, Manager, officer, employee or
agent in the official capacity of such person or an action in another
capacity while holding such position, except that indemnification, unless
ordered by a court pursuant to Section 10.05 above, may not be made to or
on behalf of the Member or any Manager if a final adjudication established
that its acts or omissions involved intentional misconduct, fraud or a
knowing violation of the law and was material to the cause of action; and
(b) Continues for a person who has ceased to be a Member,
Manager, officer, employee or agent and inures to the benefit of the
successors, heirs, executors and administrators of such a person.
ARTICLE XII
Miscellaneous Provisions
12.01 Amendments. This Limited Liability Company Agreement may
be amended by written instrument executed by the Member and the Company and
filed with the records of the Company.
12.02 Applicable Law. This Agreement, and its application,
shall be governed by the laws of the State of Delaware.
12.03 Headings. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define,
or limit the scope, extent or intent of this Agreement or any provisions
contained herein.
12.04 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be deemed invalid,
illegal or unenforceable to any extent, the remainder of this Agreement and
the application thereof shall not be affected and shall be enforceable to
the fullest extent permitted by law.
12.05 Assigns. Each and all of the covenants, terms, provisions
and agreements contained in this Agreement shall be binding upon and inure
to the benefit of the Member, and its successors and assigns.
IN WITNESS WHEREOF, this Limited Liability Company Agreement is
hereby executed by the undersigned as the sole Member of the Company as of
July 21, 1999.
PUBLIC SERVICE ELECTRIC
AND GAS COMPANY
By: /s/ James T. Foran
Name: James T. Foran
Title: General Corporate Counsel of
Public Service Electric and Gas Company
SCHEDULE A
Schedule of Capital Contributions of Member
COMMON INTEREST
MEMBER'S CAPITAL COMMON INTEREST CAPITAL
NAME CONTRIBUTION PERCENTAGE ACCOUNT
Public Service Electric
and Gas Company $1,000 100% $1,000
SCHEDULE B
CERTIFICATE OF COMMON INTEREST
of
PSE&G Transition Funding LLC
A Limited Liability Company
Organized under the Laws of the State of Delaware
This Certificate is issued and shall be held subject to the provisions
of the Certificate of Formation of PSE&G Transition Funding LLC, a Limited
Liability Company organized under the laws of the State of Delaware (the
"Company"), filed on July __, 1999 with the Secretary of State of the State
of Delaware, and the Limited Liability Company Agreement dated July __,
1999 of the Company, as each may be amended from time to time.
This Certificate of Common Interest certifies that Public Service
Electric and Gas Company is the registered holder of the entire Common
Interest of the Company, which Common Interest shall be transferable only
on the books of the Company by the holder hereof in person or by a duly
authorized attorney upon surrender of this Certificate with a proper
endorsement.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed by one of its duly authorized Managers this ___ day of July, 1999.
__________________________
Title: Manager
PSE&G TRANSITION FUNDING LLC
For Value Received the undersigned hereby sells, assigns and transfers
unto _________________________________________________________________
the entire Common Interest of the Company represented by the within
Certificate and does hereby irrevocably constitute and appoint
_______________________________________________________________________
Attorney, to transfer said Common Interest on the books of the Company
with full power of substitution in the premises.
Dated:____________________
___________________________________
SCHEDULE C
Initial Managers
Names
1) Robert E. Busch
2) Robert C. Murray
3) R. Edwin Selover
SCHEDULE D
Initial Officers
Names Office
Robert C. Murray President and Chief Executive Officer
Robert E. Busch Senior Vice-President and Chief Financial Officer
James T. Foran Vice-President and General Counsel
Morton A. Plawner Vice-President and Treasurer
Edward J. Biggins, Jr. Assistant Secretary
Steven B. Oster Assistant Treasurer
Ardeshir Rostami Assistant Treasurer
Fred F. Saunders Assistant Treasurer
Patrick M. Burke Assistant Secretary
James T. Foran Assistant Secretary
Patricia A. Rado Controller
Exhibit 4.2
Certificate of Formation of
PSE&G Transition Funding LLC
CERTIFICATE OF FORMATION
OF
PSE&G TRANSITION FUNDING LLC
(a) The name of the limited liability company is PSE&G
Transition Funding
LLC.
(b) The address of its registered office in the State of
Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware
19801. The name of its registered agent at such address is CT Corporation.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate of Formation of PSE&G Transition Funding LLC this 21st day of
July, 1999.
PSE&G TRANSITION FUNDING LLC
By: /s/ James T. Foran
-------------------------------------
Name: James T. Foran
Title: General Corporate Counsel of Public
Service Electric and Gas Company
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
IN THE MATTER OF THE PETITION OF PUBLIC SERVICE ) PETITION
ELECTRIC AND GAS COMPANY FOR A BONDABLE STRANDED )
COST RATE ORDER IN ACCORDANCE WITH CHAPTER 23 OF ) DOCKET NO.: E______
THE LAWS OF 1999, TO AUTHORIZE THE IMPOSITION OF )
A NONBYPASSABLE TRANSITION BOND CHARGE, THE )
ISSUANCE AND SALE OF $2.525 BILLION AGGREGATE )
PRINCIPAL AMOUNT OF TRANSITION BONDS BY A )
FINANCING ENTITY TO RECOVER PETITIONER'S )
BONDABLE STRANDED COSTS, AND THE APPLICATION OF )
TRANSITION BOND PROCEEDS TO RETIRE OUTSTANDING )
DEBT, EQUITY OR BOTH, AND TO APPROVE THE FORMULA )
FOR THE CALCULATION AND ADJUSTMENT OF THE )
TRANSITION BOND CHARGE AND MARKET TRANSITION )
CHARGE-TAX RELATED THERETO. )
Public Service Electric and Gas Company ("Petitioner"), a New Jersey
corporation organized under the provisions of Chapter 185 of the Laws of
1896, as amended and supplemented, with its principal office at 80 Park
Plaza, Newark, New Jersey, respectfully shows that:
1. Petitioner is a public utility engaged in the electric and gas
business, subject to the jurisdiction of your Honorable Board.
2. Petitioner in BPU Docket Nos. EO97070461, EO97070462 and
EO97070463 and OAL Docket Nos. PUC-7348-97N and PUC-7347-97N, and herein
(pursuant to the Electric Discount and Energy Competition Act, Chapter 23
of the Laws of 1999, which is herein called the "Act") requests authority
to recover, and to securitize (in the "Transition Bond Transaction")
Petitioner's bondable stranded costs (as defined in the Act), to impose a
transition bond charge (as defined in the Act ), and the sale of the right
to receive such charge to an approved financing entity. Petitioner also
requests approval of the formula for the calculation and adjustment of the
transition bond charge and the market transition charge-tax related
thereto.
3. STATUTORY AND REGULATORY OVERVIEW
On February 9, 1999, Governor Whitman signed the Act into law as a
comprehensive restructuring law for the electric power and gas industries,
which Act authorizes electric public utilities to securitize bondable
stranded costs through the issuance of transition bonds to provide savings
to ratepayers. Terms defined in the Act (and not specifically defined
herein consistently with the Act) are used herein as defined in the Act.
For purposes of recovering a portion of the stranded costs deemed
eligible for rate recovery by the Board in its final order to be issued (as
summarized in a Summary Order issued April 21, 1999) (the "Recovery Order")
consistent with the provisions of Section 13 of the Act, together with
other bondable stranded costs described in the Act, and to allow Petitioner
to comply with the rate reduction requirements determined by the Board to
be necessary and appropriate consistent with the provisions of Sections 4
and 13 of the Act, Petitioner is hereby requesting the Board to issue an
irrevocable bondable stranded costs rate order (a "Financing Order"). The
Financing Order will provide, among other things, for the imposition of a
nonbypassable transition bond charge, as provided in Section 18 of the Act,
and the right to receive such charge (the "Transition Bond Charge") by
another entity approved by the Board as described below. Petitioner is
further requesting the Board to authorize under such Financing Order the
issuance of transition bonds (the "Transition Bonds") by a financing entity
to recover such bondable stranded costs. The net proceeds of the Transition
Bonds will be used by or on behalf of Petitioner solely for the purposes of
reducing the amount of its otherwise recovery-eligible stranded costs
through the retirement of debt or equity, or both, of Petitioner.
As provided in the Recovery Order, the Petitioner is directed to
impose a market transition charge (the "MTC-Tax") to recover federal income
and State Corporate Business Taxes associated with the collection of the
Transition Bond Charge until the related Bondable Stranded Costs have been
paid in full, and to adjust the MTC-Tax in the same manner and at the same
time as the Transition Bond Charge is adjusted as described in this
petition.
The entire amount of cost savings achieved as a result of the
issuance of the Transition Bonds shall be passed on to customers in the
form of reduced rates for electricity as described in this Petition.
4. TRANSITION BOND TRANSACTION
A. PROPOSED STRUCTURE
A general description of the Transition Bond Transaction structure
follows. The proposed structure is subject to modification depending upon
the requirements of tax authorities, input from underwriters in connection
with the marketing of the Transition Bonds and negotiations with nationally
recognized statistical rating organizations (the "rating agencies")
selected by Petitioner to assign credit ratings to the Transition Bonds.
The proposed structure is intended to minimize debt service costs and
maximize ratepayer savings by obtaining the best possible rating for the
Transition Bonds as asset backed securities. The final structure of the
transaction, pricing and terms of the Transition Bonds will be determined
by Petitioner at the time Transition Bonds are priced and approved by a
designee (the "Designee") of the Board as provided in the Act and herein.
Pursuant to the Recovery Order, the Board has approved the recovery
by the Petitioner of $2.400 billion of the Petitioner's bondable stranded
costs (plus transaction costs aggregating $125 million) through the
issuance of Transition Bonds. The Board has also determined that the taxes
related to securitization, which reflect the grossed up revenue requirement
number associated with the $2.400 billion in net of tax stranded costs
being securitized plus transaction costs (i.e., the "Tax Component") are
legitimate recoverable stranded costs to be recovered through the MTC-Tax
approved in the Recovery Order. The Petitioner requests in this Petition
the authority to recover related bondable stranded costs including (1) the
costs, estimated at $100 million, to retire the Petitioner's existing debt
or equity, or both, with the proceeds of the Transition Bonds ("Capital
Reduction Costs"); (2) the costs, estimated at $25 million, incurred to
issue Transition Bonds (the "Upfront Transaction Costs"), and (3) principal
and interest on the Transition Bonds, together with the costs of paying,
refinancing, administering and servicing, credit enhancing,
overcollateralizing, and hedging the Transition Bonds, as more fully
described herein (such costs in clause (3) are herein called the "Ongoing
Transition Bond Costs" and all such bondable stranded costs, as more fully
defined in the Act, the "Bondable Stranded Costs"). The Petitioner also
requests approval of the formula for the calculation and adjustment of the
Transition Bond Charge and MTC-Tax related thereto.
Pursuant to the proposed Financing Order, Petitioner requests
authority to recover from the proceeds of the Transition Bonds, up to
$2.525 billion of its Bondable Stranded Costs, including its Capital
Reduction Costs and Upfront Transaction Costs. The remaining Bondable
Stranded Costs, being the Ongoing Transition Bond Costs, will be recovered
through the assessment and collection of the Transition Bond Charge. The
Transition Bond Charge will be a separate, nonbypassable charge assessed
and collected from all customers of Petitioner and/or any successor
distribution company within Petitioner's existing service territory as of
the date of this Petition, except as provided in Section 28 of the Act.
The principal asset to be used to support Transition Bonds is the
Bondable Transition Property (defined below), a property right created
under the Act, which includes the irrevocable right to charge and collect
Transition Bond Charges and to obtain periodic adjustments of such
Transition Bond Charges, and all revenues, collections, payments, money and
proceeds thereof. Pursuant to Section 16 of the Act, the Financing Order
and the Transition Bond Charges are irrevocable upon the Financing Order
becoming effective under the Act, and the Financing Order cannot be
rescinded, altered, repealed, modified or amended by the Board or any other
governmental entity, nor can it be impaired by the State of New Jersey, as
pledged in Section 17 of the Act.
Petitioner will form at least one non-utility, special-purpose
bankruptcy-remote entity (each and collectively, the "SPE"), wholly owned
by Petitioner, and will provide the capitalization for such SPE. Petitioner
will sell the Bondable Transition Property directly or through an assignee
(as defined in the Act) to the SPE in a transaction which, under Section 23
of the Act, will be a legal true sale and absolute transfer to the SPE. The
SPE will constitute a financing entity for purposes of the Act.
To raise the funds to pay the purchase price of the Bondable
Transition Property to Petitioner, the SPE will issue and sell Transition
Bonds. The SPE will issue and sell the Transition Bonds in a negotiated,
fully underwritten public offering as asset-backed securities ("ABS"). All
prior securitizations of utility stranded costs in other jurisdictions have
been structured as ABS and sold on a negotiated basis. The expertise of an
underwriter is critical to the structuring, pricing and marketing of
securities in the ABS market. Indeed, in other states where, unlike New
Jersey, competitive bidding requirements exist, such as Massachusetts,
competitive bidding of stranded cost securitization transactions has been
waived or are not required to access the ABS market. Petitioner believes
that a negotiated sale will assure that the Transition Bonds will receive
the highest possible rating and will obtain the lowest possible interest
and transaction costs, ensuring compliance with the requirements of Section
14(b)(4) of the Act that Petitioner's customers will pay the lowest
transition bond charges consistent with market conditions at time of
pricing.
All of the assets of the SPE, including, without limitation, the
Bondable Transition Property and the other collateral of the SPE (the
"Other SPE Collateral"), will be pledged as collateral to secure Transition
Bonds. The Other SPE Collateral will include, without limitation: (1) the
rights of the SPE under the Transition Bond transaction documents,
including the purchase agreement by which each SPE acquires the Bondable
Transition Property; (2) a servicing agreement by which Petitioner or any
successor Servicer acts as servicer of the Bondable Transition Property;
(3) an administration agreement by which the SPE will be administered; (4)
various trust accounts of the SPE into which the proceeds of Transition
Bond Charges, together with the pledged funds of the SPE, will be
deposited; (5) any investment earnings on amounts held by the Bond Trustee;
and (6) the equity capital of the SPE.
While the Board is requested to approve Transition Bonds with
scheduled amortizations not exceeding 15 years at issuance in accordance
with Section 14 of the Act, it is also requested to approve final legal
maturities up to 17 years in order to minimize overcollateralization
requirements and enhance the prospects of securing the highest possible
credit rating for the Transition Bonds. These objectives should result in
lower interest costs, and thus savings to ratepayers.
Pursuant to the Recovery Order, the duration of the MTC-Tax has been
authorized to be identical to the duration of the Transition Bond Charge in
order that Petitioner may achieve mandated rate reductions ordered therein
by the Board.
The following schematic illustrates the proposed transaction.
PARTIES TO TRANSACTION
[GRAPH OMITTED]
B. RECOVERY OF UPFRONT TRANSACTION COSTS
In order to issue Transition Bonds and to achieve net savings for
the benefit of its customers, Petitioner will incur Upfront Transaction
Costs related to the issuance of Transition Bonds. Based on the current
estimated initial offering of $2.525 billion of Transition Bonds,
Petitioner estimates that such amount will include Upfront Transaction
Costs of approximately $25 million which may vary, in part, based on the
factors described below. Upfront Transaction Costs of issuing Transition
Bonds will include, among other items, the underwriting spread, rating
agency fees, accounting fees, Securities and Exchange Commission
registration fees, printing and marketing expenses, trustees' fees, legal
fees, the servicing set-up fee and the administrative cost of forming the
SPE.
The Petitioner requests authority to recover the Upfront Transaction
Costs from the proceeds of the sale of the Transition Bond and to include
such costs as Bondable Stranded Costs, the right to recover such amounts to
constitute a portion of the Bondable Transition Property. To the extent
prior payment is required, such costs will be paid by Petitioner and
reimbursed from the proceeds of the Transition Bonds.
C. RECOVERY OF CAPITAL REDUCTION COSTS
Pursuant to the Recovery Order, Petitioner requests recovery of the
costs, estimated at $100 million, of retiring Petitioner's debt and/or
equity capital, including any accrued interest, premium and other fees,
costs and charges relating thereto out of the proceeds of the sale of the
Bondable Transition Property and to include such costs as Bondable Stranded
Costs, the right to recover such amounts to constitute a portion of the
Bondable Transition Property.
D. ONGOING TRANSITION BOND COSTS
Pursuant to the Recovery Order, Petitioner requests recovery of the
Ongoing Transition Bond Costs through the Transition Bond Charge. The
primary Ongoing Transition Bond Costs are the principal and interest on the
Transition Bonds. Other Ongoing Transition Bond Costs include principally
the servicing fee (the "Servicing Fee") paid to Petitioner, as the Servicer
(as defined below) and the ongoing cost of credit enhancement and
overcollateralization.
It is anticipated that there will be a small amount of additional
Ongoing Transition Bond Costs associated with the Transition Bond
Transaction, such as an administration fee, legal and accounting fees,
directors or managers fees, rating agency fees, trustee fees and other
costs of operating the SPE. These costs will be Bondable Stranded Costs and
will be recovered through the Transition Bond Charge in accordance with
Section 3 of the Act, and the right to recover these costs as Bondable
Stranded Costs will be a portion of the Bondable Transition Property.
E. APPROVAL OF FINAL TERMS AND CONDITIONS: TRANSITION BOND
TRANSACTION
Upon the pricing of the Transition Bonds, the Board's Designee under
Sections 14 and 15 of the Act will file with the Board a certificate to the
effect that the structure and pricing of the Transition Bonds assures that
Petitioner's customers pay the lowest Transition Bond Charges consistent
with market conditions and the terms of the Financing Order, and approving
the terms and conditions of the Transition Bonds, including scheduled
amortization up to 15 years and legal maturities of up to 17 years, as
required to obtain the highest possible credit ratings. Payments on the
Transition Bonds will be semiannual or quarterly, depending upon input from
rating agencies, tax considerations and market conditions at the time of
the pricing of Transition Bonds. Debt service on the Transition Bonds will
be scheduled upon issuance so that the sum, for each annual period, of the
Period Payment Requirement (as defined below) and the associated MTC-Tax
collections will be substantially equal. One or more classes of the
Transition Bonds may be issued as variable rate instruments which are fixed
or capped through the execution of an interest rate exchange agreement, an
interest rate cap agreement or similar hedge arrangement (collectively, a
"hedging arrangement") if the Petitioner shall determine that such a
hedging arrangement is expected to result in a lower interest cost on such
classes of bonds or on all classes of an issue taken as a whole, and such
hedging arrangement is approved by the Designee. Any counterparty to a
hedging agreement must have a credit rating consistent with achieving the
highest possible ratings on the Transition Bonds. So long as the structure,
pricing, terms and conditions meet such parameters, Petitioner will be
authorized under the Financing Order to undertake the Transition Bond
Transaction.
Not later than five business days after the issuance and sale of the
Transition Bonds, Petitioner will be required to confirm to the Board, in
an "Issuance Advice Letter", the actual interest rates on the Transition
Bonds, the expected principal amortization schedule (the "expected
amortization schedule") and the initial Transition Bond Charge and MTC-Tax,
which will be calculated using the formula described in Exhibit A. The
Issuance Advice Letter will also include a calculation of present value
savings to customers using the methodology employed in Exhibit B applied to
the actual structure and terms of the Transition Bonds. The initial
Transition Bond Charge and MTC-Tax shall become effective immediately when
the Issuance Advice Letter is filed, without further action by the Board.
F. TRANSITION BOND CHARGE
Transition Bond Charges will be set by formula, from time to time,
at a level intended to recover the sum of the Ongoing Transition Bond
Costs, including without limitation, the principal of (in accordance with
the expected amortization schedule approved by the Designee at the time of
pricing of the Transition Bonds), and interest on, Transition Bonds
authorized by the Board in the Financing Order, together with the costs of
operating and administering the SPE, the costs of servicing the Transition
Bonds, including servicing and trustee fees, expenses and indemnities,
amounts required to fund or replenish the overcollateralization account in
accordance with overcollateralization schedule approved at pricing of the
Transition Bonds, the reimbursement of any amounts drawn from the capital
account, and the ongoing expenses of any other credit enhancement or
hedging agreement (the required periodic payment of all such amounts,
including deficiencies on past due amounts for any reason, is herein called
the "Periodic Payment Requirement" and the total of such requirements until
paid in full, the "Total Payment Requirements").
In Attachment A3 to Exhibit A, the Petitioner sets forth the formula
by which it proposes to establish and adjust from time to time the
Transition Bond Charge and the MTC-Tax. Transition Bond Charges and the
MTC-Tax will be set and adjusted based on assumptions described in
Attachment A3 and A3to Exhibit A, as those assumptions are adjusted from
time to time, including but not limited to energy sales forecasts, customer
payment and charge-off patterns, defaults by third party suppliers (as
described herein), the Periodic Payment Requirement and, with respect to
the MTC-Tax, the applicable state and federal income tax rates in effect
from time to time. In Attachment A2 to Exhibit A, Petitioner projected the
initial Transition Bond Charge and MTC-Tax using the formula described in
Attachment A3 to Exhibit A and assuming the Transition Bond Periodic
Payment Requirements as shown in Attachment A1 to Exhibit A.
Transition Bond Charges shall remain in effect until the SPE owner
of the Bondable Transition Property has received Transition Bond Charges
sufficient to discharge the Total Payment Requirements.
Each customer's monthly bill will contain a line item which contains
the combined then current Transition Bond Charge and MTC-Tax and will note
in text or a footnote that a portion of such combined charge represents
Bondable Transition Property being collected on behalf of an SPE as owner
of Bondable Transition Property.
G. PERIODIC ADJUSTMENTS TO THE TRANSITION BOND CHARGE AND MTC-TAX
The Board is required by Section 15 of the Act to make mandatory
periodic adjustments (the "True-Up Mechanism") to the Transition Bond
Charge upon petition of Petitioner, its assignee or financing entity, to
ensure receipt of revenues sufficient to satisfy, on a timely basis, the
Periodic Payment Requirement. Mandatory periodic adjustments must be made
at least annually, and, as described earlier, using the formula described
in Attachment A3 to Exhibit A. As Servicer, the Petitioner will be
responsible for filing with the Board documentation for any necessary
periodic adjustments. (Petitioner, as servicer under the Service Agreement
and any successor to Petitioner as servicer are herein referred to as the
"Servicer".) Although the Servicer expects to file for periodic adjustments
annually, it is also requesting authorization to file for adjustments as
often as quarterly as determined necessary for credit rating purposes. Each
periodic adjustment shall become effective 30 days after filing thereof
with the Board absent a determination by the Board of manifest error. Under
Section 15 of the Act, Petitioner, as initial Servicer, shall propose such
adjustments in a filing with the Board at least 30 days in advance of the
date upon which it is requested to be effective. The proposed adjustment
shall become effective on an interim basis on such date and, in the absence
of a Board order to the contrary finding a manifest error, shall become
final 60 days thereafter.
As provided in the Recovery Order, the Petitioner shall be entitled
to request and the Board shall approve mandatory periodic adjustments of
the MTC-Tax authorized by the Board in the Recovery Order. The adjustment
is to be made at least annually to reconcile the income tax recovered to
the income taxes required to be paid on the taxable net revenue from the
Transition Bond Charges. The reconciliation is to be made in the same
manner as the True Up Mechanism for Transition Bond Charges in order to
ensure receipt of revenues sufficient to assure recovery of the MTC-Tax.
Upon petition of Petitioner, the MTC-Tax will be adjusted based upon
assumptions described in Attachment A3 and A3 to Exhibit A to this
Petition, as those assumptions are adjusted from time to time in accordance
with such Attachment A3. No delay in the mandatory adjustment of the
MTC-Tax will in any way adversely affect the mandatory periodic adjustment
of the Transition Bond Charge described in the preceding paragraph.
The Petitioner also requests that the Board grant the Petitioner
authority to make "non-routine" adjustments. Non-routine filings for
adjustments would be made to accommodate changes to the formula described
in Attachment A3 to Exhibit A, if deemed appropriate by Petitioner to
remedy a significant and recurring variance between actual and expected
Transition Bond Charge collections. Any such filing would be required to be
made at least 90 days prior to the proposed effective date, and would be
subject to Board approval.
H. REMITTANCE OF TRANSITION BOND CHARGES
The Servicer will remit, at least monthly, to the Transition Bond
trustee ("Bond Trustee") the Transition Bond Charges, based on the
collection methodology described in Exhibit C.
The Servicer will receive the Transition Bond Charge collections
daily and may, as authorized by Section 15 of the Act, commingle Transition
Bond Charge collections with other customer payments until the remittance
date to the Bond Trustee.
Collections from each customer will be applied first to sales taxes
(which Petitioner will collect as trustee for the State and not for its own
account or that of the SPE, and which are not "charges" for purposes of the
following allocations), then to charges in arrears, if any, and then to
current charges. With respect to each billing period, partial payments of
charges will be allocated to the Transition Bond Charges, to the MTC-Tax
and to the Petitioner's other charges, pro rata, based on the proportions
that the Transition Bond Charges, the MTC-Tax and the Petitioner's other
charges bear to the total charges collected. Partial payments of Transition
Bond Charges will be allocated to the owners of Bondable Transition
Property, pro rata, based on the proportions that the Transition Bond
Charge representing the Bondable Transition Property and any transition
bond charges established pursuant to other subsequent financing orders bear
to the total Transition Bond Charges collected.
The Bond Trustee will retain Transition Bond Charge collections
until it makes scheduled principal and interest payments and all servicing
fees and ongoing expense payments to the appropriate parties. These
distributions are expected to be made on a quarterly or semiannual basis.
The Bond Trustee will hold all Transition Bond Charge collections received
from the Petitioner between the remittance date and distribution date in a
collection account. The Bond Trustee will invest the funds in the
collection account in investment grade short-term securities that mature on
or before the next distribution date.
Investment income earned in the trust accounts held by the Bond
Trustee may be used to satisfy currently scheduled interest and principal
payments on the Transition Bonds and related expenses and to reimburse the
SPE's equity and to satisfy scheduled overcollateralization amount.
Investment income on the capital account not used currently for this
purpose will be released to the SPE. Any earnings in excess of required
amounts in such trust accounts (other than the capital account) will reduce
the Transition Bond Charges through the True-Up Mechanism.
Upon retirement of all outstanding Transition Bonds and any related
Ongoing Transition Bond Costs, any remaining amounts held by the Bond
Trustee will be released to the SPE. Petitioner's equity in the SPE may be
distributed to Petitioner, and Petitioner will credit an amount equal to
any overcollected Transition Bond Charges, less any amount of any unpaid
MTC-Tax charges, to its customers against its distribution charges.
I. CREDIT ENHANCEMENT
The Transition Bond documents will incorporate the True-Up Mechanism
authorized by Section 15 of the Act as described above and
overcollateralization amounts or other means of credit enhancement as
required by the rating agencies or taxing authorities.
The Transition Bond Charge will be set to collect an
overcollateralization amount over time in addition to the principal (in
accordance with the expected amortization schedule) and interest payable on
the Transition Bonds and the other Ongoing Transition Bond Costs. The
overcollateralization amount needed to satisfy the rating agencies will be
determined by Petitioner, with input from the rating agencies and tax
authorities prior to the time Transition Bonds are priced, and approved by
the Designee at the time of pricing of the Transition Bonds. As with other
components of the Transition Bond Charge, the overcollateralization
component will be incorporated into each periodic adjustment to the extent
necessary using the True-Up Mechanism.
Customers will receive credit from Petitioner against distribution
charges equal to the amount of any collateral remaining after satisfaction
of the Total Payment Requirements less any amount of any unpaid MTC-Tax
charges. As a result, overcollateralization will not reduce customer
benefits from the Transition Bond Transaction.
J. FORMATION OF SPE
The SPE will be formed by the Petitioner prior to the issuance of
the Transition Bonds as a wholly-owned, non-utility subsidiary of the
Petitioner and is expected to be a limited liability company.
The fundamental organizational documents of the SPE will impose
significant limitations upon the activities of the SPE and the ability of
Petitioner to take actions as the holder of the equity interest therein.
For example, the SPE will be formed for the limited purpose of acquiring
the Bondable Transition Property and Other SPE Collateral and issuing and
selling the Transition Bonds. It will not be permitted to engage in any
other activities, and will have no assets other than the Bondable
Transition Property and Other SPE Collateral.
K. BONDABLE TRANSITION PROPERTY
Petitioner's bondable transition property (the "Bondable Transition
Property") will consist of (a) the irrevocable right to charge, collect and
receive, and be paid from collections of Transition Bond Charges the amount
necessary to provide for the full recovery of Total Payment Requirements,
(b) all rights of Petitioner under the Financing Order, including without
limitation all rights to obtain periodic adjustments of the Transition Bond
Charges pursuant to the True-Up Mechanism and (c) all revenues,
collections, payments, money and proceeds arising under, or with respect
to, all of the Transition Bond Charges. Pursuant to Sections 16 and 22 of
the Act, upon receipt of payment for the Bondable Transition Property by
the Petitioner from the SPE, the Bondable Transition Property will
constitute a vested presently existing property right which will
continuously exist as property for all purposes as provided in the Act and
the Financing Order, whether or not the revenues and proceeds arising with
respect thereto have accrued and notwithstanding the fact that the value of
the property right may depend upon consumers using electricity or Servicer
performing services; and the validity of any sale, assignment or other
transfer of the Bondable Transition Property will not be defeated or
adversely affected by the commingling by Petitioner of revenues recovered
from amounts charged, collected and received on account of the Bondable
Transition Property with other funds of Petitioner.
L. SALE OF BONDABLE TRANSITION PROPERTY TO SPE
The Board is requested to approve the sale by Petitioner of the
Bondable Transition Property to one or more SPEs in one or more
transactions which, under Section 23 of the Act, will be a legal true sale
and absolute transfer to each SPE, notwithstanding any other
characterization for tax, accounting or other purposes. The SPE will have
all of the rights originally held by Petitioner with respect to the
Bondable Transition Property, including the right to exercise any and all
rights and remedies to collect any amounts payable by any customer in
respect of the Bondable Transition Property, which includes the right to
direct Petitioner or any successor electric public utility to shut-off
electric power to the extent permitted in accordance with law and any
applicable regulations.
The agreement in connection with the sale and transfer of the
Bondable Transition Property to an SPE may include representations and
warranties with respect to, among other things, the validity of the
Financing Order, the Bondable Transition Property and the title thereto,
and provide specific covenants, indemnities and repurchase obligations in
connection with such transfer for the benefit of the holders of Transition
Bonds.
M. ISSUANCE OF TRANSITION BONDS
The Board is requested to approve the issuance of Transition Bonds
by the SPE. The Transition Bonds will, by their terms, be recourse only to
the SPE's credit and assets, and will be secured by a pledge of all of the
right, title and interest of each SPE in its Bondable Transition Property
and Other SPE Collateral. Transition Bonds may be issued in series and
classes with different terms.
N. NONBYPASSABLE TRANSITION BOND CHARGE
Under Section 18 of the Act, the Transition Bond Charge is
nonbypassable and will be assessed against and collected from all customers
of the Petitioner or any successor electric public utility, except as
provided in Section 28 of the Act, within the Petitioner's service area at
the date of this Petition until the Total Payment Requirements are
discharged in full. The Transition Bond Charge shall apply equally to each
customer, regardless of class, based on the amount of electricity delivered
to the customer through the transmission and distribution system of
Petitioner or any successor electric public utility that may take over all
or a portion of the Petitioner's service area at the date of this Petition,
including electricity sold to customers by any third party supplier, as
described below.
O. THIRD PARTY SUPPLIERS
Billing, collection and remittance of Transition Bond Charges by a
third party supplier ("TPS") may increase the risk of shortfalls in
Transition Bond Charge or MTC-Tax 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 increasing the required credit enhancement or reducing the
credit rating and increasing the rate of interest on Transition Bonds that
would be required by investors. Such TPS billing may increase the
Transition Bond Charge or MTC-Tax component resulting from interruption or
delay in payment.
In order to mitigate against these risks, satisfy rating agency
concerns and reduce the cost to ratepayers, Petitioner requests that any
TPS should be required to comply with the billing, collection and
remittance procedures and information access requirements set forth below.
These procedures and requirements are comparable to those in effect in
other states in which stranded cost securitizations have been effected.
These requirements are largely derived from rating agencies' criteria.
Attached as Exhibit D are published reports from Moody's Investors Service
and Fitch IBCA, which describe Moody's and Fitch's review of the TPS
criteria.
Petitioner requests that the Board will only authorize a TPS to bill
and collect the Transition Bond Charge and associated MTC-Tax with respect
to power sold by it for remittance to the Servicer if (i) such TPS agrees
to remit the full amount of all charges it bills to customers for services
provided by Petitioner, together with Transition Bond Charges and MTC-Tax,
regardless of whether payments are received from such customers, within 15
days of Petitioner's (or any successor Servicer's) bill for such charges;
(ii) such TPS provides the Servicer with total monthly kWh usage
information for each customer in a timely manner for the Servicer to
fulfill its obligations, as such information is the basis of such
remittance; and (iii) the Servicer is entitled, within seven days after a
default by the TPS in remitting any charges payable to Petitioner,
including Transition Bond Charges and MTC-Tax billed, to assume
responsibility for billing all charges for services provided by Petitioner
or any Servicer, including the Transition Bond Charges and MTC-Tax, or to
transfer responsibility to a qualifying 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 should be required to maintain,
with the Servicer or as directed by the Servicer, a cash deposit or
comparable security equal to two months' maximum estimated collections of
all charges payable to the Petitioner, including the Transition Bond
Charges and MTC-Tax, as agreed upon by Petitioner (or any successor
Servicer) and the TPS. In the event of a default in the remittance of any
such charges by a TPS, any shortfall in Transition Bond Charge or MTC-Tax
collections by a TPS would be included in the periodic adjustment of the
Transition Bond Charge and MTC-Tax as described in Exhibit A.
P. SERVICING
Pursuant to Section 22 of the Act, Petitioner will enter into a
servicing agreement with the SPE to perform servicing functions on behalf
of the SPE. Pursuant to the servicing agreement with the SPE, Petitioner
will act as Servicer of the Bondable Transition Property. Petitioner will
be responsible for customer kWh billing and usage information, and for
billing, collecting and remitting the Transition Bond Charges. Petitioner's
proposed procedures for remittance of Transition Bond Charges are described
in Exhibit C hereto.
Petitioner, as Servicer, will contract with each SPE to collect
amounts in respect of the Transition Bond 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
Petitioner, as initial Servicer, may not voluntarily resign its duties as
Servicer without obtaining the prior approval of the Board or if such
resignation will result in the reduction or withdrawal of the credit
ratings of Transition Bonds. In the event that the Petitioner defaulted in
its servicing functions, as set forth in the servicing agreement, or were
required to discontinue its billing and collecting functions, a successor
Servicer acceptable to the Bond Trustee and the rating agencies would
replace the Petitioner, as Servicer, and assume such billing and collecting
functions. Credit and data-processing quality and expertise in performing
servicing functions are important considerations when appointing a
successor Servicer.
If the Petitioner no longer performs servicing functions, the
Servicing Fee will be paid directly to the successor Servicer and
Petitioner's future rates will not be adjusted to reflect the amount of the
Servicing Fee.
The servicing agreement may include Petitioner's representations,
warranties, agreements, covenants and indemnities for the benefit of the
holders of Transition Bonds.
An annual Servicing Fee equalling .05% (five basis points) of the
initial principal balance of the Transition Bonds, which may be payable in
semiannual or more frequent installments, will be a part of the servicing
agreement and will be recovered through Transition Bond Charges. The
Servicing Fee represents a reasonable good faith estimate of Petitioner's
incremental cost to service Transition Bonds, including billing,
monitoring, collecting, receiving, accounting for and remitting Transition
Bond Charges, systems modifications to bill, monitor, collect and remit
Transition Bond Charges, reporting requirements imposed by the servicing
agreement, procedures required to coordinate with each TPS, required audits
related to Petitioner's role as Servicer and legal and accounting fees
related to the servicing obligation, together with a reasonable return. The
size of the Servicing Fee has been calculated in a manner to protect the
"bankruptcy remote" nature of the transaction. The Servicing Fee paid to
Petitioner, as Servicer, will be lower than the Servicing Fee paid to a
successor Servicer which does not bill the Transition Bond Charge
concurrently with charges for other services to reflect the higher costs
incurred by such successor. The rating agencies would expect an annual
Servicing Fee as high as 1.25% of the original Transition Bond principal
amount to be authorized in the Financing Order for a successor Servicer
which does not bill and collect charges other than the Transition Bond
Charge. This higher Servicing Fee would assure that a successor Servicer
could be found.
Q. TAX COMPONENT RECOVERIES - ACCOUNTING AND RELATED ISSUES
Pursuant to the Recovery Order, Petitioner has been directed to
recover the Tax Component of the recoverable stranded costs through the
ongoing collection of the MTC-Tax, until full payment of principal and
interest of the Transition Bonds. Pursuant to the Recovery Order, the
MTC-Tax will be subject to mandatory periodic adjustment (at the same time
and in the same manner as the Transition Bond Charges) to reconcile the
MTC-Tax collections with the income tax required to be paid on the taxable
revenue from the Transition Bond Charge and the MTC-Tax. The Petitioner
will maintain separate accounting for the MTC-Tax collections and the
Bondable Transition Property. As provided in Section 23(a)(4) of the Act,
Petitioner's retention of the MTC-Tax will in no way affect or impair the
legal true sale and absolute transfer of the Bondable Transition Property
to the SPE, or otherwise affect the legal rights and attributes of the
Bondable Transition Property under the Act.
5. RATEPAYER BENEFITS AND RELATED FINDINGS
In connection with its issuance of the Recovery Order the Board has
found that (i) the Petitioner has taken all reasonable measures, and has
the appropriate incentives or plans in place to take reasonable measures,
to mitigate the total amount of its recoverable stranded costs, (ii) the
Petitioner will not be able to achieve the level of rate reduction deemed
by the Board to be necessary and appropriate pursuant to the provisions of
Sections 4 and 13 of the Act absent the issuance of Transition Bonds and
the recovery of the MTC-Tax for the term of the Transition Bonds, and (iii)
the issuance of the Transition Bonds will provide tangible and quantifiable
benefits to ratepayers, including greater rate reductions than would have
been achieved absent the issuance of the Transition Bonds and net present
value savings over the term of the Transition Bonds.
In the Issuance Advice Letter, the Petitioner will file with the
Board its estimate of the expected net present value savings and rate
reductions resulting from issuance of the Transition Bonds. Based upon its
most recent rate case, Petitioner has a pre-tax rate of return of 14.23%,
which is equivalent to an after-tax rate of return of 8.42%. Based upon the
structure, methodology and assumptions in Exhibit B and assuming that the
Periodic Payment Requirements are as shown in Attachment A1 to Exhibit A,
Petitioner estimates that the Transition Bond Transaction will result in
net present value savings over the term of the Transition Bonds, and
greater rate reductions than would be required to recover the recoverable
stranded costs if the Transition Bonds were not issued. Specifically, such
savings and reductions will be assured if the weighted average coupon rate
on the Transition Bonds does not exceed 10% per annum. The actual net
present value savings and rate reductions resulting from the Transition
Bond Transaction will depend upon the actual amount of Transition Bonds
issued, market conditions at the time of Transition Bond pricing, and the
actual amount of bondable stranded costs. Pricing, structure, terms and
conditions of the Transition Bonds are to be approved by the Designee
pursuant to the Financing Order.
6. USE OF PROCEEDS
The proceeds, net of underwriting discount, from the sale of
Transition Bonds will be remitted to Petitioner in consideration of
Petitioner's sale of its Bondable Transition Property. In accordance with
Section 14 of the Act, Petitioner will use such proceeds, after paying of
Upfront Transaction Costs, to reduce its Bondable Stranded Costs through
the retirement of its debt or equity, or both (including transactions
completed prior to the date hereof).
7. RELATED ISSUES
There are several related issues that have a potentially significant
impact on the Transition Bond Transaction as described below.
A. TAX CONSIDERATIONS
The benefits of the Transition Bond Transaction depend in large part
on recognizing taxable income in respect of Bondable Stranded Costs as
Transition Bond Charges are paid by customers, rather than such income
being accelerated into current income upon issuance of the Transition
Bonds.
As a result, Petitioner will submit a ruling request to the Internal
Revenue Service ("IRS") seeking confirmation that (a) the issuance of the
Financing Order by the Board will not result in gross income to Petitioner;
(b) the issuance of the Transition Bonds will not result in gross income to
Petitioner; and (c) the Transition Bonds will be treated as obligations of
Petitioner for federal income tax purposes. A favorable ruling is expected.
Should the IRS not provide a ruling, or rule adversely, Petitioner
would have to reassess the Transition Bond Transaction and, if possible,
modify it to eliminate the risk of current taxation.
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 the SPE for financial reporting purposes. Because such SPE
will be a wholly owned subsidiary of Petitioner, it is required that such
SPE be consolidated with Petitioner for financial reporting purposes under
GAAP. Therefore, the SPE's debt will appear on the consolidated balance
sheet of Petitioner in its financial statements filed with the Securities
and Exchange Commission.
For purposes of financial reporting to the Board, Petitioner will
exclude the SPE's debt from its capital structure and exclude interest on
the Transition Bonds and other Ongoing Transition Bond Costs from its
regulated cost of service..
The Transition Bond Transaction is not expected to impact
Petitioner's credit ratings, as it is expected that the rating agencies
will determine that Transition Bonds, which are not supported by
Petitioner's general revenue stream and not collateralized by its assets,
do not adversely affect Petitioner's creditworthiness. Therefore, it is
anticipated that the rating agencies will exclude the Transition Bonds as
debt for purposes of calculating financial ratios.
C. RATING AGENCY CONSIDERATIONS
(i) Bankruptcy-Related Opinions
The rating agencies will expect acceptable opinions of bankruptcy
counsel at the time Transition Bonds are issued for assurance that the
Bondable Transition Property will be bankruptcy-remote from Petitioner. To
obtain such opinions, the transfer of the Bondable Transition Property from
Petitioner to the SPE must constitute a legal "true sale" such that if
Petitioner were to become the subject of a bankruptcy or insolvency case,
the Bondable Transition Property would not be part of its bankruptcy estate
and therefore would not be subject to the claims of its creditors.
Another element of the bankruptcy analysis focuses on the separate
legal status of Petitioner and the SPE. Although Petitioner will wholly own
the SPE, the Transition Bond Transaction will be structured so that, in the
event of a bankruptcy of Petitioner, the SPE's separate legal existence
would be respected and the assets and liabilities of the SPE would remain
separate from the estate of Petitioner. The structural elements supporting
such separate existence include requirements that the SPE be adequately
capitalized, that Petitioner be adequately compensated on an arms-length
basis for the servicing functions it performs in billing, collecting and
remitting the Transition Bond Charges and that Petitioner and the SPE take
steps to ensure that creditors are not misled 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 the SPE's separate existence.
(ii) Credit Enhancement
Credit enhancements are mechanisms that provide investors with added
assurance that they will timely recover their principal and interest as
scheduled. Examples of credit enhancement provided by the seller of
transition property or from proceeds of transition bonds include the
capitalization of the SPE, true-up mechanisms, overcollateralization
amounts and liquidity reserves. Examples of credit enhancement provided by
third parties include bond insurance and letters of credit. The Transition
Bond Transaction will incorporate the True-Up Mechanism authorized by
Section 15 of the Act 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 Transition Bonds
by providing an additional amount to cover shortfalls in Transition Bond
Charge collections. As a result, the Transition Bond Charge will be set to
collect an overcollateralization amount over time in addition to the
principal (in accordance with the expected amortization schedule) and
interest payable on the Transition Bonds, together with the other Periodic
Payment Requirements. The overcollateralization amount needed to satisfy
the rating agencies will be determined by Petitioner with input from the
rating agencies and tax authorities prior to the time Transition Bonds are
priced and will be submitted to the Designee for approval at the time of
pricing of the Transition Bonds. As with other components of the Transition
Bond Charge, the overcollateralization component, any deficiencies on past
due payments and any excess in Transition Bond Charge collections
accumulated under the Indenture will be incorporated into each periodic
adjustment to the extent necessary using the True-Up Mechanism.
Customers will receive credit equal to the amount of any Bondable
Transition Property overcollateralization remaining upon discharge of the
Total Payment Requirements. As a result, overcollateralization will not
reduce customer benefits from the Transition Bond Transaction.
D. ALLOCATION OF COLLECTION SHORTFALLS
In order to preserve the bankruptcy-remote status of the Bondable
Transition Property and Other SPE Collateral once it is transferred to the
SPE, Petitioner cannot have any claim on the Bondable Transition Property.
In its capacity as Servicer, Petitioner will bill Transition Bond Charges
along with other charges for services rendered to customers obligated to
pay such charges. If Petitioner collects less than the full amount that is
billed to such customers, it is not permitted to favor itself over the SPE,
as owner of Bondable Transition Property. As described earlier, upon the
issuance of Transition Bonds, amounts collected from a customer will be
applied first to sales taxes (which Petitioner will collect as trustee for
the State and not for its own account or that of the SPE, and which are not
"charges" for purposes of the following allocations), then to charges in
arrears, if any, and then to current charges. With respect to each billing
period, partial payments of charges will be allocated to the Transition
Bond Charges, to the MTC-Tax and to the Petitioner's other charges, pro
rata, based on the proportions that the Transition Bond Charges, the
MTC-Tax and the Petitioner's other charges bear as the total charges
collected. Partial payments of Transition Bond Charges will be allocated to
the owners of Bondable Transition Property, pro rata, based on the
proportions that the Transition Bond Charge servicing the Bondable
Transition Property and any Transition Bond Charges established pursuant to
other subsequent financing orders bear to the total Transition Bond Charges
collected.
E. SPE ADMINISTRATION AND OTHER TRANSACTIONS WITH THE SPE
The SPE will enter into an administration agreement with Petitioner
pursuant to which Petitioner will perform ministerial services and provide
facilities for the 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 Transition Bond Transaction documents. The Petitioner
will be paid an administration fee in an amount commensurate with its
costs, which will be included in the Periodic Payment Requirements.
8. Correspondence or communications with respect to this petition may
be addressed to:
James T. Foran, Esq., General Corporate Counsel
Public Service Electric and Gas Company
80 Park Plaza, T5B
P.O. Box 570
Newark, New Jersey 07101
Petitioner therefore prays that your Honorable Board approve the
Petitioner's proposal by issuing an irrevocable bondable stranded costs
rate order to authorize (1) the imposition of a nonbypassable transition
bond charge and the collection of such charge, and (2) the sale of the
right to receive such charge to an approved financing entity, and (3) the
issuance of transition bonds by a financing entity to recover Petitioner's
bondable stranded costs and to apply the proceeds of such bonds to retire
Petitioner's outstanding debt, equity or both, and (4) the formula for the
calculation and adjustment of the transition bond charge and the market
transition charge-tax related thereto.
Public Service Electric and Gas Company
By ____________________________________
(James T. Foran)
General Corporate Counsel
80 Park Plaza
Newark, New Jersey 07101
Dated: June 8, 1999
Newark, New Jersey
STATE OF NEW JERSEY )
) SS : ###-##-####
COUNTY OF ESSEX )
MORTON A. PLAWNER, of full age, being duly sworn, upon his oath
deposes and says:
I am a Vice President and Treasurer of Public Service Electric and
Gas Company, the Petitioner named in the foregoing Petition.
The facts stated in said Petition and the Exhibits attached thereto
are true to the best of my knowledge and belief.
By ___________________________
(Morton A. Plawner)
Subscribed and sworn to before me
this 8th day of June, 1999.
_________________________________
EXHIBIT A
TBC AND MTC-TAX FORMULA, WHICH IS ALSO TRUE-UP FORMULA
ATTACHMENT A-1 TO EXHIBIT A
TRANSITION BOND CHARGE PERIODIC PAYMENT REQUIREMENTS
(ASSUMED)
ATTACHMENT A-2 TO EXHIBIT A
PROJECTED INITIAL TBC AND MTC-TAX
ATTACHMENT A-3 TO EXHIBIT A
TBC AND MTC-TAX FORMULA CALCULATION
EXHIBIT B
PV SAVINGS METHODOLOGY
EXHIBIT C
REMITTANCE METHODOLOGY
EXHIBIT D
TPS CRITERIA FROM MOODY'S INVESTORS SERVICES AND FITCH IBCA
