<PAGE> 1
Pursuant to Rule 424b5
Registration No. 33-53207
Information contained herein is subject to completion or amendment.
SUBJECT TO COMPLETION, DATED APRIL 28, 1998
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED APRIL 28, 1998
$100,122,300
THE DETROIT EDISON COMPANY
% QUARTERLY INCOME DEBT SECURITIES (QUIDSSM)
(JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES, DUE 2028)
------------------------
The QUIDS will mature on June 30, 2028. Interest on the QUIDS is payable
quarterly on each March 31, June 30, September 30 and December 31, commencing
June 30 , 1998. The QUIDS will be redeemable at the option of the Company, in
whole or in part, on or after June 30, 2003 at 100% of the principal amount
redeemed together with accrued interest to the redemption date. In addition, the
QUIDS are subject to redemption, in whole but not in part, at 100% of the
principal amount thereof together with accrued interest to the redemption date
at the option of the Company upon the occurrence of certain tax events described
under "Description of the QUIDS -- Tax Event Redemption." The QUIDS will be
represented by a Global Security or Securities that will be deposited with, or
on behalf of, The Depository Trust Company, and will be available for purchase
in denominations of $25 and any integral multiple thereof. See "Description of
the QUIDS".
Payment of the principal of and interest on the QUIDS is subordinate and
subject in right of payment to the prior payment in full of all Senior Debt of
the Company. As of March 31, 1998, outstanding Senior Indebtedness of the
Company aggregated approximately $3.7 billion.
Application will be made for listing of the QUIDS on the New York Stock
Exchange. Trading of the QUIDS on the New York Stock Exchange is expected to
commence within a thirty-day period after the initial delivery of the QUIDS. The
QUIDS are expected to trade "flat".
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-2 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE QUIDS, INCLUDING THE PERIOD AND CIRCUMSTANCES
DURING AND UNDER WHICH PAYMENT OF INTEREST ON THE QUIDS MAY BE DEFERRED AND
CERTAIN RELATED FEDERAL INCOME TAX CONSEQUENCES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(1)(3)
-------------- ------------ -------------
<S> <C> <C> <C>
Per QUID.................................... 100% % %
Total....................................... $100,122,300 $ $
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting expenses payable by the Company estimated at $ .
------------------------
The QUIDS are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that the QUIDS will be ready for
delivery in New York, New York, on or about May , 1998.
QUIDSSM is a service mark of Goldman, Sachs & Co.
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
------------------------
The date of this Prospectus Supplement is April , 1998.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE QUIDS, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN SUCH QUIDS, AND
THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
THE COMPANY
GENERAL
The Detroit Edison Company (the "Company"), incorporated in Michigan since
1967, is a regulated public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in a 7,600 square mile
area in Southeastern Michigan. The Company's service area includes about 13% of
Michigan's total land area and about half of its population (approximately five
million people). The Company's residential customers reside in urban and rural
areas, including an extensive shoreline along the Great Lakes and connecting
waters.
DTE ENERGY COMPANY
DTE Energy Company ("DTE Energy"), a Michigan corporation incorporated in
1995, is an exempt holding company under the Public Utility Holding Company Act.
As a result of the 1996 corporate restructuring, DTE Energy became the parent
holding company of the Company and certain previously wholly-owned Company
subsidiaries. DTE Energy has no significant operations of its own. The Company
is DTE Energy's principal operating subsidiary, representing approximately 96%
and 97% of DTE Energy's assets and revenues, respectively, at December 31, 1997.
RISK FACTORS
Prospective purchasers of the QUIDS should carefully consider, in addition
to the other information set forth elsewhere or incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus, the following:
RIGHT OF COMPANY TO DEFER PAYMENT OF INTEREST
So long as no Event of Default with respect to the QUIDS has occurred and
is continuing, the Company shall have the right, upon prior notice by public
announcement given in accordance with New York Stock Exchange ("NYSE") rules at
any time, to extend the interest payment period at any time and from time to
time on the QUIDS, provided that the aggregate interest payment period, as
extended, must end on an interest payment date and must not exceed 20
consecutive quarterly interest payment periods or extend beyond the maturity of
the QUIDS or any date on which any QUIDS are fixed for redemption (each such
extended period, a "Deferral Period"). No interest shall be due and payable
during a Deferral Period, but on the interest payment date occurring at the end
of each Deferral Period the Company shall pay to the holders of record on the
record date for such interest payment date (regardless of who the holders of
record may have been on other dates during the Deferral Period) all accrued and
unpaid interest on the QUIDS, together with interest thereon compounded
quarterly at the rate of interest on the QUIDS. In the event that the Company
exercises its right to extend, the Company may not declare or pay dividends on,
or redeem, purchase or acquire, any shares of its preferred stock, preference
stock, common stock or any other equity securities of the Company ("Capital
Stock") until deferred interest on the QUIDS is paid in full, other than
redemptions of any series of Capital Stock of the Company pursuant to the terms
of any sinking fund provisions with respect thereto. In addition, during any
Deferral Period, the Company may not make any advance or loan to, or purchase
any securities of, or make any other investment in, any affiliate of the
Company, including DTE Energy, for the purpose of, or to enable
S-2
<PAGE> 3
the payment of, directly or indirectly, dividends on any equity securities of
DTE Energy. See "The Company".
Upon the termination of any Deferral Period and the payment of all interest
then due, the Company may commence a new Deferral Period. Consequently, there
could be multiple Deferral Periods of varying lengths throughout the term of the
QUIDS. See "Description of the QUIDS -- Payment Deferral".
In the event a Deferral Period occurs, the QUIDS would be treated as
reissued with original issue discount ("OID") at the beginning of such Deferral
Period and, under the OID rules, holders of the QUIDS would be required to
accrue income on the QUIDS for United States federal income tax purposes. As a
result, a holder ordinarily would include such amounts in gross income in
advance of the receipt of cash. A holder that disposes of its QUIDS prior to the
record date for payment of interest at the end of a Deferral Period will not
receive cash from the Company related to such interest because such interest
will be paid to the holder of record on such record date, regardless of who the
holders of record may have been on other dates during the Deferral Period. The
extent to which such a holder will receive a return on the QUIDS for the period
it held such QUIDS will depend on the market for the QUIDS at the time of such
disposition. See "Certain United States Federal Income Tax Consequences --
United States Holders".
The Company has no current intention of exercising its right to extend an
interest payment period.
POTENTIAL MARKET VOLATILITY DURING DEFERRAL PERIOD
As described above, the Company has the right to extend an interest payment
period from time to time, provided that the aggregate interest payment period,
as extended, must end on an interest payment date and must not exceed 20
consecutive quarterly interest payment periods or extend beyond the maturity of
the QUIDS or any date on which any QUIDS are fixed for redemption. In the event
the Company determines to extend an interest payment period, or in the event the
Company thereafter extends a Deferral Period, the market price of the QUIDS is
likely to be adversely affected. In addition, as a result of such rights, the
market price of the QUIDS may be more volatile than other debt instruments that
do not have such rights. A holder that disposes of its QUIDS during a Deferral
Period, therefore, may not receive the same return on its investment as a holder
that continues to hold its QUIDS.
SUBORDINATION OF QUIDS
The QUIDS are unsecured obligations of the Company and will be subordinate
to all existing and future Senior Indebtedness (as hereinafter defined) of the
Company, but senior to all Capital Stock of the Company. On March 31, 1998,
approximately $3.7 billion of such Senior Indebtedness was outstanding. There
are no terms in the QUIDS that limit the Company's ability to incur additional
indebtedness, including indebtedness that would rank equal to or senior to the
QUIDS. The Company has two other series of quarterly income debt securities
outstanding in the aggregate principal amount of approximately $235 million
which are of equal rank to the QUIDS. With respect to the QUIDS, the Indenture
(as hereinafter defined) does not contain any cross-defaults to any other
indebtedness of the Company, and therefore, a default with respect to, or the
acceleration of, any such indebtedness will not constitute an "Event of Default"
with respect to the QUIDS. As the QUIDS will be issued by the Company, the QUIDS
effectively will be subordinate to all obligations of the Company's
subsidiaries. See "Description of the QUIDS -- Subordination" and "--
Subrogation".
CERTAIN TRADING CHARACTERISTICS OF THE QUIDS
The QUIDS are expected to be approved for listing on the NYSE, subject to
notice of issuance. Trading of the QUIDS on the NYSE is expected to commence
within a thirty-day period after the initial delivery of the QUIDS. The QUIDS
are expected to trade "flat". This means that purchasers
S-3
<PAGE> 4
will not pay and sellers will not receive any accrued and unpaid interest on the
QUIDS that is not included in the trading price.
TAX EVENT REDEMPTION
Upon the occurrence and continuation of a Tax Event (as defined in
"Description of the QUIDS -- Tax Event Redemption"), the Company has the right,
within 90 days following the occurrence of such Tax Event, to redeem the QUIDS,
in whole but not in part, at a redemption price equal to the aggregate principal
amount of the QUIDS plus accrued and unpaid interest.
CERTAIN FACTORS AFFECTING THE COMPANY
The electric utility industry is facing serious issues as legislators and
regulators consider various proposals designed to reduce rates and promote
economic growth through competition and deregulation of generation assets.
Deregulation, cogeneration, independent power production, open access to
transmission lines, competitive bulk power supply markets, municipalization,
retail customer choice or open access and the unbundling of utility products and
services are issues under consideration.
The Company is participating at both the federal and state (Michigan)
levels in legislative and administrative proceedings attempting to make the
electric energy market competitive. These proceedings, which include matters
under appeal, are dealing with the effects of competition on both public
utilities and consumers. Issues under consideration include: (1) the recovery of
stranded costs (possibly including securitization) by public utilities now
recovering capital costs under traditional ratemaking principles, (2) retail
wheeling and open transmission access, and (3) revisions to (and the possible
repeal of all or portions of) various federal and state energy-related statutes,
as well as new implementing legislation. The Company is not able to predict the
outcome or timing of these proceedings.
The Company is subject to extensive environmental regulation. Additional
costs may result as the effects of various chemicals on the environment
(including nuclear waste) are studied and governmental regulations are developed
and implemented. In addition, the impact of proposed Environmental Protection
Agency ozone transport regulations and final new air quality standards relating
to particulate air pollution are unknown. The costs of future nuclear
decommissioning activities are the subject of increased regulatory attention.
Substantially all of the Company's properties are subject to the lien of a
Mortgage and Deed of Trust, under which approximately $3.0 billion of General
and Refunding Mortgage Bonds were outstanding as of March 31, 1998.
Ownership of Fermi 2, a nuclear generating unit comprising 24% of the
Company's total assets and 11% of the Company's summer net rated capability,
subjects the Company to additional significant risks. Nuclear plants are highly
regulated by a number of governmental agencies concerned with public health and
safety and environmental protection. Consequently, Fermi 2 is subject to greater
scrutiny than a conventional fossil fueled plant.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Summary:
Operating Revenues............... $901 $864 $3,657 $3,642 $3,636 $3,519 $3,555
Operating Income................. 237 204 1,003 841 1,015 719 844
Net Income....................... 98 74 417 328 434 420 522
</TABLE>
S-4
<PAGE> 5
FIRST QUARTER 1998 RESULTS
Results for the three months ended March 31, 1998 and 1997 are set forth
below:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Operating Revenues.......................................... $901 $864
Operating Expenses.......................................... 664 660
---- ----
Operating Income............................................ 237 204
Interest Expense and Other.................................. 73 76
---- ----
Income Before Income Taxes.................................. 164 128
Income Taxes................................................ 66 54
---- ----
Net Income.................................................. 98 74
Preferred Stock Dividends................................... 3 3
---- ----
Net Income Available for Common Stock....................... $ 95 $ 71
==== ====
</TABLE>
The 1998 three-month earnings were higher than 1997 due to the 1997
increase in the Fermi 2 Performance Standard accrual and expenses for a major
ice storm.
Storm damage costs of $30 million incurred during the first three quarters
of 1997 were deferred in the fourth quarter of 1997 and are being amortized to
expense over a 24 month period beginning in January 1998.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges* were as follows for the
respective periods indicated:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------------
1998 1997 1996 1995 1994 1993
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
3.17 3.24 2.71 3.21 3.13 3.25
</TABLE>
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* For the purposes of computing these ratios, earnings represent net income
(including accretion income and deferred Fermi 2 depreciation, amortization
and return) before deducting income taxes and fixed charges. Fixed charges
represent total interest charges, interest factor of rents and amortization of
debt discount, premium and expense.
S-5
<PAGE> 6
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1998 and as adjusted to give effect to the issuance of the
QUIDS offered hereby and the planned May 1998 redemption of approximately $100
million of the Company's Cumulative Preferred Stock.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
ACTUAL AS ADJUSTED
------ -----------
(MILLIONS)
<S> <C> <C> <C> <C>
Long-Term Debt........................................... $3,277 46.2% $3,277 46.1%
Quarterly Income Debt Securities......................... 235 3.3 335 4.7
------ ----- ------ -----
3,512 49.5 3,612 50.8
Cumulative Preferred Stock Redeemable Solely at the
Option of the Company.................................. 144 2.0 47 0.7
Common Shareholder's Equity.............................. 3,444 48.5 3,441 48.5
------ ----- ------ -----
$7,100 100.0% $7,100 100.0%
====== ===== ====== =====
</TABLE>
DESCRIPTION OF THE QUIDS
GENERAL
The QUIDS will be a series of notes to be issued under the Note Indenture,
dated as of June 30, 1993, as supplemented, and as further supplemented by a
Sixth Supplemental Indenture dated as of May 1, 1998 creating the QUIDS (as
supplemented, the "Indenture"), between the Company and Bankers Trust Company,
as trustee (the "Trustee"). The following statements with respect to the QUIDS
are summaries and are subject to the detailed provisions of the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), and the Indenture, a copy
of the form of which has been filed as an exhibit to the Registration Statement.
The following summaries of certain provisions of the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the QUIDS and the Indenture, including the definitions
therein of certain terms capitalized and not otherwise defined in this
Prospectus Supplement. Wherever references are made to particular provisions of
the Indenture or terms defined therein, such provisions or definitions are
incorporated by reference as part of the statements made and such statements are
qualified in their entirety by such references.
$410 million aggregate principal amount of the debt securities of the
Company previously issued under the Indenture are secured as to payment of
principal, interest and premium, if any, by the Company's General and Refunding
Mortgage Bonds pledged to the Trustee for the benefit of the holders of such
securities. The QUIDS offered hereby, as well as approximately $50 million and
$185 million aggregate principal amount of 8.5% QUIDS and 7.625% QUIDS,
respectively, previously issued, will not, and do not, have the benefit of any
Mortgage Bonds or any other security.
The QUIDS will constitute an additional series of unsecured, subordinated
debt securities, will be subordinated to Senior Indebtedness of the Company, as
described herein, will be limited in aggregate principal amount to $100,122,300
and will mature on June 30, 2028 (the "Stated Maturity"). The annual interest
requirement on the QUIDS will be $ .
The QUIDS will be issued only in book-entry form through the facilities of
DTC and will be in denominations of $25 and integral multiples thereof.
Transfers or exchanges of beneficial interests in the QUIDS may be effected only
through records maintained by DTC or its nominee. Settlement and secondary
trading in the QUIDS will be in same-day funds. Payments of principal and
interest on the QUIDS will be made to DTC in immediately available funds, as
described in the Prospectus. For a description of DTC and the specific terms of
the depository arrangements, see "DTC Book-Entry-Only System" in the
accompanying Prospectus.
S-6
<PAGE> 7
QUARTERLY PAYMENTS
Interest on the QUIDS will accrue from the date of original issuance at a
rate of % per annum and will be payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year (each an "Interest Payment Date"),
commencing June 30, 1998 to the persons in whose names the QUIDS are registered
on the relevant record dates, which will be one Business Day (as hereinafter
defined) prior to the relevant Interest Payment Dates (each a "Record Date").
The amount of interest payable on June 30, 1998 to holders of QUIDS will be
per $25 principal amount of QUIDS.
The amount of interest payable for any period will be computed on the basis
of twelve 30-day months and a 360-day year and, for any period shorter than a
full quarterly interest period, will be computed on the basis of the actual
number of days elapsed in such period. In the event that any date on which
interest is payable on the QUIDS is not a Business Day, then payment of the
amount payable on such date will be made on (i) the next succeeding day which is
a Business Day (and without interest or other payment in respect of any such
delay) with the same force and effect as if made on such date or (ii) the
preceding Business Day if the succeeding Business Day would fall within a new
calendar year (and without reduction in amount due to such early payment) with
the same force and effect as if made on such date, subject, in each case, to
certain rights of deferral described below. A "Business Day" shall mean any day
other than a day on which banking institutions in the State of New York or the
State of Michigan are authorized or obligated pursuant to law or executive order
to close.
PAYMENT DEFERRAL
The Company shall have the right at any time, on one or more occasions, so
long as an Event of Default (as hereinafter defined) has not occurred and is not
continuing under the Indenture with respect to the QUIDS, to extend any interest
payment period on the QUIDS; provided that the aggregate interest payment
period, as extended, must end on an interest payment date and must not exceed 20
consecutive quarterly interest payment periods or extend beyond the maturity of
the QUIDS or any date on which any QUIDS are fixed for redemption. As a
consequence, the quarterly interest payments on the QUIDS would be deferred (but
would continue to accrue with interest thereon at the rate of interest on the
QUIDS) during any such Deferral Period. At the end of each Deferral Period, the
Company shall pay all interest then accrued and unpaid (compounded quarterly).
In the event the Company exercises this right, Company shall not declare or pay
any dividend on, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its Capital Stock or make any guarantee payments with respect
to the foregoing during such Deferral Period, other than redemptions of any
series of Capital Stock of the Company pursuant to the terms of any sinking fund
provisions with respect thereto. In addition, during any Deferral Period, the
Company may not make any advance or loan to, or purchase any securities of, or
make any other investment in, any affiliate of the Company, including DTE
Energy, for the purpose of, or to enable the payment of, directly or indirectly,
dividends on any equity securities of DTE Energy. The Company has no current
intention of exercising its right to extend an interest payment period. During
any Deferral Period, the Company may continue to extend the interest payment
period by extending the Deferral Period; provided that the aggregate Deferral
Period, as extended, must end on an Interest Payment Date and must not exceed 20
consecutive quarterly interest payment periods or extend beyond the maturity of
the QUIDS or any date on which the QUIDS are fixed for redemption. The Company
shall give the holders of QUIDS notice of its election to defer payments or to
extend the Deferral Period ten Business Days prior to the earlier of (i) the
next scheduled quarterly payment date and (ii) the date the Company is required
to give notice of the record date of such related interest payment to the NYSE
or other applicable self-regulatory organization or to the holders of the QUIDS,
but in any event not less than two Business Days prior to such record date.
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<PAGE> 8
Upon the termination of any Deferral Period and the payment of all interest
then due, the Company may commence a new Deferral Period. Consequently, there
could be multiple Deferral Periods of varying lengths throughout the term of the
QUIDS.
OPTIONAL REDEMPTION
The QUIDS will be redeemable at the option of the Company, in whole or in
part, at any time on or after June 30, 2003 and prior to maturity, upon not less
than 30 nor more than 60 days' notice, at a redemption price equal to 100% of
the principal amount redeemed plus accrued and unpaid interest to the date fixed
for redemption.
TAX EVENT REDEMPTION
If a Tax Event (a "Tax Event") has occurred and is continuing, the Company
has the right, within 90 days following the occurrence of such Tax Event, to
redeem the QUIDS, in whole but not in part, at a redemption price equal to the
aggregate principal amount of the QUIDS plus accrued and unpaid interest to the
date of redemption (the "Redemption Price").
"Tax Event" means that the Company shall have received an opinion of
counsel (which may be counsel to the Company or an affiliate but not an employee
thereof) experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting taxation, or as a
result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such pronouncement or decision is announced on or after the date of
original issuance of the QUIDS, there is more than an insubstantial risk that
interest payable by the Company on the QUIDS is not, or will not be, deductible
by the Company for federal income tax purposes.
EVENTS OF DEFAULT
Any one of the following events will constitute an Event of Default under
the Indenture with respect to the QUIDS offered hereby: (a) failure to pay any
interest on the QUIDS when due, continued for 30 days; (b) failure to pay
principal on the QUIDS when due; (c) failure to perform any other covenant or
warranty of the Company in the Indenture (other than a covenant or warranty
included in the Indenture solely for the benefit of a series of securities other
than the QUIDS), continued for 60 days after written notice as provided in the
Indenture; and (d) certain events of bankruptcy, insolvency or reorganization
involving the Company. With respect to the QUIDS offered hereby, the Indenture
does not contain any cross-default to any other indebtedness of the Company, and
therefore, default with respect to, or an acceleration of, any such indebtedness
will not constitute an Event of Default with respect to the QUIDS.
If an Event of Default with respect to the QUIDS occurs and is continuing,
either the Trustee or the holders of at least 25% in aggregate principal amount
of the outstanding QUIDS by notice as provided in the Indenture may declare the
principal amount of the QUIDS to be due and payable immediately. At any time
after a declaration of acceleration has been made, but before a judgment or
decree for payment of money has been obtained by the Trustee, and subject to
applicable law and certain other provisions of the Indenture, the holders of a
majority in aggregate principal amount of the QUIDS may, under certain
circumstances, rescind and annul such acceleration.
The Indenture provides that within 90 days after the occurrence of any
Event of Default thereunder with respect to the QUIDS, the Trustee shall
transmit, in the manner set forth in the Indenture, notice of such Event of
Default to the holders of the QUIDS unless such Event of Default has been cured
or waived; provided, however, that except in the case of a default in the
payment of the principal of or interest on any QUIDS of such series, the Trustee
may withhold such notice if and so long as the board of directors, the executive
committee or a trust committee of directors or
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<PAGE> 9
responsible officers of the Trustee has in good faith determined that the
withholding of such notice is in the interest of the holders of QUIDS.
If an Event of Default occurs and is continuing with respect to the QUIDS,
the Trustee may in its discretion proceed to protect and enforce its rights and
the rights of the holders of QUIDS by all appropriate judicial proceedings.
The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate as to the Company's compliance with all conditions and
covenants of the Indenture.
The Indenture provides that, subject to the duty of the Trustee during any
default to act with the required standard of care, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of QUIDS, unless such holders shall
have offered to the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, and subject to applicable law and certain
other provisions of the Indenture, the holders of a majority in aggregate
principal amount of the outstanding QUIDS will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, with
respect to the QUIDS.
SUBORDINATION
The payment of the principal of and interest on the QUIDS will be expressly
subordinated, to the extent and in the manner set forth in the Indenture, in
right of payment to the prior payment in full of all existing and future Senior
Indebtedness of the Company.
Upon (i) any acceleration of the principal amount due on the QUIDS or (ii)
any payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to creditors upon any dissolution or
winding-up or total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, all principal and premium, if any, and interest due upon all
Senior Indebtedness shall first be paid in full, or payment thereof provided for
in money or money's worth in accordance with its terms, before any payment is
made on account of the principal of or interest on the indebtedness evidenced by
the QUIDS, and upon any such dissolution or winding-up or liquidation or
reorganization any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the holders of
the QUIDS would be entitled, except for the provisions of the Indenture, shall
(subject to the power of a court of competent jurisdiction to make other
equitable provision reflecting the rights conferred by the provisions of the
Indenture upon the Senior Indebtedness and the holders thereof with respect to
the QUIDS and the holders thereof by a lawful plan of reorganization under
applicable bankruptcy law), be paid by the Company or any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the holders of the QUIDS if received by them, directly to
the holders of Senior Indebtedness (pro rata to each such holder on the basis of
the respective amounts of Senior Indebtedness held by such holder) or their
representatives, to the extent necessary to pay all Senior Indebtedness
(including interest thereon) in full, in money or money's worth, after giving
effect to any concurrent payments or distribution to or for the holders of
Senior Indebtedness, before any payment or distribution is made to the holders
of the indebtedness evidenced by the QUIDS. The consolidation of the Company
with or the merger of the Company into another person or the liquidation or
dissolution of the Company following the conveyance or transfer of its property
as an entirety, or substantially as an entirety, to another person upon the
terms and conditions provided in the Indenture shall not be deemed a
dissolution, winding-up, liquidation or reorganization for these purposes.
In the event that any payment or distribution of assets of the Company of
any kind or character not permitted by the foregoing provisions, whether in
cash, property or securities, shall be received by the holders of QUIDS before
all Senior Indebtedness is paid in full, or provision made for such
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payment, in accordance with its terms, such payment or distribution shall be
held in trust for the benefit of, and shall be paid over or delivered to, the
holders of such Senior Indebtedness or their representative or representatives,
or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness may have been issued, as
their respective interests may appear, for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness in full in accordance with its terms, after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness.
No payment on account of principal of or interest on the QUIDS shall be
made unless full payment of amounts then due for principal, premium, if any,
sinking funds and interest on any Senior Indebtedness has been made or duly
provided for in money or money's worth in accordance with the terms of such
Senior Indebtedness. No payment on account of principal or interest on the QUIDS
shall be made if, at the time of such payment or immediately after giving effect
thereto, (i) there shall exist a default in the payment of principal, premium,
if any, sinking fund or interest with respect to any Senior Indebtedness, or
(ii) there shall have occurred an event of default (other than a default in the
payment of principal, premium, if any, sinking funds or interest) with respect
to any Senior Indebtedness, as defined therein or in the instrument under which
the same is outstanding, permitting the holders thereof to accelerate the
maturity thereof, and such event of default shall not have been cured or waived
or shall not have ceased to exist.
SUBROGATION
From and after the payment in full of all Senior Indebtedness, the holders
of the QUIDS (together with the holders of any other indebtedness of the Company
which is subordinate in right of payment to the payment in full of all Senior
Indebtedness, which is not subordinate in right of payment to the QUIDS and
which by its terms grants such right of subrogation to the holder thereof) shall
be subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of assets or securities of the Company applicable to
the Senior Indebtedness until the QUIDS shall be paid in full, and, for the
purposes of such subrogation, no such payments or distributions to the holders
of Senior Indebtedness of assets or securities, which otherwise would have been
payable or distributable to holders of the QUIDS, shall, as between the Company,
its creditors other than the holders of Senior Indebtedness, and the holders of
the QUIDS, be deemed to be a payment by the Company to or on account of the
Senior Indebtedness, it being understood that these provisions of the Indenture
are and are intended solely for the purpose of defining the relative rights of
the holders of the QUIDS, on the one hand, and the holders of the Senior
Indebtedness, on the other hand, and nothing contained in the Indenture is
intended to or shall impair as between the Company, its creditors other than the
holders of Senior Indebtedness, and the holders of the QUIDS, the obligation of
the Company, which is unconditional and absolute, to pay to the holders of the
QUIDS the principal of and interest on the QUIDS as and when the same shall
become due and payable in accordance with their terms, or to affect the relative
rights of the holders of the QUIDS and creditors of the Company other than the
holders of the Senior Indebtedness, nor shall anything therein prevent the
holder of any QUIDS from exercising all remedies otherwise permitted by
applicable law upon default under such QUIDS subject to the rights of the
holders of Senior Indebtedness to receive cash, property or securities of the
Company otherwise payable or deliverable to the holders of the QUIDS or to a
representative of such Holders, on their behalf.
With respect to the QUIDS offered hereby, the term "Senior Indebtedness" is
defined in the Indenture as (1) any Payment Obligation (as defined) of the
Company in respect of any Indebtedness, directly or indirectly, created,
incurred or assumed for borrowed money or in connection with the acquisition of
any business, property or asset (including securities), other than any account
payable or other indebtedness created, incurred or assumed in the ordinary
course of business in connection with the obtaining of materials or services;
(2) any Payment Obligation of
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the Company in respect of any lease that would be required to be classified and
accounted for as a capital lease; (3) any Payment Obligation of the Company in
respect of any interest rate exchange agreement, currency exchange agreement or
similar agreement that provides for payment (whether or not contingent) over a
period or term (including any renewals or extensions) longer than one year from
the execution thereof; (4) any Payment Obligation of the Company in respect of
any agreement relating to an acquisition (including a sale and buyback) or the
lease (including a sale and leaseback) of real or personal property and that
provides for payment (whether or not contingent) over a period or term
(including any renewals or extensions) longer than one year from the execution
thereof; (5) any Payment Obligation of any Subsidiary (as defined in the
Indenture) or of others of the kind described in the preceding clauses (1)
through (4) assumed or guaranteed by the Company or for which the Company is
otherwise responsible or liable; and (6) any amendment renewal, extension or
refunding of any of the foregoing Payment Obligations.
The term "Payment Obligation", when used with respect to Senior
Indebtedness, means an obligation stated in an agreement, instrument or lease to
pay money (whether for principal, premium, interest, sinking fund, periodic
rent, stipulated value, termination value, liquidated damages or otherwise), but
excludes an obligation to pay money in respect of fees of, or as payment or
reimbursement for expenses incurred by or on behalf of, or as indemnity for
losses, damages, taxes or other indemnity claims of any kind owed to, any holder
of Senior Indebtedness or other party to such agreement, instrument or lease.
The Indenture does not restrict the amount of Senior Indebtedness that the
Company may incur.
CONCERNING THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture with respect to
both collateralized and uncollateralized notes, including the QUIDS. Bankers
Trust Company also serves as Trustee for the Company's Mortgage and Deed of
Trust with respect to General and Refunding Mortgage Bonds.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the ownership of QUIDS as of the date hereof and sets forth in
full the opinion of Brown & Wood LLP, special tax counsel to the Company,
insofar as it relates to matters of law or legal conclusions. Except where
noted, it deals only with QUIDS held as capital assets and does not deal with
special situations, such as those of dealers in securities or currencies,
financial institutions, life insurance companies, persons holding QUIDS as a
part of a hedging or conversion transaction or a straddle, United States Holders
(as defined below) whose "functional currency" is not the U.S. dollar, or
Non-United States Holders (as defined below) who own (actually or
constructively) ten percent or more of the combined voting power of all classes
of voting stock of the Company, who are present in the United States or who have
any other special status with respect to the United States. Furthermore, the
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified so as to result in federal income tax consequences different from
those discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR
DISPOSITION OF QUIDS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL
AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
UNITED STATES HOLDERS
As used herein, a "United States Holder" of QUIDS means a holder that is a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, an estate the income of which is
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subject to United States federal income taxation regardless of its source or a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust. A
"Non-United States Holder" is a holder that is not a United States Holder.
Interest Income and Original Issue Discount
Under applicable Treasury regulations (the "Regulations"), if the terms and
conditions of a debt instrument make the likelihood that stated interest will
not be timely paid a "remote" contingency, such contingency will be ignored in
determining whether the debt instrument is issued with OID. The Company believes
that the likelihood of its exercising its option to defer payments of interest
on the QUIDS is remote, since exercising that option would prevent it from
declaring dividends on any class of its stock. Based on the foregoing, the
Company intends to take the position that the QUIDS were not issued with OID
and, accordingly, a United States Holder should include in gross income only
such United States Holder's pro rata share of stated interest on the QUIDS in
accordance with such United States Holder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS").
Accordingly, it is possible the IRS could take the position that the likelihood
of deferral was not a remote contingency within the meaning of the Regulations.
Under the Regulations, if the Company were to exercise its option to defer
payments of interest after treating the QUIDS as issued without OID, the QUIDS
would be treated as reissued with OID at that time, and all stated interest (and
de minimis OID, if any) on the QUIDS would thereafter be treated as OID as long
as the QUIDS remained outstanding. In such event, all of a United States
Holder's income with respect to the QUIDS would be accounted for as OID on an
economic accrual basis regardless of such United States Holder's method of tax
accounting, and actual distributions of stated interest would not be includable
in gross income. Consequently, a United States Holder would be required to
include OID in gross income even though the Company would not make any actual
cash payments during a Deferral Period.
A United States Holder that disposed of QUIDS prior to the record date for
the payment of interest following a Deferral Period would include OID in gross
income but would not receive any cash related thereto from the Company. Any
amount of OID included in a United States Holder's gross income (whether or not
during a Deferral Period) would increase such United States Holder's tax basis
in its QUIDS, and the amount of interest not includable in gross income would
reduce such United States Holder's tax basis in its QUIDS.
Sale, Exchange and Retirement of the QUIDS
Upon the sale, exchange or retirement of QUIDS, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange or retirement and the adjusted tax basis of the QUIDS. A
United States Holder's adjusted tax basis in QUIDS will, in general, be the
United States Holder's initial basis therefor, increased by any OID previously
included in income by the United States Holder and reduced by any cash payments
on the QUIDS. Such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if at the time of sale, exchange or retirement,
the QUIDS have been held for more than one year. Under current law, net capital
gains of individuals are, under certain circumstances, taxed at lower rates than
items of ordinary income. The deductibility of capital losses is subject to
limitations.
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") reduces the maximum
rates on long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition (and would
further reduce the maximum rates on such gains in the year 2001 and thereafter
for certain individual taxpayers who meet specified conditions). The
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capital gains rate for capital assets held by individual taxpayers for more than
twelve months but less than eighteen months was not changed by the 1997 Tax Act.
The 1997 Tax Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning these tax
law changes.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest (which for purposes of this discussion includes OID)
on QUIDS owned by a Non-United States Holder, provided (i) the beneficial
owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (ii) the beneficial owner is not a bank
whose receipt of interest on the QUIDS is described in section 881(c)(3)(A)
of the Code and (iii) either (y) the beneficial owner certifies to the
Company or its agent, under the penalties of perjury, that it is not a U.S.
person, citizen or resident and provides its name and address or (z) a
financial institution holding the QUIDS on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been
received by it and furnishes the Company or its agent with a copy thereof;
(b) no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange or retirement of QUIDS; and
(c) QUIDS beneficially owned by an individual who at the time of death
is a Non-United States Holder will not be subject to United States federal
estate tax as a result of such individual's death, provided that the
interest payments with respect to such QUIDS would not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a trade or business by such individual in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal and interest paid and OID accrued, if any, on the QUIDS
and to the proceeds of sale of the QUIDS made to United States Holders other
than certain exempt recipients (such as corporations). United States Holders
other than exempt recipients generally will receive information returns on IRS
Form 1099-OID stating the amount of OID, if any, accrued on the QUIDS each year.
A 31 percent backup withholding tax will apply to payments described in the
preceding sentence if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
No information reporting or backup withholding will be required with
respect to payments made by the Company or any paying agent to Non-United States
Holders if a statement described in (a)(iii) under "Non-United States Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States person.
Payments of the proceeds from the sale by a Non-United States Holder of
QUIDS made to or through a foreign office of a broker will not be subject to
information reporting or backup withholding, except that if the broker is, for
federal income tax purposes, a United States person, a controlled foreign
corporation or a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
such payments will not be subject to backup withholding but may be subject to
information reporting. Such payment of the proceeds of the sale of QUIDS to or
through the United States office of a broker is subject to
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information reporting and backup withholding unless the Non-United States Holder
or the beneficial owner certifies as to its non-United States status or
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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<PAGE> 15
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the QUIDS, the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Goldman, Sachs
& Co., A.G. Edwards & Sons, Inc., Morgan Stanley & Co. Incorporated and Smith
Barney Inc. are acting as representatives, has severally agreed to purchase, the
principal amount of QUIDS set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF QUIDS
----------- ----------------
<S> <C>
Goldman, Sachs & Co. .................................... $
A.G. Edwards & Sons, Inc. ...............................
Morgan Stanley & Co. Incorporated........................
Smith Barney Inc. .......................................
BT Alex. Brown Incorporated..............................
CIBC Oppenheimer Corp. ..................................
EVEREN Securities, Inc...................................
First of Michigan Corporation............................
McDonald & Company Securities, Inc. .....................
Prudential Securities Incorporated.......................
SBC Warburg Dillon Read Inc. ............................
Blaylock & Partners, L.P. ...............................
J.C. Bradford & Co. .....................................
Cowen & Company..........................................
Crowell, Weeden & Co. ...................................
Dain Rauscher Wessels, A Division of Dain Rauscher
Incorporated...........................................
Fahnestock & Co. Inc. ...................................
J.J.B. Hilliard, W.L. Lyons, Inc. .......................
Interstate/Johnson Lane Corporation......................
Janney Montgomery Scott Inc. ............................
Legg Mason Wood Walker Incorporated......................
McGinn, Smith & Co., Inc. ...............................
Morgan Keegan & Company, Inc. ...........................
National Financial Services Corporation..................
The Ohio Company.........................................
Olde Discount Corporation................................
Piper Jaffray Inc. ......................................
Raymond James & Associates, Inc. ........................
The Robinson-Humphrey Company, LLC.......................
Muriel Siebert & Co., Inc. ..............................
Sutro & Co. Incorporated.................................
Tucker Anthony Incorporated..............................
Fleet Securities Inc.....................................
Wedbush Morgan Securities................................
Wheat First Securities, Inc. ............................
------------
Total............................................... $100,122,300
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the QUIDS, if any are
taken.
The Underwriters propose to offer the QUIDS in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus Supplement and to certain securities
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dealers at such price less a concession not in excess of $ per QUIDS. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per QUIDS to certain brokers and dealers. After the QUIDS are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters.
In connection with the offering of the QUIDS, the Underwriters may purchase
and sell the QUIDS in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the QUIDS; and syndicate short positions
involve the sale by the Underwriters of a greater number of QUIDS than they are
required to purchase from the Company. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the QUIDS sold for their account may be reclaimed
by the syndicate if such QUIDS are repurchased by the syndicate in stabilizing
or covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the QUIDS, which may be higher than the price that
might otherwise prevail in the open market; and these activities, if commenced,
may be discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
The QUIDS are a new issue of securities with no established trading market.
The QUIDS are expected to be approved for listing on the NYSE. Trading of the
QUIDS on the NYSE is expected to commence within a thirty-day period after the
initial delivery of the QUIDS. No assurance can be given as to the liquidity of
the trading market for the QUIDS.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
LEGAL OPINIONS
The validity of the QUIDS will be passed upon for the Company by
Christopher C. Nern, Esq., Vice President and General Counsel of the Company,
and for the Underwriters by Brown & Wood LLP. Brown & Wood LLP, special tax
counsel to the Company, has passed upon certain United States federal income tax
considerations with respect to the QUIDS.
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<PAGE> 17
PROSPECTUS
$165,000,000
THE DETROIT EDISON COMPANY
DEBT SECURITIES
------------------------
The Detroit Edison Company (the "Company") intends from time to time to
issue up to $165,000,000 aggregate principal amount of its debt securities
("Debt Securities") in one or more series of (i) senior Debt Securities ("Senior
Debt Securities"), consisting of (A) General and Refunding Mortgage Bonds (the
"Mortgage Bonds"), (B) other Senior Debt Securities secured by Mortgage Bonds,
which may consist of (x) Senior Debt Securities with interest rates which may be
periodically established by a remarketing agent selected by the Company
("Remarketed Notes"), or (y) any other Senior Debt Security (together with the
Remarketed Notes, the "Secured Debt Securities"), (ii) unsecured Debt
Securities, which may be senior ("Senior Unsecured Debt Securities") or
subordinated ("Subordinated Debt Securities," and, together with the Senior
Unsecured Debt Securities, "Unsecured Debt Securities") and may include
unsecured Remarketed Notes, or any combination of the foregoing, at an aggregate
initial offering price not to exceed $165,000,000, at prices and on terms to be
determined at or prior to the time of sale. The specific designation, aggregate
principal amount, maturity, interest rate or method for determining interest
rate, method of distribution, ranking as senior debt or subordinated debt,
description of the security securing such debt security, if any, any remarketing
or refunding provisions, and exchangeability, conversion, redemption, prepayment
or sinking fund provisions and any other variable terms with regard to the Debt
Securities in respect of which this Prospectus will be delivered will be set
forth in an accompanying Prospectus Supplement. Unless otherwise provided, Debt
Securities will bear interest at an initial rate per annum for an initial period
as set forth in the applicable Prospectus Supplement.
The Subordinated Debt Securities will be subordinate to all existing and
future Senior Indebtedness, each as defined herein. See "Description of Debt
Securities -- Provisions Applicable to Subordinated Debt Securities." As of
March 31, 1998, the aggregate amount of Senior Indebtedness of the Company was
approximately $3.7 billion.
Unless otherwise specified herein or in the applicable Prospectus
Supplement, Debt Securities will be issued in fully registered book-entry form
and will be registered in the name of The Depository Trust Company, as
depositary ("DTC"), or its nominee. Interests in the Debt Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. Debt Securities will not be issuable as
certificated securities except as specified herein or in the applicable
Prospectus Supplement. See "DTC Book-Entry-Only System."
Payment of principal of and interest on the Debt Securities will be made to
DTC so long as DTC or its nominee is the registered owner of the Debt
Securities. The disbursement of such payments to beneficial owners of the Debt
Securities ("Beneficial Owners") will be the responsibility of the DTC
Participants and the Indirect Participants, all as defined and more fully
described in this Prospectus under the caption "DTC Book-Entry-Only System."
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities will be subject to redemption at the option of the Company prior to
maturity as set forth herein and in the applicable Prospectus Supplement. See
"Description of Debt Securities." The applicable Prospectus Supplement will also
contain information, where applicable, concerning certain United States federal
income tax considerations relating to, and any listing on a securities exchange
of, the Debt Securities covered by such Prospectus Supplement.
This Prospectus, appropriately supplemented, may also be delivered in
connection with any remarketing of Remarketed Notes.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The Debt Securities may be sold directly by the Company to one or more
institutional purchasers, through agents designated from time to time, through
dealers or underwriters or through any combination of the above. If any agents
of the Company or any underwriters are involved in the sale of the Debt
Securities, the names of such agents or underwriters and any applicable
commissions or discounts will be set forth in the Prospectus Supplement. See
"Plan of Distribution" for indemnification arrangements which the Company is
prepared to make available to underwriters and agents for the sale of the Debt
Securities.
---------------------
The date of this Prospectus is April 28, 1998.
<PAGE> 18
CERTAIN PERSONS PARTICIPATING IN AN OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBT SECURITIES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH SUCH
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("1934 Act") and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission ("SEC"). Such reports, proxy statements and other information
concerning the Company can be inspected and copied at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; 500
West Madison Street, Chicago, Illinois 60611 and 7 World Trade Center, New York,
New York 10048 and copies of such material can be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such material can also be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005. In addition, the
SEC maintains a Web site that contains reports, proxy and other information
regarding registrants, such as the Company, that file electronically with the
SEC. The address of such Web site is http://www.sec.gov. The address of the
Company's principal executive offices and its telephone number are 2000 Second
Avenue, Detroit, Michigan 48226 and (313) 235-8000.
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933 with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the SEC. The information
so omitted may be obtained from the SEC's principal office in Washington, D.C.
upon payment of the fees prescribed by the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed by the Company with the SEC
pursuant to the 1934 Act, are hereby incorporated in this Prospectus by
reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. DTE Energy Company's definitive proxy statement, dated March 17,
1998, in connection with its April 27, 1998 Annual Meeting of Common Stock
Shareholders.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
All reports and definitive proxy or information statements filed pursuant
to Section 13, 14 or 15(d) of the 1934 Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Debt Securities
offered by the Prospectus shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge, upon the written
or oral request of any person to whom a copy of the Prospectus has been
delivered, a copy of any or all of the documents referred to above which are
incorporated in this Prospectus by reference, other than exhibits to such
documents. Requests should be directed to Susan M. Beale, Vice President and
Corporate Secretary, The Detroit Edison Company, 2000 Second Avenue, Detroit,
Michigan 48226; (313) 235-8000.
2
<PAGE> 19
THE COMPANY
GENERAL
The Company, incorporated in Michigan since 1967, is a regulated public
utility engaged in the generation, purchase, transmission, distribution and sale
of electric energy in a 7,600 square mile are in Southeastern Michigan. The
Company's service area includes about 13% of Michigan's total land area and
about half of its population (approximately five million people). The Company's
residential customers reside in urban and rural areas, including an extensive
shoreline along the Great Lakes and connecting waters.
DTE ENERGY COMPANY
DTE Energy Company ("DTE Energy"), a Michigan corporation incorporated in
1995, is an exempt holding company under the Public Utility Holding Company Act.
As a result of the 1996 corporate restructuring, DTE Energy became the parent
holding company of the Company and certain previously wholly-owned Company
subsidiaries. DTE Energy has no significant operations of its own. The Company
is DTE Energy's principal operating subsidiary, representing approximately 96%
and 97% of DTE Energy's assets and revenues, respectively, at December 31, 1997.
USE OF PROCEEDS
The Company is offering hereby a maximum of $165,000,000 aggregate
principal amount of its Debt Securities. Net proceeds from the sale of the Debt
Securities will be used to refund or replace funds utilized by the Company for
the purpose of meeting debt and preferred stock refundings (including optional
redemptions).
REGULATORY MATTERS
Federal and state legislators and regulators are working to introduce
competition and customer choice into the generation segment of the electric
public utility industry, believing that competition will lead to reduced
electric rates and stimulate economic growth. The Company has been voluntarily
participating in these efforts. Traditional utility services are being
unbundled, with many of such services becoming non-regulated; and a demand is
being created for new energy-related services.
There are ongoing Michigan legislative, judicial and administrative
proceedings considering the deregulation of the generation segment of the
Michigan electric public utility industry, among other things. The Company is
not able to predict the outcome or timing of these proceedings.
In October 1997, the Michigan Public Service Commission ("MPSC") issued a
series of Orders, with one of the three MPSC Commissioners dissenting, which
provided for a competitive direct access program for the Company. These Orders
did not provide a definitive basis for the Company to recover its potentially
stranded costs, substantially all of which costs were fully litigated in
previous rate proceedings before the MPSC. On January 14, 1998, in response to
motions for rehearing, the MPSC, with one Commissioner dissenting, issued a
Restructuring Order. In this Order, the MPSC expressed its long-standing view
(disputed by the Company) that it has authority under Michigan state law to
establish a mandatory direct access program. The Order established a phase-in
schedule for open access, providing for the Company to implement the program in
incremental blocks of 225 megawatts in March and June 1998 and January 1999,
2000 and 2001, with all remaining customers having the option of choosing open
access service on January 1, 2002. Portions of the program are subject to the
final approvals of the Federal Energy Regulatory Commission ("FERC"). Using an
estimated market price for power of 2.9 cents per kilowatt-hour, the MPSC found
that the Company's stranded costs were $2.48 billion and that a transition
charge of 1.25 cents per kilowatt-hour was appropriate. The Company is uncertain
whether the transition
3
<PAGE> 20
charge will be sufficient to recover its stranded costs. A securitization charge
was not established, with the MPSC indicating that such a determination should
await enabling state legislation. The MPSC also determined that the Company's
Power Supply Cost Recovery ("PSCR") should be suspended one month after open
access load reaches 225 megawatts and that open access customers should have
rates providing for the collection of nuclear decommissioning and site security
charges.
The provisions of the October 1997 Orders providing for an annual
proceeding for stranded cost recovery true-up based upon the actual price paid
by direct access customers and the limitation of reciprocity prior to completion
of the phase-in period only to utilities and utility affiliates remained
unchanged by the Restructuring Order.
On January 20, 1998, the Michigan Court of Appeals ruled that the MPSC had
sufficient statutory authority under Michigan law to authorize an experimental
retail wheeling program. On February 10, 1998, the Company requested the
Michigan Supreme Court to grant leave to appeal the January 20, 1998, Michigan
Court of Appeals decision.
On February 11, 1998, the MPSC issued an order directing the Company to
file its retail access tariff by February 25, 1998, and also directed the MPSC
Staff to begin discussions to amicably resolve implementation issues. In its
February 25, 1998 filing of the retail access tariffs, the Company indicated
that several preconditions must be met prior to beginning direct access,
including assurance of stranded cost recovery through a statewide true-up
mechanism, and a base rate freeze. Several parties have filed objections to the
Company's retail access tariff and the preconditions.
The Company filed in March 1998 to suspend the PSCR clause and to set the
Fermi 2 Performance Standard adjustment at zero.
On April 6, 1998, the Company submitted a Draft Customer Choice
Implementation Plan to the MPSC Staff. The draft plan outlines the guidelines
and processes necessary to successfully implement retail access in the State of
Michigan. Key aspects of this Plan include: rules for supplier and customer
participation, an explanation of the tasks and processes involved in changing
the Company's business practices to accommodate customer choice, and a
description of an awareness and education campaign to educate employees,
customers, and others on the basics of customer choice. The MPSC Staff has
initiated a series of three public forums to discuss the draft implementation
plans of the Company.
On April 14, the MPSC issued an order granting the Company's March 31, 1998
request to waive competitive bidding for Connors Creek and restart the plant.
Based on a 1995 case, the MPSC concluded that the Company has a need for at
least 417 MW of additional capacity in 1998, 570 MW of additional capacity in
1999, and additional capacity in future years. The MPSC reiterated findings from
an earlier order which directed the Company to implement a retail wheeling
experiment covering 90 MW of load once the utility required additional capacity.
The order indicated that if the Company fails to take reasonable actions to
provide adequate supplies for its customers, then the MPSC will make
corresponding adjustments to the utility's authorized rate of return to reflect
actual service quality. In an April 24, 1998 informational filing with the MPSC,
the Company has proposed customer options that will assist in meeting customer
demand this summer. The Company also proposed an experimental program permitting
certain industrial customers with interruptible service to secure their own
backup power during the summer peak periods in 1998 and 1999. The filing also
suggests that large customers may be permitted to negotiate for reduced usage
under a capacity release program. The Company declined to implement the 90 MW
retail wheeling experiment for the reason that it would not contribute to
meeting the capacity need.
The Company is continuing to hold discussions with the MPSC, the Michigan
legislature and other interested parties on all of the above matters.
4
<PAGE> 21
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratios of earnings to fixed charges* were as follows for the
respective periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
THREE MONTHS ENDED --------------------------------
MARCH 31, 1998 1997 1996 1995 1994 1993
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
3.17 3.24 2.71 3.21 3.13 3.25
</TABLE>
- -------------------------
* For the purpose of computing this ratio, earnings represent net income,
(including accretion income and deferred Fermi 2 depreciation, amortization
and return) before deducting income taxes and fixed charges. Fixed charges
represent total interest charges, interest factor of rents and amortization or
debt discount, premium and expense. See Note 1 of Notes to Consolidated
Financial Statements appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 for a description of accretion income and
deferred Fermi 2 depreciation, amortization and return.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities, other than General and Refunding Mortgage Bonds, are
to be issued under an indenture dated as of June 30, 1993, as supplemented, and
Supplemental Indentures creating each applicable series of Debt Securities
between the Company and Bankers Trust Company, as trustee (the "Trustee")
(together, the "Indenture").
The General and Refunding Mortgage Bonds (the "Mortgage Bonds") are to be
issued under and secured by, the Mortgage and Deed of Trust dated as of October
1, 1924 between the Company and Bankers Trust Company, as trustee (the "Mortgage
Trustee"), as amended and supplemented by various supplemental indentures (the
"Mortgage") and as to be further amended and supplemented by one or more
supplemental indentures creating the Mortgage Bonds. Each series of secured
Remarketed Notes and any other Secured Debt Securities will be secured as to
payment of principal, interest and premium, if any, by Mortgage Bonds.
The Debt Securities to be offered by this Prospectus are limited to
$165,000,000 aggregate principal amount. However, the Indenture does not limit
the amount of securities which can be issued thereunder and provides that
additional securities of any series may be issued thereunder up to the aggregate
principal amount which may be authorized from time to time by the Company. See
"Provisions Applicable to General and Refunding Mortgage Bonds -- Issuance of
Additional Bonds" herein for information regarding limitations on the amount of
Mortgage Bonds issuable under the Mortgage.
Unless otherwise indicated herein or in the applicable Prospectus
Supplement, the Debt Securities will be issued in denominations of $1,000 and
integral multiples thereof.
Copies of the Indenture and the Mortgage are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The summaries herein
are summaries of certain provisions of the Indenture and the Mortgage and do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all provisions of the Indenture and the Mortgage, including the
definition therein of certain terms. The following summaries set forth certain
general terms and provisions of the Debt Securities to which any Prospectus
Supplement may relate. The particular terms of the Debt Securities offered by
any Prospectus Supplement and the extent, if any, to which such general
provisions may apply to the Debt Securities so offered, will be described in the
Prospectus Supplement relating to such Debt Securities.
5
<PAGE> 22
PROVISIONS APPLICABLE TO ALL DEBT SECURITIES
GENERAL
Reference is made to the Prospectus Supplement that accompanies this
Prospectus for the following terms, to the extent permitted by the Indenture or
the Mortgage, as the case may be, and other information with respect to the Debt
Securities being offered thereby: (i) the designation, aggregate principal
amount and authorized denominations of such Debt Securities; (ii) the percentage
of their principal amount at which such Debt Securities will be issued; (iii)
the date (or the manner of determining or extending the date or dates) on which
the principal of such Debt Securities will be payable; (iv) the terms for
conversion or exchange, if any, of the Debt Securities; (v) the classification
as Senior Debt Securities, including as Remarketed Notes or Mortgage Bonds, or
as Subordinated Debt Securities; (vi) whether such Debt Securities will be
issued in fully registered form or in bearer form or any combination thereof;
(vii) whether such Debt Securities will be issued in the form of one or more
global securities and whether such global securities are to be issuable in a
temporary global form or permanent global form; (viii) if other than U.S.
dollars, the currency or currencies or currency unit or units for which Debt
Securities may be denominated and purchased and the currency or currencies or
currency units in which principal, premium (if any) and any interest may be
payable; (ix) if the currency for which Debt Securities may be purchased or in
which principal, premium (if any) and any interest may be payable is at the
election of the Company or the purchaser, the manner in which such an election
may be made and the terms of such election; (x) the rate per annum at which such
Debt Securities will bear interest, if any, or the method of determination of
such rate; (xi) the dates on which such interest, if any, will be payable, or
the method of determining such dates; (xii) the option of the Company, if any,
to defer interest payments, and the terms and conditions of such interest
deferral provisions; (xiii) any mandatory or optional sinking fund, redemption
or other similar terms; (xiv) if the Debt Securities are Secured Securities, a
ranking of such series with other securities of the Company; (xv) any index or
other method used to determine the amount of payments of principal, premium (if
any) and interest, if any, on such Debt Securities; (xvi) if a trustee other
than Bankers Trust Company of New York is named for such Debt Securities, the
name of such trustee; and (xvii) any other specific terms of the Debt
Securities. All Debt Securities of any one series need not be issued at the same
time and all the Debt Securities of any one series need not bear interest at the
same rate or mature on the same date.
If any of the Debt Securities are sold for foreign currencies or foreign
currency units or if the principal of, premium, if any, or interest, if any, on
any series of Debt Securities is payable in foreign currencies or foreign
currency units, the restrictions, elections, tax consequences, specific terms
and other information with respect to such issue of Debt Securities and such
currencies or currency units will be set forth in an applicable Prospectus
Supplement relating thereto.
PROVISIONS APPLICABLE TO GENERAL AND REFUNDING MORTGAGE BONDS
GENERAL
The Mortgage Bonds, which may be issued hereunder or one of which may
secure the Company's obligations with respect to a series of Secured Debt
Securities, are to be issued under and secured by the Mortgage. A copy of the
Mortgage is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, and reference is hereby made to the Mortgage for full and
complete statements of the provisions thereof, including the definitions of
certain terms used, and for other information with respect to the Mortgage
Bonds.
The following statements concerning the Mortgage Bonds and the Mortgage are
brief summaries of certain provisions contained in the Mortgage. They do not
purport to be complete and are qualified in their entirety by reference to the
Mortgage as noted below.
6
<PAGE> 23
SINKING FUND PROVISIONS AND COLLATERAL
The Mortgage contains no sinking fund or other similar restrictive
requirements.
The bonds of Series KKP No. 10-15, 1989 Series BP, 1989 Series BP No. 2,
1991 Series AP, 1991 Series BP, 1991 Series CP, 1991 Series DP, 1991 Series EP,
1991 Series FP, 1992 Series AP, 1992 Series BP, 1992 Series CP, 1993 Series AP,
1993 Series FP, 1993 Series IP, 1994 Series AP and 1994 Series BP, 1995 AP and
1995 BP were issued as security for revenue bonds. The bonds of 1993 Series H,
1993 Series K and 1994 Series C were issued as security for the Company's
Remarketed Secured Notes 1993 Series A Due 2028, 1993 Series B due 2033, and
1994 Series C due 2034, respectively. Such bonds contain provisions which
correspond to the revenue bonds or notes they collateralize in respect of
principal amounts, interest rates, maturity dates and redemption. All payments
of interest on, and reductions of the principal amounts of, such revenue bonds
or notes will be credited as payments to, or will give rise to reductions of
principal amounts of, the corresponding bonds issued under the Mortgage.
FORM AND DENOMINATIONS OF MORTGAGE BONDS; BOOK-ENTRY BONDS
The Mortgage Bonds may be issued in whole or in part in the form of one or
more Global Securities that shall be deposited with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") or such other Depositary as
may be specified, and registered in the name of a nominee of the Depositary
("Book-Entry Bonds"). See "DTC Book-Entry Only System." Otherwise, the Mortgage
Bonds will be issued only in fully registered form in denominations of $1,000 or
any authorized multiple thereof. Mortgage Bonds of any denomination will be
exchangeable without charge (except for stamp taxes and other governmental
charges) for Mortgage Bonds of the same series of other denominations.
PRIORITY AND SECURITY
The Mortgage Bonds will rank equally as to security with all mortgage bonds
of all other series outstanding under the Mortgage except insofar as any
sinking, improvement or analogous fund may be deemed to afford additional
security for the bonds of any series and except that, as provided in Section 3
of Article VI of the Mortgage, the Mortgage Trustee may, when in possession
during a default, apply any residue of collections to payment of principal of
such bonds as are then due if all of the bonds have not become due.
The Company has good and marketable title to all properties standing of
record in its name (which include all of those properties, except pollution
control facilities standing in the names of certain municipalities which are
being sold to the Company pursuant to installment sales contracts and the
undivided ownership interest of the Michigan Public Power Agency in a portion of
the Belle River Power Plant, on which its principal plants, generating stations
and substations are erected and on which its general office and service
buildings are constructed and all other important parcels of real estate and
improvements thereon), subject to the lien of the Mortgage and subject to minor
exceptions, defects, irregularities and deficiencies which, in the opinion of
the Company, do not materially impair the use of such property, and has adequate
rights to maintain and operate such of its transmission and distribution
facilities as are located on public or other property. The Mortgage is a first
lien (subject only to excepted encumbrances as described in the Mortgage) on
substantially all of the Company's properties and franchises and will (subject
to the necessity for particular filings and recordings in the case of certain
personal property) constitute a first lien on any such properties hereafter
acquired by the Company, except that (i) after-acquired property will be subject
to prior liens and encumbrances, if any, existing when acquired by the Company,
(ii) the Mortgage will not become a lien upon after-acquired real property in a
new county until it has been duly filed and recorded, and (iii) the Mortgage may
not be effective as to property acquired subsequent to the filing of a
bankruptcy proceeding with respect to the Company.
7
<PAGE> 24
ISSUANCE OF ADDITIONAL BONDS
Additional bonds may be issued under the Mortgage (Article III) on the
basis of retirements of equal amounts of bonds or prior lien bonds; deposit of
cash with the Mortgage Trustee; and 60% of property additions; provided that (in
the case of the issue of bonds upon the basis of property additions or the
deposit of cash) the earnings of the Company (after all taxes) available for
interest and reserves, including depreciation, for any consecutive twelve-month
period within the immediately preceding fifteen months shall have been at least
one and three-quarters times the annual interest charges on all bonds then
outstanding under the Mortgage, all bonds then applied for, and all prior lien
bonds if there are any outstanding. Cash deposited with the Mortgage Trustee as
the basis for the issuance of additional bonds may be withdrawn by the Company
up to an amount equal to the aggregate principal amount of bonds to the
authentication and delivery of which the Company shall have become entitled on
the basis of property additions, or equal to the aggregate principal amount of
bonds theretofore authenticated and delivered under the Mortgage which are
delivered to the Mortgage Trustee for cancellation (Article III, Section 7).
At March 31, 1998, $1.6 billion of Mortgage Bonds could have been issued on
the basis of bond retirements.
RELEASE PROVISIONS
The Company may, in the ordinary course of business, use and consume
materials and equipment and may alter, repair, replace, change location or
position of and add to plants, buildings, machinery and other fixtures without
notice to the bondholders. Leases and contracts may be entered into, terminated
or altered, and materials, equipment and supplies may be sold, exchanged or
otherwise disposed of, free from the lien of the Mortgage, all in the ordinary
course of business (Article X, Sections 1 and 2); the Company may also surrender
or modify its franchises or sell or exchange any other part of its property upon
compliance with the Mortgage requirements (Article X, Sections 3 and 4; Article
XA, Section 2); and the Mortgage Trustee is required to report annually to the
bondholders with respect to any release, or release and substitution of property
(Article XII, Section 7).
MODIFICATION
The Mortgage and the rights and obligations of the Company and of the
bondholders may be modified with the consent of the Company and of the holders
of 85% of the principal amount of bonds outstanding; provided that no such
modification may permit any change in the terms of payment of principal or
interest of any bond without the consent of the holder thereof, nor permit the
creation of any lien ranking prior to or on a parity with the lien of the
Mortgage with respect to any property mortgaged thereunder, nor reduce the
percentage of bondholders necessary to consent to such modification (Article
XV). The Mortgage also provides that the Company and the Mortgage Trustee may
enter into supplemental indentures for various purposes, adding to or not
detracting from the undertakings of the Company, and that any supplemental
indenture shall, insofar as may be required by the provisions of the Trust
Indenture Act of 1939 as then in effect, comply with the provisions of that Act
(Article XVI).
EVENTS OF DEFAULT AND REMEDIES
The following events of default are applicable to the Mortgage Bonds:
failure to pay interest when due on the Mortgage Bonds, continued for 90 days;
failure to pay principal of the Mortgage Bonds when due; failure to pay interest
on outstanding underlying or prior lien Mortgage Bonds when due, continued for
90 days; failure to pay principal on such bonds when due; failure to perform or
observe covenants, agreements or conditions contained in the Mortgage, continued
for 90 days after notice of default; and insolvency or adjudication of
bankruptcy or appointment of a receiver not revoked within 90 days (Article VI,
Section 2).
8
<PAGE> 25
The Company is required to furnish to the Mortgage Trustee an opinion of
counsel as to recordation of each supplemental indenture and an annual opinion
as to recording, filing, re-recording and re-filing of the Mortgage and
supplements thereto (Article XA, Section 3). The Company is also required to
furnish to the Mortgage Trustee an annual certificate of its officers as to
compliance with certain provisions of the Mortgage (Article V, Section 19).
The holders of a majority in principal amount of the Mortgage Bonds have
the right to direct the method and place of conducting all proceedings for the
sale of the trust estate, foreclosure or appointment of a receiver or other
proceedings under the Mortgage (Article VI, Section 15); holders of not less
than a majority in principal amount, upon providing reasonable security and
indemnity to the Mortgage Trustee, can require the Mortgage Trustee to take
action toward the execution or enforcement of the trusts created by the Mortgage
(Article VI, Section 16; Article XII, Section 1(b)(8)).
PROVISIONS APPLICABLE TO ALL DEBT SECURITIES OTHER THAN MORTGAGE BONDS
The Debt Securities may be sold at a substantial discount below their
stated principal amount, bearing no interest or interest at a rate which at the
time of issuance is below market rates. See "Certain United States Federal
Income Tax Considerations" herein. Federal income tax consequences and special
considerations applicable to any such series may also be described in the
Prospectus Supplement relating thereto.
The Debt Securities may be issued in one or more series with the same or
various maturities. (Section 301) Debt Securities may be issued solely in fully
registered form without coupons ("Registered Securities"), solely in bearer form
with or without coupons ("Bearer Securities"), or both as Registered Securities
and Bearer Securities. (Section 301) Registered Securities may be exchangeable
for other Debt Securities of the same series, registered in the same name, for a
like aggregate principal amount in authorized denominations and will be
transferable at any time or from time to time at the aforementioned office. No
service charge will be made to the Holder for any such exchange or transfer
except for any tax or governmental charge incidental thereto. If Debt Securities
of any series are issued as Bearer Securities, the Prospectus Supplement will
contain any restrictions applicable to the offer, sale or delivery of Bearer
Securities and the terms upon which Bearer Securities of the series may be
exchanged for Registered Securities of the series and, if permitted by
applicable laws and regulations, the terms upon which Registered Securities of
the series may be exchanged for Bearer Securities of the series, whether such
Debt Securities are to be issuable in permanent global form with or without
coupons and, if so, whether beneficial owners of interests in any such permanent
global security may exchange such interests for Debt Securities of such series
and the circumstances under which any such exchanges may occur.
Unless otherwise specified in the applicable Prospectus Supplement,
principal and interest, if any, on the Debt Securities offered thereby are to be
payable at the office or agency of the Company maintained for such purposes in
the city where the principal corporate trust office of the Trustee is located,
and will initially be the principal corporate trust office of the Trustee,
provided that payment of interest, if any, may be made (subject to collection)
at the option of the Company by check mailed to the persons in whose names the
Debt Securities are registered at the close of business on the day specified in
the Prospectus Supplement accompanying this Prospectus.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Debt Securities will be exchangeable for other Debt Securities of the same
series and of like tenor, of any authorized denominations and of a like
aggregate principal amount and Stated Maturity (as defined in the Indenture).
Debt Securities may be presented for registration of transfer (with the form of
transfer endorsed thereon duly executed), at the office of the Trustee or at the
office of any transfer agent designated by the Company for such purpose, without
service charge and upon payment of any taxes and other governmental charges as
described in the Indenture. Such transfer
9
<PAGE> 26
or exchange will be effected upon the books of the Trustee or such transfer
agent, as the case may be, being satisfied with the documents of title and
identity of the person making the request. (Section 305)
In the event of any redemption of Debt Securities, the Company shall not be
required to: (i) issue, register the transfer of or exchange such Debt
Securities during a period beginning at the opening of business 15 days before
any selection of such Debt Securities to be redeemed and ending at the close of
business on the day of mailing of the relevant notice of redemption; or (ii)
register the transfer of or exchange any such Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any such Debt Security
being redeemed in part. (Section 305)
SATISFACTION AND DISCHARGE
The Company shall be deemed to have paid and discharged the indebtedness on
all the Debt Securities of a series and the Trustee shall execute instruments
acknowledging the satisfaction and discharge of such indebtedness and, if
applicable, shall pay, or assign or transfer and deliver to the Company the
related Mortgage Bond which has been held as security for the Debt Securities of
such series if (1) (i) the Company has deposited or caused to be deposited with
the Trustee an amount sufficient to pay and discharge the entire indebtedness on
all outstanding Debt Securities of such series for principal (and premium, if
any) and interest to the Stated Maturity or any Redemption Date, as the case may
be; or (ii) the Company has deposited or caused to be deposited with the Trustee
such amount of direct noncallable obligations of, or noncallable obligations the
payment of principal of and interest on which is fully guaranteed by, the United
States of America maturing as to principal and interest in such amounts and at
such times as will, without consideration of any reinvestment thereof, be
sufficient to pay and discharge the entire indebtedness on all outstanding Debt
Securities of such series for principal (and premium, if any) and interest to
the Stated Maturity or any Redemption Date, as the case may be; and (2) the
Company has paid or caused to be paid all other sums payable with respect to the
Debt Securities of such series. (Section 503)
EVENTS OF DEFAULT
Any one of the following events will constitute an Event of Default under
the Indenture with respect to the Debt Securities of any series: (a) failure to
pay any interest on any Debt Security of such series when due, continued for 30
days; (b) failure to pay principal of (or premium, if any) on the Debt
Securities of such series when due; (c) failure to perform any other covenant or
warranty of the Company in the Indenture (other than a covenant or warranty
included in the Indenture solely for the benefit of a series of securities other
than the Debt Securities), continued for 60 days after written notice as
provided in the Indenture; and (d) certain events of bankruptcy, insolvency or
reorganization involving the Company. (Section 601)
If an Event of Default with respect to the Debt Securities of any series
occurs and is continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Debt Securities of such series by
notice as provided in the Indenture may declare the principal amount of such
Debt Securities to be due and payable immediately. At any time after a
declaration of acceleration has been made, but before a judgment or decree for
payment of money has been obtained by the Trustee, and subject to applicable law
and certain other provisions of the Indenture, the holders of a majority in
aggregate principal amount of the Debt Securities of such series may, under
certain circumstances, rescind and annul such acceleration. (Section 602)
The Indenture provides that within 90 days after the occurrence of any
Event of Default thereunder with respect to the Debt Securities of any series,
the Trustee shall transmit, in the manner set forth in the Indenture, notice of
such Event of Default to the holders of the Debt Securities of such series
unless such Event of Default has been cured or waived; provided, however,
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<PAGE> 27
that except in the case of a default in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series, the Trustee
may withhold such notice if and so long as the board of directors, the executive
committee or a trust committee of directors or Responsible Officers of the
Trustee has in good faith determined that the withholding of such notice is in
the interest of the holders of Debt Securities of such series. (Section 701)
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the holders of Debt Securities of such
series by all appropriate judicial proceedings. (Section 603)
The Indenture provides that, subject to the duty of the Trustee during any
default to act with the required standard of care, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Debt Securities, unless such
holders shall have offered to the Trustee reasonable indemnity. (Section 702)
Subject to such provisions for the indemnification of the Trustee, and subject
to applicable law and certain other provisions of the Indenture, the Holders of
a majority in aggregate principal amount of the outstanding Debt Securities of a
series will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee, with respect to the Debt Securities of such
series. (Section 612)
MODIFICATION AND WAIVER
Modification and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the Debt Securities of each series affected
thereby; provided, however, that no such modification or amendment may, without
the consent of the holder of each Debt Security effected thereby, (a) change the
Stated Maturity of the principal of, or any installment of principal of or
interest on, any Debt Securities, (b) reduce the principal amount of, or premium
or interest on, any Debt Securities, (c) change the coin or currency in which
any Debt Securities or any premium or any interest thereon is payable, (d)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity of any Debt Securities (or, in the case of redemption,
on or after the Redemption Date), (e) reduce the percentage and principal amount
of the outstanding Debt Securities, the consent of whose holders is required in
order to take certain actions, (f) change any obligation of the Company to
maintain an office or agency in the places and for the purposes required by the
Indenture, or (g) modify any of the above provisions.(Section 1002)
The holders of at least 66 2/3% in aggregate principal amount of Debt
Securities of any series may, on behalf of the holders of all Debt Securities of
such series, waive compliance by the Company with certain restrictive provisions
of the Indenture. (Section 1109) The holders of not less than a majority in
aggregate principal amount of Debt Securities of any series may, on behalf of
all holders of Debt Securities of such series, waive any past default and its
consequences under the Indenture with respect to the Debt Securities of such
series, except a default (a) in the payment of principal of (or premium, if any)
or any interest on any Debt Security of such series or (b) in respect of a
covenant or provision of the Indenture that cannot be modified or amended
without the consent of the holder of each Debt Security of any series. (Section
613)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may, without the consent of the holders of the Debt Securities,
consolidate or merge with or into, or convey, transfer or lease its properties
and assets substantially as an entirety to, any Person that is a corporation,
partnership or trust organized and validly existing under the laws of any
domestic jurisdiction, or may permit any such Person to consolidate with or
merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, provided that any successor Person
assumes the Company's obligations on the Debt Securities and under the
Indenture, that after giving effect to the transaction no Event of Default, and
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<PAGE> 28
no event which, after notice or lapse of time or both, would become an Event of
Default, shall have occurred and be continuing, and that certain other
conditions are met. (Section 901)
CONCERNING THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture. Bankers Trust
Company also serves as Mortgage Trustee under the Mortgage.
PROVISIONS APPLICABLE TO REMARKETED NOTES
SECURITY
Unless otherwise set forth in the applicable Prospectus Supplement, each
series of Remarketed Notes will be secured as to payment of principal, interest
and premium, if any, by Mortgage Bonds, pledged to the Trustee for the benefit
of the holders of the Remarketed Notes. See "Provisions Applicable to Remarketed
Notes -- Security; Pledge of Mortgage Bond" and "Provisions Applicable to
General and Refunding Mortgage Bonds."
INTEREST
General. The Remarketed Notes will initially bear interest at a rate per
annum and for such period as will be set forth in the Prospectus Supplement
relating thereto (the "Initial Interest Rate"). Thereafter, each Remarketed Note
will bear interest at the Company's option in either the Commercial Paper Term
Mode (as defined below) or the Long Term Rate Mode (as defined below and,
together with the Commercial Paper Term Mode, the "Interest Rate Modes"). Unless
otherwise indicated in the applicable Prospectus Supplement, each Remarketed
Note may bear interest in the same or a different Interest Rate Mode and other
terms from other Remarketed Notes. The interest rate for Remarketed Notes will
be established periodically as described herein by a Remarketing Agent selected
by the Company (the "Remarketing Agent"). If so provided in a Prospectus
Supplement hereto, the Company also may appoint one or more Standby Remarketing
Agents for any Remarketing Agent (each, a "Standby Remarketing Agent") on the
terms described in such Prospectus Supplement and this Prospectus.
Unless otherwise indicated in the applicable Prospectus Supplement,
interest will be payable on any Remarketed Note (i) bearing interest at the
Initial Interest Rate, on the date or dates set forth in the applicable
Prospectus Supplement; (ii) for any Interest Rate Period in the Commercial Paper
Term Mode, on the Interest Rate Adjustment Date commencing the next succeeding
Interest Rate Period for such Remarketed Note and on such other dates (if any)
as will be established upon conversion of such Remarketed Note to the Commercial
Paper Term Mode or upon remarketing of the Remarketed Note in a new Interest
Rate Period in the Commercial Paper Term Mode; and (iii) in the Long Term Rate
Mode, no less frequently than semiannually on such dates as will be established
upon conversion of such Remarketed Note to the Long Term Rate Mode (or upon
remarketing of the Remarketed Note in a new Interest Rate Period in the Long
Term Rate Mode) and set forth in the applicable Remarketed Note in the case of a
fixed interest rate, or as described below under "Floating Interest Rates" in
the case of a floating interest rate, and on the Interest Rate Adjustment Date
commencing the next succeeding Interest Rate Period (each such date, an
"Interest Payment Date"). Such interest will be payable to the holder thereof as
of the related Record Date (the "Record Date"), which, for any Remarketed Note
(x) bearing interest at the Initial Interest Rate is the date or dates set forth
in the applicable Prospectus Supplement, (y) in the Commercial Paper Term Mode,
is the Business Day (as defined below) prior to the related Interest Payment
Date; and (z) in the Long Term Rate Mode is the 15th day (whether or not a
Business Day) prior to the related Interest Payment Date. If any Interest
Payment Date would otherwise be a day that is not a Business Day, such Interest
Payment Date will be postponed to the next succeeding Business Day, and no
interest will accrue on such payment for the period from and after such Interest
Payment Date to the date of such payment on the next succeeding Business Day.
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Interest on Remarketed Notes bearing interest in the Commercial Paper Term
Mode or at a floating interest rate during an Interest Rate Period in the Long
Term Rate Mode will be computed on the basis of actual days elapsed over 360;
provided that, if an applicable Interest Rate Basis (as defined below) is the
CMT Rate or Treasury Rate (each as defined below), interest will be computed on
the basis of actual days elapsed over the actual number of days in the year.
Interest on Remarketed Notes bearing interest at a fixed rate in the Long Term
Rate Mode will be computed on the basis of a year of 360 days consisting of
twelve 30-day months. Interest on Remarketed Notes at the Initial Interest Rate
will be computed on the basis set forth in the applicable Prospectus Supplement.
As used herein, "Business Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions located in
the State of Michigan or in the state in which the principal corporate trust
office of the Trustee is located are authorized or obligated by or pursuant to
law or executive order to close; provided, however, that with respect to
Remarketed Notes in the Long Term Rate Mode as to which LIBOR (as defined below)
is an applicable Interest Rate Basis, such day is also a London Business Day (as
hereinafter defined). "London Business Day" means (i) if the Index Currency (as
hereinafter defined) is other than European Currency Units ("ECU"), any day on
which dealings in such Index Currency are transacted in the London interbank
market or (ii) if the Index Currency is ECU, any day that does not appear as an
ECU non-settlement day on the display designated as "ISDE" on the Reuter Monitor
Money Rates Service (or a day so designated by the ECU Banking Association) or,
if ECU non-settlement days do not appear on the page (and are not so
designated), is not a day on which payments in ECU cannot be settled in the
international interbank market.
Determination of Interest Rates. The interest rate and, in the case of a
floating interest rate, the Spread (as defined below), if any, and the Spread
Multiplier (as defined below), if any, for any Remarketed Note will be
established by the applicable Remarketing Agent in a remarketing as (described
below) or otherwise not later than the first day of each succeeding Interest
Rate Period for such Remarketed Note, which must be a Business Day (each, an
"Interest Rate Adjustment Date"), and will be the minimum rate of interest and,
in the case of a floating interest rate, Spread (if any) and Spread Multiplier
(if any) necessary in the judgment of such Remarketing Agent to produce a par
bid in the secondary market for such Remarketed Note on the date the interest
rate is established. Such rate will be effective for the next succeeding
Interest Rate Period for such Remarketed Note commencing on such Interest Rate
Adjustment Date.
In the event that (i) the applicable Remarketing Agent has been removed or
has resigned and no successor has been appointed, or (ii) such Remarketing Agent
has failed to announce the appropriate interest rate, Spread, if any, or Spread
Multiplier, if any, as the case may be, on the Interest Rate Adjustment Date for
any Remarketed Note for whatever reason, or (iii) the appropriate interest rate,
Spread, if any, or Spread Multiplier, if any, as the case may be, or Interest
Rate Period cannot be determined for any Remarketed Note for whatever reason,
then the Interest Rate Period for such Remarketed Note will be automatically
converted to a Weekly Rate Period (a Commercial Paper Term Period described
below), and the rate of interest thereon will be equal to the rate per annum
announced by Citibank, N.A., or such other nationally recognized bank located in
the United States as the Company may select, as its prime lending rate, (such
rate of interest being referred to herein as the "Special Interest Rate").
The interest rate on the Remarketed Notes will not exceed the "Maximum
Rate," which is defined to mean that rate of interest equal to 15% per annum or
such higher rate as may be established from time to time by the Board of
Directors of the Company.
The Trustee will, upon request of any Beneficial Owner of a Remarketed
Note, advise such Beneficial Owner or the applicable Remarketing Agent of the
interest rate and, in the case of a floating interest rate, the Interest Rate
Basis or Bases, Spread (if any) and Spread Multiplier (if any), and in each case
the other terms applicable to such Beneficial Owner's Remarketed Notes for
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the next Interest Rate Period. Neither the Trustee nor the Company will
otherwise be required to advise Beneficial Owners of the applicable interest
rate.
The interest rate and other terms announced by the Remarketing Agent,
absent manifest error, will be binding and conclusive upon the Beneficial
Owners, the Company and the Trustee.
INTEREST RATE MODES
The times specified below are subject to extension pursuant to standby
remarketing arrangements, if any, as provided herein and in the applicable
Prospectus Supplement. See "Remarketing -- Interest Rate Adjustment Date;
Determination of Interest Rate" below.
Commercial Paper Term Mode. As used herein, "Commercial Paper Term Mode"
means, with respect to any Remarketed Note, the Interest Rate Mode in which the
interest rate on such Remarketed Note is reset on a periodic basis which shall
not be less than one calendar day nor more than 364 consecutive calendar days
and interest is paid as provided for such Interest Rate Mode above under
"Interest -- General". The Interest Rate Period for any Remarketed Note in the
Commercial Paper Term Mode will be a period of not less than one nor more than
364 consecutive calendar days (a "Commercial Paper Term Period"), as determined
by the Company (as described below under "Conversion") or, if not so determined,
by the Remarketing Agent for such Remarketed Note (in its best judgment in order
to obtain the lowest interest cost for such Remarketed Note). Each Commercial
Paper Term Period will commence on the Interest Rate Adjustment Date therefor
and end on the day preceding the date specified by such Remarketing Agent as the
first day of the next Interest Rate Period for such Remarketed Note. A "Weekly
Rate Period" is a Commercial Paper Term Period and will be a period of seven
days commencing on any Interest Rate Adjustment Date and ending on the day
preceding the first day of the next Interest Rate Period for such Remarketed
Note. The interest rate for any Commercial Paper Term Period relating to a
Remarketed Note will be determined not later than 11:00 a.m., New York City
time, on the Interest Rate Adjustment Date for such Remarketed Note, which is
the first day of each Interest Rate Period for such Remarketed Note.
Long Term Rate Mode. As used herein, "Long Term Rate Mode" means, with
respect to any Remarketed Note, the Interest Rate Mode in which the interest
rate on such Remarketed Note is reset in a Long Term Rate Period and interest is
paid as provided for such Interest Rate Mode above under "Interest -- General"
or below under "Floating Interest Rates." The Interest Rate Period for any
Remarketed Note in the Long Term Rate Mode will be established by the Company
(as described below under "Conversion") as a period of more than 364 days and
not exceeding the remaining term to the final Stated Maturity of such Remarketed
Note (a "Long Term Rate Period"); provided, however, that such Interest Rate
Period must end on the day prior to an Interest Payment Date for such Remarketed
Note; and provided further that, if so provided in a Remarketed Note in the Long
Term Rate Mode and specified at the time of remarketing into a Long Term Rate
Period, the Company may shorten the Interest Rate Period and provide for payment
of a premium in respect thereof for any such Remarketed Note upon written notice
to the Remarketing Agent and the Trustee not less than thirty (30) days prior to
the date upon which such shortened Interest Rate Period shall expire. Promptly
upon the receipt of such notice, and, in any case, not later than the close of
business on such date, the Trustee will transmit such information to DTC in
accordance with DTC's procedures as in effect from time to time. The interest
rate, or Spread (if any) and Spread Multiplier (if any) for any Remarketed Note
in the Long Term Rate Mode will be determined not later than 11:00 a.m., New
York City time, on the Interest Rate Adjustment Date for such Remarketed Note,
which is the first day of each Interest Rate Period for such Remarketed Note.
If any Remarketed Note is subject to early remarketing as provided above,
the Interest Rate Period may be shortened by the Company to end on any date on
and after the Initial Early Remarketing Date, if any, specified in the
Remarketed Note, upon prior written notice as provided above. On and after the
Initial Early Remarketing Date, if any, on the Interest Rate Adjustment Date
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relating to such shortened Interest Rate Period for such Remarketed Note, the
Company will pay a premium to the tendering Beneficial Owner of the Remarketed
Note, together with accrued interest, if any, thereon at the applicable rate
payable to such Interest Rate Adjustment Date. Unless otherwise specified in the
Remarketed Note, the premium will be an amount equal to the Initial Early
Remarketing Premium specified therein (as adjusted by the Annual Early
Remarketing Premium Percentage Reduction specified therein, if applicable),
multiplied by the principal amount of the Remarketed Note subject to early
remarketing. The Initial Early Remarketing Premium, if any, will decline at each
anniversary of the Initial Early Remarketing Date by an amount equal to the
applicable Annual Early Remarketing Premium Percentage Reduction, if any,
specified in the Remarketed Note until the premium is equal to 0.
CONVERSION
The Company may change the Interest Rate Mode at its option in the manner
described below.
Conversion Between Commercial Paper Term Periods. Each Remarketed Note in a
Commercial Paper Term Period may be remarketed into the same Interest Rate
Period or converted at the option of the Company to a different Commercial Paper
Term Period on any Interest Rate Adjustment Date upon receipt by the Remarketing
Agent and the Trustee of a notice, which will be in or promptly confirmed in
writing (which includes facsimile or appropriate electronic media), from the
Company (a "Conversion Notice") prior to 9:30 a.m., New York City time, or the
remarketing of such Remarketed Note, whichever later occurs, on such Interest
Rate Adjustment Date.
Conversion from the Commercial Paper Term Mode to the Long Term Rate
Mode. Each Remarketed Note in the Commercial Paper Term Mode may be converted at
the option of the Company to the Long Term Rate Mode on any Interest Rate
Adjustment Date upon receipt not less than ten (10) days prior to such Interest
Rate Adjustment Date by the Remarketing Agent and the Trustee of a Conversion
Notice from the Company.
Conversion Between Long Term Rate Periods or from the Long Term Rate Mode
to the Commercial Paper Term Mode. Each Remarketed Note in a Long Term Rate
Period may be remarketed in the same Interest Rate Period or converted at the
option of the Company to a different Long Term Period or from the Long Term Rate
Mode to the Commercial Paper Term Mode on any Interest Rate Adjustment Date for
such Remarketed Note upon receipt by the Trustee and the Remarketing Agent for
such Remarketed Note of a Conversion Notice from the Company not less than ten
(10) days prior to such Interest Rate Adjustment Date.
Conversion Notice. Each Conversion Notice must state each Remarketed Note
to which it relates and the new Interest Rate Mode (if applicable), the new
Interest Rate Period (which, if not so stated, shall be the Weekly Rate Period),
the date of the applicable conversion (the "Conversion Date") and, with respect
to any Long Term Rate Period, any optional redemption or repayment terms for
each such Remarketed Note. If the Company revokes a Conversion Notice or the
Trustee and the Remarketing Dealer fail to receive a Conversion Notice from the
Company by the specified date in advance of the Interest Rate Adjustment Date
for a Remarketed Note, the Remarketed Note shall be converted automatically to
the Weekly Rate Period.
Revocation or Change of Conversion Notice or Floating Interest Rate
Notice. The Company may, upon written notice received by the Trustee and the
applicable Remarketing Agent, revoke any Conversion Notice or Floating Interest
Rate Notice (as defined herein) or change the Interest Rate Mode to which such
Conversion Notice relates or change any Floating Interest Rate Notice up to 9:30
a.m., New York City time, on the Conversion Date, subject to the limitation set
forth in the next paragraph.
Limitation on Conversion, Change of Conversion Notice or Floating Interest
Rate Notice and Revocation. Notwithstanding the foregoing, the Company may not,
without the consent of the applicable Remarketing Agent, convert any Remarketed
Note or revoke or change any Conversion
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Notice or Floating Interest Rate Notice at or after the time at which such
Remarketing Agent has determined the interest rate, or Spread (if any) and
Spread Multiplier (if any), for any Remarketed Note being remarketed (i.e., the
time at which such Remarketed Note has been successfully remarketed, subject to
settlement on the related Interest Rate Adjustment Date). The Remarketing Agent
may advise the Company of indicative rates from time to time, or at any time
upon the request of the Company, prior to making such determination of the
interest rate, Spread or Spread Multiplier, as the case may be.
TENDER OF REMARKETED NOTES
Each Remarketed Note will be automatically tendered for purchase, or deemed
tendered for purchase, on each Interest Rate Adjustment Date relating thereto.
Remarketed Notes will be purchased on the Interest Rate Adjustment Date relating
thereto as described below.
REMARKETING
When any Remarketed Note is tendered for remarketing, the Remarketing Agent
therefor will use its reasonable efforts to remarket such Remarketed Note on
behalf of the Beneficial Owner thereof at a price equal to 100% of the principal
amount thereof. The Remarketing Agent may purchase tendered Remarketed Notes for
its own account in a remarketing, but will not be obligated to do so. The
Company may offer to purchase Remarketed Notes in a remarketing, provided that
the interest rate established with respect to Remarketed Notes in such
remarketing is not different from the interest rate that would have been
established if the Company had not purchased such Remarketed Notes. Any
Remarketed Notes for which the Company shall have given a notice of redemption
shall not be considered in a remarketing.
Interest Rate Adjustment Date; Determination of Interest Rate. By 11:00
a.m., New York City time, on the Interest Rate Adjustment Date for any
Remarketed Note, the applicable Remarketing Agent will determine the interest
rate for such Remarketed Note being remarketed to the nearest one
hundred-thousandth (0.00001) of one percent per annum for the next Interest Rate
Period in the case of a fixed interest rate, and the Spread (if any) and Spread
Multiplier (if any) in the case of a floating interest rate; provided, that
between 11:00 a.m., New York City time, and 11:50 a.m., New York City time, the
Remarketing Agent and the Standby Remarketing Agent, if any, will use their
reasonable efforts to determine the interest rate for any Remarketed Notes not
successfully remarketed as of the applicable deadline specified in this
paragraph. In determining the applicable interest rate for such Remarketed Note
and other terms, such Remarketing Agent will, after taking into account market
conditions as reflected in the prevailing yields on fixed and variable rate
taxable debt securities, (i) consider the principal amount of all Remarketed
Notes tendered or to be tendered on such date and the principal amount of such
Remarketed Notes prospective purchasers are or may be willing to purchase and
(ii) contact, by telephone or otherwise, prospective purchasers and ascertain
the interest rates therefor at which they would be willing to hold or purchase
such Remarketed Notes.
Notification of Results; Settlement. By 12:30 p.m., New York City time, on
the Interest Rate Adjustment Date for any Remarketed Notes, the applicable
Remarketing Agent will notify the Company and the Trustee in writing (which may
include facsimile or other electronic transmission), of (i) the interest rate
or, in the case of a floating interest rate, the initial interest rate, the
Spread and Spread Multiplier and the Initial Interest Reset Date (as defined
herein), applicable to such Remarketed Notes for the next Interest Rate Period,
(ii) the Interest Rate Adjustment Date, (iii) the Interest Payment Dates, for
any Remarketed Notes in the Commercial Paper Term Mode (if other than the
Interest Rate Adjustment Date) or the Long Term Rate Mode, (iv) the optional
redemption terms, if any, and early remarketing terms, if any, in the case of a
remarketing into a Long Term Rate Period, (v) the aggregate principal amount of
tendered Remarketed Notes and (vi) the aggregate principal amount of such
tendered Remarketed Notes which such Remarketing Agent was able to remarket, at
a price equal to 100% of the principal amount thereof plus accrued interest, if
any.
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Immediately after receiving such notice and, in any case, not later than 1:30
p.m., New York City time, the Trustee will transmit such information and any
other settlement information required by DTC to DTC in accordance with DTC's
procedures as in effect from time to time.
By telephone at approximately 1:00 p.m., New York City time, on such
Interest Rate Adjustment Date, the Remarketing Agent will advise each purchaser
of such Remarketed Notes (or the DTC Participant of each such purchaser who it
is expected in turn will advise such purchaser) of the principal amount of such
Remarketed Notes that such purchaser is to purchase.
Each purchaser of Remarketed Notes in a remarketing will be required to
give instructions to its DTC Participant to pay the purchase price therefor in
same day funds to the Remarketing Agent against delivery of the principal amount
of such Remarketed Notes by book entry through DTC by 3:00 p.m., New York City
time, on the Interest Rate Adjustment Date. Any Remarketed Notes bearing
interest in the Commercial Paper Term Mode for the Interest Rate Period
immediately preceding a remarketing will be settled at a price of 100% of the
principal amount thereof plus accrued interest from the most recent Interest
Payment Date therefor to the date of settlement.
All tendered Remarketed Notes will be automatically delivered to the
account of the Trustee (or such other account meeting the requirements of DTC's
procedures as in effect from time to time), by book entry through DTC against
payment of the purchase price or redemption price therefor, on the Interest Rate
Adjustment Date relating thereto.
The applicable Remarketing Agent will make, or cause the Trustee to make,
payment to the DTC Participant of each tendering Beneficial Owner of Remarketed
Notes subject to a remarketing, by book entry through DTC by the close of
business on the Interest Rate Adjustment Date against delivery through DTC of
such Beneficial Owner's tendered Remarketed Notes, of the purchase price for
tendered Remarketed Notes that have been sold in the remarketing. If any such
Remarketed Notes were purchased pursuant to a Special Mandatory Purchase subject
to receipt of funds from the Company or the Liquidity Provider (as defined
below), if any, as the case may be, the Trustee will make such payment of, the
purchase price of such Remarketed Notes plus, accrued interest, if any, to such
date.
The transactions described above for a remarketing of any Remarketed Notes
will be executed on the Interest Rate Adjustment Date for such Remarketed Notes
through DTC in accordance with the procedures of DTC, and the accounts of the
respective DTC Participants will be debited and credited and such Remarketed
Notes delivered by book entry as necessary to effect the purchases and sales
thereof, in each case as determined in the related remarketing.
Except as otherwise set forth herein under "Provisions Applicable to
Remarketed Notes -- Purchase and Redemption of Remarketed Notes," any Remarketed
Notes tendered in a remarketing will be purchased solely out of the proceeds
received from purchasers of such Remarketed Notes in such remarketing, and
neither the Remarketing Agent for such Remarketed Notes nor the Standby
Remarketing Agent, if any, or the Company will be obligated to provide funds to
make payment upon any Beneficial Owner's tender in a remarketing.
Although tendered Remarketed Notes will be subject to purchase by the
Remarketing Agent in a remarketing, the Remarketing Agent will not be obligated
to purchase any such Remarketed Notes.
The remarketing procedures set forth above will apply to all Remarketed
Notes except to the extent otherwise indicated in the applicable Prospectus
Supplement for such Remarketed Notes. The settlement and remarketing procedures
described above, including provisions for payment by purchasers of tendered
Remarketed Notes or for payment to selling Beneficial Owners of tendered
Remarketed Notes, may be modified to the extent required by DTC. In addition,
the Remarketing Agent may, in accordance with the terms of the Indenture, modify
the settlement and remarketing procedures set forth above in order to facilitate
the settlement process.
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As long as DTC's nominee holds the certificates representing any Remarketed
Notes in the book entry system of DTC, no certificates for such Remarketed Notes
will be delivered by any selling Beneficial Owner to reflect any transfer of
such Remarketed Notes effected in any remarketing.
Failed Remarketing. Unless otherwise provided in the applicable Prospectus
Supplement, Remarketed Notes not successfully remarketed will be subject to
Special Mandatory Purchase. The obligation of the Company to effect a Special
Mandatory Purchase of the Remarketed Notes (the "Special Mandatory Purchase
Right") can be satisfied either directly by the Company or through a Liquidity
Provider (as hereinafter defined). By 12:00 o'clock noon, New York City time, on
any Interest Rate Adjustment Date, the Remarketing Agent for such Remarketed
Notes will notify the Liquidity Provider, if any, the Trustee and the Company by
telephone or facsimile, confirmed in writing, of the principal amount of
Remarketed Notes that such Remarketing Agent and the Standby Remarketing Agent,
if any, were unable to remarket on such date. In the event that the Company has
entered into a Standby Note Purchase Agreement (as hereinafter defined) which is
in effect on such date, such notice will constitute a demand for the benefit of
the Company to the Liquidity Provider to purchase such unremarketed Remarketed
Notes at a price equal to the outstanding principal amount thereof pursuant to
the terms of such Standby Note Purchase Agreement. If a Standby Note Purchase
Agreement is not in effect on such date, or if the Liquidity Provider fails to
advance funds under the Standby Note Purchase Agreement, the Company will be
required to purchase such unremarketed Remarketed Notes. In either case the
Company will pay all accrued and unpaid interest, if any, on unremarketed
Remarketed Notes to such Interest Rate Adjustment Date. Payment of the principal
amount of unremarketed Remarketed Notes by the Company or the Liquidity
Provider, as the case may be, and payment of accrued and unpaid interest, if
any, by the Company, shall be made by deposit of same-day funds with the Trustee
by 3:00 p.m., New York City time, on such Interest Rate Adjustment Date. See
"Provisions Applicable to Remarketed Notes -- Purchase and Redemption of
Remarketed Notes."
The Remarketing Agent. The Company and the Remarketing Agent for Remarketed
Notes will enter into a Remarketing Agreement, a form of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
summaries below are summaries of certain provisions of the form of Remarketing
Agreement and do not purport to be complete and are subject to, and qualified in
their entirety by, the provisions of the Remarketing Agreement.
For its services in determining the interest rate and remarketing
Remarketed Notes, the Remarketing Agent will receive from the Company a fee to
be determined at the time of execution of the Remarketing Agreement. The
Remarketing Agent may pay to selected broker-dealers, including any Standby
Remarketing Agent, a portion of any fees it receives from the Company for its
services as Remarketing Agent reflecting Remarketed Notes sold through such
broker-dealers to purchasers in remarketings.
The Company will agree to indemnify the Remarketing Agent and the Standby
Remarketing Agent against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"), arising out of or in connection
with its duties under the Remarketing Agreement.
The Remarketing Agreement will provide that the Company may in its absolute
discretion replace the Remarketing Agent by giving 30 days prior notice to the
Remarketing Agent and the Trustee, such replacement to be effective upon the
Company's appointment of a successor to perform the services of the Remarketing
Agent under the Remarketing Agreement. The Remarketing Agreement will also
provide that the Company reserves the right to appoint or replace any Standby
Remarketing Agent at any time.
The Remarketing Agreement will also provide that the Remarketing Agent or
any Standby Remarketing Agent may resign at any time as Remarketing Agent, such
resignation to be effective 30 days after the delivery to the Company and the
Trustee of notice of such resignation. In such case, it shall be the sole
obligation of the Company to appoint a successor Remarketing Agent.
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PURCHASE AND REDEMPTION OF REMARKETED NOTES
Special Mandatory Purchase. Unless otherwise provided in the applicable
Prospectus Supplement, Remarketed Notes which have not been remarketed by 12
o'clock noon, New York City time, on an Interest Rate Adjustment Date for such
Remarketed Notes will be purchased by the Company directly or through a
Liquidity Provider pursuant to the Special Mandatory Purchase Right. In such
event, either the Company or, subject to the terms and conditions of a Standby
Note Purchase Agreement, if any, which may be in effect on such date, the
Liquidity Provider, will deposit same-day funds with the Remarketing Agent for
such Remarketed Notes irrevocably in trust for the benefit of the Beneficial
Owners of Remarketed Notes subject to Special Mandatory Purchase by 3:00 p.m.,
New York City time, on such Interest Rate Adjustment Date. Such funds shall be
in an amount sufficient to pay the aggregate purchase price of such unremarketed
Remarketed Notes, equal to 100% of the principal amount thereof. In the event a
Standby Note Purchase Agreement is in effect but the Liquidity Provider shall
fail to advance funds for whatever reason thereunder, the Company will be
obligated to purchase such unremarketed Remarketed Notes on such Interest Rate
Adjustment Date. The Company will be responsible for paying the accrued
interest, if any, on such Remarketed Notes by depositing sufficient same-day
funds therefor with the Remarketing Agent by 3:00 p.m., New York City time, on
such Interest Rate Adjustment Date. See "The Standby Note Purchase Agreement."
Remarketed Notes purchased by the Liquidity Provider ("Purchased Notes")
shall bear interest at the rates and be payable on the dates as may be agreed
upon by the Company and the Liquidity Provider. Upon purchase of any Remarketed
Note by the Liquidity Provider, all interest accruing thereon from the last date
for which interest was paid shall accrue for the benefit of and be payable to
the Liquidity Provider. Unless an event of default under the Standby Note
Purchase Agreement occurs, the Remarketing Agent for such Remarketed Notes
shall, subject to compliance with applicable securities laws, continue its
remarketing efforts with respect to Purchased Notes until the earlier to occur
of a successful remarketing of such Purchased Notes or the expiration of the
Standby Note Purchase Agreement. All Purchased Notes that have been remarketed
will be subject to Special Mandatory Purchase Rights when held by subsequent
purchasers. In the event the Liquidity Provider holds Purchased Notes on the
date the Standby Note Purchase Agreement expires, the Company will be required
to purchase such Remarketed Notes on such date at a purchase price equal to the
principal amount thereof plus accrued interest thereon to the purchase date.
Such Remarketed Notes will remain outstanding and enjoy the benefits of the
Indenture until such time as the Company delivers certificates for the
Remarketed Notes to the Trustee for cancellation.
Optional Redemption on any Interest Rate Adjustment Date. Each Remarketed
Note in the Commercial Paper Term Mode will be subject to redemption at the
option of the Company in whole or in part on any Interest Rate Adjustment Date
relating thereto without notice to the holders thereof at a redemption price
equal to the aggregate principal amount of such Remarketed Notes to be redeemed
plus accrued interest thereon to the redemption date.
Redemption While Remarketed Notes are in the Long Term Rate Mode. Any
Remarketed Notes in the Long Term Rate Mode are subject to redemption at the
option of the Company at the times and upon the terms specified at the time of
conversion to or within such Long Term Rate Mode.
Allocation. Except in the case of a Special Mandatory Purchase, if the
Remarketed Notes are to be redeemed in part, DTC, after receiving notice of
redemption specifying the aggregate principal amount of Remarketed Notes to be
so redeemed, will determine by lot (or otherwise in accordance with the
procedures of DTC) the principal amount of such Remarketed Notes to be redeemed
from the account of each DTC Participant. After making its determination as
described above, DTC will give notice of such determination to each DTC
Participant from whose account such Remarketed Notes are to be redeemed. Each
such DTC Participant, upon receipt of such notice, will in turn determine the
principal amount of Remarketed Notes to be redeemed from the accounts of the
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Beneficial Owners of such Remarketed Notes for which it serves as DTC
Participant, and give notice of such determination to the Remarketing Agent.
FLOATING INTEREST RATES
While any Remarketed Note bears interest in the Long Term Rate Mode, the
Company may elect a floating interest rate by providing notice, which will be in
or promptly confirmed in writing (which includes facsimile or appropriate
electronic media), received by the Trustee and the Remarketing Agent for such
Remarketed Note (the "Floating Interest Rate Notice") not less than ten (10)
days prior to the Interest Rate Adjustment Date for such Long Term Rate Period.
The Floating Interest Rate Notice must identify by CUSIP number or otherwise the
portion of the Remarketed Note to which it relates and state the Long Term Rate
Period therefor to which it relates. Each Floating Interest Rate Notice must
also state the Interest Rate Basis or Bases, the Initial Interest Reset Date,
the Interest Reset Period and Dates, the Interest Payment Period and Dates, the
Index Maturity (as defined below) and the Floating Rate Maximum Interest Rate
(as defined below) and/or Floating Rate Minimum Interest Rate (as defined
below), if any. If one or more of the applicable Interest Rate Bases is LIBOR or
the CMT Rate, the Floating Interest Rate Notice will also specify the Index
Currency and Designated LIBOR Page or the Designated CMT Maturity Index and
Designated CMT Telerate Page, respectively, as such terms are defined below.
If any Remarketed Note bears interest at a floating rate in a Long Term
Rate Period, such Remarketed Note will bear interest at the rate determined by
reference to the applicable Interest Rate Basis or Bases (a) plus or minus the
Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any, in each
case as specified by the Remarketing Agent. Commencing on the Interest Rate
Adjustment Date for such Long Term Rate Period, the rate at which interest on
such Remarketed Note will be payable will be reset as of each Interest Reset
Date during such Long Term Rate Period specified in the applicable Floating
Interest Rate Notice.
The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Long Term Rate
Period for such Remarketed Note. The "Spread Multiplier" is the percentage of
the related Interest Rate Basis or Bases applicable to such Long Term Rate
Period by which such Interest Rate Basis or Bases will be multiplied to
determine the applicable interest rate from time to time for such Long Term Rate
Period. The "Index Maturity" is the period to maturity of the instrument or
obligation with respect to which the related Interest Rate Basis or Bases will
be calculated.
The applicable floating interest rate on any Remarketed Note during any
Long Term Rate Period will be determined by reference to the applicable Interest
Rate Basis or Interest Rate Bases, which may include (i) the CD Rate, (ii) the
CMT Rate, (iii) the Federal Funds Rate, (iv) LIBOR, (v) the Prime Rate, (vi) the
Treasury Rate, or (vii) such other Interest Rate Basis or interest rate formula
as may be specified in the applicable Floating Interest Rate Notice (each, an
"Interest Rate Basis").
Unless otherwise specified in the applicable Floating Interest Rate Notice,
the interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Floating Interest Rate Notice, the interest rate in effect on
each day will be (i) if such day is an Interest Reset Date, the interest rate
determined as of the Interest Determination Date (as hereinafter defined)
immediately preceding such Interest Reset Date or (ii) if such day is not an
Interest Reset Date, the interest rate determined as of the Interest
Determination Date immediately preceding the most recent Interest Reset Date. If
any Interest Reset Date would otherwise be a day that is not a Business Day,
such Interest Reset Date will be postponed to the next succeeding Business Day,
unless LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, in which case such Interest Reset Date will
be the immediately preceding Business Day. In addition, if the Treasury Rate is
an applicable Interest Rate Basis and the Interest Determination Date would
otherwise fall on an
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Interest Reset Date, then such Interest Reset Date will be postponed to the next
succeeding Business Day.
The applicable Floating Interest Rate Notice will specify whether the rate
of interest will be reset daily, weekly, monthly, quarterly, semiannually or
annually or on such other specified basis (each, an "Interest Reset Period") and
the dates on which such rate of interest will be reset (each, an "Interest Reset
Date"). Unless otherwise specified in the applicable Floating Interest Rate
Notice, the Interest Reset Dates will be, in the case of a floating interest
rate which resets: (i) daily, each Business Day; (ii) weekly, the Wednesday of
each week (unless the Treasury Rate is an applicable Interest Rate Basis, in
which case the Tuesday of each week except as described below); (iii) monthly,
the third Wednesday of each month; (iv) quarterly, the third Wednesday of March,
June, September and December of each year, (v) semiannually, the third Wednesday
of the two months specified in the applicable Floating Interest Rate Notice; and
(vi) annually, the third Wednesday of the month specified in the applicable
Floating Interest Rate Notice.
The interest rate applicable to each Interest Reset Period commencing on
the related Interest Reset Date will be the rate determined as of the applicable
Interest Determination Date. The "Interest Determination Date" with respect to
the CD Rate, the CMT Rate, the Federal Funds Rate and the Prime Rate will be the
second Business Day immediately preceding the applicable Interest Reset Date;
and the "Interest Determination Date" with respect to LIBOR will be the second
London Business Day immediately preceding the applicable Interest Reset Date,
unless the Index Currency is British pounds sterling, in which case the
"Interest Determination Date" will be the applicable Interest Reset Date. The
"Interest Determination Date" with respect to the Treasury Rate will be the day
in the week in which the applicable Interest Reset Date falls on which day
Treasury Bills (as defined below) are normally auctioned (Treasury Bills are
normally sold at an auction held on Monday of each week, unless that day is a
legal holiday, in which case the auction is normally held on the following
Tuesday, except that such auction may be held on the preceding Friday);
provided, however, that if an auction is held on the Friday of the week
preceding the applicable Interest Reset Date, the "Interest Determination Date"
will be such preceding Friday. If the interest rate of any Remarketed Note is a
floating interest rate determined with reference to two or more Interest Rate
Bases specified in the applicable Floating Interest Rate Notice, the "Interest
Determination Date" pertaining to the Remarketed Note will be the most recent
Business Day which is at least two Business Days prior to the applicable
Interest Reset Date on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the related Interest Reset Date.
Either or both of the following may also apply to the floating interest
rate on any Remarketed Note for a Long Term Rate Period: (i) a Floating Rate
Maximum Interest Rate, or ceiling, that may accrue during any Interest Reset
Period and (ii) a Floating Rate Minimum Interest Rate, or floor, that may accrue
during any Interest Reset Period. In addition to any Floating Rate Maximum
Interest Rate that may apply, the interest rate on any Remarketed Note will in
no event be higher than the Maximum Rate established by the Company or the
maximum rate permitted by New York law, as the same may be modified by United
States laws of general application.
Except as provided below or in the applicable Floating Interest Rate
Notice, interest will be payable, in the case of floating interest rates which
reset: (i) daily, weekly or monthly, on the third Wednesday of each month or on
the third Wednesday of March, June, September and December of each year, as
specified in the applicable Floating Interest Rate Notice; (ii) quarterly, on
the third Wednesday of March, June, September and December of each year; (iii)
semiannually, on the third Wednesday of the two months of each year specified in
the applicable Floating Interest Rate Notice; and (iv) annually, on the third
Wednesday of the month of each year specified in the applicable Floating
Interest Rate Notice and, in each case, on the Business Day immediately
following the applicable Long Term Rate Period. If any Interest Payment Date for
the payment of interest at a floating rate (other than following the end of the
applicable Long Term Rate Period) would otherwise be a day that is not a
Business Day, such Interest Payment Date will be postponed to the
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<PAGE> 38
next succeeding Business Day, except that if LIBOR is an applicable Interest
Rate Basis and such Business Day falls in the next succeeding calendar month,
such Interest Payment Date will be the immediately preceding Business Day.
All percentages resulting from any calculation of floating interest rates
will be rounded to the nearest one hundred-thousandth of a percentage point,
with five one-millionths of a percentage point rounded upwards (e.g., 9.876545%
(or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used
in or resulting from such calculation will be rounded, in the case of United
States dollars, to the nearest cent or, in the case of a foreign currency or
composite currency, to the nearest unit (with one-half cent or unit being
rounded upwards).
Accrued floating rate interest will be calculated by multiplying the
principal amount of the applicable Remarketed Note by an accrued interest
factor. Such accrued interest factor will be computed by adding the interest
factor calculated for each day in the applicable Interest Reset Period. Unless
otherwise specified in the applicable Floating Interest Rate Notice, the
interest factor for each such day will be computed by dividing the interest rate
applicable to such day by 360, if an applicable Interest Rate Basis is the CD
Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number
of days in the year if an applicable Interest Rate Basis is the CMT Rate or the
Treasury Rate. Unless otherwise specified in the applicable Floating Interest
Rate Notice, if the floating interest rate is calculated with reference to two
or more Interest Rate Bases, the interest factor will be calculated in each
period in the same manner as if only one of the applicable Interest Rate Bases
applied as specified in the applicable Floating Interest Rate Notice.
Unless otherwise specified in the applicable Floating Interest Rate Notice,
Bankers Trust Company will be the "Calculation Agent." For any Remarketed Note
bearing interest at a floating rate, the applicable Remarketing Agent will
determine the interest rate in effect from the Interest Rate Adjustment Date for
such Remarketed Note to the Initial Interest Reset Date. The Calculation Agent
will determine the interest rate in effect for each Interest Reset Period
thereafter. Upon request of the Beneficial Owner of a Remarketed Note, after any
Interest Rate Adjustment Date, the Calculation Agent or the Remarketing Agent
will disclose the interest rate and, in the case of a floating interest rate,
Interest Rate Basis or Bases, Spread (if any) and Spread Multiplier (if any),
and in each case the other terms applicable to such Remarketed Note then in
effect and, if determined, the interest rate that will become effective as a
result of a determination made for the next succeeding Interest Reset Date with
respect to such Remarketed Note. Except as described herein with respect to a
Remarketed Note earning interest at floating rates, no notice of the applicable
interest rate, Spread (if any) or Spread Multiplier (if any) will be sent to the
Beneficial Owner of any Remarketed Note.
Unless otherwise specified in the applicable Floating Interest Rate Notice,
the "Calculation Date", if applicable, pertaining to any Interest Determination
Date will be the earlier of (i) the tenth calendar day after such Interest
Determination Date or, if such day is not a Business Day, the next succeeding
Business Day or (ii) the Business Day immediately preceding the applicable
Interest Payment Date or Maturity, as the case may be.
CD Rate. If an Interest Rate Basis for any Remarketed Note is specified in
the applicable Floating Interest Rate Notice as the "CD Rate," the CD Rate
means, with respect to any Interest Determination Date relating to a Remarketed
Note for which the interest rate is determined with reference to the CD Rate (a
"CD Rate Interest Determination Date"), the rate on such date for negotiable
United States dollar certificates of deposit having the Index Maturity specified
in the applicable Floating Interest Rate Notice as published by the Board of
Governors of the Federal Reserve System in "Statistical Release H.15(519),
Selected Interest Rates" or any successor publication ("H.15(519)") under the
heading "Cds (Secondary Market)," or, if not published by 3:00 p.m., New York
City time, on the related Calculation Date (as defined above), the rate on such
CD Rate Interest Determination Date for negotiable United States dollar
certificates of deposit of the Index Maturity specified in the applicable
Floating Interest Rate Notice as published by the Federal
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<PAGE> 39
Reserve Bank of New York in its daily statistical release "Composite 3:30 P.M.
Quotations for United States Government Securities" or any successor publication
("Composite Quotations") under the heading "Certificates of Deposit." If such
rate is not yet published in either H.15(519) or Composite Quotations by 3:00
p.m., New York City time, on the related Calculation Date, then the CD Rate on
such CD Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the arithmetic mean of the secondary market offered rates as
of 10:00 a.m., New York City time, on such CD Rate Interest Determination Date,
of three leading nonbank dealers in negotiable United States dollar certificates
of deposit in The City of New York (which may include the Remarketing Agent or
its affiliates) selected by the Calculation Agent, after consultation with the
Company, for negotiable United States dollars certificates of deposit of major
United States money center banks for negotiable certificates of deposit with a
remaining maturity closest to the Index Maturity specified in the applicable
Floating Interest Rate Notice in an amount that is representative for a single
transaction in that market at that time; provided, however, that if the dealers
so selected by the Calculation Agent are not quoting as mentioned in this
sentence, the CD Rate determined as of such CD Rate Interest Determination Date
will be the CD Rate in effect on such CD Rate Interest Determination Date.
CMT Rate. If an Interest Rate Basis for any Remarketed Note is specified in
the applicable Floating Interest Rate Notice as the "CMT Rate," the CMT Rate
means, with respect to any Interest Determination Date relating to a Remarketed
Note for which the interest rate is determined with reference to the CMT Rate (a
"CMT Rate Interest Determination Date"), the rate displayed on the Designated
CMT Telerate Page (as defined below) under the caption ". . . Treasury Constant
Maturities . . . Federal Reserve Board Release H.15 . . . Mondays Approximately
3:45 P.M.," under the column for the Designated CMT Maturity Index (as defined
below) for (i) if the Designated CMT Telerate Page is 7055, the rate on such CMT
Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is
7052, the weekly or monthly average, as specified in the Floating Interest Rate
Notice, for the week or the month, as applicable, ended immediately preceding
the week or the month, as applicable, in which the related CMT Rate Interest
Determination Date occurs. If such rate is no longer displayed on the relevant
page or is not displayed by 3:00 p.m., New York City time, on the related
Calculation Date, then the CMT Rate for such CMT Rate Interest Determination
Date will be such treasury constant maturity rate for the Designated CMT
Maturity Index as published in H.15(519). If such rate is no longer published or
is not published by 3:00 p.m., New York City time, on the related Calculation
Date, then the CMT Rate on such CMT Rate Interest Determination Date will be
such treasury constant maturity rate for the Designated CMT Maturity Index (or
other United States Treasury rate for the Designated CMT Maturity Index) for the
CMT Rate Interest Determination Date with respect to such Interest Reset Date as
may then be published by either the Board of Governors of the Federal Reserve
System or the United States Department of the Treasury that the Calculation
Agent determines to be comparable to the rate formerly displayed on the
Designated CMT Telerate Page and published in H.15(519). If such information is
not provided by 3:00 p.m., New York City time, on the related Calculation Date,
then the CMT Rate on the CMT Rate Interest Determination Date will be calculated
by the Calculation Agent and will be a yield to maturity, based on the
arithmetic mean of the secondary market closing offer side prices as of
approximately 3:30 p.m., New York City time, on such CMT Rate Interest
Determination Date reported, according to their written records, by three
leading primary United States government securities dealers (each, a "Reference
Dealer") in The City of New York (which may include the Remarketing Agent or its
affiliates) selected by the Calculation Agent after consultation with the
Company (from five such Reference Dealers selected by the Calculation Agent,
after consultation with the Company, and eliminating the highest quotation (or,
in the event of equality, one of the highest) and the lowest quotation (or, in
the event of equality, one of the lowest)), for the most recently issued direct
noncallable fixed rate obligations of the United States ("Treasury Notes") with
an original maturity of approximately the Designated CMT Maturity Index and a
remaining term to maturity of not less than such Designated CMT Maturity Index
minus one year. If the Calculation Agent is unable to obtain three such Treasury
Note quotations, the CMT Rate on such CMT Rate
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<PAGE> 40
Interest Determination Date will be calculated by the Calculation Agent and will
be a yield to maturity based on the arithmetic mean of the secondary market
offer side prices as of approximately 3:30 p.m., New York City time, on such CMT
Rate Interest Determination Date of three Reference Dealers in The City of New
York (from five such Reference Dealers selected by the Calculation Agent, after
consultation with the Company, and eliminating the highest quotation (or, in the
event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for Treasury Notes with an original
maturity of the number of years that is the next highest to the Designated CMT
Maturity Index and a remaining term to maturity closest to the Designated CMT
Maturity Index and in an amount of at least U.S.$100 million. If three or four
(and not five) of such Reference Dealers are quoting as described above, then
the CMT Rate will be based on the arithmetic mean of the offer prices obtained
and neither the highest nor the lowest of such quotes will be eliminated;
provided, however, that if fewer than three Reference Dealers so selected by the
Calculation Agent, after consultation with the Company, are quoting as mentioned
herein, the CMT Rate determined as of such CMT Rate Interest Determination Date
will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If
two Treasury Notes with an original maturity as described in the second
preceding sentence have remaining terms to maturity equally close to the
Designated CMT Maturity Index, the Calculation Agent, after consultation with
the Company, will obtain from five References Dealers quotations for the
Treasury Note with the shorter remaining term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Markets
Limited (or any successor service) on the page specified in the applicable
Floating Interest Rate Notice (or any other page as may replace such page on
such service for the purpose of displaying Treasury Constant Maturities as
reported in H.15(519)) for the purpose of displaying Treasury Constant
Maturities as reported in H.15(519). If no such page is specified in the
applicable Floating Interest Rate Notice, the Designated CMT Telerate Page shall
be 7052 for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of
the United States Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Floating Interest Rate Notice with respect to which
the CMT Rate will be calculated. If no such maturity is specified in the
applicable Floating Interest Rate Notice, the Designated CMT Maturity Index
shall be 2 years.
Federal Funds Rate. If an Interest Rate Basis for any Remarketed Note is
specified in the applicable Floating Interest Rate Notice, as the "Federal Funds
Rate", the Federal Funds Rate means, with respect to any Interest Determination
Date relating to a Remarketed Note for which the interest rate is determined
with reference to the Federal Funds Rate (a "Federal Funds Rate Interest
Determination Date"), the rate on such date for United States dollar federal
funds as published in H.15(519) under the heading "Federal Funds (Effective)"
or, if not published by 3:00 p.m., New York City time, on the Calculation Date,
the rate on such Federal Funds Rate Interest Determination Date as published in
Composite Quotations under the heading "Federal Funds/Effective Rate". If such
rate is not published in either H.15(519) or Composite Quotations by 3:00 p.m.,
New York City time, on the related Calculation Date, then the Federal Funds Rate
on such Federal Funds Rate Interest Determination Date will be calculated by the
Calculation Agent and will be the arithmetic mean of the rates for the last
transaction in overnight United States dollar federal funds arranged by three
leading brokers of federal funds transactions in The City of New York (which may
include the Remarketing Agent or its affiliates) selected by the Calculation
Agent after consultation with the Company, prior to 9:00 a.m., New York City
time, on such Federal Funds Rate Interest Determination Date; provided, however,
that if the brokers so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Federal Funds Rate determined as of such Federal
Funds Rate Interest Determination Date will be the Federal Funds Rate in effect
on such Federal Funds Rate Interest Determination Date.
LIBOR. If an Interest Rate Basis for any Remarketed Note is specified in
the applicable Floating Interest Rate Notice as "LIBOR," LIBOR means the rate
determined by the Calculation Agent as of
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<PAGE> 41
the applicable Interest Determination Date (a "LIBOR Interest Determination
Date") in accordance with the following provisions:
(i) if (a) "LIBOR Reuters" is specified in the applicable Floating
Interest Rate Notice, the arithmetic mean of the offered rates (unless the
Designated LIBOR Page (as defined below) by its terms provides only for a
single rate, in which case such single rate will be used) for deposits in
the Index Currency having the Index Maturity specified in the applicable
Floating Interest Rate Notice, commencing on the applicable Interest Reset
Date, that appear (or, if only a single rate is required as aforesaid,
appears) on the Designated LIBOR Page (as defined below) as of 11:00 a.m.,
London time, on such LIBOR Interest Determination Date, or (b) "LIBOR
Telerate" is specified in the applicable Floating Interest Rate Notice, or
if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the
applicable Floating Interest Rate Notice as the method for calculating
LIBOR, the rate for deposits in the Index Currency having the Index
Maturity specified in the applicable Floating Interest Rate Notice,
commencing on such Interest Reset Date, that appears on the Designated
LIBOR Page as of 11:00 a.m., London time, on such LIBOR Interest
Determination Date. If fewer than two such offered rates appear, or if no
such rate appears, as applicable, LIBOR on such LIBOR Interest
Determination Date will be determined in accordance with the provisions
described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks in the London interbank market, as selected by the
Calculation Agent, after consultation with the Company, to provide the
Calculation Agent with its offered quotation for deposits in the Index
Currency for the period of the Index Maturity specified in the applicable
Floating Interest Rate Notice, commencing on the applicable Interest Reset
Date, to prime banks in the London interbank market at approximately 11:00
a.m., London time, on such LIBOR Interest Determination Date and in a
principal amount that is representative for a single transaction in such
Index Currency in such market at such time. If at least two such quotations
are so provided, then LIBOR on such LIBOR Interest Determination Date will
be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of the rates quoted at approximately 11:00
a.m., in the applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks in such Principal Financial Center
selected by the Calculation Agent, after consultation with the Company, for
loans in the Index Currency to leading European banks, having the Index
Maturity specified in the applicable Floating Interest Rate Notice and in a
principal amount that is representative for a single transaction in such
Index Currency in such market at such time; provided, however, that if the
banks so selected by the Calculation Agent are not quoting as mentioned in
this sentence, LIBOR determined as of such LIBOR Interest Determination
Date will be LIBOR in effect on such LIBOR Interest Determination Date.
"Index Currency" means the currency or composite currency specified in the
applicable Floating Interest Rate Notice as to which LIBOR will be calculated.
If no such currency or composite currency is specified in the applicable
Floating Interest Rate Notice, the Index Currency will be United States dollars.
"Principal Financial Center" means the capital city of the country issuing
the Index Currency, except that with respect to United States dollars,
Australian dollars, Deutsche marks, Dutch guilders, Italian lire, Swiss francs
and ECUs, the Principal Financial Center will be The City of New York, Sydney,
Frankfurt, Amsterdam, Milan, Zurich and Luxembourg, respectively.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Floating Interest Rate Notice, the display on the Reuter Monitor
Money Rates Service (or any successor service) on the page specified in such
Floating Interest Rate Notice (or any other page as may
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<PAGE> 42
replace such page on such service) for the purpose of displaying the London
interbank rates of major banks for the Index Currency, or (b) if "LIBOR
Telerate" is specified in the applicable Floating Interest Rate Notice or
neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable
Floating Interest Rate Notice as the method for calculating LIBOR, the display
on the Dow Jones Markets Limited (or any successor service) on the page
specified in such Floating Interest Rate Notice (or any other page as may
replace such page on such service) for the purpose of displaying the London
interbank rates of major banks for the Index Currency.
Prime Rate. If an Interest Rate Basis for any Remarketed Note is specified
in the applicable Floating Interest Rate Notice as the "Prime Rate", Prime Rate
means, with respect to any Interest Determination Date relating to a Remarketed
Note for which the interest rate is determined with reference to the Prime Rate
(a "Prime Rate Interest Determination Date"), the rate on such date as such rate
is published in H.15(519) under the heading "Bank Prime Loan." If such rate is
not published prior to 3:00 p.m., New York City time, on the related Calculation
Date, then the Prime Rate will be the arithmetic mean of the rates of interest
publicly announced by each bank that appears on the Reuters Screen U.S. PRIME 1
Page (as defined below) as such bank's prime rate or base lending rate as in
effect for such Prime Rate Interest Determination Date. If fewer than four such
rates appear on the Reuters Screen U.S. PRIME 1 Page for such Prime Rate
Interest Determination Date, the Prime Rate will be the arithmetic mean of the
prime rates quoted on the basis of the actual number of days in the year divided
by a 360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include Bankers
Trust Company) in The City of New York selected by the Calculation Agent, after
consultation with the Company. If fewer than four such quotations are so
provided, the Prime Rate will be the arithmetic mean of four prime rates quoted
on the basis of the actual number of days in the year divided by a 360-day year
as of the close of business on such Prime Rate Interest Determination Date as
furnished in The City of New York by the major money center banks, if any, that
have provided such quotations and by as many substitute banks or trust companies
(which may include Bankers Trust Company) as necessary in order to obtain four
such prime rate quotations, provided such substitute banks or trust companies
are organized and doing business under the laws of the United States, or any
State thereof, have total equity capital of at least U.S.$500 million and are
each subject to supervision or examination by Federal or State authority,
selected by the Calculation Agent, after consultation with the Company, to
provide such rate or rates; provided, however, that if the banks or trust
companies so selected by the Calculation Agent are not quoting as mentioned in
this sentence, the Prime Rate determined as of such Prime Rate Interest
Determination Date will be the Prime Rate in effect on such Prime Rate Interest
Determination Date.
"Reuters Screen U.S. PRIME 1 Page" means the display designated as page
"U.S. PRIME 1" on the Reuter Monitor Money Rates Service (or any successor
service) on the U.S. PRIME 1 Page (or such other page as may replace the U.S.
PRIME 1 Page on such service) for the purpose of displaying prime rates or base
lending rates of major United States banks.
Treasury Rate. If an Interest Rate Basis for any Remarketed Note is
specified in the applicable Floating Interest Rate Notice as the "Treasury
Rate," Treasury Rate means, with respect to any Interest Determination Date
relating to a Remarketed Note for which the interest rate is determined with
reference to the Treasury Rate (a "Treasury Rate Interest Determination Date"),
as the rate from the auction held on such Treasury Rate Interest Determination
Date (the "Auction") of direct obligations of the United States ("Treasury
Bills") having the Index Maturity specified in the applicable Floating Interest
Rate Notice, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 p.m., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Floating Interest Rate Notice are not reported as provided above by
3:00 p.m., New York City time,
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on such Calculation Date, or if no such Auction is held, then the Treasury Rate
will be calculated by the Calculation Agent, and will be a yield to maturity
(expressed as a bond equivalent on the basis of a year of 365 or 366 days, as
applicable, and applied on a daily basis) of the arithmetic mean of the
secondary market bid rates, as of approximately 3:30 p.m., New York City time,
on such Treasury Rate Interest Determination Date, of three leading primary
United States government securities dealers (which may include the Remarketing
Agent or its affiliates) selected by the Calculation Agent, after consultation
with the Company, for the issue of Treasury Bills with a remaining maturity
closest to the Index Maturity specified in the applicable Floating Interest Rate
Notice; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the Treasury Rate
determined as of such Treasury Rate Interest Determination Date will be the
Treasury Rate in effect on such Treasury Rate Interest Determination Date.
SECURITY; PLEDGE OF MORTGAGE BONDS
Unless otherwise set forth in the applicable Prospectus Supplement, each
series of Remarketed Notes will be secured as to payment of principal, interest
and premium, if any, as set forth below.
General. In order to secure the obligation of the Company to pay the
principal of (and premium, if any) and interest on the Remarketed Notes of each
series, the Company will issue and deliver to and pledge with the Trustee its
Mortgage Bond. (Section 401) The aggregate principal amount of the Remarketed
Notes outstanding and maximum aggregate amount of premium thereon, if any, will
not exceed the aggregate principal amount of the related Mortgage Bonds pledged
with and held by the Trustee. The Mortgage Bonds will bear interest at times and
in amounts sufficient to provide for the payment of interest on the related
Remarketed Notes and also will be redeemed at times and in amounts that
correspond to the required payments of principal of and any premium on the
related Remarketed Notes. Payments on the Remarketed Notes will satisfy payment
obligations on the underlying Mortgage Bonds. The Mortgage Bonds will be secured
by a first mortgage lien on certain property owned by the Company and will rank
on a parity with all other general and refunding mortgage bonds of the Company.
As of March 31, 1998, the Company had outstanding approximately $3.0 billion
aggregate principal amount of General and Refunding Mortgage Bonds. See
"Provisions Applicable to General and Refunding Mortgage Bonds."
Satisfaction of Payment Obligation on Mortgage Bond. The interest rate on
the Mortgage Bond will be equal to the aggregate interest due on the related
Remarketed Notes. The Indenture provides that the obligation of the Company to
make any payment of the principal of (and premium, if any) or interest on the
Mortgage Bond will be deemed to have been satisfied and discharged to the extent
that at the time any such payment shall be due, the then due principal of (and
premium, if any) or interest on the related Remarketed Notes, shall have been
paid, deemed to have been paid or otherwise satisfied and discharged. In
addition, such obligation to make any payment of the principal of (and premium,
if any) or interest on the Mortgage Bond at any time shall be deemed to have
been satisfied and discharged to the extent that the amount of the Company's
obligation to make any payment of the principal of (and premium, if any) or
interest on the Mortgage Bond exceeds the obligation of the Company at that time
to make any payment of the principal of (and premium, if any) or interest on the
related Remarketed Notes.
Redemption of Mortgage Bond. The Company covenants and agrees in the
Indenture that upon the required payment of principal or premium, if any,
becoming due and payable with respect to any Remarketed Notes, it will redeem
the related Mortgage Bond in an aggregate principal amount equal to the amount
becoming due and payable on such Remarketed Notes, plus accrued interest;
provided, however, that the Company's obligation to redeem such Mortgage Bond
will be fully or partially deemed to have been satisfied and discharged to the
extent that at the time any such payment shall be due, the then due aggregate
principal amount of the Remarketed Notes, plus the aggregate amount of any
premium on, or accrued interest to the redemption date for, such Remarketed
Notes shall have been fully or partially paid, deemed to have been paid or
otherwise
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satisfied and discharged. Except for such redemption, the Company covenants that
it will not redeem the Mortgage Bond or take any action that will result in the
Mortgage Trustee or the Company incurring an obligation to redeem the Mortgage
Bond. (Section 404)
Surrender and Exchange of Mortgage Bonds. The Trustee will surrender to the
Mortgage Trustee for cancellation the Mortgage Bonds in an aggregate principal
amount equal to the aggregate principal amount of any other Mortgage Bond
delivered to and pledged with the Trustee pursuant to the Indenture in exchange
therefor; provided that the Mortgage Bonds so delivered to and pledged with the
Trustee contain no provisions that would impair the benefit of the lien of the
Mortgage in favor of the holders of the related Remarketed Notes. (Section
406(c))
EVENTS OF DEFAULT
In addition to the Events of Default set forth above under "Provisions
Applicable to All Debt Securities Other than Mortgage Bonds -- Events of
Default", any one of the following events will constitute an Event of Default
under the Indenture with respect to the Remarketed Notes of any series: (a)
failure by the Company to comply with the provisions of the Indenture relating
to the pledge of the Mortgage Bonds in respect of such series or to the
provisions of such Mortgage Bonds; (b) failure by the Company to purchase
Remarketed Notes of such series held by the Liquidity Provider pursuant to the
Standby Note Purchase Agreement, if any, continued for 60 days after written
notice as provided in the Indenture; and (c) the occurrence of a "default" as
such term is defined in the Mortgage. (Section 601)
The Indenture provides that within 90 days after the occurrence of any
Event of Default thereunder with respect to the Remarketed Notes of any series,
the Trustee shall transmit, in the manner set forth in the Indenture, notice of
such Event of Default to the holders of the Remarketed Notes of such series
unless such Event of Default has been cured or waived; provided however, that
except in the case of a default in the payment of the principal of (or premium,
if any) or interest on any such Remarketed Note of such series or a failure by
the Company to comply with the provisions of the Indenture relating to the
Mortgage Bonds or to the provisions of such Mortgage Bonds, the Trustee may
withhold such notice if and so long as the board of directors, the executive
committee or a trust committee of directors or Responsible Officers of the
Trustee has in good faith determined that the withholding of such notice is in
the interest of the holders of Remarketed Notes of such series; and provided,
further, that in the case of any default referred to in clause (a) of the
preceding paragraph with respect to the Remarketed Notes of such series, no such
notice to holders shall be given until at least 60 days after the occurrence
thereof. (Section 701)
If an Event of Default occurs and is continuing with respect to the
Remarketed Notes of any series, the Trustee may in its discretion proceed to
protect and enforce its rights and the rights of the holders of Remarketed Notes
of such series by all appropriate judicial proceedings, including the rights of
the Trustee as the holder of the related Mortgage Bonds; provided, however, that
the Trustee shall not have the power to sell the related Mortgage Bonds.
(Section 603)
MODIFICATION AND WAIVER
In addition to the provisions set forth above under "Provisions Applicable
to All Debt Securities Other than Mortgage Bonds -- Modification and Waiver," no
modification or amendment to the Indenture may, without the consent of each
holder of Remarketed Notes affected thereby, modify or change the provisions of
the Indenture relating to the pledge of the Mortgage Bond relating to any
Remarketed Note or modify or change the provisions of the Mortgage or the
related Mortgage Bond in a manner that is adverse to holders of any Remarketed
Notes. (Section 1002)
THE STANDBY NOTE PURCHASE AGREEMENT
In order to fulfill its obligations under the Special Mandatory Purchase
Right, the Company may from time to time, at its option, enter into a Standby
Note Purchase Agreement (the "Standby Note
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Purchase Agreement") with one or more banks or other credit providers (referred
to individually and collectively herein as the "Liquidity Provider"), each of
which, unless otherwise provided in the applicable Prospectus Supplement, has
(i) obligations such as those under the Standby Note Purchase Agreement that are
exempt from registration under the Act, (ii) long term senior debt ratings by
Standard & Poor's Rating Services and Moody's Investors Service, Inc. at least
equal to those of the Company as of the date of the Standby Note Purchase
Agreement and (iii) minimum combined capital and surplus of at least
$50,000,000.
The Company will retain the right to replace or add Liquidity Providers at
any time. Purchasers of the Remarketed Notes should not rely upon the presence
of Liquidity Providers in making an investment decision regarding the Remarketed
Notes.
Beneficial Owners of the Remarketed Notes will receive amounts advanced by
the Liquidity Provider to the Remarketing Agent pursuant to any Standby Note
Purchase Agreement in payment of the purchase price for Remarketed Notes subject
to a Special Mandatory Purchase. See "Provisions Applicable to Remarketed Notes
- -- Purchase and Redemption of Remarketed Notes -- Special Mandatory Purchase."
Pursuant to the Standby Note Purchase Agreement, if any, the Liquidity Provider
will be obligated, upon receipt of an appropriate demand for payment from the
Remarketing Agent and so long as the Company is in compliance with the terms and
conditions thereof, to purchase unremarketed Remarketed Notes in any Special
Mandatory Purchase at a price equal to 100% of the outstanding principal amount
thereof. Any such purchase will be effected upon the Liquidity Provider's
receipt of notification of a failed remarketing not later than 12:00 o'clock
noon, New York City time, on the date of the Special Mandatory Purchase by the
deposit of same-day funds by the Liquidity Provider with the Remarketing Agent
not later than 3:00 p.m., New York City time on such date. See "Provisions
Applicable to Remarketed Notes -- Purchase and Redemption of Remarketed Notes."
Notwithstanding the existence of the Standby Note Purchase Agreement, if any,
the Company will be responsible for paying the accrued interest, if any, on any
unremarketed Remarketed Notes by depositing sufficient same-day funds therefor
with the Remarketing Agent not later than 3:00 p.m., New York City time, on the
applicable date of Special Mandatory Purchase.
The Liquidity Provider's obligation to advance funds will be subject to
conditions specified in the Standby Note Purchase Agreement. Unless otherwise
indicated in the applicable Prospectus Supplement, such conditions include:
receipt by the Liquidity Provider of various documents, certificates and
opinions from the Company; the continued accuracy of representations and
warranties (other than with respect to material adverse change and litigation)
made by the Company in the Standby Note Purchase Agreement; that no event has
occurred and is continuing which would constitute an Event of Default under the
Standby Note Purchase Agreement (such events include failure by the Company to
pay amounts owing under the Standby Note Purchase Agreement, inaccuracy of
representations and warranties when made, failure to perform covenants under the
Standby Note Purchase Agreement, failure to pay any debt owing by the Company in
excess of $10,000,000, certain events of bankruptcy or insolvency of the
Company, an Event of Default under the Indenture or failure to maintain the
security interest thereunder and the non-enforceability of certain related
documents); and receipt by the Liquidity Provider of a properly completed notice
of a failed remarketing and a borrowing request from the Remarketing Agent.
The Company may indemnify a Liquidity Provider against certain liabilities
arising out of or in connection with its duties under the Standby Note Purchase
Agreement. A form of the Standby Note Purchase Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
summaries of certain provisions of any Standby Note Purchase Agreement do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all provisions of such Standby Note Purchase Agreement.
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PROVISIONS APPLICABLE TO SUBORDINATED DEBT SECURITIES
GENERAL
Subordinated Debt Securities will be issued under the Indenture and will
rank pari passu with certain other subordinated debt of the Company that may be
outstanding from time to time and will rank junior to all Senior Indebtedness of
the Company (including any Senior Debt Securities) that may be outstanding from
time to time.
SUBORDINATION
The payment of the principal of (and premium, if any) and interest on the
Subordinated Debt Securities is expressly subordinated, to the extent and in the
manner set forth in the Indenture, in right of payment to the prior payment in
full of all Senior Indebtedness of the Company. (Section 401 of the Supplemental
Indenture Creating Subordinated Debt Securities).
Upon (i) any acceleration of the principal amount due on the Subordinated
Debt Securities or (ii) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities, to creditors
upon any dissolution or winding-up or total or partial liquidation or
reorganization of the Company, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all principal and
premium, if any, and interest due upon all Senior Indebtedness shall first be
paid in full, or payment thereof provided for in money or money's worth in
accordance with its terms, before any payment is made on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by the
Subordinated Debt Securities, and upon any such dissolution or winding-up or
liquidation or reorganization any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Subordinated Debt Securities would be entitled, except
for the provisions of the Indenture, shall (subject to the power of a court of
competent jurisdiction to make other equitable provision reflecting the rights
conferred by the provisions of the Subordinated Debt Securities upon the Senior
Indebtedness and the holders thereof with respect to the Subordinated Debt
Securities and the Holders thereof by a lawful plan of reorganization under
applicable bankruptcy law), be paid by the Company or any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by the Holders of the Subordinated Debt Securities if received
by them, directly to the holders of Senior Indebtedness (pro rata to each such
holder on the basis of the respective amounts of Senior Indebtedness held by
such holder) or their representatives, to the extent necessary to pay all Senior
Indebtedness (including interest thereon) in full, in money or money's worth,
after giving effect to any concurrent payments or distribution to or for the
holders of Senior Indebtedness, before any payment or distribution is made to
the Holders of the indebtedness evidenced by the Subordinated Debt Securities.
The consolidation of the Company with or the merger of the Company into another
Person or the liquidation or dissolution of the Company following the conveyance
or transfer of its property as an entirety, or substantially as an entirety, to
another Person upon the terms and conditions provided in the Indenture shall not
be deemed a dissolution, winding-up, liquidation or reorganization for these
purposes.
In the event that any payment or distribution of assets of the Company of
any kind or character not permitted by the foregoing provisions, whether in
cash, property or securities, shall be received by the Holders of Subordinated
Debt Securities before all Senior Indebtedness is paid in full, or provision
made for such payment, in accordance with its terms, such payment or
distribution shall be held in trust for the benefit of, and shall be paid over
or delivered to, the holders of such Senior Indebtedness or their representative
or representatives, or to the trustee or trustees under any indenture pursuant
to which any instruments evidencing any of such Senior Indebtedness may have
been issued, as their respective interests may appear, for application to the
payment of all Senior Indebtedness remaining unpaid to the extent necessary to
pay all such Senior Indebtedness in full in accordance with its terms, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.
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No payment on account of principal of, premium, if any, sinking funds or
interest on the Subordinated Debt Securities shall be made unless full payment
of amounts then due for principal, premium, if any, sinking funds and interest
on any Senior Indebtedness has been made or duly provided for in money or
money's worth in accordance with the terms of such Senior Indebtedness. No
payment on account of principal, premium, if any, sinking funds or interest on
the Subordinated Debt Securities shall be made if, at the time of such payment
or immediately after giving effect thereto, (i) there shall exist a default in
the payment of principal, premium, if any, sinking fund or interest with respect
to any Senior Indebtedness, or (ii) there shall have occurred an event or
default (other than a default in the payment of principal, premium, if any,
sinking funds or interest) with respect to any Senior Indebtedness, as defined
therein or in the instrument under which the same is outstanding, permitting the
holders thereof to accelerate the maturity thereof, and such event of default
shall not have been cured or waived or shall not have ceased to exist.
SUBROGATION
From and after the payment in full of all Senior Indebtedness, the Holders
of the Subordinated Debt Securities (together with the holders of any other
indebtedness of the Company which is subordinate in right of payment to the
payment in full of all Senior Indebtedness, which is not subordinate in right of
payment to the Subordinated Debt Securities and which by its terms grants such
right of subrogation to the holder thereof) shall be subrogated to the rights of
the holders of Senior Indebtedness to receive payments or distributions of
assets or securities of the Company applicable to the Senior Indebtedness until
the Subordinated Debt Securities shall be paid in full, and, for the purposes of
such subrogation, no such payments or distributions to the holders of Senior
Indebtedness of assets or securities, which otherwise would have been payable or
distributable to Holders of the Subordinated Debt Securities, shall, as between
the Company, its creditors other than the holders of Senior Indebtedness, and
the Holders of the Subordinated Debt Securities, be deemed to be a payment by
the Company to or on account of the Senior Indebtedness, it being understood
that these provisions of the Indenture are and are intended solely for the
purpose of defining the relative rights of the Holders of the Subordinated Debt
Securities, on the one hand, and the holders of the Senior Indebtedness, on the
other hand, and nothing contained in the Indenture is intended to or shall
impair as between the Company, its creditors other than the holders of Senior
Indebtedness, and the holders of the Subordinated Debt Securities, the
obligation of the Company, which is unconditional and absolute, to pay to the
Holders of the Subordinated Debt Securities the principal of and interest on the
Subordinated Debt Securities as and when the same shall become due and payable
in accordance with their terms, or to affect the relative rights of the Holders
of the Subordinated Securities and creditors of the Company other than the
holders of the Senior Indebtedness, nor shall anything therein prevent the
Holder of any Subordinated Debt Security from exercising all remedies otherwise
permitted by applicable law upon default under such Subordinated Debt Security
subject to the rights of the holders of Senior Indebtedness to receive cash,
property or securities of the Company otherwise payable or deliverable to the
Holders of the Subordinated Debt Securities or to a representative of such
Holders, on their behalf.
The term "Senior Indebtedness" is defined in the Indenture as indebtedness
incurred by the Company for money borrowed whether outstanding on the date
hereof or incurred in the future, all deferrals, renewals or extensions of any
such indebtedness and all evidences of indebtedness issued in exchange for any
such indebtedness and guarantees by the Company of the foregoing items of
indebtedness for money borrowed by persons other than the Company and all
obligations as lessee under any and all leases of property, equipment and other
assets required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles, unless, in any such case, such
indebtedness, guarantee or obligation provides by its terms that it shall not
constitute Senior Indebtedness.
If Subordinated Debt Securities are issued under the Indenture, the
aggregate principal amount of Senior Indebtedness outstanding as of a recent
date will be set forth in the Prospectus Supplement. The Indenture does not
restrict the amount of Senior Indebtedness that the Company may incur.
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DTC BOOK-ENTRY-ONLY SYSTEM
Upon issuance, the Debt Securities will be represented by a global security
or securities (the "Global Security"). The Global Security representing the Debt
Securities will be deposited with, or on behalf of, DTC. Upon the issuance of
such Global Security, DTC or its nominee will credit the accounts of persons
held with it with the respective principal or face amounts of the Debt
Securities represented by such Global Security. Ownership of beneficial
interests in such Global Security will be limited to persons that have accounts
with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in such Global
Security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC. Ownership of beneficial interests in
such Global Security by persons that hold through participants will be shown on,
and the transfer of that ownership interest within such participant will be
effected only through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to acquire or transfer beneficial interests in such Global
Security.
Payment of principal of and interest on the Debt Securities will be made to
DTC or its nominee, as the case may be, as the sole registered owner and holder
of the Global Security for all purposes under the Indenture. Neither the
Company, the Trustee nor, in the case of any series of Remarketed Notes, the
Remarketing Agent nor any agent of the Company or the Trustee will have any
responsibility or liability for any aspect of DTC's records relating to or
payments made on account of beneficial ownership interests in such Global
Security or for maintaining, supervising or reviewing any of DTC's records
relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of or interest on any Global Security, DTC will immediately credit, on
its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in such
Global Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
The Global Security may not be transferred except as a whole by DTC to a
nominee of DTC. The Global Security representing the Debt Securities is
exchangeable for certificated Debt Securities only if (x) DTC notifies the
Company that it is unwilling or unable to continue as DTC for such Global
Security or if at any time DTC ceases to be a clearing agency registered under
the 1934 Act and the Company fails within 90 days thereafter to appoint a
successor, (y) the Company in its sole discretion determines that such Global
Security shall be exchangeable or (z) there shall have occurred and be
continuing an Event of Default (as defined in the Indenture) or an event which
with the giving of notice or lapse of time or both, would constitute an Event of
Default with respect to the Debt Securities represented by such Global Security.
In such event, the Company will issue Debt Securities in certificated form in
exchange for such Global Security. In any such instance, an owner of a
beneficial interest in the Global Security will be entitled to physical delivery
in certificated form of Debt Securities equal in principal amount to such
beneficial interest and to have such Debt Securities registered in its name.
Debt Securities so issued in certificated form will be issued in denominations
of $1,000 or any larger amount that is an integral multiple thereof, and will be
issued in registered form only, without coupons. Subject to the foregoing,
neither Global Security is exchangeable, except for a Global Security of Debt
Securities of like denomination to be registered in the name of DTC or its
nominee.
So long as DTC, or its nominee, is the registered owner of a Global
Security, or such nominee, as the case may be, will be considered the sole owner
or holder of the Debt Securities represented by such Global Security for the
purposes of receiving payment on such Debt Securities, receiving
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notices and for all other purposes under the Indenture and such Debt Securities.
Beneficial interests in any series of Debt Securities will be evidenced only by,
and transfer thereof will be effected only through, records maintained by DTC
and its participants. Except as provided herein, owners of beneficial interests
in any Global Security will not be entitled to and will not be considered the
holders thereof for any purposes under the Indenture. Accordingly, each person
owning a beneficial interest in such Global Security must rely on the procedures
of DTC, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the Indenture. DTC will not consent or vote with respect to
the Global Security representing a series of Debt Securities. Under its usual
procedures, DTC mails an Omnibus Proxy to the Company as soon as possible after
the applicable record date. The Omnibus Proxy assigns Cede & Co.'s (DTC's
partnership nominee) consenting or voting rights to those participants to whose
accounts the Debt Securities of a series are credited on the applicable record
date (identified in a listing attached to the Omnibus Proxy).
DTC has advised the Company that DTC is a limited-purpose trust company
organized under New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered under the 1934 Act. DTC was created to
hold the securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. DTC's participants include
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations some of whom (and/or their representatives) own
DTC. Access to DTC's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
rules applicable to DTC and its participants are on file with the SEC.
SAME-DAY SETTLEMENT AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement,
settlement for the Debt Securities will be made by a purchaser in immediately
available funds. While the Debt Securities are in the book-entry-only system
described above, all payments of principal and interest will be made by the
Trustee or, in the case of any series of Remarketed Notes, the Remarketing Agent
on behalf of the Company to DTC in immediately available funds.
The Debt Securities will trade in DTC's Same-Day Fund Settlement System
until maturity or until such debt securities are issued in definitive form, and
secondary market trading activity in the Debt Securities will therefore be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
the trading activity in the Debt Securities.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which is based upon the advice of Brown & Wood LLP,
special tax counsel to the Company, whose opinion is set forth herein, of
certain United States Federal income tax consequences of the purchase, ownership
and disposition of the Debt Securities is based upon laws, regulations, rulings
and decisions now in effect (or, in the case of certain regulations, in proposed
form), all of which are subject to change (including changes in effective dates)
or possible differing interpretations. It deals only with Debt Securities held
as capital assets and does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding Debt
Securities as a hedge against currency risks or as a position in a "straddle"
for tax purposes, or persons whose functional currency is not the United States
dollar. It also does not deal with holders other than original purchasers
(except where otherwise specifically noted). Persons
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considering the purchase of the Debt Securities should consult their own tax
advisors concerning the application of United States Federal income tax laws to
their particular situations as well as any consequences of the purchase,
ownership and disposition of the Debt Securities arising under the laws of any
other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Debt
Security that is for United States Federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate the income of which is subject to
United States Federal income taxation regardless of its source, (iv) a trust if
a court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust, or (v) any other
person whose income or gain in respect of a Debt Security is effectively
connected with the conduct of a United States trade or business. As used herein,
the term "non-U.S. Holder" means a holder of a Debt Security that is not a U.S.
Holder.
U.S. HOLDERS
Payments of Interest. Payments of interest on a Debt Security generally
will be taxable to a U.S. Holder as ordinary interest income at the time such
payments are accrued or are received (in accordance with the U.S. Holder's
regular method of tax accounting).
Original Issue Discount. The following summary is a general discussion of
the United States Federal income tax consequences to U.S. Holders of the
purchase, ownership and disposition of Debt Securities issued with original
issue discount ("Discount Debt Securities"). The following summary is based upon
final Treasury regulations (the "OID Regulations") released by the Internal
Revenue Service ("IRS") on January 27, 1994, as amended on June 11, 1996, under
the original issue discount provisions of the Code.
For United States federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Debt Security over
its issue price, if such excess equals or exceeds a de minimis amount (generally
1/4 of 1% of the Debt Security's stated redemption price at maturity multiplied
by the number of complete years to its maturity from its issue date or, in the
case of a Debt Security providing for the payment of any amount other than
qualified stated interest (as defined below) prior to maturity, multiplied by
the weighted average maturity of such Debt Security). The issue price of each
Debt Security in an issue of Debt Securities equals the first price at which a
substantial amount of such Debt Securities has been sold (ignoring sales to bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers). The stated redemption price at
maturity of a Debt Security is the sum of all payments provided by the Debt
Security other than "qualified stated interest" payments. The term "qualified
stated interest" generally means stated interest that is unconditionally payable
in cash or property (other than debt instruments of the issuer) at least
annually at a single fixed rate. In addition, under the OID Regulations, if a
Debt Security bears interest for one or more accrual periods at a rate below the
rate applicable for the remaining term of such Debt Security (e.g., Debt
Securities with teaser rates or interest holidays), and if the greater of either
the resulting foregone interest on such Debt Security or any "true" discount on
such Debt Security (i.e., the excess of the Debt Security's stated principal
amount over its issue price) equals or exceeds a specified de minimis amount,
then the stated interest on the Debt Security would be treated as original issue
discount rather than qualified stated interest.
Payments of qualified stated interest on a Debt Security are taxable to a
U.S. Holder as ordinary interest income at the time such payments are accrued or
are received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of a Discount Debt Security must include original
issue discount in income as ordinary interest for United States Federal income
tax purposes as it accrues under a constant yield method in advance of receipt
of the cash payments attributable
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to such income, regardless of such U.S. Holder's regular method of tax
accounting. In general, the amount of original issue discount included in income
by the initial U.S. Holder of a Discount Debt Security is the sum of the daily
portions of original issue discount with respect to such Discount Debt Security
for each day during the taxable year (or portion of the taxable year) on which
such U.S. Holder held such Discount Debt Security. The "daily portion" of
original issue discount on any Discount Debt Security is determined by
allocating to each day in any accrual period a ratable portion of the original
issue discount allocable to that accrual period. An "accrual period" may be of
any length and the accrual periods may vary in length over the term of the
Discount Debt Security, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs either on the
final day of an accrual period or on the first day of an accrual period. The
amount of original issue discount allocable to each accrual period is generally
equal to the difference between (i) the product of the Discount Debt Security's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular accrual period) and (ii) the amount of any qualified stated interest
payments allocable to such accrual period. The "adjusted issue price" of a
Discount Debt Security at the beginning of any accrual period is the sum of the
issue price of the Discount Debt Security plus the amount of original issue
discount allocable to all prior accrual periods minus the amount of any prior
payments on the Discount Debt Security that were not qualified stated interest
payments. Under these rules, U.S. Holders generally will have to include in
income increasingly greater amounts of original issue discount in successive
accrual periods.
A U.S. Holder who purchases a Discount Debt Security for an amount that is
greater than its adjusted issue price as of the purchase date and less than or
equal to the sum of all amounts payable on the Discount Debt Security after the
purchase date other than payments of qualified stated interest, will be
considered to have purchased the Discount Debt Security at an "acquisition
premium." Under the acquisition premium rules, the amount of original issue
discount which such U.S. Holder must include in its gross income with respect to
such Discount Debt Security for any taxable year (or portion thereof in which
the U.S. Holder holds the Discount Debt Security) will be reduced (but not below
zero) by the portion of the acquisition premium properly allocable to the
period.
Under the OID Regulations, Floating Rate Debt Securities and Indexed Debt
Securities ("Variable Debt Securities") are subject to special rules whereby a
Variable Debt Security will qualify as a "variable rate debt instrument" if (a)
its issue price does not exceed the total noncontingent principal payments due
under the Variable Debt Security by more than a specified de minimis amount and
(b) it provides for stated interest, paid or compounded at least annually, at
current values of (i) one or more qualified floating rates, (ii) a single fixed
rate and one or more qualified floating rates, (iii) a single objective rate, or
(iv) a single fixed rate and a single objective rate that is a qualified inverse
floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Debt Security is denominated. Although a multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate, a
variable rate equal to the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35 will constitute a
qualified floating rate. A variable rate equal to the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate, will also constitute a qualified
floating rate. In addition, under the OID Regulations, two or more qualified
floating rates that can reasonably be expected to have approximately the same
values throughout the term of the Variable Debt Security (e.g., two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Debt Security's issue date) will be treated as a
single qualified floating rate. Notwithstanding the foregoing, a variable rate
that would otherwise constitute a qualified floating rate but which is
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subject to one or more restrictions such as a maximum numerical limitation
(i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under
certain circumstances, fail to be treated as a qualified floating rate under the
OID Regulations unless such cap or floor is fixed throughout the term of the
Debt Security. An "objective rate" is a rate that is not itself a qualified
floating rate but which is determined using a single fixed formula and that is
based on objective financial or economic information. A rate will not qualify as
an objective rate if it is based on information that is within the control of
the issuer (or a related party) or that is unique to the circumstances of the
issuer (or a related party), such as dividends, profits, or the value of the
issuer's stock (although a rate does not fail to be an objective rate merely
because it is based on the credit quality of the issuer). A "qualified inverse
floating rate" is any objective rate where such rate is equal to a fixed rate
minus a qualified floating rate, as long as variations in the rate can
reasonably be expected to inversely reflect contemporaneous variations in the
qualified floating rate. The OID Regulations also provide that if a Variable
Debt Security provides for stated interest at a fixed rate for an initial period
of one year or less followed by a variable rate that is either a qualified
floating rate or an objective rate and if the variable rate on the Variable Debt
Security's issue date is intended to approximate the fixed rate (e.g., the value
of the variable rate on the issue date does not differ from the value of the
fixed rate by more than 25 basis points), then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be.
If a Variable Debt Security that provides for stated interest at either a
single qualified floating rate or a single objective rate throughout the term
thereof qualifies as a "variable rate debt instrument" under the OID Regulations
and if the interest on such Debt Security is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually, then all
stated interest on the Debt Security will constitute qualified stated interest
and will be taxed accordingly. Thus, a Variable Debt Security that provides for
stated interest at either a single qualified floating rate or a single objective
rate throughout the term thereof and that qualifies as a "variable rate debt
instrument" under the OID Regulations will generally not be treated as having
been issued with original issue discount unless the Variable Debt Security is
issued at a "true" discount (i.e., at a price below the Debt Security's stated
principal amount) in excess of a specified de minimis amount. The amount of
qualified stated interest and the amount of original issue discount, if any,
that accrues during an accrual period on such a Variable Debt Security is
determined under the rules applicable to fixed rate debt instruments by assuming
that the variable rate is a fixed rate equal to (i) in the case of a qualified
floating rate or qualified inverse floating rate, the value, as of the issue
date, of the qualified floating rate or qualified inverse floating rate, or (ii)
in the case of an objective rate (other than a qualified inverse floating rate),
a fixed rate that reflects the yield that is reasonably expected for the
Variable Debt Security. The qualified stated interest allocable to an accrual
period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid during
the accrual period pursuant to the foregoing rules.
In general, any other Variable Debt Security that qualifies as a "variable
rate debt instrument" will be converted into an "equivalent" fixed rate debt
instrument for purposes of determining the amount and accrual of original issue
discount and qualified stated interest on the Variable Debt Security. The OID
Regulations generally require that such a Variable Debt Security be converted
into an "equivalent" fixed rate debt instrument by substituting any qualified
floating rate or qualified inverse floating rate provided for under the terms of
the Variable Debt Security with a fixed rate equal to the value of the qualified
floating rate or qualified inverse floating rate, as the case may be, as of the
Variable Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Variable Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Variable Debt Security. In the case of a Variable
Debt Security that qualifies as a "variable rate debt instrument" and provides
for stated interest at a fixed rate in addition to either one or more qualified
floating rates or a qualified inverse floating rate, the fixed rate is initially
converted into a qualified floating rate (or a qualified inverse floating rate,
if the Variable Debt Security provides for a qualified inverse floating rate).
Under such
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circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Variable Debt Security as of the Variable Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Variable Debt Security is then converted into an "equivalent" fixed
rate debt instrument in the manner described above.
Once the Variable Debt Security is converted into an "equivalent" fixed
rate debt instrument pursuant to the foregoing rules, the amount of original
issue discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Debt Security will account for such original issue discount and
qualified stated interest as if the U.S. Holder held the "equivalent" fixed rate
debt instrument. In each accrual period appropriate adjustments will be made to
the amount of qualified stated interest or original issue discount assumed to
have been accrued or paid with respect to the "equivalent" fixed rate debt
instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Variable Debt Security during the accrual
period.
If a Variable Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Debt Security would be
treated as a contingent payment debt obligation. U.S. Holders should be aware
that on June 11, 1996, the Treasury Department issued final regulations (the
"CPDI Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments. In general, the CPDI
Regulations would cause the timing and character of income, gain or loss
reported on a contingent payment debt instrument to substantially differ from
the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principles of current United States
Federal income tax law. Specifically, the CPDI Regulations generally require a
U.S. Holder of such an instrument to include future contingent and noncontingent
interest payments in income as such interest accrues based upon a projected
payment schedule. Moreover, in general, under the CPDI Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a contingent
payment debt instrument will be treated as ordinary income and all or a portion
of any loss realized could be treated as ordinary loss as opposed to capital
loss (depending upon the circumstances). The CPDI Regulations apply to debt
instruments issued on or after August 13, 1996. The proper United States Federal
income tax treatment of Variable Debt Securities that are treated as contingent
payment debt obligations will be more fully described in the applicable
Prospectus Supplement. Furthermore, any other special United States Federal
income tax considerations, not otherwise discussed herein, which are applicable
to any particular issue of Debt Securities will be discussed in the applicable
Prospectus Supplement.
Certain of the Debt Securities (i) may be redeemable at the option of the
Company prior to their stated maturity (a "call option") and/or (ii) may be
repayable at the option of the holder prior to their stated maturity (a "put
option"). Debt Securities containing such features may be subject to rules that
differ from the general rules discussed above. Investors intending to purchase
Debt Securities with such features should consult their own tax advisors, since
the original issue discount consequences will depend, in part, on the particular
terms and features of the purchased Debt Securities.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
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Remarketed Notes. The proper United States Federal income tax treatment of
Remarketed Notes is uncertain. Because the Remarketed Notes are subject to
mandatory tender to the Remarketing Agent at par on each Interest Rate
Adjustment Date, the Remarketed Notes may be treated as maturing on the initial
Interest Rate Adjustment Date and each Interest Rate Adjustment Date thereafter
for United States Federal income tax purposes. Under the foregoing treatment,
interest on the Remarketed Notes would generally be taxable as ordinary income
for United States Federal income tax purposes when received or accrued by a U.S.
Holder in accordance with such holder's regular method of tax accounting because
such interest would constitute qualified stated interest. However, it is
possible that the Remarketed Notes may be treated for United States Federal
income tax purposes as maturing only on the final Stated Maturity therefor.
Under such analysis, in general, the proper treatment of Remarketed Notes will
generally depend upon whether the Remarketed Notes qualify as "variable rate
debt instruments" or, alternatively, are treated as contingent payment debt
instruments.
Although the matter is not free from doubt, each Commercial Paper Term Mode
and the Long Term Rate Mode should individually constitute separate qualified
floating rates under the OID Regulations since the interest rate for Remarketed
Notes in either a Commercial Paper Term Mode or the Long Term Rate Mode will be
periodically reset to a market rate pursuant to a remarketing and such
remarketing can reasonably be expected to measure contemporaneous variations in
the cost of newly borrowed funds in the currency in which the Remarketed Notes
are denominated. In addition, the IRS has announced in IRS Notice 88-90, I.R.B.
1988-34, that payments of interest with respect to a debt instrument will not be
treated as contingent interest (which would disqualify the debt instrument from
being a "variable rate debt instrument" under the OID Regulations) merely
because the interest rate on the debt instrument may be reset to a market rate
determined through a remarketing or reset procedure. Furthermore, IRS Notice
88-90 provides that the interest rate on a debt instrument which is reset to a
market rate pursuant to a remarketing may be subject to a specified minimum or
maximum rate (e.g., the Maximum Rate) as long as the remarketing procedure is
not subject to manipulation (e.g., to create a front-loading or back-loading of
interest). Thus, since the interest rate on any Remarketed Note in a Commercial
Paper Term Mode or in the Long Term Rate Mode for any Interest Rate Period
commencing on a certain Interest Rate Adjustment Date, is established by an
independent agent on such Interest Rate Adjustment Date at the lowest rate that
will enable the Remarketed Notes to trade at par, each Commercial Paper Term
Mode and the Long Term Rate Mode should individually constitute separate
qualified floating rates.
The Remarketed Notes will initially bear interest at the Initial Interest
Rate. Thereafter, each Remarketed Note will bear interest in either the
Commercial Paper Term Mode or the Long Term Rate Mode. Any Remarketed Note in
the Commercial Paper Term Mode may be converted at the option of the Company to
a different Commercial Paper Term Period or to the Long Term Rate Mode on any
Interest Rate Adjustment Date for such Remarketed Note. In addition, any
Remarketed Note in the Long Term Rate Mode, at any time during the term of such
Remarketed Note, may be converted at the option of the Company to the Commercial
Paper Term Mode or to a different Long Term Rate Period on any Interest Rate
Adjustment Date for such Remarketed Note.
Since the Remarketed Notes provide for payment of 100% of the principal
amount thereof at maturity and assuming that the Remarketed Notes will not be
issued at a premium in excess of the de minimis premium permitted under the OID
Regulations for qualification as a "variable rate debt instrument", if any of
the Remarketed Notes are converted from the Initial Interest Rate to bear
interest only in the Commercial Paper Term Mode or the Long Term Rate Mode
throughout the remaining term thereof, then it could possibly be argued that
such Remarketed Note (or Notes) should qualify as "variable rate debt
instruments" under the OID Regulations and should not be treated as contingent
payment debt obligations, based on the theory that such Remarketed Note (or
Notes) would provide for stated interest at a single fixed rate (i.e., the
Initial Interest Rate) followed by current values of one or more qualified
floating rates, payable at least annually. Similarly, if any of the Remarketed
Notes are converted from the Initial Interest Rate to bear interest in a single
Interest
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Rate Period in the Long Term Rate Mode throughout the remaining term thereof,
then it could possibly be argued that such Remarketed Note (or Notes) should be
treated as providing for stated interest at a single fixed rate followed by a
second fixed rate. Under this analysis, such Remarketed Note (or Notes) would
also not be treated as contingent payment debt obligations and such Remarketed
Note (or Notes) could possibly be treated as having been issued with original
issue discount to the extent that amounts payable with respect to such
Remarketed Note (or Notes) at one of the two fixed rates exceeds amounts payable
with respect to the Remarketed Note (or Notes) at the other fixed rate.
Furthermore, it could also possibly be argued that all of the Remarketed Notes
should qualify as "variable rate debt instruments" under the OID Regulations
based on the theory that the Initial Interest Rate should be treated as a
qualified floating rate, the Initial Interest Rate together with the first rate
in effect subsequent to the Initial Interest Rate should be treated as a single
qualified floating rate and/or that the Long Term Mode should be treated as a
qualified floating rate. If any or all of the Remarketed Notes were to qualify
as "variable rate debt instruments" then all payments of interest on such
Remarketed Notes would constitute payments of qualified stated interest and
would be taxed accordingly.
Despite the foregoing, because it will be unknown, as of the original
issuance of the Remarketed Notes, whether or to what extent the Company will
convert the Remarketed Notes from one Interest Rate Mode to another, none of the
Remarketed Notes may qualify as "variable rate debt instruments" under the OID
Regulations and all of the Remarketed Notes may be treated as contingent payment
debt obligations, regardless of the extent to which the Company actually
converts the Remarketed Notes from one Interest Rate Mode to another. Due to the
uncertainty surrounding the proper treatment of the Remarketed Notes under the
OID Regulations, prospective investors in the Remarketed Notes are advised to
consult their own tax advisors regarding the proper treatment of the Remarketed
Notes under the OID Regulations. If the Remarketed Notes do not qualify as
"variable rate debt instruments" under the OID Regulations, then the Remarketed
Notes will be treated as contingent payment debt obligations.
It is not entirely clear under law how the Remarketed Notes would be taxed.
If the Remarketed Notes were treated as contingent payment debt instruments,
such Remarketed Notes would be taxed in accordance with the rules contained in
the CPDI Regulations. Prospective investors in the Remarketed Notes are urged to
consult their own tax advisors regarding the application of the CPDI Regulations
to their investment in the Remarketed Notes.
Short-Term Debt Securities. Debt Securities that have a fixed maturity of
one year or less ("Short-Term Debt Securities") will be treated as having been
issued with original issue discount. In general, an individual or other cash
method U.S. Holder is not required to accrue such original issue discount unless
the U.S. Holder elects to do so. If such an election is not made, any gain
recognized by the U.S. Holder on the sale, exchange or maturity of the
Short-Term Debt Security will be ordinary income to the extent of the original
issue discount accrued on a straight-line basis, or upon election under the
constant yield method (based on daily compounding), through the date of sale or
maturity, and a portion of the deductions otherwise allowable to the U.S. Holder
for interest on borrowings allocable to the Short-Term Debt Security will be
deferred until a corresponding amount of income is realized. U.S. Holders who
report income for United States Federal income tax purposes under the accrual
method, and certain other holders including banks and dealers in securities, are
required to accrue original issue discount on a Short-Term Debt Security on a
straight-line basis unless an election is made to accrue the original issue
discount under a constant yield method (based on daily compounding).
Market Discount. If a U.S. Holder purchases a Debt Security, other than a
Discount Debt Security, for an amount that is less than its issue price (or, in
the case of a subsequent purchaser, its stated redemption price at maturity) or,
in the case of a Discount Debt Security, for an amount that is less than its
adjusted issue price as of the purchase date, the amount of the difference will
be treated as "market discount," unless such difference is less than a specified
de minimis amount.
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Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of a Discount Debt Security, any
payment that does not constitute qualified stated interest) on, or any gain
realized on the sale, exchange, retirement or other disposition of, a Debt
Security as ordinary income to the extent of the lesser of (i) the amount of
such payment or realized gain or (ii) the market discount which has not
previously been included in income and is treated as having accrued on such Debt
Security at the time of such payment or disposition. Market discount will be
considered to accrue ratably during the period from the date of acquisition to
the maturity date of the Debt Security, unless the U.S. Holder elects to accrue
market discount on the basis of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Debt Security with market discount until the maturity of the
Debt Security or its earlier disposition in a taxable transaction, because a
current deduction is only allowed to the extent the interest expense exceeds an
allocable portion of market discount. A U.S. Holder may elect to include market
discount in income currently as it accrues (on either a ratable or semiannual
compounding basis), in which case the rules described above regarding the
treatment as ordinary income of gain upon the disposition of the Debt Security
and upon the receipt of certain cash payments and regarding the deferral of
interest deductions will not apply. Generally, such currently included market
discount is treated as ordinary interest for United States Federal income tax
purposes.
Premium. If a U.S. Holder purchases a Debt Security for an amount that is
greater than its stated redemption price at maturity, such U.S. Holder will be
considered to have purchased the Debt Security with "amortizable bond premium"
equal in amount to such excess. A U.S. Holder may elect to amortize such premium
using a constant yield method over the remaining term of the Debt Security and
may offset interest otherwise required to be included in respect of the Debt
Security during any taxable year by the amortized amount of such excess for the
taxable year. However, if the Debt Security may be optionally redeemed after the
U.S. Holder acquires it at a price in excess of its stated redemption price at
maturity, special rules would apply which could result in a deferral of the
amortization of some bond premium until later in the term of the Debt Security.
Disposition of a Debt Security. Except as discussed above, upon the sale,
exchange or retirement of a Debt Security, a U.S. Holder generally will
recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement and such U.S. Holder's adjusted tax
basis in the Debt Security. A U.S. Holder's adjusted tax basis in a Debt
Security generally will equal such U.S. Holder's initial investment in the Debt
Security increased by any original issue discount included in income (and
accrued market discount, if any, if the U.S. Holder has included such market
discount in income) and decreased by the amount of any payments, other than
qualified stated interest payments, received and amortizable bond premium taken
with respect to such Debt Security. Such gain or loss generally will be
long-term capital gain or loss if the Debt Security were held for more than one
year.
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") reduces the maximum
rates on long-term capital gains recognized on capital assets held by
individuals taxpayers for more than eighteen months as of the date of
disposition (and would further reduce the maximum rates on such gains in the
year 2001 and thereafter for certain individual taxpayers who meet specified
conditions). The capital gains rate for capital assets held by individual
taxpayers for more than twelve months but less than eighteen months was not
changed by the 1997 Tax Act. The 1997 Tax Act does not change the capital gain
rates for corporations. Prospective investors should consult their own tax
advisors concerning these tax law changes.
Foreign Currency Debt Securities. Any special United States Federal income
tax considerations applicable to Debt Securities that provide for the payment of
principal, premium (if any) or interest in a currency other than U.S. dollars
will be discussed in the applicable Prospectus Supplement.
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NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Debt Security, unless such non-U.S. Holder is a direct or
indirect 10% or greater shareholder of the Company, a controlled foreign
corporation related to the Company or a bank receiving interest described in
section 881(c)(3)(A) of the Code. To qualify for the exemption from taxation,
the last United States payor in the chain of payment prior to payment to a
non-U.S. 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 calendar years, a statement that (i) is signed by the beneficial owner
of the Debt Security under penalties of perjury, (ii) certifies that such owner
is not a U.S. Holder and (iii) provides the name and address of the beneficial
owner. The statement may be made on an IRS Form W-8 or a substantially similar
form, and the beneficial owner must inform the Withholding Agent of any change
in the information on the statement within 30 days of such change. If a Debt
Security is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in such case, the signed statement
must be accompanied by a copy of the IRS Form W-8 or the substitute form
provided by the beneficial owner to the organization or institution. The
Treasury Department is considering implementation of further certification
requirements aimed at determining whether the issuer of a debt obligation is
related to holders thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Debt Security, provided the gain is not effectively connected with the conduct
of a trade or business in the United States by the non-U.S. Holder. Certain
other exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
The Debt Securities will not be includible in the estate of a non-U.S.
Holder unless the individual is a direct or indirect 10% or greater shareholder
of the Company or, at the time of such individual's death, payments in respect
of the Debt Securities would have been effectively connected with the conduct by
such individual of a trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Debt Securities to registered owners
who are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the Debt Securities to a U.S. Holder must be
reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. Compliance with the identification procedures
described in the preceding section would establish an exemption from backup
withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a Debt Security to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i) the
broker determines that the seller is a corporation or other exempt recipient or
(ii) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller is
a non-U.S. Holder (and certain other conditions are met). Such a sale must also
be reported by the broker to the IRS, unless either (i) the broker determines
that the seller is an exempt recipient or (ii) the seller certifies its non-U.S.
status (and certain other conditions are met). Certification of the registered
owner's non-U.S. status would be made normally on an IRS Form W-8 under
penalties of perjury, although in certain cases it may be possible to submit
other documentary evidence.
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Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities (i) through underwriters or
dealers, (ii) directly to a limited number of institutional purchasers or to a
single purchaser, (iii) through agents or (iv) through any combination of the
above. An accompanying Prospectus Supplement will set forth the terms of the
offering of the Debt Securities offered thereby, including the name or names of
any underwriters, the purchase price of the Debt Securities and the net proceeds
to the Company from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers.
If underwriters are used in the sale of Debt Securities, such Debt
Securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Unless otherwise set forth in the Prospectus Supplement,
the several obligations of the underwriters to purchase any Debt Securities
offered thereby will be subject to certain conditions precedent and the
underwriters will be obligated to take and pay for all of such Debt Securities
if any are taken.
The Debt Securities may be sold directly by the Company or through
underwriters or agents designated by the Company from time to time. Any agent
involved in the offer or sale of the Debt Securities will be named, and any
commissions payable by the Company to such agents will be set forth, in an
accompanying Prospectus Supplement. Unless otherwise indicated in such
Prospectus Supplement, any such agent will be acting on a reasonable efforts
basis for the period of its appointment.
Until the distribution of the Debt Securities is completed, rules of the
SEC may limit the ability of underwriters and certain selling group members to
bid for and purchase the Debt Securities. As an exception to these rules,
underwriters are permitted to engage in certain transactions that stabilize the
price of the Debt Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Debt Securities.
If any underwriters create a short position in the Debt Securities in
connection with an offering, i.e., if they sell more Debt Securities than are
set forth on the cover page of the applicable Prospectus Supplement, the
underwriters may reduce that short position by purchasing Debt Securities in the
open market.
Underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase Debt Securities in the
open market to reduce the underwriters' short position or to stabilize the price
of the Debt Securities, they may reclaim the amount of the selling concession
from the selling group members who sold those Debt Securities as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Debt Securities to the extent that
it discourages resales of the Debt Securities.
Neither the Company nor any underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Debt Securities. In addition,
neither the Company nor any underwriters make any representation that the
underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
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Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Act.
The place and time of delivery for the Debt Securities in respect of which
this Prospectus is delivered are set forth in the accompanying Prospectus
Supplement.
LEGAL OPINIONS
The validity of the Debt Securities offered hereby will be passed upon for
the Company by Christopher C. Nern, Esq., Vice President and General Counsel of
the Company, and for any underwriters, dealers or agents by counsel named in the
applicable Prospectus Supplement. Brown & Wood LLP, special tax counsel to the
Company, has passed upon certain United States federal income tax considerations
with respect to the Debt Securities.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and its subsidiaries, incorporated in this Prospectus
by reference from the Company's Annual Report on Form 10-K, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
With respect to unaudited interim financial information for the periods
included in the Quarterly Reports on Form 10-Q which are incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as stated
in their report included in such Quarterly Reports on Form 10-Q and incorporated
by reference herein, they did not audit and they do not express an opinion on
such interim financial information. Accordingly, the degree of reliance on their
reports on such information should be restricted in light of the limited nature
of the review procedures applied. Deloitte & Touche LLP are not subject to the
liability provisions of Section 11 of the Securities Act of 1933, as amended,
(the "Act") for their reports on the unaudited interim financial information
because any such report is not a "report" or a "part" of the Registration
Statement prepared or certified by an accountant within the meaning of Sections
7 and 11 of the Act.
The statements made in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (which are incorporated in this Prospectus by reference),
as to matters of law with respect to regulation and environmental matters and
the statements made herein under the caption "Description of Debt Securities",
have been reviewed by Christopher C. Nern, Esq., Vice President and General
Counsel of the Company, and have been made in reliance upon his opinion and upon
his authority as an expert.
43
<PAGE> 60
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company.............................. S-2
Risk Factors............................. S-2
Selected Historical Consolidated
Financial Data......................... S-4
First Quarter 1998 Results............... S-5
Ratios of Earnings to Fixed Charges...... S-5
Capitalization........................... S-6
Description of the QUIDS................. S-6
Certain United States Federal Income Tax
Consequences........................... S-11
Underwriting............................. S-15
Legal Opinions........................... S-16
PROSPECTUS
Available Information.................... 2
Incorporation of Certain Documents by
Reference.............................. 2
The Company.............................. 3
Use of Proceeds.......................... 3
Regulatory Matters....................... 3
Ratio of Earnings to Fixed Charges....... 5
Description of Debt Securities........... 5
DTC Book-Entry-Only System............... 32
Certain United States Federal Income Tax
Considerations......................... 33
Plan of Distribution..................... 42
Legal Opinions........................... 43
Experts.................................. 43
</TABLE>
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$100,122,300
THE DETROIT EDISON COMPANY
% QUARTERLY INCOME DEBT
SECURITIES (QUIDSSM)
(JUNIOR SUBORDINATED
DEFERRABLE INTEREST
DEBENTURES, DUE 2028)
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DETROIT EDISON LOGO
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GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
REPRESENTATIVES OF THE UNDERWRITERS
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