<PAGE>
As filed with the Securities and Exchange Commission on November 17, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RELIANT ENERGY TRANSITION BOND COMPANY LLC
(Exact name of registrant as specified in its certificate of formation)
DELAWARE [APPLIED FOR]
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<TABLE>
<S> <C>
HUGH RICE KELLY
1111 LOUISIANA 1111 LOUISIANA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 207-3000 (713) 207-3000
(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area code, telephone number, including area code,
of registrant's principal executive offices) of agent for service)
Copies to:
CHRISTOPHER J. KELL MARGO S. SCHOLIN KEVIN P. LEWIS
SKADDEN, ARPS, SLATE, MEAGHER BAKER & BOTTS, L.L.P. VINSON & ELKINS, L.L.P.
& FLOM LLP 910 LOUISIANA 3600 FIRST CITY TOWER
919 THIRD AVENUE ONE SHELL PLAZA 1001 FANNIN STREET
NEW YORK, NEW YORK 10022 HOUSTON, TEXAS 77002-4995 HOUSTON, TEXAS 77002
(212) 735-2160 (713) 229-1234 (713) 758-2222
</TABLE>
Approximate date of commencement of proposed sale to public: From time to
time after the effective date of this registration statement as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed maximum Proposed maximum
Title of each class of offering price per aggregate offering Amount of
securities to be registered Amount to be registered unit (1) price (1) registration fee
==============================================================================================================================
<S> <C> <C> <C> <C>
Transition Bonds Issuable in Series $1,000,000 100% $1,000,000 $278
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) and exclusive of accrued interest, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
The information in this prospectus supplement and the 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 supplement and the prospectus are not an offer to sell these
securities and they are not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject to completion, dated , 2000.
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED _______, 2000)
$_____________________ Transition Bonds, Series 2000-__
RELIANT ENERGY TRANSITION BOND COMPANY LLC
Issuer
RELIANT ENERGY, INCORPORATED
Seller and the Initial Servicer
___________________________
<TABLE>
<CAPTION>
Expected
Underwriting Final Final
Principal Interest Discounts and Net Payment Maturity
Class: Amount: Rate: Commissions: Proceeds: Price: Date: Date:
- ------ --------- -------- ------------- --------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Class __ Transition Bonds
Class __ Transition Bonds
</TABLE>
The total price to the public is $_____. The total amount of the underwriting
discounts and commissions is $_______. The total amount of proceeds plus
accrued interest before deduction of expenses is $__________.
The underwriters expect to deliver the transition bonds through the book-entry
facilities of The Depository Trust Company against payment in New York, New York
on __________, 2000.
___________________________
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 14 OF THE
PROSPECTUS BEFORE YOU INVEST IN THE TRANSITION BONDS.
The transition bonds represent obligations of the issuer, Reliant Energy
Transition Bond Company LLC, and are secured only by the assets of the issuer.
Reliant Energy, Incorporated and its affiliates, other than the issuer, are not
liable for any payments on the transition bonds.
There currently is no secondary market for the transition bonds, and we cannot
assure you that one will develop.
Additional information is contained in the prospectus. You should read this
prospectus supplement and the prospectus carefully before you invest in the
transition bonds. This prospectus supplement may not be used to offer and sell
the transition bonds unless accompanied by the prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
___________________________
The date of this prospectus supplement is , 2000.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Where You Can Find Information About This Offering S-3
Introduction S-4
The Series 2000-__ Transition Bonds S-5
The Collateral S-5
The Transition Property S-6
Payment and Record Dates and Payment Sources S-6
Interest Payments S-6
Principal Payments S-7
Optional Redemption S-8
Credit Enhancement S-8
Periodic Adjustments of the Transition Charges S-8
Collection Account and Subaccounts S-9
The Transition Charges S-10
Underwriting the Series 2000-__Transition Bonds S-11
The Underwriters' Sales Price for the Series 2000-__ Transition Bonds S-11
No Assurance as to Resale Price or Resale Liquidity for the Series 2000-__ Transition Bonds S-11
Various Types of Underwriter Transactions Which May Affect the Price of the
Series 2000-__ Transition Bonds S-11
Ratings for the Series 2000-___ Transition Bonds S-12
PROSPECTUS
About This Prospectus 2
Cautionary Statement Regarding Forward-Looking Information 3
Where You Can Find More Information 4
Prospectus Summary 5
Risk Factors 14
Reliant Energy 26
The Texas Electric Choice Plan 27
Reliant Energy's Financing Order 30
The Issuer 42
Use of Proceeds 45
The Transition Bonds 45
Weighted Average Life and Yield Considerations for the Transition Bonds 51
The Sale Agreement 52
The Servicing Agreement 57
The Indenture 65
How a Bankruptcy May Affect Your Investment 80
Material Federal Income Tax Consequences for the Transition Bondholders 83
ERISA Considerations 87
Plan of Distribution for the Transition Bonds 89
Ratings for the Transition Bonds 90
Legal Matters 90
Appendix A - Glossary of Defined Terms A-1
Index to Financial Statements of Reliant Energy Transition Bond Company LLC F-1
</TABLE>
S-2
<PAGE>
WHERE YOU CAN FIND INFORMATION ABOUT THIS OFFERING
This prospectus supplement and the prospectus provide information about us,
Reliant Energy and the transition bonds. This prospectus supplement describes
the specific terms of the series of the transition bonds we are offering, the
Series 2000-__ transition bonds. The prospectus describes terms that apply to
all series of the transition bonds.
References in this prospectus supplement and the prospectus to the terms
"we," "us," "our" or "the issuer" mean Reliant Energy Transition Bond Company
LLC. References to "Reliant Energy" or "the seller" mean Reliant Energy,
Incorporated. You can find a glossary of some of the other defined terms we use
in this prospectus supplement and the prospectus on page A-1 of the prospectus.
We have included cross-references to sections in this prospectus supplement
and the prospectus where you can find further related discussions. You can also
find references to key topics in the table of contents on the previous page.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone else to provide you with any different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not offering to sell the Series 2000-__ transition bonds in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement is current only as of the date of this prospectus
supplement.
S-3
<PAGE>
INTRODUCTION
<TABLE>
<S> <C>
The issuer of the Series 2000-__ Reliant Energy Transition Bond Company LLC, a direct wholly owned
transition bonds: subsidiary of Reliant Energy and a limited liability company formed
under Delaware law. We were formed solely to purchase the transition
property, to issue one or more series of the transition bonds secured by
the transition property and to perform any activity incidental thereto.
Our address: 1111 Louisiana, Suite ____, Houston, Texas 77002
Our telephone number: (713) 207-3000
The seller of the transition property: Reliant Energy, a diversified international energy services company,
incorporated under Texas law. Reliant Energy HL&P, its electric
utility division, provides electric utility services to approximately 1.7
million retail electric customers in the City of Houston, Texas, and
surrounding areas of the Texas Gulf Coast.
Reliant Energy's address: 1111 Louisiana, Houston, Texas 77002
Reliant Energy's telephone number: (713) 207-3000
The servicer of the transition property: Reliant Energy, acting as the initial servicer, and any successor
servicer, referred to in this prospectus supplement and the prospectus
as the "servicer," will service the transition property under a servicing
agreement with us.
The trustee: _______________, a national banking association.
Risk Factors: You should carefully consider the risk factors beginning on page 14 of
the prospectus before you invest in the Series 2000-___ transition
bonds.
</TABLE>
S-4
<PAGE>
THE SERIES 2000-__ TRANSITION BONDS
We will issue the Series 2000-__ transition bonds under an indenture we will
enter into with __________________, as trustee, referred to in this prospectus
supplement and the prospectus as the "trustee." We will issue the Series 2000-
__ transition bonds in denominations of integral multiples of $1,000, except
that we may issue one transition bond in each class in a smaller denomination.
The Series 2000-__ transition bonds will consist of _______ classes. The
initial principal balance, expected final payment date, final maturity date and
interest rate for each class of the Series 2000-__ transition bonds are stated
in Table 1 below.
TABLE 1
<TABLE>
<CAPTION>
Initial Expected Final Final
Class Principal Balance Payment Date Maturity Date Interest Rate
- ----- ----------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Class ___ $__________ __________ __________ _________%
(________) (________)
Class ___ $__________ __________ __________ _________%
(________) (________)
Class ___ $__________ __________ __________ _________%
(________) (________)
</TABLE>
The expected final payment date for each class of the Series 2000-__ transition
bonds is the date when the outstanding principal balance of that class will be
reduced to zero if we make payments on that class according to the expected
amortization schedule for that class. The final maturity date for each class of
the Series 2000-__ transition bonds is the date when we are required to pay the
entire remaining unpaid principal balance, if any, of all outstanding Series
2000-__ transition bonds of that class.
THE COLLATERAL
The Series 2000-__ transition bonds will be secured under the indenture by
the indenture's trust estate. The indenture's trust estate consists of:
. the transition property, which is a property right created under the
Texas Electric Choice Plan enacted in June 1999 and the financing order
issued by the Public Utility Commission of Texas, which is referred to in
this prospectus supplement and the prospectus as the "Texas commission,"
on ___________, 2000,
. our rights under the sale agreement,
. all bills of sale delivered by Reliant Energy pursuant to the sale
agreement,
. our rights under the servicing agreement and any subservicing agreements
or collection agreements executed in connection with the servicing
agreement,
. the collection account and all subaccounts of the collection account,
. all of our other property, other than any cash released to us by the
trustee quarterly from earnings on the capital subaccount,
. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing, and
. all payments on or under and all proceeds in respect of any or all of
the foregoing.
S-5
<PAGE>
THE TRANSITION PROPERTY
In general terms, the rights and interests of Reliant Energy under the
financing order, which will be transferred to us pursuant to the sale agreement,
are referred to in this prospectus supplement and the prospectus as the
"transition property." The transition property includes the irrevocable right
to recover, through the transition charges payable by retail electric customers
within Reliant Energy's geographical certificated service area as it existed on
May 1, 1999, which we refer to in this prospectus supplement and the prospectus
as "Reliant Energy's service territory," the qualified costs of Reliant Energy
authorized in the financing order. Reliant Energy's qualified costs authorized
in the financing order approving the issuance of the Series 2000-___ transition
bonds include:
. 100% of Reliant Energy's generation related regulatory assets, as
determined by the financing order, and
. the costs of issuing, supporting and servicing the Series 2000-___
transition bonds.
Reliant Energy will sell the transition property to us to support the
issuance of up to $____ billion in principal amount of the Series 2000-__
transition bonds. Prior to January 1, 2002, the servicer will collect the
transition charges from retail electric customers within Reliant Energy's
service territory on our behalf. On and after January 1, 2002, or in limited
circumstances, sooner, retail electric customers in Reliant Energy's service
territory will purchase electricity and related services from retail electric
providers, one of which is expected to be Reliant Energy or one of its
affiliates, rather than from electric utilities. Each retail electric provider
will include the transition charges in its bill to retail electric customers but
is not required to show the transition charges as a separate line item or
footnote. The retail electric providers will be obligated to remit payments with
respect to the transition charges to the servicer whether or not collected from
retail electric customers. The servicer will have limited rights to collect the
transition charges directly from retail electric customers if the retail
electric provider does not remit such payments to the servicer.
PAYMENT AND RECORD DATES AND PAYMENT SOURCES
Beginning ___________, we are required to pay principal and interest on the
transition bonds quarterly on ___________, ___________, ___________ and
___________ of each year, or, if that day is not a business day, the following
business day. We refer to each of these dates as a "payment date." We will
make these payments to the holders of record of the Series 2000-___ transition
bonds on ___________, ___________, ___________ and ___________ of each year. We
refer to each of these dates as a "record date." On each payment date, we will
pay amounts then due on outstanding Series 2000-___ transition bonds from
amounts available from the collection account and the related subaccounts held
by the trustee. These amounts, which will include amounts collected by the
servicer for us with respect to the transition charges during the prior quarter,
are described in greater detail under "The Indenture--The Collection Account for
the Transition Bonds" in the prospectus.
INTEREST PAYMENTS
Interest on each class of the Series 2000-___ transition bonds will accrue
from the date we issue the Series 2000-___ transition bonds at the interest
rates stated in Table 1. On each payment date, we will pay interest on each
class of the Series 2000-___ transition bonds as follows:
. any interest payable but unpaid on any prior payment date, together
with interest on such unpaid interest, if any, and
. accrued interest on the principal balance of each class of the Series
2000-___ transition bonds as of the close of business on the preceding
payment date, or the date of the original issuance of the class of the
Series 2000-___ transition bonds, as applicable, after giving effect
to all payments of principal made on the preceding payment date.
We will pay interest on the Series 2000-___ transition bonds before we pay
principal of the Series 2000-___ transition bonds, except in the circumstances
described under "The Transition Bonds--Payments of Interest and Principal on the
Transition Bonds" in the prospectus. If there is a shortfall in the amounts
available in the collection account to make interest payments, the trustee will
distribute interest pro rata to each series and class of transition
S-6
<PAGE>
bonds based on the amount of interest payable on each outstanding series. We
will calculate interest on the Series 2000- ___ transition bonds [(other than
Class____)] on the basis of a 360-day year of twelve 30-day months. [Interest on
the Class ___ transition bonds will be calculated on the basis of [to be
completed if floating rate transition bonds are being issued].]
PRINCIPAL PAYMENTS
On each payment date, we will pay principal of the Series 2000-__ transition
bonds to the transition bondholders in accordance with the expected amortization
schedule, but only to the extent funds are available in the collection account
after payment of interest as described above under "Interest Payments." We will
pay principal of the Series 2000-__ transition bonds in the following order:
1. to the holders of the class _____ transition bonds, until the principal
balance of that class has been reduced to zero,
2. [Add other classes]
However, we will not pay principal of any class of Series 2000-__ transition
bonds on a payment date if making the payment would reduce the principal balance
of that class to an amount lower than the amount specified in the expected
amortization schedule in Table 2 below for that class on that payment date. Any
excess funds remaining in the collection account after payment of principal,
interest, applicable fees and expenses and payments to the applicable
subaccounts of the collection account will be retained in the reserve subaccount
until applied on a subsequent payment date. Please refer to "Reliant Energy's
Financing Order--True-Ups" in the prospectus.
The entire unpaid principal balance of each class of the Series 2000-__
transition bonds will be due and payable on the final maturity date for the
class. If an event of default under the indenture has occurred and is
continuing, the trustee or holders of a majority in principal amount of the
transition bonds of all series then outstanding may declare the unpaid principal
balance of all outstanding series of the transition bonds, together with accrued
interest, to be immediately due and payable. If there is a shortfall in the
amounts available to make principal payments on transition bonds that are due
and payable, including upon an acceleration following an event of default, or
that are scheduled to be paid, the trustee will distribute principal pro rata to
each series and class of transition bonds based on the amount of principal
payable and scheduled to be paid on the payment date.
The expected amortization schedule in Table 2 below lists the principal
balance that is scheduled to remain outstanding for each class of the Series
2000-__ transition bonds from the issuance date to the expected final payment
date. The table reflects the principal balance for each class at each payment
date after we have made the principal payment scheduled for that date for each
class. In establishing the expected amortization schedule it has been assumed
that:
. the Series 2000-__ transition bonds are issued on ______________,
. we make the scheduled payments on the Series 2000-__ transition bonds on
each payment date, commencing on ___________,
. the annual servicing fee for the Series 2000-__ transition bonds equals
0.05% of the initial outstanding principal balance of the Series 2000-__
transition bonds, and that we pay quarterly installments of the annual
servicing fee on each payment date,
. we pay our operating expenses, including all fees, costs and charges of
the trustee and our independent managers, in the amount of $_____ in the
aggregate with respect to all series of the transition bonds on each
payment date and these amounts are paid in arrears,
. all collected transition charges are received in accordance with Reliant
Energy's forecasts and any applicable collections curves and are
deposited in the collection account, and
. the initial transition charges and adjustments thereto are sufficient to
make the scheduled payments on the transition bonds.
S-7
<PAGE>
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING PRINCIPAL BALANCE PER CLASS
<TABLE>
<CAPTION>
PAYMENT DATES CLASS ___ BALANCE CLASS ___ BALANCE CLASS ___ BALANCE CLASS ___ BALANCE
- -------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
We cannot assure you that the principal balance of any class of the Series
2000-__ transition bonds will be reduced at the rate indicated in Table 2. The
actual reduction in class principal balances may occur more slowly than
indicated in Table 2. The actual reduction in class principal balances will not
occur more quickly than indicated in Table 2, except in the case of optional
redemption or acceleration due to an event of default under the indenture. The
Series 2000-__ transition bonds will not be in default unless we do not pay the
final outstanding principal balance of a class of the Series 2000-___ transition
bonds on the final maturity date of that class.
OPTIONAL REDEMPTION
We may redeem all of the outstanding Series 2000-__ transition bonds, at our
option, on any payment date if the outstanding principal balance of the Series
2000-__ transition bonds, after giving effect to payments scheduled to be made
on that payment date, is less than 5% of the initial principal balance of the
Series 2000-__ transition bonds. If we redeem the Series 2000-__ transition
bonds, we will pay the outstanding principal balance of the Series 2000-__
transition bonds and interest accrued and unpaid on the Series 2000-__
transition bonds 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. We may not redeem the Series 2000-__
transition bonds under any other circumstances.
CREDIT ENHANCEMENT
Credit enhancement for the Series 2000-__ transition bonds is intended to
protect you against losses or delays in scheduled payments on your Series 2000-
__ transition bonds.
PERIODIC ADJUSTMENTS OF THE TRANSITION CHARGES
Credit enhancement for the Series 2000-__ transition bonds includes mandatory
periodic review and adjustment to the transition charges to be collected from
the retail electric customers within Reliant Energy's service territory. The
servicer is required to petition the Texas commission for an adjustment at least
annually and true-up adjustments may be made as required, but not more
frequently than quarterly, to correct any significant undercollection of
transition charges. The amount of the adjustment will be determined by using a
formula established by the financing order approving the issuance of the Series
2000-__ transition bonds. These periodic adjustments are designed to provide
sufficient funds for payments on the Series 2000-__ transition bonds, as well as
any other outstanding series of transition bonds, in accordance with the
expected amortization schedule in Table 2. Please refer to "Reliant Energy's
Financing Order--True-Ups" in the prospectus. The adjustments will be made if
there are excess revenues from collections of the transition charges or if the
transition charges do not produce sufficient revenues to:
. make timely interest and principal payments on the transition bonds,
. pay expenses of the trustee, our independent managers and the servicer
and other fees, expenses, costs and charges, and
S-8
<PAGE>
. fund the overcollateralization subaccount and maintain the capital
subaccount at their required levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the capital
contribution deposited by Reliant Energy and collected transition charges
periodically remitted to the trustee by the servicer. The collection account
will consist of various subaccounts, including the following:
. the general subaccount,
. the capital subaccount,
. the overcollateralization subaccount, and
. the reserve subaccount.
Withdrawals from and deposits to these subaccounts will be made as described
under "The Indenture--The Collection Account for the Transition Bonds" and "--
How Funds in the Collection Account Will Be Allocated" in the prospectus.
The General Subaccount. The trustee will deposit collected transition
charges remitted to it by the servicer into the general subaccount. On each
payment date, the trustee will allocate amounts in the general subaccount as
described under "The Indenture--How Funds in the Collection Account Will Be
Allocated" in the prospectus.
The Capital Subaccount. On the date we issue the Series 2000-__ transition
bonds, Reliant Energy will deposit $______ in the capital subaccount as a
capital contribution, which is equal to ___% of the initial outstanding
principal balance of the Series 2000-__ Transition Bonds. The capital
contribution has been set at a level sufficient to obtain the ratings on the
Series 2000-__ transition bonds described below under "Ratings for the Series
2000-__ Transition Bonds." If amounts available in the general subaccount, the
reserve subaccount and the overcollateralization subaccount are not sufficient
on any payment date to make scheduled payments to the transition bondholders and
to pay the expenses, fees and charges specified in the indenture, the trustee
will draw on amounts in the capital subaccount to make those payments.
The Overcollateralization Subaccount. The trustee will deposit collected
transition charges in the overcollateralization subaccount over the term of the
Series 2000-__ transition bonds on each payment date up to an amount which we
refer to as the "scheduled overcollateralization level." The scheduled
overcollateralization level for each payment date is listed below in Table 3.
The aggregate overcollateralization level for the Series 2000-__ transition
bonds is $______ million which represents ____% of the initial outstanding
principal balance of that series. The scheduled overcollateralization levels
have been set at amounts sufficient to obtain the ratings on the Series 2000-__
transition bonds described below under "Ratings for the Series 2000-___
Transition Bonds." Please refer to "The Indenture--The Collection Account for
the Transition Bonds" in the prospectus.
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
<TABLE>
<CAPTION>
Scheduled Over- Scheduled Over-
Payment Date Collateralization Level Payment Date Collateralization Level
------------ ----------------------- ------------ -----------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
If amounts available in the general subaccount and the reserve subaccount are
not sufficient on any payment date to make scheduled payments to the transition
bondholders and to pay the expenses, fees and charges specified in the
indenture, the trustee will draw on amounts in the overcollateralization
subaccount to make those payments.
S-9
<PAGE>
The Reserve Subaccount. The reserve subaccount will be funded with collected
transition charges and earnings on amounts in the collection account, other than
earnings on amounts allocated to the capital subaccount, in excess of the amount
necessary to pay on any payment date:
. expenses of the trustee, our independent managers and the servicer and
other fees, expenses, costs and charges,
. scheduled principal and interest payments on the Series 2000-__
transition bonds payable on that payment date,
. any amount required to replenish the capital subaccount, and
. the amounts required to fund the overcollateralization subaccount to
the required level.
The periodic adjustments of the transition charges will be calculated to
eliminate any amounts held in the reserve subaccount. These adjustments
generally will occur annually. Under limited circumstances these adjustments
may occur more frequently, but not more frequently than quarterly.
If amounts available in the general subaccount are not sufficient to make
scheduled payments to the transition bondholders on any payment date, the
trustee will draw on any amounts in the reserve subaccount to make those
payments.
THE TRANSITION CHARGES
The financing order authorizes Reliant Energy to recover qualified costs from
retail electric customers in Reliant Energy's service territory through the
collection of the transition charges. The servicer will bill the transition
charges to each retail electric customer until January 1, 2002, after which time
retail electric customers will be billed by retail electric providers. Reliant
Energy will be the initial servicer. Beginning on the date we issue the Series
2000-__ transition bonds, the initial transition charges listed in Table 4 below
will be imposed on retail electric customers in each customer class at the
applicable rate for the class determined pursuant to the financing order. The
amount of these transition charges will be adjusted at least annually on
petition by the servicer to the Texas commission. Please refer to "Reliant
Energy's Financing Order" in the prospectus.
TABLE 4
INITIAL TRANSITION CHARGES
TRANSITION CHARGE CLASS INITIAL TRANSITION CHARGE RATE
----------------------- ------------------------------
IN CENTS PER KWH
----------------
Residential ___
- ------------------------------------------------------------------------------
Commercial/Industrial Distribution ___
- ------------------------------------------------------------------------------
Commercial/Industrial Transmission ___
- ------------------------------------------------------------------------------
Non-Metered Lighting
- ------------------------------------------------------------------------------
Standby Electric Service - Distribution
- ------------------------------------------------------------------------------
Interruptible Service Supplemental - Distribution
- ------------------------------------------------------------------------------
Standby Electric Service - Transmission
- ------------------------------------------------------------------------------
Interruptible Service 30 Minute Notice
- ------------------------------------------------------------------------------
Interruptible Service 10 Minute Notice
- ------------------------------------------------------------------------------
S-10
<PAGE>
Interruptible Service Instantaneous
- ------------------------------------------------------------------------------
Interruptible Service Supplemental - Transmission
- ------------------------------------------------------------------------------
Standby Interruptible Service
- ------------------------------------------------------------------------------
Please refer to "Reliant Energy's Financing Order--Allocation" in the
prospectus.
UNDERWRITING THE SERIES 2000-__TRANSITION BONDS
Subject to the terms and conditions in the underwriting agreement among
Reliant Energy, the underwriters, for whom___________________________________ is
acting representative, and us, we have agreed to sell to the underwriters, and
the underwriters have severally agreed to purchase, the principal amount of the
Series 2000-__ transition bonds listed opposite each underwriter's name below:
NAME CLASS PRINCIPAL AMOUNT
---- ----- -----------------
- ------------------------------------
- ------------------------------------
- ------------------------------------
Under the underwriting agreement, the underwriters will take and pay for all
of the Series 2000-__ transition bonds we offer, if any are taken.
THE UNDERWRITERS' SALES PRICE FOR THE SERIES 2000-__ TRANSITION BONDS.
Series 2000-__ transition bonds sold by the underwriters to the public
initially will be offered at the initial public offering prices stated on the
cover of this prospectus supplement. The underwriters propose initially to
offer the Series 2000-__ transition bonds to dealers at the initial public
offering prices, less a selling concession not to exceed the percentage listed
below for each class. The underwriters may allow and dealers may reallow a
discount not to exceed the percentage listed below for each class.
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- ------ ---------- -----------
Class [ ]
[Add other classes]
After the initial public offering, the public offering prices, selling
concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE SERIES 2000-__
TRANSITION BONDS.
The Series 2000-__ transition bonds are a new issue of securities with no
established trading market. They will not be listed on any securities exchange.
The underwriters have advised us that they intend to make a market in the Series
2000-__ transition bonds, but they are not obligated to do so and may
discontinue market making at any time without notice. We cannot assure you that
a liquid trading market will develop for the Series 2000-__ transition bonds.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS WHICH MAY AFFECT THE PRICE OF THE
SERIES 2000-__ TRANSITION BONDS.
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The underwriters may engage in overallotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the Series 2000-__ 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 Series 2000-__ transition
bonds which are permitted, so long as the stabilizing bids do not exceed a
specific maximum price. Syndicate covering transactions involve purchases of the
Series 2000-__ 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 Series 2000-__ 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 Series 2000-__ transition bonds to be
higher than they would otherwise be. Neither we, Reliant Energy, the trustee,
our managers nor 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 or may engage in transactions with us and our affiliates, including
Reliant Energy. In addition, each underwriter may from time to time take
positions in the Series 2000-__ transition bonds.
Under the underwriting agreement, we and Reliant Energy have agreed to
reimburse the underwriters for some expenses. We and Reliant Energy have agreed
to indemnify the underwriters against some liabilities, including liabilities
under the Securities Act of 1933.
RATINGS FOR THE SERIES 2000-___ TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the Series
2000-__ transition bonds that each class of the Series 2000-___ transition bonds
be rated "___" by Standard & Poor's Ratings Group, a division of the McGraw-Hill
Companies, Inc., and "___" by Moody's Investors Service.
A security rating is not a recommendation to buy, sell or hold securities and
may be revised or withdrawn at any time by the rating agency. No person is
obligated to maintain the rating on the Series 2000-__ transition bonds, and
accordingly, we cannot assure you that the ratings assigned to any class of the
Series 2000-__ transition bonds upon initial issuance will not be revised or
withdrawn by a rating agency at a later time. If a rating of any class of the
Series 2000-__ 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 the likelihood of any particular rate of
principal payments on the Series 2000-__ transition bonds other than payment in
full of each class of the Series 2000-__ transition bonds by the applicable
final maturity date.
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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 in any state
where the offer or sale is not permitted.
Subject to completion, dated __________, 2000.
PROSPECTUS
- ----------
RELIANT ENERGY TRANSITION BOND COMPANY LLC
Issuer
TRANSITION BONDS
RELIANT ENERGY, INCORPORATED
Seller and the Initial Servicer
--------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS
PROSPECTUS BEFORE YOU INVEST IN THE TRANSITION BONDS.
Reliant Energy Transition Bond Company LLC may issue from time to time one or
more series of the transition bonds as described in this prospectus. The
transition bonds represent our obligations and are backed only by our assets.
Reliant Energy, Incorporated and its affiliates, other than us, are not liable
for any payments on the transition bonds.
There currently is no secondary market for the transition bonds, and we cannot
assure you that one will develop.
We may offer and sell the transition bonds by use of this prospectus. We will
provide the specific terms of any offerings in one or more supplements to this
prospectus. You should read this prospectus and the related prospectus
supplement carefully before you invest in the transition bonds. This prospectus
may not be used to offer and sell the transition bonds unless accompanied by a
prospectus supplement.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is ___________, 2000.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
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Page
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About This Prospectus 2
Cautionary Statement Regarding Forward-Looking Information 3
Where You Can Find More Information 4
Prospectus Summary 5
Risk Factors 14
Reliant Energy 26
The Texas Electric Choice Plan 27
Reliant Energy's Financing Order 30
The Servicer of the Transition Property 32
The Issuer 42
Use of Proceeds 45
The Transition Bonds 45
Weighted Average Life and Yield Considerations for the Transition Bonds 51
The Sale Agreement 52
The Servicing Agreement 57
The Indenture 65
How a Bankruptcy May Affect Your Investment 80
Material Federal Income Tax Consequences for the Transition Bondholders 83
ERISA Considerations 87
Plan of Distribution for the Transition Bonds 89
Ratings for the Transition Bonds 90
Legal Matters 90
Appendix A - Glossary of Defined Terms A-1
Index to Financial Statements of Reliant Energy Transition Bond Company LLC F-1
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we have filed with the
SEC using a "shelf" registration process. By using this process, we may offer
the transition bonds in one or more offerings. This prospectus provides you
with a description of the transition bonds we may offer. Each time we offer
transition bonds, we will provide a supplement to this prospectus. The
prospectus supplement will describe the specific terms of the offering. The
prospectus supplement may also add, update or change the information contained
in this prospectus. Please carefully read this prospectus, the prospectus
supplement and the information, if any, contained in the documents we refer to
in this prospectus under the heading "Where You Can Find More Information."
References in this prospectus and the prospectus supplement to the terms
"we," "us," "our" or "the issuer" mean Reliant Energy Transition Bond Company
LLC. References to "Reliant Energy" or "the seller" mean Reliant Energy,
Incorporated. You can find a glossary of some of the other defined terms we use
in this prospectus on page A-1 of this prospectus.
You should rely only on the information contained or incorporated by
reference in this prospectus and the prospectus supplement. We have not
authorized anyone else to provide you with any different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to sell the transition bonds in any jurisdiction
where the offer or sale is not permitted. The information in this prospectus is
current only as of the date of this prospectus.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Some statements contained in this prospectus and the prospectus supplement
concerning expectations, beliefs, plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
not historical facts, including statements in the documents that are
incorporated by reference as discussed in this prospectus under the heading
"Where You Can Find More Information," are forward-looking statements within the
meaning of the federal securities laws. Although we and Reliant Energy believe
that the expectations and the underlying assumptions reflected in these
statements are reasonable, we cannot assure you that these expectations will
prove to be 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:
. state and federal legislative or regulatory developments,
. national or regional economic conditions,
. the accuracy of the servicer's estimates of market demand and prices
for energy,
. the accuracy of the servicer's estimates of industrial, commercial and
residential growth in Reliant Energy's service territory,
. weather variations and other natural phenomena affecting retail
electric customer energy usage,
. the speed, degree and effect of continued electric industry
restructuring,
. operating performance of Reliant Energy's facilities, and
. the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and any
collections curves.
Any forward-looking statements should be considered in light of these
important factors and in conjunction with the other documents filed by us and by
Reliant Energy with the SEC.
New factors that could cause actual results to differ materially from those
described in forward-looking statements may emerge from time to time. It is not
possible for us or Reliant Energy 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
we nor Reliant Energy undertakes any obligation to update the information
contained in the statement to reflect subsequent developments or information.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we have filed with the
SEC relating to the transition bonds. This prospectus and the prospectus
supplement describe the material terms of some of the documents we have filed as
exhibits to the registration statement. However, this prospectus and the
prospectus supplement do not contain all of the information contained in the
registration statement and the exhibits. Any statements contained in this
prospectus or the 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. Each statement concerning those
provisions is qualified in its entirety by reference to the respective exhibit.
For further information, we refer you to the registration statement and the
exhibits, which are available for inspection without charge at the SEC's Public
Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York,
New York 10048. You may obtain further information regarding the operation of
the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330.
Information filed with the SEC can also be inspected at the SEC's Internet site
located at http://www.sec.gov. You may also obtain a copy of our filings with
the SEC at no cost, by writing to or telephoning us at the following address:
Reliant Energy Transition Bond Company LLC
1111 Louisiana, Suite ____
Houston, Texas 77002
(713) 207-3000
We will also file with the SEC all of the periodic reports we are required
to file under the Securities Exchange Act of 1934 and the rules, regulations or
orders of the SEC thereunder. We may, however, discontinue filing such reports
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.
The SEC allows us to "incorporate by reference" into this prospectus
information we file with the SEC. This means we can disclose important
information to you by referring you to the documents containing the information.
The information we incorporate by reference is considered to be part of this
prospectus, unless we update or supersede that information by the information
contained in the prospectus supplement or information that we file subsequently
that is incorporated by reference into this prospectus. We are incorporating
into this prospectus our future filings with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the offering of
the transition bonds is completed. Any statement contained in this prospectus,
in the prospectus supplement or in a document incorporated or deemed to be
incorporated by reference in this prospectus will be deemed to be modified or
superseded for purposes of this prospectus and the prospectus supplement to the
extent that a statement contained in this prospectus, the 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 the prospectus supplement.
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PROSPECTUS SUMMARY
This summary contains a brief description of the transition bonds and
applies to all series of transition bonds we may offer by use of this
prospectus. You may find information relating to a specific series of our
transition bonds in the prospectus supplement relating to that series. You will
find a more detailed description of the terms of the offering of the transition
bonds following this summary.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS
PROSPECTUS BEFORE YOU INVEST IN THE TRANSITION BONDS.
<TABLE>
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SUMMARY OF THE TRANSITION BONDS
<S> <C>
The issuer of the transition bonds: Reliant Energy Transition Bond Company LLC, a direct wholly
owned subsidiary of Reliant Energy and a limited liability company
formed under Delaware law. We were formed solely to purchase
the transition property, to issue one or more series of the transition
bonds secured by the transition property and to perform any activity
incidental thereto.
Our address: 1111 Louisiana, Suite ____, Houston, Texas 770002
Our telephone number: (713) 207-3000
The seller of the transition property: Reliant Energy, a diversified international energy services company,
incorporated under Texas law. Reliant Energy HL&P, its electric
utility division, provides electric utility services to approximately
1.7 million retail electric customers in the City of Houston, Texas,
and surrounding areas of the Texas Gulf Coast.
Reliant Energy's address: 1111 Louisiana, Houston, Texas 77002
Reliant Energy's telephone number: (713) 207-3000
The servicer of the transition property: Reliant Energy, acting as the initial servicer, and any successor
servicer, referred to in this prospectus and the prospectus
supplement as the "servicer," will service the transition property
under a servicing agreement with us.
The trustee: __________________, a national banking association.
</TABLE>
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Transaction Overview: The Texas Electric Choice Plan permits electric utilities, such as
Reliant Energy, to recover generation related regulatory assets
through irrevocable non-bypassable transition charges assessed on
all retail electric customers within a utility's geographical
certificated service area as it existed on May 1, 1999. We refer to
this area in this prospectus and the prospectus supplement, with
regard to Reliant Energy, as "Reliant Energy's service territory."
The amount and terms for collections of these transition charges are
governed by a financing order issued by the Public Utility
Commission of Texas, referred to in this prospectus and the
prospectus supplement as the "Texas commission," on __________.
The Texas Electric Choice Plan and the financing order permit an
electric utility to transfer its rights and interests in the financing
order, including the right to collect transition charges, to a special
purpose entity formed by the electric utility to issue debt securities
secured by the right to receive revenues arising from the transition
charges. The electric utility's right to receive the transition charges
and its other rights and interests under the financing order, upon
transfer to the issuer, constitute transition property.
The primary transactions underlying the offering of the transition
bonds are as follows:
. Reliant Energy will sell the transition property to us in
exchange for the net proceeds from the sale of the
transition bonds.
. We will sell the transition bonds to the underwriters named
in the prospectus supplement.
. Reliant Energy will act as the initial servicer of the
transition property.
The transition bonds are not obligations of the trustee, our
managers, Reliant Energy or of any of its affiliates, other than us.
The transition bonds are also not obligations of the State of Texas or
any governmental agency, authority or instrumentality of the State
of Texas.
</TABLE>
The following chart represents a general summary of the parties to the
transactions underlying the offering of the transition bonds, their roles and
their various relationships to the other parties:
6
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[CHART APPEARS HERE]
7
<PAGE>
THE COLLATERAL
The transition bonds will be secured under the indenture by the indenture's
trust estate. The indenture's trust estate consists of:
. the transition property, which is a property right created under the
Texas Electric Choice Plan enacted in June 1999 and the financing
order issued by the Texas commission,
. our rights under the sale agreement,
. all bills of sale delivered by Reliant Energy pursuant to the sale
agreement,
. our rights under the servicing agreement and any subservicing
agreements or collection agreements executed in connection with the
servicing agreement,
. the collection account and all subaccounts of the collection account,
. all of our other property, other than any cash released to us by the
trustee quarterly from earnings on the capital subaccount,
. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing, and
. all payments on or under and all proceeds in respect of any or all of
the foregoing.
THE TRANSITION PROPERTY
In general terms, the rights and interests of Reliant Energy under the
financing order, which will be transferred to us pursuant to the sale agreement,
are referred to in this prospectus and the prospectus supplement as the
"transition property." The transition property includes the irrevocable right
to recover, through the transition charges payable by retail electric customers
within Reliant Energy's service territory, the qualified costs of Reliant Energy
authorized in the financing order. Reliant Energy's qualified costs include:
. 100% of Reliant Energy's generation related regulatory assets, as
determined by the financing order, and
. the costs of issuing, supporting and servicing the transition bonds.
Reliant Energy will sell the transition property to us to support the
issuance of the transition bonds. Prior to January 1, 2002, the servicer will
collect the transition charges from retail electric customers within Reliant
Energy's service territory on our behalf. On and after January 1, 2002, or in
limited circumstances, sooner, retail electric customers in Reliant Energy's
service territory will purchase electricity and related services from retail
electric providers, one of which is expected to be Reliant Energy or one of its
affiliates, rather than from electric utilities. Each retail electric provider
will include the transition charges in its bills to retail electric customers
but is not required to show the transition charges as a seperate line item or
footnote. The retail electric providers will be obligated to remit payments with
respect to the transition charges to the servicer whether or not collected from
retail electric customers. The servicer will have limited rights to collect the
transition charges directly from retail electric customers if the retail
electric provider does not remit such payments to the servicer.
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PRINCIPAL PAYMENTS AND RECORD DATES AND PAYMENT SOURCES
On each payment date specified in the prospectus supplement for each series
of transition bonds, referred to in this prospectus as a "payment date," we will
pay amounts then due or scheduled to be paid on outstanding series of the
transition bonds from amounts available from the collection account and the
related subaccounts held by the trustee. We will make these payments to the
holders of record of the transition bonds on each record date specified in the
prospectus supplement, referred to in this prospectus as a "record date." These
amounts, which will include the transition charges collected by the servicer for
us during the prior quarter, are described in greater detail under "The
Indenture--The Collection Account for the Transition Bonds."
INTEREST PAYMENTS
Interest on each class or series of transition bonds will accrue from the
date we issue the class or series of transition bonds at the interest rates
stated in the related prospectus supplement. On each payment date, we will pay
interest on each class or series of transition bonds as follows:
. any interest payable but unpaid on any prior payment dates, together
with interest on such unpaid interest, if any, and
. accrued interest on the principal balance of each class or series of
transition bonds as of the close of business on the preceding payment
date, or the date of the original issuance of each class or series of
transition bonds, as applicable, after giving effect to all payments
of principal made on the preceding payment date, if any.
We will pay interest on each class or series of transition bonds before we
pay the principal of each class or series of transition bonds, except in the
circumstances described under "The Transition Bonds--Payments of Interest and
Principal on the Transition Bonds." If there is a shortfall in the amounts
available in the collection account to make interest payments, the trustee will
distribute interest pro rata to each series and class of transition bonds based
on the amount of interest payable on each outstanding series or class. Unless
otherwise specified in the prospectus supplement, we will calculate interest on
the basis of a 360-day year of twelve 30-day months.
PRIORITY OF DISTRIBUTIONS
On each payment date, the trustee will apply the transition charges
remitted by the servicer together with all investment earnings on the collection
account, other than investment earnings on amounts in the capital subaccount, to
the extent funds are available in the collection account, in the following order
of priority:
1. payment of the trustee's fee, which will be a fixed fee in an amount
specified in the indenture,
2. payment of the servicing fee and any unpaid servicing fees from prior
payment dates, which will be a fixed fee in an amount specified in the
servicing agreement,
3. payment of the administration fee, which will be a fixed fee in an
amount specified in the administration agreement between us and
Reliant Energy, and fees of our independent managers, which will be
specified in the amended and restated limited liability company
agreement,
4. payment of operating expenses up to an aggregate of $_______ for each
payment date for all series of the transition bonds, so long as no
event of default has occurred and is continuing or would be caused by
this payment,
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5. payment of the interest then due on the transition bonds, including
payment of any amount payable to the swap counterparty on any interest
rate swap agreement,
6. payment of the principal then required to be paid on the transition
bonds, including any principal due and payable at final maturity or
upon redemption or acceleration,
7. payment of the principal then scheduled to be paid on the transition
bonds,
8. payment of any amounts payable to any other credit enhancement
providers,
9. payment of any of our remaining unpaid operating expenses plus any
expenses and indemnity amounts owed to the trustee or our managers,
10. replenishment of any shortfalls in the capital subaccount,
11. payment of the scheduled allocation to and replenishment of any
shortfall in the overcollateralization subaccount,
12. release of an amount equal to investment earnings on amounts in the
capital subaccount to us, so long as no event of default has occurred
and is continuing, and
13. allocation of the remainder, if any, to the reserve subaccount.
The amount of all fees referenced in clauses (1) through (3) above are
described in the prospectus supplement for the related series of the transition
bonds. The priority of distributions for the collected transition charges, as
well as available amounts in the subaccounts, are described in more detail under
"The Indenture--How Funds in the Collection Account Will Be Allocated," as well
as in the prospectus supplement for each series of the transition bonds.
CREDIT ENHANCEMENT
Unless otherwise specified in the prospectus supplement, credit enhancement
for the transition bonds will be as follows:
. The Texas commission will permit adjustments to the transition
charges, but only upon petition of the servicer, to make up for any
shortfall or reduce any excess in collected transition charges. These
adjustments will be made at least annually. Please refer to "Reliant
Energy's Financing Order--True-Ups."
. Collection Account--Under the indenture, the trustee will hold a
single collection account, divided into various subaccounts, for all
series of the transition bonds. The primary subaccounts for credit
enhancement purposes are:
. the overcollateralization subaccount--we will specify a funding
level for the overcollateralization subaccount in the prospectus
supplement, which amount will be funded from collected transition
charges ratably over the term of the transition bonds,
. the capital subaccount--Reliant Energy will deposit an amount
specified in the prospectus supplement for each series of the
transition bonds into the capital subaccount on the date of
issuance of that series, and
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. the reserve subaccount--any excess amount of collected transition
charges and investment earnings not released to us will be held
in the reserve subaccount.
Each of these subaccounts will be available to make payments on all series
of the transition bonds on each payment date.
Additional credit enhancement for any series may include surety bonds or
letters of credit or other forms of credit enhancement. Any additional forms of
credit enhancement for each series will be specified in the related prospectus
supplement. Credit enhancement for the transition bonds is intended to protect
you against losses or delays in scheduled payments on your transition bonds.
STATE PLEDGE
The State of Texas has pledged in the Texas Electric Choice Plan that it
will not take or permit any action that would impair the value of the transition
property, or, except as permitted in connection with a true-up adjustment,
reduce, alter or impair the transition charges until the principal, interest and
premium, and any other charges incurred and contracts to be performed in
connection with the transition bonds, have been paid and performed in full. The
transition bonds are not a debt or obligation of the State of Texas and are not
a charge on its full faith and credit or its taxing power.
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[ALLOCATIONS AND DISTRIBUTIONS DIAGRAM APPEARS HERE]
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OPTIONAL REDEMPTION
The prospectus supplement may provide for redemption of a series of the
transition bonds at our option at a redemption price not less than the
outstanding principal of and accrued interest on the transition bonds.
EXPECTED FINAL PAYMENT DATES AND FINAL MATURITY DATES
Failure to pay a scheduled principal payment on any payment date or the
entire outstanding amount of the transition bonds of any class or series by the
expected final payment date will not result in a default with respect to that
class or series. The failure to pay the entire outstanding principal balance of
the transition bonds of any series will result in a default only if such payment
has not been made by the final maturity date for the series, or on any date set
for redemption of the series. We will specify the expected final payment date
and the final maturity date of each series and class of transition bonds in the
prospectus supplement.
REPORTS TO TRANSITION BONDHOLDERS
Pursuant to the indenture, the trustee will provide to the holders of
record of the transition bonds regular reports prepared by the servicer
containing information concerning, among other things, us and the collateral for
the transition bonds. Unless and until the transition bonds are issued in
definitive form, the reports will be provided to The Depository Trust Company.
The reports will be available to beneficial owners of the transition bonds upon
request to the trustee or the servicer. These reports will not be examined and
reported upon by an independent public accountant. In addition, no independent
public accountant will provide an opinion thereon. Please refer to "The
Indenture--The Trustee Must Provide an Annual Report to All Transition
Bondholders."
SERVICING COMPENSATION
We will pay the servicer on each payment date the servicing fee with
respect to all series of the transition bonds. As long as Reliant Energy acts
as servicer, this fee will be 0.05% of the initial principal balance of the
series of transition bonds on an annualized basis. If a successor servicer is
appointed, the servicing fee will be negotiated by the successor servicer and
the trustee, but will not exceed 1.25% of the initial principal balance of the
series of transition bonds on an annualized basis. The servicer will be entitled
to retain as additional compensation net investment income it receives on the
transition charges it collects pending remittance to the trustee, as well as any
late fees paid by retail electric customers to the servicer which are associated
with the transition charges.
FEDERAL INCOME TAX STATUS
Reliant Energy has received a private letter ruling from the Internal
Revenue Service to the effect that the transition bonds will be classified as
obligations of Reliant Energy for U.S. federal income tax purposes. If you
purchase a transition bond, you agree to treat it as debt of Reliant Energy for
U.S. federal income tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to the Employee Retirement Income
Security Act of 1974 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, or
other investor subject to ERISA, will be deemed to certify that the purchase and
subsequent holding of the transition bonds would be exempt from the prohibited
transaction rules of ERISA. For further information regarding the application of
ERISA, please refer to "ERISA Considerations."
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RISK FACTORS
You should carefully consider all the information we have included or
incorporated by reference in this prospectus and the prospectus supplement
before deciding whether to invest in the transition bonds. In particular, you
should carefully consider the risk factors described below. In addition, please
read "Cautionary Statement Regarding Forward-Looking Information" in this
prospectus, where we describe additional uncertainties associated with the
forward-looking statements in this prospectus and the prospectus supplement.
If any of the following risks actually occur, your investment in the
transition bonds could be materially adversely affected. In such case, the
trading price of the transition bonds could decline and you may lose all or part
of your investment.
YOU MAY EXPERIENCE MATERIAL PAYMENT DELAYS OR INCUR A LOSS ON YOUR INVESTMENT IN
THE TRANSITION BONDS DUE TO THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION
BONDS AND LIMITED CREDIT ENHANCEMENT, IF ANY.
You may suffer material payment delays or losses on your transition bonds
if our assets are insufficient to make principal and interest payments on the
transition bonds in full. The only source of funds for payments of interest and
principal on the transition bonds will be our assets, which include:
. the transition property,
. the funds on deposit in the collection account and the related
subaccounts held by the trustee,
. rights under various contracts, and
. any other credit enhancement described in the prospectus supplement.
Any floating rate transition bonds will also have the proceeds of any swap
agreement available as a payment source.
The transition bonds will not be insured or guaranteed by Reliant Energy,
including in its capacity as the initial servicer, any of its affiliates (other
than us), the trustee, or by any other person or entity. Thus, you must rely
for payment of the transition bonds solely upon collections of the transition
charges, funds on deposit in the collection account held by the trustee and any
other credit enhancement described in the prospectus supplement. Our
organizational documents will restrict our right to acquire other assets
unrelated to the transactions described in this prospectus. Please refer to
"The Issuer."
RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS
FUTURE JUDICIAL ACTION COULD REDUCE THE VALUE OF YOUR INVESTMENT IN THE
TRANSITION BONDS.
The transition property is the creation of the Texas Electric Choice Plan
and the financing order issued by the Texas commission to Reliant Energy. The
Texas Electric Choice Plan was enacted in June 1999 and the financing order was
issued on __________. A court decision might seek to overturn either the Texas
Electric Choice Plan or the financing order. Because the transition property is
a creation of the Texas Electric Choice Plan, any event affecting the validity
of the underlying statutory provisions could have an adverse effect on the
transition bonds. For example, if the provisions which create the transition
property were invalidated, the servicer could lose the right to collect the
transition charges or could otherwise be prevented from making such collections.
Or, if the provisions allowing adjustment of the transition charges were
invalidated, the servicer might be prevented from securing sufficient funds for
the scheduled payments on the transition bonds. If this occurs, you may lose
some or all of your investment in the transition bonds or you may experience
delays in recovering your investment in the transition bonds. Legislation in
other states that is similar to the Texas Electric Choice Plan has been
challenged but not overturned.
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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 or regulatory experience implementing and
interpreting the legislation. The Texas Electric Choice Plan or any of its
provisions may be directly contested in courts or otherwise become the subject
of litigation, however since the enactment of the Texas Electric Choice Plan in
June 1999, no lawsuit has challenged the validity of the Texas Electric Choice
Plan or the financing order. If a court were to determine that the relevant
provisions of the Texas Electric Choice Plan or the financing order are unlawful
or invalid, that decision could adversely affect the validity of the transition
bonds or the transition property or could adversely affect our ability to make
payments on the transition bonds. In that case, you could suffer a loss on your
investment in the transition bonds. The deadline established under the Texas
Electric Choice Plan to appeal the financing order will expire prior to the
issuance of the transition bonds. However, if the Texas Electric Choice Plan is
overturned, the limitation on appealing the financing order may also be
overturned. We cannot assure you that a lawsuit challenging the validity of the
Texas Electric Choice Plan will not be filed in the future or that, if filed,
such lawsuit will not be successful.
Although as of the date of this prospectus we are aware of no lawsuit that
has been filed challenging the Texas Electric Choice Plan or the financing
order, judicial challenges have been filed in other states seeking to overturn
electricity generation deregulation laws similar to the Texas Electric Choice
Plan. In Pennsylvania, three lawsuits have challenged the validity of similar
state legislation. Two of these lawsuits alleged that the Pennsylvania
legislation was not validly enacted by the Pennsylvania legislature. A
Pennsylvania court has rejected these claims. The court's decisions in those
cases have not been appealed and the period for filing appeals has lapsed. The
third lawsuit asserted that the provisions in the Pennsylvania legislation that
allowed for the recovery of transition charges violated the Commerce Clause of
the U.S. Constitution. The Pennsylvania courts rejected that claim, and a
petition that the U.S. Supreme Court review the case was denied.
In California, a consumer advocacy group and others filed a petition with
the California Supreme Court asking that the court suspend the implementation of
the California Public Utility Commission's decision, which, among other things,
allowed for the recovery of a utility's stranded costs. The California Supreme
Court denied this petition.
Other states in addition to California and Pennsylvania have passed
electricity deregulation laws and further judicial challenges could be made in
other states. An unfavorable decision regarding another state's law would not
automatically invalidate the Texas Electric Choice Plan or the financing order,
but it might give rise to a challenge to the Texas Electric Choice Plan. In
addition, an unfavorable court decision on another state's statute may establish
a legal precedent for a successful challenge to the Texas Electric Choice Plan
depending on the similarity of the other statute and the applicability of the
legal precedent to the Texas Electric Choice Plan. Furthermore, legal action in
other states could heighten awareness of the political and other risks of the
transition bonds, and in that way may limit the liquidity and value of the
transition bonds. Therefore, legal activity in other states may indirectly
affect the value of your investment in the transition bonds.
Neither we nor Reliant Energy will indemnify you for any changes in the law
that may affect the value of your transition bonds.
FEDERAL PREEMPTION OF THE TEXAS ELECTRIC CHOICE PLAN COULD REDUCE THE VALUE OF
YOUR INVESTMENT IN THE TRANSITION BONDS.
Congress or a federal agency may attempt to preempt the Texas legislature
and pass a law or adopt a rule or regulation prohibiting or limiting the
collection of transition charges, or otherwise affecting the electric utility
industry. At least one bill was introduced in the 105th Congress prohibiting
the recovery of stranded costs, and this prohibition could negate the existence
of the transition property. The 105th Congress adjourned without taking any
further action on that bill. As of the date of this prospectus, no member of
Congress had introduced a bill in the 106th Congress that would affect the
existence or value of the transition property or the imposition of the
transition charges. We cannot predict whether any future bills, which 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.
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Neither we nor Reliant Energy will indemnify you for any changes in the
law, including, without limitation, any federal preemption of the Texas Electric
Choice Plan, that may affect the value of your transition bonds.
FUTURE LEGISLATIVE ACTION COULD REDUCE THE VALUE OF YOUR INVESTMENT IN THE
TRANSITION BONDS.
Unlike California, Massachusetts and some other states, the citizens of the
State of Texas do not have the constitutional right to adopt, revise or repeal
state laws by initiative or referendum. Thus, the Texas Electric Choice Plan
cannot be amended or repealed by direct action of the electorate.
Under the Texas Electric Choice Plan, the State of Texas has pledged that
it will not take or permit any action that would impair the value of the
transition property, or, except as permitted in connection with a true-up
adjustment, reduce, alter or impair the transition charges until the principal,
interest and premium, and any other charges incurred and contracts to be
performed in connection with the transition bonds, have been paid and performed
in full. For a description of this pledge, please refer to "The Texas Electric
Choice Plan--Reliant Energy and Other Utilities May Securitize Stranded Costs
and Regulatory Assets" in this prospectus. Despite this pledge, the legislature
of the State of Texas may attempt in the future to repeal or amend the Texas
Electric Choice Plan in a manner that might limit or alter the transition
property so as to reduce its value.
We cannot assure you that a repeal of or amendment to the Texas Electric
Choice Plan will not be sought or adopted or that an action by the State of
Texas adverse to your investment in the transition bonds will not occur. In any
event, costly and time-consuming litigation might ensue. Any litigation of this
type might adversely affect the price and liquidity of the transition bonds and
the dates of payments of interest on and principal of the bonds and,
accordingly, their weighted average lives. Moreover, given the lack of judicial
precedent directly on point, and the novelty of the security for the transition
bonds, the outcome of any litigation cannot be predicted with certainty.
Accordingly, you could incur a loss on or delay in recovery of your investment
in the transition bonds.
Neither we nor Reliant Energy will indemnify you for any changes in the
law, including, without limitation, any future repeal or amendment of the Texas
Electric Choice Plan, that may affect the value of your transition bonds.
THE TEXAS COMMISSION MAY TAKE ACTIONS WHICH COULD REDUCE THE VALUE OF YOUR
INVESTMENT IN THE TRANSITION BONDS.
Pursuant to the Texas Electric Choice Plan, the financing order issued to
Reliant Energy is irrevocable when it becomes effective according to its terms.
The Texas commission may not directly or indirectly, by any subsequent action,
rescind or amend the financing order or reduce or impair the transition charges
authorized under the financing order, except for the true-up adjustments to the
transition charges. However, the Texas commission retains the power to adopt,
revise or rescind rules or regulations affecting Reliant Energy or a successor
electric public utility. The Texas commission also retains the power to
interpret the financing order. Any new or amended regulations or orders by the
Texas commission, for example, could affect the ability of the servicer to
collect the transition charges in full and on a timely basis. Reliant Energy
and, if Reliant Energy is no longer the servicer, the successor servicer, are
required to institute any action or proceeding necessary to compel performance
by the Texas commission or the State of Texas of any of their obligations or
duties under the Texas Electric Choice Plan or the financing order with respect
to the transition property. Please refer to "The Sale Agreement--Reliant
Energy's Representations and Warranties" in this prospectus. However, we cannot
assure you that Reliant Energy would be able to take this action or that any
action Reliant Energy is able to take would be successful. Future regulations
or orders of the Texas commission may affect the rating of the transition bonds,
their price or the collection rate of the transition charges and, accordingly,
the amortization of the transition bonds and their weighted average lives. As a
result, you could suffer a loss on your investment in the transition bonds.
The servicer is required to file with the Texas commission, on our behalf,
periodic adjustments of the transition charges. These adjustments are intended
to provide, among other things, for timely payment of the transition bonds. The
servicer must file with the Texas commission in order to implement any true-up
adjustment. The Texas commission may challenge the servicer's calculation of its
proposed adjustments, which may cause
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delay. Actions by the Texas commission may prevent the servicer from collecting
a sufficient amount of transition charges to repay the transition bonds on a
timely basis. Any delay in the implementation of the adjustments could cause a
delay in the payments on the transition bonds and may materially reduce the
value of your investment in the transition bonds.
Neither we nor Reliant Energy will indemnify you for any action or inaction
by the Texas commission that may affect the value of your transition bonds.
RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE TRANSITION PROPERTY
WE WILL NOT RECEIVE TRANSITION CHARGES FOR ELECTRICITY DELIVERED MORE THAN 15
YEARS FROM THE DATE THOSE TRANSITION CHARGES ARE FIRST ASSESSED.
We may not charge transition charges for electricity delivered after the
fifteenth anniversary of the first assessment of the transition charges, but we
may collect delinquincies and uncollected end of period billings after that
date. Amounts collected from the transition charges imposed for electricity
delivered through the fifteenth anniversary of the first assessment of the
transition charges, or from credit enhancement funds, may not be sufficient to
repay the transition bonds in full. If that is the case, no other funds will be
available to pay the unpaid balance due on the transition bonds.
SERVICING RISKS
RELIANT ENERGY MAY INCORRECTLY EVALUATE ITS RETAIL ELECTRIC CUSTOMERS' ABILITY
TO PAY TRANSITION CHARGES.
The transition charges are generally assessed based on kilowatt-hours of
electricity consumed by retail electric customers. The transition charges are
calculated by the servicer according to the methodology approved in the
financing order. In addition, the servicer is required to file with the Texas
commission periodic adjustment requests for the transition charges. These
adjustments are intended to provide, among other things, for timely payment of
the transition bonds. However, the frequency of these adjustments is limited.
The servicer will generally base its adjustment requests on any shortfalls
during the prior adjustment period and on projections of future electricity use
and the ability of retail electric customers in Reliant Energy's service
territory to pay their electric bills in full and on a timely basis. However,
unforeseen events, such as weather, changes in technology associated with
distributed electricity generation, changes in economic conditions or market
changes due to increased competition, may make these projections inaccurate. If
the servicer inaccurately forecasts electricity consumption or underestimates
retail electric customer delinquencies or charge-offs when setting or adjusting
the transition charges, or if the effectiveness of the adjustments is delayed
for any reason, there could be a shortfall or material delay in transition
charge payments. A shortfall or material delay in collected transition charges
could result in payments of principal of the transition bonds not being paid
according to the expected amortization schedule, lengthening the weighted
average life of the transition bonds, or payments of principal and interest not
being made at all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
. warmer winters or cooler summers, resulting in less electricity
consumption than forecasted,
. general economic conditions being worse than expected, causing retail
electric customers to migrate from Reliant Energy's service territory or
reduce their electricity consumption,
. the occurrence of a natural disaster, such as a hurricane, unexpectedly
disrupting electrical service and reducing consumption,
. problems with electricity generation, transmission or distribution
resulting from a change in the market structure of the electric
industry,
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. large retail electric customers ceasing business or departing from
Reliant Energy's service territory,
. dramatic changes in energy prices,
. retail electric customers consuming less electricity because of
increased conservation efforts, or
. large retail electric customers switching to alternative sources of
energy, including self-generation of electric power.
Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
. unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater delinquencies or charge-offs than expected or
forcing Reliant Energy or a successor electric utility or retail
electric providers to grant additional payment relief to more retail
electric customers,
. a change in law that makes it more difficult for Reliant Energy or a
successor electric utility or retail electric providers to disconnect
nonpaying retail electric customers, or that requires Reliant Energy or
a successor transmission and distribution company to apply more lenient
credit standards in accepting retail electric customers, or
. the introduction into the energy markets of less creditworthy retail
electric providers who collect and remit payments arising from the
transition charges, but who fail to remit the transition charges to the
servicer in a timely manner. Please refer to "--It may be more difficult
to collect transition charges from retail electric providers than from
Reliant Energy's retail electric customers" in this prospectus.
THERE ARE UNCERTAINTIES ASSOCIATED WITH COLLECTING THE TRANSITION CHARGES AND
THERE IS UNPREDICTABILITY ASSOCIATED WITH A DEREGULATED ELECTRICITY MARKET.
Reliant Energy has not previously calculated transition charges for retail
electric customers before making such calculations required in connection with
the financing order and the initial issuance of transition bonds. The
transition charges were calculated based primarily on historical performance
data of retail electric customers and energy usage and collection of payment for
which Reliant Energy has records available. These usage and collection records,
however, do not reflect retail electric customers' payment patterns or energy
usage in a competitive market as competition is being introduced in Texas for
the first time. These records also do not reflect any experience with
consolidated billing by third party retail electric providers. Because this
kind of billing is new in Texas and to Reliant Energy, there are potentially
unforseen factors in the billing which may impact the collection of payments.
Therefore, the records which Reliant Energy has to date may have limited value
in calculating the initial transition charges and future true-up adjustments.
Furthermore, the servicer does not have any experience administering the
transition charges on behalf of an independent issuer. The servicer's
inexperience in calculating, billing and collecting the transition charges and
in managing retail electric customer payments on our behalf could result in a
shortfall or material delay in transition charge payments. A shortfall or
material delay in collected transition charges could result in payments of
principal of the transition bonds not being paid according to the expected
amortization schedule, lengthening the weighted average life of the transition
bonds, or payments of principal and interest not being made at all.
YOUR INVESTMENT IN THE TRANSITION BONDS IS DEPENDANT ON RELIANT ENERGY OR ITS
SUCCESSOR, ACTING AS SERVICER OF THE TRANSITION PROPERTY.
The servicer will be responsible for billing and collecting the transition
charges from retail electric customers and retail electric providers and for
submitting requests to the Texas commission to adjust these charges. If Reliant
Energy ceases to service the transition property, it might be difficult to find
a successor servicer. Any successor servicer may have less experience than
Reliant Energy and less capable collection systems than Reliant
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Energy. A successor servicer may experience difficulties in collecting
transition charges and determining appropriate adjustments to the transition
charges. If Reliant Energy were to be replaced as servicer, any of these factors
and others could delay the timing of payments and may reduce the value of your
investment in the transition bonds. Also, a change in servicer may cause billing
and/or payment arrangements to change, which may lead to a period of disruption
in which customers continue to remit payments according to the former
arrangements, resulting in delays in collection that could result in a delay in
payments on the transition bonds. Please refer to "The Servicing Agreement" in
this prospectus.
Upon a servicer default based upon the commencement of a case by or against
the servicer under the United States Bankruptcy Code or similar laws, we and the
trustee may be prevented from effecting a transfer of servicing. The Texas
Electric Choice Plan provides that if a default or termination occurs under the
transition bonds, the Texas commission may order that amounts arising from the
transition charges be transferred to a separate account, and the trustee or
transition bondholders may apply to a district court of Travis County, Texas for
an order for sequestration and payment of revenues arising from the transition
charges. However, federal bankruptcy law may prevent the Texas commission or a
Texas court from issuing or enforcing these orders. The indenture requires the
trustee to request an order from the bankruptcy court to permit the Texas
commission or Texas court to issue and enforce these orders. However, the
bankruptcy court may deny the request. Please refer to "How a Bankruptcy May
Affect Your Investment" in this prospectus.
Under the Texas Electric Choice Plan and the indenture, the trustee or the
transition bondholders have the right to foreclose or otherwise enforce the lien
on the transition property securing the transition bonds. However, in the event
of foreclosure, there is likely to be a limited market, if any, for the
transition property. Therefore, foreclosure may not be a realistic or practical
remedy.
IT MAY BE MORE DIFFICULT TO COLLECT TRANSITION CHARGES FROM RETAIL ELECTRIC
PROVIDERS THAN FROM RELIANT ENERGY'S RETAIL ELECTRIC CUSTOMERS.
As part of the restructuring of the Texas electric industry, retail
electric customers in Reliant Energy's service territory will, as of January 1,
2002, or in limited circumstances, sooner, purchase electricity and related
services from retail electric providers rather than Reliant Energy. Reliant
Energy will no longer be permitted to sell electricity directly to retail
electric customers. However, Reliant Energy currently expects that it will have
an affiliated retail electric provider to provide electricity and related
services to retail electric customers. The Texas Electric Choice Plan requires
Reliant Energy to allow retail electric providers, including its affiliated
retail electric provider, pursuant to a tariff to be filed by Reliant Energy and
approved by the Texas commission, to issue a single bill to retail electric
customers purchasing electricity from a retail electric provider. This single
bill would include all charges related to purchasing electricity from the retail
electric provider, delivery services from Reliant Energy and the applicable
transition charges. Retail electric customers will pay the transition charges to
retail electric providers who supply them with electric power. The retail
electric providers will be obligated to remit payments of the transition
charges, less a specified percentage, to the servicer even if they do not
collect the transition charges from retail electric customers. Each retail
electric provider will be entitled to recover amounts remitted to the servicer
in excess of payments of transition charges received from its retail electric
customers in an annual reconciliation as part of the true-up mechanism provided
under the Texas Electric Choice Plan and the financing order. The servicer will
have limited rights to collect transition charges directly from retail electric
customers who receive their electricity bills from a retail electric provider in
the event that the retail electric provider does not remit the transition
charges to Reliant Energy. Because the retail electric providers will bill most
retail electric customers for the transition charges once retail competition
begins, we will have to rely on a relatively small number of entities for the
collection of the bulk of the transition charges. The servicer will not pay any
shortfalls resulting from the failure of any retail electric provider to forward
transition charge collections. This may adversely affect your investment in the
transition bonds because:
. retail electric providers might use more permissive standards in bill
collection and credit appraisal than Reliant Energy uses towards its
retail electric customers, or might be less effective in billing and
collecting. As a result, those entities may not be as successful in
collecting the transition charges as Reliant Energy or a successor
servicer anticipated when the transition charges were set,
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. if a retail electric provider defaults, the servicer may then directly
bill and collect transition charges due from the retail electric
provider's customers. However, the servicer will generally have even
more limited rights to pursue these customers to pay amounts owed to us
by the defaulted retail electric provider. In no event may the servicer
directly bill a retail electric customer for service that was previously
billed by the retail electric provider and paid by that customer to the
retail electric provider,
. a default by a retail electric provider which collects from a large
number of retail electric customers would have a greater impact than a
default by a single retail customer,
. any security deposit, letter of credit or comparable security made by a
retail electric provider may not be sufficient to cover any shortfalls
resulting from a failure of that retail electric provider to remit
transition charges to the servicer, and
. the bankruptcy of a retail electric provider may cause a delay in or
prohibition of payment to the servicer of transition charges collected
by the retail electric provider.
In addition, the Texas Electric Choice Plan provides for one retail
electric provider in each area to be designated the "retail electric provider of
last resort." The Texas Electric Choice Plan requires the retail electric
provider of last resort to offer basic electric service to retail electric
customers in its designated area at a fixed rate, regardless of the
creditworthiness of the customer. The retail electric provider of last resort
may face greater difficulty in bill collection than other retail electric
providers and therefore the servicer may face greater difficulty in collecting
transition charges from the retail electric provider of last resort.
Adjustments to the transition charges and any credit enhancement will be
available to compensate for a failure by a retail electric provider to pay the
transition charges to the servicer. However, the amount of credit enhancement
funds may not be sufficient to protect your investment in the transition bonds.
Please refer to "Reliant Energy's Financing Order--Requirements for Retail
Electric Providers" in this prospectus.
RETAIL ELECTRIC CUSTOMERS WITHIN RELIANT ENERGY'S SERVICE TERRITORY DO NOT HAVE
EXPERIENCE IN PAYING THE TRANSITION CHARGES AND PAYING THROUGH RETAIL ELECTRIC
PROVIDERS.
The transition charges are being introduced to retail electric customers
within Reliant Energy's service territory for the first time. Retail electric
customers unused to paying transition charges may be confused by the transition
charges and any other changes in retail electric customer billing and payment
arrangements. This confusion may cause the misdirection or delay of payments.
This could have the effect of causing delays in collections of the transition
charges. Any problems arising from new and untested systems or any lack of
experience on the part of the retail electric providers with retail electric
customer billing and collections could also cause delays in billing and
collecting the transition charges. These delays could result in shortfalls in
transition charge collections and reduce the value of your investment in the
transition bonds.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE VALUE OF YOUR INVESTMENT IN THE
TRANSITION BONDS.
The financing order set the methodology for determining the amount of the
transition charges we may impose on each customer. The servicer cannot change
this methodology. However, the servicer may set its own billing and collection
arrangements with retail electric providers and with those retail electric
customers from whom it collects the transition charges directly. For example,
to recover part of an outstanding bill, the servicer may agree to extend a
retail electric provider's or customer's payment schedule or to write off the
remaining portion of the bill, including transition charges. Also, the servicer
may change billing and collection practices. Any change to billing and
collection practices may have an adverse or unforseen impact on the timing and
amount of retail electric customer payments and may reduce the amount of
transition charge collections and thereby limit our ability to make scheduled
payments on the transition bonds. Separately, the Texas commission 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 retail
electric providers to the servicer or make it more difficult for the servicer to
collect the transition charges. These changes may adversely affect the value of
your investment in the transition bonds and their amortization and, accordingly,
their weighted average lives. Please refer to "The Servicer of the Transition
Property--How Reliant Energy Forecasts the Number of Retail Electric Customers
and the Amount of Electricity Usage" in this prospectus.
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LIMITS ON RIGHTS TO TERMINATE SERVICE MAY MAKE IT MORE DIFFICULT TO COLLECT THE
TRANSITION CHARGES.
An important element of an electric utility's policies and procedures
relating to credit and collections is the right to disconnect service on account
of nonpayment. The financing order expressly provides that we may authorize the
servicer to disconnect service for nonpayment of transition charges to the same
extent as an electric utility would be entitled to take such action because of
nonpayment of any other charge for tariffed services. Nonetheless, Texas
statutory requirements and the rules and regulations of the Texas commission,
which may change from time to time, regulate and control the right to disconnect
service. Reliant Energy and the retail electric providers may not terminate
service to a retail electric customer on (1) a weekend day, (2) a day when the
previous day's high temperature did not exceed 32 degrees Fahrenheit and is
predicted to remain at or below that level for the next 24 hours or (3) a day
for which the National Weather Service issues a heat advisory for any county in
Reliant Energy's service territory, or when a heat advisory has been issued for
either of the two prior calendar days. As a result, Reliant Energy must continue
to provide service to these retail electric customers under these circumstances.
To the extent these retail electric customers do not pay for their electric
service, the servicer will not be able to recoup transition charges from these
retail electric customers. This reduces the amount of transition charge
collections available for payments on the transition bonds, although the
expected associated reduction in payments would be factored into the transition
charge true-up adjustments.
RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
For a detailed discussion of the following bankruptcy risks, please refer to
"How a Bankruptcy May Affect Your Investment" in this prospectus.
THE BANKRUPTCY OF RELIANT ENERGY COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON
THE TRANSITION BONDS.
The Texas Electric Choice Plan and the financing order provide that as a
matter of Texas state law:
. the transition charges are contract rights of Reliant Energy,
. Reliant Energy may make a present transfer of its rights under the
financing order, including the right to receive future transition
charges that retail electric customers do not yet owe,
. upon the transfer to us, the rights will become property rights, and
. the transfer of the transition property from Reliant Energy to us as it
has been structured in this transaction is a true sale of the transition
property, not a pledge of the transition property to secure a financing
by Reliant Energy.
Please refer to "The Texas Electric Choice Plan" in this prospectus. These
four provisions are important to maintaining payments on the transition bonds in
accordance with their terms during any bankruptcy of Reliant Energy. In
addition, the transaction has been structured with the objective of keeping us
separate from Reliant Energy in the event of a bankruptcy of Reliant Energy.
A bankruptcy court generally follows state property law on issues such as
those addressed by the four state law 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 Reliant Energy bankruptcy refused to enforce one or more
of the state property law provisions described above for this reason, the effect
on you as a transition bondholder could be similar to the treatment you would
receive in a Reliant Energy bankruptcy if the transition bonds had been issued
directly by Reliant Energy. In addition, a decision by the bankruptcy court
that, despite our separateness from Reliant Energy, our assets and liabilities
and those of Reliant Energy should be consolidated, would have a similar effect
on you as a transition bondholder. Either decision could
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cause material delays in payment of, or losses on, your transition bonds and
could materially reduce the value of your investment in the transition bonds.
For example:
. the trustee could be prevented from:
. exercising any remedies against Reliant Energy on your behalf,
. recovering funds to repay the transition bonds,
. using funds in the accounts under the indenture to make payments
on the transition bonds, or
. replacing Reliant Energy as the servicer,
without permission from the bankruptcy court, which could be denied,
. the bankruptcy court could order the trustee to exchange the transition
property for other property, which might be of lower value,
. tax or other government liens on Reliant Energy's property that arose
after the transfer of the transition property to us might nevertheless
have priority over the trustee's lien and might be paid from collected
transition charges before payments on the transition bonds,
. the trustee's lien might not be properly perfected in the collected
transition charges that were commingled with other funds Reliant Energy
collects from its retail electric customers or retail electric providers
as of the date of Reliant Energy's bankruptcy, or might not be properly
perfected in all of the 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
Reliant Energy,
. the trustee's lien may not extend to transition charges in respect of
electricity consumed after the commencement of Reliant Energy's
bankruptcy case, with the result that the transition bonds would
represent only general unsecured claims against Reliant Energy,
. we and Reliant Energy might be relieved of any obligation to make any
payments on the transition bonds during the pendency of the bankruptcy
case,
. Reliant Energy might be able to alter the terms of the transition bonds
as part of its plan of reorganization, or
. the bankruptcy court might rule that the transition charges should be
used to pay, or that we should be charged for, a portion of the cost of
providing electric service.
Furthermore, if Reliant Energy enters into bankruptcy, it may be permitted
to stop acting as servicer and it may be difficult to find a successor servicer.
The failure of the servicer to perform its duties or the inability to find a
successor servicer may cause payment delays or losses on your investment in the
transition bonds. Also, the mere fact of a servicer or retail electric provider
bankruptcy proceeding could have an adverse effect on the resale market for the
transition bonds and the value of the transition bonds. Please refer to "How a
Bankruptcy May Affect Your Investment" in this prospectus.
THE SERVICER MAY COMMINGLE THE TRANSITION CHARGES WITH OTHER REVENUES IT
COLLECTS. THIS MAY REDUCE THE VALUE OF YOUR INVESTMENT IN THE TRANSITION BONDS
IN THE EVENT THE SERVICER ENTERS BANKRUPTCY PROCEEDINGS.
The servicer will not be required to segregate the transition charges from
the other funds it collects from retail electric customers or retail electric
providers or its general funds. The transition charges will be segregated only
when the servicer pays them to the trustee. The servicer will be permitted to
remit collections on a monthly basis only if Reliant Energy or any successor to
Reliant Energy's electric transmission and distribution business remains the
servicer, and if:
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. Reliant Energy or its successor has the requisite credit ratings from
the specified rating agencies,
. Reliant Energy or its successor satisfies the specified rating agency
condition and complies with any conditions or limitations imposed by the
ratings agencies in connection therewith, or
. Reliant Energy or its successor obtains a letter of credit or surety
bond from a bank that meets specified credit standards to assure
remittances of collections on each remittance date.
Otherwise, the servicer will be required to remit collections within two
business days of receipt. Despite these requirements, the servicer might fail
to pay the full amount of the transition charges to the trustee or might fail to
do so on a timely basis. This failure, whether voluntary or involuntary, could
materially reduce the amount of transition charge collections available to make
payments on the transition bonds.
The Texas Electric Choice Plan provides that our rights to the transition
property are not affected by the commingling of these funds with the servicer's
other funds. In a bankruptcy of the servicer, however, a bankruptcy court might
rule that federal bankruptcy law takes precedence over the Texas Electric Choice
Plan and, among other things, decline to recognize our right to collections of
the transition charges that are commingled with other funds of the servicer as
of the date of bankruptcy. If so, the collections of the transition charges
held by the servicer as of the date of bankruptcy would not be available to pay
amounts owing on the transition bonds. In this case, we would have only a
general unsecured claim against the servicer for those amounts. This decision
could cause material delays in payments of principal or interest, or losses, on
your transition bonds and could materially reduce the value of your investment
in the transition bonds. Please refer to "How a Bankruptcy May Affect Your
Investment" in this prospectus.
RETAIL ELECTRIC PROVIDERS MAY COMMINGLE THE TRANSITION CHARGES WITH OTHER
REVENUES THEY COLLECT. THIS MAY REDUCE THE VALUE OF YOUR INVESTMENT IN THE
TRANSITION BONDS IN THE EVENT A RETAIL ELECTRIC PROVIDER ENTERS BANKRUPTCY
PROCEEDINGS.
A retail electric provider will not be required to segregate from its
general funds the transition charges it collects, but will be required to remit
to the services, an amount equal to transition charges billed to it within 16
days after billing by the servicer. A retail electric provider nonetheless might
fail to remit the full amount of the transition charges owed to the servicer or
might fail to do so on a timely basis. This failure, whether voluntary or
involuntary, could materially reduce the amount of transition charge collections
available to make payments on the transition bonds.
The Texas Electric Choice Plan provides that our rights to the transition
property are not affected by the commingling of these funds with a retail
electric provider's other funds. In a bankruptcy of a retail electric provider,
however, a bankruptcy court might rule that federal bankruptcy law takes
precedence over the Texas Electric Choice Plan and, among other things, decline
to recognize our right to collections of the transition charges that are
commingled with other funds of a retail electric provider as of the date of
bankruptcy. If so, the collections of the transition charges held by a retail
electric provider as of the date of bankruptcy would not be available to pay
amounts owing on the transition bonds. In this case, we would have only a
general unsecured claim against the retail electric provider for those amounts.
This decision could cause material delays in payments of principal or interest
or losses on your transition bonds and could materially reduce the value of your
investment in the transition bonds. Please refer to "How a Bankruptcy May
Affect Your Investment" in this prospectus.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
THE ABSENCE OF A SECONDARY MARKET FOR THE TRANSITION BONDS COULD LIMIT YOUR
ABILITY TO RESELL YOUR TRANSITION BONDS.
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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 a secondary market does develop, it may
not continue or it may not be sufficiently liquid to allow you to resell any of
your transition bonds. We do not expect that the transition bonds will be listed
on any securities exchange. Please refer to "Plan of Distribution for the
Transition Bonds" in this prospectus.
THE IMPLICATIONS OF THE RATINGS ISSUED WITH RESPECT TO THE TRANSITION BONDS ARE
LIMITED.
The transition bonds will be rated by one or more established rating
agencies. The ratings merely analyze the probability that we will repay the
total principal amount of the transition bonds at final maturity and will make
timely interest payments. The ratings are not an indication that the rating
agencies believe that principal payments will be paid on time according to the
expected amortization schedule and do not assess the speed at which we will
repay the principal of the transition bonds. Thus, we may repay the principal
of your transition bonds at a different rate than you expect, which may
materially reduce the value of your investment in the transition bonds. A
rating is not a recommendation to buy, sell or hold transition bonds. The rating
assigned to the transition bonds may change at any time. A rating agency has
the authority to revise or withdraw its rating based solely upon its own
judgment. Please refer to "Ratings for the Transition Bonds" in this prospectus.
YOU MAY HAVE TO REINVEST THE PRINCIPAL OF YOUR TRANSITION BONDS AT A LOWER RATE
OF RETURN IN THE EVENT THE TRANSITION BONDS ARE OPTIONALLY REDEEMED.
If so provided in the prospectus supplement, the transition bonds may be
subject to optional redemption by us. Redemption of a series of the transition
bonds will result in a shorter than expected weighted average life for that
series. Redemption will also shorten the yield to maturity of the transition
bonds redeemed. Future market conditions may require you to reinvest the
proceeds of such a redemption at a rate lower than the rate you received on the
transition bonds. We cannot predict whether we will redeem any series of the
transition bonds. Please refer to "Weighted Average Life and Yield
Considerations for the Transition Bonds" and "The Transition Bonds--Credit
Enhancement for the Transition Bonds" in this prospectus.
RELIANT ENERGY'S OBLIGATION TO INDEMNIFY US FOR A BREACH OF A REPRESENTATION OR
WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT IN THE TRANSITION
BONDS.
If Reliant Energy breaches a representation or warranty in the sale
agreement, Reliant Energy is obligated to indemnify us and the trustee for any
losses, liabilities, obligations, claims, actions, suits or payments resulting
from that breach, as well as any reasonable costs and expenses incurred. In
addition, Reliant Energy is obligated to indemnify us and the trustee for
principal and interest on the transition bonds not paid when due in accordance
with their terms and the amount of any deposits to us 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 Reliant Energy
may not be sufficient for you to recover all of your investment in the
transition bonds. Reliant Energy will not be obligated to repurchase the
transition property in the event of a breach of any of its representations and
warranties regarding the transition property, 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 its representations and
warranties. If Reliant Energy 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 transition
bondholders will be unsecured creditors of Reliant Energy with respect to any of
these indemnification amounts. Please refer to "The Sale Agreement--Reliant
Energy's Representations and Warranties" in this prospectus.
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WE MAY ISSUE ADDITIONAL SERIES OF TRANSITION BONDS.
We may issue other series of the transition bonds without your prior review
or approval. These series may include terms and provisions which would be
unique to that particular series. We may not issue a new series of transition
bonds if the issuance would result in the credit ratings on any outstanding
series of the transition bonds being reduced or withdrawn. However, we cannot
assure you that a new series would not cause reductions or delays in payments on
your transition bonds. In order to issue an additional series of the transition
bonds, Reliant Energy may need to obtain an additional financing order. An
additional financing order would specify the amount of additional transition
charges created for each additional series of the transition bonds. Any
additional transition charges could reduce the ability of Reliant Energy to
recover its ordinary rates during the rate freeze period or the price to beat
period. Please refer to "The Texas Electric Choice Plan--'Price to Beat' and
Services" in this prospectus. In addition, all outstanding transition bonds
will have an equal lien with respect to all transition property held by us.
Please refer to "The Transition Bonds" in this prospectus. In addition, some
matters relating to the transition bonds require the vote of the holders of all
series and classes of the 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.
Reliant Energy may sell transition property to one or more entities other
than us in connection with the issuance of a new series of transition bonds
under a separate financing order. Neither any sales nor the terms of any
transition bonds issued by that entity or entities will be subject to the prior
review by or consent of the transition bondholders of any series or class.
Collected transition charges will be pro rated among us and such other entities
based on the respective amounts of billed transition charges. The sale of
transition property to an entity other than us will be subject, among other
things, to notification in writing by each rating agency to the servicer and the
trustee that the sale will not result in the reduction or withdrawal of the then
current credit rating on any outstanding class of the transition bonds. We
cannot assure you, however, that the issuance of other transition bonds secured
by the transition property would not cause reductions or delays in payments on
your transition bonds.
YOU MIGHT RECEIVE PRINCIPAL PAYMENTS LATER THAN YOU EXPECTED, OR IN LIMITED
CIRCUMSTANCES, EARLIER THAN YOU EXPECTED.
The amount and the rate of collection of transition charges that the
servicer will collect from each customer class will partially depend on actual
electricity usage and the amount of delinquencies and write-offs for that
customer class. The amount and the rate of collection of the transition
charges, together with the transition charge adjustments, will generally
determine whether there is a delay in the scheduled repayments of transition
bond principal. If the servicer collects the transition charges at a slower
rate than expected from any customer class, it may have to request adjustments
of the transition charges. If those adjustments are not timely and accurate,
you may experience a delay in payments of principal and interest or a material
decrease in the value of your investment in the transition bonds. If there is
an acceleration of the transition bonds before maturity, all classes will be
paid pro rata, therefore some classes may be paid earlier than expected and some
classes may be paid later than expected. Unless there is a redemption or
acceleration of the transition bonds before maturity, the transition bonds will
not be retired earlier than scheduled. Please refer to "Reliant Energy's
Financing Order" in this prospectus.
TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE IN THE
FUTURE.
The continuous process of technological development may result in the
introduction of economically attractive alternatives to purchasing electricity
through Reliant Energy's distribution facilities for increasing numbers of
retail customers. Previously, only the largest industrial and institutional
users with large process steam requirements could use cogeneration or
self-generation installations cost-effectively. However, manufacturers of
self-generation facilities continue to develop smaller-scale, more
fuel-efficient generating units that can be cost-effective options for a greater
number of retail customers. Some users of smaller self-generation facilities may
be able to avoid paying the transition charges. A reduction in the number of
payers of transition charges could result in delays or a failure to make
payments of interest on and principal of the transition bonds.
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RELIANT ENERGY
GENERAL
Reliant Energy is a diversified international energy services company.
Reliant Energy HL&P, its electric utility division, provides electric utility
services to approximately 1.7 million retail electric customers in the City of
Houston, Texas, and surrounding areas of the Texas Gulf Coast. Reliant Energy
Resources Corp., its largest subsidiary, is a natural gas utility serving over
2.8 million customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas. Reliant Energy Resources Corp., through its subsidiaries, is also a
major interstate natural gas pipeline company and a provider of energy marketing
services.
Reliant Energy's other principal subsidiaries include:
. Reliant Energy International, Inc., which participates in the
privatization of foreign generating and distribution facilities and the
development and acquisition of foreign independent power projects, and
. Reliant Energy Power Generation, Inc., which engages in the acquisition,
development, operation and sale of capacity and energy from, domestic
and certain international non-utility power generation facilities.
Subject to certain limited exceptions, Reliant Energy is exempt from
regulation as a public utility holding company pursuant to Section 3(a)(2) of
the Public Utility Holding Company Act of 1935.
WHERE YOU CAN FIND MORE INFORMATION ABOUT RELIANT ENERGY
Reliant Energy files reports and other information with the SEC. You may
read and copy any document Reliant Energy files with the SEC at the SEC's Public
Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York,
New York 10048. You may obtain further information regarding the operation of
the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. Reliant
Energy's filings are also available to the public on the SEC's Internet site
located at http://www.sec.gov. In addition, you may inspect Reliant Energy's
reports at the offices of the New York Stock Exchange, Inc. at 20 Broad Street,
New York, New York 10005 and at the offices of the Chicago Stock Exchange at 440
South LaSalle Street, Chicago, Illinois 60605.
You may also obtain a copy of Reliant Energy's filings with the SEC at no
cost, by writing to or telephoning it at the following address:
Reliant Energy, Incorporated
1111 Louisiana
Houston, Texas 77002
Attn: Corporate Secretary
(713) 207-3000
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THE TEXAS ELECTRIC CHOICE PLAN
THE TEXAS ELECTRIC CHOICE PLAN'S GENERAL EFFECT ON THE ELECTRIC UTILITY INDUSTRY
IN TEXAS
An Overview of the Texas Electric Choice Plan. The Texas Electric Choice
Plan was enacted in June 1999 and became effective on September 1, 1999. The
Texas Electric Choice Plan, among other things:
. authorizes competition in the retail electric market and the electricity
generation market beginning January 1, 2002,
. provides for recovery of stranded costs and regulatory assets,
. requires a rate freeze for all retail electric customers until
January 1, 2002, and certain rate reductions for residential and small
commercial retail electric customers for up to five years thereafter,
and
. sets limits on capacity owned and controlled by power generation
companies.
Unbundling. By September 1, 2000, each electric utility must separate its
customer-related energy services activities that are otherwise already widely
available in the competitive market from its regulated activities. By January
1, 2002, each electric utility must separate its business into the following
units:
. a power generation company,
. a retail electric provider, and
. a transmission and distribution utility or separate transmission and
distribution utilities.
A power generation company generates electricity that is intended to be sold at
wholesale. In general, a power generation company may not own a transmission or
distribution facility and may not have a certificated service area. A retail
electric provider sells electric energy to retail electric customers. A retail
electric provider may not own or operate generation assets. A transmission and
distribution utility owns or operates facilities to transmit or distribute
electricity.
Retail Competition. In June 2001, utilities are required to implement a
"pilot project" covering 5% of the utility's load in all customer classes.
Retail electric customers electing to participate in the pilot project will
choose their own retail electric provider, but cannot choose the retail electric
provider affiliated with their existing utility. Beginning on January 1, 2002,
all retail electric customers will be able to choose their own retail electric
provider which may be the retail electric provider affiliated with their
existing utility. The Texas Electric Choice Plan freezes base rates of most
investor owned electric utilities until full competition begins on January 1,
2002. The affiliated retail electric provider of the utility serving a retail
electric customer on December 31, 2001 may continue service, unless the retail
electric customer chooses another retail electric provider. Competition in a
particular region of the state may be delayed if the Texas commission determines
that that region is unable to offer fair competition and reliable service to all
retail customer classes. If a delay occurs, the Texas commission may establish
new rates for utilities in that region using traditional rate making principles.
"Price to Beat" and Services. Effective January 1, 2002, the affiliated
retail electric provider of a utility must make available a "price to beat" to
residential and small commercial retail electric customers in the electric
utility's service area. The "price to beat" must be 6% less than the bundled
rates of the electric utility in effect on January 1, 1999. For all
residential, and most small commercial retail electric customers, the affiliated
retail electric provider may not charge rates that are different than the "price
to beat" for three years or until 40% of retail electric customers in that class
have chosen new retail electric providers. Each utility in Reliant Energy's
region must include a provision to establish a "price to beat" in their
transition to competition plans submitted to the Texas commission. The "price
to beat" is subject to adjustment only in limited circumstances.
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The Texas commission will designate a "provider of last resort" for each
service area in the state. The provider of last resort will be required to
offer, in its service area, a standard retail service package for each class of
retail electric customers at a fixed rate approved by the Texas commission to be
offered to any requesting retail electric customer in that service area.
The transmission and distribution affiliate of the utility that was serving
the area before competition begins will provide metering services for
residential retail electric customers until the later of September 1, 2005 or
until 40% of those retail electric customers are taking service from
unaffiliated retail electric providers. For other retail electric customers,
metering services will become competitive on January 1, 2004.
RECOVERY OF STRANDED COSTS FOR RELIANT ENERGY AND OTHER TEXAS UTILITIES
The Texas Electric Choice Plan allows utilities an opportunity to recover
their net, verifiable, nonmitigatible stranded costs incurred in purchasing
power and providing electric generation service. Stranded costs include the
positive excess of the net book value of generation assets over the market value
of the assets, taking into account:
. a utility's generation assets,
. any above-market purchased power costs, and
. any deferred debit relating to a utility's mandatory discontinuance of
the application of Statement of Financial Accounting Standards No. 71
("Accounting for the Effects of Certain Types of Regulation") for
generation-related assets.
As a mechanism to recover these stranded costs, the Texas Electric Choice
Plan provides for the imposition and collection of competition transition
charges on retail electric customers' bills. In general, the retail electric
customers will be assessed competition transition charges regardless of whether
the retail electric customers purchase electricity from the utility presently
serving them or another electric generation supplier. Competition transition
charges are similar to transition charges in how they are imposed, but
competition transition charges are not securitized.
RELIANT ENERGY AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS AND REGULATORY
ASSETS
We May Issue Transition Bonds to Recover Reliant Energy's Stranded Costs
and Regulatory Assets. The Texas Electric Choice Plan authorizes the Texas
commission to issue "financing orders" approving the issuance of transition
bonds to recover regulatory assets and stranded costs of an electric utility. A
utility, its successors or a third-party assignee of a utility may issue
transition bonds. Under the Texas Electric Choice Plan, proceeds of transition
bonds must be used to reduce the amount of recoverable regulatory assets through
the refinancing or retirement of the electric utility's debt or equity. The
transition bonds are secured by or payable from transition property, which
includes the right to impose, collect and receive the transition charges, and
may have a maximum maturity of 15 years. The amounts of transition charges must
be allocated to customer classes based in part on the methodology used to
allocate the costs of the underlying assets in the utility's most recent Texas
commission order addressing rate design and in part based on the energy
consumption of the customer classes. Transition charges can be imposed only
when and to the extent that transition bonds are issued.
The Texas Electric Choice Plan contains a number of provisions designed to
facilitate the securitization of regulatory assets and stranded costs.
Creation of Transition Property. Under the Texas Electric Choice Plan
transition property is created when the rights and interests of an electric
utility or successor under a financing order, including the right to impose,
collect and receive transition charges authorized in the order, are first
transferred to an assignee or pledged in connection with the issuance of
transition bonds.
A Financing Order is Irrevocable. A financing order, once effective,
together with the transition charges authorized in the order, will be
irrevocable and not subject to reduction, impairment, or adjustment by the Texas
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commission except for adjustments pursuant to the Texas Electric Choice Plan in
order to correct overcollections or undercollections and to provide that
sufficient funds are available for payments of debt service and other required
amounts in connection with the transition bonds. In addition, under the Texas
Electric Choice Plan, the State of Texas has pledged, for the benefit and
protection of transition bondholders and the electric utilities covered by the
Texas Electric Choice Plan, that it will not take or permit any action that
would impair the value of the transition property, or, except for adjustments
discussed in the following paragraph, reduce, alter, or impair the transition
charges to be imposed, collected and remitted to transition bondholders, until
the principal, interest and premium, and any other charges incurred and
contracts to be performed in connection with the related transition bonds have
been paid and performed in full. Please refer to "Risk Factors--Risks
Associated With Potential Judicial, Legislative or Regulatory Actions" in this
prospectus.
The Texas Commission May Adjust Transition Charges. The Texas Electric
Choice Plan requires the Texas commission to provide in all financing orders a
mechanism requiring that transition charges be reviewed and adjusted at least
annually, within 45 days of the anniversary of the date of the issuance of the
transition bonds:
. to correct any overcollections or undercollections during the preceding
12 months, and
. to provide for the expected recovery of amounts sufficient to timely
provide all payments of debt service and other required amounts and
charges in connection with the transition bonds.
Current Retail Electric Customers Cannot Avoid Paying Transition Charges.
The Texas Electric Choice Plan provides that the transition charges are non-
bypassable. Non-bypassable means that a utility collects these charges from all
existing retail electric customers of a utility and all future retail electric
customers located within the utility's service territory as it existed on May 1,
1999, except for certain categories of existing customers whose load has been
lawfully served by a fully operational qualifying facility before September 1,
2001 or by an on-site power production facility with a rated capacity of 10
megawatts or less, or customers in a dually-certificated service area that
requested to switch providers on or before May 1, 1999, or was not taking
service from the utility on, and does not do so after, May 1, 1999. The utility
is generally entitled to collect transition charges from those customers even if
they elect to purchase electricity from another supplier or choose to operate
self-generation equipment.
The Texas Electric Choice Plan Protects the Transition Bonds' Lien on
Transition Property. The Texas Electric Choice Plan provides that a valid and
enforceable lien and security interest in transition property may be created
only by a financing order and the execution and delivery of a security agreement
in connection with the issuance of transition bonds. The security interest
automatically attaches from the time the related transition bonds are issued if:
. value is received by the issuer of the transition bonds, and
. a filing is made with the Secretary of State of Texas to perfect the
security interest within 10 days after value is received for the
transition bonds.
Upon perfection, the statutorily created lien attaches both to transition
property and to all proceeds of transition property, whether or not the
transition charges have been collected from retail electric customers. The
Texas Electric Choice Plan provides that the transfer of an interest in
transition property will be perfected against all third parties, including
subsequent judicial or other lien creditors, when:
. the financing order becomes effective,
. transfer documents have been delivered to the assignee, and
. a notice of the transfer has been filed with the Secretary of State of
Texas.
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If the notice of the transfer is not filed within 10 days after the delivery of
transfer documentation, the transfer is not perfected against third parties
until the notice is filed. The Texas Electric Choice Plan provides that
priority of security interests in transition property will not be impaired by:
. commingling of funds arising from transition charges with other funds,
or
. modifications to the financing order resulting from any true-up
adjustment.
The Texas Electric Choice Plan Characterizes the Transfer of Transition
Property as a True Sale. The Texas Electric Choice Plan provides that an
electric utility's or an assignee's transfer of transition property is a "true
sale" and is not a secured transaction and that legal and equitable title passes
to the transferee, if the agreement governing that transfer expressly states
that the transfer is a sale or other absolute transfer. Please refer to "The
Sale Agreement" and "Risk Factors--Risks Associated With Potential Bankruptcy
Proceedings" in this prospectus.
Tax Exemption. The Texas Electric Choice Plan provides that transactions
involving the transfer and ownership of transition property and the receipt of
transition charges are exempt from state and local income, sales, franchise,
gross receipts, and other taxes or similar charges.
RELIANT ENERGY'S FINANCING ORDER
Background. On November 16, 1999, Reliant Energy filed an application with
the Texas commission for a financing order to permit securitization of its
regulatory assets. After issuing the appropriate notice and holding a hearing,
the Texas commission determined that the application met the requirements for a
financing order under the Texas Electric Choice Plan and issued the requested
financing order on ___________.
Issuance of Transition Bonds. The financing order allows Reliant Energy to
authorize us to issue transition bonds in an aggregate principal amount not to
exceed $_________.
Collection of Transition Charges. The Texas commission authorized Reliant
Energy to collect transition charges from its retail electric customers in an
amount sufficient to recover its aggregate qualified costs. We may not charge
transmission charges after the fifteenth anniversary of the first assessment of
the transition charges.
Issuance Advice Letter. Following the determination of the final terms of
the transition bonds and prior to their issuance, Reliant Energy is required to
file with the Texas commission an issuance advice letter, which will:
. demonstrate compliance with the requirements of the financing order,
. evidence the actual terms on which the transition bonds will be issued,
. show the actual dollar amount of the initial transition charges,
. set the dates on which any reconciliation adjustments to these amounts
may take effect, and
. establish the mathematical formulas for making the adjustments.
The Texas commission's review of the issuance advice letter is limited to the
arithmetic accuracy of the calculations. Both the issuance advice letter and
the accompanying compliance tariff are deemed approved unless Reliant Energy
receives a written objection from the Texas commission within two business days
of the filing.
Allocation. Under the terms of the financing order, Reliant Energy will
initially allocate the qualified costs among its customer classes as follows:
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TRANSITION CHARGE CLASS PERCENT OF QUALIFIED COSTS ALLOCATED TO CUSTOMER CLASS
- ----------------------- ------------------------------------------------------
Residential
- ------------------------------------------------------------------------------
Commercial/Industrial Distribution
- ------------------------------------------------------------------------------
Commercial/Industrial Transmission
- ------------------------------------------------------------------------------
Non-Metered Lighting
- ------------------------------------------------------------------------------
Standby Electric Service - Distribution
- ------------------------------------------------------------------------------
Interruptible Service Supplemental - Distribution
- ------------------------------------------------------------------------------
Standby Electric Service - Transmission
- ------------------------------------------------------------------------------
Interruptible Service - 30 Minute Notice
- ------------------------------------------------------------------------------
Interruptible Service - 10 Minute Notice
- ------------------------------------------------------------------------------
Interruptible Service Instantaneous
- ------------------------------------------------------------------------------
Interruptible Service Supplemental - Transmission
- ------------------------------------------------------------------------------
Standby Interruptible Service
- ------------------------------------------------------------------------------
True-Ups. The financing order requires the servicer to make reconciliation
adjustment filings pursuant to the following true-up mechanism and
reconciliation procedures:
True-up adjustments will be based upon the periodic payment requirements
for the current and ensuing payment period plus the cumulative differences
between the periodic payment requirements and the collected transition charges
remitted to the trustee for prior periods. In order to assure adequate revenues
from the transition charges, the servicer will calculate the adjusted transition
charges using its most recent corporate forecast of electric consumption and its
most current estimates of ongoing transaction-related expenses. The calculation
of the transition charges will reflect both a projection of uncollectible
transition charges and payment lags between the billing and collection of
transition charges based upon the servicer's collection rate during the most
recent twelve-month period. The calculation of transition charges will also
take into account any amounts due any retail electric providers as a result of
the reconciliation of the remittances and collections.
Servicing Agreement. In the financing order, the Texas commission
authorized Reliant Energy, as the initial Servicer, to enter into the servicing
agreement described under "The Servicing Agreement" in this prospectus.
Requirements for Retail Electric Providers. The financing order requires
all retail electric providers to meet the creditworthiness criteria to be
established by the Texas commission and to comply with the billing, collection
and remittance procedures and information access requirements established in the
financing order. Retail electric providers must remit to the servicer the
amount of transition charges attributable to its retail electric customers, less
a specified percentage, regardless of whether at the time of such remittance
payment is actually received from these retail electric customers. The retail
electric provider will be entitled to recover amounts remitted to the servicer
in excess of payments received from retail electric customers in an annual
reconciliation as a part of the true-up mechanism under the Texas Electric
Choice Plan. Retail electric providers will remit payments based on ____% of
amounts invoiced to retail electric customers. On an annual basis, in
connection with the true-up process, each retail electric provider and the
servicer will be responsible for reconciling amounts paid by the retail electric
provider to the servicer against those collected by the retail electric provider
from retail electric customers during the period of calculation, as evidenced by
a certificate, signed by each retail electric provider and provided by the
retail electric provider to the servicer not less than __ days prior to the
scheduled date of the annual true-up filing.
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Each retail electric provider's right to reconciliation for advances paid
to the servicer in excess of amounts collected from retail electric customers on
an annual basis, which are referred to in this prospectus as "excess advances,"
will be limited to amounts remaining overdue and unpaid with respect to retail
electric customers whose service has been permanently terminated. Each retail
electric provider will be reimbursed for excess advances solely from increased
amounts payable by retail electric customers as an adjustment to transition
charge rates as part of the true-up process, referred to herein as the
"adjustment rate," from and after the date that such adjustment rate takes
effect. In no event will a retail electric provider have recourse to us or our
funds for such reimbursement. Each retail electric provider shall provide
information on a timely basis to the servicer so that the servicer can include
the retail electric provider's default experience and any subsequent credits in
its calculation of the adjusted transition charges for the next transition
charge billing period and the retail electric provider's rights to credits will
not take effect until after such adjustment rate has been implemented.
If a retail electric provider defaults on its obligation to remit
transition charges, the servicer is entitled to assume responsibility for
billing all charges, including the transition charges. The financing order also
requires retail electric providers which do not meet certain minimum credit
ratings to maintain a cash deposit, letter of credit or comparable security,
equal to two months maximum estimated collections of transition charges with the
trustee.
Binding on Successors. The financing order, along with the transition
charges authorized in that financing order, are binding on:
. Reliant Energy,
. any successor to Reliant Energy which provides transmission or
distribution service in Reliant Energy's service territory,
. any other entity which provides transmission or distribution service to
retail electric customers within Reliant Energy's service territory,
. each retail electric provider which sells electric energy to retail
electric customers located within Reliant Energy's service territory or
any such retail electric provider's successor,
. any other entity responsible for imposing, billing, collecting and
remitting transition charges on our behalf, or
. any successor to the Texas commission.
THE SERVICER OF THE TRANSITION PROPERTY
Background Information. In anticipation of the restructured Texas electric
utility market, Reliant Energy is in the process of transitioning Reliant Energy
HL&P, its electric utility division, from its current function as a fully
integrated utility provider to its future role as an energy delivery system.
The transmission and distribution functions which will be provided by Reliant
Energy HL&P will continue to be regulated in the restructured market while power
generation and retail electric sales will be deregulated. Reliant Energy
currently sells electric power and services in a 5,000 square mile service area
located along the Texas Gulf Coast. Its service area includes the City of
Houston and surrounding cities such as Galveston, Pasadena, Baytown, Bellaire
and Freeport. With the exception of Texas City, nearly all of the
Houston/Galveston consolidated metropolitan statistical area is served by
Reliant Energy. The population of the service area in 1998 was estimated to be
4,408,000. During 1998, approximately 38% of Reliant Energy's total consolidated
revenues and 69% of its operating income was derived from electrical generation,
transmission and distribution activities. Of the electric utility division's
total revenues in 1998, 41% came from residential customers, 26% from commercial
customers, 32% from industrial customers and 1% from sales to others, including
wholesale.
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Area Economic Profile. Although the city has undergone a decade of
diversification, Houston's economy is still primarily centered around its key
roles in international energy sectors. These roles include (1) an operations
center for global exploration and drilling activities of major oil firms, (2)
one of the world's largest concentrations of petrochemical and refining
facilities, (3) home office and base of operations for several of the world's
largest industrial and petrochemical construction firms, and (4) a major
distribution and processing center for the natural gas industry. Other
important sectors of the Houston economy include the Port of Houston, the
Johnson Space Center, the Texas Medical Center and a growing technology
industry. Together, Houston's energy and non-energy sectors provide the city
with a strong technical and engineering employment base.
Area Economic Outlook. Most sectors in Houston's economy are currently
performing well, and the outlook is for moderate growth over the next several
years. As a result of the current economic outlook, Reliant Energy expects the
number of residential retail electric customers to increase by 2% per year for
the next 3 years. KWh sales to the residential class are expected to grow at
about the same rate. KWh sales to the commercial class, which have increased
rapidly for several years, are expected to moderate to a 2% growth rate. The
industrial sector, which already has a large amount of self-generation capacity
in place, is forecasted to remain relatively flat.
Throughout the 1990's, the number of customers and the firm load served by
Reliant Energy has grown steadily. Reflecting the strength of the local
economy, Reliant Energy has added over 20,000 residential customers in each year
since 1988, including over 38,000 new residential customers in 1998. As a
consequence, firm energy sales and firm peak demand have also increased. On a
weather-adjusted basis, firm energy sales and firm peak demand have increased an
average of 2.2% and 1.9% respectively, over the last five years. There can be no
assurance that future usage rates will be similar to historical experience.
RELIANT ENERGY'S CUSTOMER CLASSES
Reliant Energy's Customer Rate Classes. Reliant Energy's customer base is
divided into the following classes:
. residential,
. commercial,
. industrial, and
. other, which includes government and municipal street lighting.
These customer classes are determined by the voltage and usage levels of
individual customers rather than the business nature or characteristics of the
customers within the class. Residential customers are those in individually
metered single-family or multi-family homes, apartments or mobile homes.
Master-metered apartments are included in the commercial class. Commercial
customers typically have a maximum usage level less than 500 Kva and include
such customers as offices, retail stores, schools and other businesses.
Industrial customers, which generally use more than 600 Kva on a sustained
basis, range from large office buildings and small manufacturing concerns (small
industrials) to massive chemical, oil refining and other process plants and
facilities (large industrials). Other is primarily municipal street lighting.
Customer classes may include a number of rate schedules. Rate schedules and
customer classes are created by Reliant Energy and approved by the Texas
commission, and are subject to change. Any changes will be reflected in any
adjustment request filed with the Texas commission by the servicer. The current
rate schedules were effective on or before April 1, 1998.
Statistics Regarding Reliant Energy's Retail Electric Customers. The
following table shows various operating statistics by customer class. Reliant
Energy will bill transition charges to rate schedules in each class. For the
transition charges assessed to individual rate schedules as of any series
issuance date and any adjustment thereto, in each case giving effect to the
issuance of transition bonds on that date, see the related prospectus
supplement. There can be no assurance that total retail electric customers, the
composition of total retail electric customers by
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<PAGE>
customer class, usage levels or revenues for each customer class will remain at
or near the levels reflected in the following table.
Actual usage fluctuations are highly dependent on weather conditions. See
"How Reliant Energy Forecasts the Number of Customers and the Amount of
Electricity Usage." The actual total annual usage has increased for each of the
past three years. The compound annual growth rate for actual usage (including
interruptible) for all customer classes for the period 1994 through 1998 was
3.4%. On a weather-adjusted basis, growth over the same period averaged 2.3%
per year. There can be no assurance that future usage rates will be similar to
historical experience. See "Risk Factors--Servicing Risks" in this prospectus.
Sales and Revenues. Reliant Energy experiences significant seasonal
variation in its sales of electricity. Sales during the summer months are
typically higher than sales during other months of the year due to the extensive
use of air conditioning in Reliant Energy's service territory. The following
table highlights historical sales and revenue by customer class. All figures
reflect billings and are not adjusted for end of the month unbilled KWh sales or
revenues. On a weather-adjusted basis, retail electric KWh sales and base
revenues, which exclude utility fuel charges, in 1998 were 66,494 million KWh
and $2,650 million, respectively. Non-weather adjusted sales and base revenues
were 69,189 million KWh and $2,822 million, respectively, over the same period.
Total revenues, which include utility fuel cost pass through billed to
consumers, were $4,207 million in 1998.
Retail Electric Customers. In the past, Reliant Energy has experienced
stable growth in residential retail electric customers, generally in the range
of 1.6% to 2.0% annually throughout the 1990s. During 1998, Reliant Energy's
service area saw significantly higher growth in residential retail electric
customers as shown in the table below. This growth has continued into 1999.
Growth in other customer classes has been steady. However, trends are less
discernible and less meaningful within the commercial and industrial classes
since customer counts within specific rates can change as a result of
reclassification within these classes due to voltage and usage level
determinants. For further discussion of this point, see "--Reliant Energy's
Customer Classes." The following table sets forth customer counts as of
December 31 of each year shown, a measure which illustrates current totals more
accurately than the average number of retail electric customers during the year.
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<PAGE>
TABLE OF HISTORICAL RELIANT ENERGY HL&P SALES, REVENUE, AND CUSTOMER STATISTICS
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
BILLED MWH SALES BY CUSTOMER CLASS AND PERCENTAGE COMPOSITION
CUSTOMER CLASS 1994 1995 1996 1997
- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 17,194,724 28.4% 18,103,209 30.1% 19,048,238 30.2% 19,365,892 29.8%
Commercial 13,631,381 22.6% 14,233,413 23.6% 14,640,762 23.2% 15,474,761 23.8%
Industrial 29,506,233 48.8% 27,760,819 46.1% 29,285,622 46.4% 30,098,710 46.3%
Other 116,642 0.2% 117,253 0.2% 119,339 0.2% 127,761 0.2%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Retail 60,448,980 100.0% 60,214,694 100.0% 63,093,961 100.0% 65,067,124 100.0%
BASE REVENUE BY CUSTOMER CLASS AND PERCENTAGE COMPOSITION
CUSTOMER CLASS 1994 1995 1996 1997
- -------------- ----------- ----------- ----------- -----------
Residential $ 1,241,210 45.7% $ 1,218,115 47.1% $ 1,271,750 47.5% $ 1,288,073 47.3%
Commercial $ 752,782 27.7% $ 715,573 27.6% $ 731,440 27.3% $ 761,348 28.0%
Industrial $ 696,051 25.7% $ 636,151 24.6% $ 656,258 24.5% $ 648,757 23.8%
Other $ 23,509 0.9% $ 19,024 0.7% $ 19,581 0.7% $ 22,534 0.8%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Retail $ 2,713,552 100.0% $ 2,588,863 100.0% $ 2,679,029 100.0% $ 2,720,713 100.0%
TOTAL REVENUE BY CUSTOMER CLASS AND PERCENTAGE COMPOSITION
CUSTOMER CLASS 1994 1995 1996 1997
- -------------- ----------- ----------- ----------- -----------
Residential $ 1,586,074 40.3% $ 1,471,702 42.1% $ 1,603,591 42.3% $ 1,662,177 41.5%
Commercial $ 1,029,104 26.2% $ 923,222 26.4% $ 986,591 26.0% $ 1,065,917 26.6%
Industrial $ 1,293,300 32.9% $ 1,077,815 30.9% $ 1,182,110 31.2% $ 1,254,190 31.3%
Other $ 25,902 0.7% $ 20,679 0.6% $ 22,125 0.6% $ 24,868 0.6%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Retail $ 3,934,381 100.0% $ 3,493,418 100.0% $ 3,794,417 100.0% $ 4,007,152 100.0%
SERVICE AREA YEAR-END CUSTOMER COUNT AND PERCENTAGE COMPOSITION
CUSTOMER CLASS 1994 1995 1996 1997
- -------------- ----------- ----------- ----------- -----------
Residential 1,301,074 88.3% 1,327,168 88.2% 1,353,631 87.9% 1,378,658 87.8%
Commercial 170,959 11.6% 175,998 11.7% 185,031 12.0% 190,437 12.1%
Industrial 1,670 0.1% 1,661 0.1% 1,818 0.1% 1,658 0.1%
Other 81 0.0% 82 0.0% 83 0.0% 86 0.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Retail 1,473,784 100.0% 1,504,909 100.0% 1,540,563 100.0% 1,570,839 100.0%
</TABLE>
CUSTOMER CLASS 1998 Jan-Jun-1999
- -------------- ----------- --------------------
Residential 21,090,164 30.5% 8,553,152 27.3%
Commercial 16,329,354 23.6% 7,652,979 24.4%
Industrial 31,635,481 45.7% 15,107,420 48.1%
Other 133,644 0.2% 68,418 0.2%
----------- ----- ----------- -----
Total Retail 69,188,643 100.0% 31,381,969 100.0%
CUSTOMER CLASS 1998 Jan-Jun-1999
- -------------- ----------- -----------
Residential $ 1,365,269 48.4% $ 513,485 42.1%
Commercial $ 781,977 27.7% $ 376,687 30.9%
Industrial $ 651,136 23.1% $ 317,466 26.0%
Other $ 23,321 0.8% $ 12,068 1.0%
----------- ----- ----------- -----
Total Retail $ 2,821,703 100.0% $ 1,219,705 100.0%
CUSTOMER CLASS 1998 Jan-Jun-1999
- -------------- ----------- -----------
Residential $ 1,786,662 42.5% $ 691,717 37.0%
Commercial $ 1,108,328 26.3% $ 534,985 28.6%
Industrial $ 1,286,512 30.6% $ 630,310 33.7%
Other $ 25,964 0.6% $ 13,473 0.7%
----------- ----- ----------- -----
Total Retail $ 4,207,466 100.0% $ 1,870,485 100.0%
CUSTOMER CLASS 1998 12 Mos.Ending 6/99
- -------------- ----------- -----------
Residential 1,417,206 87.7% 1,442,008 87.7%
Commercial 196,941 12.2% 200,523 12.2%
Industrial 1,737 0.1% 1,753 0.1%
Other 87 0.0% 87 0.0%
----------- ----- ----------- -----
Total Retail 1,615,971 100.0% 1,644,341 100.0%
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<PAGE>
PERCENTAGE CONCENTRATION WITHIN RELIANT ENERGY'S LARGE INDUSTRIAL CUSTOMER CLASS
For the year ended December 31, 1998, the largest retail electric customer
represented less than 1%, and the ten largest retail electric customers
represented approximately 5%, of Reliant Energy's total revenues.
HOW RELIANT ENERGY FORECASTS THE NUMBER OF RETAIL ELECTRIC CUSTOMERS AND THE
AMOUNT OF ELECTRICITY USAGE
Accurate projections of the number of retail electric customers, usage and
retail electric revenue are important in setting, maintaining and adjusting the
transition charges. The transition charges must be sufficient to make principal
and interest payments on the transition bonds, to fund the scheduled
overcollateralization level, to replenish any shortfalls in the capital
subaccount and to pay the trustees' fee, the servicing fee and the other
expenses and costs included in qualified costs. Please refer to "Reliant
Energy's Financing Order" and "Risk Factors--Unusual Nature of Transition
Property" in this prospectus.
On a monthly basis, Reliant Energy compares its sales forecast to actual
consumption to determine the accuracy of its forecasting models. Reliant Energy
historically has prepared forecasts of electric energy sales for the following
year and several years thereafter, as well as longer-term forecasts of customer
peak demand and energy consumption. These load forecasts are utilized in a
variety of planning needs, from short-term budgeting purposes to long-term
facilities planning, and in various regulatory filings and rate-setting
proceedings. Reliant Energy uses models to generate reasonable short and long-
term forecasts for all customer classes.
The residential model forecasts electric energy sales based on electricity
price, real income, household size, weather and changes in the saturation and
efficiency of appliances. The commercial and small industrial models forecast
electric energy sales based on electricity price, employment, floor space, and
energy intensity by commercial building type. Large industrial customers are
forecast in detail based on knowledge of their past activity and expected
activity and how it relates to their energy needs. Known and measurable
industrial plant additions, expansions and closures are incorporated into the
electricity sales projections, based on information obtained by Reliant Energy
through multiple sources, including in-house research. Reliant Energy uses
economic forecasts, prepared by independent economic forecasting and consulting
firms, as inputs to its forecasting models. Weather inputs to the forecasting
models are based on normal weather conditions, which are developed from
historical averages. Reliant Energy forecasts on a weather-normalized sales and
demand basis.
Weather Adjustments. Weather volatility is an important consideration in
load forecasting due primarily to its direct effect on consumption of
electricity for refrigeration, air conditioning and space heating by both
households and businesses. For example, since the Houston area contains an
unusually heavy concentration of air conditioning systems, a change in
temperature and humidity conditions sufficient to trigger additional
simultaneous use (or disuse) of those systems over extended periods can have a
significant impact on electricity sales. Although temperature swings between
seasons are not as pronounced as in many other climates, short-term weather on
the Texas Gulf Coast is relatively unpredictable. As a result, Reliant Energy
chooses to remove the influence of weather from historical sales series used as
model inputs. To accomplish this, Reliant Energy calculates normalized values
from its actual energy sales for rate classes that contain weather sensitive
loads in the residential, commercial and small industrial customer classes.
Weather adjustments are based on regression models that measure load
responsiveness as a function of deviations of actual from normal weather and
within discrete temperature ranges. Thirty-year averages of calendar month
heating degree-hours and cooling degree-hours form the basis for establishing
"normal" weather. Revenue adjustments are also made on the basis of the kWh
adjustments determined through use of this weather adjustment procedure.
Sales Forecast Variances. Reliant Energy will use its annual sales
forecast to determine the appropriate levels of transition charges. Actual
sales can deviate from forecasted sales for many reasons, including the general
economic climate in the service territory, the impact of weather on air
conditioning and heating usage, levels of
36
<PAGE>
business activity, the availability of more energy efficient appliances, new
energy conservation technologies and the customers' ability to acquire these new
products. Reliant Energy's ability to accurately predict energy consumption may
affect the timing of collections of transition charges.
The table below compares actual usage in MWh for a particular year to the
most recent forecast, usually prepared during the preceding year. For example,
the annual 1998 variance is based on a forecast prepared in 1997. Since Reliant
Energy's load forecasting models are built with weather normalized sales, the
forecast is compared to actual values adjusted to exclude the effects of
abnormal weather. The variances for the residential customer class ranged from
(0.9%) to 3.2%. The variances for the commercial customer class ranged from
(2.1%) to 8.6% and for the industrial class from (5.2%) to 3.3%. Variances for
the total retail sales forecast ranged from (0.1%) to 1.7%. Actual sales to
Reliant's other retail class (Municipal street lighting) are not subject to
weather adjustment. Wholesale sales, which are not included in these retail
totals, are also not considered weather sensitive. Reliant Energy can give no
assurance that the future variance between actual and expected consumption in
the aggregate or by customer class will be similar to the historical experience
set forth below. In the following table "variance" represents percentage
deviation from the forecasted amount of electricity usage.
ANNUAL FORECAST VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED
WEATHER-ADJUSTED ACTUAL MWH SALES
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
1994 1995 1996 1997 1998
RESIDENTIAL
<S> <C> <C> <C> <C> <C>
Forecast (MWH) 17,264,440 17,454,451 18,363,830 18,878,444 19,457,388
Weather-Adjusted
Actual (MWH) 17,505,263 18,006,413 18,490,790 19,218,880 19,278,338
Variance 1.4% 3.2% 0.7% 1.8% -0.9%
COMMERCIAL
Forecast (MWH) 12,766,349 13,038,341 14,755,570 15,167,849 15,335,948
Weather-Adjusted
Actual (MWH) 13,664,482 14,159,764 14,450,494 15,420,764 15,683,594
Variance 7.0% 8.6% -2.1% 1.7% 2.3%
INDUSTRIAL
Forecast (MWH) 30,058,561 29,242,232 28,281,202 29,562,194 31,641,006
Weather-Adjusted
Actual (MWH) 29,506,517 27,726,615 29,222,057 30,075,407 31,398,625
Variance -1.8% -5.2% 3.3% 1.7% -0.8%
OTHER
Forecast (MWH) 123,064 124,609 124,366 125,724 127,080
Actual (MWH) 116,642 117,253 119,339 127,761 133,644
Variance -5.2% -5.9% -4.0% 1.6% 5.2%
WEATHER-ADJUSTED
TOTAL RETAIL SALES
Forecast (MWH) 60,212,414 59,859,633 61,524,969 63,734,211 66,561,422
Weather-Adjusted
Actual (MWH) 60,792,904 60,010,045 62,282,679 64,842,842 66,494,202
Variance 1.0% 0.3% 1.2% 1.7% -0.1%
</TABLE>
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<PAGE>
During the last five years, there has been no discernible trend in the
variance between projected electricity consumption and actual electricity
consumption.
Customer Forecast Variances. The next table compares actual number of
retail electric customers for a particular year to the most recent preceding
forecast. For example, the annual 1998 variance is based on a forecast prepared
in 1997. The variances for the residential customer class ranged from 0.0% to
0.8%. The variances for the smaller commercial and industrial customer classes
ranged from (8.0%) to 5.6%. The variances for all retail customer classes
ranged from (0.2%) to 1.4%.Because customer reclassification on the basis of
voltage and usage levels affects the customer count within the commercial and
industrial classes, variances within these classes can be misleading. Reliant
Energy can give no assurance that the future variance between actual and
expected number of customers in the aggregate or by customer class will be
similar to the historical experience set forth below. In the following table,
"variance" represents percentage deviation from the forecasted number of
customers.
ANNUAL FORECAST VARIANCE FOR THE NUMBER OF CUSTOMERS
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RESIDENTIAL
Forecast 1,300,466 1,323,090 1,346,813 1,377,541 1,405,694
Actual 1,301,074 1,327,168 1,353,631 1,378,658 1,417,206
Variance 0.0% 0.3% 0.5% 0.1% 0.8%
COMMERCIAL
Forecast 174,804 177,962 179,442 186,088 186,455
Actual 170,959 175,998 185,031 190,437 196,941
Variance -2.2% -1.1% 3.1% 2.3% 5.6%
INDUSTRIAL
Forecast 1,794 1,806 1,723 1,775 1,816
Actual 1,670 1,661 1,818 1,658 1,737
Variance -6.9% -8.0% 5.5% -6.6% -4.4%
OTHER
Forecast 82 82 81 82 83
Actual 81 82 83 86 87
Variance -1.2% 0.0% 2.5% 4.9% 4.8%
TOTAL RETAIL
Forecast 1,477,146 1,502,940 1,528,059 1,565,486 1,594,048
Actual 1,473,784 1,504,909 1,540,563 1,570,839 1,615,971
Variance -0.2% 0.1% 0.8% 0.3% 1.4%
</TABLE>
During the last five years, there has been no discernible trend in the
variance between projected number of retail electric customers and actual number
of retail electric customers.
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<PAGE>
RELIANT ENERGY'S BILLING PROCESS
Reliant Energy operates on a continuous billing cycle, with an
approximately equal number of bills being distributed each business day.
Accordingly, the initial collection of transition charges and changes in the
amount of transition charges will occur at different points in each customer's
billing cycle. For the year ended December 31, 1998, Reliant Energy mailed out
an average of 76,016 bills daily. Normal billing is for a period of
approximately 30 days ending one or two days prior to the mailing of the bill.
Subject to statutory and legal requirements, Reliant Energy may change its
billing policies and procedures from time to time. Reliant Energy expects that
any change would be designed to enhance Reliant Energy's ability to make timely
recovery of amounts billed to retail electric customers.
RELIANT ENERGY MAINTAINS LIMITED INFORMATION ON ITS CUSTOMERS' CREDITWORTHINESS
Under the servicing agreement, any changes to customary billing and
collection practices instituted by Reliant Energy will apply to the servicing of
transition property so long as Reliant Energy is the servicer.
Reliant Energy requires new residential and non-residential customers to
post a security deposit equal to two months of estimated electricity usage.
These new customers may avoid the security deposit requirement if they
demonstrate creditworthiness or were previously a customer of Reliant Energy
with a satisfactory payment history. The principal means of establishing
creditworthiness is by a letter from another utility indicating a satisfactory
payment history, or by an external scoring system based on the customers'
current credit bureau information. To help prevent fraud, Reliant Energy uses
an on-line identification process for new applicants.
Reliant Energy's low income residential customers are referred to various
social agencies and ministries within Reliant Energy's service area. Reliant
Energy provides an in-house designated social agency representative for
assistance to qualified applicants. When customers apply at the social agencies
and ministries for assistance, they must demonstrate an inability to pay overdue
electric bills and an annual household gross income under 150% of the federal
poverty level. In 1998, Reliant Energy received approximately $8.2 million from
the various social agencies and ministries to assist low income retail electric
customers in paying their electric service bills.
In 1998, approximately 67% of total bill payments were received by Reliant
Energy via the U.S. mail. During the same period, approximately 30% of total
payments were paid in person at third party collectors throughout the service
territory. Direct debits of customer accounts through local banks accounted for
approximately 3% of bill payments collected in 1998.
Reliant Energy's Collection Process for Residential Customers. Customer
bills for residential customers are due 16 days after mailing. If a customer
has an overdue balance in excess of $49.99, or is 20 days overdue in paying his
or her bill, Reliant Energy will mail a termination notice requesting payment
within 10 days, and stating that Reliant Energy will shut off electricity
service within 14 days if the retail electric customer takes no action to reduce
the outstanding balance. At least two days prior to the termination date,
Reliant Energy will deliver another service termination notice by telephone.
Termination of Service for Residential Customers in the Winter. Reliant
Energy will not disconnect a customer anywhere in Reliant Energy's service
territory on a day when the previous day's highest temperature, according to the
National Weather Service, did not exceed 32 degrees Fahrenheit, and the
temperature is predicted to remain at or below that level for the next 24 hours,
according to the nearest National Weather Service reports. Residential retail
electric customers will continue to receive standard termination notices and
calls, but the field disconnect staff will leave notice of delinquent
outstanding balances rather than terminating electric service.
Termination of Service for Residential Customers in the Summer. Reliant
Energy will not disconnect a customer anywhere in Reliant Energy's service
territory on a day when the National Weather Service issues a heat
39
<PAGE>
advisory for any county in the service territory, or when such advisory has been
issued on any one of the preceding two calendar days. Residential customers
continue to receive standard termination notices and calls, but the field
disconnect staff will leave notice of delinquent outstanding balances rather
than terminating electric service.
Reliant Energy's Collection Process for Governmental Customers. Federal,
state or local government accounts have 30 days from the date the bill is mailed
to pay their electric service charges. Reliant Energy generally does not use
service termination as a means of collection for government accounts. Some
government accounts have difficulty paying within the 30 days due to payment
approval or other factors. A "special review" notation refers government
accounts that are delinquent to a designated credit representative for
collection activity.
Reliant Energy's Collection Process for All Other Customers. Customer
bills for commercial and industrial customers are due 16 days after the bill is
mailed. If a commercial customer has an overdue balance in excess of $49.99,
and is 20 days overdue in paying its bill, Reliant Energy will mail a
termination notice requesting payment within 10 days, and stating that Reliant
Energy will shut off electricity within 14 days if the customer takes no action
to reduce the outstanding balance. At least two days prior to the termination
date, Reliant Energy delivers another service termination notice by telephone.
Industrial customers who are 18 days overdue in paying their bills are generated
a past due notice requesting payment within 10 days. Before being mailed, these
notices are reviewed by a designated credit representative. The credit
representative initiates any further collection activity if payment is not
received.
Referrals of Delinquent Accounts to Third-Parties. Reliant Energy files
claims for residential and commercial final bills greater than $500 in small
claims court 46 business days after the final bill is mailed. Reliant Energy
writes off unpaid residential and commercial accounts 63 business days after the
final bill is mailed. Reliant Energy refers accounts that have been written off
to a collection agency 75 business days after the final bill is mailed and also
reports residential accounts to the three major credit bureaus.
Exceptions to the General Collection Process. In some cases, service
termination may prove difficult due to certain factors such as illness or
landlord-owned property. Reliant Energy will not disconnect service at a
permanent individually metered dwelling unit of a delinquent residential
customer when that customer establishes through an attending physician that
disconnection of service will cause some person residing at that residence to
become seriously ill or more seriously ill. The attending physician must call or
contact Reliant Energy and submit a written statement by the stated date of
disconnection. A customer making such a request must enter into a deferred
payment plan by the stated date of disconnection. When Reliant Energy sends a
termination notice to landlord-owned property such as master-metered apartments,
the customer/landlord is also informed that notice of possible disconnection
will be provided to the tenants of the apartment complex in six days if payment
is not received. Six days after providing the customer/landlord with a
termination notice, and at least four days prior to disconnecting, Reliant
Energy will post a minimum of five disconnection notices in conspicuous areas in
the public places of the apartment complex.
Definition of a Delinquent Account. If a residential, commercial or
industrial customer fails to pay any portion of charges within 16 days after
the bills have been mailed to the customer, then Reliant Energy will consider
the entire amount to be delinquent.
Reliant Energy's Delinquency and Write-Off Experience. The tables below set
forth Reliant Energy's delinquency and net write-off experience for residential
customers as well as for all other customers, for each of the periods indicated
below. During the last three years, the delinquency experience for residential
customers has increased during the second half of the year due primarily to
higher summer usage. However, the delinquency experience for commercial retail
electric customers basically remained constant year round during the same time
period. Changes in the market, including but not limited to the introduction of
retail electric providers, who will be permitted to provide consolidated billing
to Reliant Energy's retail electric customers, could mean that historical
delinquency and net write-off data will not be indicative of future experiences.
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TABLE 6
DELINQUENCIES AS A PERCENTAGE OF TOTAL BILLED REVENUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of As of As of As of As of As of
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99
-------- -------- -------- -------- -------- -------
RESIDENTIAL
31-60 days .46% .53% .73% .67% .77% .71%
61-90 days .22% .25% .33% .31% .41% .15%
Over 90 days .14% .14% .20% .16% .45% .13%
TOTAL .81% .92% 1.26% 1.14% 1.62% .982%
ALL OTHER
31-60 days .07% .08% .21% .17% .24% .11%
61-90 days .02% .04% .03% .04% .06% .04%
Over 90 days .02% .07% .03% .05% .07% .11%
TOTAL .11% .19% .27% .26% .38% .26%
GRAND TOTAL .40% .49% .69% .62% .91% .57%
</TABLE>
TABLE 7
NET WRITE-OFFS AS A PERCENTAGE OF BILLED RETAIL ELECTRIC REVENUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of As of As of As of As of As of
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 6/30/99
-------- -------- -------- -------- -------- -------
Residential .23% .25% .28% .35% .36% .52%
All Other .03% .04% .04% .05% .04% .06%
Total .11% .13% .14% .17% .18% .25%
</TABLE>
The numbers in Table 6 for delinquencies over 90 days include all accounts
on payment arrangements. In 1998, a State of Texas mandated summer moratorium
increased all delinquency categories for residential customers. This discrepancy
does not apply to non-residential customers. See "--Reliant Energy Maintains
Limited Information on its Customers' Credit Worthiness."
Reliant Energy writes off customer bills 63 business days after the final
bill is issued. A final bill results from either of two actions:
. the customer notifies Reliant Energy that the customer no longer wants
electricity service at the address, or
. electricity service is disconnected for nonpayment and the customer
does not come forward to pay the required amount to have service
reconnected.
The net write-offs for the second quarter of 1999 are higher due to the
1998 State of Texas mandated summer moratorium and the required six month
arrangements for residential customers.
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The net write-offs for residential customers were higher in 1998 as
compared to previous years because:
. a moratorium mandated by the State of Texas prevented sending
termination notices or disconnecting residential electric services
from August 12, 1998 to September 30, 1998,
. the State of Texas mandated that residential customers were to be
offered six month arrangements on any bill amounts incurred during the
moratorium, and
. after the end of the moratorium, the disconnect process had to restart
with termination notices sent to customers before termination of
electric service could occur.
[How Reliant Energy in its Capacity as Servicer Will Apply Partial Payments by
its Retail Electric Customers. On _________, the Texas commission ruled that
all electricity distribution companies must apply partial payments of
electricity bills for balances arising after retail electric customers are
permitted to choose their electricity generation supplier in the following
manner:
1. to the balance due for prior transition charges, competition transition
charges and transmission and distribution charges;
2. to current transition charges and competition transition charges;
3. to current transmission and distribution charges;
4. to the balance due for prior energy charges;
5. to current energy charges; and
6. to non-basic services.]
THE ISSUER
GENERAL
We are a limited liability company formed under the Delaware Limited
Liability Company Act pursuant to the limited liability company agreement
executed by our sole member, Reliant Energy, and the filing of a certificate of
formation with the Secretary of State of the State of Delaware. The limited
liability company agreement will be amended and restated in its entirety prior
to the date we enter into the sale agreement with Reliant Energy. We have filed
the form of the amended and restated limited liability company agreement with
the SEC as an exhibit to the registration statement. We have summarized
selected provisions of the amended and restated limited liability company
agreement below.
As of the date of this prospectus, we have not carried on any business
activities and have no operating history. We have included our audited
financial statements as a part of this prospectus. Our fiscal year is the
calendar year. We are not an agency or instrumentality of the State of Texas.
Our sole member is Reliant Energy. Our assets include:
. the transition property,
. our rights under the sale agreement,
. all bills of sale delivered by Reliant Energy pursuant to the sale
agreement,
. our rights under the servicing agreement and any subservicing
agreements or collection agreements executed in connection with the
servicing agreement,
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. the collection account and all subaccounts of the collection account,
. all of our other property,
. all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing, and
. all payments on or under and all proceeds in respect of any or all of
the foregoing.
The indenture provides that the transition property, as well as our other
assets, other than any cash released to us by the trustee quarterly from
earnings on the capital subaccount following repayment of all outstanding series
of transition bonds, will be pledged by us to the trustee. Pursuant to the
indenture, the collected transition charges remitted to the trustee by the
servicer must be used to pay the transition bonds and our other obligations
specified in the indenture.
OUR PURPOSE
We were created for the specific purposes of:
. purchasing and owning the transition property and the other transition
bond collateral,
. issuing and registering one or more series of the transition bonds,
. pledging our interest in the transition property and other transition
bond collateral to the trustee pursuant to the terms of the indenture
in order to secure the transition bonds,
. making payments on the transition bonds,
. distributing amounts released to us, and
. performing other activities that are necessary, suitable or convenient
to accomplish these purposes.
The amended and restated limited liability company agreement does not permit us
to engage in any activities not directly related to these purposes.
OUR RELATIONSHIP WITH RELIANT ENERGY
On the issue date for each series of the transition bonds, except in the
event of a refunding of outstanding transition bonds, Reliant Energy will sell
the transition property to us pursuant to the sale agreement between us and
Reliant Energy. Reliant Energy will service the transition property pursuant to
the servicing agreement between us and Reliant Energy. Reliant Energy will
provide administrative services to us pursuant to an administration agreement
between us and Reliant Energy. We will pay Reliant Energy fixed fees for
performing these servicing and administrative services.
OUR MANAGERS
Pursuant to the amended and restated limited liability company agreement,
our affairs will be managed by five managers, whom we refer to in this
prospectus and the prospectus supplement as our "managers." Reliant Energy will
appoint our managers from time to time or, in the event Reliant Energy transfers
its interest in us, the new owner or owners will appoint our managers.
Following the initial issuance of the transition bonds, we will have at least
two independent managers at all times who, among other things, are not and have
not been for at least three years prior to the date of their appointment:
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. a direct or indirect legal or beneficial owner of us, Reliant Energy,
any of our affiliates or any of Reliant Energy's affiliates,
. a relative, supplier, employee, officer, director, manager, contractor
or material creditor of us, Reliant Energy, any of its affiliates, or
. a person who controls Reliant Energy or any of its affiliates.
The remaining managers will be employees or officers of Reliant Energy. The
managers will devote the time necessary to conduct our affairs. The following
are our managers as of the date of this prospectus:
NAME AGE POSITION AT RELIANT ENERGY
- --------- ---- -----------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
None of our managers has been involved in any legal proceedings which are
specified in Item 401(k) of the SEC's regulation S-K.
MANAGER COMPENSATION AND LIMITATION ON LIABILITIES
As of the date of this prospectus, we have not paid any compensation to any
of our managers since the date we were formed. We will not compensate our
managers, other than our independent managers, for their services performed on
our behalf. The independent managers will be paid quarterly fees from our
assets and will be reimbursed for their reasonable expenses including, without
limitation, the reasonable compensation, expenses and disbursements of any
agents, representatives, experts and counsel the independent managers may employ
in connection with the performance of their respective duties under the amended
and restated limited liability company agreement.
Under the amended and restated limited liability company agreement, our
managers will not be liable under any circumstances except for:
. liabilities arising from their own willful misconduct or gross
negligence,
. liabilities arising from the failure by any manager to perform
obligations expressly undertaken in the amended and restated limited
liability company agreement, or
. taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by our managers in connection
with the transactions described in this prospectus.
Under the amended and restated limited liability company agreement, we will
indemnify our managers to the fullest extent permitted by law against any
liability incurred with respect to their services as managers under the amended
and restated limited liability company agreement, except in the circumstances
described above.
WE ARE A SEPARATE AND DISTINCT LEGAL ENTITY FROM RELIANT ENERGY
Under the amended and restated declaration of trust, we may not file a
voluntary petition for relief under the bankruptcy code without a unanimous vote
of our managers. Reliant Energy has agreed that it will not cause us to file a
voluntary petition for relief under the bankruptcy code. The amended and
restated limited liability company agreement requires us:
. to take all reasonable steps to continue our identity as a separate
legal entity,
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. to make it apparent to third persons that we are an entity with assets
and liabilities distinct from those of Reliant Energy, other
affiliates of Reliant Energy, our managers or any other person, and
. to make it apparent to third persons that we are not a division of
Reliant Energy or any of its affiliates or any other person, except
that we will be treated as a division of Reliant Energy only in our
federal and state income tax returns.
Our principal place of business is 1111 Louisiana, Suite ____, Houston,
Texas 7002 and our telephone number at such address is (713) 207-3000.
USE OF PROCEEDS
We will use the proceeds of the issuance of the transition bonds to pay the
expenses of the issuance and sale of the transition bonds and to purchase the
transition property from Reliant Energy. In accordance with the Texas Electric
Choice Plan, Reliant Energy will reduce the debt and equity Reliant Energy HL&P
uses to set its rates. Unless we inform you otherwise in the applicable
prospectus supplement, Reliant Energy anticipates using the proceeds it receives
from the sale of the transition property for general corporate purposes. These
purposes may include, but are not limited to:
. working capital,
. capital expenditures,
. acquisitions, and
. the repayment or refinancing of Reliant Energy's indebtedness,
including inter-company indebtedness.
THE TRANSITION BONDS
We will issue the transition bonds under an indenture between us and
_____________________, as the trustee. We have filed the form of the indenture
with the SEC as an exhibit to the registration statement. The particular terms
of each series of the transition bonds will be provided in the indenture and a
related supplemental indenture. We have summarized selected provisions of the
indenture and the transition bonds below. We will describe the particular terms
of each series of the transition bonds in a supplement to this prospectus. You
should carefully read the summary below, the applicable prospectus supplement
and the terms and provisions of the indenture that may be important to you
before investing in the transition bonds. Please refer to "Where You Can Find
More Information" in this prospectus.
GENERAL TERMS OF THE TRANSITION BONDS
We may issue the transition bonds 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 a
series. All transition bonds of the same series will be identical in all
respects except for the denomination thereof, unless such series is comprised of
more than one class, in which case all transition bonds of the same class will
be identical in all respects except for the denomination thereof. We will
specify terms of each series in the related prospectus supplement.
The indenture requires, as a condition to the issuance of each series of
transition bonds, that this issuance will not result in any rating agency
reducing or withdrawing its then current rating of any outstanding series or
class
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<PAGE>
of the transition bonds. The notification in writing by each rating agency to
the trustee and us that any action will not result in a reduction or withdrawal
is referred to in this prospectus and the prospectus supplement as the "rating
agency condition."
PAYMENTS OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
Interest will accrue on the principal balance of the transition bonds of a
series or class at the interest rate specified in or determined in the manner
specified in the related prospectus supplement. Interest will be payable to the
transition bondholders of the series or class on each payment date, commencing
on the payment date specified in the related prospectus supplement. On any
payment date with respect to any series, we will generally pay principal of a
class of transition bonds only until the outstanding principal balance of that
class 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 generally not sooner, than reflected in the expected amortization
schedule for such series or class, except in the case of an applicable optional
redemption or acceleration. Please refer to "Risk Factors--Other Risks
Associated With an Investment in the Transition Bonds" and "Weighted Average
Life and Yield Considerations for the Transition Bonds" in this prospectus.
The trustee will distribute on each payment date to the holders of each
class of the transition bonds all payments of principal and interest then due on
such transition bonds (other than special payments as defined in the indenture).
The trustee will make each such payment, other than the final payment, to the
holders of record of the transition bonds of the applicable class, on the
applicable record date. The final payment with respect to any transition bond,
however, will be made only upon presentation and surrender of such transition
bond at the office or agency of the trustee specified in the notice given by the
trustee with respect to such final payment. This will only be applicable if the
transition bonds are ever issued in definitive form. The transition bonds will
originally be issued in book-entry form, and we do not expect that the
transition bonds will be issued in definitive form.
The indenture also provides that failure to pay the entire outstanding
principal amount of the transition bonds of any series by the expected final or
scheduled payment date will not result in a default on the series of transition
bonds. The failure to pay the entire outstanding principal amount of the
transition bonds of any series will result in a default only if such payment has
not been made by the final maturity date for the series or the date set for
redemption of that series.
On each payment date, the amount to be paid as principal on the transition
bonds of each series will equal:
. the unpaid principal amount of each series due on the final payment
date of that series, plus
. the unpaid principal amount of any transition bonds of each series
called for redemption, plus
. the unpaid principal amount of each series upon acceleration following
an event of default, plus
. the principal scheduled to be paid on each series on that payment
date.
If interest on the transition bonds of any series is not paid when due, the
trustee will pay such defaulted interest (plus interest on such defaulted
interest at the applicable interest rate to the extent lawful) to the persons
who are transition bondholders on a subsequent special record date (as defined
in the indenture). The trustee will fix a special record date and a special
payment date, and, at least 10 days before such special record date, the trustee
will mail to each affected transition bondholder a notice that states the
special record date, the special payment date and the amount of defaulted
interest (plus interest on such defaulted interest) to be paid.
The entire unpaid principal amount of a series of transition bonds will be
due and payable if:
. an event of default under the indenture occurs and is continuing, and
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. 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.
If any special payment date or other date specified herein for distribution
of any payments to transition bondholders is not a business day, payments
scheduled to be made on such special payment date or other date may be made on
the next succeeding business day and no interest will accrue upon such payment
during the intervening period. "Business day" means any day other than a
Saturday, a Sunday or a day on which banking institutions in New York, New York,
Wilmington, Delaware or Houston, Texas are required or authorized by law or
executive order to remain closed.
Please refer to "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.
Notwithstanding the above, neither we nor Reliant Energy make any
representation or warranty that any amounts actually collected arising from the
transition charges will in fact be sufficient to meet payment obligations on the
transition bonds or that assumptions made in calculating the transition charges
will in fact be realized.
REDEMPTION OF THE TRANSITION BONDS
We will specify the redemption provisions, if any, for any series of the
transition bonds in the related prospectus supplement, including the premiums,
if any, payable upon redemption. Unless the context requires otherwise, all
references in this prospectus to principal of the transition bonds of a series
as it relates to redemption include any premium that might be payable on the
transition bonds if the transition bonds of the series are redeemed. The trustee
will give notice of redemption of any series of the transition bonds to each
registered holder of a transition bond of such series 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 we may specify
in the related prospectus supplement. The redemption price will, in each case,
include accrued interest to, but excluding, the date of redemption. Notice of
redemption may be conditioned upon the deposit of moneys with the trustee before
the redemption date and this notice will be of no effect unless these monies are
so deposited. All transition bonds called for redemption will cease to bear
interest on the specified redemption date, provided the redemption price is on
deposit with the trustee at that time, and will no longer be considered
"outstanding" under the indenture. The transition bondholders will have no
further rights to transition bonds called for redemption after the specified
redemption date, except to receive from the trustee payment of the redemption
price of such transition bonds and unpaid interest accrued to the date fixed for
redemption.
CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement with respect to the transition bonds of all series will
be provided principally by adjustments to the transition charges and amounts on
deposit in the reserve subaccount, the overcollateralization subaccount and the
capital subaccount. In addition, for any series of the transition bonds or one
or more classes of the transition bonds, additional credit enhancement may be
provided. We will describe the amounts and types of credit enhancement, if any,
and the provider of credit enhancement with respect to each series of the
transition bonds or one or more classes of the transition bonds in the
applicable prospectus supplement. Additional credit enhancement may be in the
form of:
. an additional reserve subaccount,
. subordination,
. additional overcollateralization,
. a financial guaranty insurance policy,
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. a letter of credit,
. a credit or liquidity facility,
. a swap agreement,
. a repurchase obligation for certain obligations and warranties,
. a third-party payment or other support,
. a cash deposit or other credit enhancement, or
. any combination of the foregoing, as we may describe in the applicable
prospectus supplement.
If specified in the applicable prospectus supplement, credit enhancement
for a series of the transition bonds may cover one or more other series of the
transition bonds.
TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless we specify otherwise in the related prospectus supplement, all
classes of the transition bonds will initially be represented by one or more
bonds registered in the name of Cede & Co., as nominee of The Depository Trust
Company, or another securities depository. The transition bonds will be
available to investors only in the form of book-entry transition bonds.
Transition bondholders may also hold transition bonds through CEDEL, or
Euroclear in Europe, if they are participants in one of those systems or
indirectly through participants.
The Role of Cede & Co., CEDEL and Euroclear. Cede & Co., as nominee for
The Depository Trust Company, will hold the global bond or bonds representing
the transition bonds. CEDEL and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositories. These
depositories will, in turn, hold these positions in customers' securities
accounts in the depositories' names on the books of The Depository Trust
Company. Citibank, N.A. will act as depository for CEDEL and Morgan Guaranty
Trust Company of New York will act as depository for Euroclear.
The Function of The Depository Trust Company. The Depository Trust Company
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. The Depository Trust
Company 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. The Depository Trust Company was created to hold securities
for its participants and to facilitate the clearance and settlement of
securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of bonds. Direct
participants of The Depository Trust Company include securities brokers and
dealers, banks, trust companies, clearing corporations and some other
organizations. The Depository Trust Company 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 The
Depository Trust Company's system is also available to indirect participants.
The Function of CEDEL. CEDEL is incorporated under the laws of Luxembourg.
CEDEL holds securities for its customers and facilitates the clearance and
settlement of securities transactions by electronic book-entry transfers between
their accounts. CEDEL provides various services, including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. CEDEL also deals with domestic securities
markets in over 30 countries through established depository and custodial
relationships. CEDEL has established an electronic bridge with Morgan Guaranty
Trust as the Operator of the Euroclear system in Brussels to facilitate
settlement of trades between CEDEL and MGT/EOC. CEDEL currently accepts over
110,000 securities issues on its books.
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CEDEL customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include any underwriters, agents or dealers with
respect to a series of transition bonds offered hereby. CEDEL's U.S. customers
are limited to securities brokers and dealers and banks.
The Function of Euroclear. Euroclear was created in 1968 to hold
securities for Euroclear participants and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment. By performing these functions, Euroclear eliminated
the need for physical movement of securities and also eliminated any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 30 currencies, including Euros and United States dollars. The
Euroclear system includes various other services, including securities lending
and borrowing and arrangements with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with The
Depository Trust Company described below. The Euroclear system is operated by
the Euroclear operator, under contract with the cooperative. All operations are
conducted by the Euroclear operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear operator,
not the cooperative. The cooperative establishes policy for Euroclear on behalf
of Euroclear participants. Euroclear participants include central banks,
commercial banks, securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a Federal
Reserve System member, it is regulated and examined by the Board of Governors of
the Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Terms and Conditions of Euroclear. Securities clearance accounts and cash
accounts with the Euroclear operator are governed by the terms and conditions
governing use of Euroclear and the related operating procedures of Euroclear and
applicable Belgian law, which are referred to in this prospectus as the terms
and conditions. The terms and conditions govern transfers of securities and
cash within Euroclear, withdrawals of securities and cash from Euroclear and
receipts of payments with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear operator
acts under the terms and conditions only on behalf of Euroclear participants and
has no record of or relationship with persons holding through Euroclear
participants.
The Rules for Transfers Among The Depository Trust Company, CEDEL or
Euroclear Participants. Transfers between participants will occur in accordance
with The Depository Trust Company rules. Transfers between CEDEL customers and
Euroclear participants will occur in accordance with their respective rules and
operating procedures. Cross-market transfers between persons holding directly
or indirectly through The Depository Trust Company, on the one hand, and
directly or indirectly through CEDEL customers or Euroclear participants, on the
other, will be effected in The Depository Trust Company in accordance with The
Depository Trust Company 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
The Depository Trust Company, and making or receiving payments in accordance
with normal procedures for same-day funds settlement applicable to The
Depository Trust Company. CEDEL customers and Euroclear participants may not
deliver instructions directly to the depositories.
Cede & Co. Will Be the Holder of the Transition Bonds. Unless and until
definitive transition bonds are issued, it is anticipated that the only "holder"
of transition bonds of any series will be Cede & Co., as nominee of The
Depository Trust Company. Transition bondholders will only be permitted to
exercise their rights as transition bondholders indirectly through participants
and The Depository Trust Company. All references herein to actions by
transition bondholders thus refer to actions taken by The Depository Trust
Company upon instructions from its
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participants. In addition, all references herein to payments, notices, reports
and statements to transition bondholders refer to payments, notices, reports and
statements to Cede & Co., as the registered holder of the transition bonds, for
payments to the beneficial owners of the transition bonds in accordance with The
Depository Trust Company procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a series
are outstanding, under The Depository Trust Company's rules, The Depository
Trust Company is required to make book-entry transfers among participants on
whose behalf it acts with respect to the book-entry transition bonds. In
addition, The Depository Trust Company is required to receive and transmit
payments of principal of, and interest on, the book-entry transition bonds.
Participants with whom transition bondholders have accounts with respect to
book-entry transition bonds are similarly required to make book-entry transfers
and receive and transmit these payments on behalf of their respective transition
bondholders. Accordingly, although transition bondholders will not possess
physical bonds, The Depository Trust Company's rules provide a mechanism by
which transition bondholders will receive payments and will be able to transfer
their interests.
The Depository Trust Company 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 Depository Trust
Company system, or otherwise take actions in respect of these transition bonds,
may be limited due to the lack of definitive transition bonds.
The Depository Trust Company 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 The
Depository Trust Company the transition bonds are credited.
How Transition Bond Payments Will Be Credited by CEDEL and Euroclear.
Payments with respect to transition bonds held through CEDEL or Euroclear will
be credited to the cash accounts of CEDEL customers or Euroclear participants in
accordance with the relevant systems' rules and procedures, to the extent
received by its depository. These payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Please refer
to "Material Federal Income Tax Consequences for the Transition Bondholders" in
this prospectus. CEDEL or the Euroclear operator, as the case may be, will take
any other action permitted to be taken by a transition bondholder under the
indenture on behalf of a CEDEL participant or Euroclear participant only in
accordance with its relevant rules and procedures and subject to its
depository's ability to effect these actions on its behalf through The
Depository Trust Company.
The Depository Trust Company, CEDEL and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of the transition bonds
among participants of The Depository Trust Company, CEDEL and Euroclear.
However, they are under no obligation to perform or continue to perform these
procedures and these procedures may be discontinued at any time.
DEFINITIVE TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Definitive Transition
Bonds. Unless we specify otherwise in the related prospectus supplement, each
class of the transition bonds will be issued in fully registered, certificated
form to transition bondholders or their nominees, rather than to The Depository
Trust Company or its nominee, only if:
. we advise the trustee in writing that The Depository Trust Company is
no longer willing or able to discharge properly its responsibilities
as depository with respect to this class of transition bonds and we
are unable to locate a qualified successor,
. we, at our option, advise the trustee in writing that we elect to
terminate the book-entry system through The Depository Trust Company,
or
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. after the occurrence of an event of default under the indenture,
transition bondholders representing at least a majority of the
outstanding principal amount of the transition bonds of all series
advise the trustee through The Depository Trust Company in writing
that the continuation of a book-entry system through The Depository
Trust Company, or a successor thereto, is no longer in the transition
bondholders' best interest.
The Delivery of Definitive Transition Bonds. Upon the occurrence of any
event described in the immediately preceding paragraph, The Depository Trust
Company will be required to notify all affected beneficial owners of transition
bonds through participants of the availability of definitive transition bonds.
Upon surrender by The Depository Trust Company of the global bonds representing
the applicable transition bonds and receipt of instructions for registration,
the trustee will authenticate and deliver definitive transition bonds.
Thereafter the trustee will recognize the holders of these definitive transition
bonds as transition bondholders under the indenture.
The Payment Mechanism for Definitive Transition Bonds. Payments of
principal of, and interest on, definitive transition bonds will be made by the
trustee, as paying agent, in accordance with the procedures set forth in the
indenture. These payments will be made directly to holders of definitive
transition bonds in whose names the definitive transition bonds were registered
at the close of business on the related record date specified in each prospectus
supplement. These payments will be made by check mailed to the address of the
holder as it appears on the register maintained by the trustee. The final
payment on any transition bond, however, will be made only upon presentation and
surrender of the transition bond at the office or agency specified in the notice
of final payment to transition bondholders.
The Transfer or Exchange of Definitive Transition Bonds. Definitive
transition bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the trustee. No service
charge will be imposed for any registration of transfer or exchange, but the
transfer agent and registrar may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS
The rate of principal payments, the aggregate amount of each interest
payment and the actual final payment date of each series or class of the
transition bonds and the weighted average life thereof will be affected
primarily by the timing of receipt of collected transition charges. The
aggregate amount of collected transition charges and the rate of principal
amortization on the transition bonds will depend, in part, on actual energy
usage and the rate of delinquencies and write-offs. This is because the
transition charges are based on kilowatt per hour usage, except for one limited
case. The transition charges will be adjusted from time to time based in part
on the actual rate of collected transition charges and forecasts. However, we
can give no assurance that the servicer will be able to forecast accurately
actual electricity usage and the rate of delinquencies and write-offs or
implement adjustments to the transition charges that will cause collected
transition charges to be received at any particular rate. Please refer to "Risk
Factors--Servicing Risks," "--Other Risks Associated With an Investment in the
Transition Bonds" and "Reliant Energy's Financing Order--True-Ups" in this
prospectus.
If collected transition charges are received at a slower rate than
expected, the transition bonds may be retired later than expected. Except in
the event of a redemption or the acceleration of the final payment date of the
transition bonds after an event of default, however, the transition bonds will
not be paid at a rate faster than that contemplated in the expected amortization
schedule for each series or class of the transition bonds even if the receipt of
collected transition charges is accelerated. Instead, receipts in excess of the
amounts necessary to amortize the transition bonds in accordance with the
applicable expected amortization schedules, to pay interest and related fees and
expenses and to fund subaccounts of the collection account will be allocated to
the reserve subaccount. Redemption of any class or series of the transition
bonds and acceleration of the final maturity date after an event of default in
accordance with the terms thereof will result in payment of principal earlier
than the related expected final payment dates. A payment on a date that is
earlier than forecasted might result in a shorter weighted average life, and a
payment on a date that is later than forecasted might result in a longer
weighted average life.
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THE SALE AGREEMENT
The following summary describes particular material terms and provisions of
the sale agreement pursuant to which Reliant Energy is selling and we are
purchasing the transition property. The sale agreement may be amended by the
parties thereto without the consent of the transition bondholders, but with the
consent of the trustee, if notice of the amendment is provided by us to each
rating agency and the rating agency condition has been satisfied. We have filed
the form of the sale agreement with the SEC as an exhibit to the registration
statement.
RELIANT ENERGY'S SALE AND ASSIGNMENT OF THE TRANSITION PROPERTY
On the initial transfer date, pursuant to the sale agreement, Reliant
Energy will sell and assign to us, without recourse, except as provided therein,
the transition property. The transition property represents the rights and
interests of Reliant Energy under the financing order, including the right to
impose, collect and receive the transition charges authorized in the financing
order with respect to the related series of the transition bonds. The net
proceeds received from the sale of the transition bonds will be applied by us to
purchase the transition property. In addition, Reliant Energy may from time to
time offer to sell additional transition property to us, 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 the transition bonds. If this offer is accepted by us, the
subsequent sale will be effective on a subsequent transfer date.
In accordance with the Texas Electric Choice Plan, a valid and enforceable
lien and security interest in the transition property will be created upon the
issuance of the financing order and the execution and delivery of the sale
agreement in connection with the issuance of a series of the transition bonds.
The lien and security interest attaches automatically from the time that value
is received for the series of the transition bonds and, on perfection through
the filing of a notice with the Texas Secretary of State in accordance with the
rules prescribed under the Texas Electric Choice Plan, will be a continuously
perfected lien and security interest in the transition property. Upon the
issuance of the financing order, the execution and delivery of the sale
agreement and the related bill of sale and the filing of a notice with the Texas
Secretary of State in accordance with the rules prescribed under the Texas
Electric Choice Plan, the transfer of the transition property will be perfected
as against all third persons, including subsequent judicial or other lien
creditors.
Reliant Energy's records and computer systems will reflect the sale and
assignment of the transition property to us. Reliant Energy, however, will
treat the transition bonds as debt of Reliant Energy for federal income tax
purposes and financial reporting purposes so long as any of the transition bonds
are outstanding.
The initial transition property is the transition property, as identified
in the related bill of sale, sold to us on the initial transfer date pursuant to
the sale agreement in connection with the issuance of the initial series of the
transition bonds. The subsequent transition property is the transition property,
as identified in the related bill of sale, sold to us on any subsequent transfer
date pursuant to the sale agreement in connection with the subsequent issuance
of a series of the transition bonds.
RELIANT ENERGY'S REPRESENTATIONS AND WARRANTIES
In the sale agreement, Reliant Energy will make representations and
warranties to us as of the initial transfer date and any subsequent transfer
date to the effect, among other things, that:
1. all information, as amended or supplemented from time to time, provided
by Reliant Energy to us with respect to the transition property
(including the financing order and the issuance advice letter) is true
and correct in all material respects;
2. it is the intention of the parties hereto that the transfers and
assignments contemplated by the sale agreement each constitute a sale
and absolute transfer of the transferred transition property from
Reliant Energy to us and that no interest in, or right or title to, the
transferred transition property
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shall be part of Reliant Energy's estate in the event of the filing of a
bankruptcy petition by or against Reliant Energy under any bankruptcy
law. No portion of the transferred transition property has been sold,
transferred, assigned or pledged or otherwise conveyed by Reliant Energy
to any person other than us;
3. a. Reliant Energy is the sole owner of the transition property being
sold to us on the initial transfer date or subsequent transfer date,
as applicable,
b. on the transfer date, immediately upon the sale under the sale
agreement, the transferred transition property shall be validly
transferred and sold to us free and clear of all liens (except for
any lien created in favor of the transition bondholders pursuant to
Section 39.309 of the Texas Electric Choice Plan or any lien created
by us under the basic documents), and
c. all filings (including filings with the Texas Secretary of State in
accordance with the rules prescribed under the Texas Electric Choice
Plan) necessary in any jurisdiction to give the trustee a first
priority perfected security interest in the transition property have
been made;
4. the financing order has been issued by the Texas Commission in
accordance with the Texas Electric Choice Plan; the financing order and
the process by which it was issued comply with all applicable laws,
rules and regulations and the financing order is in full force and
effect;
5. as of the date of issuance of any series of the transition bonds, the
transition bonds will be entitled to the protections provided by the
Texas Electric Choice Plan and, in accordance with the Texas Electric
Choice Plan, the financing order and the transition charges have become
irrevocable and not subject to reduction, impairment or adjustment by
further action of the Texas commission, except as permitted by Section
39.307 of the Texas Electric Choice Plan and the issuance advice letter
relating to the transferred transition property has been filed in
accordance with the financing order;
6. a. under the Texas Electric Choice Plan, the State of Texas has pledged
that it will not take or permit any action that would impair the
value of the transition property, or, except as permitted in Section
39.307 of the Texas Electric Choice Plan, reduce, alter or impair the
transition charges until the principal, interest and premium, and any
other charges incurred and contracts to be performed in connection
with the transition bonds, have been paid and performed in full,
b. under the laws of the State of Texas and the United States, the State
of Texas, may not take any action that substantially impairs the
rights of the transition bondholders unless that action is a
reasonable exercise of the State of Texas' sovereign powers and
appropriate to further a legitimate public purpose, and, under the
takings clauses of the Texas and United States Constitutions, in the
event this action constitutes a permanent appropriation of the
property interest of transition bondholders in the transition
property and deprives the transition bondholders of their reasonable
expectations arising from their investments in the transition bonds,
that action cannot be taken unless just compensation, as determined
by a court of competent jurisdiction, is provided to transition
bondholders;
7. there is no order by any court providing for the revocation, alteration,
limitation or other impairment of the Texas Electric Choice Plan, the
financing order, the transition property or the transition charges or
any rights arising under any of them or that seeks to enjoin the
performance of any obligations under the financing order;
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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 of the transition property, except those that have
been obtained or made;
9. there are no proceedings pending and, to the best of Reliant Energy's
knowledge, (i) there are no proceedings threatened and (ii) there are
no investigations pending or threatened before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over us or Reliant Energy or our
respective properties challenging the Texas Electric Choice Plan or the
financing order;
10. on each transfer date, based upon the information available to Reliant
Energy on such date, the assumptions used in calculating the transition
charges are reasonable and made in good faith. Notwithstanding the
foregoing, Reliant Energy makes no representation or warranty, express
or implied, that the assumptions used in calculating such transition
charge will in fact be realized;
11. a. upon the effectiveness of the financing order, the issuance advice
letter and the transfer of transition property pursuant to the sale
agreement, the transition property constitutes a present property
right upon transfer to us for purposes of contracts concerning the
sale or pledge of property, and
b. upon the effectiveness of the financing order, the issuance advice
letter and the transfer of transition property pursuant to the sale
agreement, the transition property includes, without limitation:
(1) the transition charges authorized in the financing order,
(2) all rights of Reliant Energy under the financing order, and
(3) the rights to obtain periodic adjustments of the transition
charges as provided in the financing order, and
12. Reliant Energy is a corporation duly organized and in good standing
under the laws of the State of Texas, with the requisite corporate
power and authority to own its properties as currently owned and to
conduct its business as currently conducted by it, and has the
requisite corporate power and authority to obtain the financing order
and own, sell and transfer the transition property;
13. Reliant Energy has the corporate power and authority to execute and
deliver the sale agreement and to carry out its terms, and the
execution, delivery and performance of the sale agreement have been
duly authorized by Reliant Energy by all necessary corporate action on
the part of Reliant Energy;
14. the sale agreement constitutes a legal, valid and binding obligation of
Reliant Energy, enforceable against Reliant Energy 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 (i) conflict with or
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 Reliant Energy, or any
material indenture or agreement or other instrument to which Reliant
Energy is a party or by which it is bound; (ii) result in the creation
or imposition of any lien upon any of Reliant Energy's properties
pursuant to the terms of any such indenture or agreement or other
instrument (other than any lien that may be granted under the basic
documents or any lien created pursuant to Section 39.309 of the Texas
Electric Choice
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Plan); or (iii) violate any existing law or any existing order, rule or
regulation applicable to Reliant Energy of any court or of any federal
or state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over Reliant Energy or its
properties, so as to adversely affect Reliant Energy, us or the
transition bondholders;
16. except for continuation filings under the Uniform Commercial Code and
other filings under the Texas Electric Choice Plan and 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 Reliant Energy of the
sale agreement, the performance by Reliant Energy of the transactions
contemplated by the sale agreement or the fulfillment by Reliant Energy
of the terms of the sale agreement, except those which have previously
been obtained or made and those that Reliant Energy, in its capacity as
servicer under the servicing agreement, is required to make in the
future pursuant to the servicing agreement;
17. there are no proceedings or investigations pending and, to Reliant
Energy's knowledge, (i) there are no proceedings threatened and (ii)
there are no investigations pending or threatened before any court,
federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over its properties
involving or related to Reliant Energy or us or, to Reliant Energy's
knowledge, to any other person:
a. asserting the invalidity of the sale agreement, any of the other
basic documents or the transition bonds,
b. seeking to prevent the issuance of the transition bonds or the
consummation of the transactions contemplated by the sale agreement
or any of the other basic documents;
c. seeking any determination or ruling that could be reasonably
expected to materially and adversely affect the performance by
Reliant Energy of its obligations under, or the validity or
enforceability of, the sale agreement or any of the other basic
documents, or
d. challenging Reliant Energy's treatment of the transition bonds as
debt of Reliant Energy for U.S. federal income tax purposes;
18. after giving effect to the sale of any transition property under the
sale agreement, Reliant Energy:
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. Reliant Energy 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 or obtain
such licenses and approvals would not be reasonably
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likely to have a material adverse effect on Reliant Energy's business,
operations, assets, revenues or properties).
RELIANT ENERGY'S OBLIGATION TO INDEMNIFY US AND THE TRUSTEE AND TO TAKE LEGAL
ACTION
Under the sale agreement, Reliant Energy is obligated to indemnify us and
the trustee, for itself and on behalf of the transition bondholders, 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 transition property
by Reliant Energy to us, the acquisition or holding of the transition
property by us or the issuance and sale by us of the transition bonds,
including any sales, gross receipts, general corporation, personal
property, privilege or license taxes, but excluding any taxes imposed as
a result of a failure of that person to properly withhold or remit taxes
imposed with respect to payments on any transition bond, in the event
and to the extent such taxes are not recoverable qualified costs; and
2. any and all liabilities, obligations, losses, claims, damages, payments,
costs or expenses of any kind whatsoever that may be imposed on,
incurred by, or asserted against each such person as a result of (i)
Reliant Energy's willful misconduct or gross negligence in the
performance of its duties or observance of its covenants under the sale
agreement, or (ii) Reliant Energy's breach in any material respect of
its representations and warranties contained in the sale agreement.
These indemnification obligations will rank pari passu with other general
unsecured obligations of Reliant Energy. The indemnities described above will
survive the resignation or removal of the trustee or the termination of the sale
agreement and include reasonable fees and expenses of investigation and
litigation (including reasonable attorneys' fees and expenses).
Reliant Energy's Limited Obligation to Undertake Legal Action. Reliant
Energy and, if Reliant Energy is no longer the servicer, the servicer, are
required to institute any action or proceeding necessary to compel performance
by the Texas commission or the State of Texas of any of their obligations or
duties under the Texas Electric Choice Plan or the financing order with respect
to the transition property. The cost of any such actions or proceedings will be
payable by us. Except for the foregoing and subject to Reliant Energy's further
covenant to fully preserve, maintain and protect our interests in the transition
property, Reliant Energy 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 RELIANT ENERGY
The sale agreement provides that any person which succeeds to the major
part of the electric public utility business of Reliant Energy will be the
successor to Reliant Energy with respect to Reliant Energy's ongoing obligations
under the sale agreement. The sale agreement further requires that:
. immediately after giving effect to any transaction referred to in this
paragraph, no representation or warranty made in the sale agreement
will have been breached and no servicer default, and no event that,
after notice or lapse of time, or both, would become a servicer
default will have occurred and be continuing,
. the rating agencies will have received prior written notice of the
transaction, and
. officers' certificates and opinions of counsel specified in the sale
agreement will have been delivered to us and the trustee.
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THE SERVICING AGREEMENT
The following summary describes the material terms and provisions of the
servicing agreement pursuant to which the servicer is undertaking to service
transition property. We have filed the form of the servicing agreement 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
provided the rating agency condition has been satisfied.
RELIANT ENERGY'S SERVICING PROCEDURES
General. The servicer, as our agent, will manage, service, administer and
make collections in respect of transition property. The servicer's duties will
include:
. calculating and billing the transition charges and collecting the
transition charges from retail electric customers and retail electric
providers as applicable, and posting all collections,
. responding to inquiries by retail electric customers, retail electric
providers, the Texas commission or any federal, local or other state
governmental authority with respect to the transition property and
transition charges,
. accounting for collected transition charges, investigating
delinquencies, processing and depositing collections, making periodic
remittances and furnishing periodic reports to us, the trustee and the
rating agencies,
. selling, as an agent, defaulted or written-off accounts in accordance
with the servicer's usual and customary practices, and
. taking action in connection with adjustments to the transition charges
as described below.
Please refer to "Reliant Energy's Financing Order" in this prospectus. The
servicer is required to notify us, the trustee and the rating agencies in
writing of any laws or Texas commission 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.
Servicer Obligation to Undertake Legal Action. The servicer is required to
institute any action or proceeding necessary to compel performance by the Texas
commission or the State of Texas of any of their obligations or duties under the
Texas Electric Choice Plan or the financing order with respect to the transition
property. The cost of any action reasonably allocated by the servicer to the
transition property would be payable from collected transition charges as an
operating expense.
Collections Curve. Prior to January 1, 2002, the servicer will annually
prepare a forecast of the percentages of amounts billed in a particular calendar
month, referred to as a billing month, that are expected to be received during
each of the following seven months. These forecasts are referred to as the
collections curve. There will be a separate collections curve for each customer
class.
The servicer will remit collected transition charges for any billing month
to the trustee for deposit in the collection account not later than the
reconciliation date for that billing month. In addition, the servicer will make
periodic payments on account of collected transition charges to the trustee for
deposit in the collection account. For so long as:
. Reliant Energy or any successor to Reliant Energy's electric
transmission and distribution business remains the servicer,
. no servicer default has occurred and is continuing, and
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. either:
. Reliant Energy, or any successor servicer referred to in this
paragraph, maintains a short-term rating of "A-1" or better by S&P
and "P-1" or better by Moody's,
. the rating agency condition has been satisfied, and any conditions
or limitations imposed by the rating agencies in connection
therewith are complied with, or
. the servicer obtains a letter of credit or surety bond to assure
remittances of collected transition charges,
the servicer may make remittances on account of collected transition charges on
a monthly basis. On each monthly remittance date, the servicer will remit to
the trustee for each of the seven preceding billing months an amount equal to
the amount of collected transition charges estimated to have been received
during the preceding calendar month, based on the collections curve for each
customer class then in effect, for those billing months. If the servicer has
not satisfied the conditions specified above, the servicer will be required to
remit periodic payments on account of collected transition charges to the
trustee within two business days of receipt. The sum of the amounts paid to the
trustee over a seven-month period, following a particular billing month based on
the collections curves for that billing month, is referred to as the collections
curve payment for that billing month.
On or before the reconciliation date for each billing month, the servicer
will compare the actual collected transition charges to the collections curve
payments previously made to the trustee for that billing month. If the
collections curve payments previously made for that billing month exceed actual
collected transition charges for that billing month, this excess is referred to
as an excess curve payment. In that case, the servicer may reduce the amount
that the servicer remits to the trustee for deposit in the collection account on
the corresponding remittance date, and if necessary, succeeding remittance
dates, by the amount of the excess curve payment.
If the payments made for a billing month are less than actual collected
transition charges for that billing month, this deficiency is referred to as a
curve payment shortfall. In that case, the servicer must pay the curve payment
shortfall to the trustee on that reconciliation date for deposit in the
collection account.
On and after January 1, 2002, or in limited circumstances, sooner, retail
electric customers in Reliant Energy's service territory will purchase
electricity and related services from retail electric providers, one of which is
expected to be Reliant Energy or one of its affiliates, rather than from
electric utilities. Each retail electric provider will include the transition
charges in its bill to retail electric customers. The servicer will bill each
retail electric provider for transition charges attributable to the retail
electric provider's retail electric customers at least monthly. Pursuant to the
financing order, each retail electric provider must remit to the servicer the
amount of transition charges attributable to its retail electric customers (less
a specified percentage) within 16 days of the servicer's bill for such charges
regardless of whether payments are received from such retail electric customers.
The servicer will make periodic payments on account of collected transition
charges to the trustee for deposit in the collection account. If the servicer
meets the criteria set forth above, it may make remittances on account of
collected transition charges on a monthly basis; otherwise, it will be required
to remit collected transition charges to the trustee within two business days of
receipt.
THE TEXAS COMMISSION'S TRANSITION CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires the servicer to file
adjustment requests at least annually. For more information on the true-up
process please refer to "Reliant Energy's Financing Order -- True-Ups." These
adjustment requests are based on actual collected transition charges and updated
assumptions by the servicer as to projected future usage of electricity by
retail electric customers, expected delinquencies and write-offs and future
payments and expenses relating to the transition property and the transition
bonds. The servicer agrees to calculate these adjustments to result in:
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. the transition bond balance equaling the projected transition bond
balance and the aggregate reimbursement amount due and owing for the
preceding calendar year to any REP,
. the amount on deposit in the overcollateralization subaccount equaling
the scheduled overcollateralization level,
. the replenishment of any shortfalls in the capital subaccount to its
required level, and
. the amount in the reserve account equaling zero by the payment date
immediately preceding the next adjustment date, taking into account
any amounts on deposit in the reserve subaccount.
The servicer will file adjustment requests on each calculation date for us
as specified in the servicing agreement. In accordance with the financing
order, the Texas commission has ____ days to approve the adjustments. The
adjustments to the transition charges are expected to occur on each adjustment
date. Adjustments to the transition charges will cease with respect to each
series on the final adjustment date specified in the prospectus supplement for
that series.
Reliant Energy's Collected Transition Charges. The servicer is required to
remit all collected transition charges from whatever source and all proceeds of
our other collateral, if any, to the trustee for deposit pursuant to the
indenture on each remittance date. Until collected transition charges are
remitted to the collection account, the servicer will not segregate them from
its general funds. Remittances of collected transition charges will not include
interest thereon prior to the remittance date or late fees from retail electric
customers, which the servicer may retain. Please refer to "Risk Factors--Risks
Associated With Potential Bankruptcy Proceedings" in this prospectus.
RELIANT ENERGY'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER
PARTIES
We Agree to Pay the Servicer a Servicing Fee on Each Payment Date. The
servicing fee for each series, together with any portion of the servicing fee
that remains unpaid from prior payment dates, will be paid solely to the extent
funds are available therefor as described under "The Indenture--How Funds in the
Collection Account Will Be Allocated" in this prospectus. The servicing fee
will be paid prior to the payment of or provision for any amounts in respect of
interest on and principal of the transition bonds. In the servicing agreement,
the servicer releases us and the trustee from any and all claims whatsoever
relating to the transition property or the servicer's servicing activities with
respect thereto.
RELIANT ENERGY'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other things,
that, in servicing the transition property:
. except where the failure to comply with any of the following would not
materially adversely affect our or the trustee's respective interests
in the transition property,
. it will manage, service, administer and make collections in
respect of the transition property with reasonable care and in
material compliance with applicable law, including all applicable
Texas commission regulations and guidelines, using the same
degree of care and diligence that the servicer exercises with
respect to billing and collection activities that the servicer
conducts for itself and others,
. it will follow standards, policies and procedures in performing
its duties as servicer that are customary in the electric
transmission and distribution industry,
. it will use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain the trustee's and
our rights in respect of the transition property,
. it will calculate the transition charges in compliance with the
Texas Electric Choice Plan, the financing order and any
applicable tariffs,
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. it will petition the Texas commission for adjustments to the
transition charges that the servicer determines to be necessary
in accordance with the financing order,
. it will keep on file, in accordance with customary procedures,
all documents related to the transition property and will
maintain accurate and complete accounts, records and computer
systems pertaining to the transition property, and
. it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of
the transition property as they become due.
The duties of the servicer set forth in the servicing agreement are qualified by
any Texas commission regulations or orders in effect at the time these duties
are to be performed.
RELIANT ENERGY'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations and
warranties as of the date Reliant Energy sells or otherwise transfers the
transition property to us to the effect, among other things, that:
. the servicer is duly organized and validly existing as a corporation
in good standing under the laws of the state of its incorporation,
with the corporate power and authority to conduct its business as
presently conducted and to execute, deliver and carry out the terms of
the servicing agreement,
. the servicer is duly authorized or qualified to do business and is in
good standing, and has obtained all necessary licenses and approvals,
in all jurisdictions in which it is required to do so (except where
such failure would not have a material adverse effect on its business,
operations or properties or adversely affect the servicing of the
transition property),
. the servicer's execution, delivery and performance of the servicing
agreement have been duly authorized by the servicer by all necessary
corporate action,
. the servicing agreement constitutes a legal, valid and binding
obligation of the servicer, enforceable against the servicer in
accordance with its terms, subject to customary exceptions relating to
bankruptcy and equitable principles,
. the consummation of the transactions contemplated by the servicing
agreement does not conflict with or result in any breach of the terms
and provisions of nor constitute a default under the servicer's
articles of incorporation or by-laws or any material agreement to
which the servicer is a party or bound (except where such failure
would not have a material adverse effect on its business, operations
or properties or adversely affect the servicing of the transition
property), nor result in the creation or imposition of any lien upon
the servicer's properties or violate any law or any order, rule or
regulation applicable to the servicer or its properties, so as to
materially adversely affect the servicer or its ability to service the
transition property,
. except for filings with the Texas commission for adjusting the
transition charges, continuation filings under the Uniform Commercial
Code and other filings under the Texas Electric Choice Plan and the
Uniform Commercial Code, no governmental approvals, authorizations,
consents, orders or other actions or filings are required for the
servicer to execute, deliver and perform its obligations under the
servicing agreement, except those which have previously been obtained
or made or that are required by the servicing agreement to be made in
the future by the servicer, and
. no proceeding or investigation is pending or, to the servicer's best
knowledge, threatened before
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any court, federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the
servicer or its properties:
. seeking any determination or ruling that might materially and
adversely affect the performance by the servicer of its
obligations under, or the validity or enforceability against the
servicer of, the servicing agreement, or
. relating to the servicer and which might materially and adversely
affect the federal or state income, gross receipts or franchise
tax attributes of the transition bonds.
THE SERVICER WILL INDEMNIFY US AND OTHER RELATED ENTITIES IN LIMITED
CIRCUMSTANCES
Under the servicing agreement, the servicer agrees to indemnify, defend and
hold harmless us, the trustee, for itself and on behalf of the transition
bondholders, and related parties specified in the servicing agreement, including
our managers, against any costs, expenses, losses, damages and liabilities of
any kind whatsoever that may be imposed upon, incurred by or asserted against
any of those persons as a result of:
. the servicer's willful misconduct or gross negligence in the
performance of its duties or observance of its covenants under the
servicing agreement,
. the servicer's breach in any material respect of any of its
representations or warranties under the servicing agreement, and
. litigation and related expenses relating to its status and obligations
as servicer,
except to the extent that any such costs, expenses, losses, damages or
liabilities resulted from the willful misconduct, bad faith or gross negligence
of any such person or resulting from a breach of a representation or warranty
made by any such person in any of the basic documents that gives rise to the
servicer's indemnification obligation.
THE SERVICER WILL PROVIDE STATEMENTS TO US AND TO THE TRUSTEE
For each calculation date, the servicer will provide to us and the trustee
a statement indicating, with respect to the transition property, among other
things:
. the transition bond balance and the projected transition bond balance
for each series as of the immediately preceding payment date,
. the amount on deposit in the overcollateralization subaccount and the
scheduled overcollateralization level as of the immediately preceding
payment date,
. the amount on deposit in the capital subaccount and the amount
required to be on deposit in the capital subaccount as of the
immediately preceding payment date,
. the amount on deposit in the reserve subaccount as of the immediately
preceding payment date,
. the projected transition bond balance and the servicer's projection of
the transition bond balance for the payment date immediately preceding
the next succeeding adjustment date,
. the scheduled overcollateralization level and the servicer's
projection of the amount on deposit in the overcollateralization
subaccount for the payment date immediately preceding the next
succeeding adjustment date,
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. the required capital subaccount balance and the servicer's projection
of the amount on deposit in the capital subaccount for the payment
date immediately preceding the next succeeding adjustment date, and
. the servicer's projection of the amount on deposit in the reserve
subaccount for the payment date immediately preceding the next
succeeding adjustment date.
The servicer will prepare and furnish to us and the trustee a monthly statement
setting forth the aggregate amount remitted or to be remitted by the servicer to
the trustee. In addition, on or before each payment date, the servicer will
prepare and furnish to us and the trustee a statement setting forth the
transfers and payments to be made on that payment date and the amounts thereof.
Further, on or before each payment date for each series of the transition bonds,
the servicer will prepare and furnish to us and the trustee a statement setting
forth the amounts to be paid to the holders of the transition bonds of that
series. On the basis of this information, the trustee will furnish to the
transition bondholders on each payment date the report described under "The
Indenture--Reports to Holders of the Transition Bonds" in this prospectus.
THE SERVICER WILL PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
The servicing agreement provides that a firm of independent public
accountants will furnish to us, the trustee and the rating agencies, on or
before March 31 of each year, beginning March 31, 2001, 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 transition
property. This report, which is referred to in this prospectus 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, identify the results of these procedures and include any
exceptions noted. The annual accountant's report will also indicate that the
accounting firm providing the report is independent of the servicer within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants. The servicing agreement also provides for
delivery to us and the trustee, on or before March 31 of each year, a
certificate signed by an officer of the servicer. This certificate will state
that the servicer has fulfilled its obligations under the servicing agreement
for the preceding calendar year, or the relevant portion thereof, or, if there
has been a default in the fulfillment of any relevant obligation, describing
each default. The servicer has agreed to give us, each rating agency and the
trustee notice of any servicer default under the servicing agreement.
MATTERS REGARDING RELIANT ENERGY AS SERVICER
Under the servicing agreement, any person:
. into which the servicer may be merged, consolidated or converted and
which succeeds to the major part of the electric transmission and
distribution business of the servicer (or if transmission and
distribution are split, which provides wire service directly to
customers),
. which results from the division of the servicer into two or more
persons and which succeeds to the major part of the electric
transmission and distribution business of the servicer (or if
transmission and distribution are split, which provides wire service
directly to customers),
. which may result from any merger, consolidation or conversion to which
the servicer shall be a party and which succeeds to the major part of
the electric transmission and distribution business of the servicer
(or if transmission and distribution are split, which provides wire
service directly to customers),
. which may succeed to the properties and assets of the servicer
substantially as a whole and which succeeds to the major part of the
electric transmission and distribution business of the servicer (or if
transmission and distribution are split, which provides wire service
directly to customers), or
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. which may otherwise succeed to the major part of the electric
transmission and distribution business of the servicer (or if
transmission and distribution are split, which provides wire service
directly to customers),
will be the successor of the servicer under the servicing agreement.
The servicing agreement further requires that:
. immediately after giving effect to the transaction referred to above,
no representation or warranty made by the servicer in the servicing
agreement will have been breached and no servicer default, and no
event which, after notice or lapse of time, or both, would become a
servicer default will have occurred and be continuing,
. the successor to the servicer must execute an agreement of assumption
to perform every obligation of the servicer under the servicing
agreement,
. officers' certificates and opinions of counsel will have been
delivered to us and the trustee, and
. prior written notice will have been received by the rating agencies.
The servicing agreement provides that, subject to the foregoing provisions,
Reliant Energy may not resign from the obligations and duties imposed on it as
servicer unless either:
. Reliant Energy determines that the performance of its duties under the
servicing agreement shall no longer be permissible under applicable
law, or
. satisfaction of the following:
. the rating agency condition shall have been satisfied except that
with respect to Moody's it shall be sufficient to provide ten
days' prior notice, and
. to the extent required under the financing order, the Texas
commission shall have approved such resignation.
Notice of any such determination will be communicated to us, to the trustee and
to each rating agency at the earliest practicable time and shall be evidenced by
an opinion of counsel. A resignation by Reliant Energy as servicer will not
become effective until a successor servicer has assumed the servicing
obligations and duties of Reliant Energy under the servicing agreement.
Except as expressly provided in the servicing agreement, the servicer will
not be liable to us or the trustee for any action taken or for refraining from
taking any action pursuant to the servicing agreement or for errors in judgment.
However, the servicer will be liable to the extent this liability is imposed by
reason of the servicer's wilful misconduct, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of obligations and
duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY RELIANT ENERGY IN ITS ROLE AS SERVICER
Servicer defaults under the servicing agreement will include, among other
things:
. any failure by the servicer to deliver to the trustee, on our behalf,
any required remittance that continues unremedied for a period of five
business days after written notice of such failure is received by the
servicer from us or the trustee,
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. any failure by the servicer to duly observe or perform in any material
respect any other covenant or agreement in the servicing agreement or
any other basic document to which it is a party, which failure
materially and adversely affects the transition property and which
continues unremedied for 60 days after written notice of this failure
has been given to the servicer, by us or the trustee or after
discovery of this failure by an officer of the servicer, as the case
may be,
. 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, the
trustee or us and which continues unremedied for 60 days after written
notice of this failure has been given to the servicer by us or the
trustee or after discovery of this failure by an officer of the
servicer, as the case may be, or
. an event of bankruptcy, insolvency, readjustment of debt, marshaling
of assets and liabilities, or similar proceedings with respect to the
servicer or an action by the servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay
its obligations as specified in the servicing agreement.
The trustee with the consent of the holders of the majority of the outstanding
principal amount 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 RELIANT ENERGY DEFAULTS IN ITS ROLE AS SERVICER
As long as a servicer default under the servicing agreement remains
unremedied, the trustee may, and upon the instruction of the holders of a
majority of the outstanding principal amount of the transition bonds of all
series, shall by written notice to the servicer, 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. In the event of the removal or resignation of the servicer, the
trustee may, and upon the instruction of the holders of a majority of the
outstanding principal amount of the transition bonds of all series, shall
appoint a successor servicer which will succeed to all the rights and duties of
the servicer under the servicing agreement. The trustee may make arrangements
for compensation to be paid to any successor servicer.
Upon a servicer default based upon the commencement of a case by or against
the servicer under the insolvency laws, the trustee may be prevented from
effecting a transfer of servicing. Please refer to the "Risk Factors--Risks
Associated With Potential Bankruptcy Proceedings" and "How a Bankruptcy May
Affect Your Investment" in this prospectus. Upon a servicer default because of
a failure to make required remittances, we and the trustee will have the right
to apply to a Texas court for sequestration and payment to the trustee of
revenues arising from the transition property.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS RELIANT ENERGY
In accordance with the provisions of the financing order and pursuant to
the provisions of the servicing agreement, if for any reason a third party
assumes or succeeds to the role of the servicer under the servicing agreement,
the servicing agreement will require the servicer to cooperate with us, 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 documentation pertaining to the
transition property and all cash amounts then held by the servicer for
remittance or subsequently acquired by the servicer. The servicing agreement
provides that the servicer will be liable for all reasonable costs and expenses
incurred in transferring servicing responsibilities to the successor servicer in
the event the successor servicer is appointed as a result of a servicer default.
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.
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THE INDENTURE
The following summary describes particular material terms of the indenture
pursuant to which transition bonds will be issued. We have filed the form of
the indenture and the form of the supplemental indenture with the SEC as
exhibits to the registration statement.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal, premium, if any, and interest on, and
any other amounts owing in respect of, the transition bonds pursuant to the
indenture, we will grant to the trustee for the benefit of the transition
bondholders a security interest in all of our right, title and interest in and
to the following collateral which constitutes the trust estate under the
indenture:
. the transition property,
. our rights under the sale agreement,
. all bills of sale delivered by Reliant Energy pursuant to the sale
agreement,
. our rights under the servicing agreement and any subservicing
agreements or collection agreements executed in connection with the
servicing agreement,
. the collection account and all subaccounts of the collection
account, including the general subaccount, the overcollateralization
subaccount, the capital subaccount and the reserve subaccount and
all cash, securities, instruments, investment property or other
assets credited to or deposited in the collection account or any
subaccount of the collection account from time to time or purchased
with funds from the collection account,
. all of our other property, other than any cash released to us by the
trustee quarterly from earnings on the capital subaccount,
. all present and future claims, demands, causes and choses in action
in respect of any or all of the foregoing, and
. all payments on or under and all proceeds in respect of any or all
of the foregoing, including all proceeds of the conversion,
voluntary or involuntary, into cash or other liquid property of any
or all of the foregoing, all cash proceeds, accounts, accounts
receivable, general intangibles, notes, drafts, acceptances, chattel
paper, checks, deposit accounts, insurance proceeds, condemnation
awards, rights to payment of any and every kind, and other forms of
obligations and receivables, instruments and other property which at
any time constitute all or part of or are included in the proceeds
of any of the foregoing,
provided that cash or other property released to us from the collection account
in accordance with the provisions of the indenture will not be subject to the
lien of the indenture. Please refer to "--How Funds in the Collection Account
Will Be Allocated."
THE TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
The transition bonds may be issued under the indenture from time to time to
finance the purchase by us of transition property, which we refer to as a
"financing issuance." The aggregate principal amount of the transition bonds
that may be authenticated and delivered under the indenture may not exceed
$_________. Any series of the 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
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particular terms of the transition bonds of any series and, if applicable,
classes thereof, will be set forth in the supplemental indenture for that
series. The terms of a series of transition bonds and any classes thereof, will
not be subject to consent of the transition bondholders of any previously issued
series. Please refer to "Risk Factors--Other Risks Associated With an Investment
in the Transition Bonds," and "The Transition Bonds" in this prospectus.
The issuance of more than one series of the transition bonds is not
expected to adversely affect collections of transition charges to make payments
on the other series. This is because transition charges and adjustments thereof
are generally based on the total principal amount of all transition bonds
outstanding.
Under the indenture, the trustee will authenticate and deliver an
additional series of the transition bonds only upon receipt by the trustee of,
among other things, a certificate from us stating that no event of default has
occurred and is continuing, an opinion of our counsel 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 must 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 charges with respect to the transferred transition property
or, if applicable, the most recent revised transition charges with respect to
the 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 charges will be sufficient to:
. pay all fees, costs and charges associated with each series of the
transition bonds,
. pay interest of each series of the transition bonds when due,
. pay principal of each series of the transition bonds in accordance
with the expected amortization schedule therefor, and
. fund the overcollateralization subaccount to the scheduled
overcollateralization level and replenish any shortfalls in the
capital subaccount,
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, we will establish the collection account with the
trustee or at another eligible institution. Funds received from collections of
the transition charges will be deposited into the collection account. The
collection account will be divided into the following subaccounts, which need
not be separate bank accounts:
. the general subaccount,
. the overcollateralization subaccount,
. the capital subaccount, and
. 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 in this prospectus and the prospectus supplement to the collection
account include all of the subaccounts contained therein. All monies deposited
from time to time in the collection account, all deposits therein pursuant to
the indenture, and all investments made in eligible investments with these
monies will be held by the trustee in the collection account as part of the
collateral.
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The Definition of Eligible Institution. Eligible institution means:
. the corporate trust department of the trustee, or
. the trust department of a depository institution organized under the
laws of the United States of America or any state or domestic branch
of a foreign bank, which:
has either:
. a long-term unsecured debt rating of "AAA" by S&P and "A1" by
Moody's, or
. a certificate of deposit rating of "A-1+" by S&P and "P-1" by
Moody's, or any other long-term, short-term or certificate of
deposit rating acceptable to the rating agencies, and
. whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. So long as no
default or event of default has occurred and is continuing, all funds in the
collection account must be invested in any of the following, each of which is
referred to as an eligible investment:
1. direct obligations of, and obligations fully guaranteed as to timely
payment by, the United States of America,
2. demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of
the United States of America or any State thereof, or any domestic
branch of a foreign bank, and subject to supervision and examination by
federal or state banking or depository institution authorities;
provided, however, that at the time of the investment or contractual
commitment to invest therein, the commercial paper or other short-term
unsecured debt obligations, other than any obligations thereof where the
rating is based on the credit of a person other than such depository
institution or trust company, shall have either (A) a long term
unsecured debt rating from Moody's and S&P of Aaa and Aaa, respectively,
or (B) a certificate of deposit rating by Moody's and S&P of P-1 and
A-1+, respectively,
3. commercial paper or other short-term obligations of any corporation,
other than Reliant Energy, whose ratings, at the time of the investment
or contractual commitment to invest therein, from Moody's and S&P of
"A-1/P-1,"
4. investments in money market funds having a rating from Moody's and S&P
of Aaa and AAA, respectively, including funds for which the trustee or
any of its affiliates act as investment manager or advisor,
5. bankers' acceptances issued by any depository institution or trust
company referred to in clause 2 above,
6. repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States of America or
any agency or instrumentality thereof the obligations of which are
backed by the full faith and credit of the United States of America, in
either case entered into with a depository institution or trust company,
acting as principal, described in clause 2 above,
7. repurchase obligations with respect to any security or whole loan
entered into with:
a. a depository institution or trust company, acting as principal,
described in clause 2 above, except that the rating referred to in
the proviso in that clause 2 shall be "A-1" or higher in the case of
S&P,
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b. broker/dealer, acting as principal, registered as a broker or dealer
under Section 15 of the Securities Exchange Act of 1934 the unsecured
short-term debt obligations of which are rated "P-1" by Moody's and
at least "A-1" by S&P at the time of entering into this repurchase
obligation, or
c. an unrated broker/dealer, acting as principal, that is a wholly-owned
subsidiary of a non-bank or bank holding company the unsecured short-
term debt obligations of which are rated "P-1" by Moody's and at
least "A-1" by S&P at the time of purchase, or
8. any other investment permitted by each of the rating agencies; provided,
however, that:
a. any book-entry security, instrument or security having a maturity of
one month or less that would be an eligible investment but for its
failure, or the failure of the obligor thereon, to have the rating
specified above shall be an eligible investment if such book-entry
security, instrument or security, or the obligor thereon, has a long-
term unsecured debt rating of at least "A2" by Moody's, or the
equivalent thereof by the other rating agencies, or a short-term
rating of at least "P-1" by Moody's, or the equivalent thereof by the
other rating agencies, and
b. any book-entry security, instrument or security having a maturity of
greater than one month that would be an eligible investment but for
its failure, or the failure of the obligor thereon, to have the
rating specified above shall be an eligible investment if such book-
entry security, instrument or security, or the obligor thereon, has a
long-term unsecured debt rating of at least "A1" by Moody's, or the
equivalent thereof by the other rating agencies, and a short-term
rating of at least "P-1" by Moody's, or the equivalent thereof by the
other rating agencies.
These eligible investments may not:
. mature later than the next payment date, or
. be sold, liquidated or otherwise disposed of at a loss prior to the
maturity thereof.
No moneys held in the collection account may be invested, and no investment held
in the collection account may be sold, unless the security interest granted and
perfected in the collection account will continue to be perfected in the
investment or the proceeds of the sale in either case without any further action
by any person. Funds in the defeasance account, if any, for any series of
transition bonds may be invested only in securities discussed in clause 1 above.
Remittances to the Collection Account. On each remittance date, the
servicer will remit all collected transition charges and any indemnity amounts
to the trustee under the indenture for deposit in the collection account.
Indemnity amount means any amount paid by the servicer or Reliant Energy to the
trustee, for the trustee or on behalf of the transition bondholders, in respect
of indemnification obligations pursuant to the servicing agreement or the sale
agreement. Please refer to "The Servicing Agreement" and "The Sale Agreement"
in this prospectus.
General Subaccount. Collected transition charges and any indemnity amounts
remitted to the trustee 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."
Capital Subaccount. Upon the issuance of each series of the transition
bonds, Reliant Energy will make a capital contribution to us in an amount stated
in the prospectus supplement. We will pay this amount to the trustee for
deposit into the capital subaccount which will be invested in eligible
investments. The trustee will draw on amounts in the capital subaccount to the
extent that, in allocating funds in accordance with clauses 1 through 9 in "How
Funds in the Collection Account Will Be Allocated" below, amounts on deposit in
the general subaccount, the reserve subaccount and the overcollateralization
subaccount are insufficient to make scheduled payments on the
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transition bonds and payments of fees and expenses specified in clauses 1
through 9. If any series of the transition bonds has been retired as of any
payment date, the amounts on deposit in the capital subaccount allocable to that
series will be released to us, free of the lien of the indenture.
Overcollateralization Subaccount. To the extent funds are available as
described in "How Funds in the Collection Account Will Be Allocated" below, the
trustee will allocate them to the overcollateralization subaccount on each
payment date. We will specify the scheduled overcollateralization level on each
payment date for the overcollateralization subaccount in the prospectus
supplement for the related series of the transition bonds. The
overcollateralization amount will be funded over the life of the transition
bonds with collected transition charges for each series as specified in the
related prospectus supplement, and in aggregate will equal the amount stated in
the related prospectus supplement for that series, which we refer to in this
prospectus and the prospectus supplement as the "overcollateralization amount."
Amounts in the overcollateralization subaccount will be invested in
eligible investments. On each payment date, the trustee will draw on amounts in
the overcollateralization subaccount to the extent that, after allocation of
funds in accordance with clauses 1 through 9 in "How Funds in the Collection
Account Will Be Allocated" below, amounts on deposit in the general subaccount
and the reserve subaccount are insufficient to make scheduled payments on the
transition bonds and payments of fees and expenses specified in clauses 1
through 9.
Reserve Subaccount. The trustee will allocate collected transition charges
available on any payment date that are not necessary to pay clauses 1 through 12
in "How Funds in the Collection Account Will Be Allocated" below to the reserve
subaccount. The trustee will invest amounts in the reserve subaccount in
eligible investments. On each payment date, the trustee will draw on the reserve
subaccount in allocating funds in accordance with clauses 1 through 12 in "How
Funds in the Collection Account Will Be Allocated" below to the extent that
amounts on deposit in the general subaccount are insufficient to make scheduled
payments on the transition bonds and payments of fees and expenses specified in
clauses 5 through 7.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted by the servicer to the trustee, including any indemnity
amounts, and all investment earnings on the subaccounts in the collection
account, other than the capital subaccount, will be deposited into the general
subaccount of the collection account. On each payment date, the trustee will
allocate or pay all amounts on deposit in the general subaccount of the
collection account in the following priority:
1. payment of the trustee's fee, which will be a fixed fee in an amount
specified in the indenture,
2. payment of the servicing fee and any unpaid servicing fees from prior
payment dates, which will be a fixed fee in an amount specified in the
servicing agreement,
3. payment of the administration fee, which will be a fixed fee in an
amount specified in the administration agreement between us and
Reliant Energy, and fees of our independent managers which will be
specified in the amended and restated limited liability company
agreement,
4. payment of all of our operating expenses up to an aggregate of
$_______ for each payment date for all series of the transition bonds,
so long as no event of default has occurred and is continuing or would
be caused by this payment,
5. payment of the interest then due on the transition bonds, including
payment of any amount payable to the swap counterparty on any interest
rate swap agreement,
6. payment of the principal then required to be paid on the transition
bonds, including any principal due and payable at final maturity or
upon redemption or acceleration,
7. payment of the principal then scheduled to be paid on the transition
bonds,
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8. payment of any amounts payable to any other credit enhancement
providers,
9. payment of any of our remaining unpaid operating expenses plus any
expenses and indemnity amounts owed to the trustee or our managers,
10. replenishment of any shortfalls in the capital subaccount,
11. payment of the scheduled allocation to and replenishment of any
shortfall in the overcollateralization subaccount,
12. release of an amount equal to investment earnings on amounts in the
capital subaccount to us, so long as no event of default has occurred
and is continuing, and
13. allocation of the remainder, if any, to the reserve subaccount.
Interest means, for any payment date for any series of the transition
bonds, the sum, without duplication, of:
. an amount equal to the interest accrued on that series at the applicable
bond rate from the prior payment date or, with respect to the first
payment date, the amount of interest accrued since the issuance date,
with respect to that series,
. any unpaid interest plus, to the fullest extent permitted by law, any
interest accrued on this unpaid interest, and
. if the transition bonds have been declared due and payable, all accrued
and unpaid interest thereon.
Principal means, with respect to any payment date and any series of the
transition bonds, the sum, without duplication, of:
. the amount of principal due as a result of the occurrence and
continuance of an event of default and acceleration of the transition
bonds,
. the amount of principal due on the final maturity date of any series,
. the amount of principal and premium, if any, due as a result of a
redemption of the transition bonds prior to such payment date pursuant
to the indenture,
. any overdue payments of principal, and
. the amount of principal scheduled to be paid on such payment date in
accordance with the expected amortization schedule.
If on any payment date funds in the general subaccount are insufficient to
make the allocations or payments contemplated by clauses 1 through 12 of the
first paragraph of this subsection, the trustee will draw from amounts on
deposit in the following subaccounts in the following order up to the amount of
the shortfall:
1. from the reserve subaccount, for allocations and payments contemplated
in clauses 1 through 12,
2. from the overcollateralization subaccount for allocations and payments
contemplated by clauses 1 through 9, and
3. from the capital subaccount for allocations and payments contemplated by
clauses 1 through 9.
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If, on any payment date, available collections of transition charges,
together with available amounts in the subaccounts, are not sufficient to pay
interest due on all outstanding transition bonds, amounts available will be
allocated among the outstanding series of the transition bonds pro rata based on
the amount of interest payable on the outstanding series. If, on any payment
date, remaining collections of the transition charges, together with available
amounts in the subaccounts, are not sufficient to pay principal due and payable
on all outstanding series of the transition bonds, amounts available will be
allocated among the outstanding series pro rata based on the principal amount of
each series then due and payable. If, on any payment date, remaining
collections of the transition charges, together with available amounts in the
subaccounts, are not sufficient to pay principal scheduled to be paid on all
outstanding series of the transition bonds, amounts available will be allocated
on a pro rata basis based on the amounts of principal payable and scheduled to
be paid on the payment date.
REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of the 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 applicable supplemental indenture, as to the transition
bonds of that series with respect to that payment date or the period since the
previous payment date, as applicable:
. the amount paid to transition bondholders of that series and the related
classes in respect of principal,
. the amount paid to transition bondholders of that series and the related
classes in respect of interest,
. the transition bond balance and the projected transition bond balance of
that series and the related classes as of that payment date,
. the amount on deposit in the overcollateralization subaccount and the
scheduled overcollateralization level, with respect to that series and
as of that payment date,
. the amount on deposit in the capital subaccount as of that payment date,
and
. the amount, if any, on deposit in the reserve subaccount for all series
as of that payment date.
WE AND THE TRUSTEE MAY MODIFY THE INDENTURE
Modifications of the Indenture that Do Not Require Consent of Transition
Bondholders. Without the consent of any of the holders of the outstanding
transition bonds but with prior notice to the rating agencies, we and the
trustee may execute a supplemental indenture for any of the following purposes:
. to correct or amplify the description of the collateral, or to better
assure, convey and confirm unto the trustee the collateral, or to
subject to the lien of the indenture additional property,
. to evidence the succession, in compliance with the applicable provisions
of the indenture, of another entity to us, and the assumption by any
applicable successor of our covenants contained in the indenture and in
the transition bonds,
. to add to our covenants, for the benefit of the holders of the
transition bonds, or to surrender any right or power therein conferred
upon us,
. to convey, transfer, assign, mortgage or pledge any property to the
trustee,
. to cure any ambiguity, to correct or supplement any provision of the
indenture or in any supplemental indenture which may be inconsistent
with any other provision of the indenture or in any supplemental
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indenture or to make any other provisions with respect to matters or
questions arising under the indenture or in any supplemental indenture;
provided, however, that:
. this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
transition bondholder, and
. the rating agency condition shall have been satisfied with respect
thereto,
. to evidence and provide for the acceptance of the appointment under the
indenture by a successor trustee with respect to the transition bonds
and to add to or change any of the provisions of the indenture as shall
be necessary to facilitate the administration of the trusts under the
indenture by more than one trustee, pursuant to the requirements
specified in the indenture,
. to modify, eliminate or add to the provisions of the indenture to the
extent necessary to effect the qualification of the indenture under the
Trust Indenture Act or under any similar federal statute hereafter
enacted and to add to the indenture any other provisions as may be
expressly required by the Trust Indenture Act, or
. 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.
Additional Modifications to the Indenture that Do Not Require the Consent
of Transition Bondholders. Additionally, without the consent of any of the
transition bondholders, we and the trustee may execute a supplemental indenture.
The supplemental indenture referred to in this paragraph may add provisions to,
or change in any manner or eliminate any other provisions of, the indenture, or
modify in any other manner the rights of the transition bondholders under the
indenture; provided, however, that:
. this action shall not adversely affect in any material respect the
interests of any transition bondholder, and
. the rating agency condition shall have been satisfied with respect
thereto.
Modifications That Require the Approval of the Transition Bondholders. We
and the trustee also may, with prior notice to the rating agencies and with the
consent of the holders of not less than a majority of the outstanding amount of
the transition bonds of each series or class to be affected, execute a
supplemental indenture to add any provisions to, or change in any manner or
eliminate any of the provisions of, the indenture or modify in any manner the
rights of the transition bondholders under the indenture. However, this
supplemental indenture may not, without the consent of the holder of each
outstanding transition bond of each series or class affected thereby:
. change the date of payment of any installment of principal of or
premium, if any, or interest on any transition bond, or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price or the premium, if any, with respect thereto, change
the provisions of the indenture and the related applicable supplemental
indenture relating to the application of collections on, or the proceeds
of the sale of, the collateral to payment of principal of or premium, if
any, or interest on the transition bonds, or change the coin or currency
in which any transition bond or any interest thereon is payable,
. impair the right to institute suit for the enforcement of those
provisions of the indenture specified therein regarding payment,
. reduce the percentage of the aggregate amount of the outstanding
transition bonds, or of a series or class thereof, the consent of the
transition bondholders of which is required for any supplemental
indenture, or the consent of the transition bondholders of which is
required for any waiver of
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compliance with those provisions of the indenture specified therein or
of defaults specified therein and their consequences provided for in the
indenture,
. reduce the percentage of the outstanding amount of the transition bonds
required to direct the trustee to direct us to sell or liquidate the
collateral,
. modify any provision of the section of the indenture relating to the
consent of transition bondholders with respect to supplemental
indentures, except to increase any percentage specified therein or to
provide that those provisions of the indenture or the basic documents
specified in the indenture cannot be modified or waived without the
consent of each outstanding transition bondholder affected thereby,
. modify any of the provisions of the indenture in a manner so as to
affect the amount of any payment of interest, principal or premium, if
any, payable on any transition bond on any payment date or change the
redemption dates, expected amortization schedules, series final maturity
dates or class final maturity dates of any transition bonds,
. decrease the required capital amount with respect to any series, the
overcollateralization amount or the scheduled overcollateralization
level with respect to any series and any payment date,
. modify or alter the provisions of the indenture regarding the voting of
the transition bonds held by us, Reliant Energy, an affiliate of either
of them or any obligor on the transition bonds,
. decrease the percentage of the aggregate principal amount of the
transition bonds required to amend the sections of the indenture which
specify the applicable percentage of the aggregate principal amount of
the transition bonds necessary to amend the indenture or other related
agreements specified therein, or
. 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 permitted or contemplated in
the indenture, terminate the lien of the indenture on any property at
any time subject thereto or deprive the holder of any transition bond of
the security provided by the lien of the indenture.
Enforcement of the Sale Agreement, the Administration Agreement and the
Servicing Agreement. The indenture provides that we will take all lawful
actions to enforce our rights under the sale agreement, the administration
agreement and the servicing agreement. The indenture also provides that we will
take all lawful actions to compel or secure the performance and observance by
Reliant Energy, the administrator and the servicer, of their respective
obligations to us under or in connection with the sale agreement, the
administration agreement and the servicing agreement. So long as no event of
default occurs and is continuing, we may exercise any and all rights, remedies,
powers and privileges lawfully available to us under or in connection with the
sale agreement, the administration agreement and the servicing agreement.
However, if we or the servicer proposes to amend, modify, waive, supplement,
terminate or surrender, or agree to any amendment, modification, supplement,
termination, waiver or surrender of, the process for adjusting the transition
charges, we must notify the trustee and the trustee must notify the transition
bondholders of this proposal. In addition, the trustee may consent to this
proposal only with the consent of the holders of a majority of the principal
amount of the outstanding transition bonds of each series or class materially
and adversely affected thereby and only if the rating agency condition is
satisfied.
If an event of default occurs and is continuing, the trustee may, and, at
the direction of the holders of a majority of the outstanding amount of the
transition bonds of all series shall, exercise all of our rights, remedies,
powers, privileges and claims against Reliant Energy, the administrator and
servicer, under or in connection with the sale agreement, the administration
agreement and the servicing agreement, and any right of us 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 transition property, and, therefore, foreclosure
may not be a realistic or practical remedy.
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Modifications to the Sale Agreement and the Servicing Agreement. With the
consent of the trustee, the sale agreement and the servicing agreement may be
amended, so long as the rating agency condition is satisfied in connection
therewith, at any time and from time to time, without the consent of the
transition bondholders. However, this amendment may not adversely affect the
interest of any transition bondholder in any material respect without the
consent of the holders of a majority of the outstanding principal amount of the
transition bonds.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of Any Modification. If we, Reliant Energy, or the servicer
. propose to amend, modify, waive, supplement, terminate or surrender, or
agree to any other amendment, modification, waiver, supplement,
termination or surrender of, the terms of the sale agreement or the
servicing agreement, or
. waive timely performance or observance by Reliant Energy or the servicer
under the sale agreement or the servicing agreement,
in each case in a way which would materially and adversely affect the interests
of transition bondholders, we must first notify the rating agencies of the
proposed amendment. Upon receiving notification regarding the rating agency
condition, we must thereafter notify the trustee and the trustee shall notify
the transition bondholders of the proposed amendment and whether the rating
agency condition has been satisfied with respect thereto. The trustee will
consent to this proposed amendment, modification, supplement or waiver only with
the consent of the holders of a majority of the outstanding principal amount of
the transition bonds of each series or class materially and adversely affected
thereby.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An event of default is defined in the indenture as being:
1. a default in the payment of any interest on any transition bond when the
same becomes due and payable and the continuation of this default for
five business days,
2. a default in the payment of the then unpaid 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 of our covenants or
agreements made in the indenture, other than those specifically dealt
with in clause 1, 2 or 3 above, or any of our representations or
warranties made in the indenture or in any certificate or other writing
delivered pursuant to the indenture or in connection with the indenture
proving to have been incorrect in any material respect as of the time
when made, and this default continues or is not cured for a period of 30
days after:
a. notice of the default is given to us by the trustee or to us and
the trustee by the holders of at least 25% of the outstanding
principal amount of the transition bonds of any series or class,
or
b. the date we have actual knowledge of the default,
5. the filing of a decree or order for relief by a court having
jurisdiction in respect of us or any substantial part of the collateral
in an involuntary case under any applicable federal or state bankruptcy,
insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of us or our property for any
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substantial part of the collateral, or ordering the winding-up or
liquidation of our affairs, and such decree or order remains unstayed
and in effect for a period of 90 consecutive days, or
6. the commencement by us of a voluntary case under any applicable federal
or state bankruptcy, insolvency or other similar law now or hereafter in
effect, or the consent by us to the entry of an order for relief in an
involuntary case under any such law, or the consent by us to the
appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of us or our
property for any substantial part of the collateral, or the making by us
of any general assignment for the benefit of creditors, or the failure
by us generally to pay our debts as such debts become due, or the taking
of action by us in furtherance of any of the foregoing.
If an event of default occurs and is continuing, the trustee or holders of a
majority in principal amount of the transition bonds of all series then
outstanding may declare the unpaid principal balance of all series of the
transition bonds, together with accrued interest, to be immediately due and
payable. This declaration may, under the circumstances specified therein, be
rescinded by the holders of a majority in principal amount of all series of the
transition bonds then outstanding.
When the Trustee Can Sell the Collateral. If the transition bonds of all
series have been declared to be due and payable following an event of default,
the trustee may, in its discretion, either:
. sell the collateral, or
. elect to have us 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 for five days or more in the payment of any
interest on any transition bond of any series, a default in the payment of the
then unpaid 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, or a default in the payment of the redemption price for any
transition bond on the redemption date therefor unless:
. the holders of 100% of the principal amount of all series of the
transition bonds consent to the sale,
. the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and premium, if any, and accrued interest on the
outstanding transition bonds, or
. the trustee determines that funds provided by the collateral would not
be sufficient on an ongoing basis to make all payments on the transition
bonds of all series as these payments would have become due if the
transition bonds had not been declared due and payable, and the trustee
obtains the consent of the holders of 66 2/3% of the aggregate
outstanding principal amount of the transition bonds of all series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the indenture,
the holders of a majority in principal amount of the outstanding transition
bonds of all series will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the trustee or exercising
any trust or power conferred on the trustee; provided that, among other things:
. this direction does not conflict with any rule of law or with the
indenture,
. subject to the provisions specified in the indenture, any direction to
the trustee to sell or liquidate the collateral is by the holders of
100% of the principal amount of all series of the transition bonds then
outstanding, and
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. the trustee may take any other action deemed proper by the trustee that
is not inconsistent with this direction.
However, 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 request or direction of any of the holders of the 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, or
. it determines that this action might materially adversely affect the
rights of any transition bondholder not consenting to the action.
Waiver of Default. The holders of a majority in principal amount of the
transition bonds of all series then outstanding may, in those cases specified in
the indenture, waive any default with respect thereto. However, they may not
waive a default in the payment of principal of or premium, if any, or interest
on any of the transition bonds or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all of the holders of the outstanding transition bonds of all affected series
and classes.
No transition bondholder of any series will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of the right to foreclose
on the transition property or otherwise enforce the lien in the transition
property, pursuant to Section 39.309 of the Texas Electric Choice Plan, with
respect to the indenture, unless:
. the holder previously has given to the trustee written notice of a
continuing event of default,
. the holders of not less than 25% in principal amount of the outstanding
transition bonds of all series have made written request of the trustee
to institute the proceeding in its own name as trustee,
. the holder or holders have offered the trustee security or indemnity
reasonably satisfactory to the trustee against the costs, expenses and
liabilities to be incurred in complying with the request,
. the trustee for 60 days after its receipt of the notice, request and
offer of security or indemnity has failed to institute the proceeding,
and
. 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 in principal amount of the outstanding transition bonds of
all series.
OUR COVENANTS
We will keep in effect our existence, rights and franchises as a limited
liability company under Delaware law, provided that we may consolidate with,
merge into or convert into another entity or sell substantially all of our
assets to another entity and dissolve if:
. the entity formed by or surviving the consolidation, merger or
conversion or to whom substantially all of our assets are sold is
organized under the laws of the United States or any state thereof and
expressly assumes by a supplemental indenture the due and punctual
payment of the principal of and premium, if any, and interest on all
transition bonds and the performance of our obligations under the
indenture,
. the entity formed by or surviving the consolidation, merger or
conversion or to whom substantially all of our assets are sold expressly
assumes all obligations and succeeds to all of our rights under the sale
agreement, the administration agreement, the servicing agreement and any
other basic document
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specified in the indenture to which we are a party or under which we
have rights pursuant to an assignment and assumption agreement executed
and delivered to the trustee,
. no default or event of default will have occurred and be continuing
immediately after giving effect to the merger, consolidation, conversion
or sale,
. the rating agency condition will have been satisfied with respect to
this merger, consolidation, conversion or sale,
. we have received an opinion of counsel to the effect that this merger,
consolidation, conversion or sale of assets would have no material
adverse tax consequence to us or any transition bondholder, the merger,
consolidation, conversion or sale complies with the indenture and all
conditions precedent therein provided relating to the merger,
consolidation, conversion or sale and will result in the trustee
maintaining a continuing valid first priority security interest in the
collateral,
. none of the transition property, the financing order or Reliant Energy's
or our rights under the Texas Electric Choice Plan or the financing
order are impaired thereby, and
. any action that is necessary to maintain the lien and security interest
created by the indenture has been taken.
Additional Covenants. We will from time to time execute and deliver all
documents, make all filings and take any other action necessary or advisable to,
among other things, maintain and preserve the lien of the indenture and the
priority thereof. We will not permit the validity of the indenture to be
impaired, the lien to be amended, subordinated or terminated or discharged, or
any person to be released from any covenants or obligations except as expressly
permitted by the indenture. We will also not permit any lien, charge, claim,
security interest, mortgage or other encumbrance, other than the lien of the
indenture, to be created on or extend to or otherwise arise upon or burden the
collateral or any part thereof or any interest therein or the proceeds thereof.
We may not, among other things:
. except as expressly permitted by the indenture, the sale agreement or
the servicing agreement, sell, transfer, exchange or otherwise dispose
of any of the collateral unless directed to do so by the trustee in
accordance with the indenture, or
. claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the transition
bonds, other than amounts properly withheld under the Internal Revenue
Code of 1986, or assert any claim against any present or former
transition bondholder because of the payment of taxes levied or assessed
upon us.
We may not engage in any business other than purchasing and owning the
transition property, issuing the transition bonds from time to time, pledging
our interest in the collateral to the trustee under the indenture in order to
secure the transition bonds, and performing activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto.
We May Not Engage in Any Other Financial Transactions. We may not issue,
incur, assume or guarantee any indebtedness except for the transition bonds and
any obligations under any credit enhancement or any swap, hedge or other similar
financial arrangement for any series of the transition bonds. Also, we 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. We may not, except as contemplated by the
indenture, the sale agreement, the servicing agreement and related documents,
including the amended and restated limited liability company agreement, make any
loan or advance or credit to any person. We will not make any expenditure for
capital assets or lease any capital asset other than the transition
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property purchased from Reliant Energy pursuant to, and in accordance with, the
sale agreement. We may not make any payments, distributions or dividends to any
member in respect of its membership interest except in accordance with 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. Please refer to "The Servicing
Agreement" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any transition bondholder who has owned a transition bond for at least six
months 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. In addition, a group of transition
bondholders each of whom has owned a transition bond for at least six months may
also obtain access to the list of all transition bondholders for the same
purpose. The trustee may elect not to afford the requesting transition
bondholders access to the list of transition bondholders if it agrees to mail
the desired communication or proxy, on behalf and at the expense of the
requesting transition bondholders, to all transition bondholders.
WE MUST FILE AN ANNUAL COMPLIANCE STATEMENT
We will be required to file annually with the trustee a written statement
as to the fulfillment of our obligations under the indenture. In addition, we
will furnish to the trustee an opinion of counsel concerning filings made by us
on an annual basis and before the effectiveness of any amendment to the sale
agreement or the servicing agreement.
THE TRUSTEE MUST PROVIDE AN ANNUAL 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:
. the trustee's eligibility and qualification to continue as the trustee
under the indenture,
. any amounts advanced by it under the indenture,
. the amount, interest rate and maturity date of specific indebtedness
owing by us to the trustee in the trustee's individual capacity,
. the property and funds physically held by the trustee,
. any additional issue of a series of the transition bonds not previously
reported, and
. any action taken by it that materially affects the transition bonds of
any series and that has not been previously reported.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the trustee of funds sufficient for the payment
in full of all of the transition bonds of that series with the trustee. In
addition, we must deliver to the trustee the managers' 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.
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OUR LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
We may, at any time, terminate:
. all of our obligations under the indenture with respect to the
transition bonds of any series, or
. our obligations to comply with some of the covenants in the indenture,
including all of the covenants described under "--Our Covenants."
The legal defeasance option is our right to terminate at any time our
obligations under the indenture with respect to the transition bonds of any
series. The covenant defeasance option is our right at any time to terminate
our obligations to comply with the covenants in the indenture. We may exercise
the legal defeasance option with respect to any series of the transition bonds
notwithstanding our prior exercise of the covenant defeasance option with
respect to that series. If we exercise 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
we exercise 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 of our covenants or agreements made in the indenture.
We may exercise the legal defeasance option or the covenant defeasance
option with respect to any series of the transition bonds only if:
. we irrevocably deposit or cause to be deposited in trust with the
trustee cash or U.S. government obligations specified in the indenture
for the payment of principal of and premium, if any, and interest on the
transition bonds of 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,
. we deliver to the trustee a certificate from a nationally recognized
firm of independent accountants expressing its opinion that the payments
of principal and interest on the U.S. government obligations when due
and without reinvestment plus any cash deposited in the defeasance
subaccount will provide cash at times and in sufficient amounts to pay
in respect of the transition bonds of that series:
. 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
. interest when due,
. in the case of the legal defeasance option, 95 days pass after the
deposit is made and during the 95 day period no default relating to
events of our bankruptcy, insolvency, receivership or liquidation occurs
and is continuing at the end of the period,
. no default has occurred and is continuing on the day of this deposit and
after giving effect thereto,
. in the case of the legal defeasance option, we deliver to the trustee an
opinion of counsel stating that:
. we have received from, or there has been published by, the Internal
Revenue Service a ruling, or
. since the date of execution of the indenture, there has been a
change in the applicable federal income tax law, and
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in either case confirming that the holders of the transition bonds of
that series will not recognize income, gain or loss for federal income
tax purposes as a result of the exercise of the legal defeasance option
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if the
legal defeasance had not occurred,
. in the case of the covenant defeasance option, we deliver 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
. we deliver to the trustee a certificate of one of our managers 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.
THE TRUSTEE
___________________ will be the trustee under the indenture. The trustee
may resign at any time upon 30 days notice by so notifying us. The holders of a
majority in principal amount of the transition bonds of all series then
outstanding may remove the trustee by so notifying the trustee and may appoint a
successor trustee. We 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, we will
be obligated promptly to appoint a successor trustee eligible under the
indenture. No resignation or removal of the trustee will become effective until
acceptance of the appointment by a successor trustee. The trustee shall at all
times satisfy the requirements of the Trust Indenture Act, as amended, and have
a combined capital and surplus of at least $50 million and a long term debt
rating of "Baa3" or better by Moody's. If the trustee consolidates with, merges
or converts into, or transfers all or substantially all of its corporate trust
business or assets to, another entity, the resulting, surviving or transferee
entity shall without any further action be the successor trustee.
HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT
Challenge to True Sale Treatment. Reliant Energy will represent and
warrant that the transfer of the transition property in accordance with the sale
agreement constitutes a true and valid sale and assignment of the transition
property by Reliant Energy to us. It is a condition of closing for the sale of
transition property pursuant to the sale agreement that Reliant Energy will take
the appropriate actions under the Texas Electric Choice Plan, including filing a
notice of transfer of an interest in transition property, to perfect this sale.
The Texas Electric Choice Plan provides that a transfer of 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 shall be
treated as an absolute transfer of all the transferor's right, title and
interest, as in a "true sale" under applicable creditors' rights principles, and
not as a pledge or other financing, of the relevant transition property. We and
Reliant Energy will treat the transaction as a sale under applicable law.
Reliant Energy will treat the transition bonds as debt of Reliant Energy for
financial accounting and federal income tax purposes. See "The Texas Electric
Choice Plan--Recovery of Stranded Costs and Regulatory Assets" in this
prospectus.
In the event of a bankruptcy of Reliant Energy, if a party in interest in
the bankruptcy were to take the position that the transfer of the transition
property to us was a financing transaction and not a true sale, there can be no
assurance that a court would not adopt this position. Even if a court did not
ultimately recharacterize the transaction as a financing transaction, the mere
commencement of a bankruptcy of Reliant Energy and the attendant possible
uncertainty surrounding the treatment of the transaction could result in delays
in payments on the transaction bonds.
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We and Reliant Energy have attempted to mitigate the impact of a possible
recharacterization of a sale of the transition property as a financing
transaction under applicable creditors' rights principles. The sale agreement
provides that if the transfer of transition property is thereafter
recharacterized by a court as a financing transaction and not a true sale,
Reliant Energy grants to us a first priority security interest in all Reliant
Energy's right, title and interest in and to the transition property and all
proceeds thereof. In addition, the sale agreement requires the filing of a
notice of security interest in the transition property and the proceeds thereof
in accordance with the Texas Electric Choice Plan. As a result of this filing,
we would be a secured creditor of Reliant Energy and entitled to recover against
the collateral or its value. This does not, however, eliminate the risk of
payment delays or reductions and other adverse effects caused by a Reliant
Energy bankruptcy. Further, if, for any reason, a transition property notice is
not filed under the Texas Electric Choice Plan or we fail to otherwise perfect
our interest in the transition property, and the transfer is thereafter deemed
not to constitute a true sale, we would be an unsecured creditor of Reliant
Energy.
Consolidation of the Issuer and Reliant Energy. If Reliant Energy were to
become a debtor in a bankruptcy case, a party in interest might attempt to
substantively consolidate the assets and liabilities of Reliant Energy and us.
We and Reliant Energy have taken steps to attempt to minimize this risk.
Please refer to the "Issuer" in this prospectus.
However, no assurance can be given that if Reliant Energy were to become a
debtor in a bankruptcy case, a court would not order that our assets and
liabilities be substantively consolidated with those of Reliant Energy.
Substantive consolidation would result in our assets being combined with the
assets of Reliant Energy into a single pool from which the claims of our
creditors and Reliant Energy's creditors would be satisfied ratably.
Status of Transition Property as Current Property. Reliant Energy has
represented in the sale agreement, and the Texas Electric Choice Plan provides,
that the transition property constitutes a current property right on the date
that it is first transferred or pledged in connection with the issuance of the
transition bonds. Nevertheless, no assurance can be given that, in the event of
a bankruptcy of Reliant Energy, a court would not rule that the transition
property comes into existence only as retail electric customers use electricity.
If a court were to accept the argument that the transition property comes
into existence only as retail electric customers use electricity, no assurance
can be given that a security interest in favor of the transition bondholders
would attach to the transition charges in respect of electricity consumed after
the commencement of the bankruptcy case. If it were determined that the
transition property had not been sold to us, and the security interest in favor
of the transition bondholders did not attach to the transition charges in
respect of electricity consumed after the commencement of the bankruptcy case,
then we would be an unsecured creditor of Reliant Energy. If so, there would be
delays or reductions in payments on the transition bonds. Also, a tax or
government lien or other nonconsensual lien on property of Reliant Energy
arising before the transition property came into existence could have priority
over our interest in the transition property. Whether or not a court determined
that the transition property had been sold to us, no assurances can be given
that a court would not rule that any transition charges relating to electricity
consumed after the commencement of the bankruptcy cannot be transferred to us or
the trustee.
In addition, in the event of a bankruptcy of Reliant Energy, a party in
interest in the bankruptcy could assert that we should pay a portion of Reliant
Energy's costs associated with the generation, transmission or distribution of
the electricity, consumption of which gave rise to the transition charges used
to make payments on the transition bonds.
Estimation of Claims. If Reliant Energy were to become a debtor in a
bankruptcy case, claims, including indemnity claims, by us or the trustee
against Reliant Energy under the sale agreement and the other documents executed
in connection therewith could 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 us or the trustee against Reliant Energy. 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.
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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 Reliant Energy.
Enforcement of Rights by the Trustee. Upon an event of default under the
indenture, the Texas Electric Choice Plan permits the trustee to enforce the
security interest in the transition property in accordance with the terms of the
indenture. If an event of default occurs, the Texas commission may order that
amounts arising from transition charges be transferred to a separate account for
the benefit of the transition bondholders. Furthermore, upon request by the
transition bondholders, a district judge in Travis County, Texas must order the
sequestration and payment to the transition bondholders of revenues arising from
the transition charges. There can be no assurance, however, that the Texas
commission or a district judge would issue this order after a Reliant Energy
bankruptcy in light of the automatic stay provisions of Section 362 of the
United States Bankruptcy Code or, alternatively, that a bankruptcy court would
lift the automatic stay to permit this action by the Texas commission or a
district judge. In that event, the trustee could under the indenture seek an
order from the bankruptcy court lifting the automatic stay with respect to this
action by the Texas commission or a district judge, and an order requiring an
accounting and segregation of the revenues arising from the transition property.
But there can be no assurance that the bankruptcy court would grant either
order.
The servicing agreement provides that the trustee, as our assignee,
together with the other persons specified therein, may 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 Texas commission 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 Reliant Energy as servicer was capable of performing.
Furthermore, should the servicer enter into bankruptcy, it may be permitted to
stop acting as servicer.
Bankruptcy of Servicer. Under the servicing agreement, the servicer is
entitled to commingle transition charges with its own funds until each
remittance date. The Texas Electric Choice Plan provides that the relative
priority of a lien created under the Texas Electric Choice Plan is not defeated
or adversely affected by the commingling of the transition charges arising with
respect to the 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 the transition charges
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 our
property. 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 charges held as of that date and could not recover the
commingled transition charges held as of the date of the bankruptcy.
However the court rules on the ownership of the commingled transition
charges, the automatic stay arising upon the bankruptcy of the servicer could
delay the trustee from receiving the commingled transition charges held by the
servicer as of the date of the bankruptcy until the court grants relief from the
stay. A court ruling on any question for relief from the stay could be delayed
pending the court's resolution of whether the commingled transition charges are
our property or are property of the servicer, including resolution of any
tracing of proceeds issues. If, as a result of the risk factors discussed in
the preceding paragraphs or for any other reason, the trustee becomes an
unsecured or an undersecured creditor in a bankruptcy involving the servicer, a
party in interest may take the position that the funds remitted prior to
bankruptcy by the servicer to the trustee pursuant to the servicing agreement
constitute preferences under bankruptcy law. If payments by the servicer are
made late or otherwise outside the ordinary course of business, a court may hold
that the remitted funds constitute preferences. Any such transfer within ninety
days of the filing of the bankruptcy petition would be avoidable, and the funds
could be returned to the bankruptcy estate of the servicer. If the trustee or
we are considered to be an "insider" of the servicer, any such transfer made
within one year of the filing of the bankruptcy petition would be avoidable. In
either case, the trustee or we would merely be an unsecured creditor of the
servicer.
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Bankruptcy of Retail Electric Provider. The Texas Electric Choice Plan Act
establishes a process whereby retail electric customers, at some point in time,
will choose their retail electric provider. The financing order requires retail
electric providers to remit to the servicer the full amount of transition
charges billed to its retail electric customers whether or not payment is
actually received from these retail electric customers. The retail electric
provider is entitled to commingle transition charges with its own funds until
each remittance date. The Texas Electric Choice Plan provides that the relative
priority of a lien created under the Texas Electric Choice Plan is not defeated
or adversely affected by the commingling of transition charges arising with
respect to the transition property with funds of the retail electric provider.
However, in the event of a bankruptcy of a retail electric provider, a party in
interest in the bankruptcy might assert, and a court might rule, that the
transition charges commingled by the retail electric provider with its own funds
and held by the retail electric provider as of the date of bankruptcy were
property of the retail electric provider as of that date, and are therefore
property of the retail electric provider's bankruptcy estate and not subject to
the lien of the trustee. If the court so rules, then the court would likely
rule that the trustee has only a general unsecured claim against the retail
electric provider for the amount of commingled transition charges held as of
that date and could not recover the commingled transition charges held as of the
date of the bankruptcy.
However the court rules on the ownership of the commingled transition
charges, the automatic stay arising upon the bankruptcy of the retail electric
provider could delay the servicer and the trustee from receiving the commingled
transition charges held by the retail electric provider as of the date of the
bankruptcy until the court grants relief from the stay. A court ruling on any
question for relief from the stay could be delayed pending the court's
resolution of whether the commingled transition charges are property of the
retail electric provider or of the trustee, including resolution of any tracing
of proceeds issues.
In the event of a bankruptcy of a retail electric provider, a party in
interest may take the position that the funds remitted prior to bankruptcy to
the servicer, pursuant to the financing order, constitute preferences under
bankruptcy law. If a court were to hold that the remitted funds constitute
preferences, any such transfer within ninety days of the filing of the
bankruptcy petition would be avoidable, and the funds would be returned to the
bankruptcy estate of the retail electric provider. If the servicer is
considered to be an "insider" of the retail electric provider, any such transfer
made within one year of the filing of the bankruptcy petition would be
avoidable. In either case, the servicer would merely be an unsecured creditor
of the retail electric provider.
Other risks relating to bankruptcy may be found in "Risk Factors--Risks
Associated With Potential Bankruptcy Proceedings."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES FOR THE TRANSITION BONDHOLDERS
GENERAL
The following is a summary of the material federal income tax consequences
to holders of the transition bonds, and is based on the opinion of Baker &
Botts, L.L.P., special federal income tax counsel to us and to Reliant Energy,
referred to in this prospectus as special tax counsel. Special tax counsel has
advised us that the description of material federal income tax consequences in
this summary is accurate in all material respects. The opinion of special tax
counsel is based on some assumptions and is limited by some qualifications
stated in this discussion or in the opinion. This discussion is based on
current provisions of the Internal Revenue Code, currently applicable Treasury
Regulations, and judicial and administrative rulings and decisions.
Legislative, judicial or administrative changes could alter or modify the
statements and conclusions in this discussion. Any legislative, judicial or
administrative changes or new interpretations may be retroactive and could
affect tax consequences to holders of the transition bonds.
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This discussion applies to holders of the transition bonds who acquire the
bonds at original issue for cash equal to the issue price of those bonds and
hold the transition bonds as capital assets. This discussion does not address
all of the tax consequences relevant to a particular holder of the transition
bonds in light of that holder's circumstances, and some holders may be subject
to special tax rules and limitations not discussed below (e.g., life insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities, S corporations, taxpayers subject to the alternative minimum tax
provisions of the Internal Revenue Code, broker-dealers, and persons who hold
the transition bonds as part of a hedge, straddle, "synthetic security," or
other integrated investment, risk reduction or constructive sale transaction).
Except as described below, this discussion also does not address the tax
consequences to nonresident aliens, foreign corporations, foreign partnerships
or foreign trusts that are subject to U.S. federal income tax on a net basis on
income with respect to the transition bonds because that income is effectively
connected with the conduct of a U.S. trade or business. In addition, this
discussion does not address any tax consequences under state, local or foreign
tax laws. CONSEQUENTLY, YOU ARE URGED TO CONSULT YOUR TAX ADVISER TO DETERMINE
THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRANSITION BONDS.
INCOME TAX STATUS OF THE TRANSITION BONDS AND THE ISSUER
Reliant Energy has received a ruling from the Internal Revenue Service to
the effect that the transition bonds will be classified as obligations of
Reliant Energy for federal income tax purposes. Based on that private letter
ruling and the assumptions contained therein, including a representation by
Reliant Energy that it will not make, or allow there to be made, any election to
the contrary, special tax counsel will render its opinion that we will not be
subject to United States federal income tax as an entity separate from Reliant
Energy.
TAXATION OF HOLDERS OF THE TRANSITION BONDS
Based on the assumptions and subject to the qualifications stated herein,
it is the opinion of special tax counsel that the material federal income tax
consequences to holders of the transition bonds are as follows:
DEFINITION OF UNITED STATES PERSON
For purposes of the discussion below, a United States person includes:
. an individual, who is a citizen or resident of the United States for
U.S. federal income tax purposes,
. a corporation, partnership or other entity created or organized in or
under the laws of the United States, or any state, including the
District of Columbia, or any political subdivision thereof or, in the
case of a partnership, otherwise treated as a United States Person under
applicable Treasury Regulations,
. an estate, the net income of which is subject to United States federal
income taxation regardless of its source, or
. a trust, if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United
States persons have the authority to control all substantial decisions
of such trust.
A U.S. holder means a holder of a transition bond that is a United States
person. A non-U.S. holder means a holder of a transition bond that is not a
United States person.
TAX CONSEQUENCES TO U.S. HOLDERS
PAYMENTS OF INTEREST
Stated interest on the transition bonds will be taxable as ordinary
interest income when received or accrued by U.S. holders under their method of
accounting. Generally, interest received on the transition bonds will
constitute
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"investment income" for purposes of Internal Revenue Code limitations on the
deductibility of investment interest expense.
SALE OR OTHER TAXABLE DISPOSITION OF THE TRANSITION BONDS
If there is a sale, exchange, redemption, retirement or other taxable
disposition of a transition bond, a U.S. holder generally will recognize gain or
loss equal to the difference between (a) the amount of cash and the fair market
value of any other property received (other than amounts attributable to, and
taxable as, accrued stated interest) and (b) the holder's adjusted tax basis in
the transition bond. The adjusted tax basis in the transition bond generally
will equal its cost, reduced by any payments reflecting principal previously
received with respect to the bond. Gain or loss generally will be capital gain
or loss if the transition bond was held as a capital asset.
BACKUP WITHHOLDING
Payments made on and proceeds from the sale of a transition bond may be
subject to backup withholding at the rate of 31% unless a U.S. holder complies
with certain identification requirements. Any amounts withheld from a payment
to a U.S. holder will be allowed as a credit against such U.S. holder's federal
income tax liability, provided that the required information is timely furnished
to the Internal Revenue Service.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
WITHHOLDING
Under present United States federal income tax law, and subject to the
discussion below concerning backup withholding, payments of principal, premium
(if any) and interest on a transition bond by us or any paying agent to any non-
U.S. holder, and gain realized on the sale or exchange of a transition bond by a
non-U.S. holder, will be exempt from United States federal income or withholding
tax, provided that:
. such non-U.S. holder does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of
Reliant Energy's stock entitled to vote, is not a controlled foreign
corporation related, directly or indirectly, to Reliant Energy through
stock ownership, and is not a bank receiving interest described in
Section 881(c)(3)(A) of the Internal Revenue Code;
. the statement requirement set forth in Section 871(h) or Section 881(c)
of the Internal Revenue Code has been fulfilled with respect to the
beneficial owner, as discussed below;
. such non-U.S. holder is not an individual who is present in the United
States for 183 days or more in the taxable year of disposition, or such
individual does not have a "tax home" (as defined in Section 911(d)(3)
of the Internal Revenue Code) or an office or other fixed place of
business in the United States; and
. such payments and gain are not effectively connected with the conduct by
such non-U.S. holder of a trade or business in the United States.
The statement requirement referred to in the preceding paragraph will be
fulfilled if the beneficial owner of a transition bond certifies on an
appropriate form (generally IRS Form W-8BEN), under penalties of perjury, that
it is not a United States person and provides its name and address, and (a) the
beneficial owner files that form with the withholding agent or (b) a securities
clearing organization, bank or other financial institution holding customers'
securities in the ordinary course of its trade or business holds the transition
bond on behalf of the beneficial owner, files with the withholding agent a
statement that it has received that form from the beneficial owner and furnishes
the withholding agent with a copy thereof. With respect to any transition bond
held by a foreign partnership, under current law, this certification may be
provided by the foreign partnership. However, unless a foreign partnership has
entered into a withholding agreement with the IRS, each partner that is a non-
U.S. holder will be required to supply this certification in order to avoid
withholding with respect to such partner's share of interest paid to the foreign
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partnership after December 31, 2000. Prospective investors, including foreign
partnerships and their partners, should consult their tax advisers regarding
possible additional reporting requirements.
If a non-U.S. holder of a transition bond is engaged in a trade or business
in the United States, and if interest on the transition bond is effectively
connected with the conduct of such trade or business, the non-U.S. holder,
although exempt from the withholding tax discussed in the preceding paragraphs,
will generally be subject to regular United States federal income tax on
interest and on any gain realized on the sale or exchange of the transition bond
in the same manner as if it were a U.S. holder. In lieu of the certificate
described in the preceding paragraph, such a non-U.S. holder will be required to
provide to the withholding agent an appropriate form (generally IRS Form W-
8ECI), executed under penalties of perjury, in order to claim an exemption from
withholding tax. In addition, if such a non-U.S. holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% (or such
lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments.
ESTATE TAX
A transition bond held by an individual who is a non-U.S. holder at the
time of his death will not be subject to United States federal estate tax as a
result of such individual's death, provided that:
. the individual does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of Reliant
Energy's voting stock; and
. at the time of such individual's death, payments with respect to a
transition bond would not have been effectively connected with the
conduct by such individual of a trade or business in the United
States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding (at the rate of 31%) will not apply to payments made on
or proceeds from the sale of a transition bond if the certifications required by
Sections 871(h) or 881(c) of the Internal Revenue Code are received, provided in
each case that the payor does not have actual knowledge (and, with respect to
payments made after December 31, 2000, does not have reason to know) that the
payee is a United States person. Please refer to "--Tax Consequences to U.S.
Holders--Backup Withholding."
Interest on a transition bond that is beneficially owned by a non-U.S.
holder will be reported annually on IRS Form 1042-S, which must be filed with
the IRS and furnished to such non-U.S. holder. non-U.S. holders of a transition
bond should consult their tax advisers regarding the application of information
reporting and backup withholding in their particular situations, the
availability of an exemption therefrom, and the procedure for obtaining such an
exemption, if available. Any amounts withheld from a payment to a non-U.S.
holder under the backup withholding rules will be allowed as a credit against
such non-U.S. holder's United States federal income tax liability and may
entitle such non-U.S. holder to a refund, provided that the required information
is furnished to the IRS.
STATE TAX CONSEQUENCES
Because of the variation in each state's and locality's tax laws, it is
impossible to predict the tax consequences to us or to holders of the transition
bonds in all of the state and local taxing jurisdictions in which they may be
subject to tax. Prospective investors are urged to consult with their own tax
advisors regarding the state and local tax treatment of us as well as any state
and local tax consequences to them of purchasing, holding and disposing of the
transition bonds.
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ERISA CONSIDERATIONS
ERISA and Section 4975 of the Internal Revenue Code impose restrictions on:
. employee benefit plans, as defined in Section 3(3) of ERISA, that are
subject to Title I of ERISA,
. plans, as defined in Section 4975(e)(1) of the Internal Revenue Code,
that are subject to Section 4975 of the Internal Revenue Code, including
individual retirement accounts or Keogh plans,
. any entities whose underlying assets include plan assets by reason of
that plan's investment in these entities, each of the entities described
in 1, 2 and 3 being referred to as a plan, and
. persons who have specified relationships to plans which are "parties in
interest" under ERISA and "disqualified persons" under the Internal
Revenue Code, which collectively are referred to as parties in interest.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an
insurance company's general account may be deemed to include assets of the plans
investing in the general account, such as through the purchase of an annuity
contract. Thus, this insurance company might be treated as a party in interest
with respect to a plan by virtue of this investment. ERISA also imposes specific
duties on persons who are fiduciaries of plans subject to ERISA, and ERISA and
Section 4975 99933of the Internal Revenue Code prohibit specified transactions
between a plan and parties in interest with respect to the plan. Violations of
these rules may result in the imposition of excise taxes and other penalties and
liabilities under ERISA and Section 4975 of the Internal Revenue Code.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE TRANSITION BONDS
The plan asset regulation is a regulation issued by the United States
Department of Labor which states that if a plan makes an "equity" investment in
a corporation, partnership, trust or another specified entity, the underlying
assets and properties of the entity will be deemed for purposes of ERISA and
Section 4975 of the Internal Revenue 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, our assets should not be treated as the assets of plans investing
in the transition bonds.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment of the
transition bonds as equity interests under the plan asset regulation, Reliant
Energy, the underwriters and/or their 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 the 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 Internal Revenue Code.
However, the purchase and holding of the 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 Internal Revenue Code.
Examples of Prohibited Transaction Class Exemptions. Potentially
applicable prohibited transaction class exemptions, which are referred to as
PTCE's, include the following:
. PTCE 90-1, which exempts specific transactions involving insurance
company pooled separate accounts,
. PTCE 95-60, which exempts specific transactions involving insurance
company general accounts,
. PTCE 91-38, which exempts specific transactions involving bank
collective investment funds,
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. 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 PTCE 84-14, and which is referred to as a QPAM, or
. PTCE 96-23, which exempts specific transactions effected on behalf of a
plan by "in-house" asset managers that satisfy the requirements of PTCE
96-23.
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.
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 INTERNAL
REVENUE 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 INTERNAL REVENUE CODE.
SPECIAL CONSIDERATIONS APPLICABLE TO INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996 added
new Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Internal Revenue
Code. Pursuant to Section 401(c), the Department of Labor issued proposed
regulations, referred to as the "general account regulations," with respect to
insurance policies issued on or before December 31, 1998 that are supported by
an insurer's general account. The general account regulations are to provide
guidance on which assets held by the insurer constitute plan assets for purposes
of the fiduciary responsibility provisions of ERISA and Section 4975 of the
Internal Revenue Code. Section 401(c) also provides that until the date that is
18 months after the general account regulations become final, no liability under
the fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan assets of any plan. This
provision does not apply in cases of avoidance of the general account
regulations or actions brought by the Secretary of Labor relating to particular
breaches of fiduciary duties that also constitute breaches of state or federal
criminal law.
If the general account regulations are adopted substantially in the form in
which proposed, the general account regulations may not exempt the assets of
insurance company general accounts from treatment as plan assets after December
31, 1998. The proposed regulations should not, however, adversely affect the
applicability of PTCE 95-60 to purchases of the transition bonds by insurance
company general accounts. The plan asset status of insurance company separate
accounts is also unaffected by new Section 401(c) of ERISA, and separate account
assets continue to be treated as the plan assets of any plan invested in a
separate account.
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 Internal Revenue 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,
. whether the fiduciary has the authority to make the investment,
. whether the investment constitutes a direct or indirect transaction with
a party in interest,
88
<PAGE>
. the composition of the plan's portfolio with respect to diversification
by type of asset,
. the plan's funding objectives,
. the tax effects of the investment, and
. 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 Internal Revenue 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 Internal
Revenue Code.
The sale of the transition bonds to a plan shall not be deemed a
representation by Reliant Energy, we 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. We
and the trustee intend that the transition bonds may be offered through various
methods from time to time. We also intend that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of the transition bonds may be made through a combination of
these methods.
The distribution of the transition bonds may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The transition bonds may be offered through one or more different methods,
including offerings through underwriters. It is not anticipated that any of the
transition bonds will be listed on any securities exchange. There can be no
assurance that a secondary market for any series of the 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 us 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 of 1933. These underwriters or agents will be identified, and
any compensation received from us will be described, in the related prospectus
supplement.
Other Distribution Issues. Under agreements which may be entered into by
Reliant Energy, us and the trustee, underwriters and agents who participate in
the distribution of the transition bonds may be entitled to indemnification by
Reliant Energy and us against liabilities specified therein, including under the
Securities Act of 1933. 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.
89
<PAGE>
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 Standard & Poor's, a
division of the McGraw-Hill Companies, Inc. and Moody's Investors Service Inc.
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, we can give no assurance that
the ratings assigned to any series or class of the 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 the transition bonds is
revised or withdrawn, the liquidity of this series or class of the 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 the
transition bonds by the applicable series final maturity date or class final
maturity date.
LEGAL MATTERS
Some legal matters relating to us and the issuance of the transition bonds
will be passed upon for us by Baker & Botts, L.L.P., Houston, Texas and for the
underwriters by Vinson & Elkins L.L.P. and Skadden, Arps, Slate, Meagher & Flom
LLP. Some legal matters relating to the federal tax consequences of the
issuance of the transition bonds will be passed upon for us by Baker & Botts,
L.L.P.
90
<PAGE>
APPENDIX A
GLOSSARY OF DEFINED TERMS
The following definitions are used in this prospectus and in any
accompanying prospectus supplement:
Adjustment rate means the rate by which the transition charges will be modified,
as calculated under the true-up provision.
Adjustment request with regard to the transition charges means a request filed
by the servicer with the Texas commission requesting modifications to the
transition charges.
CEDEL means Cedelbank, societe anonyme.
Collection account means the segregated trust account designated the collection
account and held by the trustee under the indenture.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
Euroclear means the Euroclear System.
Excess advances means advances paid to the servicer by the retail electric
provider in excess of amounts paid by retail electric customers to the retail
electric provider on an annual basis.
Financing order means the order issued by the Texas commission to Reliant Energy
which, among other things, governs the amount and terms for collections of the
transition charges.
Indenture means the indenture to be entered into between Reliant Energy
Transition Bond Company LLC and the trustee, providing for the issuance of
transition bonds, as the same may be amended and supplemented from time to time
by one or more indentures supplemental hereto.
KWh means kilowatt-hour.
Moody's means Moody's Investors Service Inc.
MVh means mega-watt-hour.
Non-bypasssable refers to the right of the servicer to collect the transaction
charges from all existing and future retail electric customers located within
Reliant Energy's service territory even if those customers elect to purchase
electricity from another supplier or choose to operate self-generation
equipment.
Payment date means the date or dates on which interest and principal are to be
payable on the transition bonds.
Qualified costs means the transition or stranded costs of an electric utility
recoverable through the issuance of transition bonds; the costs of issuing,
supporting and servicing the transition bonds; and any costs of retiring and
refunding existing debt and equity securities in connection with the issuance of
transition bonds.
Record date means the date or dates on which payments will be made to the
holders of the transition bonds.
A-1
<PAGE>
Retail electric customers means the consumers of electricity and related
services within Reliant Energy's service territory.
Retail electric providers means the providers of electricity and related
services to retail electric customers within Reliant Energy's service territory.
S&P means Standard and Poor's Rating Services, a division of the McGraw-Hill
Companies.
Sale agreement means the sale agreement to be entered into between Reliant
Energy Transition Bond Company LLC and Reliant Energy pursuant to which Reliant
Energy is selling and Reliant Energy Transition Bond Company LLC is buying the
transition property.
Service territory means, with regard to Reliant Energy, the geographical
certificated service area as it existed on May 1, 1999 within which it may
recover generation related regulatory assets through non-bypassable transition
charges assessed on all retail electric customers within that area.
Servicer means Reliant Energy, acting as the initial servicer, and any successor
servicer, which will service the transition property under a servicing agreement
with Reliant Energy Transition Bond Company LLC.
Servicing agreement means the servicing agreement to be entered into between
Reliant Energy Transition Bond Company LLC and Reliant Energy, as the same may
be amended and supplemented from time to time, pursuant to which Reliant Energy
is undertaking to service transition property.
Stranded costs means the net electric generation related costs which
traditionally would be recoverable under a regulated environment but which may
not be recoverable in a competitive electric generation market.
Texas commission means the Public Utility Commission of Texas.
Texas Electric Choice Plan means the Texas legislation adopted in June 1999 that
substantially amends the regulatory structure governing electric utilities in
order to allow retail competition beginning on January 1, 2002.
Transition charges means, with regard to Reliant Energy, the amounts
authorized to be imposed on all retail electric customer bills within Reliant
Energy's service territory and collected, through a non-bypassable mechanism, by
the servicer, to recover qualified costs pursuant to the financing order.
Transition property means, with regard to Reliant Energy, all of Reliant
Energy's right, title and interest in and to the financing order, including the
irrevocable right to recover, through the transition charges, amounts sufficient
to recover all of Reliant Energy's qualified costs, sold to us pursuant to the
sale agreement.
True-up provision means a mechanism required by the financing order whereby the
servicer will apply to the Texas commission for adjustments to the transition
charges based on actual collected transition charges and updated assumptions by
the servicer as to future collections of transition charges.
A-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF RELIANT ENERGY
TRANSITION BOND COMPANY LLC
Page
Independent Auditors' Report F-2
Balance Sheet F-3
Statement of Member's Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Member of
Reliant Energy Transition Bond Company LLC
Houston, Texas
We have audited the accompanying balance sheet of Reliant Energy Transition Bond
Company LLC (the "Company"), a wholly owned subsidiary of Reliant Energy,
Incorporated ("Reliant Energy"), as of November 15, 1999, and the related
statement of member's equity and cash flows for the period from November 10,
1999 (date of inception) to November 15, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of November 15, 1999 and its
cash flows for the period from November 10, 1999 (date of inception) to November
15, 1999 in conformity with generally accepted accounting principles.
November 15, 1999
F-2
<PAGE>
RELIANT ENERGY TRANSITION BOND COMPANY LLC
BALANCE SHEET
NOVEMBER 15, 1999
-----------------
Total Assets - Cash $1,000
======
Member's Equity $1,000
======
See Notes to the Financial Statements
F-3
<PAGE>
RELIANT ENERGY TRANSITION BOND COMPANY LLC
STATEMENT OF MEMBER'S EQUITY
FOR THE PERIOD FROM NOVEMBER 10, 1999 (DATE OF INCEPTION)
TO NOVEMBER 15, 1999
Initial Contribution $1,000
Net Income --
------
Total Member's Equity $1,000
======
See Notes to the Financial Statements
F-4
<PAGE>
RELIANT ENERGY TRANSITION BOND COMPANY LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 10, 1999 (DATE OF INCEPTION)
TO NOVEMBER 15, 1999
Cash Flows from Financing Activities:
Contribution from member $1,000
------
Net Increase in Cash 1,000
Cash at Date of Inception --
------
Cash at End of Period $1,000
======
See Notes to the Financial Statements
F-5
<PAGE>
RELIANT ENERGY TRANSITION BOND COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Reliant Energy Transition Bond Company LLC (Company) is a special purpose
Delaware limited liability company, whose sole member is Reliant Energy,
Incorporated (Reliant Energy). Reliant Energy is a diversified
international energy services company.
In June 1999, the State of Texas enacted the Texas Electric Choice Plan
(Legislation). The Legislation authorizes competition in the retail and
generation markets for electricity beginning January 1, 2002, and provides
for recovery of stranded costs (i.e. the excess of net book value of
generation assets (as defined by the Legislation) over the market value of
those assets) and generation related regulatory assets (as defined by
Legislation) through irrevocable non-bypassable transition charges assessed
on all retail electric customers within a utility's geographical
certificated service area as it existed on May 1, 1999. The Legislation
authorizes the Public Utility Commission of Texas to issue "financing
orders" approving the issuance of transition bonds to recover generation
related regulatory assets and stranded costs. The Legislation and the
financing order permit an electric utility to transfer its rights and
interests in the financing order, including the right to collect transition
charges pursuant to the Legislation, to a special purpose entity formed by
the electric utility to issue debt securities secured by the right to
receive revenues arising from the transition charges. The electric
utility's right to receive the transition charges and its other rights and
interests under the financing order constitute the transition property.
The Company was organized on November 10, 1999 under the laws of the State
of Delaware for the sole purpose of acquiring and holding transition
property to be acquired from Reliant Energy. In connection with the
acquisition of the transition property, the Company will (a) issue and
register one or more series of transition bonds, (b) pledge its interests
in the transition property and other transition bond collateral to secure
the transition bonds, (c) make debt service payments on the transition
bonds, and (d) perform other activities that are necessary, suitable or
convenient to accomplish these purposes. The purchase price of such
transition property will be paid from the proceeds of the transition bonds
issued by the Company secured by the transition property and other
collateral.
The Company is restricted by the organization documents from engaging in
any other activities. In addition, its organization documents require it to
operate in such a manner that it should not be consolidated in the
bankruptcy estate of Reliant Energy, in the event Reliant Energy becomes
subject to such a proceeding. The Company is legally separate from
Reliant Energy.
Under a servicing agreement to be entered into by the Company and Reliant
Energy concurrently with the issuance of the first series of transition
bonds, Reliant Energy, as servicer, will be required to manage and
administer the transition property of the Company and to collect the
transition
F-6
<PAGE>
charges on behalf of the Company. The Company will pay an annual servicing
fee to Reliant Energy for these services.
F-7
<PAGE>
The Requirement to deliver a copy of the prospectus. Until 90 days after the
date of this prospectus supplement, all dealers effecting transactions in the
related series of the transition bonds, whether or not participating in the
distribution of the related series of the transition bonds, may be required to
deliver a prospectus and a prospectus supplement. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus and a
prospectus supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant estimates that expenses in connection with the offering
described in this registration statement, other than underwriting discounts and
commissions, will be as follows:
Securities and Exchange Commission filing fee $278
Printing and engraving expenses *
Attorney's fees and expenses *
Rating Agency fees *
Independent Auditor's fees and expenses *
Trustee's fees and expenses *
Miscellaneous fees and expenses *
-----
Total $ *
=====
____________
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 109 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in the
limited liability company agreement of a limited liability company, a limited
liability company may, and 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. Under the amended and restated limited liability company
agreement, we will indemnify our managers to the fullest extent permitted by law
against any liability incurred with respect to their services as managers under
the amended and restated limited liability company agreement, except for:
. liabilities arising from their own willful misconduct or gross
negligence,
. liabilities arising from the failure by any manager to perform
obligations expressly undertaken in the amended and restated limited
liability company agreement, or
. taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by our managers in connection
with the transactions described in this prospectus.
ITEM 16. EXHIBITS.
See Index to Exhibits at page II-5.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-1
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this item do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(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) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-2
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) 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 ("Act") in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, the State of Texas, on November 16, 1999.
RELIANT ENERGY TRANSITION BOND COMPANY LLC
(Registrant)
By: /s/ Marc Kilbride
--------------------------------
Name: Marc Kilbride
Title: Sole 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.
/s/ Marc Kilbride November 16, 1999
- ----------------------------------
Name: Marc Kilbride
Title: Sole Manager
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document Description
- ------- --------------------
1.1* Form of Underwriting Agreement
4.1 Limited Liability Company Agreement of Reliant Energy Transition Bond
Company LLC
4.2 Certificate of Formation of Reliant Energy Transition Bond Company LLC
4.3* Form of Amended and Restated Limited Liability Company Agreement
4.4* Form of Indenture
4.5* Form of Supplemental Indenture
4.6* Form of the Transition Bonds (included in Exhibit 4.5)
5.1* Opinion of Baker & Botts, L.L.P. relating to legality of the
transition bonds
8.1* Opinion of Baker & Botts, L.L.P. with respect to federal tax matters
10.1* Form of Sale Agreement
10.2* Form of Servicing Agreement
10.3* Form of Administration Agreement
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Baker & Botts, L.L.P. (included in Exhibit 5.1)
25.1* Statement of Eligibility under the Trust Indenture Act on Form T-1 of
_________, as Trustee under the Indenture
27.1* Financial Data Schedule
99.1* Application for the Financing Order
99.2* Financing Order
99.3* Internal Revenue Service Private Letter Ruling
- -----------------------------------
* To be filed by amendment.
II-5
<PAGE>
EXHIBIT 4.1
LIMITED LIABILITY COMPANY AGREEMENT
OF
RELIANT ENERGY TRANSITION BOND COMPANY LLC
Effective as of November 10, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS............................................................... 1
ARTICLE II
FORMATION OF THE COMPANY.................................................. 2
2.1 Formation........................................................... 2
2.2 Name................................................................ 3
2.3 Place of Business................................................... 3
2.4 Registered Office and Registered Agent.............................. 3
2.5 Term................................................................ 3
2.6 Purpose of the Company.............................................. 3
ARTICLE III
INITIAL MEMBER............................................................ 3
ARTICLE IV
CAPITAL OF THE COMPANY.................................................... 3
4.1 Common Shares and Initial Contributions............................. 3
4.2 Additional Contributions............................................ 4
4.3 Additional Issuances of Common Shares............................... 4
4.4 Record of Contributions............................................. 4
4.5 No Fractional Common Shares......................................... 4
4.6 Interest............................................................ 4
4.7 Loans from Members.................................................. 5
4.8 Withdrawal or Reduction of Members' Capital Contributions........... 5
4.9 Loans to Company.................................................... 5
4.10 Borrowing........................................................... 5
4.11 No Further Obligation............................................... 5
ARTICLE V
RIGHTS AND OBLIGATIONS OF MEMBERS......................................... 5
5.1 Limitation of Members' Responsibility, Liability.................... 5
5.2 Return of Distributions............................................. 6
5.3 Priority and Return of Capital...................................... 6
-i-
<PAGE>
Page
----
ARTICLE VI
MEETINGS OF MEMBERS; AMENDMENTS........................................... 6
6.1 Meetings............................................................ 6
6.2 Place of Meetings................................................... 6
6.3 Notice of Meetings.................................................. 6
6.4 Meeting of All Members.............................................. 6
6.5 Record Date......................................................... 6
6.6 Quorum.............................................................. 6
6.7 Manner of Acting.................................................... 7
6.8 Proxies............................................................. 7
6.9 Action by Members Without a Meeting................................. 7
6.10 Waiver of Notice.................................................... 7
6.11 Special Prohibitions and Limitations................................ 7
6.12 Amendments to be Adopted Solely by the Managers..................... 8
6.13 Amendments.......................................................... 8
ARTICLE VII
RIGHTS AND DUTIES OF MANAGERS............................................. 9
7.1 Management.......................................................... 9
7.2 Number and Qualifications........................................... 9
7.3 Powers of the Managers.............................................. 9
7.4 Initial Manager..................................................... 9
7.5 Place of Meetings................................................... 9
7.6 Meetings of Managers................................................ 9
7.7 Quorum.............................................................. 9
7.8 Attendance and Waiver of Notice..................................... 10
7.9 Action by Managers Without a Meeting................................ 10
7.10 Compensation of Managers............................................ 10
7.11 Committees.......................................................... 10
7.12 Liability of Managers............................................... 10
7.13 Officers............................................................ 11
ARTICLE VIII
INDEMNIFICATION........................................................... 11
8.1 Indemnification..................................................... 11
8.2 Power to Indemnify in Actions, Suits or Proceedings Other Than
Those by or in the Right of the Company........................... 11
8.3 Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Company.............................................. 12
8.4 Good Faith Defined.................................................. 12
-ii-
<PAGE>
Page
----
8.5 Advancement or Reimbursement of Expenses............................ 12
8.6 Nonexclusivity and Survival of Indemnification...................... 13
8.7 Insurance........................................................... 13
8.8 Interested Party Transactions....................................... 13
ARTICLE IX
ISSUANCE OF CERTIFICATES.................................................. 14
9.1 Issuance of Certificates............................................ 14
9.2 Lost, Stolen or Destroyed Certificates.............................. 14
9.3 Registered Owners................................................... 14
ARTICLE X
ALLOCATIONS AND DISTRIBUTIONS............................................. 15
10.1 Allocations......................................................... 15
10.2 Distributions....................................................... 15
ARTICLE XI
ACCOUNTING PERIOD, RECORDS AND REPORTS.................................... 15
11.1 Accounting Period................................................... 15
11.2 Records, Audits and Reports......................................... 15
11.3 Inspection.......................................................... 15
ARTICLE XII
TAX MATTERS............................................................... 15
12.1 Tax Returns and Elections........................................... 15
12.2 State, Local or Foreign Income Taxes................................ 15
12.3 Assignments and Issuance of Additional Common Shares................ 16
ARTICLE XIII
RESTRICTIONS ON TRANSFERABILITY; ADMISSION OF SUBSTITUTE MEMBERS.......... 16
13.1 Generally........................................................... 16
13.2 Restriction on Transfer............................................. 16
13.3 Substituted Members................................................. 16
ARTICLE XIV
DISSOLUTION AND TERMINATION............................................... 17
-iii-
<PAGE>
Page
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14.1 Dissolution......................................................... 17
14.2 Effect of Dissolution............................................... 17
14.3 Winding Up, Liquidating and Distribution of Assets.................. 17
14.4 Certificate of Cancellation......................................... 18
14.5 Return of Contribution Non-recourse to Other Members................ 18
ARTICLE XV
MISCELLANEOUS PROVISIONS.................................................. 18
15.1 Notices............................................................. 18
15.2 Books of Account and Records........................................ 19
15.3 Application of Delaware Law......................................... 19
15.4 Waiver of Action for Partition...................................... 19
15.5 Execution of Additional Instruments................................. 19
15.6 Headings............................................................ 19
15.7 Waivers............................................................. 19
15.8 Rights and Remedies Cumulative...................................... 19
15.9 Severability........................................................ 19
15.10 Heirs, Successors and Assigns....................................... 20
15.11 Creditors........................................................... 20
15.12 Counterparts........................................................ 20
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LIMITED LIABILITY COMPANY AGREEMENT
This Limited Liability Company Agreement (this "Agreement") is made
and executed to be effective as of November 10, 1999, by Reliant Energy,
Incorporated, a Texas corporation.
WHEREAS, a certificate of formation of Reliant Energy Transition Bond
Company LLC (the "Company"), has been filed with the Secretary of State of the
State of Delaware; and
WHEREAS, it is desired that the orderly management of the affairs of
the Company be provided for;
NOW, THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the following
meanings (unless otherwise expressly provided herein):
"Additional Member" shall mean any Person admitted to the Company as
an Additional Member pursuant to Section 4.3 of this Agreement.
"Affiliate," with respect to a specified Person, shall mean a Person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person specified. For
purposes of this definition, "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"Agreement" shall mean this Agreement as originally executed and
as it may be amended from time to time hereafter.
"Capital Contribution" shall mean any contribution to the capital of
the Company in cash or property by a Member whenever made. "Initial Capital
Contribution" shall mean the initial Capital Contribution by a Member pursuant
to Section 4.1(b) of this Agreement.
"Capital Percentage" shall mean a Member's ownership interest in the
Company expressed as a percentage of the total Common Shares issued and
outstanding.
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"Certificate of Formation" shall mean the Certificate of Formation of
the Company filed with and endorsed by the Secretary of State of the State of
Delaware, as such certificate may be amended from time to time hereafter.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent superseding federal revenue laws.
"Common Share" shall mean an undivided portion of all of the rights,
duties, obligations and ownership interests in the Company.
"Delaware Act" shall mean the Delaware Limited Liability Company Act,
as the same may be amended from time to time hereafter.
"Entity" shall mean any foreign or domestic general partnership,
limited partnership, limited liability company, corporation, joint enterprise,
trust, business trust, employee benefit plan, cooperative or association.
"Fiscal Year" shall mean the Company's fiscal year, which shall be
determined by the Managers in accordance with Section 706(b) of the Code.
"Manager" shall mean any of the managers of the Company duly appointed
or elected to serve in such capacity under Delaware law and this Agreement.
"Member" shall mean each Person who executes a counterpart of this
Agreement as a Member and each Person who may hereafter become an Additional
Member pursuant to Section 4.3 or a Substituted Member pursuant to Section 13.3;
but shall not include any Member that ceases to be a Member.
"Person" shall mean any individual or Entity, and any heir, executor,
administrator, legal representative, successor or assign of such "Person" where
the context so admits.
"Requisite Interest" shall mean the Members holding more than 50% of
the issued and outstanding Common Shares held by Members at any given time.
"Substituted Member" shall mean any transferee or assignee of Common
Shares that is admitted to the Company as a Member pursuant to Section 13.3.
ARTICLE II
FORMATION OF THE COMPANY
2.1 Formation. On November 10, 1999, the Certificate of Formation of
the Company was filed with the Secretary of State of the State of Delaware
pursuant to the Delaware Act.
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2.2 Name. The name of the Company is Reliant Energy Transition Bond
Company LLC. If the Company shall conduct business in any jurisdiction other
than the State of Delaware, it shall register the Company or its trade name with
the appropriate authorities in such state in order to have the legal existence
of the Company recognized.
2.3 Place of Business. The Company may locate its places of business
and registered office at any place or places as the Managers may from time to
time deem advisable.
2.4 Registered Office and Registered Agent. The Company's registered
office shall be at the office of its registered agent at 1209 Orange Street,
Wilmington, Delaware 19801, and the name of its initial registered agent at such
address shall be The Corporation Trust Company.
2.5 Term. The Company and this Agreement shall continue until the
earliest of (a) such time as all of the Company's assets have been sold or
otherwise disposed of, (b) such time as the Company's existence has been
terminated as otherwise provided herein or in the Delaware Act, or (c) 30 years
from the date hereof.
2.6 Purpose of the Company. The purpose of the Company shall be to
do any or all things that may lawfully be done by a limited liability company
pursuant to the Delaware Act. The Company shall have any and all powers
necessary or desirable to carry out the purpose and business of the Company to
the extent the same may be legally exercised by limited liability companies
under the Delaware Act. The Company shall carry out the foregoing activities
pursuant to the Certificate of Formation and this Agreement.
ARTICLE III
INITIAL MEMBER
The name and place of business of the initial Member (the "Initial
Member") is as follows:
Reliant Energy, Incorporated
1111 Louisiana
Houston, Texas 77002
ARTICLE IV
CAPITAL OF THE COMPANY
4.1 Common Shares and Initial Contributions.
(a) A class of equity interests denominated the "Common Shares"
is hereby designated as the sole class of equity interests of the Company. Each
issued and outstanding
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Common Share shall at any time represent that undivided portion of all of the
rights, duties, obligations and ownership interests in the Company in proportion
to the total number of Common Shares outstanding at such time.
(b) The Company will issue to the Initial Member 1,000 Common
Shares upon payment of $1,000 to the Company from the Initial Member, which
shall be deemed to be the "Initial Capital Contribution" of the Initial Member.
Upon receipt of the Initial Capital Contribution and issuance of said 1,000
Common Shares, such Common Shares shall be validly issued and outstanding, fully
paid and nonassessable.
4.2 Additional Contributions. No Member shall be required to make
additional Capital Contributions unless, and except on such terms as, the
Managers and Members unanimously agree.
4.3 Additional Issuances of Common Shares
(a) In the event of any additional Capital Contributions, and in
order to raise additional capital or to acquire assets, to redeem or retire
Company debt or for any other purpose, the Company is authorized to issue Common
Shares from time to time to Members or to other Persons, subject to the approval
of the Requisite Interest. The Company may assume liabilities in connection with
any such issuance. The Managers shall determine the consideration and terms and
conditions with respect to any such issuance of Common Shares. The Managers
shall do all things necessary to comply with the Delaware Act and are authorized
and directed to do all things they deem to be necessary or advisable in
connection with any such issuance, including, without limitation, compliance
with any statute, rule, regulation or guideline of any federal, state or other
governmental agency.
(b) Upon (i) the execution and delivery to the Company of this
Agreement, as it may be amended, by any Person who is issued any Common Shares,
(ii) receipt by the Company of any Capital Contribution required of such Person
made in connection with the issuance of Common Shares, (iii) consent by all
other Members to such Person being admitted as an Additional Member and (iv) any
other action required by Delaware law, such Person shall be admitted as an
Additional Member of the Company.
4.4 Record of Contributions. The books and records of the Company
shall include true and full information regarding the amount of cash and cash
equivalents and designation and statement of the value of any other property
contributed by each Member to the Company.
4.5 No Fractional Common Shares. No fractional Common Shares shall
be issued by the Company unless otherwise determined by the Managers; instead,
each fractional Common Share shall be rounded to the nearest whole Common Share.
4.6 Interest. No interest shall be paid by the Company on Capital
Contributions.
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4.7 Loans from Members. Loans by a Member to the Company shall not
be considered Capital Contributions.
4.8 Withdrawal or Reduction of Members' Capital Contributions.
(a) A Member shall not be entitled to withdraw any part of his
Capital Contribution or to receive any distribution from the Company, except as
otherwise provided in this Agreement.
(b) A Member shall not receive out of the Company's property any
part of his Capital Contributions until all liabilities of the Company, except
liabilities to Members on account of their Capital Contributions, have been paid
or there remains property of the Company sufficient to pay them.
(c) A Member, irrespective of the nature of his Capital
Contribution, has only the right to demand and receive cash in return for his
Capital Contribution.
4.9 Loans to Company. Nothing in this Agreement shall prevent any
Member from making secured or unsecured loans to the Company by agreement with
the Company.
4.10 Borrowing. In the event that the Company, in order to discharge
costs, expenses or indebtedness, requires funds in excess of the funds provided
by Capital Contributions of the Members and by revenues, the Managers shall be
authorized, at any time and from time to time, to cause the Company to borrow
additional funds, as shall in the judgment of the Managers be sufficient for
such purposes and upon such terms as the Managers may deem advisable.
4.11 No Further Obligation. Except as expressly provided for in or
contemplated by this Article IV, no Member shall have any obligation to provide
funds to the Company, whether by Capital Contributions, loans, return of monies
received pursuant to the terms of this Agreement or otherwise.
ARTICLE V
RIGHTS AND OBLIGATIONS OF MEMBERS
5.1 Limitation of Members' Responsibility, Liability. The Members
shall not perform any act on behalf of the Company, incur any expense,
obligation or indebtedness of any nature on behalf of the Company, or in any
manner participate in the management of the Company or receive or be credited
with any amounts, except as specifically contemplated hereunder. The Members
shall not be personally liable for any amount in excess of their respective
Capital Contributions, and shall not be liable for any of the debts or losses of
the Company, except to the extent that a liability of the Company is founded
upon or results from an unauthorized act or activity of such Member. In
addition, each Member's liability shall be limited as set forth in the Delaware
Act and other applicable law hereafter in effect.
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5.2 Return of Distributions. In accordance with Section 18-607 of
the Delaware Act, a Member will be obligated to return any distribution from the
Company only as provided by applicable law.
5.3 Priority and Return of Capital. Except as may be provided in
this Agreement, no Member shall have priority over any other Member, either as
to the return of Capital Contributions or as to profits, losses or
distributions; provided that this Section shall not apply to loans (as
distinguished from Capital Contributions) that a Member has made to the Company.
ARTICLE VI
MEETINGS OF MEMBERS; AMENDMENTS
6.1 Meetings. Meetings of the Members, for any purpose or purposes,
unless otherwise prescribed by statute, may be called by any Manager or by any
Member or group of Members holding, in the aggregate, 25% or more of the Capital
Percentage.
6.2 Place of Meetings. The Members may designate any place as the
place of meeting for any meeting of the Members. If no designation is made, the
meeting shall be held at the principal offices of the Company.
6.3 Notice of Meetings. Except as provided in Section 6.4, written
notice stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called shall be delivered not less than ten
nor more than 60 days before the date of the meeting, either personally or by
mail, by or at the direction of the Manager or Person calling the meeting, to
each Member entitled to vote at such meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, addressed to
the Member at his address as it appears on the books of the Company, with
postage thereon prepaid. If transmitted by way of facsimile, such notice shall
be deemed to be delivered on the date of such facsimile transmission to the fax
number, if any, for the respective Member that has been supplied by such Member
to the Manager and identified as such Member's facsimile number.
6.4 Meeting of All Members. If all of the Members shall meet at any
time and place and consent to the holding of a meeting at such time and place,
such meeting shall be valid without call or notice, and at such meeting lawful
action may be taken.
6.5 Record Date. For the purpose of determining Members entitled to
notice of or to vote at any meeting of Members, the Managers may set a record
date. When a determination of Members entitled to vote at any meeting of
Members has been made as provided in this Section, such determination shall
apply to any adjournment thereof.
6.6 Quorum. Members holding at least a majority of Common Shares
entitled to vote, represented in person or by proxy, shall constitute a quorum
at any meeting of Members.
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In the absence of a quorum at any such meeting, Members holding a majority of
such Common Shares so represented may adjourn the meeting from time to time for
a period not to exceed 60 days without further notice. However, if the
adjournment is for more than 60 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each Member of record entitled to vote at the meeting.
At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed. The Members present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal during such meeting of Members holding that number of Common Shares
whose absence would cause less than a quorum.
6.7 Manner of Acting. If a quorum is present, the affirmative vote
of the Requisite Interest on the subject matter shall be the act of the Members,
unless the vote of a greater or lesser proportion or number is otherwise
required by the Delaware Act, by the Certificate of Formation or by this
Agreement.
6.8 Proxies. At all meetings of Members, a Member may vote in person
or by proxy executed in writing by the Member or by a duly authorized attorney-
in-fact. Such proxy shall be filed with the Managers of the Company before or
at the time of the meeting. No proxy shall be valid after 11 months from the
date of its execution, unless otherwise provided in the proxy.
6.9 Action by Members Without a Meeting. Action required or
permitted to be taken at a meeting of Members may be taken without a meeting if
the action is evidenced by one or more written consents describing the action
taken, signed by Members entitled to vote thereon holding not less than the
number of Common Shares required to approve such action and delivered to the
Managers of the Company for inclusion in the minutes or for filing with the
Company records. Action taken under this Section is effective when all Members
entitled to vote thereon holding not less than the number of Common Shares
required to approve such action have signed the consent, unless the consent
specifies a different effective date. The record date for determining Members
entitled to take action without a meeting shall be the date the first Member
signs a written consent.
6.10 Waiver of Notice. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the Person entitled to such
notice, whether before, at or after the time stated therein, shall be equivalent
to the giving of such notice.
6.11 Special Prohibitions and Limitations. Without the prior approval
of the Requisite Interest, the Company shall not (i) sell, exchange or otherwise
dispose of all or substantially all of the assets of the Company outside the
ordinary course of business of the Company (provided, however, that this
provision shall not be interpreted to preclude or limit the mortgage, pledge,
hypothecation or grant of a security interest in all or substantially all of the
assets of the Company and shall not apply to any forced sale of any or all of
the assets of the Company pursuant to the foreclosure of (or in lieu of
foreclosure), or other realization upon, any such
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<PAGE>
encumbrance), (ii) merge, consolidate or combine with any other Person, or (iii)
issue additional Common Shares.
6.12 Amendments to be Adopted Solely by the Managers. The Managers,
without the consent at the time of any Member, may amend any provision of this
Agreement and execute, swear to, acknowledge, deliver, file and record whatever
documents may be required in connection therewith, to reflect:
(a) a change in the name of the Company or the location of the
principal place of business of the Company;
(b) the admission, substitution or withdrawal of Members in
accordance with this Agreement;
(c) a change that is necessary or advisable in the opinion of the
Managers to qualify the Company as a company in which members have limited
liability under the laws of any state or other jurisdiction or to ensure that
the Company will not be treated as an association taxable as a corporation for
federal income tax purposes;
(d) a change that (i) in the sole discretion of the Managers does
not adversely affect the Members in any material respect, (ii) is necessary or
desirable to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state agency
or contained in any federal or state statute or (iii) is required or
contemplated by this Agreement;
(e) a change in any provision of this Agreement that requires any
action to be taken by or on behalf of the Company or the Members pursuant to the
requirements of Delaware law if the provisions of Delaware law are amended,
modified or revoked so that the taking of such action is no longer required;
provided that this Section 6.2(e) shall be applicable only if such changes are
not materially adverse to the Members;
(f) a change that is necessary or desirable in connection with
the issuance of Common Shares pursuant to Section 4.3; or
(g) any other amendments similar to the foregoing.
Each Member hereby appoints each Manager as its attorney-in-fact to
execute any amendment permitted by this Section 6.12.
6.13 Amendments. A proposed amendment to this Agreement (other than
one permitted by Section 6.12) shall be effective upon its adoption by Members
holding in excess of 80% of the issued and outstanding Common Shares at such
time. The Company shall notify all Members upon final adoption or rejection of
any proposed amendment to this Agreement.
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ARTICLE VII
RIGHTS AND DUTIES OF MANAGERS
7.1 Management. The powers of the Company shall be exercised by or
under the authority of, and the business and affairs of the Company shall be
managed under, its Managers. In addition to the powers and authorities
expressly conferred by this Agreement upon the Managers, the Managers may
exercise all such powers of the Company and do all such lawful acts and things
as are not directed or required to be exercised or done by the Members by the
Delaware Act, the Certificate of Formation of the Company or this Agreement.
7.2 Number and Qualifications. The number of Managers of the Company
shall initially be one; but the number of Managers may be changed by unanimous
agreement of the Members. Managers need not be residents of the State of
Delaware or Members of the Company. The Managers, in their discretion, may elect
a chairman of the Managers who shall preside at any meetings of the Managers.
7.3 Powers of the Managers. Without limiting the generality of
Section 7.1, the Managers shall have power and authority, acting in concert in
accordance with this Agreement, to cause the Company to do and perform all acts
as may be necessary or appropriate to the conduct of the Company's business.
7.4 Initial Manager. The initial Manager shall be Marc Kilbride.
The Members shall have the right to take action pursuant to a meeting of the
Members or unanimous written consent of the Members to designate one or more
Managers and to remove, replace or fill any vacancy occurring for any reason of
any Manager.
7.5 Place of Meetings. All meetings of the Managers of the Company
or committees thereof may be held either within or without the State of
Delaware. Any Manager may participate in a meeting by means of conference
telephone or similar equipment, and participation by such means shall constitute
presence in person at the meeting.
7.6 Meetings of Managers. Meetings of the Managers may be called by
any Manager on two days' notice to each Manager, either personally or by mail,
telephone or telegram.
7.7 Quorum. At all meetings of the Managers, the presence of a
majority of the Managers shall be necessary and sufficient to constitute a
quorum for the transaction of business unless a greater number is required by
law. The act of a majority of the Managers present at a meeting at which a
quorum is present shall be the act of the Managers, except as otherwise provided
by law, Certificate of Formation or this Agreement. If a quorum shall not be
present at any meeting of the Managers, the Managers present at the meeting may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
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7.8 Attendance and Waiver of Notice. Attendance of a Manager at any
meeting shall constitute a waiver of notice of such meeting, except where a
Manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Managers need be specified in the
notice or waiver of notice of such meeting.
7.9 Action by Managers Without a Meeting. Action required or
permitted to be taken at a meeting of Managers may be taken without a meeting if
the action is evidenced by one or more written consents describing the action
taken, signed by a majority of the Managers and included in the Company minutes
or records. Action taken under this Section is effective when a majority of the
Managers have signed the consent, unless the consent specifies a different
effective date. The record date for determining Managers entitled to take
action without a meeting shall be the date the first Manager signs a written
consent.
7.10 Compensation of Managers. Managers, as such, shall not receive
any stated salary for their services, but shall receive such compensation for
their services as may be from time to time approved by the Members, provided
that nothing contained in this Agreement shall preclude any Manager from serving
the Company in any other capacity and receiving compensation for service. In
addition, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each meeting of the Managers.
7.11 Committees. The Managers may, by resolution, designate from
among the Managers one or more committees, each of which shall be comprised of
one or more Managers, and may designate one or more of the Managers as alternate
members of any committee, who may, subject to any limitations imposed by the
Managers, replace absent or disqualified Managers at any meeting of that
committee. Such committee shall have and may exercise all of the authority of
the Managers, subject to the limitations set forth in this Agreement and under
the Delaware Act.
7.12 Liability of Managers. A Manager shall not be liable under any
judgment, decree or order of a court, or in any other manner, for any debt,
obligation or liability of the Company by reason of his acting as a Manager of
the Company. A Manager of the Company shall not be personally liable to the
Company or its Members for monetary damages for breach of fiduciary duty as a
Manager, except for liability for any acts or omissions that involve intentional
misconduct, fraud or a knowing violation of law or for a distribution in
violation of Delaware law as a result of the willful or grossly negligent act or
omission of the Manager. If the laws of the State of Delaware are amended after
the date of this Agreement to authorize action further eliminating or limiting
the personal liability of Managers, then the liability of a Manager of the
Company, in addition to the limitation on personal liability provided herein,
shall be limited to the fullest extent permitted by the amended laws of the
State of Delaware. Any repeal or modification of this Section 7.12 by the
Members of the Company shall be prospective only, and shall not adversely affect
any limitation on the personal liability of a Manager of the Company existing at
the time of such repeal or modification or thereafter arising as a result of
acts or omissions prior to the time of such repeal or modification.
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7.13 Officers. The Managers of the Company may elect the officers of
the Company, who shall hold offices specified by the Managers for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Managers; and each officer of the Company shall hold office
until his successor is chosen and qualified or until his earlier resignation or
removal. Any officer elected by the Managers may be removed at any time by the
affirmative vote of the Managers. Any vacancy occurring in any office of the
Company may be filled by the unanimous agreement of the Managers. The salaries
of all officers of the Company shall be fixed by the Managers but must be
approved by the Members.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. Each Person who at any time shall be, or shall
have been, a Member, Manager or officer of the Company, or any Person who, while
a Member, Manager, officer, employee or agent of the Company, is or was serving
at the request of the Company as a director, member, manager, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of an
Entity, shall be entitled to indemnification as and to the fullest extent
permitted by the provisions of Delaware law or any successor statutory
provisions, as from time to time amended. The foregoing right of
indemnification shall not be deemed exclusive of any other rights to which one
to be indemnified may be entitled as a matter of law or under this Agreement,
any other agreement, by vote of the Members or disinterested Managers or
otherwise, both as to any action in an official capacity and as to action in
another capacity while holding such office. Any repeal of this Section 8.1
shall be prospective only, and shall not adversely affect any right of
indemnification existing at the time of such repeal or modification or
thereafter arising as a result of acts or omissions prior to the time of such
repeal or modification. Any Person entitled to indemnification in accordance
with this Section 8.1 shall hereinafter be referred to as an "Indemnitee." If
any provision or provisions of this Agreement relating to indemnification shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby; and, to the fullest extent possible,
the provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable,
including, without limitation, by allowing indemnification by vote of the
Members or Managers or the disinterested minority thereof.
8.2 Power to Indemnify in Actions, Suits or Proceedings Other Than
Those by or in the Right of the Company. Without limiting the provisions of
Section 8.1, the Company may indemnify an Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company) by reason of the fact
that the Indemnitee is or was a Member or Manager or officer of the Company,
or is or was serving at the request of the Company as a director, member,
manager, officer, employment or agent of an Entity, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Indemnitee in connection with such action, suit or
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proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the Indemnitee's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the Indemnitee did not act in good faith and
in a manner that the Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the Indemnitee's conduct was
unlawful.
8.3 Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Company. Without limiting the provisions of Section 8.1, the
Company may indemnify an Indemnitee who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that the Indemnitee is or was a Member or Manager or officer of the Company, or
is or was serving at the request of the Company as a director, member, manager,
officer, employee or agent of an Entity against expenses (including attorneys'
fees) actually and reasonably incurred by the Indemnitee in connection with the
defense or settlement of such action or suit if the Indemnitee acted in good
faith and in a manner the Indemnitee reasonably believed to be in or not opposed
to the best interests of the Company; except that no indemnification shall be
made in respect of any claim, issue or matter as to which the Indemnitee shall
have been adjudged to be liable to the Company unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the Indemnitee is fairly and reasonably entitled to
indemnification for such expenses that the court shall deem proper.
8.4 Good Faith Defined. For purposes of any determination under this
Article VIII, a Person shall be deemed to have acted in good faith and in a
manner such Person reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or proceeding,
to have had no reasonable cause to believe such Person's conduct was unlawful,
if such Person's action is based upon the records of the Company and upon such
information, opinions, reports or statements presented to the Company by any of
the Members, Managers, officers, employees or committees of the Company or by
any other Person as to matters the Person reasonably believes are within such
other Person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including information, opinions,
reports or statements as to the value and amount of assets, liabilities, profits
or losses of the Company or any other facts pertinent to the existence and
amount of assets from which distributions to the Members might properly be paid.
The provisions of this Section 8.4 shall not be deemed to be exclusive or to
limit in any way the circumstances in which a Person may be deemed to have met
the applicable standards of conduct set forth in the provisions of the Delaware
Act, or in Section 8.2 or Section 8.3, as the case may be.
8.5 Advancement or Reimbursement of Expenses. The Company may pay in
advance or reimburse expenses actually or reasonably incurred or anticipated by
an Indemnitee in connection with an appearance as a witness or other
participation in a proceeding whether or not
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such Indemnitee is a named defendant or a respondent in the proceeding. To
obtain reimbursement or an expense advance, the requesting Person shall submit
to the Company a written request with such information as is reasonably
available. If the expense advance is to be paid prior to final disposition of
the proceeding, there shall be included a written statement of such Person's
good faith belief that such indemnification is appropriate under the
circumstances and, if such Person is not a Member or Manager, that such Person
has met the necessary standard of conduct under Section 8.2 or Section 8.3 as
applicable or otherwise has met any applicable standard of conduct under the
Delaware Act and an undertaking to repay any amount paid if it is ultimately
determined that those conduct requirements were not met. Upon receipt of the
request, the Managers and Members (by unanimous agreement), shall determine
whether such Person is entitled to such reimbursement or an expense advance. If
the request is rejected, the Company shall notify such Person of the reason
therefor. If, within sixty days of the Company's receipt of the request, the
request for payment is not acted on, such Person shall have the right to an
adjudication in any court of competent jurisdiction of such Person's entitlement
to such indemnification or expense advance.
8.6 Nonexclusivity and Survival of Indemnification. The
indemnification and advancement of expenses provided by, or granted pursuant to,
the other subsections of this Article VIII shall not be deemed exclusive of any
other rights to which one seeking indemnification and advancement of expenses
may be entitled under this Agreement, any other agreement, by vote of the
disinterested Members or Managers or otherwise, both as to action in an official
capacity and as to action in any other capacity while holding such office, it
being the policy of the Company that, if the Managers and Members unanimously
approve, indemnification specified in this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any Person who is not specified in
this Article VIII but whom the Company has the power or obligation to indemnify
under the provisions of the Delaware Act or otherwise.
8.7 Insurance. The Company may purchase and maintain insurance on
behalf of any Person who is or was a Member, Manager, officer, employee or agent
of the Company, or is or was serving at the request of the Company as a member,
manager, director, officer, employee or agent of an Entity against any liability
asserted against and incurred by such Person in any such capacity or arising out
of such Person's status as such, whether or not the Company would have the power
or the obligation to indemnify such Person against such liability under the
provisions of this Article VIII.
8.8 Interested Party Transactions. Without limiting the generality
of any other provision hereof, the Company may (except as otherwise specifically
provided for in this Agreement) enter into any contract, arrangement or
transaction between the Company and one or more Members, Managers or officers,
or between the Company and an Entity that is an Affiliate of one or more Members
or officers or in which a Member, Manager or officer has an interest or serves
as a director, member, manager, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary and such contract, arrangement or
transaction shall not, because of such interest by or position of a Member,
Manager or officer, be void or voidable nor impose on any such Person any burden
or obligation to show the fairness of the contract, arrangement or transaction,
but shall
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instead be accorded the same treatment as a contract, arrangement or
understanding between the Company and an unrelated party.
ARTICLE IX
ISSUANCE OF CERTIFICATES
9.1 Issuance of Certificates. Upon the issuance of Common Shares,
the Company shall issue one or more certificates representing such Common Shares
(each a "Certificate") in the name of the Members owning such Common Shares.
Upon the transfer of a Common Share, the Company shall issue replacement
Certificates according to such procedures as the Company may reasonably
establish.
9.2 Lost, Stolen or Destroyed Certificates. The Company shall issue
a new Certificate in place of any Certificate previously issued if the
registered owner of the Certificate:
(a) makes proof by affidavit, in form and substance satisfactory
to the Company, that a previously issued Certificate has been lost, destroyed or
stolen;
(b) requests the issuance of a new Certificate before the Company
has notice that the Certificate has been acquired by a purchaser for value in
good faith and without notice of an adverse claim;
(c) if requested by the Company, delivers to the Company a bond,
in form and substance satisfactory to the Company, with such surety or sureties
and with fixed or open penalty as the Company may direct to indemnify the
Company against any claim that may be made on account of the alleged loss,
destruction or theft of the Certificate; and
(d) satisfies any other reasonable requirements imposed by the
Company.
When a Certificate has been lost, destroyed or stolen, and the Member fails to
notify the Company within a reasonable time after he has notice of it, and a
transfer of the Common Shares represented by the Certificate is registered
before the Company receives such notification, the Member shall be precluded
from making any claim against the Company for such transfer or for a new
Certificate.
9.3 Registered Owners. The Company shall be entitled to treat the
registered owner of any Common Shares as the Person that owns such Common Shares
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such Common Shares on the part of any other Person, regardless
of whether it shall have actual or other notice thereof, except as otherwise
provided by law.
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ARTICLE X
ALLOCATIONS AND DISTRIBUTIONS
10.1 Allocations. Except as may otherwise be unanimously agreed by
the Managers with the consent of the Members, all items of income, gain, loss,
deduction, and credit of the Company shall be allocated among the Members in
accordance with their Capital Percentages.
10.2 Distributions. From time to time the Managers by unanimous
agreement may determine to what extent (if any) the Company's cash on hand
exceeds its current and anticipated needs, including, without limitation, for
operating expenses, debt service, acquisitions, and a reasonable contingency
reserve, and if such an excess exists, cause the Company to distribute to the
Members, in accordance with their Capital Percentages (or such other proportions
as all of the Managers may agree, with the consent of the Members) an amount in
cash equal to that excess.
ARTICLE XI
ACCOUNTING PERIOD, RECORDS AND REPORTS
11.1 Accounting Period. The Company's accounting period shall be the
Fiscal Year.
11.2 Records, Audits and Reports. At the expense of the Company, the
Managers shall maintain records and accounts of all operations and expenditures
of the Company.
11.3 Inspection. The books and records of the Company shall be
maintained at the principal place of business of the Company and shall be open
to inspection by the Members at all reasonable times during any business day.
ARTICLE XII
TAX MATTERS
12.1 Tax Returns and Elections. The Managers or their designees shall
cause the preparation and timely filing of all tax returns required to be filed
by the Company pursuant to the Code and all other tax returns that the Managers
or their designees deem necessary and are required to be filed by the Company.
Copies of such returns, or pertinent information therefrom, shall be furnished
to the Members as promptly as practicable after filing.
12.2 State, Local or Foreign Income Taxes. In the event state or
foreign income taxes are applicable, any references to federal income taxes or
to "income taxes" contained herein shall refer to federal, state, local and
foreign income taxes. References to the Code or Treasury
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Regulations shall be deemed to refer to corresponding provisions that may become
applicable under state, local or foreign income tax statutes and regulations.
12.3 Assignments and Issuance of Additional Common Shares. The
Company shall allocate taxable items attributable to a Common Share that is
assigned or newly issued during a Fiscal Year between the assignor and the
assignee of such Common Share or the existing Members and the new Members by
closing the books of the Company as of the end of the day prior to the day in
which such Common Shares are assigned or issued.
ARTICLE XIII
RESTRICTIONS ON TRANSFERABILITY;
ADMISSION OF SUBSTITUTE MEMBERS
13.1 Generally.
(a) All Common Shares at any time and from time to time
outstanding shall be held subject to the conditions and restrictions set forth
in this Article, which conditions and restrictions shall apply equally to the
Members and their respective transferees (except as otherwise expressly stated),
and each Member by executing this Agreement or by accepting a Certificate or
other indicia of ownership therefor from the Company agrees with the Company and
with each other Member to such conditions and restrictions. Without limiting the
generality of the foregoing, the Company shall require as a condition to the
transfer of record ownership of Common Shares that the transferee of such Common
Shares execute and deliver this Agreement as evidence that such Common Shares
are held subject to the terms, conditions and restrictions set forth herein.
(b) The personal representative (or other successor-in-interest)
of a deceased Member shall, subject to the provisions of this Article XIII,
succeed to the deceased Member's interest in the Company. However, such personal
representative (or other successor in interest) shall not be entitled to be
admitted as a Member unless the conditions specified in this Article XIII are
met.
13.2 Restriction on Transfer. No Common Shares shall be sold,
assigned, given, transferred, exchanged, devised, bequeathed, pledged or
otherwise disposed of to any Person except in accordance with the terms of this
Agreement. All Certificates shall contain conspicuous notation on such
Certificate indicating that the transfer of such Common Shares is subject to the
terms and restrictions of this Agreement, and each Member consents to the
placement of such legend on the Certificate or Certificates representing the
Common Shares owned by such Member.
13.3 Substituted Members. Any Person that acquires any Common Shares
that is not already a Member shall not have the right to participate in the
management of the business and affairs of the Company, to vote such Common
Shares, or to become a Member of
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the Company unless the Members of the Company unanimously consent to such Person
becoming a Member of the Company. If such Person is not admitted as a Member of
the Company, such Person only is entitled to receive the share of profits,
distributions, and allocations of income, gain, loss, deduction, credit, or
similar item to which the Person would be entitled if such Person were a Member
of the Company.
ARTICLE XIV
DISSOLUTION AND TERMINATION
14.1 Dissolution. The Company shall dissolve upon the occurrence of
any of the following events:
(i) when the period fixed for the duration of the Company
shall expire;
(ii) if the Members so agree in writing;
(iii) if the Requisite Interest votes to dissolve the Company;
or
(iv) as otherwise provided under Delaware law.
14.2 Effect of Dissolution. Upon the occurrence of any of the events
specified in this Article effecting the dissolution of the Company, the Company
shall cease to carry on its business, except insofar as may be necessary for the
winding up of its business, but its separate existence shall continue until a
certificate of cancellation has been issued by the Secretary of State of the
State of Delaware or until a decree dissolving the Company has been entered by a
court of competent jurisdiction.
14.3 Winding Up, Liquidating and Distribution of Assets.
(a) Upon dissolution, an accounting shall be made of the
accounts of the Company and of the Company's assets, liabilities and operations,
from the date of the last previous accounting until the date of dissolution. The
Managers shall immediately proceed to wind up the affairs of the Company.
(b) If the Company is dissolved and its affairs are to be wound
up, the Managers shall (1) sell or otherwise liquidate all of the Company's
assets as promptly as practicable (except to the extent the Managers may
determine to distribute any assets in kind to the Members), (2) allocate any
income or loss resulting from such sales to the Members in accordance with this
Agreement, (3) discharge all liabilities to creditors in the order of priority
as provided by law, (4) discharge all liabilities of the Members (other than
liabilities to Members or for Capital Contributions to the extent unpaid in
breach of an obligation to do so), including all costs relating to the
dissolution, winding up and liquidation and distribution of assets, (5)
establish such reserves as the Managers may determine to be reasonably necessary
to provide for contingent liabilities of
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the Company, (6) discharge any liabilities of the Company to the Members other
than on account of their interests in Company capital or profits and (7)
distribute the remaining assets to the Members, either in cash or in kind, as
determined by the Managers, pro rata according to the relative number of Common
Shares held by each. If any assets of the Company are to be distributed in kind,
the net fair market value of such assets as of the date of dissolution shall be
determined by independent appraisal or by agreement of the Managers.
(c) Notwithstanding anything to the contrary in this Agreement,
upon a liquidation of the Company no Member shall have any obligation to make
any contribution to the capital of the Company other than any Capital
Contributions such Member agreed to make in accordance with this Agreement.
(d) Upon completion of the winding up, liquidation and
distribution of the assets, the Company shall be deemed terminated.
(e) The Managers shall comply with any applicable requirements
of applicable law pertaining to the winding up of the affairs of the Company and
the final distribution of its assets.
14.4 Certificate of Cancellation. When all debts, liabilities and
obligations have been paid and discharged or adequate provisions have been made
therefor and all of the remaining property and assets have been distributed to
the Members, a Certificate of Cancellation shall be executed in duplicate, and
verified by the person signing the Certificate of Cancellation and filed with
the Secretary of State of the State of Delaware, which Certificate shall set
forth the information required by the Delaware Act.
14.5 Return of Contribution Non-recourse to Other Members. Except as
provided by law, upon dissolution, each Member shall look solely to the assets
of the Company for the return of the Member's Capital Contribution. If the
Company property remaining after the payment or discharge of the debts and
liabilities of the Company is insufficient to return the cash or other property
contribution of one or more Members, such Member or Members shall have no
recourse against any other Member.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 Notices. Any notice, demand or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the party or to an executive officer of the party to whom the same is directed
or if sent by registered or certified mail, postage and charges prepaid,
addressed to the Member's and/or Company's address, as appropriate, which is set
forth in this Agreement.
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If mailed, any such notice shall be deemed to be delivered two calendar days
after being deposited in the United States mail with postage thereon prepaid,
addressed and sent as aforesaid.
15.2 Books of Account and Records. Proper and complete records and
books of account in which shall be entered fully and accurately all transactions
and other matters relating to the Company's business in such detail and
completeness as is customary and usual for businesses of the type engaged in by
the Company shall be kept or shall be caused to be kept by the Company. Such
books and records shall be maintained as provided in Section 11.3. The books
and records shall at all times be maintained at the principal executive office
of the Company and shall be open to the reasonable inspection and examination of
the Members or their duly authorized representatives during reasonable business
hours.
15.3 Application of Delaware Law. This Agreement, and the application
of interpretation hereof, shall be governed exclusively by its terms and by the
laws of the State of Delaware, and specifically the Delaware Act.
15.4 Waiver of Action for Partition. Each Member irrevocably waives,
during the term of the Company, any right that such Member may have to maintain
any action for partition with respect to the property of the Company.
15.5 Execution of Additional Instruments. Each Member hereby agrees
to execute such other and further statements of interest and holdings,
designations, powers of attorney and other instruments necessary to comply with
any laws, rules or regulations.
15.6 Headings. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any provision hereof.
15.7 Waivers. No waiver of any right under this Agreement shall be
effective unless evidenced in writing and executed by the Person entitled to the
benefits thereof. The failure of any party to seek redress for violation of or
to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent another act or omission, which would have originally
constituted a violation, from having the effect of an original violation.
15.8 Rights and Remedies Cumulative. The rights and remedies provided
by this Agreement are cumulative and the use of any one right or remedy by any
party shall not preclude or waive the right to use any or all other rights or
remedies. Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance or otherwise.
15.9 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid, illegal or
unenforceable to any extent, the remainder of this Agreement and the application
thereof shall not be affected and shall be enforceable to the fullest extent
permitted by law.
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15.10 Heirs, Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding upon and
inure to the benefit of the parties hereto and, to the extent permitted by this
Agreement, their respective heirs, legal representatives, successors and
assigns.
15.11 Creditors. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any creditors of the Company.
15.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same instrument.
EXECUTED to be effective as of the date first above written.
RELIANT ENERGY, INCORPORATED
By: /s/ Marc Kilbride
---------------------------------
Marc Kilbride
Treasurer
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF FORMATION
OF
RELIANT ENERGY TRANSITION BOND COMPANY LLC
This Certificate of Formation of Reliant Energy Transition Bond
Company LLC (the "Company"), dated as of November 10, 1999, is being executed
and filed by Marc Kilbride, as an authorized person, to form a limited liability
company under the Delaware Limited Liability Company Act (6 Del. C. (S) 18-101
et seq.).
Article One
-----------
The name of the limited liability company formed hereby is Reliant
Energy Transition Bond Company LLC.
Article Two
-----------
The address of the registered office of the Company in the State of
Delaware is c/o The Corporation Trust Company, 1209 Orange Street, Wilmington,
New Castle County, Delaware 19801.
Article Three
-------------
The name and address of the registered agent for service of process on
the Company in the State of Delaware are The Corporation Trust Company, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation as of the date first above written.
/s/ Marc Kilbride
--------------------------------
Marc Kilbride, Authorized Person
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Reliant Energy
Transition Bond Company LLC on Form S-3 of our report dated November 15, 1999,
appearing in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Houston, Texas
November 16, 1999
