<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
CPL TRANSITION FUNDING LLC
(Exact name of Registrant as Specified in its Certificate of Formation)
<TABLE>
<S> <C>
DELAWARE 74-2935495
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
1616 WOODALL RODGERS FREEWAY
DALLAS, TEXAS 75202
(214) 777-1000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive Offices)
WENDY G. HARGUS
1616 WOODALL RODGERS FREEWAY
DALLAS, TEXAS 75202
(214) 777-1000
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
----------------------
Copies to:
<TABLE>
<S> <C> <C>
J. GONZALO SANDOVAL, PRESIDENT KEVIN F. BLATCHFORD TRAYTON M. DAVIS
CENTRAL POWER AND LIGHT COMPANY SIDLEY & AUSTIN ROBERT B. WILLIAMS
539 NORTH CARANCAHUA STREET BANK ONE PLAZA MILBANK, TWEED, HADLEY & MCCLOY LLP
CORPUS CHRISTI, TEXAS 78401-2802 10 SOUTH DEARBORN 1 CHASE MANHATTAN PLAZA
(512) 881-5300 CHICAGO, ILLINOIS 60603 NEW YORK, NEW YORK 10005
(312) 853-7000 (212) 530-5000
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transition Notes................... $1,000,000 100% $1,000,000 $278.00
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information contained in this preliminary prospectus supplement and the
related 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 preliminary prospectus
supplement is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated , 2000.
Prospectus Supplement to Prospectus Dated , 2000.
$
CPL TRANSITION FUNDING LLC
ISSUER
CENTRAL POWER AND LIGHT COMPANY
SELLER AND SERVICER
Transition Notes, Series 2000
----------------------
We will pay interest on the notes on and of each year.
The first such payment will be made on . The notes will be issued only
in denominations of $1,000 and integral multiples of $1,000.
See "Risk Factors" beginning on page 12 in the accompanying prospectus to
read about factors you should consider before buying the notes.
These notes are legal obligations of CPL Transition Funding LLC, as issuer,
only. These notes do not constitute a debt, liability or other legal obligation
of Central Power and Light Company or any of its affiliates (other than the
issuer). These notes are not obligations of the State of Texas, the Public
Utility Commission of Texas or any other governmental agency or instrumentality.
Neither the full faith and credit nor the taxing power of the State of Texas nor
of any political subdivision, agency, authority or instrumentality of the State
of Texas is pledged to the payment of principal of, or interest on, these notes,
or the payments securing these notes. Furthermore, neither the State of Texas
nor any political subdivision, agency, authority or instrumentality of the State
of Texas will appropriate any funds for the payment of any of these notes.
We are a special purpose entity and own no property other than the
collateral described under "Security for the Notes -- Pledge of Collateral" in
the accompanying prospectus, and that collateral is the sole source of payment
for these notes.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
PROCEEDS SCHEDULED
NOTE INITIAL TO FINAL FINAL
INTEREST PRINCIPAL UNDERWRITING ISSUER PAYMENT MATURITY
RATE AMOUNT PRICE(%) PRICE($) DISCOUNT(%) (%)(1)(2) DATE DATE
-------- --------- -------- -------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A-1............ % $ % $ % %
Class A-2............ % $ % $ % %
Class A-3............ % $ % $ % %
Class A-4............ % $ % $ % %
Class A-5............ % $ % $ % %
</TABLE>
(1) Before payment of fees and expenses.
(2) The total price to the public is $ and the total amount of the
underwriting discount and other fees is $ . The total amount of proceeds
before deduction of expenses (estimated to be $ ) is $ .
----------------------
The underwriters expect to deliver the notes through the facilities of The
Depository Trust Company against payment in New York, New York on
, 2000.
[Names of Underwriters]
Prospectus Supplement dated , 2000.
<PAGE> 3
This prospectus supplement does not contain all of the information that you
should know about this offering. You will find additional information in the
accompanying prospectus. The prospectus for the offering of these notes consists
of both this prospectus supplement and the accompanying prospectus. You should
read both of these documents in full before purchasing these notes.
----------------------
S-1
<PAGE> 4
DESCRIPTION OF THE NOTES
We will issue these notes in minimum denominations of $1,000 and in
integral multiples of $1,000. These notes will consist of classes, in
the initial principal amounts and bearing the interest rates and having the
scheduled final payment dates and final maturity dates listed below:
<TABLE>
<CAPTION>
SCHEDULED
INITIAL NOTE FINAL FINAL
PRINCIPAL INTEREST PAYMENT MATURITY
CLASS AMOUNT RATE DATE DATE
- ----- --------- -------- --------- --------
<S> <C> <C> <C> <C>
A-1.................................. $ %
A-2.................................. $ %
A-3.................................. $ %
A-4.................................. $ %
A-5.................................. $ %
</TABLE>
The scheduled final payment date for a class of notes is the date by which
we expect the indenture trustee to pay in full all interest on and principal of
that class of notes. The final maturity date for a class of notes is the legal
maturity date of that class. The failure to pay principal of any class of notes
in full by the final maturity date for that class is an event of default, and
the indenture trustee or the holders of not less than a majority in principal
amount of the notes of all series then outstanding may declare the unpaid
principal amount of all outstanding notes of all series to be due and payable.
Please refer to "Description of the Notes -- Events of Default; Rights Upon
Event of Default" in the accompanying prospectus.
INTEREST
Interest on each class of notes will accrue from the issuance date of that
class at the interest rate listed in the table above. Beginning , we
are required to pay interest semiannually on and (or, if any
payment date is not a business day, the following business day) of each year, to
holders of notes. The record date (so long as these notes are book-entry notes)
for any payment of interest on and principal of these notes will be the business
day immediately before the payment date. The indenture trustee will pay interest
on these notes prior to paying principal of these notes. Please refer to
"Security for the Notes -- Allocations; Payments" in the prospectus.
On each payment date, the indenture trustee will pay interest as follows:
- if there has been a payment default, any unpaid interest payable on any
prior payment dates, together with interest at the applicable interest
rate on any of this unpaid interest; and
- accrued interest on the principal balance of each class of notes as of
the close of business on the preceding payment date, or the date of the
original issuance of the class of notes, if applicable, after giving
effect to all payments of principal made on the preceding payment date.
If there is a shortfall in the amounts necessary to make these interest
payments, the indenture trustee will distribute interest pro rata to each class
of notes based on the outstanding principal amount of that class and the
applicable interest rate. The indenture trustee will calculate interest on the
basis of a 360-day year of twelve 30-day months.
S-2
<PAGE> 5
PRINCIPAL
After paying interest as described above, the indenture trustee will pay
any principal on each payment date as follows:
(1) to the holders of Class A-1 notes, until the principal balance of
that class has been reduced to zero;
(2) to the holders of Class A-2 notes, until the principal balance of
that class has been reduced to zero;
(3) to the holders of Class A-3 notes, until the principal balance of
that class has been reduced to zero;
(4) to the holders of Class A-4 notes, until the principal balance of
that class has been reduced to zero; and
(5) to the holders of Class A-5 notes, until the principal balance of
that class has been reduced to zero.
The indenture trustee will not, however, pay principal on a payment date of
any class of notes if making the payment would reduce the principal balance of a
class to an amount lower than the balance specified in the expected amortization
schedule for that class on that payment date except in the case of an optional
redemption, as described below, or an acceleration of the notes following an
event of default. If an event of default under the indenture under which these
notes will be issued has occurred and is continuing, the indenture trustee or
the holders of not less than a majority in principal amount of the notes of all
series then outstanding may declare the unpaid principal amount of all
outstanding notes of all series to be due and payable.
The following expected amortization schedule lists the scheduled
outstanding principal balance for each class of these notes on each payment date
from the issuance date to the scheduled final payment date, after giving effect
to the payments expected to be made on that payment date. In preparing the
following table, we have assumed, among other things, that:
- these notes are issued on , 2000;
- payments on these notes are made on each payment date, commencing
, 2000;
- the initial servicing fee equals 0.05% annually of the initial principal
amount of these notes;
- there are no net earnings on amounts on deposit in the collection
account;
- other ongoing operating expenses are estimated to be approximately $
per annum, and these amounts are payable in arrears; and
- payments arising from the property securing these notes are deposited in
the collection account as expected.
S-3
<PAGE> 6
OUTSTANDING PRINCIPAL BALANCE
<TABLE>
<CAPTION>
EXPECTED
AMORTIZATION
SCHEDULE
------------
AGGREGATE
DATE CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 SERIES 2000
- ---- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
We cannot assure you that the principal balances of the classes of these
notes will be reduced at the rates indicated in the table above. The actual
rates of reduction in class principal balances may be slower (but cannot be
faster, except in the case of an optional redemption or acceleration of the
notes following an event of default) than those indicated in the table.
We may redeem these notes on any payment date if, after giving effect to
payments that would otherwise be made on that payment date, the outstanding
principal balance of these notes has been reduced to less than five percent of
the initial principal balance. We may not redeem these notes under any other
circumstances.
COLLECTION ACCOUNT AND SUBACCOUNTS
The indenture trustee will establish a collection account to hold amounts
remitted by the servicer of the property securing the notes. The collection
account will consist of five subaccounts:
- a general subaccount;
- an overcollateralization subaccount;
- a capital subaccount;
- a reserve subaccount; and
- an REP deposit subaccount.
Withdrawals from and deposits to these subaccounts (other than the REP
deposit subaccount) will be made as described under "Security for the Notes
-- Allocations; Payments" in the accompanying prospectus. Withdrawals from and
deposits to the REP deposit subaccount will be made as described under "-- Other
Credit Enhancement -- REP Deposit Subaccount" in this prospectus supplement.
REQUIRED OVERCOLLATERALIZATION LEVEL
We are entitled to collect amounts arising from the property securing these
notes exceeding the actual amounts necessary to pay interest on and principal of
these notes and fees and expenses of servicing and retiring these notes. The
collection of these excess amounts is intended to enhance the likelihood that
payments on these notes will be made on a timely basis. These amounts will fund
the required overcollateralization level. The required overcollateralization
level for these notes will be $ , which is 0.50% of the initial principal
amount of these notes. The servicer will collect on our behalf and deposit with
the indenture trustee the overcollateralization amount ratably in the amount of
approximately $ on each payment date (except the first payment date, on
which date the amount collected will be approximately $ )
S-4
<PAGE> 7
over the expected life of these notes. The indenture trustee will make deposits
of these amounts on each payment date into the overcollateralization subaccount.
The required overcollateralization level on each payment date is as follows:
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
<TABLE>
<CAPTION>
REQUIRED REQUIRED
OVERCOLLATERALIZATION OVERCOLLATERALIZATION
PAYMENT DATE LEVEL PAYMENT DATE LEVEL
------------ --------------------- ------------ ---------------------
<S> <C> <C> <C>
$ $
</TABLE>
The indenture trustee will draw on amounts in the overcollateralization
subaccount to the extent amounts available in the general subaccount and reserve
subaccount are insufficient to pay interest on and principal of these notes and
fees and expenses of servicing and retiring these notes.
OTHER CREDIT ENHANCEMENT
Capital Subaccount. Upon the issuance of these notes, CPL will contribute
capital of $
to us from the proceeds of the sale of these notes. This amount is equal to
0.50% of the initial principal amount of these notes and is the capital level
required to be maintained under the indenture. The indenture trustee will
deposit the capital into the capital subaccount. The indenture trustee will draw
on amounts in the capital subaccount, to the extent amounts available in the
general subaccount, reserve subaccount and overcollateralization subaccount are
insufficient to pay interest on and principal of these notes and fees and
expenses of servicing and retiring these notes. If the indenture trustee uses
the capital subaccount to pay those amounts, subsequent true-up adjustments will
take into account those amounts and on subsequent payment dates the indenture
trustee will replenish the capital subaccount to the extent transition charge
collections exceed amounts required to pay amounts having a higher priority of
payment.
Reserve Subaccount. On each payment date, the indenture trustee will
allocate to the reserve subaccount any amounts remitted to the general
subaccount exceeding amounts necessary to:
- pay fees and expenses related to the servicing and retirement of these
notes;
- pay interest on and principal of these notes;
- fund the capital subaccount to the required capital level; and
- fund the overcollateralization subaccount to the required
overcollateralization level.
The indenture trustee will draw on amounts in the reserve subaccount, to
the extent amounts available in the general subaccount are insufficient to pay
the amounts listed above.
REP Deposit Subaccount. Generally, from and after the introduction of
customer choice, each retail electric provider who bills and collects transition
charges will maintain a security deposit with the indenture trustee. An REP
which maintains an investment grade rating and meets certain billing criteria
will not be required to maintain a security deposit. Each security deposit will
be held in the REP deposit subaccount. The indenture trustee will only withdraw
amounts from the REP deposit subaccount for deposit in the general subaccount of
the collection account in the event that an REP defaults in payment. The
indenture trustee may then withdraw the amount of the payment default or, if
less, the amount of that REP's security deposit.
S-5
<PAGE> 8
TRANSITION PROPERTY
These notes will be secured primarily by the transition property created
under the financing order issued to CPL by the Texas commission on ,
including the right to impose, collect and receive transition charges generally
billed to retail consumers of electricity within CPL's service area as it
existed on May 1, 1999. The transition property will be transferred to us by CPL
on the date of the issuance of these notes and we will pledge the transition
property to the indenture trustee to secure payment of these notes.
The actual initial transition charge for each customer class, as of the
date of this prospectus supplement, is as follows:
<TABLE>
<CAPTION>
INITIAL TRANSITION
CUSTOMER CLASS CHARGE
- -------------- ------------------
<S> <C>
Residential................................................. $ per kWh
Commercial and Small Industrial-Energy...................... $ per kWh
Commercial and Small Industrial-Demand...................... $ per kW
Large Industrial-Firm....................................... $ per kW
Large Industrial-Non-Firm................................... $ per kW
Municipal................................................... $ per kWh
</TABLE>
The financing order requires that transition charges be reviewed and
adjusted to correct any overcollections or undercollections in the collection
account in the preceding 12 months. These adjustments will be implemented
annually unless more frequent adjustments are required in order to maintain the
principal balance of these notes (adjusted for amounts in the reserve
subaccount) within 5% of the expected amortization schedule or the servicer
determines that any class of notes maturing after , 20 has not been
paid in full as of its scheduled final payment date. Please refer to
"Description of the Transition Property -- Tariff" in the accompanying
prospectus.
S-6
<PAGE> 9
UNDERWRITING
We have entered into an underwriting agreement and a pricing agreement with
respect to these notes with CPL and the underwriters for the offering named
below. Assuming that conditions in the underwriting agreement are met, each
underwriter has severally agreed to purchase the respective principal amount of
notes indicated in the following table. , and are
the representatives of the underwriters.
<TABLE>
<CAPTION>
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
- ---- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
------- ------- ------- ------- -------
Total................ $ $ $ $ $
======= ======= ======= ======= =======
</TABLE>
Notes sold by the underwriters to the public will initially be offered to
the public at the initial public offering prices set forth on the cover of this
prospectus supplement. Any notes sold by the underwriters to securities dealers
may be sold at a discount from the initial public offering price of up to the
percentage of the principal amount of these notes set forth below. Any such
securities dealers may sell any notes purchased from the underwriters to other
brokers or dealers at a discount from the initial offering price of up to the
percentage of the principal amount of these notes set forth below.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- ----- ---------- -----------
<S> <C> <C>
Class A-1................................................... % %
Class A-2................................................... % %
Class A-3................................................... % %
Class A-4................................................... % %
Class A-5................................................... % %
</TABLE>
These notes are a new issue of securities with no established trading
market. These notes will not be listed on any securities exchange. The
underwriters have advised us that they intend to make a market in these notes
but are not obligated to do so and may discontinue market making at any time
without notice. We cannot give any assurances as to the liquidity of the trading
market for these notes.
In connection with the offering, the underwriters may purchase and sell
these notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of notes than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the notes while the offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased notes sold
by or for the account of an underwriter in stabilizing or short covering
transactions.
S-7
<PAGE> 10
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of these notes. As a result, the price of these notes
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These activities may be effected in the over-the-counter market or
otherwise.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
We, along with CPL, have agreed to reimburse the several underwriters for
some expenses and indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to CPL and its affiliates for which they have in
the past received, and in the future may receive, customary fees.
RATINGS
It is a condition of issuance of these notes that these notes be rated
by each of Moody's Investors Service, Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Duff & Phelps Credit Rating
Co. and Fitch IBCA, Inc.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. No person is obligated to maintain the rating on any note, and,
accordingly, we can give no assurance that the ratings assigned to any class of
notes upon initial issuance will not be revised or withdrawn by a rating agency
at any time thereafter. If a rating of any class of notes is revised or
withdrawn, the liquidity of such class of notes may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of the
rate of principal payments.
MATERIAL U.S. FEDERAL TAX CONSEQUENCES
CPL has received a private letter ruling from the IRS to the effect that,
for federal income tax purposes:
- The issuance of the financing order authorizing the collection of
transition charges related to these notes will not result in gross income
to CPL.
- The issuance of these notes will not result in gross income to CPL.
- These notes will be obligations of CPL.
In the opinion of Sidley & Austin, counsel to us and to CPL, interest paid on
these notes generally will be taxable to a U.S. noteholder as ordinary interest
income at the time it accrues or is received in accordance with the U.S.
noteholder's method of accounting for U.S. federal income tax purposes. Sidley &
Austin's opinion assumes, based on the ruling from the IRS described above, that
these notes will constitute indebtedness of CPL for federal income tax purposes.
Please refer to "Material U.S. Federal Tax Consequences" in the accompanying
prospectus.
S-8
<PAGE> 11
The information in this preliminary 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 preliminary prospectus is not an offer to sell nor does it seek an
offer to buy these securities in any jurisdiction where the offer or sale
is not permitted.
Subject to Completion, Dated , 2000
PRELIMINARY PROSPECTUS
CPL TRANSITION FUNDING LLC
ISSUER
TRANSITION NOTES
ISSUABLE IN SERIES
CENTRAL POWER AND LIGHT COMPANY
SELLER AND SERVICER
----------------------
CPL Transition Funding LLC, the issuer, may periodically offer and sell
transition notes in one or more series, each with one or more classes, as
described in the related prospectus supplement. We will own transition property,
a property right established under Subchapter G of Chapter 39 of the Texas
Utilities Code and created through a financing order issued by the Public
Utility Commission of Texas, otherwise referred to as the Texas commission. In
general terms, the transition property includes the right to impose, collect and
receive transition charges from retail consumers of electricity in Central Power
and Light Company's certificated service area as it existed on May 1, 1999. The
transition charges will be in amounts designed to be sufficient to repay the
notes, to pay other expenses specified in the indenture and to fund or replenish
the indenture trust accounts. We will also own other property described in this
prospectus.
The notes will be payable only from our assets. The notes will be supported
by trust accounts held by the indenture trustee for the notes. We may issue
notes in series without the consent of existing noteholders. Each series of
notes will rank on a parity with all other series of notes, provided that we may
enter into credit enhancements with respect to a specific class or series of
notes and hedge or swap transactions with respect to any floating rate class or
series of notes.
We are a Delaware limited liability company formed by CPL. CPL formed us
for the purpose of purchasing and owning the transition property, issuing notes
from time to time and pledging our interest in the collateral to the indenture
trustee under the indenture in order to secure the notes.
The notes are our legal obligations only. The notes do not constitute a
debt, liability or other legal obligation of CPL or any of its affiliates (other
than us). The notes are not obligations of the State of Texas, the Public
Utility Commission of Texas or any other governmental agency or instrumentality.
Neither the full faith and credit nor the taxing power of the State of Texas nor
of any political subdivision, agency, authority or instrumentality of the State
of Texas is pledged to the payment of principal of, or interest on, the notes,
or the payments securing the notes. Furthermore, neither the State of Texas nor
any political subdivision, agency, authority or instrumentality of the State of
Texas will appropriate any funds for the payment of any of the notes.
Before purchasing the notes, you should consider carefully the Risk Factors
beginning on page in this prospectus.
We are a special purpose entity and own no property other than the
collateral described in this prospectus, and that collateral is the sole source
of payment for the notes.
This prospectus may be used to offer and sell a series of notes only if
accompanied by the prospectus supplement for that series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................ 1
RISK FACTORS.............................. 12
AVAILABLE INFORMATION..................... 26
REPORTS TO HOLDERS........................ 27
INCORPORATION OF DOCUMENTS BY REFERENCE... 27
ENERGY DEREGULATION AND NEW TEXAS MARKET
STRUCTURE............................... 28
The Restructuring Act's General Effect on
the Electric Utility Industry in
Texas................................... 28
Recovery of Stranded Costs for CPL and
Other Texas Utilities................... 29
CPL and Other Utilities May Securitize
Stranded Costs and Regulatory Assets.... 29
Restructuring of CPL...................... 31
DESCRIPTION OF THE TRANSITION PROPERTY.... 31
Creation of Transition Property; Financing
Order................................... 31
Tariff.................................... 32
CPL TRANSITION FUNDING LLC, THE ISSUER.... 35
Our Purpose............................... 36
Our Interaction with CPL.................. 36
Our Management............................ 36
The Managers' Compensation and Limitation
on Liabilities.......................... 37
We are a Separate and Distinct Legal
Entity.................................. 38
THE SELLER AND SERVICER................... 38
CPL Customer Base and Electric Energy
Consumption............................. 38
Transition Charge Retail Customer
Classes................................. 39
Information by FERC Form 1 Customer Class
Allocation.............................. 39
Information by Customer Class
Allocation.............................. 40
Annual Forecast Variance for Retail
Electric Sales (GWh).................... 41
Billing and Collections................... 42
Loss Experience........................... 44
Days Sales Outstanding.................... 44
Delinquencies............................. 45
THE SALE AGREEMENT........................ 46
Sale and Assignment of Transition
Property................................ 46
Conditions to the Sale of Transition
Property................................ 46
Seller Representations and Warranties..... 47
Covenants of the Seller................... 50
Indemnification........................... 52
Amendment................................. 53
Assumptions of the Obligations of the
Seller.................................. 53
</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
Bankruptcy and Creditors' Rights Issues... 53
THE SERVICING AGREEMENT................... 55
Servicing Procedures...................... 55
Servicing Standards and Covenants......... 55
Remittances to Collection Account......... 56
Servicing Compensation.................... 57
Retail Electric Providers................. 58
Servicer Representations and Warranties... 59
Evidence as to Compliance................. 60
Matters Regarding the Servicer............ 61
Servicer Defaults......................... 62
Rights When Servicer Defaults............. 62
Waiver of Past Defaults................... 63
Successor Servicer........................ 63
Amendment................................. 63
DESCRIPTION OF THE NOTES.................. 64
General................................... 64
Interest and Principal.................... 65
Payments on the Notes..................... 66
Floating Rate Notes....................... 67
No Third-Party Credit Enhancement......... 67
Registration and Transfer of the Notes.... 67
Book-Entry Registration................... 67
Definitive Notes.......................... 68
Optional Redemption....................... 69
Conditions of Issuance of Additional
Series and Acquisition of Additional
Transition Property..................... 70
Access of Noteholders..................... 70
Reports to Noteholders.................... 70
Supplemental Indentures................... 71
Covenants of the Issuer................... 72
Events of Default; Rights Upon Event of
Default................................. 74
Actions by Noteholders.................... 76
Annual Report of Indenture Trustee........ 77
Annual Compliance Statement............... 77
The Indenture Trustee..................... 77
SECURITY FOR THE NOTES.................... 78
General................................... 78
Pledge of Collateral...................... 78
Security Interest in the Collateral....... 78
Right of Foreclosure...................... 80
Description of Indenture Accounts......... 80
Allocations; Payments..................... 81
State Pledge.............................. 83
MATERIAL U.S. FEDERAL TAX CONSEQUENCES.... 83
Tax Consequences to U.S. Noteholders...... 84
</TABLE>
(ii)
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Tax Consequences to Non-U.S.
Noteholders............................... 85
Backup Withholding and Information
Reporting............................... 88
ERISA CONSIDERATIONS...................... 90
General................................... 90
Regulation of Assets Included in a Plan... 91
Prohibited Transaction Exemptions......... 91
Consultation with Counsel................. 91
USE OF PROCEEDS........................... 92
</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
PLAN OF DISTRIBUTION...................... 92
LEGAL MATTERS............................. 93
EXPERTS................................... 93
INDEX TO FINANCIAL STATEMENTS............. F-1
</TABLE>
(iii)
<PAGE> 14
IMPORTANT NOTICE
ABOUT INFORMATION IN THIS PROSPECTUS
You should rely only on information about the notes provided in this
prospectus and in the related prospectus supplement. We have not authorized
anyone to provide you with different information.
This prospectus and the related prospectus supplement do not constitute an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction where it is not lawful to do so.
References to "we," "us" and "our" refer to CPL Transition Funding LLC, the
issuer of the notes.
References to the "seller" refer to CPL and any successor seller under the
sale agreement described in this prospectus. References to the "servicer" refer
to CPL and any successor servicer under the servicing agreement described in
this prospectus.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
(iv)
<PAGE> 15
PROSPECTUS SUMMARY
This summary contains a brief description of the notes that applies to all
series of notes issued under this prospectus. Information that relates to a
specific series or class of notes can be found in the prospectus supplement
related to that series or class. You will find a detailed description of the
terms of the offering of the notes in "Description of the Notes" in this
prospectus.
Consider carefully the Risk Factors beginning on page of this prospectus.
Transaction Overview: In 1999, Texas enacted an act ("restructuring act")
amending the Texas Utilities Code, governing the
restructuring of the electric industry in Texas,
and providing competition for retail electric
service beginning on January 1, 2002. Deregulation
of the Texas retail electric utility industry under
the restructuring act will require electric
utilities to unbundle their generation,
transmission and distribution, and retail electric
services. While transmission and distribution
services will continue to be provided by electric
utilities, the statute authorizes:
- Retail electric providers, referred to as "REPs,"
certified by the Texas commission, to provide
electric energy and related services, including
billing and collecting, beginning January 1,
2002, and
- REPs and other entities to provide metering
services to commercial and industrial retail
customers beginning January 1, 2004, and to
residential retail customers beginning the later
of September 1, 2005 or the date on which at
least 40% of those residential customers are
taking services from REPs unaffiliated with the
utility.
The restructuring act permits electric utilities to
recover the loss in value of generation-related
assets caused by the transition from a regulated
environment to competition for retail electric
generation services, as determined by the Texas
commission. Examples of generation-related assets
include electric generation facilities (including
nuclear power plants), power purchase contracts
with third-party generators of electricity and
regulatory assets recoverable through electric
rates. The costs of these assets were historically
recoverable in rates established by the Texas
commission but are not expected to be recoverable
in rates established by market forces in a
competitive environment.
Under the portion of the restructuring act
providing for securitization, the Texas commission
may authorize an electric utility to use
securitization financing to recover regulatory
assets and stranded costs through the issuance by
the utility or its designee of transition bonds
secured by or payable from transition property. The
notes constitute transition bonds under the
restructuring act. The net proceeds of the notes
will be used solely for the purposes of reducing
the amount of recoverable regulatory assets and
stranded costs, as determined by the Texas
commission in accordance with the restructuring
act, through the refinancing or retirement of
utility debt or equity.
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<PAGE> 16
The restructuring act further provides that the
Texas commission shall ensure that:
- Securitization provides tangible and quantifiable
benefits to ratepayers, greater than would have
been achieved absent the issuance of the notes;
and
- The structuring and pricing of the notes results
in the lowest transition bond charges consistent
with market conditions and the terms of the Texas
commission's financing order.
Under the restructuring act, an electric utility in
the state of Texas is authorized to securitize up
to:
- 100% of its regulatory assets,
- 75% of its estimated stranded costs,
- The costs of issuing, supporting, and servicing
the notes,
- Any costs of retiring and refunding the electric
utility's existing debt and equity securities in
connection with the issuance of the notes, and
- The costs of the Texas commission in evaluating
the financing order and related matters in
connection with the issuance of notes.
Collectively, these amounts are referred to as
"qualified costs" in the restructuring act.
Pursuant to the restructuring act, the Texas
commission has issued and may hereafter issue one
or more financing orders authorizing CPL or a
successor seller to securitize specified amounts of
qualified costs, including costs incurred in
connection with the issuance of notes and the
retirement or refunding of existing debt and
equity. Each financing order will establish the
qualified costs and the amount of notes that may be
issued and create transition property upon the
transfer to us of such property. In order to
securitize the qualified costs established under a
financing order, CPL or a successor seller will
sell to us, as the issuer, the related transition
property. Transition property is comprised of the
right to impose, collect and receive transition
charges payable by existing and future retail
customers in CPL's certificated service area as it
existed on May 1, 1999 in an amount sufficient to
recover the qualified costs established in that
financing order. For each financing order,
qualified costs will include the aggregate
principal amount of notes to be issued plus an
amount sufficient to provide any credit
enhancement, to fund any reserves (including the
trust accounts) and to pay interest, redemption
premiums, if any, servicing fees and other expenses
relating to the notes.
We will sell notes from time to time to fund the
purchase of transition property. We may also issue
notes to refund outstanding notes. Under the
restructuring act, as implemented by a financing
order, the right to collect transition charges is
irrevocable, and not subject to reduction,
impairment, or
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<PAGE> 17
adjustment by action of the Texas commission (other
than periodic "true-up" adjustments in accordance
with the restructuring act). The true-up
adjustments are designed to increase or decrease
future transition charge collections to ensure
recovery of the expected amounts for fees and
expenses of servicing the notes, payment of
premiums, if any, and interest on the notes when
due, payment of principal of each series of the
notes in accordance with the related expected
amortization schedule and funding of the trust
accounts to required levels. We will issue the
notes from time to time in one or more series, each
of which may be comprised of one or more classes.
[CHART SHOWING PARTIES TO THE TRANSACTION]
The Issuer: CPL Transition Funding LLC is a special purpose
Delaware limited liability company. CPL is our sole
member and owns all of our equity interests. We
were formed solely for the purpose of purchasing
and owning the transition property, issuing notes
from time to time and pledging our interest in the
collateral to the indenture trustee under the
indenture in order to secure the notes and engaging
in activities necessary, suitable or convenient for
the accomplishment of these purposes. Our address
is 1616 Woodall Rogers Freeway, Dallas, Texas 75202
(telephone: (214) 777- ).
Seller and Servicer of the
Transition Property: CPL is an electric utility providing retail service
in southern Texas. At December 31, 1998, CPL
provided service to approximately 642,000 retail
customers covering a service territory of
approximately 44,000 square miles. CPL is an
operating subsidiary of Central and South West
Corporation, a Delaware corporation. Central and
South West Corporation is a public utility holding
company registered under the Public Utility Holding
Company Act of 1935. On December 22, 1997, Central
and South West Corporation and American Electric
Power Company, Inc. announced that their boards of
directors had approved a definitive merger
agreement. The shareholders of each company have
approved the merger, which is subject to regulatory
approvals and other customary conditions.
On the issue date for each series of notes, except
in the event of a refunding of outstanding notes,
CPL or a successor seller will sell transition
property to us pursuant to the sale agreement and
will agree to service the transferred transition
property pursuant to a servicing agreement between
us and CPL, as the servicer. CPL may transfer
certain of its obligations to approved affiliates
or third parties. Upon satisfaction of conditions
described in the servicing agreement, any entity
which becomes successor by merger, sale, transfer,
lease, management contract or otherwise to the
major part of CPL's electric transmission and
distribution business will become the servicer and
CPL will no longer be liable for those servicing
obligations. If separate entities provide
transmission and distribution services, the entity
providing wires service directly to retail
3
<PAGE> 18
customers will become the servicer. If CPL
transfers any of its servicing obligations for
another reason, CPL will remain primarily liable
for those servicing obligations.
Indenture Trustee: will act as indenture trustee under the
indenture for the benefit of the noteholders.
Managers: and will be named as
independent managers under our limited liability
company agreement. R. Russell Davis, Wendy G.
Hargus and J. Gonzalo Sandoval, officers and/or
employees of CPL, are also managers and will
execute and file the amendments to the registration
statement relating to the notes and related
documents, register the notes with the applicable
state securities commissions and take other
necessary and appropriate related actions on our
behalf in connection with the notes.
Interest: Interest on each class of notes will accrue at the
interest rate specified in the related prospectus
supplement. The indenture trustee will pay interest
accrued on each class of notes on each payment
date, to the extent of transition charge
collections received from the servicer and amounts
available from accounts held by the indenture
trustee.
Principal: The indenture trustee will pay the principal of
each class of notes in the amounts and on the
payment dates specified in the expected
amortization schedule in the related prospectus
supplement, but only to the extent of collections
by the servicer on our behalf and amounts available
from accounts held by the indenture trustee. Please
refer to "Security for the Notes -- Allocations;
Payments."
On any payment date, the indenture trustee will pay
principal of the notes only until the outstanding
principal balances of the various classes of notes
have been reduced to the principal balances
specified for those classes in their expected
amortization schedules. If cash is not available,
the indenture trustee will pay principal of a class
of notes later than set forth in the expected
amortization schedule. If an event of default under
the indenture has occurred and is continuing for
any class of notes, the indenture trustee may, and
with the written direction of the holders of not
less than a majority in principal amount of the
notes of all series then outstanding will, declare
the unpaid principal amount of all series of notes
and accrued interest to be due and payable. Please
refer to "Description of the Notes -- Events of
Default; Rights Upon Event of Default" in this
prospectus.
Collateral: We will own and pledge to the indenture trustee for
the benefit of the noteholders all of our right,
title and interest in and to:
- The transition property transferred to us,
- The basic documents described in this prospectus,
- Trust accounts held by the indenture trustee, and
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<PAGE> 19
- Other credit enhancement acquired or held to
ensure payment of the notes, including rights
under any interest rate swaps or hedges
supporting payment of any floating rate notes
that we issue.
- All claims, demands, causes and choses in action.
- All payments and proceeds of the foregoing.
Transition Property: Transition property is a property right established
under the restructuring act and created through a
financing order issued by the Texas commission. In
general terms, transition property is the rights
granted to CPL or a successor seller by the Texas
commission under a financing order, including the
right to impose, collect and receive transition
charges. The amount of transition charges which may
be imposed will be calculated at an amount
sufficient to retire the principal amount of the
related series of notes in accordance with the
expected amortization schedule, to pay all interest
on those notes when due, to pay fees and expenses
of servicing those notes and premiums, if any,
associated with those notes and to fund any
required credit enhancement for those notes.
On the closing date for each issuance of notes, the
seller will sell related transition property to us.
The servicer of the transition property will
collect the transition charges on our behalf.
Beginning with the introduction of customer choice,
REPs will be responsible for collecting transition
charges from retail customers within CPL's service
territory and paying the amounts collected to the
servicer. Please refer to "The Servicing
Agreement -- Retail Electric Providers" in this
prospectus.
Transition Charges: The transition charges will be payable by all
existing and future retail customers of CPL or its
successor located within CPL's certificated service
area as it existed on May 1, 1999. There are
exceptions for
- certain categories of existing customers whose
load has been lawfully served by a
fully-operational qualifying facility before
September 1, 2001 or whose load has been lawfully
served by an on-site power production facility
with a rated capacity of 10 megawatts or less,
- retail customers in a dually-certificated service
area that requested to switch providers on or
before May 1, 1999, or were not taking service
from the utility on, and do not do so after, May
1, 1999, and
- the facilities and premises of customers that are
not taking retail service from CPL pursuant to
Texas commission orders in certain designated
dockets issued prior to the issuance of the
initial financing order.
The defined classes of retail customers are:
- Residential,
5
<PAGE> 20
- Commercial and Small Industrial-Energy,
- Commercial and Small Industrial-Demand,
- Large Industrial-Firm,
- Large Industrial-Non-Firm, and
- Municipal.
Because of differences in the tariff rate for each
class of retail customers and the provisions of the
restructuring act, the transition charges payable
by each class of retail customers will differ.
After the introduction of customer choice, the REPs
will be responsible for billing, collecting and
paying to CPL, as servicer, the retail customer's
transition charges. Each REP will be responsible
for paying transition charges billed to retail
customers of the REP, whether or not the retail
customers pay the REP, less an amount based on the
servicer's systemwide charge-off percentage,
subject to annual reconciliations for actual
charge-offs as provided in tariffs to be filed with
the Texas commission. Please refer to "The
Servicing Agreement -- Retail Electric Providers"
in this prospectus.
The obligation of retail customers to pay
transition charges is not subject to right of
set-off. Transition charges are "non-bypassable" in
accordance with the provisions set forth in the
restructuring act and a financing order. Prior to
the introduction of customer choice, which
generally begins January 1, 2002, the servicer may
terminate electric service to any retail customer
who fails to pay any transition charges in
accordance with the restructuring act and Texas
commission guidelines. After the introduction of
customer choice, the servicer may terminate service
to any such retail customer in accordance with the
restructuring act and Texas commission guidelines
and may assume or transfer billing and collection
rights from any REP that fails to pay transition
charges in accordance with the financing order.
Transition charges will be assessed by the servicer
for our benefit as owner of the transition
property. Transition charges will be based on a
retail customer's actual consumption of electricity
or electric demand from time to time. Transition
charges will be collected by the servicer, either
directly from retail customers prior to customer
choice or indirectly from an REP that collects
transition charges from retail customers after
January 1, 2002 as part of its normal collection
activities. Transition charges will be deposited by
the servicer into the collection account under the
terms of the indenture and the servicing agreement.
Each financing order will require a notification
letter (which we refer to as an "issuance advice
letter") and a tariff to be filed with the Texas
commission by CPL, as seller of the transition
property, prior to the issuance of notes. Each
issuance advice
6
<PAGE> 21
letter and tariff will establish the initial
transition charges relating to such notes,
calculated using the methodology described in the
related financing order. Subsequent issuance advice
letters may modify transition charges or evidence
new transition charges to reflect the adjustments
described in the next paragraph to support the
issuance of additional series of notes.
Adjustments to Transition
Charges: Each financing order will require that transition
charges be reviewed and adjusted at least annually
to correct any overcollections or undercollections
in the preceding 12 months. These adjustments are
intended to ensure the expected recovery of amounts
sufficient to timely provide all payments of debt
service and other required amounts and expenses in
connection with the notes. The servicing agreement
and each financing order will require the servicer
to calculate and implement these true-up
adjustments to the transition charges by providing
written notice to the Texas commission. These
adjustments will be implemented annually; provided,
however, that the servicer may also be required to
implement adjustments to the transition charges by
providing written notice to the Texas commission,
if as of the end of the month prior to any payment
date, the servicer determines that
- the aggregate outstanding principal balance of
any series of notes plus amounts on deposit in
the reserve subaccount described below will vary
by more than 5% from the principal balance set
forth on the expected amortization schedule, or
- commencing after the payment date specified in
the related prospectus supplement, any series of
notes will not have been paid in full as of its
scheduled final payment date.
Collections: The servicer will deposit in the collection account
estimated payments of transition charges on each
business day. However, if the servicer achieves a
long-term unsecured rating of at least "A" or the
equivalent by each nationally recognized rating
agency that has assigned a credit rating to the
notes or provides credit enhancement satisfactory
to the rating agencies, and no servicer default is
continuing, the servicer may remit to the
collection account estimated payments of transition
charges on a monthly basis.
Payment Sources: On each payment date specified in the related
prospectus supplement, the indenture trustee will
pay amounts owed on all outstanding series of notes
from:
- Amounts collected by the servicer on our behalf
with respect to transition charges during the
prior collection period; and
- Amounts available from trust accounts held by the
indenture trustee.
Priority of Payments: On each payment date specified in the related
prospectus supplement, the indenture trustee will
pay or allocate, at the direction of the servicer,
all amounts on deposit in the trust accounts and
all investment earnings on the trust accounts
7
<PAGE> 22
(other than the REP deposit subaccount) to the
extent funds are available in the collection
account, in the following order of priority:
- Amounts owed by us to our independent managers
and to the indenture trustee;
- The servicing fee, which will be a fixed
percentage of the initial principal balance of
the notes, in an amount specified in the
servicing agreement, to the servicer;
- So long as no event of default has occurred and
is continuing or would be caused by their
payment, our current operating expenses, up to an
aggregate of $100,000 for each payment date;
- Overdue interest on the notes and interest on
past due interest;
- Interest then due on the notes, including payment
of any amount to a swap counterparty with respect
to floating rate notes;
- Principal then due and payable on the notes
together with any past due installments of
principal, first to principal due and payable on
any series of notes on its final maturity date or
as a result of acceleration and then to any
scheduled principal payments of any series of
notes according to the expected amortization
schedule;
- Payment of any remaining unpaid operating
expenses;
- Replenishment of any shortfalls in the capital
subaccount;
- Allocation of any required amount to the
overcollateralization subaccount; and
- Allocation of the remainder, if any, to the
reserve subaccount.
[CHART SHOWING PRIORITY OF PAYMENTS]
Credit Enhancement and
Accounts: Credit enhancement for the notes will be as
follows:
- True-up Adjustments -- The servicer will make
true-up adjustments to the transition charges, at
least annually, to make up for any shortfall or
excess in transition charge collections and will
file the true-up adjustments with the Texas
commission as described above.
- Collection Account -- The indenture trustee will
hold a single collection account, divided into
various subaccounts, for all series of the notes.
The primary subaccounts for credit enhancement
purposes are:
- Overcollateralization Subaccount -- The
prospectus supplement for each series of notes
will specify a required funding level for the
overcollateralization subaccount. The required
funding level will be equal to one-half of one
percent (0.5%) of the initial principal amount
of that series
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<PAGE> 23
of notes or a higher percentage as may be
specified in the related prospectus supplement.
That amount will be funded approximately
ratably over the term of the notes of such
series through transition charge collections.
- Capital Subaccount -- An amount equal to
one-half of one percent (0.5%) of the initial
principal amount of each series of notes (or a
higher amount as may be specified in the
related prospectus supplement) will be
deposited into the capital subaccount from the
proceeds of the sale of a series of notes on
the date of issuance of that series of notes.
Any shortfall in the capital subaccount will be
included in the periodic adjustment of the
transition charges and replenished from
transition charge collections.
- Reserve Subaccount -- All amounts (including
investment earnings) that, as of a payment
date, are not needed to pay interest,
principal, fees and expenses and to replenish
the overcollateralization subaccount and
capital subaccount will be held in the reserve
subaccount.
Each of the overcollateralization subaccount, the
capital subaccount and the reserve subaccount and
investment earnings thereon will be available to
make payments on all series of notes on each
payment date.
The collection account will also have a separate
subaccount, the REP deposit subaccount, that will
hold security deposits from REPs. In the event that
an REP defaults in payment, the indenture trustee
may withdraw the amount of the payment default or,
if less, the amount of that REP's security deposit
for deposit into the general subaccount of the
collection account.
Additional credit enhancement for any series of
notes may include surety bonds, letters of credit,
liquidity reserves or other forms of credit
enhancement. Any additional forms of credit
enhancement for a series of notes will be specified
in the related prospectus supplement. Additional
credit enhancement for any series of notes is
intended to protect against losses or delays in
scheduled payments on that series of notes.
State Pledge: The State of Texas has pledged, and the Texas
commission will pledge in each financing order, for
the benefit and protection of noteholders and CPL
that it will not take or permit any action that
would:
- Impair the value of transition property, or
- Reduce, alter, or impair the transition charges
to be imposed, collected, and remitted to the
indenture trustee on behalf of the noteholders
(other than periodic true-up adjustments in
accordance with the restructuring act),
until the principal, interest and premium, and any
other charges incurred and contracts to be
performed in connection with the related notes have
been paid and performed in full.
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<PAGE> 24
Events of Default: An event of default with respect to any series of
notes is defined in the indenture as being:
- A default in the payment of interest that is not
cured within five business days.
- A default in the payment of principal on any
final maturity date.
- A default in the payment of the optional
redemption price on a redemption date.
- A default in the observance or performance of any
covenant or agreement of the issuer made in the
indenture, and which continues unremedied for 30
days after notice is given to the issuer by the
indenture trustee or to the issuer and the
indenture trustee by the holders of at least 25%
in principal amount of the notes of that series
then outstanding.
- Any representation or warranty made by the issuer
in the indenture or in any certificate delivered
by the issuer in connection with the indenture
proving to have been incorrect in a material
respect when made and which continues unremedied
for a period of 30 days after notice is given to
the issuer by the indenture trustee or to the
issuer and the indenture trustee by the holders
of at least 25% in principal amount of the notes
of that series then outstanding.
- Events of bankruptcy, insolvency, receivership or
liquidation of the issuer.
- A breach by the State of Texas of the State's
pledge.
- Any other event designated as an event of default
in the related prospectus supplement.
If an event of default should occur and be
continuing with respect to any series of notes, the
indenture trustee or holders of not less than a
majority in principal amount of the notes of all
series then outstanding may declare the notes of
all series to be immediately due and payable. Under
circumstances set forth in the indenture, the
holders of a majority in principal amount of notes
of all series then outstanding may rescind the
declaration.
If the notes have been declared to be due and
payable following an event of default, the
indenture trustee may, in its discretion, subject
to the limitations and conditions provided in the
indenture, either sell the transition property or
elect to maintain possession of the transition
property and continue to apply payments arising
from the transition charges remitted to the
indenture trustee as if there had been no
declaration of acceleration.
Optional Redemption: We will have the option to redeem a series of notes
- if the outstanding principal balance of the
series of notes has been reduced to less than 5%
of the initial principal amount of that series,
or
10
<PAGE> 25
- if provided for in the applicable prospectus
supplement, from the proceeds of the issuance and
sale of another series of notes.
The prospectus supplement relating to a series of
notes will describe any other optional redemption
provisions for that series. The redemption price
for any series of notes will not be less than the
outstanding principal of and accrued interest on
those notes.
Payment and Record Dates: Payments of interest on and principal of any series
of notes will be made on the dates specified in the
related prospectus supplement. So long as the notes
are in book-entry form, the record date for any
payment of interest on or principal of the notes
will be the business day immediately before the
payment date.
Scheduled Final Payment
Dates and Final Maturity
Dates: Failure to pay the entire outstanding amount of the
notes of any class or series by the scheduled final
payment date for each class or series will not
result in a default with respect to that class or
series unless such amount remains unpaid on the
final maturity date for the class or series. The
final maturity date may be up to two (2) years
after the scheduled final payment date for each
class, but cannot exceed 15 years from the date of
original issuance. The scheduled final payment date
and the final maturity date of each series and
class of notes will be specified in the related
prospectus supplement.
Ratings of Notes: It will be a condition of issuance of the notes
that the notes be rated in one of the four highest
rating categories by each of Moody's Investors
Service, Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Duff &
Phelps Credit Rating Co., and Fitch IBCA, Inc.
Federal Income Tax Status: In the opinion of Sidley & Austin, counsel to us
and to CPL, interest paid on each series of notes
generally will be taxable to a U.S. noteholder as
ordinary interest income at the time it accrues or
is received in accordance with the U.S.
noteholder's method of accounting for U.S. federal
income tax purposes. Sidley & Austin's opinion
assumes that, based on a ruling or tax opinion
described under "Material U.S. Federal Tax
Consequences," the notes will constitute
indebtedness of CPL for federal income tax
purposes. All parties have agreed that the notes
will be treated as debt for all purposes, including
federal income tax purposes.
ERISA Considerations: Pension plans and other investors subject to ERISA
may acquire the notes subject to specified
conditions. The acquisition and holding of the
notes could be treated as an indirect prohibited
transaction under ERISA. Accordingly, by purchasing
the notes, each investor purchasing on behalf of a
pension plan will be deemed to certify that the
purchase and subsequent holding of the notes would
be exempt from the prohibited transaction rules of
ERISA.
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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 notes. In particular, you should
consider carefully the risk factors described below.
If any of the following risks actually occur, your investment in the notes
could be materially adversely affected. In that event, the trading price of your
notes could decline and you may lose all or part of your investment.
YOU MAY EXPERIENCE MATERIAL PAYMENT DELAYS OR LOSSES ON YOUR INVESTMENT IN THE
NOTES DUE TO THE LIMITED SOURCES OF PAYMENT FOR THE NOTES AND LIMITED CREDIT
ENHANCEMENT.
You may suffer material payment delays or losses on your notes if our
assets are insufficient to pay the principal amount of the notes in full. The
only source of funds for payments on the notes will be our assets. These assets
are limited to:
- the transition property, including the right to impose, collect and
receive the transition charges and to adjust the transition charges at
least annually;
- the funds on deposit in the trust accounts held by the indenture trustee;
- contractual rights under the sale agreement, the servicing agreement and
other contracts; and
- any other credit enhancements described in a prospectus supplement.
Any floating rate notes will also have the proceeds of any swap agreement
available as a payment source.
The notes will not be insured or guaranteed by CPL, including in its
capacity as servicer, or by its parent, Central and South West Corporation, any
of its affiliates (other than us), the indenture trustee or any other person or
entity. Thus, you must rely for payment of the notes upon collections of the
transition charges, funds on deposit in the trust accounts held by the indenture
trustee and any other credit enhancement described in the related prospectus
supplement. Our organizational documents will restrict our right to acquire
other assets unrelated to the transactions (including future financing orders)
described in this prospectus. Please refer to "CPL Transition Funding LLC, the
Issuer" in this prospectus.
RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS
Legal Action May Challenge or Invalidate the Restructuring Act or a
Financing Order and Materially Adversely Affect Your Investment. The transition
property is created pursuant to the restructuring act and one or more financing
orders issued by the Texas commission pursuant to the restructuring act. The
restructuring act was adopted in June 1999. A court decision might seek to
overturn the restructuring act or a financing order. Because the notes are a
creation of statute, any alteration affecting the validity of the relevant
underlying legislative provisions could directly impact the notes. For example,
the provisions which create transition property may be invalidated. This would
eliminate the validity of the assets securing the notes. As another example, the
provisions which allow for the transition charge true-up adjustment process may
be invalidated. This would prevent the servicer from ensuring that sufficient
funds are deposited with the indenture trustee for the scheduled payments on the
notes. If this occurs, you may lose some or all of your investment or you may
experience delays in recovering your investment.
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 restructuring act or any provisions thereof,
including the provisions relating to securitization, may be directly contested
in
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courts or otherwise become the subject of litigation. If a court were to
determine that the relevant provisions of the restructuring act or a financing
order are unlawful or invalid, that decision could adversely affect the validity
of the notes or our ability to make payments on the notes. In that case, you
could suffer a loss on or delay in recovery of your investment in the notes. As
of the date of this prospectus, we are not aware of any lawsuit that has
challenged or challenges any provision of the restructuring act relating to
securitization, any financing order, the creation or characterization of
transition property or the issuance of transition bonds. The deadline
established under the restructuring act to appeal the initial financing order
will expire prior to the issuance of the related notes. However, if the
restructuring act is overturned, the limitation on appealing any financing order
may also be overturned. Please refer to "Energy Deregulation and New Texas
Market Structure" in this prospectus.
Although as of the date of this prospectus we are aware of no lawsuit that
has been filed in Texas challenging the restructuring act or the initial
financing order, judicial challenges have been filed in other states seeking to
overturn electricity generation deregulation laws similar to the restructuring
act. In Pennsylvania, three lawsuits challenged the validity of similar state
legislation. Two of these alleged that the legislation was not validly enacted
by the Pennsylvania legislature. A Pennsylvania court has rejected these claims.
The court's decisions in those cases have not been appealed and the period for
filing appeals has lapsed. The third lawsuit asserted that the legislative
provisions that allowed for the recovery of 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 items,
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 restructuring act or a financing order, but it
might provoke a challenge to the restructuring act. In addition, an unfavorable
court decision on another state's statute may establish a legal precedent for a
successful challenge to the restructuring act depending on the similarity of the
other statute and the applicability of the legal precedent to the restructuring
act. Furthermore, legal action in other states could heighten awareness of the
political and other risks of the notes, and in that way may limit the liquidity
and value of the notes. Therefore, legal activity in other states may indirectly
affect the value of your investment.
Neither we nor CPL nor any successor seller will indemnify you for any
changes in the law that may affect the value of your notes. CPL or a successor
seller may, however, have to indemnify us if legal action based on law in effect
at the time of the issuance of the notes invalidates the transition property.
The Restructuring Act May be Overturned by the Federal Government Without
Full Compensation. 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 energy
industry. Two bills, neither of which passed in committee, were introduced in
the 105th Congress prohibiting the recovery of stranded costs through charges
such as the transition charges provided for in the restructuring act. A
prohibition of this nature could negate the existence of transition property. As
of the date of this prospectus, no member of the 106th Congress has introduced a
bill that would affect the existence or value of transition property or the
imposition of the transition charges.
We cannot predict whether any future bills that prohibit the recovery of
stranded costs, or securitized financing for the recovery of these costs, will
become law or, if they become law,
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what their final form or effect will be. Moreover, even if this preemption of
the restructuring act and/or the financing order by the federal government were
considered a "taking" under the U.S. Constitution for which the government had
to pay the estimated market value of the transferred transition property at the
time of the taking, we can give no assurance that this compensation would be
sufficient to pay the full amount of principal of and interest on the notes or
to pay such amounts on a timely basis.
Except as described in "The Sale Agreement -- Indemnification," neither we
nor CPL nor any successor seller will indemnify you for any changes in law that
may affect the value of your notes.
Future Texas Legislative Action May Invalidate the Notes or the Transition
Property which is the Primary Source of Payments on Your Notes. Unlike many
other states, the citizens of the State of Texas do not have the constitutional
right to adopt or revise laws by initiative or referendum. Thus, absent any
amendment of the constitution of the State of Texas, the restructuring act
cannot be amended or repealed by direct action of the electorate.
The Texas legislature may repeal the restructuring act, or amend the
restructuring act in a way that limits or alters the transition property so as
to reduce its value. Under the restructuring act, the State of Texas has pledged
not to diminish the value of the transition property. For a description of this
pledge, please refer to "Security for the Notes -- State Pledge" in this
prospectus. In the opinion of Sidley & Austin, counsel to CPL and us, with
respect to applicable federal constitutional principles relating to the
impairment of contracts, and in the opinion of Vinson & Elkins, LLP, Texas
counsel to CPL and us, under applicable Texas constitutional principles relating
to the impairment of contracts, the State of Texas could not, absent a
demonstration that such action was necessary to serve a significant and
legitimate public purpose, repeal or amend the restructuring act by means of the
legislative process, or take or refuse to take any action required under its
pledge described above if the repeal or amendment or the action or inaction
would substantially impair the rights of the owners of the transition property
or the noteholders. It may be possible for the Texas legislature to repeal or
amend the restructuring act without violating the State's pledge, if the
legislature acts in order to serve a significant and legitimate public purpose,
such as protecting the public health and safety. Even if the legislature
provides you with an amount deemed to be adequate compensation, it may not be
sufficient for you to fully recover your investment. Any action of the Texas
legislature adversely affecting the transition property or the ability to
collect transition charges may be considered a "taking" under the U.S. or Texas
constitutions. The Texas legislature might then be obligated to pay the
estimated value of the transition property at the time of the taking. We cannot
assure you of the likelihood or legal validity of any action of this type by the
Texas legislature, or whether the action would be considered a taking. As of the
date of the prospectus, we are not aware of any pending legislation in the Texas
legislature that would affect any provisions of the restructuring act.
We cannot assure you that a repeal or amendment to the restructuring act
will not be sought or adopted or that any action by the State of Texas 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
notes and delay the payment of interest and principal. Moreover, given the lack
of judicial precedent directly on point, and the novelty of transition property
as security for noteholders, we cannot predict the outcome of any litigation
with certainty. Accordingly, you may suffer a loss on or delay in recovery of
your investment in the notes.
The seller has agreed to take legal or administrative action, including
instituting legal action, as may be reasonably necessary to block or overturn
any attempts to cause a repeal, modification or amendment to the restructuring
act, a financing order or transition property.
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Except as described in "The Sale Agreement -- Indemnification," neither we
nor CPL nor any successor seller will indemnify you for any changes in the law
that may affect the value of your notes.
Future Actions By The Texas Commission May Reduce the Value of Your
Investment. The restructuring act provides that the financing order issued to
CPL, or any successor seller is irrevocable upon issuance and is not subject to
reduction, impairment or adjustment by further action of the Texas commission,
except for the periodic true-up adjustments. The State of Texas and the Texas
commission have each pledged that it will not take or permit any action to
amend, alter or impair the value of transition property created under the
financing order, except as permitted in true-up adjustments until the principal,
interest and premium, and any other charges incurred and contracts to be
performed in connection with the notes have been paid and performed in full.
However, the Texas commission retains the power to adopt, revise or rescind
rules or regulations affecting the seller or a successor utility. The Texas
commission also retains the power to interpret the financing order. Any new or
amended regulations or orders by the Texas commission could affect the ability
of the servicer to collect the transition charges in full and on a timely basis.
The seller has agreed to take legal or administrative action to resist any Texas
commission rule, regulation or decision that would reduce the value of the
transition property. We cannot assure you that the seller would be successful in
its efforts. Thus, future Texas commission rules, regulations or decisions may
adversely affect the rating of the notes, their price or the rate of transition
charge collections and, accordingly, the amortization of notes and their
weighted average lives. As a result, you could suffer a loss of your investment.
The Texas commission may challenge the servicer's calculation of its
proposed adjustments which may cause delay or may refuse to permit an adjustment
to take effect on the grounds the adjustment contains an arithmetic error. There
is uncertainty associated with investing in notes whose timely payment of
principal and interest may depend on true-up adjustments because of the absence
of any judicial or regulatory experience implementing and interpreting the
provisions of the restructuring act providing for true-up adjustments. The
servicer must make periodic filings with the Texas commission in order to
implement any true-up adjustment, which under the terms of a financing order
will become effective at the beginning of the next monthly billing cycle
following the filing. Nonetheless, the adjustment procedures and adjustments
could be challenged. This could result in costly and time consuming litigation.
A shortfall or material delay in transition charge collections due to inaccurate
forecasts or delayed implementation of true-up adjustments could result in
payments of principal of and interest on the notes not being paid according to
the expected amortization schedule, lengthening the weighted average life of the
notes, or in payments of principal and interest not being made at all.
We May Not Charge Transition Charges for Electricity Delivered More Than 15
Years From the Original Issue Date of the Series of Notes relating to Those
Transition Charges. Each financing order establishes the amount of qualified
costs and of notes that may be issued and creates transition property, including
the right to collect the related transition charges. We will be prohibited from
recovering transition charges under a financing order after the fifteenth
anniversary of the original issue date of the series of notes related to those
transition charges. However, the servicer may continue to collect transition
charges after the 15-year period for electricity consumed or made available
during the 15-year period that are either unbilled or not yet collected. Amounts
collected from the specific transition charges relating to a series of notes
imposed for electricity delivered during the applicable 15-year period, or from
credit enhancement funds, may not be sufficient to repay the notes in full. If
so, it is possible that no other funds will be available to pay the unpaid
balance due on the notes.
The Amount of Retail Base Rate Charges Including Transition Charges May Not
Exceed a Statutory Cap. The restructuring act sets caps on the total bundled
charges that CPL may charge for electric service, including transition charges,
through January 1, 2002. These rate caps apply to each customer class
separately. The restructuring act also limits the bundled rates that
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can be assessed by CPL and its affiliates to residential and small commercial
retail customers through January 1, 2007. If there is a severe or persistent
shortfall in collections of transition charges, the rate caps applicable to a
customer class may prevent the servicer from adjusting transition charges for
that customer class in excess of the rate caps. If this occurs, the servicer
would have to adjust transition charges for other customer classes. These
adjustments may result in the assessment of transition charges on the remaining
customer classes at a level that is limited by their rate caps. This could
reduce the amount or the rate of collections of transition charges, which may
adversely affect the value of your investment. Please refer to "Energy
Deregulation and New Texas Market Structure" in this prospectus.
SERVICING RISKS
Inaccurate Forecasting or Unanticipated Delinquencies Could Result in
Insufficient Funds to Make Scheduled Payments on the Notes. The transition
charges are generally assessed based on customer usage, which includes kilowatts
demanded and kilowatt-hours of electricity consumed by retail customers. The
transition charges are calculated by the servicer according to the methodology
approved by the related financing order. In addition, the servicer is required
to file with the Texas commission, on our behalf, periodic true-up adjustments
for the transition charges. These adjustments are intended to provide, among
other things, for timely payment of the notes, but the frequency of these
adjustments is limited. The servicer will generally base its adjustments on any
shortfalls during the prior adjustment period and on projections of future
electricity usage (consumption and demand) and the retail customers' ability to
pay their electric bills in full and on a timely basis. The servicer has
historically forecasted customer usage based on kilowatt-hours and the servicer
has historically forecasted peak demand annually on a total company basis. The
servicer has not historically forecasted demand by customer class. If the
servicer inaccurately forecasts electricity consumption or demand or
underestimates retail 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.
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
customers to migrate from CPL's service territory or reduce their
electricity consumption;
- the occurrence of a natural disaster, such as a hurricane, unexpectedly
disrupting electrical service and reducing usage;
- problems with energy generation, transmission or distribution resulting
from the change in the market structure of the electric industry;
- retail customers ceasing business or departing CPL's service territory;
- dramatic changes in energy prices;
- retail customers consuming less electricity because of increased
conservation efforts; or
- retail customers switching to alternative sources of energy, including
self-generation or co-generation of electric power. Please refer to
"Energy Regulation and New Texas Market Structure" in this prospectus.
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Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
- unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater charge-offs than expected or forcing CPL or a
successor utility to grant additional payment relief to more retail
customers;
- a change in law that makes it more difficult for CPL or a successor
distribution company to disconnect nonpaying retail customers, or that
requires CPL or a successor distribution company to apply more lenient
credit standards for retail customers; or
- the introduction into the energy markets of less creditworthy REPs who
collect and remit payments arising from the transition charges, but who
fail to remit retail customer charges to the servicer in a timely manner.
Please refer to "-- It May Be More Difficult to Collect the Transition
Charges from REPs Who Will Provide Electricity to CPL's Retail Customers
Commencing in 2002."
Uncertainties Associated with Collecting the Transition Charges and
Unpredictability of a Deregulated Electricity Market. CPL has not previously
calculated transition charges for retail customers, nor made all of the
associated calculations and predictions which are inherent in that calculation,
before making the calculations required in connection with the initial financing
order and our initial issuance of notes. The predictions are based primarily on
historical retail customer usage and payments, collection of payments and
forecasted energy usage for which CPL has records available. The servicer has
historically forecasted customer usage based on kilowatt-hours and the servicer
has historically forecasted peak demand annually on a total company basis. The
servicer CPL has not historically forecasted demand by customer class. In
addition, historical usage and collection records may not reflect retail
customers' payment patterns or energy usage in the competitive market since
retail competition is being introduced in Texas for the first time. These
records also do not reflect any experience with consolidated billing by REPs.
Because that kind of billing is new in Texas, there are potentially unforeseen
factors in that billing which may affect collection of payments. Furthermore,
the servicer does not have any experience administering transition charges.
Risks are associated with the servicer's inexperience in calculating, billing
and collecting transition charges and in managing retail customer payments on
our behalf. A shortfall or material delay in collecting transition charges could
result in payments of principal not being paid according to the expected
amortization schedule, lengthening the weighted average life of the notes, or
payments of principal and interest not being made at all.
Your Investment Relies on CPL or Its Successor Acting as Servicer of
Transition Property. CPL, as servicer, will be responsible for billing and
collecting transition charges from retail customers and REPs and for periodic
filings with the Texas commission to adjust these charges. If CPL ceased
servicing the transition property, it might be hard to find a successor
servicer. Any successor servicer may have less experience than CPL and less
capable billing and/or collection systems than CPL. A successor servicer may
experience difficulties in collecting transition charges, determining
appropriate adjustments to transition charges, terminating service to retail
customers or otherwise taking actions against retail customers for non-payment
of their transition charges. If CPL 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. Also, a change in servicer or the reclaiming of
billing functions by the servicer from an REP that has defaulted may cause
billing and/or payment arrangements to change, which may lead to a period of
disruption in which retail customers continue to remit payments according to the
former arrangement, resulting in delays in collection that could result in a
delay in payments on your notes. 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, the
indenture trustee and we may be
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prevented from effecting a transfer of servicing. The restructuring act provides
that, if a default or termination occurs under the notes, the Texas commission
may order that amounts arising from transition charges be transferred to a
separate account, and the indenture trustee or noteholders 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, in the event
that the servicer becomes subject to a bankruptcy proceeding, federal bankruptcy
law may prevent the Texas commission or a Texas court from issuing or enforcing
these orders. The indenture requires the indenture trustee to request an order
from the bankruptcy court to permit the Texas commission or a Texas court to
issue and enforce these orders. However, the bankruptcy court may deny the
request. The failure of the servicer to make required remittances would likely
result in a default under the indenture. Please refer to "The Sale
Agreement -- Bankruptcy and Creditors' Rights Issues" in this prospectus.
Under the restructuring act and the indenture, the indenture trustee or the
noteholders have the right to foreclose or otherwise enforce the lien on
transition property securing the notes. 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 the Transition Charges from REPs Who
Will Provide Electricity to CPL's Retail Customers Commencing in 2002. As part
of the restructuring of the Texas electric industry, retail customers in CPL's
service territory will, as of January 1, 2002, or in limited circumstances,
sooner, purchase electricity and related services from REPs rather than CPL. CPL
or any affiliated transmission and distribution utility will no longer be
permitted to sell electricity directly to retail customers. However, CPL
currently expects that it will organize an affiliated REP to provide electricity
and related services to retail customers. The restructuring act contemplates
that REPs, including CPL's affiliated REP, will issue a single bill to retail
customers purchasing electricity from an REP. This single bill would include all
charges related to purchasing electricity from the REP, delivery services from
the transmission and distribution utility and the applicable transition charges.
Therefore, we expect that retail customers will pay transition charges to REPs
who supply them with electric power. The REPs will be obligated to remit
payments of transition charges to the servicer, even if they do not collect the
charges from retail customers, less an amount based on the servicer's
system-wide charge-off percentage. Each REP will be entitled to recover amounts
remitted to the servicer in excess of payments received from retail customers
(and will be obligated to remit to the servicer any excess of such collections
over prior remittances) in an annual reconciliation made in conjunction with the
true-up adjustment process. The servicer will have limited rights to collect
transition charges directly from those retail customers who receive their
electricity bills from an REP in the event that the REP does not pay the
transition charges to the servicer. Once retail competition begins, the REPs
will bill most retail customers for the transition charges, and 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 REP to forward transition charge collections. This may cause
delays in payments on the notes and adversely affect your investment because:
- REPs might use more permissive standards in bill collection and credit
appraisal than CPL uses for its retail customers, or might be less
effective in billing and collecting. As a result, those entities may not
be as successful in collecting the transition charges as the servicer
anticipated when setting the transition charge.
- If an REP defaults, the servicer may assume responsibility for billing
and collecting transition charges from the REP's retail customers or
transfer billing and collection rights with respect to transition charges
due from the REP's retail customers to another entity in accordance with
the financing order unless and until the retail customer switches service
to a non-defaulting REP. However, the servicer will generally have even
more limited rights to pursue these retail customers to pay amounts owed
to us by the defaulted REP. In no
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event may the servicer directly bill a retail customer for service that
was previously billed by the REP and previously paid by that customer to
the REP. In addition, if the servicer assumes the billing and collecting
responsibility during the period of an REP default, billing and
collections may be delayed due to the need to convert to the servicer's
systems or because the servicer may not have adequate or complete
information. This change could cause customer confusion.
- A default by an REP which collects from a large number of retail
customers would have a greater impact than a default by a single retail
customer.
- The bankruptcy of an REP may cause a delay in or prohibition of payment
to the servicer of transition charges collected by that REP.
- Any security deposit made by an REP may not be sufficient to cover
shortfalls resulting from a default by such REP.
Please refer to "The Transition Property -- Tariff -- Billing and
Collection Terms and Conditions" in this prospectus.
REPs who do not meet specified credit rating and billing criteria will be
required to provide a cash deposit to the indenture trustee. The cash deposit
will equal two months maximum estimated collections of transition charges, as
determined by the servicer, and will be deposited in the REP deposit subaccount
of the collection account. In the event that an REP defaults in remitting
transition charges, the indenture trustee may withdraw the amount of the payment
default or, if less, the amount of that REP's security deposit from the REP
deposit subaccount for deposit into the general subaccount of the collection
account.
In addition, the restructuring act provides for one REP in each designated
geographical area to be designated the "provider of last resort." The
restructuring act requires the provider of last resort to offer a standard
retail service package of basic electric service to retail customers in its
designated area at a fixed, nondiscountable rate approved by the Texas
commission, regardless of the creditworthiness of the customer. The REP serving
as the provider of last resort may face greater difficulty in bill collection
than other REPs and therefore the servicer may face greater difficulty in
collecting transition charges from the REP serving as the provider of last
resort.
Adjustments to transition charges and, in some cases credit enhancement,
will be available to compensate for a failure by an REP to pay transition
charges over to the servicer. However, the amount of credit enhancement funds
may not be sufficient to protect your investment. Please refer to "Energy
Deregulation and New Texas Market Structure -- Transition Property" in this
prospectus.
Retail Customer Payments May Decline or be Delayed due to Confusion. The
transition charges are being introduced to retail customers for the first time.
Retail customers unused to paying transition charges may be confused by the
transition charges and any other changes in customer billing and payment
arrangements. This confusion may cause the misdirection or delay of collections
of transition charges. When retail competition begins, all generation and
related services, including billing and collections, will be provided by REPs,
and in the case of CPL, by an affiliated REP. Any problems arising from new and
untested systems or any lack of experience on the part of the REPs with customer
billing and collections could also cause delays in billing and collecting
transition charges. These delays could result in shortfalls in transition charge
collections and payments on the notes.
Billing and Collection Practices May Reduce the Amount of Funds Available
for Payments on the Notes. Each financing order will set the methodology for
determining the amount of the transition charges we may impose on each retail
customer. The servicer cannot change this methodology. However, the servicer may
set its own billing and collection arrangements with REPs and with those retail
customers from whom it collects the transition charges directly,
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provided that these arrangements comply with Texas commission customer
safeguards. For example, to recover part of an outstanding bill, the servicer
may agree to extend an REP's or a retail 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 unforeseen impact on the timing and
amount of customer payments and may reduce the amount of transition charge
collections and thereby limit our ability to make scheduled payments on the
notes. 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 REPs to the servicer or make it
more difficult for the servicer to collect the transition charges. These changes
may adversely affect the value of the notes and their amortization and,
accordingly, their weighted average lives. Please refer to "The Seller and
Servicer -- Billing and Collection" in this prospectus. The servicing agreement
provides, however, that the Servicer will not take any action that will
adversely impair our interest in the transition property.
Limits on Rights to Terminate Service May Make it More Difficult to Collect
Transition Charges. An important element of an electric utility's policies and
procedures relating to credit and collections is the right to terminate or
disconnect service on account of nonpayment. After customer choice begins and
transmission and distribution utilities no longer sell electricity directly to
retail customers, the servicer may have to rely on the REP's right to terminate
or disconnect service. We expect the tariff authorized by each financing order
to authorize the servicer to terminate service for nonpayment of transition
charges pursuant to the Texas commission rules. 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 terminate service. CPL and the REPs may
not terminate service to a retail 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
the service territory, or when a heat advisory has been issued for either of the
two prior calendar days. As a result, CPL or an REP must continue to provide
service to these retail customers under these circumstances. To the extent these
retail customers do not pay for their electric service, we will not receive
payment of transition charges from these retail customers. The servicer's
ability to disconnect service will also be dependent on the information provided
to it by the REP and the REP's policies and procedures relating to service
termination. This may reduce the amount of transition charge collections
available for payments on the notes, although the expected associated reduction
in payments would be factored into the transition charge true-up adjustments.
Please refer to "The Seller and Servicer -- Billing and Collections" in this
prospectus.
Future Adjustments to Transition Charges by Customer Class May Result in
Insufficient Collections. The retail customers who will be responsible for
paying transition charges are divided into customer classes. Transition charges
will be allocated among customer classes and assessed in accordance with the
formula required under the restructuring act and as specified in the financing
order. This allocation is based in part upon the existing rate structure of each
customer class. For a description of the formula, please refer to "Energy
Deregulation and New Texas Market Structure" in this prospectus. Adjustments to
the transition charges will also be made ratably to each customer class with the
result that a shortfall in collections of transition charges in any one customer
class may be corrected by making adjustments to the transition charges payable
by all customer classes.
CPL's large industrial class consists of a small number of large industrial
retail customers. In addition, several of these retail customers have already
notified CPL that they will cease purchasing electricity from CPL and have
secured or are securing their own power resources that qualify under the
restructuring act to allow them to avoid paying transition charges. The
inability to impose and collect transition charges or the failure to collect
transition charges from
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the retail customers in this customer class could lead to increases in
transition charges for other customers. These increases could lead to failures
by retail customers to pay transition charges. In addition, transition charges
cannot exceed statutory caps during the rate freeze and price to beat periods.
In either case, these increases could increase the risk of a shortfall in
transition charge collections to pay the notes.
The restructuring act provides that transition charges must be collected
and allocated among retail customers in the same manner as competition
transition charges provided for elsewhere in the restructuring act. The final
amount of stranded cost recovery and the final allocations of competition
transition charges among retail customers, however, may not be known for some
time. Accordingly, the Texas commission could order that the allocation of
transition charges among customer classes set forth in a financing order be
modified to reflect any subsequent Texas commission orders concerning the
allocation of stranded cost recovery. The initial tariff filed to evidence the
transition charges requires the servicer to file a true-up adjustment within 45
days of any such order by the Texas commission in accordance with the same
methodology used to establish the initial transition charges but reflecting the
changed class allocations. Any reductions in transition charge collections due
to reallocation among customer classes would be factored into the transition
charge true-up adjustments. Nonetheless, these adjustments could lead to
increased transition charges for one or more classes and could therefore lead to
increased risks of nonpayment as described above.
UNCERTAINTIES RELATED TO ELECTRIC INDUSTRY GENERALLY
Technological Change May Make Alternative Energy Sources More
Attractive. The continuous process of technological development may result in
the introduction for an increasing number of retail customers of economically
attractive alternatives to purchasing electricity through CPL's distribution
facilities. 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 which can be cost-effective options for retail customers with smaller
electric energy requirements. If such facilities have rated capacities of 10
megawatts or less those customers may not have to pay transition charges under
provisions of the restructuring act. Technological developments may allow
greater numbers of retail customers to avoid transition charges under such
provisions, which may reduce the total number of retail customers from which
transition charges will be collected. A reduction in the number of payers of
transition charges could result in delays in or a failure to make payments of
interest on and principal of the notes.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
Bankruptcy of CPL or any Successor Seller Could Result in Losses or Delays
in Payments on the Notes. The restructuring act and the financing order provide
that as a matter of Texas state law:
- the rights and interests of a selling utility under a financing order,
including the right to impose, collect and receive transition charges,
are contract rights of the seller;
- the seller may make a present transfer of its rights under a financing
order, including the right to impose, collect and receive future
transition charges that retail customers do not yet owe;
- upon the transfer to us, the rights will become transition property and
transition property constitutes a present property right, even though the
imposition and collection of transition charges depend on further acts
that have not yet occurred; and
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- a transfer of the transition property from the seller, or its affiliate,
to us is a true sale of the transition property, not a pledge of the
transition property to secure a financing by the seller.
These four provisions are important to maintaining payments on the notes in
accordance with their terms during any bankruptcy of the seller. In addition, we
have structured the transaction with the objective of keeping us separate from
the seller in the event of a bankruptcy of the seller.
A bankruptcy court generally follows state property law on issues such as
those addressed by the four 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 bankruptcy of the seller refused to enforce one or more of
the state property law provisions described above for this reason, the effect of
this decision on you as a noteholder would be similar to the treatment you would
receive in a bankruptcy of the seller if the notes had been issued directly by
the seller. A decision by the bankruptcy court that, despite the separateness of
us and the seller, we should be consolidated with the seller, would have a
similar effect on you as a noteholder. Either decision could cause material
delays in payment of, or losses on, your notes and could materially reduce the
value of your investment. For example:
- the indenture trustee could not, without permission from the bankruptcy
court (which could be denied):
-- exercise any remedies against the seller on your behalf,
-- recover funds to repay the notes,
-- use funds in the accounts under the indenture to make payments on the
notes, or
-- replace the seller as the servicer (if the same entity is acting in
both capacities);
- the bankruptcy court could order the indenture trustee to exchange the
transition property for other property, which might be of lower value;
- tax or other government liens on the seller's property that arose after
the transfer of the transition property to us might nevertheless have
priority over the indenture trustee's lien and might be paid from
transition charge collections before payments on the notes;
- the indenture trustee's lien might not be properly perfected in
transition property collections that were commingled with other funds of
the seller collected from its retail customers as of the date of the
seller'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 notes would represent only general
unsecured claims against the seller;
- the bankruptcy court might rule that neither our property interest nor
the indenture trustee's lien extends to transition charges in respect of
electricity consumed after the commencement of the seller's bankruptcy
case, with the result that the notes would represent only general
unsecured claims against the seller;
- neither the seller nor we may be obligated to make any payments on the
notes during the pendency of the bankruptcy case;
- the seller may be able to alter the terms of the notes as part of its
plan of reorganization;
- the bankruptcy court might rule that the transition charges should be
used to pay a portion of the cost of providing electric service; or
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- the bankruptcy court might rule that the remedy provisions of the sale
agreement are unenforceable, leaving us with a claim of actual damages
against the seller which may be difficult to prove.
Furthermore, if the seller enters into bankruptcy, it may be permitted to
stop acting as servicer and it may be difficult to find a third-party to act as
servicer. The failure of a servicer to perform its duties or the inability to
find a successor servicer may cause payment delays or losses on your investment.
Also, the mere fact of a servicer or REP bankruptcy proceeding could have an
adverse effect on the resale market for the notes and the value of the notes.
Please refer to "The Sale Agreement -- Bankruptcy and Creditors' Rights Issues"
in this prospectus.
The Servicer Will Commingle the Transition Charges with Other Revenues
which May Obstruct Access to the Transition Charges in Case of Bankruptcy of the
Servicer. The servicer will not segregate the transition charges from its
general funds. The transition charges will be segregated only when the servicer
pays them to the indenture trustee. The servicer will be permitted to remit
collections on a monthly basis only if no servicer default has occurred and is
continuing and if:
- the servicer has the requisite credit ratings from the rating agencies or
- the servicer provides credit enhancement satisfactory to the rating
agencies to assure remittance by the servicer to the indenture trustee of
the transition charges it collects.
Otherwise, the servicer will be required to remit estimated payments of
transition charges on each business day. Despite these requirements, the
servicer might fail to pay the full amount of the transition charges to the
indenture 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 notes.
The restructuring act provides that our rights to the transition property
are not affected by the commingling of these funds with any other funds. In a
bankruptcy of the servicer, however, a bankruptcy court might rule that federal
bankruptcy law takes precedence over the restructuring act 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 notes. In this case, we would have only a general unsecured claim
against the servicer for those amounts. This decision could cause material
delays in payment or losses on your notes and could materially reduce the value
of your investment.
REPs Will Commingle the Transition Charges with Other Revenues which May
Obstruct Access to Transition Charges in Case of an REP's Bankruptcy. An REP is
not required to segregate the transition charges it collects from its general
funds, but will be required to remit transition charge collections to the
servicer within 16 days of billing by the servicer. An REP nonetheless might
fail to pay the full amount of the transition charges 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 notes.
The restructuring act provides that our rights to the transition property
are not affected by the commingling of these funds with other funds. In a
bankruptcy of an REP, however, a bankruptcy court might rule that federal
bankruptcy law takes precedence over the restructuring act and does not
recognize our right to collections of the transition charges that are commingled
with other funds of an REP as of the date of bankruptcy. If so, the collections
of the transition charges held by an REP as of the date of bankruptcy would not
be available to pay amounts owing on the notes. In this case, we would have only
a general unsecured claim against that REP for those amounts. This decision
could cause material delays in payment or losses on your notes and could
materially reduce the value of your investment.
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OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES
Absence of a Secondary Market for Notes Could Limit Your Ability to Resell
Notes. The underwriters for the notes may assist in resales of the notes but
they are not required to do so. A secondary market for the notes may not
develop. If a secondary market does develop, it may not continue or there may
not be sufficient liquidity to allow you to resell any of your notes. We do not
anticipate that any notes will be listed on any securities exchange. Please
refer to "Plan of Distribution" in this prospectus.
We May Issue Additional Series of Notes Whose Holders have Conflicting
Interests. We may issue other series of notes 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 notes if the issuance
would result in the credit ratings on any outstanding class of notes being
reduced or withdrawn. However, we cannot assure you that a new series would not
cause reductions or delays in payments on your notes. In order to issue an
additional series of notes, CPL or any successor seller 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
notes. Any additional transition charges would reduce the ability of CPL or any
successor seller to recover its bundled rates during the rate freeze period or
for a CPL affiliated REP to recover its remaining rates during the price to beat
period. In addition, all outstanding notes will have an equal lien with respect
to all transition property held by us. Please refer to "Description of the
Notes" and "Security for the Notes" in this prospectus. In addition, some
matters relating to the notes require the vote of the holders of all series and
classes of notes. Your interests in these votes may conflict with the interests
of the noteholders of another series or of another class. Thus, these votes
could result in an outcome that is materially unfavorable to you.
CPL or any successor seller may sell additional 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 noteholders of any series. Transition
charge collections will be prorated among us and the other entities based on the
respective amounts of transition charges billed. 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 us and to our managers, the servicer and the
indenture trustee that the sale will not result in the reduction or withdrawal
of the then current rating of any outstanding class of notes. We cannot assure
you, however, that the issuance of other transition bonds secured by transition
property would not cause reductions or delays in payments on your notes.
The Ratings have a Limited Function and Are No Indication of the Expected
Rate of Payment of Principal on the Notes. Each series or class of notes 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 notes at final
maturity (which is later than the expected final payment date) and will make
timely interest payments. The ratings are not an indication that the rating
agencies believe that principal payments are likely to be paid on time according
to the expected amortization schedule. Thus, we may repay the principal of your
notes earlier or later than you expect, which may materially reduce the value of
your investment. A rating is not a recommendation to buy, sell or hold notes.
The rating may change at any time. A rating agency has the authority to revise
or withdraw its rating based solely upon its own judgment.
The Obligation of the Seller of Transition Property to Indemnify Us for a
Breach of a Representations or Warranty May Not Be Sufficient to Protect Your
Investment. If the seller (initially CPL) breaches a representation or warranty
in the sale agreement, it is obligated to indemnify us and the indenture trustee
for any liabilities, obligation, claims, actions, suit or payments resulting
from that breach, as well as any reasonable costs and expenses incurred.
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This indemnification obligation would include principal and interest on the
notes not paid when scheduled to be paid in accordance with their terms and the
amounts of any deposits to the indenture accounts required to be made which are
not made when so required, but in each case only as a result of a breach by the
seller of a representation or warranty in the sale agreement. The seller will
not be obligated to repurchase the transition property in the event of a breach
of any of its representations or warranties regarding the transition property,
and neither the indenture trustee nor the noteholders will have the right to
accelerate payments on the notes because of a breach. The seller may not have
sufficient funds available to satisfy its indemnification obligation to us;
therefore, we may not be able to pay you amounts owing on your notes in full. If
the seller becomes obligated to indemnify noteholders, the ratings on the notes
will likely be downgraded since noteholders will be unsecured creditors of the
seller with respect to any of these indemnification amounts. Please refer to
"The Sale Agreement -- Seller Representations and Warranties" and
"-- Indemnification" in this prospectus. The seller has agreed to take legal or
administrative action, including instituting legal action, as may be reasonably
necessary to block or overturn any attempts to cause a repeal, modification or
amendment to the restructuring act, a financing order or transition property.
The seller has also agreed to resist proceedings of third parties, which, if
successful, would result in a breach of its representations and warranties
concerning the transition property, a financing order or the restructuring act.
We cannot assure you that the seller would be able to take any action or that
any action the seller is able to take would be successful.
You May Have to Reinvest Principal of Your Notes at a Lower Rate of Return
Because of an Optional Redemption of Notes. As described more fully under
"Description of the Notes -- Optional Redemption," we may redeem any series of
notes on any payment date if, after giving effect to payments that would
otherwise be made on that payment date, the outstanding principal balance of
that series of notes has been reduced to less than five percent of that series'
initial principal amount. In addition, we may redeem a series of notes if and to
the extent provided in the related prospectus supplement. Redemption of a series
of notes will result in a shorter than expected weighted average life for that
series. Redemption may also adversely affect the yield to maturity of the notes
redeemed. We cannot predict whether any series of notes will be redeemed. Future
market conditions may require you to reinvest the proceeds of a redemption at a
lower rate than the rate you receive on the notes. Please refer to "Description
of the Notes -- Optional Redemption" in this prospectus.
Additional Risks of Floating Rate Notes. A termination event under a swap
agreement may adversely affect the liquidity and the market value of any
floating rate notes. As described under "Description of the Notes -- Floating
Rate Notes," in the event that we issue floating rate notes, upon the occurrence
of an event of default or termination event under the swap agreement, the swap
agreement pursuant to which interest will be paid on any floating rate notes
will terminate or may be terminated. In particular, we will terminate the swap
agreement if the swap counterparty's rating by either Moody's or S&P falls below
AA (or the equivalent rating) and the swap agreement is not assigned to a
replacement swap counterparty satisfying that ratings criteria or a lower
ratings criteria that may be permitted by the swap agreement within the time
period specified in the related prospectus supplement. In no event will any
successor swap counterparty be rated below A (or the equivalent rating) by
either Moody's or S&P. The failure to assign the swap agreement after a
downgrade of the counterparty's rating constitutes a termination of the swap
agreement. Upon any swap termination, the interest rate payable with respect to
the floating rate notes will convert permanently to the fixed swap rate payable
to the swap counterparty, which may be substantially less than the rate
otherwise payable on the floating rate notes. A conversion to a fixed interest
rate may adversely affect both the liquidity and the market value of the
floating rate notes.
Risks Associated With the Use of Credit Enhancements, Hedge or Swap
Transactions. We may enter into certain forms of credit enhancement, interest
rate swaps or hedge arrangements
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with respect to a series or class of floating rate notes that entail certain
kinds of risks. These risks include credit risks (the risk associated with the
credit of any party providing the credit enhancement, interest rate swap or
hedge). The applicable prospectus supplement will contain the risk factors, if
any, associated with any applicable credit enhancement, interest rate swap or
hedge arrangement.
You Might Receive Principal Payments Later, 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
transition charges, together with the transition charge adjustments described
above, will generally determine whether there is a delay in the scheduled
repayments of note principal. If the servicer collects 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. If there is an acceleration
of the notes before maturity, all classes will be paid pro rata. Therefore, some
classes may be paid earlier and some classes may be paid later than expected.
Unless there is a redemption or acceleration of the notes before maturity, the
notes will not be retired earlier than scheduled.
AVAILABLE INFORMATION
We have filed a registration statement relating to the notes with the
Securities and Exchange Commission. This prospectus is a part of the
registration statement. This prospectus, together with the prospectus
supplement, describes the material terms of each material document filed as an
exhibit to the registration statement. This prospectus and the prospectus
supplement do not, however, contain all of the information contained in the
registration statement and related exhibits. You can inspect the registration
statement and the related exhibits without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices located as follows: Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048. You may obtain copies of the registration statement and
related exhibits at the above locations at prescribed rates. You may obtain
information on the operation of the public reference facilities by calling the
SEC at 1-800-SEC-0330. You can also inspect information filed electronically
with the SEC, including the registration statement at the SEC's site on the
World Wide Web at http://www.sec.gov.
We will file annual, quarterly and special reports and other information
with the SEC. We are permitted and intend to stop filing periodic reports with
the SEC at the beginning of any fiscal year following the issuance of the notes
if there are fewer than 300 record holders of the notes.
REPORTS TO HOLDERS
Pursuant to the indenture, the indenture trustee will provide to
noteholders of record regular reports prepared by the servicer containing
information concerning, among other things, the issuer and the collateral.
Unless and until notes are no longer issued in book-entry form, the reports will
be provided to the depository for the notes, or its nominee, as sole beneficial
owner of the notes. The reports will be available to noteholders upon request to
the indenture trustee or the servicer. Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. The financial information provided to noteholders will not be
examined and reported upon by an independent public accountant. In addition, an
independent public accountant will not provide an opinion on the financial
information. Please refer to "Description of the Notes -- Reports to
Noteholders" in this prospectus.
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INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents that we file with the SEC after the date of
this prospectus and prior to the termination of this offering are incorporated
by reference in this prospectus and considered to be part of this prospectus.
Any statement in this prospectus or in any prospectus supplement, or in a
document incorporated or deemed to be incorporated by reference, will be deemed
to be modified or superseded if we file a document that modifies that statement.
Any statement as modified or superseded shall constitute a part of this
prospectus or the prospectus supplement.
You can request a free copy of any document incorporated by reference in
the registration statement (except exhibits to the documents) by writing to CPL
Transition Funding LLC at 1616 Woodall Rogers Freeway, Dallas, Texas, 75202,
Attention: , or by calling (214) 777- .
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ENERGY DEREGULATION AND NEW TEXAS MARKET STRUCTURE
THE RESTRUCTURING ACT'S GENERAL EFFECT ON THE ELECTRIC UTILITY INDUSTRY IN TEXAS
An Overview of the Restructuring Act. The restructuring act, including the
provisions relating to securitization, became effective on September 1, 1999.
The restructuring act, among other things:
- authorizes competition in the retail electric markets beginning January
1, 2002;
- provides for recovery of stranded costs and regulatory assets;
- requires a rate freeze for all retail customers until January 1, 2002,
and certain rate reductions for residential and small commercial retail
customers for up to five years thereafter; and
- sets certain limits on electric generation capacity owned and controlled
by power generation companies.
Unbundling. By September 1, 2000, each electric utility must separate from
its regulated activities its customer related energy services business
activities that are otherwise already widely available in the competitive
market. By January 1, 2002, each electric utility must separate its business
into the following units:
- a power generation company, which generates electricity that is intended
to be sold at wholesale, and which may not, in general, own a
transmission or distribution facility and may not have a certificated
service area,
- an REP, which sells electric energy to retail customers and which may not
own or operate generation assets, and
- a transmission and distribution utility or separate transmission and
distribution companies, which own or operate facilities to transmit or
distribute electricity.
Retail Competition. On June 1, 2001, utilities are required to implement a
pilot project covering 5% of the utility's load in all customer classes. Retail
customers electing to participate in the pilot project will choose their own
REP, but cannot choose the REP affiliated with their existing utility. Beginning
on January 1, 2002, all retail customers will be able to choose their own REP.
The restructuring act freezes base rates of most investor owned electric
utilities until competition begins on January 1, 2002. The affiliated REP of the
utility serving a retail customer on December 31, 2001 may continue service,
unless the customer chooses another REP. Competition in a particular region of
the state may be delayed if the Texas commission determines that the 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, until January 1,
2007, the affiliated REP of a utility must make available a "price to beat" to
residential and small commercial retail 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 customers, the affiliated REP may not charge rates that
are different from the "price to beat" for three years or until 40% of customers
in that class have chosen new REPs. The "price to beat" is subject to adjustment
only in limited circumstances.
The Texas commission will designate an "REP of last resort" for each
service area in the state. The REP of last resort will be required to offer a
standard retail service package for each class of retail customers in a
designated service area at a fixed rate approved by the Texas commission.
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The transmission and distribution affiliate of the utility that was serving
the area before competition begins will provide metering services for
residential retail customers until the later of September 1, 2005 or when 40% of
those retail customers are taking service from unaffiliated REPs. For commercial
and industrial retail customers, metering services will become competitive on
January 1, 2004.
RECOVERY OF STRANDED COSTS FOR CPL AND OTHER TEXAS UTILITIES
The restructuring act allows utilities an opportunity to recover their net,
verifiable, nonmitigatible stranded costs. Stranded costs means the amount by
which the net book value of generation-related assets exceeds the market value
of the assets. Stranded costs are calculated taking into account:
- all of a utility's generation-related assets,
- any above-market purchased power costs, and
- any deferred debit relating to a utility's 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 if required by the provisions of the
restructuring act.
The restructuring act provides that recovery of retail stranded costs by an
electric utility shall be through collection of competition transition charges
imposed on all existing or future retail customers, including the facilities,
premises, and loads of those retail customers within a utility's certificated
service area as it existed on May 1, 1999. The restructuring act allows certain
retail customers to avoid paying transition charges: (1) retail customers with
on-site power production facilities with rated capabilities of 10 megawatts or
less; (2) retail customers whose load has been lawfully served by qualifying
facilities that are fully operational before September 1, 2001, and that made
substantially complete filings for all necessary site-specific environmental
permits by December 31, 1999; and (3) retail customers in dually certificated
service areas that requested to switch providers on or before May 1, 1999, or
were not taking service from the utility on, and do not do so after, May 1,
1999. In addition, the initial tariff provides an exception for the facilities
and premises of retail customers that are not taking retail service from CPL
pursuant to Texas commission orders in certain designated dockets issued prior
to the issuance of the initial financing order.
CPL AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS AND REGULATORY ASSETS
We May Issue Transition Bonds to Recover CPL's Stranded Costs and
Regulatory Assets. The restructuring act authorizes the Texas commission to
issue financing orders approving the issuance of transition bonds, such as the
notes, 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. The proceeds of the transition bonds are to be used solely for
the purpose of reducing the amount of recoverable regulatory assets and stranded
costs of a utility through the refinancing or retirement of debt or equity of
the utility. The transition bonds are secured by and payable from transition
property, which includes the right to impose, collect and receive transition
charges. Transition bonds 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.
Creation of Transition Property. Under the restructuring act, 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 established in the order, are first
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transferred to an assignee, such as us, 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 established in the order, will be
irrevocable and not subject to reduction, impairment, or adjustment by the Texas
commission. The only exception is for periodic true-up adjustments pursuant to
the restructuring act 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 restructuring act, the State of Texas has pledged, and the Texas
Commission will pledge in each financing order, for the benefit and protection
of transition bondholders and the electric utilities covered by the
restructuring act, 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 the issuer of transition bonds. The State's
pledge remains effective 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 restructuring act
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. The purpose of these adjustments is:
- 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 Customers Cannot Avoid Paying Transition Charges. The
restructuring act provides that the transition charges are non-bypassable.
"Non-bypassable" means that a utility collects these charges from all existing
retail customers of a utility and all future retail customers located within the
utility's certificated service area as it existed on May 1, 1999. There are
exceptions for certain categories of existing retail 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 retail customers in a dually-certificated service area
that requested to switch providers on or before May 1, 1999, or were not taking
service from the utility on, and do not do so after, May 1, 1999. In addition,
the initial tariff provides an exception for the facilities and premises of
retail customers that are not taking retail service from CPL pursuant to Texas
commission orders in certain designated dockets issued prior to the issuance of
the initial financing order.
The Restructuring Act Protects the Lien on Transition Property for the
Benefit of Holders of Transition Bonds. The restructuring act 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 value is received by the issuer of
the transition bonds and, on perfection through filing with the Secretary of
State of Texas will be a continuously perfected lien and security interest in
the transition property.
Upon perfection, the statutorily created lien attaches both to transition
property and to all proceeds of transition property, whether the related
transition charges have accrued or not. The
30
<PAGE> 45
restructuring act 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.
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 restructuring act 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 Restructuring Act Characterizes the Transfer of Transition Property as
a True Sale. The restructuring act 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 "Risk Factors -- The Risks
Associated With Potential Bankruptcy Proceedings" in this prospectus.
The Restructuring act Provides a Tax Exemption. The restructuring act
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."
RESTRUCTURING OF CPL
[To Come]
DESCRIPTION OF THE TRANSITION PROPERTY
CREATION OF TRANSITION PROPERTY; FINANCING ORDER
The restructuring act defines transition property as the rights and
interests of an electric utility or successor under a financing order, including
the right to impose, collect and receive transition charges established in the
order. Transition property becomes property at the time that it is first
transferred to an assignee or pledged in connection with the issuance of
transition bonds, such as the notes. The notes will be secured by transition
property, as well as the other collateral described under "Security for the
Notes."
Unless otherwise specified in the accompanying prospectus supplement, in
addition to the right to impose, collect and receive transition charges, each
financing order will:
- authorize the transfer of transition property to us and the issuance of
notes;
- establish procedures for periodic true-up adjustments to transition
charges in the event of overcollection or undercollection;
- implement guidelines for REPs who collect transition charges; and
- provide that the financing order is irrevocable and not subject to
reduction, impairment, or adjustment by further act of the Texas
commission (except for the periodic adjustments to the transition
charges).
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<PAGE> 46
A form of issuance advice letter and a form of tariff will be attached to
each financing order. We will complete and file both documents with the Texas
commission immediately after the pricing of the notes.
The issuance advice letter confirms to the Texas commission the interest
rate and expected amortization schedule for the notes. The issuance advice
letter also establishes that the seller and we have satisfied all requirements
for the issuance of the notes.
The tariff establishes the initial transition charges. It also implements
the minimum requirements for REPs which collect transition charges, the
procedures for periodic adjustments to the transition charges, the procedures
for REPs to remit transition charge payments and the annual procedures allowing
REPs to reconcile remittances with actual charge-offs.
The issuance advice letter and the tariff will become effective in
accordance with their terms. The Texas commission's review of the issuance
advice letter and the tariff will be limited to confirming the arithmetic
accuracy of the calculations. Any terms of the issuance advice letter and tariff
affecting the terms of the notes will be more fully described in the related
prospectus supplement.
Each financing order, along with the transition charges established under
the financing order, is binding on:
- any successor to CPL that provides transmission and distribution service
in CPL's existing service area, (or, if such services are provided by
different entities, the entity that provides wire service directly to
customers),
- any other entity that provides transmission and distribution or wire
services to retail customers within CPL's existing service area,
- each REP that sells electric energy to retail customers located within
CPL's existing service area, and any successor to such REP,
- any other entity responsible for billing and collecting transition
charges on our behalf, and
- any successor to the Texas commission.
TARIFF
The following is a description of the initial tariff to be filed with the
Texas commission pursuant to the initial financing order creating transition
property. We expect that future tariffs will have substantially similar terms.
We will describe any material differences between the initial tariff and future
tariffs in the prospectus supplement relating to the classes or series of notes
subject to such tariffs.
The initial tariff applies primarily to energy consumption and demand of
retail customers taking transmission and/or distribution service from CPL and
its successors and assigns that provide transmission and distribution service,
or if transmission and distribution services are not provided by a single
entity, the successor entity providing wire service directly to retail customers
taking service at facilities, premises or loads located within CPL's
certificated service area as it existed on May 1, 1999. In no event will
transition charges provided for in the tariff be billed for service provided
after 15 years from the issuance of the related notes, or sooner if the notes
are paid in full at an earlier date, and the initial tariff will remain in
effect throughout the period. Delinquencies and end of period billings may be
collected after the fifteen-year period.
Transition Charges. The transition charges will be payable by all existing
retail customers of CPL and all existing and future retail customers located
within CPL's certificated service area as it existed on May 1, 1999. There are
exceptions for certain categories of existing retail 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
32
<PAGE> 47
retail customers in a dually-certificated service area that requested to switch
providers on or before May 1, 1999, or were not taking service from the utility
on, and do not do so after, May 1, 1999, and the facilities and premises of
customers that are not taking retail service from CPL pursuant to Texas
commission orders in certain designated dockets issued prior to the issuance of
the initial financing order. The defined classes of retail customers are:
- Residential -- This service is applicable to customers consisting of
individual private dwellings and individually metered apartments. In
addition, security or flood lighting services provided on residential
end-use customers premises will be included in this rate class.
- Commercial and Small Industrial -- Energy -- This service is applicable
to non-residential customers (1) with annual maximum measured demands
less than 12,500 KVA and (2) whose current rate class for the purpose of
transmission and distribution usage is billed without any demand charges.
In addition, security or flood lighting services provided on applicable
end-use customer's premises will be included in this rate class.
- Commercial and Small Industrial -- Demand -- This service is applicable
to non-residential customers (1) with annual maximum measured demands
less than 12,500 KVA and (2) whose current rate class for the purpose of
transmission and distribution usage requires a demand meter.
- Large Industrial -- Firm -- This service is applicable to non-residential
customers taking non-interruptible service with annual maximum measured
demands equal to 12,500 KVA or more. In addition, firm standby and
maintenance power will be included in this rate class.
- Large Industrial -- Non-firm -- This service is applicable to
non-residential customers taking interruptible service including as
available standby service with annual maximum measured demands equal to
12,500 KVA or more. In addition, as available standby and maintenance
power will be included in this rate class.
- Municipal -- This service is applicable to municipalities, other
utilities, and other public agencies for electric service for the
operation of water supply, sewage, and/or drainage systems serving the
general public supplied at one point of delivery and measured by one
meter. In addition, this service is applicable to political subdivisions
and eleemosynary institutions for traffic lighting, flood lighting and
street lighting service on public streets and highways, in public areas,
and upon the grounds of public schoolyard or educational institutions not
organized for profit.
Because of differences in the tariff rate for each class of retail
customers and the provisions of the restructuring act, the transition charges
payable by each class of retail customers will differ. The restructuring act
requires that transition charges be allocated to each of CPL's classes of retail
customers according to the same formula used to allocate competition transition
charges. Under this formula:
- The servicer will determine the allocation to the residential class by
allocating 50% of all transition charges to all customer classes in
accordance with the methodology used to allocate the costs of the
underlying assets in CPL's most recent commission order addressing rate
design (the "rate design methodology"). The servicer will allocate the
remaining transition charges on the basis of energy consumption of the
classes. For purposes of determining the amount of transition charges to
be allocated to the residential class under this formula, allocations are
made to all classes but only the result for the residential class is
retained.
- After the allocation to the residential class, the servicer will
determine the allocation to the large industrial non-firm class by
allocating the transition charges which have not been allocated to the
residential class as described above to all classes other than the
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<PAGE> 48
residential class in accordance with the rate design methodology and then
multiplying the resulting amount for the large industrial non-firm class
by 150%. For purposes of determining the amount of transition charges to
be allocated to the large industrial non-firm class, allocations are made
to all classes other than the residential class but only the result for
the large industrial non-firm class is retained.
After the allocation to the residential and large industrial non-firm
classes, the servicer will determine the allocation of remaining transition
charges to all classes other than the residential class and the large industrial
non-firm class in accordance with the rate design methodology.
In the case of Commercial and Small Industrial retail customers, demand
metered rates will be applicable to customers in those transmission and
distribution rate classes who are billed on a demand basis. All other retail
customers will be billed on a kilowatt-hour, non-demand metered basis. Each new
retail customer will be assigned to the appropriate customer class.
Transition charges will not change the total rate levels required to be
paid by retail customers through the rate freeze period, which ends January 1,
2002. During the price to beat period, generally from January 1, 2002 until
January 1, 2007, bundled rates, including the transition charges, charged to
residential and small commercial retail customers by the utility's affiliated
REP may not exceed the price to beat.
Each financing order will require that transition charges be reviewed and
adjusted at least annually. Transition charges will be adjusted to correct any
overcollections or undercollections in the preceding 12 months. These
adjustments are intended to ensure the expected recovery of amounts sufficient
to timely provide all payments of debt service and other required amounts and
charges in connection with the notes. The servicing agreement and the financing
order require the servicer to calculate and implement these true-up adjustments
to the transition charges by providing written notice to the Texas commission.
These adjustments will be implemented annually; provided, however, that the
servicer may also be required to implement adjustments to the transition charges
by providing written notice to the Texas commission if, as of the end of the
month prior to any payment date, the servicer determines that
- the aggregate outstanding principal balance of any series of notes
together with amounts on deposit in the reserve subaccount will vary by
more than 5% from the principal balance set forth on the expected
amortization schedule for such payment date, or
- commencing after the payment date specified in the related prospectus
supplement, any series of notes will not have been paid in full as of its
scheduled final payment date.
The servicer will deposit in the collection account estimated payments of
transition charges on each business day. However, if the servicer achieves a
long-term unsecured rating of at least "A" or the equivalent by a nationally
recognized rating agency that has assigned a credit rating to the notes or
provides credit enhancement satisfactory to the rating agencies to assure
remittance to the indenture trustee of the transition charges it collects, and
no servicer default is continuing, the servicer may remit to the collection
account estimated payments of transition charges on a monthly basis.
Billing and Collection Terms and Conditions. Transition charges will be
assessed by the servicer for our benefit as owner of the transition property.
Transition charges will be based on a retail customer's actual consumption of
electricity or electric demand from time to time. Transition charges will be
collected by the servicer, either directly from retail customers until the
introduction of customer choice or indirectly from an REP that collects
transition charges from retail customers after the introduction of customer
choice as part of its normal collection activities. Transition charges will be
deposited by the servicer into the collection account under the terms of the
indenture and the servicing agreement.
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<PAGE> 49
After the introduction of customer choice, the REPs will be responsible for
billing, collecting and paying to the servicer the retail customer's transition
charges. Each REP will be responsible for paying transition charges billed to
retail customers of the REP, whether or not the retail customers pay the REP,
less an amount based on the servicer's systemwide charge-off percentage and
except as otherwise provided in tariffs to be filed with the Texas commission,
subject to limited rights of refund and credit as described in "The Servicing
Agreement -- Retail Electric Providers."
The obligation to pay transition charges is not subject to right of
set-off. Transition charges are "non-bypassable" in accordance with the
provisions set forth in the restructuring act and the financing order. If a
retail customer or an REP pays only a portion of its bill, a pro-rata share
amount of transition charge revenues will be deemed to be collected. The
servicer will allocate any shortfall first, ratably based on the amount owed to
transition charges and the amount owed for other fees and charges, other than
late charges, owed to the servicer, and second, all late charges will be
allocated to the servicer. Prior to the introduction of customer choice, the
servicer may terminate electric service to any retail customer who fails to pay
any transition charges in accordance with the restructuring act and Texas
commission guidelines. After the introduction of customer choice, the servicer
may terminate service to any such customer in accordance with the restructuring
act and Texas commission guidelines and may assume or transfer billing and
collection rights from any REP who fails to pay transition charges in accordance
with the financing order.
In the event that the REP defaults, the servicer will be entitled, within
five business days thereafter, to assume responsibility for billing and
collecting the transition charges or to the extent it does not retain such
ability, to assign responsibility to a new REP that meets the deposit
requirements described above. In addition, the servicer may bill and collect
from retail end-use customers any accrued transition charges which were not
billed by the REP or which were unpaid by the customer.
CPL TRANSITION FUNDING LLC, THE ISSUER
We are a special purpose limited liability company formed on October 28,
1999 under the laws of the State of Delaware. As of the date of this prospectus,
CPL is our sole member and owns all of our equity interests. The limited
liability company agreement restricts us from engaging in other activities. We
do not have any employees, but we will pay our member for administrative
services in accordance with the limited liability company agreement. Our assets
will consist of
- the transition property,
- the other collateral -- collections of transition charges that are
allocated to us, trust accounts held by the indenture trustee and other
credit enhancements acquired or held to ensure payment of the notes, and
- any money distributed by the indenture trustee from the collection
account in accordance with the indenture.
As of the date of this prospectus, we have not carried on any business
activities and have no operating history. Our limited liability company
agreement will be amended and restated immediately prior to the initial issuance
of notes. The form of the amended and restated limited liability company
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part. Our audited financial statements are included as
an exhibit to this prospectus.
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<PAGE> 50
OUR PURPOSE
We have been created for the sole purpose of:
- purchasing and owning the transition property;
- issuing from time to time one or more series of notes, each of which may
be comprised of one or more classes;
- pledging our interest in the transition property and other collateral to
the indenture trustee under the indenture in order to secure the notes;
and
- performing activities that are necessary, suitable or convenient to
accomplish these purposes.
OUR INTERACTION WITH CPL
On the issuance date for each series of notes, except in the event of a
series issued solely to refund outstanding notes, CPL will sell transition
property to us pursuant to a sale agreement. CPL will service the transition
property pursuant to a servicing agreement with us. Any entity which becomes the
successor by merger, sale, transfer, lease, management contract or otherwise to
the major part of the electric transmission and distribution business of CPL may
assume the rights and obligations of CPL under the servicing agreement and the
sale agreement, subject to satisfying the conditions in the servicing agreement
and the sale agreement. If transmission and distribution are not provided by a
single entity after any such transaction, the entity which provides wire service
directly to retail customers taking service at facilities, premises or loads
located in CPL's certificated service area as it existed on May 1, 1999 may
assume CPL's rights and obligations under the servicing agreement and the sale
agreement, subject to satisfying the conditions in the servicing agreement and
the sale agreement. So long as the conditions of any such assumption are met,
CPL will automatically be released from its obligations under the servicing
agreement and the sale agreement.
OUR MANAGEMENT
Our business will be managed by five managers appointed from time to time
by CPL or, in the event that CPL transfers its interest in us, by the new owner.
At all times following the initial issuance of notes at least two of the five
managers must be independent managers who, among other things, are not and have
not been for at least three years from the date of their appointment:
- a direct or indirect legal or beneficial owner of us, our owner or any of
our respective affiliates,
- a relative, supplier, employee, officer, director, manager, contractor or
material creditor of us, our owner or any of our respective affiliates,
or
- a person who controls our owner or its affiliates.
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<PAGE> 51
The remaining managers will be employees or officers of CPL or any new owner.
The managers will devote the time necessary to conduct our affairs. The
following is a list of our managers as of the date of the initial issuance of
notes:
<TABLE>
<CAPTION>
NAME AGE BACKGROUND
- ---- ---- ----------
<S> <C> <C>
R. Russell Davis..................... 43 Mr. Davis is currently controller of CPL,
Public Service Company of Oklahoma, West
Texas Utilities Company, Southwestern
Electric Power Company and Central and South
West Services, Inc. Mr. Davis has served in
these positions since 1994.
Wendy G. Hargus...................... 42 Ms. Hargus is currently treasurer of Central
and South West Corporation, CPL, Public
Service Company of Oklahoma, Southwestern
Electric Power Company, West Texas Utilities
Company and Central and South West Services,
Inc. Ms. Hargus has served in these positions
since 1996. Prior to her current position,
Ms. Hargus served as controller of Central
and South West Corporation from 1993 to 1996.
J. Gonzalo Sandoval.................. 51 Mr. Sandoval is currently general manager and
president of CPL. Mr. Sandoval has served in
this position since February 1998. Prior to
his current position, Mr. Sandoval served as
general manager of CPL from 1996 to 1998 and
vice president, operations and engineering of
CPL from 1993 to 1996.
</TABLE>
The independent managers will begin to serve effective immediately prior to the
closing of the initial issuance of the notes. None of our managers or officers
has been involved in any legal proceedings which are specified in Item 401(f) of
the SEC's Regulation S-K.
THE MANAGERS' COMPENSATION AND LIMITATION ON LIABILITIES
We have not paid any compensation to any manager since we were formed. We
will not compensate the managers other than the independent managers for their
services on our behalf. We will pay the independent managers annual fees from
our revenues and will reimburse them for their reasonable expenses. These
expenses include the reasonable compensation, expenses and disbursements of the
agents, representatives, experts and counsel that the independent managers may
employ in connection with the exercise and performance of their rights and
duties under our limited liability company agreement, the indenture, the sale
agreement and the servicing agreement. The limited liability company agreement
provides that the managers will not be personally liable for any of our debts,
obligations or liabilities. The limited liability company agreement further
provides that, except as described below, to the fullest extent permitted by
law, we will indemnify the managers against any liability incurred in connection
with their services as managers for us if they acted in good faith and in a
manner which they reasonably believed to be in or not opposed to our best
interests. With respect to a criminal action, the managers will be indemnified
unless they had reasonable cause to believe their conduct was unlawful. Unless
ordered by a court, we will not indemnify the managers if a final adjudication
establishes that their acts or omissions involved intentional misconduct, bad
faith, fraud or a knowing violation of the law and were material to the cause of
action. We will pay any indemnification amounts owed to the managers out of
funds in the collection account, subject to the priority of payments described
in "Security for the Notes -- Allocation; Payments."
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<PAGE> 52
WE ARE A SEPARATE AND DISTINCT LEGAL ENTITY
Under our limited liability company agreement, we may not file a voluntary
petition for relief under the Title 11 of the U.S. Code, the Bankruptcy Code,
without a unanimous vote of our managers, including the independent managers.
CPL has agreed that it will not cause us to file a voluntary petition for relief
under the Bankruptcy Code. The limited liability company agreement requires us
to take all reasonable steps to maintain our existence separate from CPL. This
will include:
- taking all reasonable steps to continue our identity as a separate legal
entity;
- making it apparent to third persons that we are an entity with assets and
liabilities distinct from those of CPL, other affiliates of CPL, the
managers or any other person; and
- making it apparent to third persons that, except for federal and certain
other tax purposes, we are not a division of CPL or any of its affiliated
entities or any other person.
Our principal place of business is 1616 Woodall Rodgers Freeway, Dallas,
Texas 75202, and our telephone number is (214) 777- .
THE SELLER AND SERVICER
CPL is an electric utility providing retail service in southern Texas. At
December 31, 1998, CPL provided retail service to approximately 642,000 retail
customers in a service territory covering approximately 44,000 square miles. The
retail customer base includes a mix of residential, commercial and diversified
industrial retail customers. In 1998, CPL sold approximately 23.1 million
kilowatt hours of electricity resulting in operating revenues of $1.406 billion
and operating income of $283 million.
CPL, incorporated under the laws of the State of Texas in 1945, is an
operating subsidiary of Central and South West Corporation. Central and South
West Corporation is a Dallas-based public utility holding company registered
under the Public Utility Holding Company Act of 1935. On December 22, 1997,
Central and South West Corporation and American Electric Power Company, Inc.
announced that their boards of directors had approved a definitive merger
agreement. The shareholders of each company have approved the merger, which is
subject to regulatory approvals and other customary conditions.
CPL is subject to the jurisdiction of the SEC under the Public Utility
Holding Company Act of 1935 with respect to the issuance of securities,
acquisitions and divestitures of utility assets, certain affiliate transactions
and other matters. CPL is regulated by the Texas commission and the Federal
Energy Regulatory Commission. CPL is also regulated by the Nuclear Regulatory
Commission because of its part ownership of the STP nuclear generating units.
CPL CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
CPL's retail customer base consists of four FERC revenue reporting customer
classes: residential, commercial, industrial and other. The revenue reporting
customer classes are broad groups that include accounts with a wide range of
load characteristics served under a variety of rate designs. In order to comply
with the statutory provisions of the restructuring act which state that
transition charges be allocated to each of CPL's classes of retail customers
according to the same formula used to allocate competition transition charges,
CPL, for purposes of allocating the transition charges required to be billed in
order to recover the qualified costs that are the subject of the financing
order, established the six transition charge retail customer classes listed
below and their respective allocation percentages, each of which was approved in
the financing order issued by the Texas commission. For additional information
please refer to "Description of the Transition Property -- Tariff."
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<PAGE> 53
TRANSITION CHARGE RETAIL CUSTOMER CLASSES
<TABLE>
<CAPTION>
TRANSITION CHARGE RETAIL CUSTOMER CLASS ALLOCATION PERCENTAGE
- --------------------------------------- ---------------------
<S> <C>
Residential................................................. %
Commercial and Small Industrial: Energy..................... %
Commercial and Small Industrial: Demand..................... %
Large Industrial: Firm...................................... %
Large Industrial: Non-Firm.................................. %
Municipal................................................... %
</TABLE>
The restructuring act provides that transition charges must be collected
and allocated among retail customers in the same manner as competition
transition charges provided for elsewhere in the restructuring act. The final
amount of stranded cost recovery and the final allocations of competition
transition charges among retail customers, however, may not be known for some
time. Accordingly, the Texas commission could order that the allocation of
transition charges among customer classes set forth in a financing order be
modified to reflect any subsequent Texas commission orders concerning the
allocation of stranded cost recovery. The initial tariff filed to evidence the
transition charges requires the servicer to file a true-up adjustment within 45
days of any such order by the Texas commission in accordance with the same
methodology used to establish the initial transition charges but reflecting the
changed class allocations. Please refer to "Risk Factors -- Servicing
Risks -- Future Adjustments to Transition Charges by Customer Class May Result
in Insufficient Collections."
For the initial transition charges that will be assessed to customers
comprising each of the above transition charge retail customer classes as of the
issuance date for any series of transition bonds, see the related prospectus
supplement.
The tables below show the retail electricity sales, retail electric
revenues and number of retail customers for each of the four revenue reporting
customer classes for the first nine months of 1999 and each of the five
preceding years. Any updated information relating to the tables below will be
set forth in a prospectus supplement. There can be no assurances that the retail
electricity sales, retail electric revenues and number of retail customers or
the composition of any of the foregoing will remain at or near the levels
reflected in the following tables.
INFORMATION BY FERC FORM 1 CUSTOMER CLASS ALLOCATION:
RETAIL ELECTRIC SALES, RETAIL ELECTRIC REVENUES AND RETAIL CUSTOMERS
<TABLE>
<CAPTION>
RETAIL ELECTRIC SALES (GWH): 1994 1995 1996 1997 1998 1999YTD(1)
- ---------------------------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential............... 5,954 6,223 6,680 6,771 7,167
Commercial................ 4,523 4,656 4,773 4,846 5,122
Industrial................ 6,910 7,250 7,610 7,999 8,350
Other..................... 457 465 499 486 553
Total..................... 17,844 18,594 19,562 20,102 21,192
</TABLE>
- ---------------
(1) 1999 Year-to-date information through September 30, 1999.
<TABLE>
<CAPTION>
RETAIL ELECTRIC REVENUES
($000S): 1994 1995 1996 1997 1998 1999YTD(1)
- ------------------------ --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential.............. 474,480 465,478 528,916 541,169 527,081
Commercial............... 368,405 355,238 388,008 400,412 377,492
Industrial............... 271,738 256,223 308,186 330,481 309,543
Other.................... 52,579 (55,551) 3,414 33,759 125,321
Total.................... 1,167,202 1,021,388 1,228,524 1,305,821 1,339,437
</TABLE>
39
<PAGE> 54
<TABLE>
<CAPTION>
AVERAGE RETAIL ELECTRIC
CUSTOMERS: 1994 1995 1996 1997 1998 1999YTD(1)
- ----------------------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential.............. 516,355 526,900 529,100 538,700 550,000
Commercial............... 76,739 77,700 78,000 79,700 82,000
Industrial............... 5,864 5,700 5,700 5,600 5,500
Other.................... 3,577 3,600 3,900 3,900 4,500
Total.................... 602,535 613,900 616,700 627,900 642,000
</TABLE>
- ---------------
(1) 1999 Year-to-date information through September 30, 1999.
INFORMATION BY TRANSITION CHARGE RETAIL CUSTOMER CLASS ALLOCATION:
RETAIL ELECTRIC SALES, BILLED RETAIL ELECTRIC REVENUES AND RETAIL CUSTOMERS
<TABLE>
<CAPTION>
RETAIL ELECTRIC SALES (GWH): 1994 1995 1996 1997 1998 1999YTD(1)
---------------------------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential.......................
Commercial and Small Industrial:
Energy..........................
Commercial and Small Industrial:
Demand..........................
Large Industrial: Firm............
Large Industrial: Non-Firm........
Municipal.........................
Total.............................
</TABLE>
- ---------------
(1) 1999 Year-to-date information through September 30, 1999.
<TABLE>
<CAPTION>
BILLED RETAIL ELECTRIC REVENUES ($000)(1): 1994 1995 1996 1997 1998 1999 YTD(2)
- ------------------------------------------ ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Residential..........................
Commercial and Small Industrial: Energy...
Commercial and Small Industrial: Demand...
Large Industrial: Firm...............
Large Industrial: Non-Firm...........
Municipal............................
Total................................
</TABLE>
- ---------------
(1) The Billed Retail Electric Revenue includes only the billed base and fuel
revenue by transition charge customer class. It does not include unbilled
revenue or revenue related taxes.
(2) 1999 Year-to-date information through September 30, 1999.
<TABLE>
<CAPTION>
AVERAGE RETAIL ELECTRIC CUSTOMERS: 1994 1995 1996 1997 1998
---------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Residential..................................
Commercial and Small Industrial: Energy......
Commercial and Small Industrial: Demand......
Large Industrial: Firm.......................
Large Industrial: Non-Firm...................
Municipal....................................
Total........................................
</TABLE>
FORECASTING ELECTRICITY CONSUMPTION
CPL conducts sales forecast variance analyses on a monthly basis to monitor
how well forecasts track actual consumption, by comparing forecasts to weather
normalized consumption,
40
<PAGE> 55
and thus determine the accuracy of its short-term forecasting models. Using this
process, CPL establishes the need for revised megawatt-hour sales projections
throughout the year. Otherwise, CPL normally revises its short-term
megawatt-hour sales forecasts on a quarterly basis. CPL usually adopts the
forecast produced during the third quarter for the following year as its
official megawatt-hour sales, usage and number of customers forecasts. These
short-term projections usually extend for two years. CPL also produces
longer-term forecasts of number of customers, energy consumption, usage and peak
demand. These long-term forecasts are updated every year.
CPL has opted for the use of Box-Jenkins time series methods for short-term
forecasting. The advantages of these methods over econometric methods are of a
statistical nature and of primary importance in the short-term horizon. CPL uses
univariate ARIMA models and some variations of ARIMA to arrive at the forecast
for the number of customers, and regression models with time series errors to
forecast the megawatt-hours per customer. The company also uses state space
models. In general, these time series methods extract the past patterns and
extrapolate them into the future by using sophisticated statistical processes.
The regression models with time series errors contain only cooling and
heating-degree days as explanatory variables, as contrasted with econometric
models which usually include several variables of an economic nature, such as
income, employment, electricity price, and other economic variables that are
thought to influence electricity sales.
An important consideration in CPL's decision to utilize time series methods
is that the short-term trends and cycles in electricity consumption are often
the result of customer behavior reacting to abnormal changes in weather, changes
in season, and short term contingencies such as fuel price shocks and emergency
conservation measures. Using the cause and effect models containing economic
drivers mainly implies or suggests long-term adjustments in the capital stock
when, usually, the short-term infrastructure tends to remain fairly constant.
ANNUAL FORECAST VARIANCE FOR RETAIL ELECTRIC SALES (GWH) (1)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999 YTD(2)
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Residential
Forecast.........................
Actual...........................
Variance ($).....................
Variance (%).....................
Commercial
Forecast.........................
Actual...........................
Variance ($).....................
Variance (%).....................
Industrial
Forecast.........................
Actual...........................
Variance ($).....................
Variance (%).....................
Other Retail
Forecast.........................
Actual...........................
Variance ($).....................
Variance (%).....................
TOTAL
Forecast.........................
Actual...........................
Variance ($).....................
Variance (%).....................
</TABLE>
41
<PAGE> 56
- ---------------
(1) Variance ($) amounts may not be exact due to rounding.
(2) 1999 Year-to-date information through September 30, 1999.
During the last five years, there has been no discernible trend in the
variance between projected retail electric sales and actual retail electric
sales.
BILLING AND COLLECTIONS
Credit Policy. Under Texas law, CPL is generally required to provide
electric service to all retail customers in its service area. CPL's review of
the credit history of a new applicant for electric service generally consists of
a review to determine if the applicant has previously received service from CPL
and, if so, whether there are any delinquent billed amounts outstanding. CPL
relies on information provided by the applicant, and on its customer information
system, to determine whether CPL has previously served the customer and whether
any delinquent billed amounts are outstanding. In accordance with the Texas
commission's regulations, deposits may be required from certain applicants for
service or existing customer accounts to protect CPL against losses. Accounts
from which deposits are most frequently obtained are new commercial and
industrial customers (i.e., applicants with limited or no credit history), and
residential customers with poor payment histories (as defined in the Texas
commission's regulations). The maximum allowable amount of the deposit is
one-sixth of the projected annual billings to the customer. The deposit will be
refunded to a residential customer after one year if the customer has not been
disconnected for non-payment and has not paid a bill after the due date more
than twice during the year. Under the same circumstances, the deposit will be
refunded after two years for a non-residential customer. Deposits are typically
credited to a customer's account automatically, but may be refunded upon
request.
CPL may change its credit policies and procedures, consistent with Texas
commission guidelines, from time to time. It is expected that any change would
be designed to enhance CPL's ability to make timely recovery of amounts billed
to customers.
Billing and Meter Reading. CPL bills its customers once every 26 to 34
days, with approximately an equal number of bills being distributed each
business day. For the year ending December 31, 1998, CPL mailed out an average
of 36,470 bills on each business day to customers in its various customer
categories. Accounts with potential billing errors are held for review. This
review examines accounts that have abnormally high or low bills, potential meter
reading errors, safety problems as identified by the meter-reading staff and
possible meter malfunctions.
Billings for electric service, except for unmetered electric service, are
based upon registration of meters furnished, installed and maintained by CPL.
All billings are tariff driven and a customer must meet the availability of that
tariff to be billed under it. Kilowatt demand is available to non-residential
customers and is stated in the tariff.
Customer bills are due 16 calendar days after issuance or, in the case of
state agencies subject to Texas Governmental Code, Chapter 2251, 30 days from
receipt. If the due date falls on a holiday or weekend, the due date for payment
purposes shall be the next business day. A bill not paid on or before the due
date is considered delinquent. These billing guidelines hold constant for all
customer classes.
CPL also has an alternative payment plan that allows residential and
commercial customers who have satisfactory credit the opportunity for a monthly
budget payment. CPL currently has 54,990 customers on this plan.
Collection Process. CPL receives the majority of its payments via the U.S.
mail and paystations; however, other payment options are also available. These
options include electronic
42
<PAGE> 57
payments, electronic fund transfers, credit/debit cards and direct payment at
field office locations.
CPL's collection process begins when balances are unpaid for 17 days or
more from the billing date. At that time CPL begins collection activities
ranging from delinquency notice mailings and telephone calls to termination of
electric service. CPL also uses collection agencies and legal collection experts
as needed throughout this process.
CPL tracks credit history based upon a customer's payment habits over the
past twelve months. A customer who is considered as having a poor payment
history is sent a disconnection notice 17 days after an unpaid bill is issued.
In late 1999, CPL installed a new calling system that allows CPL to attempt to
contact the customer via telephone in order to discuss payment options within 29
days after the date the delinquent bill was issued. If the customer cannot be
reached and payment is still not made, the customer may be disconnected
approximately 30 days after billing. A customer in good standing with the
Company who has made payment in a timely fashion over the past twelve months
will receive a reminder notice 17 days after an unpaid bill is mailed. It is not
until 17 days following a second bill that such a customer would receive a
disconnection notice and be subject to the disconnection time frame outlined for
a customer with a poor payment history.
If a customer requests termination of service, or if a customer does not
make a payment after service is canceled, a final bill is sent. A customer has
16 days to pay a final bill after which point it becomes delinquent. When a
final bill becomes delinquent, three collection letters are mailed to the
customer, one every eight business days. Unpaid bills are charged-off between 90
and 120 days after the disconnection date. The charged-off account is then
transferred to a collection agency and the major credit bureaus are notified.
Under certain circumstances, customers may enter into deferred payment
arrangements that allow the customer to make partial payments or to extend an
arrearage. A customer's electric service would not be terminated if the customer
has entered into one of these payment agreements and is abiding by the
agreement. In addition, CPL may not terminate electric service under certain
conditions, such as when there is a "heat advisory day" as issued by the
National Weather Service. When a "heat advisory day" is announced, CPL cannot
terminate service for non-payment on that day or on the two following days.
There were experienced a total of 23 heat advisory days in 1999. Additionally,
CPL may not disconnect power when the previous day's highest temperature did not
exceed 32 degrees Fahrenheit, and the temperature is predicted to remain at that
level for the next 24 hours as determined by the National Weather Service.
CPL may change its collection policies and procedures, consistent with
Texas commission guidelines, from time to time; however, it is expected that any
changes would be designed to enhance CPL's ability to make timely recovery of
amounts billed to customers.
Restoration of Service. Before restoring service that has been shut-off for
non-payment, CPL has the right to require the payment of all of the following
charges: (i) amounts owing on an account including the amount of any past-due
balance for charges for which CPL may terminate electric service if they are
unpaid and legal noticing requirements were met prior to service termination,
(ii) a credit deposit, if applicable; (iii) any miscellaneous charges associated
with the reconnection of service (i.e., reconnection charges, field collection
charges and/or returned check charges); (iv) any charges assessed for unusual
costs incidental to the termination or restoration of service which have
resulted from the customer's action or negligence; and (v) any unpaid closing
bills from other accounts in the name of the customer of record.
CPL may change its restoration of service policies and procedures,
consistent with Texas commission guidelines, from time to time. It is expected
that any change would be designed to enhance CPL's ability to make timely
recovery of amounts billed to customers.
43
<PAGE> 58
LOSS EXPERIENCE
CPL's policy is to charge-off a finaled account approximately 90 to 120
days after the final bill has been issued. The final bill is generally issued
from 35 to 90 days from issuance of the original bill. The following table sets
forth information relating to CPL's annual net charge-offs for retail customers
for the years 1994 through 1999:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999 YTD(1)
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Billed Retail Electric Revenues
($000)(2)..............................
Net Charge-offs ($000).................
Percentage of Billed Revenue(%)........
</TABLE>
- ---------------
(1) 1999 Year-to-date information through September 1999.
(2) Billed Retail Electric Revenues includes billed base, fuel and revenue
related taxes.
From 1994 through September 1999, the annual net charge-offs for all retail
customers have trended up due to increases in revenue and the waiver of
residential deposits. Prior to 1994, CPL decided to waive the deposit
requirement for residential customers unless the customer owed a previous bad
debt upon returning to the CPL service territory. During 1997, CPL changed its
deposit requirements so that any new residential customer who did not have a
proven or a good credit history would be required to make a deposit. In
addition, CPL added 11 additional credit collectors. As a result, charge-offs in
1998 declined. In 1999, the charge-offs increased due to the heat moratorium in
1998 in which CPL did not terminate customers' service for non-payment. In
addition, a large industrial customer of CPL went bankrupt in 1999. During this
period, the annual ratios of net charge-offs to [billed] retail electric
revenues have been between [ ].
DAYS SALES OUTSTANDING
The following table sets forth information relating to the average number
of days retail customer bills remain outstanding:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999 YTD(1)
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Average Days Sales
Outstanding.................
</TABLE>
- ---------------
(1) 1999 Year-to-date information through September 1999.
From 1994 to through September 1999, average number of days that retail
customers' bills have remained outstanding has been relatively stable, although
there has been a slight upward trend due to [ ].
44
<PAGE> 59
DELINQUENCIES
The tables below set forth the delinquency and net write-off experience
with respect to payments to CPL by customer class.
DELINQUENCIES AS A PERCENTAGE OF TOTAL BILLED REVENUES
<TABLE>
<CAPTION>
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 9/30/99
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Residential
30-59 days..............
60-89 days..............
90+ days................
Total...................
Commercial and Small
Industrial: Energy
30-59 days..............
60-89 days..............
90+ days................
Total...................
Commercial and Small
Industrial: Demand
30-59 days..............
60-89 days..............
90+ days................
Total...................
Large Industrial: Firm
30-59 days..............
60-89 days..............
90+ days................
Total...................
Large Industrial: Non-
Firm..................
30-59 days..............
60-89 days..............
90+ days................
Total...................
Municipal
30-59 days..............
60-89 days..............
90+ days................
Total...................
Grand Total.............
</TABLE>
45
<PAGE> 60
THE SALE AGREEMENT
The following summary describes the material terms and provisions of the
sale agreement pursuant to which we will purchase transition property from the
seller. The form of the sale agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part. This summary is
subject to the provisions of the sale agreement.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
From time to time the seller will offer and sell transition property to us,
subject to the satisfaction of the conditions specified in the sale agreement
and the indenture. We will finance each purchase of transition property through
the issuance of notes. On each date of issuance of a series of notes, the seller
will sell to us, without recourse, its entire right, title and interest in and
to the transition property to be transferred to us on that date. The transition
property will include all of the seller's rights under the financing order
related to such transition property, including the irrevocable right to receive
transition charges in an amount sufficient to recover the qualified costs
approved in that financing order.
In accordance with the restructuring act, upon the receipt of value for the
notes and the filing of notice with the Texas Secretary of State, the transfer
of transition property will be perfected as against all third persons, including
judicial lien creditors.
CONDITIONS TO THE SALE OF TRANSITION PROPERTY
Our obligation to purchase transition property on any transfer date is
subject to the satisfaction or waiver of each of the following conditions:
- on or prior to the transfer date, the seller must deliver to us a duly
executed bill of sale identifying transition property to be conveyed on
that date;
- on or prior to the transfer date, the seller must have received a
financing order from the Texas commission;
- as of the transfer date, the seller may not be insolvent and may not be
made insolvent by the sale of transition property to us, and the seller
may not be aware of any pending insolvency with respect to itself;
- as of the transfer date, the representations and warranties of the seller
in the sale agreement must be true and correct, the seller may not have
breached any of its covenants in the sale agreement, and the servicer may
not be in default under the servicing agreement;
- as of the transfer date, we must have sufficient funds available to pay
the purchase price for transition property to be conveyed and all
conditions to the issuance of one or more series of notes intended to
provide the funds to purchase that transition property must have been
satisfied or waived;
- on or prior to the transfer date, the seller must have taken all action
required to transfer ownership of transition property to be conveyed to
us on the transfer date, free and clear of all liens other than liens
created by us pursuant to the indenture; and we or the servicer, on our
behalf, must have taken any action required for us to grant the indenture
trustee a first priority perfected security interest in the collateral
and maintain that security interest as of the transfer date;
- in the case of a sale of transition property after the initial issuance
of notes only, on or prior to the transfer date, the seller must provide
timely notice to us and to the rating agencies;
- the seller must deliver appropriate opinions of counsel to us and to the
rating agencies;
46
<PAGE> 61
- the seller must deliver an opinion of tax counsel or a ruling from the
IRS regarding the tax treatment of the transition property and the
related notes to the effect that, for federal income tax purposes, (1)
the issuance of the related financing order authorizing the collection of
transition charges and transfer of the transition property will not
result in gross income for the seller and (2) in the case of an
acquisition of transition property after the initial issuance of notes
only, that the acquisition will not adversely affect the characterization
of the then outstanding notes of any series as obligations of the seller;
- on and as of the transfer date, our limited liability company agreement,
the servicing agreement, the sale agreement, the indenture, the
restructuring act, any issued financing order and any tariff authorizing
the collection of transition charges must be in full force and effect;
- each rating agency has notified us, the servicer and the indenture
trustee that the acquisition of the transition property will not result
in a reduction or withdrawal of the then-current rating of any
outstanding class of notes; and
- the seller must deliver to us and to the indenture trustee an officers'
certificate confirming the satisfaction of each of these conditions.
SELLER REPRESENTATIONS AND WARRANTIES
In the sale agreement, the seller will represent and warrant to us, as of
each transfer date, among other things, that:
(1) no portion of the transferred transition property has been sold,
transferred, assigned or pledged or otherwise conveyed by the seller to any
person other than us and immediately prior to the sale of the transition
property, the seller owns the transition property free and clear of all
liens and rights of any other person, and no offsets, defenses or
counterclaims exist or have been asserted with respect to the transition
property;
(2) on the transfer date, immediately upon the sale under the sale
agreement, the transition property transferred on the transfer date will be
validly transferred and sold to us, we will own the transferred transition
property free and clear of all liens (except for liens created in your
favor by the restructuring act and the basic documents) and all filings
(including filings with the Secretary of State of Texas under the
restructuring act) necessary in any jurisdiction to give us a perfected
ownership interest (subject to any lien created by us under the basic
documents or the restructuring act) in the transferred transition property
will have been made;
(3) at the transfer date, all written information, as amended or
supplemented from time to time, provided by the seller to us with respect
to the transition property (including the expected amortization schedule,
the financing order and the issuance advice letter relating to the
transition property) is true and correct in all material respects;
(4) under the laws of the State of Texas (including the restructuring
act) and the U.S. in effect on the transfer date:
-- the financing order pursuant to which the rights and interests of
the seller, including the right to impose, collect and receive the
transition charges, in and to the transition property have been
created has become final, is not subject to appeal and is in full
force and effect;
-- as of the issuance of the related notes, those notes are entitled
to the protection provided in the restructuring act and,
accordingly, the transition property and the related financing
order, transition charges and issuance advice letter are not
revocable by the Texas commission;
47
<PAGE> 62
-- as of the issuance of the related notes, the related tariff is in
full force and effect and is not subject to modification by the
Texas commission except for true-up adjustments made in accordance
with the restructuring act;
-- neither the State of Texas nor the Texas commission may take or
permit any action that would impair the value of the transition
property, or, except for true-up adjustments made in accordance
with the restructuring act, reduce, alter, or impair the
transition charges relating to such transition property until the
principal, interest and premium, and any other charges incurred
and contracts to be performed in connection with the related notes
have been paid and performed in full (except for temporary
impairments necessary to advance a significant and legitimate
public purpose);
-- the process by which the financing order was approved and the
financing order, issuance advice letter and tariff comply with all
applicable laws and regulations;
-- the issuance advice letter and the tariff have been filed in
accordance with the related financing order; and
-- no other approval, authorization, consent, order or other action
of, or filing with any governmental authority is required in
connection with the creation of the transition property
transferred on the transfer date, except those that have been
obtained or made;
(5) based on information available to the seller on the transfer date,
the assumptions used in calculating the transition charges as of the
transfer date are reasonable and are made in good faith;
(6) upon the effectiveness of the financing order, the issuance advice
letter and the tariff and the transfer of the transition property to us:
-- the rights and interests of the seller under the financing order,
including the right to impose, collect and receive the transition
charges established in the financing order, become transition
property;
-- the transition property constitutes a present property right;
-- the transition property includes the right, title and interest of
the seller in the financing order and the transition charges, the
right to impose, collect and obtain periodic adjustments of the
transition charges, and the rates and other charges established by
the financing order and all revenues, claims, payments, money or
proceeds of or arising from the transition charges; and
-- the owner of the transition property is legally entitled to
collect payments in respect of the transition charges in the
aggregate sufficient to pay the interest on and principal of the
related notes, to pay the fees and expenses of servicing the
notes, to replenish the capital subaccount to the required capital
level and to fund the overcollateralization subaccount to the
required overcollateralization level until the notes are paid in
full or until the last date permitted for the collection of
payments in respect of the transition charges under the financing
order, whichever is earlier;
(7) the seller is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation, with
requisite corporate power and authority to own its properties as owned on
the transfer date and to conduct its business as conducted by it on the
transfer date, to obtain financing orders and own, sell and transfer
transition property and to execute, deliver and perform the terms of the
sale agreement;
48
<PAGE> 63
(8) the seller is duly qualified to do business 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 requires such
qualifications, licenses or approvals except where a failure to qualify or
obtain such licenses and approvals would not be reasonably likely to have a
material adverse effect on the business, operations, assets, revenues or
properties of the seller;
(9) the execution, delivery and performance of the sale agreement have
been duly authorized by all necessary corporate action on the part of the
seller;
(10) the sale agreement constitutes a legal, valid and binding
obligation of the seller, enforceable against it in accordance with its
terms, subject to applicable insolvency, reorganization, moratorium,
fraudulent transfer and other laws relating to or affecting creditors' or
secured parties' rights generally from time to time in effect and to
general principles of equity, regardless of whether considered in a
proceeding in equity or law;
(11) the consummation of the transactions contemplated by the sale
agreement do not conflict with the seller's corporate charter or by-laws or
any indenture, agreement or material instrument to which the seller is a
party or by which it is bound, result in the creation or imposition of any
lien upon the seller's properties pursuant to the terms of any such
indenture, agreement or material instrument (other than any that may be
granted under the basic documents or any liens created by us pursuant to
the restructuring act) or violate any existing law or any existing order,
rule or regulation applicable to the seller so as to adversely affect the
seller, us, the noteholders or the noteholders' interest in the transferred
transition property;
(12) except as disclosed to us, no proceeding is pending and, to the
seller's knowledge, no proceeding is threatened and no investigation is
pending or threatened before any governmental authority:
-- asserting the invalidity of the restructuring act, any financing
order, the notes of any series and the basic documents;
-- seeking to prevent the issuance of the notes of the relevant
series or the consummation of any of the transactions contemplated
by any of the basic documents;
-- seeking a determination that might materially and adversely affect
the performance by the seller of its obligations under, or the
validity or enforceability of, the restructuring act, any
financing order, the notes of any series or the basic documents;
or
-- seeking to adversely affect the federal income tax or state income
or franchise tax classification of the notes of any series as
debt; and
(13) no governmental approvals, authorizations, consents, orders or
other actions or filings, other than filings under the Uniform Commercial
Code, are required for the seller to execute, deliver and perform its
obligations under the sale agreement except those which have previously
been obtained or made or are required to be made by the servicer in the
future.
The seller makes no representation or warranty that any amounts actually
collected in respect of the transition charges will in fact be sufficient to
meet payment obligations on the notes or that assumptions made in calculating
the transition charges will in fact be realized.
Certain of the representations and warranties that the seller makes in the
sale agreement involve conclusions of law. The seller makes those
representations and warranties in order to reflect the understanding of the
basis on which we are issuing the notes and to reflect the
49
<PAGE> 64
agreement that if this understanding proves to be incorrect, the seller will be
obligated to indemnify us.
COVENANTS OF THE SELLER
In the sale agreement, the seller makes the following covenants:
- Subject to its right to assign its rights and obligations under the sale
agreement, so long as any of the notes of any series are outstanding, the
seller will keep in full force and effect its corporate existence under
the laws of the jurisdiction of its organization, and obtain and preserve
its qualifications to do business in those jurisdictions necessary to
protect the validity and enforceability of the basic documents or to the
extent necessary to perform its obligations under the basic documents.
- Except for the conveyances under the sale agreement or any lien under the
restructuring act or for the benefit of us (as issuer), the noteholders
or the indenture trustee, the seller will not sell, pledge, assign or
transfer, or grant, create, or incur any lien on, any of the transferred
transition property and the seller will defend the right, title and
interest of us and of the indenture trustee in, to and under the
transferred transition property against all claims of third parties
claiming through or under the seller. The seller also covenants that, in
its capacity as seller, it will not at any time assert any lien against,
or with respect to, any of the transferred transition property.
- If the seller receives any payments in respect of the transition charges
or the proceeds thereof when it is not acting as the servicer, the seller
agrees to pay all those payments to the servicer and to hold such amounts
in trust for us prior to such payment.
- The seller will notify us and the indenture trustee promptly after
becoming aware of any lien on any of the transferred transition property,
other than the conveyances under the sale agreement, or any lien under
the basic documents or under the restructuring act for our benefit or for
the benefit of the noteholders.
- The seller agrees to comply with its organizational or governing
documents and all laws, treaties, rules, regulations and determinations
of any governmental authority applicable to it, except to the extent that
failure to so comply would not adversely affect our or the indenture
trustee's interests in the transferred transition property or under the
basic documents to which the seller is a party or the seller's
performance of its obligations under the basic documents.
- So long as any of the notes are outstanding, the seller will treat the
notes as debt for all purposes and specifically as our debt, other than
for financial accounting or tax purposes or as required under the Public
Utility Holding Company Act.
- So long as any of the notes are outstanding:
-- The seller will indicate in its financial statements that we and not
the seller are the owner of the transferred transition property; and
-- The seller will not own or purchase any notes.
- The seller agrees that, upon the sale by the seller of transition
property to us pursuant to the sale agreement
-- to the fullest extent permitted by law, we will have all of the rights
originally held by the seller with respect to the transition property,
including the right (subject to the terms of the servicing agreement)
to exercise any and all rights and remedies to collect any amounts
payable by any retail customer or REP in respect of the transferred
transition property, notwithstanding any objection or direction to the
contrary by the seller, and
50
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-- any payment by any retail customer or REP to us will discharge that
customer's or REP's obligations in respect of the transferred
transition property to the extent of that payment, notwithstanding any
objection or direction to the contrary by the seller.
- So long as any of the notes are outstanding:
-- the seller will not make any statement or reference in respect of the
transferred transition property that is inconsistent with our ownership
interest (other than for financial accounting or tax purposes or as
required under the Public Utility Holding Company Act), and
-- the seller will not take any action in respect of the transferred
transition property except solely in its capacity as servicer pursuant
to the servicing agreement or as otherwise contemplated by the basic
documents.
- The seller will execute and file the filings required by law to fully
preserve, maintain and protect our ownership interest in the transferred
transition property. The seller will 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 restructuring act,
any financing order or any issuance advice letter. The seller also agrees
to take those legal or administrative actions that may be reasonably
necessary to protect us from claims, state actions or other actions or
proceedings of third parties which, if successfully pursued, would result
in a breach of any representation or warranty of the seller in the sale
agreement. We will reimburse the seller for the costs of any actions or
proceedings out of funds in the collection account as an operating
expense.
- Even if the sale agreement or the indenture is terminated, the seller
will not, prior to the date which is one year and one day after the
termination of the indenture, petition or otherwise invoke or cause us to
invoke the process of any court or government authority for the purpose
of commencing or sustaining a case against us under any federal or state
bankruptcy, insolvency or similar law, appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official or
any substantial part of our property, or ordering the winding up or
liquidation of our affairs.
- So long as any of the notes are outstanding, the seller will, and will
cause each of its subsidiaries to, pay all material taxes, assessments
and governmental charges imposed upon it or any of its properties or
assets or with respect to any of its franchises, business, income or
property before any penalty accrues if the failure to pay any such taxes,
assessments and governmental charges would, after any applicable grace
periods, notices or other similar requirements, result in a lien on the
transferred transition property.
- The seller agrees not to withdraw the filing of any issuance advice
letter with the Texas commission.
- The seller will make all reasonable efforts to keep each tariff in full
force and effect.
- Subject to its right to assign its rights and obligations under the sale
agreement, the seller will continue to provide wire service directly to
retail customers so long as the notes are outstanding.
- Promptly after obtaining knowledge of any breach of its representations
and warranties in the sale agreement, the seller will notify us and the
rating agencies of the breach.
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INDEMNIFICATION
The seller will indemnify and hold harmless us and the indenture trustee
(for your benefit) and any swap counterparty and any of our respective officers,
directors, employees and agents against
- any amounts of principal and interest on the notes not paid when due,
- any deposits required to be made by or to us under the basic documents or
any financing order which are not made when required, and
- any liabilities, obligations, losses, claims, damages, payment, costs or
expenses incurred by any of these persons
as a result of
- the seller's willful misconduct or gross negligence in the performance of
its duties or observance of the covenants under the sale agreement,
- a breach by the seller of the representations and warranties identified
in items 1, 2, 4, 6, 7, 9, 10 and 11 under "-- Seller Representations and
Warranties" above,
- a breach in any material respect by the seller of any of its other
representations and warranties in the sale agreement.
The seller will also indemnify and hold harmless us and the indenture
trustee (for itself and for your benefit) and any of our respective officers,
directors, employees and agents against any and all taxes, except taxes imposed
on you as a result of your ownership of the notes, that may be imposed on or
asserted against us or the indenture trustee under existing law as of the
applicable transfer date as a result of either the sale of transition property
to us or the issuance by us of notes.
In addition, the seller will indemnify and hold harmless the indenture
trustee (for itself), our independent managers and any of our respective
affiliates, officers, directors, employees and agents against any and all
liabilities, obligations, losses, claims, damages, payment, costs or expenses
incurred by any of these parties as a result of
- the seller's willful misconduct or gross negligence in the performance of
its duties or observance of its covenants under sale agreement, or
- the seller's breach in any material respect of any of its representations
and warranties contained in the sale agreement,
except to the extent of losses either resulting from the willful misconduct, bad
faith or gross negligence of any of the indemnified persons or resulting from a
breach of a representation or warranty made by any of the indemnified persons in
the indenture or any related documents that gives rise to the seller's breach.
The seller will not be in breach of any representation or warranty under
the sale agreement as a result of a change in law by means of any legislative
enactment, constitutional amendment or voter initiative.
The indemnification provided for in the sale agreement will survive the
termination of the sale agreement and will rank in priority with other general,
unsecured obligations of the seller.
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AMENDMENT
The sale agreement may be amended with ten business days' prior written
notice to the ratings agencies and the consent of the indenture trustee, but
without the consent of the noteholders,
- to cure any ambiguity,
- to correct or supplement any provision in the sale agreement,
- for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the sale agreement, or
- of modifying in any manner the rights of noteholders,
provided that the action will not, as certified in a certificate of an officer
of the seller delivered to us and the indenture trustee, adversely affect in any
material respect the interest of any holder of notes then outstanding. The sale
agreement may also be amended by the seller and us with ten business days' prior
written notice to the rating agencies and with the consent of the indenture
trustee and the holders of notes evidencing at least a majority in principal
amount of the then outstanding notes for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the sale
agreement or of modifying in any manner the rights of noteholders.
ASSUMPTIONS OF THE OBLIGATIONS OF THE SELLER
Any entity which becomes the successor by merger, sale, transfer, lease,
management contract or otherwise to the major part of the electric transmission
and distribution business of CPL may assume the rights and obligations of CPL
under the sale agreement. If transmission and distribution are not provided by a
single entity after any such transaction, the entity which provides wire service
directly to retail customers taking service at facilities, premises or loads
located in CPL's certificated service area as it existed on May 1, 1999 may
assume CPL's rights and obligations under the sale agreement. So long as the
conditions of any such assumption are met, CPL will automatically be released
from its obligations under the sale agreement. The conditions include that,
immediately after giving effect to the transaction, no servicer default under
the servicing agreement may have occurred or be continuing.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
True Sale. The seller will represent and warrant in the sale agreement that
each transfer of transition property to us is a valid sale and assignment of the
transition property. The seller will also represent and warrant that it will
take the appropriate actions under the restructuring act to perfect each sale.
The restructuring act provides that the transactions described in the sale
agreement will constitute a sale of transition property to us, and both we and
the seller will treat the transactions as a sale under applicable law. However,
for federal income tax purposes we will not be considered a taxable entity so
the transactions will be treated as occurring between two divisions of CPL,
rather than between CPL and a separate entity.
Should the transfer of any transition property to us be recharacterized as
a borrowing by the seller, under the sale agreement the seller grants to us a
security interest in the transferred transition property. The seller also
covenants under the sale agreement that it will take appropriate actions to
perfect the security interest, although the seller takes the position that it
has no rights in the transition property to which a security interest could
attach.
Under the restructuring act and the financing order, once the seller
transfers transition property to us, the transition property constitutes a
present property right that continuously exists as property for all purposes.
Nonetheless, if the seller were to become the debtor in a
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bankruptcy case, a creditor of, or a bankruptcy trustee for, the seller, or the
seller itself as debtor in possession, may attempt to take the position that,
because the payments based on the transition charge are usage-based charges,
transition property comes into existence only as retail customers use
electricity. If a court were to adopt this position, we cannot assure you that
either our property interest in the transition property or the statutory lien
created by the restructuring act would be valid as to electricity consumed after
the commencement of a bankruptcy case by or against the seller. Please refer to
"Risk Factors -- The Risks Associated with Potential Bankruptcy Proceedings" in
this prospectus.
Substantive Consolidation. We have taken steps together with CPL, as the
seller, to reduce the risk that in the event the seller or an affiliate of the
seller were to become the debtor in a bankruptcy case, a court would order that
our assets and liabilities be substantively consolidated with those of the
seller or an affiliate. These steps include the fact that we are a separate,
special purpose limited liability company, and our organizational documents
provide that we will not commence a voluntary bankruptcy case without the
unanimous affirmative vote of all of our managers, including the managers
independent of the seller. Nonetheless, these steps may not be completely
effective, and thus if the seller or an affiliate of the seller were to become a
debtor in a bankruptcy case, a court may order that our assets and liabilities
be consolidated with those of the seller or an affiliate. This could result in
delays or reductions in payments on the notes. Other factors that may tend to
support consolidation include the seller's ownership of us, the designation of
officers or employees of the seller as managers, other than the independent
managers, and the existence of indemnities by the seller for some liabilities.
Please refer to "Risk Factors -- The Risks Associated with Potential Bankruptcy
Proceedings" in this prospectus.
Estimation of Claims; Challenge to Indemnity Claims. If the seller were to
become a debtor in a bankruptcy case, claims, including indemnity claims, by us
against the seller under the sale agreement and the other documents executed in
connection with the sale agreement would be unsecured claims and would be
subject to being discharged in the bankruptcy case. In addition, a party in
interest in the bankruptcy may request that the bankruptcy court estimate any
contingent claims that we have against the seller. That party may then take the
position that these claims should be estimated at zero or at a low amount
because the contingency giving rise to these claims is unlikely to occur. If the
seller were to become a debtor in a bankruptcy case and the indemnity provisions
of the sale agreement were triggered, a party in interest in the bankruptcy
might challenge the enforceability of the indemnity provisions. If a court were
to hold that the indemnity provisions were unenforceable, we would be left with
a claim for actual damages against the seller based on breach of contract
principles. The actual amount of these damages would be subject to estimation
and/or calculation by the court. We cannot give any assurance as to the result
if any of the above-described actions or claims were made. Furthermore, we
cannot give any assurance as to what percentage of their claims, if any,
unsecured creditors would receive in any bankruptcy proceeding involving the
seller.
Enforcement of Rights by Indenture Trustee. Upon an event of default under
the indenture, the restructuring act permits the indenture trustee to enforce
the security interest in the transition property in accordance with the terms of
the indenture. In this capacity, the indenture trustee is permitted to request a
Travis County, Texas district court to order the sequestration and payment to
noteholders of all revenues arising with respect to the transition property.
There can be no assurance, however, that the Travis County, Texas district court
would issue this order after a seller bankruptcy in light of the automatic stay
provisions of Section 362 of the United States Bankruptcy Code. In that event,
the indenture trustee under the indenture would be required to seek an order
from the bankruptcy court lifting the automatic stay to permit this action by
the Texas court, and an order requiring an accounting and segregation of the
revenues arising from the transition property. There can be no assurance that a
court would grant either order. Please refer to "Risk Factors -- The Risks
Associated with Potential Bankruptcy Proceedings" in this prospectus.
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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 the
transition property. The form of the servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
This summary is subject to the provisions of the servicing agreement.
SERVICING PROCEDURES
The servicer, on our behalf, will manage, service and administer, and bill
and collect payments in respect of the transition property according to the
terms of the servicing agreement. The servicer's duties will include:
calculating, billing and collecting the transition charges; responding to
inquiries of retail customers, REPs and the Texas commission regarding the
transition property; calculating electricity usage; accounting for collections;
furnishing periodic reports and statements to us, the rating agencies and to the
indenture trustee; making all filings with the Texas commission necessary to
perfect our ownership interests in and the indenture trustee's lien on the
transition property; and periodically adjusting the transition charge. The
servicer is required to notify us, the indenture 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. The
servicer is also authorized to execute and deliver documents and to make filings
and participate in proceedings on our behalf.
In addition, if we request, the servicer will provide public information
about the servicer, any material information about the transition property that
is reasonably available and, so long as any notes are outstanding, any
information necessary to calculate the transition charges applicable to each
customer class. The servicer will also prepare any reports to be filed by us
with the SEC.
SERVICING STANDARDS AND COVENANTS
The servicing agreement will require the servicer, in servicing and
administering the transition property, to employ or cause to be employed
procedures and exercise or cause to be exercised the same care it customarily
employs and exercises in servicing and administering bill collections for its
own account and for others.
Among other things, the servicing agreement requires the servicer to file,
and the restructuring act requires the Texas commission to approve, annual
true-up adjustments within 45 days of each anniversary of the initial issuance
of notes. These adjustments are to be based on actual transition charge
collections and updated assumptions by the servicer as to projected future
billed revenue from which transition charges are allocated, projected
electricity usage during the next period, expected delinquencies and write-offs
and future payments and expenses relating to the transition property serviced by
the servicer and the notes. The servicing agreement also requires the servicer
to file interim true-up adjustment requests if as of the month-end preceding any
payment date it determines that
- the outstanding principal of any series of notes (less amounts in the
reserve subaccount) would be greater than 105% or less than 95% of the
anticipated outstanding principal balance of the notes as of such payment
date, and
- any series of notes which matures after the date specified in the related
prospectus supplement will not have been paid in full as of its scheduled
final payment date.
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The servicer will calculate the transition charges necessary to result in
- all accrued and unpaid interest being paid in full,
- the outstanding principal balance of each series equaling the amount
provided its the expected amortization schedule, the amount on deposit in
the overcollateralization subaccount equaling the overcollateralization
level,
- the amount on deposit in the capital subaccount equaling the required
capital level, and
- all other fees and expenses under the indenture being paid,
by (1) the date for payment immediately succeeding the next scheduled true-up
adjustment filing date, or (2) with respect to a true-up adjustment occurring
after the last scheduled final payment date for any notes, the earlier of the
payment date preceding the next date for a true-up adjustment and the final
maturity date for those notes. The servicer will file true-up adjustments and,
in accordance with the financing order, the Texas commission has the right to
review the adjustments. The Commission's rights of review are limited to
arithmetic errors. Absent the need for an interim true-up adjustment, the
servicer will implement adjustments to the transition charges annually, unless
more frequent adjustments are required as described above.
If the Texas commission enters an order setting forth an allocation of
transition charges and requiring transition charges to be reallocated among
customer classes in the same manner, the servicer will recalculate the
transition charges to give effect to the reallocation within 45 days of the
commission's order becoming final.
The servicing agreement requires the servicer to implement procedures and
policies to ensure that REPs remit the transition charges collected from their
retail customers to the servicer on behalf of us and the noteholders. These
procedures and policies include creating and maintaining records that would
permit the servicer to bill retail customers directly for the transition charges
and maintaining the capability to promptly assume billing and collecting
responsibilities in the event that an REP defaults. The servicer will also
monitor payments from REPs and will take all permitted steps to ensure and
collect payment by the REPs. The servicer will impose credit and collection
policies on the REPs, as permitted under each financing order and the rules of
the Texas commission, to prevent the then current rating of the related notes by
the rating agencies from being withdrawn or downgraded. Please refer to
"-- Retail Electric Providers" below.
The servicer is responsible for instituting any proceeding to compel
performance by the State of Texas or the Texas commission of their respective
obligations under the restructuring act, any financing order, any issuance
advice letter, any true-up adjustment or any tariff. The servicer is also
responsible for instituting any proceeding to block or overturn any attempts to
cause a repeal, modification or judicial invalidation of the restructuring act
or any financing order. The servicing agreement also designates the servicer as
the custodian of our records and documents. The servicing agreement requires the
servicer to indemnify us, our independent managers and the indenture trustee
(for itself and for your benefit) for any negligent act or omission relating to
the servicer's duties as custodian.
REMITTANCES TO COLLECTION ACCOUNT
The servicer will make periodic payments on account of transition charge
collections to the indenture trustee for deposit in the collection account as
follows. For a description of the allocation of the deposits, please refer to
"Security for the Notes -- Allocations; Payments" in this prospectus. The
servicer will remit estimated collection payments on the transition charges to
the collection account each business day. The servicer may, however, remit
estimated collection payments on the transition charges to the collection
account each calendar month if no servicer default has occurred and is
continuing, and the servicer maintains a long-term rating of at least A
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or its equivalent, or each rating agency has notified the servicer, us, as well
as the indenture trustee and the managers that monthly payment will not result
in a reduction or withdrawal of the then current rating of any outstanding class
of notes.
The servicer will remit to the indenture trustee transition charge
collections based on its estimated system-wide charge-off percentage and the
average number of days outstanding of bills. Each year, the servicer will
reconcile remittances of estimated payments arising from transition charges with
the indenture trustee to more accurately reflect the amount of billed transition
charges that should have been remitted, based on the actual system-wide
charge-off percentage. To the extent the remittances of estimated payments
arising from the transition charge exceed the amounts that should have been
remitted based on actual system-wide charge-offs, the servicer will be entitled
to receive a payment from the indenture trustee in an amount equal to the excess
remittance, or to withhold the excess amount from any subsequent remittance to
the indenture trustee. To the extent the remittances of estimated payments
arising from the transition charge are less than the actual payments arising
from the transition charge collected, the servicer will remit the amount of the
shortfall to the indenture trustee within two business days, or, if monthly
remittances are permitted, on the next remittance date. Although the servicer
will remit estimated payments arising from the transition charge to the
indenture trustee, the servicer is not obligated to make any payments on the
notes.
In the event that the servicer makes changes to its current computerized
customer information system which would allow the servicer to track actual
transition charge payments and/or otherwise monitor payment and collection
activity more efficiently or accurately than is being done today, the servicing
agreement will allow the servicer to substitute actual remittance procedures for
the estimated remittance procedures described above and otherwise modify the
remittance procedures described above as may be appropriate in the interests of
efficiency, accuracy, cost and/or system capabilities. However, the servicer
will not be allowed to make any modification or substitution that will
materially adversely affect the noteholders. The servicer must also give notice
to the rating agencies of any such computer system changes no later than 60
business days after the date on which all retail customer accounts are billed on
the new system.
SERVICING COMPENSATION
The servicer will be entitled to receive an annual servicing fee paid
semi-annually in an amount equal to:
- 0.05% of the initial aggregate principal amount of the notes for so long
as the servicer remains CPL or an affiliate or bills the transition
charge concurrently with other charges for its own account for electric
services; or
- 0.60% of the initial aggregate principal amount of the notes if CPL or an
affiliate is not the servicer and the transition charge is not being
concurrently billed with other charges for electric service for the
servicer's own account. So long as CPL or an affiliate remains the
servicer, the servicer will not cause transition charges to be billed
separately to retail customers or REPs from amounts owed to the servicer
on its own account.
The servicer will also be entitled to retain any interest earnings on
transition charge collections prior to remittance to the collection account, and
all late payment charges collected from REPs or retail customers. The indenture
trustee will pay the servicing fee on each payment date (together with any
portion of the servicing fee that remains unpaid from prior payment dates) to
the extent of available funds prior to the distribution of any interest on and
principal of the notes. Please refer to "Security for the Notes -- Allocations;
Payments" in this prospectus.
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RETAIL ELECTRIC PROVIDERS
As part of the restructuring of the Texas electric industry, retail
customers of CPL will, as of the introduction of customer choice or in limited
circumstances, sooner, purchase electricity and related services from REPs
rather than CPL. CPL will no longer be permitted to sell electricity directly to
retail customers. However, CPL currently expects that it will organize an
affiliated REP to provide electricity and related services to retail customers.
The restructuring act grants all retail customers the option to have all
electric service provided on a single bill. REPs, including CPL's affiliated
REP, will issue a single bill to retail customers purchasing electricity from an
REP. This single bill would include all charges related to purchasing
electricity from the REP, delivery services from CPL or a successor servicer and
the applicable transition charges under the financing order. Therefore, we
expect that retail customers will pay the transition charges to REPs who supply
them with electric power. The REPs will be obligated to forward payments on the
transition charges to the servicer even if they do not collect the charge from
retail customers. This obligation is subject to the right to credits or refunds
from the servicer for amounts written off as uncollectible as described above.
The servicer will have limited rights to collect the transition charges directly
from those retail customers who receive their electricity bills from a third
party in the event that the REP does to pay the transition charge. Because the
REPs will initially bill most retail customers for the transition charges, 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 REP to forward transition charge collections.
REPs must provide the servicer with timely information necessary for
billing and true-up adjustments. In addition, prior to billing or collecting any
transition charges, the REP must provide a cash deposit equal to two months'
maximum estimated collections of transition charges, which deposit will be put
into the REP deposit subaccount. There will be a quarterly evaluation of the
REP's estimated transition charge collections to determine the correct size of
the deposit. If the REP's customer base has grown, then the REP will have to
deposit additional cash. If the REP's customer base has declined or if the
earnings on the REP's deposit have caused the deposit to exceed two months'
maximum estimated collections of transition charges, the REP will be entitled to
a refund of the excess, provided that the REP is not in default. An REP who
maintains a credit rating of BBB by S&P and Baa2 by Moody's or better will be
exempt from this requirement for so long as the servicer maintains an
unqualified ability to assume the REP's billing and collection function and to
separately bill and collect transition charges upon an REP default. The servicer
will be allowed to impose other credit and collection policies as may be
reasonably necessary to prevent the ratings of the notes from being withdrawn or
downgraded as authorized by the financing order and the rules of the Texas
commission. The servicer will also maintain the right to terminate transmission
and distribution service for non-payment by end-use retail customers in
accordance with the rules of the Texas commission.
The REP must pay the transition charges billed to it by the servicer within
16 days after billing by the servicer regardless of whether the REP collects
such charges from end-use retail customers. The amount of payments that an REP
must remit will incorporate the same system-wide charge off percentage used by
the servicer to remit payments to the indenture trustee. On an annual basis in
connection with the true-up adjustment process, the REP and the servicer will
reconcile the amounts held back with amounts actually written-off as
uncollectible in accordance with the terms agreed to by the REP and the
servicer. The REP's right to reconciliation for write-offs will be limited to
retail customers whose service has been permanently terminated and whose entire
accounts have been written off. The REP's recourse will be limited to a credit
against future transition charge payments unless the REP and the servicer agree
to alternative arrangements. The REP will not have recourse to us or our funds
for such payments. The REP's rights to credits will not take effect until after
adjusted transition charges which take the REP's uncollectible bills into
account have been implemented.
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Neither CPL nor any successor servicer will pay any shortfalls resulting
from the failure of any REP to remit payments arising from the transition
charges to the servicer. The annual true-up and interim true-up adjustment
mechanisms for the transition charges, as well as the overcollateralization
amount and the amounts deposited in the capital subaccount, are intended to
mitigate the risk of shortfalls. Any shortfalls that occur will delay the
distribution of interest on and principal of the notes.
SERVICER REPRESENTATIONS AND WARRANTIES
In the servicing agreement, the servicer will represent and warrant to us,
as of the date of each issuance of a series of notes, 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
corporate power and authority to own its properties as owned by it on the
issuance date, to conduct its business as its business is conducted by it
on the issuance date and to service the transition property and hold the
records related to the transition property, and to execute, deliver and
carry out the terms of the servicing agreement;
- the servicer is duly qualified to do business 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 requires
such qualifications, licenses or approvals, except where a failure to
qualify or obtain such licenses and approvals would not be reasonably
likely to have a material adverse effect on the business, operations,
assets, revenues or properties of the servicer;
- the execution, delivery and carrying out of the terms of the servicing
agreement have been duly authorized by all necessary corporate action on
the part of the servicer;
- the servicing agreement constitutes a legal, valid and binding obligation
of the servicer, enforceable against it in accordance with its terms,
subject to insolvency, reorganization, moratorium, fraudulent transfer
and other laws relating to or affecting creditors' rights generally from
time to time in effect and to general principles of equity, regardless of
whether considered in a proceeding in equity or at law;
- the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's corporate charter or
by-laws or any material agreement to which the servicer is a party or by
which it is bound, result in the creation or imposition of any lien upon
the servicer's properties pursuant to the terms of a material agreement
or violate any existing law or any existing order, rule or regulation
applicable to the servicer so as to adversely affect the servicer's
ability to perform its obligations under the servicing agreement or the
noteholders;
- each report or certificate delivered in connection with an advice letter
to the Texas commission will be true and correct, or, if based on
predictions and assumptions, will be based on predictions and assumptions
that are reasonably based on historical performance and facts known to
the servicer on the date such report or certificate is delivered;
- no governmental approvals, authorizations or filings are required for the
servicer to execute, deliver and perform its obligations under the
servicing agreement except those which have previously been obtained or
made or are required to be made by the servicer in the future; and
- except as disclosed to us, no proceeding is pending and, to the
servicer's knowledge, no proceeding is threatened and no investigation is
pending or threatened before any governmental authority, asserting the
invalidity of any of the basic documents, seeking to
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prevent issuance of notes or the consummation of the transactions
contemplated by any of the basic documents, seeking a determination that
might materially and adversely affect the performance by the servicer of
its obligations under any of the basic documents or which could
reasonably be expected to adversely affect the federal income tax or
state income or franchise tax attributes of the notes as debt.
The servicer is not responsible for any ruling, action or delay of the
Texas commission, except those caused by the servicer's failure to file required
applications in a timely and correct manner or other breach of its duties under
the servicing agreement. The servicer also is not liable for the calculation of
the transition charges and adjustments, including any inaccuracy in the
assumptions made in the calculation, so long as the servicer has acted in good
faith and has not acted in a grossly negligent manner.
The servicer will indemnify, defend and hold harmless us and the indenture
trustee (for itself and for your benefit) and the independent managers and each
of their respective officers, directors, employees and agents from any and all
liabilities, obligations, losses, damages, payments and claims, and reasonable
costs or expenses, arising from the servicer's willful misconduct, bad faith or
gross negligence in the performance of its duties, the servicer's reckless
disregard of its obligations and duties or the servicer's breach in any material
respect of any of its representations or warranties. The servicer will not be
liable, however, for any liabilities, obligations, losses, damages, payments or
claims, or reasonable costs or expenses, resulting from the willful misconduct,
bad faith or gross negligence of the party seeking indemnification.
The servicing agreement also provides that the servicer releases us and our
independent managers, the indenture trustee and each of our respective officers,
directors and agents from any actions, claims and demands which the servicer, in
the capacity of servicer or otherwise, may have against those parties relating
to the transition property or the servicer's activities, other than actions,
claims and demands arising from the willful misconduct, bad faith or gross
negligence of the parties.
EVIDENCE AS TO COMPLIANCE
The servicing agreement will provide that a firm of independent public
accountants, at our expense, will furnish to us, the indenture trustee and the
rating agencies on or before of each year, beginning , a
statement as to compliance by the servicer with standards relating to the
servicing of the transition property during the preceding twelve months ended
(or preceding period since the closing date of the issuance of the
notes in the case of the first statement). This report will state that the
accounting firm has performed agreed upon procedures in connection with the
servicer's compliance with the servicing procedures of the servicing agreement,
identifying the results of the procedures and including any exceptions noted.
The report will also indicate that the accounting firm providing the report is
independent of the servicer within the meaning of the Code of Professional
Ethics of the American Institute of Certified Public Accountants.
The servicing agreement will also provide for delivery to us and to the
indenture trustee and the rating agencies, on or before of each year,
beginning , of a certificate signed by an officer of the servicer
stating that the servicer has fulfilled its obligations under the servicing
agreement throughout the preceding twelve months ended (or preceding
period since the closing date of the issuance of the notes in the case of the
first certificate) or, if there has been a default in the fulfillment of any
obligation under the servicing agreement, describing each default. The servicer
has agreed to give us, the indenture trustee and the ratings agencies notice of
servicer defaults under the servicing agreement.
You may obtain copies of the statements and certificates by sending a
written request addressed to the indenture trustee.
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The servicer will also be required to deliver monthly reports and copies of
any filings made with the Texas commission to us and to the indenture trustee
and the rating agencies. In addition, the servicer is required to make certain
disclosures to its retail customers and REPs, and must provide information about
the REPs as is reasonably requested by the rating agencies.
MATTERS REGARDING THE SERVICER
The servicing agreement will provide that CPL may not resign from its
obligations and duties as servicer thereunder, except when either:
- CPL determines that performance of its duties is no longer permissible
under applicable law; or
- CPL receives (1) notice from the rating agencies rating the notes that
CPL's resignation will not result in a reduction or withdrawal of the
then current ratings on any class of notes, and (2) consent of the Texas
commission, to the extent required under the financing order.
No resignation by CPL as servicer will become effective until a successor
servicer has assumed CPL's servicing obligations and duties under the servicing
agreement.
The servicing agreement further provides that neither the servicer nor any
of its directors, officers, employees, and agents will be liable to us or to the
indenture trustee, our managers, you or any other person or entity, except as
provided under the servicing agreement, for taking any action or for refraining
from taking any action under the servicing agreement or for errors in judgment.
However, neither the servicer nor any person or entity will be protected against
any liability that would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence in the performance of duties. The servicer and any
of its directors, officers, employees or agents may rely in good faith on the
advice of counsel reasonably acceptable to the indenture trustee or on any
document submitted by any person respecting any matters under the servicing
agreement. In addition, the servicing agreement will provide that the servicer
is under no obligation to appear in, prosecute, or defend any legal action,
except as provided in the servicing agreement at our expense.
Under the circumstances specified in the servicing agreement, any entity
which becomes the successor by merger, sale, transfer, lease, management
contract or otherwise to the major part of the servicer's electric transmission
and distribution business may assume all of the rights and obligations of the
servicer under the servicing agreement. If transmission and distribution are not
provided by a single entity after any such transaction, the entity which
provides wire service directly to retail customers taking service as facilities,
premises located in the servicer's certificated service area as it existed on
May 1, 1999 may assume all of the servicer's rights and obligations under the
servicing agreement. The following are conditions to the transfer of the duties
and obligations to a successor servicer:
- immediately after the transfer, no servicer default has occurred and is
continuing;
- the servicer has delivered to us and to the indenture trustee and the
rating agencies an officer's certificate and an opinion of counsel
stating that the transfer complies with the servicing agreement and all
conditions to the transfer under the servicing agreement have been
complied with;
- the servicer has delivered to us and to the indenture trustee and the
rating agencies an opinion of counsel stating either that all necessary
filings, including those with the Texas commission, to protect our
interests in all of the transition property have been made or that no
filings are required; and
- the servicer has given prior notice to the rating agencies.
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So long as the conditions of any such assumptions are met, then the prior
servicer will automatically be released from its obligations under the servicing
agreement.
The servicing agreement permits the servicer to appoint any person to
perform any or all of its obligations. However, unless the appointed person is
an affiliate of CPL, the servicer must receive notice from the rating agencies
that the appointment will not result in a reduction or withdrawal of the then
current ratings on any class of notes and the servicer must remain obligated and
liable under the servicing agreement.
SERVICER DEFAULTS
Servicer defaults under the servicing agreement will include, among other
things:
- any failure by the servicer to remit payments arising from the transition
charge into the collection account as required under the servicing
agreement, which failure continues unremedied for five business days
after written notice from us or the indenture trustee is received by the
servicer or after discovery of the failure by an officer of the servicer;
- any failure by the servicer or CPL to observe or perform in any material
respect any of its respective other covenants or agreements in the
servicing agreement or the other agreements related to the notes, which
failure materially and adversely affects the rights of noteholders and
which continues unremedied for 60 days after the giving of notice of a
failure (1) to the servicer or CPL by us or (2) to the servicer or CPL by
the indenture trustee or holders of notes evidencing not less than 25% in
principal amount of the outstanding notes;
- any representation or warranty made by the servicer in the servicing
agreement will prove to have been incorrect in a material respect when
made, which has a material adverse effect on us or the noteholders and
which material adverse effect continues unremedied for a period of 60
days after the giving of notice to the servicer by us or the indenture
trustee; and
- events of bankruptcy, insolvency, receivership or liquidation of the
servicer.
RIGHTS WHEN SERVICER DEFAULTS
In the event of a servicer default that remains unremedied, either the
indenture trustee or holders of notes evidencing not less than a majority in
principal amount of then outstanding notes of all series may terminate all the
rights and obligations of the servicer under the servicing agreement, other than
the servicer's indemnity obligation and obligation to continue performing its
functions as servicer until a successor servicer is appointed. After the
termination, the indenture trustee will appoint a successor servicer who will
succeed to all the responsibilities, duties and liabilities of the servicer
under the servicing agreement and will be entitled to similar compensation
arrangements. In addition, when a servicer defaults, the noteholders (subject to
the provisions of the indenture) and the indenture trustee as beneficiary of any
statutory lien permitted by the restructuring act will be entitled to apply to a
Travis County, Texas district court for sequestration and payment of revenues
arising from the transition property. If, however, a bankruptcy trustee or
similar official has been appointed for the servicer, and no servicer default
other than an appointment of a bankruptcy trustee or similar official has
occurred, that trustee or official may have the power to prevent the indenture
trustee or the noteholders from effecting a transfer of servicing. The indenture
trustee may appoint, or petition a court of competent jurisdiction for the
appointment of, a successor servicer which satisfies criteria specified by the
nationally recognized statistical rating agencies rating the notes. The
indenture trustee may make arrangements for compensation to be paid to the
successor servicer.
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WAIVER OF PAST DEFAULTS
Holders of notes evidencing not less than a majority in principal amount of
the then outstanding notes, on behalf of all noteholders, may waive any default
by the servicer in the performance of its obligations under the servicing
agreement and its consequences, except a default in making any required
remittances to the collection account under the servicing agreement. The
servicing agreement provides that no waiver will impair the noteholders' rights
relating to subsequent defaults.
SUCCESSOR SERVICER
If for any reason a third party assumes the role of the servicer under the
servicing agreement, the servicing agreement will require the servicer to
cooperate with us and with the indenture trustee and the successor servicer in
terminating the servicer's rights and responsibilities under the servicing
agreement, including the transfer to the successor servicer of all cash amounts
then held by the servicer for remittance or subsequently acquired. The servicing
agreement will provide that we will be liable for its reasonable costs and
expenses incurred in transferring servicing responsibilities (which will not
include any set-up costs for the successor) to the successor servicer.
AMENDMENT
The servicing agreement may be amended with five business days' prior
written notice to the rating agencies with the consent of the indenture trustee,
but without the consent of the noteholders
- to cure any ambiguity,
- to correct or supplement any provision in the servicing agreement,
- for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the servicing agreement, or
- of modifying in any manner the rights of the noteholders,
provided that the action will not, as certified in a certificate of an officer
of the servicer delivered to us and to the indenture trustee and the managers,
adversely affect in any material respect the interest of any holder of notes
then outstanding.
The servicing agreement may also be amended by the servicer and us with
five business days' prior written notice to the rating agencies and with the
consent of the indenture trustee and the holders of notes evidencing at least a
majority in principal amount of the then outstanding notes for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the servicing agreement or of modifying in any manner the rights
of the noteholders. However, no amendment adopted in this manner may increase or
decrease, or accelerate or delay the timing of, collection of transition
charges, or reduce the percentage of noteholders required to consent to
amendments. No amendment of the provisions of the servicing agreement relating
to the servicer's remittance and transition charge adjustment obligations will
be permitted absent confirmation from the rating agencies that such amendment
will not result in a reduction or withdrawal of the then existing rating of the
notes by the rating agencies (except that with regard to Moody's it will be
sufficient to provide ten days' prior notice of the amendment). We may also
amend the servicing procedures provided in the servicing agreement solely to
address changes to the servicer's method of calculating payments of transition
charges received as a result of changes to the servicer's current computerized
information system, if the amendment does not have a material adverse effect on
the holders of notes then outstanding, with prior written notice to the
indenture trustee and the rating agencies, but without the consent of the
indenture trustee, any rating agency or any noteholder. These
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changes may include changes which would replace remittances calculated by
estimation procedures with remittances of transition charge collections actually
received.
DESCRIPTION OF THE NOTES
GENERAL
We will issue the notes pursuant to the terms of an indenture between us
and the indenture trustee. The particular terms of the notes of any series will
be established in a supplement to the indenture or an issuance certificate and,
in either case, the material terms will be described in the related prospectus
supplement. Although we have disclosed the material terms of the notes and the
indenture in this prospectus, this summary is subject to the terms and
provisions of the indenture and related supplements or issuance certificates,
forms of which are filed as exhibits to the registration statement of which this
prospectus forms a part.
We may issue the notes in one or more series, any one or more of which may
be comprised of one or more classes. Classes of notes may differ as to the
interest rate and the timing, sequential order and amount of payments of
principal or interest, or both. Each series of notes may include one or more
classes of notes that accrue interest at a variable rate based on an index
described in the related prospectus supplement. A swap agreement may serve as
security for any class of floating rate notes, in addition to the security
provided under the indenture. Please refer to "-- Floating Rate Notes" below.
While the prospectus supplement will describe the specific terms of only a
series of notes (and the classes of that series (if any)) in respect of which
this prospectus is being delivered, the terms of that series and any classes
will not be subject to the prior review of or consent of the holders of
outstanding notes. All notes of the same series will be identical in all
respects except for the denominations, unless that series is comprised of more
than one class, in which case all notes of the same class will be identical in
all respects except for the denominations.
All notes that we issue under the indenture will be payable solely from,
and secured solely by, a pledge of and lien on the transition property and the
other collateral as provided in the indenture. Please refer to "Security for the
Notes -- Pledge of Collateral" in this prospectus. All notes that we issue under
the indenture, whenever issued, on all of the collateral.
The prospectus supplement for a series of notes will describe the following
terms of that series of notes and, if applicable, the classes of that series:
- the designation of the series and, if applicable, the classes of that
series,
- the principal amount of the series and, if applicable, the classes of
that series,
- the annual rate at which interest accrues,
- the payment dates,
- the scheduled final payment date and the final maturity date of the
series and, if applicable, the classes of that series,
- the issuance date of the series,
- the place or places for the payment of principal,
- the authorized denominations,
- any provisions for optional redemption of the series or class,
- the expected amortization schedule for principal of the series and, if
applicable, the classes of that series,
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- that the series will have an equal priority lien with all other
outstanding series,
- any other material terms of the class that are not inconsistent with the
provisions of the indenture and that will not result in any rating agency
reducing or withdrawing its rating of any outstanding class of notes,
- the identity of the indenture trustee, and
- solely if a series includes floating rate notes, the terms of any swap
agreement executed to permit such issuance and the identity of any swap
counterparty related thereto.
The notes are not a debt, liability or other obligation of the State of
Texas or of any political subdivision, agency or instrumentality of the State
and do not represent an interest in or legal obligation of CPL or any of its
affiliates, other than us. Neither CPL nor any of its affiliates will guarantee
or insure the notes. Financing orders authorizing the issuance of the notes do
not constitute a pledge of the full faith and credit of the State of Texas or of
any of its political subdivisions. The issuance of the notes under the
restructuring act will not directly, indirectly or contingently obligate the
State of Texas or any of its political subdivisions to levy or to pledge any
form of taxation for the notes or to make any appropriation for their payment.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of a class of notes at the
annual rate either specified in or determined in the manner specified in the
related prospectus supplement and will be payable on the payment dates specified
in the related prospectus supplement. Collections of transition charges,
including amounts available in the reserve subaccount, the overcollateralization
subaccount and, if necessary, the amounts available in the capital subaccount.
In the event of default by an REP, the amounts in the REP deposit subaccount (up
to an amount of the lesser of the payment defaults of an REP or that REP's
deposit amount) will be used to make interest payments to the noteholders of
each class on each payment date for the notes. Please refer to "Security for the
Notes -- Allocations; Payments."
Principal of the notes of each class will be payable in the amounts and on
the payment dates specified in the related prospectus supplement, but only to
the extent that amounts in the collection account are available, and subject to
the other limitations described below, under "Security for the
Notes -- Allocations; Payments." Each prospectus supplement will set forth the
expected amortization schedule for each series of notes and, if applicable, the
classes of that series. On any payment date, unless an event of default has
occurred and is continuing and the notes have been declared due and payable, the
indenture trustee will make principal payments on the notes only until the
outstanding principal balances of those notes have been reduced to the principal
balances specified in the applicable expected amortization schedule for that
payment date. The indenture trustee will retain in the reserve subaccount for
payment on later payment dates any collections of transition charges in excess
of amounts payable as
- expenses of the servicer, the independent managers and the indenture
trustee (including the servicing fee),
- payments of interest on and principal of the notes,
- allocations to the capital subaccount, and
- allocations to the overcollateralization subaccount (all as described
under "Security for the Notes -- Allocations; Payments").
If the indenture trustee receives insufficient collections of transition charges
for any payment date, and amounts in the collection account (and the applicable
subaccount of the collection account) are not sufficient to make up the
shortfall, principal of any class of notes may be
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payable later than expected, as described in this prospectus. Please refer to
"Risk Factors -- Other Risks Associated with an Investment in the Notes." The
entire unpaid principal amount of the notes of all series will be due and
payable on the date on which an event of default (other than a breach by the
State of Texas of its pledge) has occurred and is continuing, if the indenture
trustee or the holders of not less than a majority in principal amount of the
notes of all series then outstanding have declared the notes to be immediately
due and payable. Please refer to "Description of the Notes -- Events of Default;
Rights Upon Event of Default" in this prospectus.
Unless the context requires otherwise, all references in this prospectus to
principal of the notes of a series include any premium that might be payable if
notes of that series are redeemed, as described in the related prospectus
supplement.
PAYMENTS ON THE NOTES
The indenture trustee will pay on each payment date to the holders of each
class of notes to the extent of available funds in the collective account all
payments of principal and interest then due. In the case of floating rate notes,
in lieu of interest, the indenture trustee will make payments under any related
swap agreement with respect to interest. The indenture trustee will make each
payment other than the final payment with respect to any notes to the holders of
record of the notes of the applicable class on the record date for that payment
date. The indenture trustee will make the final payment for each class of notes,
however, only upon presentation and surrender of the notes of that class at the
office or agency of the indenture trustee specified in the notice given by the
indenture trustee of the final payment. The indenture trustee will mail notice
of the final payment to the noteholders no later than five days prior to the
final payment date, specifying the date set for the final payment and the amount
of the payment.
If interest on the notes of any series is not paid when due, the defaulted
interest will be paid (plus interest on the defaulted interest at the applicable
note's interest rate to the extent lawful) to the noteholders on a special
record date. The special record date will be at least fifteen business days
prior to the date on which the indenture trustee is to make a special payment (a
"special payment date"). We will fix any special record date and special payment
date. At least 20 days before any special record date, the indenture trustee
will mail to each affected noteholder a notice that states the special record
date, the special payment date and the amount of defaulted interest (plus
interest on the defaulted interest) to be paid.
At the time, if any, we issue the notes of any series in the form of
definitive notes and not to DTC or its nominee, the indenture trustee will make
payments with respect to that class on a payment date or a special payment date
by check mailed to each holder of a definitive note of the class of record on
the applicable record date at its address appearing on the register maintained
with respect to the notes of that series. Upon application by a holder of any
class of notes in the principal amount of $10,000,000 or more to the indenture
trustee not later than the applicable record date, the indenture trustee will
make payments by wire transfer to an account maintained by the payee in New
York, New York.
If any special payment date or other date specified for any payments to
noteholders is not a business day, the indenture trustee will make payments
scheduled to be made on that special payment date or other date on the next
succeeding business day and no interest will accrue upon the payment during the
intervening period. "Business day" means any day other than a Saturday, a Sunday
or a day on which banking institutions or trust companies in New York, New York
or Dallas, Texas are, or DTC is, authorized or obligated by law, regulation or
executive order to remain closed.
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FLOATING RATE NOTES
If we offer any floating rate notes of any class, we will enter into one or
more swap agreements with a swap counterparty identified and having the terms
described in the related prospectus supplement. Generally, a swap agreement, on
each payment date, will obligate us to pay to the swap counter party, solely
from payments of transition charges received with respect to that class of
notes, an amount equal to the interest due on that class of notes on the payment
date. The swap agreement will obligate the swap counter party to pay to us an
amount equal to the product of (1) the floating rate and (2) the principal
balance of the floating rate notes as of the close of business on the preceding
payment date, after giving effect to all payments of principal made to the
floating rate noteholders on the preceding payment date. Please refer to "Risk
Factors -- Additional Risks of Floating Rate Notes" in this prospectus.
NO THIRD-PARTY CREDIT ENHANCEMENT
We do not currently anticipate that the notes will have the benefit of any
third-party credit enhancement, such as guarantees, letters of credit, insurance
or the like. If, however, we issue any series of notes with any third-party
credit enhancement any credit enhancement will be described in the related
prospectus supplement.
REGISTRATION AND TRANSFER OF THE NOTES
If specified in the related prospectus supplement, we may issue one or more
classes of notes in definitive form, which will be transferable and exchangeable
at the office of the registrar identified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, there will be
no service charge for any registration or transfer of the notes, but the
indenture trustee may require the owner to pay a sum sufficient to cover any tax
or other governmental charge.
We will issue each class of notes in the minimum initial denominations set
forth in the related prospectus supplement and, except as otherwise provided in
the related prospectus supplement, in integral multiples thereof.
The indenture trustee will make payments of interest and principal on each
payment date to the noteholders in whose names the notes were registered on the
record date.
BOOK-ENTRY REGISTRATION
If specified in the related prospectus supplement, one or more classes of
notes may initially be book-entry notes. Book-entry notes are initially
represented by one or more notes registered in the name of Cede & Co., as
nominee of DTC, or another securities depository, and are available only in the
form of book-entries. We will initially register any book-entry notes in the
name of Cede & Co., the nominee of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, and is a member of the federal Reserve System. DTC is a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participants and to facilitate the settlement of securities
transactions between participants through electronic book-entries, thereby
eliminating the need for physical movement of securities. Participants include
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others, such as banks, brokers,
dealers and trust companies, that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Transfers between DTC participants will occur in accordance with DTC rules.
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Noteholders that are not DTC participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, notes may do so only through participants and indirect participants. In
addition, noteholders will receive all payments of principal of and interest on
the notes from the indenture trustee through DTC and its participants. Under a
book-entry format, noteholders will receive payments after the related payment
date because, while payments are required to be forwarded to Cede & Co., as
nominee for DTC, on that date, DTC will forward the payments to its
participants, which thereafter will be required to forward them to indirect
participants or holders of beneficial interests in the notes. The indenture
trustee, the servicer and any paying agent, transfer agent or registrar may
treat the registered holder in whose name any note is registered (expected to be
Cede & Co.) as the absolute owner thereof (whether or not the note is overdue
and notwithstanding any notice of ownership or writing thereon or any notice to
the contrary) for the purpose of making payments and for all other purposes.
Unless and until we issue definitive notes, we anticipate that the only
"holder" of notes of any series will be Cede & Co., as nominee of DTC.
Noteholders will only be permitted to exercise their rights as noteholders
indirectly through DTC or its participants. All references in this prospectus to
actions by noteholders thus refer to actions taken by DTC upon instructions from
its participants. All references in this prospectus to payments, notices,
reports and statements to noteholders refer to payments, notices, reports and
statements to Cede & Co., as the registered holder of the notes, for
distribution to the beneficial owners of the notes in accordance with DTC
procedures.
Except under the circumstances described below, while any book-entry notes
of a series are outstanding under DTC's rules, DTC is required to make
book-entry transfers among participants on whose behalf it acts with respect to
the book-entry notes. In addition, DTC is required to receive and transmit
payments of principal of, and interest on, the book-entry notes. Participants
with whom noteholders have accounts with respect to book-entry notes are
similarly required to make book-entry transfers and receive and transmit these
payments on behalf of their respective noteholders. Accordingly, although
noteholders will not possess physical notes, DTC's rules provide a mechanism by
which noteholders will receive payments and will be able to transfer their
interests.
DTC can only act on behalf of participants, who in turn act on behalf of
indirect participants and certain banks. Thus, the ability of holders of
beneficial interests in the notes to pledge notes to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of the
notes, may be limited due to the lack of a definitive note for the notes.
DTC has advised the indenture trustee that it will take any action
permitted to be taken by a noteholder under the indenture and the related
prospectus supplement only at the direction of one or more participants to whose
account with DTC the notes are credited. Additionally, DTC has advised the
indenture trustee that it may take actions with respect to the noteholders'
interest that might conflict with other of its actions with respect thereto.
DEFINITIVE NOTES
Unless otherwise specified in the related prospectus supplement, we will
issue notes of a series in registered, certificated form to noteholders, or
their nominees, rather than to DTC only under the circumstances provided in the
indenture, which will include: (1) our advising the indenture trustee in writing
that DTC is no longer willing or able to properly discharge its responsibilities
as nominee and depositary with respect to the book-entry notes of that series
and that we are unable to locate a qualified successor, (2) our electing to
terminate the book-entry system through DTC, with written notice to the
indenture trustee, or (3) after the occurrence of an event of default under the
indenture, holders' of notes representing not less than a majority of the
aggregate outstanding principal amount of the notes of any series
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maintained as book-entry notes advising us, the indenture trustee, and DTC in
writing that the continuation of a book-entry system through DTC (or a
successor) is no longer in the best interests of those noteholders. Upon
issuance of definitive notes of a series, those notes will be transferable
directly (and not exclusively on a book-entry basis) and registered holders will
deal directly with the indenture trustee with respect to transfers, notices and
payments.
Upon surrender by DTC of the definitive securities representing the notes
and instructions for registration, the indenture trustee will issue the notes in
the form of definitive notes, and thereafter the indenture trustee will
recognize the registered holders of the definitive notes as noteholders under
the indenture.
The indenture trustee will make payment of principal of and interest on the
notes directly to noteholders in accordance with the procedures set forth herein
and in the indenture and the related prospectus supplement. The indenture
trustee will make interest payments and principal payments to noteholders in
whose names the definitive notes were registered at the close of business on the
related record date. The indenture trustee will make payments by check mailed to
the address of the noteholder as it appears on the register maintained by the
indenture trustee or in such other manner as may be provided in the related
trustee's issuance certificate or supplement to the indenture and except that
certain payments will be made by wire transfer as described in the indenture.
The indenture trustee will make the final payment on any note (whether
definitive notes or notes registered in the name of Cede & Co.), however, only
upon presentation and surrender of the note on the final payment date at the
office or agency that is specified in the notice of final payment to
noteholders. The indenture trustee will provide the notice to registered
noteholders not later than the fifth day prior to the final payment date.
Definitive notes will be transferable and exchangeable at the offices of
the transfer agent and registrar, which initially will be the indenture trustee.
There will be no service charge 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.
OPTIONAL REDEMPTION
We may redeem a series of notes on any payment date if, after giving effect
to payments that would otherwise be made on that date, the outstanding principal
balance of the series of notes has been reduced to less than five percent of the
initial principal balance. If specified in the prospectus supplement related to
any series or class of notes, the indenture may also permit the redemption of
the series or class of notes in full for cash on any payment date using proceeds
received from the issuance of any additional series or class of notes. These new
notes will be payable solely out of the transition property and other collateral
and will have no more than an equal priority lien thereon as against all
existing series of notes. In addition, a series of notes will be subject to
redemption if and to the extent provided in the related prospectus supplement.
The indenture does not permit a redemption under the indenture unless each
rating agency other than Moody's, to which prior written notice will be given,
has notified us and our managers, the servicer and the indenture trustee that
the redemption will not result in a reduction or withdrawal of the then current
rating of any outstanding class of notes. Upon any redemption of any series or
class of notes, we will have no further obligations under the indenture with
respect thereto. We may redeem the notes in all instances of optional
redemptions permitted by the indenture upon payment of the outstanding principal
amount of the notes to be redeemed and accrued but unpaid interest thereon as of
the date of redemption. We will give notice of redemption to the indenture
trustee and the rating agencies not less than 25 days nor more than 50 days
prior to the date of redemption. We will give written notice to each holder of
notes to be redeemed by first-class mail, postage prepaid, mailed not less than
five days nor more than 25 days prior to the applicable date of redemption.
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CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES AND ACQUISITION OF ADDITIONAL
TRANSITION PROPERTY
Our acquisition of transition property and issuance of any series of notes
with respect thereto after the initial acquisition and issuance is subject to
the following conditions, among others:
- all parties required to do so by the terms of the relevant documents must
have authorized, executed and delivered appropriate documentation
required by the indenture and the limited liability company agreement,
including trustee's certificates or supplements to the limited liability
company agreement;
- the seller must have irrevocably assigned all of its right, title and
interest in the additional transition property to us and made a filing
required by Section 39.309 of the restructuring act with respect to the
assignment;
- each rating agency must have notified us and our managers, the servicer
and the indenture trustee that the transactions will not result in a
reduction or withdrawal of the then current rating of any outstanding
class of notes;
- the seller must have delivered to us and our managers and the indenture
trustee an opinion of independent tax counsel and/or a ruling from the
IRS (as selected by, and in form and substance reasonably satisfactory
to, the seller) to the effect that, for federal income tax purposes, (1)
the issuance of the notes will not result in gross income to the seller
and the notes will be obligations of the seller, and (2) in the case of
the acquisition of subsequent transition property only, the issuance will
not adversely affect the characterization of the then outstanding notes
as obligations of the seller;
- no event of default may have occurred and be continuing under the
indenture;
- as of the date of issuance, we must have sufficient funds available to
pay the purchase price for the additional transition property, and all
conditions to the issuance of a new series of notes must have been
satisfied or waived; and
- we must deliver certain certificates and opinions specified in the
indenture to the indenture trustee.
Our obligation to purchase transition property on any transfer date is also
subject to the satisfaction or waiver of the conditions described in "The Sale
Agreement -- Conditions to the Sale of Transition Property."
ACCESS OF NOTEHOLDERS
Upon written request of any noteholder or group of noteholders of any
series or of all outstanding series of notes evidencing not less than 10 percent
of the aggregate outstanding principal amount of the notes of that series or all
series, as applicable, the indenture trustee will afford the noteholder or
noteholders access during business hours to the current list of noteholders of
that series or of all outstanding series, as the case may be, for purposes of
communicating with other noteholders with respect to their rights under the
indenture.
The indenture does not provide for any annual or other meetings of
noteholders.
REPORTS TO NOTEHOLDERS
On or prior to each payment date, special payment date or any other date
specified in the indenture for payments with respect to any series or class of
notes, the indenture trustee will deliver to the noteholders of that series or
class a statement with respect to the payment to be
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made on the payment date, special payment date or other date, as the case may
be, setting forth the following information:
- the amount of the payment to noteholders allocable to (1) principal and
(2) interest,
- the aggregate outstanding principal balance of the notes, after giving
effect to payments allocated to principal reported immediately above, and
- the difference, if any, between the amount specified immediately above
and the principal amount scheduled to be outstanding on that date
according to the related expected amortization schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the notes, the indenture trustee
will mail to each person who at any time during the calendar year has been a
noteholder and received any payment thereon, a statement containing certain
information for the purposes of the noteholder's preparation of U.S. federal and
state income tax returns. Please refer to "Material U.S. Federal Tax
Consequences."
SUPPLEMENTAL INDENTURES
From time to time, and without the consent of the noteholders of any series
(but with prior notice to the rating agencies), we may enter into one or more
agreements supplemental to the indenture for various purposes described in the
indenture, including:
- to correct or amplify the description of any property subject to the
indenture, or to better convey the property subject to the indenture, or
to add additional property,
- to add to the covenants for the benefit of the noteholders,
- to cure any ambiguity or correct or supplement any provision in the
indenture or in any supplemental indenture which may be inconsistent with
any other provision in the indenture or in any supplemental indenture or
to make any other provisions with respect to matters or questions arising
under the indenture, however, any such action will not adversely affect
the interests of the noteholders,
- to evidence the succession of another person to us or to the indenture
trustee in accordance with the terms of the indenture,
- to effect qualification under the Trust Indenture Act of 1939, or
- to set forth the terms of any additional series or class of notes or to
provide for the terms of any swap agreement.
We may also, without the consent of the noteholders, enter into one or more
other agreements supplemental to the indenture so long as the supplemental
agreement does not, as evidenced by an opinion of counsel, adversely affect the
interests of any holders of notes then outstanding in any material respect and
each rating agency has notified us and the servicer, the indenture trustee and
the issuer trustee that the supplemental agreement will not result in a
reduction or withdrawal of the then current rating of any outstanding class of
notes.
In addition, we may, with the consent of noteholders holding not less than
a majority of the aggregate outstanding principal amount of the notes of all
affected series or classes, enter into one or more indentures supplemental to
the indenture for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of the
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indenture. No supplement, however, may, without the consent of each noteholder
of each series or class affected thereby, take certain actions enumerated in the
indenture, including:
- reduce in any manner the amount of, or delay the timing of, deposits or
payments on any note,
- reduce the percentage of the aggregate outstanding principal amount of
the notes the holders of which are required to consent to any supplement,
- modify the provisions in the indenture relating to amendments with the
consent of noteholders to decrease any minimum percentage of noteholders
required to approve amendments,
- permit the creation of any lien on the collateral ranking prior to or on
a parity with the lien of the indenture, or
- cause any material adverse federal income tax consequences to us or to
our managers or to the seller, the indenture trustee or the then existing
noteholders.
Promptly following the execution of any supplement to the indenture, the
indenture trustee will furnish written notice of the substance of the supplement
to each noteholder. Any supplement to the indenture or trustee's issuance
certificate executed in connection with the issuance of one or more additional
series of notes will not be considered an amendment to the indenture.
COVENANTS OF THE ISSUER
We may not consolidate with or merge into any other entity, unless:
- the entity formed by or surviving the consolidation or merger is
organized under the laws of the U.S., any State or the District of
Columbia;
- the entity expressly assumes by an indenture supplemental to the
indenture the performance or observance of all of our agreements and
covenants under the indenture;
- no default or event of default under the indenture has occurred and is
continuing immediately after the merger or consolidation;
- each rating agency has notified us, the servicer and the indenture
trustee that the transaction will not result in a reduction or withdrawal
of the then current rating of any outstanding class of notes;
- the seller has delivered to us, the indenture trustee and the rating
agencies an opinion of outside tax counsel (as selected by, and in form
and substance reasonably satisfactory to, the seller, and which may be
based on a ruling from the IRS) to the effect that the consolidation or
merger will not result in a material adverse federal income tax
consequence to us, the seller, the indenture trustee or the then existing
noteholders;
- any action as is necessary to maintain the first perfected security
interest in the note collateral created by the indenture has been taken,
as evidenced by an opinion of outside counsel; and
- we have delivered to the indenture trustee an officer's certificate and
an opinion of counsel, each stating that all conditions precedent in the
indenture provided for relating to the transaction have been complied
with.
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We may not sell, convey, exchange or transfer or otherwise dispose of any
of our properties or assets to any person or entity, unless:
- the person or entity acquiring the properties and assets
-- is a U.S. citizen or an entity organized under the laws of the U.S.,
any State or the District of Columbia,
-- expressly assumes by an indenture supplemental to the indenture the
performance or observance of all of our agreements and covenants under
the notes,
-- expressly agrees by the supplemental indenture that all right, title
and interest so conveyed or transferred will be subject and subordinate
to the rights of noteholders,
-- unless otherwise specified in the supplemental indenture referred to
above, expressly agrees to indemnify, defend and hold us harmless
against and from any loss, liability or expense arising under or
related to the indenture and the notes, and
-- expressly agrees by means of the supplemental indenture that the person
(or if a group of persons, then one specified person) will make all
filings with the SEC (and any other appropriate person) required by the
Securities Exchange Act of 1934 in connection with the notes;
- no default under the indenture has occurred and is continuing immediately
after the transactions;
- each rating agency has notified us, the servicer and the indenture
trustee that the transactions will not result in a reduction or
withdrawal of the then current rating of any outstanding class of notes;
- the seller has delivered to us, the indenture trustee and the rating
agencies an opinion of outside tax counsel (as selected by, and in form
and substance reasonably satisfactory to, the seller, and which may be
based on a ruling from the IRS) to the effect that the disposition will
not result in a material adverse federal income tax consequence to us,
the Seller, the indenture trustee or the then existing noteholders;
- any action as is necessary to maintain a first perfected security
interest in the note collateral created by the indenture has been taken
as evidenced by an opinion of outside counsel; and
- we have delivered to the indenture trustee an officer's certificate and
an opinion of counsel, each stating that the conveyance or transfer
complies with the indenture and all conditions precedent therein provided
for relating to the transaction have been complied with.
We will not, among other things, for so long as any notes are outstanding:
- except as expressly permitted by the indenture, sell, transfer, exchange
or otherwise dispose of any of our assets unless directed to do so by the
indenture trustee,
- claim any credit on, or make any deduction from the principal or interest
payable in respect of, the notes (other than amounts properly withheld
under the Code) or assert any claim against any present or former
noteholder because of the payment of taxes levied or assessed upon any
part of the transition property and the other collateral,
- terminate our existence, or dissolve or liquidate in whole or in part,
- permit the validity or effectiveness of the indenture to be impaired,
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- permit the lien of the indenture to be amended, hypothecated,
subordinated, terminated or discharged or permit any person to be
released from any covenants or obligations with respect to the notes
except as may be expressly permitted by the indenture,
- permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance, other than the lien and security interest granted
under 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 (other than tax liens arising by operation of law
with respect to amounts not yet due),
- permit the lien granted under the indenture not to constitute a valid
first priority security interest in the collateral, or
- elect to be classified as an association taxable as a corporation for
federal income tax purposes.
We may not engage in any business other than financing, purchasing, owning
and managing the transition property and the other collateral and the issuance
of the notes in the manner contemplated by the notes, the basic documents or
certain related activities incidental thereto.
We will not issue, incur, assume, guarantee or otherwise become liable for
any indebtedness except for the notes.
We will not, except as contemplated by the notes and the basic documents,
make any loan or advance or credit to, or guarantee, endorse or otherwise become
contingently liable in connection with the obligations, stocks or dividends of,
or own, purchase, repurchase or acquire (or agree contingently to do so) any
stock, obligations, assets or securities of, or any other interest in, or make
any capital contribution to, any other person. We will not, except as
contemplated by the notes and the basic documents, make any expenditure (by
long-term or operating lease or otherwise) for capital assets (either realty or
personalty).
We will not make any payments, distributions, dividends or redemptions to
any holder of our equity interests in respect of that interest for any calendar
month unless no event of default has occurred and is continuing and any
distributions do not cause the book value of our remaining equity to decline
below 0.50% of the initial principal amount of all series of notes issued and
outstanding pursuant to the indenture.
We will cause the servicer to deliver to the indenture trustee the annual
accountant's certificates, compliance certificates, reports regarding
distributions and statements to noteholders required by the servicing agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
An "event of default" with respect to any series of notes is defined in the
indenture as being:
- a default for five business days in the payment of any interest on any
note,
- a default in the payment of the then unpaid principal of any note on the
final maturity date for the series,
- a default in the payment of the optional redemption price for any note on
the optional redemption date therefor,
- a default in the observance or performance in any material respect of any
of our covenants or agreements made in the indenture (other than a
default under the first three bullet points above) and the continuation
of any default for a period of 30 days after written notice of the
default is given to us by the indenture trustee or to us and the
indenture trustee by the holders of at least 25% in principal amount of
the notes of that series then outstanding,
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- any representation or warranty made by us in the indenture or in any
certificate delivered pursuant to the indenture or in connection with the
indenture having been incorrect in a material respect as of the time
made, and the breach not having been cured within 30 days after notice of
the breach is given to us by the indenture trustee or to us and the
indenture trustee by the holders of at least 25% in principal amount of
the indenture of that series then outstanding,
- certain events of bankruptcy, insolvency, receivership or liquidation,
- a breach by the State of Texas or any of its agencies (including the
Texas commission) of the State's pledge, or
- any other event designated as such in an issuance certificate or series
supplement relating to that series as described in the related prospectus
supplement.
If an event of default (other than as specified in the seventh bullet point
above) should occur and be continuing with respect to any series of notes, the
indenture trustee or holders of not less than a majority in principal amount of
the notes of all series then outstanding may declare the unpaid principal of the
notes of all series to be immediately due and payable. The holders of a majority
in principal amount of the notes of all series then outstanding may rescind that
declaration under certain circumstances set forth in the indenture. If an event
of default as specified in the seventh bullet above has occurred, the servicer
will be obligated to institute (and the indenture trustee, for the benefit of
the noteholders, will be entitled and empowered to institute) any suits, actions
or proceedings at law, in equity or otherwise, to enforce the State's pledge and
to collect any monetary damages as a result of a breach thereof, and each of the
servicer and the indenture trustee may prosecute any suit, action or proceeding
to final judgment or decree. The servicer would be required to advance its own
funds in order to bring any suits, actions or proceedings and, for so long as
the legal actions were pending, the servicer would, unless otherwise prohibited
by applicable law or court or regulatory order in effect at that time, be
required to bill and collect the transition charges, perform adjustments and
discharge its obligations under the servicing agreement. The servicer would be
entitled to reimbursement of its expenses advanced by it in connection with the
legal or administrative action as our operating expense under the indenture.
If the notes of all series have been declared to be due and payable
following an event of default, the indenture trustee may, in its discretion,
either sell the transition property or elect to have us maintain possession of
the transition property and continue to apply transition charge collections as
if there had been no declaration of acceleration. There is likely to be a
limited market, if any, for the transition property following a foreclosure, in
light of the event of default, the unique nature of the transition property as
an asset and other factors discussed in this prospectus. In addition, the
indenture trustee is prohibited from selling the transition property following
an event of default with respect to any series, other than a default in the
payment of any principal or redemption price or a default for five days or more
in the payment of any interest on any note of any series unless
- the holders of all the outstanding notes of all series consent to the
sale,
- the proceeds of the sale are sufficient to pay in full the principal of
and the accrued interest on the outstanding notes of all series, or
- the indenture trustee determines that the proceeds of the collateral
would not be sufficient on an ongoing basis to make all payments on the
notes of all series as those payments would have become due if the notes
had not been declared due and payable, and the indenture trustee obtains
the consent of the holders of 66 2/3% of the aggregate outstanding amount
of the notes of all series.
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Subject to the provisions of the indenture relating to the duties of the
indenture trustee, if an event of default occurs and is continuing, the
indenture trustee will be under no obligation to exercise any of the rights or
powers under the notes at the request or direction of any of the holders of
notes of any series if the indenture trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with the request. Subject to the provisions for
indemnification and certain limitations contained in the indenture:
- the holders of not less than a majority in principal amount of the
outstanding notes of all series (or, if less than all series or classes
are affected, the affected series, class or classes) will have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee and,
- the holders of not less than a majority in principal amount of the notes
of all series then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the
indenture that cannot be modified without the consent of all of the
holders of the outstanding notes of all series or classes affected
thereby.
With respect to the notes, no holder of any note of any series will have
the right to institute any proceeding with respect to the notes, unless:
- the holder previously has given to the indenture trustee written notice
of a continuing event of default with respect to that series,
- the holders of not less than a majority in principal amount of the
outstanding notes of all series have made written request of the
indenture trustee to institute the proceeding in its own name as
indenture trustee,
- the holder or holders have offered the indenture trustee satisfactory
indemnity,
- the indenture trustee has for 60 days failed to institute the proceeding,
and
- no direction inconsistent with the written request has been given to the
indenture trustee during the 60-day period by the holders of a majority
in principal amount of the outstanding notes of all series.
In addition, each of the indenture trustee, the noteholders and the
servicer will covenant that it will not, prior to the date which is one year and
one day after the termination of the indenture, institute against us or against
our managers or our member or members any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law, subject to the
right of a Travis county, Texas district court to order sequestration and
payment of revenues arising with respect to the transition property.
Neither any manager nor the indenture trustee in its individual capacity,
nor any holder of any ownership interest in us, nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the notes
of any series or for our agreements contained in the indenture.
ACTIONS BY NOTEHOLDERS
Subject to certain exceptions, the holders of not less than a majority of
the aggregate outstanding amount of the notes of all series (or, if less than
all series or classes are affected, the affected series or class or classes)
will have the right to direct the time, method and place of
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conducting any proceeding for any remedy available to the indenture trustee, of
exercising any trust or power conferred on the indenture trustee under the
indenture; provided that:
- the direction is not in conflict with any rule of law or with the
indenture and would not involve the indenture trustee in personal
liability or expense;
- the consent of 100% of the noteholders of all series is required to
direct the indenture trustee to sell the collateral; and
- the indenture trustee may take any other action deemed proper by the
indenture trustee which is not inconsistent with the direction.
In circumstances under which the indenture trustee is required to seek
instructions from the holders of the notes of any class with respect to any
action or vote, the indenture trustee will take the action or vote for or
against any proposal in proportion to the principal amount of the corresponding
class, as applicable, of notes taking the corresponding position.
Notwithstanding the foregoing, the indenture allows each noteholder to institute
suit for the nonpayment of (1) the interest, if any, on its notes which remains
unpaid as of the applicable due date and (2) the unpaid principal, if any, of
its notes on the final maturity date therefor.
ANNUAL REPORT OF INDENTURE TRUSTEE
If required by the Trust Indenture Act of 1939, the indenture trustee will
be required to mail each year to all noteholders a brief report. The report must
state, among other things:
- the indenture trustee's eligibility and qualification to continue as the
indenture 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 indenture trustee in the indenture trustee's
individual capacity,
- the property and funds physically held by the indenture trustee,
- any additional issue of a series of notes not previously reported, and
- any action taken by it that materially affects the notes or any series
and that has not been previously reported.
ANNUAL COMPLIANCE STATEMENT
We will file annually with the indenture trustee and the rating agencies
rating the notes a written statement as to whether we have fulfilled our
obligations under the indenture.
THE INDENTURE TRUSTEE
will be the indenture trustee under the indenture. The indenture
trustee may resign at any time by so notifying us. The holders of a majority in
principal amount of the notes of all series then outstanding may remove the
indenture trustee by so notifying the indenture trustee and may appoint a
successor indenture trustee. We will remove the indenture trustee if the
indenture trustee ceases to be eligible to continue in this capacity under the
indenture, the indenture trustee becomes insolvent, a receiver or other public
officer takes charge of the indenture trustee or its property or the indenture
trustee becomes incapable of acting. If the indenture trustee resigns or is
removed or a vacancy exists in the office of indenture trustee for any reason,
we will be obligated promptly to appoint a successor indenture trustee eligible
under the indenture. No resignation or removal of the indenture trustee will
become effective until acceptance of the appointment by a successor indenture
trustee. The indenture trustee will at all times satisfy the requirements of the
Trust Indenture Act and Rule 3a-7 under the Investment
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Company Act of 1940 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
indenture trustee consolidates with, merges or converts into, or transfers all
or substantially all of its corporate trust business or assets to, another
entity, the resulting, surviving or transferee entity will without any further
action be the successor indenture trustee.
SECURITY FOR THE NOTES
GENERAL
The notes issued under the indenture are payable solely from and secured
solely by a pledge of and lien on the transition property and the other
collateral as provided in the indenture. As noted under the heading,
"Description of the Notes," we will issue the notes pursuant to the terms of the
indenture. We will establish the particular terms of the notes of any series in
a supplement to the indenture or an issuance certificate. We will describe the
material terms of the notes in the prospectus supplement for the related series
of notes.
PLEDGE OF COLLATERAL
To secure the payment of principal of and interest on the notes, we will
grant to the indenture trustee a security interest in all of our right, title
and interest in and to:
- all of the transition property,
- the sale agreement and servicing agreement,
- the collection account, all subaccounts of the collection account and all
amounts of cash or investment property on deposit therein or credited
thereto from time to time,
- with respect to floating rate notes only, any swap agreement entered into
with respect to the issuance of the floating rate notes,
- all rights to compel CPL, as servicer (or any successor), to file for and
obtain adjustments to the transition charges in accordance with Section
39.307 of the restructuring act and the financing order,
- 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 the
foregoing, and
- all proceeds in respect of any or all of the foregoing.
The security interest does not extend to:
- amounts (including net investment earnings) on deposit in the REP deposit
subaccount that have been released to the servicer or an REP,
- amounts deposited in the overcollateralization subaccount and the capital
subaccount that have been released to us or as we direct following
retirement of all series of notes, and
- amounts deposited with us on any series issuance date for payment of
costs of issuance with respect to the related series of notes (together
with any interest earnings thereon).
We refer to the foregoing assets to which we, as assignee of the seller, will
grant the indenture trustee a security interest as the "collateral" in this
prospectus.
SECURITY INTEREST IN THE COLLATERAL
Section 39.308 of the restructuring act provides that transition property
does not constitute property in which a security interest may be created under
the Uniform Commercial Code.
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Rather, Section 39.308(b) of the restructuring act provides that a valid and
enforceable security interest in transition property will attach and be
perfected only by the means set forth in Section 39.308. Specifically, Section
39.308(b) 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 issuance of financing
instruments such as the notes. The lien and security interest attach
automatically at the time when value is received for the instruments. Upon
perfection by filing notice with the Texas Secretary of State under Section
39.308(d) of the restructuring act, the lien and security interest will be a
continuously perfected lien and security interest in the transition property and
all proceeds of the property, whether accrued or not, and will have priority in
the order of filing and take precedence over any subsequent judicial or other
lien creditor. If notice is filed within 10 days after value is received for the
notes, the security interest will be perfected retroactively to the date that
value was received. Otherwise, the security interest will be perfected as of the
date of filing.
The relative priority of the lien and security interest perfected under
Section 39.308(d) of the restructuring act is not impaired by later modification
of the financing order or the commingling of revenues arising with respect to
any transition property with other funds (subject to the tracing requirements of
federal bankruptcy law).
The servicer, pledges in the servicing agreement to file with the Texas
Secretary of State on or before the date of issuance of any series of notes the
filing required by Section 39.308 of the restructuring act to perfect the lien
of the indenture trustee in the transition property. The seller will represent,
at the time of issuance of any series of notes, that no prior filing has been
made under the terms of Section 39.308 of the restructuring act with respect to
the transition property securing the notes to be issued other than a filing
which provides the indenture trustee with a first priority perfected security
interest in the transition property on a parity basis with that securing any
outstanding notes, if any.
Certain items of the collateral may not constitute transition property and
the perfection of the indenture trustee's security interest in those items of
collateral would therefore be subject to the UCC or common law and not Section
39.308 of the restructuring act. These items consist of our rights in
- the sale agreement or the servicing agreement,
- the capital subaccount or any other funds on deposit in the collection
account which do not constitute transition charge collections,
- any interest rate exchange agreements, and
- proceeds of the foregoing items.
Additionally, any contractual rights we have against retail customers (other
than the right to impose transition charges and rights otherwise included in the
definition of transition property) would be collateral to which the UCC applies.
As a condition to the issuance of any series of notes, we will have made
all filings and taken any other action required by the UCC or common law to
perfect the lien of the indenture trustee in all the items included in
collateral which do not constitute transition property. We will also covenant to
take all actions necessary to maintain or preserve the lien and security
interest on a first priority basis. We will represent, along with the seller, at
the time of issuance of any series of notes, that no prior filing has been made
with respect to the party under the terms of the UCC, other than a filing which
provides the indenture trustee with a first priority perfected security interest
in the collateral on a parity basis with that securing any outstanding notes.
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RIGHT OF FORECLOSURE
Section 39.308(f) of the restructuring act provides that if an event of
default occurs under the notes, the holders of the notes or their
representatives, as secured parties, may foreclose or otherwise enforce the lien
in the transition property securing the notes as if they were secured parties
under Article 9 of the UCC. The Texas commission may order that amounts arising
from transition charges be transferred to a separate account for the holders'
benefit, to which their lien and security interest will apply.
DESCRIPTION OF INDENTURE ACCOUNTS
Collection Account. Pursuant to the indenture, we will establish a
segregated trust account in the name of the indenture trustee with an eligible
institution, called the "collection account." The indenture trustee will hold
the collection account for our benefit as well as for the benefit of the
noteholders. The collection account will consist of five subaccounts: a general
subaccount, a reserve subaccount, an overcollateralization subaccount for the
overcollateralization amount with respect to each series of notes, an REP
deposit subaccount for REP deposits and a capital 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 to the collection account include each of the subaccounts
contained therein.
An "eligible institution" means (1) the corporate trust department of the
indenture trustee or (2) a depository institution organized under the laws of
the United States of America or any State or the District of Columbia (or any
domestic branch of a foreign bank) (A) which has either (i) a long-term
unsecured debt rating of "AAA" by S&P and "A2" by Moody's or (ii) a certificate
of deposit rating of "A-1 +" by S&P and "P-1" by Moody's, or any other
long-term, short-term or certificate of deposit rating acceptable to the rating
agencies and (B) whose deposits are insured by the Federal Deposit Insurance
Corporation.
Funds in the collection account may be invested in any of the following
eligible investments (subject to additional restrictions in the indenture):
- direct obligations of, or obligations fully and unconditionally
guaranteed as to timely payment by, the U.S.,
- demand deposits, time deposits, certificates of deposit or bankers'
acceptances of eligible institutions,
- commercial paper (other than commercial paper issued by CPL or any of its
affiliates) having, at the time of investment or contractual commitment
to invest, a rating in the highest rating category from each rating
agency from which a rating is available,
- money market funds which have the highest rating from each rating agency
from which a rating is available,
- repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the U.S. or certain of its
agencies or instrumentalities, entered into with certain depository
institutions or trust companies, or
- any other investment permitted by each rating agency, in each case which
mature on or before the business day preceding the next payment date.
The indenture trustee will have access to the collection account for the purpose
of making deposits in and withdrawals from the collection account in accordance
with the indenture. The servicer will select the eligible investments in which
funds will be invested, unless otherwise directed by the issuer.
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The servicer will remit transition charge payments to the collection
account in the manner described under "The Servicing Agreement -- Remittances to
Collection Account."
General Subaccount. The general subaccount will hold all funds held in the
collection account that are not held in the other four subaccounts. The servicer
will remit all transition charge payments to the general subaccount. On each
payment date, the indenture trustee will draw on amounts in the general
subaccount to pay our expenses and to pay interest and make scheduled payments
on the notes, and to make other payments and transfers in accordance with the
terms of the indenture.
Reserve Subaccount. The servicer will allocate to the reserve subaccount
transition charge collections available with respect to any payment date in
excess of amounts necessary to make the payments specified on such payment date.
Overcollateralization Subaccount. Each financing order will provide that
we, as the assignee of the transition property created by the financing order,
are entitled to collect an additional amount (referred to as the
"overcollateralization amount") specified in the related prospectus supplement.
The overcollateralization amount is intended to enhance the likelihood that
payments on the notes will be made in accordance with their expected
amortization schedules. Each financing order will permit the servicer to set the
transition charges at levels that it expects will produce transition charge
collections in amounts that exceed the amounts expected to be required to pay
interest and make scheduled payments on the notes, and to pay all related fees
and expenses of the issuer, including the servicing fee, in order to collect the
overcollateralization amount. The prospectus supplement will specify the
overcollateralization amount established in connection with each series of
notes, which will not be less than 0.50% of the initial principal balance of
that series of notes. The servicer will collect the overcollateralization amount
over the expected life of the notes of the series. The expected life of the
notes of any series is the period from the issuance date of the series of notes
through the latest scheduled final payment date for any note in the series. The
overcollateralization amount for all series of notes will be held in the
overcollateralization subaccount. We refer to the amount required to be on
deposit in the overcollateralization subaccount as of any payment date with
respect to each series, as specified in the schedule set forth in the related
prospectus supplement, as the "required overcollateralization level."
Amounts in the overcollateralization subaccount will be invested in
eligible investments, and earnings thereon will be deposited into the reserve
subaccount, subject to the limitations described under "-- Allocations;
Payments." Amounts in the overcollateralization subaccount are intended to cover
any shortfall in transition charge collections that might otherwise occur on any
payment date or at the last scheduled final payment date for any series or class
of notes.
Capital Subaccount. In connection with the issuance of each series of
notes, the seller will contribute capital to us in an amount, referred to as the
"required capital level," which will be at least equal to 0.50% of the initial
principal amount of that series of notes. This amount will be funded from the
proceeds of the sale of such series of notes. The amount in the aggregate for
all series of notes will be deposited into the capital subaccount.
REP Deposit Subaccount. Deposits received from REPs as described under
"Servicing Agreement -- Retail Electric Providers" will be held in the REP
deposit subaccount. Amounts in the REP deposit subaccount will only be available
to make payments on the notes in the event that an REP defaults in payment, in
which case the indenture trustee may withdraw the amount of the payment default
or, if less, the amount of that REP's security deposit.
ALLOCATIONS; PAYMENTS
On each payment date, the indenture trustee will pay or allocate, at the
direction of the servicer, all amounts on deposit in the collection account
(including investment earnings
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thereon) other than, except as described above, amounts in the REP deposit
subaccount, which have accumulated from the first billing date of the month in
which the prior payment date occurred until the final billing date of the month
immediately preceding the month of the relevant payment date, to pay the
following amounts in the following priority:
- the indenture trustee will pay all amounts owed by us to our independent
managers and the indenture trustee to those persons;
- the indenture trustee will pay the servicing fee and all unpaid servicing
fees from any prior payment dates to the servicer;
- so long as no event of default has occurred and is continuing or would be
caused by their payment, the indenture trustee will pay all other
operating expenses to the persons entitled thereto, provided that the
amount paid on each payment date may not exceed $100,000;
- the indenture trustee will pay any overdue interest on the notes
(together with, to the extent lawful, interest on the overdue interest at
the applicable notes' interest rate) and then currently due interest on
each series of notes to the noteholders (including payment of any amount
to a swap counterparty with respect to floating rate notes);
- the indenture trustee will pay principal on any series of notes payable
as a result of an event of default or on the final maturity date for the
series of notes to the noteholders of the applicable series;
- the indenture trustee will pay the scheduled principal payments for any
series of notes based on priorities described in each prospectus
supplement to the noteholders of the applicable series;
- the indenture trustee will pay any remaining unpaid operating expenses to
the persons entitled thereto;
- the indenture trustee will allocate the amount, if any, by which the
required capital level with respect to all outstanding series of notes
exceeds the amount in the capital subaccount as of that payment date to
the capital subaccount;
- the indenture trustee will allocate the amount, if any, by which the
required overcollateralization level exceeds the amount in the
overcollateralization subaccount as of that payment date to the
overcollateralization subaccount;
- the indenture trustee will allocate the balance, if any, to the reserve
subaccount for distribution on subsequent payment dates; and
- following the payment in full of all outstanding series of notes, the
indenture trustee will release the balance, if any (including amounts in
the overcollateralization subaccount and the capital subaccount), to us.
If on any payment date funds on deposit in the general subaccount are
insufficient to make the payments contemplated by the first six bullet points
above, the indenture trustee will first, draw from amounts on deposit in the
reserve subaccount, second, draw from amounts on deposit in the
overcollateralization subaccount, and third, draw from amounts on deposit in the
capital subaccount, up to the amount of the shortfall, in order to make those
payments in full. If the indenture trustee uses amounts on deposit in the
capital subaccount or the overcollateralization subaccount to pay those amounts
or make those transfers, as the case may be, subsequent adjustments to the
transition charges will take into account, among other things, those amounts.
Thereafter, on subsequent payment dates the indenture trustee will replenish the
capital subaccount or the overcollateralization subaccount, as the case may be,
to the extent transition charge collections exceed amounts required to pay
amounts having a higher priority of payment. In addition, if on any payment date
funds on deposit in the general subaccount are
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insufficient to make the transfers described in the eighth and ninth bullet
points above, the indenture trustee will draw from amounts on deposit in the
reserve subaccount to make the transfers notwithstanding the fact that, on that
payment date, the obligation to pay unpaid operating expenses to the persons
entitled thereto may not have been fully satisfied. If on any payment date when
there is more than one series of notes outstanding, funds on deposit in the
collection account are insufficient to make the payments of principal and
interest described above, the indenture trustee will allocate the funds among
the various series and classes pro rata, as specified in the related prospectus
supplement.
The indenture trustee will make payments to the noteholders of a series to
the noteholders as specified in the related prospectus supplement.
STATE PLEDGE
The restructuring act provides: "The State [of Texas] pledges [ ] for the
benefit and protection of financing parties and the electric utility, that it
will not take or permit any action that would impair the value of the transition
property, or, except as permitted by Section 39.307 [relating to true-up
adjustments], reduce, alter or impair the transition charges to be imposed,
collected and remitted to financing parties, 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. Any party issuing transition bonds is authorized to include this pledge in
any documentation relating to those bonds."
The noteholders and the indenture trustee, for the benefit of the
noteholders, will be entitled to the benefit of the pledges and agreements of
the State of Texas set forth in Section 39.310 of the restructuring act and both
we and the seller are authorized to include these pledges and agreements in any
contract with the noteholders, the indenture trustee or with any assignees
pursuant to the restructuring act. The seller will include these pledges and
agreements of the State of Texas in the sale agreement, and we, in turn, have
included these pledges and agreements in the indenture and the notes for the
benefit of the indenture trustee and the noteholders.
MATERIAL U.S. FEDERAL TAX CONSEQUENCES
The following discussion is a summary of material U.S. federal income and
estate tax consequences relevant to the purchase, ownership and disposition of
the notes by U.S. noteholders and non-U.S. noteholders. The discussion is
limited to original purchasers of the notes, except where specifically noted.
This summary is not a complete analysis of all the potential U.S. federal income
and estate tax consequences relating to the purchase, ownership and disposition
of the notes. The IRS may take a different view of such consequences. Further,
the discussion does not address all aspects of taxation that might be relevant
to particular purchasers in light of their individual circumstances, including
the effect of any state, local, non-U.S. or other tax laws, or to certain types
of purchasers, including dealers in securities, insurance companies, financial
institutions and tax-exempt entities, subject to special treatment under U.S.
federal tax law.
A U.S. noteholder is a beneficial owner of a note that is a U.S. person, or
a beneficial owner of a note who is a former citizen or resident of the U.S.
whose income and gain from the notes will be subject to U.S. federal taxation. A
U.S. person is a person who or which is, for U.S. federal income tax
purposes --
- a citizen or resident of the U.S.;
- a corporation or partnership (or entity treated as a corporation or a
partnership for tax purposes) created or organized in the U.S., or under
the laws of the U.S. or of any State
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(including the District of Columbia), unless in the case of a
partnership, treasury regulations are adopted that provide otherwise;
- an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
- a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust, and one or more U.S.
persons have the authority to control all substantial decisions of the
trust (taking into account changes thereto and associated effective
dates, elections and transition rules under Section 7701(a)(30) of the
Internal Revenue Code of 1986, as amended).
A Non-U.S. noteholder is a beneficial owner of a note that is not a U.S.
noteholder.
The discussion below is based on the code, administrative pronouncements,
judicial decisions, existing, proposed and temporary U.S. treasury regulations,
all in effect as of the date hereof, all of which are subject to change at any
time, and any such change may be applied retroactively. The discussion below
assumes that the notes are held as capital assets within the meaning of Section
1221 of the code.
IT IS RECOMMENDED THAT ALL PROSPECTIVE PURCHASERS OF THE NOTES CONSULT
THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES
OF THE OWNERSHIP AND DISPOSITION OF THE NOTES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES AS WELL AS ANY TAX CONSEQUENCES TO THEM UNDER THE LAWS OF ANY
STATE, LOCAL OR NON-U.S. TAXING JURISDICTION.
With respect to each series of notes, the seller expects to receive a
ruling from the IRS to the effect that, among other things:
- our issuance of the notes will not result in gross income to the seller
and
- the notes will be obligations of the seller.
CPL has received this ruling with respect to the notes to be issued in
accordance with the initial financing order issued by the Texas commission. For
a given series of notes, however, the seller may decide that, in lieu of
obtaining a ruling from the Internal Revenue Service, the seller will rely on an
opinion from its tax counsel to the effect that, among other things, the notes
will be obligations of the seller. The IRS ruling or the tax opinion will be
discussed in the related prospectus supplement.
The following summary of material U.S. federal income and estate tax
consequences relevant to the purchase, ownership and disposition of the notes by
U.S. noteholders and non-U.S. noteholders is based on the advice of Sidley &
Austin, counsel to CPL, and assumes that, based on the ruling or tax opinion
discussed above, the notes will constitute indebtedness of our sole member for
federal income and estate tax purposes. All parties, including each noteholder
by purchasing a note, agree to treat the notes as indebtedness, including for
federal income tax purposes.
TAX CONSEQUENCES TO U.S. NOTEHOLDERS
Payments of Interest. Interest paid on a note will generally be taxable to
a U.S. noteholder as ordinary interest income at the time payments are accrued
or received in accordance with such U.S. noteholder's regular method of
accounting for U.S. federal income tax purposes. The preceding sentence assumes
that, in the case of floating rate notes, the floating rate notes will qualify
as "variable rate debt instruments" as defined in treasury regulation
sec. 1.1275-5(a) and that interest on such floating rate notes will be
unconditionally payable, or will be constructively received under Section 451 of
the code, in cash or in property at least annually at a single "qualified
floating rate" or "objective rate." If such assumption is incorrect with respect
to a
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floating rate note, the taxation of interest on such floating rate note will be
addressed in the related prospectus supplement.
"Original Issue Discount." Because it is expected that the stated principal
amount of the notes will not exceed their issue price by more than a statutory
de minimis amount (i.e., 0.25% of the principal amount of a note multiplied by
its weighted average maturity), the notes should not be issued with "original
issue discount." If the stated principal amount of a note exceeds its issue
price by an amount that is less than or equal to such de minimis amount, the
excess generally will be taken into income by a U.S. noteholder as gain from the
retirement of a note (as described below under "-- Sale, Exchanges, Redemption
or Retirement of the Notes"), in proportion to principal payments made on the
notes. A U.S. noteholder may elect to treat all interest on a note as original
issue discount. If such an election is made, the excess of a note's stated
principal amount over its issue price would not be treated as de minimis, and
would be taken into income on a constant yield basis under the rules applicable
to accrual of original issue discount.
Market Discount and Premium. A U.S. noteholder attempting to sell a note in
the secondary market should be aware that a subsequent U.S. noteholder who
purchases a note for an amount that is less than the note's principal amount
might be subject to the "market discount" rules of the code. Also, a subsequent
U.S. noteholder who purchases a note for an amount that exceeds the principal
amount, disregarding the portion of the purchase price attributable to accrued
but unpaid interest, (i.e., a purchase at a premium) may elect to amortize and
deduct the premium over the remaining term of the note in accordance with rules
set forth in Section 171 of the code.
Sale, Exchanges, Redemption or Retirement of the Notes. Upon the sale,
exchange, redemption or retirement of a note, a U.S. noteholder will recognize
taxable gain or loss equal to the difference between the amount realized on such
sale, exchange, redemption or retirement (not including any amount attributable
to accrued but unpaid interest) and the U.S. noteholder's adjusted tax basis in
the note. To the extent the amount realized is attributable to accrued but
unpaid interest not previously includible in income, the amount recognized by
the U.S. noteholder will be treated as a payment of interest. Please refer to
"-- Payments of Interest" above. A U.S. noteholder's adjusted tax basis in a
note generally will equal such U.S. noteholder's cost for the note, reduced by
any principal payments received by such noteholder.
Gain or loss recognized on the sale, exchange, redemption or retirement of
a note will be capital gain or loss. For non-corporate taxpayers, capital gain
recognized on the disposition of a note held for more than one year is subject
to U.S. federal income tax at a maximum rate of 20%. Capital gain on the
disposition of a note held for one year or less is taxed at the rates applicable
to ordinary income (i.e., up to a maximum rate of 39.6%). The distinction
between capital gain or loss and ordinary income or loss is relevant for
purposes of, among other things, limitations on the deductibility of capital
losses.
TAX CONSEQUENCES TO NON-U.S. NOTEHOLDERS
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding:
- payments of principal and interest (including original issue discount, if
any) on a note by us or any paying agent to a non-U.S. noteholder will
not be subject to withholding of U.S. federal income tax, provided that,
in the case of interest:
-- the non-U.S. noteholder does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of
stock of our sole member entitled to vote,
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-- the non-U.S. noteholder is not, for U.S. federal income tax purposes, a
controlled foreign corporation related, directly or indirectly, to our
sole member through stock ownership,
-- the non-U.S. noteholder is not a bank receiving interest described in
Section 881(c)(3)(A) of the code, and
-- the certification requirements under Section 871(h) or Section 881(c)
of the code and treasury regulations thereunder (summarized below) are
met;
- a non-U.S. noteholder will not be subject to U.S. federal income tax on
gain recognized on the sale, exchange, redemption, retirement or other
disposition of such note, unless:
-- the non-U.S. noteholder is a non-resident alien individual who is
present in the U.S. for 183 days or more in the taxable year of
disposition, and certain conditions are met, or
-- the gain is effectively connected with the conduct by the non-U.S.
noteholder of a trade or business in the U.S.; and
- a note held by an individual who is not a citizen or resident (as defined
for U.S. federal estate tax purposes) of the U.S. at the time of his
death will not be subject to U.S. federal estate tax as a result of such
individual's death, provided that, at the time of the individual's death:
-- the individual does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of stock of our
sole member entitled to vote, and
-- payments with respect to such note, if received at the time of the
individual's death, would not have been effectively connected with the
conduct by the individual of a trade or business in the U.S.
Sections 871(h) and 881(c) of the code and U.S. treasury regulations
thereunder require that, in order to obtain the exemption from withholding tax
described above, either:
- the beneficial owner of a note must certify, under penalties of perjury,
to the issuer or paying agent, as the case may be, that the owner is a
non-U.S. noteholder and must provide such owner's name and address, or
- a securities clearing organization, bank or other financial institution
that holds retail customers' securities in the ordinary course of its
trade or business, referred to as a "financial institution" and holds the
note on behalf of the beneficial owner thereof must certify, under
penalties of perjury, to the issuer or paying agent, as the case may be,
that the certificate has been received from the beneficial owner by it or
by a financial institution between it and the beneficial owner and must
furnish the payor with a copy thereof.
A certificate described in this paragraph is effective only with respect to
payments of interest made to the certifying non-U.S. noteholder after issuance
of the certificate in the calendar year of its issuance and the two immediately
succeeding calendar years. Under the U.S. treasury regulations, the foregoing
certification may be provided by the beneficial owner of a note on IRS Form W-8
or IRS Form W-8BEN.
While most interest payments are exempt from withholding tax under (and
subject to) the rules described above, Section 871(h)(4) of the code subjects
certain types of interest to a U.S. withholding tax at a 30% rate (or such lower
rate as may be provided by an applicable treaty). In general, interest described
in Section 871(h)(4) of the code includes (subject to certain exceptions) any
interest, the amount of which is determined by reference to: receipts, sales or
other cash flow of the issuer or a related person, any income or profits of the
issuer or
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a related person, any change in the value of any property of the issuer or a
related person, or any dividends, partnership distribution or similar payments
made by the issuer or a related person. Interest described in Section 871(h)(4)
of the code may include other types of contingent interest identified by the IRS
in future treasury regulations. We do not currently expect to issue notes the
interest on which is described in Section 871(h)(4) of the code. However, if
such notes are issued, the taxation of such notes will be addressed in the
related prospectus supplement.
On October 14, 1997, the IRS published in the Federal Register final
treasury regulations, referred to as the "1997 final regulations," which affect
the U.S. taxation of non-U.S. noteholders. As promulgated, the 1997 final
regulations will be effective for payments after December 31, 1998, regardless
of the issue date of the instrument with respect to which such payments are
made, subject to certain transition rules. The IRS thereafter amended the 1997
final regulations to extend this date to December 31, 2000, subject to certain
transition rules. The discussion under this heading and under "-- Backup
Withholding and Information Reporting," below, is not intended to be a complete
discussion of the provisions of the 1997 final regulations or the transition
rules, and it is recommended that prospective purchasers of the notes consult
their tax advisors concerning the tax consequences of their acquiring, holding
and disposing of the notes in light of the 1997 final regulations.
The 1997 final regulations provide documentation procedures designed to
simplify compliance by withholding agents. A withholding agent is the last U.S.
person in the chain of interest payments prior to payment to a non-U.S.
noteholder. The 1997 final regulations generally do not affect the documentation
rules described above, but add other certification options. Under one such
option, a withholding agent will be allowed to rely on an intermediary
withholding certificate furnished by a "qualified intermediary" (as defined
below) on behalf of one or more beneficial owners (or other intermediaries)
without having to obtain the beneficial owner certificate described above.
"Qualified intermediaries" include: foreign financial institutions or foreign
clearing organizations (other than a U.S. branch or U.S. office of such
institution or organization), or foreign branches or offices of U.S. financial
institutions or foreign branches or offices of U.S. clearing organizations, in
each case, which have entered into withholding agreements with the IRS. In
addition to certain other requirements, qualified intermediaries must obtain
withholding certificates, such as IRS Form W-8BEN (see below), from each
beneficial owner. Under another option, an authorized foreign agent of a U.S.
withholding agent will be permitted to act on behalf of the U.S. withholding
agent, provided certain conditions are met.
For purposes of the certification requirements, the 1997 final regulations
generally treat, as the beneficial owners of payments on a note, those persons
that, under U.S. tax principles, are the taxpayers with respect to those
payments, rather than persons such as nominees or agents legally entitled to the
payments. In the case of payments to an entity classified as a foreign
partnership under U.S. tax principles, the partners, rather than the
partnership, generally will be required to provide the required certifications
to qualify for the withholding exemption described above. A payment to a U.S.
partnership, however, is treated for these purposes as payment to a U.S. payee,
even if the partnership has one or more foreign partners. The 1997 final
regulations provide certain presumptions with respect to withholding for
non-U.S. noteholders not furnishing the required certifications to qualify for
the withholding exemption described above. In addition, the 1997 final
regulations replaced a number of tax certification forms (including IRS Form W-8
and IRS Form 4224, discussed below) with revised IRS Forms W-8BEN, W-8IMY, and
W-8EXP (which, in certain circumstances, requires information in addition to
that previously required). Under the 1997 final regulations, Form W-8s will
remain valid, generally, until the last day of the third calendar year following
the year in which the certificate is signed. In its announcement that it was
amending the 1997 final regulations to postpone the effective date of the
regulations to payments made after December 31, 2000, the IRS announced that the
certification forms provided under the current treasury regulations would not be
extended beyond December 31,
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2000. In addition, the new withholding certificates will satisfy the
documentation requirements of the current treasury regulations.
If a non-U.S. noteholder is engaged in a trade or business in the U.S., and
if interest on the note, or gain recognized on the sale, exchange, redemption,
retirement or other disposition of a note, is effectively connected with the
conduct of that trade or business, the non-U.S. noteholder, although exempt from
withholding of U.S. income tax, will generally be subject to regular U.S. income
tax on the interest or gain in the same manner as if it were a U.S. noteholder.
Please refer to "-- Tax Consequences to U.S. Noteholders" above. In lieu of the
certificate described above, such a noteholder must provide to the withholding
agent a properly executed IRS Form 4224 (the old form) or a W-8ECI (the new
form) in order to claim an exemption from withholding. In addition, if the
non-U.S. noteholder 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. For purposes of the branch profits tax, interest on, and
any gain recognized on the sale, exchange, redemption, retirement or other
disposition of, a note will be included in the effectively connected earnings
and profits of the non-U.S. noteholder if such interest or gain is effectively
connected with the conduct by the non-U.S. noteholder of a trade or business in
the U.S.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current U.S. federal income tax law, a 31% backup withholding tax and
information reporting requirements apply to certain payments of principal and
interest made to, and to the proceeds of sale before maturity by, certain
non-U.S. and U.S. noteholders.
In the case of a non-corporate U.S. noteholder, backup withholding will
apply only if:
- the U.S. noteholder fails to furnish its Taxpayer Identification Number
("TIN") (which, for an individual, is his or her Social Security number)
to the payor in the manner required;
- the U.S. noteholder furnishes an incorrect TIN and the payor is so
notified by the IRS;
- the payor is notified by the IRS that the noteholder has failed properly
to report payments of interest or dividends; or
- under certain circumstances, the U.S. noteholder fails to certify, under
penalties of perjury, that it has furnished a correct TIN and has not
been notified by the IRS that it is subject to backup withholding for
failure to report interest or dividend payments.
Backup withholding does not apply with respect to payments made to certain
exempt recipients, such as a corporation (within the meaning of Section 7701(a)
of the Code) and tax-exempt organizations. U.S. noteholders should consult their
tax advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a U.S. noteholder
will be allowed as a credit against such U.S. noteholder's U.S. federal income
tax liability and may entitle such U.S. noteholder to a refund, provided that
the required information is furnished to the IRS.
In the case of a non-U.S. noteholder, under currently applicable U.S.
treasury regulations, backup withholding and information reporting will not
apply to payments of principal or interest made by the issuer or any paying
agent thereof on a note (absent actual knowledge that the alleged non-U.S.
noteholder is a U.S. noteholder) if the non-U.S. noteholder has provided the
required certification under penalties of perjury that it is not a U.S.
noteholder (as defined above) or has otherwise established an exemption. If the
non-U.S. noteholder does not provide the required certification, the non-U.S.
noteholder may nevertheless avoid backup withholding or information reporting in
the circumstances described below, but might be subject to withholding
88
<PAGE> 103
of U.S. federal income tax as described above under "-- Tax Consequences to Non-
U.S. Noteholders."
Under currently applicable U.S. treasury regulations, if payments of
principal or interest are collected outside the U.S. by a foreign office of a
custodian, nominee or other agent acting on behalf of a beneficial owner of a
note, the custodian, nominee or other agent will not be required to apply backup
withholding to such payments made to such beneficial owner, and generally will
not be subject to information reporting requirements. However, if the custodian,
nominee or other agent is a U.S. person, a controlled foreign corporation for
U.S. tax purposes or a foreign person 50% or more of whose gross income is
effectively connected with a U.S. trade or business for a specified three-year
period, information reporting (but not backup withholding) will be required
unless the custodian, nominee or other agent has in its records documentary
evidence that the beneficial owner is not a U.S. noteholder (which the agent
does not actually know to be false) and certain other conditions are met or the
beneficial owner otherwise establishes an exemption.
Under currently applicable U.S. treasury regulations, payments on the sale,
exchange, redemption, retirement or other disposition of a note made to or
through a foreign office of a broker generally will not be subject to backup
withholding, and generally will not be subject to information reporting
requirements. These payments, however, will be subject to information reporting
(but not backup withholding) if the broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation or a foreign person
50% or more of whose gross income is effectively connected with a U.S. trade or
business for a specified three-year period, unless the broker has in its records
documentary evidence that the beneficial owner is not a U.S. noteholder (which
the broker does not actually know to be false) and certain other conditions are
met or the beneficial owner otherwise establishes an exemption. Payments made to
or through the U.S. office of a broker will be subject to backup withholding and
information reporting unless the non-U.S. noteholder certifies, under penalties
of perjury, that it is not a U.S. person or otherwise establishes an exemption.
In general, the 1997 final regulations do not significantly alter the
substantive backup withholding and information reporting requirements described
above. Under current law, backup withholding and information reporting will not
apply to: payments to a non-U.S. noteholder of principal and interest and
payments to a non-U.S. Noteholder on the sale, exchange, redemption, retirement
or other disposition of a note, in each case if such non-U.S. noteholder
provides the required certification to establish an exemption from the
withholding of U.S. federal income tax or otherwise establishes an exemption.
Similarly, even if a non-U.S. noteholder does not provide the certification or
otherwise establish an exemption, unless the payor has actual knowledge that the
payee is a U.S. noteholder, backup withholding will not apply to: payments of
interest made outside the U.S. to certain offshore accounts, and payments on the
sale, exchange, redemption, retirement or other disposition of a note effected
outside the U.S. However, information reporting (but not backup withholding)
will apply to: payments of interest made by a payor outside the U.S. and
payments on the sale, exchange, redemption, retirement or other disposition of a
note effected outside the U.S. if payment is made by a broker that is, for U.S.
federal income tax purposes: a U.S. person, a controlled foreign corporation, a
U.S. branch of a foreign bank or foreign insurance company, a foreign
partnership controlled by U.S. persons or engaged in a U.S. trade or business,
or a foreign person 50% or more of whose gross income is effectively connected
with the conduct of a U.S. trade or business for a specified three-year period,
in each case, unless the payor or broker has in its records documentary evidence
that the beneficial owner is not a U.S. noteholder and certain other conditions
are met or the beneficial owner otherwise establishes an exemption (in which
case neither information reporting nor backup withholding will apply). As noted
above, the IRS amended the 1997 final regulations to be effective generally for
payments made after December 31, 2000, subject to certain transition rules.
89
<PAGE> 104
Non-U.S. noteholders should consult their tax advisors 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. noteholder under the backup withholding rules will be allowed as a
credit against the non-U.S. noteholder's U.S. federal income tax liability and
may entitle the non-U.S. noteholder to a refund, provided that the required
information is furnished to the IRS.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT BE
APPLICABLE DEPENDING UPON A NOTEHOLDER'S PARTICULAR SITUATION. IT IS RECOMMENDED
THAT PROSPECTIVE NOTEHOLDERS CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NOTES, INCLUDING THE TAX CONSEQUENCES UNDER FEDERAL, STATE, LOCAL, NON-U.S. AND
OTHER TAX LAWS AND THE EFFECTS OF CHANGES IN SUCH LAWS.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, known as ERISA, and
Section 4975 of the code impose certain requirements on plans subject to ERISA
or Section 4975 of the code. ERISA and the code also impose certain requirements
on fiduciaries of a plan in connection with the investment of the assets of the
plan. "Plans" are any employee benefit plans and other plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and some
collective investment funds and insurance company general or separate accounts
in which the assets of those plans, accounts or arrangements are invested. A
fiduciary of an investing plan is any person who in connection with the assets
of the plan:
- has discretionary authority or control over the management or disposition
of assets, or
- provides investment advice for a fee.
Some plans, such as governmental plans, and certain church plans, and the
fiduciaries of those plans, are not subject to ERISA requirements. Accordingly,
assets of these plans may be invested in the notes without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law. Any plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the code, however, is subject to the
prohibited transaction rules in Section 503 of the code.
ERISA imposes certain general fiduciary requirements on fiduciaries,
including:
- investment prudence and diversification, and
- the investment of the assets of the plan in accordance with the documents
governing the plan.
Section 406 of ERISA and Section 4975 of the code also prohibit a broad
range of transactions involving the assets of a plan and persons who have
certain specified relationships to the plan, referred to as "parties in
interest," unless a statutory or administrative exemption is available. Parties
in interest include parties in interest under ERISA and disqualified persons
under the code. The types of transactions that are prohibited include:
- sales, exchanges or leases of property;
- loans or other extensions of credit; and
- the furnishing of goods or services.
90
<PAGE> 105
Certain persons that participate in a prohibited transaction may be subject
to an excise tax under Section 4975 of the code or a penalty imposed under
Section 501(i) of ERISA, unless a statutory or administrative exemption is
available. In addition, the persons involved in the prohibited transaction may
have to cancel the transaction and pay an amount to the plan for any losses
realized by the plan or profits realized by these persons. In addition,
individual retirement accounts involved in the prohibited transaction may be
disqualified which would result in adverse tax consequences to the owner of the
account.
REGULATION OF ASSETS INCLUDED IN A PLAN
A fiduciary's investment of the assets of a plan in the notes may cause our
assets to be deemed assets of the plan. Section 2510.3-101 of the regulations of
the U.S. Department of Labor provides that the assets of an entity will be
deemed to be assets of a plan that purchases an interest in the entity only if
the interest that is purchased by the plan is an equity interest and none of the
exceptions contained in Section 2510.3-101 of the regulations applies. An equity
interest is defined in Section 2510.3-101 of the regulations as an interest in
an entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. Although
there is no authority directly on point and unless otherwise stated in the
prospectus supplement, it is anticipated that the notes will be treated as
indebtedness under local law without any substantial equity features.
In addition, the acquisition or holding of the notes by or on behalf of a
plan could give rise to a prohibited transaction if we or the indenture trustee,
CPL, any other servicer, Central and South West Corporation, American Electric
Power Company, Inc. upon completion of the merger with Central and South West
Corporation, any swap counterparty, any underwriter or certain of their
affiliates has, or acquires, a relationship to an investing plan. Each purchaser
of the notes will be deemed to have represented and warranted that its purchase
and holding of the notes will not result in a prohibited transaction.
Before purchasing any notes by or on behalf of a plan, you should consider
whether the purchase and holding of notes might result in a prohibited
transaction under ERISA or Section 4975 of the code and, if so, whether any
prohibited transaction exemption might apply to the purchase and holding of the
notes.
PROHIBITED TRANSACTION EXEMPTIONS
If you are a fiduciary of a plan, before purchasing any notes, you should
consider the availability of one of the Department of Labor's prohibited
transaction exemptions, which include:
- Prohibited transaction class exemption 75-1, which exempts certain
transactions between a plan and certain broker-dealers, reporting dealers
and banks;
- Prohibited transaction class exemption 84-14, which exempts certain
transactions effected on behalf of a plan by a "qualified professional
asset manager";
- Prohibited transaction class exemption 90-1, which exempts certain
transactions between insurance company separate accounts and parties in
interest;
- Prohibited transaction class exemption 91-38, which exempts certain
transactions between bank collective investment funds and parties in
interest;
- Prohibited transaction class exemption 95-60, which exempts certain
transactions between insurance company general accounts and parties in
interest; and
- Prohibited transaction class exemption 96-23, which exempts certain
transactions effected on behalf of a plan by an "in-house asset manager".
91
<PAGE> 106
We cannot provide any assurance that any of these class exemptions will
apply with respect to any particular investment in the notes by, or on behalf
of, a plan or, even if it were deemed to apply, that any exemption would apply
to all transactions that may occur in connection with the investment. Even if
one of these class exemptions were deemed to apply, notes may not be purchased
with assets of any plan if we or the indenture trustee, CPL, any other servicer,
Central and South West Corporation, American Electric Power Company, Inc. upon
completion of the merger with Central and South West Corporation, any swap
counterparty, any underwriter or any of their affiliates:
- has investment discretion over the assets of the plan used to purchase
the notes;
- has authority or responsibility to give, or regularly gives, investment
advice regarding the assets of the plan used to purchase the notes, for a
fee and under an agreement or understanding that the advice will serve as
a primary basis for investment decisions for the assets of the plan, and
will be based on the particular investment needs of the plan; or
- unless one of the class exemptions applied to the purchase and holding of
the notes, is an employer maintaining or contributing to the plan.
CONSULTATION WITH COUNSEL
If you are a fiduciary which proposes to purchase the notes on behalf of or
with assets of a plan, you should consider your general fiduciary obligations
under ERISA and you should consult with your legal counsel as to the potential
applicability of ERISA and the code to any investment and the availability of
any prohibited transaction exemption in connection with any investment.
USE OF PROCEEDS
We will use the net proceeds from the sale of the notes to purchase the
transition property from the seller and to pay certain costs of issuing the
notes. The seller will apply the net proceeds from the sale of the transition
property towards the reduction of recoverable regulatory assets and stranded
costs through the retirement or refinancing of a portion of its debt and equity.
PLAN OF DISTRIBUTION
We may sell the notes to or through the underwriters named in the
prospectus supplement by a negotiated firm commitment underwriting and public
reoffering by the underwriters or another underwriting arrangement that may be
specified in the prospectus supplement. We may also offer or place the notes
either directly or through agents. We intend that notes will be offered through
these various methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of the
notes may be made through a combination of these methods.
The distribution of notes may be effected in one or more transactions at a
fixed price or prices, which may be changed, or at market prices prevailing at
the time of sale, at prices related to prevailing market prices or in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale.
In connection with the sale of the notes, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell notes to dealers at prices less a concession. Underwriters
may allow, and the dealers may reallow, a concession to other dealers.
Underwriters, dealers and agents that participate in the distribution of the
notes may be deemed to be underwriters and any discounts or commissions received
by them from the issuer and any profit on the resale of the notes by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933. We will identify any of these
92
<PAGE> 107
underwriters or agents, and describe any compensation we give them, in the
prospectus supplement.
LEGAL MATTERS
Certain legal matters relating to the notes will be passed on by Sidley &
Austin, Chicago, Illinois, counsel to CPL and the issuer, by Richards, Layton &
Finger, P.A., Wilmington, Delaware, Delaware counsel to the issuer, Broyles &
Pratt, Austin, Texas, regulatory counsel to CPL, and Vinson & Elkins, LLP,
Dallas, Texas, Texas counsel to CPL and the issuer, and Milbank, Tweed, Hadley &
McCloy LLP, New York, New York, counsel to the underwriters or agents. Certain
matters relating to U.S. federal tax consequences of the issuance of the notes
will be passed upon by Sidley & Austin, Chicago, Illinois, counsel to CPL and
the issuer. Milbank, Tweed, Hadley & McCloy LLP has represented CPL and
affiliates of CPL from time to time in connection with various legal matters.
EXPERTS
The financial statements of the issuer as of , 1999 and for the
period from , 1999 (date of inception) to , 1999
included in this prospectus have been so included in reliance on the report of
Arthur Andersen LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
93
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................... F-2
Statement of Operations for the period from ,
1999 (date of inception) to , 1999......... F-3
Balance Sheet as of , 1999.................... F-4
Statement of Changes in Member's Equity for the period
from , 1999 (date of inception) to ,
1999................................................... F-5
Statement of Cash Flows for the period from ,
1999 (date of inception) to , 1999......... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Member of
CPL Transition Funding LLC
We have audited the accompanying balance sheet of CPL Transition Funding
LLC (a special purpose Delaware limited liability company) (Company) as of
, and the related statements of operations, changes in member's equity
and cash flows for the period from inception (October 28, 1999) to .
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 have 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CPL Transition Funding LLC
as of , and the results of its operations and its cash flows for the
period from inception (October 28, 1999) to , in conformity with
generally accepted accounting principles.
Dallas, Texas
F-2
<PAGE> 110
CPL TRANSITION FUNDING LLC
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1999) TO
<TABLE>
<S> <C>
Revenues.................................................... $
Expenses.................................................... $
Net Income (Loss)........................................... $
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-3
<PAGE> 111
CPL TRANSITION FUNDING LLC
BALANCE SHEET
Assets
<TABLE>
<S> <C>
Current Assets:
Accounts Receivable from CPL.............................. $
Deferred Charges:
Unamortized Issuance Expense of Notes..................... $
Total Assets...................................... $
Liabilities and Member's Equity
Current Liabilities:
Accounts Payable.......................................... $
Member's Equity........................................... $
Total Liabilities and Member's Equity............. $
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-4
<PAGE> 112
CPL TRANSITION FUNDING LLC
STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1999) TO
<TABLE>
<S> <C>
Member's Equity at Inception................................ $
Add: Net Loss............................................. $
Contributed Equity.................................. $
Member's Equity at End of Period............................ $
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-5
<PAGE> 113
CPL TRANSITION FUNDING LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 28, 1999) TO
<TABLE>
<S> <C>
Cash Flows From Operating Activities........................ $
Cash Flows From Investing Activities........................ $
Cash Flows From Financing Activities........................ $
Net Increase/(Decrease) in Cash............................. $
Cash at Inception........................................... $
Cash at End of Period....................................... $
</TABLE>
The accompanying Notes to Financial Statements are an integral part of this
statement.
F-6
<PAGE> 114
CPL TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements include the accounts of the company, a special
purpose Delaware limited liability company, whose sole member is CPL (CPL). CPL,
a subsidiary of Central and South West Corporation, is engaged in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of customers. The company was formed on October 28, 1999, for the
exclusive purpose of issuing notes and will remit the proceeds to CPL in
consideration for the transferring of CPL's interest in the transition property
(described below). In accordance with the restructuring law and the related
financing order, the company shall be entitled to receive the transition
property created by such financing order as assignee of CPL, and shall be
authorized to issue notes as transitional funding bonds. The assets of the
company will consist of the transition property and the other collateral,
including capital transferred by CPL in an amount specified in each prospectus
supplement which will be sufficient to meet certain requirements of the
indenture between the company and the indenture trustee. CPL anticipates that
the notes will be issued sometime in the quarter of 2000.
The company was organized with the sole purpose of limited business
activities as are necessary or reasonably related to the issuance of the notes.
The company is structured and is to be operated in a manner such that even in
the event of bankruptcy proceedings against CPL, the assets of the company will
not be consolidated into the bankruptcy estate of CPL.
The transition property is a separate property right, as created under the
financing order issued by the Public Utility Commission of the State of Texas on
, including, without limitation, the right to impose, collect and receive
transition charges. Transition charges are non-bypassable, usage-based charges
to be imposed on designated retail consumer of electricity.
2. SUMMARY OF ACCOUNTING POLICIES
(a) General
The company follows the accrual method of accounting. The account
receivable from CPL was received subsequent to the balance sheet date. The
issuance expenses in connection with the notes will be paid from the proceeds
received for the notes.
(b) Unamortized Issuance Expense in Connection with the Notes
The unamortized issuance expenses in connection with the notes will be
amortized over the life of the notes.
(c) Income Taxes
As a special purpose limited liability company, the member of the company
intends for the company and CPL to be treated as a single entity of tax
purposes. Income and losses are passed through to the member of the company and,
accordingly, there will be no provision for income taxes.
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 115
CPL TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
3. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Notwithstanding the non-recourse nature of the transactions, CPL
(individually, as servicer or otherwise) will be required under the transaction
documents (i) to make certain representations and warranties with respect to,
among other things, the validity of the company's and its assignees' title to
the transition property and (ii) to observe certain covenants for the benefit of
the company and its assignees. CPL will also be required to indemnify the
company against breaches of such representations and warranties and its failure
to perform its covenants and to protect such parties against certain other
losses, which result from actions or inactions of CPL.
CPL will act as the initial servicer for the company under the transaction
documents. The transaction documents will contain provisions allowing the
servicer to be replaced under limited circumstances. The servicer will be paid a
servicing fee in consideration for billing and collection transition charges on
behalf of the company, calculating the true-up adjustments and performing
related services. Such servicing fees shall be paid to the servicer for the
transition charges collection.
F-8
<PAGE> 116
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson, or other person is authorized to give any information
or to represent anything not contained in this prospectus supplement and the
accompanying prospectus. You must not rely on any unauthorized information or
representations. This prospectus supplement and the accompanying prospectus is
an offer to sell only the securities offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus supplement and the accompanying prospectus is
current only as of the date of this prospectus supplement and the accompanying
prospectus.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Description of the Notes................ S-2
Transition Property..................... S-6
Underwriting............................ S-7
Ratings................................. S-8
Material U.S. Federal Tax Consequences.. S-8
PROSPECTUS
Prospectus Summary...................... 1
Risk Factors............................ 12
Available Information................... 26
Reports to Holders...................... 27
Incorporation of Documents by
Reference............................. 27
Energy Deregulation and New Texas Market
Structure............................. 28
Description of the Transition
Property.............................. 31
CPL Transition Funding LLC, the
Issuer................................ 35
The Seller and Servicer................. 38
The Sale Agreement...................... 46
The Servicing Agreement................. 55
Description of the Notes................ 64
Security for the Notes.................. 78
Material U.S. Federal Tax Consequences.. 83
ERISA Considerations.................... 90
Use of Proceeds......................... 92
Plan of Distribution.................... 92
Legal Matters........................... 93
Experts................................. 93
Index to Financial Statements........... F-1
</TABLE>
----------------------
Through and including , (the 90th day after the date of this
prospectus supplement and the accompanying prospectus), all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus supplement and the accompanying
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
supplement and the accompanying prospectus when acting as an underwriter and
when offering an unsold allotment or subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
$
CPL TRANSITION FUNDING LLC
ISSUER OF THE NOTES
CENTRAL POWER AND LIGHT COMPANY
SELLER AND SERVICER
Transition Notes, Series 2000
$ Class A-1
$ Class A-2
$ Class A-3
$ Class A-4
$ Class A-5
----------------------
PROSPECTUS SUPPLEMENT
----------------------
[NAMES OF UNDERWRITERS]
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 117
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates, except
the SEC registration fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
Securities and Exchange Commission Registration Fee......... $278
Blue Sky Fees and Expenses.................................. *
Printing Expenses........................................... *
Managers' Fees and Expenses................................. *
Accountants' Fees and Expenses.............................. *
Legal Fees and Expenses..................................... *
Rating Agency Fees.......................................... *
Trustee's Fees and Expenses................................. *
Miscellaneous Fees and Expenses............................. *
----
Total............................................. $*
====
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF MEMBERS AND MANAGERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to specified standards and restrictions, if any, as are set forth in the
limited liability company agreement, a limited liability company shall have the
power to indemnify and hold harmless any member or manager or other person from
and against any and all claims and demands whatsoever.
The amended and restated limited liability company agreement (the "LLC
Agreement") of CPL Transition Funding LLC (the "Issuer") provides that, to the
fullest extent permitted by law, the Issuer shall indemnify its members and
managers against any liability incurred in connection with any proceeding in
which any member or manager may be involved as a party or otherwise by reason of
the fact that the member or manager is or was serving in its capacity as a
member or manager, unless this liability is based on or arises in connection
with the member's or manager's own willful misconduct or gross negligence, the
failure to perform the obligations set forth in the LLC Agreement, or taxes,
fees or other charges on, based on or measured by any fees, commissions or
compensation received by the managers in connection with any of the transactions
contemplated by the LLC Agreement and related agreements.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Form of Amended and Restated Limited Liability Company
Agreement of Registrant.*
3.2 -- Certificate of Formation of Registrant.
4.1 -- Form of Indenture.*
4.2 -- Form of Note.*
5.1 -- Opinion of Sidley & Austin with respect to legality of
the Notes.*
8.1 -- Opinion of Sidley & Austin with respect to federal tax
matters.*
</TABLE>
II-1
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
8.2 -- Opinion of Vinson & Elkins with respect to state tax
matters.*
10.1 -- Form of Transition Property Purchase and Sale Agreement.*
10.2 -- Form of Transition Property Servicing Agreement.*
23.1 -- Consent of Sidley & Austin (contained in its opinion
filed as Exhibit 5.1).*
23.2 -- Consent of Sidley & Austin (contained in its opinion
filed as Exhibit 8.1).*
23.3 -- Consent of Vinson & Elkins (contained in its opinion
filed as Exhibit 8.2)*
23.4 -- Consent of Arthur Andersen LLP*.
25.1 -- Statement of Eligibility and Qualification of Indenture
Trustee on Form T-1.*
27.1 -- Financial Data Schedule.*
99.1 -- Financing Order.*
99.2 -- Internal Revenue Service Private Letter Ruling Pertaining
to the first series of Notes.*
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a twenty percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change
to such information in the Registration Statement; provided, however, that
(a)(1)(i) and (a)(1)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934),
that is incorporated by reference in the Registration Statement shall be
deemed to be a new
II-2
<PAGE> 119
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
under Item 15 above, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication
of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
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<PAGE> 120
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 that the security rating requirement of
Form S-3 will be met by the time of sale and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on this 19th day of November,
1999.
CPL TRANSITION FUNDING LLC
as Registrant
By: Central Power and Light Company,
sole member
By: WENDY G. HARGUS
----------------------------------
Name: Wendy G. Hargus
Title: Treasurer
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<PAGE> 121
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Form of Amended and Restated Limited Liability Company
Agreement of Registrant.*
3.2 -- Certificate of Formation of Registrant.
4.1 -- Form of Indenture.*
4.2 -- Form of Note.*
5.1 -- Opinion of Sidley & Austin with respect to legality of
the Notes.*
8.1 -- Opinion of Sidley & Austin with respect to federal tax
matters.*
8.2 -- Opinion of Vinson & Elkins with respect to state tax
matters.*
10.1 -- Form of Transition Property Purchase and Sale Agreement.*
10.2 -- Form of Transition Property Servicing Agreement.*
23.1 -- Consent of Sidley & Austin (contained in its opinion
filed as Exhibit 5.1).*
23.2 -- Consent of Sidley & Austin (contained in its opinion
filed as Exhibit 8.1).*
23.3 -- Consent of Vinson & Elkins (contained in its opinion
filed as Exhibit 8.2)*
23.4 -- Consent of Arthur Andersen LLP*.
25.1 -- Statement of Eligibility and Qualification of Indenture
Trustee on Form T-1.*
27.1 -- Financial Data Schedule.*
99.1 -- Financing Order.*
99.2 -- Internal Revenue Service Private Letter Ruling Pertaining
to the first series of Notes.*
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF FORMATION
OF
CPL TRANSITION FUNDING LLC
This Certificate of Formation of CPL Transition Funding LLC (the "LLC"),
dated as of October 28, 1999, is being duly executed and filed by Bernard J.
Kelley, as an authorized person, to form a limited liability company under the
Delaware Limited Liability Company Act (6 Del. C. Section 18-101, et seq.).
FIRST. The name of the limited liability company formed hereby is CPL
Transition Funding LLC.
SECOND. The address of the registered office of the LLC in the State of
Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801.
THIRD. The name and address of the registered agent for service of process
on the LLC in the State of Delaware is The Corporation Trust Company,
Corporation Trust Center, 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/ BERNARD J. KELLEY
------------------------------------
Name: Bernard J. Kelley
Title: Authorized Person
