AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1999
REGISTRATION NO. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TXU TRANSITION BOND COMPANY LLC
(Issuer with respect to the Transition Bonds)
(Exact name of registrant as specified in its charter)
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Delaware applied for
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Energy Plaza
1601 Bryan Street
Suite 2-023
Dallas, Texas 75201
(214) 812-5711
(Address, Fincluding zip code, and telephone number,
including area code, of registrant's principal executive offices)
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ROBERT A. WOOLDRIDGE, Esq. DIANE J. KUBIN ROBERT J. REGER, JR., Esq.
WORSHAM, FORYSTHE Manager THELEN REID & PRIEST LLP
& WOOLDRIDGE, L.L.P. TRANSITION BOND COMPANY 40 West 57th Street
1601 Bryan Street LLC New York, New York 10019
Dallas, Texas 75201 1601 Bryan Street (212) 603-2000
(214) 979-3000 Suite 2-023
Dallas, Texas 75201
(214) 812-5711
(Names, addresses, including zip codes, and telephone numbers,
including area codes, of agents for service)
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It is respectfully requested that the Commission send copies
of all orders, notices and communications to:
RICHARD L. HARDEN, Esq.
WINTHROP, STIMSON, PUTNAM & ROBERTS
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
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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 and other factors.
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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 of 1933, 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(b)
under the Securities Act of 1933, 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
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<CAPTION>
<S> <C> <C>
Proposed maximum
aggregate offering Amount of
Title of each class of securities to be registered price(1) registration fee
-------------------------------------------------- -------- ----------------
Transition Bonds, Issuable in series..................................... $1,000,000 $264
</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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED ________
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 2000)
$__________ Transition Bonds, Series _____
TXU Transition Bond Company LLC
TXU Electric Company, servicer
-----------------------------
THE FOLLOWING SECURITIES ARE BEING OFFERED IN THIS PROSPECTUS SUPPLEMENT*:
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<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
UNDERWRITING EXPECTED
DISCOUNTS FINAL FINAL
PRINCIPAL AND NET PAYMENT MATURITY
CLASS AMOUNT PRICE COMMISSIONS PROCEEDS DATE DATE
- ----- ------- ----- ----------- -------- ---------- ----
</TABLE>
(*) These securities will be referred to as the series _____ bonds in this
prospectus supplement.
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Interest and principal on the series _____ bonds will be payable quarterly, on
the ____ day of ________, ________, ________ and ________ or the first business
day after these dates, beginning __________, 2000.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE ___ OF THE PROSPECTUS.
The series _____ bonds represent obligations of TXU Transition Bond Company LLC,
which is the issuer, and are backed only by the assets of TXU Transition Bond
Company LLC. Neither TXU Electric Company, TXU Corp, nor any of their other
affiliates are liable for payments on the series ___ bonds.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
There currently is no secondary market for the series _____ bonds, and there is
no assurance that one will develop.
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The following underwriters have agreed to purchase all of the series _____
bonds from the issuer if they purchase any of them:
[Underwriters]
This prospectus supplement does not contain complete information about the
offering of the series _____ bonds. Additional information is contained in the
prospectus. Prospective investors are urged to read both this prospectus
supplement and the prospectus in full. Sales of the series _____ bonds may not
be consummated unless the purchaser has received both this prospectus supplement
and the prospectus.
The date of this prospectus supplement is , 2000.
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
WHERE TO FIND INFORMATION IN THESE DOCUMENTS ............................... S-2
SUMMARY OF TERMS--PROSPECTUS SUPPLEMENT .................................... S-3
THE SERIES _____ BONDS ..................................................... S-8
General ............................................................... S-8
Interest .............................................................. S-9
Principal ............................................................. S-9
Optional Redemption of the Series _____ Bonds .........................S-12
The Overcollateralization and Capital Amounts .........................S-13
Other Credit Enhancement ..............................................S-14
Issuance of Additional Transition Bonds ...............................S-15
DESCRIPTION OF TRANSITION PROPERTY .........................................S-15
Customer Class Descriptions ...........................................S-16
TXU Electric Will Assess Transition Charges on Particular Customers ...S-17
TXU Electric's Transition Charges .....................................S-17
TXU Electric May Obtain Adjustments to the Transition Charges .........S-18
DESCRIPTION OF TXU ELECTRIC'S BUSINESS .....................................S-19
TXU Electric's Operations .............................................S-19
Where You Can Find More Information ...................................S-20
UNDERWRITING THE SERIES _____ BONDS ........................................S-20
RATINGS FOR THE SERIES _____ BONDS .........................................S-22
<PAGE>
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the attached prospectus provide information
about TXU Electric Company and TXU Transition Bond Company LLC, the issuer of
the transition bonds, which is sometimes referred to as "Transition Bond
Company" or "we" in this prospectus supplement. The information includes terms
and conditions that apply to the series _____ bonds. The specific terms of the
series _____ bonds are contained in this prospectus supplement. You should rely
only on information about the series _____ bonds provided in this prospectus
supplement and the attached prospectus. We have not authorized anyone to provide
you with different information.
We have included cross-references to captions in these materials where you
can find further related discussions. We have started with an introductory
section in this prospectus supplement describing Transition Bond Company and
terms in abbreviated form, followed by a more complete description of the terms.
The introductory section is called "Summary of Terms--Prospectus Supplement" and
provides information concerning the amounts and the payment terms of each class
of series _____ bonds.
Cross references may be contained in the introductory sections which will
direct you elsewhere in this prospectus supplement or the attached prospectus to
more detailed descriptions of a particular topic. You can also find references
to key topics in the Table of Contents on the preceding page.
You can find the definition of some of the terms that are frequently used
in this prospectus supplement in a Glossary, which is Appendix A to the
prospectus.
<PAGE>
SUMMARY OF TERMS--PROSPECTUS SUPPLEMENT
This summary contains a brief description of the series _____ bonds. You
will find a detailed description of the terms of the offering of the series
bonds following this summary. The terms that apply to all series of
transition bonds appear in the prospectus, which follows this prospectus
supplement.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE ___ OF THE PROSPECTUS.
THE ISSUER OF THE TRANSITION
BONDS: TXU Transition Bond Company LLC, a Delaware
limited liability company wholly-owned by TXU
Electric Company
ISSUER'S ADDRESS: Energy Plaza, 1601 Bryan Street, Suite 2-023,
Dallas, Texas 75201
ISSUER'S TELEPHONE NUMBER: (214) 812-5711
SELLER OF THE TRANSITION
PROPERTY TO THE ISSUER: TXU Electric Company, an electric utility
serving approximately 2.5 million customers in
north central, eastern and western Texas.
SELLER'S ADDRESS: Energy Plaza, 1601 Bryan Street, Dallas, Texas
75201
SELLER'S TELEPHONE NUMBER: (214) 812-4600
SERVICER OF THE TRANSITION
PROPERTY: TXU Electric Company
INDENTURE TRUSTEE: The Bank of New York
CLOSING DATE: On or about _________________, 2000
MINIMUM DENOMINATIONS: $1,000
THE TERMS OF THE SERIES _____ BONDS
CLASS ____ CLASS ___ CLASS ____
Principal Amount: $ $ $
Interest Rate Per Annum: % % %
Interest Accrual Method:
Payment Dates:
First Payment Date:
Expected Final Payment Date:
Final Maturity Date:
CUSIP Number:
Anticipated Ratings
(Moody's/S&P/Fitch
IBCA/Duff & Phelps): Aaa/AAA/AAA/AAA Aaa/AAA/AAA/AAA Aaa/AAA/AAA/AAA
S-3
<PAGE>
THE COLLATERAL
Transition Bond Company will own transition property, a present property
right created pursuant to Texas' electric utility restructuring act. The
transition property includes the right to impose, collect and receive transition
charges in amounts designed to recover:
o the principal amount of the transition bonds; and
o the interest, and other amounts, charges and expenses associated with
the transition bonds.
Those transition charges will be payable, directly or through retail
electric providers, by retail consumers of electricity within TXU Electric's
service territory. See "The Restructuring Act--The Restructuring Act's General
Effect on the Electric Utility Industry in Texas" in the prospectus. The
principal amount of the transition bonds is equal to a portion of TXU Electric's
generation-related regulatory assets together with certain costs of issuance,
costs to retire existing obligations and costs for professional services
provided to the PUC. The amount of TXU Electric's generation-related regulatory
assets is equal to a portion of the amount reported by TXU Electric as
regulatory assets in its 1998 annual report on Form 10-K, as adjusted. The
transition property is described in more detail under "The Sale Agreement--TXU
Electric's Sale and Assignment of Transition Property" in the prospectus.
In connection with the issuance of the series ___ bonds, TXU Electric will
sell transition property to Transition Bond Company to support the issuance of
up to $__________ in principal amount of transition bonds. TXU Electric, as
servicer of the transition property, will collect, either directly or through
retail electric providers, the transition charges from retail customers within
its service territory on behalf of Transition Bond Company.
RETAIL ELECTRIC PROVIDERS
Beginning on January 1, 2002, all retail electric customers in Texas will
be entitled to purchase electric energy from a "retail electric provider" of
their own choosing. For more information about retail electric providers, see
"The Restructuring Act--The Restructuring Act's General Effect on the Electric
Utility Industry in Texas" in the prospectus. Retail electric providers will be
allowed to charge and collect transition charges from customers within TXU
Electric's service territory and will be required to pay the amounts billed to
them by the servicer, less an amount relating to expected customer charge-offs.
See "The Servicer of the Transition Property" in the prospectus.
PAYMENT SOURCES
On each payment date, the indenture trustee will pay amounts owed on the
series _____ bonds from:
o amounts collected by the servicer for Transition Bond Company with
respect to transition charges during the applicable collection
periods; and, if not sufficient,
o amounts available from trust accounts held by the indenture trustee.
These accounts are described in greater detail under "The Indenture--The
Collection Account for the Transition Bonds" in the prospectus.
The series _____ bonds will not be payable from collateral that is separate
S-4
<PAGE>
from that securing other series of transition bonds except that a separate
overcollateralization, capital and reserve subaccount will be established for
each series of transition bonds and, so long as no event of default under the
indenture exists or would result from the failure to make a scheduled payment on
another series, those subaccounts will be available to make payments only on
that series. If additional transition bonds are issued, the principal source of
repayment for those transition bonds will also be the transition charges
received by the servicer. The issuance of additional transition bonds is not
expected to adversely affect collections of transition charges to make payments
on the series _____ bonds. We may not issue additional transition bonds unless
the applicable rating agencies confirm that the issuance would not result in a
reduction or withdrawal of the current ratings on the outstanding series _____
bonds. See "The Indenture" in the prospectus.
INTEREST PAYMENTS
On each payment date, Transition Bond Company will pay interest on each
class of the series _____ bonds.
Interest generally is payable on the outstanding principal balance of the
series _____ bonds on a quarterly basis. Interest payments for all classes of
the series _____ bonds will be made on an equal basis. The series _____ bonds
will accrue interest on any interest not paid on a timely basis.
Interest means, for any payment date for the series _____ bonds, the sum,
without duplication, of:
o an amount equal to the amount of interest accrued at the applicable
interest rates from the prior payment date with respect to the series
_____ bonds; plus
o any unpaid interest due plus any interest accrued on this unpaid
interest; plus
o if the series ______ bonds have been declared due and payable, all
accrued and unpaid interest thereon.
For the first payment date, interest will accrue from the initial issuance
date.
PRINCIPAL PAYMENTS
On each payment date, the amount that is to be paid as principal on the
transition bonds, including the series _____ bonds, will equal the sum, without
duplication, of:
o the unpaid principal amount of any transition bonds whose final
maturity date is on that payment date; plus
o the unpaid principal amount of any transition bonds called for
redemption; plus
o the unpaid principal amount if there is a default on the transition
bonds and the indenture trustee or the holders of a majority of the
principal amount of the transition bonds have declared the transition
bonds to be due and payable; plus
o the principal scheduled to be paid on the transition bonds on that
payment date.
On each payment date, holders of each class of series _____ bonds will be
entitled to receive payments of principal in a sequential manner, to the extent
funds are available, as follows:
S-5
<PAGE>
1. To the holders of the series _____ bonds, class ___, until this class
is paid in full;
2. To the holders of the series _____ bonds, class ___, until this class
is paid in full; and
3. To the holders of the series _____ bonds, class ___, until this class
is paid in full.
However, the principal payment on any class on a payment date will
generally not be greater than the amount necessary to reduce the principal
balance of the class to the amount specified in Table 2 in this prospectus
supplement.
OPTIONAL REDEMPTION
Transition Bond Company may redeem the series _____ bonds, in whole but not
in part, at its option, on any payment date, if the outstanding principal
balance of the series _____ bonds, after giving effect to payments that would
otherwise be made on that payment date, is less than or equal to five percent of
the initial principal balance of the series _____ bonds.
In addition, Transition Bond Company may redeem the series ___ bonds, in
whole or in part, at its option, _________.
In the case of redemption, Transition Bond Company will pay the outstanding
principal amount of the series _____ bonds together with accrued but unpaid
interest as of the redemption date. The indenture trustee will give notice of
the redemption to holders of series _____ bonds not less than five days nor more
than 45 days prior to the redemption date. The series _____ bonds will not be
redeemed in any other circumstances.
PARTICULAR CREDIT ENHANCEMENT FEATURES
Credit enhancement for the series _____ bonds includes the following:
o Adjustments to the Transition Charges. TXU Electric, as servicer of
the transition property on behalf of Transition Bond Company, will
make adjustments to the transition charges it bills, directly or
through retail electric providers, to customers, if TXU Electric:
o collects insufficient transition charges, or
o collects excess amounts of transition charges,
in order:
o to make timely payments on the series _____ bonds,
o to pay fees, costs and charges associated with the transition bonds,
and
o to fund any of the subaccounts to its required level.
If the final outstanding class of the series _____ bonds is not paid at its
final maturity date, the transition charges will continue to be collected, but
no transition charges will be charged with respect to this series of bonds after
____________. See "The Initial Financing Order and the Transition Charges" in
the prospectus.
o Collection Account--Under the indenture providing for the issuance of
the transition bonds, the indenture trustee will hold a single
collection account, divided into various subaccounts. The primary
S-6
<PAGE>
subaccounts for credit enhancement purposes are:
o Overcollateralization Subaccount--A separate overcollateralization
subaccount will be established for the series ___bonds. The funding
level for this overcollateralization subaccount is [0.5%] of the
initial principal amount of the series _____ bonds, which will be
funded ratably over the life of the series ___ bonds, as described in
Table 3 in this prospectus supplement;
o Capital Subaccount--A separate capital subaccount will be established
for the series ___bonds. An amount equal to 0.5% of the initial
principal amount of the series _____ bonds will be deposited in this
capital subaccount on the initial issuance date of the series ___
bonds;
o Reserve Subaccount--A separate reserve subaccount will be established
for the series ___bonds. A portion of any excess amount of transition
charge remittances and investment earnings not released to Transition
Bond Company will be allocated to this reserve subaccount on a pro
rata basis, based on the annual revenue requirements for the series
___ bonds; and
o Retail Electric Provider Security Deposit Subaccount--An amount,
subject to adjustment, from each retail electric provider collecting
transition charges from customers in the servicer's service territory
equal to two months of that retail electric provider's maximum
estimated collections of transition charges, as specified by the
servicer, will be deposited in the retail electric provider security
deposit subaccount.
The credit enhancement for the series _____ bonds is intended to protect
you against losses or delays in scheduled payments on your series _____ bonds. A
separate overcollateralization subaccount, a separate capital subaccount and a
separate reserve subaccount will be established for each series of the
transition bonds.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the series
___ bonds subject to specified conditions. The acquisition and holding of the
series ___ bonds could be treated as an indirect prohibited transaction under
ERISA. Accordingly, by purchasing the series ___ bonds, each investor purchasing
on behalf of a pension plan, or other investor subject to ERISA, will be deemed
to certify that the purchase and subsequent holding of the series ___ bonds
would be exempt from the prohibited transaction rules of ERISA. For further
information regarding the application of ERISA, see "ERISA Considerations" in
the prospectus.
S-7
<PAGE>
THE SERIES _____ BONDS
The series _____ bonds will be issued under and their payment will be
secured pursuant to the indenture to be entered into between Transition Bond
Company and The Bank of New York, as indenture trustee, providing for the
issuance of the transition bonds, as that indenture may be amended or
supplemented from time to time. In the indenture, Transition Bond Company will
grant to the indenture trustee, for the benefit of the holders of transition
bonds, a security interest in the transition property sold to it by TXU Electric
pursuant to one or more financing orders issued to TXU Electric under the
Restructuring Act. The following summary describes the material terms of the
series _____ bonds. See "Description of Transition Property" in this prospectus
supplement.
Where to Find Definitions of Some Terms. Some of the terms that are
frequently used in this prospectus supplement are defined in a Glossary, which
is Appendix A to the prospectus.
GENERAL
The following classes of series _____ bonds will be issued on the initial
issuance date of the series ___ bonds.
TABLE 1
INITIAL EXPECTED FINAL FINAL
CLASS PRINCIPAL BALANCE PAYMENT DATE MATURITY DATE INTEREST RATE
- ----- ----------------- ------------ ------------- -------------
How Transition Bond Company Will Make Series _____ Bond Payments.
Transition Bond Company will pay interest and principal relating to the series
_____ bonds through DTC or, if the series _____ bonds are no longer in
book-entry form, at the offices of The Bank of New York at 101 Barclay Street,
Floor 12 East, New York, NY 10286, Attention: Asset Backed Finance Unit.
Transition Bond Company will make payments by wire transfer in immediately
available funds to the account designated by Cede & Co. as nominee of DTC if the
series _____ bonds are in book-entry form. Otherwise, Transition Bond Company
will make payments by check mailed first-class, postage prepaid, to the address
of a holder of series _____ bonds as it appears as of the record date on the
register maintained by the indenture trustee. After prior notice to the holder
of series _____ bonds, Transition Bond Company will pay the final installment of
S-8
<PAGE>
principal and premium, if any, only upon presentation and surrender of the
series _____ bonds at the place or places specified in the notice. A beneficial
owner of a series _____ bond in book-entry form will receive payments from the
securities intermediary through whom it holds the series _____ bonds.
INTEREST
Interest on each class of the series _____ bonds will accrue from their
initial issuance date at the respective interest rates indicated above. For each
class of the series _____ bonds, interest is payable on each payment date
indicated on Table 2 in this prospectus supplement, commencing ____________, to
the persons in whose names the series _____ bonds of each class are registered
at the close of business on the preceding record date.
On each payment date, holders of each class of series _____ bonds will be
entitled to receive payments of interest on an equal basis among all classes.
The record date with respect to any payment date for series ____ bonds held in
book-entry form will be the close of business on the business day preceding the
payment date. The record date with respect to any payment date for series ____
bonds not held in book-entry form will be the close of business on the fifteenth
calendar day preceding the payment date.
PRINCIPAL
On each payment date, holders of each class of series _____ bonds will be
entitled to receive payments of principal in a sequential manner, to the extent
funds are available after payment of interest to all classes, as follows:
1. To the holders of the series _____ bonds, class ___, until this class
is paid in full;
2. To the holders of the series _____ bonds, class ___, until this class
is paid in full; and
3. To the holders of the series _____ bonds, class ___, until this class
is paid in full.
However, the principal payment on any class on a payment date will generally not
be greater than the amount necessary to reduce the outstanding principal balance
of the class to the amount specified in Table 2 in this prospectus supplement.
The entire unpaid principal amount of each class of the series _____ bonds
will be due and payable on the Final Maturity Date for the class.
In the event of an acceleration of payments following a default on the
series _____ bonds, principal payments on each class of series _____ bonds will
be made on a pro rata basis based on the respective outstanding principal
balance for each class as of the prior payment date.
S-9
<PAGE>
The Expected Amortization Schedule for the Series _____ Bonds. Table 2 in
this prospectus supplement sets forth the principal balance that is scheduled to
remain outstanding on each payment date for each class of the series _____ bonds
after giving effect to the payments made on that date. In preparing Table 2, it
has been assumed, among other things, that:
o the series _____ bonds are initially issued on ____________;
o payments on the series _____ bonds are made on each payment date,
commencing on ____________;
o the servicing fee payable to TXU Electric or any other servicer of the
transition property equals approximately 0.25% per year of the
outstanding principal amount of series __ bonds; however, if the
servicer is not affiliated with TXU Electric, this fee may be as high
as 1.5% per year of the outstanding principal amount of series __
bonds;
o the quarterly fee paid to the indenture trustee under the indenture
for the series _____ bonds equals $________;
o the quarterly fees paid to the independent managers of Transition Bond
Company equal $_____;
o the quarterly fee paid to the administrator of Transition Bond Company
for the series _____ bonds equals $-------;
o there are no net earnings on amounts on deposit in the collection
account;
o operating expenses, including all other fees, costs and charges of
Transition Bond Company and amounts owed by Transition Bond Company to
the indenture trustee not noted above are paid in the amount of
$_______ in the aggregate for all series of transition bonds on each
payment date; and
o all transition charges received by the servicer from customers, either
directly or through retail electric providers, are deposited in the
collection account in accordance with TXU Electric's forecasts.
S-10
<PAGE>
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING CLASS PRINCIPAL BALANCE
PAYMENT DATE CLASS CLASS CLASS
- ------------ --------- --------- ---------
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Series _____ Bond Principal Payments May Be Made Later than Scheduled.
There can be no assurance that the principal balance of any class of the series
_____ bonds will be reduced to the amounts indicated in Table 2. The actual
principal payments on a class may be made on a payment date later than indicated
in Table 2. The series _____ bonds will not be in default if not paid on the
dates specified in Table 2, unless any class is not paid in full on or prior to
its respective Final Maturity Date.
S-11
<PAGE>
OPTIONAL REDEMPTION OF THE SERIES _____ BONDS
Transition Bond Company may redeem the series _____ bonds, in whole but not
in part, at its option, on any payment date if the outstanding principal balance
of the series _____ bonds, after giving effect to payments that would otherwise
be made on that payment date, is less than or equal to five percent of the
initial principal balance of the series _____ bonds.
In addition, Transition Bond Company may redeem the series ___ bonds, in
whole or in part, at its option ------------.
In the case of redemption, Transition Bond Company will pay the outstanding
principal amount of the series _____ bonds together with accrued but unpaid
interest as of the redemption date. The indenture trustee will give notice of
the redemption to the holders of series _____ bonds not less than five days nor
more than 45 days prior to the redemption date. The series _____ bonds will not
be redeemed in any other circumstances.
S-12
<PAGE>
THE OVERCOLLATERALIZATION AND CAPITAL AMOUNTS
The Overcollateralization Subaccount. The Overcollateralization Amount for
the series _____ bonds is [0.5%] of the aggregate outstanding principal amount
of the series___ bonds. The transition charges related to the series _____ bonds
will be calculated at and periodically adjusted to a level that is designed to
collect the Overcollateralization Amount in equal amounts over the life of the
series _____ bonds up to the Scheduled Overcollateralization Level shown in
Table 3. The Scheduled Overcollateralization Levels, as of the date of this
prospectus supplement, for each payment date for the series _____ bonds are set
forth below. See also "The Transition Bonds--Credit Enhancement for the
Transition Bonds" and "The Indenture--How Funds in the General Subaccount Will
be Allocated" in the prospectus.
TABLE 3
SCHEDULED
PAYMENT DATE OVERCOLLATERALIZATION LEVEL
- ------------ ---------------------------
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If amounts available in the general subaccount and the reserve subaccount
for the series ___ bonds are not sufficient on any payment date to make
scheduled payments to the holders of series _____ bonds and to pay the fees,
costs and charges specified in the indenture, the indenture trustee will draw on
amounts in the overcollateralization subaccount for the series ___ bonds. See
"The Transition Bonds--Credit Enhancement for the Transition Bonds" and "The
Indenture--How Funds in the General Subaccount Will Be Allocated" in the
prospectus. The Overcollateralization Amount set forth above has been set at a
level sufficient to obtain the ratings on the series _____ bonds which are
described below under "Ratings for the Series _____ Bonds."
The Capital Subaccount. The Required Capital Amount for the series _____
bonds is 0.5% of the aggregate outstanding principal amount of the series___
bonds, which initially will be $________. Upon the issuance of any series _____
bonds, TXU Electric will deposit the Required Capital Amount attributable to
those series ___ bonds in the capital subaccount for the series ___ bonds. If
amounts available in the general subaccount, the reserve subaccount for the
series ___ bonds and the overcollateralization subaccount for the series ___
bonds are not sufficient on any payment date to make scheduled payments to the
holders of series _____ bonds and to pay the fees, costs and charges specified
in the indenture, the indenture trustee will draw on any amounts in the capital
subaccount for the series ___ bonds in excess of $100,000. An amount in that
capital subaccount equal to $100,000 will be set aside to cover other operating
expenses not funded from transition charges received by the servicer. The
Required Capital Amount has been set at a level sufficient to obtain the ratings
on the series _____ bonds that are described below under "Ratings for the Series
_____ Bonds."
OTHER CREDIT ENHANCEMENT
The Reserve Subaccount. Any transition charges received by the servicer,
any amounts paid by TXU Electric or the servicer in respect of indemnification
obligations under the sale agreement or the servicing agreement plus investment
earnings on the collection account (except for investment earnings on the
capital subaccounts, which will be released to Transition Bond Company if not
needed on that payment date), will be available on each payment date to pay:
o the fees and expenses of the indenture trustee and the servicer and
other fees, costs and charges associated with the transition bonds
including operating expenses of Transition Bond Company,
o scheduled payments of principal of and interest on each series of
transition bonds payable on that payment date,
o any amount required to replenish the capital subaccounts, and
o the amounts allocable to the overcollateralization subaccounts,
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all as described under "The Indenture--How Funds in the General Subaccount Will
Be Allocated" in the prospectus. Any transition charges received by the servicer
and any investment earnings in excess of the amounts payable described (except
investment earnings on the capital subaccounts) will be allocated to the reserve
subaccount for the series ___ bonds, pro rata based on the annual revenue
requirements for the series ___ bonds. If on any payment date, amounts available
in the general subaccount are not sufficient to make scheduled payments to the
holders of series _____ bonds and to pay the fees, costs and charges specified
in the indenture, the indenture trustee will draw on any amounts in the reserve
subaccount for the series ___ bonds.
See "The Indenture--The Collection Account for the Transition Bonds" in the
prospectus.
Retail Electric Provider Security Deposit Subaccount. Each retail electric
provider must deposit with the indenture trustee a cash amount, or comparable
security satisfying applicable rating agency requirements, equal to two months
maximum estimated collections of transition charges, as specified by the
servicer. In the event of a default by the retail electric provider in its
obligations to remit transition charges to the servicer, the servicer will
collect those transition charges from the deposit or security and any remaining
deficiency in collections and in the amount of that deposit or security will be
taken into consideration in the periodic adjustment of the transition charges.
See "Description of Transition Property--TXU Electric May Obtain Adjustments to
the Transition Charges" in this prospectus supplement.
ISSUANCE OF ADDITIONAL TRANSITION BONDS
Transition Bond Company may issue additional transition bonds of one or
more new or existing series, including additional series ___ bonds, without the
prior approval of the holders of transition bonds. Any new series may include
terms and provisions that are unique to those particular series. Additional
transition bonds may not be issued if it would result in the credit ratings on
the series _____ bonds being reduced or withdrawn. See "Risk Factors--Other
Risks Associated With an Investment in the Transition Bonds," "The Transition
Bonds" and "The Indenture" in the prospectus.
DESCRIPTION OF TRANSITION PROPERTY
The transition property is a present property right created pursuant to the
Restructuring Act. The transition property represents the rights and interests
of TXU Electric or its assignee under the initial financing order issued by the
PUC to TXU Electric pursuant to the Restructuring Act on ____________, including
the right to impose, collect and receive the transition charges authorized in
that financing order. That initial financing order authorizes TXU Electric to
impose, collect and receive transition charges in amounts sufficient to recover
all of the following:
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o $1,650 million of regulatory assets (see "The Restructuring Act--TXU
Electric and Other Utilities May Securitize Stranded Costs and
Regulatory Assets" in the prospectus);
o the costs of retiring and refunding TXU Electric's existing debt or
equity in connection with the issuance of transition bonds;
o the costs incurred to issue, support and service the transition bonds;
and
o the cost to the PUC of the professional services or advisors hired to
help the PUC evaluate this transaction.
In general, each of the seven customer classes of TXU Electric is
responsible for a fixed percentage of the transition charges. The transition
charges will be applied to each rate schedule within each customer class.
Aggregate adjustments to the transition charges will be allocated across all of
the customer classes based on the percentage of Qualified Costs allocated to
each customer class, which may result in an increase in transition charges to
one customer class because of shortfalls in transition charges received by the
servicer from another customer class. See "The Restructuring Act" and "The
Initial Financing Order and the Transition Charges" in the prospectus.
CUSTOMER CLASS DESCRIPTIONS
The following seven customer classes make up TXU Electric's retail customer
base:
o residential;
o commercial;
o industrial;
o large industrial;
o lighting;
o commercial/industrial-noticed interruptible; and
o commercial/industrial-instantaneous interruptible.
Each customer class includes a number of rate schedules. Customer classes
and rate schedules are created by TXU Electric and approved by the PUC, and are
subject to change. Any changes will be reflected in any true-up adjustment
filings with the PUC by the servicer for adjustment of the transition charges.
See "The Servicer of the Transition Property--TXU Electric's Customer Classes"
in the prospectus.
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TXU ELECTRIC WILL ASSESS TRANSITION CHARGES ON PARTICULAR CUSTOMERS
TXU Electric will, either directly or through retail electric providers,
assess transition charges on the bills of substantially all of its existing
retail customers and all future retail customers located within its geographical
service area as it existed on May 1, 1999. A customer must pay transition
charges even if another company serves as that customer's retail electric
provider.
Generally, a customer can only avoid paying transition charges by moving
out of TXU Electric's service area. However, a customer can also avoid
transition charges if that customer is served by:
o certain power production facilities that have made substantially
complete filings on or before December 31, 1999 for all necessary
site-specific environmental permits and become fully operational
before September 1, 2001; or
o an on-site power production facility with a rated capacity of 10
megawatts or less.
In addition, a customer in a dually-certificated area that requested to switch
providers on or before May 1, 1999, or was not taking service from TXU Electric
on May 1, 1999, and does not do so after that date, will not be required to pay
transition charges. The transition charges have been allocated among the seven
customer classes. See "--TXU Electric's Transition Charges" below.
TXU ELECTRIC'S TRANSITION CHARGES
The Qualified Costs authorized in the initial financing order are to be
recovered from the customers in each of TXU Electric's customer classes.
Generally, except as described above, each customer must pay transition charges,
even if the customer elects to purchase electricity from another supplier or
elects to self-generate its electricity needs. In general, as long as the
customer is located within TXU Electric's service area, that customer must pay
transition charges, even if some other entity is providing the customer with
electricity generation service.
Transition charges will be allocated among TXU Electric's customer classes
based on the relative generation-related charges borne by each customer class
through the electric rates specified in TXU Electric's electricity rate tariff
that became effective on June 25, 1998. From this determination, TXU Electric
will calculate the total amount of transition charges required to be billed to
each customer class such that the servicer will receive transition charges
sufficient to ensure timely recovery of the Qualified Costs authorized in the
initial financing order. That amount will be expressed as a charge or charges
for each rate schedule within a customer class. Those charges will be included
in each customer's bill within each rate schedule. The charges will vary among
customer classes but will be identical for all customers within a given customer
class. The dollar amount of the charge on a customer's bill includes the
transition charge payable by the customer.
Transition charges actually received by the servicer will vary from
projections because total electricity revenues are affected by changes in usage,
number of customers, rate of delinquencies and write-offs or other factors. On
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each date on which the servicer is required to file transition charge adjustment
calculations with the PUC, it will recalculate the transition charges to adjust
for the variations. See the Tables under "The Servicer of the Transition
Property" in the prospectus.
The servicer will remit all investment earnings, all transition charges
that it receives, and all amounts paid by TXU Electric or the servicer in
respect of indemnification obligations under the sale agreement or the servicing
agreement to the indenture trustee on the date required under the indenture for
deposit in the collection account. These funds remitted by the servicer to the
indenture trustee will be deposited into the general subaccount. On each payment
date, the indenture trustee will allocate amounts in the general subaccount as
described under "The Indenture--How Funds in the General Subaccount Will Be
Allocated" in the prospectus.
The Average Transition Charge for Customers. Initially, the transition
charges billed will be approximately $_____ per month for an average customer in
the residential class; approximately $_____ per month for an average customer in
the commercial class; approximately $_____ per month for an average customer in
the industrial class; approximately $_____ per month for an average customer in
the large industrial class; approximately $_____ per month for an average
customer in the lighting class; approximately $_____ per month for an average
customer in the commercial/industrial-noticed interruptible class; and
approximately $_____ per month for an average customer in the
commercial/industrial-instantaneous interruptible class. Transition charges will
be collected from customers in per kilowatt-hour ("kWh") components. The Average
Transition Charge Rate tabulated below generally reflects the projected amount
of transition charges to be assessed by the servicer during the period covered
by Table 4, divided by projected customer class usage in kWh for that period.
The average monthly bill for each TXU Electric customer class during _____ was
$_____, $_____, $_____, $_____, $_____, $_____ and $_____, respectively. The
following projected average transition charges will be imposed on customers in
each customer class beginning on the initial issuance date for the series _____
bonds:
TABLE 4
PROJECTED AVERAGE TRANSITION CHARGES FOR THE PERIOD FROM ________ TO ________
[_____________]
CUSTOMER CLASS AVERAGE TRANSITION CHARGE RATE (DOLLARS PER KWH)
- -------------- ------------------------------------------------
TXU ELECTRIC MAY OBTAIN ADJUSTMENTS TO THE TRANSITION CHARGES
The servicing agreement requires that the servicer review transition
charges and make true-up adjustment filings with the PUC for adjustment of those
transition charges at least annually, to correct any overcollections or
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undercollections of the preceding period and 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 transition bonds.
Under the initial financing order issued to TXU Electric under the
Restructuring Act, the servicer must make true-up adjustment filings annually,
within 45 days of the anniversary of the date of the issuance of the transition
bonds. Under the initial financing order, the PUC has 15 days after the true-up
adjustment filing in which to confirm the mathematical accuracy of the
servicer's adjustment; however, since the adjustment is effective immediately
upon filing, any necessary corrections to the adjustment will be made in future
true-up adjustment filings. The initial financing order and the servicing
agreement allow adjustments to be made more frequently. See "The Servicing
Agreement--The PUC's Transition Charge Adjustment Process" and "The Initial
Financing Order and the Transition Charges--True-Up Adjustments" in the
prospectus.
DESCRIPTION OF TXU ELECTRIC'S BUSINESS
The following information supplements the information provided under the
heading "TXU Electric Company" in the prospectus. For a more complete discussion
of the servicer, see "TXU Electric Company" and "The Servicer of the Transition
Property" in the prospectus.
TXU ELECTRIC'S OPERATIONS
TXU Electric is an operating electric utility, incorporated under the laws
of the State of Texas in 1982. TXU Electric is a wholly-owned subsidiary of TXU
Corp and, prior to June 1999, was known as Texas Utilities Electric Company.
TXU Electric reported net income of $695 million on revenue of $4.847
billion for the nine months ended September 30, 1999 as compared with net income
of $697 million on revenue of $5.121 billion for the nine months ended September
30, 1998.
Actual electricity usage is dependent on factors such as weather
conditions, demographic changes, and economic conditions. See "Risk
Factors--Servicing Risks" in the prospectus. The compounded annual growth rate
in usage, adjusted for weather effects, by all customer classes from 1995
through 1998 was 3.1%. There can be no assurance that future usage growth rates
for TXU Electric will be similar to historical experience.
The Percentage Concentration of TXU Electric's Large Customers. For the
year ended December 31, 1998, the largest customer represented approximately
0.8%, and the ten largest customers represented approximately 3.8%, of TXU
Electric's actual retail electric usage. All of those customers are within the
large industrial customer class.
There can be no assurance that current customers will remain customers or
that the levels of customer concentration in the future will be similar to those
set forth above.
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WHERE YOU CAN FIND MORE INFORMATION
Transition Bond Company Will File Information With the SEC. Transition Bond
Company will file with the SEC all periodic reports as are required by the
Securities Exchange Act of 1934, and the rules, regulations or orders of the SEC
thereunder. Copies of the registration statement and exhibits thereto may be
obtained at the locations specified in the prospectus under "TXU Electric
Company" at prescribed rates. Information filed with the SEC can also be
inspected at the SEC's site on the World Wide Web at http://www.sec.gov.
Transition Bond Company may discontinue filing periodic reports under the
Securities Exchange Act of 1934 with respect to any series at the beginning of
the fiscal year following the issuance of transition bonds of that series if
there are fewer than 300 holders of record of transition bonds of that series.
Disclaimers About the Prospectus. No dealer, salesperson or other person
has been authorized to give any information or to make any representations other
than those contained in this prospectus supplement and the prospectus and, if
given or made, the information or representations must not be relied upon as
having been authorized by Transition Bond Company, TXU Electric, the
underwriters or any dealer, salesperson or other person. Neither the delivery of
this prospectus supplement and the prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time after the date of this prospectus supplement
or the prospectus. This prospectus supplement and the prospectus do not
constitute an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make this offer or solicitation.
UNDERWRITING THE SERIES _____ BONDS
Subject to the terms and conditions set forth in the underwriting agreement
with the underwriters, for whom ____________ is acting as the representative,
Transition Bond Company has agreed to sell to the underwriters, and the
underwriters have severally agreed to purchase, the principal amount of series
_____ bonds set forth opposite each underwriter's name below:
UNDERWRITER PRINCIPAL AMOUNT
- ----------- ----------------
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and to pay for all of the series _____ bonds
offered hereby, if any are taken.
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The Underwriters' Sales Price for the Series _____ Bonds. The underwriters
propose to offer these series _____ bonds in part directly to retail purchasers
at the initial public offering prices set forth on the cover page of this
prospectus supplement, and in part to some securities dealers at a price less a
concession not in excess of ____ percent of the principal amount of these series
____ bonds. The underwriters may allow and the dealers may reallow a concession
to some brokers and dealers not in excess of ____ percent of the principal
amount of these series _____ bonds. After these series _____ bonds are released
for sale to the public, the underwriters may from time to time vary the offering
price and other selling terms.
No Assurance as to Resale Price or Resale Liquidity for the Series _____
Bonds. The series _____ bonds are a new issue of securities with no established
trading market. The series _____ bonds will not be listed on any securities
exchange. The underwriters have advised Transition Bond Company that they intend
to make a market in the series _____ bonds but are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the series _____ bonds.
Various Types of Underwriter Transactions Which May Affect the Price of the
Series _____ Bonds. The underwriters may engage in overallotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids with
respect to the series _____ bonds in accordance with Regulation M under the
Securities Exchange Act of 1934. Overallotment transactions involve syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the series _____ bonds so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the series _____ bonds in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the series _____ bonds originally sold by the
syndicate member are purchased in a syndicate covering transaction. These
overallotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids may cause the prices of the series _____ bonds to
be higher than they would otherwise be in the absence of these transactions.
None of TXU Electric, Transition Bond Company, the indenture trustee or any of
the underwriters represents that the underwriters will engage in any of these
transactions or that these transactions, once commenced, will not be
discontinued without notice at any time.
In the ordinary course of business, each underwriter and its affiliates
have engaged and may engage in investment banking and/or commercial banking
transactions with Transition Bond Company and its affiliates, including TXU
Electric. In addition, each underwriter may from time to time take positions in
the series _____ bonds.
Under the terms of the underwriting agreement, Transition Bond Company and
TXU Electric have agreed to reimburse the underwriters for some expenses.
Transition Bond Company and TXU Electric have agreed to indemnify the
underwriters against, or contribute to payments that the underwriters may be
required to make in respect of, some liabilities, including liabilities under
the Securities Act of 1933.
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RATINGS FOR THE SERIES _____ BONDS
It is a condition of any underwriter's obligation to purchase the series
_____ bonds that each class of the series _____ bonds be rated "AAA" by S&P,
"Aaa" by Moody's, "AAA" by Fitch IBCA and "AAA" by Duff & Phelps.
Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency. No person is obligated to maintain the
rating on any series _____ bond, and, accordingly, there can be no assurance
that the ratings assigned to any class of series _____ bonds upon initial
issuance will not be revised or withdrawn by a rating agency at any time
thereafter. If a rating of any class of series _____ bonds is revised or
withdrawn, the liquidity of the class of series _____ bonds may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the series _____
bonds other than payment in full of each class of series _____ bonds by the
applicable Final Maturity Date.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE OR OTHER JURISDICTIO WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ________, 1999
PROSPECTUS
TXU TRANSITION BOND COMPANY LLC, ISSUER
TXU ELECTRIC COMPANY, SERVICER
TRANSITION BONDS
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE __ OF THIS PROSPECTUS.
These securities are backed primarily by an intangible asset and issued by an
issuer that has no assets other than the assets described in this prospectus.
These securities are not obligations of TXU Electric or any affiliate other than
TXU Transition Bond Company LLC.
This prospectus may be used to offer and sell a series of transition bonds only
if accompanied by a prospectus supplement for transition bonds of that series.
THE ISSUER
may periodically issue transition bonds in one or more series, each with one or
more classes, and will own:
o transition property, which is the rights and interests, created
pursuant to Texas' electric utility restructuring act, and which
includes the right to impose, collect and receive transition charges
in amounts designed to be sufficient to repay the transition bonds, to
pay expenses specified in the indenture and to fund or replenish the
trust accounts held by the indenture trustee for the transition bonds;
and
o other assets described in this prospectus.
THE TRANSITION BONDS
o will be payable only from assets of TXU Transition Bond Company LLC;
o will be supported by trust accounts held by the indenture trustee for
the transition bonds, and, if so stated in the prospectus supplement,
other credit enhancement; and
o will be issued in series, each of which TXU Transition Bond Company
LLC may issue without the consent of existing holders of transition
bonds.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is
<PAGE>
TABLE OF CONTENTS
PAGE
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS ............. 1
SUMMARY OF TERMS--PROSPECTUS ................................................ 2
RISK FACTORS ................................................................ 9
You May Experience Material Payment Delays or Losses on Your Transition
Bonds Due to the Limited Sources of Payment for the Transition Bonds and
Limited Credit Enhancement, if Any ........................................ 9
Judicial, Legislative or Regulatory Action That May Adversely Affect Your
Investment ................................................................ 9
Servicing Risks ........................................................... 12
The Risks Associated With Potential Bankruptcy Proceedings ................ 18
Other Risks Associated With an Investment in the Transition Bonds ......... 20
FORWARD-LOOKING INFORMATION ................................................. 24
ALLOCATIONS AND DISTRIBUTIONS ............................................... 25
TEXAS SECURITIZATION OVERVIEW ............................................... 26
PARTIES TO THE TRANSACTIONS ................................................. 27
TXU ELECTRIC COMPANY ........................................................ 28
THE RESTRUCTURING ACT ....................................................... 28
The Restructuring Act's General Effect on the Electric Utility
Industry in Texas ....................................................... 28
Recovery of Stranded Costs for TXU Electric and Other Texas Utilities ..... 30
TXU Electric and Other Utilities May Securitize Stranded Costs
and Regulatory Assets ..................................................... 30
THE INITIAL FINANCING ORDER AND THE TRANSITION CHARGES ...................... 33
POTENTIAL LEGAL CHALLENGES TO THE RESTRUCTURING ACT OR FINANCING ORDERS ..... 36
Litigation Relevant to the Restructuring Act .............................. 36
Legislative Activity ...................................................... 37
Potential Unexpected Regulatory Action by the PUC ......................... 38
Legal Challenges in Other States .......................................... 39
THE SERVICER OF THE TRANSITION PROPERTY ..................................... 39
TXU Electric .............................................................. 39
TXU Electric's Customer Classes ........................................... 40
How TXU Electric Forecasts the Number of Customers and the Amount
of Electricity Usage .................................................... 47
TXU Electric's Billing Process ............................................ 50
TXU Electric's Collection Process ......................................... 51
TXU Electric's Procedures for Collecting Transition Charges from
Retail Electric Providers ............................................... 53
TXU TRANSITION BOND COMPANY LLC ............................................. 55
HOW TRANSITION BOND COMPANY WILL USE THE PROCEEDS OF THE TRANSITION BONDS ... 57
INCORPORATION OF DOCUMENTS BY REFERENCE ..................................... 58
THE TRANSITION BONDS ........................................................ 58
General Terms of the Transition Bonds ..................................... 59
Payments of Interest and Principal on the Transition Bonds ................ 59
Redemption of the Transition Bonds ........................................ 60
Credit Enhancement for the Transition Bonds ............................... 61
Transition Bonds Will Be Issued in Book-Entry Form ........................ 62
Definitive Transition Bonds ............................................... 65
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS ..... 66
THE SALE AGREEMENT .......................................................... 67
TXU Electric's Sale and Assignment of Transition Property ................. 67
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TXU Electric's Representations and Warranties ............................. 68
TXU Electric's Covenants .................................................. 72
TXU Electric's Obligation to Indemnify Transition Bond Company and
the Indenture Trustee ................................................... 74
Successors to TXU Electric ................................................ 75
The Treatment of the Sale of Transition Property .......................... 76
THE SERVICING AGREEMENT ..................................................... 76
TXU Electric's Servicing Procedures ....................................... 76
Potential Limitations to Collecting Transition Charges .................... 79
The PUC's Transition Charge Adjustment Process ............................ 80
TXU Electric's Compensation for Its Role as Servicer and Its Release
of Other Parties ........................................................ 80
TXU Electric's Duties as Servicer ......................................... 80
TXU Electric's Representations and Warranties as Servicer ................. 81
TXU Electric, as Servicer, Will Indemnify Transition Bond Company
and Other Related Entities .............................................. 82
TXU Electric, as Servicer, Will Provide Statements to Transition
Bond Company and to the Indenture Trustee ............................... 82
TXU Electric to Provide Compliance Reports Concerning the
Servicing Agreement ..................................................... 84
Matters Regarding TXU Electric as Servicer ................................ 84
Events Constituting a Default by TXU Electric in Its Role as Servicer ..... 85
The Indenture Trustee's Rights If the Servicer Defaults in Its
Role as Servicer ........................................................ 86
The Obligations of a Servicer That Succeeds TXU Electric .................. 86
THE INDENTURE ............................................................... 87
The Security for Payment of the Transition Bonds .......................... 87
Transition Bonds May Be Issued in Various Series or Classes ............... 87
The Collection Account for the Transition Bonds ........................... 88
How Funds in the General Subaccount Will Be Allocated ..................... 93
Reports to Holders of the Transition Bonds ................................ 96
Transition Bond Company and the Indenture Trustee May Modify the Indenture. 96
What Constitutes an Event of Default on the Transition Bonds ..............100
Covenants of Transition Bond Company ......................................103
Access to the List of Holders of the Transition Bonds .....................105
Transition Bond Company Must File an Annual Compliance Statement ..........106
The Indenture Trustee Must Provide an Annual Report to All Holders
of Transition Bonds .....................................................106
What Will Trigger Satisfaction and Discharge of the Indenture .............106
Transition Bond Company's Legal Defeasance and Covenant
Defeasance Options ......................................................107
The Indenture Trustee .....................................................108
HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT .................................109
MATERIAL UNITED STATES FEDERAL INCOME TAX MATTERS FOR THE HOLDERS
OF TRANSITION BONDS .......................................................113
General ...................................................................113
Treatment of the Transition Bonds .........................................114
Treatment of Transition Bond Company ......................................114
Taxation of United States Holders .........................................114
Taxation of Non-United States Holders .....................................115
ERISA CONSIDERATIONS ........................................................117
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS ...............................120
RATINGS FOR THE TRANSITION BONDS ............................................121
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS ......................121
APPENDIX A--GLOSSARY OF DEFINED TERMS .......................................A-1
FINANCIAL STATEMENTS OF TXU TRANSITION BOND COMPANY LLC .....................F-1
ii
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IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information about the transition bonds provided in
this prospectus and in the prospectus supplement. We have not authorized anyone
to provide you with different or additional information.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
This prospectus and the prospectus supplement do not constitute an offer to
sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make this offer or solicitation.
Where to Find Definitions of Some Terms. Some of the terms that are
frequently used in this prospectus are defined in a Glossary, which is Appendix
A to this prospectus.
<PAGE>
SUMMARY OF TERMS--PROSPECTUS
This summary contains a brief description of the transition bonds that
applies to all series of transition bonds issued under this prospectus.
Information that relates to a specific series of transition bonds can be found
in a prospectus supplement related to that series. You will find a detailed
description of the terms of the offering of transition bonds following this
summary.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE OF THIS PROSPECTUS.
The Issuer of the Transition Bonds: TXU Transition Bond Company LLC, a
Delaware limited liability company
wholly-owned by TXU Electric Company.
The issuer was formed solely to purchase
transition property and to issue one or
more series of transition bonds secured
by the transition property.
Issuer's Address: Energy Plaza, 1601 Bryan Street,
Suite 2-023, Dallas, Texas 75201
Issuer's Telephone Number: (214) 812-5711
Seller of the Transition
Property to the Issuer: TXU Electric Company, an operating
electric utility serving approximately
2.5 million customers in north central,
eastern and western Texas
TXU Electric's Address: Energy Plaza, 1601 Bryan Street,
Dallas, Texas 75201
TXU Electric's Telephone Number: (214) 812-4600
Servicer of the Transition Property: TXU Electric Company, acting as
servicer, will service the transition
property pursuant to a servicing
agreement between the issuer and the
servicer.
Indenture Trustee: The Bank of New York
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The Assets of the Issuer: Transition Bond Company will own:
o the transition property
transferred to Transition Bond
Company, as described under
"The Sale Agreement--TXU
Electric's Sale and Assignment
of the Transition Property" in
this prospectus;
o trust accounts held by the
indenture trustee including
rights to security deposits
made by retail electric
providers and held by the
indenture trustee;
o rights under various
contracts; and
o any other credit enhancement
acquired or held to ensure
payment of the transition
bonds.
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THE COLLATERAL
Transition Bond Company will own transition property, a present property
right created pursuant to Texas' electric utility restructuring act. The
transition property includes the right to impose, collect and receive transition
charges in amounts designed to recover:
o the principal amount of the transition bonds; and
o the interest, and other amounts, charges and expenses, associated with
the transition bonds.
Those transition charges will be payable, directly or through retail
electric providers, by retail consumers of electricity within TXU Electric's
service territory. The principal amount of the transition bonds is equal to a
portion of TXU Electric's stranded costs and generation-related regulatory
assets together with certain costs of issuance, costs to retire existing
obligations and costs for professional services provided to the PUC. The amount
of TXU Electric's generation-related regulatory assets is equal to a portion of
the amount reported by TXU Electric as regulatory assets in its 1998 annual
report on Form 10-K, as adjusted. The transition property is discussed in more
detail under "The Sale Agreement--TXU Electric's Sale and Assignment of
Transition Property" in this prospectus.
TXU Electric will sell transition property to Transition Bond Company to
support the issuance of up to $_________ in principal amount of transition
bonds. TXU Electric, as servicer of the transition property, will collect,
either directly or through retail electric providers, the transition charges
from retail customers within its service territory on behalf of Transition Bond
Company.
RETAIL ELECTRIC PROVIDERS
Beginning on January 1, 2002, all retail electric customers in Texas will
be entitled to purchase electric energy from a "retail electric provider" of
their own choosing. For more information about retail electric providers, see
"The Restructuring Act--The Restructuring Act's General Effect on the Electric
Utility Industry in Texas" in this prospectus. Retail electric providers will be
allowed to charge and collect transition charges from customers within TXU
Electric's service territory and will be required to pay the amounts billed to
them by the servicer, less an amount relating to expected customer charge-offs.
See "The Servicer of the Transition Property" in this prospectus.
PAYMENT SOURCES
On each payment date specified in the prospectus supplement, the indenture
trustee will pay amounts owed on all outstanding series of transition bonds
from:
o amounts collected by the servicer for Transition Bond Company with
respect to transition charges during the applicable collection period;
and
o amounts available from trust accounts held by the indenture trustee.
These accounts are described in greater detail under "The Indenture--The
Collection Account for the Transition Bonds" in this prospectus.
PRIORITY OF DISTRIBUTIONS
On each payment date specified in the prospectus supplement, the indenture
trustee will pay or allocate remittances by the servicer and all investment
earnings on the trust accounts, to the extent funds are available in the
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collection account, in the following order of priority:
(1) payment of the indenture trustee's fee, which will be a fixed fee
in an amount specified in the indenture providing for the issuance of the
transition bonds, plus expenses and amounts paid to the indenture trustee
for indemnification of the indenture trustee under the sale agreement or
the servicing agreement, if any;
(2) payment of fees to the independent managers of Transition Bond
Company, which will be fixed in an amount to be agreed upon by Transition
Bond Company and the independent managers;
(3) payment of the servicing fee that will be a fixed fee or
percentage in an amount specified in the servicing agreement;
(4) payment of the administration fee, which will be a fixed fee in an
amount specified in the administration agreement between Transition Bond
Company and TXU Electric;
(5) payment of all operating expenses of Transition Bond Company, up
to an aggregate of $100,000 for each payment date for all series, so long
as no event of default has occurred and is continuing or would be caused by
this payment;
(6) payment of the interest then due on the transition bonds,
including payment of any amount payable to the swap counterparty on any
interest rate swap;
(7) payment of the principal then legally required to be paid on the
transition bonds, including any principal paid at final maturity or upon
redemption or acceleration;
(8) payment of the principal then scheduled to be paid on the
transition bonds;
(9) payment of any remaining unpaid operating expenses of Transition
Bond Company;
(10) replenishment of any shortfalls in the capital subaccounts, pro
rata to the capital subaccount for each series based on the annual revenue
requirements for that series;
(11) allocation of any required amounts to the overcollateralization
subaccounts, pro rata to the overcollateralization subaccount for each
series based on the annual revenue requirements for that series;
(12) release of an amount equal to investment earnings on amounts in
the capital subaccounts to Transition Bond Company, so long as no event of
default has occurred and is continuing;
(13) allocation of the remainder, if any, to the reserve subaccounts,
pro rata to the reserve subaccount for each series based on the annual
revenue requirements for that series; and
(14) following repayment of all outstanding series of transition
bonds, the balance, if any, will be released to Transition Bond Company
free from the lien of the indenture.
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The amount of all fees referenced in clauses (1) through (4) above are
described in a prospectus supplement for the related series of transition bonds.
The priority of distributions as well as available amounts in the subaccounts,
are described in more detail in "The Indenture--How Funds in the General
Subaccount Will Be Allocated" in this prospectus, as well as in the summary for
a prospectus supplement for each series of transition bonds. A diagram depicting
how the transition charges and investment earnings will be allocated may be
found on page of this prospectus.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any prospectus supplement, credit enhancement
for the transition bonds will be as follows:
o Adjustments to Transition Charges--The servicer will make adjustments
to the transition charges to make up for any shortfall or reduce any
excess in transition charge collections. See "The Initial Financing
Order and the Transition Charges" in this prospectus.
o Collection Account--Under the indenture, the indenture trustee will
hold a single collection account, divided into various subaccounts.
The primary subaccounts for credit enhancement purposes are:
o Overcollateralization Subaccounts--A separate
overcollateralization subaccount will be established for each
series of transition bonds. A prospectus supplement for each
series of transition bonds will specify a funding level for the
overcollateralization subaccount for that series. That amount
will be periodically funded from transition charges over the life
of the transition bonds;
o Capital Subaccounts--A separate capital subaccount will be established
for each series of transition bonds. An amount specified in a
prospectus supplement for each series of transition bonds will be
deposited into the capital subaccount for that series on the date of
issuance of transition bonds of that series;
o Reserve Subaccounts--A separate reserve subaccount will be established
for each series of transition bonds. A portion of any excess amount of
transition charge remittances and investment earnings not released to
Transition Bond Company will be allocated to the reserve subaccount
for each series, pro rata based on the annual revenue requirements for
that series; and
o Retail Electric Provider Security Deposit Subaccount--An amount,
subject to adjustment, from each retail electric provider collecting
transition charges from customers in the servicer's service territory
equal to two months of that retail electric provider's maximum
estimated collections of transition charges, as specified by the
servicer, will be deposited in the retail electric provider security
deposit subaccount.
Each of the overcollateralization subaccounts, the capital subaccounts and
the reserve subaccounts will be available to make payments on the related series
of transition bonds on each payment date except that if an event of default
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under the indenture exists, then those subaccounts will be available to make
payments on all series of transition bonds. In addition, those subaccounts will
be available to make any payment on any series of transition bonds if the
failure to make that payment would result in an event of default under the
indenture.
In the event that a retail electric provider defaults in its obligation to
make transition charge payments to the servicer, the servicer may instruct the
indenture trustee to apply that retail electric provider's security deposit to
those defaulted payments and to treat that security deposit like other
transition charge collections.
Additional credit enhancement for any series may include surety bonds or
letters of credit or other forms of credit enhancement. Any additional forms of
credit enhancement for a series will be specified in a prospectus supplement for
that series and may not be available to support payment of any other series.
Credit enhancement for the transition bonds is intended to protect you against
losses or delays in scheduled payments on your transition bonds.
STATE PLEDGE
The State of Texas has pledged that it will not take or permit any action
that would impair the value of the transition property or reduce, alter or
impair the transition charges until the transition bonds are fully repaid or
discharged, other than adjustments to correct any overcollections or
undercollections.
OPTIONAL REDEMPTION
A prospectus supplement may provide for redemption of a series of
transition bonds at the option of Transition Bond Company at a redemption price
not less than the outstanding principal balance of, and accrued but unpaid
interest on, the transition bonds of that series.
PAYMENT AND RECORD DATES
The payment and record dates for each series of transition bonds will be
specified in a corresponding prospectus supplement.
EXPECTED FINAL PAYMENT DATES AND FINAL MATURITY DATES
Failure to pay the entire outstanding amount of the transition bonds of any
class or series by the expected final payment date will not result in a default
with respect to that class or series until the final maturity date for the class
or series. The expected final payment date and the final maturity date of each
series and class of transition bonds will be specified in the corresponding
prospectus supplement.
REPORTS TO HOLDERS OF TRANSITION BONDS
Pursuant to the indenture, the indenture trustee will provide to the
holders of the transition bonds regular reports prepared by the servicer
containing information concerning, among other things, Transition Bond Company
and the collateral. Unless and until transition bonds are issued in definitive
form, the reports will be provided to Cede & Co. The reports will be available
upon request to the indenture trustee or the servicer. These reports will not be
examined and reported upon by an independent public accountant, and no
independent public accountant will provide an opinion thereon. See "The
Indenture--The Indenture Trustee Must Provide an Annual Report to All Holders of
Transition Bonds" in this prospectus.
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SERVICING COMPENSATION
Transition Bond Company will pay the servicer on each payment date the
servicing fee due with respect to any series of transition bonds, solely to the
extent that Transition Bond Company has funds available to pay this fee. As long
as TXU Electric acts as servicer, the servicing fee will be 0.25% per year of
the outstanding principal balance of the transition bonds. If a successor
servicer that is not affiliated with TXU Electric is appointed, it will be
entitled to receive a servicing fee but will not be entitled to any servicing
fee in excess of 1.5% per year of the outstanding principal balance of the
transition bonds.
TAX STATUS
TXU Electric has received a private letter ruling from the Internal Revenue
Service to the effect that the transition bonds will be classified as
obligations of TXU Electric for United States federal tax purposes. See
"Material United States Federal Income Tax Matters for the Holders of Transition
Bonds."
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the
transition bonds subject to specified conditions. The acquisition and holding of
the transition bonds could be treated as an indirect prohibited transaction
under ERISA. Accordingly, by purchasing the transition bonds, each investor
purchasing on behalf of a pension plan, or other investor subject to ERISA, will
be deemed to certify that the purchase and subsequent holding of the transition
bonds would be exempt from the prohibited transaction rules of ERISA. For
further information regarding the application of ERISA, see "ERISA
Considerations" in this prospectus.
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RISK FACTORS
You should consider carefully the following risk factors before you decide
whether to purchase transition bonds:
YOU MAY EXPERIENCE MATERIAL PAYMENT DELAYS OR LOSSES ON YOUR TRANSITION BONDS
DUE TO THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS AND LIMITED
CREDIT ENHANCEMENT, IF ANY
You may suffer material payment delays or losses on your transition bonds
if our assets are insufficient to pay the principal amount of the transition
bonds and accrued interest on those transition bonds in full. The only source of
funds for payments of interest on and principal of the transition bonds will be
our assets. These assets are limited to:
o the transition property, including the right to impose, collect and
receive the transition charges and to adjust the transition charges at
least annually;
o available funds on deposit in the trust accounts held by the indenture
trustee;
o contractual rights under the sale agreement, the servicing agreement
and other contracts; and
o any other credit enhancements described in the prospectus supplement.
Any floating rate bonds will also have the proceeds of any swap agreement
available as a payment source.
The transition bonds will not be insured or guaranteed by TXU Electric,
including in its capacity as servicer, or by its parent, TXU Corp, any of its
affiliates (other than Transition Bond Company), the indenture trustee or any
other person or entity. Thus, you must rely for payment of the transition bonds
upon collections of the transition charges, available funds on deposit in the
trust accounts held by the indenture trustee and any other credit enhancement
described in the prospectus supplement. Our organizational documents will
restrict our right to acquire other assets unrelated to the transactions,
including future financing orders, described in this prospectus. See "TXU
Transition Bond Company LLC" in this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION THAT MAY ADVERSELY AFFECT YOUR
INVESTMENT
Legal Action May Reduce the Value of Your Investment. The transition
property is created pursuant to Texas' electric utility restructuring act and
any financing order issued by the PUC pursuant to the restructuring act. The
restructuring act was adopted in June 1999. A court decision or a federal or
state law might seek to overturn either the restructuring act or a financing
order issued thereunder. Because the transition bonds are a creation of statute,
any alteration affecting the validity of the relevant underlying legislative
provisions could directly impact the transition bonds. For example, the
provisions that allow utility companies to create transition property as a
present property right may be invalidated. This would eliminate the validity of
the assets securing the transition bonds. As another example, the provisions
that allow for the transition charge true-up adjustment process may be
invalidated. This would prevent the servicer from ensuring that we have
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sufficient funds for the scheduled payments on the transition bonds. 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 may be directly contested in
courts. 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 transition bonds or our ability to
pay interest and principal on the transition bonds. In that case, you could
suffer a loss on or delay in recovery of your investment in the transition
bonds. To date, no lawsuit has challenged the validity of the restructuring act
or any financing order. The deadline established under the restructuring act to
appeal any financing order issued thereunder will have expired before we issue
any transition bonds under that financing order. However, if the restructuring
act is overturned, the limitation on appealing a financing order may also be
overturned. See "The Restructuring Act" in this prospectus.
Other states have passed electricity deregulation laws and judicial
challenges could be made in other states. An unfavorable decision regarding
another state's law would not automatically invalidate the restructuring act or
any financing order issued thereunder, 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 transition bonds, and as a result adversely affect the liquidity
and value of the transition bonds. Therefore, legal activity in other states may
indirectly affect the value of your investment.
Further Legislative Action May Reduce the Value of Your Investment. The
value of your investment may decline due to legislative action. For example:
o 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 impair the value of the transition
property. For a description of this pledge, see "The Restructuring
Act--TXU Electric and Other Utilities May Securitize Stranded Costs
and Regulatory Assets." We cannot assure you of the likelihood or
legal validity of any action of this type by the Texas legislature.
o The United States Congress or a federal agency may decide that it can
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. 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 prevent a utility company from creating
transition property or imposing transition charges under state law.
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Neither Transition Bond Company nor TXU Electric will indemnify you for any
changes in the law that may affect the value of your transition bonds. In
addition, any action by the United States Congress or Texas legislature, even if
the action is ultimately determined to be invalid and even if full compensation
is ultimately provided to the holders of transition bonds, might result in
costly and time-consuming litigation. Any litigation of this type might
adversely affect the price and liquidity of the transition bonds and the dates
of payment of interest and principal. Moreover, given the lack of judicial
precedent directly on point, and the novelty in Texas of transition property as
security for transition bonds, 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 transition bonds.
The PUC May Take Actions Which May Reduce the Value of Your Investment.
Under the restructuring act, a financing order issued to TXU Electric under the
restructuring act is irrevocable upon issuance. The PUC may not, by any
subsequent action, rescind or amend that financing order or reduce or impair the
amount of transition property authorized under that financing order, except as
permitted in true-up adjustments. However, the PUC retains the power to adopt,
revise or rescind rules or regulations affecting TXU Electric or a successor
utility. The PUC also retains the power to interpret that financing order. Any
new or amended regulations or orders by the PUC, for example, could affect the
ability of the servicer to collect the transition charges on a full and timely
basis. TXU Electric, as servicer, has agreed to take legal or administrative
action to resist any PUC rule, regulation or decision that would reduce the
value of the transition property. We cannot assure you that TXU Electric would
be successful in its efforts. Thus, future PUC rules, regulations or decisions
may adversely affect the ratings of the transition bonds, their price or the
collection rate of the transition charges and, accordingly, the rate of
amortization of transition bonds and their weighted average lives. As a result,
you could suffer a loss of your investment.
TXU Electric May Not Charge Transition Charges for Electricity Delivered
More Than 15 Years from the Date those Transition Charges are First Assessed.
TXU Electric will be prohibited from charging transition charges after the
fifteenth anniversary of the date of issuance of the related transition bonds,
but may collect delinquencies and uncollected end of period billings after that
date. Amounts collected from transition charges imposed for electricity delivery
through the fifteenth anniversary of the date of issuance of the related
transition bonds, or from credit enhancement funds, may not be sufficient to
repay the transition bonds in full. If that is the case, no other funds will be
available to pay the unpaid balance due on the transition bonds.
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 TXU Electric 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, for a specified time period
between January 1, 2002 and January 1, 2007, the bundled rates that can be
assessed by TXU Electric and its affiliates to residential and small commercial
customers. If there is a severe or persistent shortfall in collections of
transition charges in any customer class, the rate caps applicable to that
customer class may prevent the servicer from adjusting transition charges for
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that customer class in excess of the rate caps. If this occurs, the servicer
would have to rely on adjustments of transition charges for the 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. See "The Restructuring
Act--The Restructuring Act's General Effect on the Electric Utility Industry in
Texas" in this prospectus.
SERVICING RISKS
Inaccurate Forecasting or Unanticipated Delinquencies Could Result in
Insufficient Funds to Make Scheduled Payments on the Transition Bonds. The
transition charges are generally assessed based on kilowatt-hours of electricity
consumed by customers in TXU Electric's service area. TXU Electric calculates
the transition charges according to the methodology approved by the financing
order authorizing those transition charges. In addition, TXU Electric, as
servicer, is required to file with the PUC periodic adjustment calculations for
the transition charges. These adjustments are intended to provide, among other
things, for timely payment of the transition bonds, but the frequency of these
adjustments is limited. TXU Electric will generally base its adjustment
calculations on any shortfalls in collections from customers during the prior
adjustment period and on projections of future electricity use and customers'
ability to pay their electric bills. If the servicer inaccurately forecasts
electricity consumption or underestimates 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 collections. A shortfall or material delay in
transition charge collections could result in payment of principal of and
interest on the transition bonds not being made according to the expected
amortization schedule, thus lengthening the weighted average life of the
transition bonds, or in payments of principal and interest not being made at
all.
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from TXU Electric's service territory or reduce
their electricity consumption;
o the occurrence of a natural disaster, such as a tornado, unexpectedly
disrupting electrical service and reducing consumption;
o problems with energy generation, transmission or distribution
resulting from the change in the market structure of the electric
industry;
o customers ceasing business or departing TXU Electric's service
territory;
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o dramatic changes in energy prices;
o customers consuming less electricity because of increased conservation
efforts; or
o customers switching to alternative sources of energy, including
self-generation of electric power.
Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
o unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater charge-offs than expected or forcing TXU
Electric or a successor utility to grant additional payment relief to
more customers;
o a change in law that makes it more difficult for TXU Electric or a
successor utility to disconnect nonpaying customers, or that requires
TXU Electric or a successor distribution company to apply more lenient
credit standards in accepting customers; or
o the introduction into the energy markets of less creditworthy third
party retail electric providers who fail to remit customer charges to
the servicer in a timely manner. See "--It May Be More Difficult to
Collect the Transition Charges from Retail Electric Providers than
from TXU Electric's Customers."
There are Uncertainties Associated with Collecting the Transition Charges
and There is Unpredictability Associated with a Deregulated Electricity Market.
TXU Electric has not previously calculated transition charges for customers, nor
made all of the associated calculations and predictions that are inherent in
that calculation, before the calculations required in connection with the
initial financing order issued to TXU Electric under the restructuring act and
our initial issuance of transition bonds. The predictions are based primarily on
historical collection of payments and forecasted energy usage for which TXU
Electric has records available. These usage and collection records, however, do
not reflect customers' payment patterns or energy usage in the competitive
market, as competition is being introduced now in Texas for the first time.
These records also do not reflect any experience with consolidated billing by
retail electric providers. Because that kind of billing is new in Texas,
unforeseen factors may adversely affect collection of payments. Therefore, the
records that TXU Electric has to date may have limited value in calculating the
initial transition charges and the proposed true-up adjustments. Furthermore,
TXU Electric, as servicer, does not have any experience collecting the
transition charges on behalf of an independent issuer. Risks are associated with
TXU Electric's inexperience in calculating, billing and collecting the
transition charges and in managing customer payments on our behalf.
Your Investment Relies on TXU Electric or its Successor Acting as Servicer
of the Transition Property. TXU Electric, as servicer, will be responsible for
billing and collecting transition charges from customers and retail electric
providers and for filing with the PUC to adjust these charges. If TXU Electric
ceases servicing the transition property, it might be hard to find a successor
servicer. Any successor servicer may have less experience than TXU Electric and
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less capable collection systems than TXU Electric. A successor servicer may
experience difficulties in collecting transition charges and determining
appropriate adjustments to transition charges. Further, a successor servicer
that is not a utility may not be able to terminate electric service to retail
electric customers or otherwise take actions against retail electric customers
who fail to pay their bills. If TXU Electric 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 may cause
billing and/or payment arrangements to change, which may lead to a period of
disruption in which customers continue to remit payments according to the former
arrangement, resulting in delays in collection that could result in delays in
payment on your transition bonds. See "The Servicing Agreement" in this
prospectus.
Upon a default under the servicing agreement 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 prevented from effecting a
transfer of servicing. The restructuring act provides that upon a default under
the transition bonds, which may result from servicer's failure to make required
remittances, the indenture trustee would have the right to apply to the PUC for
an order that amounts arising from transition charges be transferred to a
separate account, and to apply to the district court of Travis County, Texas for
an order for sequestration and payment of revenues arising from the transition
charges. However, federal bankruptcy law may prevent the PUC or the 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 PUC or the
Texas court to issue and enforce these orders. However, the bankruptcy court may
deny the request. See "How a Bankruptcy May Affect Your Investment" in this
prospectus.
Under the restructuring act and the indenture, the indenture trustee or the
holders of transition bonds have the right to foreclose on or otherwise enforce
the lien on the transition property. 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 Retail
Electric Providers than from TXU Electric's Customers. As part of the
restructuring of the Texas electric industry, customers of TXU Electric will, as
of January 1, 2002 or, in limited circumstances, sooner be permitted to purchase
electricity and related services from retail electric providers rather than TXU
Electric. In these circumstances TXU Electric will no longer sell electricity
directly to these customers. However, TXU Electric currently expects that it
will organize an affiliated retail electric provider to provide electricity and
related services to customers. The restructuring act requires TXU Electric to
allow each retail electric provider, including its affiliated retail electric
provider, pursuant to a tariff to be filed by TXU Electric and approved by the
PUC, to issue a single bill to customers purchasing electricity from that retail
electric provider. This single bill would include all charges related to
purchasing electricity from the retail electric provider, delivery services from
TXU Electric and the applicable transition charges. Therefore, we expect that
customers will pay transition charges to retail electric providers who supply
them with electric power. The retail electric providers will be obligated to
forward transition charges to TXU Electric, as servicer, even if they do not
collect the charges from customers. TXU Electric will have rights to collect
transition charges directly from those customers who receive their electricity
bills from a retail electric provider in the event that the retail electric
provider does not pay the transition charges to TXU Electric. Because the retail
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electric providers will initially bill most 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 retail electric provider to remit
amounts billed to it as transition charges. This may adversely affect your
investment because:
o retail electric providers might use more permissive standards in bill
collection and credit appraisal than TXU Electric uses towards its
customers, or might be less effective in billing and collecting. As a
result, those retail electric providers may not be as successful in
collecting the transition charges as TXU Electric or a successor
servicer anticipated when setting the transition charge;
o if a retail electric provider defaults, TXU Electric or a successor
servicer may then directly bill and collect transition charges due
from the retail electric provider's customers. However, the servicer
will generally have even more limited rights to pursue these customers
to pay amounts owed to us by the defaulted retail electric provider
because in no event may the servicer directly bill a customer for
service that was previously billed by the retail electric provider and
paid by that customer to the retail electric provider;
o a default by a retail electric provider which collects from a large
number of customers would have a greater impact than a default by a
single customer;
o the bankruptcy of a retail electric provider may cause a delay in or
prohibition of payment to the servicer of transition charges
previously collected by the retail electric provider; or
o any security deposit made by a retail electric provider may not be
sufficient to cover any shortfalls resulting from a failure of that
retail electric provider to forward transition charges to TXU Electric
as servicer.
In addition, the restructuring act provides for one retail electric
provider in each area to be designated the "provider of last resort." The
restructuring act requires the provider of last resort to offer basic electric
service to customers in its designated area at a fixed rate, regardless of the
creditworthiness of the customer.
Retail electric providers will not be required to disclose the amount of
transition charges being collected for us on their statements to customers. This
may increase the risk that customers who have claims against the retail electric
provider will attempt to offset those claims against transition charges payable
to the servicer or us. This also increases the risk that a bankruptcy court in
the event of a bankruptcy of a retail electric provider would find that the
retail electric provider has an interest in the transition property and may make
it more difficult to terminate a bankrupt retail electric provider or collect
transition charges from its customers.
Adjustments to transition charges and, in some cases, credit enhancements
(other than swap agreements) will be available to compensate for a failure by a
retail electric provider to pay transition charges over to the servicer.
However, the amount of credit enhancement funds may not be sufficient to protect
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your investment. See "The Initial Financing Order and the Transition Charges" in
this prospectus.
Customers Have Limited Experience in Paying the Transition Charges and
Paying Through Retail Electric Providers. The transition charges are being
introduced to customers for the first time. As a result, customers may be
confused by the appearance of transition charges and any other changes in
customer billing and payment arrangements. This confusion may cause the
misdirection or delay of payments. This could have the effect of causing delays
in collections of transition charges. Any problems arising from new and untested
systems or any lack of experience on the part of the retail electric providers
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 reduce the value of your investment.
Billing and Collection Practices May Reduce the Value of Your Investment.
Each financing order issued to TXU Electric under the restructuring act will set
the methodology for determining the amount of the transition charges we may
impose on each customer under that financing order. The servicer cannot change
this methodology. However, TXU Electric, as servicer, may set its own billing
and collection arrangements with retail electric providers and with those
customers from whom it collects the transition charges directly. For example, to
recover part of an outstanding bill, TXU Electric may agree to extend a retail
electric provider's or a customer's payment schedule or to write off the
remaining portion of the bill. Also, TXU Electric, or a successor to TXU
Electric as 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 transition bonds. Separately, the PUC may require changes to these
practices. Any changes in billing and collection regulation might adversely
affect the billing terms and the terms of remittances by retail electric
providers to the servicer or make it more difficult for the servicer to collect
the transition charges. These changes may adversely affect the value of the
transition bonds and their amortization, and, accordingly, their weighted
average lives. See "The Servicer of the Transition Property--How TXU Electric
Forecasts the Number of Customers and the Amount of Electricity Usage" in this
prospectus.
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Limits on Rights to Terminate Service May Make it More Difficult to Collect
Transition Charges. An important element of an electric utility's policies and
procedures relating to credit and collections is the right to disconnect service
on account of nonpayment. Each financing order issued to TXU Electric under the
restructuring act will expressly provide that we may authorize the servicer to
disconnect service for nonpayment of transition charges authorized by that
financing order to the same extent as a utility would be entitled to take this
action because of nonpayment of any other charge for tariffed services.
Nonetheless, Texas statutory requirements and the rules and regulations of the
PUC, which may change from time to time, regulate and control the right to
disconnect service. TXU Electric and the retail electric providers may not
terminate service to a 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, TXU Electric must provide service to these
customers during this period without recouping transition charges from these
customers. This reduces the amount of transition charge collections available
for payments on the transition bonds, although any associated reduction in
payments would be factored into the transition charge true-up adjustments. See
"The Servicer of the Transition Property--TXU Electric's Billing Process."
Future Adjustments to Transition Charges by Customer Class May Result in
Insufficient Collections. The customers who will be responsible for paying
transition charges are divided into customer classes. Transition charges will be
allocated among customer classes in accordance with the formula required by the
financing order relating to those transition charges. This allocation is based
in part upon the existing rate structure of each customer class. For a
description of the formula contained in the initial financing order issued to
TXU Electric under the restructuring act, see "The Initial Financing Order and
the Transition Charges--Method of Calculation of Transition Charges" in this
prospectus. Adjustments to the transition charges will also be made separately
to each customer class. A shortfall in collections of transition charges in one
customer class may be corrected by making adjustments to the transition charges
payable by that customer class and any other customer class. Some customer
classes have a significantly smaller number of customers than other customer
classes. If customers in a class fail to pay transition charges, the servicer
may have to substantially increase the transition charges for the remaining
customers in that customer class and for other customer classes. The servicer
may also have to take this action if customers representing a significant
percentage of a class cease to be customers. These increases could lead to
further failures by the remaining customers to pay transition charges, thereby
increasing the risk of a shortfall in funds to pay the transition bonds.
The large industrial and the interruptible customer classes consist of a
small number of large customers. The failure of the customers in these customer
classes to pay transition charges could lead to increases in transition charges
to other members of this class as well as other customer classes. These
increases could lead to failures by customers to pay transition charges or to
transition charges that 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 funds to pay the transition bonds.
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THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
The Servicer Will Commingle the Transition Charges with Other Revenues,
Which May Harm Your Investment in Case of the Servicer's Bankruptcy. 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. Generally, the servicer will be required to remit collections
within two business days of receipt. However, the servicer will be permitted to
remit collections on a monthly basis only if TXU Electric or a successor to TXU
Electric's electric public utility business remains the servicer, and if:
o the servicer has the requisite credit ratings from the applicable
rating agencies; or
o the servicer provides credit enhancement satisfactory to the
applicable rating agencies to assure remittance by the servicer to the
indenture trustee of the transition charges it collects.
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 value of your investment.
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 does not
recognize our right to collections of the transition charges that are commingled
with other funds of the servicer as of the date of bankruptcy. If so, the
collections of the transition charges held by the servicer as of the date of
bankruptcy would not be available to pay amounts owing on the transition bonds.
In this case, we would have only a general unsecured claim against the servicer
for those amounts. This decision could cause material delays in payment or
losses on your transition bonds and could materially reduce the value of your
investment. See "How a Bankruptcy May Affect Your Investment" in this
prospectus.
Retail Electric Providers Will Commingle the Transition Charges with Other
Revenues, which May Harm Your Investment in Case of a Retail Electric Provider's
Bankruptcy. A retail electric provider is not required to segregate the
transition charges it collects from its general funds, but will be required to
remit amounts billed to it for transition charges, less an amount relating to
expected customer charge-offs, to the servicer within 20 days of billing by the
servicer. A retail electric provider 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 value of your investment.
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 a retail electric provider, however, a bankruptcy court might rule
that federal bankruptcy law takes precedence over the restructuring act and does
not recognize our right to receive the collected transition charges that are
commingled with other funds of a retail electric provider as of the date of
bankruptcy. If so, the collected transition charges held by a retail electric
provider as of the date of bankruptcy would not be available to us to pay
amounts owing on the transition bonds. In this case, we would have only a
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general unsecured claim against that retail electric provider for those amounts.
This decision could cause material delays in payment or losses on your
transition bonds and could materially reduce the value of your investment.
Bankruptcy of TXU Electric Could Result in Losses or Delays in Payments on
the Transition Bonds. The restructuring act and the financing orders issued
thereunder provide or will provide that as a matter of Texas state law:
o TXU Electric may make a present transfer of its rights under each
financing order issued under the restructuring act, including the
right to impose, collect and receive transition charges, including
future transition charges that customers do not yet owe;
o upon the transfer, these rights will become a present property right;
and
o a transfer of the transition property from TXU Electric, 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 TXU
Electric.
See "The Restructuring Act" in this prospectus. These three provisions are
important to maintaining payments on the transition bonds in accordance with
their terms during any bankruptcy of TXU Electric. In addition, we have
structured the transaction with the objective of keeping us separate from TXU
Electric in the event of a bankruptcy of TXU Electric.
A bankruptcy court generally follows state property law on issues such as
those addressed by the state law provisions described above. However, a
bankruptcy court has authority not to follow state law if it determines that the
state law is contrary to a paramount federal bankruptcy policy or interest. If a
bankruptcy court in a TXU Electric bankruptcy refused to enforce one or more of
the state property law provisions described above for this reason, the effect of
this decision on you as a beneficial owner of transition bonds might be similar
to the treatment you would receive in a TXU Electric bankruptcy if the
transition bonds had been issued directly by TXU Electric. A decision by the
bankruptcy court that, despite the separateness of TXU Electric and Transition
Bond Company, the two companies should be consolidated, would have a similar
effect on you as a beneficial owner of transition bonds. Either decision could
cause material delays in payment of, or losses on, your transition bonds and
could materially reduce the value of your investment. For example:
o the indenture trustee could be prevented from exercising any remedies
against TXU Electric on your behalf, from recovering funds to repay
the transition bonds, from using funds in the accounts under the
indenture to make payments on the transition bonds or from replacing
TXU Electric as servicer, without permission from the bankruptcy
court;
o the bankruptcy court could order the indenture trustee to exchange the
transition property for other property, which might be of lower value;
o tax or other government liens on TXU Electric's property that arose
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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 transition bonds;
o the indenture trustee's lien might not be properly perfected in
transition property collections that were commingled with other funds
TXU Electric collected from its customers or retail electric providers
as of the date of TXU Electric's bankruptcy, or might not be properly
perfected in all of the transition property, and the lien could
therefore be set aside in the bankruptcy, with the result that the
transition bonds would represent only general unsecured claims against
TXU Electric;
o 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 TXU Electric's
bankruptcy case, with the result that the transition bonds would
represent only general unsecured claims against TXU Electric;
o neither TXU Electric nor we may be obligated to make any payments on
the transition bonds during the pendency of the bankruptcy case;
o TXU Electric may be able to alter the terms of the transition bonds as
part of its plan of reorganization;
o the bankruptcy court might rule that the transition charges should be
used to pay a portion of the cost of providing electric service; or
o the bankruptcy court might rule that the remedy provisions of the sale
agreement are unenforceable, leaving us with a claim of actual damages
against TXU Electric that may be difficult to prove.
Furthermore, if TXU Electric 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 retail electric provider bankruptcy
proceeding could have an adverse effect on the resale market for the transition
bonds and on the value of the transition bonds. See "The Servicing
Agreement--The Indenture Trustee's Rights If the Servicer Defaults in Its Role
as Servicer."
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
Absence of a Secondary Market for Transition Bonds Could Limit Your Ability
to Resell Transition Bonds. The underwriters for the transition bonds may assist
in resales of the transition bonds but they are not required to do so. A
secondary market for the transition bonds may not develop. If a secondary market
does develop, it may not continue or there may not be sufficient liquidity to
allow you to resell any of your transition bonds. We do not anticipate that any
transition bonds will be listed on any securities exchange. See "Plan of
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Distribution for the Transition Bonds."
We May Issue Additional Transition Bonds. We may issue additional
transition bonds of any new or existing series without your prior review or
approval. Any new series may include terms and provisions that would be unique
to that particular series. We may not issue additional transition bonds if the
issuance would result in the credit ratings on any outstanding series of
transition bonds being reduced or withdrawn. However, we cannot assure you that
a new series would not cause reductions or delays in payments on your transition
bonds. In order to issue additional transition bonds, TXU Electric may need to
obtain an additional financing order under the restructuring act. This
additional financing order would specify the amount of additional transition
charges created for the additional transition bonds. Any additional transition
charges would reduce the ability of TXU Electric to recover its ordinary rates
during the rate freeze period or the price to beat period. See "The
Restructuring Act--The Restructuring Act's General Effect on the Electric
Utility Industry in Texas--`Price to Beat' and Services" in this prospectus. In
addition, all outstanding transition bonds will be secured by the same lien, and
thus have claims of equal priority with respect to all transition property held
by us. See "The Transition Bonds" and "The Indenture--The Security for Payment
of the Transition Bonds." In addition, some matters relating to the transition
bonds require the vote of the holders of all series and classes of transition
bonds. Your interests in these votes may conflict with the interests of the
beneficial owners of transition bonds of another series or of another class.
Thus, these votes could result in an outcome that is materially unfavorable to
you.
TXU Electric may sell transition property to one or more entities other
than us in connection with the issuance of a new series of transition bonds
under a separate financing order. Neither any sales nor the terms of any
transition bonds issued by that entity or entities will be subject to the prior
review by or consent of the holders of transition bonds of any series.
Transition charge collections will be pro rated 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 applicable 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 credit rating of any
outstanding class of transition bonds. 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 transition bonds.
Limited Nature of Ratings. Each series or class of transition bonds will be
rated by one or more established rating agencies. The ratings merely analyze the
probability that we will repay the total principal amount of the transition
bonds at final maturity (which is later than the expected final payment date)
and will make timely interest payments. The ratings do not assess the speed at
which we will repay the principal of the transition bonds. Thus, we may repay
the principal of your transition bonds earlier or later than you expect, which
may materially reduce the value of your investment. A rating is not a
recommendation to buy, sell or hold transition bonds. The rating may change at
any time. A rating agency has the authority to revise or withdraw its rating
based solely upon its own judgment. See "Ratings for the Transition Bonds" in
this prospects.
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TXU Electric's Obligation to Indemnify Us for a Breach of a Representation
or Warranty May Not Be Sufficient to Protect Your Investment. If TXU Electric
breaches a representation or warranty in the sale agreement, it is obligated to
indemnify Transition Bond Company and the indenture trustee for any liability,
obligation, claim, action, suit or payment resulting from that breach, as well
as any reasonable costs and expenses incurred. In addition, TXU is obligated to
indemnify us and the indenture trustee for principal and interest on the
transition bonds not paid when scheduled to be paid in accordance with their
terms and the amount of any deposits not made when required under the indenture
as a result of a breach of a representation or warranty. TXU Electric will not
be obligated to repurchase the transition property in the event of a breach of
any representation or warranty regarding the transition property, and neither
the indenture trustee nor the holders of transition bonds will have the right to
accelerate payments on the transition bonds because of a breach. The sale
agreement provides that any change in the law by legislative enactment,
constitutional amendment or voter initiative that renders any of the
representations and warranties untrue would not constitute a breach under the
sale agreement. The amount of any indemnification paid by the servicer or the
seller may not be sufficient for you to recover your investment. If TXU Electric
becomes obligated to indemnify holders of transition bonds, the ratings on the
transitions bonds will likely be downgraded since holders of transition bonds
will be unsecured creditors of TXU Electric with respect to any of these
indemnification amounts. TXU Electric will not indemnify any person for any
liability, obligation, claim, action, suit or payment resulting solely from a
downgrade in the ratings on the transition bonds. See "The Sale Agreement--TXU
Electric's Representations and Warranties" in this prospectus.
You May Have to Reinvest Principal of Your Transition Bonds at a Lower Rate
of Return Because of Optional Redemption of Transition Bonds. As described more
fully under "The Transition Bonds--Redemption of the Transition Bonds," we may
redeem any series of transition bonds if, and to the extent, provided in the
prospectus supplement. Redemption of a series of transition bonds will result in
a shorter than expected weighted average life for that series. Redemption may
also adversely affect the yield to maturity of the transition bonds redeemed. We
cannot predict whether any series of transition bonds 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 transition bonds. See "The
Transition Bonds--Redemption of the Transition Bonds."
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 with respect to a series or class of floating
rate transition bonds that entail additional kinds of risks, including the risk
associated with the credit of any party providing the credit enhancement,
interest rate swap or hedge. The 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 Earlier, Than You Expected.
The amount and the rate of collection of transition charges that TXU Electric
will collect from each customer class will partially depend on actual
electricity usage and the amount of collections 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
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whether there is a delay in the scheduled repayments of transition bond
principal. If TXU Electric collects transition charges at a slower rate than
expected from any customer class or retail electric provider, 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 transition bonds before maturity, all classes will be paid
pro rata, therefore some classes may be paid earlier than expected and some
classes may be paid later than expected. In addition, if any series of
transition bonds is redeemed prior to maturity, that series will have been paid
earlier than expected.
Technological Change May Make Alternative Energy Sources More Attractive.
The continuous process of technological development may result in the
introduction of economically attractive alternatives to purchasing electricity
from TXU Electric or other utilities for increasing numbers of customers.
Manufacturers of self-generation facilities continue to develop smaller-scale,
more fuel-efficient generating units that can be cost-effective options for a
greater number of customers. Some users of smaller self-generation facilities
may be able to avoid paying transition charges. A reduction in the number of
payers of transition charges could result in delays or a failure to make
payments of interest on and principal of the transition bonds. See "The
Restructuring Act--TXU Electric and Other Utilities May Securitize Stranded
Costs and Regulatory Assets--Current Customers Cannot Avoid Paying Transition
Charges" in this prospectus.
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FORWARD-LOOKING INFORMATION
This prospectus and prospectus supplement contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Although TXU Electric and Transition Bond Company, which is the issuer of
the transition bonds, each believe that in making any forward-looking statement
its expectations are based on reasonable assumptions, any forward-looking
statement involves uncertainties and is qualified in its entirety by reference
to the following important factors, among others, that could cause the actual
results of Transition Bond Company or TXU Electric to differ materially from
those projected in the forward-looking statements:
o federal or state policies or regulatory developments;
o weather conditions and other natural phenomena;
o unanticipated population growth or decline, and changes in market
demand and demographic patterns;
o competition for retail customers;
o unanticipated changes in operating expenses;
o changes in technology used and services offered by TXU Electric and
others;
o operating performance of TXU Electric's facilities;
o the payment pattern of customers including the rate of delinquencies
and the accuracy of the collection curve;
o uncertainties relating to billing and collection patterns and
creditworthiness of retail electric providers; and
o uncertainties relating to the implementation and effect of retail
electric consumer choice in Texas.
Any forward-looking statement speaks only as of the date on which the
statement is made, and neither TXU Electric nor Transition Bond Company
undertakes any obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time and it is not possible for TXU Electric or Transition Bond Company to
predict all of the factors, nor can they assess the impact of each factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
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ALLOCATIONS AND DISTRIBUTIONS
[GRAPHIC OMITTED]
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TEXAS SECURITIZATION OVERVIEW
TRANSACTION CASHFLOWS
[GRAPHIC OMITTED]
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PARTIES TO THE TRANSACTIONS
[GRAPHIC OMITTED]
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TXU ELECTRIC COMPANY
TXU Electric's Operations. TXU Electric, a Texas corporation, is an
electric utility engaged in the generation, purchase, transmission, distribution
and sale of electric energy wholly within the State of Texas. TXU Electric
changed its name from Texas Utilities Electric Company on June 14, 1999. TXU
Electric's service area is located in north central, eastern and western parts
of Texas, with a population estimated at 6.1 million,about one-third of the
population of Texas. Electric service is provided to over 2.5 million customers
in 91 counties and 370 incorporated municipalities, including Dallas, Fort
Worth, Arlington, Irving, Plano, Waco, Mesquite, Grand Prairie, Wichita Falls,
Odessa, Midland, Carrollton, Tyler, Richardson and Killeen. The area is a
diversified commercial and industrial center with substantial banking,
insurance, communications, electronics, aerospace, petrochemical and specialized
steel manufacturing, and automotive and aircraft assembly. The territory served
includes major portions of the oil and gas fields in the Permian Basin and East
Texas, as well as substantial farming and ranching sections of the State of
Texas. The service territory also includes Dallas-Fort Worth International
Airport and Alliance Airport.
TXU Electric is wholly-owned by TXU Corp. TXU Corp is a holding company
whose principal operations are conducted through TXU Electric, TXU Gas Company,
Eastern Energy Limited, TXU Europe Group plc, Westar Pty Ltd and Kinetik Energy
Pty Ltd. Through these and other subsidiaries, TXU Corp engages in the
generation, purchase, transmission, distribution and sale of electricity; the
gathering, processing, transportation and distribution of natural gas; energy
marketing; and telecommunications, retail energy services, international gas
operations, power development and other businesses, primarily in the United
States, the United Kingdom and Australia.
The electric utility industry in Texas is undergoing fundamental
restructuring. See "The Restructuring Act" in this prospectus. In addition to
the Restructuring Act, in 1996 the Federal Energy Regulatory Commission issued
Order No. 888 providing for competition in wholesale generation by requiring
that all public utilities file non-discriminatory, open-access transmission
tariffs.
Where to Find Information about TXU Electric. TXU Electric files annual,
quarterly and special reports and other information with the SEC under File No.
1-12833. These SEC filings are available to the public over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy any of these SEC
filings at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
THE RESTRUCTURING ACT
THE RESTRUCTURING ACT'S GENERAL EFFECT ON THE ELECTRIC UTILITY INDUSTRY IN TEXAS
An Overview of the Restructuring Act. The Restructuring Act was enacted in
June, 1999 and became effective on September 1, 1999. The Restructuring Act,
among other things, authorizes competition in the retail and generation markets
for electricity beginning January 1, 2002; provides for recovery of stranded
costs and regulatory assets; requires a rate freeze for all retail customers
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until January 1, 2002, and rate reductions for residential and small commercial
customers for up to five years thereafter; and sets limits on capacity owned and
controlled by power generation companies.
Unbundling. By September 1, 2000, each electric utility must separate from
its regulated activities its customer 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, a retail electric provider, and a transmission and
distribution company or separate transmission and distribution companies. A
power generation company generates electricity that is intended to be sold at
wholesale. In general, a power generation company may not own a transmission or
distribution facility and may not have a certificated service area. A retail
electric provider sells electric energy to retail customers. A retail electric
provider may not own or operate generation assets. A transmission and
distribution company only owns or operates facilities to transmit or distribute
electricity.
Retail Competition. In June 2001, utilities are required to implement a
"pilot project" covering 5% of the utility's load in all customer classes.
Customers participating in the pilot project can choose their own retail
electric provider, but cannot choose the retail electric provider affiliated
with their existing utility. Beginning on January 1, 2002, all customers will be
able to choose their own retail electric provider. The Restructuring Act freezes
retail base rates of most investor owned electric utilities until full
competition begins on January 1, 2002. The affiliated retail electric provider
of the utility serving a customer on December 31, 2001 may continue service,
unless the customer chooses another retail electric provider. Competition in a
particular region of Texas may be delayed if the PUC determines that that region
is unable to offer fair competition and reliable service to all retail customer
classes. If a delay occurs, the PUC may establish new rates for utilities in
that region using traditional rate making principles.
"Price to Beat" and Services. Effective January 1, 2002, the affiliated
retail electric provider of a utility must make available a "price to beat" to
residential and small commercial customers in the electric utility's service
area that is 6% less than the bundled rates of the electric utility in effect on
January 1, 1999. For all residential, and most small commercial customers, the
affiliated retail electric provider may not charge rates that are different than
the "price to beat" until the earlier of three years or when 40% of the electric
power consumed by customers in that customer class or segment is supplied by new
providers. Each utility in TXU Electric's region must include a provision to
establish a "price to beat" in its transition to competition plans submitted to
the PUC. The "price to beat" is subject to adjustment in limited circumstances.
The PUC will designate a "provider of last resort" for each service area in
Texas. The provider of last resort will be required to offer, in its service
area, a standard retail service package for each class of customers at a fixed
rate approved by the PUC to be offered to any requesting customer in that
service area.
The transmission and distribution affiliate of the utility that was serving
the area before competition begins will provide metering services for
residential customers until the later of September 1, 2005 or when 40% of those
customers are taking service from unaffiliated retail electric providers. For
other customers, metering services will become competitive on January 1, 2004.
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RECOVERY OF STRANDED COSTS FOR TXU ELECTRIC AND OTHER TEXAS UTILITIES THROUGH
THE IMPOSITION OF "COMPETITION TRANSITION CHARGES"
The Restructuring Act allows utilities an opportunity to recover their net,
verifiable, nonmitigable stranded costs incurred in purchasing power and
providing electric generation service. "Stranded costs" include the positive
excess of the net book value of Generation Assets over the market value of the
assets, taking into account any above-market purchased power costs and any
deferred debit relating to a utility's mandatory discontinuance of the
application of Statement of Financial Accounting Standards No. 71 ("Accounting
for the Effects of Certain Types of Regulation") for generation-related assets.
A utility must estimate its stranded costs using one of the methods allowed by
the Restructuring Act. After January 10, 2004, at a time and pursuant to
procedures established by the PUC, each transmission and distribution utility,
or its affiliated retail electric provider, and its affiliated power generation
company must file with the PUC to finalize its previously estimated stranded
costs.
In addition to securitization, as described below, the Restructuring Act
provides for the imposition and collection of "competition transition charges"
on customers' bills as an alternative mechanism to recover these stranded costs.
In general, the customers will be assessed competition transition charges
regardless of whether the customers purchase electricity from the utility or
another electric generation supplier. Competition transition charges are similar
to transition charges in how they are imposed, but competition transition
charges are not securitized.
TXU ELECTRIC AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS AND REGULATORY
ASSETS
We May Issue Transition Bonds in Order to Recover TXU Electric's Stranded
Costs and Regulatory Assets. The Restructuring Act authorizes the PUC to issue
"financing orders" approving the issuance of transition bonds to facilitate the
recovery of regulatory assets and stranded costs of an electric utility.
Pursuant to the Restructuring Act, "regulatory assets" include the
generation-related portion of the Texas jurisdictional portion of the amount
reported by the electric utility in its 1998 annual report on SEC Form 10-K as
regulatory assets and liabilities, as adjusted, offset by the applicable portion
of generation-related investment tax credits permitted under the Internal
Revenue Code of 1986. Under the Restructuring Act, a utility may securitize
(i.e., issue transition bonds secured by transition charges imposed in amounts
designed to recover) up to 100% of its regulatory assets and up to 75% of its
stranded costs.
A utility, its successors or a third-party assignee of a utility may issue
transition bonds. Under the Restructuring Act, proceeds of transition bonds must
be used to reduce the amount of recoverable regulatory assets or stranded costs
through the refinancing or retirement of the electric utility's debt or equity.
The transition bonds are secured by or payable from transition property, which
includes the right to impose, collect and receive the transition charges, and
may have a maximum maturity of 15 years. The amounts of transition charges must
be allocated to customer classes based in part on the methodology used to
allocate the costs of the underlying assets in the utility's most recent PUC
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.
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The Restructuring Act contains a number of provisions designed to
facilitate the securitization of regulatory assets and stranded costs, including
those described below.
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 authorized in the financing order, are first
transferred to an assignee or pledged in connection with the issuance of
transition bonds.
A Financing Order is Irrevocable. A financing order issued under the
Restructuring Act, once effective, together with the transition charges
authorized in the financing order, will be irrevocable and not subject to
reduction, impairment, or adjustment by the PUC except for adjustments pursuant
to the Restructuring Act in order to correct overcollections or undercollections
and to ensure 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, for the benefit and protection of holders of transition
bonds 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 holders of transition bonds, until the principal, interest and any
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. See "Risk Factors--Judicial, Legislative or Regulatory Action That May
Adversely Affect Your Investment" in this prospectus.
The PUC May Adjust Transition Charges. The Restructuring Act requires the
PUC to provide in all financing orders issued thereunder a mechanism requiring
that transition charges be reviewed and adjusted at least annually, within 45
days of the anniversary of the date of the issuance of the transition bonds, to
correct any overcollections or undercollections of the preceding 12 months and
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 transition bonds.
Current 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
service territory. The utility or its successor is generally entitled to collect
transition charges from those customers even if they elect to purchase
electricity from another supplier or choose to operate self-generation
equipment.
Generally, a customer can only avoid paying a utility's transition charges
by moving out of the utility's service area. However, a customer can also avoid
transition charges if that customer is served by:
o certain power production facilities that have made substantially
complete filings on or before December 31, 1999 for all necessary
site-specific environmental permits and become fully operational
before September 1, 2001; or
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o an on-site power production facility with a rated capacity of 10
megawatts or less.
In addition, a customer in a dually-certificated area that requested to switch
providers on or before May 1, 1999, or was not taking service from the utility
on May 1, 1999, and does not do so after that date, will not be required to pay
transition charges to that utility.
The Restructuring Act Protects the Transition Bonds' Lien on Transition
Property. The Restructuring Act provides that a valid and enforceable lien and
security interest in transition property may be created only by a financing
order issued thereunder and the execution and delivery of a security agreement
in connection with the issuance of transition bonds. The security interest
automatically attaches from the time the related transition bonds are issued if:
o value is received by the issuer of the transition bonds; and
o a filing is made with the Secretary of State of Texas to perfect the
security interest within 10 days after value is received for the
transition bonds.
Upon perfection, the statutorily created lien attaches both to transition
property and to all proceeds of transition property, whether or not the
transition charges have been billed to or collected from customers. The
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:
o the related financing order becomes effective;
o transfer documents have been delivered to the assignee; and
o 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 changes to the
financing order.
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. See "The Sale Agreement" and "Risk Factors--The
Risks Associated With Potential Bankruptcy Proceedings" in this prospectus.
Tax Exemption. Under the Restructuring Act, transactions involving the
transfer and ownership of transition property and the receipt of transition
charges are exempt from Texas state and local income, sales, franchise, gross
receipts, and other taxes or similar charges.
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THE INITIAL FINANCING ORDER AND THE TRANSITION CHARGES
Background. On October 18, 1999, TXU Electric filed an application with the
PUC for a financing order under the Restructuring Act to permit securitization
of a portion of its regulatory assets. After issuing the appropriate notice and
holding a hearing, the PUC determined that the application met the requirements
for a financing order under the Restructuring Act and issued the requested
financing order on _______.
Issuance of Transition Bonds. The initial financing order allows TXU
Electric to authorize us to issue transition bonds in an aggregate principal
amount not to exceed $1,650,000,000.
Collection of Transition Charges. The PUC authorized TXU Electric to
collect transition charges from its retail customers in an amount sufficient to
recover its aggregate Qualified Costs authorized thereunder. We may not charge
transition charges with respect to a series of transition bonds after the
fifteenth anniversary of the initial issuance of that series of transition
bonds.
Issuance Advice Letter. Following the determination of the final terms of
the transition bonds and prior to their issuance, TXU Electric is required to
file with the PUC an "issuance advice letter":
o demonstrating compliance with the requirements of the initial
financing order; and
o showing the actual dollar amount of the initial transition charges.
The PUC's review of the issuance advice letter is limited to the mathematical
accuracy of the calculations. The issuance advice letter will be deemed approved
unless TXU Electric receives a written objection from the PUC within two days of
filing.
Method of Calculation of Transition Charges. For each retail customer on
all rate schedules, TXU Electric will calculate a transition charge by
multiplying the customer's kWh usage in a billing month by a factor, expressed
in dollars per kWh ("Recovery Factor"), determined in accordance with the
following formula:
Recovery Factor = (C+A)/K, where
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o C = the "collections" for that customer's class, which is equal to TC
multiplied by the percent of Qualified Costs allocated to that
customer's class, as described under "--Allocation" below, where
o TC = the "total collections" necessary to recover the principal
and interest and ongoing fees and expenses associated with the
transition bonds, and
o A = the "true-up amount" for that customer's class, as contained in a
"true-up adjustment filing" with the PUC, which is equal to TA
multiplied by the percent of Qualified Costs allocated to that
customer's class, as described under "--Allocation" below, where
o TA = any difference between TC and total collections for that
customer's class during all but the last month of the "recovery
period" (which, pursuant to the Restructuring Act will be a
period not to exceed 12 months) plus an estimate of total
collections for that customer's class for the last month of the
recovery period, calculated by multiplying the current Recovery
Factor applicable to that customer by the most recent projected
kWh sales for that customer's class for that month, and
o K = TXU Electric's most current estimated kWh by customer class for
the length of the recovery period.
Allocation. Under the terms of the initial financing order, TXU Electric
will initially allocate the Qualified Costs authorized thereunder among its
customer classes as follows:
Percent of Qualified Costs
Customer Class Allocated to Customer Class
- -------------- ---------------------------
Residential 41.2703%
Commercial 46.3115%
Industrial 06.1064%
Large Industrial 02.8859%
Lighting 00.7078%
Commercial/Industrial-
Noticed Interruptible 01.0906%
Commercial/Industrial-
Instantaneous Interruptible 01.6275%
-------
TOTAL 100%
===
If any of the customer classes ceases to have any customers, the percent of
Qualified Costs allocated to that customer class will be deemed to be 0.00%, and
the percent of Qualified Costs allocated to the remaining customer classes will
be adjusted proportionately so that the total percentage is equal to 100%.
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True-Up Adjustments. The initial financing order requires the servicer to
make true-up adjustment filings with the PUC in order to adjust transition
charges annually, within 45 days of the anniversary of the date of the issuance
of the transition bonds, to correct any overcollections or undercollections of
the preceding 12 months and 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 transition bonds. The servicer may
make true-up adjustment filings more frequently than annually. Under the initial
financing order, the PUC has 15 days after the true-up adjustment filing in
which to confirm the mathematical accuracy of the servicer's adjustment; but the
adjustment is effective upon filing, and any necessary corrections to the
adjustment will be made in future true-up adjustment filings.
Requirements for Retail Electric Providers. The initial financing order
requires all retail electric providers to meet the creditworthiness criteria to
be established by the PUC and to comply with the billing, collection and
remittance procedures and information access requirements established in the
initial financing order. The servicer will send a bill for transition charges to
the retail electric provider based on the approved tariff. The bill will specify
the billed amount, based on the transition charge tariff, and the amount
actually owed by the retail electric provider to the servicer. The difference
between the amount billed by the servicer and the amount owed by the retail
electric provider will reflect the expected loss experience for the retail
electric provider for the coming year. Each retail electric provider is required
to remit to the servicer a specified "remittance percentage" of billed charges
within 20 days of being billed by the servicer. Should the retail electric
provider not pay this amount at the end of the 20 day period, the servicer will
provide notice of breach and will allow for an additional 10 day period for the
retail electric provider to make payment. Any failure to remit this specified
amount in full at the end of the 30 day period constitutes a default causing
billing responsibility to transfer immediately to the servicer, the provider of
last resort or another retail electric provider, as determined by the servicer.
As incentive collection agent compensation, the retail electric provider may
retain collections from end-use customers above the specified percentage but is
not reimbursed for collections below the specified percentage. The specified
percentage will be adjusted on an annual basis to take into account the
collection experience of the previous year, as demonstrated by audited reports
from all retail electric providers. The adjustments to the transition charges
will take into account the specified remittance percentage such that the receipt
of the specified percentage results in appropriate collections to service the
transition bonds and pay all associated fees. There will be no rebate or credit
to the retail electric providers at any time. The servicer will remit to the
indenture trustee only those amounts remitted to the servicer by the retail
electric providers.
In the first year of retail competition, the servicer will calculate the
remittance percentage for all retail electric providers based on the most recent
year of actual TXU Electric loss experience. In each subsequent year, the
servicer will calculate the remittance percentage for all retail electric
providers based on the retail electric providers' composite actual experience
during the previous year, with the composite amount determined as (A) total
transition charges collected by retail electric providers from customers divided
by (B) total transition charge billings by retail electric providers to
customers. The retail electric providers will support their claimed remittance
percentage with an audited financial statement, and the actual calculation will
be attested to by each retail electric provider's independent auditor. The
retail electric providers will have to submit their annual remittance percentage
[30] days prior to the annual transition charge adjustment. The servicer will
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have 15 days to review and approve the percentage amount. If the servicer
disagrees with the percentage amount, the PUC will arbitrate the dispute and
decide within 15 days. Retail electric providers that do not submit their annual
remittance percentage [30] days prior to the annual transition charge adjustment
will be in default causing billing responsibility to transfer immediately to the
servicer, the provider of last resort or another retail electric provider, as
determined by the servicer. The servicer will determine the overall expected
remittance percentage and use that figure in determining the revenues required
to service the transition bonds for the next year.
Each retail electric provider participating in the pilot project under the
Restructuring Act will follow the procedures established for retail electric
providers during the first year of retail competition. Retail electric providers
who begin serving customers after January 1, 2003 will be required to use the
composite expected remittance percentage determined in the last annual
transition charge adjustment. See "The Restructuring Act--The Restructuring
Act's General Effect on the Electric Utility Industry in Texas--Retail
Competition" in this prospectus.
Binding on Successors. The initial financing order, along with the
transition charges authorized in that initial financing order, are binding on:
o any successor to TXU Electric that provides transmission and
distribution service in TXU Electric's service territory;
o any other entity that provides transmission and distribution service
to retail customers within TXU Electric's service territory;
o any retail electric provider that sells electric energy to retail
customers located within TXU Electric's service territory or that
retail electric provider's successor;
o any other entity responsible for billing and collecting transition
charges on our behalf; and
o any successor to the PUC.
POTENTIAL LEGAL CHALLENGES TO
THE RESTRUCTURING ACT OR FINANCING ORDERS
LITIGATION RELEVANT TO THE RESTRUCTURING ACT
A legal action successfully challenging, under the United States
Constitution or federal law, a state deregulation statute similar to the
Restructuring Act adopted by a jurisdiction other than Texas could establish
legal principles that would serve as a basis to challenge the Restructuring Act.
Whether or not a subsequent challenge to the Restructuring Act would be
successful would depend on the similarity of the other statute and the
applicability of the legal precedent to the Restructuring Act. While the
Restructuring Act would not become invalid automatically as a result of a court
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decision invalidating another state's statute, this decision could establish a
legal precedent for a successful challenge to the Restructuring Act that could
adversely affect your investment. Legal challenges brought in jurisdictions
other than Texas that assert claims that are based on state laws other than the
laws of Texas would not, however, have a direct effect on the Restructuring Act
or the interests of the holders of transition bonds.
LEGISLATIVE ACTIVITY
Possible Federal Preemption of the Restructuring Act. At least one bill was
introduced in the 105th Congress prohibiting the recovery of stranded costs, and
thereby threatening the existence of transition property. That bill, H.R. 1230,
was introduced on April 8, 1997 and was referred to the House Commerce
Committee, which referred it to the Subcommittee on Energy and Power. On October
21, 1997, the Subcommittee on Energy and Power held hearings, but on October 22,
1997 these hearings were concluded. The 105th Congress adjourned without taking
any further action on H.R. 1230. As of the date hereof, no member of Congress
had introduced a bill that would affect the existence or value of stranded costs
in the 106th Congress. Although the 105th Congress did not pass H.R. 1230, no
prediction can be made as to whether any future bills, that prohibit the
recovery of stranded costs, will become law or, if they become law, what their
final form or effect will be. The courts may consider a preemption of the
Restructuring Act, and/or a financing order issued thereunder, by the federal
government a "taking," for which the government would have to pay the estimated
market value of the transition property at the time of the taking. However,
there is no assurance that the courts would consider this preemption a "taking"
and there is no assurance that this compensation would be sufficient to pay the
full amount of principal of and interest on the transition bonds.
Possible State Amendment or Repeal of the Restructuring Act. Under the
Restructuring Act, the State of Texas has pledged for the benefit and protection
of the holders of transition bonds 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 pursuant to the
mechanism included in the related financing order, reduce, alter, or impair the
transition charges to be imposed, collected and remitted to holders of
transition bonds, until the principal, interest and any 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.
In the opinion of Worsham, Forsythe & Wooldridge, L.L.P., general counsel
to TXU Electric, under the Contract Clauses of the United States and Texas
Constitutions, the State of Texas could not repeal or amend the Restructuring
Act or take any other action that substantially impairs the rights of the
holders of transition bonds, unless this action is a reasonable exercise of the
State of Texas' sovereign powers and is necessary to serve a significant and
legitimate public purpose. Further, in the opinion of Worsham, Forsythe &
Wooldridge, L.L.P., it would appear unlikely that the State of Texas could
reduce, modify, alter or take any other action with respect to the transition
property which would substantially impair the rights of holders of transition
bonds, unless the action is reasonable and appropriate to further a legitimate
public purpose. Moreover, in the opinion of Worsham, Forsythe & Wooldridge,
L.L.P., repeal or amendment by the State of Texas of the Restructuring Act or
action by it in contravention of its pledge to the holders of transition bonds
may constitute a "taking" under the Takings Clause of the United States and
Texas Constitutions for which holders of the transition bonds would be entitled
to just compensation if such action would constitute a permanent appropriation
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of the property interest of holders of transition bonds in the transition
property and deprive the holders of transition bonds of their reasonable
expectations arising from their investments in the transition bonds. There is no
assurance, however, that, even if a court were to award just compensation, it
would be sufficient to pay the full amount of principal of and interest on the
transition bonds. In addition, there can be no assurance that a repeal of or
amendment to the Restructuring Act will not be sought or adopted or that any
action by the State of Texas may not occur, any of which might constitute a
violation of the State of Texas' pledge to the holders of transition bonds. In
any event, costly and time-consuming litigation might ensue. Any litigation
might adversely affect the price and liquidity of the transition bonds and the
dates of payments of interest on and principal thereof and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point and the novelty of the security for the holders of transition
bonds, the outcome of any litigation cannot be predicted with certainty, and
accordingly, holders of transition bonds could incur a loss or delay in recovery
of their investment.
POTENTIAL UNEXPECTED REGULATORY ACTION BY THE PUC
Even with the enactment of the Restructuring Act, the PUC will continue to
regulate some aspects of the electric industry in Texas. For example, the PUC
will continue to fully regulate electric transmission and distribution
companies. The PUC will also:
o certify retail electric providers that demonstrate financial and other
qualifications;
o ensure that retail customer protections are established before
customer choice begins on January 1, 2002; and
o adopt rules relating to nondiscriminatory rates or service for
metering and billing services.
Pursuant to the Restructuring Act, a financing order issued thereunder will
remain in effect and the related transition property will continue to exist
until the principal, interest and any 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. The PUC nevertheless might attempt to
revise or rescind any of its regulations in ways that ultimately could have an
adverse impact upon the transition charges. Any new or amended regulations or
orders by the PUC could have an effect on the transition bonds. In the sale
agreement, TXU Electric agrees to take legal or administrative actions,
including instituting and pursuing legal actions, as may be reasonably necessary
to block or overturn any attempts to change the Restructuring Act, a financing
order issued thereunder or the transition property by regulatory action,
legislative enactment or constitutional amendment that would be adverse to the
holders of transition bonds. TXU Electric will also resist proceedings of third
parties, which, if successful, would result in a breach of representations
concerning the transition property, the Restructuring Act, or a financing order
issued thereunder. See "The Sale Agreement" in this prospectus. There is no
assurance that TXU Electric would be able to take this action or that any action
TXU Electric is able to take would be successful. Future PUC regulations or
orders may affect the ratings of the transition bonds, their price or the rate
at which the servicer receives transition charges and, accordingly, the rate of
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amortization of transition bonds and their weighted average lives. As a result,
holders of transition bonds could suffer a loss of their investment.
LEGAL CHALLENGES IN OTHER STATES
Although we are not aware of any lawsuit challenging the Restructuring Act
or any financing order issued to TXU Electric thereunder, judicial challenges
have been filed in other states seeking to overturn electricity generation
deregulation laws similar to the Restructuring Act. In Pennsylvania, three
lawsuits have challenged the validity of state legislation similar to the
Restructuring Act. Two of these lawsuits alleged that the legislation was not
validly enacted by the Pennsylvania legislature. A Pennsylvania court has
rejected these claims. The court's decisions in these 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 United States
Constitution. The Pennsylvania courts rejected that claim, and a petition that
the United States Supreme Court review the case was denied.
In California, a consumer advocacy group and others filed a petition to the
California Supreme Court asking that the court suspend the implementation of the
California Public Utility Commission's decision, which, among other items,
allowed for the recovery of a utility's stranded costs. The Supreme Court denied
this petition. Various consumer groups then filed a voter initiative which,
among other items, would have prohibited the collection of customer charges to
pay for interest and principal for debt instruments which were backed by the
recovery of a utility's stranded costs. In November 1998, approximately 73% of
the votes cast were voted against the initiative. Although consumer groups have
recently issued press releases threatening legal action, no other legal action
has taken place which threatens the recovery of stranded costs in California.
In Massachusetts, a consumer advocacy group filed a voter initiative which
would have repealed the Commonwealth of Massachusetts' electricity deregulation
law. This law includes a provision allowing utilities to recover stranded costs
from consumers. In November 1998, approximately 65% of the votes cast were voted
to keep the deregulation law. No other legal action has taken place which
threatens the recovery of stranded costs in Massachusetts.
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 the Restructuring Act cannot be amended or repealed by direct action of the
voters.
THE SERVICER OF THE TRANSITION PROPERTY
TXU ELECTRIC
TXU Electric will be the initial servicer of the transition property. See
"TXU Electric Company" in this prospectus.
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TXU ELECTRIC'S CUSTOMER CLASSES
General. The following seven customer classes make up TXU Electric's retail
customer base:
o residential;
o commercial;
o industrial;
o large industrial;
o lighting;
o commercial/industrial-instantaneous interruptible; and
o commercial/industrial-noticed interruptible.
These customer classes are determined by voltage level and other
characteristics. Each customer class includes a number of rate schedules.
Customer classes and rate schedules are created by TXU Electric and approved by
the PUC, and are subject to change. Any changes will be reflected in any true-up
adjustment filings with the PUC by the servicer for adjustment of the transition
charges.
Residential. Residential service is available at standard voltages and is
applicable to all customers for all of the electric service supplied at one
point of delivery and measured through one meter used for residential purposes
(which may include small amounts of commercial usage incidental to residential
usage) in an individual private dwelling or in an individually metered apartment
for which no specific rate is provided.
Commercial. Commercial service is available at standard secondary voltages
and is applicable to any customer for all of the electric service supplied at
one point of delivery and measured through one meter. Over 70% of this class
consists of customers belonging to the commercial revenue class (e.g., grocery
stores, shopping malls, office buildings, etc.). The voltage requirements of the
customers in this class range in size from less than 10 kW (approximately 60% of
the customers in this class) to 9,700 kW.
Industrial. Industrial service is available at standard primary voltages
and is applicable to any customer for all of the electric service supplied at
one point of delivery and measured through one meter. Approximately 85% of this
class consists of customers belonging to the industrial revenue class (e.g. oil
and gas, manufacturing, etc.) with approximately 96% of those customers involved
in the oil and gas extraction business. The voltage requirements of the
customers in this class range in size from less than 10 kW (approximately 38% of
the customers in this class) to 17,500 kW.
Large Industrial. Large industrial service is available at three phase at
the most available transmission voltage and is applicable to any customer for
all of the electric service supplied at one point of delivery and measured
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through one meter. Over 65% of this class consists of customers belonging to the
industrial revenue class, with 84% of those customers in the manufacturing
sector. The voltage requirements of the customers in this class range in size
from 50 kW to 99,000 kW.
Lighting. Outdoor lighting service is available to residential, commercial
and industrial customers. Street lighting is available to governmental entities.
Commercial/Industrial-Instantaneous Interruptible. Commercial/industrial
instantaneous interruptible service is applicable in conjunction with
commercial, industrial or large industrial service supplied at one point of
delivery and measured through one meter. This service is separately metered and
is interruptible by TXU Electric. Over 90% of this class consists of customers
belonging to the industrial revenue class. The voltage requirements of the
customers in this class range in size from 20 kW to 167,000 kW.
Commercial/Industrial-Noticed Interruptible. Commercial/industrial-noticed
interruptible service is applicable in conjunction with commercial, industrial
or large industrial service supplied at one point of delivery and measured
through one meter. This service is separately metered and is applicable to
customers choosing a voluntary curtailable rate, under which TXU Electric may
provide a customer with notice of curtailment. A customer choosing the voluntary
curtailable rate will have 15 minutes following notice of curtailment in which
to voluntarily curtail all of the load at the point of delivery or, if a
customer chooses not to curtail all of the load at the point of delivery, all
kWh used during the curtailment period will be billed at either 50 cents per kWh
or 70 cents per kWh depending on the level of load curtailment by the customer.
Over 60% of this class consists of customers belonging to the industrial revenue
class. The voltage requirements of the customers in this class range in size
from 90 kW to 143,000 kW.
Statistics Regarding TXU Electric's Total Customers. Tables 1 through 3
below show various operating statistics by customer class. Table 1 shows the
number and percentage of retail customers. Table 2 shows actual retail electric
usage. Table 3 shows retail electric revenue. All customer classes will be
billed transition charges. There can be no assurance that future operating
statistics will remain at or near the levels reflected in Tables 1 through 3
below.
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<TABLE>
<CAPTION>
TABLE 1
NUMBER OF RETAIL ELECTRIC CUSTOMERS BY CUSTOMER CLASS
FOR THE YEAR ENDED
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 12/31/96 12/31/97 12/31/98
----------------------- ------------------------ ---------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL CUSTOMERS % OF TOTAL
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Residential 2,015,189 86.22% 2,061,837 86.25% 2,104,151 86.19% 2,156,431 86.20%
Commercial 305,240 13.06% 312,304 13.06% 320,690 13.14% 329,597 13.17%
Industrial 5,948 0.25% 5,878 0.25% 5,901 0.24% 5,775 0.23%
Large Industrial 59 0.01% 55 0.00% 53 0.00% 54 0.00%
Lighting 10,491 0.45% 10,334 0.43% 10,229 0.42% 9,544 0.38%
Commercial/Industrial
-Instantaneous Interruptible 192 0.01% 183 0.01% 178 0.01% 181 0.01%
Commercial/Industrial-Noticed
Interruptible 18 0.00% 68 0.00% 130 0.00% 111 0.01%
--------- ------ --------- ------ --------- ---- --------- ------
Total 2,337,137 100.00% 2,390,659 100.00% 2,441,305 0.00% 2,501,693 100.00%
========= ====== ========= ====== ========= ==== ========= ======
</TABLE>
42
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<TABLE>
<CAPTION>
TABLE 2
ACTUAL RETAIL ELECTRIC USAGE IN MEGAWATT-HOURS ("MWH") BY CUSTOMER CLASS
FOR THE YEAR ENDED
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 12/31/96 12/31/97 12/31/98
------------------- ------------------ -------------------- ---------------------
MWH % OF TOTAL MWH % OF TOTAL MWH % OF TOTAL MWH % OF TOTAL
--- ---------- --- ---------- --- ---------- --- ----------
Residential 28,635,593 35.15% 30,785,860 35.93% 31,410,509 35.80% 34,536,687 36.81%
Commercial 34,209,316 42.00% 35,407,543 41.33% 36,178,973 41.24% 38,458,876 40.99%
Industrial 7,621,615 9.36% 7,575,664 8.84% 7,454,632 8.50% 7,445,236 7.94%
Large Industrial 4,759,823 5.84% 4,236,379 4.94% 3,662,187 4.17% 4,068,293 4.34%
Lighting 452,983 0.56% 465,089 0.54% 476,296 0.54% 485,052 0.52%
Commercial/Industrial
-Instantaneous Interruptible 5,539,072 6.80% 5,667,335 6.61% 5,570,774 6.35% 5,737,802 6.12%
Commercial/Industrial-
Noticed Interruptible 237,621 0.29% 1,537,668 1.79% 2,984,986 3.40% 3,081,658 3.28%
---------- ------ ---------- ---- ---------- ------ ---------- ------
Total 81,456,023 100.00% 85,675,538 0.00% 87,738,357 100.00% 93,813,604 100.00%
========== ====== ========== ==== ========== ====== ========== ======
</TABLE>
Actual usage fluctuations are highly dependent on weather and economic
conditions. See "The Servicer of the Transition Property--How TXU Electric
Forecasts the Number of Customers and the Amount of Electricity Usage." The
actual total annual usage has increased for each of the past four years. The
compounded annual growth rate for actual usage for all customer classes for the
period from 1995 through 1998 was 3.59%. There can be no assurance that future
usage rates will be similar to historical experience. See "Risk
Factors--Servicing Risks" in this prospectus.
43
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
RETAIL ELECTRIC REVENUES BY CUSTOMER CLASS
FOR THE YEAR ENDED
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 12/31/96 12/31/97 12/31/98
---------------------- --------------------- ---------------------- ----------------------
$(000S) % OF TOTAL $(000S) % OF TOTAL $(000S) % OF TOTAL $(000S) % OF TOTAL
------- ---------- ------- ---------- ------- ---------- ------- ----------
Residential 1,767,123 45.47% 1,878,441 46.35% 1,884,572 46.41% 2,042,790 47.34%
Commercial 1,626,502 41.85% 1,677,600 41.40% 1,679,135 41.35% 1,764,977 40.90%
Industrial 252,014 6.48% 245,396 6.06% 235,466 5.80% 234,528 5.43%
Large Industrial 120,612 3.10% 107,696 2.66% 89,505 2.20% 99,335 2.30%
Lighting 49,330 1.27% 50,675 1.25% 51,035 1.26% 52,790 1.22%
Commercial/Industrial
-Instantaneous Interruptible 66,003 1.70% 66,341 1.64% 68,354 1.68% 66,243 1.53%
Commercial/Industrial-Noticed
Interruptible 4,908 0.13% 26,191 0.65% 52,971 1.30% 54,849 1.27%
--------- ------ --------- ------ --------- ------ --------- ------
Total 3,886,492 100.00% 4,052,340 100.00% 4,061,038 100.00% 4,315,512 100.00%
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
44
<PAGE>
The Percentage Concentration of TXU Electric's Large Customers. For the
year ended December 31, 1998, the largest customer represented approximately
0.8%, and the ten largest customers represented approximately 3.8%, of TXU
Electric's actual retail electric usage. All of those customers are within the
large industrial customer class.
There can be no assurance that current customers will remain customers or
that the levels of customer concentration in the future will be similar to those
set forth above.
TXU Electric's Delinquency and Write-Off Experience. Table 4 and Table 5
below set forth the delinquency and net write-off experience with respect to
payments to TXU Electric for residential, commercial and industrial customers,
as well as for all other customers, for each of the periods indicated below.
Accounts are considered delinquent if they are not paid within the 13 business
day period allotted for on-time payment. Service to delinquent accounts may be
terminated approximately 27 business days after the billing date and, if not
paid within 7 business days after termination, TXU will issue a "closing bill."
Unless other arrangements have been made, unpaid accounts are written off 90
days after the closing bill is issued. See "--TXU Electric's Collection Process"
below.
The customers included in the customer groupings in Table 4 and Table 5 do
not match the customers in the customer classes previously described in this
prospectus because TXU Electric has historically prepared delinquency and
write-off information based on different customer groupings.
TABLE 4
DELINQUENCIES AS A PERCENTAGE OF TOTAL SALES OF ELECTRICITY
AS OF
Number of Days -----------------------------------------------
After Billing Date 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------- -------- -------- -------- --------
RESIDENTIAL
30-59 days 0.76% 0.84% 0.93% 1.06%
60-89 days 0.18% 0.19% 0.20% 0.49%
90+ days 0.10% 0.08% 0.07% 0.35%
COMMERCIAL
30-59 days 0.25% 0.27% 0.31% 0.40%
60-89 days 0.05% 0.05% 0.05% 0.09%
90+ days 0.03% 0.04% 0.04% 0.06%
INDUSTRIAL
30-59 days 0.06% 0.11% 0.10% 0.28%
60-89 days 0.02% 0.01% 0.01% 0.11%
90+ days 0.02% 0.00% 0.00% 0.01%
OTHER
30-59 days 0.14% 0.08% 0.11% 1.06%
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<PAGE>
60-89 days 0.01% 0.01% 0.01% 0.03%
90+ days 0.01% 0.00% 0.00% 0.01%
46
<PAGE>
TABLE 5
NET WRITE-OFFS AS A PERCENTAGE OF TOTAL SALES OF ELECTRICITY
FOR THE YEAR ENDED
----------------------------------------------------
12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- --------
RESIDENTIAL 0.62% 0.37% 0.32% 0.36%
COMMERCIAL 0.26% 0.17% 0.17% 0.17%
INDUSTRIAL 0.02% 0.06% 0.03% 0.03%
OTHER 0.00% 0.00% 0.00% 0.00%
TOTAL 0.35% 0.22% 0.20% 0.22%
Historical trends indicate relatively level performance in delinquencies
and write-offs as a percentage of sales.
Net write-offs for residential customers were higher in 1998 as compared to
previous years because, due to extreme heat in the summer of 1998:
o a moratorium mandated by the State of Texas prevented sending
termination notices or disconnecting residential electric services
from August 12, 1998 to September 30, 1998;
o the State of Texas mandated that residential customers were to be
offered six month arrangements on any bill amounts incurred during the
moratorium; and
o after the end of the moratorium, the disconnect process had to restart
with termination notices sent to customers before termination of
electric service could occur.
The 1998 moratorium resulted in higher than normal delinquencies for 1998 and
will result in higher than normal write-offs for 1999.
Pending any unusual or adverse weather conditions, future delinquencies and
write-offs are anticipated to remain consistent with historical trends. However,
changes in the retail electric market, including but not limited to the
introduction of retail electric providers, could mean that historical
delinquency and write-off statistics will not be indicative of future trends.
HOW TXU ELECTRIC FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY
USAGE
Accurate projections of the number of customers, usage and retail electric
revenue are important in setting, maintaining and adjusting the transition
charges to sufficient levels. These levels must be sufficient to recover
interest on and principal of the transition bonds, to fund the Scheduled
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<PAGE>
Overcollateralization Level for each series of transition bonds, to replenish
any shortfalls in the capital subaccount for each series of transition bonds and
to pay the indenture trustee's fee, the servicing fee and the other expenses and
costs included in Qualified Costs authorized by the financing orders issued to
TXU Electric under the Restructuring Act. See "The Initial Financing Order and
the Transition Charges" and "Risk Factors--Other Risks Associated With an
Investment in the Transition Bonds" in this prospectus.
TXU Electric compares its sales forecast to actual consumption on a monthly
basis to determine the accuracy of its forecasting model. TXU Electric
historically has prepared annual forecasts of electric energy sales for the
following year and several years thereafter. The principal uses of the electric
energy forecasts have been for short-term budgeting and rate-setting purposes.
TXU Electric has also prepared longer-term forecasts of customer peak demand and
energy consumption, primarily for use in facilities planning. TXU Electric most
recently updated its electric energy forecasting models in 1999. TXU Electric
uses sophisticated models to generate forecasts of short-term monthly sales as
well as reasonable long-term forecasts for all customer classes. The residential
model forecasts electric energy sales based on electricity price, real income,
household size, weather and changes in the saturation and efficiency of
appliances. The commercial and industrial models forecast electric energy sales
based on electricity price, commercial square footage, employment, industrial
output and weather. TXU Electric uses economic forecasts, prepared by an
independent consulting firm, as inputs to its forecasting models. Weather inputs
to the forecasting models are based on normal weather conditions, which are
developed from 30-year historical averages. In addition, TXU Electric will use
its annual sales forecast to determine the appropriate levels of transition
charges. As a result, TXU Electric's ability to accurately predict energy
consumption may affect the timing of collections of transition charges.
Actual sales can deviate from forecasted sales for many reasons, including
the general economic climate in TXU Electric's service territory; weather as it
impacts air conditioning and heating usage; levels of business activity; the
availability of more energy efficient appliances, new energy conservation
technologies; and the customer's ability to acquire these new products and
technologies.
48
<PAGE>
Table 6 compares actual usage for a particular year to the related forecast
prepared during the previous year. For example, the annual 1995 variance is
based on a forecast prepared in 1994. Variance, expressed as a percentage,
represents the difference between forecasted and actual usage. A positive
variance means that actual usage was greater than forecasted. A negative
variance means that actual usage was lower than forecasted. The variances for
the residential customer group ranged from -2.42% to 9.04%. The variances for
the commercial and government customer group ranged from 0.68% to 5.92%. The
variances for the industrial customer group ranged from -0.54% to 2.83%. There
can be no assurance that the future variance between actual and expected
consumption in the aggregate or by customer class will be similar to the
historical experience set forth below. In Table 6, "variance" represents
percentage deviation from the forecasted amount of electricity usage. The
customers included in the customer groupings in Table 6 and Table 7 do not match
the customers in the customer classes described in this prospectus because TXU
Electric has historically prepared forecasts of consumption and number of
customers based on different customer groupings.
TABLE 6
ANNUAL FORECAST VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
RESIDENTIAL
Projected
(in Gigawatt-hours ("gWh")) 31,492 32,927 33,802 33,699
Actual (in gWh) 30,729 32,992 33,552 36,744
Variance -2.42% 0.20% -0.74% 9.04%
COMMERCIAL AND GOVERNMENT
Projected (in gWh) 30,818 32,106 33,160 33,775
Actual (in gWh) 31,182 32,339 33,384 35,774
Variance 1.18% 0.73% 0.68% 5.92%
INDUSTRIAL
Projected (in gWh) 19,007 20,032 20,915 21,088
Actual (in gWh) 19,545 20,344 20,802 21,296
Variance 2.83% 1.56% -0.54% 0.99%
49
<PAGE>
Table 7 compares actual number of customers for a particular year to the
related forecast prepared during the previous year. For example, the annual 1995
variance is based on a forecast prepared in 1994. Variance, expressed as a
percentage, represents the difference between forecasted and actual number of
customers. A positive variance means that there were more customers than
forecasted. A negative variance means that there were fewer customers than
forecasted. The variances for the residential customer group ranged from -0.4%
to 0.6%. The variances for the commercial customer group ranged from -1.2% to
1.0%. The variances for the industrial customer group ranged from -0.7% to 0.8%.
There can be no assurance that the future variance between actual and expected
number of customers in the aggregate or by customer class will be similar to the
historical experience set forth below. In Table 7, "variance" represents
percentage deviation from the forecasted number of customers.
TABLE 7
ANNUAL FORECAST VARIANCE FOR THE NUMBER OF CUSTOMERS
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
RESIDENTIAL
Projected 2,046,379 2,075,868 2,140,660 2,169,758
Actual 2,038,714 2,087,742 2,131,408 2,181,768
Variance -0.4% 0.6% -0.4% 0.6%
COMMERCIAL
Projected 225,327 227,058 235,658 240,303
Actual 222,662 229,291 234,595 241,394
Variance -1.2% 1.0% -0.5% 0.5%
INDUSTRIAL
Projected 21,290 21,255 20,843 20,892
Actual 21,324 21,112 21,004 20,812
Variance 0.1% -0.7% 0.8% -0.4%
OTHER
Projected 28,948 29,661 30,142 30,851
Actual 29,182 29,765 30,307 30,754
Variance 0.8% 0.4% 0.5% -0.3%
During the last four years, there has been no discernible trend in the
variance between projected number of customers and actual number of customers.
TXU ELECTRIC'S BILLING PROCESS
TXU Electric operates on a continuous billing cycle with approximately 21
billing cycles each month and approximately an equal number of bills being
distributed each business day. Normal billing is for a period of approximately
30 days, ending one day prior to the mailing of the bill. All accounts are
50
<PAGE>
automatically reviewed by TXU Electric at the time of billing to determine
appropriate collection actions.
Prior to the onset of competition on January 1, 2002, customers will be
billed through a bundled rate. After competition commences, the PUC will not
mandate an unbundled bill unless requested by a retail electric provider, in
which case the PUC will consider the merits of that request.
Subject to statutory and legal requirements, TXU Electric may change
its billing policies and procedures from time to time. It is expected that any
change would be designed to enhance TXU Electric's ability to make timely
recovery of amounts billed to customers.
TXU ELECTRIC'S COLLECTION PROCESS
General. Under the servicing agreement, any changes to customary billing
and collection practices instituted by TXU Electric will apply to the servicing
of transition property so long as TXU Electric is the servicer.
Under Texas law, TXU Electric is obligated to provide service to new
customers. New residential and non-residential customers will be required to
post a security deposit equal to two months of estimated electricity usage when
they apply for electric service. These new customers may avoid the security
deposit requirement if they can demonstrate creditworthiness or were previously
a customer of TXU Electric with a satisfactory payment history. The principal
means of establishing credit-worthiness is by a letter from another utility
indicating satisfactory payment history.
TXU Electric's Collection Process for All Customer Classes. TXU receives
approximately 77% of total bill payments via the U.S. mail. Approximately 16% of
total payments were paid in person through third-party collectors throughout TXU
Electric's service territory. Other payment methods include credit and debit
cards, electronic funds transfer and electronic data interchange, which, in the
aggregate, accounted for approximately 7% of bill payments collected.
One business day after a customer's meter is read, that customer's bill is
processed and mailed to that customer. Bills are due upon presentation, and are
considered past due after 13 business days.
All accounts are reviewed when billed. Based on credit history and other
information, an account may be reviewed again one day after the past due date
(or 14 business days after billing), and, at that time, TXU Electric determines
whether to issue a "past-due notice." After the issuance of a past-due notice, a
customer with an outstanding bill greater than $75 has nine business days during
which to pay the outstanding amount. TXU Electric issues "termination notices"
24 business days after billing. Termination notices alert the customer that
service will be terminated in three business days. TXU Electric reviews accounts
for payments, extensions, deferred payment agreements, bank returned items and
applicable service orders that would affect termination of service. Prior to
disconnecting a customer, TXU Electric attempts to contact that customer either
by leaving a notice at the customer's premises or by telephoning that customer.
51
<PAGE>
If a disconnected customer's account is not paid within seven business days
of termination, a closing bill, including all unpaid amounts, is issued. Unless
other arrangements are made, unpaid closed accounts are written-off 90 days
after the closing bill is issued. After being written off, accounts are passed
to a collection agency, which will continue to attempt to collect unpaid amounts
for a period of seven months.
TXU Electric does not disconnect residential customers for non-payment on
any day on which the National Weather Service has issued a heat advisory for
that day or any one of the preceding two calendar days or any day on which
temperatures drop below freezing (32oF). Also, during periods of extreme heat,
the PUC may impose moratoriums against non-payment disconnections. In addition,
TXU does not disconnect residential customers for non-payment if it is
established that termination would result in a resident becoming ill or more
seriously ill. In order to invoke this rule, the customer must have an attending
physician contact TXU Electric within 16 days of the issuance of the bill and
provide a written statement within 26 days of the issuance of the bill. After
receiving the written statement, TXU Electric will not terminate service for 63
days from the issuance of the bill. TXU Electric may require the customer to
enter a deferred payment agreement after the invocation of this rule.
If TXU has been notified prior to the date of termination that a customer
has been granted "energy assistance funds" and the customer has made an
acceptable arrangement for payment of his or her outstanding balance, TXU
Electric will discontinue collection action.
TXU Electric may restore service to a customer when that customer pays all
outstanding past due amounts or makes other arrangements to have service
restored.
Normal reconnection is guaranteed to be complete within 24 hours of
payment. Dependent upon credit history, TXU Electric may require the customer to
pay a reconnection fee before reconnection or may bill the customer for the
reconnection fee during the next billing cycle.
Once a customer is disconnected for non-payment, TXU Electric requires a
deposit equal to one-sixth of the estimated annual revenue on that customer's
account. Dependent upon credit history, TXU Electric may require the customer to
pay the required deposit before reconnection or may bill the customer for the
required amount during the next one to three billing cycles.
TXU Electric may change its collection policies and procedures from time to
time. It is expected that any such changes would be designed to enhance TXU
Electric's ability to make timely recovery of amounts billed to customers.
Deferred Payment Agreements. A deferred payment agreement is an agreement
with a customer to pay an outstanding amount in installments extending beyond
the upcoming due date. A deferred payment agreement is available to any customer
claiming an inability to pay amounts owed by the due date. The length of
deferral is normally limited to three billing periods past the due date. At
September 30, 1999, approximately 0.2% of customers were subject to these
agreements.
Convenience Payment Plan (Senior Payment Option). This plan is available to
residential customers who are senior citizens or receive monthly payment
assistance from the government. The purpose of the plan is to establish a new
52
<PAGE>
past due date for the customer's account to mitigate hardship caused by the
timing of payments.
Third Party Notification Plan (Special Friend Plan). For residential
customers who participate in this plan, a third party, or "Special Friend,"
receives notification when any collection action is imminent regarding the
customer's account. The goal of the plan is for the Special Friend to aid the
customer in managing his or her payment schedule.
Average Billing Plan. This plan is a 12-month rolling average payment plan
for residential customers, schools and churches. These customers are billed an
amount equal to the average of their actual bills over the last 12 months in
order to lessen seasonal swings in monthly billed amounts. Any differences
between the cumulative average amount paid by the customer and the actual amount
owed will be settled upon the closing of the customer account. Less than 5% of
TXU Electric's residential customers participate in this plan.
TXU ELECTRIC'S PROCEDURES FOR COLLECTING TRANSITION CHARGES FROM RETAIL ELECTRIC
PROVIDERS
The servicer will send a bill for transition charges to the retail electric
provider based on the approved tariff. The bill will specify the billed amount,
based on the transition charge tariff, and the amount actually owed by the
retail electric provider to the servicer. The difference between the amount
billed by the servicer and the amount owed by the retail electric provider will
reflect the expected loss experience for the retail electric provider for the
coming year. Each retail electric provider is required to remit to the servicer
a specified "remittance percentage" of billed charges within 20 days of being
billed by the servicer. Should the retail electric provider not pay this amount
at the end of the 20-day period, the servicer will provide a notice of breach
and will allow for an additional 10-day period for the retail electric provider
to make payment. Any failure to remit this specified amount in full at the end
of the 30-day period constitutes a default and billing responsibility transfers
immediately to the servicer, the provider of last resort or another retail
electric provider, as determined by the servicer. As incentive collection agent
compensation, the retail electric provider may retain collections from end-use
customers above the specified percentage but is not reimbursed for collections
below the specified percentage. The specified percentage will be adjusted on an
annual basis to take into account the collection experience of the previous
year, as demonstrated by audited reports from all retail electric providers. The
adjustments to the transition charges will take into account the specified
remittance percentage such that the receipt of the specified percentage results
in appropriate collections to service the transition bonds and pay all
associated fees. There will be no rebate or credit to the retail electric
providers at any time. The servicer will remit to the indenture trustee only
those amounts remitted to the servicer by the retail electric providers.
In the first year of retail competition, the servicer will calculate the
remittance percentage for all retail electric providers based on the most recent
year of actual TXU Electric loss experience. In each subsequent year, the
servicer will calculate the remittance percentage for all retail electric
providers based on the retail electric providers' composite actual experience
during the previous year, with the composite amount determined as (A) total
transition charges collected by retail electric providers from customers divided
by (B) total transition charge billings by retail electric providers to
customers. The retail electric providers will support their claimed remittance
53
<PAGE>
percentage with an audited financial statement, and the actual calculation will
be attested to by each retail electric provider's independent auditor. The
retail electric providers will have to submit their annual remittance percentage
[30] days prior to the annual transition charge adjustment. The servicer will
have 15 days to review and approve the percentage amount. If the servicer
disagrees with the percentage amount, the PUC will arbitrate the dispute and
decide within 15 days. Retail electric providers that do not submit their annual
remittance percentage [30] days prior to the annual transition charge adjustment
will be in default and billing responsibility will transfer immediately to the
servicer, the provider of last resort or another retail electric provider, as
determined by the servicer. The servicer will determine the overall expected
remittance percentage and use that figure in determining the revenues required
to service the transition bonds for the next year.
Each retail electric provider participating in the pilot project under the
Restructuring Act will follow the procedures established for retail electric
providers during the first year of retail competition. Retail electric providers
who begin serving customers after January 1, 2003 will be required to use the
composite expected remittance percentage determined in the last annual
transition charge adjustment. See "The Restructuring Act--The Restructuring
Act's General Effect on the Electric Utility Industry in Texas--Retail
Competition" in this prospectus.
54
<PAGE>
TXU TRANSITION BOND COMPANY LLC
The issuer of the transition bonds is TXU Transition Bond Company LLC,
a Delaware limited liability company, which was formed on December 1, 1999 and
is sometimes referred to as "Transition Bond Company," "we," "us" or "our" in
this prospectus. TXU Electric will execute the amended and restated limited
liability company agreement of Transition Bond Company as its sole member. The
assets of Transition Bond Company are limited to the transition property, the
other Collateral and any third-party credit enhancement. As of the date of this
prospectus, Transition Bond Company has not carried on any business activities
and has no operating history.
TRANSITION BOND COMPANY'S PURPOSE
Transition Bond Company has been created for the sole purpose of:
o purchasing and owning transition property;
o issuing, from time to time, one or more series of transition bonds,
each of which may be comprised of one or more classes;
o pledging its interest in transition property and other Collateral to
the indenture trustee under the indenture in order to secure the
transition bonds; and
o performing activities that are necessary, suitable or convenient to
accomplish these purposes.
THE INTERACTION BETWEEN TXU ELECTRIC AND TRANSITION BOND COMPANY
On the initial issuance date of each series of transition bonds, TXU
Electric will sell transition property to Transition Bond Company pursuant to
the sale agreement between TXU Electric and Transition Bond Company. The
servicer will service transition property pursuant to the servicing agreement.
TRANSITION BOND COMPANY'S MANAGEMENT
Transition Bond Company's business will be managed by five managers.
Transition Bond Company will have at all times following the initial issuance
date of the first series of transition bonds at least two managers who, among
other things, are not and have not been for at least five years from the date of
his or her appointment:
o a stockholder, member, partner, director, officer, employee,
affiliate, associate, customer, supplier, creditor or independent
contractor of, or any person that has received any benefit in any form
whatsoever from, or any person that has provided any service in any
form whatsoever to, Transition Bond Company or TXU Electric or any of
their respective affiliates, other than as a customer of TXU Electric
in the ordinary course of business;
55
<PAGE>
o any person owning beneficially, directly or indirectly, any
outstanding shares of common stock, any limited liability company
interests or any partnership interests, as applicable, of Transition
Bond Company or TXU Electric or any of their respective affiliates;
o a stockholder, member, partner, director, officer, employee,
affiliate, associate, customer, supplier, creditor or independent
contractor of, or any person that has received any benefit in any form
whatsoever from, or any person that has provided any service in any
form whatsoever to, a beneficial owner referred to in the second
bullet point above or any of its affiliates or associates; or
o a member of the immediate family of any person described in the first
three bullet points above.
These managers are referred to as the "independent managers." The remaining
managers will be employees or officers of TXU Electric.
The managers will devote the time necessary to conduct the affairs of
Transition Bond Company. The following are the managers as of the date of this
prospectus:
POSITION AT TXU ELECTRIC OR AFFILIATE OF
NAME AGE TXU ELECTRIC
---- --- ------------
Kirk R. Oliver Vice President and Treasurer of TXU Corp
Marc D. Moseley Vice President of TXU Business Services Company,
a subsidiary of TXU Corp
Diane J. Kubin Assistant Secretary of TXU Corp and Corporate
Secretary and Assistant Treasurer of various
foreign and domestic subsidiaries of TXU Corp
THE MANAGERS' BUSINESS EXPERIENCE
Each of the three non-independent managers listed above currently work for
TXU Electric or an affiliate of TXU Electric. As of the date of this prospectus,
the independent managers have not yet been appointed. The business experience of
the managers' for the past five years is as follows:
o Kirk R. Oliver is currently serving as Vice President and Treasurer of
TXU Corp as well as [Vice President] and Treasurer of TXU Electric;
prior to joining TXU Corp in September 1998 Mr. Oliver was an
investment banker with Lehman Brothers, most recently serving as
Senior Vice President for its Global Power Group.
o Marc D. Moseley has served as a Vice President of TXU Business
Services Company, a subsidiary of TXU Corp, since May, 1995; his prior
positions with TXU Electric and its affiliates during the past five
years included Controller of [TXU Corp.]
o Diane J. Kubin has, [for the past five years,] served as Assistant
Secretary of TXU Corp as well as Corporate Secretary and Assistant
Treasurer of various domestic and foreign subsidiaries of TXU Corp.
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THE MANAGERS' COMPENSATION AND LIMITATION ON LIABILITIES
Transition Bond Company has not paid any compensation to any manager since
it was formed. The non-independent managers will not be compensated by
Transition Bond Company for their services on its behalf. The independent
managers will be paid quarterly fees from the revenues of Transition Bond
Company and will be reimbursed for their reasonable expenses. These expenses
include, without limitation, the reasonable compensation, expenses and
disbursements of agents, representatives, experts and counsel as the independent
managers may employ in connection with the exercise and performance of their
rights and duties under the amended and restated limited liability company
agreement of Transition Bond Company, the indenture, the sale agreement and the
servicing agreement. The amended and restated limited liability company
agreement of Transition Bond Company provides that the managers will not be
personally liable under any circumstances except for material acts or omissions
involving intentional misconduct, fraud or a knowing violation of the law. The
amended and restated limited liability company agreement of Transition Bond
Company further provides that, to the fullest extent permitted by law,
Transition Bond Company shall indemnify the managers against any liability
incurred in connection with their services as managers for Transition Bond
Company, except in the case described in the preceding sentence.
TRANSITION BOND COMPANY IS A SEPARATE LEGAL ENTITY
Under its amended and restated limited liability company agreement,
Transition Bond Company may not file a voluntary petition for relief under the
federal bankruptcy code without a unanimous vote of its managers, including the
independent managers. TXU Electric has agreed that it will not cause Transition
Bond Company to file a voluntary petition for relief under the federal
bankruptcy code. The amended and restated limited liability company agreement of
Transition Bond Company requires it to:
o take all reasonable steps to continue its identity as a separate legal
entity;
o maintain its assets and accounts separate from TXU Electric and its
affiliates; and
o maintain separate records and financial statements and not commingle
its records with the records of TXU Electric or its affiliates.
The principal place of business of Transition Bond Company is Energy Plaza,
1601 Bryan Street, Suite 2-023, Dallas, Texas 75201, and its telephone number is
(214) 812-5711.
ADMINISTRATION AGREEMENT
TXU Electric will provide administrative services for Transition Bond
Company pursuant to an administration agreement between Transition Bond Company
and TXU Electric.
HOW TRANSITION BOND COMPANY WILL USE THE
PROCEEDS OF THE TRANSITION BONDS
Transition Bond Company will use the proceeds of the issuance of the
transition bonds to pay expenses of issuance and certain other Qualified Costs
as provided in the related financing orders and to purchase transition property
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from TXU Electric. TXU Electric proposes using the proceeds it receives from the
sale of transition property principally to reduce recoverable regulatory assets
and stranded costs through the refinancing or retirement of debt or equity.
INCORPORATION OF DOCUMENTS BY REFERENCE
Transition Bond Company has filed with the SEC a registration statement
under the Securities Act of 1933 with respect to the transition bonds. This
prospectus, which forms a part of the registration statement, and any prospectus
supplement describe the material terms of some documents filed as exhibits to
the registration statement. However, this prospectus and any prospectus
supplement do not contain all of the information contained in the registration
statement and its exhibits. Any statements contained in this prospectus or any
prospectus supplement concerning the provisions of any document filed as an
exhibit to the registration statement or otherwise filed with the SEC are not
necessarily complete, and in each instance reference is made to the copy of the
document so filed. Each statement concerning those provisions is qualified in
its entirety by reference to the complete document. For further information,
reference is made to the registration statement and the exhibits thereto, which
are available to the public over the Internet at the SEC's website at
http://www.sec.gov. You may also read and copy any of these SEC filings at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Transition Bond Company will file with the SEC
all periodic reports as are required by the Securities Exchange Act of 1934, and
the rules, regulations or orders of the SEC thereunder. After transition bonds
of any series are issued, Transition Bond Company may discontinue filing
periodic reports under the Securities Exchange Act of 1934 in any subsequent
fiscal year if, at the beginning of that fiscal year, there are fewer than 300
holders of record of the transition bonds.
The SEC allows Transition Bond Company to "incorporate by reference" the
information contained in documents it files with them, which means that
Transition Bond Company can disclose important information to you by referring
you to those documents. Transition Bond Company incorporates by reference any
future filings it makes with the SEC under Section 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until it sells all of the transition bonds.
The information that Transition Bond Company files later with the SEC will
automatically update and supersede any prior inconsistent statement contained in
those documents.
You may request a copy of any future filings at no cost, by writing or
contacting Transition Bond Company at the following address: TXU Transition Bond
Company LLC, Energy Plaza, 1601 Bryan Street, Suite 2-023, Dallas, Texas 75201;
telephone number (214) 812-5711.
THE TRANSITION BONDS
The transition bonds will be issued under and their payment will be secured
by an indenture substantially in the form filed as an exhibit to the
registration statement of which this prospectus forms a part. The terms of each
series of transition bonds will be provided in a supplement to the indenture.
The following summary describes some general terms and provisions of the
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transition bonds. The particular terms of the transition bonds of any series
offered by any prospectus supplement will be described in the prospectus
supplement. This summary does not purport to be complete and is subject to, and
is qualified by reference to, the terms and provisions of the transition bonds
and the indenture.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each made up of
one or more classes. The terms of a series may differ from the terms of another
series, and the terms of a class may differ from the terms of another class of
the same series. The terms of each series and class will be specified in a
prospectus supplement relating to that series and class.
The indenture requires, as a condition to the issuance of additional
transition bonds, that this issuance will not result in any applicable rating
agency reducing or withdrawing its then current rating of any outstanding series
or class of transition bonds. The notification in writing by each applicable
rating agency to TXU Electric, the servicer, the indenture trustee and
Transition Bond Company that any action will not result in a reduction or
withdrawal is referred to as the Rating Agency Condition. (ss.2.10 (8))
The indenture also provides that failure to pay the entire outstanding
principal amount of the transition bonds of any series or class will not result
in a default on the series or class of transition bonds until after the Final
Maturity Date for the series or class. Failure to pay the entire principal
amount by the Expected Final Payment Date is not a default. (ss.5.01(ii) &
ss.2.08(b))
Transition Bonds Will be Maintained in Book-Entry Format. The prospectus
supplement will set forth the procedure for the manner of the issuance of the
transition bonds of each series. Generally, each series of transition bonds will
initially be represented by one or more transition bonds registered in the name
of Cede & Co., as the nominee of DTC. The transition bonds will be available for
purchase in initial denominations specified in the prospectus supplement, which
will be not less than $1,000. Unless and until definitive transition bonds are
issued under the limited circumstances described in this prospectus, no
beneficial owner of transition bonds will be entitled to receive a physical bond
representing a transition bond. All references in this prospectus to actions by
holders of transition bonds will refer to actions taken by DTC upon instructions
from DTC participants. In addition, all references in this prospectus to
payments, notices, reports and statements to holders of transition bonds will
refer to payments, notices, reports and statements to DTC or Cede & Co., as the
registered owner of each series of transition bonds. DTC or Cede & Co. will
receive these payments, notices, reports and statements for distribution to the
beneficial owners of the transition bonds in accordance with DTC's procedures
with respect thereto. See "--Transition Bonds Will be Issued in Book-Entry Form"
and "--Definitive Transition Bonds."
PAYMENTS OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
Interest will accrue on the principal balance of transition bonds of a
series or class at the interest rate specified in or determined in the manner
specified in the prospectus supplement. Interest will be payable to the holders
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of transition bonds of the series or class on each payment date, commencing on
the payment date specified in the prospectus supplement.
On any payment date with respect to any series, Transition Bond Company
will generally make principal payments on that series only until the outstanding
principal balance of that series has been reduced to the principal balance
specified for that payment date in the Expected Amortization Schedule for that
series, but only to the extent funds are available for that payment as described
in this prospectus. (ss.2.08(b)) Accordingly, principal of the series or class
of transition bonds may be paid later, but generally not sooner, than reflected
in the Expected Amortization Schedule for that series or class. See "Risk
Factors--Other Risks Associated With an Investment in the Transition Bonds" and
"Weighted Average Life and Yield Considerations for the Transition Bonds" in
this prospectus.
The failure to make a scheduled payment of principal on the transition
bonds because there are not sufficient funds in the collection account does not
constitute a default or an event of default under the indenture. (ss.2.08(b))
Notwithstanding the foregoing, the entire unpaid principal amount of the
transition bonds of any series or class will be due and payable:
o on the Final Maturity Date of the series or class;
o if an event of default under the indenture occurs and is continuing,
and the indenture trustee or the holders of a majority in principal
amount of the transition bonds of all series then outstanding, declare
the transition bonds to be immediately due and payable, then on that
date; and
o on the date of redemption, if any. (ss.2.08(b))
See "The Indenture--What Constitutes an Event of Default on the Transition
Bonds" and "Weighted Average Life and Yield Considerations for the Transition
Bonds" in this prospectus.
REDEMPTION OF THE TRANSITION BONDS
Redemption provisions, if any, for transition bonds of any series will be
specified in a prospectus supplement relating to transition bonds of that
series, including the redemption price and the premiums, if any, payable upon
redemption. Unless the context requires otherwise, all references in this
prospectus to principal of the transition bonds of a series insofar as it
relates to redemption includes any premium that might be payable thereon if
transition bonds of the series are redeemed, as described in the prospectus
supplement. (ss.10.1 & ss.10.2) Notice of redemption of any series of transition
bonds will be given by the indenture trustee to each holder of a transition bond
by first-class mail, postage prepaid, mailed not less than five days nor more
than 45 days prior to the date of redemption or in another manner or at another
time as may be specified in the prospectus supplement. (ss.10.3) All transition
bonds called for redemption will cease to bear interest on the specified
redemption date, provided funds for their redemption are on deposit with the
indenture trustee at that time, and will no longer be considered "outstanding"
under the indenture. The holders of transition bonds will have no further rights
with respect to those transition bonds, except to receive payment of the
redemption price of those transition bonds and unpaid interest accrued to the
redemption date from the indenture trustee. (ss.10.4)
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CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement for the transition bonds of each series will be provided
principally by adjustments to the transition charges and amounts on deposit in
the reserve subaccount for that series, the overcollateralization subaccount for
that series, the retail electric provider security deposit subaccount and the
capital subaccount for that series. In addition, for any series of transition
bonds or one or more classes of a series, additional credit enhancement may be
provided. The amounts and types of credit enhancement, and the provider of
credit enhancement, if any, for each series of transition bonds or one or more
classes of a series will be described in a prospectus supplement. Credit
enhancement may be in the form of:
o an additional reserve account;
o subordination;
o additional overcollateralization;
o a financial guaranty insurance policy;
o a letter of credit;
o a credit or liquidity facility;
o a swap agreement;
o a repurchase obligation;
o a third party payment or other support;
o a cash deposit or other credit enhancement; or
o any combination of the foregoing, as may be set forth in the
prospectus supplement.
If specified in a prospectus supplement, credit enhancement for a series of
transition bonds may cover one or more other series of transition bonds.
If any additional credit enhancement is provided with respect to a series
offered hereby, a prospectus supplement relating to transition bonds of that
series will include a description of:
o the amount payable under the credit enhancement;
o any conditions to payment under the credit enhancement not otherwise
described in this prospectus;
o the conditions, if any, under which the amount payable under the
credit enhancement may be reduced and under which the credit
enhancement may be terminated or replaced; and
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o any material provisions of any applicable agreement relating to the
credit enhancement.
Additionally, in some cases, the prospectus supplement may contain
information about the provider of any third-party credit enhancement, including:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business; and
o its total assets, and its stockholders' equity or policyholders'
surplus, if applicable, as of a date specified in the prospectus
supplement.
TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the prospectus supplement, all series of
transition bonds will initially be represented by one or more bonds registered
in the name of Cede & Co., as nominee of DTC, or another securities depository.
The transition bonds will be available to investors only in the form of
book-entries maintained indirectly with DTC through organizations that are DTC
participants. Beneficial owners of transition bonds may also hold transition
bonds directly through Cedelbank, societe anonyme ("Cedelbank"), or Morgan
Guaranty Trust Company of New York in its role as operator of the Euroclear
system, which is based in its Brussels, Belgium office (the "Euroclear
Operator") in Europe, if they are customers of or participants in one of those
systems or indirectly through a customer of or participant in one of those
systems. (ss.2.11)
The Role of Cede & Co., Cedelbank and Euroclear. Cede & Co., as nominee for
DTC, will hold the global bond or bonds representing the transition bonds.
Cedelbank and Euroclear will hold omnibus positions on behalf of their customers
or participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositories. These
depositories will, in turn, hold these positions in customers' securities
accounts in the depositories' names on the books of DTC. Citibank, N.A. will act
as depository for Cedelbank and Morgan Guaranty Trust Company of New York will
act as depository for Euroclear.
The Function of DTC. DTC is a limited purpose trust company organized under
the laws of the State of New York, and is a member of the Federal Reserve
System. DTC is a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Securities Exchange Act of 1934. DTC was created to hold securities
for its participants and to facilitate the clearance and settlement of
securities transactions between its participants through electronic
book-entries, thereby eliminating the need for physical movement of bonds.
"Direct participants" of DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and some other organizations. DTC is
owned by a number of its direct participants and by the New York Stock Exchange,
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Inc., the Nasdaq-Amex Market Group and the National Association of Securities
Dealers, Inc. Access to DTC's system is also available to "indirect
participants."
The Function of Cedelbank. Cedelbank is incorporated under the laws of
Luxembourg. Cedelbank holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Cedelbank provides various services, including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedelbank also deals with
domestic securities markets in over 30 countries through established depository
and custodial relationships. Cedelbank has established an electronic bridge with
the Euroclear Operator to facilitate settlement of trades between Cedelbank and
Euroclear. Cedelbank currently accepts over 110,000 securities issues on its
books.
Cedelbank customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies, and
clearing corporations and may include any underwriters, agents or dealers with
respect to a series of transition bonds offered hereby. Cedelbank's United
States customers are limited to securities brokers and dealers and banks.
The Function of Euroclear. Euroclear was created in 1968 to hold securities
for Euroclear participants and to clear and settle transactions between
Euroclear participants through simultaneous electronic book-entry delivery
against payment. By performing these functions, Euroclear eliminated the need
for physical movement of securities and also eliminated any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 30 currencies, including Euros and United States Dollars. The
Euroclear system includes various other services, including securities lending
and borrowing, and arrangements with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described below. The Euroclear system is operated by the Euroclear Operator,
under contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation. All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not Euroclear Clearance System. Euroclear Clearance
System establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include central banks, commercial banks, securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a Federal
Reserve System member, it is regulated and examined by the Board of Governors of
the Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Terms and Conditions of Euroclear. Securities clearance accounts and cash
accounts with the Euroclear Operator are governed by the Terms and Conditions
Governing Use of Euroclear and the related Operating Procedures of Euroclear and
applicable Belgian law, which are referred to in this prospectus as the "Terms
and Conditions." The Terms and Conditions govern transfers of securities and
cash within Euroclear, withdrawals of securities and cash from Euroclear and
receipts of payments with respect to securities in Euroclear. All securities in
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Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear participants and
has no record of or relationship with persons holding through Euroclear
participants.
The Rules for Transfers Among DTC, Cedelbank or Euroclear Participants.
Transfers between customers and participants of DTC, Cedelbank and Euroclear
will occur in accordance with DTC rules. Transfers between Cedelbank customers
and Euroclear participants will occur in accordance with their respective rules
and operating procedures. Cross-market transfers between persons holding
directly or indirectly through DTC, on the one hand, and directly or indirectly
through Cedelbank customers or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its depository. Cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in this system in accordance with its rules and
procedures and within its established deadlines, in European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depository to take action
to effect final settlement on its behalf by delivering or receiving transition
bonds in DTC, and making or receiving payments in accordance with normal
procedures for same-day funds settlement applicable to DTC. Cedelbank customers
and Euroclear participants may not deliver instructions directly to Citibank,
N.A., as depository for Cedelbank, and Morgan Guaranty Trust Company of New
York, as depository for Euroclear.
Cede & Co. Will be the Holder of the Transition Bonds. Unless and until
definitive transition bonds are issued, it is anticipated that the only "holder"
of transition bonds of any series will be Cede & Co., as nominee of DTC.
Beneficial owners of transition bonds will only be permitted to exercise their
rights as beneficial owners of transition bonds indirectly through customers and
participants of DTC, Cedelbank and Euroclear, and through DTC. All references
herein to actions by holders of transition bonds thus refer to actions taken by
DTC upon instructions from its participants. In addition, all references herein
to payments, notices, reports and statements to holders of transition bonds
refer to payments, notices, reports and statements to Cede & Co., as the
registered owner of the transition bonds, for payments to the beneficial owners
of the transition bonds in accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while outstanding transition bonds of a series
are in book-entry form, under DTC's rules, DTC is required to make book-entry
transfers among its direct participants on whose behalf it acts with respect to
those transition bonds. In addition, DTC is required to receive and transmit
payments of principal of, and interest on those transition bonds. DTC's direct
and indirect participants with whom beneficial owners of transition bonds have
accounts with respect to transition bonds in book-entry form are similarly
required to make book-entry transfers and receive and transmit these payments on
behalf of their respective beneficial owners of transition bonds. Accordingly,
although beneficial owners of transition bonds will not possess physical bonds,
DTC's rules provide a mechanism by which beneficial owners of transition bonds
will receive payments and will be able to transfer their interests.
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DTC can only act on behalf of its direct participants, who in turn act on
behalf of its indirect participants and some banks. Thus, the ability of holders
of beneficial interests in the transition bonds to pledge transition bonds to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of these transition bonds, may be limited due to the lack of
definitive transition bonds.
DTC has advised the indenture trustee that it will take any action
permitted to be taken by a registered owner of transition bonds under the
indenture only at the direction of one or more of DTC's direct participants to
whose DTC account the transition bonds are credited.
How Transition Bond Payments Will Be Credited by Cedelbank and Euroclear.
Payments with respect to transition bonds held through Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank customers or Euroclear
participants in accordance with the relevant systems' rules and procedures, to
the extent received by its depository. These payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material United States Federal Income Tax Matters for the Holders of
Transition Bonds" in this prospectus. Cedelbank or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
registered owner of transition bonds under the indenture on behalf of a
Cedelbank customer or Euroclear participant only in accordance with its relevant
rules and procedures and subject to its depository's ability to effect these
actions on its behalf through DTC.
DTC, Cedelbank and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of transition bonds among customers and
participants of DTC, Cedelbank and Euroclear. However, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
DEFINITIVE TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Definitive Transition
Bonds. Unless otherwise specified in the prospectus supplement, each series of
transition bonds will be issued in fully registered, certificated form to
beneficial owners of transition bonds or their nominees, rather than to DTC or
its nominee, only if:
o Transition Bond Company advises the indenture trustee in writing that
DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to this series of
transition bonds and Transition Bond Company is unable to locate a
qualified successor;
o Transition Bond Company, at its option, elects to terminate the
book-entry system through DTC; or
o after the occurrence of an event of default under the indenture,
beneficial owners of transition bonds representing at least a majority
of the outstanding principal amount of the transition bonds of all
series advise the indenture trustee through DTC in writing that the
continuation of a book-entry system through DTC is no longer in those
beneficial owners' best interest.
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The Delivery of Definitive Transition Bonds. Upon the occurrence of any
event described in the immediately preceding paragraph, DTC will be required to
notify all affected beneficial owners of transition bonds and the indenture
trustee of the availability of definitive transition bonds. Upon surrender by
DTC of the definitive bonds representing the applicable transition bonds and
receipt of instructions for reregistration, the indenture trustee will
authenticate and deliver definitive transition bonds. Thereafter the indenture
trustee will recognize the holders of these definitive transition bonds as
registered owners of transition bonds under the indenture. (ss.2.13)
The Payment Mechanism for Definitive Transition Bonds. Payments of
principal of, and interest on, definitive transition bonds will be made by the
indenture trustee, as paying agent, in accordance with the procedures set forth
in the indenture. (ss.3.03) These payments will be made directly to holders of
definitive transition bonds in whose names the definitive transition bonds were
registered at the close of business on the related record date specified in each
prospectus supplement. These payments will be made by check mailed to the
address of the holder as it appears on the register maintained by the indenture
trustee. The final payment on any Transition Bond, however, will be made only
upon presentation and surrender of the Transition Bond at the office or agency
specified in the notice of final payment to holders of transition bonds.
The Transfer or Exchange of Definitive Transition Bonds. Definitive
transition bonds will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the indenture trustee. No
service charge will be imposed for any registration of transfer or exchange, but
the transfer agent and registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS
The rate of principal payments on each series or class of transition bonds,
the aggregate amount of each interest payment on each series or class of
transition bonds and the actual final payment date of each series or class of
transition bonds will be dependent on the rate and timing of the servicer's
receipt of transition charges from customers or retail electric providers.
Accelerated receipts of transition charges by the servicer will generally not,
however, result in payment of principal on the transition bonds earlier than the
related Expected Final Payment Dates. This is because receipts in excess of the
amounts necessary to amortize the transition bonds of each series in accordance
with the applicable Expected Amortization Schedules and to pay interest and
related fees and expenses will be allocated to the reserve subaccount for that
series and will be applied, if needed, to satisfy revenue requirements on the
next payment date. However, delayed receipts of transition charges by the
servicer may result in principal payments on the transition bonds occurring more
slowly than as reflected in the Expected Amortization Schedules or later than
the related Expected Final Payment Dates. Redemption of any class or series of
transition bonds and payment following acceleration of the Final Maturity Date
after an event of default under the indenture in accordance with the terms of
the transition bonds of the class or series will result in payment of principal
earlier than the related Expected Final Payment Dates.
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THE EFFECT OF THE SERVICER'S RECEIPT OF TRANSITION CHARGES ON THE TIMING OF
TRANSITION BOND PAYMENTS
The actual payments on each payment date for each series or class of
transition bonds and the weighted average life of that series or class will be
affected primarily by the rate at which the servicer receives transition charges
and the timing of those receipts. Amounts available in the reserve subaccount
for that series, the overcollateralization subaccount for that series and the
capital subaccount for that series will also affect the weighted average life of
the transition bonds of that series. The aggregate amount of transition charges
received by the servicer and the rate of principal amortization on the
transition bonds will depend, in part, on actual energy usage by customers and
the rate of delinquencies and write-offs. This is because the transition charges
will be calculated based on estimates of usage and the rate of write-offs and
delinquencies. The transition charges will be adjusted from time to time based
in part on the actual rate at which the servicer receives transmission charges.
However, there can be no assurance that the servicer will be able to forecast
accurately actual electricity usage and the rate of delinquencies and write-offs
or implement adjustments to the transition charges that will cause the servicer
to receive transition charges at any particular rate. See "Risk
Factors--Servicing Risks" and "The Initial Financing Order and the Transition
Charges" in this prospectus. If the servicer receives transition charges at a
slower rate than expected, transition bonds may be retired later than expected.
Except in the event of a redemption or the acceleration of the final payment
date of the transition bonds after an event of default under the indenture, the
transition bonds will not be paid earlier than scheduled. This is because
principal will not be paid at a rate faster than that contemplated in the
Expected Amortization Schedule for each series or class. A payment on a date
that is earlier than forecasted might result in a shorter weighted average life,
and a payment on a date that is later than forecasted might result in a longer
weighted average life. In addition, if a larger portion of the delayed payments
on the transition bonds is received in later years, this might result in a
longer weighted average life of the transition bonds.
THE SALE AGREEMENT
The following summary describes particular material terms and provisions of
the sale agreement pursuant to which TXU Electric is selling and Transition Bond
Company is purchasing transition property. The sale agreement may be amended by
the parties thereto, with the consent of the indenture trustee, provided notice
of the substance of this amendment is provided by Transition Bond Company to
each applicable rating agency and the Rating Agency Condition has been
satisfied. The form of the sale agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part. This summary does
not purport to be complete and is subject to, and is qualified by reference to,
the provisions of the sale agreement.
TXU ELECTRIC'S SALE AND ASSIGNMENT OF TRANSITION PROPERTY
On the initial issuance date for the first series of transition bonds,
pursuant to the sale agreement, TXU Electric will sell and assign transition
property to Transition Bond Company, without recourse, except as provided in the
sale agreement. The transition property acquired on that date represents the
irrevocable right to receive through transition charges amounts sufficient to
recover the Qualified Costs authorized by the initial financing order issued to
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TXU Electric under the Restructuring Act with respect to the applicable series
of transition bonds. Transition Bond Company will apply the net proceeds that it
receives from the sale of the transition bonds issued on that date to the
purchase of the transition property acquired on that date.
In addition, TXU Electric may from time to time sell additional transition
property to Transition Bond Company, subject to the satisfaction of the
conditions specified in the sale agreement and the indenture. Each additional
sale of transition property will be financed through the issuance of additional
transition bonds of one or more new or existing series.
In accordance with the Restructuring Act, and subject to the timely filing
of notice thereunder, upon the execution and delivery of the sale agreement and
the related bill of sale, the transfer of the transition property will be
perfected as against all third persons, including judicial lien creditors.
TXU ELECTRIC'S REPRESENTATIONS AND WARRANTIES
In the sale agreement, TXU Electric makes the following representations and
warranties, which survive the sale of the transition property to Transition Bond
Company and the pledge thereof to the indenture trustee pursuant to the
indenture:
o all information provided by TXU Electric to Transition Bond Company
with respect to the transition property sold pursuant to the sale
agreement is correct in all material respects;
o the sale contemplated by the sale agreement constitutes an absolute
transfer of the transition property from TXU Electric to Transition
Bond Company as provided in the Restructuring Act, and the beneficial
interest in and title to the transition property would not be part of
the debtor's estate in the event of the filing of a bankruptcy
petition by or against TXU Electric under any bankruptcy law;
o TXU Electric was the sole owner of the transition property sold
and assigned to Transition Bond Company as of the date of the
execution of the sale agreement,
o upon the execution and delivery of the sale agreement, the
transition property was validly assigned, transferred and
conveyed to Transition Bond Company free and clear of all liens
and
o all actions or filings required of TXU Electric or Transition
Bond Company, including filings with the Secretary of State of
Texas under the Restructuring Act, necessary in any jurisdiction
to give Transition Bond Company and its permitted assignees a
valid ownership interest in the transition property, free and
clear of all liens of TXU Electric or anyone claiming through TXU
Electric and to grant to the indenture trustee a first priority
perfected security interest in the transition property pledged
under the indenture have been taken or made;
o the relevant financing order has been issued by the PUC in accordance
with the Restructuring Act; that financing order and the process by
which it was issued comply with all applicable laws, rules and
regulations; and that financing order is and as of the date of
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issuance of any related transition bonds will be in full force and
effect;
o as of the date of issuance of any transition bonds, those transition
bonds will be entitled to the protections provided by the
Restructuring Act; and, based on present law, to the extent provided
in the Restructuring Act the provisions of the related financing order
relating to transition property and transition charges are not
revocable by the PUC;
o based on present law, under the Restructuring Act, neither the State
of Texas nor the PUC may impair the value of transition property or
reduce, alter or impair transition charges approved by a financing
order issued to TXU Electric thereunder or any rights thereunder,
except as otherwise contemplated or allowed by the Restructuring Act;
o there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Restructuring Act,
any financing order issued to TXU Electric thereunder, the transition
property or the transition charges or any rights arising under any of
them or which seeks to enjoin the performance of any obligations under
any financing order issued to TXU Electric under the Restructuring
Act;
o no other approval, authorization, consent, order or other action of,
or filing with, any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is
required in connection with the creation of the transition property,
except those that have been obtained or made;
o there are no proceedings or investigations pending, or to TXU
Electric's best knowledge, threatened before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over TXU Electric or Transition
Bond Company or their respective properties challenging the
Restructuring Act or any financing order issued to TXU Electric
thereunder;
o the assumptions used in calculating the initial transition charges (as
set forth in the Issuance Advice Letter) are reasonable and made in
good faith; however, notwithstanding the foregoing, TXU Electric makes
no representation or warranty, express or implied, that the
assumptions used in calculating the initial transition charges will in
fact be realized;
o upon the initial transfer of the rights and interests of TXU
Electric under a financing order, the related transition property
will constitute a current property right;
o the relevant financing order, including the right to impose,
collect and receive transition charges, is irrevocable by the
PUC;
o TXU Electric is a corporation duly organized and in good standing
under the laws of the State of Texas, with corporate power and
authority to own its properties and conduct its business as currently
owned and conducted;
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o TXU Electric has the power and authority to execute and deliver the
sale agreement and to carry out its terms,
o TXU Electric has the power and authority to sell and assign its
rights under the relevant financing order to Transition Bond
Company,
o TXU Electric has duly authorized that sale and assignment to
Transition Bond Company, and
o TXU Electric has duly authorized the execution, delivery and
performance of the sale agreement;
o the sale agreement constitutes a legal, valid and binding obligation
of TXU Electric enforceable against TXU Electric in accordance with
its terms, subject to bankruptcy, receivership, insolvency, fraudulent
transfer, reorganization, moratorium or other laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity;
o the consummation of the transactions contemplated by the sale
agreement and the fulfillment of the terms of the sale agreement do
not:
o conflict with or result in any breach of any terms of, or
constitute a default under, the organizational documents of TXU
Electric or any indenture, agreement or other instrument to which
TXU Electric is a party or by which it is bound,
o result in the creation or imposition of any lien upon any of the
properties of TXU Electric pursuant to the terms of any such
indenture, agreement or other instrument, or
o violate any law or any order, rule or regulation applicable to
TXU Electric of any court or of any federal or state regulatory
body, administrative agency or other governmental instrumentality
having jurisdiction over TXU Electric or its properties;
o no approval, authorization, consent, order, release or other action
of, or filing with, any court, federal or state regulatory body,
administrative agency or other governmental instrumentality is
required in connection with the execution and delivery of the sale
agreement by TXU Electric, the performance by it of the transactions
contemplated by the sale agreement or the fulfillment by it of the
terms of the sale agreement, except those that have been obtained or
made;
o each of the parties to the sale agreement is duly qualified to do
business as a foreign corporation or limited liability company, as
applicable, in good standing, and has obtained all necessary licenses
and approvals, in all jurisdictions in which the ownership or lease of
its property or the conduct of its business requires those
qualifications, licenses or approvals except where the failure to so
qualify or to obtain those licenses or approvals would not be
reasonably likely to have a material adverse effect on it;
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o there are no proceedings or investigations pending or, to TXU
Electric's best knowledge, threatened, before any court, federal or
state regulatory body, administrative agency or other governmental
instrumentality:
o asserting the invalidity of the Basic Documents or the transition
bonds,
o challenging the right of TXU Electric to sell transition property
free and clear of any lien,
o seeking to prevent the issuance of transition bonds or the
consummation of the transactions contemplated by the Basic
Documents or the transition bonds,
o which might materially and adversely affect the treatment of the
transition bonds as debt for federal or state income tax
purposes, or
o seeking any determination or ruling that could reasonably be
expected to materially and adversely affect the performance by
TXU Electric of its obligations under, or the validity or
enforceability of, the Basic Documents or the transition bonds;
and
o after giving effect to the sale of any transition property to
Transition Bond Company pursuant to the sale agreement, TXU Electric:
o is solvent and expects to remain solvent,
o is adequately capitalized to conduct its business and affairs
considering its size and the nature of its business and intended
purposes,
o is not engaged nor does it expect to engage in a business for
which its remaining property represents an unreasonably small
portion of its capital,
o believes that it will be able to pay its debts as they become due
and that this belief is reasonable, and
o is able to pay its debts as they mature and does not intend to
incur, and does not believe that it will incur, indebtedness that
it will not be able to repay at its maturity.
Notwithstanding the above, TXU Electric makes no representation or warranty
that any amounts actually collected arising from the transition charges will in
fact be sufficient to meet payment obligations on the transition bonds or that
the assumptions made in calculating the transition charges will in fact be
realized.
The sale agreement provides that any change in the law by legislative
enactment, constitutional amendment or voter initiative that renders any of the
representations and warranties untrue would not constitute a breach under the
sale agreement.
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TXU ELECTRIC'S COVENANTS
In the sale agreement, TXU Electric makes the following covenants:
o so long as any of the transition bonds are outstanding, TXU Electric
shall keep in full force and effect its corporate existence and remain
in good standing under the laws of the State of Texas, and shall
obtain and preserve its qualification to do business in each
jurisdiction in which qualification is necessary to protect the
validity and enforceability of the sale agreement and each other
instrument or agreement to which TXU Electric is a party necessary to
the proper administration of the sale agreement and the transactions
contemplated hereby;
o except for the conveyances described in the sale agreement, TXU
Electric shall not sell, pledge, assign or transfer to any other
person, or grant, create, incur, assume or suffer to exist any lien
on, any of the transition property, whether now existing or hereafter
created, or any interest therein;
o TXU Electric shall not at any time assert any lien against or with
respect to any transition property, and shall defend the right, title
and interest of Transition Bond Company and the indenture trustee, in,
to and under the transition property, whether now existing or
hereafter created, against all claims of third parties claiming
through or under TXU Electric;
o if TXU Electric receives collections in respect of the transition
charges or the proceeds thereof, TXU Electric agrees to pay the
servicer, on behalf of Transition Bond Company, all payments received
by TXU Electric in respect thereof as soon as practicable after
receipt thereof by TXU Electric, but in no event later than two
business days after receipt;
o TXU Electric shall notify the indenture trustee promptly after
becoming aware of any lien on any transition property other than the
conveyances under the sale agreement or the indenture;
o TXU Electric hereby agrees to comply with its organizational or
governing documents and all laws, treaties, rules, regulations and
determinations of any governmental instrumentality applicable to TXU
Electric, except to the extent that failure to so comply would not
adversely affect the interests of Transition Bond Company or the
indenture trustee in the transition property or under any of the Basic
Documents or TXU Electric's performance of its obligations under the
sale agreement or under any of the other Basic Documents to which it
is a party;
o so long as any of the transition bonds are outstanding, TXU Electric
shall:
o treat the transition bonds as debt of TXU Electric for federal
income tax purposes,
o clearly disclose in its financial statements that it is not the
owner of the transition property and that the assets of
Transition Bond Company are not available to pay creditors of TXU
Electric or any of its other affiliates, and
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o clearly disclose the effects of all transactions between TXU
Electric and Transition Bond Company in accordance with generally
accepted accounting principles;
o so long as any of the transition bonds are outstanding:
o TXU Electric shall not make any statement or reference in respect
of transition property sold under the sale agreement that is
inconsistent with the ownership thereof by Transition Bond
Company, and
o TXU Electric shall not take any action in respect of the
transition property except solely in its capacity as the servicer
thereof pursuant to the servicing agreement or as otherwise
contemplated by the Basic Documents;
o in connection with the issuance of any transition bonds, TXU Electric
agrees to execute and deliver, or cause to be delivered, any
amendments to the sale agreement and any additional agreements,
certificates, documents and opinions as may in TXU Electric's judgment
be required to maintain the highest possible rating for the transition
bonds from each applicable rating agency rating the transition bonds
and to effect the sale of the transition bonds to the underwriters of
these bonds;
o TXU Electric shall deliver to Transition Bond Company and the
indenture trustee, promptly after having obtained knowledge thereof,
written notice in a certificate, signed by authorized officers of TXU
Electric, of the occurrence of any event which requires or which, with
the giving of notice or the passage of time or both, would require TXU
Electric to make any indemnification payment pursuant to the sale
agreement;
o TXU Electric shall execute and file or cause to be executed and filed
any filings, including filings with the PUC pursuant to the
Restructuring Act, in the manner and in the places as may be required
by law fully to preserve, maintain and protect the interests of
Transition Bond Company and the indenture trustee in the transition
property, including all filings contemplated by the Restructuring Act
relating to the transfer of the ownership of the transition property
by TXU Electric to Transition Bond Co;
o TXU Electric shall deliver to Transition Bond Company file-stamped
copies of, or filing receipts for, any document filed as provided
above, as soon as available following the filing;
o TXU Electric agrees to take legal or administrative actions, including
defending against or instituting and pursuing legal actions and
appearing or testifying at hearings or similar proceedings, as may be
reasonably necessary:
o to protect Transition Bond Company 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 set forth in the sale agreement, or
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o to block or overturn any attempts to cause a repeal of,
modification of or supplement to the Restructuring Act or any
financing order issued to TXU Electric thereunder or the rights
of holders of transition property by legislative enactment or
constitutional amendment that would be materially adverse to the
holders of transition property; and
o so long as any of the transition bonds are outstanding, TXU Electric
shall, and shall cause each of its subsidiaries to, pay all material
taxes, including gross receipts 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 thereon if the failure to pay any of those taxes,
assessments and governmental charges would, after any applicable grace
periods, notices or other similar requirements, result in a lien on
the transition property; provided that the taxes need not be paid
while TXU Electric or any of its subsidiaries is contesting those
taxes in good faith by appropriate proceedings promptly instituted and
diligently conducted and if TXU Electric or that subsidiary has
established appropriate reserves as shall be required in conformity
with generally accepted accounting principles.
TXU ELECTRIC'S OBLIGATION TO INDEMNIFY TRANSITION BOND COMPANY AND THE INDENTURE
TRUSTEE
Under the sale agreement, TXU Electric is obligated to indemnify Transition
Bond Company and the indenture trustee and related parties specified therein,
against:
o any and all taxes that may at any time be imposed on or asserted
against any of those persons under existing law as of the date of
issuance of the transition bonds as a result of the sale of the
transition property by TXU Electric to Transition Bond Company, or the
acquisition or holding of transition property by Transition Bond
Company, or the issuance and sale by Transition Bond Company of the
transition bonds, including any sales, gross receipts, general
corporation, personal property, privilege, franchise or license taxes
not recovered by Transition Bond Company through transition charges,
but excluding any taxes imposed as a result of a failure of that
person to properly withhold or remit taxes imposed with respect to
payments on any transition bond;
o any and all amounts of principal of and interest on the transition
bonds not paid when due or when scheduled to be paid in accordance
with their terms and the amount of any deposits to Transition Bond
Company required to have been made in accordance with the terms of the
Basic Documents which are not made when so required, in either case as
a result of TXU Electric's breach of any of its representations,
warranties or covenants contained in the sale agreement; and
o any and all liabilities, obligations, claims, actions, suits or
payments of any kind whatsoever that may be imposed on or asserted
against any of those persons, other than any liabilities, obligations
or claims for or payments of principal or interest on the transition
bonds, together with any reasonable costs and expenses incurred by
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that person, as a result of TXU Electric's breach of any of its
representations, warranties or covenants contained in the sale
agreement.
TXU Electric will not indemnify any person for any liability, obligation,
claim, action, suit or payment resulting solely from a downgrade in the ratings
on the transition bonds. These indemnification obligations will rank equally
with other general unsecured obligations of TXU Electric. The indemnities
described above will survive the termination of the sale agreement and include
reasonable fees and expenses of investigation and litigation, including
reasonable attorneys' fees and expenses.
TXU Electric's Obligation to Undertake Legal Actions. The sale agreement
requires TXU Electric to take legal or administrative actions as may be
reasonably necessary to protect the rights of the holders of the transition
property. See "--TXU Electric's Covenants" above. TXU Electric will not be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its obligations under the sale agreement, and that in its opinion
may involve it in any expense or liability. However, this provision is subject
to TXU Electric's covenant to fully preserve, maintain and protect the interests
of Transition Bond Company in the transition property.
SUCCESSORS TO TXU ELECTRIC
The sale agreement provides that any person:
o into which TXU Electric may be merged or consolidated and which
succeeds to all or substantially all of the electric distribution
business of TXU Electric,
o which results from the division of TXU Electric into two or more
persons and which succeeds to all or substantially all of the electric
distribution business of TXU Electric,
o which may result from any merger or consolidation to which TXU
Electric shall be a party and which succeeds to all or substantially
all of the electric distribution business of TXU Electric,
o which may succeed to the properties and assets of TXU Electric
substantially as a whole and which succeeds to all or substantially
all of the electric distribution business of TXU Electric, or
o which may otherwise succeed to all or substantially all of the
electric distribution business of TXU Electric,
will be the successor to TXU Electric. The sale agreement further requires
that:
o immediately after giving effect to any transaction referred to in this
paragraph, no representation or warranty made in the sale agreement
will have been breached and no default under the servicing agreement,
and no event that, after notice or lapse of time, or both, would
become a default under the servicing agreement will have occurred and
be continuing;
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o the successor to TXU Electric must execute an agreement of assumption
to perform every obligation of TXU Electric under the sale agreement;
o the applicable rating agencies will have received prior written notice
of the transaction; and
o officers' certificates and opinions of counsel specified in the sale
agreement will have been delivered to Transition Bond Company and the
indenture trustee.
THE TREATMENT OF THE SALE OF TRANSITION PROPERTY
TXU Electric's regulatory accounting records and computer systems will
reflect the sale of transition property to Transition Bond Company. However, TXU
Electric will treat the transition bonds as debt of TXU Electric for federal and
state income, gross receipts and franchise tax purposes and for financial
accounting purposes.
THE SERVICING AGREEMENT
The following summary describes the material terms and provisions of the
servicing agreement pursuant to which the servicer is undertaking to service
transition property. The servicing agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part. The servicing
agreement may be amended by the parties thereto with the consent of the
indenture trustee under the indenture provided that the Rating Agency Condition
has been satisfied. This summary does not purport to be complete and is subject
to, and is qualified by reference to, the provisions of the servicing agreement.
TXU ELECTRIC'S SERVICING PROCEDURES
General. The servicer, as agent for Transition Bond Company, will manage,
service, administer and make collections in respect of transition property. The
servicer's duties will include:
o calculating and billing the transition charges and collecting,
directly or through retail electric providers, the transition charges
from customers;
o responding to inquiries by customers, third parties, the PUC, or any
federal, local or other state governmental authority with respect to
transition property and transition charges;
o accounting for receipt of transition charges, investigating
delinquencies, processing and depositing collections, making periodic
remittances and furnishing periodic reports to Transition Bond
Company, the indenture trustee and the applicable rating agencies;
o selling, as agent for Transition Bond Company, defaulted or
written-off accounts in accordance with the servicer's usual and
customary practices; and
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o taking action in connection with adjustments to the transition charges
as described below.
The servicer is required to notify Transition Bond Company, the indenture
trustee and the applicable rating agencies in writing of any laws or PUC
regulations promulgated after the execution of the servicing agreement that have
a material adverse effect on the servicer's ability to perform its duties under
the servicing agreement.
Servicer Obligation to Undertake Legal Action. The servicer is required to
institute any action or proceeding necessary to compel performance by the PUC or
the State of Texas of any of their obligations or duties under the Restructuring
Act or a financing order issued to TXU Electric thereunder with respect to the
transition property. The cost of any action reasonably allocated by the servicer
to the transition property sold pursuant to the sale agreement would be payable
as an operating expense out of transition charges received by the servicer.
General Information About Payment of Transition Charges by Retail Electric
Providers. The servicer will send a bill for transition charges to the retail
electric provider based on the approved tariff. The bill will specify the billed
amount, based on the transition charge tariff, and the amount actually owed by
the retail electric provider to the servicer. The difference between the amount
billed by the servicer and the amount owed by the retail electric provider will
reflect the expected loss experience for the retail electric provider for the
coming year. Each retail electric provider is required to remit to the servicer
a specified percentage of billed charges within 20 days after billing. Should
the retail electric provider not pay this amount at the end of the 20 day
period, the servicer will provide notice of breach and will allow for an
additional 10 day period for the retail electric provider to make payment. Any
failure to remit this specified amount in full at the end of the 30 day period
constitutes a default and billing responsibility transfers immediately to the
servicer, the provider of last resort or another retail electric provider, as
determined by the servicer. As incentive collection agent compensation, the
retail electric provider may retain collections from end-use customers above the
specified percentage but is not reimbursed for collections below the specified
percentage. The specified percentage will be adjusted on an annual basis to take
into account the collection experience of the previous year, as demonstrated by
audited reports from all retail electric providers. The adjustments to the
transition charges will take into account the specified remittance percentage
such that the receipt of the specified percentage results in appropriate
collections to service the transition bonds and pay all associated fees. There
will be no rebate or credit to the retail electric providers at any time. The
servicer will remit to the indenture trustee only those amounts remitted to the
servicer by the retail electric providers.
Payment of Transition Charges Received by Servicer Before Retail
Competition Begins. Prior to January 1, 2002, the servicer will, on a daily
basis, determine the amount of transition charges that it receives from each
customer in each customer class by multiplying the amount it receives from that
customer on that day by a fraction equal to (A) the total amount of transition
charges billed to that customer for the related billing month divided by (B) the
total aggregate amount billed to that customer for that billing month.
The servicer will remit transition charges that it receives from a customer
to the indenture trustee for deposit in the collection account within two
business days of the business day upon which those transition charges are
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received. Notwithstanding the previous sentence, for so long as:
o TXU Electric or any successor to TXU Electric's electric distribution
business remains the servicer,
o no default under the servicing agreement has occurred and is
continuing, and
o TXU Electric, or any successor to TXU Electric's electric
distribution business, maintains a short-term rating of "A-1" or
better by S&P, "P-1" or better by Moody's, "F-1" or better by
Fitch IBCA and "D-1" or better by Duff & Phelps or
o the Rating Agency Condition has been satisfied, and any
conditions or limitations imposed by the applicable rating
agencies in connection therewith are complied with,
the servicer will remit to the indenture trustee monthly, on each date on which
the servicer is required to remit funds to the indenture trustee as specified in
the servicing agreement, an amount equal to the amount of transition charges
received during the preceding billing month. A billing month represents a full
monthly cycle of bills sent to TXU Electric's customers and a year is made up of
12 billing months.
Payment of Transition Charges Received by Servicer After Retail Competition
Begins. In the first year of retail competition, the servicer will calculate the
remittance percentage for all retail electric providers based on the most recent
year of actual TXU Electric loss experience. In each subsequent year, the
servicer will calculate the remittance percentage for all retail electric
providers based on the retail electric providers' composite actual experience
during the previous year, with the composite amount determined as (A) total
transition charges collected by retail electric providers from customers divided
by (B) total transition charge billings by retail electric providers to
customers. The retail electric providers will support their claimed remittance
percentage with an audited financial statement, and the actual calculation will
be attested to by each retail electric provider's independent auditor. The
retail electric providers will have to submit their annual remittance percentage
[30] days prior to the annual transition charge adjustment. The servicer will
have 15 days to review and approve the percentage amount. If the servicer
disagrees with the percentage amount, the PUC will arbitrate the dispute and
decide within 15 days. Retail electric providers that do not submit their annual
remittance percentage [30] days prior to the annual transition charge adjustment
will be in default and billing responsibility will transfer immediately to the
servicer, the provider of last resort or another retail electric provider, as
determined by the servicer. The servicer will determine the overall expected
remittance percentage and use that figure in determining the revenues required
to service the transition bonds for the next year.
Each retail electric provider participating in the pilot project under the
Restructuring Act will follow the procedures established for retail electric
providers during the first year of retail competition. Retail electric providers
who begin serving customers after January 1, 2003 will be required to use the
composite expected remittance percentage determined in the last annual
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transition charge adjustment. See "The Restructuring Act--The Restructuring
Act's General Effect on the Electric Utility Industry in Texas--Retail
Competition" in this prospectus.
POTENTIAL LIMITATIONS TO COLLECTING TRANSITION CHARGES
Uncertainties Created by Changes in General Economic Conditions and
Electricity Usage. General economic conditions and technological changes may
significantly alter power consumption or reduce the customer base in TXU
Electric's historical service area. Additionally, changes in business cycles,
departures of customers from TXU Electric's historical service area, weather,
occurrence of natural disasters, dramatic changes in energy prices,
implementation of energy conservation efforts and increased efficiency of
equipment, among other things, affect energy usage. If a sufficient number of
customers within a customer class leave TXU Electric's service territory,
significantly reduce their electricity consumption, or cease consuming
electricity altogether, the transition charges, as adjusted from time to time,
required to be paid by remaining customers may become burdensome. This could
cause the required transition charge to exceed the capped amount, if any, that
may be charged to the customers within that customer class. See "The
Restructuring Act--The Restructuring Act's General Effect on the Electric
Utility Industry in Texas" in this prospectus. It also could result in greater
delinquencies and write-offs or petitions to the PUC, or in legislative
proposals to reduce transition charges.
The Potential for Customers Within TXU Electric's Service Territory to
Generate Their Own Electricity. The servicer's current forecasts of future
electricity demand do not include any shift by customers to self-generation,
because self-generation of electricity by customers is not expected to be
economically viable during the period in which the transition bonds will be
outstanding. The customer generally must pay transition charges even if it
elects to purchase electricity from another supplier or to self-generate all or
a portion of its electricity needs.
However, a customer can avoid transition charges if that customer is served by:
o certain power production facilities that have made substantially
complete filings on or before December 31, 1999 for all necessary
site-specific environmental permits and become fully operational
before September 1, 2001; or
o an on-site power production facility with a rated capacity of 10
megawatts or less.
Uncertainties Associated with Collecting Transition Charges. TXU Electric
has no historical performance data for transition charges, although customer and
energy usage records are available. These customer and energy usage records,
however, do not reflect customers' payment patterns or energy usage in a
competitive market. These records also do not reflect consolidated billing by
retail electric providers or other third parties, so these records may have
limited predictive value with respect to the transition charges. Furthermore,
the servicer does not have any experience administering this type of asset.
TXU Electric's Customers Have Limited Experience in Paying Transition
Charges. Changes in customer billing and payment arrangements may result in
customer confusion and the misdirection or delay of payments, which could have
the effect of causing shortfalls in the servicer's transition charge receipts.
Any problems arising from new and untested systems or any lack of experience on
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the part of the retail electric providers or other third parties with customer
billing and collections could cause delays in billing and collecting the
transition charges. These delays could result in shortfalls in the amount of
transition charges that the servicer receives.
THE PUC'S TRANSITION CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires that the servicer
review transition charges and make true-up adjustment filings with the PUC for
adjustment of those transition charges at least annually, to correct any
overcollections or undercollections of the preceding related period and 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 transition bonds.
Under the initial financing order issued to TXU Electric under the
Restructuring Act, the servicer must make true-up adjustment filings annually,
within 45 days of the anniversary of the date of the issuance of the transition
bonds. Under the initial financing order, the PUC has 15 days after the true-up
adjustment filing in which to confirm the mathematical accuracy of the
servicer's adjustment; however, since the adjustment is effective immediately
upon filing, any necessary corrections to the adjustment will be made in future
true-up adjustment filings. Under the initial financing order and the servicing
agreement, the servicer may make true-up adjustment filings more frequently than
annually. Subsequent financing orders issued to TXU Electric under the
Restructuring Act are expected to include similar provisions.
TXU ELECTRIC'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER
PARTIES
Transition Bond Company has agreed to pay the servicer a servicing fee on
the business day preceding each payment date. The servicing fee for each series,
together with any portion of the servicing fee that remains unpaid from prior
payment dates, will be paid solely to the extent funds are available therefor as
described under "The Indenture--How Funds in the General Subaccount Will Be
Allocated" in this prospectus. The servicing fee will be paid prior to the
payment of or provision for any amounts in respect of interest on and principal
of the transition bonds. In the servicing agreement, the servicer releases
Transition Bond Company and the indenture trustee from any and all claims
whatsoever by the servicer relating to transition property or the servicer's
servicing activities with respect thereto.
TXU ELECTRIC'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other things,
that, in servicing transition property:
o except where the failure to comply with any of the following would not
adversely affect Transition Bond Company's or the indenture trustee's
respective interests in the transition property pledged under the
indenture, it will:
o manage, service, administer and make collections in respect of
transition property with reasonable care and in material
compliance with applicable law, including all applicable PUC
regulations and guidelines, using the same degree of care and
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diligence that the servicer exercises with respect to billing and
collection activities that the servicer conducts for itself and
others,
o follow standards, policies and procedures in performing its
duties as servicer that are customary in the electric
distribution industry,
o use all reasonable efforts, consistent with its customary
servicing procedures, to enforce and maintain Transition Bond
Company's and the indenture trustee's rights in respect of
transition property, and
o calculate transition charges and allocate those transition
charges among customers in compliance with the Restructuring Act,
the financing orders issued to TXU Electric thereunder and any
applicable tariffs;
o it will keep on file, in accordance with customary procedures, all
documents related to transition property and will maintain accurate
and complete accounts, records and computer systems pertaining to
transition property; and
o it will use all reasonable efforts consistent with its customary
servicing procedures to collect all amounts owed in respect of
transition charges as they become due.
The duties of the servicer set forth in the servicing agreement are qualified by
any PUC regulations or orders in effect at the time these duties are to be
performed.
TXU ELECTRIC'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations and
warranties as of the date TXU Electric sells or otherwise transfers transition
property to Transition Bond Company to the effect, among other things, that:
o the servicer is a corporation duly organized and in good standing
under the laws of the state of its incorporation, with the corporate
power and authority to own its properties and conduct its business as
its properties are currently owned and its business is presently
conducted and to execute, deliver and carry out the terms of the
servicing agreement and has the power, authority and legal right to
service the transition property;
o the servicer's execution, delivery and performance of the servicing
agreement have been duly authorized by the servicer by all necessary
corporate action;
o the servicing agreement constitutes a legal, valid and binding
obligation of the servicer, enforceable against the servicer in
accordance with its terms, subject to customary exceptions relating to
bankruptcy and equitable principles;
o the consummation of the transactions contemplated by the servicing
agreement does not conflict with or result in any breach of the terms
and provisions of nor constitute a default under the servicer's
articles of incorporation or by-laws or any material agreement to
which the servicer is a party or bound, nor result in the creation or
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imposition of any lien upon the servicer's properties or violate any
law or any order, rule or regulation applicable to the servicer or its
properties;
o except for filings with the PUC for adjusting transition charges and
filings with the Secretary of State of Texas pursuant to the
Restructuring Act, no governmental approvals, authorizations,
consents, orders, or other actions or filings are required for the
servicer to execute, deliver and perform its obligations under the
servicing agreement, except those which have previously been obtained
or made; and
o no proceeding or investigation is pending or, to the servicer's best
knowledge, threatened before any court, federal or state regulatory
body, administrative agency or other governmental instrumentality
having jurisdiction over the servicer or its properties:
o except as disclosed by the servicer to Transition Bond Company,
seeking any determination or ruling that might materially and
adversely affect the performance by the servicer of its obligations
under, or the validity or enforceability against the servicer of, the
servicing agreement, or
o relating to the servicer and which might adversely affect the federal
or state income, gross receipts or franchise tax attributes of the
transition bonds.
TXU ELECTRIC, AS SERVICER, WILL INDEMNIFY TRANSITION BOND COMPANY AND OTHER
RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify, defend and
hold harmless Transition Bond Company, the indenture trustee, for itself and on
behalf of the holders of transition bonds, and related parties specified in the
servicing agreement, against any liabilities of any kind whatsoever that may be
imposed upon, incurred by or asserted against any of those persons as a result
of:
o the servicer's willful misconduct, bad faith or gross negligence in
the performance of its duties or observance of its covenants under the
servicing agreement or the servicer's reckless disregard of its
obligations and duties under the servicing agreement;
o the servicer's breach of any of its representations or warranties
under the servicing agreement; and
o litigation and related expenses relating to the servicer's status and
obligations as servicer.
TXU ELECTRIC, AS SERVICER, WILL PROVIDE STATEMENTS TO TRANSITION BOND COMPANY
AND TO THE INDENTURE TRUSTEE
For each date on which the servicer is required to make a true-up
adjustment filing with the PUC to adjust the transition charges, the servicer
will provide to Transition Bond Company and the indenture trustee a statement
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indicating, with respect to the transition property sold pursuant to the sale
agreement, among other things:
o the aggregate outstanding principal balance for each series of
transition bonds and the Projected Transition Bond Balance for each
series as of the immediately preceding payment date;
o the amount on deposit in each overcollateralization subaccount and the
related Scheduled Overcollateralization Level as of the immediately
preceding payment date;
o the amount on deposit in each capital subaccount and the amount
required to be on deposit in that capital subaccount as of the
immediately preceding payment date;
o the amount on deposit in each reserve subaccount as of the immediately
preceding payment date;
o the Projected Transition Bond Balance and the servicer's projection of
the aggregate outstanding principal balance for each series of
transition bonds for the payment date immediately preceding the next
succeeding adjustment date;
o the Scheduled Overcollateralization Level for each series of
transition bonds and the servicer's projection of the amount on
deposit in each overcollateralization subaccount for the payment date
immediately preceding the next succeeding adjustment date;
o the required capital subaccount balance for each series of transition
bonds and the servicer's projection of the amount on deposit in each
capital subaccount for the payment date immediately preceding the next
succeeding adjustment date; and
o the servicer's projection of the amount on deposit in each reserve
subaccount for the payment date immediately preceding the next
succeeding adjustment date.
Moreover, on or before each date on which the servicer is required to remit
funds to the indenture trustee as specified in the servicing agreement, the
servicer will prepare and furnish to Transition Bond Company and the indenture
trustee a statement setting forth the aggregate amount remitted or to be
remitted by the servicer to the indenture trustee on that date. In addition, on
or before each payment date, the servicer will prepare and furnish to Transition
Bond Company and the indenture trustee a statement setting forth the transfers
and payments to be made on that payment date and the amounts thereof. Further,
on or before each payment date, the servicer will prepare and furnish to
Transition Bond Company and the indenture trustee a statement setting forth the
amounts to be paid to the holders of transition bonds. On the basis of this
information, the indenture trustee will furnish to the holders of transition
bonds on each payment date the report described under "The Indenture--Reports to
Holders of the Transition Bonds" in this prospectus.
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TXU ELECTRIC TO PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
The servicing agreement provides that a firm of independent public
accountants will furnish to Transition Bond Company, the indenture trustee and
the applicable rating agencies, on or before April 15 of each year, commencing
April 15, 2001, an annual accountants' report. This annual accountants' report
will state that the firm has performed the procedures in connection with the
servicer's compliance with the servicing obligations under the servicing
agreement, identifying the results of these procedures and including any
exceptions noted. The annual accountants' 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 Transition Bond
Company, the indenture trustee and each applicable rating agency, on or before
April 15 of each year, commencing April 15, 2001, a certificate signed by an
officer of the servicer. This certificate will state that the servicer has
fulfilled its obligations under the servicing agreement for the preceding
calendar year, or the relevant portion thereof, or, if there has been a default
in the fulfillment of any relevant obligation, describing each default. The
servicer has agreed to give Transition Bond Company, each applicable rating
agency, and the indenture trustee notice of any default under the servicing
agreement.
MATTERS REGARDING TXU ELECTRIC AS SERVICER
Under the servicing agreement, any person:
o into which the servicer may be merged or consolidated and which
succeeds to all or substantially all of the electric distribution
business of the servicer,
o which results from the division of the servicer into two or more
entities and which succeeds to all or substantially all of the
electric distribution business of the servicer,
o which may result from any merger or consolidation to which the
servicer shall be a party and which succeeds to all or substantially
all of the electric distribution business of the servicer,
o which may succeed to the properties and assets of the servicer
substantially as a whole and which succeeds to all or substantially
all of the electric distribution business of the servicer, or
o which may otherwise succeed to all or substantially all of the
electric distribution business of the servicer,
will be the successor of the servicer under the servicing agreement. The
servicing agreement further requires that:
o the successor to TXU Electric must execute an agreement of assumption
to perform every obligation of TXU Electric under the servicing
agreement;
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o immediately after giving effect to the transaction referred to in this
paragraph, no representation or warranty made by the servicer in the
servicing agreement will have been breached and no default under the
servicing agreement, and no event which, after notice or lapse of
time, or both, would become a default under the servicing agreement
will have occurred and be continuing;
o officers' certificates and opinions of counsel will have been
delivered to Transition Bond Company, the indenture trustee, and the
applicable rating agencies; and
o prior written notice will have been received by the applicable rating
agencies.
The servicing agreement provides that, subject to the foregoing provisions,
TXU Electric may not resign from the obligations and duties imposed on it as
servicer. However, TXU Electric may resign as servicer upon a determination,
communicated to Transition Bond Company, the indenture trustee and each
applicable rating agency and evidenced by an opinion of counsel, that the
performance of TXU Electric's duties under the servicing agreement are no longer
permissible under applicable law. This resignation will not become effective
until a successor servicer has assumed the servicing obligations and duties of
TXU Electric under the servicing agreement.
Except as expressly provided in the servicing agreement, the servicer will
not be liable to Transition Bond Company for any action taken or for refraining
from taking any action pursuant to the servicing agreement or for errors in
judgment. However, the servicer will be liable to the extent this liability is
imposed by reason of the servicer's willful misconduct, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY TXU ELECTRIC IN ITS ROLE AS SERVICER
Defaults under the servicing agreement will include, among other things:
o any failure by the servicer to deliver to the indenture trustee, on
behalf of Transition Bond Company, any required remittance, which
failure continues unremedied for a period of five business days after
written notice of that failure is received by the servicer from
Transition Bond Company or the indenture trustee;
o any failure by the servicer duly to observe or perform in any material
respect any other covenant or agreement in the servicing agreement or
any other Basic Document to which it is a party, which failure
o materially and adversely affects transition property, and
o continues unremedied for 60 days after notice of this failure has been
given to the servicer, by Transition Bond Company or the indenture
trustee or after discovery of this failure by an officer of the
servicer, as the case may be;
o any representation or warranty made by the servicer in the servicing
agreement proves to have been incorrect when made, which has a
material adverse effect on any of the holders of transition bonds or
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Transition Bond Company and which continues unremedied for 60 days
after notice of this failure has been given to the servicer by
Transition Bond Company or the indenture trustee or after discovery of
this failure by an officer of the servicer, as the case may be; or
o an event of bankruptcy, insolvency, readjustment of debt, marshalling
of assets and liabilities, or similar proceedings with respect to the
servicer or an action by the servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay
its obligations as specified in the servicing agreement.
The indenture trustee with the consent of the holders of the majority of
the outstanding principal amount of the transition bonds of all series may waive
any default by the servicer, except a default in making any required remittances
to the indenture trustee.
THE INDENTURE TRUSTEE'S RIGHTS IF THE SERVICER DEFAULTS IN ITS ROLE AS SERVICER
As long as a default under the servicing agreement remains unremedied, the
indenture trustee, with the consent of the holders of a majority of the
outstanding principal amount of the transition bonds of all series, may
terminate all the rights and obligations of the servicer under the servicing
agreement. However, the servicer's indemnification obligation and obligation to
continue performing its functions as servicer may not be terminated until a
successor servicer is appointed. Under the servicing agreement, the indenture
trustee, with the consent of the holders of a majority of the outstanding
principal amount of the transition bonds of all series, may appoint a successor
servicer which will succeed to all the rights and duties of the servicer under
the servicing agreement.
Upon a default under the servicing agreement based upon the commencement of
a case by or against the servicer under the United States Bankruptcy Code or
similar laws in effect in any jurisdiction within the United States, the
indenture trustee and Transition Bond Company may be prevented from effecting a
transfer of servicing. See "Risk Factors--The Risks Associated With Potential
Bankruptcy Proceedings" and "How a Bankruptcy May Affect Your Investment" in
this prospectus. Upon a default under the servicing agreement because of a
failure to make required remittances, Transition Bond Company or the indenture
trustee will have the right to apply to the PUC for sequestration and payment of
revenues arising from the transition property.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS TXU ELECTRIC
Pursuant to the provisions of the servicing agreement, if for any reason a
third party assumes or succeeds to the role of the servicer under the servicing
agreement, the servicing agreement will require the servicer on an ongoing basis
to cooperate with the successor servicer and provide whatever information is,
and take whatever actions are, reasonably necessary to assist the successor
servicer in performing its obligations under the servicing agreement. A
successor servicer may not resign unless it is prohibited from serving by law.
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THE INDENTURE
The following summary describes the material terms of the indenture
pursuant to which transition bonds will be issued. The indenture, including the
form of supplement thereto, has been filed as an exhibit to the registration
statement of which this prospectus forms a part. This summary does not purport
to be complete and is subject to and is qualified by reference to the provisions
of the indenture.
THE SECURITY FOR PAYMENT OF THE TRANSITION BONDS
To secure the payment of principal of and premium, if any, and interest on,
and any other amounts owing in respect of, the transition bonds pursuant to the
indenture, Transition Bond Company will grant to the indenture trustee for the
benefit of the holders of transition bonds a security interest in all of
Transition Bond Company's right, title and interest whether now owned or
hereafter acquired in, to and under the following Collateral:
o the transition property acquired by Transition Bond Company from TXU
Electric from time to time pursuant to the sale agreement and all
proceeds thereof;
o the sale agreement;
o all bills of sale delivered by TXU Electric pursuant to the sale
agreement;
o the servicing agreement;
o the collection account and all amounts on deposit therein from time to
time, subject to the rights of specific series to certain amounts on
deposit in the collection account;
o all other property of whatever kind owned from time to time by
Transition Bond Company other than any cash released to Transition
Bond Company by the indenture trustee pursuant to the indenture;
o all present and future claims, demands, causes and choses in action in
respect of any or all of the foregoing; and
o all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing,
provided that cash or other property released to Transition Bond Company from
the collection account in accordance with the provisions of the indenture will
not be subject to the lien of the indenture. (ss.8.03) See "--How Funds in the
General Subaccount Will Be Allocated."
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Transition bonds may be issued under the indenture in an unlimited amount
from time to time to finance the purchase by Transition Bond Company of
transition property. Any series of transition bonds may include one or more
classes that differ, among other things, as to interest rate and amortization of
principal. The terms of all transition bonds of the same series will be
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identical, unless a series includes more than one class, in which case the terms
of all transition bonds of the same class will be identical. Additional
transition bonds of any series or class may be issued from time to time after
the initial issuance of transition bonds of that series or class. The particular
terms of the transition bonds of any series and, if applicable, classes thereof,
will be set forth in one or more supplements to the indenture relating to that
series. (ss.2.03) The terms of a series and any classes thereof will not be
subject to consent of the holders of transition bonds of any previously issued
series. (ss.9.01(a)) See "Risk Factors--Other Risks Associated With an
Investment in the Transition Bonds," and "The Transition Bonds" in this
prospectus.
Under the indenture, the indenture trustee will authenticate and deliver
additional transition bonds only upon receipt by the indenture trustee
of, among other things, a certificate of Transition Bond Company that no default
has occurred and is continuing, an opinion of counsel to Transition Bond Company
and evidence of satisfaction of the Rating Agency Condition. (ss.2.10(5), (6)
and (8))
Opinion of Independent Certified Public Accountants Required for Each
Issuance of Transition Bonds. In addition, in connection with the issuance of
additional transition bonds, the indenture trustee must receive a certificate or
opinion of a firm of independent certified public accountants of recognized
national reputation. This certificate will be based on the assumptions used in
calculating the initial transition charges with respect to the transition
property sold pursuant to the sale agreement or, if applicable, the most recent
revised transition charges with respect to that transition property. The
certificate will state to the effect that, after giving effect to the issuance
of the additional transition bonds and the application of the proceeds
therefrom, the transition charges will be sufficient, in their estimation, to:
o pay all fees, costs and charges associated with the transition bonds,
o pay interest on each series of transition bonds when due,
o pay principal of each series of transition bonds in accordance with
the Expected Amortization Schedule therefor, and
o fund each overcollateralization subaccount to the Scheduled
Overcollateralization Level for the related series and replenish any
shortfalls in the capital subaccount for the related series,
as of each payment date[, taking into account any amounts on deposit in the
reserve subaccount for each series]. (ss.2.10(7))
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, Transition Bond Company will establish the collection
account with the indenture trustee or another Eligible Institution (as defined
below). (ss.8.02(a)) Funds received from collections of the transition charges
will be deposited into the collection account. The collection account will be
divided into the following subaccounts, which need not be separate bank
accounts:
o the general subaccount;
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o a series subaccount for each series;
o an overcollateralization subaccount for each series;
o a capital subaccount for each series;
o a reserve subaccount for each series
o the retail electric provider security deposit subaccount; and
o if required by the indenture, one or more defeasance subaccounts.
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 all of the
subaccounts contained therein. All monies deposited from time to time in the
collection account, all deposits therein pursuant to the indenture, and all
investments made in Eligible Investments (as defined below) with these monies,
will be held by the indenture trustee in the collection account as part of the
Collateral. (ss.8.02(a))
The Definition of Eligible Institution. Eligible Institution means:
o the corporate trust department of the indenture trustee, so long as
any of the securities of the indenture trustee have a credit rating
from each applicable rating agency in one of its generic rating
categories which signifies investment grade; or
o a depository institution organized under the laws of the United States
or any state or any domestic branch of a foreign bank: o which has
either:
o a long-term unsecured debt rating of "AAA" by S&P, "AAA" by Fitch IBCA
and "A1" by Moody's; or
o 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 applicable rating agencies; and
o whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. So long as no
default or event of default under the indenture has occurred and is continuing,
all or a portion of the funds in the collection account shall be invested in any
of the following, each of which is referred to as an "Eligible Investment":
(ss.8.02(b))
o direct obligations of, and obligations fully guaranteed as to timely
payment by, the United States;
o demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of
the United States or any state, or any domestic branch of a foreign
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bank, and subject to supervision and examination by federal or state
banking or depository institution authorities; provided, however, that
at the time of the investment or contractual commitment to invest
therein, the commercial paper or other short-term unsecured debt
obligations, other than any obligations thereof where the rating is
based on the credit of a person other than that depository institution
or trust company, shall have a credit rating from each of the
applicable rating agencies in the highest investment category granted
thereby;
o commercial paper or other short-term obligations of any corporation
organized under the laws of the United States, other than TXU
Electric, whose ratings, at the time of the investment or contractual
commitment to invest therein, from each of the applicable rating
agencies are in the highest investment category granted thereby;
o investments in money market funds having a rating from each of the
applicable rating agencies in the highest investment category granted
thereby, including funds for which the indenture trustee or any of its
affiliates acts as investment manager or advisor;
o bankers' acceptances issued by any depository institution or trust
company referred to in the second bullet point above;
o repurchase obligations with respect to any security that is a direct
obligation of, or fully guaranteed by, the United States or any agency
or instrumentality thereof the obligations of which are backed by the
full faith and credit of the United States, in either case entered
into with a depository institution or trust company, acting as
principal, described in the second bullet point above;
o repurchase obligations with respect to any security or whole loan
entered into with:
o a depository institution or trust company, acting as principal,
described in the second bullet point above, except that the
rating referred to in the proviso in the second bullet point
above shall be A-1+ or higher in the case of S&P,
o a broker/dealer, acting as principal, registered as a broker or
dealer under Section 15 of the Securities Exchange Act of 1934,
the unsecured short-term debt obligations of which are rated P-1
by Moody's and at least A-1+ by S&P at the time of entering into
this repurchase obligation, or
o an unrated broker/dealer, acting as principal, that is a
wholly-owned subsidiary of a non-bank or bank holding company the
unsecured short-term debt obligations of which are rated P-1 by
Moody's and at least A-1+ by S&P at the time of purchase; or
o any other investment permitted by each of the applicable rating
agencies;
provided, that unless otherwise permitted by the applicable rating
agencies, upon the failure of any Eligible Institution to maintain any
applicable rating set forth in this definition or the definition of
Eligible Institution, the related investments at that institution shall be
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reinvested in Eligible Investments at a successor Eligible Institution
within 10 days.
These Eligible Investments may not:
o unless otherwise provided in the prospectus supplement, mature later
than the business day prior to the next payment date; or
o be sold, liquidated or otherwise disposed of at a loss prior to the
maturity thereof.
No funds in the defeasance subaccount for any series of transition bonds
shall be invested in Eligible Investments or otherwise, other than United States
Government Obligations. (ss.8.02(b)) In the case of a defeasance, Transition
Bond Company may deposit United States Government Obligations in the defeasance
subaccount to fund the defeasance of that series. (ss.4.02(a)) No moneys held in
the collection account may be invested, and no investment held in the collection
account may be sold, unless the security interest granted and perfected in the
collection account will continue to be perfected in the investment or the
proceeds of the sale, in either case without any further action by any person
and an opinion of counsel shall be delivered to such effect if requested by the
indenture trustee. (ss.8.02(b))
Remittances to the Collection Account. On each date on which the servicer
is required to remit funds to the indenture trustee as specified in the
servicing agreement, the servicer will remit all of the transition charges that
it receives, any amounts paid by TXU Electric or the servicer in respect of
indemnification obligations under the sale agreement or the servicing agreement,
and any other proceeds of Collateral to the indenture trustee under the
indenture for deposit in the collection account. (ss.8.02(c)) See "The Sale
Agreement" and "The Servicing Agreement" in this prospectus.
General Subaccount. Transition charges received and remitted by the
servicer, any amounts remitted by TXU Electric or the servicer in respect of
indemnification obligations under the sale agreement or the servicing agreement
and any proceeds of Collateral received by the servicer, TXU Electric or the
indenture trustee will be deposited into the general subaccount. On the business
day preceding each payment date, the indenture trustee will allocate amounts in
the general subaccount as described under "--How Funds in the General Subaccount
Will Be Allocated" below.
Series Subaccount. Upon the issuance of each series of transition bonds, a
series subaccount will be established with respect to that series. (ss.8.02(a))
On each payment date, the indenture trustee will allocate from amounts on
deposit in the general subaccount to the series subaccount for each series an
amount sufficient to pay, among other items:
o interest payable on that series on that payment date;
o the principal of that series payable as a result of an acceleration
following the occurrence and continuance of an event of default under
the indenture, on the Final Maturity Date of that series or class, or
on a redemption date of that series or class; and
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o principal scheduled to be paid on that series on that payment date,
excluding amounts provided for in the preceding clause. (ss.8.02(d))
On the business day preceding each payment date, allocations will be made
to each series subaccount as described under "--How Funds in the General
Subaccount Will Be Allocated" below. On each payment date, the indenture trustee
will withdraw funds from the series subaccount to make payments on the related
series of transition bonds. (ss.8.02(d))
Capital Subaccount. Upon the issuance of each series of transition bonds, a
capital subaccount will be established for that series and TXU Electric will
make a capital contribution to Transition Bond Company in an amount equal to the
Required Capital Amount for that series. TXU Electric will not use proceeds from
the sale of transition property to fund this capital contribution. Transition
Bond Company will pay this amount to the indenture trustee for deposit into the
capital subaccount for that series, which will be invested in Eligible
Investments. (ss.8.02(a)) On each payment date for a series of transition bonds,
the indenture trustee will draw on amounts in the capital subaccount for that
series to the extent that, after the allocation of funds in accordance with
clauses 1 through 9 in "--How Funds in the General Subaccount Will Be Allocated"
below, amounts on deposit in the general subaccount, the related series
subaccount, the related reserve subaccount and the related overcollateralization
subaccount are insufficient to make scheduled payments on the transition bonds
of that series and to pay expenses of Transition Bond Company, the indenture
trustee and the servicer and other fees, costs and charges specified in the
indenture that are then due. (ss.8.02(d)) [If any series of transition bonds has
been retired as of any payment date, the amounts on deposit in the capital
subaccount for that series will be released to Transition Bond Company, free of
the lien of the indenture; provided, that, amounts on deposit in that capital
subaccount will first be used to replenish shortfalls in the capital subaccount
for each remaining series, pro rata, based on the annual revenue requirements
for that series]. (ss.8.03(d))
Retail Electric Provider Security Deposit Subaccount. Each retail electric
provider will deposit a cash amount, or other collateral meeting applicable
rating agency requirements, equal to two months maximum estimated collections of
transition charges, as specified by the servicer, to secure its obligations to
remit transition charge collections to the servicer. In the event of a default
in the remittance of transition charges by the retail electric provider to the
servicer, the servicer will notify the indenture trustee of that default and
direct the indenture trustee to collect those transition charges from the amount
of that deposit or security and deposit that amount in the general subaccount.
Overcollateralization Subaccount. Upon the issuance of each series of
transition bonds, an overcollateralization subaccount will be established for
that series. To the extent funds are available as described in "--How Funds in
the General Subaccount Will Be Allocated" below, the indenture trustee will
allocate them to the overcollateralization subaccount for a series of transition
bonds on each payment date for that series. Each prospectus supplement will
specify the Scheduled Overcollateralization Level on each payment date for the
overcollateralization subaccount for the related series of transition bonds. The
Overcollateralization Amount will be funded over the life of the transition
bonds for each series as specified in one or more prospectus supplements, and in
aggregate will equal the amount stated in the prospectus supplement or
prospectus supplements relating to transition bonds of that series, which is
referred to as the Overcollateralization Amount. (ss.3.19) The failure to have
sufficient funds available to fund the Overcollateralization Amount will not be
a default under the indenture.
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Amounts in each overcollateralization subaccount will be invested in
Eligible Investments. (ss.8.02(a)) On each payment date for a series of
transition bonds, the indenture trustee will draw on amounts in the
overcollateralization subaccount for that series to the extent that, after
allocation of funds in accordance with clauses 1 through 9 in "--How Funds in
the General Subaccount Will Be Allocated" below, amounts on deposit in the
general subaccount, the related series subaccount and the related reserve
subaccount are insufficient to make scheduled payments on the transition bonds
of that series and to pay expenses of Transition Bond Company, the indenture
trustee and the servicer and other fees, costs and charges specified in the
indenture that are then due. (ss.8.03(d)) [If any series of transition bonds has
been retired as of any payment date, the amounts on deposit in the
overcollateralization subaccount for that series will be released to Transition
Bond Company, free of the lien of the indenture; provided, that, amounts on
deposit in that overcollateralization subaccount will first be used to replenish
shortfalls in the following subaccounts in the following order of priority:
1. shortfalls in the capital subaccount for each remaining series, pro
rata, based on the annual revenue requirements for that series, and
2. shortfalls in the overcollateralization subaccount for each remaining
series, pro rata, based on the annual revenue requirements for that
series.] (ss.8.03(d))
Reserve Subaccount. Upon the issuance of each series of transition bonds, a
reserve subaccount will be established for that series. Funds available on any
payment date that are not required to be allocated pursuant to clauses 1 through
11 in "--How Funds in the General Subaccount Will Be Allocated" below will be
allocated to the reserve subaccount for each series on a pro rata basis, based
on the annual revenue requirements for that series.
Amounts in each reserve subaccount will be invested in Eligible
Investments. (ss.8.02(a)) On each payment date with respect to a series of
transition bonds, the indenture trustee will draw on amounts in the reserve
subaccount for that series, if any, to the extent that, after the allocation of
funds in accordance with clauses 1 through 11 in "--How Funds in the General
Subaccount Will Be Allocated" below, amounts on deposit in the general
subaccount and the series subaccount for that series are insufficient to make
scheduled payments on the transition bonds of that series and pay expenses of
Transition Bond Company, the indenture trustee and the servicer and other fees,
costs and charges specified in the indenture.
Defeasance Subaccount. If funds are to be remitted to the indenture trustee
in connection with the exercise by Transition Bond Company of its option to
defease a series of transition bonds, Transition Bond Company will establish a
defeasance subaccount for each series to be defeased. If this occurs, funds set
aside for future payment of the transition bonds will be deposited into the
defeasance subaccount. (ss.4.02(a)) All amounts in a defeasance subaccount will
be applied by the indenture trustee to the payment to the holders of the
particular transition bonds for the payment or redemption of which these amounts
were deposited with the indenture trustee. These amounts will include, among any
other amounts, all sums due and to become due for principal, premium, if any,
and interest. These amounts will be applied in accordance with the provisions of
the transition bonds and the indenture. (ss.4.03) See "--Transition Bond
Company's Legal Defeasance and Covenant Defeasance Options" below.
HOW FUNDS IN THE GENERAL SUBACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the indenture trustee, including any
amounts remitted by TXU Electric or the servicer in respect of indemnification
obligations under the sale agreement or the servicing agreement, any proceeds of
Collateral received by the servicer, the Issuer or the indenture trustee, and
all investment earnings on the subaccounts (other than the capital subaccounts
and the retail electric provider security deposit subaccount) of the collection
account will be deposited into the general subaccount. On the business day
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preceding each payment date, the indenture trustee will allocate all amounts on
deposit in the general subaccount in the following priority:
1. all amounts owed to the indenture trustee, including expenses and
amounts remitted by TXU Electric or the servicer in respect of
indemnification obligations under the sale agreement or the servicing
agreement relating to the indenture trustee, if any, will be paid to
the indenture trustee;
2. all amounts owed to the independent managers will be paid to the
independent managers;
3. the servicing fee payable, and all unpaid servicing fees from prior
payment dates will be paid to the servicer;
4. the administration fee payable under the administration agreement
between Transition Bond Company and TXU Electric will be paid to TXU
Electric;
5. all operating expenses of Transition Bond Company, other than expenses
listed in clauses 1 through 4 above, up to an aggregate of $100,000
for each payment date for all series, so long as no event of default
under the indenture has occurred and is continuing or would be caused
by this payment, will be paid to the persons entitled thereto;
6. an amount equal to interest payable on each series of transition bonds
for the payment date will be allocated to the corresponding series
subaccount or will be paid to the counterparty on any interest rate
swap between Transition Bond Company and that counterparty;
7. an amount equal to principal of each series or class of transition
bonds payable as a result of acceleration following an event of
default under the indenture, principal of any series or class of
transition bonds payable on the Final Maturity Date for that series or
class, or the principal payable with respect to a redemption date will
be allocated to the corresponding series subaccount;
8. an amount equal to principal scheduled to be paid on each series of
transition bonds on the next payment date, excluding amounts provided
for pursuant to clause 7 above, will be allocated to the corresponding
series subaccount;
9. all remaining unpaid operating expenses of Transition Bond Company
will be paid to the persons entitled thereto;
10. any amount necessary to replenish any shortfalls in any of the capital
subaccounts will be allocated to the capital subaccount of each
series, on a pro rata basis, based on the annual revenue requirements
that series;
11. an amount necessary to cause the amount in each of the
overcollateralization subaccounts to equal the Scheduled
Overcollateralization Level for that overcollateralization subaccount
for that payment date will be allocated to the overcollateralization
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subaccount of each series, on a pro rata basis, based on the annual
revenue requirements for that series;
12. release of an amount equal to investment earnings on amounts in each
capital subaccount to Transition Bond Company, so long as no event of
default has occurred and is continuing;
13. the balance, if any, will be allocated to the reserve subaccount for
each series, on a pro rata basis, based on the annual revenue
requirements for that series; and
14. following repayment of all outstanding series of transition bonds, the
balance, if any, will be released to Transition Bond Company free from
the lien of the indenture. (ss.8.02(c))
If, on any payment date for any series, funds in the general subaccount are
insufficient to make the payments or transfers contemplated by clauses 1 through
9 of the first paragraph of this subsection, the indenture trustee will draw
from amounts on deposit in the following subaccounts in the following order up
to the amount of the shortfall:
1. from the reserve subaccount for that series (which can also be used to
make allocations contemplated in clauses 10 and 11 of the first
paragraph of this subsection);
2. from the overcollateralization subaccount for that series; and
3. from the capital subaccount for that series. (ss.8.02(d))
Each of the reserve subaccounts, the overcollateralization subaccounts and
the capital subaccounts will be available to make payments only on the related
series of transition bonds, except that if an event of default under the
indenture exists, then those subaccounts will be available to make payments on
all series of transition bonds. In addition, those subaccounts will be available
to make any payment on any series of transition bonds if the failure to make
that payment would result in an event of default under the indenture.
If, on any payment date, available collections of transition charges,
together with available amounts in the subaccounts, are not sufficient to pay
interest due on all outstanding transition bonds, amounts available will be
allocated among the outstanding series of transition bonds pro rata based on the
amount of interest payable on the outstanding series. If on any payment date,
remaining collections on the transition property, together with available
amounts in the subaccounts, are not sufficient to pay principal legally due on
all outstanding series of transition bonds, amounts available will be allocated
among the outstanding series pro rata based on the scheduled principal then
legally due on the outstanding series. If on any payment date, remaining
collections on the transition property, together with available amounts in the
subaccounts, are not sufficient to pay principal scheduled to be paid on all
outstanding series of transition bonds, amounts available will be allocated to
each series on a pro rata basis based on the annual revenue requirements for
that series. (ss.8.02(d)(vi)-(viii))
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REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to each
payment date, the indenture trustee will deliver a statement prepared by the
indenture trustee to each holder of transition bonds of that series. This
statement will include, to the extent applicable, the following information, as
well as any other information so specified in the applicable supplement to the
indenture, as to the transition bonds of that series with respect to that
payment date or the period since the previous payment date, as applicable:
o the amount paid to holders of transition bonds of that series and the
related classes in respect of principal;
o the amount paid to holders of transition bonds of that series and the
related classes in respect of interest;
o the aggregate outstanding principal balance for that series of
transition bonds, after giving effect to payments to be made on that
payment date, and the Projected Transition Bond Balance of that series
and the related classes as of that payment date;
o the amount on deposit in the overcollateralization subaccount and the
Scheduled Overcollateralization Level, with respect to that series as
of that payment date;
o the amount on deposit in the capital subaccount for that series and
the Required Capital Amount for that series as of that payment date;
and
o the amount, if any, on deposit in the reserve subaccount for that
series as of that payment date. (ss.6.06)
TRANSITION BOND COMPANY AND THE INDENTURE TRUSTEE MAY MODIFY THE INDENTURE
Modifications of the Indenture that Do Not Require Consent of the Holders
of Transition Bonds. Without the consent of any of the holders of transition
bonds but with prior notice to the applicable rating agencies, Transition Bond
Company and the indenture trustee may enter into a supplement to the indenture
for any of the following purposes:
o to correct or amplify the description of the Collateral, or to better
assure, convey and confirm unto the indenture trustee the Collateral,
or to subject to the lien of the indenture additional property;
o to evidence the succession, in compliance with the applicable
provisions of the indenture, of another person to either the ownership
of, or the rights and obligations of, Transition Bond Company,
including the assumption by any applicable successor of the covenants
of Transition Bond Company contained in the indenture and in the
transition bonds;
o to add to the covenants of Transition Bond Company, for the benefit of
the holders of transition bonds, or to surrender any right or power
therein conferred upon Transition Bond Company;
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o to convey, transfer, assign, mortgage or pledge any property to the
indenture trustee;
o to cure any ambiguity, to correct or supplement any provision of the
indenture or in any supplement thereto which may be inconsistent with
any other provision of the indenture or in any supplement thereto or
to make any other provisions with respect to matters or questions
arising under the indenture or in any supplement thereto or change in
any manner or eliminate any provisions of the indenture, or modify in
any manner the rights of the holders of transition bonds under the
indenture; provided, however, that:
o this action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
holders of transition bonds, and
o the Rating Agency Condition shall have been satisfied with
respect thereto;
o to evidence and provide for the acceptance of the appointment under
the indenture by a successor indenture trustee with respect to the
transition bonds and to add to or change any of the provisions of the
indenture as shall be necessary to facilitate the administration of
the trusts under the indenture by more than one indenture trustee,
pursuant to the requirements specified in the indenture;
o to modify, eliminate or add to the provisions of the indenture to the
extent necessary to effect the qualification of the indenture under
the Trust Indenture Act of 1939 or under any similar federal statute
hereafter enacted and to add to the indenture any other provisions as
may be expressly required by the Trust Indenture Act of 1939; or
o to set forth the terms of any series that has not theretofore been
authorized by a supplement to the indenture, provided that the Rating
Agency Condition has been satisfied. (ss.9.01(a))
Modifications That Require the Approval of the Holders of Transition Bonds.
Transition Bond Company and the indenture trustee also may, with prior notice to
the applicable rating agencies (with respect to Moody's, Fitch IBCA and Duff &
Phelps) and upon satisfaction of the Rating Agency Condition (with respect to
S&P) and with the consent of the holders of not less than a majority of the
outstanding amount of the transition bonds of each series or class to be
affected, enter into a supplement to the indenture to add any provisions to, or
change in any manner or eliminate any of the provisions of, the indenture or
modify in any manner the rights of the holders of transition bonds under the
indenture. However, this supplement may not, without the consent of the holders
of each outstanding Transition Bond of each series or class affected thereby:
o change the date of payment of any installment of principal of or
premium, if any, or interest on any Transition Bond, or reduce the
principal amount thereof, the interest rate thereon or the redemption
price or the premium, if any, with respect thereto, change the
provisions of the indenture and the related applicable supplement to
the indenture relating to the application of collections on, or the
proceeds of the sale of, the Collateral to payment of principal of or
premium, if any, or interest on the transition bonds, or change the
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currency in which, any Transition Bond or the interest thereon is
payable;
o impair the right to institute suit for the enforcement of those
provisions of the indenture specified therein regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
transition bonds or of a series or class thereof, the consent of the
holders of transition bonds of which is required for any supplement to
the indenture, or the consent of the holders of transition bonds of
which is required for any waiver of compliance with provisions of the
indenture or defaults therein and their consequences provided for in
the indenture or modify or alter the definition of the term
"Outstanding" as it is defined in the indenture;
o reduce the percentage of the aggregate principal amount of the
outstanding transition bonds required to direct the indenture trustee
to direct Transition Bond Company to sell, liquidate or preserve the
Collateral;
o modify any provision of the section of the indenture relating to the
consent of holders of transition bonds with respect to supplements to
the indenture, except to increase any percentage specified therein or
to provide that those provisions of the indenture or the Basic
Documents specified in that section of the indenture cannot be
modified or waived without the consent of the holders of each
outstanding Transition Bond affected thereby;
o modify any of the provisions of the indenture in a manner so as to
affect the amount of any payment of interest, principal or premium, if
any, payable on any Transition Bond on any payment date or change the
redemption dates, Expected Amortization Schedules, Final Maturity
Dates of any series or class of any transition bonds;
o decrease the Required Capital Amount with respect to any series, the
Overcollateralization Amount or the Scheduled Overcollateralization
Level with respect to any series and any payment date;
o modify or alter the provisions of the indenture regarding the voting
of transition bonds held by Transition Bond Company, TXU Electric, an
affiliate of either of them or any obligor on the transition bonds;
o decrease the percentage of the aggregate principal amount of the
transition bonds required to amend the sections of the indenture which
specify the applicable percentage of the aggregate principal amount of
the transition bonds necessary to amend the indenture or any other
Basic Documents; or
o permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any part of the Collateral
or, except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any property at any time
subject thereto or deprive any holder of transition bonds of the
security provided by the lien of the indenture. (ss.9.02)
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Enforcement of the Sale Agreement and the Servicing Agreement. The
indenture provides that Transition Bond Company will take all lawful actions to
enforce its rights under the sale agreement and the servicing agreement. The
indenture also provides that Transition Bond Company will take all lawful
actions to compel or secure the performance and observance by TXU Electric and
the servicer of each of their obligations to Transition Bond Company under or in
connection with the sale agreement and the servicing agreement. So long as no
event of default under the indenture occurs and is continuing, Transition Bond
Company may exercise any and all rights, remedies, powers and privileges
lawfully available to Transition Bond Company under or in connection with the
sale agreement and the servicing agreement. (ss.3.20(a)) The indenture provides
that following a default by either TXU Electric or the servicer under the sale
agreement or the servicing agreement, Transition Bond Company will take, at its
expense, all such lawful action as the indenture trustee may request to compel
or secure the performance and observance by TXU Electric or the servicer, as
applicable, of each of their obligations to Transition Bond Company under or in
connection with the respective agreements or to exercise any and all rights,
remedies, powers and privileges lawfully available to Transition Bond Company
under or in connection with the respective agreements to the extent and in the
manner directed by the indenture trustee. (ss.3.20(f)) However, if Transition
Bond Company or the servicer proposes to amend, modify, waive, supplement,
terminate or surrender in any material respect, or agree to any material
amendment, modification, supplement, termination, waiver or surrender of, the
process for adjusting transition charges, Transition Bond Company must notify
the indenture trustee and the indenture trustee must notify holders of
transition bonds of this proposal. In addition, the indenture trustee's consent
is required and the indenture trustee may consent to this proposal only with the
consent of the holders of a majority of the aggregate principal amount of the
outstanding transition bonds of each series materially and adversely affected
thereby and only if the Rating Agency Condition is satisfied. (ss.3.20(e))
If an event of default under the indenture occurs and is continuing, the
indenture trustee may, and, at the direction of the holders of a majority of the
aggregate principal amount of the outstanding transition bonds of all series
shall, exercise all rights, remedies, powers, privileges and claims of
Transition Bond Company against TXU Electric or the servicer under or in
connection with the sale agreement and the servicing agreement, and any right of
Transition Bond Company to take this action shall be suspended. (ss.3.20(b)) In
the event of a foreclosure, there is likely to be a limited market, if any, for
the transition property, and, therefore, foreclosure may not be a realistic or
practical remedy.
Modifications to the Sale Agreement and the Servicing Agreement. With the
consent of the indenture trustee, the sale agreement and the servicing agreement
may be amended, so long as the Rating Agency Condition is satisfied in
connection therewith, at any time and from time to time, without the consent of
the holders of transition bonds. (ss.3.20(c)) However, this amendment may not,
as evidenced by an opinion of counsel, adversely affect the interest of any
holder of transition bonds in any material respect without the consent of the
holders of a majority of the aggregate principal amount of the outstanding
transition bonds of each series materially and adversely affected thereby.
(ss.3.20(d))
Notification of the Rating Agencies, the Indenture Trustee and the Holders
of Transition Bonds of Any Modification. If Transition Bond Company, TXU
Electric or the servicer:
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o proposes to amend, modify, waive, supplement, terminate or surrender,
or agree to any amendment, modification, waiver, supplement,
termination or surrender of, the terms of the sale agreement or the
servicing agreement, or
o waives timely performance or observance by TXU Electric or the
servicer under the sale agreement or servicing agreement,
in each case in a way that would materially and adversely affect the interests
of holders of transition bonds, Transition Bond Company must first notify the
applicable rating agencies of the proposed amendment. Upon receiving
notification regarding the Rating Agency Condition, Transition Bond Company must
thereafter notify the indenture trustee and the indenture trustee shall notify
the holders of transition bonds of the proposed amendment and whether the Rating
Agency Condition has been satisfied with respect thereto. The indenture trustee
will consent to this proposed amendment, modification, waiver or supplement only
with the consent of the holders of a majority of the aggregate principal amount
of the outstanding transition bonds of each series or class materially and
adversely affected thereby. (ss.3.20(d))
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An event of default is defined in the indenture as being:
o a default in the payment of any interest on any transition bond when
the same becomes due and payable and the continuation of this default
for five business days;
o a default in the payment of the then unpaid principal of any
transition bond of any series on the Final Maturity Date for that
series or, if applicable, any class on the Final Maturity Date for
that class;
o a default in the payment of the redemption price for any Transition
Bond on the redemption date therefor;
o a default in the observance or performance of any covenant or
agreement of Transition Bond Company made in the indenture, other than
those specifically dealt with in the first three bullet points above,
or any representation or warranty of Transition Bond Company made in
the indenture or in any certificate or other writing delivered
pursuant to the indenture or in connection with the indenture proving
to have been incorrect in any material respect as of the time when
made, and this default shall continue or not be cured, for a period of
30 days after the earlier of the date:
o notice of the default is given to Transition Bond Company by the
indenture trustee or to Transition Bond Company and the indenture
trustee by the holders of at least 25% of the aggregate principal
amount of the outstanding transition bonds of any series or
class, or
o Transition Bond Company has knowledge of the default;
o the filing of a decree or order for relief by a court having
jurisdiction in respect of Transition Bond Company or any substantial
part of the Collateral in an involuntary case or proceeding under any
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applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of
Transition Bond Company or its property or for any substantial part of
the Collateral, or ordering the winding-up or liquidation of
Transition Bond Company's affairs, and that decree or order remains
unstayed and in effect for a period of 90 consecutive days; or
o the commencement by Transition Bond Company of a voluntary case or
proceeding under any applicable federal or state bankruptcy,
insolvency or other similar law now or hereafter in effect, or the
consent by Transition Bond Company to the entry of an order for relief
in an involuntary case under any such law, or the consent by
Transition Bond Company to the appointment or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of Transition Bond Company or for any substantial
part of the Collateral, or the making by Transition Bond Company of
any assignment for the benefit of creditors, or the failure by
Transition Bond Company generally to pay its debts as they become due,
or the taking of action by Transition Bond Company in furtherance of
any of the foregoing.
If an event of default under the indenture occurs and is continuing, then the
indenture trustee or holders of a majority in aggregate principal amount of the
outstanding transition bonds of all series may declare the principal of all
series of the transition bonds together with the accrued and unpaid interest
thereon through the date of acceleration to be immediately due and payable.
(ss.5.02) This declaration may be rescinded by the holders of a majority in
aggregate principal amount of the outstanding transition bonds of all series
prior to the indenture trustee obtaining a judgment or decree for the money due
if:
o Transition Bond Company has paid or deposited with the indenture
trustee an amount sufficient to pay
o all payments of principal of and premium, if any, and interest on
all transition bonds of all series and all other amounts that
would then be due under the indenture or on the transition bonds
if the event of default giving rise to such acceleration had not
occurred, and
o all amounts paid or advanced by the indenture trustee under the
indenture and the reasonable compensation, expenses,
disbursements and advances of the indenture trustee and its
agents and counsel; and
o all other events of default under the indenture have been cured or
waived.
When the Indenture Trustee Can Sell the Collateral. If the transition bonds
of all series have been declared to be due and payable following an event of
default under the indenture, the indenture trustee may, in its discretion,
either:
o sell the Collateral; or
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o elect to maintain possession of the Collateral and continue to apply
cash received with respect to the Collateral as if there had been no
declaration of acceleration. (ss.5.04(a) and ss.5.05)
However, the indenture trustee is prohibited from selling or otherwise
liquidating the Collateral following an event of default under the indenture,
other than (i) a default in the payment of any interest on any transition bond
when the same becomes due and payable and the continuation of this default for
five business days, (ii) a default in the payment of the then unpaid principal
of any Transition Bond of any series on the Final Maturity Date for that series
or, if applicable, any class on the Final Maturity Date for that class, or (iii)
a default in the payment of the redemption price for any Transition Bond on the
redemption date therefor, unless:
o the holders of 100% of the aggregate principal amount of all
outstanding series of transition bonds consent thereto;
o the proceeds of this sale or liquidation are sufficient to pay in full
all amounts then due and unpaid upon the transition bonds for
principal, premium, if any, and interest; or
o the indenture trustee determines that the Collateral will not continue
to provide sufficient funds to make all payments on the transition
bonds of all series as these payments would have become due if the
transition bonds had not been declared due and payable, and the
indenture trustee obtains the consent of the holders of 66-2/3% of the
aggregate principal amount of the outstanding transition bonds of all
series. (ss.5.04)
Right of the Holders of Transition Bonds to Direct Proceedings. Subject to
the provisions for indemnification and the limitations contained in the
indenture, the holders of a majority in principal amount of the outstanding
transition bonds of all series, or, if less than all series or classes are
affected, the affected series or class, will have the right to direct the time,
method and place of conducting any judicial or administrative proceeding for any
remedy available to the indenture trustee or exercising any trust or power
conferred on the indenture trustee; provided that:
o this direction does not conflict with any rule of law or with the
indenture;
o except as discussed above, any direction to the indenture trustee to
sell or liquidate the Collateral shall be by the holders of 100% of
the aggregate principal amount of outstanding transition bonds of all
series; and
o the indenture trustee may take any other action deemed proper by the
indenture trustee that is not inconsistent with this direction.
However, the indenture trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the holders of transition bonds of any series if:
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o it reasonably believes it will not be adequately indemnified against
the costs, expenses and liabilities which might be incurred by it in
complying with this request; or
o it determines that this action might materially and adversely affect
the rights of any holder of transition bonds not consenting to this
action. (ss.5.11)
Waiver of Default. The holders of a majority in aggregate principal amount
of the outstanding transition bonds of all series may, prior to the acceleration
of the maturity of the transition bonds of all series, waive any default or
event of default under the indenture and its consequences. However, they may not
waive:
o a default in the payment of principal of or premium, if any, or
interest on any of the transition bonds; or
o a default in respect of a covenant or provision of the indenture that
cannot be modified without the waiver or consent of each holder of
transition bonds of all series and classes affected. (ss.5.12)
No holder of transition bonds of any series will have the right to
institute any proceeding, judicial or otherwise, or to avail itself of the right
to foreclose on the transition property or otherwise enforce the lien in the
transition property, pursuant to Section 39.309(f) of the Restructuring Act,
with respect to the indenture, unless:
o the holder previously has given to the indenture trustee written
notice of a continuing event of default under the indenture; o the
holders of not less than 25% in aggregate principal amount of the
outstanding transition bonds of all series have made written request
of the indenture trustee to institute the proceeding in its own name
as indenture trustee;
o the holder or holders have offered the indenture trustee security or
indemnity reasonably satisfactory to the indenture trustee against the
costs, expenses, and liabilities to be incurred in complying with the
request;
o the indenture trustee for 60 days after its receipt of the notice,
request and offer has failed to institute the proceeding; and
o no direction inconsistent with this written request has been given to
the indenture trustee during the 60-day period referred to above by
the holders of a majority in principal amount of the outstanding
transition bonds of all series.
COVENANTS OF TRANSITION BOND COMPANY
Consolidation, Merger or Sale of Assets. Transition Bond Company will keep
in effect its existence, rights and franchises as a limited liability company
under Delaware law and will obtain and preserve its qualification to do business
in each jurisdiction in which that qualification is or shall be necessary to
protect the validity and enforceability of the indenture provided that
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Transition Bond Company may consolidate with or merge into another entity or
sell substantially all of its assets to another entity or dissolve if:
o the entity formed by or surviving the consolidation or merger or to
whom substantially all of its assets are sold is organized under the
laws of the United States or any state thereof and expressly assumes
by a supplement to the indenture the due and punctual payment of the
principal of and premium, if any, and interest on all transition bonds
and the performance of Transition Bond Company's obligations under the
indenture and the applicable supplement to the indenture;
o the entity expressly assumes all obligations and succeeds to all
rights of Transition Bond Company under the sale agreement and the
servicing agreement pursuant to an assignment and assumption agreement
executed and delivered to the indenture trustee;
o no default or event of default under the indenture will have occurred
and be continuing immediately after giving effect to the merger,
consolidation or sale;
o the Rating Agency Condition will have been satisfied with respect to
this merger, consolidation or sale;
o Transition Bond Company has received an opinion of counsel to the
effect that this merger, consolidation or sale
o would have no material adverse tax consequence to Transition Bond
Company or any holder of transition bonds,
o complies with the indenture and all conditions precedent therein
provided relating to a merger, consolidation or sale, and
o will result in the indenture trustee maintaining a continuing
valid first priority security interest in the Collateral;
o none of the transition property, any financing order issued to TXU
Electric under the Restructuring Act or TXU Electric's, the servicer's
or Transition Bond Company's rights under the Restructuring Act or any
financing order issued thereunder are impaired thereby; and
o any action that is necessary to maintain the lien created by the
indenture has been taken. (ss.3.04 and ss.3.10)
Additional Covenants of Transition Bond Company. Transition Bond Company
will from time to time execute and deliver all documents, make all filings and
take any other action necessary or advisable to, among other things, maintain
and preserve the lien of the indenture and the priority thereof. (ss.3.05)
Transition Bond Company will not permit the validity or effectiveness of the
indenture to be impaired, the lien of the indenture to be amended, hypothecated,
subordinated, terminated or discharged, or any person to be released from any
covenants or obligations with respect to the transition bonds except as
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expressly permitted by the indenture. (ss.3.08) Transition Bond Company will
also not permit any lien, other than the lien of the indenture, to be created on
or extend to or otherwise arise upon or burden the Collateral or any part
thereof or any interest therein or the proceeds thereof.
Transition Bond Company may not, among other things:
o except as expressly permitted by the indenture, the sale agreement or
the servicing agreement, sell, transfer, exchange or otherwise dispose
of any of the Collateral, unless directed to do so by the indenture
trustee in accordance with the indenture; or
o claim any credit on, or make any deduction from the principal or
premium, if any, or interest payable in respect of, the transition
bonds, other than amounts properly withheld under the Internal Revenue
Code of 1986, or assert any claim against any present or former holder
of transition bonds because of the payment of taxes levied or assessed
upon Transition Bond Company. (ss.3.08)
Transition Bond Company may not engage in any business other than
purchasing and owning the transition property, issuing transition bonds from
time to time, pledging its interest in the Collateral to the indenture trustee
under the indenture in order to secure the transition bonds and performing
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto. (ss.3.12)
Transition Bond Company May Not Engage in Any Other Financial Transactions.
Transition Bond Company may not issue, incur, assume, guarantee or otherwise
become liable, directly or indirectly, for any indebtedness except for the
transition bonds and except as contemplated by the Basic Documents. (ss.3.13)
Also, Transition Bond Company may not make any loan guarantee or otherwise
become contingently liable, directly or indirectly, 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.
Transition Bond Company may not, except as contemplated by the Basic Documents,
make any loan or advance or credit to any person. (ss.3.14) Transition Bond
Company will not make any expenditure for capital assets or lease any capital
asset other than transition property purchased from TXU Electric pursuant to,
and in accordance with, the sale agreement. (ss.3.15) Transition Bond Company
may not make any payments, distributions or dividends to any member of
Transition Bond Company in respect of its membership interest in Transition Bond
Company, except in accordance with the indenture. (ss.3.16)
The servicer will deliver to the indenture trustee an annual accountant's
report, compliance certificates and monthly reports regarding distributions and
other statements required by the servicing agreement. See "The Servicing
Agreement" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any holder of transition bonds who has owned a transition bond for at least
six months may, by written request to the indenture trustee, obtain access to
the list of all holders of transition bonds maintained by the indenture trustee
for the purpose of communicating with other holders of transition bonds with
respect to their rights under the indenture or the transition bonds. In
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addition, a group of holders of transition bonds each of whom has owned a
transition bond for at least six months may also obtain access to the list of
all holders of transition bonds for the same purpose. The indenture trustee may
elect not to afford the requesting holders of transition bonds access to the
list of holders of transition bonds if it agrees to mail the desired
communication or proxy, on behalf and at the expense of the requesting holders
of transition bonds, to all holders of transition bonds. (ss.7.02 & TIA ss.312)
TRANSITION BOND COMPANY MUST FILE AN ANNUAL COMPLIANCE STATEMENT
Transition Bond Company will be required to file annually with the
indenture trustee a written statement as to the fulfillment of its obligations
under the indenture. (ss.3.09) In addition, Transition Bond Company will furnish
to the indenture trustee an opinion of counsel concerning filings made by
Transition Bond Company on an annual basis and before the effectiveness of any
amendment to the sale agreement or the servicing agreement. (ss.7.03)
THE INDENTURE TRUSTEE MUST PROVIDE AN ANNUAL REPORT TO ALL HOLDERS OF TRANSITION
BONDS
If required by the Trust Indenture Act of 1939, the indenture trustee will
be required to mail each year to all holders of transition bonds a brief report.
This report must state, among other items:
o the indenture trustee's eligibility and qualification to continue as
the indenture trustee under the indenture;
o any amounts advanced by it under the indenture which remain unpaid on
the date of the report;
o the amount, interest rate and maturity date of specific indebtedness
owing by Transition Bond Company to the indenture trustee in the
indenture trustee's individual capacity;
o the property and funds physically held by the indenture trustee;
o any additional issue of a series of transition bonds not previously
reported, which remain unpaid on the date of the report; and
o any action taken by it that materially affects the transition bonds of
any series and that has not been previously reported. (ss.7.04(o) &
TIA ss.313(a))
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds of
any series upon the delivery to the indenture trustee of funds sufficient for
the payment in full of all of the transition bonds of that series with the
indenture trustee. In addition, Transition Bond Company must deliver to the
indenture trustee the officer's certificate and opinion of counsel specified in
the indenture. The deposited funds will be segregated and held apart solely for
paying the transition bonds, and the transition bonds will not be entitled to
any amounts on deposit in the collection account other than amounts on deposit
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in the defeasance subaccount for the transition bonds. (ss.4.04(o))
TRANSITION BOND COMPANY'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
Transition Bond Company may, at any time, terminate:
o all of its obligations under the indenture with respect to the
transition bonds of any series; or
o its obligations to comply with some of the covenants in the indenture,
including all of the covenants described under "--Covenants of
Transition Bond Company."
The "legal defeasance option" is the right of Transition Bond Company to
terminate at any time its obligations under the indenture with respect to the
transition bonds of any series. The "covenant defeasance option" is the right of
Transition Bond Company at any time to terminate its obligations to comply with
some of the covenants in the indenture. Transition Bond Company may exercise the
legal defeasance option with respect to any series of transition bonds
notwithstanding its prior exercise of the covenant defeasance option with
respect to that series. (ss.4.01(b)) If Transition Bond Company exercises the
legal defeasance option with respect to any series, that series will be entitled
to payment only from the funds or other obligations set aside under the
indenture for payment thereof on the Expected Final Payment Date or redemption
date therefor as described below. That series will not be subject to payment
through redemption or acceleration prior to the Expected Final Payment Date or
redemption date, as applicable. If Transition Bond Company exercises the
covenant defeasance option with respect to any series, the maturity of the
transition bonds of that series may not be accelerated because of an event of
default under the indenture relating to a default in the observance or
performance of any covenant or agreement of Transition Bond Company made in the
indenture. (ss.4.01(b))
Transition Bond Company may exercise the legal defeasance option or the
covenant defeasance option with respect to any series of transition bonds only
if:
o Transition Bond Company irrevocably deposits or causes to be deposited
in trust with the indenture trustee cash or United States Government
Obligations for the payment of principal of and premium, if any, and
interest on that series to the Expected Final Payment Date or
redemption date therefor, as applicable, the deposit to be made in the
defeasance subaccount for that series;
o Transition Bond Company delivers to the indenture trustee a
certificate from a nationally recognized firm of independent
accountants expressing its opinion that the payments of the principal
and interest when due and without reinvestment on the deposited United
States Government Obligations plus any cash deposited in the
defeasance subaccount without investment will provide cash at times
and in sufficient amounts to pay in respect of the transition bonds of
that series:
o principal in accordance with the Expected Amortization Schedule
therefor, or if that series is to be redeemed, the redemption price on
the redemption date therefor, and
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o interest when due;
o in the case of the legal defeasance option, 125 days pass after the
deposit is made and during the 125-day period no default under the
indenture relating to events of bankruptcy, insolvency, receivership
or liquidation of Transition Bond Company occurs and is continuing at
the end of the period;
o no default under the indenture has occurred and is continuing on the
day of the deposit and after giving effect thereto; o in the case of
the legal defeasance option, Transition Bond Company delivers to the
indenture trustee an opinion of counsel stating that:
o Transition Bond Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or
o since the date of execution of the indenture, there has been a
change in the applicable federal income tax law,
in either case confirming that the holders of transition bonds of that
series will not recognize income, gain or loss for federal income tax
purposes as a result of the exercise of the legal defeasance option
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if the
legal defeasance had not occurred;
o in the case of the covenant defeasance option, Transition Bond Company
delivers to the indenture trustee an opinion of counsel to the effect
that the holders of transition bonds of that series will not recognize
income, gain or loss for federal income tax purposes as a result of
the exercise of the covenant defeasance option and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if the covenant defeasance had
not occurred; and
o Transition Bond Company delivers to the indenture trustee a
certificate of an authorized officer of Transition Bond Company and an
opinion of counsel, each stating that all conditions precedent to the
satisfaction and discharge of the transition bonds of that series have
been complied with as required by the indenture. (ss.4.02)
There will be no other conditions to the exercise by Transition Bond
Company of its legal defeasance option or its covenant defeasance option.
THE INDENTURE TRUSTEE
The Bank of New York will be the indenture trustee under the indenture. The
indenture trustee may resign at any time upon 30 days notice by so notifying
Transition Bond Company The holders of a majority in principal amount of the
transition bonds of all series then outstanding may remove the indenture trustee
by so notifying Transition Bond Company and the indenture trustee and may
appoint a successor indenture trustee. Transition Bond Company will remove the
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indenture trustee if: (a) the indenture trustee ceases to be eligible to
continue in this capacity under the indenture; (b) the indenture trustee is
adjudged a bankrupt or insolvent; (c) a receiver or other public officer takes
charge of the indenture trustee or its property; or (d) the indenture trustee
otherwise becomes incapable of acting. If the indenture trustee resigns or is
removed or if a vacancy exists in the office of indenture trustee for any
reason, Transition Bond Company shall promptly 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. (ss.6.08) The indenture trustee shall at all times satisfy
the requirements of the Trust Indenture Act of 1939 and, at the time of its
appointment, have a combined capital and surplus of at least $50 million and a
long term debt rating of "Baa3" or better by Moody's and "BBB-" or better by
Fitch IBCA. (ss.6.11) 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 corporation or banking association, the resulting,
surviving or transferee corporation banking association shall, without any
further action, be the successor indenture trustee. Transition Bond Company and
its affiliates may, from time to time, maintain various banking and trust
relationships with The Bank of New York.
HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT
Challenge to True Sale Treatment. TXU Electric will represent and warrant
in the sale agreement that the transfer of transition property in accordance
with the sale agreement constitutes a valid sale and assignment by TXU Electric
to Transition Bond Company of the transition property. It is a condition of
closing for the sale of transition property pursuant to the sale agreement that
TXU Electric will take the appropriate actions under the Restructuring Act,
including filing notice with Secretary of State of Texas, to perfect this
transfer. The Restructuring Act provides that a transfer of transition property
by an electric utility to an assignee which the parties have in the governing
documentation expressly stated to be a sale or other absolute transfer, in a
transaction approved in a financing order, shall be treated as an absolute
transfer of all the transferor's right, title and interest, as a true sale, and
not as a pledge or other financing, of the relevant transition property. TXU
Electric and Transition Bond Company will treat the transactions as a sale under
applicable law, but will treat the transition bonds as debt of TXU Electric for
financial accounting and federal and state income tax purposes. See "The
Restructuring Act--TXU Electric and Other Utilities May Securitize Stranded
Costs and Regulatory Assets" in this prospectus. In the event of a bankruptcy of
a party to the sale agreement, if a party in interest in the bankruptcy were to
take the position that the transfer of transition property to Transition Bond
Company pursuant to the sale agreement was a financing transaction and not a
"true sale" under applicable creditors' rights principles, there can be no
assurance that a court would not adopt this position. Even if a court did not
ultimately recharacterize the transaction as a financing transaction, the mere
commencement of a bankruptcy of TXU Electric or another party to the sale
agreement and the attendant possible uncertainty surrounding the treatment of
the transaction could result in delays in payments on the transition bonds.
The Restructuring Act provides that the creation, granting, perfection and
enforcement of liens and security interests in transition property are governed
by the Restructuring Act and not by the Texas Business & Commerce Code. Under
the Restructuring Act, a valid and enforceable lien and security interest in
transition property may be created only by a financing order issued under the
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Restructuring Act and the execution and delivery of a security agreement with a
holder of transition bonds or a trustee or agent for the holder. The lien and
security interest attaches automatically from the time value is received for the
transition bonds. Upon perfection through the filing of notice with the
Secretary of State of Texas pursuant to rules established by the Secretary of
State of Texas, the security interest shall be a continuously perfected lien and
security interest in the transition property, with priority in the order of
filing and take precedence over any subsequent judicial or other lien creditor.
If this notice is filed within ten days after value is received for the
transition bonds, the security interest will be perfected retroactive to the
date value was received, otherwise, the security interest will be perfected as
of the date of filing. None of this, however, mitigates the risk of payment
delays and other adverse effects caused by a TXU Electric bankruptcy. Further,
if, for any reason, a transition property notice is not filed under the
Restructuring Act or Transition Bond Company fails to otherwise perfect its
interest in the transition property sold pursuant to the sale agreement, and the
transfer is thereafter deemed not to constitute a true sale, Transition Bond
Company would be an unsecured creditor of TXU Electric.
Consolidation of Transition Bond Company and TXU Electric. If TXU Electric
becomes a debtor in a bankruptcy case, a party in interest may attempt to
substantively consolidate the assets and liabilities of Transition Bond Company
and TXU Electric. TXU Electric and Transition Bond Company have taken steps to
attempt to minimize this risk. See "TXU Transition Bond Company LLC" in this
prospectus. However, no assurance can be given that if TXU Electric becomes a
debtor in a bankruptcy case, a court would not order that the assets and
liabilities of Transition Bond Company be consolidated with those of TXU
Electric.
Estimation of Claims; Challenge to Indemnity Claims. If TXU Electric were
to become a debtor in a bankruptcy case, claims, including indemnity claims, by
Transition Bond Company against TXU Electric under the sale agreement and the
other documents executed in connection therewith would be unsecured claims and
would be subject to being discharged in the bankruptcy case. In addition, a
party in interest in the bankruptcy may request that the Bankruptcy Court
estimate any contingent claims of Transition Bond Company against TXU Electric.
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 TXU Electric 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, Transition Bond Company would be left with a claim for actual
damages against TXU Electric based on breach of contract principles. The actual
amount of these damages would be subject to estimation and/or calculation by the
court.
No assurances can be given as to the result of any of the above-described
actions or claims. Furthermore, no assurance can be given as to what percentage
of their claims, if any, unsecured creditors would receive in any bankruptcy
proceeding involving TXU Electric.
Status of Transition Property as Current Property. TXU Electric has
represented in the sale agreement, and the Restructuring Act provides, that the
transition property sold pursuant to the sale agreement constitutes a current
property right. Nevertheless, no assurance can be given that, in the event of a
bankruptcy of TXU Electric, a party in interest in the bankruptcy would not
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attempt to take the position that transition property comes into existence only
as customers use electricity. If a court were to adopt this position, no
assurance can be given that a security interest in favor of the holders of
transition bonds would attach to transition charges in respect of electricity
consumed after the commencement of the bankruptcy case. If it were determined
that that transition property had not been sold to Transition Bond Company, and
the security interest in favor of the holders of transition bonds did not attach
to transition charges in respect of electricity consumed after the commencement
of the bankruptcy case, then Transition Bond Company would be an unsecured
creditor of TXU Electric. If so, there would be delays and/or reductions in
payments on the transition bonds. Whether or not a court determined that
transition property had been sold to Transition Bond Company pursuant to the
sale agreement, no assurances can be given that a court would not rule that the
rights to collect any transition charges relating to electricity consumed after
the commencement of the bankruptcy cannot be transferred to Transition Bond
Company or the indenture trustee.
In addition, in the event of a bankruptcy of TXU Electric, a party in
interest in the bankruptcy could assert that Transition Bond Company should pay
a portion of TXU Electric's costs associated with the generation, transmission
or distribution of the electricity, consumption of which gave rise to the
transition charge receipts used to make payments on the transition bonds.
Regardless of whether TXU Electric is the debtor in a bankruptcy case, if a
court were to accept the argument that transition property sold pursuant to the
sale agreement comes into existence only as customers use electricity, a tax or
government lien or other nonconsensual lien on property of TXU Electric arising
before that transition property came into existence could have priority over
Transition Bond Company's interest in that transition property. Adjustments to
the transition charges may be available to mitigate this exposure, although
there may be delays in implementing these adjustments.
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 sold pursuant to the sale
agreement in accordance with the terms of the indenture. In this capacity, the
indenture trustee is permitted to request the PUC to order the sequestration and
payment to holders of transition bonds of all revenues arising from the
transition charges. There can be no assurance, however, that the PUC would issue
this order after a TXU Electric bankruptcy in light of the automatic stay
provisions of Section 362 of the United States Bankruptcy Code or,
alternatively, that a bankruptcy court would lift the automatic stay to permit
this action by the PUC. In that event, the indenture trustee may under the
indenture seek an order from the bankruptcy court lifting the automatic stay
with respect to this action by the PUC, and an order requiring an accounting and
segregation of the revenues arising from the transition property sold pursuant
to the sale agreement. There can be no assurance that a court would grant either
order.
Bankruptcy of Servicer. The servicer is entitled to commingle the
transition charges that it receives with its own funds until each date on which
the servicer is required to remit funds to the indenture trustee as specified in
the servicing agreement. The Restructuring Act provides that the relative
priority of a lien created under the Restructuring Act is not defeated or
adversely affected by the commingling of transition charges arising with respect
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to the transition property with funds of the electric utility. However, in the
event of a bankruptcy of the servicer, a party in interest in the bankruptcy
might assert, and a court might rule, that transition charges commingled by the
servicer with its own funds and held by the servicer as of the date of
bankruptcy were property of the servicer as of that date, and are therefore
property of the servicer's bankruptcy estate, rather than property of Transition
Bond Company. If the court so rules, then the court would likely rule that the
indenture trustee has only a general unsecured claim against the servicer for
the amount of commingled transition charges held as of that date and could not
recover the commingled transition charges held as of the date of bankruptcy.
However the court rules on the ownership of the commingled transition
charges, the automatic stay arising upon the bankruptcy of the servicer could
delay the indenture trustee from receiving the commingled transition charges
held by the servicer as of the date of the bankruptcy until the court grants
relief from the stay. A court ruling on any request for relief from the stay
could be delayed pending the court's resolution of whether the commingled
transition charges are property of Transition Bond Company or of the servicer,
including resolution of any tracing of proceeds issues.
The servicing agreement provides that the indenture trustee, as assignee of
Transition Bond Company, together with the other persons specified therein, may
vote to appoint a successor servicer that satisfies the Rating Agency Condition.
The servicing agreement also provides that the indenture trustee, together with
the other persons specified therein, may petition the PUC or a court of
competent jurisdiction to appoint a successor servicer that meets this
criterion. However, the automatic stay in effect during a servicer bankruptcy
might delay replacement of the servicer. Even if a successor servicer may be
appointed and may replace the servicer, a successor may be difficult to obtain
and may not be capable of performing all of the duties that TXU Electric as
servicer was capable of performing. Furthermore, should the servicer enter into
bankruptcy, it may be permitted to stop acting as servicer.
Bankruptcy of a Retail Electric Provider. A retail electric provider is not
required to segregate the transition charges it collects from its general funds.
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 a retail electric provider, however, a bankruptcy court might rule that
federal bankruptcy law takes precedence over the Restructuring Act and does not
recognize Transition Bond Company's right to receive the collected transition
charges that are commingled with other funds of a retail electric provider as of
the date of bankruptcy. If so, the collected transition charges held by a retail
electric provider as of the date of bankruptcy would not be available to
Transition Bond Company to pay amounts owing on the transition bonds. In this
case, Transition Bond Company would have only a general unsecured claim against
that retail electric provider for those amounts.
Affiliated Retail Electric Providers. Retail electric providers, including
those affiliated with TXU Electric, will be required to remit to the servicer a
fixed portion of billed transition charges except for a reasonable allowance for
expected losses. As incentive collection agent compensation, a retail electric
provider may retain collections from end-use customers in excess of the
specified percentage remitted but is not reimbursed for collections below the
specified percentage. The specified percentage will be adjusted on an annual
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basis to take into account the collection experience of the previous year, as
demonstrated by audited reports from all retail electric providers.
In the event of a bankruptcy of TXU Electric, a party in interest in
bankruptcy could attempt to take the position that an affiliated retail electric
provider had taken all or some of the risk of transition charge collections.
This risk may be increased if the affiliated retail electric provider is also
the "provider of last resort." If a court were to adopt this position, there
would be an increased possibility that the court would recharacterize the
transaction as a financing transaction and not a "true sale" or substantively
consolidate the assets and liabilities of Transition Bond Company and TXU
Electric.
Other risks relating to bankruptcy may be found in "Risk Factors--The Risks
Associated With Potential Bankruptcy Proceedings."
MATERIAL UNITED STATES FEDERAL INCOME TAX MATTERS FOR
THE HOLDERS OF TRANSITION BONDS
GENERAL
The following is a discussion of the material United States federal income
tax consequences of the ownership and disposition of the transition bonds and
constitutes the opinion of Thelen Reid & Priest LLP, counsel to TXU Electric and
Transition Bond Company, insofar as it relates to matters of law and legal
conclusions. This discussion deals only with transition bonds held as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the "Code"). This discussion does not discuss all of the tax
consequences that may be relevant to a holder of transition bonds in light of
the holder's particular circumstances, or to holders subject to special rules,
such as financial institutions, insurance companies, tax-exempt organizations,
dealers in securities or currencies, individual retirement and tax deferred
accounts, persons who engage in a straddle or a hedge or a conversion
transaction relating to transition bonds, or persons whose "functional currency"
is not the United States dollar. In addition, this discussion does not address
the tax consequences to holders that purchase transition bonds other than
pursuant to their initial issuance and distribution, and at their original issue
price. This discussion is based upon the Code, existing and proposed United
States Treasury regulations promulgated thereunder, and applicable judicial and
administrative determinations now in effect, all of which are subject to change,
which may be retroactively applied in a manner that could adversely affect
holders.
Prospective investors should consult their own tax advisors with regard to
the application of the tax considerations discussed below to their particular
situations as well as the application of any state, local or other tax laws.
As used herein, the term "United States Person" means: (1) an individual
citizen or resident of the United States; (2) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof; (3) an estate the income of which is
subject to United States federal income taxation regardless of its source; or
(4) a trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more United
States persons have the authority to control all substantial decisions of the
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trust. As used herein, the term "United States Holder" means any beneficial
owner of a transition bond that for United States federal tax purposes is a
United States Person. As used herein, the term "Non-United States Holder" means
any beneficial owner of a transition bond other than a United States Holder.
TREATMENT OF THE TRANSITION BONDS
TXU Electric has received a private letter ruling from the Internal Revenue
Service (the "IRS") holding that the transition bonds are obligations of TXU
Electric for United States federal income tax purposes. The transition bonds
will be treated as debt by TXU Electric for United States federal income tax
purposes, and payments of interest on the transition bonds will be taxable as
described below.
TREATMENT OF TRANSITION BOND COMPANY
Transition Bond Company will be treated as a division of TXU Electric for
United States federal income tax purposes and not as an association taxable as a
corporation. As a result, Transition Bond Company will not be subject to United
States federal income tax as an entity separate from TXU Electric, and the
transition bonds will be treated as indebtedness of TXU Electric for United
States federal income tax purposes.
TAXATION OF UNITED STATES HOLDERS
Interest
Stated interest on the transition bonds will be taxable to United States
Holders as ordinary income at the time it is paid or accrued, in accordance with
their method of accounting.
Sale, Exchange or Redemption of Transition Bonds
Upon the sale, exchange, redemption or other taxable disposition of
transition bonds, a United States Holder generally will recognize gain or loss
equal to the difference between (1) the amount of cash and the fair market value
of any other property received (other than amounts attributable to, and taxable
as, accrued stated interest) and (2) the United States Holder's adjusted basis
in the transition bonds. A United States Holder's adjusted basis in the
transition bonds will generally equal its cost, reduced by any payments of
principal on the transition bonds. Such gain or loss will generally be capital
gain or loss and will be long-term capital gain or loss if the transition bonds
have been held for more than one year at the time of the sale, exchange,
redemption or other taxable disposition. Long-term capital gains of
non-corporate taxpayers are generally subject to a lower rate of taxation than
ordinary income. Capital losses generally may be used by a corporate taxpayer
only to offset capital gains, and by an individual taxpayer only to offset
capital gains and $3,000 of other income.
Information Reporting and Backup Withholding
In general, information reporting will apply to certain payments of (1)
principal and interest and (2) the proceeds from the sale of the transition
bonds, made to United States Holders other than certain exempt recipients (such
as corporations). Moreover, a 31% backup withholding tax will apply to those
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payments if the United States Holder: (1) fails to provide a taxpayer
identification number (a "TIN"); (2) furnishes an incorrect TIN; (3) is notified
by the IRS that it has failed to properly report payments of interest and
dividends; or (4) under certain circumstances, 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. Any amounts withheld under the
backup withholding rules generally will be allowed as a refund or credit against
that United States Holder's United States federal income tax liability provided
the required information is furnished to the IRS.
TAXATION OF NON-UNITED STATES HOLDERS
Interest
Subject to the discussion below concerning backup withholding, a Non-United
States Holder generally will not be subject to withholding of United States
federal income tax on interest it receives on a transition bond unless the
Non-United States Holder: (1) is a controlled foreign corporation (a "CFC"), as
defined in the Code, that is related to TXU Electric through stock ownership; or
(2) actually or constructively owns 10% or more of the total combined voting
power of all classes of stock of TXU Electric entitled to vote. To qualify for
the exemption from United States federal income taxation, the last United States
Person in the chain of payment prior to payment to a Non-United States Holder
(the "Withholding Agent") must have received (in the year in which a payment of
interest or principal occurs or in either of the two preceding years) a
statement that: (1) is signed by the Non-United States Holder under penalties of
perjury; (2) certifies that the Non-United States Holder is not a United States
Person; and (3) provides the name and address of the Non-United States Holder.
The statement may be made on a Form W-8 "Certificate of Foreign Status" or on a
substantially similar form. If a transition bond is held by a Non-United States
Holder through a securities clearing organization or certain other financial
institutions, that organization or institution may certify to the Withholding
Agent that such a statement has been received by it from the Non-United States
Holder and furnish to the Withholding Agent a copy thereof. Certain
modifications in certification procedures will apply for payments made after
December 31, 2000.
Even if none of the above requirements are satisfied, the Withholding Agent
will not withhold United States federal income tax on interest paid to a
Non-United States Holder if it receives IRS Form 4224 "Exemption From
Withholding of Taxation on Income Effectively Connected With the Conduct of a
Trade or Business in the United States" (or, after December 31, 2000, a Form
W-8) from that Non-United States Holder, establishing that the interest income
is effectively connected with the conduct of a trade or business in the United
States, unless the Withholding Agent has knowledge to the contrary. Interest
paid to a Non-United States Holder that is effectively connected with the
conduct by the holder of a trade or business in the United States is generally
taxed at graduated rates that are applicable to United States Persons. In the
case of a Non-United States Holder that is a corporation, the effectively
connected income may also be subject to the United States branch profits tax,
which is generally imposed on a foreign corporation on the deemed repatriation
from the United States of effectively connected earnings and profits, at a 30%
rate, unless the rate is reduced or eliminated by an applicable income tax
treaty and the Non-United States Holder is a qualified resident of the treaty
country.
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Sale, Exchange or Redemption of Transition Bonds
Generally, any gain realized by a Non-United States Holder upon the sale,
exchange, redemption or other taxable disposition of transition bonds will not
be subject to United States federal income tax, unless: (1) the gain is
effectively connected with a trade or business of the Non-United States Holder
in the United States; or (2) in the case of a Non-United States Holder who is an
individual, that Non-United States Holder is present in the United States for
183 days or more during the taxable year in which that sale, exchange,
redemption or other taxable disposition occurs. Certain exceptions may be
applicable, and an individual Non-United States Holder should consult his or her
own tax advisor regarding the application of these rules to his or her specific
situation.
Gain derived by a Non-United States Holder from the sale, exchange,
redemption or other taxable disposition of a transition bond that is effectively
connected with the conduct by the holder of a trade or business in the United
States is generally taxed at the graduated rates that are applicable to United
States Persons. In the case of a Non-United States Holder that is a corporation,
the effectively connected income may also be subject to the United States branch
profits tax. If any individual Non-United States Holder falls under clause (2)
above, the holder will be subject to a flat 30% tax on the gain derived from the
sale, exchange, redemption or other taxable disposition, which may be offset by
United States source capital losses recognized within the same taxable year as
the sale, exchange, redemption or other taxable disposition.
Information Reporting and Backup Withholding
No information reporting or backup withholding will be required with
respect to payments made by the Withholding Agent to Non-United States Holders
if a statement described under "Taxation of Non-United States Holders--Interest"
has been received and the payor does not have actual knowledge that the
beneficial owner of the transition bond is a United States Person.
Information reporting and backup withholding will not apply to payments of
interest on transition bonds made to or collected by a custodian, nominee, or
agent on behalf of the beneficial owner of those transition bonds if the
custodian, nominee, or agent has documentary evidence in its records that the
beneficial owner is not a United States Person and certain other conditions are
met, or the beneficial owner otherwise establishes an exemption.
The payment of the proceeds from the sale of transition bonds to or through
the United States office of a broker will be subject to information reporting
and backup withholding unless the holder of the transition bond certifies, under
penalties of perjury, that it is not a United States Person or otherwise
establishes an exemption. The payment of the proceeds from the sale of
transition bonds to or through the foreign office of a broker generally will not
be subject to backup withholding. However, in the case of the payment of the
proceeds from the sale of transition bonds made through the foreign office of a
broker that is: (1) a United States Person; (2) a CFC; (3) a foreign person 50%
or more of whose gross income is effectively connected with a United States
trade or business for a specified three year period; or (4) with respect to
payments made after December 31, 2000, a foreign partnership with certain
connections to the United States, that payment will be subject to information
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reporting unless the broker has in its records documentary evidence that the
holder of the transition bond is not a United States Person and certain other
conditions are met, or the holder otherwise establishes an exemption. Backup
withholding may apply to any payment that the broker is required to report if
the broker has actual knowledge that the payee is a United States Person.
For payments made after December 31, 2000, with respect to transition bonds
held by a foreign partnership, regulations require that the certification
described under "Taxation of Non-United States Holders--Interest" above be
provided by the partners, rather than by the foreign partnership, and that the
partnership provide certain information, including a TIN. A look-through rule
will apply in the case of tiered partnerships.
Non-United States Holders should consult their own tax advisors regarding
the application of information reporting and backup withholding in their
particular situations, the availability of an exemption therefrom, and the
procedures for obtaining such an exemption, if available. Any amounts withheld
under the backup withholding rules generally will be allowed as a refund or
credit against the Non-United States Holder's United States federal income tax
liability and may entitle the holder to a refund, provided the required
information is furnished to the IRS.
ERISA CONSIDERATIONS
Before making an investment in the transition bonds, a benefit plan
investor, including an individual retirement account investor, subject to ERISA
and/or the prohibited transaction provisions of the Code, or similar
restrictions (a "Benefit Plan") should review the following summary of issues
that should be considered by Benefit Plans.
THIS SUMMARY IS BASED ON THE PROVISIONS OF ERISA AND THE CODE (AND THE
RELATED REGULATIONS AND ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS) AS OF THE
DATE HEREOF. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND NO ASSURANCE CAN
BE GIVEN THAT FUTURE LEGISLATION, COURT DECISIONS, ADMINISTRATIVE REGULATIONS,
RULINGS OR ADMINISTRATIVE PRONOUNCEMENTS WILL NOT SIGNIFICANTLY MODIFY THE
REQUIREMENTS SUMMARIZED HEREIN. ANY SUCH CHANGES MAY BE RETROACTIVE AND MAY
THEREBY APPLY TO TRANSACTIONS ENTERED INTO PRIOR TO THE DATE OF THEIR ENACTMENT
OR RELEASE.
In contemplating an investment of a portion of a Benefit Plan in transition
bonds, the fiduciary of the Benefit Plan who is responsible for making that
investment should carefully consider, taking into account the facts and
circumstances of the Benefit Plan, whether that investment is consistent with
the fiduciary responsibility requirements of ERISA, including, but not limited
to, whether: (i) that investment is consistent with the prudence and
diversification requirements of ERISA; (ii) the fiduciary has authority to make
that investment under the appropriate governing instrument, Title I of ERISA and
other governing law; (iii) that investment is consistent with the fiduciary duty
of loyalty and is made solely in the interest of the participants in and
beneficiaries of the Benefit Plan; (iv) the acquisition and holding of a
transition bond does not result in a non-exempt "prohibited transaction" under
Section 406 of ERISA or Section 4975 of the Code; and (v) that investment does
not violate ERISA's prohibition on improper delegation of control over or
responsibility for "plan assets."
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PLAN ASSET ISSUES
In contemplating an investment in the transition bonds, fiduciaries of
Benefit Plans should also carefully consider the definition of the term "plan
assets" in Regulations Section 2510.3-101 promulgated by the United States
Department of Labor ("DOL") (the "Plan Asset Regulations"). Under the Plan Asset
Regulations, if a Plan invests in an "equity interest" in a corporation,
partnership, trust or another specified entity, the underlying assets and
properties of the entity may be deemed for purposes of ERISA and Section 4975 of
the Code to be assets of the investing Plan. According to the Plan Asset
Regulations, an interest is not an "equity interest" if it is treated as an
indebtedness under applicable local law and has no substantial equity features.
Although there is little statutory or regulatory guidance on this subject, and
there can be no assurances in this regard, it appears that the transition bonds
should not be treated as equity interests for purposes of the Plan Asset
Regulations. Accordingly, the assets of the Borrower should not be treated as
the assets of Plans investing in the transition bonds.
If the transition bonds are considered "equity interests," the assets of
Transition Bond Company might be deemed to be "plan assets," and a portion of
those assets would be attributable to each of the Benefit Plans that have
purchased transition bonds. In this event, with respect to those Benefit Plans
subject to Title I of ERISA that have purchased transition bonds, the prudence,
diversification, exclusive benefit and other requirements of ERISA generally
applicable to investments by those Benefit Plans would extend to the assets of
Transition Bond Company.
PROHIBITED TRANSACTIONS
In addition, ERISA and the Code generally prohibit certain transactions
involving the assets of a Benefit Plan and persons who have certain specified
relationships to the Benefit Plan ("parties in interest" as defined in ERISA or
"disqualified persons" as defined in the Code (collectively, "Parties in
Interest")). If the assets of Transition Bond Company should be deemed to be
"plan assets," transition charges received by the servicer would be deemed, for
purposes of the prohibited transaction rules, to flow indirectly from customers
to Benefit Plans that own transition bonds. Thus, if one or more customers were
Parties in Interest with respect to a Benefit Plan that owned that class or
series of transition bonds, this holding could be deemed to constitute a
prohibited transfer of property between a Plan and any Party in Interest with
respect to the Plan.
ADDITIONAL PROHIBITED TRANSACTION ISSUES
Regardless of whether the assets of Transition Bond Company are deemed to
be "plan assets," the acquisition of transition bonds by a Benefit Plan could,
depending upon the facts and circumstances of that acquisition, be a prohibited
transaction under ERISA or the Code if TXU Electric, the underwriters or any of
their affiliates, are Parties in Interest with respect to the Benefit Plan.
However, such a potential prohibited transaction may be treated as exempt under
ERISA and the Code if the transition bonds were acquired pursuant to and in
accordance with one or more "class exemptions" issued by the DOL, such as
Prohibited Transaction Exemption ("PTE") 84-14 (a class exemption for certain
transactions determined by independent qualified professional asset managers),
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PTE 90-1 (a class exemption for certain transactions involving insurance company
pooled separate accounts), PTE 91-38 (a class exemption for certain transactions
involving bank collective investment funds), PTE 95-60 (a class exemption for
certain transactions involving insurance company general accounts) or PTE 96-23
(a class exemption for certain transactions determined by in-house asset
managers). If the purchase of transition bonds were to be a non-exempt
prohibited transaction, the purchase might have to be rescinded.
Each of these PTEs contains conditions and limitations on its application.
Fiduciaries of Benefit Plans which consider purchasing Transition Bonds in
reliance on any of these or other PTEs should carefully review those PTEs to
assure that one of them is applicable.
A BENEFIT PLAN INVESTOR SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED
THAT THE USE OF PLAN ASSETS OF THE PLAN TO PURCHASE AND HOLD THE TRANSITION
BONDS DOES NOT AND WILL NOT CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT
PROHIBITED TRANSACTION IN VIOLATION OF SECTION 406 OR 407 OF ERISA OR SECTION
4975 OF THE CODE.
In this regard, any potential investor that is an insurance company
investing assets out of its general account should consider the United States
Supreme Court's decision in John Hancock Mutual Life Insurance Co. vs. Harris
-------------------------------------------------
Trust and Savings Bank, 114 S.Ct. 517 (1993), which in certain circumstances
- ----------------------
treats those general account assets as assets of a Benefit Plan for purposes of
the fiduciary responsibility provisions of ERISA and the prohibited transaction
rules of ERISA and the Code.
In addition, the United States Congress amended Section 401(c) of ERISA to
require the DOL to issue regulations clarifying which assets of the insurer
should be considered plan assets when an insurance contract or policy is issued
to an employee benefit plan and that contract or policy is supported by the
assets of the insurer. Pursuant to this directive, the DOL issued proposed
regulations ss. 2550.401c-1 on December 15, 1997. Those regulations apply to
insurance policies or contracts issued on or before December 31, 1998
("transition policies"). The proposed regulations provide that no person shall
be subject to liability under Parts 1 and 4 of Title I of ERISA (generally,
reporting, fiduciary and prohibited transaction violations) or the excise tax
provisions of Section 4975 of the Code (pertaining to prohibited transactions)
for any conduct occurring before the effective date of the regulation on the
basis of a claim that the assets of an insurer (other than assets held in a
separate account) constitute plan assets. The effective date of the regulation
is 18 months after publication of final regulations in the Federal Register.
Those regulations have not yet been published.
The DOL regulations do not apply to insurance policies or contracts issued
after December 31, 1998. Nor does the regulation apply to certain actions
brought by the DOL for violation of criminal laws, civil actions commenced
before November 7, 1995 or to violations of state laws regulating insurance.
Prohibited Transaction Exemption 95-60 is not limited to policies issued on or
before December 31, 1998.
Insurance companies which consider purchasing transition bonds for their
general accounts should carefully review PTE 95-60 and the DOL regulations for
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information on their scope and limitations. Insurance companies should also
consider whether any state laws regulating insurance affect the purchase of
Transition Bonds.
IMPORTANCE OF OBTAINING PROFESSIONAL ADVICE
PROSPECTIVE INVESTORS THAT ARE BENEFIT PLANS ARE STRONGLY URGED TO CONSULT
THEIR OWN ERISA AND TAX ADVISORS REGARDING THE CONSEQUENCES OF AN INVESTMENT IN
THE TRANSITION BONDS.
The sale of Transition Bonds to a Plan shall not be deemed a representation
by TXU Electric, Transition Bond Company or the underwriters that this
investment meets all relevant legal requirements with respect to Benefit Plans
generally or any particular Benefit Plan.
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public reoffering
by the underwriters. The transition bonds may also be sold to or through any
other underwriting arrangement as may be specified in the prospectus supplement
or may be offered or placed either directly or through agents. Transition Bond
Company and the indenture trustee intend that transition bonds will be offered
through various methods from time to time. Transition Bond Company also intends
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular series of transition bonds may be made
through a combination of these methods.
The distribution of transition bonds may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
The transition bonds may be offered through one or more different methods,
including offerings through underwriters. It is not anticipated that any of the
transition bonds will be listed on any securities exchange. There can be no
assurance that a secondary market for any series of transition bonds will
develop or, if one does develop, that it will continue.
Compensation to Underwriters. In connection with the sale of the transition
bonds, underwriters or agents may receive compensation in the form of discounts,
concessions or commissions. Underwriters may sell transition bonds to particular
dealers at prices less a concession. Underwriters may allow, and these dealers
may reallow, a concession to other dealers. Underwriters, dealers and agents
that participate in the distribution of the transition bonds of a series may be
deemed to be underwriters. Any discounts or commissions received by the
underwriters from Transition Bond Company and any profit on the resale of the
transition bonds by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. These underwriters or agents will
be identified, and any compensation received from Transition Bond Company will
be described, in the prospectus supplement.
Other Distribution Issues. Under agreements which may be entered into by
TXU Electric, Transition Bond Company and the indenture trustee, underwriters
and agents who participate in the distribution of the transition bonds may be
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entitled to indemnification by TXU Electric and Transition Bond Company against
liabilities specified therein, including under the Securities Act of 1933. The
underwriters may, from time to time, buy and sell the transition bonds, but
there can be no assurance that a secondary market will develop and there is no
assurance that this market, if established, will continue.
RATINGS FOR THE TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the
transition bonds that each series or class receive the ratings indicated in the
prospectus supplement.
Limitations of Security Ratings. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency. No person is obligated to maintain the
rating on any transition bonds, and, accordingly, there can be no assurance that
the ratings assigned to any series or class of transition bonds upon initial
issuance will not be lowered or withdrawn by a rating agency at any time
thereafter. If a rating of any series or class of transition bonds is revised or
withdrawn, the liquidity of this class of transition bonds may be adversely
affected. In general, ratings address credit risk and do not represent any
assessment of any particular rate of principal payments on the transition bonds
other than the payment in full of each series or class of transition bonds by
the applicable Final Maturity Date of any series or class of transition bonds.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to Transition Bond Company and the issuance of
the transition bonds will be passed upon for Transition Bond Company by Thelen
Reid & Priest LLP, New York, New York and Worsham, Forsythe & Wooldridge,
L.L.P., Dallas, Texas, and for the underwriters by Winthrop, Stimson, Putnam &
Roberts, New York, New York. Some legal matters relating to TXU Electric and
Transition Bond Company will be passed upon for TXU Electric and Transition Bond
Company by Thelen Reid & Priest LLP and Worsham, Forsythe & Wooldridge, L.L.P.
Some legal matters relating to the federal tax consequences of the issuance of
the transition bonds will be passed upon for Transition Bond Company by Thelen
Reid & Priest LLP.
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APPENDIX A
GLOSSARY OF DEFINED TERMS
The following definitions are used in this prospectus and in any
accompanying prospectus supplement:
APPLICABLE RATING AGENCY means any rating agency which has, at the request
of Transition Bond Company, rated the transition bonds of any class or series at
the time of issuance thereof. If no applicable rating agency remains in
existence, then the term means a nationally recognized statistical rating
organization or other comparable person designated by Transition Bond Company.
BASIC DOCUMENTS means, the sale agreement, the servicing agreement, the
bills of sale for the transition property pursuant to the sale agreement, the
administration agreement between Transition Bond Company and TXU Electric, the
indenture, and the amended and restated limited liability company agreement of
Transition Bond Company and the certificate of formation of Transition Bond
Company.
BUSINESS DAY means any day other than a Saturday or Sunday or a day on
which banking institutions in the City of Dallas, Texas, or in the City of New
York are required or authorized by law or executive order to remain closed.
COLLATERAL means the transition property and all other property pledged to
the indenture trustee by Transition Bond Company as collateral security for the
transition bonds pursuant to the indenture.
DTC means the Depository Trust Company.
DUFF & PHELPS means Duff & Phelps Credit Rating Co., or its successors.
ERISA means the Employee Retirement Security Act of 1974.
EXPECTED AMORTIZATION SCHEDULE means a schedule of the anticipated
outstanding principal balance of the transition bonds of each series and, if
applicable, each class, as specified in the corresponding supplement to the
indenture.
EXPECTED FINAL PAYMENT DATE for each series or class of transition bonds
means the date when all principal is scheduled to be paid for that series or
class in accordance with the Expected Amortization Schedule.
FINAL MATURITY DATE means, for a series or class of transition bonds, the
date by which all principal and interest on the transition bonds is required to
be paid.
FITCH IBCA means Fitch IBCA, Inc., or its successor.
GENERATION ASSETS means all assets associated with the production of
electricity, including generation plants, electrical interconnections of the
generation plant to the transmission system, fuel contracts, fuel transportation
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contracts, water contracts, lands, surface or subsurface water rights,
emissions-related allowances, and gas pipeline interconnections.
MOODY'S means Moody's Investors Service Inc., or its successor.
OVERCOLLATERALIZATION AMOUNT means, with respect to any series, an amount
to be funded over the life of the transition bonds for that series as specified
in one or more prospectus supplements relating to that series which in aggregate
will equal the amount stated in the prospectus supplement or prospectus
supplements for that series.
PROJECTED TRANSITION BOND BALANCE means, for each series or class of
transition bonds and each payment date, the projected aggregate outstanding
principal balance for that series or class as specified for that payment date in
the Expected Amortization Schedule.
PUC means the Public Utility Commission of Texas.
QUALIFIED COSTS means 100% of an electric utility's regulatory assets and
75% of its stranded costs, together with the costs of issuing, supporting, and
servicing transition bonds and any costs of retiring and refunding the electric
utility's existing debt and equity securities in connection with the issuance of
transition bonds. The term includes the costs to the PUC of acquiring
professional services for the purpose of evaluating proposed transactions under
the Restructuring Act.
RATING AGENCY CONDITION means the notification in writing by each
applicable rating agency to the indenture trustee and Transition Bond Company
that a specified action will not result in a reduction or withdrawal of its then
current rating of any outstanding series or class of transition bonds.
REQUIRED CAPITAL AMOUNT means, with respect to a series of transition
bonds, the amounts deposited by Transition Bond Company in the capital
subaccount for that series upon the issuance of transition bonds of that series,
as specified in the prospectus supplement or prospectus supplements relating to
transition bonds of that series.
RESTRUCTURING ACT means Texas Senate Bill No. 7, the Texas electric utility
restructuring act, as enacted by the Texas legislature in June 1999, and which
became effective on September 1, 1999.
RETAIL ELECTRIC PROVIDERS means a person that sells electric energy to
retail customers in Texas.
S&P means Standard and Poor's Rating Group, a division of The McGraw-Hill
Companies Inc., or its successors.
SCHEDULED OVERCOLLATERALIZATION LEVEL means in relation to any payment date
for a series of transition bonds the amount of funds required by the indenture
to be on deposit in the overcollateralization subaccount for that series on that
payment date.
A-2
TRANSITION BONDS means, with respect to TXU Electric and Transition Bond
Company, any of the transition bonds (as defined in the Restructuring Act)
issued by Transition Bond Company pursuant to the indenture.
TRANSITION CHARGES means, with respect to TXU Electric, the amounts
authorized to be imposed on all customer bills and collected, through a
non-bypassable mechanism by TXU Electric its successor, an assignee, or other
collection agent, to recover Qualified Costs pursuant to the PUC Order.
TRANSITION PROPERTY means, with respect to TXU Electric and Transition Bond
Company, the right created under the Restructuring Act representing the rights
and interests of TXU Electric under the PUC Order, including the right to
impose, collect, and receive the transition charges authorized in the PUC Order.
Under the Restructuring Act, transition property does not come into existence
until TXU Electric sells its rights under the PUC Order to Transition Bond
Company pursuant to the sale agreement. However, for convenience of reference in
this prospectus, this sale is sometimes referred to as the sale of transition
property.
TXU ELECTRIC means TXU Electric Company.
TXU CORP means Texas Utilities Company (doing business as TXU Corp), the
parent holding company of TXU Electric.
UNITED STATES GOVERNMENT OBLIGATIONS means direct obligations, or
certificates representing an ownership interest in those obligations, of the
United States, including any agency or instrumentality thereof, for the payment
of which the full faith and credit of the United States is pledged and which are
not callable at Transition Bond Company's option.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC Filing Fees ..............................................$ 264
Printing and Engraving Expenses*..............................$ **
Accounting Fees and Expenses*.................................$ **
Legal Fees and Expenses* .....................................$ **
Fees and Expenses of Trustee* ................................$ **
Rating Agency Fees* ..........................................$ **
Public Utility Commission Application and Related Fees* ......$ **
Miscellaneous* ...............................................$ **
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Total Expenses* ..............................................$ **
* Estimated.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 TXU Transition Bond Company 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.
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ITEM 16. EXHIBITS.
Exhibit
Number Description of Exhibits
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*1 - Form of Underwriting Agreement.
4(a) - Limited Liability Company Agreement of TXU Transition Bond
Company LLC.
*4(b) - Form of Amended and Restated Limited Liability Company
Agreement for TXU Transition Bond
Company LLC.
4(c) - Certificate of Formation of TXU Transition Bond Company LLC.
*4(d) - Form of Indenture.
*4(e) - Form of transition bonds.
*5(a) - Opinion of Thelen Reid & Priest LLP relating to legality of
the transition bonds
*5(b) - Opinion of Worsham, Forsythe & Wooldridge, L.L.P.
relating to legality of the transition bonds.
*8(a) - Opinion of Thelen Reid & Priest LLP with respect to material
United States federal tax matters.
*10(a) - Form of Sale Agreement.
*10(b) - Form of Servicing Agreement.
*23(a) - Consents of Thelen Reid & Priest LLP and Worsham, Forsythe &
Wooldridge, L.L.P. are contained in Exhibits 5(a) and 5(b).
*23(b) - Consent of Deloitte & Touche LLP.
24 - Power of Attorney (included on the signature page of this
registration statement).
*25 - Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of The Bank of New York, as a Trustee under
the Indenture.
*27 - Financial Data Schedule.
*99(a) - PUC Order.
*99(b) - Internal Revenue Service Private Letter Ruling pertaining
to the transition bonds.
* to be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of TXU Transition Bond Company LLC
(the "Issuer") hereby undertakes as follows:
(a) (1) to file, during any period in which offers or sales are being made,
a post-effective amendment to the registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) of the Securities Act of 1933,
as amended, if, in the aggregate, the changes in volume and price represent no
more than a twenty percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change in this information in the registration
statement; provided, however, that (a)(1)(i) and (a)(i)(ii) will not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed pursuant to Section 13 or
II-2
<PAGE>
Section 15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each relevant post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of these securities at that time shall be deemed to be the
initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended)
with respect to the Issuer that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 15 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission this indemnification is against public
policy as expressed in the Act and is, theretofore, unenforceable. In the event
that a claim for indemnification against these liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by the director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
this indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of this
issue.
(d) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
II-3
<PAGE>
POWER OF ATTORNEY
EACH MANAGER OF THE REGISTRANT WHOSE SIGNATURE APPEARS BELOW HEREBY
APPOINTS THE AGENTS FOR SERVICE NAMED IN THIS REGISTRATION STATEMENT, AND EACH
OF THEM SEVERALLY, AS HIS OR HER ATTORNEY-IN-FACT TO SIGN IN HIS OR HER NAME AND
ON HIS OR HER BEHALF, IN ANY AND ALL CAPACITIES STATED BELOW, AND TO FILE WITH
THE SEC, ANY AND ALL AMENDMENTS, INCLUDING POST-EFFECTIVE AMENDMENTS, TO THIS
REGISTRATION STATEMENT, AND THE REGISTRANT HEREBY ALSO APPOINTS EACH SUCH AGENT
FOR SERVICE AS ITS ATTORNEY-IN-FACT WITH THE AUTHORITY TO SIGN AND FILE ANY SUCH
AMENDMENTS IN ITS NAME AND BEHALF.
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 THE 1ST DAY OF DECEMBER,
1999.
TXU TRANSITION BOND COMPANY LLC
By: /s/ Marc D. Moseley
------------------------------
Marc D. Moseley
Manager
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- --------- ----- ----
- --------------------------
Kirk R. Oliver Manager December __, 1999
/s/ Marc D. Moseley
- --------------------------
Marc D. Moseley Manager December 1, 1999
/s/ Diane J. Kubin
- --------------------------
Diane J. Kubin Manager December 1, 1999
II-4
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
4(a) - Limited Liability Company Agreement of TXU Transition Bond
Company LLC.
4(c) - Certificate of Formation of TXU Transition Bond Company LLC.
24 - Power of Attorney (included on the signature page of this
registration statement).
Exhibit 4(a)
LIMITED LIABILITY COMPANY AGREEMENT
OF
TXU TRANSITION BOND COMPANY LLC
A DELAWARE LIMITED LIABILITY COMPANY
(THE "COMPANY")
ARTICLE I
GENERAL PROVISIONS
SECTION 1.01 Registered Office. The registered office of the Company
-----------------
in this state shall be Corporation Service Company, 1013 Centre Road,
Wilmington, Delaware 19805. The member of the Company (the "Member") may change
said registered office from one location to another in the State of Delaware.
SECTION 1.02 Other Offices. The Company may have an office at Energy
-------------
Plaza, 1601 Bryan Street, Suite 2-023, Dallas, Texas 75201 or at any other
offices that may at any time be established by the Member at any place or places
within or outside the State of Delaware.
SECTION 1.03 Purpose; Nature of Business Permitted; Powers. The
---------------------------------------------
Company is organized primarily for the object and purpose of purchasing
transition property, investing in investment securities, issuing transition
bonds and entering into related credit enhancement transactions. The Company
shall possess and may exercise all the powers and privileges granted by the
Delaware Limited Liability Company Act of the State of Delaware (the "Act") or
by any other law or by this Agreement, together with any powers incidental
thereto, insofar as such powers and privileges are necessary or convenient to
the conduct, promotion or attainment of the business purposes or activities of
the Company.
SECTION 1.04 Limited Liability Company Agreement; Certificate of
---------------------------------------------------
Formation. This document (the "Agreement") shall constitute a "limited liability
- ---------
company agreement" within the meaning of the Act. The Certificate of Formation
of this Company (the "Certificate of Formation") was filed with the Secretary of
State of the State of Delaware on November 30, 1999.
ARTICLE II
CAPITAL
SECTION 2.01 Initial Capital. The initial capital of the Company
---------------
shall be the sum of cash contributed to the Company by the Member in the amount
<PAGE>
set out opposite the name of the Member on Schedule A hereto, as amended from
time to time and incorporated herein by reference.
SECTION 2.02 Capital Account. A Capital Account shall be established
---------------
and maintained for the Member on the Company's books (the "Capital Account").
SECTION 2.03 Interest. No interest shall be paid or credited to the
--------
Member on its Capital Account or upon any undistributed profits left on deposit
with the Company.
ARTICLE III
MEMBER
SECTION 3.01 Powers. Subject to the provisions of the Certificate of
------
Formation, this Agreement and the Act, all powers shall be exercised by or under
the authority of, and the business and affairs of the Company shall be
controlled by, the Member pursuant to Section 3.05. The Member may delegate any
or all such powers to the Managers. Without prejudice to such general powers,
but subject to the same limitations, it is hereby expressly declared that the
Member shall have the following powers:
First - To select and remove the Managers and all officers, agents and
employees of the Company, prescribe such powers and duties for them as may be
consistent with the Act and other applicable law, the Certificate of Formation
and this Agreement, fix their compensation, and require from them security for
faithful service.
Second - To conduct, manage and control the affairs and business of
the Company, and to make such rules and regulations therefor as are consistent
with the Act and other applicable law, the Certificate of Formation and this
Agreement.
Third - To change the registered office of the Company in Delaware
from one location to another; to fix and locate from time to time one or more
other offices of the Company; and to designate any place within or without the
State of Delaware for the conduct of the business of the Company.
SECTION 3.02 Compensation of Member. The Company shall have
----------------------
authority to pay to the Member reasonable compensation for the Member's services
to the Company. It is understood that the compensation paid to the Member under
the provisions of this Section shall be determined without regard to the income
of the Company, shall not be deemed to constitute distributions to the recipient
of any profit, loss or capital of the Company and shall be considered as an
operating expense of the Company.
SECTION 3.03 Bank Accounts. From time to time, the Member may
-------------
designate a person or persons, whether such persons be the Member or not, to
open and maintain one or more bank accounts, to rent safety deposit boxes or
vaults, to sign checks, written directions, or other instruments to withdraw all
or any part of the funds belonging to the Company and on deposit in any savings
account or checking account, to negotiate and purchase certificates of deposit,
-2-
<PAGE>
to obtain access to the Company safety deposit box or boxes, and generally to
sign such forms on behalf of the Company as may be required to conduct the
banking activities of the Company.
SECTION 3.04 Other Ventures. It is expressly agreed that the Member
--------------
and any affiliates, officers, directors, managers, stockholders, partners or
employees of the Member, may engage in other business ventures of every nature
and description, whether or not in competition with the Company, independently
or with others, and the Company shall not have any rights in and to any
independent venture or activity or the income or profits derived therefrom.
SECTION 3.05 Actions by the Member. All actions of the Member may be
---------------------
taken by written resolution of the Member which shall be signed by the Member or
on behalf of the Member by an authorized officer of the Member and filed with
the records of the Company.
ARTICLE IV
COMMON INTEREST
SECTION 4.01 General. "Common Interest" means the interest in the
-------
Company. The Common Interest of the Member in the Company constitutes personal
property and shall be freely transferable upon registration of such transfer on
the books of the Company in accordance with the procedures established for such
purpose by the Managers of the Company. The Common Interest of the Member in the
Company shall be evidenced by a certificate in the form set forth in Schedule B
hereto.
SECTION 4.02 Distributions. The Member shall be entitled to receive,
-------------
out of the assets of the Company legally available therefor, when, as and if
declared by the Managers, distributions payable in cash in such amounts, if any,
as the Managers shall declare.
SECTION 4.03 Rights on Liquidation, Dissolution or Winding Up.
------------------------------------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, the Member shall be entitled to all remaining assets of the
Company available for distribution to the Member after payment of all
liabilities, debts and obligations of the Company.
(b) Neither the sale of all or substantially all of the property or business
of the Company, nor the merger or consolidation of the Company into or
with another Company or other entity, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, for
the purpose of this Section 4.03.
SECTION 4.04 Redemption. The Common Interest shall not be
----------
redeemable.
SECTION 4.05 Voting Rights. The Member shall have the sole right to
-------------
vote on all matters as to which members of a limited liability company shall be
entitled to vote pursuant to the Act and other applicable law.
-3-
<PAGE>
ARTICLE V
MANAGERS
SECTION 5.01 Managers.
--------
(a) The management of the Company's business shall be vested in the managers
of the Company (the "Managers") who shall be appointed by the Member.
The Member hereby appoints the persons identified on Schedule C to
initially be the Managers of the Company.
(b) Each Manager shall be appointed by the Member and shall hold office for
the term for which appointed and until a successor has been appointed
and qualified.
(c) The Managers shall be obliged to devote only as much of their time to
the Company's business as shall be reasonably required in light of the
Company's business and objectives. A Manager shall perform his or her
duties as a Manager in good faith, in a manner he or she reasonably
believes to be in the best interests of the Company, and with such care
as an ordinarily prudent person in a like position would use under
similar circumstances.
(d) The Managers shall act by the affirmative vote of a majority of the
Managers. Each Manager shall have the authority to sign agreements and
other instruments on behalf of the Company without the joinder of any
other Manager.
(e) Any action may be taken by the Managers without a meeting if authorized
by the written consent of a majority of the Managers.
(f) Every Manager is an agent of the Company for the purpose of its
business, and the act of every Manager, including the execution in the
Company name of any instrument for carrying on the business of the
Company, binds the Company, unless such act is in contravention of the
Certificate of Formation or this Agreement or unless the Manager so
acting otherwise lacks the authority to act for the Company and the
person with whom he or she is dealing has knowledge of the fact that he
or she has no such authority.
SECTION 5.02 Powers of the Managers. The Managers shall have the
----------------------
right and authority to take all actions which the Managers deem necessary,
useful or appropriate for the day-to-day management and conduct of the Company's
business.
The Managers may exercise all powers of the Company and do all such
lawful acts and things as are not by the Act, other applicable law, the
Certificate of Formation or this Agreement directed or required to be exercised
or done by the Member. All instruments, contracts, agreements and documents
providing for the acquisition or disposition of property of the Company shall be
valid and binding on the Company if executed by one or more of the Managers. All
instruments, contracts, agreements and documents of whatsoever type executed on
behalf of the Company shall be executed in the name of the Company by one or
more Managers.
-4-
<PAGE>
SECTION 5.03 Compensation. The Company may pay to any Manager
------------
compensation for such Manager's services rendered to the Company. Such
compensation shall be treated as expenses of the Company and shall not be deemed
to constitute distributions to the recipient of any profit, loss or capital of
the Company.
SECTION 5.04 Removal of Managers.
-------------------
(i) The Member may remove any Manager with or without cause at any time.
(ii) Any removal of a Manager shall become effective on such date as may be
specified by the Member and in a notice delivered to any remaining
Managers or the Manager appointed to replace the removed Manager (except
that it shall not be effective on a date earlier than the date such
notice is delivered to the remaining or newly-appointed Manager). Should
a Manager be removed who is also the Member, the Member shall continue
to participate in the Company as the Member and receive its share of the
Company's income, gains, losses, deductions and credits pursuant to this
Agreement.
SECTION 5.05 Resignation of Manager. A Manager may resign as a
----------------------
Manager at any time by notice to the Member. Such resignation shall be effective
as set forth in such notice.
SECTION 5.06 Vacancies. Any vacancies among the Managers may be
---------
filled by the Member.
ARTICLE VI
ALLOCATIONS OF PROFITS AND LOSSES
All profits and losses of the Company for any fiscal period shall be
allocated and credited to the Member's Common Interest.
ARTICLE VII
EXPENSES
Except as otherwise provided in this Agreement, the Company shall be
responsible for all expenses and the allocation thereof including without
limitation:
(a) all expenses incurred by the Member or its affiliates in organizing the
Company;
(b) all expenses related to the payment of the principal of and interest on
the transition bonds issued by the Company;
(c) all expenses related to the business of the Company and all routine
administrative expenses of the Company, including the maintenance of
books and records of the Company, the preparation and dispatch to the
Member of checks, financial reports, tax returns and notices required
pursuant to this Agreement;
-5-
<PAGE>
(d) all expenses incurred in connection with any litigation or arbitration
involving the Company (including the cost of any investigation and
preparation) and the amount of any judgment or settlement paid in
connection therewith;
(e) all expenses for indemnity or contribution payable by the Company to any
person;
(f) all expenses incurred in connection with the collection of amounts due
to the Company from any person;
(g) all expenses incurred in connection with the preparation of amendments
to this Agreement;
(h) all expenses incurred in connection with the liquidation, dissolution
and winding up of the Company; and
(i) all expenses otherwise allocated in good faith to the Company by the
Managers.
ARTICLE VIII
ACCOUNTING AND RECORDS
SECTION 8.01 Records and Accounting. The books and records of the
----------------------
Company shall reflect all Company transactions and shall be appropriate and
adequate for the Company's business. The fiscal year of the Company for
financial reporting and for federal income tax purposes shall be the calendar
year.
SECTION 8.02 Access to Accounting Records. All books and records of
----------------------------
the Company shall be maintained at any office of the Company or at the Company's
principal place of business, and the Member, and its duly authorized
representative, shall have access to them at such office of the Company and the
right to inspect and copy them at reasonable times.
SECTION 8.03 Tax Elections. The Managers shall make the following
-------------
elections on behalf of the Company:
(a) To elect the calendar year as the Company's fiscal year if permitted by
applicable law;
(b) To elect the accrual method of accounting;
(c) To elect to treat all organization and start-up costs of the Company as
deferred expenses amortizable over 60 months under Section 195 of the
Internal Revenue Code of 1986, as amended; and
(d) To elect with respect to such other federal, state and local tax matters
as the Managers shall agree upon from time to time.
SECTION 8.04 Annual Tax Information. The Managers shall cause the
----------------------
Company to deliver to the Member all information necessary for the preparation
of the Member's federal income tax return.
-6-
<PAGE>
SECTION 8.05 Tax Matters Member. The Member shall communicate and
------------------
negotiate with the Internal Revenue Service on any tax matter on behalf of the
Member and the Company.
ARTICLE IX
PERPETUAL EXISTENCE
The Company shall have a perpetual existence. So long as any of the
Company's transition bonds shall remain outstanding, the Member shall not be
entitled to consent to the liquidation, dissolution or winding up of the
Company.
ARTICLE X
INDEMNIFICATION
SECTION 10.01 Indemnity. Subject to the provisions of Section 10.04
---------
hereof, the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the Company, by reason of the fact that
such person is or was a Manager, Member, officer, controlling person, employee,
legal representative or agent of the Company, or is or was serving at the
request of the Company as a member, manager, director, officer, partner,
shareholder, controlling person, employee, legal representative or agent of
another limited liability company, partnership, corporation, joint venture,
trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with the action, suit or proceeding if such person
acted in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to a
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
SECTION 10.02 Indemnity for Actions By or In the Right of the
-----------------------------------------------
Company. Subject to the provisions of Section 10.04 hereof, the Company shall
- -------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he or she
is or was a Member, Manager, officer, controlling person, employee, legal
representative or agent of the Company, or is or was serving at the request of
the Company as a member, manager, director, officer, partner, shareholder,
controlling person, employee, legal representative or agent of another limited
liability company, corporation, partnership, joint venture, trust or other
enterprise, against expenses, including amounts paid in settlement and
attorneys' fees actually and reasonably incurred by such person in connection
with the defense or settlement of the actions or suit if such person acted in
good faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Company. Indemnification may not be made
for any claim, issue or matter as to which such person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the Company or for amounts paid in settlement to the Company,
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction determines upon application
-7-
<PAGE>
that in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems proper.
SECTION 10.03 Indemnity If Successful. The Company may indemnify a
-----------------------
Member, Manager, officer, employee or agent of the Company against expenses,
including attorneys' fees, actually and reasonably incurred by him or her in
connection with the defense of any action, suit or proceeding referred to in
Sections 10.01 and 10.02 or in defense of any claim, issue or matter therein, to
the extent that such person or entity has been successful on the merits.
SECTION 10.04 Expenses. Any indemnification under Sections 10.01 and
--------
10.02, as well as the advance payment of expenses permitted under Section 10.05
unless ordered by a court or advanced pursuant to Section 10.05 below, must be
made by the Company only as authorized in the specific case upon a determination
that indemnification of the Member, Manager, officer, employee or agent is
proper in the circumstances. The determination must be made:
(a) By the Member if the Member was not a party to the act, suit or
proceeding; or
(b) If the Member was a party to the act, suit or proceeding by independent
legal counsel in a written opinion.
SECTION 10.05 Advance Payment of Expenses. The expenses of the Member
---------------------------
and each Manager incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Company as they are incurred and in advance of the
final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the Member or such Manager to repay the amount if
it is ultimately determined by a court of competent jurisdiction that the Member
or such Manager is not entitled to be indemnified by the Company. The provisions
of this subsection do not affect any rights to advancement of expenses to which
personnel other than the Member or the Managers may be entitled under any
contract or otherwise by law.
SECTION 10.06 Other Arrangements Not Excluded. The indemnification
-------------------------------
and advancement of expenses authorized in or ordered by a court pursuant to this
Article 10:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
Certificate of Formation or any agreement, decision of the Member or
otherwise, for either an action of a Member, Manager, officer, employee
or agent in the official capacity of such person or an action in another
capacity while holding such position, except that indemnification,
unless ordered by a court pursuant to Section 10.05 above, may not be
made to or on behalf of the Member or any Manager if a final
adjudication established that such acts or omissions involved
intentional misconduct, fraud or a knowing violation of the law and was
material to the cause of action; and
(b) Continues for a person who has ceased to be a Member, Manager, officer,
employee or agent and inures to the benefit of the successors, heirs,
executors and administrators of such a person.
-8-
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.01 Amendments. This Agreement may be amended by written
----------
instrument executed by the Member and the Company.
SECTION 11.02 Applicable Law. This Agreement, and its application,
--------------
shall be governed by the laws of the State of Delaware.
SECTION 11.03 Headings. The headings in this Agreement are inserted
--------
for convenience only and are in no way intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provisions
contained herein.
SECTION 11.04 Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance shall be deemed invalid,
illegal or unenforceable to any extent, the remainder of this Agreement and the
application thereof shall not be affected and shall be enforceable to the
fullest extent permitted by law.
SECTION 11.05 Assigns. Each and all of the covenants, terms,
-------
provisions and agreements contained in this Agreement shall be binding upon and
inure to the benefit of the Member, and its successors and assigns.
IN WITNESS WHEREOF, this Agreement is hereby executed by the
undersigned as the Member of the Company as of November 30, 1999.
TXU ELECTRIC COMPANY
By: /s/ Kirk R. Oliver
-------------------------------------
Name: Kirk R. Oliver
Title: Treasurer
-9-
<PAGE>
SCHEDULE A
Schedule of Capital Contributions of Member
COMMON INTEREST
COMMON
CAPITAL INTEREST
MEMBER'S NAME CONTRIBUTION PERCENTAGE CAPITAL ACCOUNT
TXU Electric Company $1,000 100% $1,000
<PAGE>
SCHEDULE B
Form of Common Interest Certificate
CERTIFICATE OF COMMON INTEREST
OF
TXU TRANSITION BOND COMPANY LLC
A LIMITED LIABILITY COMPANY
This Certificate is issued and shall be held subject to the provisions of the
Certificate of Formation of TXU TRANSITION BOND COMPANY LLC, a limited liability
company organized under the laws of the State of Delaware (the "Company"), filed
on November 30, 1999 with the Secretary of State of the State of Delaware, and
the Limited Liability Company Agreement, dated as of November 30, 1999, of the
Company, as each may be amended from time to time.
This Certificate of Common Interest certifies that TXU Electric Company is the
registered holder of the entire Common Interest of the Company, which Common
Interest shall be transferable only on the books of the Company by the holder
hereof in person or by a duly authorized attorney upon surrender of this
Certificate with a proper endorsement.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by one
of its duly authorized Managers this 30th day of November, 1999.
TXU ELECTRIC COMPANY
By:
-------------------------------------
Name:
Title:
<PAGE>
TXU TRANSITION BOND COMPANY LLC
For Value Received the undersigned hereby sells, assigns and transfers
unto
--------------------------------------------------------------------------
the entire Common Interest of the Company represented by the within Certificate
and does hereby irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney, to transfer said Common Interest on the books of the Company with full
power of substitution in the premises.
Dated:
-----------------------
----------------------------------------
<PAGE>
SCHEDULE C
Initial Managers
Kirk R. Oliver
Marc D. Moseley
Diane J. Kubin
Exhibit 4(c)
CERTIFICATE OF FORMATION
OF
TXU TRANSITION BOND COMPANY LLC
(a) The name of the limited liability company is TXU Transition Bond
Company LLC.
(b) The address of its registered office in the State of Delaware is
Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The
name of its registered agent at such address is Corporation Service Company.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation of TXU Transition Bond Company LLC this 30th day of November, 1999.
TXU TRANSITION BOND COMPANY LLC
By: /s/ Kirk R. Oliver
-------------------------------------
Name: Kirk R. Oliver
Title: Authorized Person
