++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO +
+COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE +
+SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE +
+SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE +
+TIME THAT A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PRELIMINARY +
+PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT (Subject to Completion, Issued December 29, 1993)
(To Prospectus dated December 28, 1993)
$435,102,000
$ Secured Lease Obligation Bonds, % Series due
$ Secured Lease Obligation Bonds, % Series due
-----------
Interest Payable July 15 and January 15
-----------
The Secured Lease Obligation Bonds, % Series due and % Series due
(the "Bonds") will be indirectly secured, as described in the
accompanying Prospectus, by liens on, and a security interest in, certain
ownership interests in and the respective Leases relating to Unit No. 1 of
the Grand Gulf Steam Electric Generating Station (nuclear) ("Grand Gulf
1"), and will be payable solely from basic rentals and certain other
amounts to be paid under such leases by
System Energy Resources, Inc.
-----------
The Bonds will be issued by GG1B Funding Corporation ("Funding Corporation"),
a corporation created for the sole purpose of the refinancing of the financing
of Grand Gulf 1 as described in the accompanying Prospectus. System Energy
Resources, Inc. (the "Company" or "System Energy") will be unconditionally
obligated to make rental payments in amounts which will be at least
sufficient to pay in full, when due, all scheduled payments of principal of,
and premium, if any, and interest on, the Bonds, although the Bonds will not
be direct obligations of, or guaranteed by, the Company.
-----------
The principal of the Bonds will be payable from time to time in installments.
The Bonds will be redeemable, in whole or in part, on not less than 20 days'
notice, either upon certain terminations of the Leases, or on or after
, at the option of Funding Corporation at the redemption
prices set forth herein, in each case together with accrued interest to the
date fixed for redemption. (See "Description of the Bonds and the
Indenture" in the accompanying Prospectus.)
-----------
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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
Price to Underwriting
Public (1) Commissions (2)(3) Proceeds (1)(2)
---------- ------------------ ---------------
Per Series Bonds.............. % % %
Total............................ $ $ $
Per Series Bonds.............. % % %
Total............................ $ $ $
- -----
(1) Plus accrued interest, if any, from January , 1994.
(2) Expenses, estimated to be , will be paid by the Company.
(3) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
-----------
The Bonds are offered by the Underwriters named below subject to prior sale,
when, as and if accepted by the Underwriters, and subject to approval of
certain legal matters by Winthrop, Stimson, Putnam & Roberts, counsel for the
Underwriters, and certain other conditions. It is expected that delivery of
the Bonds will be made on or about January , 1994 at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in New
York funds.
-----------
MORGAN STANLEY & CO.
Incorporated
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
January , 1994
SELECTED INFORMATION
The following material, which is presented herein solely to furnish limited
introductory information regarding the Bonds, is qualified in its entirety by
reference to the detailed information included or incorporated by reference in
the Prospectus Supplement and in the accompanying Prospectus. Capitalized terms
used in this Prospectus Supplement and in the accompanying Prospectus without
definition are defined in the Glossary at the end of the accompanying
Prospectus.
SECURITIES OFFERED.......
$435,102,000 principal amount of Secured Lease
Obligation Bonds, of which:
$ bear interest at the rate of % per
annum and mature on ("Series Bonds");
and
$ bear interest at the rate of % per
annum and mature on ("Series Bonds").
The Series Bonds and the Series Bonds are
herein collectively referred to as the "Bonds."
INTEREST PAYMENT DATES...
January 15 and July 15, commencing July 15,
1994.
PRINCIPAL INSTALLMENT
PAYMENTS.................
The Supplemental Indenture relating to the
Bonds (Supplemental Indenture) provides for the
payment of principal installments on the Bonds
on each of the Installment Payment Dates set
forth below, in an aggregate amount (subject to
adjustment in certain circumstances) equal to
the Installment Payment Amounts set forth be-
low, together with interest accrued to such In-
stallment Payment Date. The Outstanding Balance
Factor set forth below for each Installment
Payment Date is for descriptive purposes only,
and, unless there has been a partial redemption
or a default or other installment payment ad-
justment, represents a factor that when multi-
plied by the original principal amount of each
Series Bond and Series Bond will indicate
the outstanding principal amount of such Bond
remaining unpaid after payment of the principal
installment due on such Installment Payment
Date.
AGGREGATE
INSTALLMENT OUTSTANDING
INSTALLMENT PAYMENT AMOUNT BALANCE FACTOR
PAYMENT ----------------------- -----------------------
DATE SERIES BOND SERIES BOND SERIES BOND SERIES BOND
----------- ----------------------- -----------------------
(See "Certain Terms of the Bonds--Principal Installment Payments" in this
Prospectus Supplement.)
REDEMPTION...............
The Bonds are subject to redemption upon
certain Lease terminations and to optional
redemption prior to their respective stated
maturity dates. (See "Certain Terms of the
Bonds--Redemption" in this Prospectus
Supplement.)
SECURITY AND SOURCE OF
PAYMENT..................
The Bonds will be indirectly secured, as
described in the accompanying Prospectus, by
liens on, and a security interest in, certain
ownership interests in and the respective
Leases relating to Grand Gulf 1, and will be
payable solely from basic rentals and certain
other amounts to be paid under such leases by
the Company. The Company is unconditionally
obligated to make payments under the Leases in
amounts that will be at least sufficient to
provide for scheduled payments of the principal
of and interest on the Pledged Lessor Notes
which amounts, in turn, will be sufficient to
provide for scheduled payments of principal of
and interest on the Bonds when due. However,
neither the Bonds nor the Pledged Lessor Notes
will be direct obligations of, or guaranteed
by, the Company. The holders of the Bonds will
have no recourse against the general credit of
any of the institutions or individuals acting
as Lessors or the general credit of the Owner
Participants. (See "Security and Source of
Payment for the Bonds" in the accompanying
Prospectus.)
GRAND GULF 1.............
Grand Gulf 1 is a 1,250 megawatt nuclear-fueled
electric generating unit located in Claiborne
County, Mississippi that was placed in
commercial operation in 1985. SMEPA (as defined
in the accompanying Prospectus) has a 10%
undivided ownership interest in Grand Gulf 1.
Unit 1 (as defined in the accompanying
Prospectus) excludes certain transmission,
pollution control and other facilities included
in Grand Gulf 1.
THE REFINANCING..........
The Company has determined, in light of
prevailing economic and financial
circumstances, to cause a refinancing of the
Old Pledged Lessor Notes issued in connection
with the Transactions and currently outstanding
(the "Refinancing"). In addition to the
offering of the Bonds described herein, as part
of the Refinancing, Old Funding Corporation
will redeem all of the outstanding Old Bonds.
(See "The Refinancing" in the accompanying
Prospectus.)
CERTAIN TERMS OF THE BONDS
The following description of certain terms of the Bonds offered hereby
supplements, and should be read together with, the statements under
"Description of the Bonds and the Indenture" in the accompanying Prospectus.
Capitalized terms used in this Prospectus Supplement have the same meanings as
in the accompanying Prospectus.
PRINCIPAL AMOUNTS, INTEREST RATES, STATED MATURITIES AND PAYMENT
The Bonds will be issued in two separate series: $ principal amount
of Secured Lease Obligation Bonds, % Series due (hereinafter sometimes
called the "Series Bonds") and $ principal amount of Secured Lease
Obligation Bonds, % Series due (hereinafter sometimes called the
"Series Bonds"). The Series Bonds and the Series Bonds are hereinafter
sometimes referred to, collectively, as the "Bonds".
The Series Bonds will mature , and the Series Bonds will
mature , . The Bonds of each series will bear interest on the
unpaid principal amount thereof from their date of issuance at the rate per
annum shown in its title, payable on January 15 and July 15 of each year,
commencing July 15, 1994, to the registered owners thereof at the close of
business on January 1 or July 1, as the case may be, next preceding such
interest payment date. (Indenture, Sections 2.03 and 2.10, Supplemental
Indenture and form of Bond)
The principal of and premium, if any, and interest on the Bonds will be
payable upon presentation and surrender thereof at the corporate trust office
of Bankers Trust Company, registrar and paying agent, in New York, New York,
except that payment of interest and installment payments of principal (other
than that payable upon stated maturity) shall be made by check mailed to the
address of the person entitled thereto, as shown in the bond register. Since
the principal of each Bond will be subject to payment from time to time without
surrender of, or notation on, the Bond, the unpaid principal amount of each
Bond as reflected in the securities register maintained by the Trustee shall be
controlling and binding on each Holder with respect to the actual unpaid
principal amount of a Bond as of any date. In any case where any redemption
date, any Installment Payment Date or the stated maturity of principal of or
any installment of interest on any Bond, or any date on which any defaulted
interest or principal is proposed to be paid, is not a business day, then
(notwithstanding any other provision of the Indenture or such Bond) payment of
interest and/or principal and premium, if any, shall be due and payable on the
next succeeding business day with the same force and effect as if made on or at
such nominal redemption date, the stated maturity, Installment Payment Date or
date on which the defaulted interest or principal is proposed to be paid, and
no interest will accrue on the amount so payable for the period from and after
such redemption date, stated maturity, Installment Payment Date or date for the
payment of defaulted interest or principal, as the case may be. (Indenture,
Sections 1.13, 2.03 and 2.10, and form of Bond)
PRINCIPAL INSTALLMENT PAYMENTS
On each Installment Payment Date (set forth below), the Company will pay an
installment of principal of each Bond of each series equal (subject to
adjustment as described below) in amount (an "Installment Payment Amount") to
the Installment Payment Percentage (set forth below) for the Bonds of such
series for such Installment Payment Date multiplied by the original principal
amount of such Bond.
INSTALLMENT PAYMENT
INSTALLMENT PERCENTAGE
PAYMENT ---------------------------
DATE SERIES BOND SERIES BOND
----------- ------ ---- ------ ----
Upon the occurrence of certain changes in Federal income tax rates or laws,
the Company or the Owner Participant may cause the respective principal amount
of Series Bonds and Series Bonds which are to be paid in installments on
the Installment Payment Date to be adjusted to match any adjustment made to the
principal amortization schedules of the Pledged Lessor Notes in connection with
a recalculation of basic rent under one or more of the Leases, provided that
such adjustments shall not increase or decrease the average life of the Bonds
of either such series (calculated in accordance with generally accepted
financial practice) by more than 6 months. The Trustee shall send by mail to
each Holder of affected Bonds at least 20 days before the first Installment
Payment Date with respect to which an adjustment is to be made, a revised
schedule of principal amounts of Bonds to be repaid upon payment of applicable
Installment Payment Amounts on Installment Payment Dates. (Supplemental
Indenture)
In the event that there shall have been any partial redemption of the Bonds
of either series (other than pursuant to principal installment payments), each
Installment Payment Amount for each Bond of a series subsequent to such
redemption shall be reduced by (i) in the case of a partial redemption as
described under "Redemption--Other Redemption", an amount equal to the amount
obtained by multiplying such Installment Payment Amount as in effect prior to
such redemption by a fraction of which the numerator shall be the aggregate
principal amount of Bonds of such series redeemed pursuant to such partial
redemption, and the denominator shall be the aggregate unpaid principal amount
of Bonds of such series Outstanding immediately prior to such redemption and
(ii) in the case of a partial redemption as described under "Redemption--
Redemption upon Lease Termination", an amount such that the aggregate of all
principal installment payments to be made on the Bonds of such series on the
relevant Installment Payment Date shall be equal to the amount of principal of
the Pledged Lessor Notes to be paid on such date under the remaining Lease
Indenture, any such reduction to be made on a prorata basis, as nearly as
practicable, among the Holders of the Bonds of such series.
REDEMPTION
Redemption upon Lease Termination
If any Lease is to be terminated as described in the accompanying Prospectus
in "Description of the Leases--Purchase Option for Significant Expenditures", -
- - "Periodic Purchase Option" or -- "Termination for Obsolescence" or in "Other
Agreements--Participation Agreement", and all Lessor Notes issued under the
related Lease Indenture are to be prepaid, Bonds, equal in principal amount to
the Pledged Lessor Notes issued under such Lease Indenture, will be redeemed on
the date on which such Lessor Notes are to be prepaid, at a redemption price
equal to the unpaid principal amount thereof plus accrued interest to the
redemption date, all subject, however, except in the case of a termination for
obsolescence, to the right of the Company to assume such Lessor Notes in which
event there will be no redemption of Bonds as a consequence of such
termination.
Other Redemption
Except as described in "Redemption upon Lease Termination" and "Principal
Installment Payments", the Bonds shall not be subject to prepayment or
redemption prior to . On and after , the Bonds of each series
will be subject to redemption, at the option of the Funding Corporation in
whole at any time or in part from time to time at the Redemption Prices
(expressed as a percentage of unpaid principal amount) set forth below with
respect to each series plus accrued interest to the redemption date:
SERIES BONDS
IF REDEEMED IN THE
12 MONTH PERIOD REDEMPTION
BEGINNING JANUARY 15 PRICE
-------------------- ----------
and thereafter at 100% of the unpaid principal amount thereof. (Indenture
Article Six, Supplemental Indenture and form of Bond)
SERIES BONDS
IF REDEEMED IN THE
12 MONTH PERIOD REDEMPTION
BEGINNING JANUARY 15 PRICE
-------------------- ----------
and thereafter at 100% of the unpaid principal amount thereof. (Indenture
Article Six, Supplemental Indenture and form of Bond)
Procedure for and Notice of Redemption
If less than all of the Bonds shall be called for redemption, the particular
Bonds or portions thereof to be redeemed shall be selected by the Trustee from
the series and in the principal amount designated by Funding Corporation except
as otherwise required by the Indenture by prorating, as nearly as practicable,
the principal amount of such Bonds to be redeemed among the Holders of such
Bonds. Any Bonds and portions of Bonds selected for redemption which are deemed
to be paid in accordance with the provisions of the Indenture will cease to
bear interest on the specified redemption date. Upon presentation and surrender
of such Bonds at the place or places of payment, such Bonds shall be paid and
redeemed. Notice of redemption shall be given by mail not less than 20 nor more
than 60 days prior to the date fixed for redemption to the Holders of Bonds to
be redeemed; provided, however, that failure duly to give such notice
by mail, or any defect therein, shall not affect the validity of any
proceedings for the redemption of Bonds as to which there shall have been no
such failure or defect. If a notice of a redemption shall be unconditional, or
if the conditions of a conditional notice of redemption shall have been
satisfied, then upon presentation and surrender of Bonds so called for
redemption at the place or places of payment such Bonds shall be redeemed.
With respect to notice of any redemption of the Bonds, unless, upon the
giving of such notice, such Bonds are deemed to have been paid under the
Indenture as described in the accompanying Prospectus under "Description of the
Bonds and the Indenture--Defeasance", such notice will state that such
redemption will be conditional upon the receipt by the Trustee at or prior to
the date fixed for such redemption of money sufficient to pay the principal of
and premium, if any, and interest on such Bonds. If such money is not so
received, such notice will be of no force and effect, Funding Corporation will
not redeem such Bonds and the Trustee will give notice, in the manner in which
the notice of redemption was given, that such money was not so received, and
such redemption is not required to be made. (Indenture, Article Six)
USE OF PROCEEDS
Proceeds from the issuance of the Bonds will be used to make loans to the
Lessors, to be evidenced by the Pledged Lessor Notes, in amounts sufficient,
together with amounts made available to the Lessors by the Company as basic and
supplemental rent under the related Leases, to enable the Lessors to prepay the
outstanding Old Pledged Lessor Notes from Old Funding Corporation and to pay
certain costs and expenses incurred in connection with the Refinancing. Such
funds will be used by Old Funding Corporation to redeem the Old Bonds as
described in the accompanying Prospectus. (See "Use of Proceeds" in the
accompanying Prospectus.)
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
System Energy, Funding Corporation and the Underwriters, the Underwriters named
below have severally agreed to purchase from Funding Corporation, and Funding
Corporation has agreed to sell to the Underwriters, severally, the respective
principal amounts of the Bonds set forth below.
PRINCIPAL
NAME AMOUNT
---- ------------
Morgan Stanley & Co. Incorporated........................... $
Bear, Stearns & Co. Inc.....................................
Goldman, Sachs & Co.........................................
------------
Total................................................... $435,102,000
============
The Underwriting Agreement provides that the several obligations of the
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the Bonds if any
are purchased; provided that the Underwriting Agreement provides that under
certain circumstances involving a default of Underwriters, less than all of the
Bonds may be purchased.
System Energy and Funding Corporation have been advised by the several
Underwriters as follows:
The Underwriters propose to offer the Series Bonds and the Series
Bonds directly to the public at the public offering prices set forth on
the cover page of this Prospectus Supplement and to certain dealers at
such prices less a concession of % of the principal amount of the Series
Bonds and % of the principal amount of the Series Bonds. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of % of the principal amount of the Series Bonds and % of
the principal amount of the Series Bonds to certain other dealers.
After the initial public offering, the offering prices and other selling
terms may be changed.
The Underwriting Agreement provides that, subject to certain conditions,
System Energy will indemnify each Underwriter and its controlling persons
against certain liabilities, including certain liabilities under the Securities
Act.
System Energy does not intend to apply for listing of the Bonds on a national
securities exchange but has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Bonds, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however,
to make a market in the Bonds, and such market making may be discontinued at
any time at the sole discretion of each Underwriter. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Bonds.
Morgan Stanley & Co. Incorporated acted as financial advisor to System Energy
in connection with the Transactions and acted as agent for the placement of the
equity portion of the lease financing.
PROSPECTUS
$435,102,000
Secured Lease Obligation Bonds
The Secured Lease Obligation Bonds (the "Bonds") will be issued at one time or
from time to time, in one or more new series, at prices and on terms to be
determined at the time of sale. The Bonds will be indirectly secured, as
described herein, by liens on, and security interests in, certain ownership
interests in and the respective Leases relating to Unit No. 1 of the Grand
Gulf Steam Electric Generating Station (nuclear) ("Grand Gulf 1"), and will
be payable solely from basic rentals and certain other amounts to be paid
under such Leases by
System Energy Resources, Inc.
The Bonds will be issued by GG1B Funding Corporation ("Funding Corporation"), a
corporation created for the sole purpose of the refinancing described herein.
System Energy Resources, Inc. (the "Company" or "System Energy") will be
unconditionally obligated to make rental payments in amounts which will be at
least sufficient to pay in full, when due, all scheduled payments of principal
of, and premium, if any, and interest on, the Bonds, although the Bonds will
not be direct obligations of, or guaranteed by, the Company. This Prospectus
will be supplemented by a prospectus supplement (the "Prospectus Supplement")
which will set forth, as applicable, the designation, the aggregate
principal amount, rate and time of payment of interest, maturity, purchase
price, initial public offering price, if any, any redemption or installment
payment provisions and other specific terms of each series of the Bonds in
respect of which this Prospectus is being delivered.
The Bonds will be secured by a pledge and assignment of certain nonrecourse
Lessor Notes ("Pledged Lessor Notes") issued by one or more of the Lessors
under the Lease Indentures described herein. Each Pledged Lessor Note will be
secured by a lien on and security interest in the undivided ownership interest
in Grand Gulf 1 of the Lessor which has issued such Pledged Lessor Notes and
certain of the rights of such Lessor under its Lease with the Company,
including the right to receive the basic rentals and certain other amounts
payable by the Company thereunder. (See "Security and Source of Payment for
the Bonds," "Description of the Bonds and the Indenture," "Description of
the Lease Indentures" and "Description of the Leases.")
---------------
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 Bonds will be sold through an underwriting syndicate including Morgan
Stanley & Co. Incorporated. The net proceeds from the sale of the Bonds, and
any applicable commissions or discounts, are set forth in the applicable
Prospectus Supplement.
December 28, 1993
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES
OFFERED HEREBY OR ANY OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
AVAILABLE INFORMATION
System Energy is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
SEC. Such reports include information, as of particular dates, concerning the
Company's directors and officers, their remuneration, the principal holders of
the Company's securities and any material interest of such persons in
transactions with the Company. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of this material can also be obtained
at prescribed rates from the Public Reference Branch of the SEC at its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC pursuant to the Exchange Act are
incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1992.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1993, June 30, 1993 and September 30, 1993.
3. The Company's Current Report on Form 8-K dated April 21, 1993.
In addition, all documents subsequently filed by the Company with the SEC
pursuant to Section 13, 14 or 15(d) of the Exchange Act prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents (such documents, and the documents enumerated above, being herein
referred to as "Incorporated Documents," provided, however, that the documents
enumerated above or subsequently filed by the Company pursuant to Section 13,
14 or 15(d) of the Exchange Act prior to the filing of the Company's most
recent Annual Report on Form 10-K with the SEC shall not be Incorporated
Documents or be incorporated by reference in this Prospectus or be a part
hereof from and after any such filing of an Annual Report on Form 10-K).
Any statement contained herein or in an Incorporated Document 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 Incorporated
Document or in an accompanying Prospectus Supplement 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 TO EACH PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN
DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR
ALL OF THE INCORPORATED DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS,
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO JOSEPH L. BLOUNT, ESQ.,
SECRETARY, SYSTEM ENERGY RESOURCES, INC., 1340 ECHELON PARKWAY, JACKSON,
MISSISSIPPI 39213, TELEPHONE NUMBER: (601) 984-9000.
THE INFORMATION RELATING TO THE COMPANY CONTAINED IN THIS PROSPECTUS AND ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT DOES NOT PURPORT TO BE COMPREHENSIVE AND IS
BASED UPON INFORMATION CONTAINED IN THE INCORPORATED DOCUMENTS; ACCORDINGLY,
SUCH INFORMATION CONTAINED HEREIN SHOULD BE READ TOGETHER WITH THE INFORMATION
CONTAINED IN THE INCORPORATED DOCUMENTS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR, WITH RESPECT TO ANY SERIES
OF THE BONDS, THE PROSPECTUS SUPPLEMENT RELATING THERETO, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS AND A PROSPECTUS SUPPLEMENT NOR ANY
SALE MADE THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF
THIS PROSPECTUS OR THAT PROSPECTUS SUPPLEMENT.
SELECTED INFORMATION RELATING TO THE BONDS
The following material, which is presented herein solely to furnish limited
introductory information regarding the Bonds, is qualified in its entirety by
reference to the detailed information included or incorporated by reference in
this Prospectus and in the accompanying Prospectus Supplement. Capitalized
terms used in this Prospectus and in the accompanying Prospectus Supplement
without definition are defined in the Glossary at the end of this Prospectus.
THE TRANSACTIONS AND THE REFINANCING
In 1988, the Company sold two portions of its 90% interest in Unit 1 (as
defined) of the Grand Gulf Station to the Owner Trustees of two separate trusts
("Lessors") established for the benefit of two equity investors, the Owner
Participants. Simultaneously, each Lessor leased the interest it purchased to
the Company under a separate long-term Lease. Approximately 87% of the
aggregate consideration paid by the Lessors for their respective interests in
Unit 1 was contributed to the Lessors in the form of loans from banks, and the
balance of such consideration was contributed to the Lessors by the Owner
Participants. The proceeds of the secured lease obligation bonds issued in 1989
(the "Old Bonds") were loaned to the Lessors (such loans being evidenced by the
issuance of the Old Pledged Lessor Notes to the Old Funding Corporation) and
were used to retire the Lessors' bank loans.
The Company has determined, in light of prevailing economic and financial
circumstances, to cause a refinancing of the Old Pledged Lessor Notes issued in
connection with the Transactions and currently outstanding (the "Refinancing").
In addition to the offering of the Bonds described herein, as part of the
Refinancing, Old Funding Corporation will redeem all of the outstanding Old
Bonds as described herein. (See "The Refinancing.")
USE OF PROCEEDS
Unless the accompanying Prospectus Supplement provides otherwise, the
proceeds of the sale of the Bonds will be used to make loans to the Lessors, to
be evidenced by the Pledged Lessor Notes, in amounts sufficient, together with
amounts made available to the Lessors by the Company as basic and supplemental
rent under the related Leases, to enable the Lessors to prepay the outstanding
Old Pledged Lessor Notes owned by Old Funding Corporation and to pay certain
costs and expenses incurred in connection with the Refinancing. Such funds will
be used by Old Funding Corporation to redeem the Old Bonds as described herein.
(See "Use of Proceeds" and "The Refinancing.")
SECURITY AND SOURCE OF PAYMENT
The Company is unconditionally obligated to make payments under the Leases in
amounts that will be at least sufficient to provide for scheduled payments of
the principal of and interest on the Pledged Lessor Notes which amounts, in
turn, will be sufficient to provide for scheduled payments of principal of and
interest on the Bonds when due. However, neither the Bonds nor the Pledged
Lessor Notes will be direct obligations of, or guaranteed by, the Company. The
holders of the Bonds will have no recourse against the general credit of any of
the institutions or individuals acting as Lessors or the general credit of the
Owner Participants. (See "Security and Source of Payment for the Bonds.")
The Bonds will be secured by the Pledged Lessor Notes, which will be held by
the Trustee. Each Pledged Lessor Note will be secured by, among other things,
(a) a lien on and security interest in the Undivided Interest of the Lessor
issuing such Pledged Lessor Note and (b) certain of the rights of such Lessor
under its Lease with the Company, including the right to receive basic rent and
certain other amounts payable by the Company thereunder. (See "Security and
Source of Payment for the Bonds.")
Upon the occurrence and continuance of any Lease Indenture Event of Default
that results from a Lease Event of Default, the related Lessor will control the
exercise of remedies against the Company under the related Lease, subject to
the right of the Lease Indenture Trustee to cause such Lessor to forbear from
any proposed action which would have a material adverse effect on the holders
of the related Lessor Notes. There could be circumstances, therefore, in which
amounts due on the Bonds are not paid and neither the Lease Indenture Trustee
nor the Trustee would be able to direct such Lessor's pursuit of remedies
against the Company under such Lease. The Lease Indenture Trustee would not be
precluded, however, from selling the related Lease Indenture Estate (including
the Undivided Interest) in a foreclosure or similar proceeding. If such sale
occurs prior to or simultaneously with the termination of the related Lease,
such Lessor must first be given an opportunity to purchase such Lease Indenture
Estate at the proposed sale price. In the event of a sale pursuant to a
foreclosure or similar proceeding (other than a sale to such Lessor), the Lease
Indenture Trustee has the right to terminate such Lease in connection with such
sale. (See "Description of the Lease Indentures--Acceleration and Remedies.")
Under certain circumstances the Company (and in certain situations, one or
more of its Affiliates) may assume all or a portion of the Lessor Notes issued
under either Lease Indenture and all obligations of the related Lessor
thereunder and under such Lease Indenture. (See "Description of the Lease
Indentures--Assumption by the Company.") In such cases, the holders of the
Bonds would retain the benefit of the pledge and mortgage under the Lease
Indenture of the related Undivided Interest and the obligation to make payments
on the Pledged Lessor Notes would become a direct obligation of the Company.
For a description of possible limitations on amounts payable as damages if
the Company were to reject the Leases in the context of a bankruptcy
proceeding, see "Security and Source of Payment for the Bonds."
DESCRIPTION OF GRAND GULF 1
Grand Gulf 1 is a 1,250 megawatt nuclear-fueled electric generating unit
located in Claiborne County, Mississippi that was placed in commercial
operation in 1985. SMEPA has a 10% undivided ownership interest in Grand Gulf
1. Unit 1 (as defined) excludes certain transmission, pollution control and
other facilities included in Grand Gulf 1.
GG1B FUNDING CORPORATION
Funding Corporation was incorporated in Delaware on September 24, 1993 for
the purpose of facilitating the refinancing of the debt associated with the
Lessors' interests in Unit 1. The assets of Funding Corporation will consist of
the Pledged Lessor Notes, which are payable from basic rent and certain other
payments which the Company is unconditionally obligated to make under the
Leases. (See "GG1B Funding Corporation.")
THE COMPANY
System Energy is a wholly-owned subsidiary of Entergy that was incorporated
under the laws of the State of Arkansas in 1974 to construct and finance
certain baseload generating units for the operating subsidiaries of Entergy.
System Energy's principal executive offices are located at Echelon One, 1340
Echelon Parkway, Jackson, Mississippi 39213. System Energy's telephone number
is 601-984-9000. Entergy, a registered public utility holding company under the
Public Utility Holding Company Act of 1935, as amended, also owns all the
common stock of four retail electric utility operating subsidiaries, AP&L,
LP&L, MP&L and NOPSI. Other subsidiaries of Entergy are Entergy Services, Inc.,
a service company; Entergy Operations, Inc., a nuclear management services
company; Entergy Power, Inc., a subsidiary formed to market certain capacity
and energy in certain wholesale markets; and Entergy Enterprises, Inc., a non-
utility company. Entergy also has several subsidiaries formed to participate in
utility projects located outside the Entergy System's retail service territory,
both domestically and in foreign countries. The System operating companies own
System Fuels, Inc., which implements and/or maintains certain programs to
procure, deliver and store fuel supplies for the System.
System Energy's principal asset consists of a 90% interest in Grand Gulf l,
approximately 78.5% of which is owned and 11.5% of which is leased on a long-
term basis. Grand Gulf 1 is a 1,250 megawatt nuclear-powered electric
generating unit located near Port Gibson, Mississippi that was placed in
commercial operation on July 1, 1985. Entergy Operations, Inc. operates Grand
Gulf 1, along with the other nuclear generating units in the System. System
Energy's investment (excluding nuclear fuel but including its capitalized lease
obligations in respect of the Transactions (as hereinafter defined)) in its 90%
share of Grand Gulf 1 is presently approximately $3.5 billion. The other 10% of
Grand Gulf 1 is owned by SMEPA, a wholesale cooperative in Mississippi.
Construction of a proposed second unit of the Grand Gulf Station was suspended
in 1985 and this unit was canceled and written off in 1989.
The Company sells its share of the capacity and energy from Grand Gulf 1
exclusively to the System operating companies under the Unit Power Sales
Agreement. As modified and approved by the Federal Energy Regulatory
Commission, the Unit Power Sales Agreement provides for the allocation in
various percentages of the capacity and energy from System Energy's 90%
interest in Grand Gulf 1 (and the costs related thereto) to the System
operating companies on a full cost of service basis. Payments under the Unit
Power Sales Agreement are System Energy's only source of operating revenues.
The financial condition of System Energy significantly depends upon the
continued commercial operation of Grand Gulf 1 and upon the receipt of payments
from the System operating companies.
At September 30, 1993, System Energy had net utility plant of $2.918 billion,
long-term debt (excluding current maturities) of $1.756 billion (of which $880
million consisted of first mortgage bonds) and common shareholder's equity of
$1.023 billion. For the nine months ended September 30, 1993, System Energy had
operating revenues of $473 million and net income of $76 million.
The information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the Incorporated Documents. For further information concerning the
System operating companies and Entergy, reference is made to the information
relating to such companies which accompanies the Incorporated Documents.
INTRODUCTION
On December 28, 1988 the Company sold and leased back, on a long-term net
lease basis, two portions of its 90% undivided interest in Unit 1 (as defined)
in two substantially identical, but entirely separate, transactions (each, a
"Transaction" and together, the "Transactions"), each such transaction being
documented separately. The Company sold undivided interests in Unit 1
representing, in the aggregate, approximately 15.146% of the total ownership
interests in Unit 1 (which constitutes approximately 11.5% of the total
ownership interests in Grand Gulf 1) to Meridian Trust Company and an
individual co-trustee, as Owner Trustee under each of two separate trust
agreements (each such agreement with an institutional investor as an Owner
Participant) and as Lessor under each of two separate Leases with the
Company. Unit 1 (as defined) excludes certain transmission, pollution
control and other facilities included in Grand Gulf 1. The Lessors as
owners of the Undivided Interests in Unit 1 are entitled to approximately
15.146% of the capacity and energy produced by Grand Gulf 1, which capacity and
energy is available to the Company during the terms of the Leases. After the
term of a Lease, any person other than the Company (including a Lessor) which
has possession of a related Undivided Interest would be required to compensate
the Company, at fair market values, for those assets excluded from Unit 1 which
are a part of Grand Gulf 1 and which are necessary to use the Undivided
Interest.
The purchase price of the Undivided Interests was $500,000,000. Of such
purchase price, approximately $64,898,000 was provided by the Owner
Participants and approximately $435,102,000 was provided by interim borrowings
from banks. These interim bank loans were refinanced by issuance by the Lessors
of the Old Pledged Lessor Notes to the Old Funding Corporation in April 1989.
Old Funding Corporation obtained the funds to loan to the Lessors by issuing
and selling on April 13, 1989 $435,102,000 principal amount of the Old Bonds.
THE REFINANCING
The Company has determined, in light of prevailing economic and financial
circumstances, to cause a refinancing of the Old Pledged Lessor Notes. As part
of the Refinancing, all of the outstanding Old Bonds consisting of $163,666,000
aggregate principal amount of Secured Lease Obligation Bonds, 11.07% Series due
2004 are to be redeemed at 105.535% of the principal amount thereof with
interest accrued to the redemption date and all of the outstanding Old Bonds
consisting of $271,436,000 aggregate principal amount of Secured Lease
Obligation Bonds, 11.50% due 2014 are to be redeemed at 108.625% of the
principal amount thereof with interest accrued to the redemption date.
As part of the Refinancing, the Lessors will prepay all of the Old Pledged
Lessor Notes issued by them. The aggregate principal amount of the Old Pledged
Lessor Notes is equal to the aggregate principal amount of the Old Bonds to be
redeemed. The proceeds from the prepayment by the Lessors of the Old Pledged
Lessor Notes will be used by Old Funding Corporation to pay for the Old Bonds
redeemed.
The Lessors will obtain the funds required to prepay the Old Pledged Lessor
Notes and to pay related expenses from non-recourse borrowings by them from
Funding Corporation and from basic and supplemental rent payments which the
Company has agreed to make under the Leases with such Lessors. The loans by
Funding Corporation to each Lessor will be evidenced by new lessor notes (the
"Pledged Lessor Notes") issued by such Lessor to Funding Corporation under the
Lease Indenture. The Pledged Lessor Notes of each Lessor will be secured by,
among other things, the basic rentals and other payments which the Company is
obligated to make under the relevant Lease. Funding Corporation intends to
obtain the funds to enable it to make the loans to the Participating Lessors
through the offer and sale of the Bonds. (See "Security and Source of Payment
for the Bonds" and "Use of Proceeds.")
USE OF PROCEEDS
Unless the Prospectus Supplement provides otherwise, proceeds from the
issuance of the Bonds will be used to make loans to the Lessors, to be
evidenced by the Pledged Lessor Notes, in amounts sufficient, together with
amounts made available to the Lessors by the Company as basic and supplemental
rent under the related Leases, to enable the Lessors to prepay the outstanding
Old Pledged Lessor Notes from Old Funding Corporation and to pay certain costs
and expenses incurred in connection with the Refinancing. Such funds will be
used by Old Funding Corporation to redeem the Old Bonds as described above
under "The Refinancing."
FLOW OF FUNDS FOR DEBT SERVICE PAYMENTS ON THE BONDS
Flowchart showing that:
(i) rental payments due under the Leases are paid by
Leasee to Lease Indenture Trustees;
(ii) Portion of such rental payments received by Lease
Indenture Trustees equal to debt service for
Pledged Lessor Notes paid by Lease Indenture
Trustees to the Trustee for the Bonds and then
distributed by such Trustee to Bondholders as
debt service on the Bonds; and
(iii) Portion of such rental payments received by Lease
Indenture Trustees in excess of debt service paid
by Lease Indenture Trustees to the Owner Trustees
(Lessors) and the distributed by such Owner
Trustees to the Owner Participants.
See "Security and Source of Payment for the Bonds."
SECURITY AND SOURCE OF PAYMENT FOR THE BONDS
Concurrently with the initial authentication and delivery of the Bonds of
each series, Funding Corporation will cause to be delivered to the Trustee
Pledged Lessor Notes (a) issued as separate series under the Lease Indentures,
(b) payable as to principal on such dates and in such amounts that on the
stated maturity of principal and each sinking fund redemption date or principal
installment payment date of such Bonds there shall be payable on the Pledged
Lessor Notes an amount in respect of principal equal to the principal amount of
such Bonds then to mature or to be payable in installments of principal or be
redeemed, (c) bearing interest at the same rate and payable at the same times
as the corresponding Bonds of such series, (d) containing provisions for
redemption, including redemption premiums, correlative to the provisions for
redemption (other than pursuant to a sinking fund) of the corresponding Bonds
of such series and (e) registered in the name of the Trustee. (Indenture,
Section 2.03.)
The Pledged Lessor Notes, which will be without recourse to the general
credit of the related Owner Trustee or the related Owner Participant and will
not be direct obligations of, or guaranteed by, the Company, will be payable
from and secured by, among other things, a lien on and security interest in the
related Undivided Interest, and, subject to certain exceptions, the rights of
the Owner Trustee under the related Lease, including the right to receive all
basic rentals and certain other payments to be made by the Company. The Leases
require that basic rent payments be made by the Company in such amounts as will
be sufficient to provide for the payment, when due, of scheduled payments of
principal of and interest on all of the related Lessor Notes. In addition, each
Lease requires that basic rent payments together with payments of Casualty
Value or Special Casualty Value and certain other amounts be made in such
amounts and at such times as will be sufficient for the payment, when due, of
the prepayments of principal of and premium, if any, and interest on the
related Lessor Notes. (See "Description of the Leases--Terms and Rentals.")
Each Lease is a net lease pursuant to which the Company is unconditionally
obligated to make all payments thereunder without any right of counterclaim,
set-off, deduction or defense. (See "Description of the Leases--Net Lease.") If
a Lease Event of Default shall have occurred and be continuing, remedies under
the Lease may be exercised as described in "Description of the Leases--
Remedies."
If a Lease Indenture Event of Default shall have occurred and be continuing,
remedies may be exercised subject to the limitations described under
"Description of the Lease Indentures--Acceleration and Remedies." If a Lease
Indenture Event of Default shall have occurred and be continuing at a time when
there shall not have occurred and be continuing a Lease Event of Default, the
exercise of such remedies may not disturb the Company's quiet use and
possession of the Undivided Interest or require prepayment of basic rent,
Casualty Value or Special Casualty Value.
In certain instances, upon the purchase by or transfer to the Company of an
Undivided Interest, the Company may assume the obligations of the Owner Trustee
under the Lease Indenture. (See "Description of the Lease Indentures--
Assumption by the Company.") Upon such an assumption by the Company, an Owner
Trustee would be released from its obligations under the related Lease
Indenture and the related Lessor Notes. In such case, the holders of the Bonds
would retain the benefit of the pledge and mortgage under the Lease Indenture
of the related Undivided Interest and the obligation to make payments on the
Pledged Lessor Notes would become a direct obligation of the Company.
Subject to certain conditions, additional Securities may be issued under the
Indenture (a) for the purpose of redeeming all or any part of any series of
Securities previously issued under the Indenture, including the Bonds, (b) to
provide funds to purchase additional Lessor Notes for all or a portion of
certain alterations, modifications, additions or improvements to Unit 1,
subject to certain limitations and (c) to refund a portion of the initial
investment of an Owner Participant. All subsequently issued Securities and the
Bonds will be secured equally by all Lessor Notes pledged by Funding
Corporation to the Trustee.
The Company has caused letters of credit to be issued to each Owner
Participant to secure the payment of certain amounts payable by the Company
under the related Lease. These letters of credit expire on
January 15, 1997. Upon the occurrence of an Event of Loss, a Deemed Loss Event
or a Lease Event of Default under such Lease, the Owner Participant is entitled
to draw on the letters of credit amounts generally not exceeding Casualty Value
less the aggregate principal amount of and accrued interest on the related
Lessor Notes then outstanding. The failure of the Company to maintain a letter
of credit for the Owner Participant or to renew or replace an expiring letter
of credit or the notice of the bank issuing a letter of credit that the letter
of credit is being terminated (if the Company fails to provide a replacement
letter of credit) will constitute a Lease Event of Default under the related
Lease. Neither the holders of the Lessor Notes (including the Trustee, as
holder of the Pledged Lessor Notes) nor the Holders of the Bonds are entitled
to the benefit of any such letter of credit. See "Description of the Leases--
Lease Events of Default" and "Other Agreements--Reimbursement Agreement."
If the Company were to enter into bankruptcy or reorganization proceedings,
the Company or its bankruptcy trustee could seek to reject either of the
Leases. In such event, there could be no assurance that the amount of any claim
for damages that would be allowed in such bankruptcy case, if the bankruptcy
court treated the Leases as true leases and authorized their rejection, would
be in amounts sufficient to provide for the repayment of the related Lessor
Notes and thus the applicable portion of the Bonds. Under Section 502(b)(6) of
the United States Bankruptcy Code, as amended, a claim by a lessor for damages
resulting from the rejection of a lease of real property in connection with
bankruptcy proceedings affecting the lessee may be limited to an amount equal
to the rent reserved under the lease, without acceleration, for the greater of
1 year or 15 percent (but not more than 3 years) of the remaining term of the
lease, plus rent already due but unpaid. There can be no assurance that a
bankruptcy court would not find the property covered by the Leases to be real
property, in whole or in part. If the property covered by the Leases were held
to constitute personal property, such limitation would not apply. In any case,
rejection of either of the Leases by the Company or its bankruptcy trustee
would not deprive the related Lease Indenture Trustee of its lien on and
security interest in the related Undivided Interest.
In a bankruptcy proceeding which is already pending with respect to another
utility, the utility has sought to reject leases of interests in a nuclear
generating unit and to have the restrictions imposed by Section 502(b)(6) of
the Bankruptcy Code applied. In addition, in such proceeding, the utility also
requested the bankruptcy court to declare that the proceeds drawn under letters
of credit provided for the benefit of the equity investors in the lessors under
such leases be credited against the damages that such utility would be liable
for as a result of its rejection of such leases. Such bankruptcy proceeding is
being conducted in a jurisdiction outside the jurisdiction in which the Company
operates or is domiciled. No final decision has been rendered with respect to
the claims of such utility with respect to Section 502(b)(6) of the Bankruptcy
Code, and the Company cannot predict at this time the eventual outcome.
For further information with respect to the source of payment for the Bonds,
the Indenture and the Lease Indentures relating to the Bonds, see "Description
of the Bonds and the Indenture" and "Description of the Lease Indentures."
GG1B FUNDING CORPORATION
Funding Corporation was incorporated under the laws of Delaware on September
24, 1993 for the purpose of facilitating the Refinancing and has only nominal
equity capital. The only business of Funding Corporation will be the issuance
and sale of the Bonds and other Securities and the lending of the proceeds
therefrom to reduce such debt and in connection with possible future sale and
leaseback transactions involving the Company's owned interests in Unit 1. (See
"Use of Proceeds.") Funding Corporation may (but is not required to) make loans
in connection with any significant capital improvements which may be installed
at Unit 1 from time to time. The assets of Funding Corporation will consist of
any Lessor Notes issued by the Lessors to Funding Corporation from time to time
and $1,000 in cash, representing the equity capital contributed by its sole
shareholder, NCR Holding, Inc., which is a wholly-owned subsidiary of National
Corporate Research, Ltd. None of the Company, any Lessor or any Owner
Participant holds any ownership interest in Funding Corporation, NCR Holding,
Inc. or National Corporate Research, Ltd., and no person affiliated with the
Company, any Lessor or any Owner Participant is an officer, director or
employee of any such entity.
DESCRIPTION OF THE BONDS AND THE INDENTURE
THE STATEMENTS CONTAINED UNDER THIS CAPTION ARE INTENDED TO BRIEFLY SUMMARIZE
THE BONDS; THEY DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE INDENTURE, A COPY OF THE FORM OF WHICH HAS BEEN
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A
PART. A PROSPECTUS SUPPLEMENT WILL DESCRIBE THE FOLLOWING TERMS OF, OR
APPLICABLE TO, THE SERIES OF BONDS TO BE ISSUED: (1) THE DESIGNATION OF EACH
SERIES OF THE BONDS; (2) THE AGGREGATE PRINCIPAL AMOUNT OF EACH SERIES; (3) THE
DATE ON WHICH EACH SERIES WILL MATURE; (4) THE RATE AT WHICH EACH SERIES WILL
BEAR INTEREST AND THE DATE FROM WHICH SUCH INTEREST ACCRUES; (5) THE DATES ON
WHICH INTEREST WILL BE PAYABLE; AND (6) THE PRICES, TERMS AND CONDITIONS UPON
WHICH EACH SERIES MAY BE REDEEMED BY THE COMPANY PRIOR TO MATURITY OR UPON
WHICH INSTALLMENT PAYMENTS OF PRINCIPAL WILL BECOME DUE AND PAYABLE.
GENERAL
The Bonds are to be issued under the Collateral Trust Indenture, dated as of
January 1, 1994 (the "Indenture"), among Funding Corporation, the Company and
Bankers Trust Company, as Trustee, as supplemented by one or more Supplemental
Indentures (each a "Supplemental Indenture"), among such parties.
Unless otherwise indicated in a Prospectus Supplement, the Bonds will be
issued in fully registered form without coupons in denominations of $1,000 or
any integral multiple thereof. Bonds may be surrendered for registration of
transfer or exchange for Bonds of the same series and maturity at the corporate
trust office of Bankers Trust Company, registrar and paying agent for the
Bonds, in New York, New York. The Trustee shall not be required to register the
transfer or exchange of any Bonds called for redemption or during a period of
15 days preceding a mailing of notice of redemption. No service charge will be
required of any Bondholder participating in any transfer or exchange of Bonds
in respect of such transfer or exchange, but, with certain exceptions, payment
may be required of any tax or other governmental charges that may be imposed in
connection therewith. (Indenture, Sections 2.05, 2.08 and 2.09.)
ADDITIONAL SECURITIES
The Indenture provides that the aggregate principal amount of Securities
(including the Bonds) which may be issued thereunder is unlimited, provided
that at least an equal aggregate principal amount of Lessor Notes must be
pledged as security under the Indenture in support of the payment of such
Securities. A separate Supplemental Indenture will be entered into among
Funding Corporation, the Company and the Trustee establishing the designation,
interest rate, sinking fund, installment payments of principal and redemption
provisions, if any, and other specific terms of any particular series of
Securities. (Indenture, Section 2.03.) Any additional series of Securities will
be secured pari passu with the Bonds by the Pledged Lessor Notes. (Indenture,
Granting Clauses.)
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS BY FUNDING CORPORATION
The certificate of incorporation of Funding Corporation provides that Funding
Corporation will not (a) dissolve or liquidate, in whole or in part, or (b)
merge into or consolidate with, or sell all or any part of its assets to, any
person, firm, corporation, partnership or other entity unless the acquiring
entity or the surviving corporation, as the case may be, has a certificate of
incorporation containing provisions identical to those of Funding Corporation's
certificate of incorporation restricting the nature of its business and
purposes and its ability to take certain action and, in the case of a sale of
assets, the acquiring entity shall have assumed all the liabilities and
obligations of Funding Corporation. In addition, Funding Corporation has
agreed in the Indenture that it will not amend those provisions of its
certificate of incorporation that restrict the nature of its business
and its purposes or restrict its activities or that provide for its
capitalization. (Indenture, Section 5.08.)
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(a) failure to pay any interest on any Security when it becomes due and
payable, and the continuation of such failure for a period of 10 days; or
(b) failure to pay principal of or premium, if any, on any Security when
it becomes due and payable, whether at its stated maturity of principal, on
any applicable redemption date or any principal installment payment date or
at any other time, and the continuation of such failure for a period of 10
days; or
(c) failure on the part of either Funding Corporation or the Company to
perform or observe any covenant or agreement in the Indenture to be
performed or observed by it, and the continuation of such failure for a
period of 30 days after notice has been given to Funding Corporation or the
Company, as the case may be, by the Trustee, or to the Company or Funding
Corporation, as the case may be, and the Trustee by the Holders of at least
25% in principal amount of the outstanding Securities, specifying such
failure and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Indenture; provided, however, that the
continuation of such failure for a period of 30 days or more after such
notice has been so given (but in no event for a period which is greater
than one year after such notice has been given) shall not constitute an
Event of Default if (i) such failure can be remedied but cannot be remedied
within such 30 days, (ii) the Company or Funding Corporation, as the case
may be, is diligent in pursuing a remedy of such failure and (iii) such
failure does not impair in any respect the lien and security interest
created by the Indenture; or
(d) the occurrence of any Lease Indenture Event of Default; or
(e) the entry of a decree or order by a court having jurisdiction in the
premises adjudging Funding Corporation a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of Funding Corporation under the
Federal Bankruptcy Act or any other applicable federal or state law or law
of the District of Columbia, or appointing a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of Funding
Corporation or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and the continuation of any such
decree or order unstayed and in effect for a period of 75 consecutive days;
or
(f) the institution by Funding Corporation of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or
relief under the Federal Bankruptcy Code or any other applicable federal or
state law or law of the District of Columbia, or the consent by it to the
filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
Funding Corporation or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by Funding Corporation
in furtherance of any such action.
(Indenture, Section 8.01)
Funding Corporation has agreed in the Indenture that it will not take certain
corporate action which could result in its being declared bankrupt or
insolvent. (Indenture, Section 5.08.) The Company, the Lessors, the Owner
Participants and the Lease Indenture Trustees have each agreed in the
Participation Agreements that none of them will file, or participate in the
filing of, a petition seeking reorganization, arrangement, adjustment, or
composition of or in respect of Funding Corporation prior to the 181st day
following the payment in full of the Bonds and discharge of the Indenture.
(Participation Agreement, Sections 7(b), 8(b), 9(b), and 10(b).)
ACCELERATION AND REMEDIES
Upon the occurrence and continuance of an Event of Default, (i) if such Event
of Default is of the type specified in clause (a), (b), (c), (e) or (f) of the
first paragraph of "Events of Default" above, the Trustee may and, upon the
direction of the Holders of not less than a majority in principal amount of the
Securities outstanding the Trustee shall, and (ii) if such Event of Default is
of the type specified in clause (d) of the first paragraph of "Events of
Default" above (including without limitation a Lease Event of Default which has
resulted in a default of the type specified in clause (a) or (b) of such
paragraph), under circumstances in which there has been an acceleration of the
maturity of the related Pledged Lessor Notes, the Trustee will declare all the
Securities to be immediately due and payable; provided that no such declaration
will be made (and the Trustee will not take action to sell any property pledged
to it under the Indenture or to institute proceedings for payment on any
Securities or Pledged Lessor Notes) in the case of a payment default of the
type specified in clause (a) or (b) of such paragraph which resulted directly
from a failure by the Company to make any payment of rent under a Lease until
such time as the Lessor under such Lease has been given the opportunity to
exercise its rights, if any, to cure such default under the related Lease
Indenture. (See "Description of the Lease Indentures--Rights of Lessor to Cure
and Purchase Lessor Notes; Substitute Lessee.") (Indenture, Section 8.02.)
In addition, upon the occurrence of a Lease Indenture Event of Default, Lease
Indenture Default, Event of Loss or Deemed Loss Event, if an officer of the
Trustee has actual knowledge thereof, the Trustee will give notice to all
Holders of such fact in accordance with the provisions of the Indenture and
thereafter each Holder will have the right to direct the Trustee, as the holder
of the Pledged Lessor Notes issued under such Lease Indenture, to vote the
principal amount of such Pledged Lessor Notes in proportion to the principal
amount of Securities owned by such Holder, or to direct the related Lease
Indenture Trustee to take such action, or refrain from taking such action, as
it is permitted to take under the terms of the related Lease Indenture. Under
each Lease Indenture, directions given to the Lease Indenture Trustee as
described in the preceding sentence will be dictated by the holders of a
majority in principal amount of all Lessor Notes outstanding thereunder which
will mean, until such time, if any, as additional Lessor Notes are issued under
such Lease Indenture, the Holders of a majority in aggregate principal amount
of the Bonds outstanding, as a result of the pass-through voting mechanism
described above. (Indenture, Section 3.03; Lease Indenture, Section 7.1.)
With certain exceptions, the request of the Holders of not less than a
majority in aggregate principal amount of Securities outstanding will be
necessary to require the Trustee to exercise any remedy under the Indenture.
(Indenture, Section 8.07.) The Trustee will be entitled to receive reasonable
indemnity and under certain circumstances is not required to act. (Indenture,
Section 9.03.) Certificates of the Company and Funding Corporation as to the
absence or nature of a default and compliance with the terms of the Indenture
will be required to be furnished to the Trustee annually. (Indenture, Section
5.09.)
VOTING OF LESSOR NOTES
The Trustee, as holder of the Pledged Lessor Notes, will have the right to
vote and give consents and waivers in respect of such Pledged Lessor Notes and
the Lease Indentures only as described below. The Holders of the Securities may
instruct the Trustee as to action by the Trustee, as holder of the Pledged
Lessor Notes, under any Lease Indenture, including the voting of Pledged Lessor
Notes. Upon receiving from Holders any directions as to the taking of any
action, including the voting of any Pledged Lessor Note, the Trustee shall
specify to the related Lease Indenture Trustee the principal amount of the
Pledged Lessor Note which is in favor of the action or vote, the principal
amount of the Pledged Lessor Note which is opposed to the action or vote and
the principal amount of the Pledged Lessor Note which is not taking any
position as to the action or vote. Such principal amounts shall be determined
by allocating to the total principal amounts of the Pledged Lessor Notes with
respect to which direction is to be given the proportionate principal amount
of Securities taking corresponding positions or not taking any position,
based on the aggregate principal amount of outstanding Securities. (Indenture,
Section 3.03.) Because the Lease Indenture will permit additional Lessor Notes
to be issued and secured thereunder, and will not require that such additional
Lessor Notes be issued only to Funding Corporation, it is possible that at
some future time the Pledged Lessor Notes would not constitute a majority of
the Lessor Notes issued and outstanding under the Lease Indenture. (See
"Description of the Lease Indentures--Additional Lessor Notes.")
SUPPLEMENTAL INDENTURES
Without the consent of the Holders of any Securities, Funding Corporation,
the Company and the Trustee may enter into supplemental indentures for the
following purposes:
(a) to establish the form and terms of any series of Securities;
(b) to evidence the succession of another corporation to the Company, and
the assumption by any such successor of the covenants of the Company
contained in the Indenture, or to evidence the succession of another
corporation to Funding Corporation, and the assumption by any such
successor of the covenants of Funding Corporation contained in the
Indenture and in the Securities;
(c) to evidence the succession of a new trustee or the appointment of a
co-trustee or a separate trustee under the Indenture;
(d) to add to the covenants of the Funding Corporation or of the Company,
for the benefit of the Holders of the Securities, or to evidence the
surrender of any right or power conferred in the Indenture upon Funding
Corporation or the Company;
(e) to convey, transfer and assign to the Trustee, and to subject to the
lien of the Indenture, additional Pledged Lessor Notes or additional
properties or assets, and to correct or amplify the description of any
property at any time subject to the lien of the Indenture or to assure,
convey and confirm unto the Trustee any property subject or required to be
subject to the lien of the Indenture;
(f) to permit or facilitate the issuance of Securities in uncertificated
form;
(g) to change or eliminate any provision of the Indenture; provided,
however, that if such change or elimination will adversely affect the
interests of the Holders of Securities of any series, such change or
elimination will become effective with respect to such series only when no
Security of such series remains outstanding; or
(h) to cure any ambiguity, to correct or supplement any provision in the
Indenture which may be defective or inconsistent with any other provision
in the Indenture, or to make any other provisions with respect to matters
or questions arising under the Indenture, provided such action shall not
adversely affect the interest of the Holders of the Securities in any
material respect.
Without limiting the generality of the foregoing, if the Trust Indenture Act
as in effect at the date of the execution and delivery of the Indenture or at
any time thereafter shall be amended and
(x) if any such amendment shall require one or more changes to any
provisions of the Indenture or the inclusion in the Indenture of any
additional provisions, or shall by operation of law be deemed to effect
such changes or incorporate such provisions by reference or otherwise, or
(y) if any such amendment shall permit one or more changes to, or the
elimination of, any provisions of the Indenture which, at the date of the
execution and delivery of the Indenture or at any time thereafter, are
required by the Trust Indenture Act to be contained in the Indenture or are
contained in the Indenture to reflect any provisions of the Trust Indenture
Act as in effect at such date,
the Indenture shall be deemed to have been amended to conform to such amendment
to the Trust Indenture Act or to effect such changes or elimination, and the
Funding Corporation, the Company and the Trustee may, without the consent of
any Holders, enter into a supplemental indenture to evidence such amendment.
(Indenture, Section 11.01.)
With the consent of the Holders of not less than a majority in aggregate
principal amount of all Securities then outstanding considered as one class,
Funding Corporation, the Company and the Trustee may enter into supplemental
indentures for any purpose; provided that if there is more than one series of
Securities outstanding and if a proposed supplemental indenture directly
affects the Holders of at least one, but not all, of such series, then only the
consent of a majority in aggregate principal amount of the Holders of the
directly affected series of Securities will be required; and provided, further,
that without the consent of the Holders of all the Securities then outstanding
directly affected thereby no such supplemental indenture may:
(a) change the stated maturity of the principal of, or any installment of
interest on, or the date of any installment of principal of, or the dates
or circumstances of payment of premium, if any, on any Security or reduce
the principal amount of, or the interest on, or any premiums payable upon
any redemption of, any Security or change the place of payment where, or
the coin or currency in which, any Security or the premium, if any, or
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment of principal or interest on or after the
stated maturity thereof (or, in the case of redemption, on or after the
redemption date) or such payment of premium, if any, on or after the date
such premium becomes due and payable or change the dates or amounts of
payments to be made through the operation of a sinking fund (if any) or
through installment payments of principal (if any) in respect of such
Securities;
(b) permit the creation of any lien prior or, except with respect to
additional Securities issued in accordance with the Indenture, equal to the
lien of the Indenture with respect to any of the Pledged Lessor Notes,
terminate the lien of the Indenture on the Pledged Lessor Notes (except as
permitted by the Indenture) or deprive any Holder of the security afforded
by the Indenture;
(c) reduce the percentage in principal amount of the Securities the
consent of whose Holders is required for any supplemental indenture or the
consent of whose Holders is required for any waiver provided for in the
Indenture or reduce the requirements of the Indenture relating to (1) a
quorum for meetings of Holders or (2) action taken by Holders pursuant to
the Indenture at meetings thereof; or
(d) modify any of the above provisions or the provisions of the Indenture
dealing with waivers of past defaults, except to increase the percentage of
the Holders whose consent is required for certain action or to provide that
certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holders affected thereby.
(Indenture, Section 11.02)
DEFEASANCE
Bonds of any series, or any portion of the principal amount thereof, will,
prior to the maturity thereof, be deemed to have been paid for purposes of the
Indenture (except as to any surviving rights of registration of transfer or
exchange expressly provided for in the Indenture), and the entire indebtedness
of the Funding Corporation in respect thereof will be deemed to have been
satisfied and discharged, if (a) there shall have been irrevocably deposited
with the Trustee, in trust, money in an amount which will be sufficient to pay
when due the principal of and premium, if any, and interest due and to become
due on such Bonds or portions thereof on and prior to the stated maturity of
principal or redemption date or each principal installment payment date
thereof or (b) the Pledged Lessor Notes of the corresponding series are
deemed to have been paid in accordance with the Lease Indenture or Lease
Indentures under which such Pledged Lessor Notes were issued. (Indenture,
Section 12.01.) (See "Description of the Lease Indentures--Defeasance.")
It is possible that for federal income tax purposes any deposit contemplated
in the preceding paragraph or any deeming of the Pledged Lessor Notes to have
been paid as contemplated in the previous paragraph could be treated as a
taxable exchange of the related Bonds for an issue of obligations of a trust or
a direct interest in the cash and securities held in a trust. In that case,
Holders of such Bonds would recognize gain or loss as if the trust obligations
or the cash or securities deposited or deemed paid, as the case may be, had
actually been received by them in exchange for their Bonds. Such gain or loss,
generally, would be capital in nature to Holders for whom the Bonds are held as
capital assets and any deductions for losses would be subject to certain
limitations. Such Holders would be required to include in income a share of the
income, gain or loss of the trust or the income from the securities held in
trust, as the case may be, in the taxable year in which such event occurs. The
amount so required to be included in income could be different from the amount
that would be includable in the absence of such deposit. Neither the Company
nor Funding Corporation has any obligation to obtain a revenue ruling or other
authority as to the absence of adverse tax consequences arising from any such
event. Prospective investors are urged to consult their own tax advisors as to
the specific consequences to them of such deposit.
THE TRUSTEE
Bankers Trust Company will act as Trustee under the Indenture. Bankers Trust
Company is also Lease Indenture Trustee under each of the Lease Indentures
entered into in connection with the Transactions and the trustee under the
collateral trust indenture for the Old Bonds.
DESCRIPTION OF THE LEASE INDENTURES
THE STATEMENTS CONTAINED UNDER THIS CAPTION ARE INTENDED TO BRIEFLY SUMMARIZE
THE LEASE INDENTURES AS THEY RELATE TO THE BONDS; THEY DO NOT PURPORT TO BE
COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE LEASE
INDENTURES, COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART. EACH LEASE INDENTURE IS AN
ENTIRELY SEPARATE INDENTURE BUT CONTAINS SUBSTANTIALLY THE SAME TERMS AND
PROVISIONS AS EACH OTHER LEASE INDENTURE. IN THE FOLLOWING SUMMARY, REFERENCES
TO THE LEASE INDENTURE, THE LEASE, THE LEASE INDENTURE ESTATE, THE LESSOR, THE
OWNER TRUSTEE, THE OWNER PARTICIPANT, THE LESSOR NOTES AND THE PLEDGED LESSOR
NOTES RELATE TO EACH LEASE INDENTURE.
GENERAL
Lessor Notes (including the Initial Series Lessor Notes, Pledged Lessor Notes
and other Lessor Notes) have been and may be issued under the Lease Indentures.
The Pledged Lessor Notes will, at the direction of Funding Corporation, be
pledged and assigned to the Trustee for the benefit of the Holders of the
Securities (including the Bonds).
LEASE INDENTURE EVENTS OF DEFAULT
The following are Lease Indenture Events of Default:
(a) any Lease Event of Default described in the following clauses of the
first paragraph in "Description of the Leases--Lease Events of Default":
(i) clause (a) (x), except a failure of the Company to pay an amount which
constitutes an Excepted Payment or except in the case of a default in the
payment of Casualty Value or Special Casualty Value where such Owner
Trustee has not rescinded or terminated such Lease or (ii) clause (e) or
(h); or
(b) the rescission or termination of, or the taking of action by the
Owner Trustee or the Owner Participant the effect of which would be to
rescind or terminate, the Lease; or
(c) the exercise by the Lessor or the Owner Participant of certain
remedies under the Lease as a result of which the Company would be
obligated to pay liquidated damages prior to the occurrence of any of the
events set forth in clause (b) above; or
(d) any assignment, sublease or transfer by the Company in violation of
the terms of the Lease; or
(e) breach by the Company of the provisions of the related Participation
Agreement relating to the maintenance of its corporate existence and
relating to a merger by the Company into or consolidation of the Company
with another entity or the sale or transfer of all or substantially all of
the Company's assets by the Company (see "Other Agreements--Participation
Agreement"); or
(f) (x) failure by the Owner Trustee to make any payment in respect of
the principal of or premium, if any, or interest on the Lessor Notes within
five Business Days after the same shall have become due (other than by
virtue of any failure by the Company to make any payment of rent therefor);
or (y) following the actual receipt by the Owner Participant of proceeds of
a partial draw upon a letter of credit in excess of the amounts due to the
Owner Participant at the time of such partial draw, failure of such Owner
Participant to cause such excess proceeds to be delivered to the Lease
Indenture Trustee within five business days after the actual receipt of
such proceeds; or
(g) (x) failure by the Owner Trustee to perform its agreement in the
Lease Indenture not to (A) create certain liens on the Lease Indenture
Estate or the trust estate, (B) enter into any business or activity other
than the business of carrying out the transactions contemplated or
permitted by the transaction documents, (C) take any action which would
result in an impairment of any Lessor Note or the obligation of the Company
to pay any amount under the Lease which is part of the Lease Indenture
Estate or any of the other rights or security created or effected thereby,
except as otherwise permitted or contemplated by the transactions
documents, (D) issue, or incur any obligation in respect of, indebtedness
for borrowed money except for its obligations in respect of such Lessor
Notes, or (y) failure by the Owner Participant to observe its covenants in
the Participation Agreement not to create certain liens on the Lease
Indenture Estate or the trust estate, and the continuance of such failure
for 30 days after notice; provided, however, that the continuation of such
failure for a period of 30 days or more after such notice has been so given
(but in no event for a period which is greater than one year after such
notice has been given) shall not constitute a Lease Indenture Event of
Default if (i) such failure can be remedied but cannot be remedied within
such 30 days, (ii) the Owner Participant or the Owner Trustee, as the case
may be, is diligent in pursuing a remedy of such failure and (iii) such
failure does not impair in any respect the mortgage and security interest
created by the Lease Indenture; or
(h) any representation or warranty made by the Owner Trustee in the
Participation Agreement, or any representation or warranty made by the
Owner Participant in the Participation Agreement concerning liens against
the trust estate or the Lease Indenture Estate as a result of claims
against the Owner Participant unrelated to the Transactions, shall prove to
have been incorrect in any material respect when such representation or
warranty was made or given and continues to be material and remains
materially incorrect at the time of discovery; provided, however, that such
failure of such representation or warranty to be correct shall not
constitute a Lease Indenture Event of Default if (i) the facts or
circumstances making such representation or warranty incorrect can be
remedied or changed so that such representation or warranty will henceforth
be correct in all material respects, (ii) the Owner Trustee or the Owner
Participant, as the case may be, is diligently pursuing such a remedy or
change, (iii) such remedy or change is, in fact, accomplished within a
period of one year from the time that the Owner Trustee or the Owner
Participant, as the case may be, has been notified of such
misrepresentation or breach of warranty and (iv) such facts or
circumstances do not impair in any material respect the mortgage and
security interest created by the Lease Indenture; or
(i) the Owner Trustee shall file any petition for dissolution or
liquidation of the trust created by the trust agreement or shall commence a
voluntary case under any applicable bankruptcy, insolvency or other similar
law now or subsequently in effect, or the Owner Trustee shall have
consented to the entry of an order for relief in an involuntary case under
any such law, or a receiver, custodian or trustee (or
other similar official) shall be appointed for the Owner Trustee or shall
take possession of any substantial part of its property (other than at the
insistence of the Lease Indenture Trustee or the holders of Lessor Notes),
or the Owner Trustee shall make a general assignment for the benefit of its
creditors, or shall enter into an agreement of composition with its
creditors; or there shall be filed (other than at the insistence of the
Lease Indenture Trustee or the holders of Lessor Notes) against the Owner
Trustee an involuntary petition in bankruptcy which results in an order for
relief being entered or, notwithstanding that an order for relief has not
been entered, the petition is not dismissed within 60 days of the date of
the filing of the petition, or there shall be filed (other than at the
insistence of the Lease Indenture Trustee or the holders of Lessor Notes)
under any federal or state law relating to bankruptcy, insolvency or relief
of debtors any petition against the Owner Trustee for reorganization,
composition, extension or arrangement with creditors which either (i)
results in a finding or adjudication of insolvency of the Owner Trustee or
(ii) is not dismissed within 60 days after the date of the filing of such
petition; or
(j) the Owner Participant shall file any petition for dissolution or
liquidation of the Owner Participant, or shall commence a voluntary case,
under any applicable bankruptcy, insolvency or other similar law now or
subsequently in effect, or the Owner Participant shall have consented to
the entry of an order for relief in an involuntary case under any such law,
or shall fail generally to pay its debts as such debts become due (within
the meaning of the United States Bankruptcy Code, as amended), or a
receiver, custodian or trustee (or other similar official) shall be
appointed for the Owner Participant or shall take possession of any
substantial part of its property, or the Owner Participant shall make a
general assignment for the benefit of its creditors, or shall enter into an
agreement of composition with its creditors; or there shall be filed
against the Owner Participant an involuntary petition in bankruptcy which
results in an order for relief being entered or, notwithstanding that an
order for relief has not been entered, the petition is not dismissed within
60 days of the date of the filing of the petition, or there shall be filed
under any federal or state law relating to bankruptcy, insolvency or relief
of debtors any petition against the Owner Participant for reorganization,
composition, extension or arrangement with creditors which either (i)
results in a finding or adjudication of insolvency of the Owner Participant
or (ii) is not dismissed within 60 days of the filing of such petition and
any such event materially adversely affects the holders of the Lessor
Notes; or
(k) after a Special Transfer has been effected and amounts payable to the
Owner Participant in connection herewith have been paid in full in
accordance with the Participation Agreement, any violation or breach of a
warranty or covenant of the Company contained in the Participation
Agreement concerning the Company's continuing obligation to pay rent under
the Lease. (Lease Indenture Section 6.2.)
RIGHTS OF LESSOR TO CURE AND PURCHASE LESSOR NOTES; SUBSTITUTE LESSEE
The Lease Indenture provides that a Lease Indenture Event of Default is to be
deemed cured if such Lease Indenture Event of Default results from a non-
payment of rent under the Lease and the Owner Trustee or Owner Participant has
paid all principal of and interest on the Lessor Notes due (other than by
acceleration) on the date such rent was payable within 15 days after receipt by
the Owner Trustee of notice of such non-payment. However, such right of the
Owner Trustee or Owner Participant to cure the non-payment of rent is limited
to not more than six basic rent payment dates or two consecutive basic rent
payment dates. (Lease Indenture, Section 6.8.)
If a Lease Indenture Event of Default has occurred and is continuing and (a)
the Lessor Notes have been accelerated and (b) the Owner Trustee, within 30
days after receiving notice from the Lease Indenture Trustee of such Lease
Indenture Event of Default, has given written notice to the Lease Indenture
Trustee of its intention to purchase all the Lessor Notes, then, upon receipt
by the Lease Indenture Trustee within 10 business days after such notice from
the Owner Trustee of an amount equal to the aggregate unpaid principal amount
of and any premium with respect to any unpaid Lessor Notes together with
accrued but unpaid interest thereon to the date of such receipt (as well as any
interest on overdue principal and, to the extent permitted by law, interest),
each holder of a Lessor Note issued by the Owner Trustee, including the
Trustee, as the registered holder of the Pledged Lessor Notes, will be
required to sell the Lessor Notes and its rights, title and interest in and
to the Lease Indenture and the Lease Indenture Estate to the Owner Trustee.
(Lease Indenture, Section 6.8.)
In addition to the foregoing, if a Lease Event of Default has occurred the
Owner Trustee may terminate the Lease and, in conjunction therewith, arrange
for a substitute lessee under a new lease substantially similar to the
terminated Lease. In connection with any such substitution, (i) the Owner
Trustee must have cured any Lease Indenture Event of Default described in
clauses (f) through (k) under "Lease Indenture Events of Default" above, (ii)
such substitute lessee must assume the Company's obligations under such Lease,
(iii) such substitute lessee must have a credit rating from Standard & Poor's
Corporation and Moody's Investors Service, Inc. (or, if either of such
organizations shall not rate securities issued by such substituted lessee, by
any other nationally recognized rating organization) with respect to at least
one series of its debt obligations or preferred stock equal to or better than
the ratings assigned, immediately prior to such substitution, by such
organizations to comparable securities of the Company immediately prior to such
substitution but in no event less than "investment grade" and (iv) if any
Securities are outstanding, the provisions of the Indenture relating to
substituted lessees must be satisfied. (Lease Indenture, Section 6.8.) Since
the property subject to the Lease is an undivided interest in a nuclear
generating station, any proposed substitute lessee would need to comply with
all applicable licensing and regulatory requirements relating to the lease of
such an interest.
ACTION BY LEASE INDENTURE TRUSTEE; WAIVER
Subject to the terms of the Lease Indenture, the Lease Indenture Trustee is
required to take such action (including the waiver of past defaults), or
refrain from taking such action, with respect to any Lease Indenture Event of
Default, Lease Event of Default, Deemed Loss Event or Event of Loss as
instructed by a Directive. To the extent that any Lessor Note is pledged as
collateral for one or more of the obligations of the registered holder thereof,
or as collateral for obligations with respect to which it is acting as trustee,
such Directive will be given in accordance with instructions received from the
holder or holders of the obligations so secured which, in the case of the
Pledged Lessor Notes, will be the Trustee as directed by the Holders of the
Securities (including the Bonds) under the circumstances described in the
discussion under "Description of the Bonds and the Indenture--Voting of Lessor
Notes." If the Lease Indenture Trustee has not received such instructions
within 20 days after the mailing by the Lease Indenture Trustee of notice of
such Lease Indenture Event of Default, Lease Event of Default, Deemed Loss
Event or Event of Loss, the Lease Indenture Trustee may, subject to the receipt
of a Directive after such 20-day period, but is not required to, take such
action, or refrain from taking such action, as it deems advisable in the best
interest of holders of Lessor Notes of all series. (Lease Indenture, Section
7.1.)
The Lease Indenture Trustee may waive any past Lease Indenture Default or
Lease Indenture Event of Default and its consequences except a Lease Indenture
Default or a Lease Indenture Event of Default (a) in the payment of the
principal of or premium, if any, or interest on any Lessor Note, subject to the
provisions described in the preceding paragraph, or (b) in respect of a
covenant or provision of the Lease Indenture which under such Lease Indenture
cannot be modified or amended without the consent of each holder of a Lessor
Note then outstanding. (Lease Indenture, Section 6.7.)
ACCELERATION AND REMEDIES
If a Lease Indenture Event of Default has occurred and is continuing, the
Lease Indenture Trustee may, and upon receipt of a Directive shall, declare the
unpaid principal amount of all outstanding Lessor Notes with accrued interest
thereon, to be due and payable, subject to the right of the Owner Trustee or
the Owner Participant to cure such default as described above. (Lease
Indenture, Section 7.1.)
Except in the case of the Lease Indenture Events of Default (i) described in
clauses (f) through (k) under "Lease Indenture Events of Default" above and
(ii) occurring or continuing after a Special Transfer, an
assumption of Lessor Notes by the Company or any of certain drawings upon a
letter of credit, and except as described in the next paragraph, the exercise
of remedies against the Company under the Lease will be controlled by the Owner
Trustee. In such circumstances, however, the Lessor is required to consult with
the Lease Indenture Trustee as to any proposed exercise or pursuit of remedies
and the Lease Indenture Trustee has the right to cause the Owner Trustee to
forbear from such action if the Lease Indenture Trustee has determined that
such action would have a material adverse effect on the holders of the Lessor
Notes. In addition, the Owner Trustee has agreed that it will not exercise or
pursue remedies in a manner which would unreasonably deprive the holders of the
Lessor Notes of a material right or remedy unless the Owner Trustee is
commensurately adversely affected. There could be circumstances, therefore, in
which amounts due on the Bonds are not paid and the Lease Indenture Trustee is
not able to direct the Owner Trustee's pursuit of remedies against the Company
under the Lease. (Lease Indenture, Sections 6.3 and 6.11.)
Although the exercise of remedies is generally within the control of the
Lessor, the Lease Indenture Trustee does have the right to sell the Lease
Indenture Estate in foreclosure or similar proceedings. However, if such sale
occurs prior to or simultaneously with the termination of the Lease, the Lease
Indenture Trustee must have offered to sell to the Owner Trustee the Lease
Indenture Estate at a stated price determined by the Lease Indenture Trustee.
If the Lessor does not, within 60 days following receipt of such offer, elect
to so purchase the Lease Indenture Estate, the Lease Indenture Trustee may
foreclose and sell the Lease Indenture Estate within 180 days to any person
(other than the Lease Indenture Trustee or a holder or holders of more than 25%
of the outstanding Bonds or the outstanding Lessor Notes (including, in each
case, affiliates thereof)) for not less than such stated price. In the event of
a sale by the Lease Indenture Trustee pursuant to a foreclosure or similar
proceeding (other than a sale to the Owner Trustee), the Lease Indenture
Trustee has the right to terminate the Lease in connection with such sale
subject, however, to the Company's rights under the Lease. (See "Limitations on
Remedies" below.) (Lease Indenture, Sections 6.11 and 6.12.)
The rights of the Trustee under the Indenture, as well as the rights of the
Lessor under the Lease, insofar as they relate to disposition of any interest
in the Grand Gulf Station (including the Undivided Interests in Unit 1), are
subject to the rights of SMEPA under the ownership agreement for the Grand Gulf
Station. Pursuant to such ownership agreement, an owner of an interest in the
Grand Gulf Station may not transfer its interest to a third party unless it
first offers such interest to SMEPA upon the same terms and conditions provided
for in the proposed transfer. SMEPA must elect to purchase within 90 days of
the notice of transfer. If SMEPA does not so elect, and the transfer is to be
made to a third party, in no event may such transfer be made to such party on
any terms at variance from those initially proposed to SMEPA. Notwithstanding
the foregoing, any transfer of an Undivided Interest from either Owner Trustee
to the Company may be made without such offer being made to SMEPA.
If a Lease Indenture Event of Default occurs and is continuing, and the
maturity of Lessor Notes has been accelerated, any sums held or received by the
Lease Indenture Trustee may be applied to reimburse the Lease Indenture Trustee
for any expense or other loss incurred by it and to pay its fees and any other
amounts due it prior to any payments to holders of the Lessor Notes. (Lease
Indenture, Section 5.3.)
In the event of a bankruptcy of either of the Owner Participants, it is
possible that, notwithstanding that the related Undivided Interest is owned by
the related Owner Trustee in trust, such Undivided Interest and the related
Lease and Pledged Lessor Notes might become subject to bankruptcy proceedings.
In such event, payments under such Lease or on such Lessor Notes might be
interrupted and the ability of the related Lease Indenture Trustee to exercise
its remedies under the related Lease Indenture might be restricted, although
such Lease Indenture Trustee would retain its status as a secured creditor in
respect of such Lease and such Undivided Interest.
LIMITATION ON REMEDIES
Notwithstanding any other provision of the Lease Indenture, so long as no
Lease Event of Default has occurred and is continuing, the Lease Indenture
Trustee may not take or cause to be taken any action contrary to the
Company's rights under the Lease, including the right to quiet use,
enjoyment and possession of the Undivided Interest. (Lease Indenture,
Section 6.12.)
ASSUMPTION BY THE COMPANY
The Company or the Company and one or more of its Affiliates, upon the
satisfaction of certain conditions, may assume the Lessor Notes. Upon
assumption by the Company (and, where applicable, any of its Affiliates), the
Lessor Notes will become direct obligations of the Company (and such
Affiliates), the Lease will terminate, the Undivided Interest of the Lessor in
Unit 1 would be transferred to the Company (and/or any such Affiliate), and the
Owner Trustee shall be released and discharged from all further obligations and
liabilities under the Lease Indenture and under the Lessor Notes. Although
certain changes will be made to the Lease Indenture to reflect the termination
of the Lease, the lien on the interest in Unit 1 created by the Lease Indenture
will not be affected thereby.
Upon the occurrence of a Deemed Loss Event or Event of Loss, a Lessor can
demand payments pursuant to its Lease (Lease, Sections 9(c) and 9(d)), and an
Owner Participant can effect a Special Transfer of its beneficial interest in
the owner trust to the Company (Participation Agreement, Section 7(b)(4)).)
If a Deemed Loss Event or Event of Loss has occurred in respect of which the
Lessor has demanded payment pursuant to the Lease or in response to which a
Special Transfer has been effected, the Company is required to pursue
diligently satisfaction of the conditions necessary to effectuate an assumption
of the Lessor Notes; specifically, to deliver to the Indenture Trustee, among
other things, (a) a duly executed assumption agreement of the Company (and,
where applicable, any of its Affiliates), (b) an opinion of counsel to the
Company (and, if applicable, such Affiliates) as to, among other things,
compliance with the conditions of the assumption (including the obtainment of
any necessary governmental actions) and as to due authorization, execution,
delivery and enforceability of the assumption agreement referred to in clause
(a) above, (c) copies of all necessary governmental actions referred to in such
opinion, (d) an indenture supplemental to the Lease Indenture which, among
other things, confirms the release of the Owner Trustee and contains provisions
amending the Lease Indenture to delete references to the Lease and reflect the
fact that the obligations of the Owner Trustee have been assumed by the Company
(and, if applicable, such Affiliates), (e) a certificate of a responsible
officer of the Company (and, if applicable, such Affiliates) to the effect
that, to the best of such officer's knowledge (i) the conditions precedent to
such assumption have been complied with, (ii) no Lease Indenture Default or
Lease Indenture Event of Default has occurred and is continuing, (iii) such
assumption is permitted by the provisions of the Company's Articles of
Incorporation and by-laws (or similar corporate documents) and (iv) the Company
(and, if applicable, such Affiliates) is not insolvent at the time of such
assumption and (f) a certificate of a responsible officer of the Owner Trustee
to the effect that, to the best of such officer's knowledge, no Lease Indenture
Default or Lease Indenture Event of Default has occurred and is continuing.
(Lease Indenture, Section 3.9.)
In the case of a Deemed Loss Event or Event of Loss in respect of which
payment had been demanded under the Lease, the Company is further required to
pay the Lessor the excess of Casualty Value (in the case of an Event of Loss)
or Special Casualty Value (in the case of a Deemed Loss Event) over the unpaid
principal amount of the Lessor Notes together with any other amounts then owing
to the Owner Trustee, the Owner Participant, the Lease Indenture Trustee or the
Trustee. Upon satisfaction of the assumption conditions and payment of the
amounts described above, the Lessor is required to transfer title to its
Undivided Interest back to the Company (or one or more Affiliates of the
Company) as directed by the Company subject to the lien of the Lease Indenture.
If the Company makes the payments to the Owner Trustee and the Owner
Participant required under the Lease as described above but has not assumed or
cannot assume the Lessor Notes and the Lessor has received payment of amounts
due it under the Lease, then the Owner Participant must make a Special
Transfer. In addition, an Owner Participant may, at its option, also make a
Special Transfer upon (x) the occurrence of any Deemed Loss Event or Event of
Loss irrespective of whether a demand for payment has been made under the
Lease or (y) the occurrence and continuance of a Lease Event of Default.
In the case of any Special Transfer, the Company would be required to pay
to the Owner Participant the Required Rent Payment Amount (which is defined
in the Participation Agreement and which can be (i) Special Casualty Value
or (ii) Casualty Value or (iii) the highest of Casualty Value, discounted
fair market rental value and fair market sales value, depending upon the
event giving rise to the Special Transfer) less any amounts drawn on the
appropriate letter of credit, and until such time as the Company shall have
assumed the Lessor Notes, the Company will be obligated to pay basic rent under
the Lease reduced to an amount, payable on each January 15 and July 15
thereafter, equal to the amount of principal of and premium, if any, and
accrued interest then payable on all outstanding related Lessor Notes.
(Participation Agreement, Section 7(b)(4); Lease Indenture, Section 3.9; Lease,
Sections 9(c) and 9(d).)
"Deemed Loss Event" includes the following types of events:
(a) the Lessor or Owner Participant becoming subject to adverse
regulation as a public utility solely as a result of the Transactions;
(b) certain changes and/or new interpretations by a governmental
authority regarding applicable law, including the Price-Anderson Act, the
Atomic Energy Act, the Nuclear Waste Act or NRC regulations, as a result of
which the Lessor or Owner Participant would (i) become liable or
responsible in any capacity for payments owed in respect of the nuclear
waste fund or in respect of, among other things, the handling or disposal
of nuclear waste and other radioactive or hazardous materials, or (ii) be
prohibited from asserting any material right, protection or defense
available under applicable law as of the date of the closing of the
Transactions with respect to civil or criminal actions brought in
connection with a nuclear incident;
(c) the Lessor or Owner Participant being required to become a licensee
of the NRC or subject to the Atomic Energy Act or otherwise subject to NRC
or other burdensome regulation; or
(d) any governmental action or change in applicable law adversely
affecting the legality of the Transactions or certain remedies of the
Lessor or Owner Participant under the transaction documents or causing the
Lessor or Owner Participant to become liable with respect to the
decommissioning of Unit 1.
"Event of Loss" includes such events as:
(a) a final shutdown of Unit 1 which could result from any of several
events, including certain NRC licensing problems with respect to Unit 1,
direction by the NRC or other governmental authority to suspend operation
of Unit 1 for reasons of radiological health and safety for a period
exceeding 24 consecutive months, cessation of operation of Unit 1 for such
period if resumption of operation would require concurrence of the NRC or
other governmental authority, the occurrence of certain nuclear incidents
(as defined in the Atomic Energy Act) with respect to Unit 1 as a result of
which Unit 1 ceases to operate for a period of 18 consecutive months,
damage to Unit 1 and failure to restore Unit 1 within the shorter of three
years or the period from the occurrence of such damage until the end of the
Lease term, or the destruction of Unit 1;
(b) a requisition of title of Unit 1 or the Undivided Interest or certain
common facilities or the Grand Gulf Station site by a governmental
authority for a period of time which exceeds or is expected to exceed the
shorter of 60 months or the remaining Lease term, subject to certain
contest rights of the Company;
(c) a requisition of the use of Unit 1 or the Undivided Interest or
certain common facilities or the site of the Grand Gulf Station by a
governmental authority, other than a requisition of title, which would
significantly interfere with the use of Unit 1 or the Undivided Interest,
and which requisition is for a period of time which exceeds or is expected
to exceed the shorter of 60 months or the remaining Lease term, subject to
certain contest rights of the Company; or
(d) failure by the Company to provide to the Lessor, effective by the end
of the lease term, access with respect to certain transmission, substitute
power and other assets necessary for the operation of Unit 1 or to make
certain payments to the Owner Trustee in respect of the exercise of certain
purchase options regarding the Undivided Interest.
The Company may, at its option, but is not required to, assume the Lessor
Notes if it chooses to exercise certain purchase options described under
"Description of The Leases--Purchase Option for Significant Expenditures" or
"Periodic Purchase Option" or under "Other Agreements--Participation
Agreement." (See Participation Agreement, 10(b)(3)(ix); Lease, Sections 13(f)
and 13(g).)
DEFEASANCE
Lessor Notes will, at or prior to the maturity thereof, be deemed to have
been paid for purposes of the Lease Indenture and the Owner Trustee (except as
expressly provided in any transaction document) will be released from any
further obligations under the Indenture with respect to such Lessor Notes, if
there shall have been irrevocably deposited with the Lease Indenture Trustee,
in trust, either: (a) moneys in an amount which will be sufficient, or (b)
Federal Securities (as defined below), which do not contain provisions
permitting the redemption or other prepayment thereof at the option of the
issuer thereof, the principal of and the interest on which when due, without
any regard to reinvestment thereof, will provide moneys which, together with
the moneys, if any, deposited with or held by the Lease Indenture Trustee, will
be sufficient, to pay when due the principal of and premium, if any, and
interest due and to become due on the Lessor Notes on and prior to the maturity
thereof. For this purpose, Federal Securities include direct obligations of, or
obligations the principal of and interest on which are unconditionally
guaranteed by, the United States of America and certificates of any ownership
interest in the principal of or interest in such obligations. (Lease Indenture,
Section 2.4.)
AMENDMENTS AND SUPPLEMENTS
The Lease Indenture Trustee and the Owner Trustee may amend or supplement
each Lease Indenture without the consent of the holders of the Lessor Notes
(including the Trustee, as the registered holder of the Pledged Lessor Notes),
to, among other things, evidence the assumption of the Lessor Notes by the
Company as described under "Assumption by the Company" above or the issuance of
additional Lessor Notes in accordance with the terms of the Lease Indenture.
(Lease Indenture, Section 10.1.)
Upon the receipt of a Directive, the Lease Indenture Trustee will enter into
amendments or supplements to the Lease Indenture or consent to certain
amendments or waivers to the Lease. Upon the receipt of an instruction from the
Company and the Owner Trustee, the Lease Indenture Trustee will consent to the
amendment, supplement, waiver or modification of the terms of the Lease other
than certain terms of the Lease relating, among other things, to the form of
payment of rent, the sufficiency of certain rental payments to provide funds at
least equal to amounts payable on the Lessor Notes, liens, certain Lease Events
of Default and the exercise of remedies under the Lease. Without the consent of
the holders of all the Lessor Notes, the Lease Indenture Trustee may not
consent to any supplement or amendment to the Lease Indenture or the Lease or
to any waiver or modification of the terms of either thereof which has the
effect of (a) (x) modifying, waiving, discharging or terminating (i) any of the
provisions of the Lease Indenture relating to (A) amendments and supplements to
such Lease Indenture or the Lease, (B) the issuance of additional Lessor Notes
or (C) the duties of the Lease Indenture Trustee in respect of Lease Indenture
Events of Default, Lease Events of Default, Deemed Loss Events, Events of Loss
and matters specified in a Directive, (ii) the provisions of the Lease relating
to (A) the sufficiency of basic rent to pay the Lessor Notes, (B) the net lease
provisions, (C) the Lease Event of Default relating to the failure of basic
rent to be paid within five days after the same shall be due or (D) insofar as
it affects redemption of the Lessor Notes, termination by the Company of the
Lease on the basis of the obsolescence of Unit 1 or (iii) the definition of
Directive or the definition of Lease Indenture Event of Default or (y) reducing
the amount of basic rent or Casualty Value or Special Casualty Value or
any payment pursuant to the remedial provisions of the Lease below the
amount required to pay the full principal of, and premium, if any, and interest
on, the Lessor Notes when due or extending the time of payment thereof; (b)
except as permitted by the preceding clause (a), modifying, amending or
supplementing the Leases or consenting to the termination of assignment thereof
so as to reduce the Company's payment obligations of the type referred to in
the preceding clause (a) below the amounts therein specified; (c) except as
provided in the Lease Indenture, depriving the holder of any Lessor Note of the
lien of the Lease Indenture; (d) materially adversely affecting the rights and
remedies for the benefit of the holders of the Lessor Notes under the default
and remedy provisions of the Lease Indenture; or (e) reducing the amount or
extending the time of payment of any amount payable under a Lessor Note or
reducing or modifying the provisions for the computations of interest owing or
payable thereon or changing the priorities of recipients of any amounts
received with respect to the Lessor Notes or reducing or modifying any
indemnities in favor of the holders of the Lessor Notes. (Lease Indenture,
Section 10.2.)
LIMITATION OF LIABILITY
The Pledged Lessor Notes which will secure the Bonds are not direct
obligations of, or guaranteed by, the Company, any Owner Participant, or any
institution or individual acting as Owner Trustee in its individual capacity.
All payments to be made by the Owner Trustee under the Lease Indenture or on
the Lessor Notes shall be made only from the Lease Indenture Estate and the
trust estate (which is composed of all of the Owner Trustee's interest in the
Undivided Interest, the transaction documents and other property contributed by
the Owner Participant but excludes Excepted Payments and certain excepted
rights). No Owner Participant or, except as specifically provided in the Lease
Indentures, Owner Trustee or Lease Indenture Trustee will be liable to any
holder of a Lessor Note for amounts payable in respect thereof or otherwise
pursuant to the Lease Indentures or, in the case of any Owner Participant or,
except as specifically provided in the Lease Indentures, any Owner Trustee to
any Lease Indenture Trustee for any amounts payable under any Pledged Lessor
Notes or Lease Indentures. (Lease Indenture, Section 3.7.)
ADDITIONAL LESSOR NOTES
The Lease Indenture permits issuance of additional Lessor Notes (including
additional Pledged Lessor Notes) at any time or from time to time, subject to
certain conditions, for cash in the original principal amount of such
additional Lessor Notes for the following purposes: (a) refunding any
previously issued series of Lessor Notes in whole or in part, (b) providing
funds for all or any portion of certain capital improvements to Unit 1 and/or
(c) under certain circumstances, refunding a portion of the initial investment
of the Owner Participant in Unit 1. (Lease Indenture, Section 3.5.) If such
additional Lessor Notes are issued to Funding Corporation they would be pledged
to the Trustee as security for subsequent issuances of Securities by Funding
Corporation, which subsequently issued Securities will be secured on a parity
with the Bonds by the Lessor Notes then or thereafter pledged to the Trustee.
All of the Lessor Notes issued and outstanding under the Lease Indenture,
whether or not issued to Funding Corporation, will rank on a parity with each
other and will as to each other be secured equally and ratably thereunder,
without preference, priority or distinction of any thereof over any other by
reason of difference in time of issuance or otherwise. (Lease Indenture,
Sections 3.5 and 3.6.)
DESCRIPTION OF THE LEASES
THE STATEMENTS CONTAINED UNDER THIS CAPTION ARE INTENDED TO SUMMARIZE BRIEFLY
THE LEASES AS THEY RELATE TO THE BONDS; THEY DO NOT PURPORT TO BE COMPLETE AND
ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE LEASES, COPIES OF WHICH
HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART. EACH LEASE IS AN ENTIRELY SEPARATE LEASE BUT CONTAINS
SUBSTANTIALLY THE SAME TERMS AND PROVISIONS AS EACH OTHER LEASE. IN THE
FOLLOWING SUMMARY, REFERENCES TO THE LEASE, THE LEASE INDENTURE, THE OWNER
PARTICIPANT, THE UNDIVIDED INTEREST, THE LESSOR AND THE LESSOR NOTES RELATE TO
EACH LEASE.
TERM AND RENTALS
The Lessor has acquired its Undivided Interest and has leased such interest
to the Company pursuant to the Lease, which has a term expiring on July 15,
2015 unless earlier terminated or extended as described below. Basic rent is
required to be paid by the Company under the Lease in immediately available
funds on each January 15 and July 15, commencing July 15, 1989 and ending July
15, 2015. (Lease, Sections 2(b) and 3(a).) The amount of basic rent payable
under the Lease on each basic rent payment date will be at least equal to the
scheduled amount of principal of and interest then payable on all Lessor Notes
then outstanding. (Lease, Section 3(g).) In addition, the Leases require that
basic rent payments, together with payments of Casualty Value or Special
Casualty Value and certain other amounts, be made in such amounts and at such
times as will be sufficient for the payment when due of the prepayment of
principal of and premium, if any, and interest on the related Lessor Notes.
Each payment of basic rent by the Company during such time as the Lease
Indenture is in effect will be made to the Lease Indenture Trustee and applied
first to the payment of principal and interest due from the Lessor on the
Lessor Notes. Except in the case of an acceleration of Lessor Notes due to a
continuing Lease Indenture Event of Default, the balances of any payments of
basic rent under the Lease, after payment of the scheduled principal of and
premium, if any, and interest on the Lessor Notes, will be distributed to the
Owner Participant, as beneficial owner of the trust which is the owner of the
Undivided Interest. (Lease Indenture, Sections 2.2, 5.1 and 5.6.)
NET LEASE
The obligations of the Company under the Lease are those of a lessee under a
"net lease," and the Company will be responsible under the Lease for paying all
insurance premiums, operating and maintenance costs, decommissioning costs, and
all other similar costs associated with the Undivided Interest. Payments of
rent under the Lease by the Company are to be made without counterclaim, set-
off, defense, abatement, suspension or reduction. (Lease, Section 4.) The
Company will be responsible under the Lease for paying all taxes, insurance
premiums, operating and maintenance costs and all other similar costs
associated with the Undivided Interest.
CAPITAL IMPROVEMENTS
The Company may incur costs from time to time in connection with capital
improvements to Unit 1. Certain of such costs, based on the Owner Trustee's
proportionate interest in Unit 1, may be financed through a Supplemental
Financing. (See "Description of the Lease Indentures--Additional Lessor
Notes.") In the event of such a Supplemental Financing, the rent under the
Lease will be increased to cover the additional debt service. In addition, the
Owner Participant may elect to make an additional equity investment with
respect to the cost of any capital improvements on terms to be agreed upon.
(Lease, Section 8(f).)
RIGHTS TO ASSIGN OR SUBLEASE
The Company is permitted to assign, sublease, encumber or transfer its rights
and obligations under the Lease or other documents related to the Transactions
so long as (i) such assignment, sublease, encumbrance or transfer does not (A)
permit the early termination of a letter of credit, or (B) result in any tax
loss to the Owner Participant, and (ii) the Company remains the primary obligor
on the Lease. (Lease, Section 11.)
INSURANCE
The Company is required under the Lease to carry and maintain, with respect
to the Undivided Interest, Unit 1 and the site of the Grand Gulf Station, the
insurance described below:
(a) provided that such insurance is commercially available at a
commercially reasonable cost, non-nuclear property insurance covering
physical loss with respect to Unit 1;
(b) provided that such insurance is commercially available at a
commercially reasonable cost, bodily injury and property damage liability
insurance covering claims arising out of the ownership, operation,
maintenance, condition or use of Unit 1;
(c) nuclear property insurance; and
(d) nuclear liability insurance.
With respect to each of the types of insurance described in (a) through (d)
above, the Company is required to maintain such insurance in such amounts and
with such terms as are consistent with the Company's normal practice in respect
of those other owned, leased or operated nuclear generating units for which the
Company determines or controls the determination of the amount and other terms
of such insurance, and in any event in such amounts and with such terms as are
consistent with applicable law and prudent utility practice. The Company is
also required to maintain supplier's and transporter's insurance and nuclear
worker exposure insurance, in each case in amounts consistent with prudent
utility practice and applicable law. (Lease, Section 10.)
PURCHASE AND RENEWAL OPTIONS AT THE END OF THE LEASE TERM
The Company has the option under the Lease to purchase at fair market sales
value the Lessor's Undivided Interest at the end of the term of the Lease, or
to renew the Lease for one or more periods of three years, at a fair market
rental value or, subject to receipt of a satisfactory appraisal which will
address certain tax matters, to renew the Lease at the end of the initial Lease
term at a fixed rate rental for a single period of at least two years. (Lease,
Sections 12 and 13.) If the Company does not give notice of its election to
exercise the options to purchase or renew the Lease not earlier than five but
not later than two years prior to the expiration of the Lease, the Lessor may,
on at least one year's prior written notice, terminate the Lease on the date
specified in the notice. Upon such termination, the Company must pay to the
Lessor all basic rent then due or accrued, together with any other amounts then
due to the Owner Trustee, the Owner Participant, the Lease Indenture Trustee
and the Trustee. On or prior to such termination, the Lessor would be required
to deposit with the Lease Indenture Trustee cash in an amount (or a letter of
credit in such an amount) equal to the unpaid principal amount of all Lessor
Notes outstanding on such date, and all premium, if any, and interest accrued
or to accrue on and as of such termination. (Lease, Section 14(c).)
PURCHASE OPTION FOR SIGNIFICANT EXPENDITURES
The Company has the option on any January 15 or July 15 on or after January
15, 1999 to terminate the Lease if the Company is planning or required to make
any significant expenditure for certain types of capital improvements to Unit
1. On such January 15 or July 15, the Company must pay to the Lessor an amount
equal to the higher of the fair market sales value of the Undivided Interest
and Casualty Value determined as of such January 15 or July 15, and assuming
such payment, the Lessor would be required to transfer the Undivided Interest
to the Company. If the Company has assumed the Lessor Notes such amount shall
be reduced by the principal amount of the Lessor Notes so assumed. A
"significant expenditure" is an expenditure with respect to certain capital
improvements to Unit 1 which (i) for the period until and including December
28, 2008, shall exceed $250,000,000 (as such amount may be adjusted
periodically in accordance with the Consumer Price Index) and (ii) for the
period from and including December 29, 2008 until the end of the Lease Term,
shall exceed $100,000,000 (as such amount may be adjusted periodically in
accordance with the Consumer Price Index). (Lease, Section 13(f).)
PERIODIC PURCHASE OPTION
The Company has the option on January 15 in each of the years 1999, 2004 and
2009 to terminate the Lease and to purchase the Undivided Interest. On such
January 15, the Company must pay to the Lessor an amount equal to the higher of
the fair market sales value of the Undivided Interest and Casualty Value
determined as of such January 15 together with any amounts of rent then due. If
the Company has assumed the Lessor Notes such amount shall be reduced by the
principal amount of the Lessor Notes so assumed. (Lease, Section 13(g).)
TERMINATION FOR OBSOLESCENCE
The Company has the option on any January 15 or July 15 commencing on January
15, 1999 to terminate the Lease if the Company's Board of Directors determines
that Unit 1 is economically obsolete and that the Company should seek to
dispose of all its interests (owned or leased) in Unit 1. On such termination
date, the Lessor will be required to sell the Undivided Interest to the highest
bidder (which may not be either the Company or any Affiliate thereof) and the
Company must pay to the Lessor an amount equal to the excess, if any, of
Special Casualty Value as of the termination date over such net sale price,
plus any premium payable on the Lessor Notes upon the redemption thereof and
any other amounts then payable to the Owner Trustee, the Owner Participant, the
Lease Indenture Trustee and the Trustee. If no such sale shall occur or if the
Company shall not have fulfilled its obligations in respect of such
termination, the Lease will continue in full force and effect. (Lease, Sections
14(a) and 14(b).) In the event of such a termination, the Lessor Notes shall be
prepaid. (Lease Indenture, Sections 3.9 and 5.2.)
LEASE EVENTS OF DEFAULT
The following are Lease Events of Default:
(a) the Company shall fail to make, or cause to be made, (x) any payment
of Casualty Value, Special Casualty Value or basic rent within five
business days after the same shall become due or (y) any payment of
supplemental rent (other than Casualty Value or Special Casualty Value)
including, without limitation, any payments due under the Tax
Indemnification Agreement, within 20 days after the same shall become due
or be demanded, as the case may be; or
(b) (x) the Company shall fail (A) to perform or observe any covenant,
condition or agreement to be performed or observed by it under the
Participation Agreement relating to the maintenance of its corporate
existence and maintenance of certain of its material agreements or to
comply with the assignment and sublease provisions of the Lease or (B) to
make the payments required to be made by it upon the exercise of its option
to purchase the Undivided Interest upon the termination of a letter of
credit or upon its inability to return the Undivided Interest at the end of
the Lease term or (y) if the Company has failed to comply with certain
notice and cooperation requirements in the Lease, failure by the Company to
return the Undivided Interest at the end of the Lease term; or
(c) the Company shall fail to perform or observe any covenant, condition
or agreement (other than those referred to in clauses (a), (b), (g), (i)
and (j) of this paragraph) to be performed or observed by it under the
Lease or any other transaction document (other than under the Tax
Indemnification Agreement or under the general tax indemnity provisions of
the Participation Agreement), and such failure shall continue for a period
of 30 days after there shall have been given to the Company by the Lessor
or the Owner Participant a notice specifying such failure and requiring it
to be remedied; provided, however, that the continuation of such failure
for a period of 30 days or more after such notice has been so given (but in
no event for a period which is greater than one year after such notice has
been given) shall not constitute a Lease Event of Default if (a) such
failure can be remedied but cannot be remedied within such 30 days, (b) the
Company is diligently pursuing a remedy of such failure and (c) such
failure does not impair in any material respect the Lessor's interest in
Unit 1 or the mortgage and security interest created by the Lease
Indenture; or
(d) any representation or warranty made by the Company in the Lease, any
other transaction document (other than the Tax Indemnification Agreement)
or any agreement, document or certificate delivered by the Company in
connection with the Transactions shall prove to have been incorrect in any
material respect when such representation or warranty was made or given if
such representation or warranty continues to be material and remains
materially incorrect at the time in question; provided, however, that such
failure of such representation or warranty to be correct shall not
constitute a Lease Event of Default if (i) the facts or circumstances
making such representation or warranty incorrect can be remedied or changed
so that such representation or warranty will thenceforth be correct in all
material respects, (ii) the Company is diligently pursuing such a remedy
or change, (iii) such remedy or change is, in fact, accomplished within a
period of one year from the time that the Company has been notified of
such misrepresentation or breach of warranty and (iv) such facts or
circumstances do not impair in any material respect the Lessor's interest
in Unit 1 or the mortgage and security interest created by the Lease
Indenture; or
(e) the Company shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or shall consent to any such relief or to the
appointment of or taking of possession by any such official in an
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall take any
corporate action to authorize any of the foregoing, or an involuntary case
or other proceeding shall be commenced against the Company seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain
undismissed or unstayed for a period of 60 consecutive days; or
(f) final judgment for the payment of money in excess of $10,000,000
shall be rendered against the Company and the Company shall not have
discharged the same or provided for its discharge in accordance with its
terms or bonded the same or procured a stay of execution thereof within 60
days from the entry thereof; or
(g) the Company (A) shall fail, at any time, to provide or maintain a
letter of credit which complies with the terms and conditions of the
Participation Agreement, whether or not the Company has used best efforts
to obtain and maintain such letter of credit, or (B) shall fail to provide
a renewal or replacement letter of credit so complying (1) by the 15th day
prior to the stated termination date of an existing letter of credit, (2)
if the issuing bank of an existing letter of credit shall have delivered
notice, in accordance with the terms thereof, that such existing letter of
credit will be terminated prior to its stated termination date and if such
issuing bank was required to give at least 30 days' notice of such early
termination, by the 15th day prior to the date of such early termination or
(3) if the issuing bank of an existing letter of credit shall have
delivered notice, in accordance with the terms thereof, that such existing
letter of credit will be terminated prior to its stated termination date
and if such issuing bank was not required to give at least 30 days' notice
of such early termination, by the later of (x) the time of the
effectiveness of such notice and (y) the 15th day prior to the date of such
early termination; or
(h) the exercise of remedies upon the occurrence and continuance of an
event of default under any other lease under which the Company is the
lessee of equipment or facilities (other than fuel) which equipment or
facilities (A) were owned or leased by the Company on the closing date of
the Transactions and (B) were purchased by the lessor at an original
purchase price not less than $100,000,000 (considering the property subject
to each such lease individually and not together with the property subject
to any other such lease); or
(i) any suspension, revocation or termination of non-nuclear insurance
required to be maintained pursuant to the Lease, and such suspension,
revocation or termination shall continue for more than five business days
from the effective date of such suspension, revocation or termination
unless such insurance is reinstated or replaced; or
(j) any suspension, revocation or termination of nuclear insurance
required to be maintained under the Lease and certain endorsements
providing that interests of the Lessor and the Owner Participant in
all insurance referred to in the Lease shall not be invalidated by a breach
of warranty by the Company, to the extent that such endorsements are
required under the Lease; provided, however, that such suspension,
revocation or termination shall not constitute a Lease Event of Default if
the applicable insurer has failed to comply with applicable notice
termination provisions of the pertinent policy; and provided, further, that
the foregoing proviso shall cease to apply upon the earlier of (x) five
business days following receipt by the Company of actual notice of such
suspension, revocation or termination or (y) the applicable termination
date of such policy assuming that the insurer had complied with its notice
obligations under the pertinent policy. (Lease, Section 15.)
REMEDIES
Upon the occurrence and continuance of any Lease Event of Default, a Lessor
may exercise one or more of the remedies set forth in the Lease, which include
the following: (a) the Lessor may declare the Lease to be in default or may
terminate the Lease; (b) the Lessor may repossess the Undivided Interest; (c)
subject to certain rights of first refusal of any other owners of an undivided
interest in the Grand Gulf Station other than the Company, the Lessor may sell
the Undivided Interest or any part thereof; (d) the Lessor may hold, keep idle
or lease to others all or any part of the Undivided Interest; (e) the Lessor
may demand any unpaid rent plus, as liquidated damages, any of the following
amounts which the Lessor, in its sole discretion, shall specify: (i) an amount
equal to the excess of Casualty Value over the fair market rental value of the
Undivided Interest until the end of the remaining useful life of Unit 1
(discounted to present worth), (ii) an amount equal to the excess of Casualty
Value over the fair market sales value of the Undivided Interest, (iii) an
amount equal to the excess of the present value of all installments of basic
rent until the end of the Lease term over the present value of the fair market
rental value of the Undivided Interest until the end of such term, or (iv) an
amount equal to the highest of Casualty Value, such discounted fair market
rental value and such fair market sales value; and (f) if the Lessor shall have
sold all the Undivided Interest pursuant to clause (c) above, the Lessor, in
lieu of exercising its rights under clause (e) above may demand that the
Company pay to the Lessor, as liquidated damages, any unpaid rent plus the
amount of any deficiency between the sale proceeds and Casualty Value together
with interest on the amount of such rent and such deficiency.
The remedies in the Lease are cumulative and in addition to any other remedy
available to the Lessor at law or in equity, and no exercise of any remedy
under the Lease will, except as specifically provided therein, relieve the
Company of any of its liabilities and obligations under the Lease. (Lease,
Section 16.)
QUIET ENJOYMENT
Unless a Lease Event of Default has occurred and is continuing, the Company's
use and possession of Unit 1, including the Undivided Interests, in accordance
with the transaction documents shall not be interrupted by the Lessor or any
person claiming by, through or under the Lessor. (Lease, Section 6(a).)
OTHER AGREEMENTS
THE DISCUSSION OF THE PARTICIPATION AGREEMENTS, TAX INDEMNIFICATION
AGREEMENTS AND REIMBURSEMENT AGREEMENT BELOW IS MERELY INTENDED TO SUMMARIZE
CERTAIN PROVISIONS OF THOSE AGREEMENTS AS THEY RELATE TO THE BONDS AND THE
TRANSACTIONS; IT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THOSE AGREEMENTS, COPIES OF WHICH HAVE BEEN FILED AS
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
PARTICIPATION AGREEMENT
In each Participation Agreement the Company has agreed that it will at all
times maintain its corporate existence and will not consolidate with or merge
into, or sell, transfer or otherwise dispose of substantially all of its assets
to, any person unless immediately after giving effect to such transaction a
number of conditions are met, including the requirements that (a) the
survivor be a corporation, organized under the laws of the United States of
America, a State thereof or the District of Columbia, (b) the survivor of
such transaction assume the obligations by the Company under each of the
other documents relating to the Transactions to which the Company was a
party, (c) such transaction does not permit the early termination of a letter
of credit prior to its scheduled expiration date, (d) all governmental
actions and corporate approvals have been obtained for the transaction, (e)
the transaction will not result in a violation of any provision of any
agreement or financing arrangement to which the Company is a party, and
(f) the survivor delivers to the Owner Participant, the Owner Trustee and
the Lease Indenture Trustee opinions and officers' certificate as to,
among other things, compliance with the transfer conditions
above. (Participation Agreement, Section 10(b)(3)(i) and (ii).)
Pursuant to each Participation Agreement, the Company has caused a letter of
credit to be issued to each Owner Participant to secure the payment of certain
amounts payable by the Company under such Owner Participant's Lease. Upon the
occurrence of an Event of Loss, a Deemed Loss Event or a Lease Event of Default
under the related Lease, an Owner Participant is entitled to draw on the letter
of credit amounts generally not exceeding Casualty Value less the aggregate
principal amount of and accrued interest on the related Lessor Notes then
outstanding. The Company is obligated to make reimbursement to the issuer of
such letter of credit for any amount so drawn plus interest thereon. The
holders of the Lessor Notes (including the Trustee, as holder of the Pledged
Lessor Notes) and Holders of the Bonds are not entitled to the benefit of any
such letter of credit. Each Participation Agreement requires the Company to
cause such a letter of credit of an eligible bank to be in place during the
entire basic term of the related Lease. If a letter of credit is to expire, or
be terminated prior to the scheduled expiration thereof, and the Company cannot
replace such letter of credit with another letter of credit issued by an
eligible bank, the Company will have the right to purchase the related
Undivided Interest from the related Lessor, thereby terminating the related
Lease, at a price equal to the higher of fair market sales value and Casualty
Value; provided, however, that if the Company has assumed the Owner Trustee's
obligations on the related Lessor Notes, the purchase price will be reduced by
the principal amount of such Lessor Notes then outstanding. (Participation
Agreement, Section 10(b)(3)(ix).)
Any Owner Participant may at any time sell, assign, convey or otherwise
transfer all or any part of its interest in, to and under any transaction
document or its trust estate to a person with a net worth at the time of such
transfer of not less that $50 million or to a person whose obligations under
the transaction documents have been absolutely and unconditionally guaranteed
by a person with such a net worth. The transferring Owner Participant will,
with certain limited exceptions, be released from its obligations under the
transaction documents to the extent of the interest transferred and the
transferee Owner Participant shall succeed to such obligations and rights of
the transferring Owner Participant to the extent of the interest transferred.
(Participation Agreement, Section 15(a).)
TAX INDEMNIFICATION AGREEMENT
Pursuant to separate Tax Indemnification Agreements, between the Company and
each Owner Participant, the Company is obligated to pay to each Owner
Participant, among other things, amounts which, on an after-tax basis, equal
the amounts of additional federal income taxes payable by such Owner
Participant with respect to any current or prior taxable year as a result of a
Tax Loss and any interest, penalties or additions to any tax imposed as a
result of such Tax Loss or the contest thereof. For purposes of each Tax
Indemnification Agreement, "Tax Loss" includes, generally, (a) loss to an Owner
Participant of depreciation or analogous deductions with respect to the related
Undivided Interest or interest deductions with respect to the related Lessor
Notes or (b) loss to an Owner Participant of foreign tax credits due to the
treatment of any item of income, gain, loss or deduction with respect to the
related Transaction as derived from, or allocable to, foreign sources, in the
case of either (a) or (b) as a result of, among other things, (i) any act or
failure to act by the Company, (ii) any misrepresentation or breach of warranty
or covenant in the transaction documents by the Company, (iii) bankruptcy of
the Company or any disposition of the related Undivided Interest pursuant to
the exercise of remedies under the related Lease Indenture or (iv) damage to or
the taking of the related Undivided Interest.
REIMBURSEMENT AGREEMENT
Under the provisions of the Reimbursement Agreement entered into by System
Energy and various banks in connection with the issuance of a letter of credit
to each Owner Participant to secure the payment of certain amounts payable by
the Company under the related Lease, System Energy has agreed to a number of
covenants relating to, among other things: preservation of its corporate
existence, properties, rights and franchises; restrictions on sales or other
dispositions of assets and on mergers or consolidations; restrictions on the
creation or incurrence of certain liens upon System Energy's assets; and the
maintenance of certain capitalization and fixed charge coverage ratios. In this
latter connection, System Energy has agreed during the term of the
Reimbursement Agreement to maintain its equity at not less than 33% of its
adjusted capitalization and to maintain its common equity at not less than 29%
of such amount. In addition, System Energy has agreed to maintain, with respect
to each fiscal quarter during the term of the Reimbursement Agreement, a ratio
of adjusted net income to interest expense (calculated, in each case, as
specified in the Reimbursement Agreement) of at least 1.60. (At September 30,
1993, System Energy's equity and common equity in each case approximated 34.32%
of its adjusted capitalization, and its fixed charge coverage ratio, calculated
as provided in the Reimbursement Agreement was 1.90.) The letters of credit may
be terminated by the banks if the Company fails to perform or observe these
covenants, if other events of default have occurred under the Reimbursement
Agreement and under certain other circumstances including any change in
applicable law or governmental action which adversely affects the obligations
or ability of System Energy and certain other participants in the Transactions
to make required payments or otherwise perform under the Transaction documents.
In connection with an audit of System Energy, the FERC issued a decision on
August 4, 1992 finding that System Energy overstated its Grand Gulf 1 utility
plant account by approximately $95 million and requiring System Energy to make
adjusting accounting entries and refunds, with interest, to the System
operating companies. System Energy filed a request for rehearing of the FERC's
order. If the decision of the FERC is ultimately sustained and implemented,
System Energy's income would be reduced. System Energy has obtained a waiver
for a twelve month period by the banks of the fixed charge coverage and equity
ratio covenants in the Reimbursement Agreement in order to avoid violation of
the covenants in the event that the decision of the FERC is sustained and
implemented in 1994. Absent a waiver, System Energy's failure to perform these
covenants would entitle the issuing bank to give notice of the early
termination of the letters of credit. If the letters of credit were not
replaced in a timely manner, a Lease Event of Default would result, the Owner
Participants would be entitled to draw on the letters of credit and remedies
may be exercised against the Company. See "Security and Source of Funds for the
Bonds" and "Description of the Leases--Lease Events of Default." Reference is
made to the Incorporated Documents for further information on this matter.
The existing letters of credit expire on January 15, 1997. The provisions of
the Reimbursement Agreement relating to renewed or replacement letters of
credit, and the provisions for the early termination of the letters of credit,
may vary from those relating to the existing letters of credit.
UNDERWRITING
Funding Corporation will sell the Bonds to an underwriting syndicate,
including Morgan Stanley & Co. Incorporated, to be named in the Prospectus
Supplement relating to the series of Bonds being offered. The Prospectus
Supplement relating to a series of Bonds ("Offered Bonds") will set forth the
terms of the offering of the Offered Bonds, including the names of
underwriters, the proceeds to the Funding Corporation from such sale, any items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed to dealers. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time. The Offered Bonds 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 each
resale. Unless otherwise set forth in the Prospectus Supplement, the
obligations of the underwriters to purchase the Offered Bonds will be subject
to certain conditions precedent, and the underwriters will be obligated to
purchase all such Offered Bonds if any are purchased; provided that the
agreement between the Company and the underwriters providing for the sale of
the Offered Bonds may provide that under certain circumstances involving a
default of underwriters, less than all of the Offered Bonds may be purchased.
Each Prospectus Supplement relating to a particular offering of Offered Bonds
will contain a statement (1) as to whether or not the existence of a secondary
market for such securities can be predicted and, if such existence is
predicted, as to the extent of such secondary market, and (2) as to whether or
not the underwriter or underwriters intend to make a market in such securities.
Subject to certain conditions, the Company may agree to indemnify the
underwriter or underwriters and their controlling persons against certain civil
liabilities, including liabilities under the Securities Act of 1933.
RATIOS OF EARNINGS TO FIXED CHARGES
System Energy has calculated ratios of earnings to fixed charges pursuant to
Item 503 of SEC Regulation S-K as follows:
TWELVE MONTHS ENDED
----------------------------------------
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1988 1989 1990 1991 1992 1993
---- ----- ---- ---- ---- -------------
Ratios of Earnings to Fixed Charges
(a)................................. 1.98 -- (b) 2.10 1.74 2.04 1.90
- --------
(a) "Earnings", as defined by SEC Regulation S-K, represent the aggregate of
(1) net income, (2) taxes based on income, (3) investment tax credit
adjustments-net and (4) fixed charges. "Fixed Charges" include interest
(whether expended or capitalized), related amortization and interest
applicable to rentals charged to operating expenses.
(b) Earnings for the twelve months ended December 31, 1989 were inadequate to
cover fixed charges due to System Energy's cancellation and write-off of
its investment in Unit No. 2 of the Grand Gulf Station in September 1989.
The amount of the coverage deficiency for fixed charges was $745.2 million.
EXPERTS AND LEGALITY
The financial statements and related financial statement schedules of System
Energy, incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K, have been audited by Deloitte & Touche, independent
auditors, as stated in their reports (which reports express an unqualified
opinion and include an explanatory paragraph referring to an uncertainty
resulting from a regulatory proceeding), which are incorporated by reference
herein and have been so incorporated in reliance upon such reports of such firm
given upon their authority as experts in accounting and auditing.
With respect to the unaudited interim financial information incorporated
herein by reference, Deloitte & Touche have applied limited procedures in
accordance with professional standards for a review of such information.
However, as stated in their reports included in the Company's Quarterly Reports
on Form 10-Q, and incorporated herein by reference, they did not audit and 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
are not subject to the liability provisions of Section 11 of the Securities Act
of 1933 for their reports on the unaudited interim financial information
because such reports are not "reports" or "parts" of the Registration Statement
prepared or certified by the accountants within the meaning of Section 7 and 11
of the Securities Act.
The statements as to matters of law and legal conclusions made under
"Description of the Bonds and the Indenture" have been reviewed by Reid &
Priest, New York, New York, and are set forth herein in reliance upon the
opinion of said firm and upon their authority as experts. The statements made
herein and in the Incorporated Documents, as to matters of law and legal
conclusions, based on the opinion or belief of System Energy or otherwise,
pertaining to titles to properties, franchises and other operating rights of
System Energy, regulations to which System Energy is subject and any legal
proceedings to which System Energy is a party, are made on the authority of
Wise Carter Child & Caraway, Professional Association, and such statements are
included herein and in such documents in reliance upon their authority as
experts.
All statements made herein and in the Incorporated Documents, as to matters
of law and legal conclusions, based on the opinion or belief of the System
operating companies or otherwise, pertaining to titles to properties,
franchises and other operating rights of the System operating companies, and
their subsidiaries, the regulations to which they are subject and any legal
proceedings to which they are parties, are made on the authority of Friday,
Eldredge & Clark, Little Rock, Arkansas, as to AP&L; Monroe & Lemann (A
Professional Corporation), New Orleans, Louisiana, as to LP&L and NOPSI, and
Wise Carter Child & Caraway, Professional Association, Jackson, Mississippi, as
to MP&L, and such statements are included herein and in such documents upon
their authority as experts.
The statements made herein and in the Incorporated Documents, as to matters
of law and legal conclusions, based on the belief of NOPSI or otherwise, with
respect to legal proceedings with respect to NOPSI have been reviewed by Thomas
O. Lind, Esq., Regional Counsel--Louisiana, Entergy Services, Inc., and such
statements are included herein and in such documents upon his authority as an
expert. Mr. Lind is a full-time employee of Entergy Services, Inc.
The legality of the Bonds will be passed upon for System Energy and Funding
Corporation by Wise Carter Child & Caraway, Professional Association, Jackson,
Mississippi, and Reid & Priest, New York, New York, and for the underwriters by
Winthrop, Stimson, Putnam & Roberts, New York, New York. However, all legal
matters pertaining to the organization of System Energy, titles to property,
franchises and the security for the Bonds will be passed upon only by Wise
Carter Child & Caraway, Professional Association, Jackson, Mississippi. In
rendering such opinions, such firms will, as appropriate, rely upon as to
matters of Mississippi law, the opinion of Wise Carter Child & Caraway,
Professional Association, Jackson, Mississippi; as to matters of Arkansas law,
the opinion of Friday, Eldredge & Clark, Little Rock, Arkansas and as to
matters of New York law, the opinion of Reid & Priest, New York, New York.
GLOSSARY
CERTAIN CAPITALIZED TERMS USED IN THIS PROSPECTUS HAVE THE FOLLOWING MEANINGS
AND SUCH MEANINGS SHALL APPLY TO TERMS BOTH SINGULAR AND PLURAL UNLESS THE
CONTEXT CLEARLY REQUIRES OTHERWISE:
"AP&L" means Arkansas Power & Light Company.
"Affiliate" means with respect to the Company any other person directly or
indirectly controlling or controlled by, or direct or indirect common control
with, the Company. For purposes of this definition, the term "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of such person, whether through the
ownership of voting securities or by contract or otherwise.
"Articles of Incorporation" means System Energy's Amended and Restated
Articles of Incorporation.
"Atomic Energy Act" means the Atomic Energy Act of 1954, as amended, and
regulations from time to time issued, published or promulgated pursuant
thereto.
"Bonds" means the Secured Lease Obligation Bonds to which this Prospectus
relates.
"Casualty Value" means an amount specified in each Lease which the Company
must pay to the Lessor under such Lease in certain circumstances, which amount
is, in general and among other things, calculated to preserve the net economic
return of the related Owner Participant.
"Company" means System Energy Resources, Inc.
"Deemed Loss Event" means any of the events described as a Deemed Loss Event
in each Lease upon the occurrence of which the Company must (subject to certain
conditions) assume the related Lessor Notes or acquire the beneficial interest
of the related Owner Participant. (See "Description of the Lease Indentures--
Assumption by the Company.")
"Directive" means, with respect to all Lessor Notes issued by a Lessor, an
instrument in writing and executed by the holder of such Lessor Notes,
representing a majority of the aggregate unpaid principal amount of such Lessor
Notes, directing such Lessor's Lease Indenture Trustee to take or refrain from
taking the action specified therein or otherwise advising such Lease Indenture
Trustee; provided, however, that each registered holder of a Lessor Note issued
by such Lessor which is outstanding at the time of a Directive will be entitled
to direct such Lessor's Lease Indenture Trustee only with respect to the
proportionate aggregate unpaid principal amount of such Lessor Notes then
outstanding which are registered in its name and which are (a) certified by the
holder of such Lessor Notes to be held by it for its own account and not
pledged as collateral for any of its obligations, or (b) pledged as collateral
for one or more of its obligations, or obligations with respect to which it is
acting as trustee under a related indenture, but in respect of which it has
received a directive, satisfactory in form and substance to such Lease
Indenture Trustee, given by the holder or holders of a proportionate interest
in the obligations secured by such Lessor Notes in accordance with the
instrument governing such obligations under the Lease Indenture.
"Entergy" means Entergy Corporation.
"Entergy System" means Entergy and its various direct and indirect
subsidiaries.
"Event of Default" means an Event of Default under the Indenture.
"Event of Loss" means any of the events described as an Event of Loss in each
Lease upon the occurrence of which the Company must (subject to certain
conditions) assume the related Lessor Notes or acquire the beneficial
interest of the Owner Participant. (See "Description of the Lease
Indentures--Assumption by the Company.")
"Excepted Payment" means (i) any indemnity payment (including payments under
the Tax Indemnification Agreement) payable to the Owner Trustee or the Owner
Participant, (ii) any amount payable under any transaction document to
reimburse the Lessor or the Owner Participant for performing or complying with
any of the obligations of the Company under and as permitted by any transaction
document, (iii) any amount payable to the Owner Participant as the purchase
price for its beneficial interest in the owner trust, (iv) any insurance
proceeds or other payments received with respect to an Event of Loss in excess
of amounts then due and owing in respect to the Lessor Notes, (v) any insurance
proceeds under liability policies and other insurance policies not required by
the Lease, (vi) payments by the Company to the Lessor with respect to certain
obligations of the Company in connection with amounts owned by it to a Lessor
upon a Special Transfer, (vii) if a letter of credit has been terminated or has
expired, the portion, if any, of Casualty Value or Special Casualty Value
(before taking into account the effect of certain drawings on such letter of
credit) equal to the amount by which Casualty Value, reduced by the principal
amount of an accrued interest on the outstanding Lessor Notes, exceeds the sum
of all amounts drawn under the letter of credit and not reinstated and (viii)
any payments in respect of interest to the extent attributable to payments
referred to in clauses (i) through (vii) above.
"Exchange Act" means Securities Exchange Act of 1934, as amended.
"FERC" means Federal Energy Regulatory Commission.
"Funding Corporation" means GG1B Funding Corporation, a Delaware corporation.
"Grand Gulf 1" means Unit No. 1 of the Grand Gulf Station.
"Grand Gulf Station" means Grand Gulf Steam Electric Generating Station
(nuclear).
"Holder" means any holder of Securities.
"Indenture" means the Collateral Trust Indenture, dated as of January 1,
1994, among Funding Corporation, the Company, and Bankers Trust Company, as
Trustee, as supplemented and amended, pursuant to which the Bonds are issued.
"Initial Series Lessor Notes" means the Lessor Notes issued to certain banks
which were parties to each Participation Agreement in connection with the
Transactions.
"Lease" means each Facility Lease, dated as of December 1, 1988, as
supplemented, under which the Company leases an Undivided Interest in Unit 1
from a Lessor in connection with the Transactions.
"Lease Default" means an event or condition which, with the giving of notice
or lapse of time, or both, would constitute a Lease Event of Default.
"Lease Event of Default" means an Event of Default as such term is defined
under a Lease.
"Lease Indenture" means each Trust Indenture, Deed of Trust, Mortgage,
Security Agreement and Assignment of Facility Lease, dated as of December 1,
1988, as supplemented, between a Lessor and the Lease Indenture Trustee,
pursuant to which the related Lessor Notes are issued.
"Lease Indenture Default" means an event or condition which, with the giving
of notice or the lapse of time, or both, would constitute a Lease Indenture
Event of Default.
"Lease Indenture Estate" means the trust estate assigned, transferred and
pledged from a Lessor to the related Lease Indenture Trustee under its Lease
Indenture, for the ratable benefit of the holders of the Lessor Notes issued
thereunder.
"Lease Indenture Event of Default" means an "Indenture Event of Default" as
defined in a Lease Indenture.
"Lease Indenture Trustee" means an indenture trustee under each of the Lease
Indentures.
"Lessor" means any institution and/or individual acting as owner trustee
under a trust agreement with an Owner Participant and as Lessor under a Lease
and which, in such capacity, has purchased an Undivided Interest in Unit 1 as
part of the Transactions, and "Lessors" means all such Lessors.
"Lessor Notes" means the non-recourse promissory notes issued by a Lessor
under its Lease Indenture.
"LP&L" means Louisiana Power & Light Company.
"MP&L" means Mississippi Power & Light Company.
"NOPSI" means New Orleans Public Service Inc.
"NRC" means Nuclear Regulatory Commission.
"Nuclear Waste Act" means Nuclear Waste Policy Act of 1982, as amended, or
any comparable successor law.
"Old Bonds" means the Secured Lease Obligation Bonds of the series initially
issued by Old Funding Corporation on April 13, 1989 in connection with the
funding of the permanent debt capital associated with the Transactions, which
were secured by a pledge of the Old Pledged Lessor Notes.
"Old Funding Corporation" means GG1A Funding Corporation, a Delaware
corporation.
"Old Pledged Lessor Notes" means the Lessor Notes which were pledged by Old
Funding Corporation as security for the Old Bonds.
"Owner Participant" means a corporation which, in connection with the
Transactions, has acquired a beneficial interest in the owner trust which is
the owner and Lessor of an Undivided Interest.
"Owner Trustee" means each institution and/or individual acting as owner
trustee under a trust agreement with an Owner Participant in connection with
the Transactions.
"Participation Agreement" means each Participation Agreement, dated as of
December 1, 1988, entered into among the Company, an Owner Participant, a
Lessor, a Lease Indenture Trustee and others which relates to a Transaction and
sets forth the terms and conditions upon which a Transaction will be
consummated.
"Pledged Lessor Notes" means the Lessor Notes which are pledged by Funding
Corporation to the Trustee as security for the Securities (including the
Bonds).
"Price-Anderson Act" means the Atomic Energy Damages Act of 1957, as amended.
"Refinancing" means the series of transactions pursuant to which the Old
Pledged Lessor Notes will be refinanced.
"Reimbursement Agreement" means the agreement, dated as of December 1, 1988,
as amended, entered into by System Energy and various banks in connection with
the sale and leaseback of a portion of System Energy's ownership interest in
Grand Gulf 1.
"SEC" means Securities and Exchange Commission.
"Securities" means debentures, notes or other evidences of indebtedness which
may be issued under the Indenture.
"Securities Act" means Securities Act of 1933, as amended.
"SMEPA" means South Mississippi Electric Power Association.
"Special Casualty Value" means an amount specified in each Lease which the
Company must pay to the Lessor under such Lease in certain circumstances, which
amount is, in general and among other things, calculated to preserve the net
economic return of the related Owner Participant.
"Special Transfer" means the assignment by an Owner Participant of its
beneficial interest in the related owner trust to the Company or its assignees
upon the occurrence of certain events, including the Company's inability to
assume the related Lessor Notes following an Event of Loss or Deemed Loss
Event.
"Supplemental Financing" means the issuance of additional Lessor Notes under
a Lease Indenture to finance the related Lessor's proportionate share of
capital improvements to Unit 1.
"Supplemental Indenture" means a supplemental indenture to the Indenture
among Funding Corporation, the Company and the Trustee.
"System" means Entergy System.
"System Energy" means System Energy Resources, Inc.
"System operating companies" means AP&L, LP&L, MP&L and NOPSI, collectively.
"Tax Indemnification Agreement" means each tax indemnity agreement dated as
of December 1, 1988 between the Company and an Owner Participant.
"Transaction" means either of the two transactions consummated on December
28, 1988 pursuant to which the Company sold the Undivided Interests in Unit 1
to Lessors under two separate owner trust agreements and leased back such
interest pursuant to two separate Leases. "Transactions" refers to both of such
transactions. (See "Brief Description of the Transactions.")
"Trustee" means Bankers Trust Company, trustee under the Indenture.
"Trust Indenture Act" means Trust Indenture Act of 1939.
"Undivided Interest" means either of the Company's leased undivided interests
in Unit 1, which interests compose in aggregate approximately 15.146% of the
total ownership interest in Unit 1 (as defined) (which constitutes
approximately 11.5% of the total ownership interest in Grand Gulf 1) and each
of which undivided interests were sold by the Company to the Owner Trustee
under two separate owner trust agreements with two Owner Participants, and then
leased back to the Company on a long-term net lease basis.
"Unit 1" means Grand Gulf 1, exclusive of certain transmission, pollution
control and other facilities, together with certain capital improvements
thereto.
"Unit Power Sales Agreement" means the agreement, dated as of June 10, 1982,
as amended, among the System operating companies and System Energy, relating to
the sale capacity and energy from System Energy's share of Grand Gulf 1.