As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 333-83635
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 6 TO FORM S-3
Registration Statement Under The Securities Act of 1933
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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, T-4D
Newark, New Jersey 07102
(973) 297-2227
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------
James T. Foran Robert E. Busch
Vice President and General Counsel Senior Vice President and
80 Park Plaza, T-5B Chief Financial Officer
Newark, New Jersey 07102 80 Park Plaza, T-8E
(973) 430-6131 Newark, New Jersey 07102
(973) 430-7761
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
----------
Copies to:
Christopher J. Kell Eric 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. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================
Proposed
Amount Maximum Maximum Amount of
Title of to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit(1) Offering Price(1) Fee
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Bonds $2,525,000,000 100% $2,525,000,000 $631,250
=============================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
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.
================================================================================
<PAGE>
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 JANUARY 8, 2001.
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JANUARY [ ], 2001.
$__________ Transition Bonds, Series 2001-1
[LOGO] PSE&G Transition Funding LLC
Issuer of the Transition Bonds
Public Service Electric and Gas Company
Seller and Servicer
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Expected
Initial Final Final
Principal Interest Underwriting Net Payment Maturity
Balance Rate Price Discounts Proceeds Date Date
--------- -------- ----- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 ....... $ % % % $
Class A-2 ....... $ % % % $
Class A-3 ....... $ % % % $
Class A-4 ....... $ LIBOR + [ ]% % % $
Class A-5 ....... $ % % % $
Class A-6 ....... $ % % % $
Class A-7 ....... $ % % % $
Class A-8 ....... $ % % % $
The total price to the public is $_____. The total amount of the underwriting
discounts is $_____. The total amount of proceeds before deduction of expenses
is $_____.
---------------------------------------------------------------------------------------------------------------
</TABLE>
Consider carefully the risk factors beginning on page S-17 of this prospectus
supplement and page 13 of the accompanying prospectus before buying the
transition bonds.
The series 2001-1 transition bonds are highly structured. 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, consisting
principally of the bondable transition property, which includes the right to
recover from customers, through a transition bond charge, amounts sufficient to
make payments on the series 2001-1 transition bonds, as described further in
this prospectus supplement and the accompanying prospectus. Neither Public
Service Electric and Gas Company, its parent, Public Service Enterprise Group
Incorporated, nor any of their respective affiliates, other than the issuer, is
liable for payments on the series 2001-1 transition bonds.
We will apply to have any class of series 2001-1 transition bonds paying
interest at a floating rate listed on the Luxembourg Stock Exchange but we
cannot assure that any of those classes of series 2001-1 transition bonds will
be listed on the Luxembourg Stock Exchange or any other stock exchange. We will
not apply to have any other class of the series 2001-1 transition bonds listed
on any stock exchange.
This prospectus supplement and the accompanying prospectus together constitute
the prospectus for the series 2001-1 transition bonds. Prospective investors are
urged to read both this prospectus supplement and the accompanying prospectus in
full. Sales of the transition bonds may not be consummated unless the purchaser
has received both this prospectus supplement and the accompanying 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
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC BANC ONE CAPITAL MARKETS, INC.
COMMERCE CAPITAL MARKETS, INC. FIRST UNION SECURITIES, INC.
JP MORGAN SCOTIA CAPITAL (USA) INC.
THE WILLIAMS CAPITAL GROUP, L.P.
___________, 2001
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
----
WHERE TO FIND INFORMATION IN THESE DOCUMENTS ........................... S-3
INTRODUCTION ........................................................... S-4
THE SERIES 2001-1 TRANSITION BONDS ..................................... S-5
The Collateral ...................................................... S-5
Payment Sources ..................................................... S-6
Principal Payments .................................................. S-6
Distribution Following Acceleration ................................. S-9
Optional Redemption ................................................. S-9
Interest Payments Generally ......................................... S-9
Interest Payments on Floating Rate Transition Bonds ................. S-10
Floating Rate Interest Determination ................................ S-11
Interest Rate Swap Agreements ....................................... S-11
Swap Counterparties ................................................. S-17
RISK FACTORS RELATING TO SERIES 2001-1 FLOATING RATE TRANSITION BONDS .. S-17
Termination of Swap Could Cause a Loss .............................. S-17
Ratings Downgrade of Any Floating Rate Class of Transition Bonds
Could Cause a Loss for Holders of Those Transition Bonds ......... S-18
Interest Payments on Series 2001-1 Transition Bonds at Floating
Rates Are Dependent on Swap Counterparties ....................... S-18
CREDIT ENHANCEMENT ..................................................... S-18
Periodic Adjustment of the Transition Bond Charge ................... S-18
Collection Account and Subaccounts .................................. S-19
DESCRIPTION OF BONDABLE TRANSITION PROPERTY ............................ S-22
THE TRANSITION BOND CHARGE ............................................. S-22
INFORMATION REGARDING PUBLIC SERVICE ELECTRIC AND GAS COMPANY .......... S-24
UNDERWRITING THE SERIES 2001-1 TRANSITION BONDS ........................ S-24
The Underwriters' Sales Price for the Series 2001-1
Transition Bonds ................................................. S-25
No Assurance as to Resale Price or Resale Liquidity for
the Transition Bonds ............................................. S-25
United Kingdom Offering ............................................. S-26
Various Types of Underwriter Transactions Which May Affect
the Price of the Transition Bonds ................................ S-26
RATINGS FOR THE SERIES 2001-1 TRANSITION BONDS ......................... S-26
LISTING AND GENERAL INFORMATION RELATED TO FLOATING RATE CLASSES ....... S-27
S-2
<PAGE>
Where to Find Information in These Documents
This prospectus supplement and the accompanying 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 2001-1 transition bonds, are contained in this prospectus
supplement. The terms that apply to all series of transition bonds appear in the
accompanying 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 accompanying 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 page.
You should rely only on information on the transition bonds provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
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S-3
<PAGE>
Introduction
--------------------------------------------------------------------------------
The Issuer ...................... PSE&G Transition Funding LLC, a Delaware
limited liability company
Issuer's Address ................ 80 Park Plaza, T-4D, Newark, New Jersey
07102
Issuer's Telephone Number ....... (973) 297-2227
Seller of the Bondable
Transition Property to
the Issuer ...................... Public Service Electric and Gas Company,
referred to as PSE&G, an operating 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, T-8E, Newark, New Jersey
07102
Seller's Telephone Number ....... (973) 430-7000
Servicer of the Bondable
Transition Property ............. PSE&G will act as servicer of the bondable
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 may 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 a servicing fee of up to 1.25%
per year 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.
--------------------------------------------------------------------------------
S-4
<PAGE>
THE SERIES 2001-1 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 2001-1 transition bonds will be issued in minimum denominations
of $1,000 and in integral multiples of $1 above that amount, with an exception
for one transition bond in each class which may have a smaller denomination. The
series 2001-1 transition bonds will consist of eight classes, in the initial
class principal balances, bearing the interest rates and having the expected
final payment dates and final maturity dates set forth below:
Table 1
Initial Class Expected Final Final
Class Principal Balance Interest Rate Payment Date Maturity Date
----- ----------------- ------------- ------------ -------------
A-1 ......... $[_______] [____]% [______] [______]
A-2 ......... $[_______] [____]% [______] [______]
A-3 ......... $[_______] [____]% [______] [______]
A-4 ......... $[_______] LIBOR+[ ]% [______] [______]
A-5 ......... $[_______] [____]% [______] [______]
A-6 ......... $[_______] [____]% [______] [______]
A-7 ......... $[_______] [____]% [______] [______]
A-8 ......... $[_______] [____]% [______] [______]
The expected final payment date for each class of the series 2001-1
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 2001-1 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.
However, if certificated transition bonds are issued to beneficial owners of the
transition bonds as described in "THE TRANSITION BONDS -- Certificated
Transition Bonds" in the prospectus, the record date will be the last business
day of the calendar month preceding the payment date.
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, referred to as customers, 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 series 2001-1 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
S-5
<PAGE>
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,
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. 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 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. All series of transition bonds,
including the series 2001-1 transition bonds, will be payable from the same
bondable transition property. If another series of transition bonds is issued,
the principal source of payment 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 2001-1
transition bonds. This is because the transition bond charge and adjustments
thereof are generally based on amounts owed with respect to the 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.
Principal Payments
On each payment date, the issuer will distribute principal of the series
2001-1 transition bonds to the series 2001-1 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-1 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
2. to the holders of the class A-2 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
3. to the holders of the class A-3 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
4. to the holders of the class A-4 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
S-6
<PAGE>
5. to the holders of the class A-5 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
6. to the holders of the class A-6 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
7. to the holders of the class A-7 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero;
and
8. to the holders of the class A-8 series 2001-1 transition bonds,
until the principal balance of that class has been reduced to zero.
The issuer will not, however, pay principal on a payment date of any class of
series 2001-1 transition bonds if making that 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 2001-1 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 expected amortization schedule 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 2001-1 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 2001-1 transition bonds are issued on _____, 2001;
2. payments on the series 2001-1 transition bonds are made on each
payment date, commencing on September 15, 2001;
3. the total servicing fee per annum for the series 2001-1 transition
bonds equals 0.05% of their initial outstanding principal balance;
4. there are no net earnings on amounts on deposit in the collection
account;
5. 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 in arrears; and
6. all transition bond charge collections are received in accordance
with PSE&G's forecasts and deposited in the collection account.
There can be no assurance that the principal balance of any class of the
series 2001-1 transition bonds will be reduced at the rate indicated in the
expected amortization schedule. The actual rates of reduction in class principal
balances may be slower, but not faster, than those indicated in Table 2, except
in the case of optional redemption or acceleration due to the events of default
specified in the indenture. The series 2001-1 transition bonds will not be in
default if principal is not paid as specified in Table 2 unless the principal of
any class is not paid in full on or before the final maturity date of that
class.
S-7
<PAGE>
Table 2
Expected Amortization Schedule
Class Class Class Class Class Class Class Class
Payment 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-8
<PAGE>
Distribution Following Acceleration
Upon an acceleration of the maturity of the transition bonds, the total
outstanding principal balance of and interest accrued on the series 2001-1
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 outstanding principal balance of, and accrued interest on, the
series 2001-1 transition bonds bears to the total outstanding principal balances
of and interest accrued on all transition bonds. For purposes of the preceding
sentence, interest includes net swap payments with respect to any class of
series 2001-1 floating rate transition bonds.
Optional Redemption
The issuer may redeem all of the outstanding series 2001-1 transition
bonds, at its option, on any payment date if (1) the outstanding principal
balance of the series 2001-1 transition bonds, after giving effect to payments
to be made on that payment date, is less than 5% of the total initial principal
balance of the series 2001-1 transition bonds, and (2) no interest rate swap
agreement remains in effect. In the case of redemption, the issuer will pay the
outstanding principal balance of the series 2001-1 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 2001-1 transition bonds will not be redeemed before the
expected final payment date in any other circumstances, except in the case of
acceleration due to those events of default specified in the indenture.
Interest Payments Generally
Holders of transition bonds in each class of series 2001-1 transition
bonds will receive interest at the rate for that class as set forth in Table 1
above.
Interest on each class of series 2001-1 transition bonds which bears
interest at a fixed rate will accrue from and including the date of issuance to
but excluding the first payment date, and thereafter from and including the
previous payment date to but excluding the applicable payment date until the
transition bonds have been paid in full, at the interest rate indicated in Table
1. Each of those periods is referred to as an interest accrual period. The
issuer is required to pay interest quarterly on September 15, December 15, March
15 and June 15 of each year, beginning September 15, 2001, or, if any 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 2001-1 transition bonds as follows:
o if there has been a payment default, any interest payable but unpaid
on any prior payment dates, together with any accrued interest on
that unpaid interest; and
o accrued interest on the principal balance of each class of series
2001-1 transition bonds as of the close of business on the preceding
payment date, or the date of issuance of the class of series 2001-1
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 2001-1 transition bonds prior
to paying principal of the series 2001-1 transition bonds. See "THE TRANSITION
BONDS -- Payments of Interest on and Principal of the Transition Bonds" in the
prospectus. If there is a shortfall in the amount necessary to make interest
payments from the amount
S-9
<PAGE>
available to pay interest on the series 2001-1 transition bonds, the trustee
will distribute interest to each class of the series 2001-1 transition bonds in
the manner described in "THE INDENTURE -- How Funds in the Collection Account
Will Be Allocated" in the prospectus.
Interest on all classes of series 2001-1 transition bonds paying interest
at a fixed rate will be calculated by the trustee on the basis of a 360-day year
of twelve 30-day months.
Interest Payments on Floating Rate Transition Bonds
Interest on each class of series 2001-1 transition bonds paying interest
at a floating rate, each referred to as a floating rate class, will be paid, for
all interest accrual periods other than the first interest accrual period, at
the rate equal to the London interbank offered rate, referred to as LIBOR, for
three-month United States dollar deposits, except with respect to the period
from the date of issuance to and including March 14, 2001 when the rate will be
based on LIBOR for one-month United States dollar deposits, in each case,
determined on the applicable floating rate interest determination date, as
described below, plus the percentage spread above LIBOR applicable to that
class. The spread above LIBOR for any floating rate class is referred to as the
floating rate spread. LIBOR plus the floating rate spread payable on each
floating rate class is referred to as the floating rate.
The floating rate spread for the series 2001-1 class A-4 transition bonds
will be [ ] percent per annum.
Interest on each floating rate class will be calculated on the basis of
the actual number of days from and including the preceding payment date, or, for
the first payment date, from and including the date of issuance of that class,
to but excluding the next payment date, divided by 360. The Luxembourg Stock
Exchange will be advised of the floating rate and the amount of the interest
payment on any floating rate class listed on that exchange for each payment
date.
For the first interest accrual period ending on September 14, 2001,
interest on each floating rate class will be paid based on (1) for the period
from and including the date of issuance of that class until and including March
14, 2001, LIBOR determined two London banking days before the date of issuance
of that class, plus (2) for the period from and including March 15, 2001 until
and including June 14, 2001, LIBOR determined on March 13, 2001, plus (3) for
the period from and including June 15, 2001 until and including September 14,
2001, LIBOR determined on June 13, 2001. Payment of the sum of the amounts
calculated for these three periods will be made on the September 15 payment
date.
On or prior to each payment date, the trustee, using LIBOR, will calculate
the amount of interest payable on each floating rate class for the relevant
interest accrual period.
There will be no minimum or maximum interest rate on any floating rate
class.
With respect to any floating rate class, if the interest rate swap
agreement relating to that class is terminated for any reason, interest on that
class will be paid at the gross fixed rate for that class, as described below,
until alternate arrangements can be made to pay the floating rate for that
class. If the swap counterparty defaults in its obligation to make floating rate
payments due under an interest rate swap agreement, the interest rate swap
agreement may terminate under the circumstances described below. See "--
Interest Rate Swap Agreements -- Amounts Payable under Interest Rate Swap
Agreements" and " Interest Rate Swap Agreement Events of Default and Termination
Events" below and "RISK FACTORS RELATING TO SERIES 2001-1 FLOATING RATE
TRANSITION BONDS" in this prospectus supplement.
S-10
<PAGE>
Floating Rate Interest Determination
The interest determination date for each floating rate class and each
payment date will be the day two London banking days prior to (1) the preceding
payment date or (2) in the case of the first payment date, the dates specified
above. A London banking day is a day on which commercial banks in London are
open for general business.
After the first payment date, interest on each floating rate class will be
paid at the rate equal to LIBOR as determined on each interest determination
date, plus the floating rate spread for that class.
The trustee will determine LIBOR in accordance with the following
provisions:
1. On each interest determination date, the trustee will determine
LIBOR based on the offered rate for deposits in United States dollars
commencing on the first day of that period that appears on page 3750 of
Telerate Services as of 11:00 a.m., London time, on that interest
determination date. That display page is referred to as the Telerate page.
If no offered rate appears on that Telerate page, LIBOR for that period
will be determined as described in clause 2. below.
2. With respect to an interest determination date on which no
offered rate appears on the Telerate page, the trustee will request each
of four major banks in the London interbank market, selected by the swap
counterparty, to provide the swap counterparty with that bank's offered
quotation for deposits in United States dollars for the applicable period,
commencing on the second London banking day immediately following that
interest determination date, to prime banks in the London interbank market
at approximately 11:00 a.m., London time, on that interest determination
date and in a principal amount that is representative for a single
transaction in United States dollars in that market at that time. The
applicable period is three months, except for the period from the date of
issuance of the series 2001-1 transition bonds to and including March 14,
2001, when the applicable period is one month. If at least two such
quotations are provided, LIBOR will be the arithmetic mean of those
quotations. If fewer than two quotations are provided, LIBOR for that
period will be the arithmetic mean of the rates quoted at approximately
11:00 a.m. in the City of New York on that interest determination date by
major banks in the City of New York selected by the swap counterparty for
loans in United States dollars to leading European banks, for the period
commencing on the second London banking day immediately following that
interest determination date and in a principal amount that is
representative for a single transaction in United States dollars in that
market at that time.
If LIBOR cannot be determined in accordance with clauses 1. or 2. above,
then that rate will be determined to be the same as the rate which applied (a)
during the previous period or (b) on the date of issuance in the case of a
failure to determine LIBOR for the first payment date.
On each interest determination date, the trustee will notify the servicer,
the issuer and the swap counterparty of LIBOR for the applicable period as
determined by the trustee, and the issuer will notify the Luxembourg Stock
Exchange of that rate to the extent any series 2001-1 transition bonds are
listed on that exchange and the rules of that exchange so require.
Interest Rate Swap Agreements
The issuer will enter into an interest rate swap agreement with a swap
counterparty for each floating rate class, on or before the date of issuance of
that class. The purpose of each
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interest rate swap agreement is to convert the cash flows allocable to each
floating rate class, which for purposes of the transition bond charge are
determined based on the gross fixed rate for each floating rate class, into cash
flows that are based on a floating rate of interest.
Amounts Payable Under Interest Rate Swap Agreements. Under each interest
rate swap agreement, for each interest accrual period the issuer will be
obligated to pay the related swap counterparty an amount equal to interest on
the related floating rate class at a fixed rate of interest, referred to as the
gross fixed rate for the related floating rate class, and the swap counterparty
will be obligated to pay the issuer an amount equal to interest at the floating
rate for that class. Those obligations will then be netted on the business day
before each payment date. Therefore, for each interest accrual period, either
the issuer will pay the swap counterparty only the amount, if any, by which
interest at the gross fixed rate exceeds interest at the floating rate, referred
to as the net swap payment, or the swap counterparty will pay the issuer only
the amount, if any, by which interest at the floating rate exceeds interest at
the gross fixed rate, referred to as the net swap receipt, as discussed below.
With respect to any payment date, the notional amount in effect under each
interest rate swap agreement for the interest accrual period prior to that
payment date will equal the principal balance of the related floating rate class
as of the close of business on the preceding payment date. With respect to the
first payment date, the notional amount in effect under each interest rate swap
agreement prior to that payment date will be equal to the initial principal
balance of the related floating rate class.
For each payment date with respect to each floating rate class, the
trustee will allocate to the subaccount established for that class, referred to
as a class subaccount, an amount equal to interest at the gross fixed rate for
that class times the outstanding principal amount of that class for the
preceding interest accrual period, referred to as the gross fixed amount for
that class on that payment date. See "THE INDENTURE -- How Funds in the
Collection Account Will be Allocated" in the prospectus. In addition, any net
swap receipt under the related interest rate swap agreement will be deposited in
that class subaccount, and will be available, together with the gross fixed
amount for that class, to pay interest due on that class on that payment date.
Any net swap payment will be paid to the related swap counterparty only out of
funds on deposit in that class subaccount and the remaining amount in that class
subaccount will be available to pay interest due on that class.
Specifically, for the first payment date, the issuer will pay a net swap
payment equal to the amount, if positive, equal to (1) an amount equal to the
interest calculated on the outstanding principal amount for the related floating
rate class at the applicable gross fixed rate for the period from and including
the issuance date of the series 2001-1 transition bonds to and including
September 14, 2001 minus (2) the sum of (a) the interest calculated on the
notional amount for that class at the applicable floating rate for the period
from and including that issuance date to and including March 14, 2001, plus (b)
the interest calculated on that notional amount at the applicable floating rate
for the period from and including March 15, 2001 to and including June 14, 2001,
plus (c) the interest calculated on that notional amount at the applicable
floating rate for the period from and including June 15, 2001 until and
including September 14, 2001. If this amount is a negative number, a net swap
receipt in this amount will be paid to the issuer by the swap counterparty.
For each payment date after the first payment date, the issuer will pay a
net swap payment equal to the amount, if positive, equal to (1) the interest
calculated on the outstanding principal amount of the related floating rate
class at the applicable gross fixed rate for the period from and including the
previous payment date to but excluding that
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payment date minus (2) the interest calculated on the notional amount for that
class at the applicable floating rate for that period. If this amount is a
negative number, a net swap receipt in this amount will be paid to the issuer by
the swap counterparty.
The gross fixed rate for the floating rate class A-4 transition bonds will
be [ ] percent per annum.
Each interest rate swap agreement may terminate under the circumstances
described under " -- Interest Rate Swap Agreement Events of Default and
Termination Events" below. In the event an interest rate swap agreement
terminates without a replacement interest rate swap agreement being established,
the interest payable on the related floating rate class will convert to the
gross fixed rate for that class. The gross fixed rate will be used to calculate
interest payable on that class starting on the last payment date at which
interest has been paid at the floating rate. See "RISK FACTORS RELATING TO
SERIES 2001-1 FLOATING RATE TRANSITION BONDS" in this prospectus supplement.
Swap Counterparty Ratings. The required long-term senior unsecured or
financial program ratings of each swap counterparty under each interest rate
swap agreement will be at least "Aa3" by Moody's Investors Service, Inc.,
referred to as Moody's, and either at least "A+" or, for short-term obligations,
"A-1" by Standard & Poor's Ratings Services, referred to as S&P. These ratings
are referred to as the swap counterparty minimum ratings.
Swap Counterparty Downgrade Event. An event referred to as a swap
counterparty downgrade event will occur if the swap counterparty no longer meets
the swap counterparty minimum ratings.
If a swap counterparty downgrade event occurs, the swap counterparty will
be required, within 30 days following that event, to either:
a. re-establish the swap counterparty minimum ratings, or
b. establish alternative arrangements to maintain or restore the ratings
of the affected floating rate class that were in effect prior to the swap
counterparty downgrade event. These alternative arrangements by the swap
counterparty may include:
1. posting collateral, arranging for a guarantee or taking similar
action to maintain or restore the ratings, or
2. assigning its rights and obligations under the interest rate swap
agreement to a replacement swap counterparty that meets the swap
counterparty minimum ratings, or that has itself made arrangements
which will maintain or restore the ratings.
Posting collateral, arranging for a guarantee and other arrangements as
described in clauses 1. and 2. above are referred to in this prospectus
supplement as satisfactory arrangements to maintain or restore the ratings prior
to the swap counterparty downgrade event.
At the end of that 30-day period, if the swap counterparty has failed to
make satisfactory arrangements to maintain or restore the ratings of that
floating rate class that were in effect prior to the swap counterparty downgrade
event, the issuer will appoint a recognized swap dealer that is a member of the
International Swaps and Derivatives Association, Inc. with capital and surplus
of at least $50 million, referred to as the swap agent, to, within an additional
30 days, either:
1. find a replacement swap counterparty that meets the swap
counterparty minimum ratings or that has made satisfactory
arrangements to maintain or restore the ratings of the related
floating rate class, referred to as a qualified replacement
counterparty, or
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2. if a qualified replacement counterparty cannot be found, find the
highest rated replacement swap counterparty available, in terms of
long-term senior unsecured or financial program credit rating
assigned by Moody's or S&P, that is higher than that of the existing
swap counterparty and that is approved by the holders of at least 66
2/3% of the total outstanding principal amount of the related
floating rate class, referred to as an approved replacement
counterparty.
In the case of a qualified replacement counterparty or an approved replacement
counterparty, if there is more than one available replacement swap counterparty
with the same credit rating, the counterparty offering the interest rate swap
terms with the lowest overall cost to the issuer will be selected by the issuer
as the replacement swap counterparty. That replacement swap counterparty must be
willing to intermediate between the issuer and the prior swap counterparty by
entering into an interest rate swap agreement with the prior swap counterparty
that is substantially the same as the prior interest rate swap agreement to
hedge or offset the risk that the replacement swap counterparty has to the
issuer.
If a qualified replacement counterparty or an approved replacement
counterparty has been found, the prior swap counterparty will be required to
assign its rights and obligations under the interest rate swap agreement to that
replacement swap counterparty and the replacement swap counterparty will enter
into a new interest rate swap agreement with substantially the same terms as the
terminated agreement. If a replacement swap counterparty satisfying the above
criteria has not been found within that second 30 day period, a termination
event will occur under the interest rate swap agreement and the interest rate
swap agreement will terminate unless holders representing 662/3% of the total
outstanding principal amount of the related floating rate class vote to continue
the interest rate swap agreement with the existing swap counterparty.
If the interest rate swap agreement is not terminated as described above,
the swap agent will be obligated every three months thereafter to renew the
search for a qualified replacement counterparty or an approved replacement
counterparty according to the above procedures. However, the replacement
counterparty will not be required to intermediate between the prior swap
counterparty and the issuer, as described above. At the end of each of these
three-month periods, if a swap counterparty meeting the above criteria has not
been found, the interest rate swap agreement will terminate unless holders
representing 66 2/3% of the total outstanding principal amount of the related
floating rate class vote to continue the interest rate swap agreement with the
existing swap counterparty.
All searches for replacement swap counterparties will be at the reasonable
cost of the swap counterparty being replaced.
Interest Rate Swap Agreement Events of Default and Termination Events. The
events referred to as swap events of default under each interest rate swap
agreement include:
o the failure of the issuer or the swap counterparty to pay any amount
when due under the interest rate swap agreement if that failure is
not remedied on or before the fifth business day after that failure,
unless, in the case of a failure by the swap counterparty, the
holders of 66 2/3% of the total outstanding principal amount of the
related floating rate class vote to waive that default within 30
days,
o certain events of bankruptcy of the issuer or the swap counterparty
or a credit support provider of the swap counterparty, or
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o a merger of the issuer or the swap counterparty without an
assumption of its obligations under the interest rate swap
agreement.
The events referred to as termination events under the interest rate swap
agreement are:
o illegality, as described below,
o an acceleration of the related floating rate class, effective upon
the final date of payment for that class, or
o a swap counterparty downgrade event, as described above, that is not
cured within the applicable time periods.
Each interest rate swap agreement may be terminated by either the issuer
or the swap counterparty upon an illegality, as described below. In addition,
upon acceleration of the transition bonds, other than as a result of an uncured
covenant default not involving a payment failure, either party may elect to
terminate. Any other swap event of default or a termination event can lead to a
termination of the interest rate swap agreement by the party not responsible for
that event. Moreover, as described above, the interest rate swap agreement will
terminate following a swap counterparty downgrade event if that event is not
cured, there is no replacement swap counterparty and the requisite holders of
the related floating rate class do not vote to continue with the existing swap
counterparty. Except in the cases described above, the issuer may terminate only
at the direction of the holders of 66 2/3% of the total outstanding principal
amount of the related floating rate class.
The issuer will not be obligated to pay any termination payment or any
other breakage amounts to the swap counterparty under any interest rate swap
agreement as a result of any termination event, any swap event of default, any
swap counterparty downgrade event or for any other reason, except following an
acceleration of the transition bonds and a liquidation of the collateral as
described under "THE INDENTURE -- How Funds in the Collection Account Will Be
Allocated" in the prospectus. Any payment made by a replacement swap
counterparty to enter into a replacement interest rate swap agreement will be
paid to the terminated swap counterparty.
Upon a termination of an interest rate swap agreement resulting from a
swap event of default, swap counterparty downgrade event or other termination
event, the swap counterparty may be liable to pay a termination payment to the
issuer, based on the market value of the interest rate swap agreement determined
in accordance with specified procedures set forth therein. Any termination
payment paid by the swap counterparty, including interest thereon, will first be
used to make any payment required to be paid to any replacement swap
counterparty and to the extent not so used will be deposited in the related
class subaccount and paid pursuant to the indenture to the holders of the
related floating rate class on the next payment date, pro rata based on the
principal amount held by such holder, as described under "CREDIT ENHANCEMENT --
Collection Account and Subaccounts -- The Class Subaccounts" in this prospectus
supplement.
Illegality means that due to the adoption of, or any change in, any
applicable law after the date on which a swap transaction is entered into, or
due to the promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any applicable
law after that date, it becomes unlawful for the issuer or the swap
counterparty:
o to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of that
swap transaction or to comply with any other material provision of
the interest rate swap agreement; or
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o to perform, or for any credit support provider of that party to
perform, any contingent or other obligation which the party or that
credit support provider has under any credit support document
relating to that swap transaction.
Replacement of Interest Rate Swap Agreement. Upon a termination or a swap event
of default under an interest rate swap agreement, the issuer is required to
appoint a swap agent. Upon its appointment, the swap agent will either:
1. find a replacement swap counterparty who meets the swap counterparty
minimum ratings or who has made such other arrangements as will
result in the related floating rate class receiving ratings from the
rating agencies not less than the ratings that would be received if
such replacement swap counterparty met the swap counterparty minimum
ratings, or
2. if a replacement swap counterparty satisfying clause 1. above cannot
be found, find the available replacement swap counterparty with the
highest available long-term senior unsecured or financial program
credit rating which is approved by the holders of at least 66 2/3%
of the total outstanding principal amount of the related floating
rate class.
In case of clause 1. or 2. above, if there is more than one available
replacement swap counterparty with the same credit rating, the counterparty
offering the interest rate swap terms with the lowest overall cost to the issuer
will be selected by the issuer as the replacement swap counterparty. If a
replacement swap counterparty satisfying the above criteria has been found, upon
the termination of the interest rate swap agreement, the replacement swap
counterparty will enter into an interest rate swap agreement with the issuer
having terms substantially the same as the original interest rate swap
agreement.
Assignment of Interest Rate Swap Agreements. Any swap counterparty may
assign its obligations under any interest rate swap agreement with the prior
written consent of the issuer or, without that consent, either:
o in a consolidation or amalgamation with or merger with or into, or
transfer of all or substantially all of its assets to another entity
which expressly assumes in a written agreement the obligations of
the swap counterparty under the interest rate swap agreement,
although if upon that consolidation, amalgamation or merger, a swap
counterparty downgrade event has occurred, it will be a termination
event as described above.
o to a replacement swap counterparty following a swap counterparty
downgrade event as described above.
Enforcement, Amendment, Modification or Waiver of Interest Rate Swap
Agreements. If a swap event of default or termination event occurs and is
continuing, the trustee may, and at the direction of at least 66 2/3% of the
total outstanding principal amount of the related floating rate class shall,
exercise all rights, remedies, powers, privileges and claims of the issuer
against the related swap counterparty, and any right of the issuer to take this
action shall be suspended.
An interest rate swap agreement may be amended with the consent of the
trustee and the related swap counterparty, as long as each of Moody's, S&P, and
Fitch, Inc., referred to as Fitch, confirm that the amendment will not result in
the reduction or withdrawal of its then current rating of the related floating
rate class, which confirmation is referred to as satisfaction of the rating
agency condition, provided that, in some circumstances, so long as Moody's has
been notified of a proposed amendment, the rating agency condition may be
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satisfied with respect to Moody's without such a confirmation. However, this
amendment may not adversely affect in any material respect the interests of the
transition bondholders of the related floating rate class unless the holders of
at least 66 2/3% of the total outstanding principal amount of that class direct
the trustee to consent to the amendment. Moreover, that amendment may not
adversely affect in any material respect the interests of any other transition
bondholders or the counterparty to any other hedge or other interest rate swap
agreement without the consent of the holders of at least 662/3% of the total
outstanding principal balance of the transition bonds of all of those other
series or classes, and each counterparty to any other hedge or other interest
rate swap agreement, materially and adversely affected thereby.
Except as set forth above under "-- Swap Counterparty Downgrade Event" or
"Interest Rate Swap Agreement Events of Default and Termination Events," with
respect to any action proposed by the issuer to amend, modify, waive, supplement
or surrender the terms of any interest rate swap agreement, or waive timely
performance or observance by the swap counterparty under any interest rate swap
agreement, in a way which would materially and adversely affect the interests of
transition bondholders of the related class, the issuer must satisfy the rating
agency condition. Thereafter, the trustee will consent to this proposed action
only with the consent of (1) 66 2/3% of the total outstanding principal amount
of the transition bonds of the related class, and (2) the consent of the holders
of at least 66 2/3% of the total outstanding principal balance of each other
series or class, and each counterparty to any other hedge or interest rate swap
agreement, materially and adversely affected thereby.
Swap Counterparties
Each initial swap counterparty shall be required to have at least the swap
counterparty minimum ratings and will be selected by the issuer upon the pricing
by the underwriters of the series 2001-1 floating rate transition bonds and
identified in the final prospectus supplement.
RISK FACTORS RELATING TO SERIES 2001-1
FLOATING RATE TRANSITION BONDS
In addition to the following risk factors applicable to the floating rate
classes, additional risk factors apply to all of the transition bonds of any
series. See "RISK FACTORS" in the prospectus.
Termination of Swap Could Cause a Loss
Termination events, swap events of default or swap counterparty downgrade
events under any interest rate swap agreement may result in termination of that
interest rate swap agreement. Each interest rate swap agreement will terminate
if the related swap counterparty defaults in its obligation to make payments
under the interest rate swap agreement and the holders representing 66 2/3% of
the total outstanding principal amount of the related floating rate class do not
vote to waive that default. If any interest rate swap agreement is terminated,
the holders of the related floating rate class will receive a fixed rate of
interest equal to the gross fixed rate for that class, which will take effect
from the last payment date to which interest has been paid at a floating rate.
See "THE SERIES 2001-1 TRANSITION BONDS -- Interest Rate Swap Agreements" in
this prospectus supplement. This rate could be substantially less than the
floating rate for that class at the time of the termination, which could
adversely affect the yield to maturity, and holders of the related floating rate
class could suffer a loss on their investment.
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Ratings Downgrade of Any Floating Rate Class of Transition Bonds Could Cause a
Loss for Holders of Those Transition Bonds
If a swap counterparty downgrade event occurs, and (1) the swap
counterparty fails to make satisfactory arrangements to maintain or restore the
prior ratings and (2) holders representing 66 2/3% of the total outstanding
principal amount of the related floating rate class either approve a replacement
swap counterparty that does not maintain or restore the prior ratings or such
holders vote to continue the existing interest rate swap agreement, that class
of transition bonds may be downgraded by the rating agencies. See "THE SERIES
2001-1 TRANSITION BONDS -- Interest Rate Swap Agreements" in this prospectus
supplement. In that event, the trading price of these transition bonds may be
reduced, and holders of these transition bonds could suffer a loss on their
investment.
Interest Payments on Series 2001-1 Transition Bonds at Floating Rates Are
Dependent on Swap Counterparties
If any swap counterparty defaults in its obligation to make any net swap
payment, the related interest rate swap agreement may terminate in the absence
of the required waiver by the holders of the related class, and the holders of
the related class of series 2001-1 floating rate transition bonds will receive
interest at the gross fixed rate for that class. There can be no assurance that
any alternate arrangements will be made to obtain a suitable replacement swap
counterparty or otherwise to obtain payment of the floating rate for that class.
The gross fixed rate for that class could be substantially less than the
floating rate for that class at the time of that failure to pay, and holders of
that class of transition bonds could suffer a loss on their investment. See "THE
SERIES TRANSITION 2001-1 BONDS -- Interest Rate Swap Agreements" in this
prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement for the series 2001-1 transition bonds is intended to
protect you against losses or delays in scheduled payments on your transition
bonds. See "RISK FACTORS -- 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" in the prospectus.
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. Under the
servicing agreement PSE&G, as servicer, will be required to petition for an
adjustment at least annually through December 1, 2014 and quarterly commencing
on March 1, 2015. The periodic adjustments will be designed to provide, among
other things, sufficient funds for timely payments of interest on and principal
of 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 of principal of and interest on the
transition bonds, which in the case of interest on any floating rate
class will be calculated at the applicable gross fixed rate; and
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3. to fund or replenish 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 class subaccounts;
o one or more series capital subaccounts, including the capital
reserve subaccount with respect to the series 2001-1 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 2001-1 transition
bonds, a series subaccount will be established with respect to that series. On
each payment date, or the day before the payment date in the case of interest
allocated to the applicable class subaccounts, as described below, 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:
o interest payable on that series on that payment date to each class on a pro
rata basis based on the amount of interest payable to that class, or in the case
of any floating rate class, based on the gross fixed amount for that class,
which gross fixed amount will in turn be allocated to the related class
subaccount;
o the principal of that series due on any class or series on the final
maturity date of that class or series, on a redemption date or upon
acceleration; and
o 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 the immediately preceding clause 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 Series Capital Subaccount. Upon the issuance of the series 2001-1
transition bonds, a capital subaccount will be established for that series, into
which PSE&G will
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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 2001-1 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 2001-1 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 2001-1 transition bonds described below under
"RATINGS FOR THE SERIES 2001-1 TRANSITION BONDS" in this prospectus supplement.
The Class Subaccounts. Upon the issuance of any floating rate class, a
subaccount, referred to as the class subaccount, will be established for that
floating rate class. On the business day preceding each payment date, the
trustee will allocate to each class subaccount from the related series
subaccount an amount equal to the gross fixed amount for the related floating
rate class and that payment date. On that day, any net swap payment will be paid
to the related swap counterparty from that class subaccount, or any net swap
receipt from the related swap counterparty will be deposited into that class
subaccount. On the related payment date, amounts in each class subaccount will
be paid as interest to the holders of the related floating rate class. See "THE
INDENTURE -- How Funds in the Collection Account Will Be Allocated" in the
prospectus. In the event of a shortfall of funds in a class subaccount to make a
net swap payment due to the related swap counterparty and to pay interest on the
related floating rate class of transition bonds, those amounts will be paid on a
pro rata basis based on the relative amounts due in respect of the swap and the
interest on the class of transition bonds. Any termination payment paid by a
swap counterparty upon termination of the related interest rate swap agreement,
to the extent not paid to a replacement swap counterparty, will be deposited in
the class subaccount for the related floating rate class and will be paid
pursuant to the indenture to the holders of the related floating rate class on
the next payment date pro rata based on the principal amount held by each
holder. Any balance remaining in any class subaccount after payments have been
made to the holders of the related floating rate class on a payment date will be
transferred to the collection account for allocation on the next payment date.
The Series Overcollateralization Subaccount. Upon the issuance of the
series 2001-1 transition bonds, an overcollateralization subaccount will be
established for the series 2001-1 transition bonds. The overcollateralization
amount for the series 2001-1 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 the transition bond charge collections, together with any earnings on
investments in the collection account, 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 2001-1 transition bonds which are described below under
"RATINGS FOR THE SERIES 2001-1 TRANSITION BONDS" in this prospectus supplement.
The required overcollateralization amount will not be less than 0.5% of the
initial outstanding principal balance of the series 2001-1 transition bonds.
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See also "THE TRANSITION BONDS -- Credit Enhancement for the Transition Bonds"
in the prospectus.
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 2001-1 transition bondholders and to pay the expenses,
fees and charges specified in the indenture, the trustee will draw on amounts in
the series 2001-1 overcollateralization subaccount to make those payments.
Table 3
Scheduled Overcollateralization Levels
Scheduled Scheduled
Payment Overcollateralization Payment Overcollateralization
Date Level Date Level
------- --------------------- ------- ---------------------
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
transaction fees, expenses, costs and charges,
2. scheduled principal of and interest on the transition bonds, which
in the case of interest on any floating rate class will be the gross
fixed amount for that class and that payment date, 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 or replenish 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.
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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 2001-1 transition bondholders, and to pay the expenses, fees and charges
specified in the indenture, the trustee will draw first on any amounts in the
reserve subaccount to make those payments.
No amounts in the series overcollateralization subaccount, the series
capital subaccount or the reserve subaccount may be used to cover any shortfalls
in interest on a floating rate class to the extent that shortfall is due to the
swap counterparty's failure to pay any net swap receipt due under the related
interest rate swap agreement. However, amounts in those subaccounts will be
available to pay the applicable gross fixed amount with respect to each floating
rate class.
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 electric customers of PSE&G through the transition bond
charge. 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. PSE&G, in its capacity as servicer of the
bondable transition property under the servicing agreement, will bill or arrange
for the billing of 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.
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. See "THE COMPETITION ACT -- PSE&G and Other Utilities May
Securitize Stranded Costs -- Customers Cannot Avoid Paying the Transition Bond
Charge" in the prospectus. In certain limited circumstances, only customers who
self-generate will be able to avoid the
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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 that 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 these
variations on each calculation date.
The initial transition bond charge will be calculated on the basis of:
o the issuance of $2.525 billion of series 2001-1 transition bonds,
o the projected total payments required in relation to the transition
bonds during the period commencing immediately after the date of
issuance of the series 2001-1 transition bonds and ending December
31, 2001, and
o the estimated amount of kilowatt-hours of electricity delivered, and
for which PSE&G bills and collects 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, which in the case of interest on any floating rate class will be
calculated at the applicable gross fixed rate, to pay related fees, 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, costs, 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. Those petitions will be
filed annually through December 1, 2014, and quarterly commencing on March 1,
2015 for so long as the series 2001-1 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 2001-1
transition bonds which in the case of the Class A-4 transition bonds, will be
the gross fixed rate of interest on that class 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
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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 $[ ] per kilowatt-hour for all customers of all
classes, beginning immediately after the issuance date of the series 2001-1
transition bonds. See "THE COMPETITION ACT" and "THE BPU FINANCING ORDER AND THE
TRANSITION BOND CHARGE" in the prospectus.
INFORMATION REGARDING
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
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 earnings of $593 million
on revenue of $5.568 billion for the year ended December 31, 1998. The loss was
attributable to an extraordinary charge of $804 million primarily resulting from
the write-off by PSE&G 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 these stations and assets to a
non-utility affiliate. Without this extraordinary charge, PSE&G would have had
earnings of $644 million during this period. For the year ended December 31,
1999, approximately 71% and 29% of revenues were derived from electricity and
gas, respectively. For the quarter ending September 30, 2000, approximately 69%
and 31% of revenues were derived from electricity and gas, respectively.
For the three quarters ending September 30, 2000, PSE&G reported earnings
of $494 million on revenue of $4.365 billion as compared to earnings of $(277)
million on revenues of $4.421 billion for the three quarters ending September
30, 1999.
PSE&G is a wholly owned subsidiary of Public Service Enterprise Group
Incorporated. As of September 30, 2000, PSE&G's assets comprised approximately
75% of Enterprise's consolidated assets.
UNDERWRITING THE SERIES 2001-1 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 2001-1 transition bonds set forth opposite each
underwriter's name below:
<TABLE>
<CAPTION>
Name Class A-1 Class A-2 Class A-3 Class A-4 Total
---- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Lehman Brothers Inc. .................. $
Merrill Lynch, Pierce,
Fenner & Smith Incorporated .........
Salomon Smith Barney Inc. .............
Banc One Capital Markets, Inc. ........
Banc of America Securities LLC ........
Chase Securities Inc. .................
Commerce Capital Markets, Inc. ........
First Union Securities, Inc. ..........
Scotia Capital (USA) Inc. .............
The Williams Capital Group, L.P. ......
Total ................................. $
==========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Class A-5 Class A-6 Class A-7 Class A-8 Total
---- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Lehman Brothers Inc. .................. $
Merrill Lynch, Pierce,
Fenner & Smith Incorporated .........
Salomon Smith Barney Inc. .............
Banc One Capital Markets, Inc. ........
Banc of America Securities LLC ........
Chase Securities Inc. .................
Commerce Capital Markets, Inc. ........
First Union Securities, Inc. ..........
Scotia Capital (USA) Inc. .............
The Williams Capital Group, L.P. ......
Total ................................. $
==========
Grand Total $
==========
</TABLE>
Under the underwriting agreement, the underwriters will take and pay for
all of the series 2001-1 transition bonds offered hereby, if any are taken.
The Underwriters' Sales Price for the Series 2001-1 Transition Bonds
Series 2001-1 transition bonds sold by the underwriters to the public will
be initially offered at the prices set forth on the cover of this prospectus
supplement. The underwriters propose initially to offer the transition bonds to
dealers at such 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 A-1 ...........................................
Class A-2 ...........................................
Class A-3 ...........................................
Class A-4 ...........................................
Class A-5 ...........................................
Class A-6 ...........................................
Class A-7 ...........................................
Class A-8 ...........................................
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 2001-1 transition bonds are a new issue of securities with no
established trading market. They will not be listed on any securities exchange,
with the exception of any floating rate class which may be listed on the
Luxembourg Stock 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.
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<PAGE>
United Kingdom Offering
Each underwriter has represented and agreed that (a) it only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of any floating rate class to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or who is a person to
whom the document may otherwise lawfully be issued or passed on, (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to any floating rate class of in, from or otherwise involving the
United Kingdom and (c) if that underwriter is an authorized person under the
Financial Services Act 1986, it has only promoted and will only promote (as that
term is defined in Regulation 1.02 of the Financial Services (Promotion of
Unregulated Schemes) Regulations 1991) to any person in the United Kingdom the
scheme described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion of Unregulated Schemes) Regulations 1991.
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 2001-1 TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the series
2001-1 transition bonds that each class of the series 2001-1 transition bonds be
rated "AAA" by S&P, "Aaa" by Moody's and "AAA" by Fitch.
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<PAGE>
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 ratings 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.
For so long as any floating rate class is listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the issuer will notify the
Luxembourg Stock Exchange if any rating assigned to those transition bonds is
reduced or withdrawn and will cause this notice to be published in a daily
newspaper published in Luxembourg, which is expected to be the Luxemburger Wort.
LISTING AND GENERAL INFORMATION
RELATED TO FLOATING RATE CLASSES
Application will be made to list each floating rate class on the
Luxembourg Stock Exchange. There can be no assurance that any floating rate
class will be listed on the Luxembourg Stock Exchange or any other stock
exchange. Purchasers of any class of series 2001-1 transition bonds should not
rely on these transition bonds being listed on the Luxembourg Stock Exchange or
any other stock exchange. You should consult with [ ], the Luxembourg listing
agent for each floating rate class, [ ], Luxembourg, phone number [ ], referred
to as the listing agent, to determine whether or not a particular floating rate
class is listed on the Luxembourg Stock Exchange.
In connection with the listing application, the certificate of
incorporation and by-laws of PSE&G, the amended and restated certificate of
formation and amended and restated limited liability company agreement of the
issuer, as well as legal notice relating to the issuance of the series 2001-1
transition bonds, will be deposited prior to listing with the Chief Registrar of
the District Court of Luxembourg, where copies thereof may be obtained, free of
charge, upon request. Once any floating rate class has been so listed, trading
of those transition bonds may be effected on the Luxembourg Stock Exchange. Each
floating rate class will be submitted for clearing through the facilities of
DTC, Clearstream and Euroclear. See "THE TRANSITION BONDS -- Transition Bonds
Will Be Issued in Book-Entry Form" in the prospectus.
The International Securities Identification Number (ISIN), Common Code
number and the CUSIP number for each floating rate class are as follows:
Class ISIN Common Code CUSIP
----- ---- ----------- -----
The issuer represents that, as of the date of this prospectus supplement,
there has been no material adverse change in its financial position since the
date of its creation. The issuer is not involved in litigation or arbitration
proceedings relating to claims on amounts which
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<PAGE>
are material in relation to the issuance of any floating rate class nor, so far
as the issuer is aware, is any litigation or arbitration of this type involving
it pending or threatened. Except as disclosed in this prospectus supplement or
the prospectus, as of the date of this prospectus supplement, the issuer has no
outstanding loan capital, borrowings, indebtedness or contingent liabilities,
nor has the issuer created any mortgages, charges or guarantees.
The transactions contemplated in this prospectus supplement were
authorized by resolutions adopted by PSE&G's Board of Directors on or about
December 19, 2000 and by the issuer's managers on or about January [__], 2001.
If any floating rate class is listed on the Luxembourg Stock Exchange,
copies of the indenture, the series 2001-1 supplemental indenture, the sale
agreement, the servicing agreement, the administration agreement, the reports of
independent certified public accountants described in "THE SERVICING AGREEMENT
-- PSE&G, as Servicer, Will Provide Statements to the Issuer and to the Trustee"
and "-- PSE&G to Provide Compliance Reports Concerning the Servicing Agreement"
in the prospectus, the documents listed under "PUBLIC SERVICE ELECTRIC AND GAS
COMPANY" and "INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS" and the
reports to transition bondholders referred to under "REPORTS TO TRANSITION
BONDHOLDERS" and "THE INDENTURE -- Reports to Holders of the Transition Bonds"
and "-- The Trustee Must Provide a Report to All Transition Bondholders" in the
prospectus, will be available free of charge at the offices of the trustee in
the City of New York and the listing agent in Luxembourg. Financial information
regarding PSE&G is included in its annual report on Form 10-K for the fiscal
year ended December 31, 1999, and is also available at the offices of the
trustee in the City of New York and the listing agent in Luxembourg. For so long
as any floating rate class is outstanding and listed on the Luxembourg Stock
Exchange, copies of each annual report on Form 10-K for subsequent fiscal years
will also be available at the offices of the trustee in the City of New York and
the listing agent in Luxembourg.
In the event that any floating rate class is listed on the Luxembourg
Stock Exchange, certificated transition bonds are issued and the rules of the
Luxembourg Stock Exchange require a Luxembourg transfer agent, the Luxembourg
paying agent will be appointed as a transfer agent.
The indenture provides that the trustee and the paying agent shall pay to
the issuer upon request any amounts held by them for the payment of principal of
and interest on any class of transition bonds, including without limitation, any
floating rate class, which amounts remain unclaimed for two years after they
become due and payable. After payment to the issuer, holders of any class of
series 2001-1 transition bonds entitled to these funds must look to the issuer
for payment as general creditors unless an abandoned property law designates
otherwise.
According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the floating rate transition bonds
will be freely transferable and therefore no transaction made on the Luxembourg
Stock Exchange will be cancelled.
The indenture, the series 2001-1 supplemental indenture, the sale
agreement, the servicing agreement and the administration agreement are governed
by the laws of the State of New Jersey. The amended and restated certificate of
formation and the amended and restated limited liability company agreement are
governed by the laws of the State of Delaware.
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<PAGE>
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 JANUARY 8, 2001.
[LOGO] 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, is 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.
--------------------------------------------------------------------------------
JANUARY [ ], 2001
<PAGE>
Table of Contents
Page
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT .............................. 1
SUMMARY OF TERMS ......................................................... 2
PARTIES TO THE TRANSACTION ............................................... 4
The Collateral ........................................................ 5
Payment Sources ....................................................... 5
Priority of Distributions ............................................. 6
Floating Rate Transition Bonds ........................................ 7
Credit Enhancement and Accounts ....................................... 7
State Pledge .......................................................... 8
ALLOCATIONS AND DISTRIBUTIONS ............................................ 10
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 ........................................ 11
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
By Judicial Action ................................................. 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 ......................................... 15
The BPU May Take Action Which Reduces the Value of the
Transition Bonds ................................................... 16
Servicing Risks ....................................................... 17
Inaccurate Consumption Forecasting or Unanticipated Delinquencies
or Charge-Offs Could Result in Insufficient Funds to Make
Scheduled Payments on the Transition Bonds ......................... 17
Initially, the Calculation of the Transition Bond Charge May Be
Affected by Limited Experience With the Transition Bond Charge ..... 18
PSE&G May Encounter Unexpected Problems in the Initial
Administration of the Transition Bond Charge ....................... 18
If the Servicer Defaults or Becomes Bankrupt, It May Be Difficult
to Find a Successor Servicer and Payments on the Transition Bonds
May Be Suspended ................................................... 18
Billing and Collection Practices May Reduce the Amount of Funds
Available for Payments on the Transition Bonds ..................... 19
It May Be Difficult to Collect the Transition Bond Charge from
Third Parties Who Provide Electricity to PSE&G's Customers ......... 19
PSE&G's Customer Payments May Decline Due to Confusion ................ 20
Inability to Terminate Service to Certain Delinquent Customers
During the Heating Season May Temporarily Reduce Amounts
Available for Payments on the Transition Bonds ..................... 20
The Risks Associated With Potential Bankruptcy Proceedings ............ 20
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 ................................................ 20
Bankruptcy of PSE&G Could Result in Losses or Delays in Payments on
the Transition Bonds ............................................... 21
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 ........... 22
A BPU Sequestration Order for Bondable Transition Property in Case
of Default Might Not Be Enforceable in Bankruptcy .................. 22
Other Risks Associated With An Investment In The Transition Bonds ..... 23
i
<PAGE>
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Risks Associated with the Use of Interest Rate Swap Transactions ...... 23
Absence of Secondary Market for Transition Bonds Could Limit Your
Ability to Resell Transition Bonds ................................. 23
The Issuer May Issue Additional Series of Transition Bonds Whose
Holders Have Conflicting Interests ................................. 23
The Ratings Have a Limited Function and They Are No Indication of the
Expected Rate of Payment of Principal on the Transition Bonds ...... 23
PSE&G's Obligation to Indemnify the Issuer for a Breach of a
Representation or Warranty May Not Be Sufficient to Protect
Your Investment .................................................... 24
FORWARD-LOOKING STATEMENTS ............................................... 24
PUBLIC SERVICE ELECTRIC AND GAS COMPANY .................................. 25
USE OF PROCEEDS .......................................................... 26
THE COMPETITION ACT ...................................................... 27
Recovery of Stranded Costs Is Allowed for PSE&G and Other New Jersey
Utilities .......................................................... 28
PSE&G and Other Utilities May Securitize Stranded Costs ............... 28
PSE&G'S RESTRUCTURING .................................................... 31
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE ................... 32
The BPU Financing Order ............................................... 32
The BPU's Transition Bond Charge Adjustment Process ................... 35
Appeals from the BPU Restructuring Order and the BPU Financing Order .. 36
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY .............. 36
PSE&G ................................................................. 36
PSE&G's Customer Classes .............................................. 36
Electric Revenues, Average Number of Customers and Billed
Electric Consumption ............................................... 36
Percentage Concentration Within PSE&G's Large Commercial and
Industrial Customers ............................................... 37
How PSE&G Forecasts the Number of Customers and the Amount of
Electricity Consumption ............................................ 37
Forecast Variances .................................................... 38
Credit Policy; Billing; Collections and Write-Offs; Termination
of Service ......................................................... 38
Write-off and Delinquency Experience .................................. 40
How PSE&G Will Apply Partial Payments by its Customers ................ 42
PSE&G TRANSITION FUNDING LLC, THE ISSUER ................................. 42
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS ...................... 46
THE TRANSITION BONDS ..................................................... 47
General Terms of the Transition Bonds ................................. 47
Payments of Interest on and Principal of the Transition Bonds ......... 47
Floating Rate Transition Bonds ........................................ 48
Redemption of the Transition Bonds .................................... 49
Credit Enhancement for the Transition Bonds ........................... 49
Transition Bonds Will Be Issued in Book-Entry Form .................... 50
Certificated Transition Bonds ......................................... 53
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS .. 54
THE SALE AGREEMENT ....................................................... 55
PSE&G's Sale and Assignment of Bondable Transition Property ........... 55
PSE&G's Representations and Warranties ................................ 56
PSE&G's Obligation to Indemnify the Issuer and the Trustee and
to Take Legal Action ............................................... 59
Successors to PSE&G ................................................... 60
THE SERVICING AGREEMENT .................................................. 61
PSE&G's Servicing Procedures .......................................... 62
The BPU's Transition Bond Charge Adjustment Process ................... 63
PSE&G's Transition Bond Charge Collections ............................ 64
PSE&G's Compensation for its Role as Servicer and its Release
of Other Parties ................................................... 64
PSE&G's Duties as Servicer ............................................ 64
PSE&G's Representations and Warranties as Servicer .................... 65
ii
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PSE&G, as Servicer, Will Indemnify the Issuer and Other
Related Entities ................................................... 66
PSE&G, as Servicer, Will Provide Statements to the Issuer and to the
Trustee ............................................................ 66
PSE&G to Provide Compliance Reports Concerning the
Servicing Agreement ................................................ 67
Matters Regarding PSE&G as Servicer ................................... 67
Events Constituting a Default by PSE&G in its Role as Servicer ........ 68
The Trustee's Rights if PSE&G Defaults as Servicer .................... 69
The Obligations of a Servicer That Succeeds PSE&G ..................... 69
THE INDENTURE ............................................................ 69
The Security for the Transition Bonds ................................. 70
Transition Bonds May Be Issued in Various Series or Classes ........... 70
The Collection Account for the Transition Bonds ....................... 72
How Funds in the Collection Account Will Be Allocated ................. 76
Reports to Holders of the Transition Bonds ............................ 79
The Issuer and the Trustee May Modify the Indenture; the
Issuer Must Enforce the Sale Agreement, the Servicing
Agreement and any Interest Rate Swap Agreement ..................... 79
What Constitutes an Event of Default on the Transition Bonds .......... 83
Covenants of the Issuer ............................................... 86
Access to the List of Holders of the Transition Bonds ................. 87
The Issuer Must File an Annual Compliance Statement ................... 88
The Trustee Must Provide a Report to All Transition Bondholders ....... 88
What Will Trigger Satisfaction and Discharge of the Indenture ......... 88
The Issuer's Legal Defeasance and Covenant Defeasance Options ......... 88
The Trustee ........................................................... 90
Governing Law ......................................................... 90
HOW A BANKRUPTCY OF THE SELLER OR SERVICER MAY AFFECT YOUR INVESTMENT .... 90
Sale or Financing ..................................................... 90
Consolidation of the Issuer and PSE&G ................................. 92
Claims in Bankruptcy; Challenge to Indemnity Claims ................... 92
Status of Bondable Transition Property as Current Property ............ 92
Enforcement of Rights by Trustee ...................................... 93
Bankruptcy of Servicer ................................................ 93
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS ..................... 94
Material Federal Income Tax Matters ................................... 94
Income Tax Status of the Transition Bonds ............................. 94
General ............................................................... 94
Tax Consequences to U.S. Holders ...................................... 95
Tax Consequences to Non-U.S Holders ................................... 97
Backup Withholding .................................................... 98
Material State Of New Jersey Tax Matters .............................. 99
ERISA CONSIDERATIONS ..................................................... 99
Plan Asset Issues for an Investment in the Transition Bonds ........... 100
Prohibited Transaction Exemptions ..................................... 100
General Investment Considerations for Prospective Plan
Investors in the Transition Bonds .................................. 101
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS ............................ 102
RATINGS FOR THE TRANSITION BONDS ......................................... 103
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS ................... 103
INDEX TO FINANCIAL STATEMENTS OF PSE&G TRANSITION FUNDING LLC ............ F-1
iii
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
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.
1
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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, T-4D,
Newark, New Jersey 07102
Issuer's Telephone Number ....... (973) 297-2227
Seller of the Bondable
Transition .................... Property to the Issuer Public Service
Electric and Gas Company, referred to as
PSE&G, an operating electric 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, T-8E,
Newark, New Jersey 07102
Seller's Telephone Number ....... (973) 430-7000
Servicer of the Bondable
Transition .................... Property PSE&G, acting as servicer, and any
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
may withhold on a monthly basis from the
transition bond charge collections.
Trustee ......................... The Bank of New York
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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;
o other credit enhancement acquired
or held to provide for the payment
of the transition bonds; and
o rights under any interest rate swap
agreements.
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 electric 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. The bondable
transition property includes this right. 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 obligations of PSE&G or any of
its affiliates, other than the issuer. The
transition bonds and the bondable transition
property are also not obligations of the
State of New Jersey or any governmental
agency, authority or instrumentality of the
State.
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PARTIES TO THE TRANSACTION
<TABLE>
<CAPTION>
<S> <C> <C>
applies, as servicer, for
transition bond charge
------------------------------ adjustments -----------------------------
PSE&G ---------------------------------------> BPU
(seller and servicer) <--------------------------------------- (State agency, not affiliated
------------------------------ issued the BPU financing with issuer or PSE&G)
order and approves adjustments -----------------------------
sells bondable /\ to the transition bond charge
transition property |
for cash pursuant |
to sale agreement |
|
|
|
services the bondable |
transition property |
of the issuer and \/
receives the servicing
fee pursuant to the
servicing agreement ---------------------
PROVIDER OF CREDIT
------------------------------ ENHANCEMENT, INTEREST
PSE&G TRANSITION -------------------------------------------- RATE SWAP
FUNDING LLC (issuer) OR HEDGE,
------------------------------ IF ANY
/\ /\ ---------------------
sells transition | |
bonds for cash, | |
pursuant to | |
underwriting | |
agreement | |
| |
| | -------------------------
| |----------------------------------------------- TRUSTEE
\/ (acts for and on behalf of
------------------------------ transition bondholders
UNDERWRITERS pursuant to indenture)
------------------------------ -------------------------
/\ /\
sells transition | |
bonds for cash | |
\/ |
------------------------------ |
TRANSITION |
BONDHOLDERS --------------------------------------------------------------
------------------------------
</TABLE>
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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, referred to
as customers, an amount sufficient to pay:
o the principal of and interest on the transition bonds, and
o the expenses, fees, charges, credit enhancement and other amounts
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 permit PSE&G
to recover 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 retail
electric generation market exceed those costs recoverable in a competitive
retail electric generation market.
Payment Sources
On each payment date, the trustee will pay amounts due on the transition
bonds from:
o transition bond charge collections remitted by the servicer to the
issuer;
o any third party credit enhancement;
o investment earnings on amounts held in accounts established under
the indenture;
o amounts payable to the issuer under any interest rate swap
agreement;
o amounts received as payment of any indemnity obligation by PSE&G
under the sale agreement or the servicing agreement; and
o other amounts available in the 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.
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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 general subaccount of the collection account,
in the following order of priority:
(a) Monthly, to the payment of the trustee fee, together with any legal
fees and other expenses and, so long as payment of any indemnity
amounts will not cause an event of default, 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 these 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 or before, if so 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 of the
independent managers of the issuer;
(2) so long as no event of default has occurred and is continuing
or would be caused by this payment, payment of any operating
expenses of the issuer, excluding items (a), (b) and (c)(1)
above, up to a total of $100,000 for that payment date for all
series;
(3) payment of the interest then due on the transition bonds or
the gross fixed amount payable under any interest rate swap
agreement, 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 remaining unpaid operating expenses, including
indemnity amounts;
(7) replenishment of each series capital subaccount, pro rata, up
to the required capital amount for each series;
(8) replenishment and funding of each series overcollateralization
subaccount, pro rata, up to the scheduled
overcollateralization level for each series as of that payment
date;
(9) payment of any amounts payable by the issuer under any hedging
arrangement other than any amounts paid under item (c)(3)
above;
(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 (or in the case of
the first payment date, since the issuance date) on amounts in
each series capital subaccount; and
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6
<PAGE>
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(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 10 of this prospectus.
Floating Rate Transition Bonds
If, in connection with the issuance of any class of transition bonds
paying interest at a floating rate, referred to as a floating rate class, the
issuer arranges for any interest rate swap transactions, the material terms of
those transactions will be described in the related prospectus supplement.
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 amounts
owed by the issuer, including:
o interest on the transition bonds, which in the case of interest on
any floating rate class of any series will be calculated at the
applicable gross fixed rate;
o for each series of transition bonds, payment of the principal 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)(6) and (c)(9) 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
scheduled overcollateralization level for that series as of that
payment date;
and to cause 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.
Transition bond charge adjustments are required to include an amount
sufficient to fully compensate for delays or losses that would otherwise result
from either the delinquent payment or non-payment of the transition bond charge.
The servicer will petition the BPU to approve these 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 at
least annually through the December 1, 2014 petition, and quarterly commencing
with the March 1, 2015 petition. Those adjustments 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. 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
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<PAGE>
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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:
o 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 prior to the following adjustment date will be
replenished by adjustments to the transition bond charge.
o 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.
o Reserve Subaccount -- Any excess amount of transition bond charge
collections, indemnity payments and investment earnings, other than
earnings on any series 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 each 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 that 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)(5) and in
(c)(7) and (c)(8) 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 amounts then payable with respect
to 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
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8
<PAGE>
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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 a
bondable stranded cost rate order of this type.
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.
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<PAGE>
ALLOCATIONS AND DISTRIBUTIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
------------------------------
| |
| |
| CUSTOMERS |
| AND THIRD PARTY |
| SUPPLIERS |
| |
| |
------------------------------
|
| payment of the transition
| bond charge to servicer
\/
------------------------------ ------------------------------
| | | Liquidity |
| PSE&G |------------------| Facility |
| (SERVICER) | | (if any) |
| | | |
------------------------------ ------------------------------
|
| remittance of transition
| bond charge collections
| (net of any servicing fees
| withheld)
\/
------------------------------ -------------------------------
| | | |
| COLLECTION | | Defeasance Subaccount: |
| ACCOUNT |------------------| |
| | |for payment of principal and |
------------------------------ | interest pursuant to a |
| | discharge of the indenture |
| application of amounts in | upon exercise of the legal |
| collection account | defeasance option or the |
| | covenant defeasance option,|
| | as described under the |
\/ | caption "The Indenture" |
------------------------------ | |
| | | |
| GENERAL | | |
| SUBACCOUNT | -------------------------------
| |
------------------------------
|
|
--------
|
|
\/
--------- --------- --------- --------- ---------
| | | | | | | | | |
| A |------------->| B |----------->| C |-------------->| D |-------------->| E |
| | | | | | | | | |
--------- --------- --------- --------- ---------
| | | | |
| | | | |
----------------- --------------- ----------------- -------------- ----------------------------
| | | | | | | | | |
| | | | | | | | | |
| Trustee: | | | | Administrator | | Issuer: | | Series |
| fees, | | | | and Managers: | | other | | Subaccount: |
| expenses and | | Servicer: | | administration| | operating | | |
| indemnity | |servicing fee| | fee and | | expenses | |o interest or gross |
| amounts | | | | independent | | up to | | fixed amount payable |
|as specified in| | | |managers' fees | |$100,000 on | | under the interest rate |
| the indenture| | | | | |each payment| | swap agreement for |
| | | | | | | date | | applicable payment date |
| | | | | | | | | |
| | | | | | | | |o principal payable as a |
----------------- --------------- ----------------- -------------- | result of acceleration, |
| redemption or |
| payable on a final |
| maturity date |
| |
|o principal for |
| applicable payment |
| date in accordance |
| with expected |------
| amortization schedule | |
| | |
---------------------------- |
|
\/
------- ------- ------- ------- ------- -------
| | | | | | | | | | | |
| K |<--------------| J |<-------------| I |<---------------| H |<---------------| G |<-----------------| F |
| | | | | | | | | | | |
------- ------- ------- ------- ------- -------
| | | | | |
| | | | | |
--------------- --------------- ---------------- ------------------- --------------------- -------------------
| | | | | | | Over- | | | | |
| | | | | Hedge | |collateralization| | Capital | | |
| | | Issuer: | |Counterparty: | | Subaccount: | | Subaccount: | | Issuer: |
| Reserve | | release of | |payments under| | funding or | | replenishment of | | all remaining |
| Subaccount: | | earnings on | | any hedging | | replenishment of| |capital required to| |unpaid operating |
|all remaining| | capital | | arrangement | | over- | | be maintained by | | expenses, |
| amounts | | subaccount | | (other than | |collateralization| | the issuer for | | including |
| | | | |payments made | | subaccount for | | each series of | | indemnity |
| | | | | under (E)) | | each series of | | transition bonds | | amounts |
| | | | | | | transition bonds| | | | |
| | | | | | | | | | | |
--------------- --------------- ---------------- ------------------- --------------------- -------------------
</TABLE>
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<PAGE>
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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 that class, if any, to the extent funds are
available therefor, until the outstanding principal balance of that 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 class and series 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 and class 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 and class with respect to that payment date or
the period since the previous payment date, or in the case of the first payment
date, from the issuance date:
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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;
6. the amount, if any, on deposit in the reserve subaccount as of that
payment date;
7. the amount to be paid to any counterparty under any hedge agreement;
8. the amount to be paid to any swap counterparty under any interest
rate swap agreement;
9. the amounts paid to the trustee since the preceding payment date;
10. the amounts paid to the servicer since the preceding payment date;
and
11. other transfers and payments pursuant to the indenture.
If any transition bonds are listed on the Luxembourg Stock Exchange, and the
rules of that exchange so require, notice that this report is available with the
listing agent in Luxembourg will be given to holders of those listed transition
bonds by publication in a daily newspaper in Luxembourg, which is expected to be
the Luxemburger Wort.
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12
<PAGE>
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 By Judicial
Action
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 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 obtaining the adjustments required
to provide sufficient funds for the scheduled payments on the transition bonds.
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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 decisions implementing and interpreting the
legislation. 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 or in any way impair the security of the
transition bondholders, it could adversely affect the validity of the transition
bonds, the bondable transition property or the issuer's ability to make payments
on the transition bonds. Although a judicial determination of that kind will
cause 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.
In October and November 1999, appeals were filed challenging the validity
of the BPU financing order, as well as the BPU order authorizing PSE&G's related
restructuring which was also issued pursuant to the Competition Act, referred to
as the BPU restructuring order. On April 13, 2000, the Appellate Division of the
New Jersey Superior Court unanimously, rejected the arguments made by appellants
and affirmed the restructuring and financing orders of the BPU. On May 22, 2000,
one of the appellants requested the New Jersey Supreme Court to review certain
aspects of the Appellate Division decision. On July 14, 2000, the Supreme Court
granted that request. On December 6, 2000, by a vote of 4 to 1, the New Jersey
Supreme Court issued its order affirming the judgment of the Appellate Division.
The 10 day period during which a party may request reconsideration of this order
has expired and thus the New Jersey Supreme Court decision is final. As with any
New Jersey Supreme Court decision, a party may request the court to enlarge this
ten day period under its rules. However, the Company believes that, in light of
the language of the court's order determining that it is in the public interest
to expedite the disposition of the appeals, this relief would be extraordinary
and that reconsideration would not be granted in any event. Although the
opinions of the Supreme Court justices relating to the order have not been
issued as of the date of this prospectus, that does not affect the finality of
the order . See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE --
Appeals from the BPU Restructuring Order and the BPU Financing Order" in this
prospectus.
Generally, appellants have 90 days from the date of a final order of a
state's highest court to file a petition for a review of that court's order by
the United States Supreme Court. Any such petition would require a party to
demonstrate to the Court's satisfaction that an important federal question had
been raised or decided in the state court proceedings. The Company believes that
the issues presented and decided in the New Jersey Supreme Court proceedings do
not present an important federal question. However, the filing of a petition for
review by the United States Supreme Court, irrespective of the merits of the
petition, could adversely affect the value of your transition bonds.
Electricity generation deregulation laws similar to the Competition Act
have been enacted in other states, including Arkansas, California, Connecticut,
Illinois, Massachusetts, Michigan, Montana, New Hampshire, Pennsylvania and
Texas. The validity of similar legislation in other states has been upheld in
those states where court challenges have been made and the judicial process has
been completed. A court might yet overturn a similar statute in another state in
response to a pending or future claim. Such a decision would not automatically
invalidate the Competition Act or the 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.
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The Competition Act May Be Overturned by the Federal Government Without Full
Compensation
In the past, bills have been introduced in Congress prohibiting the
recovery of stranded costs, and this prohibition could negate the existence of
bondable transition property. Although Congress has never passed such a bill, 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 these 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, including the BPU, could not take any action of a legislative character,
including the repeal or amendment of the Competition Act, that would
substantially limit, alter or impair the bondable transition property or other
rights vested in the transition bondholders pursuant to the BPU financing order,
or substantially limit, alter, impair or reduce the value or amount of the
bondable transition property, unless that 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 that action.
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Moreover, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
under the takings 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 doing so would constitute a permanent
appropriation of a substantial property interest of the 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 prosecuting 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
any action PSE&G takes would be successful. Future BPU regulations or orders may
affect the rating of the transition bonds,
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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 Consumption Forecasting or Unanticipated Delinquencies or Charge-Offs
Could Result in Insufficient Funds to Make Scheduled Payments on the Transition
Bonds
Because the transition bond charge is assessed based on estimates which
are projected from historical consumption of electricity by PSE&G's 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, or in principal of the transition
bonds not being paid according to the expected amortization schedule, thereby
lengthening the weighted average lives of the transition bonds, or in 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 delinquencies and charge-offs than
expected or forcing PSE&G or a
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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 transition bond
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
Although PSE&G has had limited experience in imposing a non-bypassable,
market transition charge, PSE&G has not previously calculated a transition bond
charge for customers, nor made all of the associated calculations and
projections which are inherent in the calculations. The projections are based on
forecasts of customer energy usage and historical customer payment patterns.
These usage and payment records reflect only limited experience with 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 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 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 Transition 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.
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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
Consumption" 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 obligated
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
electric 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 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 which may be required from third party suppliers and any
other credit enhancement will be available to compensate for a failure by a
third party supplier to
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remit the billed 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
Although a similar non-bypassable market transition charge has been
imposed upon customers since August 1999, 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
residential 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 will 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
collections 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 or otherwise obtains
rating agency approval regarding how frequently it remits transition
bond charge collections.
Otherwise, PSE&G will be required to remit transition bond charge
collections within two business days of the estimated collection date. 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 and cause material
delays in payment.
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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;
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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 transition
bond charge 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
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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
Risks Associated with the Use of Interest Rate Swap Transactions
The related prospectus supplement will contain the risk factors, if any,
associated with any interest rate swap that may be entered into by the issuer
with respect to a series or class of floating rate 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 the right to share equally in
all of the bondable transition property owned by the issuer with all of the
outstanding transition bonds. 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 each class of the transition bonds at its final
maturity and will make timely interest payments. The ratings do not otherwise
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
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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 with 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 as described in "THE
INDENTURE -- What Constitutes an Event of Default on the Transition Bonds." 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 third party
suppliers; and
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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 is engaged principally in the transmission,
distribution and sale of electric energy and in the transmission, distribution
and sale of gas in New Jersey. 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. 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. 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.
Enterprise, a holding company formed in 1985, has three principal, direct,
wholly owned subsidiaries, PSE&G, PSEG Power LLC and PSEG Energy Holdings Inc.
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.
In compliance with the Competition Act, on August 21, 2000, PSE&G sold all
of its generation and generation-related assets and transferred 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 which is referred to as PSEG Power. See "THE
COMPETITION ACT" in this prospectus. PSE&G is required to provide basic energy
service to its electric customers who do not choose to purchase electric
generation services from third party suppliers until July 2003. PSEG Power is
obligated to supply all of PSE&G's electric energy pursuant to a full
requirements
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contract until July 2002. After July 2002, PSE&G will bid out its basic
generation service requirement to qualified third party suppliers, including
PSEG Power. The Competition Act provides that PSE&G will be permitted full and
timely recovery from customers of all reasonable and prudently incurred costs
associated with meeting its basic generation service requirement pursuant to
those bids.
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 and, for so long as any transition bonds are
listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, will be available for inspection by the holders of any listed
transition bonds at the office of the listing agent in Luxembourg. 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 Enterprise's 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 to
purchase bondable transition property from PSE&G. See "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.
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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. Through
the enactment of the Competition Act, the New Jersey Legislature endeavored to
lower energy costs and to allow New Jersey electricity customers to choose their
electric power supplier. The Competition Act deregulated 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. The traditional
retail monopoly for electric power generation was eliminated and competition has
been introduced to the electricity generation retail market. Pursuant to the
Competition Act, the BPU directed PSE&G to transfer its electric generation
facilities and generation-related assets to an affiliate, PSEG Power. Customers'
bills have been unbundled into separate line items for electric distribution,
transmission and generation services, among others. In this competitive electric
generation retail market, the traditional electric utility rate regulation has
been 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 which are non-recoverable
in competitive retail markets, as well as other reasonably incurred costs, to
the extent permitted by the BPU. These stranded costs are, in PSE&G's case,
primarily related to generation-related facilities.
The fossil and nuclear fueled electric generation plants formerly owned by
PSE&G, which produce electric power and current are referred to as
generation-related facilities. PSE&G's 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. PSE&G's
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.
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 remain regulated.
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Even with the enactment of the Competition Act, the BPU continues to
regulate aspects of the electric utility industry in New Jersey with respect to
electric companies. The BPU has also established 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 electric public utilities an opportunity to
recover their stranded costs. Stranded costs are costs of generation-related
investments and other obligations that cannot be recouped through market based
rates in a competitive electricity generation market. 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 the remaining $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 restructuring
order also authorizes PSE&G to recover up to $125 million of additional related
costs that may be securitized. 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. See "PSE&G'S RESTRUCTURING" in this prospectus.
Moreover, the Competition Act requires the BPU to review 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 bonds
secured by the transition bond charge.
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
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financing order allows the final maturity date 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 which in the case of interest on any floating
rate class of any series will be calculated at the applicable gross fixed rate
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 AGREEMENT" in this prospectus.
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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. A sole exception to this is a single industrial customer with whom
PSE&G has a retail contract expiring in 2005 and providing an exemption from
paying the transition bond charge until the expiration of the contract. 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 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
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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;
o 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, directed PSE&G to
sell all of its generation facilities and generation-related assets to an
affiliate, PSEG Power, and authorized PSE&G to recover a total of $2.940 billion
of its net of tax stranded costs. That amount includes $2.4 billion of PSE&G's
bondable stranded costs that may be recovered 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" and "RISK FACTORS -- Servicing Risks -- It may be Difficult to
Collect the Transition Bond Charge from Third Parties Who Provide Electricity to
PSE&G's Customers" in this prospectus. PSE&G has not yet entered into any
arrangements with third party suppliers for billings and collections.
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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 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 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
upon the sale of the transition bonds, will provide an additional reduction of
at least 2%, so that customers receive the full benefit of the securitization. A
further rate reduction of up to 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 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,
2003. 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. PSE&G is
required to provide basic energy service to its electric customers who do not
choose to purchase electric generation services from third party suppliers until
July 2003. PSEG Power is obligated to supply all of PSE&G's electric energy
pursuant to a full requirements contract until July 2002. After July 2002, PSE&G
will bid out its basic generation service requirement to qualified third party
suppliers, including PSEG Power. The Competition Act provides that PSE&G will be
permitted full and timely recovery from customers of all reasonable and
prudently incurred costs associated with meeting its basic generation service
requirement pursuant to those bids.
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
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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 Authorizes 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 stated 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 Authorizes PSE&G to Enter into Hedging Arrangements. The BPU
financing order authorizes the issuer to enter into hedging arrangements (other
than interest rate swap agreements) with one or more third party counterparties,
including PSE&G, to protect against interest rate movements prior to the pricing
of the transition bonds. The BPU financing order also authorizes payments
required to be made by the issuer under any hedging arrangement to be paid from
proceeds of the transition bonds, or to be paid over the term of the transition
bonds, together with interest, and for such on-going payments to be included in
the transition bond charge adjustment process and recovered through the
transition bond charge. The issuer has entered into a hedging arrangement as
permitted by the BPU financing order. Any on-going payments required to be made
by the issuer under any hedging arrangement on any payment date will be made
after all payments of principal of and interest on the transition bonds
scheduled to be made on that payment date and after any required funding or
replenishment of each series capital subaccount and each series
overcollateralization subaccount on that payment date. See "The Indenture -- How
Funds in the Collection Account Will be Allocated" in this prospectus.
The BPU Authorizes 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 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, with the exception of the single industrial
customer with whom PSE&G has a retail-based contract providing for an exemption
from paying the transition bond charge until the expiration of the contract. The
transition bond charge 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
33
<PAGE>
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 and including 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, 2001, 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.
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.
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.
34
<PAGE>
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. See "Risk Factors -- Servicing Risks -- If the
Servicer Defaults or Becomes Bankrupt, It May Be Difficult to Find a Successor
Servicer and Payments on the Transition Bonds May Be Suspended" in this
prospectus.
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 transition bond
charge collections, including 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 which in the case of interest on any floating rate
class of any series will be calculated at the applicable gross fixed rate, to
fund or replenish 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
transition bond charge collections, as well as updated assumptions by the
servicer as to projected future usage of electricity by customers, expected
delinquencies and charge-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 Competition Act, the servicer must file an adjustment request at least
annually. Under the BPU financing order, adjustments may not be made more
frequently than quarterly, except in the case of non-routine adjustments. Under
the servicing agreement, the servicer will file a request for an adjustment 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 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, BPU will issue an order correcting such
manifest error before the adjustment becomes final 60 days after filing.
Manifest error means an arithmetic error evident on the face of the filing. 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.
35
<PAGE>
Appeals from the BPU Restructuring Order and the BPU Financing Order.
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. One appellant
alleged that the imposition of the transition bond charge would impair its
unique power supply contract, representing approximately one percent of PSE&G's
total kWh sales. On April 13, 2000, a three-judge panel of the Appellate
Division of the New Jersey Superior Court hearing these matters unanimously
rejected the arguments made by the appellants and affirmed the restructuring and
financing orders of the BPU. As a result of the unanimous decision, the
appellants had the right to request the New Jersey Supreme Court to exercise its
discretion to review the matter but not the right to require a review. In May
2000, the appellants requested the New Jersey Supreme Court to review certain
aspects of the Appellate Division decision. On July 14, 2000, the Court granted
the requests in part. On December 6, 2000, by a 4 to 1 vote the New Jersey
Supreme Court issued its order affirming the judgment of the Appellate Division.
The decision of the New Jersey Supreme Court has become final. See "Risk Factors
-- Judicial, Legislative or Regulatory Action That May Adversely Affect Your
Investment -- The Law Which Underpins the Transition Bonds May Be Invalidated by
Judicial Action" in this prospectus.
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY
PSE&G
PSE&G is both the seller and the servicer of the bondable transition
property. See "PUBLIC SERVICE ELECTRIC AND GAS COMPANY" in this prospectus.
PSE&G's Customer Classes
PSE&G's customer base is divided into three classes: residential,
commercial and industrial. Several rate classes are included within each
category differentiated by type and level of service.
Electric Revenues, Average Number of Customers and Billed Electric Consumption
The following table shows the amount of PSE&G's billed electric revenues
per customer class for the past five years and through the third quarter of 2000
and the percentage of each customer class of the total billed revenues.
Table 1
Billed Electric Revenues
(in thousands)
<TABLE>
<CAPTION>
1995 % 1996 % 1997 % 1998 % 1999
---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential ....... $1,258,773 32.72% $1,255,691 32.78% $1,228,098 32.94% $1,266,509 33.35% $1,323,111
Commercial ........ $1,892,093 49.17% $1,904,274 49.71% $1,856,899 49.80% $1,904,794 50.16% $1,944,066
Industrial ........ $ 696,947 18.11% $ 670,884 17.51% $ 643,650 17.26% $ 625,974 16.49% $ 611,072
---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Total ......... $3,847,813 100.00% $3,830,849 100.00% $3,728,647 100.00% $3,797,277 100.00% $3,878,249
========== ====== ========== ====== ========== ====== ========== ====== ==========
<CAPTION>
Sept 30,
% 2000 %
------ ---------- ------
<S> <C> <C> <C>
Residential ....... 34.12% $ 957,479 35.13%
Commercial ........ 50.13% $1,356,287 49.77%
Industrial ........ 15.75% $ 411,438 15.10%
------ ---------- ------
Total ......... 100.00% $2,725,204 100.00%
====== ========== ======
</TABLE>
The following table shows the average number of PSE&G's customers in each
customer class for the past five years and through the third quarter of 2000 and
the percentage each customer class bears to the total average number of
customers.
36
<PAGE>
Table 2
Average Number of Customers
(Number of Customer Bills)
<TABLE>
<CAPTION>
1995 % 1996 % 1997 % 1998 % 1999
---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential ....... 1,677,780 86.49% 1,683,208 86.49% 1,686,444 86.37% 1,701,066 86.30% 1,714,335
Commercial ........ 252,574 13.02% 253,611 13.03% 257,013 13.16% 260,957 13.24% 262,813
Industrial ........ 9,522 0.49% 9,300 0.48% 9,170 0.47% 9,101 0.46% 8,986
--------- ------ --------- ------ --------- ------ --------- ------ ---------
Total ......... 1,939,876 100.00% 1,946,119 100.00% 1,952,627 100.00% 1,971,124 100.00% 1,986,135
========= ====== ========= ====== ========= ====== ========= ====== =========
<CAPTION>
Sept 30,
% 2000 %
------ ---------- ------
<S> <C> <C> <C>
Residential ....... 86.32% 1,727,750 86.31%
Commercial ........ 13.23% 265,316 13.25%
Industrial ........ 0.45% 8,878 0.44%
------ --------- ------
Total ......... 100.00% 2,001,944 100.00%
====== ========= ======
</TABLE>
The following table shows the total billed electric consumption of PSE&G's
customers in megawatt-hours (referred to as MWh) for the past five years and
through the third quarter of 2000 for each customer class and the percentage
each customer class bears to the total billed electric consumption.
Table 3
Billed Electric Consumption
(MWh)
<TABLE>
<CAPTION>
1995 % 1996 % 1997 % 1998 % 1999
---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential ....... 10,755,485 27.82% 10,736,855 28.00% 10,710,735 28.13% 11,091,537 28.41% 11,756,497
Commercial ........ 18,968,792 49.07% 18,990,242 49.51% 18,923,234 49.69% 19,509,283 49.97% 20,273,330
Industrial ........ 8,934,958 23.11% 8,625,133 22.49% 8,444,973 22.18% 8,440,088 21.62% 8,233,699
---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Total ......... 38,659,235 100.00% 38,352,230 100.00% 38,078,942 100.00% 39,040,908 100.00% 40,263,526
========== ====== ========== ====== ========== ====== ========== ====== ==========
<CAPTION>
Sept 30,
% 2000 %
------ ---------- ------
<S> <C> <C> <C>
Residential ....... 29.20% 8,885,143 28.81%
Commercial ........ 50.35% 15,717,831 50.96%
Industrial ........ 20.45% 6,240,583 20.23%
------ ---------- ------
Total ......... 100.00% 30,843,557 100.00%
====== ========== ======
</TABLE>
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 5.5% of PSE&G's kilowatt-hour sales
and the ten largest multi-site electric customers represented approximately 7.0%
of PSE&G's kilowatt-hour sales. In both cases, the customers are in the large
commercial and industrial customer classes. There are no material concentrations
in the residential class.
How PSE&G Forecasts the Number of Customers and the Amount of Electricity
Consumption
Accurate projections of the number of customers, consumption and retail
electric revenues 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's average
electric price.
37
<PAGE>
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 prices 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 (other than 2000 which represents data through the
third quarter of 2000 only) to the related forecast prepared during the previous
year. For example, the annual 1995 variance is based on a forecast prepared in
1994. 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
Forecast Variance For the Amount of Electricity Consumed
Sept 30,
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ --------
Forecast (GWh).... 38,201 37,804 38,217 38,879 39,500 30,806
Actual (GWh) ..... 38,659 38,352 38,079 39,041 40,264 30,844
Variance-% ....... 1.200% 1.450% (0.361%) 0.417% 1.934% 0.122%
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 a shortfall in 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. If a deposit is required to establish credit, industrial
and commercial customers must
38
<PAGE>
deposit cash equal to twice their maximum monthly bill. 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 reference 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 84% of its
total bill payments via U.S. mail. Approximately 12% 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.
39
<PAGE>
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.
See "RISK FACTORS -- Servicing Risks -- Billing and Collection Practices
May Reduce the Amount of Funds Available for Payments on the Transition Bonds"
in this prospectus.
Write-off and Delinquency Experience
The following tables set forth information relating to the total billed
revenues and write-off experience for the past several years and through the
third quarter of 2000. 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-off 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 PSE&G electric and gas billed revenues for
the past five calendar years and through the third quarter of 2000 for each
customer class.
Table 5
Total Electric and Gas Billed Revenues
(in thousands)
<TABLE>
<CAPTION>
Sept 30,
1995 1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential ........ $2,098,138 $2,206,281 $2,193,120 $2,102,803 $2,244,482 $1,637,679
Commercial ......... $2,387,105 $2,439,707 $2,358,069 $2,306,227 $2,384,568 $1,720,953
Industrial ......... $ 997,149 $1,013,170 $ 982,258 $ 912,081 $ 903,749 $ 698,944
---------- ---------- ---------- ---------- ---------- ----------
Total ........ $5,482,392 $5,659,158 $5,533,447 $5,321,111 $5,532,799 $4,057,576
========== ========== ========== ========== ========== ==========
</TABLE>
Gross write-offs for electricity and gas have been tracked by customer
class since February 20, 1996. The following table shows gross write-offs for
electricity and gas for the past four years for each customer class, except for
1996 which calculates gross write-offs from February 20 only and 2000 which
calculates the data through the third quarter only.
40
<PAGE>
Table 6
Gross Write-Offs per Customer Class
(in thousands)
Sept 30,
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
Residential ........ $27,170 $39,919 $31,701 $30,532 $23,185
Commercial ......... $ 6,199 $ 8,777 $ 9,281 $ 8,288 $ 8,088
Industrial ......... $ 522 $ 562 $ 702 $ 649 $ 979
------- ------- ------- ------- -------
Total ........ $33,891 $49,258 $41,684 $39,469 $32,252
======= ======= ======= ======= =======
The following table shows PSE&G gross write-offs as a percentage of total
electric and gas billed revenues for the past four years for each customer
class, except for 1996 which reflects gross PSE&G write-offs on this basis from
February 20 only and 2000 which reflects gross PSE&G write-offs through the
third quarter only.
Table 7
Gross Write-Offs as a Percentage of Billed Revenue per Customer Class
Sept 30,
1996 1997 1998 1999 2000
---- ---- ---- ---- --------
Residential ............. 1.23% 1.82% 1.51% 1.36% 1.42%
Commercial .............. 0.25% 0.37% 0.40% 0.35% 0.47%
Industrial .............. 0.05% 0.06% 0.08% 0.07% 0.14%
The following table shows PSE&G total net write-offs and the corresponding
percentage of total electric and gas billed revenues for each customer class for
the past five years and through the third quarter of 2000.
Table 8
Total Net Write-Offs and
Net Write-Offs as a Percentage of Billed Revenue
Sept 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- --------
Net Write-Offs
(in thousands) .... $35,038 $35,807 $50,058 $37,793 $34,852 $28,101
Net Write-Offs as
a % of Billed
Revenue ........... 0.64% 0.63% 0.90% 0.71% 0.63% 0.69%
Net write-offs include amounts recovered by PSE&G from deposits, bankruptcy
proceedings and payments received after an account has been either written-off
by PSE&G or transferred to one of its external collection agencies.
The following table sets forth information relating to PSE&G's aging of
electric and gas accounts receivable, as a percent of accounts receivable for
all electric and gas customers for the past five years and through the third
quarter of 2000:
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Table 9
Aging of Electric and Gas Accounts Receivable
Sept 30,
1995 1996 1997 1998 1999 2000
----- ----- ----- ----- ----- --------
1-30 Days ........... 75.67% 72.83% 72.95% 68.76% 66.88% 65.39%
31-60 Days .......... 13.09% 13.36% 13.89% 14.97% 16.57% 17.02%
61-90 Days .......... 3.86% 4.20% 4.53% 5.59% 5.81% 6.60%
91-120 Days ......... 2.02% 2.41% 2.49% 3.67% 3.10% 2.97%
121-150 Days ........ 1.32% 1.58% 1.55% 1.93% 1.98% 1.98%
151-180 Days ........ 0.75% 1.02% 1.00% 1.13% 1.27% 1.47%
Over 180 Days ....... 3.29% 4.60% 3.59% 3.95% 4.39% 4.57%
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 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 aging of accounts
receivable by customer class.
See "RISK FACTORS -- Servicing Risks -- Billing and Collection Practices
May Reduce the Amount of Funds Available for Payments on the Transition Bonds"
in this prospectus.
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 in arrears 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 current 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,
rights under any interest rate swap agreement or hedge agreement 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
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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 as of
September 30, 2000 are included in this prospectus.
The Issuer's Purpose. The issuer has been created solely for the purposes
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, including the execution of any interest
rate swap agreement or hedging arrangement incident to the issuance
of transition bonds.
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 three to
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 five 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 and/or Enterprise
---- --- -----------------------------------
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.
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Name Age Position at PSE&G and/or Enterprise
---- --- -----------------------------------
Morton A. Plawner ......... 53 Vice President and Treasurer
Mr. Plawner is currently Vice President and
Treasurer of PSE&G and Treasurer of
Enterprise. Prior to his current position,
Mr. Plawner was General Manager -- Property
and Risk Management 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 Enterprise. 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;
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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, T-4D,
Newark, New Jersey 07102, and its telephone number is (973) 297-2227.
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.
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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 and,
for so long as any transition bonds are listed on the Luxembourg Stock Exchange
and the rules of that exchange so require, will be available for inspection by
the holders of any listed transition bonds at the office of the listing agent in
Luxembourg. 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 or in the prospectus supplement 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) 430-7000. In
addition, for so long as any transition bonds are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, these documents will be
available for inspection by the holders of any listed transition bonds at the
office of the listing agent in Luxembourg.
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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 supplemental indenture. The following summary describes some general
terms and provisions of the transition bonds. The particular terms of the
transition bonds of any series offered by any prospectus 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 confirmation by each of Moody's,
S&P and Fitch, to the seller, the servicer, the trustee and the issuer that any
action will not result in a reduction or withdrawal of its then current ratings
is referred to as the rating agency condition. In some circumstances, however,
so long as Moody's is notified of the proposed action, the rating agency
condition may be satisfied with respect to Moody's without such a confirmation.
The Issuer's Transition Bonds Will be Maintained in Book-Entry Format.
Except as set forth in the prospectus supplement, each series of transition
bonds will initially be represented by one or more transition bonds registered
in the name of The Depository Trust Company, or its nominee, together referred
to as 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
beneficial owner of transition bonds will be entitled to receive a physical bond
representing a transition bond. All references in this prospectus to actions by
transition bondholders or holders of transition bonds 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 or holders of transition bonds will refer to payments,
notices, reports and statements to DTC, as the registered holder of each series
of transition bonds, unless certificated transition bonds have been issued to
beneficial owners of interests in the transition bonds, as discussed in "--
Certificated Transition Bonds" below. DTC 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 on and Principal of 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
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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
applicable expected final payment date will not result in an event of default
under the indenture until after the applicable final maturity date for the
series or class, as applicable.
On each payment date, the amount required to be paid as principal of the
transition bonds of each series, from amounts on deposit in the collection
account, will equal:
o the outstanding principal balance of any transition bonds of each
class of that series due if that payment date is 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 those events of
default specified in the indenture; 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 as specified in 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.
Floating Rate Transition Bonds
In connection with the issuance of any class of floating rate transition
bonds, the issuer may enter into or arrange for one or more interest rate swap
transactions. The related prospectus supplement will include a description of:
o the material terms of any interest rate swap transaction,
o the identity of any interest rate swap counterparty,
o any payments due to be paid by or to the issuer or the trustee under
any interest rate swap transaction,
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o scheduled deposits in and withdrawals from any class subaccount of
the collection account with respect to any interest rate swap
transaction,
o the formula for calculating the floating rate of interest of any
floating interest rate class, and
o the rights of transition bondholders with respect to any interest
rate swap transaction, including any right of termination of or
amendment to the interest rate swap agreement.
Under the indenture, the issuer is obligated to perform all of its
obligations pursuant to any interest rate swap agreement to which it is a party.
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 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,
equal the outstanding principal amount of the transition bonds being redeemed
plus 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. For so long as any transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, notice of redemption
also will be given by publication in a daily newspaper in Luxembourg, expected
to be the Luxemburger Wort, not less than 10 days prior to the date of
redemption.
All transition bonds called for redemption will cease to bear interest on
the specified redemption date, if 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 from the trustee of the redemption price
thereof.
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 of one series for the benefit of another,
o additional overcollateralization,
o a financial guaranty insurance policy,
o a letter of credit,
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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. See "RISK FACTORS -- 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" in this prospectus.
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 securities. 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 securities. 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
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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 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
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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 certificated transition bonds are issued to beneficial owners of the
transition bonds, which transition bonds are referred to as certificated
transition bonds, 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, unless
certificated transition bonds are issued. 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 subsequent payments to the beneficial owners of the
transition bonds in accordance with DTC procedures, unless certificated
transition bonds are issued.
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
certificated transition 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
certificated transition bonds.
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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 beneficial owners of transition bonds or other
intermediaries, 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 that 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,
beneficial owners of transition bonds 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 the trustee and all affected beneficial owners of transition bonds
through participants of the availability of certificated transition bonds. Upon
surrender by DTC of the transition bonds in the possession of DTC that had
represented the applicable transition bonds and receipt of instructions for
re-registration, the trustee will authenticate and deliver certificated
transition bonds to the beneficial owners. Any certificated transition bonds
listed on the Luxembourg Stock Exchange will be made available to the beneficial
owners of such transition bonds through the office of the transfer agent in
Luxembourg. Thereafter, the trustee will recognize the holders of any of these
certificated transition bonds as the 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
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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 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.
Final Payments on Transition Bonds. 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 final payment of any transition bond listed on
the Luxembourg Stock Exchange may also be made upon presentation and surrender
of the transition bond at the office of the paying agent in Luxembourg as
specified in the notice of final distribution. A notice of such final
distribution will be published in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort, not later than the fifth day of the month
of such final distribution. Certificated transition bonds listed on the
Luxembourg Stock Exchange will also be transferable and exchangeable at the
offices of the transfer agent in Luxembourg. With respect to any transfer of
these listed certificated transition bonds, the new certificated transition
bonds registered in the names specified by the transferee and the original
transferor will be available at the offices of the transfer agent in Luxembourg.
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 effectiveness of credit enhancement. Accelerated receipts of
transition bond charge collections will not, however, result in payment of
principal of 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 series
overcollateralization subaccount and the series capital subaccount will also
affect the weighted average life of that series of transition bonds. The
transition bond charge will be calculated based on estimates of energy usage by
customers and
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estimates of delinquencies and write-offs. However, the aggregate amount of
transition bond charge collections and the rate of principal amortization of the
transition bonds will depend, in part, on actual energy usage by customers and
the rate of delinquencies and write-offs. 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.
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 will result in a longer weighted average life of
the transition bonds.
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.
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 of which this prospectus is a part.
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 in the
sale agreement, 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
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have granted a security interest to the issuer in the bondable transition
property, which security interest will secure a payment obligation of the seller
in an amount equal to the purchase price for 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, 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 estate of the seller as
debtor 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, including, but not limited to, the due process
requirements of the federal and state constitutions and the BPU
financing order is in full force and effect and is final and
non-appealable under state law and the designee certification
delivered pursuant to the BPU financing order is final and
incontestable as of its date;
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
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issuer, the trustee or 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 contract clauses of the State of New Jersey and the
United States constitutions, the State of New Jersey could 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 of
a character reasonable and appropriate to further a legitimate
public purpose, and, under the takings clauses of the New
Jersey and United States 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
in the Competition Act if this 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, 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 consists of:
(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
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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 has 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 is 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,
except as contemplated by the sale agreement, any bills of sale for
bondable transition property, the servicing agreement, the issuer's
limited liability company agreement and the certificate of
formation, the administration agreement, the indenture, any hedge
agreement and any interest rate swap agreement, which are referred
to together as the basic documents; 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
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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 any of the basic documents, the
transition bonds, the Competition Act, the BPU restructuring
order (insofar as it relates to the sale of the bondable
transition property) or the BPU financing order;
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
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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,
franchise 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 of 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 or
covenants 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
after the issuance of any series of transition bonds.
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 the seller to the serviced bondable transition property would be
payable from amounts on deposit in the collection account 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;
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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.
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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. obtaining meter reads, 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. delivering bills or arranging for delivery of bills, 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 retail 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 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. any additional conditions or limitations imposed by the rating
agencies are complied with;
the servicer will remit estimated transition bond charge collections 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 preceding business day,
referred to as a monthly remittance date, for each of the seven preceding
billing months (or in the case of the first six months after issuance of the
transition bonds, based upon the number of billing months since issuance), 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
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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 payments based on estimated
collections 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 to the trustee on each daily remittance date estimated daily
transition bond charge collections based on the collections curve, including any
amounts on deposit with the servicer before that daily remittance date when the
servicer was remitting on a monthly basis. 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 (or from the date of issuance, if less than 19
months have elapsed), and (2) in the case of a monthly reconciliation date, for
the billing month that is eight 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
2014 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 or, with
respect to any transition bonds listed on the Luxembourg Stock Exchange, in
Luxembourg, 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. Those requests will be filed
annually, on December 1 through December 1,
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2014, and quarterly commencing on March 1, 2015. The servicer is permitted under
the BPU financing order to file adjustment requests more often than annually but
not more frequently than quarterly, except for non-routine petitions, as
discussed below. 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 subaccount.
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, 2014 and
each March 1, June 1, September 1 and December 1 of each year beginning March 1,
2015, until the transition bonds are paid.
The servicer may also file a non-routine petition to accommodate changes
to the transition bond charge adjustment formula in order to remedy a
significant and recurring variance between actual and expected transition bond
charge collections. Any non-routine filing must be made with the BPU 90 days in
advance of the proposed adjustment date.
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 may 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, other than any actions,
claims and demands arising out of the wilful misconduct, bad faith or gross
negligence of either the issuer or the trustee.
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
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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
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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. seeking to prevent the issuance of the transition bonds or the
consummation of any of the transactions contemplated by the
servicing agreement or any of the related agreements;
b. 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 any of the related agreements; or
c. 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 misconduct, 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." For so long as any transition bonds
are listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, notice that such report is available with the listing agent in
Luxembourg also will be published in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
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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. For
so long as any transition bonds are listed on the Luxembourg Stock Exchange and
the rules of that exchange so require, this notice also will be given by
publication in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort.
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, commencing
March 31, 2002, 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, commencing March 31,
2002, 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,
which notice also will be given by publication in a daily newspaper in
Luxembourg, which is expected to be the Luxemburger Wort, so long as any
transition bonds are listed on the Luxembourg Stock Exchange and the rules of
that exchange so require.
Matters Regarding PSE&G as Servicer
Pursuant to the servicing agreement, PSE&G may assign any or all of its
rights and 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
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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 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. 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 obtaining meter reads and
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 or the trustee 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 misconduct, 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 remit 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 covenant or agreement in the servicing agreement, which
failure materially and adversely affects the bondable transition
property or the rights of transition bondholders 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
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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, appointment of a receiver or liquidator,
failure to pay its debts as they become due, 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. 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. See "RISK
FACTORS -- The Risks Associated With Potential Bankruptcy Proceedings" in this
prospectus.
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.
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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, to and
under 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 fees, costs and expenses as they come due;
7. any other property of whatever kind owned from time to time by the
issuer, including rights under any interest rate swap agreement,
other than:
a. cash released to the swap counterparty from any class
subaccount in accordance with the indenture and any interest
rate swap agreement;
b. cash released to the issuer from any capital subaccount in
accordance with the indenture, which other property is not
expected to be substantial;
c. any payment received by the issuer pursuant to any hedge
arrangement entered into by the issuer; and
d. proceeds from the sale of the transition bonds used to pay (1)
the costs of issuance of the transition bonds, and any upfront
transaction costs and capital reduction costs as permitted
under the BPU financing order, (2) any amount payable by the
issuer under any hedge arrangement entered into by the issuer
and (3) 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
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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 any additional 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 amounts owed with respect
to the outstanding transition bonds. 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
transition 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 other operating 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 fund the overcollateralization subaccount for each series to the
overcollateralization amount and scheduled overcollateralization
level for that series, and
5. to pay amounts due by the issuer under any interest rate swap or any
hedge arrangement,
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
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If the issuance is a refunding issuance, the amount of money necessary to
pay the outstanding principal amount 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, any indemnity amount, as
described below, any amounts paid by any swap counterparty under any interest
rate swap agreement and any providers of credit enhancement 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 or class 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 under
"-- Capital Subaccount"),
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.
For so long as any of the transition bonds are listed on the Luxembourg
Stock Exchange, and to the extent the rules of that exchange so require, the
issuer will have a listing agent, a paying agent and a transfer agent in
Luxembourg.
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:
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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 specified in the indenture;
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 or deposits into subaccounts 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 transition bond charge
collections for deposit in the collection account. In addition, on each
remittance date the servicer will remit any indemnity amounts 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.
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Collection Account. Transition bond charge collections and any indemnity
amounts 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 and any indemnity
amounts 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 (or
before each payment date to the extent provided in any prospectus supplement),
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
(or, to the extent provided in any prospectus supplement, any amount
required to be allocated to a class subaccount with respect to any
floating rate class);
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 if that payment date is the
final maturity date for that class, or the principal of each class
of that series if that payment date is the redemption date for that
series; 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.
Except as specified in any prospectus supplement with respect to any deposits to
any class subaccounts, on each payment date, allocations will be made to each
series subaccount, and the trustee will withdraw funds from the series
subaccount to make payments on the related series of transition bonds. See "--
How Funds in the Collection Account Will Be Allocated" below.
Class Subaccount. If specified in the related prospectus supplement, upon
the issuance of a specified class of floating rate transition bonds, a class
subaccount will be established with respect to that class. On or before each
payment date, a fixed amount specified in the related prospectus supplement will
be allocated to that class subaccount from the related series subaccount and
payments to and from any swap counterparty pursuant to the related interest rate
swap agreement will be made from or allocated to, as applicable, that class
subaccount as described in the related prospectus supplement. On or before each
payment date, amounts on deposit in the class subaccount will be applied to make
payments with respect to the related class, as specified in the related
prospectus supplement.
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.
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 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 subaccount for such series,
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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 if
other series remain outstanding) 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 an additional 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 ensure
that the issuer has sufficient assets to pay any fees, costs and expenses of the
issuer as they come due free from the lien of the indenture.
Overcollateralization Subaccount. Transition bond charge collections to
the extent available as described in " -- How Funds in the Collection Account
Will Be Allocated" below will be allocated to the overcollateralization
subaccount for any series on each payment date. Each prospectus supplement will
specify the scheduled overcollateralization level for each payment date for the
related series of transition bonds. The total 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.
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, except to the extent set forth in
any prospectus supplement, the trustee will draw on the reserve subaccount, if
any, to the extent that, in allocating funds for all series in accordance with
clauses (a) through (c)(5), (c)(7) and (c)(8) 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.
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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, on the payment
date, or on any other date specified in any prospectus supplement with respect
to any class subaccount:
(a) The trustee fee will be paid to the trustee monthly, together with
any legal fees and other expenses and, so long as payment of any
indemnity amounts will not cause an event of default, 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,
or before each payment date to the extent otherwise specified in any
prospectus supplement with respect to any class subaccount:
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 will be paid to the independent managers;
2. so long as no event of default has occurred and is continuing
or would be caused by this payment, any 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,
which, in the case of interest on any floating rate class of
any series of transition bonds as specified in the prospectus
supplement for that series, will be an amount equal to the
applicable gross fixed amount of interest for that class
specified in that prospectus supplement and which will be
allocated pro rata to the corresponding class subaccount;
4. an amount equal to (a) principal of each class of any series
of transition bonds payable as a result of acceleration
triggered by an event of default, (b) principal of each class
of any series of transition bonds payable on the final
maturity date for that class or series, or (c) principal of
each class of any series of transition bonds payable on 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;
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6. all remaining unpaid operating expenses, including indemnity
amounts, will be paid to the persons entitled thereto;
7. any amount necessary to replenish each series capital
subaccount 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;
8. an amount will be allocated to each series
overcollateralization subaccount 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;
9. payment of any amounts payable by the issuer under any hedging
arrangement will be paid to the related hedge counterparty,
other than amounts paid under clause (c)(3) above;
10. so long as no event of default has occurred and is continuing,
an amount equal to investment earnings since the preceding
payment date (or in the case of the first payment date, since
the series issuance date) on amounts in each series 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.
Amounts credited to any class subaccount will be paid from that subaccount
as specified in the related prospectus supplement. Overdue and unpaid amounts
due to a swap counterparty will be paid from that class subaccount on the same
priority as any overdue and unpaid interest due to the holders of the related
class of floating rate transition bonds.
Interest means, for any payment date for any series or class 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 or class;
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 or class to be redeemed prior to the next
payment date, the amount of interest that will be payable as
interest on the series or class on that redemption date.
Principal means, with respect to any payment date and any series or class
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
or class if such payment date is the final maturity date;
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;
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4. the amount of principal due as a result of a redemption of
transition bonds on that 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)(5), (c)(7) and
(c)(8) 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 based on the total
amounts payable with respect to each series for the allocations
contemplated by clauses (a) through (c)(5), (c)(7) and (c)(8) 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 aggregate amount of interest payable to each series bears to the
aggregate amount of interest payable to 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 amount of interest payable to each class,
including, for any floating rate class, the gross fixed amount for that class,
bears to the aggregate amount of interest payable to 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 of that class scheduled to be paid on that payment
date bears to the aggregate outstanding principal amount of all classes of that
series scheduled to be paid on that payment date.
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.
If the maturity of the transition bonds is accelerated and the collateral
held under the indenture is liquidated in accordance with the indenture and if
any interest rate swap agreement so requires, the proceeds of such liquidation
allocated to the related class of floating rate transition bonds, will be
allocated between and paid to the holders of the related floating rate class of
transition bonds, on the one hand, and the related swap counterparty, on the
other hand, based on the aggregate amount of principal and interest due and
payable on that class of transition bonds and the aggregate amount payable to
the related swap counterparty in accordance with such interest swap agreement.
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Reports to Holders of the Transition Bonds
With respect to each series and class 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 and class. 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 and class 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.
If any of the transition bonds are listed on the Luxembourg Stock Exchange
and the rules of that exchange so require, notice that such report is available
with the listing agent in Luxembourg will be given to holders of such transition
bonds by publication in a daily newspaper in Luxembourg, which is expected to be
the Luxemburger Wort.
The Issuer and the Trustee May Modify the Indenture; the Issuer Must Enforce the
Sale Agreement, the Servicing Agreement and any Interest Rate Swap Agreement
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 or the counterparty to any hedge or swap transaction 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 to 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 or pledge any property to or with the trustee;
5. to cure any ambiguity, to correct or supplement 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 or any hedge or swap counterparty; and
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a. 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;
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;
9. to provide for any interest rate swap transactions with respect to
any floating rate series or class of transition bonds or any series
or class with specified credit enhancement; but:
a. such action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder or other hedge or swap counterparty; and
b. the rating agency condition shall have been satisfied; or
10. to authorize the appointment of any listing agent, transfer agent or
paying agent or additional registrar for any class of transition
bonds required or advisable in connection with the listing of any
class of transition bonds on the Luxembourg Stock Exchange or any
other stock exchange, and otherwise to amend the indenture to
incorporate any changes requested or required by any governmental
authority, stock exchange authority, listing agent, transfer agent
or paying agent or additional registrar for any class of transition
bonds in connection with that listing.
Modifications That Require the Approval of the Transition Bondholders. The
issuer and the trustee also may, upon satisfaction of the rating agency
condition 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, the supplemental indenture may not, without the
consent of the holder of each outstanding transition bond of each series or
class affected thereby and each swap or hedge counterparty, if any, 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 thereof 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;
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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 or preserve the collateral;
5. 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 amendments to the sale
agreement, the administration agreement, the servicing agreement or
any interest rate swap entered into in connection with any series or
class of transition bonds;
6. modify the indenture to affect the amount of any payment of any
interest, or the method of calculating interest on any floating rate
transition bonds, 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.
Promptly following the execution of any amendment to the indenture or
supplemental indenture requiring the consent of any transition bondholders, the
trustee will furnish written notice of the substance of such amendment to each
transition bondholder. For so long as any of the transition bonds are listed on
the Luxembourg Stock Exchange and the rules of that exchange so require, this
notice will be published in a daily newspaper in Luxembourg, which is expected
to be the Luxemburger Wort.
Enforcement of the Sale Agreement, the Servicing Agreement and any
Interest Rate Swap Agreement. The indenture will provide that the issuer will
take all lawful actions to enforce its rights under the sale agreement, the
servicing agreement and any interest rate swap 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, the servicer and any swap counterparty
of each of their respective obligations to the issuer under the sale agreement,
the servicing agreement and any interest rate swap agreement. So long as no
event of default occurs and is continuing, except as otherwise directed by the
trustee under the circumstances described in the indenture or any supplemental
indenture, as described in any prospectus supplement, 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, the servicing agreement
and any interest rate swap agreement. However, if the issuer and PSE&G or the
servicer propose to amend, modify, waive, supplement, terminate or surrender, or
agree to any material amendment, modification, waiver, supplement, termination
or surrender of, the
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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 (1) the holders of a majority of the total outstanding
principal balance of the transition bonds of all series, with respect to the
sale agreement and the servicing agreement, and (2) the holders of that
percentage of the total outstanding principal balance of the transition bonds of
the related class specified in the related prospectus supplement, with respect
to any interest rate swap agreement, shall, exercise all rights, remedies,
powers, privileges and claims of the issuer against the seller, the servicer or
any swap counterparty under or in connection with the sale agreement, the
servicing agreement and any interest rate swap 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, the Servicing Agreement and any
Interest Rate Swap 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 or the counterparty to any hedge or
interest rate swap agreement. However, an amendment to the sale agreement or the
servicing agreement may not adversely affect in any material respect the
interest of any transition bondholder or the counterparty to any hedge or swap
transition without the consent of the holders of a majority of the total
outstanding principal balance of the transition bonds of each series or class,
and each counterparty to any hedge or swap transaction, materially and adversely
affected thereby.
Also, an interest rate swap agreement may be amended with the consent of
the trustee, as directed by the holders of the related floating rate class to
the extent described in the related prospectus supplement, and the related swap
counterparty, so long as the rating agency condition is satisfied. However, this
amendment may not adversely affect in any material respect the interest of any
other series or class of transition bondholders or the counterparty to any hedge
or other swap transactions without the consent of the holders of 662/3% of the
total outstanding principal balance of the transition bonds of each other series
or classes and each counterparty to any hedge or other swap transaction
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 proposes
to:
1. 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, the
servicing agreement or any interest rate swap agreement; or
2. waive timely performance or observance by the seller, the servicer
or any swap counterparty under the sale agreement, the servicing
agreement or any interest rate swap agreement, respectively;
in each case in a way which would materially and adversely affect the interests
of transition bondholders or the counterparty to any hedge or swap transaction,
the issuer must first notify the rating agencies of the proposed amendment,
modification, termination or
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surrender. Upon receiving notification as required regarding whether the rating
agency condition will be satisfied with respect to such projected action, the
issuer must notify the trustee and the trustee must notify the transition
bondholders and any hedge or swap counterparty of the proposed action and
whether the rating agency condition has been satisfied with respect to the
proposed action. With respect to any proposed action related to the sale
agreement or the servicing agreement, the trustee will consent to this proposed
action only with the consent of the holders of a majority of the total
outstanding principal amount of the transition bonds of each series or class,
and each counterparty to any hedge or swap transaction, materially and adversely
affected thereby and only upon satisfaction of the rating agency condition. With
respect to any proposed action related to any interest rate swap agreement, the
trustee will consent to this proposed action subject to and in accordance with
any requirements described in the related prospectus supplement. For so long as
any of the transition bonds are listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, notice of this proposed action will be
published in a daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort, promptly following its effectiveness.
Termination of an Interest Rate Swap Agreement. Upon the occurrence of any
event that permits the issuer to terminate any interest rate swap agreement, the
issuer may terminate that agreement only if so directed by holders representing
that percentage of the aggregate outstanding principal amount of the related
class and series of transition bonds specified in the related prospectus
supplement, and if so directed, the issuer must terminate that agreement.
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 or more 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 clauses 1., 2. or 3. above), or any
representation or warranty of the issuer made in the indenture or in
any certificate or other writing delivered in connection with the
indenture proving to have been incorrect in any material respect as
of the time when made, 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,
specifying such default or incorrect representation or warranty or
(c) the issuer has knowledge of the default;
5. specified events of bankruptcy, receivership or liquidation of the
issuer; and
6. violation by the State of New Jersey of its pledge and agreement
with respect to the Competition Act and the transition bonds.
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If an event of default occurs and is continuing, other than a default described
in clause 6. above, 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 of acceleration 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 the seller, the servicer or any
swap counterparty under or in connection with the sale agreement,
the servicing agreement or any interest rate swap 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.
The remedy described in clause 6. above is the only remedy that the
trustee may exercise upon an event of default caused solely by a violation by
the State of New Jersey of its pledge and agreement with respect to the
Competition Act and the transition bonds.
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
business 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:
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1. the holders of 100% of the total outstanding principal balance of
all series of transition bonds consent to this sale;
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,
and except as may be described in any prospectus supplement regarding any
floating rate class of transition bonds, the holders of a majority of the total
outstanding principal balance of the transition bonds of all series (or, if less
than all series or classes are affected, the affected series or class or
classes) will have the right to direct the time, method and place of conducting
any proceeding for 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.
Holders of transition bonds also have the unconditional right to institute
suit for the enforcement of payment of interest and principal due on the
transition bonds.
Waiver of Default. Except as may be described in any prospectus supplement
regarding any floating rate class of transition bonds, 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, these holders 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 by the holders of 100% 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:
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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 and
existing 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, the servicing agreement, any hedge agreement and any
interest rate swap agreement pursuant to an assignment and
assumption agreement executed and delivered to the trustee;
3. no default or event of default under the indenture 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, 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 provided in the indenture relating to the
consolidation, 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
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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, 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,
the servicing agreement, any hedge agreement, any interest rate swap
agreement or any other basic document, sell, transfer, exchange or
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, entering into and performing under any hedge agreement or interest rate
swap agreement, and performing activities that are necessary, suitable or
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 other obligations or indebtedness except as
contemplated by the basic documents. 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 or
otherwise not subject to the lien of 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 three or more transition bondholders 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
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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.
For so long as any of the transition bonds are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the trustee will publish or
will cause to be published following the preparation of this annual report in a
daily newspaper in Luxembourg, expected to be the Luxemburger Wort, a notice to
the effect that the information set forth in the preceding paragraph will be
available for review at the main office of the listing agent in Luxembourg.
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 amounts owed under the transition bonds of that series. 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.
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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
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 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
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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 initial 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 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
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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 accounting 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 accounting 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 of transition bond charge
collections to the issuer 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, and to have incurred an obligation secured by this security interest
in an amount equal to the purchase price for 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 includes the bondable transition
property. 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,
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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 charges, 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 the transition bond charge in respect of electricity consumed
after the commencement of the bankruptcy case, then the
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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.
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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
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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. Subject to the discussion below under the caption "Potential
Alternative Tax Characterizations of Floating Rate Transition Bonds," interest
income on the transition bonds, payable at a fixed rate or at a floating rate,
will be includible in income by a U.S. Holder when it is received, in the case
of a U.S. Holder using the cash receipts and disbursements method of tax
accounting, or as it accrues, in the case of a U.S. Holder using the accrual
method of tax accounting. PSE&G and the issuer expect that the transition bonds
will not be issued with original issue discount. If any series of transition
bonds is in fact issued with original issue discount, the prospectus supplement
for such series of transition bonds will address the tax consequences of the
purchase of transition bonds with original issue discount.
PSE&G and the issuer will treat floating rate transition bonds as variable
rate debt instruments for federal income tax purposes. Moreover, each purchaser
of floating rate transition bonds will agree by virtue of their purchase of such
transition bonds to treat them as variable rate debt instruments for federal
income tax purposes. Assuming such treatment is correct, interest on such
transition bonds will be includible in a U.S. Holder's income in the manner
described in the preceding paragraph.
If a swap termination event were to occur with respect to a swap related
to a class of floating rate transition bonds, those bonds would become fixed
rate bonds calling for interest payments based on the gross fixed rate. In
addition, if a termination payment were
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to be made by the counterparty, the termination payment would be credited to the
subaccount for the class and distributed to the holders of that class. Although
no such swap termination event is anticipated, if one were to occur, PSE&G and
the issuer would treat it as a change in circumstances that would, for purposes
of computing taxable income on the transition bonds, be treated as a reissuance
of the transition bonds. Any termination payment passed through to the
transition bondholders would reduce the adjusted issue price on the transition
bonds, which could in turn create original issue discount with respect to the
bonds deemed to have been reissued.
Characterization of the floating rate transition bonds as variable rate
debt instruments is not free from doubt. Notwithstanding the intent of PSE&G,
the issuer, and each purchaser of floating rate transition bonds to treat such
transition bonds as variable rate debt instruments, alternative tax
characterizations of such floating rate transition bonds are possible.
Potential Alternative Tax Characterizations of the Floating Rate
Transition Bonds. As noted above, the proper characterization of the floating
rate transition bonds is not clear. Accordingly, for example, the Internal
Revenue Service could assert on audit that the floating rate transition bonds
are in fact investment units made up of two components. The first component
would be a fixed rate debt instrument having a principal balance that would at
all times equal the principal balance of the floating rate transition bonds and
an interest rate equal to the gross fixed rate for such transition bonds. The
second component would be an undivided interest in the interest rate swap
agreement with the swap counterparty. If this alternative characterization of an
investment in floating rate transition bonds were to prevail, then the manner in
which a holder of such a floating rate transition bond would recognize income
would differ from that described above.
Under that alternative characterization, each holder of a floating rate
transition bond would include in income the gross fixed rate of interest on the
floating rate transition bond in accordance with its regular method of tax
accounting. As the tax owner of an undivided interest in the swap agreement
related to that class, the holder would account for net income and or net
expense with respect to the swap agreement.
In the case of a floating rate transition bond, a holder would be treated
as though it made quarterly periodic payments based on the gross fixed rate to
the counterparty and as though it received quarterly periodic payments based on
the floating rate paid by the counterparty. For any taxable year, a holder of a
floating rate transition bond would include in, or deduct from, gross income the
holder's net swap income or expense. Net swap income or expense would be based
on all periodic payments recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a holder of a floating rate
transition bond would include or deduct its share of the net periodic payments
allocated to the year. Thus, if for a taxable year the sum of periodic payments
considered to have been made by a holder for the year were to exceed the
periodic payments considered to have been received by the holder for the year,
the holder would have net swap expense for the year. Generally, such net swap
expense would be deductible for the year as an ordinary deduction.
If, however, a holder of a floating rate transition bond were an
individual, any net swap expense for any year would be treated as a
miscellaneous itemized deduction. In computing taxable income, an individual is
allowed to deduct miscellaneous itemized deductions only to the extent the sum
of such deductions exceeds two percent of the individual's adjusted gross
income. Further, an individual is not allowed a deduction for miscellaneous
itemized
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deductions in computing alternative minimum taxable income. Thus, for any period
for which the gross fixed rate on the floating rate transition bonds exceeded
the floating rate payments made to the issuer by the counterparty under the swap
agreement, an individual would include in income interest at the gross fixed
rate payable, but could be precluded from deducting all or a part of the net
swap expense for the period due to the limitations imposed on miscellaneous
itemized deductions.
If the underlying swap terminated and a payment were made as a result of
the termination, the receipt of such payment by a holder would be treated as
capital gain. Moreover, if a holder were to sell its interest in a floating rate
transition bond, it would be considered to have made or to have received a
termination payment with respect to its interest in the swap agreement. The
holder would recognize gain or loss in the year that it terminated its interest
in the swap agreement determined by reference to the amount of the termination
payment made or received and the holder's basis, if any, in the swap agreement.
Other alternative characterizations of an investment in floating rate
bonds may be possible, such as the characterization of such bonds as contingent
payment debt obligations. Investors are encouraged to consult their tax advisors
concerning the tax implications of an investment in floating rate transition
bonds.
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
Withholding Taxation on Interest. 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, will generally not be subject to United States federal withholding tax,
provided that the 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, is not a controlled foreign corporation that is related to
PSE&G through stock ownership and PSE&G or its paying agent receives:
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
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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 transition 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 transition 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
back up 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 entitled -- "Withholding Taxation
on Interest" 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 transition 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
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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
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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.
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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;
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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. Except as otherwise disclosed in the
related prospectus supplement, 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
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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.
For so long as any of the transition bonds are listed on the Luxembourg
Stock Exchange and the rules of that exchange so require, the issuer will notify
the Luxembourg Stock Exchange if any rating assigned to any class of transition
bonds listed on the Luxembourg Stock Exchange is reduced or withdrawn and will
cause such notice to be published in a daily newspaper published in Luxembourg,
which is expected to be the Luxemburger Wort.
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, Newark, New Jersey, and 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.
103
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<PAGE>
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-3
Notes to Financial Statements ............................................ F-4
F-1
<PAGE>
Report of Independent Accountants
INDEPENDENT AUDITORS' REPORT
PSE&G Transition Funding LLC:
We have audited the accompanying balance sheets of PSE&G Transition Funding LLC
(the "Company") as of September 30, 2000 and December 31, 1999. These balance
sheets are the responsibility of the Company's management. Our responsibility is
to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such balance sheets present fairly, in all material respects,
the financial position of the Company as of September 30, 2000 and December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche
November 17, 2000
F-2
<PAGE>
PSE&G Transition Funding LLC
Balance Sheet
September 30, December 31
2000 1999
------------- ----------
Assets
Cash ........................................... $ 1,000 $ 1,000
Debt Issuance Costs ............................ 2,020,007 1,477,090
---------- ----------
Total Assets ................................ $2,021,007 $1,478,090
========== ==========
Liabilities
Payable to Member .............................. $2,020,007 $1,477,090
---------- ----------
Total Liabilities ........................... 2,020,007 $1,477,090
Member's Equity .................................. 1,000 1,000
---------- ----------
Total Liabilities and Member's Equity ....... 2,021,007 $1,478,090
========== ==========
See Notes to Balance Sheet.
F-3
<PAGE>
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 (PSEG). 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
Use of Estimates
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. Accordingly, for tax purposes, the Company is treated as a division of
PSEG, and is not treated as a separate taxable entity.
F-4
<PAGE>
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
Following the enactment of the Energy Competition Act, the BPU rendered its
decision relating to PSE&G's rate unbundling, stranded costs and restructuring
proceedings (BPU Final Order). During 1999, the Office of the Ratepayer Advocate
and several customers, filed two appeals in the Appellate Division of the New
Jersey Superior Court, challenging the BPU Financing Order and the BPU Final
Order. On April 13, 2000, a three-member panel of the Appellate Division of the
Superior Court of New Jersey unanimously affirmed the BPU Financing Order and
the BPU Final Order. Thereafter, the appellants filed a Petition requesting
Certification and a Notice of Appeal with the New Jersey Supreme Court seeking
review of the Appellate Division decision. On July 14, 2000, the New Jersey
Supreme Court dismissed the appeal but granted Certification with respect to
both matters. Briefs have been filed and oral arguments for all parties were
held on November 8, 2000. On November 15, 2000, the New Jersey Supreme Court
requested that counsel for PSE&G submit post argument briefs, which must be
received on or before December 1, 2000. PSE&G is unable to predict the timing or
the outcome of the Supreme Court review. While PSE&G continues to believe that
the Appellate Division's unanimous decision was correct, it can give no
assurances with respect to the ultimate timing or disposition of these matters
by the New Jersey Supreme Court.
F-5
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<PAGE>
$__________ Transition Bonds, Series 2001-1
[LOGO] PSE&G Transition Funding LLC
Issuer of the Transition Bonds
$__________ Class A-1
$__________ Class A-2
$__________ Class A-3
$__________ Class A-4
$__________ Class A-5
$__________ Class A-6
$__________ Class A-7
$__________ Class A-8
Public Service Electric and Gas Company
Seller and Servicer
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
COMMERCE CAPITAL MARKETS, INC.
FIRST UNION SECURITIES, INC.
JP MORGAN
SCOTIA CAPITAL (USA) INC.
THE WILLIAMS CAPITAL GROUP, L.P.
Through and including April ___, 2001 (the 90th day after the date of this
prospectus supplement and the accompanying prospectus), all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus supplement and the accompanying
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
supplement and the accompanying prospectus when acting as an underwriter and
when offering an unsold allotment or subscription.
<PAGE>
PART II
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Fee ........................................... $631,250
--------
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.
II-1
<PAGE>
Item 16. Exhibits
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of PSE&G Transition Funding
LLC.**
4.1.1 Amended and Restated Limited Liability Agreement of PSE&G
Transition Funding LLC.*
4.2 Certificate of Formation of PSE&G Transition Funding LLC.**
4.2.1 Amended and Restated 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 (Supersedes Exhibit 5.1 to
Amendment No. 1 to the PSE&G Transition Funding LLC's
Registration Statement filed with the Securities and Exchange
Commission on October 1, 1999.)
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect
to material federal income tax matters (Supersedes Exhibit 8.1 to
Amendment No. 1 to the PSE&G Transition Funding LLC's
Registration Statement filed with the Securities and Exchange
Commission on October 1, 1999.)
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.**
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.
** Previously filed.
Item 17. Undertakings
The undersigned Registrant on behalf of PSE&G Transition Funding LLC (the
"issuer") hereby undertakes as follows:
II-2
<PAGE>
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.
II-3
<PAGE>
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.
II-4
<PAGE>
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
January 8, 2001.
PSE&G TRANSITION FUNDING LLC
By: /s/ Morton A. Plawner
--------------------------------
Name: Morton A. Plawner
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.
January 8, 2001 /s/ Robert E. Busch
--------------- -------------------------------
Date Name: Robert E. Busch
Title: Manager, Chief Executive
Officer, Chief Financial
Officer and Principal
Accounting Officer
January 8, 2001 /s/ Morton A. Plawner
--------------- -------------------------------
Date Name: Morton A. Plawner
Title: Manager, Vice-President
and Treasurer
January 8, 2001 /s/ R. Edwin Selover
--------------- -------------------------------
Date Name: R. Edwin Selover
Title: Manager
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.*
4.1 Limited Liability Company Agreement of PSE&G Transition Funding
LLC.**
4.1.1 Amended and Restated Limited Liability Agreement of PSE&G
Transition Funding LLC.*
4.2 Certificate of Formation of PSE&G Transition Funding LLC.**
4.2.1 Amended and Restated 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 (Supersedes Exhibit 5.1 to
Amendment No. 1 to the PSE&G Transition Funding LLC's
Registration Statement filed with the Securities and Exchange
Commission on October 1, 1999.)
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect
to material federal income tax matters (Supersedes Exhibit 8.1 to
Amendment No. 1 to the PSE&G Transition Funding LLC's
Registration Statement filed with the Securities and Exchange
Commission on October 1, 1999.)
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.**
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.
** Previously filed.
II-6
