AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000
REGISTRATION NO. 333-83635
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PSE&G TRANSITION FUNDING LLC
(Issuer of Securities)
(Exact name as specified in registrant's Certificate of Formation)
DELAWARE 22-3672053
-----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PSE&G TRANSITION FUNDING LLC
80 PARK PLAZA, [___]
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 CHIEF
80 PARK PLAZA, T-5B 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 D. TASHMAN
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BROWN & WOOD LLP
FOUR TIMES SQUARE 555 CALIFORNIA STREET
NEW YORK, NEW YORK 10036 SAN FRANCISCO, CALIFORNIA 94104
(212) 735-2160 (415) 772-1200
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check
the following box: |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, 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 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 $ 1,000,000 ____% $__________ $278
- ------------------------------------------------------------------------------------------------------------------
(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 supplement 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 supplement 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 [ ], 2000.
Prospectus Supplement to Prospectus dated [ ], 2000.
$________ TRANSITION BONDS, SERIES 2000-___
PSE&G TRANSITION FUNDING LLC
Issuer of the Transition Bonds
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Seller and Servicer
<TABLE>
<CAPTION>
Underwriting Expected
Principal Interest Discounts Net Final Final
Amount Rate Price Commissions Proceeds Payment Maturity
---------- ---------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Transition Bonds
Class A-2 Transition Bonds
Class A-3 Transition Bonds
Class A-4 Transition Bonds
Class A-5 Transition Bonds
Class A-6 Transition Bonds
Class A-7 Transition Bonds
Class A-8 Transition Bonds
The total price to the public is $_____. The total amount of the
underwriting discounts and commissions is $_____. The total amount of
proceeds plus accrued interest but before deduction of expenses is $_____.
</TABLE>
Consider carefully the risk factors beginning on page 13 of the
accompanying prospectus before buying the transition bonds. There currently
is no secondary market for the transition bonds, and there is no assurance
that one will develop.
The transition bonds represent obligations of PSE&G Transition Funding LLC
only, 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 respective affiliates, other than the issuer, are liable
for payments on the transition bonds.
This prospectus supplement and the accompanying base prospectus together
constitute the prospectus for the series 2000-__ transition bonds.
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 or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
___________, 2000
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
<S> <C>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS...............................................S-3
INTRODUCTION...............................................................................S-4
The Collateral.....................................................................S-5
Payment Sources....................................................................S-5
THE SERIES 2000-___ TRANSITION BONDS.......................................................S-6
Principal Payments.................................................................S-7
Interest Payments..................................................................S-8
Distribution Following Acceleration................................................S-9
Optional Redemption................................................................S-9
CREDIT ENHANCEMENT........................................................................S-10
Periodic Adjustment of the Transition Bond Charge.................................S-10
Collection Account and Subaccounts................................................S-10
DESCRIPTION OF BONDABLE TRANSITION PROPERTY...............................................S-13
THE TRANSITION BOND CHARGE................................................................S-14
UNDERWRITING THE SERIES 2000-___ TRANSITION BONDS.........................................S-15
The Underwriters' Sales Price for the Series 2000-___ Transition Bonds............S-16
No Assurance as to Resale Price or Resale Liquidity for the Transition Bonds......S-16
Various Types of Underwriter Transactions Which May Affect the
Price of the Transition Bonds..............................................S-16
RATINGS FOR THE SERIES 2000-___ TRANSITION BONDS..........................................S-17
</TABLE>
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 2000-___ 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. You should read both of these documents in full before buying
the transition bonds.
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 preceding pages.
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.
INTRODUCTION
THE ISSUER: PSE&G Transition Funding LLC, a
Delaware limited liability company
ISSUER'S ADDRESS: 80 Park Plaza, [___], Newark, New
Jersey 07102
ISSUER'S TELEPHONE NUMBER: (973) 430-7000
SELLER OF THE BONDABLE Public Service Electric and Gas Company,
TRANSITION PROPERTY TO referred to as PSE&G, an operating
THE ISSUER: electric and gas public utility,
incorporated under the laws of the
State of New Jersey in 1924. PSE&G
serves approximately 1.9 million
electric customers and 1.6 million gas
customers in New Jersey.
SELLER'S ADDRESS: 80 Park Plaza, Newark, New Jersey 07102
SELLER'S TELEPHONE NUMBER: (973) 430-7000
SERVICER OF THE BONDABLE PSE&G will act as servicer of the bondable
TRANSITION PROPERTY: transition property.
PSE&G will be entitled to a monthly
servicing fee of 1/12th of 0.05% of
the initial principal balance of the
transition bonds which the servicer
will withhold on a monthly basis from
the transition bond charge
collections. If PSE&G is replaced by a
successor servicer, the successor
servicer may be paid an annual fee of
up to 1.25% of the initial principal
balance of the transition bonds.
TRUSTEE: The Bank of New York
MINIMUM DENOMINATION: $1,000, except for one transition bond of
each class which may be of a smaller
denomination.
THE COLLATERAL
The transition bonds will be secured by bondable transition
property, a property right created under New Jersey state legislation. In
general terms, the bondable transition property represents the irrevocable
right to recover, through a transition bond charge payable by retail
electric customers within PSE&G's service territory who access PSE&G's
transmission and distribution system, an amount sufficient to pay:
o the interest, fees, expenses, costs, charges, credit
enhancement and premiums, if any, associated with the
transition bonds, and
o the principal amount of the transition bonds.
The proceeds of the transition bonds will be used to pay a portion
of PSE&G's stranded costs. Stranded costs are the amount determined by the
State of New Jersey Board of Public Utilities, referred to as the BPU, by
which an electric utility's net electric generation related costs which
traditionally would be recoverable under a regulated electric generation
retail market exceed those costs recoverable in a competitive electric
generation retail market. The bondable transition property is described in
more detail under "THE SALE AGREEMENT--PSE&G'S SALE AND ASSIGNMENT OF
BONDABLE TRANSITION PROPERTY" in the prospectus.
In connection with the issuance of the transition bonds, PSE&G will
sell its bondable transition property to the issuer. PSE&G, as servicer of
the bondable transition property, will collect the transition bond charge
from customers on behalf of the issuer. The transition bond charge is
non-bypassable, as described in the prospectus. See "THE COMPETITION
ACT--PSE&G AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS" in the
prospectus. Third party suppliers of electricity to PSE&G's customers may
be allowed to collect the transition bond charge from customers and pay the
billed amounts to PSE&G, as servicer. PSE&G has not as yet entered into any
arrangements with third party suppliers for billings and collections. Since
the amount of transition bond charge collections will depend on the amount
of electricity consumed by customers within PSE&G's service territory, the
amount of collections may vary substantially from year to year. See "THE
SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY" in the prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be
paid on transition bonds from amounts available for withdrawal from trust
accounts held by the trustee or paid pursuant to contracts pledged to
secure one or more series of transition bonds, including collections
received from the servicer with respect to the transition bond charge
during the prior three months. All series of transition bonds, including
the series 2000-___ transition bonds, will be payable from the same
bondable transition property. If another series of bonds is issued, the
principal source of repayment for that series will also be the transition
bond charge collections received by the servicer. The issuance of other
series of transition bonds is not expected to adversely affect the
sufficiency of transition bond charge collections to make payments on the
series 2000-___ transition bonds. This is because the transition bond
charge and adjustments thereof are generally based on the total outstanding
principal balance of all transition bonds. Moreover, any additional series
of transition bonds will be issued only if it will not result in the
downgrading or withdrawal of any rating by a rating agency on any
outstanding transition bonds. See "THE INDENTURE" in the prospectus.
THE SERIES 2000-___ 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 series 2000-___ transition bonds will be issued in minimum
denominations of $1,000 and in integral multiples of $1.00 above that
amount, with an exception for one transition bond in each class which may
have a smaller denomination. The series 2000-___ transition bonds will
consist of eight classes, in the initial principal balances, 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 Interest Rate Payment-Date Maturity-Date
- ----------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
_____________ _____________
A-1 $__________ [__________%] (__________) (__________)
_____________ _____________
A-2 $__________ [__________%] (__________) (__________)
_____________ _____________
A-3 $__________ [__________%] (__________) (__________)
_____________ _____________
A-4 $__________ [__________%] (__________) (__________)
_____________ _____________
A-5 $__________ [__________%] (__________) (__________)
_____________ _____________
A-6 $__________ [__________%] (__________) (__________)
_____________ _____________
A-7 $__________ [__________%] (__________) (__________)
_____________ _____________
A-8 $__________ [__________%] (__________) (__________)
</TABLE>
The expected final payment date for each class of the series 2000-___
transition bonds is the date on which there is expected to be no further
outstanding principal balance of that class in accordance with the expected
amortization schedule for that class. The final maturity date for each
class of the series 2000-___ transition bonds is the date on which the
issuer is required to pay any outstanding principal balance of that class.
On each payment date, payments will be made to the persons that were the
holders of record as of the business day before that payment date, which is
referred to as the record date.
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the
series 2000-___ transition bonds to the series 2000-___ transition
bondholders, in accordance with the expected amortization schedule and to
the extent funds are available, in the following order:
(1) to the holders of the class A-[ ] series 2000-[ ] 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 series 2000-___ 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 in Table 2 below, referred to as the
expected amortization schedule, for that class on that payment date. The
entire unpaid principal balance of each class of series 2000-___ 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 balance 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 series 2000-___ transition bonds.
The table reflects the principal balance for each class at each payment
date after taking into account principal payments scheduled to be made on
that date. In establishing the expected amortization schedule, it has been
assumed, among other things, that:
1. the series 2000-___ transition bonds are issued on ________;
2. payments on the series 2000-___ transition bonds are made on
each payment date, commencing on ________;
3. the total annual servicing fee for the series 2000-___
transition bonds equals 0.05% of the initial outstanding
principal balance of the series 2000-___ 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 or before each payment
date and that these amounts are payable in arrears; and
6. all transition bond charge collections are received in
accordance with PSE&G's forecasts and deposited in the
collection account.
<TABLE>
<CAPTION>
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Class Class Class Class Class Class Class Class
A-1 A-2 A-3 A-4 A-5 A-6 A-7 A-8
Date Balance Balance Balance Balance Balance Balance Balance Balance
- -------- ---------- ---------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------- ---------- ---------- ---------- --------- --------- --------- --------- ---------
- -------- ---------- ---------- ---------- --------- --------- --------- --------- ---------
</TABLE>
There can be no assurance that the principal balance of any class
of the series 2000-___ transition bonds will be reduced at the rate
indicated in the foregoing table. The actual rates of reduction in class
principal balances may be slower but, except in the case of optional
redemption or acceleration due to an event of default, not faster than
those indicated in Table 2. The series 2000-___ transition bonds will not
be in default if not paid as specified above in Table 2 unless the final
outstanding principal balance of any class is not paid in full on or before
the final maturity date of that class.
INTEREST PAYMENTS
Interest on each class of series 2000-___ transition bonds will
accrue from the date of issuance until the first payment date, and
thereafter from payment date to payment date until the transition bonds
have been paid in full, at the interest rate indicated in Table 1. The
issuer is required to pay interest quarterly on September 15, December 15,
March 15 and June 15 for each year, beginning September 15, 2000, or, if
such day is not a business day, the following business day. Each such day
is referred to as a payment date.
On each payment date, the issuer will pay interest on each class of
the series 2000-___ transition bonds as follows:
o if there has been a payment default, any unpaid interest
payable but unpaid on any prior payment dates, together with
accrued interest on any such unpaid interest; and
o accrued interest on the principal balance of each class of
series 2000-___ transition bonds as of the close of business
on the preceding payment date, or the date of issuance of
the class of series 2000-___ transition bonds, as
applicable, after giving effect to all payments of principal
made on the preceding payment date.
The issuer will pay interest on the series 2000-___ 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 amount necessary to make
interest payments that are due on the series 2000-___ transition bonds from
the amount available to pay interest on the series 2000-___ transition
bonds, the trustee will distribute interest to each class of the series
2000-___ transition bonds based on the proportion that the outstanding
principal balance of that class immediately prior to that payment date
bears to the outstanding principal balance of all classes of the series
2000-___ transition bonds immediately prior to that payment date. The
issuer will calculate interest on the basis of a 360- day year consisting
of twelve 30-day months.
DISTRIBUTION FOLLOWING ACCELERATION
Upon an acceleration of the maturity of the transition bonds, the
total outstanding principal balances of and interest accrued on the series
2000-___ transition bonds will be payable without priority of interest over
principal or principal over interest and without regard to series or class,
in the proportion that the total balance bears to the total outstanding
principal balances of and interest accrued on the series 2000-___
transition bonds.
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series 2000-___
transition bonds, at its option, on any payment date if the outstanding
principal balance of the series 2000-___ transition bonds, after giving
effect to payments scheduled to be made on that payment date, is less than
5% of the total initial principal balance of the series 2000-___ transition
bonds. In the case of redemption, the issuer will pay the outstanding
principal balance of the series 2000-___ 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 series 2000-___
transition bonds will not be redeemed before the expected final payment
date in any other circumstances except in the case of acceleration due to
an event of default.
CREDIT ENHANCEMENT
Credit enhancement for the series 2000-___ 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 BPU to the transition bond charge to be billed
to customers, upon petition by PSE&G, as servicer. Under the BPU financing
order, the servicer may petition the BPU for an adjustment to the
transition bond charge. PSE&G, as servicer, will petition for an adjustment
annually through December 1, 2013 and quarterly commencing on June 1, 2014.
The periodic adjustments will be designed to provide, among other things,
sufficient funds for timely payments of principal and interest 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 collections:
(1) to pay transaction fees and expenses;
(2) to make scheduled payments on the transition bonds; and
(3) to fund any of the subaccounts, including the capital
subaccount and the overcollateralization subaccount, to
their required levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the capital
contribution from PSE&G to the issuer and the amounts remitted by the
servicer from time to time. The collection account will contain the funds
securing the transition bonds. The collection account will consist of
subaccounts including the following:
o the general subaccount;
o one or more series subaccounts;
o one or more series capital subaccounts (including the
capital reserve subaccount with respect to the series
2000-___ transition bonds, as discussed below)
o one or more series overcollateralization subaccounts; and
o the reserve subaccount.
Withdrawals from and deposits to all of 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 General Subaccount. Transition bond charge collections remitted
by the servicer to the trustee will be deposited into the general
subaccount. On each payment date, the trustee will allocate amounts in the
general subaccount to make the allocations described under "THE
INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the
prospectus.
The Series Subaccount. Upon the issuance of the series 2000-___
transition bonds, a series subaccount will be established with respect to
the series 2000-___ transition bonds. On each payment date, the trustee
will allocate from amounts on deposit in the general subaccount to the
series subaccount for each series an amount sufficient to pay, to the
extent available:
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; and
3. principal scheduled to be paid on that series on that
payment date, as set forth in the expected amortization
schedule, excluding amounts provided for in clause 2 above.
On each payment date, allocations will be made to each series subaccount as
described under "THE INDENTURE--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in the prospectus. On each payment date, the trustee will
withdraw funds from each series subaccount to make payments on the related
series of transition bonds.
The Capital Subaccount. Upon the issuance of the series 2000-___
transition bonds, a capital subaccount will be established for the series
2000-___ transition bonds, into which PSE&G will deposit $________, which
represents the required capital amount for the series. Further, the trustee
will establish a subaccount within the capital subaccount, which will be
referred to as the capital reserve subaccount. The trustee will fund the
capital reserve subaccount with $100,000 from the required capital amount
for the series 2000-___ transition bonds. The capital reserve subaccount
will not be subject to the lien of the indenture or included in the
collateral securing any transition bonds. If amounts available in the
general subaccount, the series subaccount, the reserve subaccount and the
series overcollateralization subaccount are not sufficient on any payment
date to make scheduled payments of principal and interest to the series
2000-___ transition bondholders and to pay the expenses, fees and charges
specified in the indenture, the trustee will draw on amounts in the series
capital subaccount (other than the amounts in the capital reserve
subaccount) to make those payments. The required capital amount has been
set at a level sufficient to obtain the ratings on the series 2000-___
transition bonds described below under "RATINGS FOR THE SERIES 2000-___
TRANSITION BONDS."
The Overcollateralization Subaccount. Upon the issuance of the
series 2000-___ transition bonds, an overcollateralization subaccount will
be established for the series 2000-___ transition bonds. The
overcollateralization amount for the series 2000-___ transition bonds is
$______ million, which represents [ ]% of the initial outstanding principal
balance of the series. On each payment date, the trustee will deposit in
the series overcollateralization subaccount transition bond charge
collections up to a specified amount for that payment date which is
referred to as the scheduled overcollateralization level for that date. The
scheduled overcollateralization level for each payment date is set forth
below. The overcollateralization amount and the scheduled
overcollateralization levels have been set at amounts sufficient to obtain
the ratings on the series 2000-___ transition bonds which are described
below under "RATINGS FOR THE SERIES 2000-___ TRANSITION BONDS." The
required overcollateralization amount will not be less than 0.5% of the
initial outstanding principal balance of the series 2000-___ transition
bonds. See also "THE TRANSITION BONDS--CREDIT ENHANCEMENT FOR THE
TRANSITION BONDS" in the prospectus.
<TABLE>
<CAPTION>
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
Scheduled Over- Scheduled Over-
Payment Date Collateralization Level Payment Date Collateralization Level
- --------------------- ------------------------ --------------- -------------------------
<S> <C> <C> <C>
- --------------------- ------------------------ --------------- -------------------------
</TABLE>
If amounts available in the general subaccount, the series
subaccount and the reserve subaccount are not sufficient on any payment
date to make scheduled payments to the series 2000-___ transition
bondholders and to pay the expenses, fees and charges specified in the
indenture, the trustee will draw on amounts in the series 2000-___
overcollateralization subaccount to make those payments.
The Reserve Subaccount. The reserve subaccount will be funded with
any 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. fees and expenses of the trustee and the servicer and other
fees, expenses, costs and charges,
2. scheduled principal of and interest on the transition bonds
of each series payable on that payment date,
3. any amount required to replenish the capital subaccount for
each series, and
4. the amounts required to fund the overcollateralization
subaccount for each series to the required levels for that
payment date.
The transition bond charge will be adjusted periodically to eliminate any
amounts on deposit in the reserve subaccount. See also "THE TRANSITION
BONDS--CREDIT ENHANCEMENT FOR THE TRANSITION BONDS" and "THE BPU FINANCING
ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S TRANSITION BOND CHARGE
ADJUSTMENT PROCESS" in the prospectus.
On any payment date, if amounts available in the general subaccount
and the series subaccount are not sufficient to make scheduled payments to
the series 2000-___ 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.
DESCRIPTION OF BONDABLE TRANSITION PROPERTY
Bondable transition property is a property right created by New
Jersey state legislation. Bondable transition property represents the
irrevocable right of an electric public utility to charge, collect and
receive, and be paid from collections of, transition bond charges, in
amounts sufficient to recover the following, referred to as bondable
stranded costs:
1. the stranded costs of an electric utility approved by the
BPU for recovery through the issuance of transition bonds;
2. the costs of retiring existing debt or equity capital of the
electric utility, including accrued interest and premiums,
and other related fees, costs and charges, approved by the
BPU; and
3. the costs incurred to issue, service or refinance the
transition bonds, including accrued interest and acquisition
or redemption premium, and other financing costs and related
fees, costs and charges, including but not limited to credit
enhancements, service charges, overcollateralization,
interest rate caps, swaps or collars, yield maintenance,
maturity guarantees and other hedging agreements or to sell
or transfer the bondable transition property, or to assign,
sell or otherwise transfer bondable transition property,
approved by the BPU.
Bondable transition property also includes the right of an electric public
utility to obtain periodic adjustments of the transition bond charge and
all revenues, collections, payments, money and proceeds with respect to the
above.
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.
PSE&G Will Assess the Transition Bond Charge on Customers. PSE&G,
in its capacity as servicer of the bondable transition property under the
servicing agreement, will assess the transition bond charge on the bills of
each customer. A customer is a person that is an end user of electricity,
is connected to any part of PSE&G's transmission and distribution system
and is located within PSE&G's service territory. With the exception of the
usage for a single customer pursuant to a particular wholesale-based
contract, each customer who accesses PSE&G's transmission and distribution
system must pay the transition bond charge, even if that customer elects to
purchase electricity from another supplier. In certain limited
circumstances, customers who self-generate may avoid the transition bond
charge, as described under "THE COMPETITION ACT--PSE&G AND OTHER UTILITIES
MAY SECURITIZE STRANDED COSTS--Customers Cannot Avoid Paying the Transition
Bond Charge." The transition bond charge is assessed as a uniform per
kilowatt-hour charge against all customers of all classes, the amount of
the charge depending on the amount of electricity delivered to the customer
through PSE&G's distribution system. Any third party supplier of
electricity to PSE&G's customers must pay PSE&G the transition bond charge
billed by such third party supplier to PSE&G's customers.
PSE&G Will Calculate the Transition Bond Charge. PSE&G, as
servicer, will calculate the transition bond charge based on the total
amount required to be billed to customers to generate transition bond
charge collections sufficient to provide funds for the timely payment of
scheduled principal of and interest on the transition bonds and the other
amounts required to be paid by the issuer. The charge will be reflected in
each customer's bill. Transition bond charge collections will vary from
projections because total electricity consumption revenues are affected by
changes in usage, number of customers, rates of delinquencies and
write-offs or other factors. See Tables 1 through 9 under "THE SELLER AND
SERVICER OF THE BONDABLE TRANSITION PROPERTY" in the prospectus. PSE&G, as
servicer, is required to seek adjustments to the transition bond charge on
each calculation date as described under "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE" in the prospectus, in order to adjust for such
variations on each calculation date.
The initial transition bond charge will be calculated on the basis of:
1. the issuance of $2.525 billion of series 2000-___ transition
bonds,
2. the projected total payments required in relation to the
transition bonds during the period commencing on the date of
issuance of the series 2000-___ transition bonds and ending
December 31, 2000, and
3. the estimated amount of kilowatt-hours of electricity
delivered, billed and collected during that period.
The BPU's Transition Bond Charge Adjustment Process. Transition
bond charge collections are intended to be neither more nor less than the
amount necessary to pay the principal balance of the transition bonds of
each series in accordance with the expected amortization schedule, to pay
interest on each series, to pay related costs and expenses and to fund or
replenish the subaccounts. The BPU financing order does not limit the
number of transition bond charge adjustments except to provide that
adjustments may not occur more frequently than quarterly. Furthermore, the
BPU is obliged to continue to approve transition bond charge adjustments
calculated in accordance with the formula until there are no transition
bonds outstanding and all fees and expenses of the issuer have been paid.
In order to enhance the likelihood of a proper amount of transition bond
charge collections, the servicing agreement requires the servicer to
petition the BPU to approve adjustments to the transition bond charge
annually through December 1, 2013, and quarterly commencing on June 1, 2014
for so long as the series 2000-___ transition bonds are outstanding. The
adjustments will adjust the transition bond charge so that the charge will
be sufficient to pay scheduled principal of and interest on the series
2000-___ transition bonds and will be in an amount required to provide
revenues sufficient to provide for the full recovery of bondable stranded
costs. Each periodic 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.
There will be a single per kilowatt-hour transition bond charge for
all customers of all classes. Initially, PSE&G estimates that the
transition bond charge will be approximately $0.007497 per kilowatt-hour
for all customers of all classes, beginning on the issuance date of the
series 2000-___ transition bonds. See "THE COMPETITION ACT" and "THE BPU
FINANCING ORDER AND THE TRANSMISSION BOND CHARGE" in the prospectus.
UNDERWRITING THE SERIES 2000-___ TRANSITION 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 Inc. is acting as the representative, the issuer has agreed to
sell to the underwriters, and the underwriters have severally agreed to
purchase, the principal balance of series 2000-___ 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 series 2000-___ transition bonds offered hereby, if any
are taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES 2000-___ TRANSITION BONDS
Series 2000-___ 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.
SELLING REALLOWANCE
CLASS 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 2000-___ 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 Securities Exchange Act of 1934. 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 of 1933.
RATINGS FOR THE SERIES 2000-___ TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the
series 2000-___ transition bonds that each class of the series 2000-___
transition bonds be rated "___" by Standard & Poor's Rating Services, "___"
by Moody's Investors Service, Inc. and "___" by Fitch IBCA, Inc.
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, as well as the timely payment of interest.
[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.
PROSPECTUS
Subject to Completion. Dated [ ], 2000.
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 13
of this prospectus before buying the transition bonds.
The transition bonds represent obligations of PSE&G Transition Funding LLC
only, 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 respective 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, together with the applicable prospectus supplement,
constitutes a summary of material terms of the offering of a series of
transition bonds. 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 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. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
[ ], 2000
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS...............................................1
SUMMARY OF TERMS..............................................................................................2
PARTIES TO THE TRANSACTION....................................................................................4
The Collateral..........................................................................................5
Payment Sources.........................................................................................5
Priority of Distributions...............................................................................6
Credit Enhancement and Accounts.........................................................................7
State Pledge............................................................................................9
Payments of Interest and Principal.....................................................................11
Optional Redemption....................................................................................11
Payment Dates and Record Dates.........................................................................11
Material Income Tax Considerations.....................................................................11
ERISA Considerations...................................................................................11
REPORTS TO TRANSITION BONDHOLDERS............................................................................12
RISK FACTORS.................................................................................................13
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..........................................................................................13
Judicial, Legislative or Regulatory Action That May Adversely Affect Your Investment.........................13
The Law Which Underpins the Transition Bonds May Be Invalidated........................................13
The Competition Act May Be Overturned by the Federal Government Without Full
Compensation.........................................................................................15
Future State Legislative Action May Invalidate the Transition Bonds or Their
Underlying Assets....................................................................................16
The BPU May Take Action Which Reduces the Value of the Transition Bonds................................17
Servicing Risks..............................................................................................18
Inaccurate Forecasting or Unanticipated Delinquencies Could Result in Insufficient
Funds to Make Scheduled Payments on the Transition Bonds.............................................18
Initially, the Calculation of the Transition Bond Charge May Be Affected By Limited
Experience with the Transition Bond Charge...........................................................19
PSE&G May Encounter Unexpected Problems in the Initial Administration of the
Transition Bond Charge...............................................................................19
If the Servicer Defaults or Becomes Bankrupt, It May Be Difficult to Find a
Successor Servicer and Payments on the Bonds May Be Suspended........................................19
Billing and Collection Practices May Reduce the Amount of Funds Available for
Payments on the Transition Bonds.....................................................................20
It May Be Difficult to Collect the Transition Bond Charge From Third Parties Who
Provide Electricity to PSE&G's Customers.............................................................20
PSE&G's Customer Payments May Decline Due to Confusion.................................................21
Inability to Terminate Service to Certain Delinquent Customers in Winter May
Temporarily Reduce Amounts Available for Payments on the Transition Bonds............................21
The Risks Associated With Potential Bankruptcy Proceedings...................................................22
PSE&G Will Commingle the Transition Bond Charge with Other Revenues Which
May Obstruct Access to the Issuer's Funds in Case of Bankruptcy of PSE&G.............................22
Bankruptcy of PSE&G Could Result in Losses or Delays in Payments on the
Transition Bonds.....................................................................................22
The Sale of the Bondable Transition Property Could be Construed as a Financing and
Not a Sale in a Case of PSE&G's Bankruptcy...........................................................24
A BPU Sequestration Order for Bondable Transition Property in Case of Default
Might Not Be Enforceable in Bankruptcy...............................................................24
Other Risks Associated With An Investment In The Transition Bonds............................................25
Absence of Secondary Market for Transition Bonds Could Limit Your Ability to
Resell Transition Bonds..............................................................................25
The Issuer May Issue Additional Series of Transition Bonds Whose Holders Have
Conflicting Interests................................................................................25
The Ratings Have a Limited Function and They Are No Indication of the Expected
Rate of Payment of Principal on the Transition Bonds.................................................25
PSE&G's Obligation to Indemnify the Issuer For a Breach of a Representation or
Warranty May Not Be Sufficient to Protect Your Investment............................................26
FORWARD-LOOKING STATEMENTS...................................................................................26
PUBLIC SERVICE ELECTRIC AND GAS COMPANY......................................................................27
USE OF PROCEEDS..............................................................................................29
THE COMPETITION ACT..........................................................................................29
Recovery of Stranded Costs is Allowed for PSE&G and Other New Jersey Utilities.........................30
PSE&G and Other Utilities May Securitize Stranded Costs................................................30
PSE&G'S RESTRUCTURING........................................................................................34
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE.......................................................35
The BPU Financing Order................................................................................35
The BPU's Transition Bond Charge Adjustment Process....................................................38
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY..................................................39
PSE&G..................................................................................................39
Public Service Enterprise Group Incorporated...........................................................39
PSE&G's Customer Classes...............................................................................40
Electric Revenue, Number of Customers and Consumption..................................................41
Percentage Concentration Within PSE&G's Large Commercial and Industrial
Customers............................................................................................43
How PSE&G Forecasts the Number of Customers and the Amount of Electricity
Usage................................................................................................43
Forecast Variances.....................................................................................44
Credit Policy; Billing; Collections and Write-Offs; Termination of Service.............................44
Loss and Delinquency Experience........................................................................46
How PSE&G Will Apply Partial Payments by its Customers.................................................49
PSE&G TRANSITION FUNDING LLC, THE ISSUER.....................................................................49
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS..........................................................52
THE TRANSITION BONDS.........................................................................................53
General Terms of the Transition Bonds..................................................................54
Payments of Interest and Principal on the Transition Bonds.............................................54
Redemption of the Transition Bonds.....................................................................56
Credit Enhancement for the Transition Bonds............................................................56
Transition Bonds Will Be Issued in Book-Entry Form.....................................................57
Certificated Transition Bonds..........................................................................60
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS.....................................................................................61
THE SALE AGREEMENT...........................................................................................62
PSE&G's Sale and Assignment of Bondable Transition Property............................................63
PSE&G's Representations and Warranties.................................................................63
PSE&G's Obligation to Indemnify the Issuer and the Trustee and to Take Legal
Action...............................................................................................68
Successors to PSE&G....................................................................................69
THE SERVICING AGREEMENT......................................................................................70
PSE&G's Servicing Procedures...........................................................................71
The BPU's Transition Bond Charge Adjustment Process....................................................73
PSE&G's Transition Bond Charge Collections.............................................................74
PSE&G's Compensation for Its Role as Servicer and Its Release of Other Parties.........................74
PSE&G's Duties as Servicer.............................................................................74
PSE&G's Representations and Warranties as Servicer.....................................................75
PSE&G, as Servicer, Will Indemnify the Issuer and Other Related Entities...............................76
PSE&G, as Servicer, Will Provide Statements to the Issuer and to the Trustee...........................76
PSE&G to Provide Compliance Reports Concerning the Servicing Agreement.................................77
Matters Regarding PSE&G as Servicer....................................................................78
Events Constituting a Default by PSE&G in Its Role as Servicer.........................................79
The Trustee's Rights if PSE&G Defaults as Servicer.....................................................80
The Obligations of a Servicer That Succeeds PSE&G......................................................80
THE INDENTURE................................................................................................80
The Security for the Transition Bonds..................................................................81
Transition Bonds May Be Issued in Various Series or Classes............................................82
The Collection Account for the Transition Bonds........................................................83
How Funds in the Collection Account Will Be Allocated..................................................88
Reports to Holders of the Transition Bonds.............................................................91
The Issuer and the Trustee May Modify the Indenture....................................................91
What Constitutes an Event of Default on the Transition Bonds...........................................95
Covenants of the Issuer................................................................................98
Access to the List of Holders of the Transition Bonds.................................................100
The Issuer Must File an Annual Compliance Statement...................................................100
The Trustee Must Provide a Report to All Transition Bondholders.......................................100
What Will Trigger Satisfaction and Discharge of the Indenture.........................................101
The Issuer's Legal Defeasance and Covenant Defeasance Options.........................................101
The Trustee...........................................................................................103
Governing Law.........................................................................................103
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT.........................................................................103
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS........................................................107
Income Tax Status of the Transition Bonds.............................................................107
General...............................................................................................107
Tax Consequences To U.S. Holders .....................................................................109
Tax Consequences to Non-U.S. Holders..................................................................109
Backup Withholding....................................................................................111
Material State of New Jersey Tax Matters..............................................................111
ERISA CONSIDERATIONS........................................................................................112
Plan Asset Issues For an Investment in the Transition Bonds...........................................113
Prohibited Transaction Exemptions.....................................................................113
General Investment Considerations For Prospective Plan Investors in the Transition
Bonds...............................................................................................115
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS...............................................................115
RATINGS FOR THE TRANSITION BONDS............................................................................116
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS......................................................117
</TABLE>
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information related to 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. This prospectus and the related prospectus
supplement do not constitute an offer to sell, or a solicitation of an
offer to buy, any security in any jurisdiction in which it is unlawful to
make 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.
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 13 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, [___], Newark, New Jersey 07102
Issuer's Telephone Number: (973) 430-7000
Seller of the Bondable Public Service Electric and Gas Company,
Transition Property to the referred to as PSE&G, an operating electric
Issuer: and gas utility, incorporated under the laws
of the State of New Jersey in 1924. As of
December 31, 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. Approximately 70%
of the State's population resides in
PSE&G's service territory which
encompasses 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
bondable transition property pursuant to
a servicing agreement with the issuer.
PSE&G will be entitled to a monthly
servicing fee, in an amount specified in
the prospectus supplement, which the
servicer will be entitled to withhold on
a monthly basis from the transition bond
charge collections.
Trustee: The Bank of New York
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 provide for the payment of
the transition bonds.
Transaction Overview: The Electric Discount and Energy
Competition Act, enacted in State of New
Jersey in February 1999, which is
referred to as the Competition Act,
authorizes public utilities, such as
PSE&G, to recover stranded costs.
Stranded costs are the costs of
generation-related investments and other
obligations that cannot be recouped
through market-based rates in a
competitive electricity generation retail
market. 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. The
Competition Act 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 comprises the bondable
transition property. See "THE TRANSITION
BONDS" in this 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, other
than the issuer. 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. The State of New Jersey Board of Public Utilities,
referred to as the BPU, issued to PSE&G on September 17, 1999 an order
providing, among other things, for the issuance of transition bonds. This
order is referred to as 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 electric customers within its service territory who access PSE&G's
transmission and distribution system, an amount sufficient to pay:
o the principal balance of and interest on 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. The third party suppliers will
be required to pay the billed amounts to the servicer. See "THE SELLER AND
SERVICER OF THE BONDABLE TRANSITION PROPERTY" in this prospectus.
The net proceeds from the sale of 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 electric generation retail market exceed those costs recoverable
in a competitive electric generation retail 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 three months;
o any third party credit enhancement; 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 remitted
by the servicer together with all investment earnings on the trust
accounts, to the extent funds are available in the collection account, in
the following order of priority:
(a) Monthly, to the payment of the trustee fee, together with
any expenses (including any legal fees and expenses) and any
indemnity amounts owed to the trustee. So long as The Bank
of New York is the trustee, the monthly trustee fee will be
$1,250.
(b) Monthly, to the payment of the servicing fee and any unpaid
monthly servicing fees, if such fees have not been withheld
by the servicer from transition bond charge collections for
that purpose. 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 initial principal balance of each series of
transition bonds.
(c) On each payment date specified in the related prospectus
supplement, to
(1) payment of the administration fee in an amount
specified in the administration agreement, and
payment of the fees and expenses (including any legal
fees and expenses) of, and any indemnity amounts
payable to, the independent managers of the issuer,
up to a total amount of $[______];
(2) so long as no event of default has occurred and is
continuing or would be caused by this payment,
payment of any current operating expenses of the
issuer, excluding items (a), (b) and (c)(1) above, up
to a total of $100,000 for such payment date for all
series;
(3) payment of the interest then due on the transition
bonds or payment to the counterparty on any interest
rate swap any amounts then due, excluding any
termination or similar non-recurring payments;
(4) payment of the principal balance of the transition bonds
then due as follows:
o the outstanding principal balance of all series
of the transition bonds upon an acceleration
following an event of default; plus
o on the final maturity date of any transition
bonds, the outstanding principal balance of
those transition bonds; plus
o on the redemption date of any transition bonds,
the outstanding principal balance of those
transition bonds called for redemption;
(5) payment of the principal then scheduled to be paid on
the transition bonds according to the expected
amortization schedule other than principal paid under
item (c)(4) above;
(6) payment of any amounts payable under any hedge
agreement other than any amounts paid under item
(c)(3) above.
(7) payment of any remaining unpaid operating expenses
and indemnity amounts;
(8) replenishment of each series capital subaccount, pro
rata, up to the required capital amount for each
series;
(9) replenishment and funding of each series
overcollateralization subaccount, pro rata, up to the
scheduled overcollateralization level for each series
as of that payment date;
(10) so long as no event of default has occurred and is
continuing, release to the issuer of an amount equal
to investment earnings since the previous payment
date on amounts in each series capital subaccount;
and
(11) 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 collections will be allocated may be found on page 11 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, on behalf of the issuer, to provide
revenues sufficient to cover all ongoing transaction costs, including:
o interest on the transition bonds;
o for each series of transition bonds, payment of the principal
balance of each class of that series according to the expected
amortization schedule;
o other ongoing transaction costs and expenses as specified in
items (a) through (c)(7) above;
o for each payment date, for each series of transition bonds,
the amount to be deposited in the capital subaccount for that
series such that the amount in that subaccount equals the
required capital amount for that series; and
o for each payment date, for each series of transition bonds,
the amount to be deposited in the overcollateralization
subaccount for that series such that the amount in that
subaccount equals the required overcollateralization amount
for that series as of that payment date;
and for the reserve subaccount to equal zero, all 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.
Under the BPU financing order, PSE&G, as servicer, is permitted to petition
the BPU for adjustments at least annually but not more frequently than
quarterly. Under the servicing agreement, the servicer is required to
petition for adjustments, to be made at least annually through January 1,
2014, and quarterly commencing on June 1, 2014. Expressed generally, the
most likely causes of a shortfall or excess in transition bond charge
collections include the following situations:
o the actual electric consumption by PSE&G's customers varies
from PSE&G's forecasts; and
o the actual rate of collection of the transition bond charge
varies from PSE&G's expected rate of collection.
See "RISK FACTORS--SERVICING RISKS" in this prospectus. 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 that series' capital subaccount on the date
of issuance of that series. Any shortfall in the capital
subaccount for an existing series not made up through
subsequent collections 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 that 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 subaccount, 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 that series will be available to make payments for that
series on each payment date and other amounts allocable to that series as
described in items (a) through (c)(5) above under "Priority of
Distributions" for such series. The reserve subaccount will be available to
make payments for all series on each payment date and other amounts as
described in items (a) through (c)(6) and in (c)(8) and (c)(9) above for
all series. To the extent that amounts on deposit in the reserve subaccount
are required to be applied to make payments in relation to more than one
series, but are insufficient, the amounts on deposit will be allocated to
each series, in proportion to the outstanding principal balance of that
series.
Additional forms of credit enhancement, if any, for each series
will be specified in the related prospectus supplement. Nevertheless, it is
not anticipated that there will be any additional third party credit
enhancement, such as letters of credit or insurance, for any series.
However, the servicer may, but is not obligated to, obtain insurance or a
letter of credit in support of its obligation to remit transition bond
charge collections to the trustee. 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 any 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 a bondable stranded cost rate
order until the transition bonds are fully paid and discharged. In
addition, the State pledges and agrees not in any way to 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. The BPU financing
order is such a bondable stranded cost rate order.
The State of New Jersey may not be required to adhere to its pledge
and agreement if its actions to the contrary are a reasonable exercise of
the State of New Jersey's sovereign powers and of a character reasonable
and appropriate to the public purpose justifying such action. However,
there is no existing case law addressing such exercise of the State of New
Jersey's sovereign powers with respect to transition bonds. Alternatively,
the State of New Jersey may not be required to adhere to its pledge and
agreement if it pays just compensation to transition bondholders. There is
also no existing case law addressing the issue of just compensation in the
context of transition bonds.
[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 balance 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 that 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.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, for
federal income tax purposes, and in the opinion of Wilentz, Goldman &
Spitzer, P.C., for New Jersey state income tax purposes, the transition
bonds will constitute debt of PSE&G.
The issuer and PSE&G have received a private letter ruling from the
Internal Revenue Service regarding the federal income tax aspects of the
transactions described above. Tax counsel have relied on that ruling in
rendering their opinion that transition bonds will be treated as debt of
PSE&G. If you purchase a transition bond, you agree to treat it as debt of
PSE&G for tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the
transition bonds subject to specified conditions. The acquisition and
holding of the transition bonds could be treated as an indirect prohibited
transaction under ERISA. Accordingly, by purchasing the transition bonds,
each investor purchasing on behalf of a pension plan will be deemed to
certify that the purchase and subsequent holding of the transition bonds by
the investor would be exempt from the prohibited transaction rules of
ERISA. For further information regarding the application of ERISA, see
"ERISA CONSIDERATIONS" in this prospectus.
REPORTS TO TRANSITION BONDHOLDERS
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 actual
transition bond balance for that series and class as of that
payment date;
4. the amount on deposit in the overcollateralization
subaccount for that series and the scheduled
overcollateralization level for that series as of that
payment date;
5. the amount on deposit in the capital subaccount for that
series as of that payment date; and
6. the amount, if any, on deposit in the reserve subaccount as
of that payment date.
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. The
servicer may, however, obtain insurance or a letter of credit in support of
its obligation to remit transition bond charge collections to the trustee.
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
THE LAW WHICH UNDERPINS THE TRANSITION BONDS MAY BE INVALIDATED
The bondable transition property is the creation of the Competition
Act and a financing order issued by the BPU pursuant to the Competition
Act. The Competition Act was adopted in February 1999. PSE&G is the first
utility to issue transition bonds pursuant to the Competition Act. A court
decision or a federal or state law might seek to overturn or otherwise
invalidate 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. Because the bondable transition
property is a creation of statute, any event affecting the validity of the
relevant legislative provisions would have an adverse effect on the
transition bonds because the transition bonds are secured primarily by the
bondable transition property. For example, if the provisions of the
Competition Act which create bondable transition property as existing
property were invalidated, PSE&G, as servicer, could lose the right to
collect the transition bond charge. As another example, if the provisions
of the Competition Act which allow for periodic adjustment of the
transition bond charge were invalidated, PSE&G, as servicer, could be
prevented from requesting the adjustments required to provide sufficient
funds for the scheduled payments on the transition bonds. Similar
legislation in other states has been challenged but not overturned.
There is uncertainty associated with investing in bonds payable
from an asset which depends for its existence on recently enacted
legislation because of an absence of any judicial or regulatory experience
implementing and interpreting the legislation. Appeals have been filed
challenging the validity of the BPU financing order and the BPU order
authorizing PSE&G's related restructuring which were issued pursuant to the
Competition Act. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND
CHARGE" in this prospectus.
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, the bondable transition property or the issuer's
ability to make distributions on the transition bonds. Although a judicial
determination of that kind may trigger a requirement for PSE&G to indemnify
you, the amount of any indemnification may not be sufficient for you to
recover all of your loss on the transition bonds.
Electricity generation deregulation laws similar to the Competition
Act have been enacted in other states, including Arkansas, California,
Connecticut, Illinois, Massachusetts, Montana Pennsylvania and Texas. The
validity of similar legislation in other states has been upheld in those
states where judicial challenges were made. While the issuer is not aware
of any significant challenges to similar legislation currently pending in
other states, a court might yet overturn a similar statute in another state
in response to a future 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.
In Pennsylvania, three lawsuits have challenged the validity of
state legislation similar to the Competition Act. Two of these alleged that
the legislation was not validly enacted by the Pennsylvania legislature. A
Pennsylvania court has rejected these claims. The court's decisions in
those cases have not been appealed, and the period for filing appeals has
lapsed. The third lawsuit asserted that the legislative provisions that
allowed for the recovery of the transition bond charge violated the
commerce clause of the United States Constitution. The Pennsylvania courts
rejected that claim, and the United States Supreme Court denied a petition
to review the case.
In California, a consumer advocacy group and others filed a
petition to the California Supreme Court asking that the court suspend the
implementation of the state's Public Utility Commission's decision, which,
among other items, allowed for the recovery of a utility's stranded costs.
The California Supreme Court denied this petition. Various consumer groups
then filed a voter initiative which, among other items, would have
prohibited the collection of customer charges to pay for interest and
principal for debt instruments similar to the transition bonds
which were backed by the recovery of stranded costs. In November 1998,
approximately 73% of the total votes cast were voted against the
proposition. Although consumer groups have issued press releases
threatening legal action, no other legal action has taken place which
threatens the recovery of stranded costs in California.
In Massachusetts, a consumer advocacy group filed a voter
initiative which would have repealed Massachusetts' electricity
deregulation law. That law includes a provision allowing utilities to
recover stranded costs from consumers. In November 1998, approximately 65%
of the total votes cast were voted to keep the deregulation law. No other
legal action has taken place which threatens the recovery of stranded costs
in Massachusetts.
In Illinois, Montana, Connecticut and Texas, there has been no
legal activity which challenged the recovery of stranded costs.
THE COMPETITION ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT FULL
COMPENSATION
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 of this
prospectus, 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 just compensation to
transition bondholders, 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.
Neither the issuer nor PSE&G will indemnify you for any changes in
federal law that may affect the value of your transition bonds.
FUTURE STATE LEGISLATIVE ACTION MAY INVALIDATE THE TRANSITION BONDS OR THEIR
UNDERLYING ASSETS
Unlike the citizens of the States of California, Massachusetts and
some 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 bondable transition 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 or the
value of the transition bonds.
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, public charges or other sources of revenues
servicing bonds issued by public instrumentalities or private issuers, or
otherwise reducing or eliminating the security for bonds. Based upon this
case law, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
counsel to PSE&G, under the contract clauses of the United States and New
Jersey Constitutions, the State of New Jersey could not (1) repeal the
Competition Act or take any other action, including by amending the
Competition Act, that substantially limits, alters or impairs the bondable
transition property or other rights vested in the transition bondholders
pursuant to the BPU financing order, or (2) substantially limit, alter,
impair or reduce the value or amount of the bondable transition property,
unless this action is a reasonable exercise of the State of New Jersey's
sovereign powers and of a character reasonable and appropriate to the
public purpose justifying this action.
Moreover, in the opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, 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, or take any other action in contravention of its pledge
and agreement described above, without paying just compensation to the
transition bondholders, as determined by a court of competent jurisdiction,
if this action would constitute a permanent appropriation of a substantial
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 the
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 of and, accordingly, the weighted average lives of the transition
bonds. 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.
Neither the issuer nor PSE&G will indemnify you for any changes in
the law that may affect the value of your transition bonds.
THE BPU MAY TAKE ACTION WHICH REDUCES THE VALUE OF THE TRANSITION BONDS
Pursuant to the Competition Act, the BPU financing order issued to
PSE&G is irrevocable upon issuance and effectiveness of the order, 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, for example,
could affect the ability of the servicer to collect the transition bond
charge on a full and timely basis. 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, the letter to be delivered by PSE&G to the BPU within five
business days following issuance of each series of transition bonds
specifying the terms of that series (referred to as an issuance advice
letter), the BPU restructuring order (to the extent it affects the rights
of transition bondholders or the validity or value of the bondable
transition property) or the rights of transition bondholders.
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, and
may not trigger any obligation of PSE&G to indemnify you. As a result, you
could suffer a loss of your 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 a
proposed adjustment, which may cause delay, or refuse to permit an
adjustment to take effect, on the ground that the adjustment contains a
manifest error. Under the BPU financing order, manifest error means an
arithmetic error evident on the face of the filing. 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
INSUFFICIENT FUNDS TO MAKE SCHEDULED PAYMENTS ON THE TRANSITION BONDS
Because the transition bond charge is assessed based on
kilowatt-hours 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
shortfalls in payments of interest on the transition bonds and of principal
of the transition bonds not being paid according to the expected
amortization schedule, lengthening the weighted average lives 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 customers ceasing business or departing PSE&G's service
territory;
o customers consuming less electricity because of increased
conservation efforts; or
o customers switching to self-generation of electric power
without being required to pay transition bond charges under
the Competition Act. See "THE COMPETITION ACT" in this
prospectus.
Inaccurate forecasting of delinquencies or charge-offs by the
servicer could result from, among other things:
o unexpected deterioration of the economy or the occurrence of
a natural disaster, causing greater charge-offs than
expected or forcing PSE&G or a successor electric public
utility to grant additional payment relief to more
customers;
o a change in law, rules or regulations that makes it more
difficult for PSE&G or a successor electric public utility
to disconnect nonpaying customers, or that requires PSE&G 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
payments arising from the transition bond charge, but who
fail to remit customer charges in a timely manner. See "--IT
MAY BE MORE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE
FROM THIRD PARTIES WHO PROVIDE ELECTRICITY TO PSE&G'S RETAIL
CUSTOMERS" below.
INITIALLY, THE CALCULATION OF THE TRANSITION BOND CHARGE MAY BE AFFECTED
BY LIMITED EXPERIENCE WITH THE TRANSITION BOND CHARGE
PSE&G had not previously calculated a transition bond charge for
customers, nor made all of the associated calculations and projections
which are inherent in the calculations, before the calculations required in
connection with the BPU financing order and the initial issuance of
transition bonds. The projections are based on forecasts of customer energy
usage and historical customer payment patterns. These usage and collection
records, however, do not reflect customers' payment patterns or energy
usage in a competitive market as competition is being introduced now in New
Jersey for the first time. These records also do not reflect any experience
with consolidated billing by third party suppliers. Because that kind of
billing is new in New Jersey, there are potentially unforeseen factors in
that billing which may have an impact on collection of payments. Therefore,
the records which PSE&G has to date may have limited value in calculating
the initial transition bond charge and transaction bond charge adjustments.
PSE&G MAY ENCOUNTER UNEXPECTED PROBLEMS IN THE INITIAL ADMINISTRATION OF THE
TRANSITION BOND CHARGE
The servicer has not previously administered the transition bond
charge on behalf of a third party such as the issuer. As a result, the
servicer may encounter unexpected problems in billing and collecting the
transition bond charge and in managing customer payments on behalf of the
issuer.
IF THE SERVICER DEFAULTS OR BECOMES BANKRUPT, IT MAY BE DIFFICULT TO FIND A
SUCCESSOR SERVICER AND PAYMENTS ON THE BONDS MAY BE SUSPENDED
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 difficult 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, referred to as the 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. In either case of a servicer
default, payments on the transition bonds may be suspended. See "--THE
RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS" below.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE
FOR PAYMENTS ON THE TRANSITION BONDS
The methodology of determining the amount of the transition bond
charge the issuer may impose on each customer is specified in the BPU
financing order. 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, in its discretion, may change billing and
collection practices. Any change to billing and collection practices may
have an adverse or unforeseen impact on the timing and amount of customer
payments and may reduce the amount of transition bond charge collections.
This could limit the issuer's ability to make scheduled payments on the
transition bonds. 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. Similarly, the BPU may require
changes to these practices. Any changes in billing and collection
regulation might adversely affect the billing terms and the terms of
remittances by third party suppliers to the servicer or make it more
difficult for the servicer to collect the transition bond charge. These
changes may adversely affect the value of the transition bonds and their
amortization and, accordingly, their weighted average lives. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE" in this prospectus.
IT MAY BE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD PARTIES
WHO PROVIDE ELECTRICITY TO PSE&G'S CUSTOMERS
In the future, 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.
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. As a result, those entities may
not be as successful in collecting the transition bond charge as PSE&G
anticipated when setting the transition bond charge. 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 therefore
have a greater impact on transition bond charge collections and, in turn,
on the issuer's ability to make timely 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. It is possible that third party suppliers may
have a higher rate of delinquencies and write-offs than PSE&G. There can be
no assurance that the servicer will be able to mitigate credit risks
relating to these third party suppliers to the same extent to which it
mitigates the risks relating to its customers. The adjustment mechanism,
the deposits required from certain customers as a prerequisite to service
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.
PSE&G'S CUSTOMER PAYMENTS MAY DECLINE DUE TO CONFUSION
The transition bond charge is being introduced to customers for the
first time. Any change 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 and, therefore,
reduce the ability of the issuer to make timely payments on the transition
bonds.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS DURING THE
HEATING SEASON MAY TEMPORARILY REDUCE AMOUNTS AVAILABLE FOR PAYMENTS ON THE
TRANSITION BONDS
A winter moratorium prevents PSE&G from terminating service to
certain delinquent residential customers without special approval from the
BPU during the heating season, currently from November 15 of each year
until at least March 15 of the following year. As a result, PSE&G must
provide service to those customers during this period without recouping the
transition bond charge from those customers. This reduces the amount of
transition bond charge collections available for payments on the transition
bonds, although the expected associated reduction in payments would be
factored into the transition bond charge adjustment. See "THE SELLER AND
SERVICER OF THE BONDABLE TRANSITION PROPERTY--CREDIT POLICY; BILLING;
COLLECTIONS AND WRITE-OFFS; TERMINATION OF SERVICE" in this prospectus.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
PSE&G WILL COMMINGLE THE TRANSITION BOND CHARGE WITH OTHER REVENUES WHICH MAY
OBSTRUCT ACCESS TO THE ISSUER'S FUNDS IN CASE OF BANKRUPTCY OF PSE&G
PSE&G will not segregate the transition bond charge collections
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 collections it collects.
Otherwise, PSE&G will be required to remit transition bond charge
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 scenario could cause material delays in payment or an
inability of the issuer to gain access to the funds required for scheduled
payments on the transition bonds.
BANKRUPTCY OF PSE&G COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
TRANSITION BONDS
The Competition Act and the BPU financing 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.
THE SALE OF THE BONDABLE TRANSITION PROPERTY COULD BE CONSTRUED AS A FINANCING
AND NOT A SALE IN A CASE OF PSE&G'S BANKRUPTCY
The Competition Act provides that the characterization of a
transfer of bondable transition property as a sale or other absolute
transfer will not be affected or impaired in any manner by treatment of the
transfer as a financing for federal or state tax purposes or financial
accounting purposes. PSE&G and the issuer will treat the transaction 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. In the event of a bankruptcy of
PSE&G, a party in interest in the bankruptcy may assert that the sale of
the bondable transition property to the issuer was a financing transaction
and not a "sale or other absolute transfer" and that the treatment of the
transaction for financial reporting and tax purposes as a financing and not
a sale lends weight to that position. If a court were to characterize the
transaction as a financing, the issuer would be treated as a secured
creditor of PSE&G in the bankruptcy proceedings. Although the issuer would
in that case have a security interest in the bondable transition property,
it would not likely be entitled to access to the transition bond charge
collections during the bankruptcy. As a result, repayment on the transition
bonds could be significantly delayed and a plan of reorganization in the
bankruptcy might permanently modify the amount and timing of payments to
the issuer of transition bond charge collections and therefore the amount
and timing of funds available to the issuer to pay transition bondholders.
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. In
this scenario, the issuer would lose access to the transition bond charge
collections and thereby lose its source of funds for scheduled payments on
the transition bonds.
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 TRANSITION BONDS WHOSE HOLDERS HAVE
CONFLICTING INTERESTS
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. There
can be no assurance, however, that the issuance of additional series of
transition bonds would not cause reductions or delays in payments on your
transition bonds. Any additional series of transition bonds issued by the
issuer will have an equal right with the outstanding transition bonds to
share in all of the bondable transition property owned by the issuer.
Moreover, PSE&G may sell bondable transition property to one or more
entities other than the issuer in connection with the issuance of a new
series of transition bonds. In that case, PSE&G will need to obtain a
separate financing order from the BPU. That separate financing order will
specify an additional amount of bondable transition charges to be collected
from customers for the additional series of transition bonds. Any
additional series of transition bonds issued by another entity will have an
equal right to share in transition bond charge collections with the issuer.
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.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE EXPECTED
RATE OF PAYMENT OF PRINCIPAL ON THE TRANSITION BONDS
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 balance 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, obligations, claims, actions, suits 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
itself and on behalf of the transition bondholders, for (1) required
payments of principal of and interest on the transition bonds in accordance
with their terms and (2) required deposits of amounts to the issuer, in
each case, 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 all of your loss on the transition bonds. See
"THE SALE AGREEMENT--PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE
TRUSTEE AND TO TAKE LEGAL ACTION" in this prospectus. PSE&G will not be
obligated to indemnify any party for any changes of law. In addition, PSE&G
will not be obligated to repurchase the collateral in the event of a breach
of any of its representations and warranties, and neither the trustee nor
the transition bondholders will have the right to accelerate payments on
the transition bonds as a result of a breach of any of PSE&G's
representations and warranties, absent an event of default under the
indenture. If PSE&G becomes obligated to indemnify transition bondholders,
the ratings on the transition bonds will likely be downgraded as a result
of the circumstances causing the breach and the fact that the transition
bondholders will be unsecured creditors of PSE&G with respect to any of
those indemnification amounts.
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:
o state and federal legal or regulatory developments;
o national or regional economic conditions;
o market demand and prices for energy;
o weather variations affecting customer energy usage;
o the effect of continued electric industry restructuring;
o operating performance of PSE&G's facilities; and
o the payment patterns of customers including the rate of
delinquencies and the accuracy of the collections curve.
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, referred to as Enterprise, is an operating electric and gas
public utility incorporated under the laws of the State of New Jersey in
1924. 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
residential areas and 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. As of December 31,
1999, PSE&G's assets comprised approximately 78% of Enterprise's
consolidated assets.
The electric utility industry is undergoing a fundamental
restructuring. Through the enactment of the Competition Act, the New Jersey
Legislature endeavors to lower energy costs and to allow New Jersey
electricity customers to choose their electric power supplier. The
Competition Act deregulates the electric power generation market in order
to promote efficient energy service to consumers and to diversify the
sources of supply of electricity in the State. Therefore, the traditional
retail monopoly for electric power generation will be eliminated and
competition will be introduced to the electricity generation retail market.
To this end, the Competition Act authorized the BPU to order electric
utilities to separate their generation facilities into separate competitive
business segments or to sell such facilities to a separate company, in
order for the generation of electricity to be subject to competition in a
separate retail market. Customers' bills will be unbundled into separate
line items for electric distribution, transmission and generation services,
among others. In a competitive electric generation retail market, the
traditional electric utility rate regulation will be replaced by a
combination of modified regulation and some competition.
To maintain the financial integrity of electric utilities during
the transition to a competitive electric generation retail market, the
Competition Act provides each electric utility the opportunity to recover
certain stranded costs associated with generation-related assets through a
transition bond charge and other limited charges. In general, stranded
costs are an amount, determined by the BPU, by which an electric utility's
net electric generation related costs which traditionally would be
recoverable under a regulated electric generation retail market exceed
those costs recoverable in a competitive electric generation retail market.
Stranded costs result from the necessity to lower rates in order to compete
in a competitive electricity generation retail market. PSE&G will recover
the stranded costs related to the newly introduced competitive retail
market in electric power generation and other reasonably incurred costs
which are non-recoverable in competitive retail markets, to the extent
permitted by the BPU. These stranded costs are, in PSE&G's case, primarily
related to generation-related facilities.
PSE&G's fossil and nuclear fueled electric generation plants which
produce electric power and current are referred to as generation-related
facilities. The high voltage electric lines and related step up and step
down transformers and substations which transmit electric power
and current at higher voltages and usually over longer distances than
distribution facilities are referred to as transmission facilities. The
lower voltage electric lines, transformers and substations which
interconnect with the high voltage transmission lines and distribute the
power and current to the end-use customers at lower voltage levels
consistent with the customers' use are referred to as distribution
facilities. See "THE COMPETITION ACT" in this prospectus.
In compliance with the Competition Act, later in 2000, 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 as to the operation of the public reference facilities
is available by calling the SEC at 1-800-SEC-0330. Information filed with
the SEC can also be inspected at the SEC site on the World Wide Web at
http://www.sec.gov. PSE&G also provides information through its website at
http://www.pseg.com.
USE OF PROCEEDS
How the Issuer Will Use the Proceeds of the Transition Bonds. The
issuer will use the entire net proceeds from the sale of the transition
bonds (estimated at $_____) to purchase bondable transition property from
PSE&G as described under "THE SALE AGREEMENT" in this prospectus. As
required by the Competition Act, the BPU financing order and a
restructuring order which was issued by the BPU on August 24, 1999 and is
referred to as the BPU restructuring order, PSE&G will apply the proceeds
from the sale of the bondable transition property to the retirement of
outstanding debt and equity securities in a manner which will not
substantially alter PSE&G's overall capital structure. PSE&G will make the
final decisions with respect to the use of proceeds on the basis of market
conditions and other factors existing at the relevant time.
THE COMPETITION ACT
The 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.
Even with the enactment of the Competition Act, the BPU will
continue to regulate aspects of the electric utility 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 contracts, as determined by the BPU, exceeds the market
value of those assets or contracts in a competitive electric generation
retail 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 a usage-based charge 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. 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.
The BPU restructuring order authorizes PSE&G to recover $2.940
billion of its net of tax stranded costs, of which $2.4 billion may be
recovered through securitization pursuant to the BPU financing order, and
an additional $540 million net of tax of generation-related stranded costs
may not be securitized. In addition to this $2.940 billion in stranded
costs, the BPU final restructuring order also authorizes PSE&G to recover
up to $125 million of additional related costs through securitization. The
stranded costs which will not be securitized will be recovered through a
non-bypassable market transition charge imposed by PSE&G as of August 1,
1999 on the same customer base from which PSE&G will collect the transition
bond charge. The Competition Act permits the BPU to authorize PSE&G to
recover additional stranded costs through either an additional market
transition charge or an additional securitized transition bond charge.
PSE&G does not, however, anticipate applying for recovery of additional
stranded costs at this time. Moreover, the Competition Act requires the BPU
to review periodically any market transition charge used to recover
stranded costs to ensure that the utility imposing the charge will not
collect charges which exceed its actual stranded costs. Any periodic review
of market transition charges will not affect transition bond charges
servicing transition bonds. See "PSE&G'S RESTRUCTURING" in this prospectus.
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," such as the BPU financing order,
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 a scheduled amortization upon issuance 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, such as the BPU financing
order. The Competition Act provides that each bondable stranded cost rate
order, including the BPU financing order, will become irrevocable upon
issuance and effectiveness of the order. 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, neither 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 a 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
a bondable stranded cost rate order except as contemplated by the periodic
adjustments to the transition bond charge authorized by the Competition
Act. The BPU financing order is a bondable stranded cost rate order. See
"--The Transition Bond Charge is Adjusted Periodically" below. See also
"RISK FACTORS--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 cost rate 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 entity. The BPU financing order permits PSE&G, as servicer, to
petition the BPU for adjustments at least annually but not more frequently
than quarterly. These adjustments are formula-based to provide 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. See "THE SERVICING AGREEMENTS"
in this prospectus.
Customers Cannot Avoid Paying the Transition Bond Charge. The
Competition Act provides that the 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
also will 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 Provides Procedures for Perfecting the Transfer
and Pledge of Bondable Transition Property. The Competition Act provides
procedures for assuring that the transfer of the bondable transition
property from PSE&G to the issuer will be perfected under New Jersey law
and that the security interest granted by the issuer to the trustee in the
bondable transition property will be perfected under New Jersey law. The
Competition Act provides that a transfer of bondable transition property
will be perfected against any third party when:
o the BPU has issued its bondable stranded cost rate order
with respect to that bondable transition property,
o the agreement to transfer the bondable transition property
has been executed and delivered by the electric public
utility or its assignee, and
o a financing statement with respect to the transfer has been
filed in accordance with the New Jersey Uniform Commercial
Code, referred to as the Uniform Commercial Code.
The Competition Act provides that security interests in the bondable
transition property are perfected by means of a separate filing under the
Uniform Commercial Code. 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. Perfection of the
trustee's security interest in the bondable transition property is
necessary in order to establish the priority of the trustee's security
interest over claims of other parties to the bondable transition property.
The Competition Act provides that priority of security interests in
bondable transition property will not be defeated or adversely affected by:
o commingling of revenues received from transition bond charge
collections with other funds of the utility or its assignee, or
o 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:
o the assignor retains or acquires an equity interest of equal
priority in the bondable transition property or the fact
that only a portion of the bondable transition property is
transferred;
o the assignor retains or acquires a subordinated equity
interest or other credit enhancement provisions on terms
commensurate with market practices;
o the electric public utility acts as collector or servicer of
the related transition bond charge;
o the assignor retains mere legal title to the bondable
transition property for servicing or supervising services
and collections relating to the bondable transition
property; or
o 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 BPU Restructuring Order. The BPU final restructuring order
issued on August 24, 1999, referred to as the BPU restructuring order,
authorizes PSE&G to recover a total of $2.940 billion of its net of tax
stranded costs. That amount includes $2.4 billion to recover PSE&G's
bondable stranded costs through the issuance of transition bonds, plus an
additional $540 million of unsecuritized generation-related net of tax
stranded costs on a present-value basis through a separate market
transition charge. The BPU further authorized the recovery through the
issuance of transition bonds of an additional $125 million in transaction
costs and related expenses of the financing from transition bond proceeds,
for a total of $2.525 billion in authorized transition bonds. In addition,
the BPU authorized the recovery of federal and state taxes associated with
the collection of the transition bond charge through a separate market
transition charge.
PSE&G Unbundled its Electric Rates. PSE&G unbundled its retail
electric rates on August 1, 1999. As a result, customers' bills were
divided into separate line items for distribution charges, transmission
charges, generation services, the market transition charge, the transition
bond charge and the societal benefits charge. If a customer chooses a third
party supplier for generation services, the customer may receive separate
billings for those services directly from the third party supplier or it
may receive combined billings for all charges, either from PSE&G or, if
permitted by the BPU, from the third party supplier, in either case
pursuant to an agreement between PSE&G and the third party supplier. If the
third party supplier bills the combined charges, it must remit to PSE&G the
amount it bills to customers on behalf of PSE&G. See "THE BPU FINANCING
ORDER AND THE TRANSITION BOND CHARGE--THE BPU FINANCING ORDER--PSE&G Must
Allow Other Entities to Provide Metering and Billing Services" in this
prospectus. PSE&G has not as yet entered into any arrangements with third
party suppliers for billings and collections.
PSE&G May Collect a Societal Benefits Charge. Under the Competition
Act, an electric public utility is permitted, with BPU approval, to collect
a non-bypassable societal benefits charge from all of its retail customers
to recover:
o nuclear plant decommissioning costs,
o demand side management program costs,
o customer education program costs,
o certain environmental remediation costs, and
o previously approved social program costs such as costs for
programs to assist customers unable to pay their utility
bills in full and on time.
The BPU restructuring order provided that PSE&G may impose a societal
benefits charge commencing August 1, 1999.
PSE&G Must Reduce its Electric Rates. Pursuant to the stipulation
and the BPU restructuring order, PSE&G's current rates for generating,
transmitting and distributing electric power to its customers were reduced
on August 1, 1999 by 5% from prior rates, which includes a 1% reduction due
to the anticipated savings from securitization. The second rate reduction,
which will take place at the time the transition bonds are sold, will
provide an additional 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 rates in effect prior to August 1, 1999. In the event that the
securitization has not occurred by August 1, 2001, this additional
reduction of 2% will not occur. The final rate reduction of 4.9% will take
place on August 1, 2002 and will result in an overall rate reduction from
the rates in effect prior to August 1, 1999 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 legislative cap
after July 31, 2003, although PSE&G's rates for transmission and
distribution services will continue to be subject to BPU approval.
Pursuant to the Competition Act and the BPU restructuring 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 July 31, 2002. Pursuant to the BPU restructuring 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 kilowatt-hour usage information
for each customer in a timely manner for the servicer to fulfill the
obligations of the servicer.
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. These costs are recoverable 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 September 17, 1999, referred to as the BPU financing
order.
The BPU Authorized PSE&G to Issue Transition Bonds. Consistent with
the BPU restructuring order, the BPU financing order authorizes the
issuance of transition bonds with an initial total principal balance 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 or its designee. This approval
will be obtained prior to the issuance of the transition bonds. The BPU
financing order also permits PSE&G to enter into a hedge agreement to
protect PSE&G's customers against interest rate exposure in connection with
the sale of transition bonds.
The BPU Authorized PSE&G to Impose the Transition Bond Charge.
Under the BPU financing order, the BPU authorized 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 an expected amortization schedule and
interest on the transition bonds, 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 financing order also grants PSE&G, as servicer, the
authority to make "non- routine" filings for adjustments. This authority
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.
The transition bond charge will be a single per kilowatt-hour
charge assessed against all customers, regardless of customer class, on a
monthly basis as part of each customer's regular monthly billings. PSE&G
will set the initial per kilowatt-hour 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 with respect to that series for the period prior to August 15. 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.
The initial transition bond charge will be calculated on the basis
of:
o the issuance of $2.525 billion of transition bonds,
o the projected total payments required in relation to the
transition bonds during the period commencing on the date of
issuance of the transition bonds and ending December 31,
2000, and
o the estimated amount of kilowatt-hours of electricity to be
delivered, billed and collected during that period.
The periodic adjustments to the transition bond charge are designed
to ensure that transition bond charge collections are not more or less than
the amount necessary to meet all of the required payments in relation to
the transition bonds and related costs and expenses and to maintain the
required balances in each series overcollateralization subaccount and each
series capital subaccount. In requesting periodic adjustments, the servicer
is required to take into account updated projections of consumption levels
and timing of collections and any amounts held in the reserve subaccount.
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 competitive electric generation retail
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, referred to as Moody's, or Standard & Poor's Ratings Services,
referred to as S&P, 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, approved by the BPU, 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. Each
third party supplier 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 these payments are received
from the customers, within 15 days of PSE&G's or its successor's bill for
these charges. If a third party supplier fails to remit charges within a
further seven 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
The servicing agreement requires the servicer to seek adjustments
to the transition bond charge in order to enhance the likelihood that
actual transition bond charge collections, net of any amounts on deposit in
the reserve subaccount, are neither more nor less than the amount necessary
to amortize the transition bonds of each series in accordance with the
related expected amortization schedule, to pay interest, to fund the series
overcollateralization subaccounts to the amount required to be on deposit
in the series overcollateralization subaccounts, to replenish any
shortfalls in the series capital subaccounts, and to pay the trustee's fee,
the servicing fee and the other expenses and costs included in bondable
stranded costs. 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, and the issuance of any
additional series of transition bonds. They are designed to achieve each of
the above goals by the payment date immediately preceding the next date on
which the transition bond charge is adjusted or the expected final payment
date, as applicable, taking into account any amounts on deposit in the
reserve subaccount. 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.
Under the BPU financing order, the servicer may file an adjustment request
as often as annually but not more frequently than quarterly. Under the
servicing agreement, the servicer will file an adjustment request to the
transition bond charge 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 after
filing, in each case, absent a determination by the BPU of manifest error.
In the case of a finding of manifest error by the BPU, the proposed
adjustment will not become effective until the error is corrected to the
satisfaction of the BPU. 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.
Appeals from the BPU Restructuring Order and the BPU Financing
Order Are Pending. In October and November 1999, two appeals of the BPU
financing order and the BPU restructuring order were filed in the Appellate
Division of the New Jersey Superior Court on behalf of several customers,
who were joined in some respects by the New Jersey Division of the
Ratepayers' Advocate. This court granted PSE&G's requests to accelerate
these appeals and ordered that the matters be consolidated. The parties
filed briefs with the court and the court held oral argument on the
consolidated matters on March 8, 2000.
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 reside, servicing approximately 70% of the
State's population. 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 residential areas and 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 transmission
and distribution operations in the territory it serves.
For the year ended December 31, 1999, PSE&G reported a net loss of
$160 million on revenue of $5.890 billion as compared with net income of
$604 million on revenue of $5.590 billion for the year ended December 31,
1998. The loss was attributable to an extraordinary charge of $804 million
primarily resulting from the write down of its nuclear and fossil
generating stations and related assets in accordance with generally
accepted accounting principles as a result of the BPU's decision directing
PSE&G to transfer such stations and assets to a non-utility affiliate.
Without this extraordinary charge, PSE&G would have had net income of $653
million during such period. For the year ended December 31, 1999,
approximately 71% and 29% of revenues were derived from electricity and
gas, respectively, of which, approximately 32% was derived from residential
customers, 45% was derived from commercial customers, 14.5% was derived
from industrial customers and 8.5% 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. At
December 31, 1999 the assets of PSE&G comprised approximately 78% 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 six years and the percentage of each customer
class of the total billed revenue.
TABLE 1
BILLED REVENUE ($000)
1994 % 1995 % 1996 %
Residential $1,198,007 32.50 $1,258,773 32.70 $1,255,691 32.80
Commercial $1,796,557 48.80 $1,892,093 49.20 $1,904,274 49.70
Industrial $689,600 18.70% $ 696,947 18.10% $670,884 17.50%
Total $3,684,164 100.00 $3,847,814 100.00 $3,830,849 100.00
(chart continued)
1997 % 1998 % 1999 %
Residential $1,228,098 32.90% $1,266,508 33.40% $1,323,520 34.10%
Commercial $1,856,899 49.80% $1,904,794 50.20% $1,944,838 50.10%
Industrial $643,650 17.30% $625,974 16.50% $611,090 15.80%
Total $3,728,646 100.00% $3,797,277 100.00% $3,879,449 100.00%
The following table shows the average number of customers in each
customer class for the past six years and the percentage each customer
class bears to the total number of customers.
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (CUSTOMER BILLS)
1994 % 1995 % 1996 %
Residential 1,666,598 86.50% 1,677,780 86.50% 1,683,208 86.50%
Commercial 250,312 13.00% 252,574 13.00% 253,611 13.00%
Industrial 9,630 0.50% 9,522 0.50% 9,300 0.50%
Total 1,926,540 100.00% 1,939,876 100.00% 1,946,119 100.00%
(chart continued)
1997 % 1998 % 1999 %
Residential 1,686,444 86.40% 1,701,066 86.30% 1,714,335 86.30%
Commercial 257,013 13.20% 260,957 13.20% 262,805 13.20%
Industrial 9,170 0.50% 9,101 0.50% 8,986 0.50%
Total 1,952,627 100.00% 1,971,124 100.00% 1,986,127 100.00%
The following table shows the total billed electric consumption in
megawatt-hours (referred to as MWh) for the past six years for each
customer class and the percentage each customer class bears to the total
consumption.
TABLE 3
BILLED ELECTRIC CONSUMPTION (MWH)
1994 % 1995 % 1996 %
Residential 10,708,914 27.50% 10,755,485 27.80% 10,736,855 28.00%
Commercial 19,007,330 48.80% 18,968,792 49.10% 18,990,242 49.50%
Industrial 9,243,537 23.70% 8,934,958 23.10% 8,625,133 22.50%
Total 38,959,781 100.00% 38,659,236 100.00% 38,352,230 100.00%
(chart continued)
1997 % 1998 % 1999 %
Residential 10,710,735 28.10% 11,091,537 28.40% 11,759,956 29.20%
Commercial 18,923,234 49.70% 19,509,283 50.00% 20,281,529 50.36%
Industrial 8,444,973 22.20% 8,440,088 21.60% 8,233,917 20.44%
Total 38,078,943 100.00% 39,040,908 100.00% 40,275,401 100.00%
PERCENTAGE CONCENTRATION WITHIN PSE&G'S LARGE COMMERCIAL AND INDUSTRIAL
CUSTOMERS
For the period ended December 31, 1999, the ten largest single site
electric customers represented approximately 5.3% of PSE&G's kilowatt-hour
sales and the ten largest multi-site electric customers represented
approximately 7.1% of PSE&G's kilowatt-hour 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. The transition bond charge must be sufficient to
recover interest on and principal of the transition bonds, to maintain the
scheduled series overcollateralization levels, to replenish any withdrawals
from any series capital subaccounts 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 the number of air conditioners, 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, PSE&G's average electric
price, a forecast of floor space and the total number of buildings in
PSE&G's service territory.
The specific economic and demographic variables on which the
industrial energy forecast is 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 fuel oil prices are used as a proxy for competitive energy
prices. The largest industrial customers are forecasted 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 BPU 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 gigawatt-hours (referred
to as 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.
TABLE 4
VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
1994 1995 1996 1997 1998 1999
FORECAST 37,570 38,201 37,804 38,217 38,716 39,500
ACTUAL 38,960 38,659 38,352 38,079 39,061 40,275
VARIANCE-% 3.699% 1.200% 1.450% (0.361%) 0.839% 1.963%
If actual consumption of electricity is higher than the forecast,
there will most likely be an excess of transition bond charge collections.
Similarly, if actual consumption of electricity is lower than the forecast,
there will most likely be insufficient transition bond charge collections.
CREDIT POLICY; BILLING; COLLECTIONS AND WRITE-OFFS; TERMINATION OF SERVICE
Credit Policy
PSE&G is required under New Jersey law to provide service to all
customers. 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. 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. If a deposit is
required to establish credit, industrial and commercial customers must
deposit cash equal to twice the maximum monthly bills. In addition,
industrial and commercial customers may obtain a guaranty from a
satisfactory guarantor, or otherwise establish 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.
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
ended December 31, 1999, PSE&G mailed out an average of 105,000 bills on
each business day to its customers. For accounts with potential billing
error exceptions, reports are generated for manual review. This review
examines accounts that have abnormally high or low bills, potential
meter-reading errors and possible meter malfunctions.
Collection and Write-Off 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 payment and field collection. Bills are due on presentation
and are considered delinquent 19 days after billing. Customers are notified
of a delinquent account in the following monthly bill. The same delinquency
policy will apply to the transition bond charge. Timing and collection
follow-up is based on customer type.
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 business days 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 in order to resume service.
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 business days 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 in order to resume
service.
If service is terminated for a customer of any class, a charge of
$20 for gas service and $15 for electric service 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. The approximate number of days between the first bill that is
unpaid and the final bill due to a discontinuance of service for
non-payment is 150 days for a residential customer and 120 days for an
industrial or commercial customer.
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 Certain 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
according to a 12- month system budget plan. The regulation also provides
for restoration of service for customers eligible to participate in the
program whose service has been shut off for non-payment prior to November
15, if up to 25% of the outstanding balance is paid. Residential customers
who qualify for the program and who do not meet the requirement for
good-faith payments may have service discontinued if PSE&G successfully
petitions the BPU for non-restoration. 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 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. Write-off
and delinquency data is affected by factors such as the overall economy,
weather and changes in collection practices. The net write-offs and
delinquency experience is expected, but cannot be assured, to be similar to
PSE&G's previous experience. For example, changes in the retail electric
market, including but not limited to the introduction of third party
suppliers who may be permitted to provide consolidated billing to PSE&G's
customers, could mean that delinquency and write-off ratios will vary from
those presented in the tables below.
The following table shows total electric and gas billed revenue for
the past six years for each customer class.
TABLE 5
TOTAL ELECTRIC AND GAS BILLED REVENUES
(IN THOUSANDS)
1994 1995 1996 1997 1998 1999
Residential $2,104,795 $2,098,138 $2,206,281 $2,193,120 $2,102,802 $2,244,983
Commercial $2,342,261 $2,387,105 $2,439,707 $2,358,069 $2,306,227 $2,385,341
Industrial $1,028,396 $ 997,149 $1,013,170 $ 982,258 $ 912,081 $ 903,767
---------- ---------- ---------- ---------- ---------- ----------
Total $5,475,452 $5,482,392 $5,659,158 $5,533,446 $5,321,111 $5,539,091
Gross write-offs for electricity and gas have been tracked by class
of business since February 20, 1996. The following table shows gross
write-offs for electricity and gas for the past four years for each
customer class.
TABLE 6
GROSS WRITE-OFFS PER CUSTOMER CLASS
RESIDENTIAL COMMERCIAL INDUSTRIAL
1999 $30,531,945 $8,288,056 $649,040
1998 $31,701,242 $9,281,137 $702,047
1997 $39,918,905 $8,777,322 $561,906
1996 $27,169,511 $6,198,984 $522,359
The following table shows gross write-offs as a percentage of total
electric and gas billed revenue for the past four years for each customer
class.
TABLE 7
GROSS WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE PER CUSTOMER CLASS
RESIDENTIAL COMMERCIAL INDUSTRIAL
1999 1.36% 0.35% 0.07%
1998 1.51% 0.40% 0.08%
1997 1.82% 0.37% 0.06%
1996 1.23% 0.25% 0.05%
The following table shows total net write-offs and the
corresponding percentage of total billed revenues for the past six years
for all customers for electricity and gas.
TABLE 8
TOTAL NET WRITE-OFFS (IN THOUSANDS) AND
NET WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE
NET WRITE-OFFS AS A
NET WRITE-OFFS % OF BILLED REVENUE
1999 $34,852 0.63%
1998 $37,793 0.71%
1997 $50,058 0.90%
1996 $35,807 0.63%
1995 $35,038 0.64%
1994 $37,157 0.68%
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 six years:
<TABLE>
<CAPTION>
TABLE 9
ELECTRIC AND GAS DELINQUENCIES
1-30 31-60 61-90 91-120 121-150 151-180 OVER 180
DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST
YEAR DUE DUE DUE DUE DUE DUE DUE
<S> <C> <C> <C> <C> <C> <C> <C>
1999 67% 17% 6% 3% 2% 1% 4%
1998 69% 15% 5% 4% 2% 1% 4%
1997 73% 14% 4% 2% 2% 1% 4%
1996 73% 13% 4% 2% 2% 1% 5%
1995 76% 13% 4% 2% 1% 1% 3%
1994 76% 12% 4% 2% 1% 1% 4%
</TABLE>
While accounts are considered delinquent if they are unpaid 19 days
after billing, customers are not notified of any delinquency in their
account until the next billing. 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:
o 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);
o 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; and
o 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 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, the 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. The BPU financing order and the indenture provide that the
bondable transition property, as well as the other collateral described in
the BPU financing order and the indenture, will be pledged by the issuer to
the trustee. Pursuant to the indenture, the transition bond charge
collections remitted to the trustee by the servicer must be used to pay the
transition bonds and other obligations of the issuer specified in the
indenture. 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 in this prospectus.
The Issuer's Purpose. The issuer has been created for the sole
purpose of:
o purchasing and owning the bondable transition property;
o issuing one or more series of transition bonds, each of
which may be comprised of one or more classes, from time to
time;
o 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
o 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 the sale agreement between the issuer as buyer and PSE&G as seller.
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:
o a direct or indirect legal or beneficial owner of the issuer
or PSE&G or any of their respective affiliates,
o a relative, supplier, employee, officer, director, manager,
contractor or material creditor of the issuer or PSE&G or
any of their respective affiliates, or
o 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 53 Senior Vice President and
Chief Financial Officer
Mr. Busch is currently serving
as the Senior Vice President
and Chief Financial Officer of
PSE&G. Prior to joining PSE&G
in 1998, Mr. Busch was the
National Director of the Hay
Group Utility Consulting
Practice and prior to joining
the Hay Group, he held various
positions at Northeast
Utilities.
Robert C. Murray 54 Executive Vice President--Finance
Mr. Murray is currently
Executive Vice President of
PSE&G and Vice President and
Chief Financial Officer of
PSEG. Prior to his current
position, Mr. Murray was Chief
Financial Officer of PSE&G.
R. Edwin Selover 54 Senior Vice President and General
Counsel
Mr. Selover is currently Senior
Vice President and General
Counsel of PSE&G, as well as
Vice President and General
Counsel of PSEG. Mr. Selover
has served in these positions
since 1988.
PSE&G, as the sole member of the issuer, will appoint two independent
managers prior to the issuance of the initial series of transition bonds.
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:
o liabilities arising from their own willful misconduct or
gross negligence,
o liabilities arising from the failure by any of the managers
to perform obligations expressly undertaken in the issuer's
limited liability company agreement, or
o 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 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 the
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 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,
[___], Newark, New Jersey 07102, and its telephone number is (973)
430-7000.
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.
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. 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 as to the operation of the
public reference facilities is available by calling the SEC at
1-800-SEC-0330. 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, Public Service
Electric and Gas Company, 80 Park Plaza, Newark, New Jersey 07102.
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 the indenture and the related indenture supplement. 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.
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 and supplemental indenture.
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 requirement of
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, with an exception for one transition bond in
each class which may have a smaller denomination. 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 outstanding 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 a series or class
on each payment date, commencing on the first 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, 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 or acceleration. 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 balance 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,
as applicable.
On each payment date, the amount required to be paid as principal
on the transition bonds of each series, from transition bond charge
collections allocable to that series, the capital subaccount and
overcollateralization subaccount for that series, and the reserve
subaccount for all series, will equal:
o the outstanding principal balance of any transition bonds of
each class of that series due on the final payment date of
that class; plus
o the outstanding principal balance of any transition bonds of
each class of that series called for redemption; plus
o the outstanding principal balance of any transition bonds of
each class of that series upon acceleration following an
event of default; plus
o the principal scheduled to be paid on each class of that
series of transition bonds on that payment date.
The entire outstanding principal balance of a series of transition
bonds will be due and payable if:
o an event of default under the indenture occurs and is
continuing and
o 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
If so specified in the related prospectus supplement, the issuer
may redeem at its option any series of transition bonds on any payment date
if the outstanding principal balance of such series, after giving effect to
payments scheduled to be made on that payment date, is less than 5% of the
initial principal balance of that series of transition bonds. The
redemption price will, in each case, include accrued interest to the date
of redemption. 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 the redemption price is
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 subaccount for all series and
the overcollateralization subaccount and capital subaccount for that
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. Additional credit enhancement may be in the form of:
o an additional reserve subaccount,
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 Clearstream Banking, Luxembourg, S.A., referred to
as Clearstream, or Euroclear in Europe, if they are participants in one of
those systems or indirectly through participants.
The Role of Cede, Clearstream and Euroclear. DTC will hold the
global bond or bonds representing the transition bonds. Clearstream and
Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Clearstream's and Euroclear's
names on the books of their respective depositories. Citibank, N.A. is
depository for Clearstream and Morgan Guaranty Trust Company of New York is
depository for Euroclear. These depositories will in turn hold these
positions in customers' securities accounts in the depositories' names on
the books of DTC.
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 Clearstream. Clearstream holds securities for its
customers and facilitates the clearance and settlement of securities
transactions between Clearstream customers through electronic book-entry
changes in accounts of Clearstream customers, thereby eliminating the need
for physical movement of certificates. Transactions may be settled by
Clearstream in any of 36 currencies, including United States dollars.
Clearstream provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream also
deals with domestic securities markets in over 30 countries through
established depository and custodial relationships. Clearstream is
registered as a bank in Luxembourg, subject to regulation by the Commission
de Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream has established an electronic bridge with Morgan Guaranty Trust
Company of New York as the Operator of the Euroclear System, referred to as
MGT/EOC, in Brussels to facilitate settlement of trades between Clearstream
and MGT/EOC.
Clearsteam and MGT/EOC customers are world-wide financial
institutions, including underwriters, securities brokers and dealers,
banks, trust companies and clearing corporations. Indirect access to
Clearstream and MGT/EOC is available to other institutions that clear
through or maintain a custodial relationship with an account holder of
either system.
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 the Euroclear Operator, under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as
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, Clearstream or Euroclear
Participants. Transfers between participants will occur in accordance with
DTC rules. Transfers between Clearstream 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 Clearstream 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. Clearstream
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 Clearstream and
Euroclear. Payments with respect to transition bonds held through
Clearstream or Euroclear will be credited to the cash accounts of
Clearstream 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. Clearstream 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 Clearstream customer 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, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of transition bonds among
customers or participants of DTC, Clearstream 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.
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:
o 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;
o the issuer, at its option, elects to terminate the
book-entry system through DTC; or
o after the occurrence of an event of default under the
indenture, transition bondholders representing at least a
majority of the outstanding principal balance 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 and the availability of credit enhancement.
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
interest on the transition bonds, to pay related costs and expenses and to
fund or replenish the capital and overcollateralization subaccounts for
each series, will be allocated to the reserve subaccount. 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
subaccount, the overcollateralization subaccount and the capital subaccount
will also affect the weighted average life of the transition 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 collections. The transition bond charge
will be adjusted from time to time based in part on the actual rate of
transition bond charge collections as compared to the estimated 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 collections 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 the expected final payment
date might result in a longer weighted average life. In addition, if
scheduled payments on the transition bonds are received later than the
applicable scheduled payment dates, 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.
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 by the issuer 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
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 Uniform Commercial
Code, a transfer of subsequent bondable transition property will also be
perfected against all third persons, including judicial lien creditors. The
sale agreement provides that in the event that the sale and transfer of the
bondable transition property is determined by a court not to be a true and
absolute sale as contemplated by the Competition Act, then the sale and
transfer shall be treated as a pledge of the bondable transition property
and the seller shall be deemed to have granted a security interest to the
issuer in the bondable transition property.
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 seller will have no right, title or interest in the
bondable transition property and 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 will be 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 Uniform Commercial Code)
necessary in any jurisdiction to give the issuer a
valid perfected ownership interest in the transferred
bondable transition property, free and clear of all
liens of the seller or anyone else claiming through
the seller, have been taken or 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 BPU financing order and the transition
bond charge have become irrevocable and each issuance advice
letter delivered by the issuer to the BPU pursuant to the
BPU financing order is final and uncontestable;
6. a. under the Competition Act, the State of New Jersey
may not limit, alter or impair the bondable
transition property or other rights vested in the
seller, the issuer or the trustee of the transition
bondholders pursuant to the BPU financing order until
the transition bonds are fully paid and discharged,
or in any way limit, alter, impair or reduce the
value or amount of the bondable transition property;
and
b. under the laws of the State of New Jersey and the
United States, the State of New Jersey may not take
any action that substantially impairs the rights of
the transition bondholders unless that 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 takings
clauses of 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, that 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 BPU
restructuring order (insofar as it relates to the sale of
the bondable transition property), any issuance advice
letter, 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 in writing,
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 issuer or the seller or their
respective properties challenging the Competition Act, the
BPU financing order or the BPU restructuring order (insofar
as it relates to the sale of the bondable transition
property);
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 presently
existing property;
b. bondable transition property includes, without
limitation:
(1) the irrevocable right of the seller to charge,
collect and receive, and be paid from
collections of, the transition bond charge in
the amount necessary to provide for the full
recovery of the bondable stranded costs
described in the BPU financing order; and
(2) all rights of the seller under the BPU
financing order, including, without
limitation, all rights to obtain periodic
adjustments of the transition bond charge
pursuant to the Competition Act, and all
revenues, collections, payments, money and
proceeds arising under, or with respect to,
all of the foregoing; 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, to the issuer 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, or 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. except for the filing of financing statements and
continuation statements under the Uniform Commercial Code,
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. except as disclosed in writing by the seller to the issuer,
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;
d. reasonably believes that it will be able to pay its
debts as they become due; and
e. is able to pay its debts as they mature and does not
intend to incur, or believe that it will incur,
indebtedness that it will not be able to repay at its
maturity; 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).
The seller will make the above representations and warranties under
existing law as in effect as of the date of issuance of any series of
transition bonds.
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, for itself and on behalf of the transition
bondholders, 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 representations, 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, in each
case 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 equally in right to payment
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). The above
representations and warranties are made under existing law as in effect as
of the date of issuance of any series of transition bonds. The seller will
not indemnify any party for any changes of law.
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 who executes an
agreement of assumption to perform every obligation of the seller under the
sale agreement will be the successor to the seller if that person is a
person:
1. into which the seller may be merged or consolidated and
which succeeds to all or the major part of the electric
distribution business of the seller;
2. which results from the division of the seller into two or
more persons and which succeeds to all or the major part of
the electric distribution business of the seller;
3. which may result from any merger or consolidation to which
the seller shall be a party and which succeeds to all or the
major part of the electric distribution business of the
seller;
4. which may succeed to the properties and assets of the seller
substantially as a whole and which succeeds to all or the
major part of the electric distribution business of the
seller; or
5. which may otherwise succeed to all or the major part of the
electric distribution business of the seller.
The seller is not, however, permitted to enter into any of the
transactions contemplated by paragraphs 1 through 5 above, unless:
1. immediately after giving effect to that transaction, 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 seller will have delivered to the issuer and the trustee
an officer's certificate and an opinion of counsel each
stating that the consolidation, merger or succession and the
agreement of assumption comply with the sale agreement and
that all conditions precedent, if any, provided for in the
sale agreement relating to that transaction have been
complied with;
3. the seller will have delivered to the issuer and the trustee
an opinion of counsel either:
a. stating that, in the opinion of counsel, all filings
to be made by the seller, including Uniform
Commercial Code filings, that are necessary fully to
preserve and protect the respective interests of the
issuer and the trustee in the transferred bondable
transition property have been executed and filed, and
reciting the details of those filings; or
b. stating that, in the opinion of counsel, no such
action is necessary to preserve and protect those
interests;
4. the rating agencies will have received prior written notice of
that transaction; and
5. the seller will have delivered to the issuer and the trustee
an opinion of independent tax counsel (as selected by, and
in form and substance reasonably satisfactory to, the
seller, and which may be based on a ruling from the IRS) to
the effect that, for federal income tax purposes, that
consolidation or merger will not result in a material
adverse federal income tax consequence to the seller, the
issuer, the trustee or the then existing transition
bondholders.
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.
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 effect collections in respect of the transition
bond charge. 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 transition bond
charge;
3. accounting for transition bond charge collections,
investigating and resolving 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 for accounts of its own electric service
customers; 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. The servicer will prepare annually 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 the
billing month and each of the following six months. These forecasts are
referred to as the collections curve.
In the servicing agreement, the servicer agrees to remit actual
transition bond charge collections for each billing month to the trustee
for deposit in the collection account not later than the reconciliation
date, described below, following that billing month. In addition, the
servicer agrees to 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 distribution 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, and "F-1" or better by
Fitch IBCA, Inc., referred to as Fitch (and for five
business days following a reduction in any rating); or
b. the rating agency condition has been otherwise
satisfied, and any additional conditions or limitations
imposed by the rating agencies are complied with;
the servicer will remit these payments to the trustee on a monthly basis.
In that case, on the 13th day of each calendar month, or if such 13th 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, the
servicer will remit to the trustee 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 collections curve is used to estimate
transition bond charge collections because the actual amount of those
collections in any month cannot be determined on a current basis and the
servicer believes that the collections curve provides a reasonably accurate
estimate of those collections. The estimated payments are made by the
servicer from collections received from customers. The estimated payments
are reconciled with actual collections on each reconciliation date as
described below.
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 estimated daily transition bond charge collections
based on the collections curve to the trustee within two business days.
Each day on which those remittances are made is referred to as a daily
remittance date. Daily remittance dates and monthly remittance dates are
referred to collectively in this prospectus as remittance dates.
On or before each reconciliation date, the servicer will compare
the actual transition bond charge collections to the collections curve
payments previously made to the trustee (1) in the case of an annual
reconciliation date, for each of the 12 billing months beginning 19 months
before the month in which such reconciliation date occurs, through the
preceding month that is seven months prior to the month in which such
reconciliation date occurs and (2) in the case of a monthly reconciliation
date, for the billing month that is seven months prior to the billing month
in which that reconciliation date occurs. Reconciliation dates occur
annually on the last business day of October of each year commencing
October 2001 through October 2013 and monthly on the last business day of
each month thereafter. If the collections curve payments previously made
for those 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:
o 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
o require the trustee to pay the servicer from the general
subaccount the amount of the excess collections curve
payment, which upon payment becomes property of the
servicer.
If the estimated transition bond charge collections previously made for
those 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
annually, on December 1 through December 1, 2013, and quarterly commencing
on June 1, 2014. The servicer is permitted under the BPU financing order 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, future payments and costs and expenses relating to bondable
transition property and the transition bonds and any amounts on deposit in
the reserve account. 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 30 days after
filing, and final 60 days after filing. The servicer will be required under
the servicing agreement to file an adjustment request on December 1 of each
year until December 1, 2013 and each June 1, September 1, December 1 and
March 1, of each year beginning June 1, 2014, until the transition bonds
are paid.
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 servicer
will withhold the servicing fee for each series from transition bond charge
collections. 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 the issuer's and the trustee's rights in
respect of bondable transition property; and
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 with the BPU for adjusting the transition
bond charge and filings under the 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 determination or 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 and 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 issuer and
the trustee 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 principal balance and the
transition bond principal 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 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."
On or before each remittance date, but not more frequently than
monthly, 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.
In addition, under the servicing agreement, the servicer is
required to give written notice to the issuer, the trustee and each rating
agency, promptly after having obtained knowledge thereof, but in no event
less than five business days thereafter, of any event which, with the
giving of notice or the passage of time or both, would become a servicer
default under the servicing agreement.
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 successor approved by the
BPU provided the rating agency condition and other conditions specified in
the BPU financing order have been satisfied.
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.
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 that, communicated to the issuer, the
trustee and each rating agency and evidenced by an opinion of counsel to
the effect 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. Each of these rights and obligations
may be assigned 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 the 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 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 willful misfeasance, bad faith or gross negligence or by
reason of reckless disregard of its 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 this 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,
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 total
outstanding principal balance of the transition bonds of all series 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 total outstanding principal
balance 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 until a successor servicer is appointed may not
be terminated. Under the servicing agreement, the trustee, with the consent
of the holders of a majority of the total outstanding principal balance 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 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.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal of 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 up to $100,000 to be held in the capital
reserve 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:
a. cash or other property released to the issuer from
any capital subaccount in accordance with the
indenture, which other property is not expected to be
substantial;
b. any payment received by the issuer pursuant to any
hedge agreement entered into by the issuer; and
c. proceeds from the sale of the transition bonds used
to pay the costs of issuance of the transition bonds
and the purchase price of the bondable transition
property pursuant to the sale agreement;
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. The total principal balance of
transition bonds outstanding at any time that may be authenticated and
delivered under the indenture may not exceed $2.525 billion, plus the total
principal balance of any transition bonds the proceeds of which are used to
refinance outstanding transition bonds, any issuance of which is referred
to as a 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 and described in the
related prospectus supplement. 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 principal source of repayment for all series of transition
bonds will be the transition bond charge collected by the servicer. The
issuance of additional series of transition bonds is not expected to
adversely affect the sufficiency of transition bond charge collections for
payments on any particular series of transition bonds. This is because the
transition bond charge and adjustments thereof are generally based on the
total principal balance of all transition bonds outstanding. Moreover, any
additional series of transition bonds will be issued only if the new
issuance will not result in the downgrading or withdrawal of any rating by
a rating agency on any outstanding bonds.
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 to the
effect that the requirements under the indenture for the issuance,
authentication and delivery of an additional series of transition bonds
have been satisfied, 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 fees, costs and expenses 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 for that
series,
4. to pay amounts due under any hedge agreement, and
5. to fund the overcollateralization subaccount for each series
to the scheduled overcollateralization level for that
series, and the capital subaccount for that 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 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 trustee will establish the collection
account, with the trustee or at another eligible institution as described
below. Funds received from the transition bond charge collections 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. the overcollateralization subaccount for each series,
4. the capital subaccount for each series (including the
capital reserve subaccount for the initial series, as
described below),
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 up
to $100,000 held in the capital reserve 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 "Aaa" 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;
8. repurchase obligations with respect to any security or whole
loan, as provided and with the ratings specified in the
indenture; or
9. any other investment permitted by each rating agency.
All 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 day the eligible investment must be
held in the collection account in order for the trustee to
make scheduled payments as required under the indenture, if
the eligible investment is held by an affiliate of the
trustee, or, if the eligible investment is not held by an
affiliate of the trustee, the business day before that day.
In the case of a defeasance, the issuer will deposit U.S. Government
Obligations in the defeasance subaccount. U.S. Government Obligations are
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. 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, as
described under "THE SERVICING AGREEMENT--PSE&G'S SERVICING
PROCEDURES--COLLECTIONS CURVE" above, 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" in this prospectus.
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 to the general subaccount
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 among the other subaccounts
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 each
payment date, the trustee will allocate from amounts on deposit in the
general subaccount to each series subaccount an amount sufficient to pay,
to the extent available:
1. interest payable on each class of that series on that
payment date;
2. the principal of each class of that series payable as a
result of an acceleration following the occurrence of an
event of default, the principal of each class of that series
payable on the final maturity date of that series, or the
principal of each class of that series payable on a
redemption date; and
3. principal scheduled to be paid on each class of that series
on that payment date according to the expected amortization
schedule, excluding amounts provided for in clause 2 above.
On 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 from PSE&G's
general funds in an amount equal to the required capital amount. The issuer
will pay this amount to the trustee for deposit into the capital subaccount
for such series which will be invested in eligible investments. The trustee
will draw on amounts in the capital subaccount for such series (other than
the amounts in the capital reserve subaccount) to the extent that, in
allocating funds in accordance with clauses (a) through (c)(5) 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 subaccount and the overcollateralization subaccount for such series
are insufficient to make scheduled distributions and payments of fees and
expenses specified in those clauses. If any series of transition bonds has
been retired as of any payment date, the amounts on deposit in the capital
subaccount for such series (other than the amounts in the capital reserve
subaccount) will be released to the issuer, free of the lien of the
indenture. The issuer is not contractually obligated to pay over to PSE&G
any amounts released to the issuer from the capital subaccount upon
retirement of any series of transition bonds.
The trustee also will establish within the capital subaccount for
the initial series of transition bonds a further subaccount to be referred
to as the capital reserve subaccount. The trustee will fund the capital
reserve subaccount with $100,000 from the required capital amount for the
initial series of transition bonds. The capital reserve subaccount will not
be subject to the lien of the indenture or included in the collateral
securing any transition bonds. Amounts in the capital reserve subaccount
will be available to pay any expenses of the issuer.
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 subaccount 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 subaccount for any series will
be invested in eligible investments. On each payment date, the trustee will
draw on the overcollateralization subaccount for any series to the extent
that, in allocating funds to such series in accordance with clauses (a)
through (c)(5) in "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below, amounts on deposit in the general subaccount, the series subaccounts
and the reserve subaccount are insufficient to make scheduled distributions
and payments of fees and expenses specified in those clauses. If any series
of transition bonds has been retired as of any payment date, the amounts on
deposit in the overcollateralization subaccount for such series will be
released to the issuer, free of the lien of the indenture. The issuer is
not contractually obligated to pay over to PSE&G any amounts released to
the issuer from the overcollateralization subaccount upon retirement of any
series of transition bonds.
Reserve Subaccount. Transition bond charge collections available on
any payment date that are not necessary to pay clauses (a) through (c)(9)
in "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below will be
allocated to the reserve subaccount. Amounts in the reserve subaccount will
be invested in eligible investments. On each payment date, the trustee will
draw on the reserve subaccount, if any, to the extent that, in allocating
funds in accordance with clauses (a) through (c)(6), (c)(8) and (c)(9) 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 payments of fees and
expenses specified in those clauses.
Defeasance Subaccount. 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
subaccount for each series. If this occurs, funds set aside for future
payment of the transition bonds will be deposited into the defeasance
subaccount. All amounts in a defeasance subaccount will be applied by the
trustee to the payment to the holders of the affected transition bonds.
These amounts will include all sums due for principal 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 collection account, will be
deposited into the general subaccount of the collection account. The
trustee will allocate all amounts in the general subaccount in the
following priority:
(a) The trustee fee will be paid to the trustee monthly,
together with expenses (including any legal fees and
expenses) and any indemnity amounts owed to the trustee.
(b) The servicing fee will be paid to the servicer monthly,
together with any unpaid servicing fees, if such fees have
not been withheld by the servicer from transition bond
charge collections for that purpose.
(c) On each payment date specified in the related prospectus
supplement,
1. the administration fee payable under the administration
agreement will be paid to PSE&G as the administrator of
the issuer, and fees payable to the independent
managers of the issuer, plus any expenses, including
legal fees and expenses, of, and indemnity amounts
payable to, the independent managers will be paid to
the independent managers, up to a total amount of
$[____];
2. 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 (a), (b) and (c)(1) above, will be
paid to the persons entitled thereto, provided that the
amount paid on any payment date pursuant to this clause
may not exceed $100,000 in the aggregate for all
series;
3. an amount equal to interest payable on each class of
each series of transition bonds for the payment date
will be allocated pro rata 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, excluding any termination or similar
non-recurring payments;
4. an amount equal to principal of each class of any
series of transition bonds payable as a result of
acceleration triggered by an event of default,
principal of any class of any series of transition
bonds payable on the final maturity date for that class
or series, or the principal payable with respect to a
redemption date will be allocated pro rata to the
corresponding series subaccount;
5. an amount equal to the principal then scheduled to be
paid on each class of each series of transition bonds
on that payment date according to the expected
amortization schedule, excluding amounts provided for
pursuant to clause (c)(4) above, will be allocated pro
rata to the corresponding series subaccount;
6. payment of any amounts payable under any hedge
agreement will be paid to any hedge counterparty, other
than amounts paid under clause (c)(3) above;
7. all remaining unpaid operating expenses and indemnity
amounts will be paid to the persons entitled thereto;
8. any amount necessary to replenish the capital
subaccount for each series will be allocated to that
subaccount, pro rata, based on the outstanding
principal balance of each series, up to the required
capital amount for each series;
9. an amount will be allocated to the
overcollateralization subaccount for each series to
cause the amount in the overcollateralization
subaccount for each series to equal the scheduled
overcollateralization level for each series as of that
payment date, pro rata, based on the outstanding
principal balance of each series;
10. so long as no event of default has occurred and is
continuing, an amount equal to investment earnings
since the preceding payment date on amounts in each
capital subaccount will be released to the issuer;
11. the balance, if any, will be allocated to the reserve
subaccount; and
12. 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 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 are
insufficient to make the allocations contemplated by clauses (a) through
(c)(6), (c)(8) and (c)(9) above for any 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 subaccount pro rata among series for
the allocations contemplated by clauses (a) through
(c)(6), (c)(8) and (c)(9) above,
2. from the overcollateralization subaccount for such
series, for the allocations contemplated by clauses (a)
through (c)(5) above, and
3. from the capital subaccount for such series, for the
allocations contemplated by clauses (a) through (c)(5)
above.
For the purpose of allocations among series prior to an
acceleration, pro rata has the following meaning, unless otherwise provided
in the prospectus supplement. With respect to a payment of interest, pro
rata means the proportion that the outstanding principal amount of such
series bears to the aggregate outstanding principal amount of all series,
in each case, immediately before that payment date. With respect to a
payment of principal, pro rata means the proportion that the aggregate
outstanding principal amount scheduled to be paid on that payment date for
that series bears to the aggregate outstanding principal amount scheduled
to be paid on that payment date for all series.
For the purpose of allocations among classes within a series prior
to an acceleration, pro rata has the following meaning, unless otherwise
provided in the prospectus supplement. With respect to a payment of
interest, pro rata means the proportion that the aggregate outstanding
principal amount of that class bears to the aggregate outstanding principal
amount of all classes within that series, in each case, immediately before
that payment date. With respect to a payment of principal, pro rata means
the proportion that the aggregate outstanding principal amount scheduled to
be paid on that payment date for that class bears to the aggregate
outstanding principal amount scheduled to be paid on that payment date for
all classes within that series.
Upon an acceleration of the maturity of the transition bonds, the
aggregate amount of principal of and interest accrued on each series of
transition bonds will be payable without priority of interest over
principal or principal over interest and without regard to series or class,
in the proportion that this aggregate amount of principal of and accrued
interest on that series bears to the aggregate amount of principal of and
accrued interest on all transition bonds.
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 principal balance and the
transition bond principal balance for that series and class as
of that payment date;
4. with respect to that series, the amount on deposit in the
overcollateralization subaccount and the scheduled
overcollateralization level as of that payment date;
5. with respect to that series, 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 or amplify 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 total outstanding principal balance 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 interest on any transition bond, or reduce the
principal balance thereof, the interest rate specified thereon
or the redemption price 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 interest on the transition bonds, or change
the 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 total outstanding principal
balance of the 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 total outstanding principal
balance 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
or amendments to the issuer's limited liability company
agreement or certificate of formation, the sale agreement, any
bills of sale delivered under the sale agreement, the
servicing agreement, the administration agreement, the
agreement with the underwriters or any hedge agreement entered
into by the issuer prior to the issuance of the initial series
of transition bonds, except to increase any percentage
specified therein or to provide that those provisions of the
indenture or of these other documents 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 or principal 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. with respect to any series, decrease the required capital
amount, 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 total outstanding principal
balance of the transition bonds required to amend the sections
of the indenture which specify the applicable percentage of
the total outstanding principal balance 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 total outstanding principal
balance of the 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 total outstanding
principal balance 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, the
administration 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 total outstanding principal
balance of the 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 that 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 total outstanding principal balance 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
earliest 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% of the total outstanding principal
balance 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 the total outstanding principal balance of the transition
bonds of all series may declare the entire principal balance 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 outstanding principal balance of all series of
the transition bonds.
Remedies Available to the Trustee Following an Event of Default. In
addition to acceleration of the transition bonds, the trustee may exercise
one or more of the following remedies upon an event of default:
1. the trustee may institute proceedings in its own name and as
trustee of an express trust for the collection of all amounts
then payable on the transition bonds or under the indenture
with respect to the transition bonds, whether by declaration
or otherwise, enforce any judgment obtained, and collect from
the issuer and any other obligor upon the transition bonds
moneys adjudged due;
2. the trustee may institute proceedings from time to time for
the complete or partial foreclosure of the indenture with
respect to the collateral;
3. the trustee may exercise any remedies of a secured party under
the Uniform Commercial Code or the Competition Act or any
other applicable law and take any other appropriate action to
protect and enforce the rights and remedies of the trustee and
the holders of the transition bonds of that series;
4. the trustee may sell the collateral or any portion thereof or
rights or interest therein, at one or more public or private
sales called and conducted in any manner permitted by law;
5. the trustee may exercise all rights, remedies, powers,
privileges and claims of the issuer against PSE&G or the
administrator under or in connection with the sale agreement,
the administration agreement or the servicing agreement; and
6. the trustee may institute or participate in proceedings
reasonably necessary to compel performance of or to enforce
the pledge and agreement of the State of New Jersey under the
Competition Act and collect any monetary damages incurred by
the holders of the transition bonds or the trustee .
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 total outstanding principal balance
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 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 total outstanding
principal balance 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 of the total outstanding principal
balance 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 total outstanding
principal balance of all series of transition bonds; 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 total outstanding
principal balance of the transition bonds of all series 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
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 any remedies
provided in the Competition Act, 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% of the total outstanding
principal balance of the 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 total outstanding
principal balance of the 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 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, the
administration 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 to 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, the sale
agreement or the servicing agreement, 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 interest payable in respect of, the transition bonds, other
than amounts properly withheld under the United States
Internal Revenue Code, referred to as 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 or any part of the collateral.
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 and any obligations under any credit enhancement
or hedge agreement for any series of 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 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 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 of 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 by
the seller or the issuer 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 by the seller or the issuer 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 IRS 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
The Bank of New York 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 total outstanding principal balance of
the transition bonds of all series 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
must at all times satisfy the requirements of the Trust Indenture Act and
the Investment Company Act of 1940. The Trustee must also have a combined
capital and surplus of at least $50 million and a long- term debt rating of
at least "BBB-" by S&P, at least "Baa3" or better by Moody's and at least
"BBB-" by Fitch. 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
will without any further action be the successor trustee.
GOVERNING LAW
The indenture will be governed by the laws of the State of New
Jersey.
HOW A BANKRUPTCY OF THE 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 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. The Competition Act also
provides that the characterization of a transfer as a sale or other
absolute transfer shall not be affected or impaired in any manner by
treatment of the transfer as a financing for federal or state tax purposes
or financial accounting purposes. PSE&G and the issuer will treat the
transaction 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, a party in interest in the
bankruptcy might 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." The party in interest might argue that the treatment of
the transaction for financial reporting and tax purposes as a financing and
not a sale lends weight to the position that the transaction should be
treated as a financing and not a sale. However, as noted above, the
Competition Act specifically provides for the treatment of the transaction
as a sale as a matter of state law and that treatment is not affected by
treatment of the transfer as a financing for federal or state tax purposes
or financial accounting purposes. If a court were nonetheless to
characterize the transaction as a financing rather than a sale, the issuer
would be treated as a secured creditor of PSE&G in the bankruptcy
proceedings. Although, as noted below, the issuer would in that case have a
security interest in the bondable transition property, it would not likely
be entitled to access to the transition bond charge collections during the
bankruptcy. As a result, repayment on the bonds could be significantly
delayed and a plan of reorganization in the bankruptcy might permanently
modify the amount and timing of payments to the issuer of transition bond
charge collections and therefore the amount and timing of funds available
to the issuer to pay transition bondholders.
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 provides that in the event that the sale and
transfer of the bondable transition property is determined by a court not
to be a true and absolute sale as contemplated by the Competition Act, then
the sale and transfer shall be treated as a pledge of the bondable
transition property and the seller shall be deemed to have granted a
security interest to the issuer in the bondable transition property. 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. In that event, the issuer's sole source of
payment for the transition bonds would be whatever it recovered on its
unsecured claim in the PSE&G bankruptcy case, which could differ materially
from the amount and timing of transition bond charge collections that were
intended to fund payments on the transition bonds.
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. If the assets and liabilities were ordered consolidated, the
claims of the transition bondholders against the issuer would be treated as
secured claims against the consolidated entities. Payment of those claims
would be subject to substantial delay and to adjustment in timing and
amount under a plan of reorganization in the bankruptcy case.
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 and 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 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
MATERIAL FEDERAL INCOME TAX MATTERS
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, has rendered
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, and also summarizes the similar principal United States federal
income tax consequences to U.S. Holders, as defined below, who are initial
purchasers. This summary has been prepared by Skadden, Arps, Slate, Meagher
& Flom LLP, 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, as it relates to Non-U.S.
Holders, is correct in all material respects. Apart from that opinion and
the opinion described in the preceding paragraph, 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 PURCHASE,
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 that 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 qualify 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.
TAX CONSEQUENCES TO U.S. HOLDERS
Interest. Interest income on the transition bonds will be
includible in income of a U.S. Holder when it is received or accrued, in
accordance with the U.S. Holder's regular method of accounting.
Sale or Retirement of Transition Bonds. On a sale, exchange or
retirement of a transition bond, a U.S. Holder will have taxable gain or
loss equal to the difference between the amount received by the U.S. Holder
and the U.S. Holder's tax basis in the transition bond. A U.S. Holder's tax
basis in its transition bonds is the U.S. Holder's cost, subject to
adjustments. Gain or loss will generally be capital gain or loss, and will
be long-term capital gain or loss if the transition bond was held for more
than one year at the time of disposition. If a U.S. Holder sells the
transition bond between interest payment dates, a portion of the amount
received will reflect interest that has accrued on the transition bond but
that has not yet been paid by the sale date. To the extent that amount has
not already been included in the U.S. Holder's income, it is treated as
ordinary interest income and not as sale proceeds.
TAX CONSEQUENCES TO 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 Non-U.S. Holder 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. A U.S. Holder can obtain a complete exemption
from the withholding tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification). 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 (1)
the broker determines that the seller is a corporation or other exempt
recipient or (2) the seller provides, in the required manner, certain
identifying information and, in the case of a Non-U.S. Holder, certifies
that the seller is a Non- U.S. Holder (and certain other conditions are
met). The sale must also be reported by the broker to the IRS, unless
either (a) the broker determines that the seller is an exempt recipient or
(b) 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 Wilentz, Goldman & Spitzer, P.C., 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.
Based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993),
an insurance company's general account may be deemed to include assets of
the Plans investing in the general account (e.g., through the purchase of
an annuity contract), and the insurance company might be treated as a Party
in Interest with respect to a Plan by virtue of that investment. Any
purchaser that is an insurance company using the assets of an insurance
company general account should note 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 issued
final regulations effective January 5, 2000 (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.
As a result of these regulations, assets of an insurance company
general account will not be treated as "plan assets" for purposes of the
fiduciary responsibility provisions of ERISA and Section 4975 of the Code
to the extent such assets relate to contracts issued to employee benefit
plans on or before December 31, 1998 and the insurer satisfies various
conditions. Section 401(c) also provides that, except in the case of
avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, 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 of the Code 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 such plan. 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 such plan invested in a separate account.
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 issuer should
not be treated as the assets of Plans investing in the transition bonds.
Pursuant to the Plan Asset Regulation, an equity interest is any interest
in an entity other than an instrument that is treated as indebtedness under
applicable law and which has no substantial equity features.
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 PTCEs, 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 or 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.
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 be rated investment grade, that
is, in one of the four highest rating categories, by each of S&P, Moody's
and Fitch.
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 final maturity 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 Wilentz, Goldman & Spitzer, P.C.,
Woodbridge, 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, New York, New
York. 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 Wilentz, Goldman & Spitzer, P.C., Woodbridge, New Jersey.
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
INDEPENDENT AUDITORS' REPORT
PSE&G Transition Funding LLC:
We have audited the accompanying balance sheet of PSE&G Transition Funding
LLC (the "Company") as of December 31, 1999. This balance sheet is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of December 31, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche
Parsippany, New Jersey
March 15, 2000
PSE&G TRANSITION FUNDING LLC
BALANCE SHEET
AS OF DECEMBER 31, 1999
ASSETS
Cash $ 1,000
Debt Issuance Costs 1,477,090
---------
Total Assets $1,478,090
==========
LIABILITIES
Payable to Member $1,477,090
---------
Total Liabilities $1,477,090
MEMBER'S EQUITY 1,000
------------
Total Liabilities and Member's Equity $1,478,090
==========
See Notes to Balance Sheet.
PSE&G TRANSITION FUNDING LLC
NOTES TO BALANCE SHEET
1. NATURE OF OPERATIONS
PSE&G Transition Funding LLC (the Company), a limited liability company
established by Public Service Electric and Gas Company (PSE&G) under the
laws of the State of Delaware, was formed on July 21, 1999 pursuant to a
limited liability company agreement with PSE&G, as sole member of the
Company. PSE&G is an operating electric and gas utility and is a wholly
owned subsidiary of Public Service Enterprise Group Incorporated. The
Company was organized for the sole purpose of purchasing and owning
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 a bondable stranded cost rate order (BPU Financing
Order), which was issued on September 17, 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 February 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 income tax 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.
DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds are
capitalized and will be amortized over the life of the Bonds utilizing
the effective interest method.
INCOME TAXES
The Company has elected not to be taxed as a corporation for Federal income
tax purposes. The Company is treated as a division of PSE&G, and
accordingly, 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. 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 the BPU Financing Order, which will be
collected from PSE&G customers by PSE&G, as servicer. TBC collections will
be deposited at least 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 any
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 PSE&G 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 to PSE&G equal to 0.05% of the initial balance of
Bonds outstanding. The servicing fee will also be recovered through the
TBC.
All debt issuance costs will be paid by PSE&G and reimbursed by the Company
upon issuance of the Bonds.
5. SUBSEQUENT EVENTS
In October and November 1999, two appeals of the BPU Financing Order and
two appeals of the related BPU Final Decision and Order in PSE&G's rate
unbundling, stranded costs and restructuring proceedings, were filed in the
Appellate Division of the New Jersey Superior Court on behalf of several
customers. The Court granted PSE&G's requests to accelerate the appeals and
ordered that the matters be consolidated. All briefs have been filed and
oral argument on the consolidated matters was held on March 8, 2000. While
PSE&G believes that the appeals are without merit, no assurances can be
given at this time as to the timing or outcome of these proceedings.
Accordingly, PSE&G is not able to predict whether such appeals will have a
material adverse effect on the Company's financial condition, results of
operations or net cash flows.
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 Managers.
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, referred to as 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 income tax matters.
8.2 Opinion of Wilentz, Goldman & Spitzer, P.C. 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 State of New Jersey Board of Public
Utilities, dated June 8, 1999.
10.4 Financing Order of the BPU issued September 17, 1999.
23.1.1 Consents of Skadden, Arps, Slate, Meagher & Flom LLP (certain of
which are included in its opinions filed as Exhibits 5.1 and 8.1).
23.1.2 Consent of Wilentz, Goldman & Spitzer, P.C. (included in its
opinions 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 The Bank of New York, as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final BPU restructuring order issued August 24, 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)(1)(ii) will not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934, 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 or
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)(1) 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 March 22, 2000.
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.
March 22, 2000 /s/ Robert E. Busch
-------------- --------------------------------
Date Name: Robert E. Busch
Title: Manager and Chief
Financial Officer
March 22, 2000 /s/ Robert C. Murray
-------------- -------------------------------
Date Name: Robert C. Murray
Title: Manager and Chief
Executive Officer
March 22, 2000 /s/ R. Edwin Selover
-------------- -------------------------------
Date Name: R. Edwin Selover
Title: Manager
March 22, 2000 /s/ Patricia A. Rado
-------------- --------------------------------
Date Name: Patricia A. Rado
Title: Controller
INDEX TO 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 income tax matters.
8.2 Opinion of Wilentz, Goldman & Spitzer, P.C. 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 State of New Jersey Board of Public
Utilities, dated June 8, 1999.
10.4 Financing Order of the BPU issued September 17, 1999.
23.1.1 Consents of Skadden, Arps, Slate, Meagher & Flom LLP
(certain of which are included in its opinions filed as
Exhibits 5.1 and 8.1).
23.1.2 Consent of Wilentz, Goldman & Spitzer, P.C. (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 The Bank of New York, as Trustee under
the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final BPU restructuring order issued August 24, 1999.
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
* To be filed by amendment.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS
PAGE
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS................................1
SUMMARY OF TERMS...............................................................................2
PARTIES TO THE TRANSACTION.....................................................................5
The Collateral............................................................................6
Payment Sources...........................................................................6
Priority of Distributions.................................................................7
Credit Enhancement and Accounts...........................................................8
State Pledge.............................................................................10
Payments of Interest and Principal.......................................................12
Optional Redemption......................................................................12
Payment Dates and Record Dates...........................................................12
Material Income Tax Considerations.......................................................12
ERISA Considerations.....................................................................12
REPORTS TO TRANSITION BONDHOLDERS.............................................................13
RISK FACTORS..................................................................................14
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...........................................................................14
Judicial, Legislative or Regulatory Action That May Adversely Affect Your Investment..........14
The Law Which Underpins the Transition Bonds May Be Invalidated..........................14
The Competition Act May Be Overturned by the Federal Government Without Full
Compensation..........................................................................16
Future State Legislative Action May Invalidate the Transition Bonds or Their Underlying
Assets................................................................................17
The BPU May Take Action Which Reduces the Value of the Transition Bonds..................18
Servicing Risks...............................................................................19
Inaccurate Forecasting or Unanticipated Delinquencies Could Result in Insufficient
Funds to Make Scheduled Payments on the Transition Bonds..............................19
Initially, the Calculation of the Transition Bond Charge May Be Affected By Limited
Experience with the Transition Bond Charge............................................20
PSE&G May Encounter Unexpected Problems in the Initial Administration of the
Transition Bond Charge................................................................20
If the Servicer Defaults or Becomes Bankrupt, It May Be Difficult to Find a Successor
Servicer and Payments on the Bonds May Be Suspended...................................21
Billing and Collection Practices May Reduce the Amount of Funds Available for
Payments on the Transition Bonds......................................................21
It May Be Difficult to Collect the Transition Bond Charge From Third Parties Who
Provide Electricity to PSE&G's Customers..............................................21
PSE&G's Customer Payments May Decline Due to Confusion...................................22
Inability to Terminate Service to Certain Delinquent Customers During the Heating
Season May Temporarily Reduce Amounts Available for Payments on the Transition
Bonds.................................................................................22
The Risks Associated With Potential Bankruptcy Proceedings....................................23
PSE&G Will Commingle the Transition Bond Charge with Other Revenues Which May
Obstruct Access to the Issuer's Funds in Case of Bankruptcy of PSE&G..................23
Bankruptcy of PSE&G Could Result in Losses or Delays in Payments on the Transition
Bonds.................................................................................24
The Sale of the Bondable Transition Property Could be Construed as a Financing and
Not a Sale in a Case of PSE&G's Bankruptcy............................................25
A BPU Sequestration Order for Bondable Transition Property in Case of Default Might
Not Be Enforceable in Bankruptcy......................................................25
Other Risks Associated With An Investment In The Transition Bonds.............................26
Absence of Secondary Market for Transition Bonds Could Limit Your Ability to Resell
Transition Bonds......................................................................26
The Issuer May Issue Additional Series of Transition Bonds Whose Holders Have
Conflicting Interests.................................................................26
The Ratings Have a Limited Function and They Are No Indication of the Expected Rate
of Payment of Principal on the Transition Bonds.......................................27
PSE&G's Obligation to Indemnify the Issuer For a Breach of a Representation or
Warranty May Not Be Sufficient to Protect Your Investment.............................27
FORWARD-LOOKING STATEMENTS....................................................................27
PUBLIC SERVICE ELECTRIC AND GAS COMPANY.......................................................28
USE OF PROCEEDS...............................................................................30
THE COMPETITION ACT...........................................................................30
Recovery of Stranded Costs is Allowed for PSE&G and Other New Jersey Utilities...........31
PSE&G and Other Utilities May Securitize Stranded Costs..................................32
PSE&G'S RESTRUCTURING.........................................................................35
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE........................................37
The BPU Financing Order..................................................................37
The BPU's Transition Bond Charge Adjustment Process......................................39
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY...................................40
PSE&G....................................................................................40
Public Service Enterprise Group Incorporated.............................................41
PSE&G's Customer Classes.................................................................41
Electric Revenue, Number of Customers and Consumption....................................42
Percentage Concentration Within PSE&G's Large Commercial and Industrial Customers........44
How PSE&G Forecasts the Number of Customers and the Amount of Electricity Usage..........44
Forecast Variances.......................................................................45
Credit Policy; Billing; Collections and Write-Offs; Termination of Service...............45
Loss and Delinquency Experience..........................................................47
How PSE&G Will Apply Partial Payments by its Customers...................................50
PSE&G TRANSITION FUNDING LLC, THE ISSUER......................................................50
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS...........................................54
THE TRANSITION BONDS..........................................................................55
General Terms of the Transition Bonds....................................................55
Payments of Interest and Principal on the Transition Bonds...............................56
Redemption of the Transition Bonds.......................................................57
Credit Enhancement for the Transition Bonds..............................................57
Transition Bonds Will Be Issued in Book-Entry Form.......................................58
Certificated Transition Bonds............................................................62
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS......................................................................63
THE SALE AGREEMENT............................................................................64
PSE&G's Sale and Assignment of Bondable Transition Property..............................64
PSE&G's Representations and Warranties...................................................65
PSE&G's Obligation to Indemnify the Issuer and the Trustee and to Take Legal Action......69
Successors to PSE&G......................................................................70
THE SERVICING AGREEMENT.......................................................................72
PSE&G's Servicing Procedures.............................................................72
The BPU's Transition Bond Charge Adjustment Process......................................75
PSE&G's Transition Bond Charge Collections...............................................75
PSE&G's Compensation for Its Role as Servicer and Its Release of Other Parties...........75
PSE&G's Duties as Servicer...............................................................76
PSE&G's Representations and Warranties as Servicer.......................................76
PSE&G, as Servicer, Will Indemnify the Issuer and Other Related Entities.................77
PSE&G, as Servicer, Will Provide Statements to the Issuer and to the Trustee.............78
PSE&G to Provide Compliance Reports Concerning the Servicing Agreement...................79
Matters Regarding PSE&G as Servicer......................................................79
Events Constituting a Default by PSE&G in Its Role as Servicer...........................80
The Trustee's Rights if PSE&G Defaults as Servicer.......................................81
The Obligations of a Servicer That Succeeds PSE&G........................................81
THE INDENTURE.................................................................................82
The Security for the Transition Bonds....................................................82
Transition Bonds May Be Issued in Various Series or Classes..............................83
The Collection Account for the Transition Bonds..........................................84
How Funds in the Collection Account Will Be Allocated....................................89
Reports to Holders of the Transition Bonds...............................................93
The Issuer and the Trustee May Modify the Indenture......................................93
What Constitutes an Event of Default on the Transition Bonds.............................97
Covenants of the Issuer.................................................................100
Access to the List of Holders of the Transition Bonds...................................102
The Issuer Must File an Annual Compliance Statement.....................................102
The Trustee Must Provide a Report to All Transition Bondholders.........................102
What Will Trigger Satisfaction and Discharge of the Indenture...........................103
The Issuer's Legal Defeasance and Covenant Defeasance Options...........................103
The Trustee.............................................................................105
Governing Law...........................................................................106
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT..........................................................106
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS.........................................110
Material Federal Income Tax Matters.....................................................110
Income Tax Status of the Transition Bonds.........................................110
General...........................................................................110
Tax Consequences To U.S. Holders..................................................111
Tax Consequences to Non-U.S. Holders..............................................111
Backup Withholding................................................................113
Material State of New Jersey Tax Matters................................................114
ERISA CONSIDERATIONS.........................................................................114
Plan Asset Issues For an Investment in the Transition Bonds.............................115
Prohibited Transaction Exemptions.......................................................116
General Investment Considerations For Prospective Plan Investors in the Transition
Bonds................................................................................117
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS................................................118
RATINGS FOR THE TRANSITION BONDS.............................................................119
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS.......................................119
</TABLE>
Exhibit 8.2
[______ __], 2000
PSE&G Transition Funding LLC
80 Park Plaza
Newark, New Jersey 07102
Re: PSE&G Transition Funding LLC Transition Bonds
Ladies and Gentlemen:
We have acted as New Jersey State tax counsel to PSE&G Transition Funding
LLC, a Delaware limited liability company (the "Company"), in connection
with the preparation of the Registration Statement, as amended to the date
hereof, filed on Form S-3 (the "Registration Statement") with the
Securities and Exchange Commission in connection with the registration
under the Securities Act of 1933, as amended, of Transition Bonds of the
Company to be offered from time to time as described in the prospectus (the
"Prospectus") included as part of the Registration Statement. Capitalized
terms used in this letter and not defined herein have the meanings given to
such terms in the Prospectus.
The opinion expressed below is based on the following assumptions:
(a) the Registration Statement will become effective;
(b) the proposed transactions are consummated as contemplated in the
Registration Statement; and
(c) prior to the issuance of any Series or Class of Transition
Bonds:
i. all necessary orders, approvals and authorizations for the
Company's purchase from time to time of Bondable Transition
Property from PSE&G, in exchange for the net proceeds of
Transition Bonds will have been obtained by the Company;
ii. the Amended and Restated Limited Liability Company Agreement
of the Company will have been executed and delivered by an
authorized representative of PSE&G as sole member of the
Company;
iii. the Indenture will have been executed and delivered by the
Company's authorized representative and by the trustee named
therein;
iv. the maturity dates, the bond rates, the redemption provisions
and the other terms of the Transition Bonds being offered will
be fixed in accordance with the terms of the Indenture;
v. the Sale Agreement between the Company and PSE&G, as Seller,
will have been executed and delivered;
vi. the Servicing Agreement between the Company and PSE&G, as
Servicer, will have been executed and delivered; and
vii. the Underwriting Agreement between PSE&G and the underwriters
of the Transition Bonds will have been executed and delivered.
In rendering our opinion, we have relied on the private letter ruling
addressed to PSE&G with respect to the issuance of the Transition Bonds
issued by the Internal Revenue Service dated July 23, 1999.
Members of our firm are admitted to practice in the State of New Jersey,
and we do not express any opinion as to the laws of any other jurisdiction.
We hereby adopt and confirm to you our opinion as set forth under the
headings "Summary of Terms - Material Income Tax Considerations" and
"Material Income Tax Matters for the Transition Bonds - Material State of
New Jersey Tax Matters" in the Prospectus, and hereby consent to the filing
of this opinion as an exhibit to the Registration Statement and the
reference to this firm under the headings "Summary of Terms - Material
Income Tax Considerations" and "Material Income Tax Matters for the
Transition Bonds - Material State of New Jersey Tax Matters" in the
Prospectus.
Very truly yours,
/S/ WILENTZ, GOLDMAN & SPITZER, P.C.
----------------------------------
WILENTZ, GOLDMAN & SPITZER, P.C.
EXHIBIT 23.1.1
CONSENT OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
ONE NEWARK CENTER
NEWARK, NEW JERSEY 07102
(973) 639-6800
March 21, 2000
PSE&G Transition Funding LLC
80 Park Plaza
Newark, New Jersey 07102
Re: PSE&G Transition Funding LLC
Ladies and Gentlemen:
We have acted as special counsel to PSE&G Transition Funding LLC,
a Delaware limited liability company (the "Company"), in connection
with the preparation of Registration Statement No. 333-83635, as
amended to the date hereof, filed on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities
Act of 1933, as amended, of transition bonds of the Company to be
offered from time to time as described in the form of the prospectus
(the "Prospectus") included as part of the Registration Statement.
We consent to the filing of this letter as an Exhibit to the
Registration Statement and to the references to this firm under the
heading "RISK FACTORS - JUDICIAL, LEGISLATIVE OR REGULATORY ACTION
THAT MAY ADVERSELY AFFECT YOUR INVESTMENT - Future State Legislative
Action May Invalidate the Transition Bonds or Their Underlying Assets"
in the Prospectus. In giving this consent, we do not thereby admit
that we are included in the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
