AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 2001
REGISTRATION NO. 333-53866
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-3
Registration Statement
Under
The Securities Act of 1933
------------------------------
CONNECTICUT RRB
SPECIAL PURPOSE TRUST CL&P-1
(Issuer of Securities)
DELAWARE CL&P FUNDING LLC 06-1603869
(State or Other (Depositor of the Trust (I.R.S. Employer
Jurisdiction of Described Herein) Identification No.)
Incorporation or (Exact Name of Registrant
Organization) as Specified in Its
Certificate of Formation)
CL&P FUNDING LLC
107 SELDEN STREET
BERLIN, CONNECTICUT 06037-1616
TELEPHONE: (860) 665-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
RANDY A. SHOOP
PRESIDENT
CL&P FUNDING LLC
107 SELDEN STREET
BERLIN, CONNECTICUT 06037-1616
TELEPHONE: (860) 665-5000
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------
Copies to:
RICHARD J. WASSERMAN, ESQ. ERIC D. TASHMAN, ESQ. STANLEY KELLER, ESQ.
DAY, BERRY & HOWARD LLP BROWN & WOOD LLP PALMER & DODGE LLP
CITYPLACE I 555 CALIFORNIA STREET ONE BEACON STREET
HARTFORD, CONNECTICUT 06103-3499 SAN FRANCISCO, CALIFORNIA 94104 BOSTON, MASSACHUSETTS 02108
(860) 275-0100 (415) 772-1200 (617) 573-0100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective as determined by market
conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Proposed
Maximum Maximum
Title Of Shares Aggregate Aggregate Amount of
To Be Amount To Be Price Per Offering Registration
Registered Registered Unit (1) Price (1) Fee (1)
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Rate Reduction $1,438,400,000 100% $1,438,400,000 $359,600(2)
Certificates
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Notes 1,438,400,000 (3) (3) None
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $250 Previously paid.
(3) No additional consideration will be paid by the purchasers of the Rate
Reduction Certificates for the Notes that underlie the Rate Reduction
Certificates.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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The information in this prospectus supplement and the accompanying prospectus is
not complete and may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange Commission is
effective and we deliver a final prospectus supplement and accompanying
prospectus. This prospectus supplement and the accompanying prospectus are not
an offer to sell these securities nor are they seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED MARCH 26, 2001
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED __________, 2001
$1,438,400,000 RATE REDUCTION CERTIFICATES
CONNECTICUT RRB
SPECIAL PURPOSE TRUST CL&P-1
ISSUER OF THE CERTIFICATES
CL&P FUNDING LLC
ISSUER OF THE NOTES
THE CONNECTICUT LIGHT AND POWER COMPANY
SELLER AND SERVICER
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Underwriting Scheduled
Certificate Initial Discounts and Proceeds to Final Final
Interest Principal Price Price Commissions Trust Payment Termination
Rate Amount (%) ($) (%) (%)(1)(2) Date Date
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
Class A-1
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
Class A-2
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
Class A-3
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
Class A-4
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
Class A-5
- --------------- ------------- ------------- --------- --------- --------------- -------------- ------------ ---------------
<FN>
(1) Before payment of fees and expenses.
(2) The total price to the public is $______________ and the total amount of
the underwriting discounts, commissions and other fees is $____________.
The total amount of proceeds before deduction of expenses (estimated to be
$________________) is $_____________.
</FN>
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See "Risk Factors," which begins on page S-5 of this prospectus supplement,
and "Risk Factors," which begins on page 15 of the accompanying prospectus, to
read about factors you should consider before buying the certificates.
Each certificate represents an interest in a related class of CL&P Funding LLC
notes and, in the case of any class of floating rate certificates, a swap
agreement. The assets of the trust will consist solely of the notes and each
swap agreement relating to a class of floating rate certificates. The notes are
secured primarily by the right to assess and collect all revenues arising from a
non-bypassable usage-based charge included in the bills of retail users of The
Connecticut Light and Power Company's electric distribution system.
Neither the certificates, the notes nor the property securing the notes is an
obligation of the State of Connecticut or any political subdivision,
governmental agency, authority or instrumentality of the State of Connecticut or
of The Connecticut Light and Power Company or any of its affiliates, except for
CL&P Funding LLC, which is an affiliate of The Connecticut Light and Power
Company.
Neither the full faith and credit nor the taxing power of the State of
Connecticut is pledged to the payment of principal of, or interest on, the
certificates or the notes. Furthermore, the issuance of the certificates and the
notes shall not directly, indirectly or contingently obligate the State of
Connecticut or any political subdivision thereof to levy or to pledge any form
of taxation thereof or to make any appropriation for their payment.
There currently is no secondary market for the certificates and there can be no
assurance that a secondary market will develop.
We have applied to have any class of floating rate certificates listed on the
Luxembourg Stock Exchange. We will not apply to have any other class of
certificates listed on any stock exchange.
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Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
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LEHMAN BROTHERS SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC. GOLDMAN, SACHS & CO. MORGAN STANLEY
ADVEST, INC. M.R. BEAL & COMPANY
BELLE HAVEN INVESTMENTS, L.P. LOOP CAPITAL MARKETS, LLC.
QUICK & REILLY, INC. RAMIREZ & CO., INC.
The date of this Prospectus Supplement is ______, 2001
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Where to Find Information in These Documents............................ S-3
Summary of Terms........................................................ S-4
Risk Factors............................................................ S-5
Description of the Certificates......................................... S-5
Description of the Notes................................................ S-12
Description of the Transition Property.................................. S-16
Underwriting............................................................ S-17
Ratings................................................................. S-18
Listing and General Information Related to Floating Rate Classes........ S-18
PROSPECTUS
Prospectus Summary...................................................... 4
Risk Factors............................................................ 15
Available Information................................................... 25
Reports to Holders...................................................... 26
Incorporation of Documents by Reference................................. 26
Energy Deregulation and New Connecticut Market Structure................ 26
Description of the Transition Property.................................. 29
The Trust............................................................... 38
Office of the State Treasurer of the State of Connecticut............... 39
The Note Issuer......................................................... 39
The Seller and Servicer................................................. 41
Servicing............................................................... 45
Description of the Notes................................................ 52
Description of the Certificates......................................... 62
Federal Income Tax Consequences......................................... 72
State Taxation.......................................................... 78
ERISA Considerations.................................................... 78
Use of Proceeds......................................................... 80
Plan of Distribution.................................................... 80
Legal Matters........................................................... 80
Experts................................................................. 80
Index to Financial Statements........................................... F-1
The underwriters expect to deliver the certificates through the facilities
of The Depository Trust Company against payment in New York, New York on
[_____________], 2001.
S-2
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
We provide information about the certificates and the notes in:
o this prospectus supplement, which describes the specific terms
of each class of certificates and the related class of notes
and, in the case of a class of floating rate certificates, a
swap agreement, and
o the accompanying prospectus, which provides general information
concerning the documents under which the certificates and the
notes are being issued.
This prospectus supplement begins with several sections describing these
securities:
o "Summary of Terms" provides important amounts, dates and other
terms of each class of certificates and the related class of
notes and, in the case of a class of floating rate certificates,
a swap agreement,
o "Description of the Certificates" describes the key features of
each class of certificates, including, in the case of a class of
floating rate certificates, a swap agreement,
o "Description of the Notes" describes the key features of the
notes underlying each class of certificates, and
o "Description of the Transition Property" describes a portion of
the competitive transition assessment (referred to as the "RRB
charge") that provides the primary source for payment of the
notes and thus the source of payments with respect to the
certificates.
As you read through these sections, cross-references will direct you to
more information in the accompanying prospectus. You can also find information
on specific topics by looking at the table of contents in this prospectus
supplement and the accompanying prospectus.
This prospectus supplement and the accompanying prospectus may be used by
the underwriters in connection with offers and sales related to market-making
transactions in the certificates. The underwriters may act as principal or agent
in those transactions. Those sales will be made at prices based on prevailing
market prices at the time of sale.
This prospectus supplement and the accompanying prospectus is an offer to
sell only the securities offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so.
We, having made all reasonable inquiries, confirm that this prospectus
supplement and the accompanying prospectus contain all information with regard
to the trust, the note issuer, Connecticut Light & Power and the notes and
certificates that is material in the context of the issue and offering of the
certificates, that the information contained in this prospectus supplement and
the accompanying prospectus is true and accurate and is not misleading, that the
opinions and intentions expressed are honestly held and that there are no other
facts, the omission of which would make any part of this prospectus supplement
or the accompanying prospectus materially misleading. We accept responsibility
accordingly.
YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. NO ONE IS AUTHORIZED TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
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TO UNDERSTAND THE STRUCTURE AND PAYMENT TERMS OF THESE SECURITIES, YOU MUST
CAREFULLY READ THE ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN
THEIR ENTIRETY.
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S-3
SUMMARY OF TERMS
The following section is only a summary of selected information and does
not provide you with all the information you will need to make your investment
decision. There is more detailed information in this prospectus supplement and
in the accompanying prospectus. To understand all of the terms of the offering
of the certificates, carefully read this entire document and the accompanying
prospectus.
Securities Offered: $1,438,400,000 Rate Reduction Certificates
Issuer of the Connecticut RRB Special Purpose Trust CL&P-1
Certificates:
Note Issuer: CL&P Funding LLC
Seller and Servicer: The Connecticut Light and Power Company, or Connecticut
Light & Power
Certificate Trustee: First Union Trust Company, National Association
Note Trustee: First Union Trust Company, National Association
Delaware Trustee: First Union Trust Company, National Association
Luxembourg Listing Kredietbank S.A. Luxembourgeoise
and Paying Agent:
Issuance Date:
Certificates and Each certificate represents an interest in a class of
Notes: notes of CL&P Funding LLC, a special purpose entity
wholly owned by Connecticut Light & Power and, with
respect to each class of floating rate certificates, a
swap agreement. The notes and the swap agreement are the
only assets of the trust. Payments of principal of and
interest on a class of certificates will be made when
payments of principal and interest are made on the
related class of notes and, in the case of any class of
floating rate certificates, payments are made on the
related swap agreement.
Collateral: The notes are secured primarily by the right to assess
and collect all revenues arising from a portion of the
competitive transition assessment, a non-bypassable
usage-based charge included in the bills of retail users
of Connecticut Light & Power's distribution system. This
portion of the competitive transition assessment is known
as the RRB charge, and the right to assess and collect
this charge is the principal asset of the note issuer.
Swap Agreement: The trust will enter into a swap agreement with a swap
counterparty for each class of floating rate
certificates, on or before the date of issuance of that
class. See "Description of the Certificates - Floating
Rate Certificates," which begins on page S-6.
Anticipated Ratings: S&P / Fitch / Moody's "AAA" / "AAA" / "Aaa"
Credit Enhancement: Periodic RRB charge adjustments, overcollateralization
amount included in the RRB charge, and capital
contributed to the note issuer by Connecticut Light &
Power in an amount equal to 0.50 percent of the initial
principal amount of the notes.
Payment Dates: [ ], [ ], [ ] and
[ ] of each year beginning [ ],
2001, or, if not a business day, the next business day.
Optional Redemption: The notes are subject to optional redemption in whole by
the note issuer once the outstanding principal balance of
the notes has been reduced to less than 5 percent of the
initial principal balance. The optional redemption of the
notes will result in the redemption of the certificates
in whole.
Record Date: Close of business on the business day prior to any
payment date.
Clearance and DTC/Clearstream/Euroclear
Settlement:
S-4
RISK FACTORS
You should consider carefully the risks of investing in the certificates.
The section entitled "Risk Factors," which begins on page 15 of the accompanying
prospectus, discusses material risks of investing in the certificates. In
addition, "Description of the Certificates - Floating Rate Certificates - Risk
Factors Relating to Floating Rate Certificates," which begins on page S-12,
discusses additional material risks of investing in the floating rate
certificates.
DESCRIPTION OF THE CERTIFICATES
The trust will issue the certificates in minimum denominations of $1,000
and in integral multiples of $1.00 in excess thereof, although one certificate
of each class may be of a smaller denomination. The certificates will consist of
five classes, in the initial principal amounts, bearing the interest rates and
having the scheduled final payment dates and final termination dates listed
below:
------------------------------------------------------------------------
Scheduled
Initial Certificate Final Final
Principal Interest Payment Termination
Class Amount Rate Date Date
------------------------------------------------------------------------
A-1
------------------------------------------------------------------------
A-2
------------------------------------------------------------------------
A-3
------------------------------------------------------------------------
A-4
------------------------------------------------------------------------
A-5
------------------------------------------------------------------------
The scheduled final payment date for a class of certificates is the date
by which the trust expects to pay in full all principal of and interest on that
class of certificates. The final termination date for a class of certificates is
the legal maturity date of that class. The failure to pay principal of any class
of certificates in full by the final termination date for that class is an event
of default, and the certificate trustee may, and upon the written direction of
the holders of at least a majority in principal amount of all outstanding
certificates will, vote all of the notes in favor of declaring the unpaid
principal amount of all outstanding notes and accrued interest to be due and
payable. See "Description of the Certificates - Events of Default," which begins
on page 64 of the accompanying prospectus.
PAYMENTS OF INTEREST
Interest on each class of certificates will accrue from its issuance date
at the interest rate listed in the table above. Beginning [________ __], 2001,
the trust is required to pay interest quarterly on [________ __], [________ __],
[ ] and [________ __] (or, if any payment date is not a business day, the
following business day) of each year. On each payment date, the certificate
trustee and the Luxembourg paying agent will pay interest to the extent paid on
each class of notes or related swap agreement to the holders of the related
class of certificates as of the close of business on the record date. The record
date for any payment of principal of and interest on the certificates will be
the business day immediately before the payment date. Each payment date will
also be a payment date for principal of and interest on the notes.
PAYMENTS OF PRINCIPAL
On each payment date, the certificate trustee and the Luxembourg paying
agent will pay principal as paid on each class of notes to the holders of the
related class of certificates as of the close of business on the record date.
S-5
FLOATING RATE CERTIFICATES
PAYMENTS OF INTEREST ON FLOATING RATE CERTIFICATES
Interest on each class of floating rate certificates, each referred to as
a floating rate class, will be paid, for all interest accrual periods other than
the first interest accrual period, at the rate equal to the London interbank
offered rate, referred to as LIBOR, for three-month United States dollar
deposits determined on the applicable floating rate interest determination date,
as described under " - Floating Rate Interest Determination," which begins on
page S-6, plus the percentage spread above LIBOR applicable to that class. The
spread above LIBOR for any floating rate class is referred to as the floating
rate spread. LIBOR plus the floating rate spread payable on each floating rate
class is referred to as the floating rate.
The floating rate spread for the class A-4 floating rate certificates will
be [ ] percent per annum.
Interest on each floating rate class will be calculated on the basis of
the actual number of days from and including the preceding payment date, or, for
the first payment date, from and including the date of issuance of that class,
to but excluding the next payment date, divided by 360. The Luxembourg Stock
Exchange will be advised of the floating rate and the amount of the interest
payment on any floating rate class listed on that exchange for each payment
date.
On or prior to each payment date, the certificate trustee, using LIBOR as
determined by the certificate trustee, will calculate the amount of interest
payable on each floating rate class for the relevant interest accrual period.
With respect to any floating rate class, if the swap agreement relating to
that class is terminated for any reason, interest on that class will be paid at
the note fixed rate for that class, as described below, until alternate
arrangements can be made to pay the floating rate for that class. The swap
agreement may terminate under the circumstances described below. See " - Swap
Agreements - Amounts Payable under Swap Agreements," which begins on page S-7, "
- - Swap Agreements - Swap Agreement Events of Default and Termination Events,"
which begins on page S-9, and " - Risk Factors Relating to Floating Rate
Certificates," which begins on page S-12.
FLOATING RATE INTEREST DETERMINATION
The interest determination date for each floating rate class and each
payment date will be (1) the day two London banking days prior to the preceding
payment date or (2) in the case of the first payment date, the dates specified
below. A London banking day is a day on which dealings in United States dollars
are transacted in the London interbank market.
Interest payable on the first interest payment date of [ ], 2001 for
each floating rate class will be determined as follows:
o From and including the date of issuance until and including
[ ], 2001, interest on each floating rate class will be based
on LIBOR as determined two London business days prior to the date
of issuance.
o From and including [ ], 2001 until but excluding the first
payment date, interest on each floating rate class will be based on
LIBOR as determined on [ ], 2001.
o Payment of the sum of the amounts calculated for these two periods
will be made on [ ], 2001, the first payment date.
After the first payment date, interest on each floating rate class will be
paid at the rate equal to LIBOR as determined on each interest determination
date, plus the floating rate spread for that class.
The certificate trustee will determine LIBOR for each floating rate class
in accordance with the following provisions:
(1) On each interest determination date, the certificate trustee will
determine LIBOR based on the offered rate for deposits in United
States dollars commencing on the first day of that period that
appears on the page, USD-LIBOR-BBA, of the Dow Jones Telerate
Services as of 11:00 a.m.,
S-6
London time, on that interest determination date. That display page
is referred to as the Telerate page. If no offered rate appears on
the Telerate page, LIBOR for that period will be determined as
described in clause (2) below.
(2) With respect to an interest determination date on which no offered
rate appears on the Telerate page, the certificate trustee will
request the principal London office of each of four major banks in
the London interbank market, selected by the certificate trustee,
to provide the certificate trustee with that bank's offered
quotation for deposits in United States dollars for the applicable
period, commencing on the second London banking day immediately
following that interest determination date, to prime banks in the
London interbank market at approximately 11:00 a.m., London time,
on that interest determination date and in a principal amount that
is representative for a single transaction in United States dollars
in that market at that time. If at least two such quotations are
provided, LIBOR will be the arithmetic mean of those quotations. If
fewer than two quotations are provided, LIBOR for that period will
be the arithmetic mean of the rates quoted at approximately 11:00
a.m. in The City of New York on that interest determination date by
major banks in The City of New York selected by the certificate
trustee for loans in United States dollars to leading European
banks, for the period commencing on the second London banking day
immediately following that interest determination date and in a
principal amount that is representative for a single transaction in
United States dollars in that market at that time.
If LIBOR cannot be determined in accordance with clause (1) or (2) above,
then that rate will be determined to be the same as the rate which applied
during the previous period (or in the case of a failure to determine LIBOR for
the first payment date, on the date of issuance).
On each interest determination date, the certificate trustee will notify
the servicer, the trust and the swap counterparty of LIBOR for the applicable
period as determined by the certificate trustee, and the trust will notify the
Luxembourg Stock Exchange of that rate to the extent any floating rate
certificates are listed on that exchange and the rules of that exchange so
require.
SWAP AGREEMENTS
The trust will enter into a swap agreement with a swap counterparty for
each floating rate class, on or before the date of issuance of that class. The
purpose of each swap agreement is to convert the cash flows on the related class
of fixed rate notes into cash flows that are sufficient to pay interest on the
related floating rate class.
Amounts Payable under Swap Agreements. Under each swap agreement, the
trust will be obligated to pay the related swap counterparty a fixed rate of
interest equal to the fixed rate of interest payable on the related class of
notes, and the swap counterparty will be obligated to pay the trust interest at
the floating rate for that class. Those obligations will then be netted on the
business day before each payment date. Therefore, for each interest period,
either the trust will pay the swap counterparty only the amount, if any, by
which interest at the note fixed rate exceeds interest at the floating rate,
referred to as the net swap payment, or the swap counterparty will pay the trust
only the amount, if any, by which interest at the floating rate exceeds interest
at the note fixed rate, referred to as the net swap receipt, as discussed below.
For each payment date with respect to each floating rate class, the
certificate trustee will allocate to the account established for that class,
referred to as a class certificate account, an amount equal to the note fixed
rate for that class times the outstanding principal amount of that class as of
the close of business on the preceding payment date, referred to as the note
fixed amount for that class and that payment date. See "Description of the
Certificates - Payments," which begins on page 62 of the accompanying
prospectus. In addition, any net swap receipt under the related swap agreement
will be deposited in that class certificate account, and will be available,
together with the note fixed amount for that class, to pay interest due on that
class on that payment date. Any net swap payment will be paid to the related
swap counterparty only out of funds on deposit in that class certificate account
and the remaining amount in that class certificate account will be available to
pay interest due on that class.
Specifically, for the first payment date, the trust will pay a net swap
payment in an amount, if positive, equal to (1) the interest calculated on the
notional amount of the related floating rate class at the applicable note fixed
rate for the period from and including the issuance date of the related class of
certificates to but excluding [ ], 2001 minus (2) the sum of (a) the
interest calculated on the notional amount of that class at the applicable
floating rate for the period from and including
S-7
that issuance date to but excluding [ ], 2001, plus (b) the interest calculated
on that notional amount at the applicable floating rate for the period from and
including [ ], 2001 to but excluding [ ], 2001. If this amount is a negative
number, a net swap receipt in this amount will be paid to the trust by the swap
counterparty.
For each payment date after the first payment date, the trust will pay a
net swap payment in an amount, if positive, equal to (1) the interest calculated
on the notional amount of the related floating rate class at the applicable note
fixed rate for the period from and including the previous payment date to but
excluding that payment date minus (2) the interest calculated on the notional
amount of that class at the applicable floating rate for that period. If this
amount is a negative number, a net swap receipt in this amount will be paid to
the trust by the swap counterparty.
With respect to any payment date, the notional amount in effect under each
swap agreement prior to that payment date will equal the principal balance of
the related floating rate class as of the close of business on the preceding
payment date. With respect to the first payment date, the notional amount in
effect under each swap agreement prior to that payment date will be equal to the
initial outstanding principal balance of the related floating rate class.
The note fixed rate for the class A-4 floating rate certificates will be
[ ] percent per annum.
Each swap agreement may terminate under the circumstances described below
under " - Swap Agreement Events of Default and Termination Events," which begins
on page S-9. In the event a swap agreement terminates, the interest payable on
the related floating rate class will convert to the note fixed rate for that
class. The note fixed rate will be used to calculate interest payable on that
class starting on the last payment date to which interest has been paid at the
floating rate. See " - Risk Factors Relating to Floating Rate Certificates,"
which begins on page S-12.
Swap Counterparty Ratings. The required long-term senior unsecured or
financial program ratings of each swap counterparty under each swap agreement
will be at least "Aa3" by Moody's and either at least "A+" or, for short-term
obligations, "A-1" by S&P and, if the swap counterparty is rated by Fitch,
either at least "A+" or, for short-term obligations, "F1" by Fitch. These
ratings are referred to as the swap counterparty minimum ratings.
Swap Counterparty Downgrade Event. An event referred to as a swap
counterparty downgrade event will occur if on any date the swap counterparty is
downgraded and no longer meets the swap counterparty minimum ratings, and within
30 days after being downgraded the rating agencies have not reaffirmed the
ratings on the certificates.
If a swap counterparty is downgraded and no longer meets the swap
counterparty minimum ratings, the swap counterparty will be required, within 30
days following the date of downgrade, to either:
o re-establish the swap counterparty minimum ratings or
o establish alternative arrangements to maintain or restore the
ratings of the affected floating rate class that were in effect
prior to the swap counterparty downgrade event. These alternative
arrangements by the swap counterparty may include:
o posting collateral, arranging for a guaranty or taking similar
action to maintain or restore the ratings or
o assigning its rights and obligations under the swap agreement to
a replacement swap counterparty that meets the swap counterparty
minimum ratings, or that has itself made arrangements (if
needed) which will maintain or restore the ratings.
Posting collateral, arranging for a guaranty and other arrangements as described
above are referred to in this prospectus supplement as satisfactory arrangements
to maintain or restore the ratings prior to the swap counterparty downgrade
event.
At the end of that 30-day period, if the swap counterparty has failed to
take steps to maintain or restore the ratings of that floating rate class that
were in effect prior to the swap counterparty downgrade event, the trust will
appoint a recognized swap dealer that is a member of the International Swaps and
Derivatives Association, Inc. with capital and surplus of at least $50 million,
referred to as the swap agent, to, within an additional 30 days, either:
o find a replacement swap counterparty that meets the swap
counterparty minimum ratings or that has made satisfactory
arrangements to maintain or restore the ratings of the related
floating rate class, referred to as a qualified replacement
counterparty, or
S-8
o if a qualified replacement counterparty cannot be found, find the
available replacement swap counterparty with the highest
available long-term senior unsecured or financial program credit
rating assigned by Moody's or S&P that is higher than that of the
existing swap counterparty and which is approved by the holders
of certificates representing at least 66-2/3 percent of the
outstanding principal amount of the related class, referred to as
an approved replacement counterparty.
In case of a qualified replacement counterparty or an approved replacement
counterparty, if there is more than one available replacement swap counterparty
with the same credit rating, the counterparty offering the interest rate swap
terms with the lowest overall cost to the trust will be selected by the trust as
the replacement swap counterparty. That replacement swap counterparty must be
willing to intermediate between the trust and the prior swap counterparty by
entering into a swap agreement with the prior swap counterparty that is
substantially the same as the prior swap agreement to hedge or offset the risk
that the replacement swap counterparty has to the trust.
If a qualified replacement counterparty or an approved replacement
counterparty has been found, the prior swap counterparty will be required to
assign its rights and obligations under the swap agreement to that replacement
swap counterparty and the replacement swap counterparty will enter into a new
swap agreement with substantially the same terms as the terminated agreement. If
a replacement swap counterparty satisfying the above criteria has not been found
within that second 30-day period, a termination event will occur under the swap
agreement and the swap agreement will terminate unless the holders of
certificates representing at least 66-2/3 percent of the outstanding principal
amount of the related class vote to continue the swap agreement with the
existing swap counterparty.
If the swap agreement is not terminated as described above, the swap agent
will be obligated every three months thereafter to renew the search for a
qualified replacement counterparty or an approved replacement counterparty
according to the above procedures. However, the replacement swap counterparty
will not be required to intermediate between the prior swap counterparty and the
trust, as described above. At the end of each of these three-month periods, if a
replacement swap counterparty meeting the above criteria has not been found, the
swap agreement will terminate unless the holders of certificates representing at
least 66-2/3 percent of the outstanding principal amount of the related class
vote to continue the swap agreement with the existing swap counterparty.
All searches for replacement swap counterparties will be at the reasonable
cost of the swap counterparty being replaced.
Swap Agreement Events of Default and Termination Events. The events
referred to as swap events of default under each swap agreement include:
o the failure of the trust or the swap counterparty to pay any amount
when due under the swap agreement if that failure is not remedied
on or before the fifth business day after that failure,
o certain events of bankruptcy of the trust or the swap
counterparty, or
o a merger of the trust or the swap counterparty without an
assumption of its obligations under the swap agreement.
The events referred to as termination events under each swap agreement
include:
o illegality, as described below,
o an acceleration of the related floating rate class, effective
upon the final date of payment for that class,
o any amendment, without the consent of the swap counterparty, of the
sale agreement, the servicing agreement, the administration
agreement, the note indenture, the certificate indenture, the
underwriting agreement, the note purchase agreement, the fee and
indemnity agreement or the declaration of trust, which, in the swap
counterparty's reasonable and good faith judgment, adversely
affects its rights or obligations under the swap agreement, or
S-9
o a swap counterparty downgrade event, as described above, that is
not cured within the applicable time periods.
Each swap agreement may terminate upon an illegality, as described below.
The swap agreement will terminate upon a failure by the swap counterparty to pay
any amount when due under the swap agreement, which failure is not cured within
five business days, unless the holders of certificates representing at least
66-2/3 percent of the outstanding principal amount of the related class vote to
waive that default within 30 days.
Upon acceleration of the related floating rate class, either party may
elect to terminate the swap agreement. In addition, any other swap event of
default or a termination event can lead to a termination of the swap agreement
by the party not responsible for that event. Moreover, as described above, the
swap agreement will terminate following a swap counterparty downgrade event if
that event is not cured, there is no replacement swap counterparty and the
holders of the related floating rate class do not vote to continue with the
existing swap counterparty. Except in the case of a failure by the swap
counterparty to pay any amount when due under the swap agreement or a swap
counterparty downgrade event, the trust may terminate only at the direction of
the holders of certificates representing at least 66-2/3 percent of the
outstanding principal amount of the related class.
The trust will not be obligated to pay any termination payment or any
other breakage amounts to the swap counterparty under any swap agreement as a
result of any termination event, any swap event of default, any swap
counterparty downgrade event or for any other reason, except following an
acceleration as described under "Description of the Certificates - Events of
Default," which begins on page 64 of the accompanying prospectus, or following
the redemption of the notes (other than from the proceeds of the repurchase of
the transition property by Connecticut Light & Power). Any payment made by a
replacement swap counterparty to enter into a replacement swap agreement will be
paid to the terminated swap counterparty.
Upon a termination of a swap agreement resulting from a swap event of
default, swap counterparty downgrade event or other termination event, the swap
counterparty may be liable to pay a termination payment to the trust, based on
the market value of the swap agreement determined in accordance with specified
procedures set forth therein. Any termination payment paid by the swap
counterparty, including interest thereon, will first be used to make any payment
required to be paid to any replacement swap counterparty and to the extent not
so used will be deposited into the applicable class certificate account and
pursuant to the certificate indenture paid to the holders of the applicable
floating rate class. See "Description of the Certificates - Payments," which
begins on page 62 of the accompanying prospectus.
Illegality means that due to the adoption of, or any change in, any
applicable federal or state law after the date on which a swap transaction is
entered into, or due to the promulgation of, or any change in, the
interpretation by any court, tribunal or regulatory authority with competent
jurisdiction of any applicable federal or state law after that date, it becomes
unlawful for the trust or the swap counterparty:
o to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of that
swap transaction or to comply with any other material provision of
the swap agreement or
o to perform, or for any credit support provider of that party to
perform, any contingent or other obligation which the party or that
credit support provider has under any credit support document
relating to that swap transaction.
The determination of an illegality will be predicated on the receipt of a
written opinion from an independent law firm experienced in swap transactions,
selected by the trust and the swap counterparty, that an illegality exists.
Replacement of Swap Agreement. Upon a termination or a swap event of
default under a swap agreement, the trust is required to appoint a swap agent.
Upon its appointment, the swap agent will either:
o find a replacement swap counterparty who meets the swap
counterparty minimum ratings or who has made such other
arrangements as will result in the related floating rate class
receiving ratings from the rating agencies not less than the
ratings that would be received if such replacement swap
counterparty met the swap counterparty minimum ratings, or
o if a replacement swap counterparty satisfying the requirements of
the clause above cannot be found, find the available replacement
swap counterparty with the highest available long-term senior
unsecured or financial program credit rating which is approved by
the holders of
S-10
certificates representing at least 66-2/3 percent of the
outstanding principal amount of the related class.
If there is more than one available replacement swap counterparty with the
same credit rating, the counterparty offering the interest rate swap terms with
the lowest overall cost to the trust will be selected by the trust as the
replacement swap counterparty. If a replacement swap counterparty satisfying the
above criteria has been found, upon the termination of the swap agreement, the
replacement swap counterparty will enter into a swap agreement with the trust
having terms substantially the same as the original swap agreement.
Transfer of Swap Agreements. Any swap counterparty may transfer its
obligations under any swap agreement with the prior written consent of the trust
or, without that consent, either:
o in a consolidation or amalgamation with or merger with or into, or
transfer of all or substantially all of its assets to another
entity which expressly assumes in a written agreement the
obligations of the swap counterparty under the swap agreement, so
long as, upon that consolidation, amalgamation or merger, a swap
counterparty downgrade event has not occurred, or
o to a replacement swap counterparty following a swap counterparty
downgrade event as described above.
Enforcement, Amendment, Modification or Waiver of Swap Agreements. If a
swap event of default or termination event occurs and is continuing, the
certificate trustee may, and at the direction of the holders of certificates
representing at least 66-2/3 percent of the outstanding principal amount of the
related class will, exercise all rights, remedies, powers, privileges and claims
of the trust against the related swap counterparty, and any right of the trust
to take this action will be suspended.
A swap agreement may be amended with the consent of the certificate
trustee and the related swap counterparty, as long as each of Moody's, S&P and
Fitch confirm that the amendment will not result in the reduction or withdrawal
of its then current rating of the related floating rate class, which
confirmation is referred to as satisfaction of the rating agency condition.
However, this amendment may not adversely affect in any material respect the
interests of the certificateholders of the related floating rate class unless
the holders of certificates representing at least 66-2/3 percent of the
outstanding principal amount of the related class direct the certificate trustee
to consent to the amendment. Moreover, that amendment may not adversely affect
in any material respect the interests of any other certificateholders or the
counterparty to any other hedge or other interest rate swap agreement without
the consent of the holders of certificates representing at least 66-2/3 percent
of the outstanding principal amount of the certificates of all of those other
series or classes, and each counterparty to any other hedge or other interest
rate swap agreement, materially and adversely affected thereby.
Except as described under " - Swap Counterparty Downgrade Event," which
begins on page S-8, or " - Swap Agreement Events of Default and Termination
Events," which begins on page S-9, with respect to any action proposed by the
trust to amend, modify, waive, supplement or surrender the terms of any swap
agreement, or waive timely performance or observance by the swap counterparty
under any swap agreement, in a way which would materially and adversely affect
the interests of certificateholders of the related class, the trust must satisfy
the rating agency condition. After the rating agency condition has been
satisfied, the certificate trustee will consent to this proposed action only
with the consent of (1) the holders of certificates representing at least 66-2/3
percent of the outstanding principal amount of the related class and (2) the
consent of the holders of certificates representing at least 66-2/3 percent of
the outstanding principal amount of the certificates of each other series or
class, and each counterparty to any other hedge or other interest rate swap
agreement, materially and adversely affected thereby.
SWAP COUNTERPARTIES
Each initial swap counterparty shall be required to have at least the swap
counterparty minimum ratings and will be selected by the trust upon the pricing
by the underwriters of the related floating rate class.
S-11
RISK FACTORS RELATING TO FLOATING RATE CERTIFICATES
The following risk factors apply to the floating rate certificates.
Additional risk factors apply to all of the certificates, including the floating
rate certificates. See "Risk Factors," which begins on page 15 of the
accompanying prospectus.
Termination of Swap Could Cause a Loss. Termination events, swap events of
default or swap counterparty downgrade events under any swap agreement may
result in termination of that swap agreement. Each swap agreement will terminate
automatically if the related swap counterparty defaults in its obligation to
make payments under the swap agreement and the holders of certificates
representing at least 66-2/3 percent of the outstanding principal amount of the
related class of floating rate certificates do not vote to waive that default.
If any swap agreement is terminated, the holders of the floating rate
certificates will receive a fixed rate of interest equal to the note fixed rate
for that class, which takes effect from the previous payment date. This rate
could be substantially less than the floating rate for the floating rate
certificates at the time of the termination, which could adversely affect the
yield to maturity, and holders of the floating rate certificates could suffer a
loss on their investment.
Ratings Downgrade of any Floating Rate Certificates Could Cause a Loss for
Holders of Those Certificates. If a swap counterparty downgrade event occurs and
(1) the swap counterparty fails to make satisfactory arrangements to maintain or
restore the prior ratings and (2) the holders of certificates representing at
least 66-2/3 percent of the outstanding principal amount of the related class of
floating rate certificates either approve a replacement swap counterparty that
does not maintain or restore the prior ratings or such holders vote to continue
the existing swap agreement, the floating rate certificates may be downgraded by
the rating agencies. In that event, the trading price of the floating rate
certificates may be reduced, and holders of floating rate certificates could
suffer a loss on their investment.
Interest Payments on Floating Rate Certificates are Dependent on Swap
Counterparties. If any swap counterparty defaults in its obligation to make any
net swap receipt, the related swap agreement may terminate automatically in the
absence of the required waiver by the holders of the floating rate certificates,
and the holders of the floating rate certificates will receive interest at the
note fixed rate until alternate arrangements can be made to pay the floating
rate for the floating rate certificates. There can be no assurance that any
alternate arrangements will be made to obtain a suitable replacement swap
counterparty or otherwise to obtain payment of the floating rate for the
floating rate certificates. The note fixed rate for that class could be
substantially less than the floating rate for the floating rate certificates at
the time of that failure to pay, and holders of the floating rate certificates
could suffer a loss on their investment.
DESCRIPTION OF THE NOTES
CL&P Funding LLC, the note issuer, will issue and sell the CL&P Funding
LLC notes to the trust in exchange for the net proceeds from the sale of the
certificates by the trust. Each class of notes secures the payment of the
related class of certificates and has the same principal balance, fixed interest
rate, amortization schedule and legal maturity date as the related class of
certificates.
The notes will consist of five classes, in the initial principal amounts
and bearing the interest rates and having the scheduled maturity dates and final
maturity dates listed below:
----------------------------------------------------------------------
Initial Note Scheduled Final
Principal Interest Maturity Maturity
Class Amount Rate Date Date
----------------------------------------------------------------------
A-1
----------------------------------------------------------------------
A-2
----------------------------------------------------------------------
A-3
----------------------------------------------------------------------
A-4
----------------------------------------------------------------------
A-5
----------------------------------------------------------------------
The scheduled maturity date for a class of notes is the date by which the
note issuer expects to pay in full all principal of and interest on that class
of notes. The final maturity date for a class of notes is the legal maturity
date of that class. The failure to pay principal of any class of notes in full
by the final maturity date for that class is a note event of
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default, and the note trustee or the holders of at least a majority in principal
amount of all outstanding notes may declare the unpaid principal amount of all
outstanding notes and accrued interest to be due and payable. See "Description
of the Notes - Note Events of Default - Rights on Note Event of Default," which
begins on page 58 of the accompanying prospectus.
INTEREST
Interest on each class of notes will accrue from its issuance date at the
interest rate listed in the table above. Beginning [________ __], 2001, the note
issuer is required to pay interest quarterly on [________ __], [________ __],
[________ __] and [________ __] (or, if any payment date is not a business day,
the following business day) of each year, to the trust. The note issuer will pay
interest on the notes prior to paying principal of the notes. See "Description
of the Notes - Allocations and Payments," which begins on page 56 of the
accompanying prospectus.
On each payment date, the note issuer will pay interest as follows:
o if there has been a payment default, any unpaid interest payable on
any prior payment dates, together with interest at the applicable
interest rate on any of this unpaid interest; and
o accrued interest on the principal balance of each class of notes as of
the close of business on the preceding payment date after giving
effect to all payments of principal made on the preceding payment
date, or, in the case of the first payment date, as of the date of the
original issuance of the class of notes.
If there is a shortfall in the amounts necessary to make these interest
payments, the note trustee will allocate available amounts among each class of
notes pro rata based upon the respective amounts of interest owed on the notes
of each class, and will allocate and pay those amounts to holders within each
class pro rata based upon the respective principal amount of notes held. The
note issuer will calculate interest on the basis of a 360-day year of twelve
30-day months.
PRINCIPAL
After paying interest as described above, the note issuer will pay any
principal on each payment date as follows:
(1) to the trust as holder of the A-1 notes, until the principal
balance of that class has been reduced to zero;
(2) to the trust as holder of the A-2 notes, until the principal
balance of that class has been reduced to zero;
(3) to the trust as holder of the A-3 notes, until the principal
balance of that class has been reduced to zero;
(4) to the trust as holder of the A-4 notes, until the principal
balance of that class has been reduced to zero; and
(5) to the trust as holder of the A-5 notes, until the principal
balance of that class has been reduced to zero.
Absent an event of default under the note indenture, the note issuer will
not, however, pay principal on a payment date of any class of notes if making
the payment would reduce the principal balance of the class to an amount lower
than that specified in the expected amortization schedule for that class on that
payment date. If an event of default under the note indenture has occurred and
is continuing, the note trustee or the holders of at least a majority in
principal amount of all outstanding notes may declare the unpaid principal
amount of all outstanding notes and accrued interest to be due and payable.
The following expected amortization schedule lists the scheduled
outstanding principal balance for each class of notes on each payment date from
the issuance date to the scheduled maturity date, after giving effect to the
payments expected to be made on the payment date. In preparing the following
table, we have assumed, among other things, that:
S-13
o the notes and the certificates are issued on [________ __], 2001;
o payments on the notes are made on each payment date, beginning
[________ __], 2001 and payments on the certificates are made on the
same dates;
o the annual servicing fee will equal 0.05 percent of the initial
principal amount of the notes, payable quarterly in arrears and before
payment of principal of and interest on the notes;
o there are no net earnings on amounts on deposit in the collection
account;
o the annual administration fee (which will be $75,000, payable
quarterly) and other ongoing operating expenses will be approximately
$[ ], payable in arrears and before payment of principal of and
interest on the notes; and
o payments arising from the property securing the notes are deposited in
the collection account as expected.
EXPECTED AMORTIZATION SCHEDULE
OUTSTANDING PRINCIPAL BALANCE
Class Class Class Class Class
PAYMENT DATE A-1 A-2 A-3 A-4 A-5
- ------------ --- --- --- --- ---
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We cannot assure you that the principal balances of the classes of notes
and the related classes of certificates will be reduced at the rates indicated
in the table above. The actual rates of reduction in class principal balances
may be slower (but, absent an event of default or an optional redemption, cannot
be faster) than those indicated in the table.
COLLECTION ACCOUNT AND SUBACCOUNTS
The note issuer will establish, in the name of the note trustee, a
collection account to hold amounts remitted to it by the servicer of the
property securing the notes. The collection account will consist of four
subaccounts:
o a general subaccount;
o a reserve subaccount;
o an overcollateralization subaccount; and
o a capital subaccount.
Withdrawals from and deposits to these subaccounts will be made as described
under "Description of the Notes - Allocations and Payments," which begins on
page 56 of the accompanying prospectus.
CREDIT ENHANCEMENT
PERIODIC ADJUSTMENT OF RRB CHARGE. The RRB charge will be subject to
periodic review and adjustment. This periodic review and adjustment, which
reconciles the actual RRB charges collected against the expected collections,
reduces certificateholders' exposure to losses due to lower-than-projected sales
of electricity, longer-than-expected delays in bill collections, and
higher-than-estimated write-offs. Consequently, the need for other forms of
credit enhancements is also reduced. See "Description of the Transition Property
- - Adjustments to the RRB Charge," which begins on page 31 in the accompanying
prospectus.
RESERVE SUBACCOUNT. The note trustee will allocate to the reserve
subaccount any amounts remitted to the collection account exceeding amounts
necessary to:
o pay fees and expenses (including indemnities) related to servicing
and retiring the notes and certificates;
o pay principal of and interest on the notes;
o restore the capital subaccount to the required capital level; and
o fund the overcollateralization subaccount to the required
overcollateralization level.
The note trustee will draw on amounts in the reserve subaccount, to the extent
amounts available in the general subaccount are insufficient to pay the amounts
listed above.
OVERCOLLATERALIZATION AMOUNT. The servicer will collect and remit to the
note trustee, and the note trustee will deposit into the overcollateralization
subaccount, amounts arising from the transition property securing the notes that
exceed the amount expected to be necessary to pay legally due or scheduled
payments of principal of and interest on the notes and fees and expenses
(including indemnities) related to servicing and retiring the notes and the
certificates. These amounts will fund the required overcollateralization amount,
which is intended to enhance the likelihood that payments on the notes will be
made on a timely basis. The required overcollateralization amount will be $[ ],
which is 0.50 percent of the initial principal amount of the notes. The RRB
charge will be set and adjusted at a rate that is intended to fund the required
overcollateralization amount ratably over the life of the notes. On each payment
date, the note trustee will deposit into the overcollateralization subaccount
the amount, if any, by which the required overcollateralization level for that
payment date exceeds the amount in the overcollateralization subaccount. The
required overcollateralization level for each payment date is as follows:
S-15
REQUIRED OVERCOLLATERALIZATION LEVEL SCHEDULE
Required Required
Payment Overcollateralization Payment Overcollateralization
DATE LEVEL DATE LEVEL
---- ----- ---- -----
The note trustee will draw on amounts in the overcollateralization subaccount to
the extent amounts available in the general subaccount and the reserve
subaccount are insufficient to pay legally due or scheduled payments of
principal of and interest on the notes and fees and expenses (including
indemnities) related to servicing and retiring the notes and the certificates.
CAPITAL SUBACCOUNT. Before the issuance of the notes, Connecticut Light &
Power will contribute capital of $[ ] to the note issuer. This amount is
equal to 0.50 percent of the initial principal amount of the notes and is the
capital level required to be maintained under the note indenture. The note
trustee will deposit the capital into the capital subaccount. The note trustee
will draw on amounts in the capital subaccount, to the extent amounts available
in the general subaccount, reserve subaccount and overcollateralization
subaccount are insufficient to pay legally due or scheduled payments of
principal of and interest on the notes and fees and expenses (including
indemnities) related to servicing and retiring the notes and the certificates.
Funds withdrawn from the capital subaccount will be replenished on subsequent
payment dates if payments arising from the RRB charge exceed amounts required
for other uses having a higher priority of payment.
DESCRIPTION OF THE TRANSITION PROPERTY
The notes are secured primarily by the transition property, which is the
right to assess and collect all revenues arising from a portion of the
competitive transition assessment included in the bills of all classes of retail
users of Connecticut Light & Power's distribution system. This portion of the
competitive transition assessment, which is a non-bypassable usage-based charge,
is referred to as the RRB charge. For additional information about the
transition property, see "Description of the Transition Property," which begins
on page 29 of the accompanying prospectus, and "Description of the Notes," which
begins on page 52 of the accompanying prospectus.
The average initial competitive transition assessment is expected to be
approximately 1.021 cents/kilowatt-hour. The average initial RRB charge (which
is a portion of the competitive transition assessment) is expected to be
approximately _____ cents/kilowatt-hour.
S-16
UNDERWRITING
The note issuer, Connecticut Light & Power and the underwriters for the
offering named below have entered into an underwriting agreement relating to the
certificates. Assuming that conditions in the underwriting agreement are met,
each underwriter has severally agreed to purchase the respective principal
amount of certificates indicated in the following table.
NAME CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
- ---- --------- --------- --------- --------- ---------
Lehman Brothers Inc.
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Advest, Inc.
M. R. Beal & Company
Belle Haven Investments, L.P.
Loop Capital Markets, LLC.
Quick & Reilly, Inc.
Samuel A. Ramirez & Co., Inc.
Total
Certificates sold by the underwriters to the public will be initially
offered at the initial public offering prices set forth on the cover of this
prospectus supplement. The trust has been advised that the underwriters propose
initially to offer the certificates to dealers at the initial public offering
prices, less a selling concession not to exceed the percentage of the
certificate denomination set forth below, and that the underwriters may allow
and dealers may reallow a discount not to exceed the percentage of the
certificate denomination set forth below:
CLASS SELLING CONCESSION REALLOWANCE DISCOUNT
- ----- ------------------ --------------------
Class A-1....................
Class A-2....................
Class A-3....................
Class A-4....................
Class A-5....................
After the initial public offering, the public offering prices, selling
concessions and reallowance discounts may change as a result of market trading.
The certificates are a new issue of securities with no established trading
market. They will not be listed on any securities exchange, with the exception
of any floating rate class which may be listed on the Luxembourg Stock Exchange.
The trust has been advised by the underwriters that the underwriters intend to
make a market in the certificates but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the ability of holders of the certificates to resell the certificates.
In order to facilitate the offering of the certificates, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the certificates. Specifically, the underwriters may overallot in
connection with the offering, creating a short position in the certificates for
their own account. In addition, to cover overallotments or to stabilize the
price of the certificates, the underwriters may bid for and purchase the
certificates in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
certificates in the offering, if the syndicate repurchases previously
distributed certificates in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the certificates above independent market
levels. The underwriters are not required to engage in these activities, and if
commenced, may end any of these activities at any time.
Each underwriter has represented and agreed that (1) it has not offered or
sold and prior to the date six months after the date of issue of the
certificates will not offer or sell any certificates to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for
S-17
the purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (2) it
has complied, and will comply, with all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to the certificates in, from or otherwise involving the United Kingdom;
and (3) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
the certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
of Great Britain or is a person to whom the document may lawfully be issued or
passed on.
The certificates may not be offered, sold, transferred or delivered in or
from The Netherlands, as part of their initial distribution or as part of any
re-offering, and neither this prospectus supplement and the accompanying
prospectus nor any other document in respect of the offering may be distributed
or circulated in The Netherlands, other than to individuals or legal entities
which include, but are not limited to, banks, brokers, dealers, institutional
investors and undertakings with a treasury department, who or which trade or
invest in securities in the conduct of a business or profession.
The note issuer and Connecticut Light & Power have agreed to indemnify the
several underwriters, the State of Connecticut, the finance authority, the
Treasurer of the State of Connecticut, the trustees and the trust against
certain liabilities, including liabilities under the Securities Act of 1933.
Lehman Brothers Inc., as financial advisor to the finance authority,
has rendered certain financial advisory services to the finance authority in
respect of this transaction and will receive a customary fee for such
services. Salomon Smith Barney Inc., as financial advisor to Connecticut
Light & Power, has rendered certain financial advisory services to
Connecticut Light & Power in respect of this transaction and will receive a
customary fee for such services.
RATINGS
The certificates will not be issued unless prior to closing they have been
rated "AAA" / "AAA"/ "Aaa" by S&P, Fitch and Moody's, respectively.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. No person is obligated to maintain any rating on any certificates, and,
accordingly, there can be no assurance that the ratings assigned to any series
or class of certificates upon the initial issuance will not be revised or
withdrawn by a rating agency at any time thereafter. If a rating of any series
or class of certificates is revised or withdrawn, the liquidity of this series
or class of certificates may be adversely affected. In general, ratings address
credit risk and do not represent any assessment of any particular rate of
principal payments on the certificates other than the payment in full of each
series or class of certificates by the applicable final termination date for
such series or class. Each rating of any series or class of certificates should
be evaluated independently of any other rating.
For so long as any floating rate class is listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, the trust will notify the
Luxembourg Stock Exchange if any rating assigned to those certificates is
reduced or withdrawn and will cause this notice to be published in a daily
newspaper published in Luxembourg, which is expected to be the Luxemburger Wort.
LISTING AND GENERAL INFORMATION RELATED TO FLOATING RATE CLASSES
We have applied to list each floating rate class on the Luxembourg Stock
Exchange. We will not apply to have any other class of certificates listed on
any stock exchange. Purchasers of any class of floating rate certificates should
not rely on these certificates being listed on the Luxembourg Stock Exchange or
any other stock exchange. You should consult with Kredietbank S.A.
Luxembourgeoise, the Luxembourg listing agent for each floating rate class, 43
boulevard Royal, L-2955 Luxembourg, Luxembourg, referred to as the listing
agent, to determine whether or not a particular floating rate class is listed on
the Luxembourg Stock Exchange.
In connection with the listing application, the certificate of
incorporation and by-laws of Connecticut Light & Power, the certificate of
formation and the limited liability company agreement of the note issuer, and
the certificate of trust and the declaration of trust of the trust, as well as
legal notice relating to the issuance of the certificates, will be deposited
S-18
prior to listing with the Chief Registrar of the District Court of Luxembourg
(Greffier en Chef du Tribunal d'Arrondissement a Luxembourg), where these
documents may be examined or copies thereof may be obtained, free of charge,
upon request. We will not apply to list the floating rate certificates on any
other stock exchange. Notices to the holders of the certificates listed on the
Luxembourg Stock Exchange shall be given by first class mail, postage prepaid,
to the registered holders of such certificates at their addresses appearing in
the certificate register. In addition, for so long as any certificates are
listed on the Luxembourg Stock Exchange and so long as the rules of such
exchange so require, notices to the holders of such certificates shall also be
given by publication in a daily newspaper in Luxembourg, which is expected to be
the Luxemburger Wort.
Once any floating rate class has been so listed, trading of those
certificates may be effected on the Luxembourg Stock Exchange. Each floating
rate class will be submitted for clearing through the facilities of DTC,
Clearstream and Euroclear. See "Description of the Certificates - Certificates
Will Be Issued in Book-Entry Form," which begins on page 68 of the accompanying
prospectus.
The issuer is not involved in any litigation or arbitration proceedings
relating to claims on amounts which are material in the context of the issue of
the floating rate certificates, nor, so far as the issuer is aware, is any such
litigation or arbitration involving it pending or threatened.
The transactions described herein have been authorized by the issuer in
its limited liability company agreement, and the issuance of the floating rate
certificates was authorized by the management committee of the issuer by a
resolution passed on January 15, 2001.
The floating rate certificates have been accepted for clearance through
Euroclear and Clearstream. The International Securities Identification Number
(ISIN), Common Code number and the CUSIP number for each floating rate class are
as follows:
CLASS ISIN COMMON CODE CUSIP
- ----- ---- ----------- -----
Class A-4.................
If any floating rate class is listed on the Luxembourg Stock Exchange, for
so long as the floating rate certificates are outstanding, copies of the note
indenture, the certificate indenture, the sale agreement, the servicing
agreement, the note purchase agreement, the administration agreement, the
reports of independent certified public accountants described under "Servicing -
Evidence as to Compliance," which begins on page 49 of the accompanying
prospectus, the documents listed under "Available Information," which begins on
page 25 of the accompanying prospectus, and the reports referred to under
"Reports to Holders," which begins on page 26 of the accompanying prospectus,
and "Description of the Certificates - Reports to Certificateholders" which
begins on page 66 of the accompanying prospectus, will be available free of
charge at the offices of the certificate trustee in The City of New York and the
listing agent in Luxembourg. Financial information regarding Connecticut Light &
Power is included in its annual report on Form 10-K for the fiscal year ended
December 31, 1999, and in its quarterly reports on Form 10-Q for the first three
fiscal quarters of fiscal year 2000, and is also available at the offices of the
certificate trustee in The City of New York and the listing and paying agent in
Luxembourg, Kredietbank S.A. Luxembourgeoise. For so long as any floating rate
class is outstanding and listed on the Luxembourg Stock Exchange, copies of each
annual report on Form 10-K and each quarterly report on Form 10-Q for subsequent
fiscal years and quarters will also be available at the offices of the
certificate trustee in The City of New York and the listing agent in Luxembourg.
In the event that any floating rate class is listed on the Luxembourg
Stock Exchange, certificated certificates are issued and the rules of the
Luxembourg Stock Exchange so require, a paying agent and/or transfer agent shall
be maintained in Luxembourg.
According to Chapter VI, Article 3, point A/II/2 of the Rules and
Regulations of the Luxembourg Stock Exchange, the floating rate certificates
will be freely transferable and therefore no transaction made on the Luxembourg
Stock Exchange will be cancelled.
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The information in this prospectus and the accompanying prospectus supplement is
not complete and may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange Commission is
effective and we deliver a final prospectus supplement and accompanying
prospectus. This prospectus and the accompanying prospectus supplement are not
an offer to sell these securities nor are they seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED MARCH 26, 2001
PROSPECTUS
CONNECTICUT RRB
SPECIAL PURPOSE TRUST CL&P-1
ISSUER OF THE CERTIFICATES
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
CL&P FUNDING LLC
ISSUER OF THE NOTES
THE CONNECTICUT LIGHT AND POWER COMPANY
SELLER AND SERVICER
See "Risk Factors," which begins on page 15, to read about factors you
should consider before buying the certificates.
The trust may sell one or more series of certificates, issuable in one or more
classes, as described in the prospectus supplement. Each certificate represents
an interest in a related class of CL&P Funding LLC notes and, in the case of any
class of floating rate certificates, a swap agreement. The assets of the trust
will consist solely of the notes and each swap agreement relating to any class
of floating rate certificates. The notes are secured primarily by the right to
assess and collect all revenues arising from a non-bypassable usage-based charge
included in the bills of retail users of The Connecticut Light and Power
Company's electric distribution system.
Neither the certificates, the notes nor the property securing the notes is an
obligation of the State of Connecticut or any political subdivision,
governmental agency, authority or instrumentality of the State of Connecticut or
of The Connecticut Light and Power Company or any of its affiliates, except for
CL&P Funding LLC, which is an affiliate of The Connecticut Light and Power
Company.
Neither the full faith and credit nor the taxing power of the State of
Connecticut is pledged to the payment of principal of, or interest on, the
certificates or the notes. Furthermore, the issuance of the certificates and the
notes shall not directly, indirectly or contingently obligate the State of
Connecticut or any political subdivision thereof to levy or to pledge any form
of taxation thereof or to make any appropriation for their payment.
There currently is no secondary market for the certificates and there can be no
assurance that a secondary market will develop.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
The date of this Prospectus is ______, 2001
TABLE OF CONTENTS
PAGE
Prospectus Summary............................................................4
Parties to Transactions.......................................................5
Allocations and Payments From the Collection Account.........................13
Risk Factors.................................................................15
Available Information........................................................25
Reports to Holders...........................................................26
Incorporation of Documents by Reference......................................26
Energy Deregulation and New Connecticut Market Structure.....................26
Statutory Overview...........................................................26
Restructuring Decision.......................................................27
Exit Fees....................................................................27
Third Party Billing Options..................................................28
Federal Initiatives..........................................................29
Description of the Transition Property.......................................29
Financing Order and Issuance Advice Letter...................................29
Transition Property..........................................................30
Competitive Transition Assessment............................................30
Adjustments to the RRB Charge................................................31
Pledge by the State of Connecticut...........................................32
No Impairment by Department of Public Utility Control........................33
Sale and Assignment of Transition Property...................................33
Seller Representations and Warranties and Repurchase Obligation..............33
Bankruptcy and Creditors' Rights Issues......................................37
The Trust....................................................................38
Office of the State Treasurer of the State of Connecticut....................39
The Note Issuer..............................................................39
Officers and Directors.......................................................40
The Seller and Servicer......................................................41
Connecticut Light & Power Revenues, Customer Base and Energy Consumption.....41
Estimated Consumption and Variances..........................................42
Billing and Collections......................................................43
Loss Experience..............................................................44
Aging Receivables............................................................45
Servicing....................................................................45
Servicing Procedures.........................................................45
Servicing Standards and Covenants............................................46
Remittances to Collection Account............................................46
Servicing Compensation.......................................................47
Third Party Suppliers........................................................47
Servicer Representations and Warranties......................................48
Statements by Servicer.......................................................49
Evidence as to Compliance....................................................49
Matters Regarding the Servicer...............................................50
Servicer Defaults............................................................50
Rights When Servicer Defaults................................................51
Waiver of Past Defaults......................................................51
Successor Servicer...........................................................52
Amendment....................................................................52
Description of the Notes.....................................................52
Security.....................................................................53
Collection Account...........................................................53
Interest and Principal.......................................................54
Optional Redemption..........................................................55
Mandatory Redemption.........................................................55
Overcollateralization Subaccount.............................................55
Capital Subaccount...........................................................55
Reserve Subaccount...........................................................56
Allocations and Payments.....................................................56
Actions by Noteholders.......................................................57
Note Events of Default; Rights on Note Event of Default......................58
Covenants of the Note Issuer.................................................59
Reports to Noteholders.......................................................61
Annual Compliance Statement..................................................62
Description of the Certificates..............................................62
Payments.....................................................................62
Voting of the Certificates...................................................63
Events of Default............................................................64
Redemption...................................................................66
Reports to Certificateholders................................................66
Supplemental Certificate Indentures..........................................66
List of Certificateholders...................................................68
Registration and Transfer of the Certificates................................68
Certificates Will Be Issued in Book-Entry Form...............................68
Certificated Certificates....................................................71
Federal Income Tax Consequences..............................................72
General......................................................................72
Treatment of the Certificates................................................73
Taxation of U.S. Fixed Rate Certificateholders...............................73
Taxation of U.S. Floating Rate Certificateholders............................74
Sale or Exchange of Fixed Rate Certificates..................................75
Sale or Exchange of Floating Rate Certificates...............................76
Non-U.S. Certificateholders..................................................76
Information Reporting and Backup Withholding.................................77
State Taxation...............................................................78
ERISA Considerations.........................................................78
Prohibited Transactions......................................................78
Plan Asset Regulation........................................................79
Conclusion...................................................................79
Use of Proceeds..............................................................80
Plan of Distribution.........................................................80
Legal Matters................................................................80
Experts......................................................................80
Index to Financial Statements...............................................F-1
2
IMPORTANT NOTICE
ABOUT INFORMATION IN THIS PROSPECTUS
This prospectus and the related prospectus supplement do not constitute an
offer to sell or a solicitation of an offer to buy any security in any
jurisdiction where it is not lawful to do so.
References to the "Delaware trustee" refer to the trustee of the trust.
References to the "certificate trustee" refer to the trustee under the
certificate indenture. References to the "note trustee" refer to the trustee
under the note indenture. References to the "trustees" refer collectively to the
Delaware trustee, the certificate trustee and the note trustee.
References to the "finance authority" refer to the State of Connecticut,
acting through the Office of the State Treasurer of the State of Connecticut.
References to the "note issuer" refer to CL&P Funding LLC, the issuer of
the notes.
References to the "seller" refer to The Connecticut Light and Power
Company and any successor seller under the sale agreement described in this
prospectus.
References to the "servicer" refer to The Connecticut Light and Power
Company and any successor servicer under the servicing agreement described in
this prospectus.
References to the "swap agreement" refer to any interest rate exchange
agreement executed to permit the issuance of floating rate certificates.
References to the "swap counterparty" refer to the provider of any swap
agreement. The prospectus supplement indicates whether the trust will issue
floating rate certificates.
References to the "trust" refer to Connecticut RRB Special Purpose Trust
CL&P-l, the issuer of the certificates.
We include cross-references to sections where you can find additional
information. Check the table of contents to locate these sections.
3
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because this is a
summary, it does not contain all of the information that may be important to
you. You should read both this prospectus and the prospectus supplement before
you buy the certificates.
Transaction Overview....... Connecticut law permits electric companies,
such as The Connecticut Light and Power
Company, or Connecticut Light & Power, to
recover the costs of investments and
obligations that cannot be recouped through
market-based rates in a competitive
electricity generation market. These costs
are known as stranded costs. An electric
company recovers stranded costs through a
charge called a competitive transition
assessment, which is a non-bypassable
usage-based charge assessed on all classes
of retail users of the electric company's
distribution system (subject to certain
limited customer exemptions described
herein).
Connecticut law permits special purpose entities
formed by electric companies to issue securities
secured by the right to receive the revenues
arising from the competitive transition assessment
(or a portion of the competitive transition
assessment), if doing so would reduce costs for
the electric company's ratepayers. This right is
referred to as the transition property. See
"Description of the Transition Property," which
begins on page 29.
The following sets forth the primary steps of the
transaction underlying the offering of the
certificates:
o Connecticut Light & Power will sell the
transition property to the note issuer in
exchange for the net proceeds from the sale
of the notes.
o The note issuer will sell the notes to the
trust in exchange for the net proceeds from
the sale of the certificates.
o The trust, whose sole assets are the notes
and, in the case of a class of floating rate
certificates, a swap agreement, will sell
the certificates to the underwriters named
in the prospectus supplement.
o Connecticut Light & Power will act as the
servicer of the transition property and as
the administrator of the note issuer.
Neither the certificates, the notes nor the
property securing the notes is an obligation of
the State of Connecticut or any political
subdivision, governmental agency, authority or
instrumentality of the State of Connecticut or of
Connecticut Light & Power or any of its
affiliates, except for CL&P Funding LLC, which is
an affiliate of Connecticut Light & Power.
Neither the full faith and credit nor the taxing
power of the State of Connecticut is pledged to
the payment of principal of, or interest on, the
certificates or the notes. Furthermore, the
issuance of the certificates and the notes shall
not directly, indirectly or contingently obligate
the State of Connecticut or any political
subdivision thereof to levy or to pledge any form
of taxation thereof or to make any appropriation
for their payment.
4
The following diagram shows the parties to the transactions related to this
offering and summarizes their roles and their relationships to each other:
PARTIES TO TRANSACTIONS
Parties to note indenture ------------------- -------------------
- --------------------- governing issuance of notes | CERTIFICATE | | FINANCE |
| NOTE TRUSTEE |------------------------------------ | TRUSTEE | | AUTHORITY |
- --------------------- | ------------------- -------------------
| | |
Sale of transition | Parties to | |
- --------------------- property for net | certificate | Parties to |
| SELLER |/ proceeds of sale of notes | indenture | declaration |
| Connecticut Light |------------------------------ | governing | of trust |
| & Power |\ | | issuance of | forming trust |
- --------------------- | | certificates | |
\|/ | | -------------------
- --------------------- --------------------- | | DELAWARE |
| SERVICER | | | | | TRUSTEE |
| Connecticut Light |-------------------| NOTE ISSUER | | -------------------
| & Power | Servicing of | CL&P Funding LLC | | |
- --------------------- transition | | | |
property for | Sole Member: | | -------------------
servicing fee | Connecticut Light | ----------------| TRUST |
| & Power |/ \| Connecticut RRB |
| |-------------------------------| Special Purpose |
---------------------\ Sale of notes for /| Trust CL&P-1 |
| net proceeds of \\\\\\-------------------
| sale of \ /|\
| certificates \ |
| \ Sale of |
| \ certificates |
| \ for cash |
| \ |
| \\\\\\\\\\\\\\\\\\ \|/
- --------------------- | \ -------------------
| ADMINISTRATOR | | \ | UNDERWRITERS |
| Connecticut Light |-------------------------- \ -------------------
| & Power | Administration of note issuer \ /|\
- --------------------- for administration fee \ |
\ Sale of |
\ certificates |
\ for cash |
\\\\\\\\\\\\\\\\\\\\\\\\\ |
\ SWAP \ \|/
\ COUNTERPARTY \ -------------------
\ (to be named, if any) \ | INVESTORS |
\\\\\\\\\\\\\\\\\\\\\\\\\ -------------------
5
Risk Factors............... You should consider, among other things, the
following material risks of investing in the
certificates. These risks may delay the payment
of principal of and interest on the
certificates or cause you to suffer a loss on
your investment.
o Payments on the notes and, in the case of
any class of floating rate certificates,
payments on the related swap agreement, are
the sole source of payments on the
certificates.
o There may be attempts to limit, alter or
amend either the order of the Connecticut
Department of Public Utility Control, or
Department of Public Utility Control,
creating the transition property or the
provisions of the restructuring statute that
make the order irrevocable.
o Because the rate of collections arising from
the transition property is based on the
amount of electricity consumed by customers,
these collections may be insufficient to
make required payments on the certificates.
o If there is an event of default on the notes
and the certificates, the note trustee is
unlikely to be able to resell the transition
property.
o If Connecticut Light & Power were to cease
servicing the transition property, it might
be difficult to find a suitable successor
servicer.
o If Connecticut Light & Power were to become
a debtor in a bankruptcy case, a court could
hold that the transition property is
Connecticut Light & Power's property and may
be reached by its creditors.
For a more detailed discussion of these and
other material risks of investing in the
certificates, you should carefully read the
discussion under "Risk Factors," which begins on
page 15.
Seller and Servicer........ Connecticut Light & Power is an electric
distribution company that provides electric
service to retail customers in 149 cities and
towns in Connecticut. Connecticut Light & Power
is a wholly owned subsidiary of Northeast
Utilities.
See "The Seller and Servicer," which begins on
page 41.
The Certificates........... Connecticut RRB Special Purpose Trust CL&P-1
Rate Reduction Certificates.
The trust may issue the certificates in one or
more classes under the certificate indenture
between the trust and the certificate trustee.
One or more classes of certificates may accrue
interest at floating rates. These certificates
are referred to as floating rate certificates.
The prospectus supplement indicates whether the
trust will issue floating rate certificates.
Each class of certificates will represent
fractional undivided beneficial interests in the
related class of notes, the proceeds of that
class of notes and, in the case of floating rate
certificates, a related swap agreement and its
proceeds. Holders of each class of certificates
will receive payments received by the trust
6
on the related class of notes or, in the case of
floating rate certificates, payments on a
related swap agreement. These payments will be
the only source of payments on a class of
certificates. Each series of certificates will
be issued under a substantially identical
certificate indenture.
Issuer of Certificates..... Connecticut RRB Special Purpose Trust CL&P-1.
Certificate Trustee........ Named in the prospectus supplement.
Delaware Trustee........... Named in the prospectus supplement.
The Notes.................. CL&P Funding LLC Notes.
Each class of notes and the related class of
certificates will have the same aggregate
principal amount, expected amortization
schedule, maturity date and fixed interest rate,
as described in the prospectus supplement. The
notes will be secured primarily by the
transition property. Each series of notes will
be issued under a substantially identical note
indenture.
Note Issuer................ CL&P Funding LLC, 107 Selden Street, Berlin,
Connecticut 06037-1616. The note issuer's
telephone number is (860) 665-5000.
Note Trustee............... Named in the prospectus supplement.
Interest................... Interest on each class of certificates will
accrue at the interest rate specified in the
prospectus supplement. The certificate trustee
will pay interest accrued on each class of
certificates on each payment date, to the
extent of interest paid on the related class of
notes or, in the case of floating rate
certificates, payments on any related swap
agreement.
Principal.................. The certificate trustee will pay principal of
each class of certificates in the amounts and
on the payment dates specified in the expected
amortization schedule in the prospectus
supplement, but only to the extent of principal
paid on the related class of notes. See
"Description of the Notes - Allocations and
Payments," which begins on page 56, and
"Description of the Certificates - Payments,"
which begins on page 62.
On any payment date, the certificate trustee
will pay principal it has received on the notes
only until the outstanding principal balances of
the various classes of certificates have been
reduced to the principal balances specified for
those classes in the expected amortization
schedule. If cash is not available, however, the
certificate trustee will pay principal of a
class of certificates later than set forth in
the expected amortization schedule. If a note
event of default has occurred and is continuing,
under the certificate indenture the certificate
trustee may, and upon the written direction of
the holders of at least a majority in principal
amount of the outstanding certificates will,
vote all of the notes in favor of declaring the
unpaid principal amount of the outstanding notes
and accrued interest to be due and payable. See
"Description of the Certificates - Events of
Default," which begins on page 64.
RRB Charge................. The restructuring statute allows Connecticut
Light & Power, as well as other electric
utilities providing electricity to consumers in
7
Connecticut, to recover certain stranded costs
through the collection of a competitive
transition assessment included in the bills of
all classes of retail users of the electric
utility's retail distribution system (subject
to certain limited customer exemptions
described under "Description of the Transition
Property - Competitive Transition Assessment,"
which begins on page 30). Pursuant to the
restructuring statute, Connecticut Light &
Power has obtained from the Department of
Public Utility Control, which regulates
electric companies in Connecticut, decisions
that approve certain of Connecticut Light &
Power's stranded costs for recovery through
collection of the competitive transition
assessment. These decisions are known
collectively as a restructuring decision.
The restructuring statute also authorizes
electric utilities to securitize certain
stranded costs. Pursuant to this authorization,
Connecticut Light & Power has obtained from the
Department of Public Utility Control an order,
known as a financing order, which establishes
the stranded costs (as well as the costs of
issuing, servicing and retiring the notes and
the certificates) that will be financed through
this transaction. Pursuant to the financing
order, the right to collect and assess a
portion of the competitive transition
assessment will be sold to the note issuer in
exchange for the net proceeds of the notes.
This portion of the competitive transition
assessment is referred to as the RRB charge.
The RRB charge is non-bypassable in that
customers must pay it whether or not they
purchase electricity from Connecticut Light &
Power or a third party supplier of electricity,
and whether or not their distribution system is
being operated by Connecticut Light & Power or a
successor distribution company. See "Description
of the Transition Property," which begins on
page 29.
Customers.................. All five classes of retail users of Connecticut
Light & Power's distribution system -
residential, commercial, industrial, street
lighting and railroad.
Adjustment to the RRB
Charge..................... The servicer will calculate and set the RRB
charge at least annually and, beginning in the
last year that the certificates are scheduled to
be outstanding, at least quarterly at a level
estimated to generate sufficient revenues:
o to pay fees and expenses (including
indemnities) related to servicing and
retiring the notes and certificates;
o to pay interest on the notes;
o to pay principal of each class of notes
according to its expected amortization
schedule; and
o to fund the overcollateralization subaccount
to the required overcollateralization level
and to replenish the capital subaccount to
the required capital level.
The servicer will file a request for an increase
or decrease in the RRB charge at least 15 days
before the beginning of each calendar year and,
beginning in the last year that the certificates
are scheduled to be
8
outstanding, at least 15 days before the end of
each calendar quarter. This request is referred
to as a routine true-up letter. The servicer may
also file routine true-up letters, before the
last year that the certificates are scheduled to
be outstanding, quarterly or, beginning in the
last year that the certificates are scheduled to
be outstanding, monthly. In addition, the
servicer may file a non-routine true-up letter
to revise its method for calculating the RRB
charge.
Adjustments to the RRB charge will be performed
on a system-wide basis (i.e., across customer
classes rather than on a class-by-class basis)
in accordance with the restructuring statute.
See "Description of the Transition Property -
Adjustments to the RRB Charge," which begins on
page 31.
State Pledge............... The State of Connecticut has pledged and agreed
with the owners of transition property and
holders of rate reduction bonds (including the
note issuer and the holders of the
certificates) that the State will neither limit
nor alter the competitive transition
assessment, transition property, financing
orders, and all rights thereunder until the
obligations, together with interest thereon,
are fully met and discharged; however, this
pledge does not preclude the limitation or
alteration if and when adequate provision shall
be made by law for the protection of the owners
and holders. See "Description of the Transition
Property - Pledge by the State of Connecticut,"
which begins on page 32.
Optional Redemption........ The note issuer may redeem the notes, and cause
the trust to redeem the certificates, on any
payment date if the outstanding principal
balance of the notes (after giving effect to
payments that would otherwise be made on a
payment date) is less than 5 percent of the
initial principal balance of the notes. Upon
redemption, the note issuer will pay an
aggregate amount equal to the outstanding
principal amount of the notes and accrued but
unpaid interest as of the redemption date. See
"Description of the Certificates - Redemption,"
which begins on page 66.
Mandatory Redemption....... If the seller is required to, or elects to,
repurchase the transition property as a result
of the breach of seller representations under
the circumstances described under "Description
of the Transition Property - Seller
Representations and Warranties and Repurchase
Obligation," which begins on page 33, the note
issuer will redeem the notes on or before the
fifth business day following the repurchase of
the transition property. The trust will redeem
the certificates on the date the notes are
redeemed. The redemption price of the
certificates is the outstanding principal
balance of the certificates plus accrued but
unpaid interest as of the redemption date.
Collection Account and
Subaccounts................ The note issuer will establish a collection
account to hold payments arising from the RRB
charge as well as the capital contribution to
the note issuer. The collection account will
consist of four subaccounts:
o a general subaccount;
o an overcollateralization subaccount for the
overcollateralization amount;
9
o a capital subaccount for capital
contributions to the note issuer; and
o a reserve subaccount.
All amounts in the collection account not
allocated to any other subaccount will be
allocated to the general subaccount. Withdrawals
from and deposits to these subaccounts will be
made as described under "Description of the
Notes - Allocations and Payments," which begins
on page 56.
Overcollateralization
Subaccount................. The servicer will collect, and the note trustee
will deposit into the overcollateralization
subaccount, the overcollateralization amount
specified in the prospectus supplement to
enhance the likelihood that payments on the
notes will be made on a timely basis.
The note trustee will hold the
overcollateralization amount for all classes of
notes in the overcollateralization subaccount.
The note trustee will draw on amounts in the
overcollateralization subaccount to the extent
amounts available in the general subaccount and
the reserve subaccount are insufficient to pay
scheduled payments of principal of and interest
on the notes and fees and expenses (including
indemnities) related to servicing and retiring
the notes and the certificates.
Capital Subaccount......... Prior to the issuance of the notes, Connecticut
Light & Power will contribute capital to the
note issuer in the amount specified in the
prospectus supplement. The note issuer will
deposit the capital into the capital
subaccount. The note trustee will draw on
amounts in the capital subaccount to the extent
amounts available in the general subaccount,
the reserve subaccount and the
overcollateralization subaccount are
insufficient to pay scheduled payments of
principal of and interest on the notes and the
fees and expenses (including indemnities)
relating to servicing and retiring the notes
and the certificates. Funds withdrawn from the
capital subaccount will be replenished on
subsequent payment dates if payments arising
from the RRB charge exceed amounts required for
other uses having a higher priority of payment.
See "Description of the Notes - Allocations and
Payments," which begins on page 56.
Reserve Subaccount......... The note trustee will allocate to the reserve
subaccount any amounts remitted to the
collection account exceeding the amounts
necessary to:
o pay fees and expenses (including
indemnities) related to servicing and
retiring the notes and certificates;
o pay principal of and interest on the notes;
o fund the capital subaccount to the required
capital level; and
o fund the overcollateralization subaccount
to the required overcollateralization level.
The note trustee will draw on amounts in the
reserve subaccount to the extent amounts
available in the general subaccount are
insufficient to pay the amounts listed above.
10
Remittances to Collection
Account.................... Starting with collections that are received on
the first business day that is at least 45 days
after the first day on which Connecticut Light &
Power imposes the RRB charge, the servicer will
remit daily to the note trustee, within 2
business days after receipt, an amount equal to
the RRB charges collected (calculated based on
the servicer's remittance methodology). See
"Servicing - Remittances to Collection Account,"
which begins on page 46.
Allocations and Payments of
Amounts in the Collection.. On each payment date, or for any amount payable
Acunder clauses (1) through (4) below, on any
business day, the note trustee will apply all
amounts on deposit in the collection account,
including net earnings on those amounts (other
than on amounts in the capital subaccount) to
pay the following amounts in the following
priority:
(1) all amounts owed by the note issuer to the
note trustee, the Delaware trustee, the
certificate trustee, the trust and the
finance authority will be paid, subject, in
each case, to any limitation on such
payment described in the note indenture;
(2) the servicing fee and all unpaid servicing
fees from prior payment dates will be paid
to the servicer;
(3) the administration fee and all unpaid
administration fees from prior payment
dates will be paid to the note issuer's
administrator;
(4) so long as no note default or note event of
default has occurred and is continuing or
would result from such payment, all fees
and expenses (including indemnities)
payable by the note issuer to persons other
than those specified in clause (1) above
will be paid, provided that the total
amount paid for such other fees and
expenses (including indemnities) since the
previous payment date and on the current
payment date may not, in the aggregate,
exceed $100,000;
(5) (A) any overdue interest (together with, to
the extent lawful, interest on such overdue
interest at the applicable note interest
rate) and (B) interest currently due and
payable, will be transferred to the
certificate trustee, as noteholder, for
payment to the certificateholders or, in
the case of any floating rate certificates,
the related swap counterparty;
(6) (A) principal due and payable (x) as a
result of a note event of default or (y) on
the final maturity date of a class of notes
and (B) scheduled principal due and payable
on that payment date, will be transferred
to the certificate trustee, as noteholder,
for payment to the certificateholders;
(7) unpaid fees and expenses (including
indemnities) payable by the note issuer
will be paid to the persons entitled
thereto;
(8) the amount, if any, by which the capital
subaccount needs to be funded to equal the
required capital level as of that payment
date (disregarding for this purpose any
interest earnings held in the capital
subaccount) will be allocated to the
capital subaccount;
11
(9) the amount, if any, by which the
overcollateralization subaccount needs to
be funded to equal the required
overcollateralization level as of that
payment date will be allocated to the
overcollateralization subaccount; and
(10) the balance, if any, will be allocated to
the reserve subaccount for payment on
subsequent payment dates.
Following the repayment of all notes and
certificates, any amounts remaining in the
collection account will be released to the note
issuer.
In the case of any deficiency in the amount
required under clause (5) above, amounts
available to make payments under clause (5)
above will be allocated among each class of
notes pro rata based upon the respective amounts
of interest owed on the notes of each class, and
allocated and paid to holders within each class
pro rata based upon the respective principal
amount of notes held. In the case of any
deficiency in the amount required under clause
(6) above, amounts available to make payments
under clause (6) above will be allocated among
each class of notes pro rata based upon the
respective principal amount of notes due (in the
case of clause (6)(A)(x)) or scheduled to be
paid (in the case of clauses (6)(A)(y) and
(6)(B), based on priorities described in the
prospectus supplement and according to the
expected amortization schedule for such class),
and allocated and paid to the holders within
each class pro rata based upon the principal
amount of notes held.
If on any payment date, or for any amounts
payable under clauses (1) through (4) above, on
any business day, funds on deposit in the
general subaccount are insufficient to make the
payments contemplated by clauses (1) through (6)
above, the note trustee will:
o first, draw from amounts on deposit in the
reserve subaccount;
o second, draw from amounts on deposit in the
overcollateralization subaccount; and
o third, draw from amounts on deposit in the
capital subaccount;
up to the amount of the shortfall, in order to
make the payments described above. In addition,
if on any payment date funds on deposit in the
general subaccount are insufficient to make the
allocations described in clauses (8) and (9)
above, the note trustee will draw from amounts
on deposit in the reserve subaccount to make the
required allocations.
If the amount in the capital subaccount on the
last day of any month exceeds the required
capital level, the note trustee will pay such
excess amount to the note issuer upon request,
free and clear of the lien of the note
indenture. See "Description of the Notes -
Allocations and Payments," which begins on page
56.
12
The following diagram provides a general summary of the flow of funds from
the customers through the servicer to the collection account, and the various
allocations from the collection account:
ALLOCATIONS AND PAYMENTS FROM THE COLLECTION ACCOUNT
-------------------------
| CUSTOMERS |
-------------------------
|
| Payments to the servicer in
| respect of the RRB charge
\|/
-------------------------
| SERVICER |
-------------------------
|
| Daily remittance of estimated payments
| arising from the RRB charge
\|/
-------------------------
| COLLECTION |
| ACCOUNT |
-------------------------
| Application of amounts in collection account, including
| net earnings (other than net earnings on the capital
| subaccount), as follows:
\|/
----------------------------------------------------------------------------------------------------------------------
| | | | | | |
\|/ \|/ \|/ \|/ \|/ \|/ |
----- ----- ----- ----- ----- ----- |
| 1 | | 2 | | 3 | | 4 | | 5 | | 6 | |
----- ----- ----- ----- ----- ----- |
|
- ----------------- ----------------- ---------------------- ----------------- ----------------- ----------------------- |
| NOTE | | SERVICER: | | ADMINISTRATOR: | | NOTE | | CERTIFICATE | | CERTIFICATE | |
| TRUSTEE, | | Servicing fee | | Administration fee | | ISSUER: | | HOLDERS OR | | HOLDERS: | |
| DELAWARE | ----------------- ---------------------- | Fees and | | SWAP | | o Principal | |
| TRUSTEE, | | expenses | | COUNTER- | | following | |
| CERTIFICATE | | (not to | | PARTY: | | event of | |
| TRUSTEE, | | exceed | | Interest | | default or | |
| TRUST, | | $100,000) | ----------------- | on final maturity | |
| FINANCE | ----------------- | date | |
| AUTHORITY: | | o Scheduled | |
| Fees and | | principal | |
| expenses | | payments | |
- ----------------- ----------------------- |
|
----------------------------------------------------------------------------------------------------------------------
| | | |
\|/ \|/ \|/ \|/
----- ----- ----- -----
| 10| | 9 | | 8 | | 7 |
----- ----- ----- -----
- ----------------- ------------------------- -------------------------- ------------------
| RESERVE | | OVER- | | CAPITAL | | NOTE |
| SUBACCOUNT: | | COLLATERALIZATION | | SUBACCOUNT: | | ISSUER: |
| All remaining | | SUBACCOUNT: | | Up to required capital | | Unpaid fees |
| amounts | | Up to required | | level (disregarding | | and expenses |
- ----------------- | overcollateralization | | any interest earnings | ------------------
| level | | held in the capital |
------------------------- | subaccount) |
--------------------------
13
Servicing.................. The servicer will service and manage the
transition property and receive payments
arising from the RRB charge in the same manner
that it services bill collections for its own
account and the accounts it services for
others, if any.
Servicing Compensation..... The servicer will be entitled to receive an
annual servicing fee in an amount equal to:
o 0.05 percent of the initial principal
balance of the notes; or
o up to 1.25 percent of the initial principal
balance of the notes if the RRB charge is
billed separately to customers by a
successor servicer.
The note trustee will pay the servicing fee in
quarterly installments on each payment date.
Tax Status of the
Certificates............ For federal income tax purposes, the trust will
be treated as a "grantor trust," and thus not
taxable as a corporation. Each class of
certificates bearing a fixed interest rate will
be treated as representing ownership of an
interest in the related class of notes for
federal income tax purposes. Each class of
floating rate certificates will be treated as
representing ownership of an interest in the
related class of notes and related swap
agreement. Interest and original issue
discount, if any, on the certificates generally
will be included in gross income for federal
income tax purposes. All holders of floating
rate certificates, and all individual holders
in particular, should seriously consider making
an election to "integrate" the related notes
and related swap agreement for tax purposes by
making a notation on their books and records on
or before the date the floating rate
certificates are acquired. Interest and
original issue discount, if any, on the
certificates, and any gain on the sale of the
certificates, generally will be included in
gross income of certificateholders for federal
income tax purposes. See "Federal Income Tax
Consequences," which begins on page 72.
Interest on the certificates is exempt from
Connecticut personal income taxes. See "State
Taxation," which begins on page 78.
Ratings.................... The certificates will not be issued unless
prior to closing they have been rated "AAA" /
"AAA" / "Aaa" by S&P, Fitch and Moody's,
respectively.
A security rating is not a recommendation to
buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the
assigning rating agency. No person is obligated
to maintain any rating on any certificates, and,
accordingly, there can be no assurance that the
ratings assigned to any series or class of
certificates upon the initial issuance will not
be revised or withdrawn by a rating agency at
any time thereafter. If a rating of any series
or class of certificates is revised or
withdrawn, the liquidity of this series or class
of certificates may be adversely affected. In
general, ratings address credit risk and do not
represent any assessment of any particular rate
of principal payments on the certificates other
than the payment in full of each series or class
of certificates by the applicable final
termination date for such series or class. Each
rating of any series or class of certificates
should be evaluated independently of any other
rating.
For so long as any of the certificates are
listed on the Luxembourg Stock Exchange and the
rules of that exchange so require, the trust
will notify the Luxembourg Stock Exchange if any
rating assigned to any class of certificates
listed on the Luxembourg Stock Exchange is
reduced or withdrawn and will cause such notice
to be published in a daily newspaper published
in Luxembourg, which is expected to be the
Luxemburger Wort.
14
RISK FACTORS
You should consider carefully the following factors before you decide
whether to buy the certificates:
CERTIFICATEHOLDERS COULD EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
LIMITED SOURCES OF PAYMENT FOR THE CERTIFICATES AND LIMITED CREDIT ENHANCEMENT
You could experience payment delays or losses on the certificates because
payments on the notes and any swap agreements are the sole source of payments on
the certificates. The notes and any swap agreements are the sole assets of the
trust. The transition property and the other note collateral, which is expected
to be of relatively small value, are in turn the only sources of payments on the
notes.
There will be no form of credit enhancement for the certificates except
for the right to adjust the RRB charge and amounts held in the
overcollateralization subaccount, capital subaccount and reserve subaccount. We
do not anticipate that the certificates will have the benefit of any liquidity
facility or of any third-party credit enhancement, such as guarantees, letters
of credit or insurance.
If payments are not made on the certificates in a timely manner as a
result of nonpayment of the related notes, the holders of at least a majority of
the outstanding principal amount of the certificates may direct the certificate
trustee to bring an action against the note issuer to foreclose on the
transition property and the other note collateral securing the notes. There is
not likely to be a market, however, for the sale of the transition property and
the other note collateral.
CERTIFICATEHOLDERS COULD EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT OF
AMENDMENT, REPEAL OR INVALIDATION OF THE RESTRUCTURING STATUTE OR BREACH OF THE
STATE PLEDGE
It is possible that legislative, judicial or other official action could
be taken, or attempted, to alter the transition property or the financing order.
Uncertainty concerning the validity of the restructuring statute or the
financing order or any aspect of the actions taken by the Department of Public
Utility Control could result in delays in payment of the certificates, even if
the validity of the restructuring statute and the actions taken by the
Department of Public Utility Control were ultimately upheld. If legislative,
judicial or other official action were ultimately taken to invalidate any aspect
of the restructuring statute or the financing order, you could suffer a loss on
your investment in the certificates.
The State of Connecticut has pledged to the note issuer and the
certificateholders that it will not limit or alter the transition property or
the financing order until the certificates are fully paid and discharged. See
"Description of the Transition Property - Pledge by the State of Connecticut,"
beginning on page 32. The pledge does not, however, preclude the limitation or
alteration of the transition property or the financing order if adequate
provision is made by law for the protection of the note issuer and the
certificateholders. It is unclear what "adequate provision" would be afforded to
certificateholders by the State if such limitation or alteration were attempted.
Measures taken to satisfy the requirement of adequate provision might adversely
affect the price of the certificates, or the timing of receipt of payments with
respect to the certificates.
LEGISLATIVE OR EXECUTIVE ACTIONS
Legislative action could be taken or proposed that would affect the
restructuring statute or the financing order. Moreover, the Governor of the
State of Connecticut or the Department of Public Utility Control, exercising
executive power, might attempt to take action that is inconsistent with the
State's pledge not to limit or alter the transition property or the financing
order. As of the date of this prospectus, we are not aware of any bill pending
before the Connecticut legislature that would materially affect any of the
provisions of the restructuring statute or the financing order and that we
believe has sufficient support in the Connecticut legislature for enactment. In
addition, this bill, if enacted, would be subject to the State's pledge not to
limit or alter the transition property or the financing order. See "Description
of the Transition Property - Pledge by the State of Connecticut," which begins
on
15
page 32. As of the date of this prospectus, we are not aware of any proposed
or pending actions of the Governor of the State of Connecticut or the Department
of Public Utility Control that would materially affect any of the provisions of
the restructuring statute or the financing order.
In the reasoned opinion of Pullman & Comley, LLC, counsel to the trust,
under applicable constitutional principles relating to the impairment of
contracts, Connecticut could not repeal or amend the restructuring statute by
means of the legislative process, or take or refuse to take any action required
under its pledge described above if the repeal or amendment or the action or
inaction would substantially impair the rights of the owners of the transition
property or the certificateholders, absent a demonstration by Connecticut that
an impairment is narrowly tailored and is necessary to advance an important
public interest, such as responding to a "great public calamity."
There have been numerous cases in which legislative or popular concerns
with the burden of taxation or government charges have led to adoption of
legislation reducing or eliminating taxes or charges that supported bonds or
other contractual obligations entered into by public instrumentalities. Courts
have not considered these concerns by themselves to provide sufficient
justification for a substantial impairment of the pledged security provided by
the taxes or governmental charges for the bonds or obligations. Based on such
case law (which, however, does not address directly the certificates and the
pledge described above), it would appear unlikely that Connecticut could use the
legislative process to reduce, modify or alter the transition property, or take
or refuse to take any action regarding the transition property, in a manner that
would substantially impair the rights of the owners of the transition property
or the certificateholders.
Moreover, in the reasoned opinion of Pullman & Comley, LLC, counsel to the
trust, under the takings clause of the United States Constitution, the State of
Connecticut, in the exercise of its executive or legislative powers, could not
repeal or amend the restructuring statute or the financing order, or take any
action in contravention of its pledge described above, without paying just
compensation to the certificateholders, as determined by a court of competent
jurisdiction, if this action would constitute a permanent appropriation of a
substantial property interest of certificateholders in the transition property
and deprive the certificateholders of their reasonable expectations arising from
their investments in the certificates. There is no assurance, however, that,
even if a court were to award just compensation, it would be sufficient to pay
the full amount of the principal of and interest on the certificates.
We cannot assure you that a repeal or amendment of the restructuring
statute will not be adopted or sought or that any action or refusal to act by
the State of Connecticut will not occur, any of which may constitute a violation
of the State's pledge with the owners of the transition property and the
certificateholders. If a violation of this pledge occurred, costly and
time-consuming litigation might ensue. Any litigation might adversely affect the
price of the certificates and your ability to resell the certificates and might
delay the timing of payments on the certificates. Moreover, given the lack of
controlling judicial precedent directly addressing the certificates and the
State's pledge, we cannot predict the outcome of any litigation with certainty,
and, accordingly, you could experience a delay in receipt of payments on or
incur a loss on your investment in the certificates.
None of the trust, the note issuer or Connecticut Light & Power will
indemnify you for any changes in the law or for any official actions taken or
attempted that may affect the value of your certificates.
COURT DECISIONS
It is possible that private litigation could be brought to challenge the
provisions of the restructuring statute relating to the issuance by the
Department of Public Utility Control of a financing order, the creation or
characterization of the transition property or the issuance of rate reduction
bonds, such as the certificates. We are not aware of any such litigation that is
pending. If a court were to determine that the relevant provisions of the
restructuring statute or the financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity of the
certificates or the trust's ability to make payments on the certificates. In
either case, you could suffer a loss on your investment in the certificates.
Although the seller may be required to repurchase the transition property for a
price equal to the outstanding principal amount of the notes and accrued
interest if a court were to determine that the relevant provisions of the
restructuring statute or the financing order are unlawful, invalid or
unenforceable in whole or in part, we cannot assure you that the seller would be
able to repurchase the transition property if it were required to do so. For a
description of the circumstances under which the
16
seller will be required to repurchase the transition property, see "Description
of the Transition Property - Seller Representations and Warranties and
Repurchase Obligation," which begins on page 33.
THE DEPARTMENT OF PUBLIC UTILITY CONTROL MAY TAKE ACTIONS THAT ADVERSELY
AFFECT CERTIFICATEHOLDERS
The Department of Public Utility Control will continue to regulate some
aspects of the electric industry in Connecticut and may take actions that
adversely affect certificateholders. For example, the Department of Public
Utility Control will:
o regulate electric distribution companies,
o set financial and other requirements for electric generation
suppliers and other third parties, and
o set customer billing guidelines and collection, metering and
disclosure requirements for electric generation suppliers and other
third parties.
Actions taken by the Department of Public Utility Control pursuant to the
regular exercise of its regulatory powers as described above could adversely
affect the ability of the servicer to collect the RRB charge on a full and
timely basis or impose financial constraints on the servicer that could lead it
to default on its obligations.
Also, the Department of Public Utility Control could revise or rescind any
of its regulations or take other actions relating to the RRB charge or the
transition property. Any such change in regulations or other action would be
subject to the State of Connecticut's pledge not to limit or alter the RRB
charges or the transition property without making adequate provision for the
interests of the note issuer and the certificateholders. See "Description of the
Transition Property - Pledge by the State of Connecticut," which begins on page
32. Any such change in regulations or other action also would be subject to the
provision of the restructuring statute that prohibits the Department of Public
Utility Control from revaluing or revising stranded costs, determining that the
competitive transition assessment is unjust or unreasonable or in any way
reducing or impairing the value of the transition property or revenues arising
from its collection. See "Description of the Transition Property - No Impairment
by Department of Public Utility Control," which begins on page 33. Connecticut
Light & Power cannot predict whether the Department of Public Utility Control
will make new regulations, the timing or content of any new Department of Public
Utility Control regulations or any other actions relating to the RRB charge or
the transition property that the Department of Public Utility Control might take
in the future.
Future Department of Public Utility Control regulations may affect the
ratings of the certificates or their price. Those actions may also affect the
rate of collections of RRB charges and, as a result, the amortization of
certificates and their weighted average lives. As a result, certificateholders
could suffer a loss of their investment.
The servicer agrees, on behalf of the certificateholders, to take any
action or proceeding necessary to compel performance by the Department of Public
Utility Control and the State of Connecticut of any of their obligations or
duties under the restructuring statute, the financing order or any true-up
letter, including any actions reasonably necessary to block or overturn any
attempts to cause a repeal or modification of the restructuring statute or the
financing order or the rights of holders of the transition property by
legislative enactment or constitutional amendment that would be adverse to the
certificateholders. The servicer, however, may not be able to take those actions
and any action the servicer is able to take may not be successful.
Connecticut Light & Power, as servicer, is required to file with the
Department of Public Utility Control routine true-up letters and non-routine
true-up letters to adjust the RRB charge. See "Description of Transition
Property - Adjustments to the RRB Charge," which begins on page 31. These
adjustments are intended to provide, among other things, for timely payment on
the certificates. Although the financing order approves Connecticut Light &
Power's routine true-up methodology and indicates that routine RRB charge
adjustments are to take effect within a specified period of time after the
filing of the applicable routine true-up letter, the Department of Public
Utility Control might challenge an adjustment contained in a routine true-up
letter or may refuse to permit a routine adjustment to take effect, on the
ground that the adjustment contains an error or for some other reason. The
Department of Public Utility Control also might challenge an adjustment
contained in a non-routine true-up letter or might refuse to permit a
non-routine adjustment to take effect, on the ground that the adjustment
contains an error or
17
for some other reason. Any such challenge or refusal by the Department of Public
Utility Control could cause a delay in the payments on the certificates.
LITIGATION AND OTHER EVENTS IN JURISDICTIONS OTHER THAN CONNECTICUT COULD
ADVERSELY AFFECT CERTIFICATEHOLDERS
A legal action successfully challenging under the U.S. Constitution or
other federal law a state restructuring statute similar to the Connecticut
restructuring statute adopted by a jurisdiction other than Connecticut could
establish legal principles that would serve as a basis to challenge the
restructuring statute. Whether or not a subsequent court challenge to the
restructuring statute would be successful would depend on the similarity of the
other statute and the applicability of the legal precedent to the restructuring
statute. Although the restructuring statute would not become invalid
automatically as a result of a court decision invalidating another state's
restructuring statute, such a decision could establish a legal precedent for a
successful challenge to the restructuring statute that could adversely affect
certificateholders. Accordingly, the market value of the certificates could be
reduced. In addition, legal challenges or legislative, administrative, political
or other actions in other states challenging stranded cost recovery or
securitization as a means of stranded cost recovery could adversely affect the
market for certificates. Legal challenges brought in jurisdictions other than
Connecticut would not, however, directly affect the restructuring statute or the
interests of the certificateholders. Similarly, legislative, administrative,
political or other actions in other states (including such action in other
states that have implemented a competitive market structure for the electric
generation industry) would not directly impact the restructuring statute or the
interests of certificateholders but could heighten awareness of the political
and other risks associated with these types of securities as perceived by the
capital markets, and in that way, limit the ability of certificateholders to
resell the certificates and impair their value. We cannot assure you that future
challenges to stranded cost recovery or stranded cost recovery securitizations
in other states will not significantly impair your ability to resell the
certificates and the value of the certificates.
POSSIBLE FEDERAL PREEMPTION OF THE RESTRUCTURING STATUTE MAY PROHIBIT RECOVERY
OF THE RRB CHARGE
Federal preemption of the restructuring statute could prevent
certificateholders from receiving payments on the certificates and cause a loss
on their investment in the certificates. In the past, bills have been introduced
in Congress to prohibit the recovery of charges similar to the RRB charge.
Although Congress has not enacted any law that would prohibit the recovery of
charges similar to the RRB charge, it may do so in the future. Enactment of a
federal law prohibiting the recovery of charges similar to the RRB charge might
have the effect of preempting the restructuring statute and thereby prohibiting
the recovery of the RRB charge, which could cause payment delays or a loss of
your investment in the certificates.
None of the trust, the note issuer or Connecticut Light & Power will
indemnify you for any changes in federal law that may affect the value of your
certificates.
A SHORTFALL IN RRB CHARGE PAYMENTS AS A RESULT OF INACCURATE FORECASTING OR
UNANTICIPATED DELINQUENCIES COULD LEAD TO PAYMENT DELAYS OR LOSSES
Because the RRB charge is assessed based on kilowatt-hours of electricity
consumed by customers, a shortfall of payments arising from the RRB charge could
result if the servicer inaccurately forecasts electricity consumption or
underestimates customer delinquencies or charge-offs when setting the RRB
charge, both initially and at the time of any periodic adjustment of the RRB
charge. See "Description of the Transition Property - Adjustments to the RRB
Charge," which begins on page 31. A shortfall could cause payments on the
certificates to be made later than expected or not at all. As a result,
principal of the certificates might not be paid according to the expected
amortization schedule, which would lengthen the weighted average life of the
certificates. In addition, a change in energy consumption by customers might
also result in principal of the certificates not being paid by the final
maturity date of the certificates or not being paid at all. For the same
reasons, payments of interest on the certificates could also be delayed or not
made. Although the RRB charge adjustment process is intended to mitigate these
risks over the life of the notes and the certificates, the process may not
prevent a temporary delay in payment.
18
Inaccurate forecasting of electricity consumption by the servicer could
result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from Connecticut Light & Power's or a successor
distribution company's service territory or reduce their electricity
consumption;
o the occurrence of a natural disaster, such as a hurricane or
blizzard, unexpectedly disrupting electrical service and reducing
consumption;
o problems with energy generation, transmission or distribution
resulting from a change in the market structure of the electric
industry;
o customers accounting for a significant portion of Connecticut Light &
Power's revenues or sales ceasing to do business or leaving
Connecticut Light & Power's or a successor distribution company's
service territory, which would be more likely if such customers were
exempt under the restructuring statute from paying exit fees;
o customers consuming less electricity because of increased
conservation efforts or technological change; or
o customers accounting for a significant portion of Connecticut Light &
Power's revenues or sales switching to self-generation or
co-generation of electric power, which would be more likely if such
customers were exempt under the restructuring statute from paying exit
fees.
For a discussion of the circumstances under which the restructuring statute
permits the imposition of exit charges, see "Energy Deregulation and New
Connecticut Market Structure - Exit Fees," which begins on page 27.
Inaccurate forecasting of delinquencies or charge-offs by the servicer
could result from, among other things:
o limitations under Connecticut regulations on the methods Connecticut
Light & Power is permitted to employ in investigating and determining
the creditworthiness of new customers;
o unexpected deterioration of the economy or the occurrence of a natural
disaster, causing greater charge-offs than expected or forcing
Connecticut Light & Power or a successor distribution company to grant
additional payment relief to more customers;
o a change in law that makes it more difficult for Connecticut Light &
Power or a successor distribution company to disconnect nonpaying
customers, or that requires Connecticut Light & Power or a successor
distribution company to apply more lenient credit standards in
accepting customers; or
o the introduction into the energy markets of less creditworthy third
party energy suppliers who collect and remit payments arising from the
RRB charge to the servicer on behalf of customers.
UNIQUE NATURE OF COLLATERAL MAY IMPAIR ABILITY TO REALIZE ON COLLATERAL
If there is an event of default on the notes and the note trustee elects
or is directed by the noteholders to foreclose on the transition property, the
note trustee is unlikely to be able to resell the transition property because of
its unique nature.
19
THE SELLER'S OBLIGATION TO PAY THE REPURCHASE PRICE UPON THE BREACH OF CERTAIN
REPRESENTATIONS AND WARRANTIES MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
Although the seller is required under certain limited circumstances to
repurchase the transition property for a price equal to the outstanding
principal amount of the notes and accrued interest, we cannot assure you that
the seller would be able to repurchase the transition property if it were
required to do so. In addition, if the seller becomes obligated to pay the
repurchase price, the rating agencies are likely to downgrade the ratings on the
certificates to reflect the greater uncertainty of payment and the fact that the
obligation of the seller to repurchase the transition property is unsecured. For
a description of the circumstances under which the seller will be required to
repurchase the transition property, see "Description of the Transition Property
- - Seller Representations and Warranties and Repurchase Obligation," which begins
on page 33.
The requirement to repurchase the transition property would arise if,
among other things, there has been a breach of the seller's representations and
warranties as of the closing date that:
o the financing order under which the transition property has been
created is in full force and effect and the issuance advice letter has
been filed in accordance with the financing order;
o the process by which the financing order was adopted and approved, and
the financing order and issuance advice letter, comply with all
applicable laws, rules and regulations;
o the certificateholders are entitled to the protections of the
restructuring statute and, accordingly, the financing order is not
revocable by the Department of Public Utility Control; or
o the transition property constitutes a property right.
The requirement to repurchase the transition property upon a breach of the
seller's representations and warranties will arise only if the breach has a
material adverse effect on certificateholders and, under the circumstances
described under "Description of the Transition Property - Seller Representations
and Warranties and Repurchase Obligation," which begins on page 33, the breach
continues beyond a 90-day grace period. The seller will not be in breach of the
representations and warranties in the sale agreement as a result of a change in
law by legislative enactment or constitutional amendment or (if such means
become available in the future) referendum or initiative petition. A repeal of
the restructuring statute, an amendment voiding the transition property or the
adoption of a federal statute prohibiting the recovery of stranded costs are
examples of these changes in law. If any of these changes in law were to occur,
the servicer, on behalf of the certificateholders, would be required to bring
legal action, at the note issuer's expense, seeking to overturn the change. See
"Description of the Transition Property - Seller Representations and Warranties
and Repurchase Obligation," which begins on page 33.
ADDITIONAL ISSUANCES OF CERTIFICATES MAY AFFECT PAYMENTS ON OUTSTANDING
CERTIFICATES
The issuance of other certificates by a separate trust might delay or
reduce the payments that you receive on the certificates, because the revenues
arising from Connecticut Light & Power's competitive transition assessment will
be shared among the various issuances of certificates. As a result, if
collections of the competitive transition assessment are insufficient to pay
principal of and interest on each series of outstanding certificates, the
certificates the trust is offering will only receive their pro rata portion of
the collections according to the ratio of the RRB charges otherwise applicable
to the separate series of certificates. The terms of any new issuance of
certificates secured by the remaining portion of Connecticut Light & Power's
competitive transition assessment will not require the prior review or consent
of certificateholders. The seller has, however, agreed in the sale agreement not
to sell other transition property to secure another issuance of notes and, in
turn, another issuance of certificates if it would cause the then existing
ratings on the certificates to be downgraded.
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PROBLEMS WITH THE SERVICING OF TRANSITION PROPERTY MAY CAUSE PAYMENT DELAYS
OR LOSSES
LIMITATION ON RATES MAY ADVERSELY AFFECT SERVICER'S FINANCIAL CONDITION
AND, IN TURN, ITS ABILITY TO SERVICE TRANSITION PROPERTY
Limitations on the rates that Connecticut Light & Power is permitted to
charge its customers could adversely affect its financial condition and, in
turn, its ability to service the transition property or devote appropriate
resources to collecting and determining necessary adjustments to the RRB charge.
Generally, under the restructuring statute, Connecticut Light & Power's system
average standard offer rate may not exceed 9.351 cents/kilowatt-hour through
December 31, 2003. Under the restructuring statute, this rate limit may be
exceeded if necessary to establish, fix or revise the competitive transition
assessment (including the RRB charge) at a level sufficient to pay principal of
and interest on the certificates and related expenses, to pay stranded costs
that are not recovered through the issuance of rate reduction bonds, and to pay
capital costs specified in the restructuring statute. It also may be exceeded
under the restructuring statute upon the occurrence of specified changes in law
or accounting standards or the incurrence of extraordinary and unanticipated
expenses required to provide safe, adequate and reliable service. This rate
limitation may cause Connecticut Light & Power to collect insufficient revenues
to meet its operating expenses and other financial obligations. In particular,
this could occur if, for whatever reason, the RRB charge rose to levels higher
than currently anticipated, thereby absorbing a higher than anticipated
percentage of Connecticut Light & Power's total rates, as so limited.
The average initial competitive transition assessment is expected to be
approximately 1.021 cents/kilowatt-hour. The expected average initial RRB charge
(which is a portion of the competitive transition assessment) is set forth in
the prospectus supplement.
CHANGE IN SERVICER MAY LEAD TO PAYMENT DELAYS OR LOSSES
If, as a result of insolvency or liquidation or otherwise, Connecticut
Light & Power were to cease servicing the transition property, determining any
adjustments to the RRB charge or collecting payments arising from the RRB
charge, it could be difficult to find a suitable successor servicer. As a
result, the timing of recovery of payments arising from the RRB charge could be
delayed. The note issuer will rely on the servicer to determine any adjustments
to the RRB charge and for customer billing and collection. A successor servicer
would have less experience with Connecticut Light & Power's customer base and
service territory than Connecticut Light & Power and might have less capable
forecasting, billing and collection systems than those employed by Connecticut
Light & Power or may experience temporary errors in converting to a new system
even if equal to or more capable than the current system. Given the complexity
of the tasks to be performed by the servicer and the expertise required, a
successor servicer could experience difficulties in collecting payments arising
from the RRB charge and determining appropriate adjustments to the RRB charge.
The servicing fee would likely increase if the note issuer were to engage
a successor servicer. In addition, a successor servicer under current law might
not be able to invoke the remedy of shutting off service to a customer for
nonpayment of the RRB charge and thus might experience higher delinquencies.
Also, a change in the servicer will cause payment instructions to change, which
could lead to a period of disruption in which customers continue to remit
payment according to the former payment instructions, resulting in delays in
collection that could result in delays in payments on the notes and
certificates.
CHANGE IN SERVICING PERSONNEL, PROCEDURES OR SYSTEMS MAY LEAD TO PAYMENT
DELAYS
Changes could occur in the personnel who service the transition property
or in the procedures or systems employed in the servicing of the transition
property, which could affect the ability of the servicer to forecast, bill and
collect the RRB charge. Given the complexity of the tasks to be performed by the
servicer and the expertise required, any adverse change in the servicer's
personnel, procedures or systems could cause the servicer to experience
difficulties in collecting payments arising from the RRB charge and result in
delays in payments to certificateholders.
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DELAYS IN PAYMENTS ON CERTIFICATES MAY BE CAUSED BY CHANGES IN PAYMENT TERMS
The servicer is permitted to alter the terms of billing and collection
arrangements and modify amounts due from customers. The servicer cannot change
the amount of a customer's individual RRB charges, but it can take actions that
it believes will increase collections from a customer. These actions might
include, for example, agreeing to an extended payment schedule or agreeing to
write-off the remaining portion of an outstanding bill. The servicer can also
write-off outstanding bills that it deems uncollectible in accordance with its
usual billing and collection practices. Additionally, Connecticut Light & Power
or a successor to Connecticut Light & Power, as servicer, may change its billing
and collection practices, or the Department of Public Utility Control may
require changes to these practices.
These changes could delay or reduce collections of RRB charges and, as a
result, adversely affect the payment of interest on the certificates on a timely
basis or the payment of principal of the certificates in accordance with the
expected amortization schedule. See "Servicing - Servicing Standards and
Covenants," which begins on page 46.
CONNECTICUT LIGHT & POWER'S LIMITED INFORMATION ON NEW CUSTOMERS'
CREDITWORTHINESS MAY RESULT IN INCREASED DELINQUENCIES AND WRITE-OFFS
Because Connecticut regulations limit the methods Connecticut Light &
Power is permitted to employ in investigating and determining the
creditworthiness of new customers, Connecticut Light & Power may employ remedial
measures and other collection procedures later with respect to new customers
than it would with respect to customers that have established a credit history
with Connecticut Light & Power. This delay may result in increases in
delinquencies and write-offs, which could cause delays in payments to
certificateholders.
COMMINGLING OF COLLECTIONS OF RRB CHARGES WITH SERVICER'S OTHER FUNDS MAY
RESULT IN PAYMENT DELAYS OR REDUCTIONS
Until collections of RRB charges are deposited with the note trustee, the
servicer will not segregate them from its general funds. If the servicer does
not or cannot remit the full amount of the collections of RRB charges, there may
be delays or reductions in payments to certificateholders. The adjustments to
the RRB charges and amounts, if any, on deposit in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount are designed to
reduce this risk. However, there may be delays or reductions in payments to
certificateholders if there are delays in implementation of the adjustment
mechanism or a lack of funds in the reserve subaccount, the
overcollateralization subaccount and the capital subaccount after the final
adjustment date.
BILLING OF THE RRB CHARGE BY THIRD PARTY SUPPLIERS MAY CAUSE DELAYS IN
REMITTANCES
When a third party supplier bills, collects and remits the RRB charge to
the servicer, there is a greater risk that the servicer will receive payments
arising from the RRB charge later than it would if the servicer were billing and
collecting the RRB charge itself. A third party supplier is an entity that
supplies energy to customers and has contracted with the servicer to bill and
collect the RRB charge. The risk of nonpayment due to default, bankruptcy or
insolvency of the third party supplier holding the funds will increase the
longer that the delay in receipt of payment lasts. Third party supplier billing
also places increased information requirements on the servicer. The servicer has
the responsibility of accounting for the RRB charge which is the source of the
payments for the notes and payments on the certificates regardless of which
entity bills customers for the RRB charge.
Any third party supplier that bills and collects payments arising from the
RRB charge will be required to pay these amounts, regardless of whether payments
are received from customers, within 15 days after the servicer's bill to the
third party supplier. The third party supplier will, in effect, replace the
customer as the obligor for these amounts, and the servicer, on behalf of the
note issuer, will have no right to collect the payments arising from the RRB
charge from the customer. Therefore, the servicer will be relying on the credit
of the third party supplier, rather than on the credit of the customers. In
addition, to the extent that a few third party suppliers bill and collect the
RRB charge, the note issuer may be relying on a small number of third party
suppliers, rather than a large number of customers, to remit payments arising
from the RRB charge. A default in the remittance of payments arising from the
RRB charge by a single third party supplier that bills and collects the RRB
charge from a large number of customers
22
could adversely affect the timing of payments on the certificates. See
"Servicing - Third Party Suppliers," which begins on page 47.
Neither Connecticut Light & Power nor any other servicer will pay any
shortfalls resulting from the failure of any third party supplier to remit
payments arising from the RRB charge to the servicer. Although the servicer will
take into account revenue shortfalls arising from a default by a third party
supplier when periodically adjusting the RRB charge, any shortfalls that occur
may cause delays in payments on the certificates.
As part of the deregulation of the Connecticut electric industry, the
restructuring statute contemplates that electricity metering and billing
services may be unbundled from distribution services. See "Energy Deregulation
and New Connecticut Market Structure - Third Party Billing Options," which
begins on page 28. As a result, while the restructuring statute continues to
reserve electricity metering and billing services to electric distribution
companies, third party suppliers may have the opportunity to bill, collect and
remit the RRB charge in the future. See "Servicing - Third Party Suppliers,"
which begins on page 47.
A DEFAULT BY CONNECTICUT LIGHT & POWER UNDER ITS ACCOUNTS RECEIVABLE ARRANGEMENT
MAY TRIGGER THE NEED TO REPLACE CONNECTICUT LIGHT & POWER AS SERVICER
Connecticut Light & Power has a purchase and sale arrangement under which
it continuously sells a portion of its accounts receivable on a revolving basis
to investors. The RRB charge is not subject to such arrangement. The primary
investor is a receivables investment company. Connecticut Light & Power acts as
collection agent (or servicer) under this arrangement. Under the arrangement,
the investor, acting through its agent, has the right to replace Connecticut
Light & Power as the collection agent upon the occurrence of certain events. The
agent and the note trustee will enter into an intercreditor agreement that
requires the note trustee and the agent to act jointly in the replacement of
Connecticut Light & Power as collection agent and as servicer under the
servicing agreement. Although the removal and replacement of Connecticut Light &
Power as servicer is subject to satisfaction of the condition that the rating
agencies must confirm that such action will not result in a reduction or
withdrawal of the then current rating of the certificates, the existence of this
receivables arrangement may increase the likelihood that Connecticut Light &
Power may be replaced as servicer.
CONNECTICUT LIGHT & POWER'S RATINGS MAY AFFECT THE MARKET VALUE OF THE
CERTIFICATES
A downgrading of the credit ratings on the debt of Connecticut Light &
Power could have an adverse effect, at least temporarily, on the market value of
your certificates.
CUSTOMERS WITHIN CONNECTICUT LIGHT & POWER'S SERVICE AREA MAY STOP OR DELAY
MAKING RRB CHARGE PAYMENTS
Customers within Connecticut Light & Power's service area may stop or
delay paying the RRB charge because:
o they may misdirect their payments as they may owe amounts to several
different parties which may include both Connecticut Light & Power and
an electric generation supplier or other third party, or
o the RRB charge, as periodically adjusted, required to be paid by
customers may become burdensome if customers accounting for a
significant portion of Connecticut Light & Power's revenues or sales
self-generate electricity, move out of Connecticut Light & Power's
service territory, significantly reduce their electricity
consumption, are exempted by the Department of Public Utility
Control from the payment of the RRB charge or cease consuming
electricity altogether. This may also cause customers to file
petitions with the Department of Public Utility Control to reduce
the RRB charge.
Either of these factors could result in delays or shortfalls in scheduled
payments on the certificates.
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BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
BANKRUPTCY OF THE SELLER COULD DELAY OR REDUCE PAYMENTS ON CERTIFICATES AND
ADVERSELY AFFECT THE ABILITY TO RESELL TRANSITION PROPERTY
If the seller were to become a debtor in a bankruptcy case, and a creditor
or bankruptcy trustee of the seller or the seller itself as debtor in possession
were to take the position that the transition property constituted property of
the seller's bankruptcy estate, and a court were to adopt this position, then
delays or reductions in payments on the certificates could result. For example,
a creditor or bankruptcy trustee of the seller or the seller itself as debtor in
possession might argue that the sale of the transition property to the note
issuer was a loan to the seller from the note issuer, secured by a pledge of the
transition property. Regardless of the court's determination of the proper
characterization of the transaction in a seller bankruptcy case, the mere fact
of a seller bankruptcy case could have an adverse effect on the resale market
for the certificates and the market value of the certificates.
Because the RRB charge is a usage-based charge, if the seller were to
become the debtor in a bankruptcy case, a creditor of, or a bankruptcy trustee
for, the seller, or the seller itself as debtor in possession could argue that
the note issuer should pay a portion of the costs of the seller associated with
the generation, transmission or distribution of the electricity, the price of
which gave rise to the payments arising from the RRB charge that are used to
make payments on the certificates. If a court were to adopt this position, the
amounts paid to the note trustee, and thus to the holders of the certificates,
could be reduced.
It could also be argued that because the RRB charge is a usage-based
charge, the transition property comes into existence only as customers use
electricity. If a court adopted this position and also recharacterized the
transfer of the transition property to the note issuer as a secured loan to the
seller, the note issuer might not have rights to any transition property deemed
to come into existence after the bankruptcy of the seller. In such a case
reductions in payments on the certificates would likely result.
Regardless of whether the seller is the debtor in a bankruptcy case, if a
court were to accept the arguments of a creditor of the seller that transition
property comes into existence only as customers use electricity, a tax,
government lien or other lien on property of the seller arising before the
transition property came into existence may have priority over the note issuer's
interest in the transition property, which could reduce the amounts paid to
certificateholders. See "Description of the Transition Property - Bankruptcy and
Creditors' Rights Issues," which begins on page 37.
Some of the risks described in this section have been illustrated in the
bankruptcy cases of LTV Steel Company and certain affiliates, or LTV. Upon the
debtors' motion for interim authority to use cash collateral, the bankruptcy
judge allowed the debtors to use receivables (and the related cash proceeds)
that had been transferred to LTV's special purpose finance subsidiary prior to
the commencement of the bankruptcy case and pledged by the subsidiary to a third
party. As adequate protection for the transferred receivables, the court granted
the pledgee a first priority unsecured claim against LTV and a security interest
in receivables generated after commencement of the case. In a preliminary ruling
denying the pledgee relief from the order, the court observed that the ultimate
issue of whether LTV actually sold the receivables to the special purpose
finance subsidiary was a fact-intensive issue that could not be resolved without
extensive discovery and an evidentiary hearing. The dispute was then settled in
conjunction with the approval of senior secured financing that would retire the
debt securities issued by the special purpose finance subsidiary.
BANKRUPTCY OF THE SERVICER OR A THIRD PARTY SUPPLIER COULD ALSO DELAY OR
REDUCE PAYMENTS
The bankruptcy or insolvency of the servicer or a third party supplier
could result in delays or reductions in payments on the certificates. Each of
the servicer and any third party supplier will remit payments arising from the
RRB charge out of its general funds and will not segregate these amounts from
its general funds. In the event of a bankruptcy of the servicer or a third party
supplier, the note trustee likely will not have a perfected interest in
commingled funds and the inclusion of the commingled funds in the bankruptcy
estate of the servicer or third party supplier may result in delays in payments
on the certificates. Furthermore, if the servicer is in bankruptcy, it may stop
performing its functions as servicer and it may be difficult to find a third
party to act as successor servicer.
24
NATURE OF THE CERTIFICATES
RESALE MARKET IS LIMITED
We cannot assure you that you will be able to resell the certificates or
that a trading market for the certificates will develop or, if one does develop,
that it will continue for the life of the certificates. We do not expect to list
the certificates on any securities exchange, except that any floating rate
certificates may be listed on the Luxembourg Stock Exchange.
HIGH RATINGS DO NOT MEAN THAT PAYMENTS WILL BE MADE ON TIME
You should understand that the ratings of the certificates issued by
rating agencies address only the likelihood of the ultimate payment of principal
by the legal maturity date and the timely payment of interest on the
certificates. A rating is not an indication that these rating organizations
believe that principal payments are likely to be paid on time according to the
expected amortization schedule. You should not rely on ratings for that purpose.
A security rating is not a recommendation to buy, sell or hold securities.
There can be no assurance that a rating will remain in effect for any given
period of time or that a rating will not be revised or withdrawn entirely by a
rating agency if, in its judgment, circumstances so warrant.
POSSIBILITY OF EARLY REDEMPTION MAY LEAD TO LOWER RETURN ON INVESTMENT
The note issuer has the option to redeem all of the outstanding notes on
any payment date if, after giving effect to the payments that would otherwise be
made on that payment date, the outstanding principal balance of the notes would
be less than 5 percent of the initial principal balance of the notes. In
addition, the note issuer must redeem the notes if the seller is required to, or
elects to, repurchase the transition property as a result of a breach of the
seller's representations and warranties in the sale agreement as described under
"Description of the Transition Property - Seller Representations and Warranties
and Repurchase Obligation," which begins on page 33. Redemption of the notes
will require the certificate trustee to redeem the certificates. Redemption will
cause the certificates to be retired earlier than would otherwise be expected.
The redemption price will be the outstanding principal balance, plus accrued and
unpaid interest, on the certificates. We cannot predict whether the note issuer
will redeem the notes, or whether you will be able to receive an equivalent rate
of return on reinvestment of the proceeds arising from any redemption.
RISKS RELATING TO FLOATING RATE CERTIFICATES
The prospectus supplement indicates whether the trust will issue floating
rate certificates. Additional risks apply to floating rate certificates. If the
trust will issue floating rate certificates, these additional risks are
described in the prospectus supplement.
AVAILABLE INFORMATION
CL&P Funding LLC, the note issuer, has filed a registration statement
relating to the certificates and the notes with the Securities and Exchange
Commission. This prospectus is a part of the registration statement. This
prospectus, together with the prospectus supplement, describes the material
terms of each material document filed as an exhibit to the registration
statement. This prospectus and the prospectus supplement do not, however,
contain all of the information contained in the registration statement and
related exhibits. You can inspect the registration statement and the related
exhibits without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
copies of the registration statement and related exhibits at the above locations
at prescribed rates and, for so long as any certificates are listed on the
Luxembourg Stock Exchange and the rules of that exchange so require, will be
available for inspection by the holders of any listed certificates at the office
of the listing agent in Luxembourg. You may
25
obtain information on the operation of the public reference facilities by
calling the Commission at 1-800-SEC-0330. You can also inspect information filed
electronically with the Commission, including reports and proxy and information
statements, at the Commission's site on the World Wide Web at
http://www.sec.gov.
The note issuer will file annual, quarterly and special reports and other
information with the Securities and Exchange Commission. The note issuer may
stop filing periodic reports with the Commission at the beginning of any fiscal
year following the issuance of the certificates if there are fewer than 300
holders of the certificates.
REPORTS TO HOLDERS
Connecticut Light & Power, acting as the servicer of the property securing
the notes, or a successor servicer, will provide periodic reports concerning the
certificates. During any period when the trust issues the certificates in
book-entry form, you may obtain copies of the periodic reports by requesting
them from your broker or dealer. If you are the registered holder of the
certificates, you will receive the reports from the certificate trustee. See
"Description of the Notes - Reports to Noteholders," which begins on page 61,
and "Description of the Certificates - Reports to Certificateholders," which
begins on page 66. In addition, for so long as any certificates are listed on
the Luxembourg Stock Exchange and the rules of that exchange so require, these
reports will be available for inspection by the holders of any listed
certificates at the office of the listing agent in Luxembourg.
INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents filed by the note issuer with the
Securities and Exchange Commission after the date of this prospectus and prior
to the termination of this offering will be incorporated by reference in this
prospectus and considered to be part of this prospectus. Any statement in this
prospectus or in the prospectus supplement, or in a document incorporated or
deemed to be incorporated by reference, will be deemed to be modified or
superseded if the note issuer files a document that modifies that statement. Any
statement as modified or superseded will constitute a part of this prospectus or
the prospectus supplement.
You can request from the note issuer a free copy of any document
incorporated by reference in the registration statement (except exhibits) by
writing to CL&P Funding LLC at 107 Selden Street, Berlin, Connecticut
06037-1616, or by calling (860) 665-5000.
ENERGY DEREGULATION AND NEW CONNECTICUT MARKET STRUCTURE
The electric utility industry is experiencing intensifying competitive
pressures in the electricity generation market. Historically, electric utilities
operated as regulated monopolies in their service territories and were the
primary suppliers of electricity. In Connecticut, the Department of Public
Utility Control set electric companies' rates based upon their costs of
providing services and allowing for a reasonable return on their prudent capital
investments. Changes to the traditional legal and regulatory framework and
market structure are occurring at both the state and federal levels.
STATUTORY OVERVIEW
At the state level, the Connecticut electric industry has changed
dramatically - and is expected to continue to change - as a result of the
enactment in July 1998 of Connecticut Public Act No. 98-28, referred to as the
restructuring statute, and the approval in orders issued by the Department of
Public Utility Control of various plans related to the restructuring of
Connecticut electric companies. The restructuring statute established a
comprehensive framework for the restructuring of the Connecticut electric
industry. The restructuring statute required that on or before October 1, 1998,
electric companies file plans with the Department of Public Utility Control to
achieve the separation of their generation service function so as to allow for
retail competition in electricity generation supply. Electric utilities will
continue to provide transmission and distribution service as regulated electric
distribution companies. See " - Restructuring Decision," which begins on
page 27.
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To facilitate the transition from a regulated system to a competitive one,
the restructuring statute permits an electric company that has divested itself
of its non-nuclear generation assets by January 1, 2000 to recover stranded
costs through the collection of a competitive transition assessment, which is a
separate usage-based charge included in the bills of all classes of retail users
of the electric company's retail distribution system (subject to certain limited
customer exemptions described under "Description of the Transition Property -
Competitive Transition Assessment," which begins on page 30). Generally,
stranded costs are costs that an electric company may not be able to recover
through market-based rates in a competitive electricity generation market. Prior
to the approval by the Department of Public Utility Control of any stranded
costs, an electric company must show to the satisfaction of the Department of
Public Utility Control that it has taken all reasonable steps to mitigate to the
fullest extent possible its stranded costs. The restructuring statute also
permits an electric company to cause a special purpose entity authorized by the
finance authority to issue rate reduction bonds, such as the certificates,
secured by the revenues arising from a portion of its competitive transition
assessment, if doing so will result in net savings to ratepayers.
The restructuring statute also contemplates that an electric company's
customers will be permitted to contract with third party suppliers of
electricity and that the company will continue to distribute electricity,
whether generated by itself or a third party supplier, on a regulated basis. The
restructuring statute provides that all retail customers may choose their
electricity supplier as of July 1, 2000. In addition, as an alternative for
customers, the restructuring statute requires electric distribution companies
such as Connecticut Light & Power to make available standard offer service from
January 1, 2000 until December 31, 2003, or until such customers choose an
alternative electricity supplier. A customer may discontinue service with an
alternative electricity supplier and return to standard offer service.
RESTRUCTURING DECISION
In decisions issued in 1999 and 2000 in proceedings relating to
Connecticut Light & Power's restructuring, the Department of Public Utility
Control approved approximately $3.6 billion as the total amount of Connecticut
Light & Power's stranded costs eligible for recovery through the collection of
the competitive transition assessment. These decisions are known, collectively,
as the restructuring decision. The restructuring decision also approved certain
of these stranded costs as eligible to be securitized through the issuance of
rate reduction bonds.
In the restructuring decision, the Department of Public Utility Control
also approved a proposal regarding the procurement of the energy supply to meet
Connecticut Light & Power's obligation to provide standard offer service until
December 31, 2003 for customers that do not choose an alternative energy
supplier. Pursuant to the proposal approved in the restructuring decision,
Connecticut Light & Power has procured one-half of its standard offer energy
supply through a competitive bidding process and the remaining one-half from
Select Energy, Inc., an affiliate of Connecticut Light & Power, with the rate
for the portion provided by Select Energy set at the weighted average of the
winning competitive bids for the other portion of such energy supply. Servicing
its supply obligation to Connecticut Light & Power poses a significant risk to
Select Energy after December 31, 2001, when its entitlement to a large portion
of the output from the Millstone nuclear station ends. Select Energy's risk is
mitigated through its entitlement from another affiliate and continuing
acquisitions of new supply in the competitive market. If any of Connecticut
Light & Power's standard offer energy suppliers, including Select Energy, fail
to meet their contractual obligations, Connecticut Light & Power would be
obligated to procure standard offer energy supply from other sources in the
competitive market. Connecticut Light & Power believes that it would be
permitted under the restructuring statute to charge its standard offer customers
for any higher costs incurred to procure alternate supply, regardless of whether
the supplier that failed to meet its contractual obligations was Select Energy
or any other supplier. See "Risk Factors - Problems with the servicing of
transition property may cause payment delays or losses - Limitation on rates may
adversely affect servicer's financial condition and, in turn, its ability to
service transition property," which begins on page 21.
EXIT FEES
The RRB charge is non-bypassable, meaning that customers must pay it
whether or not they purchase energy from Connecticut Light & Power or a third
party supplier of energy, and whether or not their distribution system is being
operated by Connecticut Light & Power or a successor distribution company.
Customers may,
27
however, reduce their electricity usage through the use of self-generation
equipment, and, as a result, revenues generated by the RRB charge may decrease.
The restructuring statute provides that a customer that reduces or eliminates
its purchases of electricity through the operation of self-generation equipment
may be required to pay an exit fee. A customer will not have to pay an exit fee,
however, if such customer has installed a self-generation facility that:
o exclusively services the load of one to four residential units; or
o is installed in conjunction with the expansion of an industrial plant
that began operation before July 1, 1998, if the self-generation
facility predominantly services the industrial plant and the expansion
of the industrial plant results in economic development, as determined
by the Department of Public Utility Control. This exemption only
applies to the exit fee payable with respect to the increased usage of
electricity to service the expansion.
In addition, the restructuring statute provides that Department of Public
Utility Control will develop criteria for further exemptions from exit fees
based on unit size or specialized use, balancing concerns of the potential
impact on small businesses, equity among customer classes, and the need to
offset losses to, among other rate components, the competitive transition
assessment. The Department of Public Utility Control conducted a proceeding
pursuant to this provision, and issued a report to the Connecticut legislature
recommending that exemption from the payment of exit fees be extended to:
o self-generators of 2 megawatts or less;
o self-generators that use renewable resources;
o facilities that are "qualifying facilities" under federal law; and
o self-generation load that was not on the system prior to July 1,
1998.
As of the date of this prospectus, the Connecticut legislature has not acted
upon the Department of Public Utility Control's recommendations.
In the financing order, the Department of Public Utility Control prohibits
Connecticut Light & Power from imposing any exit fees. The financing order also
provides, however, that the Department of Public Utility Control will consider
whether to include the RRB charge as a component of any exit fees that it may
authorize in the future.
THIRD PARTY BILLING OPTIONS
The restructuring statute authorizes and directs the Connecticut Energy
Advisory Board, in consultation with the Department of Public Utility Control,
to conduct a study of the provision of metering, billing and collection services
by electric distribution companies, such as Connecticut Light & Power, and
consider whether customers would be better served if such services were
performed by electric suppliers. The board must also consider how reallocating
the performance of these services could affect reliability of collecting
payments from customers, including any potential impact on the security of funds
collected for the competitive transition assessment. The board was required to
submit its findings and legislative recommendations not later than January 1,
1999, to the Connecticut legislature. Pursuant to this requirement, in March
1999, the Connecticut Energy Advisory Board submitted a report to the Energy and
Public Utilities Committee of the Connecticut legislature recommending that the
Connecticut legislature analyze several operating and policy issues identified
in the report before determining whether to unbundle metering, billing and
collection services. However, no legislation has yet been enacted that would
authorize electric suppliers to engage in metering, billing and collection
services.
In its financing order issued to Connecticut Light & Power, the Department
of Public Utility Control states that it will not authorize a third party
supplier to bill and collect the RRB charge unless such third party supplier
meets specified creditworthiness criteria and complies with specified billing,
collection and remittance procedures and information access requirements. See
"Servicing - Third Party Suppliers," which begins on page 47. A third party
supplier is an entity that supplies energy to customers and has contracted with
the servicer to bill and collect
28
the RRB charge. See "Risk Factors - Problems with the servicing of transition
property may cause payment delays or losses - Billing of the RRB charge by third
party suppliers may cause delays in remittances," which begins on page 22, and
"Risk Factors - Bankruptcy and creditors' rights issues - Bankruptcy of the
servicer or a third party supplier could also delay or reduce payments," which
begins on page 24.
FEDERAL INITIATIVES
In addition to the changes occurring in the Connecticut market and
regulatory environment discussed throughout this section, federal legislative
efforts may also significantly alter the national market for electricity. For
example, at the federal level, the National Energy Policy Act of 1992 was
designed to increase competition in the wholesale electric generation market by
easing regulatory restrictions on producers of wholesale power and by
authorizing the Federal Energy Regulatory Commission to mandate access to
electric transmission systems by wholesale power generators. See "Risk Factors -
Possible federal preemption of the restructuring statute may prohibit recovery
of the RRB charge," which begins on page 18.
DESCRIPTION OF THE TRANSITION PROPERTY
The restructuring statute and the restructuring decision permit
Connecticut Light & Power to recover stranded costs through the assessment of a
competitive transition assessment, although Connecticut Light & Power has a duty
to mitigate its stranded costs. Examples of stranded costs include the costs of
electricity generation facilities, power purchase contracts with third-party
generators of electricity and regulatory assets. Regulatory assets reflect
previously incurred costs that have been capitalized and deferred by the
Department of Public Utility Control for future recovery in rates consistent
with traditional ratemaking.
FINANCING ORDER AND ISSUANCE ADVICE LETTER
The restructuring statute authorizes the Department of Public Utility
Control to issue a financing order, which is a regulatory order that approves
the amount of Connecticut Light & Power's stranded costs that it is permitted to
finance through the issuance of rate reduction bonds, such as the certificates.
On May 31, 2000, Connecticut Light & Power filed its application for a financing
order with the Department of Public Utility Control. The Department of Public
Utility Control issued a financing order dated November 8, 2000 and supplemented
December 12, 2000 and March 12, 2001, which authorizes the issuance of up to
$1.551 billion in aggregate principal amount of the certificates. In accordance
with the restructuring statute, the financing order became effective in
accordance with its terms on December 26, 2000, the date on which Connecticut
Light & Power filed with the Department of Public Utility Control its written
consent to all terms and conditions of the financing order.
The financing order establishes, among other things, the RRB charge to
recover the stranded costs specified in the financing order. The RRB charge is
non-bypassable in that customers must pay it whether or not they purchase energy
from Connecticut Light & Power or a third party supplier of energy, and whether
or not their distribution system is being operated by Connecticut Light & Power
or a successor distribution company. The restructuring statute provides that the
right to collect payments based on the RRB charge is a property right which may
be pledged, assigned or sold in connection with the issuance of the
certificates. Under the restructuring statute and the financing order, the owner
of the transition property is entitled to assess the RRB charge until it has
received payments from customers sufficient to retire all outstanding notes and
certificates and to pay fees and expenses of servicing and retiring the notes
and the certificates. The RRB charge, as adjusted from time to time, is a
portion of the competitive transition assessment and will be expressed as an
amount per kilowatt-hour of electricity usage by a customer. The RRB charge will
not be separately identified on customer bills, although customer bills will
note that a portion of the competitive transition assessment has been sold to
the note issuer.
The financing order requires the seller to submit an issuance advice
letter relating to the certificates to the Department of Public Utility Control.
The issuance advice letter will establish the initial RRB charge and become
effective when it is filed with the Department of Public Utility Control. The
financing order permits the servicer to file requests, referred to as true-up
letters, to adjust up or down the RRB charge at various times to enhance the
29
likelihood of retirement of each class of certificates on a timely basis. See "
- - Adjustments to the RRB Charge," which begins on page 31.
On December 21, 2000, the State of Connecticut Office of Consumer Counsel,
which is the statutory advocate for Connecticut ratepayers in utility matters,
filed an appeal of the financing order. On March 2, 2001, Connecticut Light &
Power and the Office of Consumer Counsel entered into a settlement agreement
that clarified the specific methodology by which customers would receive the
benefits of securitization without requiring any change to the financing order.
Under the settlement agreement, the Office of Consumer Counsel agreed, upon
approval of the settlement agreement by the Department of Public Utility
Control, to promptly withdraw its appeal and not to take any other
administrative or judicial action affecting the timing and issuance of rate
reduction bonds. On March 12, 2001, the Department of Public Utility Control
approved the settlement agreement. There were no parties or intervenors in the
Department of Public Utility Control's financing order proceeding other than
Connecticut Light & Power and the Office of Consumer Counsel, and the Office of
Consumer Counsel would be prevented from appealing the Department of Public
Utility Control's approval of the settlement agreement by the terms of that
agreement and Connecticut law. Accordingly, the Department of Public Utility
Control's approval of the settlement agreement and the financing order are final
and non-appealable.
TRANSITION PROPERTY
The transition property is a property right consisting of the right, title
and interest to all revenues, collections, claims, payments, money or proceeds
of or arising from the RRB charge. In accordance with the financing order,
transition property includes an allocated portion of the rates charged to
special contract customers, as described under " - Competitive Transition
Assessment," which begins on page 30. The notes will be secured by the
transition property, as well as the other note collateral described under
"Description of the Notes - Security," which begins on page 53.
COMPETITIVE TRANSITION ASSESSMENT
The competitive transition assessment is the rate mechanism through which
Connecticut Light & Power is allowed to recover on a fully reconciling basis its
stranded costs. It is determined according to the methodology specified in the
restructuring decision. The RRB charge will initially constitute a portion of
the competitive transition assessment as approved by the Department of Public
Utility Control.
Under the financing order, the Department of Public Utility Control
approved the recovery of the following stranded costs and issuance costs through
the RRB charge:
o buydown and buyout payments to independent power producers under
above-market long-term contracts;
o generation-related regulatory assets;
o costs related to retiring capital; and
o transaction costs.
The restructuring statute provides that from January 1, 2000 until
December 31, 2003, Connecticut Light & Power must provide standard offer service
to customers at a system average rate that does not exceed 9.351
cents/kilowatt-hour, which is 10 percent less than rates in effect on December
31, 1996. Under the restructuring statute, this rate limit may be exceeded if
necessary to establish, fix or revise the competitive transition assessment
(including the RRB charge) at a level sufficient to pay principal of and
interest on the certificates and related expenses, to pay stranded costs that
are not recovered through the issuance of rate reduction bonds, and to pay
capital costs specified in the restructuring statute. It also may be exceeded
under the restructuring statute upon the occurrence of specified changes in law
or accounting standards or the incurrence of extraordinary and unanticipated
expenses required to provide safe, adequate and reliable service. See "Risk
Factors - Problems with the servicing of transition property may cause payment
delays or losses - Limitation on rates may adversely affect servicer's financial
condition and, in turn, its ability to service transition property," which
begins on page 21. The average
30
initial competitive transition assessment is expected to be approximately 1.021
cents/kilowatt-hour. The expected average initial RRB charge (which is a portion
of the competitive transition assessment) is set forth in the prospectus
supplement.
Under the restructuring statute, the competitive transition assessment
must be determined by the Department of Public Utility Control in a general and
equitable manner and must be imposed on all customers at a rate that is applied
equally to all customers of the same class in accordance with methods of
allocation that were in effect on July 1, 1998 (the effective date of the
restructuring statute). The competitive transition assessment (including the RRB
charge, which is a portion of the competitive transition assessment) may be
imposed at different rates on each of Connecticut Light & Power's customer
classes. In this prospectus, references to the average initial competitive
transition assessment are to the average of the rates at which the competitive
transition assessment is initially expected to be imposed on all of Connecticut
Light & Power's customer classes, and references to the average initial RRB
charge are to the average of the rates at which the RRB charge is initially
expected to be imposed on all of Connecticut Light & Power's customer classes.
Under the restructuring statute, Connecticut Light & Power may not impose
the competitive transition assessment (including the RRB charge) on customers
that are receiving service under a special contract with CL&P that was in effect
on July 1, 1998 (the effective date of the restructuring statute). During 2000,
service provided under exempt special contracts accounted for approximately 0.52
percent of Connecticut Light & Power's billed retail revenues and approximately
0.9 percent of Connecticut Light & Power's billed retail energy sales
(gigawatt-hours). Approximately 90 percent of such billed retail revenues was
attributable to one special contract customer whose contract expires on July 31,
2004.
The restructuring statute also provides that any exemption provided to
special contract customers may not cause an increase in rates charged to other
customers. CL&P will satisfy the requirements of the restructuring statute in
accordance with the financing order by allocating a portion of the rates charged
to special contract customers to the competitive transition assessment and the
RRB charge, while continuing to maintain total rates charged to special contract
customers at existing contract levels. The RRB charge that is allocated from the
rates charged to special contract customers will be adjusted in the same manner
as the RRB charge applicable to other customers, thereby maintaining the
consistent application of the RRB charge adjustment mechanism. See " -
Adjustments to the RRB Charge," which begins on page 31.
Connecticut law also permits the Department of Public Utility Control to
grant exemptions from payment of a portion of the competitive transition
assessment. Any such exemption would also apply to the RRB charge, which is a
component of the competitive transition assessment. A customer may apply to the
Department of Public Utility Control for an exemption if it:
o is an existing or proposed manufacturing plant,
o will add or create 100 or more jobs and
o will demand at least 50 kilowatts of additional load through the
construction or expansion of manufacturing facilities.
The Department of Public Utility Control is required to hold a hearing on any
application for an exemption. If the Department of Public Utility Control
approves the application, the customer is exempted from the payment of the
portion of the competitive transition assessment, including the RRB charge
component of the competitive transition assessment, that relates to the new or
incremental load created by the customer's construction or expansion. The
Department of Public Utility Control is permitted under law to adopt regulations
to implement the exemption, but has not yet done so.
ADJUSTMENTS TO THE RRB CHARGE
Initially and during the life of the certificates, at least annually and,
beginning in the last year that the certificates are scheduled to be
outstanding, at least quarterly, the servicer will calculate and set the RRB
charge at a level estimated to generate revenues sufficient to pay the fees and
expenses (including indemnities) related to servicing and retiring the notes and
the certificates, to pay principal of and interest on the notes and related
payments
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on the certificates and to fund and replenish the overcollateralization
subaccount and replenish the capital subaccount as required for the upcoming
year. The servicer will increase or decrease the RRB charge over the life of the
certificates as a result of several factors, including:
o changes in actual electricity sales and forecasts;
o changes in payment patterns and charge-off experience (including
defaults by third party suppliers);
o changes in any ongoing fees and expenses (including indemnities)
related to the notes and the certificates; and
o deferred principal of or unpaid interest on the notes.
The financing order provides that the servicer will file true-up letters
periodically as follows:
o the servicer will file a routine true-up letter with the Department of
Public Utility Control at least 15 days prior to January 1 of each
year, with resulting adjustments up or down to the RRB charge to
become effective on January 1 each year, or the date as may be
specified in the true-up letter;
o beginning in the last year that the certificates are scheduled to be
outstanding the servicer will file a routine true-up letter with the
Department of Public Utility Control at least 15 days prior to the end
of each calendar quarter, with resulting adjustments up or down to the
RRB charge to become effective 15 days after the filing of the true-up
letter;
o the servicer may file a routine true-up letter with the Department of
Public Utility Control quarterly or, beginning in the last year that
the certificates are scheduled to be outstanding, monthly, with
resulting adjustments up or down to the RRB charge to become effective
15 days after the filing of the true-up letter; and
o with the consent of the note issuer accompanied by confirmation by
the rating agencies that the requested modification will not cause
the then existing ratings on the certificates to be downgraded, the
servicer will file a non-routine true-up letter with the Department
of Public Utility Control if the method it uses to calculate the RRB
charge requires modifications to more accurately project and
generate adequate revenues, with the modifications to become
effective when reviewed and approved by the Department of Public
Utility Control within 60 days after filing.
True-up letters will take into account amounts available in the general
subaccount and reserve subaccount, and amounts necessary to fund the
overcollateralization subaccount and to replenish the capital subaccount to
their required levels, in addition to amounts payable on the notes and
distributable on the certificates and related fees and expenses (including
indemnities).
Adjustments to the RRB charge will be performed on a system-wide basis
(i.e., across customer classes rather than on a class-by-class basis) in
accordance with the restructuring statute.
PLEDGE BY THE STATE OF CONNECTICUT
The State of Connecticut has pledged and agreed with the note issuer and
the certificateholders that it will not limit or alter the competitive
transition assessment (which includes the RRB charge as adjusted from time to
time in accordance with the financing order), the transition property or the
financing order until the certificates are fully paid and discharged. The State
of Connecticut's pledge is set forth in the restructuring statute, which
provides:
. . . the State of Connecticut does hereby pledge and agree, with the
owners of transition property and holders of rate reduction bonds that the
state shall neither limit nor alter the competitive transition assessment,
transition property, financing orders, and all rights thereunder until the
obligations, together with the interest thereon, are fully met and
discharged, provided nothing contained in this subsection shall preclude
the limitation or alteration if and when adequate provision shall be made
by law for the protection of the owners and holders. The finance authority
32
as agent for the state is authorized to include this pledge and
undertaking for the state in these obligations.
See "Risk Factors - Certificateholders could experience payment delays or losses
as a result of amendment, repeal or invalidation of the restructuring statute or
breach of the state pledge," which begins on page 15.
Under existing Connecticut law, citizens do not have the ability by means
of referendum to approve or reject directly laws adopted by the Connecticut
legislature. In addition, under existing Connecticut law, citizens do not have
the ability to propose laws for approval or rejection by the voters by means of
initiative petitions.
NO IMPAIRMENT BY DEPARTMENT OF PUBLIC UTILITY CONTROL
The restructuring statute provides that financing orders issued by the
Department of Public Utility Control and the competitive transition assessment
are irrevocable and that the Department of Public Utility Control may not
revalue or revise for ratemaking purposes the stranded costs or the costs of
providing, recovering, financing or refinancing the stranded costs, determine
that the competitive transition assessment is unjust or unreasonable, or in any
way reduce or impair the value of the transition property or revenues arising
from its collection either directly or indirectly by taking the competitive
transition assessment into account when setting other electric company rates.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
The seller has agreed in the sale agreement not to sell any other
transition property to secure another issuance of notes, and, in turn,
certificates, if it would cause the then existing ratings on the certificates to
be downgraded.
On the issuance date of the certificates, the seller will sell and assign
to the note issuer, without recourse, its entire interest in the transition
property. The note issuer will apply the net proceeds from the sale of the notes
to the trust to purchase the transition property. The seller's financial
statements will indicate that it is not the owner of the transition property,
and for financial reporting and tax purposes the seller will treat the notes as
representing debt of the seller.
SELLER REPRESENTATIONS AND WARRANTIES AND REPURCHASE OBLIGATION
In the sale agreement, the seller will represent and warrant to the note
issuer, as of the closing date, among other things, that:
(a) the information describing the seller in "The Seller and Servicer,"
which begins on page 41, is correct in all material respects;
(b) the seller has transferred the transition property, free and clear of
all security interests, liens, charges and encumbrances (including the
lien of the seller's first mortgage indenture, but excluding any
created by the restructuring statute and any granted under any of the
transaction documents);
(c) the transition property has been validly transferred and sold to the
note issuer and all filings (including filings with the Department of
Public Utility Control under the restructuring statute) necessary in
any jurisdiction to give the note issuer an ownership interest
(subject to any lien created by the restructuring statute and any lien
granted under any of the transaction documents) in the transition
property have been made;
(d) under the laws of the State of Connecticut (including the
restructuring statute) and the United States in effect on the closing
date:
o the financing order pursuant to which the transition property
has been created is in full force and effect;
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o the certificateholders are entitled to the protections of the
restructuring statute and, accordingly, the financing order is
not revocable by the Department of Public Utility Control;
o the State of Connecticut may neither limit nor alter the
competitive transition assessment, transition property, the
financing order and all rights thereunder, in a manner that
would substantially impair the rights of certificateholders,
absent a demonstration by the State of Connecticut that an
impairment is narrowly-tailored and is necessary to advance an
important public interest, such as responding to a "great
public calamity," until the certificates, together with accrued
interest, are fully met and discharged; provided that the State
of Connecticut is not precluded from such limitation or
alteration if and when adequate provision is made by law for
the protection of the note issuer and the certificateholders;
o the State of Connecticut, in the exercise of its executive or
legislative powers, may not repeal or amend the restructuring
statute or the financing order, or take any action in
contravention of the pledge by the State of Connecticut described
under "Description of the Transition Property - Pledge by the
State of Connecticut," which begins on page 32, without paying
just compensation to the certificateholders, as determined by a
court of competent jurisdiction, if this action would constitute
a permanent appropriation of a substantial property interest of
certificateholders in the transition property and deprive the
certificateholders of their reasonable expectations arising from
their investments in the certificates;
o the process by which the financing order was adopted and
approved, and the financing order and issuance advice letter,
comply with all applicable laws, rules and regulations;
o the issuance advice letter has been filed in accordance with
the financing order;
o except for periodic adjustments to the RRB charge required
under the restructuring statute and described under " -
Adjustments to the RRB Charge," which begins on page 31, the
Department of Public Utility Control does not have authority,
either by rescinding, altering or amending the financing order
or otherwise, to revalue or revise for ratemaking purposes the
stranded costs or the costs of providing, recovering, financing
or refinancing the stranded costs, to determine that the
competitive transition assessment is unjust or unreasonable or
in any way to reduce or impair the value of transition property
either directly or indirectly by taking the competitive
transition assessment into account when setting other rates for
the seller; nor are the amount of revenues arising with respect
thereto subject to reduction, impairment, postponement or
termination;
o no approval or filing with any other governmental body is
required in connection with the creation of the transition
property, except those that have been obtained or made; and
o under the restructuring statute, the limit contained in the
restructuring statute on standard offer service rates may be
exceeded if necessary to establish, fix or revise the
competitive transition assessment (including the RRB charge) at
a level sufficient to pay principal of and interest on the
certificates and related expenses, to pay stranded costs that
are not recovered through the issuance of rate reduction bonds,
and to pay capital costs specified in the restructuring statute;
(e) based on information available to the seller on the closing date, the
assumptions used in calculating the initial RRB charge are reasonable
and are made in good faith;
(f) on the effectiveness of the financing order and the issuance advice
letter:
o all of the transition property constitutes an existing property
right;
o the transition property includes the right, title and interest in
and to all revenues, collections, claims, payments, money, or
proceeds of or arising from the RRB charge (including the RRB
charge included in special contract rates), as adjusted from time
to time, and all rights to obtain adjustments to the RRB charge
pursuant to the financing order; and
34
o the owner of the transition property is legally entitled to
collect payments in respect of the RRB charge in the aggregate
sufficient to pay the principal of and interest on the notes,
to pay the fees and expenses (including indemnities) of
servicing the notes and the certificates, to replenish the
capital subaccount to the required capital level and to fund
the overcollateralization subaccount to the required
overcollateralization level until the notes and the
certificates are paid in full;
(g) the seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Connecticut, with
corporate power and authority to own its properties as owned on the
closing date and to conduct its business as conducted by it on the
closing date and to execute, deliver and perform the terms of the sale
agreement;
(h) the execution, delivery and performance of the sale agreement have
been duly authorized by all necessary corporate action on the part of
the seller;
(i) the sale agreement constitutes a legal, valid and binding obligation
of the seller, enforceable against it in accordance with its terms,
subject to applicable insolvency, reorganization, moratorium,
fraudulent transfer and other laws relating to or affecting creditors'
or secured parties' rights generally from time to time in effect and
to general principles of equity, regardless of whether considered in a
proceeding in equity or law;
(j) the consummation of the transactions contemplated by the sale
agreement do not conflict with the seller's articles of organization
or by-laws or any material agreement to which the seller is a party or
bound, result in the creation or imposition of any lien upon the
seller's properties pursuant to the terms of a material agreement
(other than any that may be granted under the transaction documents or
any lien created by the restructuring statute) or violate any existing
law or any existing order, rule or regulation applicable to the
seller;
(k) no governmental approvals, authorizations, consents, orders or other
actions or filings are required for the seller to execute, deliver and
perform its obligations under the sale agreement except those which
have previously been obtained or made and post closing filings
required in connection therewith and those that the seller, in its
capacity as servicer, is required to make in the future under the
servicing agreement; and
(l) no court or administrative proceeding is pending and, to the seller's
knowledge, no court or administrative proceeding is threatened and, to
the seller's knowledge, no investigation is pending or threatened:
o asserting the invalidity of the sale agreement, the other
transaction documents, the notes, the certificates, the
securitization statute or the financing order, or seeking to
prevent the consummation of the transactions contemplated by the
sale agreement or the other transaction documents;
o seeking a determination that might materially and adversely
affect the performance by the seller of its obligations under, or
the validity or enforceability of, the sale agreement, the other
transaction documents, the notes or the certificates; or
o seeking to adversely affect the federal or state income tax
classification of the notes or the certificates as debt.
In the sale agreement, the seller does not represent or warrant that any
amounts actually collected arising from the RRB charge will in fact be
sufficient to meet payment obligations on the notes or that assumptions made in
calculating the RRB charge will in fact be realized.
In the event of a breach by the seller of any representation specified in
clause (d) or clause (f) above that has a material adverse effect on the
certificateholders, the seller will be obligated to repurchase the transition
property from the note issuer at a repurchase price equal to the outstanding
principal amount of the notes and all accrued and unpaid interest, unless:
35
o within 90 days after the date of the occurrence of the breach, the
breach is cured or the seller takes remedial action so that there
is not and will not be a material adverse effect on the
certificateholders as a result of the breach; and
o either of the following alternative conditions are met:
o if the seller had, immediately prior to the breach, a long
term debt rating of at least "A3" by Moody's Investors
Service, Inc. and "BBB" (or the equivalent) by Standard &
Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., or Fitch, Inc., and the seller enters into a
binding agreement with the note issuer to pay any amounts
necessary so that all interest payments due on the notes
during the 90-day period will be paid in full; or
o if the seller does not have these long term debt ratings
immediately prior to the breach, but within 2 business days
after the occurrence of the breach, the seller deposits an
amount in escrow with the note trustee sufficient to pay all
interest payments, taking into account amounts available in the
collection account for such purpose, which will become due on
the notes during the 90-day period.
Any escrowed amounts will be used by the note trustee to make interest payments
if there are not sufficient funds otherwise available. The sale agreement
provides that any change in the law by legislative enactment or constitutional
amendment or (if such means become available in the future) referendum or
initiative petition that renders any of the representations and warranties
untrue does not constitute a breach under the sale agreement.
In the event of a breach by the seller of any representation or warranty
specified in clauses (b), (c), (g), (h), (i), (j) or (l) above that has a
material adverse effect on the certificateholders, if, within 90 days after the
date of the breach, the breach has not been cured and the seller has not taken
remedial action so that there is not and will not be a material adverse effect
on the certificateholders as a result of the breach, then the seller will be
required to repurchase the transition property for the repurchase price
described above. After the payment by the seller of the repurchase price, no
person or entity will have any other claims, rights or remedies against the
seller under or arising from the sale agreement, except for the indemnity rights
of the indemnified persons described below.
In the event of the repurchase of the transition property and early
redemption of notes and certificates, the seller may also be required to
indemnify any swap counterparty for any losses incurred as a result of the early
termination of the swap agreement.
In the event of the seller's willful misconduct or negligence in the
performance of its duties or observance of the covenants under the sale
agreement or a breach in any material respect of any representation or warranty
in the sale agreement other than those that trigger the seller's repurchase
obligation, the seller will be required to indemnify, defend and hold harmless
the note issuer, the noteholders, the certificateholders and any swap
counterparty against any costs, expenses, losses, claims, damages and
liabilities incurred as a result of the breach, except to the extent of amounts
either resulting from the willful misconduct or gross negligence of the
indemnified person or resulting from a breach of a representation or warranty
made by the indemnified person in the transaction documents that gives rise to
the seller's breach. The noteholders and the certificateholders, however, may
only enforce their rights against the seller through an action brought by the
note trustee or the certificate trustee, as the case may be. The seller may, at
its election and in full satisfaction of its indemnity obligation, repurchase
the transition property at the repurchase price described above, in which case
no person or entity will have any claims, rights or remedies against the seller
under or arising from the sale agreement, except for the indemnity rights of the
indemnified persons described below. The remedies provided for in the sale
agreement are the sole and exclusive remedies of the note issuer, the note
trustee (for the benefit of the noteholders) and the certificate trustee (for
the benefit of the certificateholders) against the seller for breach of its
representations and warranties in the sale agreement.
In addition, the seller will indemnify and hold harmless the note trustee,
the Delaware trustee, the certificate trustee, the trust, the State of
Connecticut, the finance authority, the State Treasurer, agencies of the State
of Connecticut and any of their respective affiliates, officials, officers,
directors, employees, consultants, counsel and agents against any expenses
(including legal fees and expenses), losses, claims, taxes, damages and
liabilities incurred by any of these persons as a result of the seller's willful
misconduct or negligence in the performance of its
36
duties or observance of the covenants under the sale agreement or a breach by
the seller of its representations and warranties in the sale agreement, except
to the extent of amounts either resulting from the willful misconduct or gross
negligence of the indemnified person or resulting from a breach of a
representation or warranty made by the indemnified person in the transaction
documents that gives rise to the seller's breach.
The seller will also agree to take any legal or administrative action,
including defending against or instituting and pursuing legal actions, as may be
reasonably necessary to protect the note issuer, the noteholders, the
certificateholders, the note trustee, the Delaware trustee, the certificate
trustee, the trust, the State of Connecticut, the finance authority, the State
Treasurer, agencies of the State of Connecticut and any of their respective
affiliates, officials, officers, directors, employees, consultants, counsel and
agents from claims, state actions or other actions or proceedings of third
parties which, if successfully pursued, would result in a breach of any
representation described above. The seller will be entitled to be reimbursed by
the note issuer for the costs and expenses of taking these actions. The seller
will also agree that it will not at any time assert any security interest, lien,
charge or encumbrance against the transition property.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
TRUE SALE
The seller will represent and warrant in the sale agreement that the
transfer of the transition property to the note issuer is a valid sale and
assignment of the transition property from the seller to the note issuer. The
seller will also represent and warrant that it will take the appropriate actions
under the restructuring statute to perfect this sale. The restructuring statute
provides that the transactions described in the sale agreement will constitute a
sale of the transition property to the note issuer, and the seller and the note
issuer will treat the transactions as a sale under applicable law, although for
financial reporting and federal income tax purposes the transactions will be
treated as debt of the seller.
Should the transfer of the transition property to the note issuer be
recharacterized as a borrowing by the seller, the restructuring statute provides
that there is a perfected first priority statutory lien on the transition
property that secures all obligations to the certificateholders. In addition, in
the sale agreement, the seller grants to the note issuer a security interest in
the transition property and covenants that it will take appropriate actions to
perfect the security interest, although the seller takes the position that it
has no rights in the transition property to which a security interest could
attach.
Under the restructuring statute and the financing order, on the effective
date of the issuance advice letter, the transition property identified in the
issuance advice letter constitutes a property right that continuously exists as
property for all purposes. Nonetheless, if the seller were to become the debtor
in a bankruptcy case, a creditor of, or a bankruptcy trustee for, the seller, or
the seller itself as debtor in possession, may attempt to take the position
that, because the payments based on the RRB charge are usage-based charges,
transition property comes into existence only as customers use electricity. If a
court were to adopt this position, there is no assurance that either the
statutory lien created by the restructuring statute or the security interest
granted in the sale agreement would be valid as to the RRB charges deemed to
relate to electricity consumed after the commencement of a bankruptcy case by or
against the seller.
If a court were to determine that the transition property has not been
sold to the note issuer, and that the statutory lien created by the
restructuring statute and the security interest granted in the sale agreement
are invalid against payments arising from the RRB charge that become collectible
as a result of the consumption of electricity after the commencement of a
bankruptcy case of the seller, then the certificate trustee, as noteholder and
for the benefit of holders of the certificates, would be an unsecured creditor
of the seller, and delays or reductions in payments on the certificates would
result.
SUBSTANTIVE CONSOLIDATION
In the event the seller or an affiliate of the seller were to become the
debtor in a bankruptcy case, a court could order that the assets and liabilities
of the note issuer be substantively consolidated with those of the seller or an
affiliate. Factors that may tend to support consolidation include the ownership
of the note issuer by the seller, the
37
designation of officers or employees of the seller as directors, other than
independent directors, of the note issuer and the existence of indemnities by
the seller for some liabilities of the note issuer. The seller and the note
issuer have taken steps to reduce this risk. These steps include the fact that
the note issuer is a separate, special purpose limited liability company, the
organizational documents of which require the note issuer to comply with certain
covenants that will respect the separateness of the note issuer from the seller
and provide that it will have two directors independent of the seller.
Nonetheless, these steps may not be completely effective, and thus if the seller
or an affiliate of the seller were to become a debtor in a bankruptcy case, a
court may order that the assets and liabilities of the note issuer be
consolidated with those of the seller or an affiliate, thus resulting in delays
or reductions in payments on the certificates.
RECENT DEVELOPMENTS - LTV STEEL COMPANY
Some of the risks described in this section have been illustrated in the
bankruptcy cases of LTV Steel Company and certain affiliates, or LTV. Upon the
debtors' motion for interim authority to use cash collateral, the bankruptcy
judge allowed the debtors to use receivables (and the related cash proceeds)
that had been transferred to LTV's special purpose finance subsidiary prior to
the commencement of the bankruptcy case and pledged by the subsidiary to a third
party. As adequate protection for the transferred receivables, the court granted
the pledgee a first priority unsecured claim against LTV and a security interest
in receivables generated after commencement of the case. In a preliminary ruling
denying the pledgee relief from the order, the court observed that the ultimate
issue of whether LTV actually sold the receivables to the special purpose
finance subsidiary was a fact-intensive issue that could not be resolved without
extensive discovery and an evidentiary hearing. The dispute was then settled in
conjunction with the approval of senior secured financing that would retire the
debt securities issued by the special purpose finance subsidiary.
See "Risk Factors - Bankruptcy and creditors' rights issues," which begins
on page 24.
THE TRUST
Prior to the sale of the certificates, the finance authority will form the
trust specifically for the purpose of acquiring the notes from the note issuer.
The trust will be a Delaware business trust. The finance authority and the
Delaware trustee, on behalf of the trust, will enter into a declaration of trust
to create the trust. The trust will not be an agency or instrumentality of the
State of Connecticut. The trust will have no assets other than the notes. The
declaration of trust will not permit the trust to engage in any activities other
than holding the notes, issuing the certificates and engaging in other related
activities.
Each class of certificates will represent a fractional undivided
beneficial interest in the related class of notes and any swap agreement,
including all amounts due and to become due under the related class of notes,
and will represent the right to receive the payments on the related class of
notes and any swap agreement. See "Description of the Certificates - Payments,"
which begins on page 62.
The note issuer, the finance authority, the trust, the Delaware trustee
and the certificate trustee will enter into a fee and indemnity agreement under
which the note issuer will pay the Delaware trustee's and the certificate
trustee's reasonable compensation and reasonable fees and expenses. The fee and
indemnity agreement will further provide that the note issuer will indemnify the
Delaware trustee, the certificate trustee, the certificateholders, the trust,
the State of Connecticut, the finance authority, the State Treasurer, agencies
of the State of Connecticut and any of their respective affiliates, officials,
officers, directors, employees, consultants, counsel and agents for, and hold
them harmless against, among other things, any loss, liability or expense
incurred by them arising from the failure of any party to perform its
obligations under the various transaction documents.
The fiscal year of the trust will be the calendar year.
As of the date of this prospectus, because the trust has not yet been
formed, we have not included any financial statements or related information for
the trust.
38
OFFICE OF THE STATE TREASURER OF THE STATE OF CONNECTICUT
The Office of the State Treasurer was established following the adoption
of the fundamental orders of Connecticut in 1638. As described in the
Connecticut State Constitution, the Treasurer has the responsibility to receive
all funds belonging to the State and disburse the same only as may be directed
by law. The Treasurer is the Chief Fiscal Officer for the State government,
overseeing a wide variety of activities regarding the prudent management of
State funds. This includes the administration of a portfolio of pension assets
currently worth approximately $22 billion and a short-term investment fund with
an average daily balance of almost $4 billion. The Office of the State Treasurer
is also responsible for issuing over $1 billion in state debt annually and
managing an existing debt portfolio of over $11 billion.
The restructuring statute contemplates state sponsorship of individual
utility rate reduction bond issuances through the finance authority. The finance
authority is the State of Connecticut, acting through the Office of the State
Treasurer. The Office of the State Treasurer has participated in the structuring
of the transaction relating to the issuance of the certificates and related
matters. Public Resources Advisory Group has provided financial advisory
services to the Office of the State Treasurer in connection with the
certificates.
The certificates do not represent an interest in, or an obligation of, the
State of Connecticut, any governmental agency, authority or instrumentality of
the State of Connecticut or Connecticut Light & Power or any of its affiliates,
except that each class of certificates does represent a fractional undivided
beneficial interest in the related class of notes issued by the note issuer
which is an affiliate of Connecticut Light & Power. None of these entities or
the trust will guarantee or insure the certificates, the notes or the property
securing the notes.
Neither the certificates, the notes nor the property securing the notes is
an obligation of the State of Connecticut or any political subdivision,
governmental agency, authority or instrumentality of the State of Connecticut or
of Connecticut Light & Power or any of its affiliates, except for CL&P Funding
LLC, which is an affiliate of Connecticut Light & Power.
Neither the full faith and credit nor the taxing power of the State of
Connecticut is pledged to the payment of principal of, or interest on, the
certificates or the notes. Furthermore, the issuance of the certificates and the
notes shall not directly, indirectly or contingently obligate the State of
Connecticut or any political subdivision thereof to levy or to pledge any form
of taxation thereof or to make any appropriation for their payment.
THE NOTE ISSUER
The note issuer is a limited liability company organized under the laws of
the State of Delaware. The seller is the sole member of the note issuer. The
principal executive office of the note issuer is located at 107 Selden Street,
Berlin, Connecticut 06037-1616. The telephone number of the note issuer is (860)
665-5000. The seller organized the note issuer for the limited purpose of
holding and servicing the transition property and issuing notes secured by the
transition property and the other note collateral and related activities. The
note issuer's organizational documents restrict it from engaging in other
activities. The note issuer does not have any employees, but Connecticut Light &
Power will provide it with administrative services and office space according to
the terms of an administration agreement. This agreement requires the note
issuer to pay Connecticut Light & Power an administrative fee of $75,000 per
year, payable quarterly, for as long as Connecticut Light & Power provides these
services. The assets of the note issuer will consist primarily of the transition
property and the other collateral for the notes. In addition, the note issuer's
organizational documents require it to operate in a manner intended to reduce
the likelihood that it would be consolidated in the seller's bankruptcy estate
if the seller becomes involved in a bankruptcy case.
The note issuer is a recently formed entity and, as of the date of this
prospectus, has not carried on any business activities. We have included audited
financial statements of the note issuer beginning at page F-1 of this
prospectus.
39
OFFICERS AND DIRECTORS
The directors of the note issuer oversee the management of its property
and business. The following is a list of the officers and directors of the note
issuer upon the closing of the offering:
NAME AGE TITLE
---- --- -----
Randy A. Shoop 42 President and Director
John P. Stack 42 Vice President and Treasurer
O. Kay Comendul 45 Secretary
William J. Quinlan 40 Assistant Secretary
David H. Boguslawski 56 Director
Rodney O. Powell 48 Director
Christopher T. Burt 30 Director
David O. Taylor 32 Director
All of the note issuer's officers and directors, other than those
directors who are independent of Connecticut Light & Power and its affiliates,
have served in their capacities since the organization of the note issuer. The
independent directors will begin to serve effective immediately prior to the
closing of the offering. The officers and directors will devote as much time as
is necessary to the affairs of the note issuer. The note issuer will have
sufficient officers, directors and employees to carry on its business.
Randy A. Shoop is Assistant Treasurer - Finance for the Northeast
Utilities system and Treasurer of Connecticut Light & Power. He began his
Northeast Utilities career in 1997 as Manager - Bank Relations and he assumed
his present position in September 1998. Prior to joining Northeast Utilities,
Mr. Shoop was employed by United Technologies Corporation for 15 years, holding
several management positions in a variety of finance positions responsible for
corporate finance, foreign exchange and capital market transactions, as well as
overseeing treasury operations.
John P. Stack is Controller of Connecticut Light & Power and Executive
Director of Corporate Accounting and Taxes for Northeast Utilities. Mr.
Stack joined the company in December 1998. Prior to joining the Company, Mr.
Stack was an audit partner with Arthur Andersen LLP for over 3 years and was
responsible for the audit services provided to Northeast Utilities.
O. Kay Comendul is Assistant Secretary of the Northeast Utilities system.
She joined Public Service Company of New Hampshire in 1978 and was promoted to
Assistant Secretary of that company in 1984. She transferred to Northeast
Utilities's legal department and assumed her present position in April 1997.
William J. Quinlan is Assistant General Counsel and chief regulatory
counsel for the Northeast Utilities system. Mr. Quinlan joined Northeast
Utilities in 1984 as an engineer in the nuclear program. In 1993, Mr. Quinlan
joined Northeast Utilities's Legal Department as an attorney. He assumed his
current position in January 2000.
David H. Boguslawski is Vice President - Energy Delivery for the
Northeast Utilities system. He joined Northeast Utilities in 1977, working
first in engineering and then in finance. In January, 1994, Mr. Boguslawski
was appointed to Vice President-Customer Operations for Public Service
Company of New Hampshire. He assumed his present position in 1996.
Rodney O. Powell is Vice President - Central Region of Connecticut Light &
Power. Mr. Powell joined Northeast Utilities in 1978 as a budget analyst. In
1982, he was promoted to senior analyst. In 1994 he worked as a customer
engineering and marketing services consultant and was promoted to manager in
Regulatory Relations in 1995. In 1997, he became the general manager of the
Simsbury Area Work Center. Prior to joining Northeast
40
Utilities, Mr. Powell worked for Arthur Andersen & Company as a senior staff
auditor and for the University of Connecticut Medical School as an associate
director. He assumed his present position in October 1998.
Christopher T. Burt will serve as an independent director of the note
issuer. Mr. Burt joined Global Securitization Services, LLC in December 1999 as
an Assistant Vice President and has been a Vice President since December 2000.
Prior to joining Global Securitization Services, LLC, Mr. Burt worked for
BancBoston Robertson Stephens as an Administrator from September 1996 to
September 1998 and worked for Chase Manhattan Bank as a Trust Officer from
September 1998 to December 1999.
David O. Taylor will serve as an independent director of the note issuer.
Mr. Taylor joined Global Securitization Services, LLC in August 1999 as an
Assistant Vice President and has been a Vice President since December 2000.
Prior to joining Global Securitization Services, LLC, Mr. Taylor was a
consultant at Phoenix Technologies, KK from October 1995 to April 1997 and an
Assistant Treasurer at Bankers Trust Company, a division of Deutsche Bank, from
April 1997 to August 1999.
The note issuer will not compensate its officers and will not compensate
its directors, other than the two directors that are independent of Connecticut
Light & Power and its affiliates, for their services on behalf of the note
issuer. The initial aggregate annual compensation for both of the independent
directors will be $2,000. Any officer will serve at the discretion of the note
issuer's sole member. The note issuer's organizational documents provide that it
will indemnify its officers and directors against liabilities incurred in
connection with their services on behalf of the note issuer.
THE SELLER AND SERVICER
Connecticut Light & Power was incorporated under Connecticut law in 1917.
Connecticut Light & Power is an electric company primarily engaged in the
business of providing electric service to retail customers in an area of
approximately 4,400 square miles, including 149 cities and towns. In 2000,
Connecticut Light & Power served an average of approximately 1.1 million
customers.
Connecticut Light & Power is regulated by the Department of Public Utility
Control and the Federal Energy Regulatory Commission. Connecticut Light & Power
is also regulated by the Nuclear Regulatory Commission because of its ownership
of nuclear generation assets.
Connecticut Light & Power is a wholly owned subsidiary of Northeast
Utilities. On October 13, 1999, Northeast Utilities entered into a merger
agreement with Consolidated Edison, Inc. pursuant to which Northeast Utilities
would become a wholly owned subsidiary of Consolidated Edison. On March 5, 2001,
Northeast Utilities announced that Consolidated Edison had advised Northeast
Utilities that Consolidated Edison was not willing to close the merger on the
previously agreed upon terms. Northeast Utilities said that it had notified
Consolidated Edison that it was treating its refusal to proceed on the terms set
forth in the merger agreement as a repudiation and breach of the merger
agreement, and that it will file suit to obtain the benefits of the transaction
as negotiated for Northeast Utilities's shareholders. On March 6, 2001,
Consolidated Edison announced that, in response to Northeast Utilities's action,
Consolidated Edison had filed suit against Northeast Utilities in the Federal
District Court in the Southern District of New York seeking a declaratory
judgment that Northeast Utilities has failed to satisfy conditions precedent
under the merger agreement. On March 12, 2001, Northeast Utilities announced
that it had filed suit against Consolidated Edison in the Federal District Court
in the Southern District of New York seeking damages in excess of $1 billion
arising from Consolidated Edison's breach of the merger agreement.
CONNECTICUT LIGHT & POWER REVENUES, CUSTOMER BASE AND ENERGY CONSUMPTION
Several factors influence the number of Connecticut Light & Power's retail
customers and their electric energy consumption. One of these factors is the
general economic climate in Connecticut Light & Power's service territory, which
affects migration of residential, commercial and industrial customers into or
out of the service territory. Another factor influencing sales of electricity is
temperature. Connecticut Light & Power's electricity sales are typically higher
in the winter and summer when heating or cooling demands are highest than in the
spring and fall when temperatures tend to be more moderate. The level of
business activity of commercial and industrial
41
customers also tends to influence their electricity consumption. Other factors
affecting the electricity consumption of retail customers, primarily over the
longer term, include the availability of more energy-efficient appliances and
other products and retail customers' ability to acquire these products.
The table below sets forth Connecticut Light & Power's total retail
revenues from retail sales of electrical energy for the years 1995 to 2000:
RETAIL REVENUES (000,000S)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Residential $ 984 $1,009 $1,014 $ 998 $1,014 $ 966
Commercial 833 848 871 876 851 823
Industrial 314 306 306 303 291 286
Other 36 37 37 37 35 35
------ ------ ------ ------ ------ ------
Total $2,167 $2,200 $2,228 $2,214 $2,191 $2,110
====== ====== ====== ====== ====== ======
The table below sets forth Connecticut Light & Power's monthly average
number of retail customers by class for the years 1995 to 2000:
MONTHLY AVERAGE NUMBER OF RETAIL CUSTOMERS (000S)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Residential 998 1,002 1,006 1,013 1,022 1,022
Commercial 90 90 91 91 92 92
Industrial 4.2 4.1 4.1 4.1 4.0 4.0
Other 2.8 2.9 2.8 2.8 2.8 2.8
------ ------ ------ ------ ------ ------
Total 1,095 1,099 1,104 1,111 1,121 1,121
====== ====== ====== ====== ====== ======
The table below sets forth Connecticut Light & Power's retail energy sales
for the years 1995 to 2000:
RETAIL ENERGY SALES (GIGAWATT-HOURS)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Residential 8,405 8,573 8,487 8,540 9,071 9,084
Commercial 8,233 8,469 8,567 8,915 8,973 9,037
Industrial 3,950 3,910 3,900 3,965 4,004 4,000
Other 268 269 268 273 268 285
------ ------ ------ ------ ------ ------
Total 20,856 21,221 21,222 21,693 22,316 22,406
====== ====== ====== ====== ====== ======
ESTIMATED CONSUMPTION AND VARIANCES
Connecticut Light & Power's calculation of the initial RRB charge and
subsequent adjustments are based on electricity sales estimates. The servicer
will use these estimates to calculate and set the RRB charge at a level intended
to generate revenues sufficient to pay principal of and interest on the
certificates, to pay fees and expenses (including indemnities) related to
servicing and retiring the notes and the certificates, to replenish the capital
subaccount and to fund the overcollateralization amount.
42
Connecticut Light & Power conducts sales estimate variance analyses on a
regular basis to monitor the accuracy of energy estimates against recorded
consumption. The table below presents the estimates of Connecticut Light &
Power's retail energy sales in gigawatt-hours for the years 1995 to 2000. There
are 1,000,000 kilowatt-hours in a gigawatt-hour. Each estimate was made in the
prior year. For example, the 1995 estimate of 21,098 gigawatt-hours was prepared
in 1994.
ANNUAL VARIANCES
RETAIL ENERGY SALES (GIGAWATT-HOURS)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Estimate 21,098 20,761 21,529 21,472 21,895 22,858
Actual 20,856 21,221 21,222 21,693 22,316 22,406
Variance -243 460 -307 221 421 -452
Percentage Variance -1.2% 2.2% -1.4% 1.0% 1.9% -2.0%
Actual usage depends on several factors, including temperatures and
economic conditions. For example, while Connecticut Light & Power's methodology
for estimating usage assumes normal conditions, abnormally hot summers can add
an extra 1 to 2 percent in electricity sales. Regional economic conditions can
also affect sales as retail customers curb electricity usage to save money,
businesses close and retail customers migrate from Connecticut Light & Power's
service territory. Accordingly, variations in conditions will affect the
accuracy of any estimate.
BILLING AND COLLECTIONS
CREDIT POLICY
Connecticut Light & Power's credit and collections policies are regulated
by the Department of Public Utility Control. Under the Department of Public
Utility Control's regulations, Connecticut Light & Power is obligated to provide
service to all customers within its service territory.
On application for service, the identification of all residential
customers is verified through the use of a major credit-reporting bureau. In
instances where nonresidential customers have not established satisfactory
credit, a signed application and a security deposit are required. The security
deposit may be in the form of a cash deposit, surety bond and/or irrevocable
letter of credit. The amount of security is normally the amount of one month's
bill. Connecticut Light & Power does not obtain security deposits from its
residential customers.
According to the Department of Public Utility Control's regulations,
Connecticut Light & Power may refuse to provide service, at any location, to an
applicant who is indebted to it for any service previously furnished to the
applicant. Connecticut Light & Power will commence service, however, if a
reasonable payment plan for the indebtedness is first made between a residential
applicant and Connecticut Light & Power, and it may likewise commence service
for an industrial or commercial applicant.
BILLING PROCESS
Connecticut Light & Power bills its customers in 20 billing cycles each
month. These billing cycles range from 25 to 38 days, with an average of 30
days. An approximately equal number of bills are distributed each business day.
During 2000, Connecticut Light & Power mailed out an average of approximately
54,000 bills per billing cycle (i.e., on each business day) to customers in its
various customer categories.
Approximately 69,000 residential and small business customers, which
constitutes approximately 6 percent of Connecticut Light & Power's retail
customers, choose to be billed using Connecticut Light & Power's budget billing
program. For these customers Connecticut Light & Power determines and bills a
monthly budget amount
43
based on the last twelve months of billing history for each account. Customers
receive eleven equal monthly budget bills. Overpayments or underpayments for
actual usage during the prior year are reconciled on each customer's twelfth
month budget bill. The budget amount is recalculated every four months, if
necessary.
For accounts with potential billing errors, exception reports are
generated for manual review. This review examines accounts that have abnormally
high or low bills, potential meter-reading errors and possible meter
malfunctions.
COLLECTION PROCESS
Connecticut Light & Power receives the majority of its payments via the
U.S. mail; however, other payment options are also available. These options
include electronic payments, electronic fund transfers, as well as direct
payment at Connecticut Light & Power's payment agency network.
Connecticut Light & Power considers customer bills to be delinquent if
they are unpaid 38 days after the billing date. In general, Connecticut Light &
Power's collection process begins when balances are unpaid for 52 days or more
from the billing date. At that time Connecticut Light & Power begins collection
activities ranging from delinquency notice mailings, to telephone calls, to
personal collection and ending with electricity shutoff. Connecticut Light &
Power also uses collection agencies and legal collection experts as needed
throughout this process.
RESTORATION OF SERVICE
Before restoring service that has been shut off for non-payment,
Connecticut Light & Power has the right to require the payment of all of the
following charges:
o amounts owing on an account including the amount of any past-due
balance for charges for which Connecticut Light & Power may
disconnect service if they are unpaid and legal notice requirements
were met prior to service termination, the current billing and a
credit deposit, if applicable;
o any miscellaneous charges associated with the reconnection of
service (i.e., reconnection charges and/or returned check charges);
o any charges assessed for unusual costs incidental to the termination
or restoration of service which have resulted from the customer's
action or negligence; and
o any unpaid closing bills from other accounts in the name of the
customer of record.
LOSS EXPERIENCE
The following table sets forth information relating to Connecticut Light &
Power's annual net charge-offs (i.e., net of recoveries) for retail customers
for the years 1995 to 2000:
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Net Charge-Offs
(000,000s): $11.5 $12.8 $10.2 $12.7 $12.4 $8.8
Percentage of
Retail
Revenues: 0.53% 0.58% 0.46% 0.58% 0.57% 0.42%
44
Connecticut Light & Power determines a customer's account to be inactive
on the date:
o the customer requests discontinuance of service,
o a new customer applies for service at a location where the
customer of record has not yet discontinued service, or
o the customer's service has been shut off due to non-payment.
Connecticut Light & Power's policy is to charge-off an inactive account
against bad debt reserve 75 days after the date the account is determined to be
inactive if payment has not been received.
AGING RECEIVABLES
The following table sets forth information relating to the aging of
Connecticut Light & Power's accounts receivable for all classes of customers on
December 31st of each year shown. This historical information is presented
because Connecticut Light & Power's actual accounts receivable aging experience
may affect the amounts charged-off, and consequently the total amounts remitted,
that arise from the RRB charge.
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Percentage
Outstanding For:
1 - 30 days 69.7% 68.7% 66.4% 64.5% 68.4% 63.9%
31 - 60 days 19.9 19.2 20.6 21.8 20.8 23.8
61 - 90 days 3.6 3.8 4.5 4.1 3.4 3.9
91 - 120 days 1.7 1.5 1.7 1.8 1.3 1.7
over 120 days 5.1 6.8 6.8 7.8 6.1 6.7
During the last six years, the accounts receivable aging experience for
Connecticut Light & Power has remained relatively consistent with no discernible
trend upwards or downwards. We are not aware of any material factors that caused
the accounts receivable aging experience to vary.
SERVICING
SERVICING PROCEDURES
The servicer, on behalf of the note issuer, will manage, service and
administer, and bill and collect payments arising from, the transition property
according to the terms of the servicing agreement between the servicer and the
note issuer. The servicer's duties will include responding to inquiries of
customers and the Department of Public Utility Control regarding the transition
property and the RRB charge, calculating electricity usage, accounting for
collections, furnishing periodic reports and statements to the note issuer, the
note trustee, the certificate trustee and the rating agencies and periodically
adjusting the RRB charge.
The servicer, on behalf of the noteholders and the certificateholders,
will institute any action or proceeding necessary to compel performance by the
Department of Public Utility Control or the State of Connecticut of any of their
obligations or duties under the restructuring statute, the financing order or
any true-up letter. In addition, the servicer will take legal or administrative
actions, including defending against or instituting and pursuing legal actions
and appearing or testifying in hearings or similar proceedings, as may be
reasonably necessary to block or overturn any attempts to cause a repeal of,
modification of or supplement to the restructuring statute or the financing
order or the rights of holders of transition property by executive action,
legislative enactment or constitutional amendment or (if such means become
available in the future) referendum or initiative petition that would be adverse
to certificateholders. The cost of any action will be payable from payments
arising from the RRB charge as an expense of the note issuer.
45
SERVICING STANDARDS AND COVENANTS
The servicing agreement will require the servicer, in servicing and
administering the transition property, to employ or cause to be employed
procedures and exercise or cause to be exercised the same care it customarily
employs and exercises in servicing and administering bill collections for its
own account and for others.
Consistent with the foregoing, the servicer may in its own discretion
waive any late payment charge or any other fee or charge relating to delinquent
payments, if any, and may waive, vary or modify any terms of payment of any
amounts payable by a customer, in each case, if the waiver or action:
o would comply with the servicer's customary practices or those of any
successor servicer for comparable assets that it services for itself
and for others;
o would not materially adversely affect the certificateholders; and
o would comply in all material respects with applicable law.
In addition, the servicer may write off any amounts that it deems uncollectible
according to its customary practices.
In the servicing agreement, the servicer will covenant that, in servicing
the transition property it will:
o manage, service, administer and make collections of payments arising
from the transition property with reasonable care and in compliance
with applicable law, including all applicable guidelines of the
Department of Public Utility Control, using the same degree of care
and diligence that the servicer exercises for bill collections for its
own account and, if applicable, for others;
o follow customary standards, policies and procedures for the industry
in performing its duties as servicer;
o use all reasonable efforts, consistent with its customary servicing
procedures, to bill and collect the RRB charge;
o comply in all material respects with laws applicable to and binding
on it relating to the transition property;
o submit annually and, beginning in the last year that the certificates
are scheduled to be outstanding, quarterly a true-up letter to the
Department of Public Utility Control seeking an adjustment, if any, of
the RRB charge; and
o submit quarterly and, beginning in the last year that the certificates
are scheduled to be outstanding, monthly a true-up letter to the
Department of Public Utility Control seeking an adjustment, if any, of
the RRB charge if it reasonably determines that an adjustment is then
necessary to assure timely payment of scheduled amortization on the
notes.
REMITTANCES TO COLLECTION ACCOUNT
Starting with collections that are received on the first business day that
is at least 45 days after the first day on which Connecticut Light & Power
imposes the RRB charge, the servicer will remit daily to the note trustee,
within 2 business days after receipt, an amount equal to the RRB charges
collected, calculated based on the servicer's remittance methodology.
Connecticut Light & Power's remittance methodology is as follows:
o Gross customer collections received will be deposited and posted to
Connecticut Light & Power's accounts receivable system.
o The amount deposited will be adjusted by deducting an amount for sales
taxes and dishonored checks and by adding an amount for write-off
recoveries to determine net collections for each of Connecticut Light
& Power's customer classes.
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o Net collections for each customer class will be multiplied by the
applicable RRB percentage (determined as described below) for such
customer class to determine the amount of RRB charge collected for
that customer class.
o The total of the RRB charges collected for all customer classes will
be remitted to the note trustee.
For net collections received on any day that occurs before two full
billing months have elapsed since the first day on which Connecticut Light &
Power imposed the RRB charge, the applicable RRB percentage for a customer class
is determined by dividing the initial RRB charge (cents per kilowatt-hour) for
such customer class by the total rate (cents per kilowatt-hour) in effect for
such customer class on the first day on which Connecticut Light & Power imposed
the RRB charge. For net collections received on any day that occurs after two
full billing months have elapsed since the first day on which Connecticut Light
& Power imposed the RRB charge, the applicable RRB percentage for a customer
class is determined by dividing the aggregate amount of all RRB charges billed
by Connecticut Light & Power to all customers in such customer class by the
aggregate of all amounts billed by Connecticut Light & Power to all customers in
such customer class, in each case during the second preceding billing month.
SERVICING COMPENSATION
The servicer will be entitled to receive an annual servicing fee in an
amount equal to:
o 0.05 percent of the initial principal amount of the notes; or
o up to 1.25 percent of the initial principal balance of the notes if
the RRB charge is being billed separately to customers by a successor
servicer.
The note trustee will pay the servicing fee in quarterly installments (together
with any portion of the servicing fee that remains unpaid from prior payment
dates) to the extent of available funds in the collection account prior to the
payment of any principal of and interest on the notes. See "Description of the
Notes - Allocations and Payments," which begins on page 56.
THIRD PARTY SUPPLIERS
As part of the deregulation of the Connecticut electric industry, the
restructuring statute contemplates that electricity metering and billing
services may be unbundled from distribution services. See "Energy Deregulation
and New Connecticut Market Structure - Third Party Billing Options," which
begins on page 28. As a result, while the restructuring statute continues to
reserve electricity metering and billing services to electric distribution
companies, third party suppliers may have the opportunity to bill, collect and
remit the RRB charge in the future. When a third party supplier bills, collects
and remits billed amounts arising from the RRB charge, there is a greater risk
that the servicer will receive payments arising from the RRB charge later than
it would if the servicer billed and collected these amounts itself. The greater
the delay in receipt of payment, the larger the amount of payments that bear the
risk of non-payment due to the default, bankruptcy or insolvency of the third
party supplier holding the funds. Third party supplier billing also places
increased information requirements on the servicer. The servicer will have the
responsibility of accounting for payments arising from the RRB charge due to
certificateholders regardless of which entity provides a customer's electric
power.
To mitigate the risks associated with a third party supplier, see "Risk
Factors - Problems with the servicing of transition property may cause payment
delays or losses - Billing of the RRB charge by third party suppliers may cause
delays in remittances," which begins on page 22, and "Risk Factors - Bankruptcy
and creditors' rights issues - Bankruptcy of the servicer or a third party
supplier could also delay or reduce payments," which begins on page 24, the
Department of Public Utility Control states in its financing order issued to
Connecticut Light & Power that it will not authorize a third party supplier to
bill and collect the RRB charge unless such third party supplier meets specified
creditworthiness criteria and complies with specified billing, collection and
remittance procedures and information access requirements. The Department of
Public Utility Control also states that it will require creditworthiness
standards and other procedures and requirements that are consistent with
maintaining "AAA" (or its equivalent) ratings on the certificates, subject to
the following minimum criteria, procedures and requirements:
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o The third party supplier must agree to remit the full amount of the
RRB charge it bills to customers, regardless of whether payments are
received from customers, within 15 days after the servicer's bill for
such charges.
o The third party supplier must provide the servicer with access to
information regarding kilowatt-hour billing and electricity usage by
customers to permit the servicer to fulfill its obligations under the
servicing agreement.
o The servicer will be entitled, within seven days after a default by a
third party supplier in remitting to the servicer any amounts arising
from the RRB charge, to assume responsibility for billing the RRB
charge to the customers of the third party supplier or to assign that
responsibility to a third party.
o If and so long as a third party supplier does not maintain at least a
"BBB" (or the equivalent) long-term unsecured credit rating from
Moody's and S&P, a third party supplier will be required to maintain
with the servicer, or as directed by the servicer, a cash deposit or
comparable security equal to one month's maximum estimated collections
of payments arising from the RRB charge, as agreed upon by the
servicer and the third party supplier.
The third party supplier will, in effect, replace the customer as the
obligor for payments arising from the RRB charge, and the servicer, on behalf of
the note issuer, will have no right to collect such payments from the customer.
In the event of a default in the remittance of payments arising from the RRB
charge by a third party supplier, the servicer will take these amounts into
account in adjusting the RRB charge.
Neither the servicer nor Connecticut Light & Power in any capacity apart
from its capacity as servicer will pay any shortfalls resulting from the failure
of any third party supplier to remit payments arising from the RRB charge to the
servicer. The true-up adjustment mechanism for the RRB charge, as well as the
overcollateralization amount and the amounts deposited in the capital
subaccount, are intended to mitigate the risk of shortfalls. Any shortfalls that
occur will delay the payment of principal of and interest on the certificates.
SERVICER REPRESENTATIONS AND WARRANTIES
In the servicing agreement, the servicer will represent and warrant to the
note issuer, as of the closing of the issuance of the certificates, among other
things, that:
o the servicer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Connecticut, with
corporate power and authority to own its properties as owned by it on
the closing date and to conduct its business as its business is
conducted by it on the closing date and to execute, deliver and carry
out the terms of the servicing agreement;
o the execution, delivery and carrying out of the terms of the servicing
agreement have been duly authorized by all necessary corporate action
on the part of the servicer;
o the servicing agreement constitutes a legal, valid and binding
obligation of the servicer, enforceable against it in accordance with
its terms, subject to insolvency, reorganization, moratorium,
fraudulent transfer and other laws relating to or affecting creditors'
rights generally from time to time in effect and to general principles
of equity, regardless of whether considered in a proceeding in equity
or at law;
o the consummation of the transactions contemplated by the servicing
agreement does not conflict with the servicer's articles of
organization or by-laws or any material agreement to which the
servicer is a party or bound, result in the creation or imposition
of any lien on the servicer's properties pursuant to a material
agreement or violate any existing law or any existing order, rule or
regulation applicable to the servicer so as to adversely affect the
servicer, the noteholders or the certificateholders;
o the servicer has all material licenses necessary for it to perform its
obligations under the servicing agreement (except where failure to
obtain such licenses would not be reasonably likely to adversely
affect the servicing of the transition property);
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o no governmental approvals, authorizations or filings are required for
the servicer to execute, deliver and perform its obligations under the
servicing agreement except those which have previously been obtained
or made and those that the servicer is required to make in the future
under the servicing agreement or pursuant to applicable law; and
o no court or administrative proceeding is pending and, to the
servicer's knowledge, no court or administrative proceeding is
threatened and, to the servicer's knowledge, no investigation is
pending or threatened, asserting the invalidity of, or seeking to
prevent the consummation of the transactions contemplated by, the
servicing agreement or seeking a determination that might materially
and adversely affect the performance by the servicer of its
obligations under, or the validity or enforceability of, the
servicing agreement.
In the event of willful misconduct or negligence by the servicer under the
servicing agreement or in the event of the servicer's breach in any material
respect of any of the representations and warranties in the preceding paragraph,
the servicer will indemnify, defend and hold harmless the note issuer, the
noteholders, the certificateholders and any swap counterparty against any costs,
expenses, losses, claims, damages and liabilities incurred as a result of these
events. The noteholders, the certificateholders and any swap counterparty,
however, may only enforce their rights against the servicer through an action
brought by the note trustee or the certificate trustee, as the case may be. The
servicer will not be liable for any costs, expenses, losses, claims, damages or
liabilities resulting from the willful misconduct or gross negligence of the
indemnified persons. The servicer also will not be liable for any costs,
expenses, losses, claims, damages or liabilities, regardless of when incurred,
after the notes and the certificates have been discharged in full.
The servicer will indemnify, defend and hold harmless the note trustee,
the certificate trustee, the Delaware trustee, the trust, the State of
Connecticut, the finance authority, the State Treasurer, agencies of the State
of Connecticut and any of their respective affiliates, officials, officers,
directors, employees, consultants, counsel and agents against any costs,
expenses, losses, claims, damages and liabilities incurred as a result of the
willful misconduct or negligence of the servicer under the servicing agreement
or the servicer's breach in any material respect of any of the representations
and warranties above. The servicer will not be liable for any costs, expenses,
losses, claims, damages or liabilities resulting from the willful misconduct or
gross negligence of the indemnified person or resulting from a breach of a
representation or warranty made by an indemnified person in the transaction
documents that gives rise to the servicer's breach.
STATEMENTS BY SERVICER
The servicer will prepare, and the note trustee will furnish to the
noteholders on each payment date the statement described under "Description of
the Notes - Reports to Noteholders," which begins on page 61. The servicer will
also prepare and the certificate trustee will furnish to the certificateholders
on each payment date the statement described under "Description of the
Certificates - Reports to Certificateholders," which begins on page 66.
EVIDENCE AS TO COMPLIANCE
The servicing agreement will provide that a firm of independent public
accountants, at the note issuer's expense, will furnish to the note issuer, the
note trustee, the certificate trustee and the rating agencies on or before March
31 of each year, beginning March 31, 2002, a statement as to compliance by the
servicer with standards relating to the servicing of the transition property
during the preceding twelve months ended December 31 (or preceding period since
the closing date of the issuance of the certificates in the case of the first
statement). This report will state that the accounting firm has performed agreed
upon procedures in connection with the servicer's compliance with the servicing
procedures of the servicing agreement, identifying the results of the procedures
and including any exceptions noted. The report will also indicate that the
accounting firm providing the report is independent of the servicer within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants.
The servicing agreement will also provide for delivery to the note issuer,
the note trustee, the certificate trustee and the rating agencies, on or before
March 31 of each year, beginning March 31, 2002, of a certificate signed by an
officer of the servicer stating that the servicer has fulfilled its obligations
under the servicing agreement
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throughout the preceding twelve months ended December 31 (or preceding period
since the closing date of the issuance of the certificates in the case of the
first certificate) or, if there has been a default in the fulfillment of any
material obligation under the servicing agreement, describing each such material
default. The servicer has agreed to give the note issuer, the note trustee and
the certificate trustee notice of servicer defaults under the servicing
agreement. For so long as any certificates are listed on the Luxembourg Stock
Exchange and the rules of that exchange so require, this notice also will be
given by publication in a daily newspaper in Luxembourg, which is expected to be
the Luxemburger Wort.
You may obtain copies of the statements and certificates by sending a
written request addressed to the certificate trustee.
MATTERS REGARDING THE SERVICER
The servicing agreement will provide that Connecticut Light & Power may
not resign from its obligations and duties as servicer under the servicing
agreement, except when either:
o Connecticut Light & Power determines that performance of its duties is
no longer permissible under applicable law; or
o Connecticut Light & Power receives notice from the rating agencies
that Connecticut Light & Power's resignation will not result in a
reduction or withdrawal of the then current ratings on any class of
certificates and consent of the Department of Public Utility Control.
No resignation by Connecticut Light & Power as servicer will become effective
until a successor servicer has assumed Connecticut Light & Power's servicing
obligations and duties under the servicing agreement.
The servicing agreement will further provide that neither the servicer nor
any of its directors, officers, employees, or agents will be liable to the note
issuer or any other person or entity, except as provided under the servicing
agreement, for taking any action or for refraining from taking any action under
the servicing agreement or for errors in judgment. The servicing agreement will
not protect the servicer or any of its directors, officers, employees or agents
against any liability that would otherwise be imposed by reason of their willful
misconduct or negligence in the performance of duties. In addition, the
servicing agreement will provide that the servicer is under no obligation to
appear in, prosecute, or defend any legal action, except as provided in the
servicing agreement at the note issuer's expense.
Under the circumstances specified in the servicing agreement, any entity
into which the servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the servicer is a party, or any entity
succeeding to the business of the servicer or its obligations as servicer, will
be the servicer under the servicing agreement. In each such case, the successor
must expressly assume the obligations of the servicer under the servicing
agreement. Other than in these cases and in the case of a servicer resignation
as described above, the servicing agreement may not be assigned by the servicer.
SERVICER DEFAULTS
Servicer defaults under the servicing agreement will include, among other
things:
o any failure by the servicer to remit payments arising from the RRB
charge into the collection account as required under the servicing
agreement, if such failure continues unremedied for 5 business days
after written notice from the note issuer or the note trustee is
received by the servicer;
o any failure by the servicer duly to observe or perform in any
material respect any other covenant or agreement in the servicing
agreement, if such failure materially and adversely affects the
rights of noteholders or certificateholders and continues unremedied
for 60 days after the giving of notice of such failure (a) to the
servicer by the note issuer or (b) to the servicer by the note
trustee or by holders of notes evidencing not less than 25 percent
in principal amount of the outstanding notes;
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o the inaccuracy in any material respect when made of any representation
or warranty made by the servicer in the servicing agreement, if such
inaccuracy has a material adverse effect on the noteholders and such
material adverse effect continues unremedied for a period of 60 days
after the giving of notice to the servicer by the note issuer or the
note trustee;
o events of bankruptcy, insolvency, receivership or liquidation of the
servicer; and
o an "event of termination" under the purchase and sale arrangement
under which it continuously sells a portion of its accounts receivable
(excluding the RRB charge) on a revolving basis to investors. See
"Risk Factors - A default by Connecticut Light & Power under its
accounts receivable arrangement may trigger the need to replace
Connecticut Light & Power as servicer," which begins on page 23.
RIGHTS WHEN SERVICER DEFAULTS
If a servicer default remains unremedied, either the note trustee or
holders of notes evidencing not less than 25 percent in principal amount of then
outstanding notes may terminate all the rights and obligations of the servicer
(other than the servicer's indemnity obligations) under the servicing agreement.
A successor servicer appointed by the note issuer, subject to the approval of
the Department of Public Utility Control, and with the note trustee's consent,
will succeed to all the responsibilities, duties and liabilities of the servicer
under the servicing agreement upon its assuming in writing the obligations of
the servicer thereunder. If the note issuer has not obtained a successor
servicer within 30 days after a termination notice has been delivered to the
defaulting servicer, the note trustee may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor servicer. In order to
qualify as a successor servicer, such entity must be permitted to perform the
duties of a servicer under the Department of Public Utility Control regulations,
the rating agencies must confirm that appointment of such successor servicer
will not result in a reduction or withdrawal of the then current rating of the
certificates and the successor servicer must assume in writing the obligations
of the servicer under the servicing agreement or enter into a substantially
similar servicing agreement with the note issuer. The note trustee may make
arrangements for compensation to be paid to the successor servicer.
In addition, when the servicer defaults, each of the following will be
entitled to apply to the Department of Public Utility Control for sequestration
and payment of revenues arising from the transition property:
o the certificateholders (subject to the provisions of the certificate
indenture) and the certificate trustee as beneficiary of any statutory
lien permitted by the restructuring statute;
o the note issuer or its assignees;
o the trust; and
o pledgees or transferees, including transferees under the restructuring
statute, of the transition property.
If, however, a bankruptcy trustee or similar official has been appointed for the
servicer, and no servicer default other than an appointment of a bankruptcy
trustee or similar official has occurred, the bankruptcy trustee or similar
official may have the power to prevent the note trustee or the noteholders from
effecting a transfer of servicing.
WAIVER OF PAST DEFAULTS
Holders of notes evidencing at least a majority in principal amount of the
then outstanding notes, on behalf of all noteholders, may waive any default by
the servicer in the performance of its obligations under the servicing agreement
and may waive the consequences of any default, except a default in making any
required remittances to the collection account under the servicing agreement.
The servicing agreement provides that no waiver will impair the noteholders'
rights relating to subsequent defaults.
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SUCCESSOR SERVICER
If for any reason a third party assumes the role of the servicer under the
servicing agreement, the servicing agreement will require the servicer to
cooperate with the note issuer, the note trustee and the successor servicer in
terminating the servicer's rights and responsibilities under the servicing
agreement, including the transfer to the successor servicer of all cash amounts
then held by the servicer for remittance or subsequently acquired. The servicing
agreement will provide that, in case a successor servicer is appointed as a
result of a servicer default, all reasonable costs and expenses (including
reasonable attorneys' fees and expenses) incurred in connection with
transferring all relevant records to the successor servicer and amending the
servicing agreement to reflect such succession as servicer shall be paid by the
predecessor servicer upon presentation of reasonable documentation of such costs
and expenses. All other reasonable costs and expenses incurred in transferring
servicing responsibilities to a successor servicer shall be paid by the note
issuer.
AMENDMENT
The servicing agreement may be amended by the parties thereto, without the
consent of the noteholders or the certificateholders (notwithstanding any
provision of any other document that would otherwise require such consent as a
precondition of note trustee consent), but with the consent of the note trustee
(which consent may not be unreasonably withheld) to cure any ambiguity, to
correct or supplement any provision thereof or for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
that agreement or of modifying in any manner the rights of the noteholders or
the certificateholders, provided that the action will not, as certified in a
certificate of an officer of the servicer delivered to the note trustee and the
note issuer, adversely affect in any material respect the interest of any
noteholder or certificateholder. The servicing agreement may also be amended by
the servicer and the note issuer with the consent of the note trustee (which
consent may not be unreasonably withheld) and the holders of notes evidencing at
least a majority in principal amount of the then outstanding notes for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement or of modifying in any manner the rights of
the noteholders; provided that an amendment of the provisions of the servicing
agreement relating to the servicer's remittance and RRB charge adjustment
obligations will not result in a reduction or withdrawal of the then existing
rating of the certificates by the rating agencies (except that with regard to
Moody's it will be sufficient to provide 10 days' prior notice of the
amendment).
Each rating agency will be given 10 business days' prior notice of any
amendment to the servicing agreement, the note indenture and the other
transaction documents relating to the issuance of the notes and the
certificates. Each rating agency will also receive a copy of any material
notice, filing or report distributed by the servicer, the note issuer's
independent accountants, the note issuer, the note trustee or the certificate
trustee under the servicing agreement, the note indenture and the other
transaction documents relating to the issuance of the notes and the
certificates.
DESCRIPTION OF THE NOTES
The note issuer will issue the notes to the trust under the terms of a
note indenture between the note issuer and the note trustee. Each class of notes
will be in an aggregate principal amount equal to the initial aggregate
principal amount of the related class of certificates. The following summary
describes the material terms and provisions of the note indenture. The
particular terms of the notes of any class will be established in the note
indenture. This summary is not complete. You should read this summary together
with the prospectus supplement and the terms and provisions of the note
indenture, a form of which is filed as an exhibit to the registration statement
relating to this prospectus, prior to buying the certificates.
The note issuer may issue the notes in one or more classes. All notes of
the same class will be identical in all respects except for their denominations.
The note issuer may not issue any additional notes under the note indenture
other than in connection with the replacement, transfer or exchange of notes
initially issued thereunder. Each series of notes will be issued under a
substantially identical note indenture.
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SECURITY
To secure the payment of principal of and interest on the notes, the note
issuer will grant to the note trustee a security interest in all of the note
issuer's right, title and interest in and to:
o the transition property;
o the sale agreement (including the security interest granted therein by
the seller to the note issuer with respect to the transition
property);
o the servicing agreement;
o the administration agreement;
o the collection account and all amounts or investment property on
deposit in the collection account;
o all other property of whatever kind owned from time to time by the
note issuer; and
o all proceeds on account of any or all of the foregoing.
We refer to the assets in which the note issuer will grant the note trustee a
security interest as the note collateral. The note collateral will not include,
however, the following:
o amounts in the collection account released as permitted under the note
indenture, including net investment earnings on the capital subaccount
that have been released to the note issuer by the note trustee under
the terms of the note indenture; and
o proceeds from the sale of the notes required to pay costs of issuance
of the notes and the certificates.
COLLECTION ACCOUNT
The note issuer will establish, in the name of the note trustee, a
collection account to hold amounts remitted to it by the servicer, including RRB
charge collections. The collection account will be a segregated trust account
with an eligible institution (as described in the next paragraph). The note
trustee will hold the collection account for the benefit of the noteholders. The
collection account will consist of four subaccounts:
o a general subaccount;
o a reserve subaccount;
o an overcollateralization subaccount for the overcollateralization
amount; and
o a capital subaccount for capital contributions to the note issuer.
All amounts in the collection account not allocated to any other subaccount will
be allocated to the general subaccount. Unless the context indicates otherwise,
all references to the collection account include each of the four subaccounts.
An "eligible institution" means (a) the corporate trust department of the
note trustee or (b) a depository institution organized under the laws of the
United States of America or any state or the District of Columbia (or any
domestic branch of a foreign bank), (i) which has either (A) with respect to any
investment having a maturity of greater than one month, a long-term unsecured
debt rating of "AAA" by S&P and Fitch and "Aaa" by Moody's or (B) with respect
to any investment having a maturity of one month or less, a certificate of
deposit rating of "A-l+" by S&P, "F1+" by Fitch and "P-1" by Moody's, or any
other long-term, short-term or certificate of deposit rating acceptable to S&P
and Moody's and (ii) whose deposits are insured by the Federal Deposit Insurance
Corporation.
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Funds in the collection account may be invested in any of the following:
o direct obligations of, or obligations fully and unconditionally
guaranteed as to timely payment by, the United States of America;
o demand deposits, time deposits or certificates of deposit or bankers'
acceptances of institutions whose commercial paper or other short term
debt obligations have a rating in the highest investment category from
each of the rating agencies;
o commercial paper or other short term obligations (other than those
issued by Connecticut Light & Power or its affiliates) having, at the
time of investment, a rating in the highest investment category from
each of the rating agencies;
o money market funds having a rating in the highest investment category
from each of the rating agencies;
o repurchase obligations for any security that is a direct obligation
of, or fully guaranteed by, the United States of America or its
approved agencies or instrumentalities, entered into with
institutions whose commercial paper or other short term debt
obligations have a rating in the highest investment category from each
of the rating agencies;
o repurchase obligations with respect to any security or whole loan
entered into with an institution that has the minimum ratings set
forth in the note indenture; or
o any other investment permitted by each of the rating agencies.
In each case, the investment must mature on or before the business day preceding
the next payment date, and in some cases, the obligor must meet additional
minimum requirements. We refer to each of the investments listed above as the
"eligible investments." The note trustee will have access to the collection
account for the purpose of making deposits and withdrawals under the note
indenture.
The servicer will account for, and ultimately credit to ratepayers, any
amounts remaining in the collection account (other than the capital subaccount
and an amount equal to interest earnings thereon) after the certificates are
paid in full, such as any overcollateralization amounts, including interest
earnings. These amounts will be released to the note issuer when the
certificates are retired. These amounts will inure to the benefit of ratepayers
through a credit to their competitive transition assessment or if there is no
competitive transition assessment, through a credit to other rates.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of a class of notes at the
per annum rate specified in the prospectus supplement and will be payable on the
payment dates specified in the prospectus supplement. Collections arising from
the RRB charge held by the note trustee in the general subaccount and any
amounts that are available in the reserve subaccount, the overcollateralization
subaccount and capital subaccount (except interest earnings) will be used to
make interest payments to the noteholders of each class on each payment date.
Principal of each class of notes will be payable in the amounts and on the
payment dates specified in the prospectus supplement to the extent of available
cash in the collection account, and with the other limitations described below.
The prospectus supplement will set forth the expected amortization schedule for
the various classes of notes. On any payment date, absent an event of default
under the note indenture, the note issuer will pay principal of a class of notes
only until the outstanding principal balance of that class has been reduced to
the principal balance specified in the expected amortization schedule.
However, if insufficient funds arising from the RRB charge collections, or
available in the reserve subaccount, the overcollateralization subaccount and
the capital subaccount, are in the collection account on any payment date,
principal of any class of notes may be paid later than expected. The entire
unpaid principal amount of the notes will be due and payable on the date on
which a note event of default has occurred and is continuing, if the note
trustee or the holders of at least a majority in principal amount of the
outstanding notes have declared the notes to be immediately due and payable. See
" - Note Events of Default; Rights On Note Event of Default," which begins on
page 58.
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OPTIONAL REDEMPTION
The note issuer may redeem the notes, at its option, on any payment date,
and cause the trust to redeem the certificates on the related payment date, if
the outstanding principal balance of the notes (after giving effect to payments
that would otherwise be made on that payment date) is less than 5 percent of the
initial principal balance of the notes. In the case of redemption, the note
trustee will pay the outstanding principal amount of the notes and accrued but
unpaid interest as of the redemption date. Unless otherwise specified in the
prospectus supplement, the note trustee will give notice of the redemption to
the trust by first-class mail, postage prepaid, mailed not less than 5 days nor
more than 25 days prior to the redemption date. For so long as any certificates
are listed on the Luxembourg Stock Exchange and the rules of that exchange so
require, notice of redemption also will be given by publication in a daily
newspaper in Luxembourg, expected to be the Luxemburger Wort, not less than 10
days prior to the date of redemption.
MANDATORY REDEMPTION
If the seller is required to, or elects to, repurchase the transition
property as described under "Description of the Transition Property - Seller
Representations and Warranties and Repurchase Obligation," which begins on page
33, the note issuer will be required to redeem the notes on or before the fifth
business day following the date of repurchase at a price equal to the principal
amount of the notes together with any accrued but unpaid interest thereon.
Mandatory redemption of the notes will cause a redemption of the certificates
under the certificate indenture.
OVERCOLLATERALIZATION SUBACCOUNT
The note trustee will collect amounts arising from the transition property
exceeding the amount expected to be necessary to pay scheduled payments of
principal of and interest on the notes and fees and expenses (including
indemnities) related to servicing and retiring the notes and the certificates,
which overcollateralization amounts are intended to enhance the likelihood that
payments on the notes will be made in a timely manner. The servicer will set and
adjust the RRB charge at a level that is intended to collect the
overcollateralization amount ratably over the life of the notes according to a
schedule set forth in the prospectus supplement.
On each payment date, all payments arising from the RRB charge remitted to
the collection account will be deposited in the respective subaccounts,
including the overcollateralization subaccount, as described under " -
Allocations and Payments," which begins on page 56. On each payment date, the
note trustee will draw on amounts in the overcollateralization account, if any,
to the extent amounts available in the general subaccount and the reserve
subaccount are insufficient to make legally due or scheduled payments of
principal of and interest on the notes and pay fees, expenses and certain
indemnities related to servicing and retiring the notes and the certificates.
Amounts in the overcollateralization subaccount will be invested in eligible
investments.
CAPITAL SUBACCOUNT
Before the issuance of the notes, Connecticut Light & Power will
contribute capital to the note issuer in the amount specified in the prospectus
supplement. The note trustee will deposit the capital into the capital
subaccount. On each payment date, the note trustee will draw on amounts in the
capital subaccount, if any, to the extent amounts available in the general
subaccount, the reserve subaccount and the overcollateralization subaccount are
insufficient to make legally due or scheduled payments of principal of and
interest on the notes and pay fees, expenses and certain indemnities relating to
servicing and retiring the notes and the certificates. Deposits to the capital
subaccount will be made as described under " - Allocations and Payments," which
begins on page 56. Amounts in the capital subaccount will be invested in
eligible investments. The note issuer will be entitled to the earnings on
amounts in the capital subaccount, free and clear of the lien of the note
indenture, if the required capital level in the capital subaccount is met at the
time such earnings are withdrawn.
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RESERVE SUBACCOUNT
The note trustee will allocate to the reserve subaccount any amounts
remitted to the collection account exceeding amounts necessary to:
o pay fees and expenses (including indemnities) related to servicing
and retiring the notes and the certificates;
o pay principal of and interest on the notes;
o fund the capital subaccount up to the required capital level; and
o fund the overcollateralization subaccount up to the required
overcollateralization level.
The note trustee will draw on amounts in the reserve subaccount, to the extent
amounts available in the general subaccount are insufficient to pay the amounts
listed above. Amounts in the reserve subaccount will be invested in eligible
investments.
ALLOCATIONS AND PAYMENTS
On any business day that the note trustee receives a written request from
the servicer requesting repayment for any excess remittances to the collection
account, the note trustee will make payment of the amount due from amounts on
deposit in the general subaccount, the reserve subaccount, the
overcollateralization subaccount and the capital subaccount, in that order and
only to the extent required to make the payment. See "Servicing - Remittances to
Collection Account," which begins on page 46.
On any business day that the note trustee receives a written request from
the note issuer's administrator stating that any fees, costs, expenses and
indemnities payable by the note issuer, as described in clauses (1) through (4)
below, will become due and payable prior to the next succeeding payment date,
and setting forth the amount and nature of the expense, as well as any
supporting documentation that the note trustee may reasonably request, the note
trustee, after receiving the information, will make payment of the expense on or
before the date the payment is due from amounts on deposit in the general
subaccount, the reserve subaccount, the overcollateralization subaccount and the
capital subaccount, in that order and only to the extent required to make the
payment.
On each payment date, or for any amount payable under clauses (1) through
(4) below, on any business day, the note trustee will apply all amounts on
deposit in the collection account, including net earnings on those amounts
(other than on amounts in the capital subaccount) to pay the following amounts
in the following priority:
(1) all amounts owed by the note issuer to the note trustee, the
Delaware trustee, the certificate trustee, the trust and the
finance authority will be paid, subject, in each case, to any
limitation on such payment described in the note indenture;
(2) the servicing fee and all unpaid servicing fees from prior
payment dates will be paid to the servicer;
(3) the administration fee and all unpaid administration fees from
prior payment dates will be paid to the note issuer's
administrator;
(4) so long as no note default or note event of default has occurred
and is continuing or would result from such payment, all fees and
expenses (including indemnities) payable by the note issuer to
persons other than those specified in clause (1) above will be
paid, provided that the total amount paid for such other fees and
expenses (including indemnities) since the previous payment date
and on the current payment date may not, in the aggregate, exceed
$100,000;
(5) (A) any overdue interest (together with, to the extent lawful,
interest on such overdue interest at the applicable note interest
rate) and (B) interest currently due and payable, will be
transferred to the certificate trustee, as noteholder, for payment
to the certificateholders or, in the case of any floating rate
certificates, the related swap counterparty;
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(6) (A) principal due and payable (x) as a result of a note event of
default or (y) on the final maturity date of a class of notes and
(B) scheduled principal due and payable on that payment date, will
be transferred to the certificate trustee, as noteholder, for
payment to the certificateholders;
(7) unpaid fees and expenses (including indemnities) payable by the
note issuer will be paid to the persons entitled thereto;
(8) the amount, if any, by which the capital subaccount needs to be
funded to equal the required capital level as of that payment date
(disregarding for this purpose any interest earnings held in the
capital subaccount) will be allocated to the capital subaccount;
(9) the amount, if any, by which the overcollateralization subaccount
needs to be funded to equal the required overcollateralization
level as of that payment date will be allocated to the
overcollateralization subaccount; and
(10) the balance, if any, will be allocated to the reserve subaccount
for payment on subsequent payment dates.
Following the repayment of all notes and certificates, any amounts
remaining in the collection account will be released to the note issuer.
In the case of any deficiency in the amount required under clause (5)
above, amounts available to make payments under clause (5) above will be
allocated among each class of notes pro rata based upon the respective amounts
of interest owed on the notes of each class, and allocated and paid to holders
within each class pro rata based upon the respective principal amount of notes
held. In the case of any deficiency in the amount required under clause (6)
above, amounts available to make payments under clause (6) above will be
allocated among each class of notes pro rata based upon the respective principal
amount of notes due (in the case of clause (6)(A)(x)) or scheduled to be paid
(in the case of clauses (6)(A)(y) and (6)(B), based on priorities described in
the prospectus supplement and according to the expected amortization schedule
for such class), and allocated and paid to the holders within each class pro
rata based upon the principal amount of notes held.
If on any payment date, or for any amounts payable under clauses (1)
through (4) above, on any business day, funds on deposit in the general
subaccount are insufficient to make the payments contemplated by clauses (1)
through (6) above, the note trustee will:
o first, draw from amounts on deposit in the reserve subaccount;
o second, draw from amounts on deposit in the overcollateralization
subaccount; and
o third, draw from amounts on deposit in the capital subaccount,
up to the amount of the shortfall, in order to make the payments described
above. In addition, if on any payment date funds on deposit in the general
subaccount are insufficient to make the allocations described in clauses (8) and
(9) above, the note trustee will draw from amounts on deposit in the reserve
subaccount to make the required allocations.
If the amount in the capital subaccount on the last day of any month
exceeds the required capital level, the note trustee will pay such excess amount
to the note issuer upon request, free and clear of the lien of the note
indenture.
ACTIONS BY NOTEHOLDERS
The certificate trustee, on behalf of the trust as sole initial holder of
the notes, has the right to vote and give consents and waivers which are
required to be given by the noteholders under the note indenture and other
transaction documents for modifications to any class of notes and to the
provisions of the note indenture and other transaction documents. With some
exceptions, the holders of a majority of the outstanding principal amount of the
notes will have the right to direct the time, method and place of conducting any
proceeding for any remedy available
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to the note trustee, or exercising any trust or power conferred on the note
trustee under the note indenture, provided that:
o the direction is not in conflict with any rule of law or with the
note indenture;
o other than in the case of a default in the payment of any interest,
principal or redemption price in respect of any note, the note trustee
may not sell or liquidate the note collateral unless the holders of
100% of the outstanding principal amount of the notes consent thereto;
o if the note trustee elects to maintain possession of the note
collateral in compliance with the note indenture, then any direction
to the note trustee by holders of notes representing less than 100% of
the outstanding principal amount of the notes to sell or liquidate the
note collateral will be of no force and effect; and
o the note trustee may take any other action deemed proper by the note
trustee that is not inconsistent with such direction.
No holder of any note will have the right to institute any proceeding with
respect to the note indenture, unless:
o the holder previously has given to the note trustee written notice
of a continuing event of default;
o the holders of not less than 25 percent in principal amount of the
outstanding notes have made written request of the note trustee to
institute the proceeding in its own name as note trustee;
o the holder or holders have offered the note trustee reasonable
indemnity;
o the note trustee has failed for 60 days after receipt of notice to
institute a proceeding; and
o no direction inconsistent with the written request has been given to
the note trustee during the 60-day period by the holders of a majority
in principal amount of the outstanding notes.
NOTE EVENTS OF DEFAULT; RIGHTS ON NOTE EVENT OF DEFAULT
An event of default on the notes is defined in the note indenture as
being:
o a default in the payment of interest on any note on its payment date
that continues for a period of 5 days;
o a default in the payment of the then unpaid principal of any note on
the final maturity date;
o a default in the payment of the redemption price for any note on a
redemption date;
o a default in the observance or performance in any material respect of
any covenant or agreement of the note issuer made in the note
indenture, which continues unremedied for 30 days after notice is
given to the note issuer by the note trustee or to the note issuer and
the note trustee by the holders of at least 25 percent in principal
amount of the notes then outstanding;
o the inaccuracy in any material respect when made of any
representation or warranty made by the note issuer in the note
indenture or in any certificate or writing delivered by the note
issuer in connection with the note indenture, which inaccuracy
continues unremedied for 30 days after notice is given to the note
issuer by the note trustee or to the note issuer and the note
trustee by the holders of at least 25 percent in principal amount of
the notes then outstanding; or
o events of bankruptcy, insolvency, receivership or liquidation of the
note issuer.
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Each of the seller, the servicer, the note trustee, the Delaware trustee
and the certificate trustee will covenant that it will not at any time institute
against the note issuer or the trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
If a note event of default should occur and be continuing, the note
trustee or holders of not less than a majority in principal amount of the notes
then outstanding may declare the notes to be immediately due and payable. Under
circumstances set forth in the note indenture, the holders of a majority in
principal amount of notes then outstanding may rescind the declaration.
If the notes have been declared to be due and payable following a note
event of default, the note trustee may, in its discretion, either sell the
transition property or elect to maintain possession of the transition property
and continue to apply payments arising from the RRB charge remitted to the note
trustee as if there had been no declaration of acceleration. We expect that
there will be a limited resale market, if any, for the transition property
following a foreclosure of the note indenture with respect to the note
collateral because of the unique nature of the transition property as an asset
and other factors discussed in this prospectus.
In addition, the note trustee is prohibited from selling the transition
property following a note event of default, other than a default in the payment
of any interest, principal or redemption price in respect of any note, unless:
o the holders of all the outstanding notes consent to the sale;
o the proceeds of the sale are sufficient to pay in full the accrued
interest on and the principal of the outstanding notes; or
o the note trustee determines that the proceeds of the transition
property would not be sufficient on an ongoing basis to make all
payments on the notes as those payments would have become due if the
notes had not been declared due and payable, and the note trustee
obtains the consent of the holders of 66-2/3 percent of the
outstanding amount of the notes.
If a note event of default occurs and is continuing, the note trustee will
be under no obligation to exercise any of the rights or powers under the notes
at the request or direction of any of the holders of notes if the note trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities that it might incur in complying with the request. The
holders of a majority in principal amount of the outstanding notes may, in some
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default arising from a covenant or provision of
the note indenture that cannot be modified without the consent of all of the
holders of the outstanding notes of all classes affected.
COVENANTS OF THE NOTE ISSUER
The note issuer may not consolidate with or merge into any other entity,
unless:
o the entity formed by or surviving a consolidation or merger of the
note issuer is organized under the laws of the United States, any
state thereof or the District of Columbia;
o the entity expressly assumes by an indenture supplemental to the note
indenture the note issuer's obligation to make due and punctual
payments on the notes and the performance or observance of every
agreement and covenant of the note issuer under the note indenture;
o no event of default will have occurred and be continuing immediately
after the merger or consolidation of the note issuer;
o the transaction will not result in a reduction or withdrawal of the
then current ratings on any class of notes or certificates;
59
o the note issuer has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the note issuer, the trust, any noteholder or any
certificateholder and the consolidation or merger complies with the
note indenture and all conditions precedent relating to the
transaction have been complied with; and
o any action as is necessary to maintain the lien and security interest
created by the note indenture will have been taken.
Except as specifically provided in the note indenture, the note issuer may
not convey or transfer any of its properties or assets to any person or entity,
unless:
o the person or entity acquiring the properties and assets:
o is a United States citizen or an entity organized under the laws
of the United States, any state thereof or the District of
Columbia;
o expressly assumes by an indenture supplemental to the note
indenture the note issuer's obligation to make due and punctual
payments on the notes and the performance or observance of every
agreement and covenant of the note issuer under the note
indenture;
o expressly agrees by a supplemental indenture that all right,
title and interest so conveyed or transferred will be subject
and subordinate to the rights of noteholders;
o unless otherwise expressly waived by the note trustee, expressly
agrees to indemnify, defend and hold harmless the note trustee
against and from any loss, liability or expense arising under or
related to the note indenture and the notes; and
o expressly agrees by means of a supplemental indenture that the
person (or if a group of persons, then one specified person)
will make all filings with the Securities and Exchange
Commission (and any other appropriate person) required by the
Securities Exchange Act of 1934 in connection with the notes;
o no event of default under the note indenture will have occurred
and be continuing immediately after the transaction;
o the transaction will not result in a reduction or withdrawal of
the then current ratings on any class of certificates;
o the note issuer has received an opinion of counsel to the effect
that the transaction will not have any material adverse tax
consequence to the note issuer, the trust, any noteholder or any
certificateholder and an officer's certificate and an opinion of
counsel each stating that the conveyance or transfer complies with
the note indenture and all conditions precedent relating to the
transaction have been complied with; and
o any action as is necessary to maintain the lien and security
interest created by the note indenture will have been taken.
The note issuer may not, among other things:
o except as expressly permitted by the note indenture, sell,
transfer, exchange or otherwise dispose of any of the assets of the
note issuer, unless directed to do so by the note trustee in
accordance with the note indenture;
o claim any credit on, or make any deduction from the principal or
interest payable on, the notes (other than amounts properly
withheld under the Internal Revenue Code of 1986) or assert any
claim against any present or former noteholder because of the
payment of taxes levied or assessed on any part of the note
collateral;
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o terminate its existence, dissolve or liquidate in whole or in
part;
o permit the validity or effectiveness of the note indenture to be
impaired;
o permit the lien of the note indenture to be amended, subordinated,
terminated or discharged or permit any person to be released from
any covenants or obligations arising from the notes except as may
be expressly permitted by the note indenture;
o permit any lien, charge, excise, claim, security interest, mortgage
or other encumbrance, other than the lien and security interest
created by the note indenture or the statutory lien under the
restructuring statute, to be created by the note issuer on or
extend to or otherwise arise on or burden the note collateral or
any part of it or any interest in it or the proceeds from it; or
o except for the statutory lien under the restructuring statute,
permit the lien of the note indenture not to constitute a valid
first priority security interest in the note collateral.
The note issuer may not engage in any business other than financing,
purchasing, owning and managing the transition property in the manner
contemplated by the note indenture and the other transaction documents and
activities incidental thereto. The note issuer will not issue, incur, assume,
guarantee or otherwise become liable for any indebtedness except for the notes.
The note issuer may not, except for any eligible investments as
contemplated by the note indenture and the other transaction documents make any
loan or advance or credit to, or guarantee, endorse or otherwise become
contingently liable in connection with the obligations, stocks or dividends of,
or own, purchase, repurchase or acquire (or agree contingently to do so) any
stock, obligations, assets or securities of, or any other interest in, or make
any capital contribution to, any other person. The note issuer will not, other
than expenditures in an annual amount not to exceed $25,000, make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either real or personal property). The note issuer will not, directly or
indirectly, make payments to or from the collection account except in compliance
with the note indenture and the other transaction documents.
The note issuer may not make any payments, distributions or dividends to
any owner of beneficial interests in the note issuer arising from the beneficial
interests in the note issuer if any note event of default has occurred and is
continuing or if distributions cause the book value of the remaining equity in
the note issuer to decline below 0.50 percent of the initial principal amount of
the notes outstanding under the note indenture.
The note issuer may deliver or cause the servicer to deliver to, among
others, the note trustee and the certificate trustee the annual accountant's
certificates, compliance certificates, reports regarding payments and statements
to noteholders and the certificateholders required by the servicing agreement.
REPORTS TO NOTEHOLDERS
On or prior to each payment date, the servicer will prepare and provide to
the note issuer, the note trustee and the certificate trustee a statement to be
delivered to the noteholders on the payment date. Each statement will include
(to the extent applicable) the following information for a payment date or the
period since the previous payment date, as applicable:
o the amount of the payment to noteholders allocable to principal;
o the amount of the payment to noteholders allocable to interest;
o the outstanding principal balance of the notes, after giving effect to
payments allocated to principal reported above; and
o the difference, if any, between the outstanding principal balance of
the notes and the principal amount scheduled to be outstanding on a
payment date according to the expected amortization schedule.
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The note trustee will deliver to each holder of the notes information in
the note trustee's possession that may be required to enable the holder to
prepare its federal and state income tax returns. See "Federal Income Tax
Consequences," which begins on page 72, and "State Taxation," which begins on
page 78.
ANNUAL COMPLIANCE STATEMENT
The note issuer will file annually with the note trustee, the certificate
trustee, the finance authority and the rating agencies a written statement as to
whether it has fulfilled its obligations under the note indenture.
DESCRIPTION OF THE CERTIFICATES
The trust will issue the certificates under the certificate indenture
among the trust, the Delaware trustee and the certificate trustee. The following
summary describes the material terms and provisions of the certificate
indenture. The particular terms of the certificates of any class will be
established in the certificate indenture. This summary is not complete. You
should read this summary together with the prospectus supplement and the terms
and provisions of the certificate indenture, a form of which is filed as an
exhibit to the registration statement relating to this prospectus, before buying
the certificates.
Each class of certificates will represent fractional undivided beneficial
interests in the related class of notes, the proceeds of that class of notes
and, in the case of floating rate certificates, a related swap agreement and its
proceeds. Each certificate will be issued in the minimum denominations specified
in the prospectus supplement. The trust may not issue any additional
certificates under the certificate indenture other than in connection with the
replacement, transfer or exchange of certificates initially issued thereunder.
Each series of certificates will be issued under a substantially identical
certificate indenture.
Except in the case of floating rate certificates, each class of
certificates will bear interest at the rate per annum borne by the related class
of notes. See "Description of the Notes - Interest and Principal," which begins
on page 54. The prospectus supplement indicates whether the trust will issue
floating rate certificates and, if so, the manner in which the floating rate
certificates will bear interest. Payments of interest and principal made on any
class of notes or pursuant to any swap agreement are required to be passed
through to holders of the related class of certificates at the times and in the
manner described below. See " - Payments," which begins on page 62, and
"Description of the Notes - Interest and Principal," which begins on page 54.
For so long as any certificates are listed on the Luxembourg Stock
Exchange, and to the extent that the rules of that exchange so require, the
issuer will have a listing agent, a paying agent and a transfer agent in
Luxembourg.
PAYMENTS
The note trustee will make payments on the notes on each payment date to
the certificate trustee, as holder of the notes, as described under "Description
of the Notes - Allocations and Payments," which begins on page 56.
The certificate trustee will pay on each payment date to the holders of
each class of certificates all payments of principal of and interest on the
related class of notes (and in the case of a class of floating rate
certificates, a related swap agreement), other than a special payment described
in the next paragraph, the receipt of which is confirmed by the certificate
trustee by 1:00 p.m. New York City time on a payment date or, if receipt is
confirmed after 1:00 p.m. New York City time on a payment date, then on the
following business day. Each payment, other than the final payment for any
certificate, will be made by the certificate trustee to the holders of record of
the certificates of the applicable class on the record date for a payment date.
If a payment of principal or interest on any class of the notes (or in the case
of a class of floating rate certificates, on a related swap agreement), other
than a special payment described in the next paragraph, is not received by the
certificate trustee on a payment date but is received within 5 days thereafter,
it will be paid to the holders of record on the date receipt is confirmed by the
certificate trustee, if receipt is confirmed by the certificate trustee by 1:00
p.m. New York City time or, if receipt is confirmed after 1:00 p.m. New York
City time, then on the following business day. If payment is received
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by the certificate trustee after the five-day period, it will be treated as a
special payment received following a payment default on a class of notes and
paid as described below in the next paragraph.
Any payment received by the certificate trustee following a payment
default on any class of notes, any proceeds from the sale of the notes by the
certificate trustee following an event of default under the certificate
indenture and any proceeds from the repurchase of the transition property by the
seller under the sale agreement (each a special payment) will be paid on the
later of:
o the date receipt is confirmed by the certificate trustee, provided that
if receipt of a special payment is not confirmed until after 1:00 p.m.
New York City time, the special payment will be paid on the following
business day and,
o the date that is the earlier of (A) if the certificate trustee receives
such special payment without prior notice, 20 days after receipt is
confirmed, or (B) the date that is 20 days after the certificate
trustee receives notice from the note issuer of the anticipated payment
of a special payment, except that:
o if the special payment represents proceeds of the sale of the notes
by the certificate trustee following an event of default under the
certificate indenture, then the special payment date will be the
earliest day for which it is practicable for the certificate trustee
to give 20 days notice to the certificateholders of payment of such
special payment, and
o the certificate trustee shall distribute proceeds from the repurchase
by the seller of the transition property under the sale agreement
not later than 5 business days after the certificate trustee receives
such proceeds.
The certificate trustee will mail notice to the holders of record of
certificates stating the anticipated special payment date as required under the
certificate indenture.
The certificate indenture requires the certificate trustee to establish
and maintain for each class of certificates, for the trust, and on behalf of the
certificateholders, one or more non-interest bearing segregated certificate
accounts for the deposit of payments on the related class of notes and any swap
agreement. The certificate trustee is required to deposit any payments received
by it arising from the notes and any swap agreement in the appropriate
certificate account. The certificate trustee will pay all amounts so deposited
to holders of the certificates on a payment date or a special payment date, as
appropriate, unless a different date for payment of the amount is specified in
the certificate indenture.
Any funds representing special payments received by the certificate
trustee in the certificate account will, to the extent practicable, be invested
and reinvested by the certificate trustee in eligible investments permitted
under the certificate indenture maturing in not more than 60 days or a lesser
time as is required for the payment of any funds on a special payment date,
pending the payment of the funds to certificateholders as described in this
prospectus.
If any special payment date or other date specified in this prospectus for
payment of any payments to certificateholders is not a business day, the
payments scheduled to be made on such date will be made on the following
business day and no interest will accrue on the payment during the intervening
period.
VOTING OF THE CERTIFICATES
The nominee for DTC, as sole initial holder of the certificates, has the
right to vote and give consents and waivers required to be given by the holders
of any class of certificates. With some exceptions, and subject to the
provisions described in the prospectus supplement with respect to matters
relating to any swap agreement, the holders of at least a majority of the
outstanding principal amount of the certificates will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the certificate trustee, or exercising any trust or power conferred on the
certificate trustee under the certificate indenture, including any right of the
certificate trustee as holder of the notes, in each case unless a different
percentage is specified in the certificate indenture. The rights of the
certificateholders to direct the action of the certificate trustee are limited
by the following, among other restrictions set forth in the certificate
indenture:
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o the direction must not be in conflict with any rule of law or with the
certificate indenture and must not involve the certificate trustee in
personal liability or expense;
o the certificate trustee must not have determined that the action so
directed would be unjustly prejudicial to the certificateholders not
taking part in the direction; and
o the certificate trustee may take any other action deemed proper by the
certificate trustee that is not inconsistent with the direction.
If the certificate trustee is required to seek instructions from the
holders of the certificates regarding any action or vote, the certificate
trustee will take the action or vote for or against any proposal in proportion
to the principal amount of the certificates taking the corresponding position.
If the vote, consent or waiver of any floating rate certificates is
required in connection with any action or inaction arising under the certificate
indenture (including any event of default), the consent of any swap counterparty
may also be required.
EVENTS OF DEFAULT
An event of default under the certificate indenture is defined as the
occurrence and continuance of a note event of default or a breach by the State
of Connecticut of its pledge under the restructuring statute. For a description
of the note events of default, see "Description of the Notes - Note Events of
Default; Rights on Note Event of Default," which begins on page 58. For a
description of the pledge of the State of Connecticut, see "Description of the
Transition Property - Pledge by the State of Connecticut," which begins on
page 32.
The certificate indenture provides that, if a note event of default occurs
and is continuing, the certificate trustee may and, with the written direction
of holders representing not less than a majority of the outstanding principal
amount of the certificates, will vote all the notes in favor of declaring the
unpaid principal amount of the notes and accrued interest to be due and payable.
In addition, the certificate indenture provides that, if a note event of default
occurs and is continuing, the certificate trustee may and, with the written
direction of holders representing not less than a majority of the outstanding
principal amount of the certificates, will vote all the notes in favor of
directing the note trustee as to the time, method and place of conducting any
proceeding for any remedy available to the note trustee, including the sale of
any or all of the notes, without recourse to or warranty by the certificate
trustee or any certificateholder, to any person or entity, or of exercising any
trust or power conferred on the note trustee under the note indenture.
If the notes are accelerated and sold in accordance with the certificate
indenture and if any swap agreement so requires, the proceeds of such sale
allocated to the related class of floating rate certificates will be deposited
in the related class certificate account and allocated between and paid to the
holders of the related floating rate class of certificates, on the one hand, and
the related swap counterparty, on the other hand, based on the aggregate amount
of principal and interest due and payable on that class of certificates and the
aggregate amount payable to the related swap counterparty in accordance with
such swap agreement.
The certificate trustee is prohibited from selling any notes following a
note event of default, other than a payment default, unless
o the certificate trustee determines that the amounts receivable
from the note collateral are not sufficient to pay in full the
principal of and accrued interest on the notes and to pay all
fees and expenses (including indemnities) then due, which are
described in clauses (1) through (4) in "Description of the
Notes - Allocations and Payments," which begins on page 56, and
the certificate trustee obtains the written consent of holders
of certificates representing 66-2/3 percent of the outstanding
principal amount of certificates, or
o the certificate trustee obtains the written consent of holders of 100
percent of the outstanding principal amount of certificates.
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Any proceeds received by the certificate trustee on any sale will be deposited
in the certificate account and will be paid to the certificateholders on a
special payment date.
If, under the terms of the certificate indenture, the certificate trustee
so decides or is required to sell the notes, the certificate trustee may, but is
not obligated to, take action to complete the sale of the notes so as to provide
for the full payment of all amounts due on the certificates.
If there is a failure to make any interest or principal payment on any
note, then the certificate trustee in its own name, and as trustee of an express
trust, as holder of such note, if directed in writing by the holders of a
majority of the outstanding principal amount of the certificates and so long as
the certificate trustee is adequately indemnified against the cost, expenses and
liabilities that it might incur in complying with such request, and to the
extent permitted by the terms of the notes, will be entitled and empowered to
institute suits, actions or proceedings, including the power to make demand on
the note trustee to take action under the note indenture to enforce the notes,
for the collection of sums due on the notes and may prosecute any proceeding to
judgment or final decree.
If a breach by the State of Connecticut of its pledge under the
restructuring statute has occurred, then the certificate trustee, in its own
name and as trustee of an express trust, as holder of the notes, will be, to the
extent permitted by state and federal law, entitled and empowered to institute
any suits, actions or proceedings at law, in equity or otherwise, to enforce the
pledge and to collect any monetary damages as a result of a breach, and may
prosecute any of these suits, actions or proceedings to final judgment or
decree.
Within 30 days after the occurrence of any event that is, or after notice
or lapse of time or both would become, a note event of default with respect to a
class of certificates, the certificate trustee will mail to the trust, note
trustee and the certificateholders notice of all uncured or unwaived defaults
known to it. Except in the case of a default relating to the payment of
principal of or interest on any of the notes, however, the certificate trustee
will be protected in withholding notice if in good faith it determines that the
withholding of notice is in the interests of the certificateholders.
The certificate indenture contains a provision entitling the certificate
trustee to be indemnified by the certificateholders before proceeding to
exercise any right or power under the certificate indenture at the request or
direction of certificateholders.
Prior to acceleration of the notes, the holders of certificates
representing not less than a majority of the outstanding principal amount of the
certificates may in writing direct the certificate trustee to waive any default
or note event of default and thereby annul any previous direction given by the
certificate trustee with respect thereto, except a default:
o in the deposit or payment of any payment on the notes or special
payment required to be made on any class of certificates;
o in the payment of principal of or interest on any of the notes; or
o in respect of any covenant or provision of the note indenture that
cannot be modified or amended without the consent of the holders of
each note or of all classes of notes affected;
which defaults may be waived by the certificate trustee only upon the written
direction of the holders of each certificate, or each affected class, as the
case may be. With this direction, the certificate trustee will vote a
corresponding percentage of the notes in favor of the waiver. The note indenture
provides that, with some exceptions, the holders of not less than a majority of
the outstanding principal amount of the notes may waive any note event of
default or any event that is, or after notice or passage of time, or both, would
be, a note event of default.
The trust may hold two or more classes of notes, each of which may have a
different interest rate and a different or potentially different schedule for
the repayment of principal. In addition, the trust may also hold a class of
notes that secures both a related class of certificates and a swap counterparty.
Accordingly, the certificateholders of one class may have divergent or
conflicting interests from the certificateholders of other classes. As a result,
the note trustee and the certificate trustee may be required to seek the
appointment of additional trustee(s) to represent the interests of one or more
classes with divergent or conflicting interests.
65
REDEMPTION
The trust will redeem the certificates if the notes are redeemed. The
certificate trustee will cause notice of each special payment with respect to
the notes to be mailed to each certificateholder. Notice of optional redemption
of the notes will be given by first-class mail, postage prepaid, mailed not less
than 5 days nor more than 25 days prior to the special payment date on which the
optional redemption payment is scheduled to be paid. Notice of mandatory
redemption of the notes shall be mailed not less than 5 days prior to the
special payment date on which any such redemption payment is scheduled to be
paid. In the case of any other special payments, such notice will be mailed not
less than 20 days prior to the special payment date on which such special
payment is scheduled to be paid.
REPORTS TO CERTIFICATEHOLDERS
On each payment date, special payment date or any other date specified in
the certificate indenture for payment of any payments on any class of
certificates, the certificate trustee will include with each payment a statement
setting forth the following information, in each case, to the extent received by
the certificate trustee from the note trustee, no later than 2 business days
prior to a payment date, special payment date or other date specified herein for
payment:
o the amount of the payment to certificateholders allocable to principal
and interest, in each case per $1,000 original principal amount of
each class of certificates;
o the aggregate outstanding principal balance of the certificates, after
giving effect to payments allocated to principal reported above; and
o the difference, if any, between the aggregate outstanding principal
balance of the certificates and the principal amount scheduled to be
outstanding on a payment date according to the expected amortization
schedule.
So long as the note trustee and the certificate trustee are the same, the
note trustee will agree to prepare and provide the statements to the certificate
trustee.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the notes, the certificate trustee
will mail to each person or entity who at any time during a calendar year has
been a certificateholder and received any payment on the certificates, a
statement containing information for the purposes of a certificateholder's
preparation of federal and state income tax returns. See "Federal Income Tax
Consequences," which begins on page 72, and "State Taxation," which begins on
page 78.
If any certificates are listed on the Luxembourg Stock Exchange, and the
rules of that exchange so require, notice that this statement is available with
the listing agent in Luxembourg will be given to holders of those listed
certificates by publication in a daily newspaper in Luxembourg, which is
expected to be the Luxemburger Wort.
SUPPLEMENTAL CERTIFICATE INDENTURES
The certificate trustee and the Delaware trustee, on behalf of the trust
and with the approval of the note issuer, will, from time to time, and without
the consent of the certificateholders, enter into one or more agreements
supplemental to the certificate indenture to:
o add to the covenants of the trust for the benefit of the
certificateholders, or to surrender any right or power in the
certificate indenture conferred on the trust;
o correct or supplement any provision in the certificate indenture or in
any supplemental certificate indenture that may be defective or
inconsistent with any other provision in the certificate indenture or
in any supplemental agreement or to make any other provisions
regarding matters or questions arising under the certificate
indenture; provided that none of these actions adversely affect in any
material respect the interests of the certificateholders;
66
o cure any ambiguity or correct any mistake;
o qualify, if necessary, the certificate indenture, including any
supplemental certificate indenture, under the Trust Indenture Act of
1939 and to add to the certificate indenture such other provisions as
may be expressly permitted by the Trust Indenture Act of 1939
excluding provisions referred to in Section 316(a)(2) of such Act as
in effect on the closing date;
o provide for any interest rate swap transactions with respect to any
floating rate series or class of certificates or any series or class
with specified credit enhancement; but:
o such action shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any
certificateholder or other swap counterparty; and
o the certificate trustee shall have received notice from the rating
agencies that such action will not result in a reduction or
withdrawal of the then current ratings on any class of
certificates; or
o to authorize the appointment of any listing agent, transfer agent or
paying agent or additional registrar for any class of certificates
required or advisable in connection with the listing of any class of
certificates on the Luxembourg Stock Exchange or any other stock
exchange, and otherwise to amend the certificate indenture to
incorporate any changes requested or required by any governmental
authority, stock exchange authority, listing agent, transfer agent
or paying agent or additional registrar for any class of
certificates in connection with that listing.
In addition, the certificate trustee and the Delaware trustee, acting on
behalf of the trust and with the approval of the note issuer, will, with the
consent of certificateholders holding not less than a majority of the
outstanding principal amount of the certificates of all affected classes, enter
into one or more certificate indentures supplemental to the certificate
indenture for the purpose of, among other things, adding any provisions to or
changing in any manner or eliminating any of the provisions of the certificate
indenture or modifying the rights and obligations of certificateholders.
However, no supplemental certificate indenture may, among other things, without
the consent of each certificateholder and each swap counterparty affected
thereby:
o reduce in any manner the amount of, or delay the timing of, any
receipt by the certificate trustee of payments on the notes or
payments with respect to any certificate, change any date of payment
on any certificate, or change the place of payment where, or the
currency in which, any certificate is payable, or change the method
of calculation of interest on any floating rate certificates or
impair the right to sue for the enforcement of any payment on or
after the payment date, special payment date or other date specified
in this prospectus;
o permit the disposition of any note held by the trust except as
permitted by the certificate indenture, or otherwise deprive any
certificateholder of the benefit of the ownership of the related notes
held by the trust;
o reduce the percentage of aggregate outstanding principal amount of the
certificates of any class that is required for any supplemental
indenture or reduce such percentage required for any waiver or consent
(of compliance with certain provisions in the certificate indenture or
certain defaults thereunder and their consequences) provided for in
the certificate indenture;
o modify the provisions in the certificate indenture relating to
amendments with the consent of certificateholders, except to increase
the percentage vote necessary to approve amendments or to add further
provisions which cannot be modified or waived without the consent of
all certificateholders affected thereby; or
o adversely affect the status of the trust as a grantor trust not
taxable as a corporation for federal income tax purposes.
Promptly following the execution of any amendment to the certificate indenture
(other than an amendment described in the preceding paragraph), the certificate
trustee will furnish written notice of the substance of an amendment to each
certificateholder. For so long as any of the certificates are listed on the
Luxembourg Stock Exchange and the
67
rules of that exchange so require, this notice will be published in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort.
Any amendment to the certificate indenture may also be subject to the
consent of any swap counterparty if such amendment adversely affects its
interests.
LIST OF CERTIFICATEHOLDERS
With the written request of any certificateholder or group of
certificateholders of record holding certificates evidencing not less than 10
percent of the outstanding principal amount of the certificates, the certificate
trustee will give such certificateholder or certificateholders access during
business hours to the current list of certificateholders for purposes of
communicating with other certificateholders about their rights under the
certificate indenture.
Neither the declaration of trust nor the certificate indenture provides
for any annual or other meetings of certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the prospectus supplement, the certificates will be
issued in definitive form and will be transferable and exchangeable at the
office of the registrar identified in the prospectus supplement. No service
charge will be made for any registration or transfer of the certificates, but
the owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
CERTIFICATES WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the prospectus supplement, all classes of
certificates will initially be represented by one or more certificates
registered in the name of the Depository Trust Company, or DTC, or another
securities depository or its nominee. The certificates will be available to
investors only in the form of book-entry certificates. Certificateholders may
also hold certificates through Clearstream Banking, Luxembourg, S.A., referred
to as Clearstream, or Euroclear in Europe, if they are participants in one of
those systems or indirectly through participants.
THE ROLE OF DTC, CLEARSTREAM AND EUROCLEAR
DTC will hold the global certificate or certificates representing the
certificates. Clearstream and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositories. Currently,
Citibank, N.A. is depository for Clearstream and The Chase Manhattan Bank is
depository for Euroclear. Those depositories will in turn hold these positions
in customers' securities accounts in the depositories' names on the books of
DTC.
THE FUNCTION OF DTC
DTC is a limited purpose trust company organized under the laws of the
State of New York, and is a member of the Federal Reserve System. DTC is a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between participants through electronic book-entries, thereby
eliminating the need for physical movement of securities. Direct participants of
DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and some other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, Inc., the Nasdaq-Amex
Market Group and the National Association of Securities Dealers, Inc. Access to
DTC's system is also available to indirect participants.
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THE FUNCTION OF CLEARSTREAM
Clearstream holds securities for its customers and facilitates the
clearance and settlement of securities transactions between Clearstream
customers through electronic book-entry changes in accounts of Clearstream
customers, thereby eliminating the need for physical movement of securities.
Transactions may be settled by Clearstream in any of 36 currencies, including
United States dollars. Clearstream provides to its customers, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. Clearstream is
registered as a bank in Luxembourg, subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of Clearstream. Clearstream has
established an electronic bridge with Euroclear Bank S.A. in Brussels to
facilitate settlement of trades between Clearstream and Euroclear. In November
2000, Clearstream and Euroclear signed an agreement, effective in 2001, to
establish a new daytime transactions processing capability to supplement the
existing overnight bridge between Clearstream and Euroclear. The new daytime
bridge will initially operate manually but is expected to become automated by
the end of 2001.
Clearstream and Euroclear customers are world-wide financial institutions,
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to Clearstream and Euroclear is
available to other institutions that clear through or maintain a custodial
relationship with an account holder of either system.
THE FUNCTION OF EUROCLEAR
Euroclear was created in 1968 to hold securities for Euroclear
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment. By
performing these functions, Euroclear eliminated the need for physical movement
of securities and also eliminated any risk from lack of simultaneous transfers
of securities and cash. Transactions may now be settled in any of 30 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and arrangements with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described below. Euroclear Bank S.A., or the
Euroclear Operator, a bank incorporated under the laws of the Kingdom of Belgium
and licensed by the Belgian Banking and Finance Commission, assumed the
operating and banking functions of the Euroclear System as of January 1, 2001.
All operations of the Euroclear System are conducted by the Euroclear Operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator. The Euroclear Operator establishes policy
for Euroclear on behalf of Euroclear participants. Euroclear participants
include central banks, commercial banks, securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
TERMS AND CONDITIONS OF EUROCLEAR
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of Euroclear and applicable Belgian law, which
are referred to in this prospectus as the Terms and Conditions. The Terms and
Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear participants and has no record of or relationship
with persons holding through Euroclear participants.
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THE RULES FOR TRANSFERS AMONG DTC, CLEARSTREAM OR EUROCLEAR PARTICIPANTS
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream customers and Euroclear participants will occur in
accordance with their respective rules and operating procedures. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and directly or indirectly through Clearstream customers or Euroclear
participants, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by its
depository. Cross-market transactions will require delivery of instructions to
the relevant European international clearing system by the counterparty in this
system in accordance with its rules and procedures and within its established
deadlines, in European time. The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to its depository to take action to effect final settlement on its behalf by
delivering or receiving certificates in DTC, and making or receiving payments in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Clearstream customers and Euroclear participants may not deliver
instructions directly to the depositories.
DTC WILL BE THE HOLDER OF THE CERTIFICATES
Unless and until definitive certificated certificates are issued to
beneficial owners of the certificates, which certificates are referred to as
certificated certificates, it is anticipated that the only "holder" of
certificates of any series will be DTC. Certificateholders will only be
permitted to exercise their rights as certificateholders indirectly through
participants and DTC. All references herein to actions by certificateholders
thus refer to actions taken by DTC upon instructions from its participants,
unless certificated certificates are issued. In addition, all references herein
to payments, notices, reports and statements to certificateholders refer to
payments, notices, reports and statements to DTC, as the registered holder of
the certificates, for subsequent payments to the beneficial owners of the
certificates in accordance with DTC procedures, unless certificated certificates
are issued.
BOOK-ENTRY TRANSFERS AND TRANSMISSION OF PAYMENTS
Except under the circumstances described below, while any book-entry
certificates of a series are outstanding, under DTC's rules, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the book-entry certificates. In addition, DTC is required to receive
and transmit payments of principal of, and interest on, the book-entry
certificates. Participants with whom certificateholders have accounts with
respect to book-entry certificates are similarly required to make book-entry
transfers and receive and transmit these payments on behalf of their respective
certificateholders. Accordingly, although certificateholders will not possess
certificated certificates, DTC's rules provide a mechanism by which
certificateholders will receive payments and will be able to transfer their
interests.
DTC can only act on behalf of participants, who in turn act on behalf of
indirect participants and some banks. Thus, the ability of holders of beneficial
interests in the certificates to pledge certificates to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
these certificates, may be limited due to the lack of certificated certificates.
DTC has advised the certificate trustee that it will take any action
permitted to be taken by a certificateholder under the certificate indenture
only at the direction of one or more participants to whose account with DTC the
certificates are credited.
HOW CERTIFICATE PAYMENTS WILL BE CREDITED BY CLEARSTREAM AND EUROCLEAR
Payments with respect to certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream customers or
Euroclear participants in accordance with the relevant systems' rules and
procedures, to the extent received by its depository. These payments will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences," which begins on page 72.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a certificateholder under the certificate
indenture on behalf of a Clearstream customer or Euroclear participant only in
accordance with its relevant rules and procedures and subject to its
depository's ability to effect these actions on its behalf through DTC.
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DTC, Clearstream and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of certificates among customers or participants of
DTC, Clearstream and Euroclear. However, they are under no obligation to perform
or continue to perform these procedures and these procedures may be discontinued
at any time.
CERTIFICATED CERTIFICATES
THE CIRCUMSTANCES THAT WILL RESULT IN THE ISSUANCE OF CERTIFICATED
CERTIFICATES
Unless otherwise specified in the prospectus supplement, each class of
certificates will be issued in fully registered, certificated form to beneficial
owners of certificates or other intermediaries, rather than to DTC, only if:
o DTC advises the certificate trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to that class of certificates and the trust is
unable to locate a qualified successor;
o the trust, at its option, elects to terminate the book-entry system
through DTC; or
o after the occurrence of an event of default under the certificate
indenture, beneficial owners of certificates representing at least a
majority of the outstanding principal amount of certificates advise
DTC and the certificate trustee in writing that the continuation of a
book-entry system through DTC, or a successor thereto, is no longer in
the certificateholders' best interest.
THE DELIVERY OF CERTIFICATED CERTIFICATES
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify the certificate trustee and all
affected beneficial owners of certificates through participants of the
availability of certificated certificates. Upon surrender by DTC of the
certificates in the possession of DTC that had represented the applicable
certificates and receipt of instructions for re-registration, the certificate
trustee will authenticate and deliver certificated certificates to the
beneficial owners. Any certificated certificates listed on the Luxembourg Stock
Exchange will be made available to the beneficial owners of such certificates
through the office of the transfer agent in Luxembourg. Thereafter, the
certificate trustee will recognize the holders of any of these certificated
certificates as the certificateholders under the certificate indenture.
THE PAYMENT MECHANISM FOR CERTIFICATED CERTIFICATES
Payments of principal of and interest on certificated certificates will be
made by the certificate trustee, as paying agent, in accordance with the
procedures set forth in the certificate indenture. These payments will be made
directly to holders of certificated certificates in whose names the certificated
certificates were registered at the close of business on the related record date
specified in the prospectus supplement. These payments will be made by check
mailed to the address of the holder as it appears on the register maintained by
the certificate trustee or by wire transfer in immediately available funds in
accordance with the certificate indenture.
THE TRANSFER OR EXCHANGE OF CERTIFICATED CERTIFICATES
Certificated certificates will be transferable and exchangeable at the
offices of the certificate trustee. No service charge will be imposed for any
registration of transfer or exchange, but the certificate trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
FINAL PAYMENTS ON CERTIFICATED CERTIFICATES
The final payment on any certificated certificates, however, will be made
only upon presentation and surrender of the certificate at the office or agency
specified in the notice of final payment to certificateholders. The final
payment of any certificate listed on the Luxembourg Stock Exchange may also be
made upon presentation and surrender of the certificate at the office of the
paying agent in Luxembourg as specified in the notice of final payment. A notice
of such final payment will be published in a daily newspaper in Luxembourg,
which is expected
71
to be the Luxemburger Wort, not later than the fifth day of the month of such
final payment. Certificated certificates listed on the Luxembourg Stock Exchange
will also be transferable and exchangeable at the offices of the transfer agent
in Luxembourg. With respect to any transfer of these listed certificated
certificates, the new certificated certificates registered in the names
specified by the transferee and the original transferor will be available at the
offices of the transfer agent in Luxembourg.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material federal income tax consequences
to certificateholders, and is based on the opinion of Brown & Wood LLP. Brown &
Wood LLP has advised the trust that the description of those material federal
income tax consequences in this summary is accurate in all material respects.
The opinion of Brown & Wood LLP is based on some assumptions and is limited by
some qualifications stated in this discussion or in that opinion. This
discussion is based on current provisions of the Internal Revenue Code of 1986,
currently applicable Treasury regulations, and judicial and administrative
rulings and decisions. Legislative, judicial or administrative changes could
alter or modify the statements and conclusions in this discussion. Any
legislative, judicial or administrative changes or new interpretations may be
retroactive and could affect tax consequences to certificateholders.
This discussion applies to certificateholders who acquire the certificates
at original issue for cash and hold the certificates as capital assets. This
discussion does not address all of the tax consequences relevant to a particular
certificateholder in light of that certificateholder's circumstances, and some
certificateholders may be subject to special tax rules and limitations not
discussed below (e.g., life insurance companies, tax-exempt organizations,
financial institutions, dealers in securities, S corporations, taxpayers subject
to the alternative minimum tax provisions of the Internal Revenue Code,
broker-dealers, and persons who hold the certificates as part of a hedge,
straddle, "synthetic security", or other integrated investment, risk reduction
or constructive sale transaction). This discussion also does not address the tax
consequences to nonresident aliens, foreign corporations, foreign partnerships
or foreign trusts that are subject to U.S. federal income tax on a net basis on
income with respect to a certificate because that income is effectively
connected with the conduct of a U.S. trade or business. Those holders generally
are taxed in a manner similar to U.S. Certificateholders (as defined below);
however, special rules not applicable to U.S. Certificateholders may apply. In
addition, except as described below, this discussion does not address any tax
consequences under state, local or foreign tax laws or the consequences under
any tax treaties. CONSEQUENTLY, YOU ARE URGED TO CONSULT YOUR TAX ADVISER TO
DETERMINE THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
We use the term, "U.S. Certificateholder" to mean a "U.S. Person" who
is the beneficial owner of a certificate. A "U.S. Person" is:
o a citizen or resident of the United States;
o a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States, or under the laws of the
United States or of any state (including the District of Columbia);
o a partnership (or entity treated as a partnership for tax purposes)
organized in the United States, or under the laws of the United States
or of any state (including the District of Columbia) unless provided
otherwise by future Treasury regulations;
o an estate the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial
decisions of the trust.
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In addition, as provided in Treasury regulations, some trusts in existence
on August 20, 1996, and treated as U.S. Persons prior to that date, may elect to
continue to be treated for federal income tax purposes as U.S. Persons.
This discussion assumes that each certificate is issued in registered
form.
TREATMENT OF THE CERTIFICATES
Connecticut Light & Power has received a ruling from the Internal Revenue
Service holding that the notes are obligations of Connecticut Light & Power for
federal income tax purposes. Brown & Wood LLP will opine that the trust will not
be a business entity classified as a corporation or a publicly traded
partnership treated as a corporation, but will be treated as a grantor trust.
Further, Brown & Wood LLP will opine that each class of certificates
bearing interest at a fixed interest rate, referred to as fixed rate
certificates, will evidence ownership of a fractional undivided beneficial
interest in the related class of notes, and any class of floating rate
certificates will evidence ownership of a fractional undivided beneficial
interest in the related class of notes, referred to as underlying notes, and
will evidence ownership of a fractional undivided beneficial interest in the
related swap agreement. Accordingly, each certificateholder is treated as an
owner of an interest in the related notes and references in this discussion to
interest, discount and premium on a certificate are references to interest,
discount, or premium on the certificateholder's interest in the related notes.
Based on the assumptions and subject to the qualifications stated herein,
it is the opinion of Brown & Wood LLP that the material federal income tax
consequences to certificateholders are as follows:
TAXATION OF U.S. FIXED RATE CERTIFICATEHOLDERS
PAYMENTS OF INTEREST
Stated interest on the fixed rate certificates will be taxable as ordinary
interest income when received or accrued by a U.S. Certificateholder under its
method of accounting. Generally, interest on the fixed rate certificates will
constitute "investment income" for purposes of Internal Revenue Code limitations
on the deductibility of investment interest expense.
ORIGINAL ISSUE DISCOUNT
This discussion assumes that any original issue discount on the fixed rate
certificates (i.e., any excess of the stated redemption price at maturity of the
certificate over its issue price) is less than a statutory minimum amount (equal
to 0.25 percent of its stated redemption price at maturity multiplied by the
certificate's weighted average maturity), all as provided in the Treasury's
original issue discount regulations. Accordingly, unless a special election is
made to treat all interest on a fixed rate certificate as original issue
discount, any original issue discount generally will be taken into income by a
U.S. Certificateholder as gain from the retirement of a certificate (as
described below under " - Sale or Exchange of Fixed Rate Certificates," which
begins on page 75) ratably as principal payments are made on the certificates.
MARKET DISCOUNT AND PREMIUM
If a U.S. Certificateholder purchases (including a purchase at original
issuance for a price less than the issue price) a fixed rate certificate for an
amount that is less than the principal balance of the certificate, the
difference will be treated as "market discount" unless it is less than a
statutory minimum amount. This market discount will generally be treated as
accruing ratably on the certificate during the period from the date of
acquisition to the maturity date of the certificate, unless the U.S.
Certificateholder makes an election to accrue the market discount on a constant
yield to maturity basis. The U.S. Certificateholder will be required to treat
any principal payment on, or any gain realized on the sale, exchange, retirement
or other disposition of the certificate as ordinary income to the extent of the
lesser of:
o the amount of the payment or gain; or
73
o the market discount which is treated as having accrued on the
Certificate at the time of the payment or disposition and which has
not previously been included in income.
In addition, a U.S. Certificateholder may be required to defer the deduction of
all or a portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a fixed rate certificate with market discount,
until the maturity of the certificate or its earlier disposition in a taxable
transaction.
In the alternative, a U.S. Certificateholder may elect to include market
discount in income currently as it accrues on either a ratable or quarterly
compounding basis, in which case the rules described above will not apply. The
election to include market discount in income as it accrues will apply to all
market discount instruments acquired by the U.S. Certificateholder on or after
the first day of the taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service. Generally,
currently included market discount is treated as ordinary interest for United
States federal income tax purposes.
A purchaser who acquires a fixed rate certificate at a premium (i.e., at a
purchase price greater than the principal balance) may elect to offset the
premium against interest income on the certificate on a constant yield to
maturity basis. Any amortized premium will reduce the adjusted basis of the
certificate. If the certificate is redeemed before maturity for a price less
than the adjusted basis of the certificate, a U.S. Certificateholder will be
allowed an ordinary loss deduction for the unamortized premium. An election to
amortize bond premium applies to all bonds acquired by a U.S. Certificateholder
on or after the first day of the taxable year to which the election applies and
can be revoked only with the consent of the Internal Revenue Service.
TAXATION OF U.S. FLOATING RATE CERTIFICATEHOLDERS
Generally, as explained above, each floating rate certificateholder will
be treated as having purchased an interest in an underlying note and an interest
in the related swap agreement. The tax treatment of the certificateholder's
interest in the underlying note would generally be the same as that described
above in the case of a certificateholder who purchased an interest in a class of
fixed rate certificates.
Each floating rate certificateholder will include in income its share of
the fixed rate interest on the underlying note in accordance with its regular
method of tax accounting. As the tax owner of an undivided interest in the swap
agreement related to that class, the certificateholder would account for income
and expense with respect to the swap agreement under the rules set out in Treas.
Reg. ss. 1.446-3 (the "Notional Principal Contract" or "NPC" regulations).
The tax treatment of payments made or received under a swap agreement
depends on whether the payments are periodic payments, nonperiodic payments, or
termination payments. A periodic payment is any payment made or received under a
swap contract payable at intervals of one year or less during the entire term of
the contract that is based on a specified index (which includes a fixed rate)
and a notional principal amount. A nonperiodic payment is a payment made or
received under a swap contract that is not a periodic payment or a termination
payment, and is usually an upfront payment made by one party to a notional
principal contract to induce the other party to enter into the contract. It is
not anticipated that there will be any nonperiodic payment made or received with
respect to a swap agreement. If such a nonperiodic payment is expected to be
made or received, the tax treatment will be described in the prospectus
supplement.
For any taxable year, a floating rate certificateholder would include in,
or deduct from, gross income the certificateholder's net swap income or expense.
Net swap income or expense would include the sum of all periodic payments
recognized and attributable to the year.
Periodic payments made on any quarterly payment date would be allocated
ratably among the days in the quarter, and a floating rate certificateholder
would include or deduct its share of the net periodic payments allocated to the
year.
Each purchaser of a floating rate certificate would be required to
allocate its purchase price between the underlying note and the related swap
agreement based on their relative fair market values. For example, even if a
floating rate certificate were purchased for its face amount, the holder might
be considered to have acquired the
74
underlying note at a discount and to have acquired the related swap agreement
for the remaining purchase price. This bifurcation of the purchase price of the
floating rate certificate could result in aggregate net income to the floating
rate certificateholder that differs somewhat in any particular year from the
interest actually payable on the certificate for such year. A holder could avoid
such results by making an integration election on or before the acquisition date
of the floating rate certificate in the manner described under " - Integration
of the Underlying Notes and the Swap Agreement," which begins on page 75.
Moreover, if an individual were to hold a floating rate certificate, any
net swap expense for any year would be treated as a miscellaneous itemized
deduction. In computing taxable income, an individual is allowed to deduct
miscellaneous itemized deductions only to the extent the sum of such deductions
exceeds two percent of the individual's adjusted gross income. Further, an
individual is not allowed a deduction for miscellaneous itemized deductions in
computing alternative minimum taxable income. Thus, for any period for which the
fixed rate on the underlying notes exceeded the floating rate payments made to
trust under the swap agreement, an individual would include in income interest
at the full fixed rate payable on the underlying notes, but could be precluded
from deducting the net swap expense for the period due to the limitations
imposed on miscellaneous itemized deductions. An individual could avoid such
treatment by making an integration election in the manner described under " -
Integration of the Underlying Notes and the Swap Agreement," which begins on
page 75.
A termination payment is a payment made or received to assign or
extinguish a party's rights and obligations under a swap contract. If a
certificateholder were to sell its interest in a floating rate certificate, it
would be considered to have made or to have received a termination payment with
respect to its interest in the swap agreement. The certificateholder would
recognize gain or loss in the year that it terminated its interest in the swap
agreement determined by reference to the amount of the termination payment made
or received and the certificateholder's basis in the swap agreement.
A floating rate certificateholder could also receive a termination payment
if an event of default under the swap agreement were to occur. If such an event
were to occur, the certificateholder could recognize gain upon receipt of a
termination payment.
INTEGRATION OF THE UNDERLYING NOTES AND THE SWAP AGREEMENT
In lieu of the tax treatment described above, a floating rate
certificateholder could identify the purchase of a floating rate certificate as
the acquisition of a fixed rate debt instrument together with a Treas. Reg. ss.
1.1275-6 hedge. In essence, if the certificateholder identifies the underlying
note and the related swap agreement as an integrated transaction on its books
and records, on or before the acquisition date of the floating rate certificate,
it may be able to integrate the cash flows on the swap agreement and the fixed
rate underlying note and treat the combined cash flows as a single synthetic
floating rate debt instrument. All interest on the synthetic floating rate debt
instrument would be treated as original issue discount, includible in income as
it accrues regardless of the holder's method of accounting. The disposition of a
floating rate certificate that was identified under the integration regime would
be treated as the disposition of a single synthetic floating rate debt
instrument.
If a swap counterparty default event were to occur so that the swap
agreement terminated, a certificateholder who had made an integration election
would be treated as having "legged-out" of integration. Such a certificateholder
could recognize gain as a result of such legging-out. Certificateholders are
urged to consult their own tax advisors concerning the integration election.
SALE OR EXCHANGE OF FIXED RATE CERTIFICATES
Upon a disposition of an interest in a fixed rate certificate, a U.S.
Certificateholder generally will recognize gain or loss equal to the difference
between (i) the amount of cash and the fair market value of any other property
received (other than amounts attributable to, and taxable as, accrued stated
interest) and (ii) the U.S. Certificateholder's adjusted basis in its interest
in the fixed rate certificate. The adjusted basis in the interest in the fixed
rate certificate will equal its cost, increased by any original issue discount
or market discount included in income with respect to the interest in the fixed
rate certificate prior to its disposition and reduced by any payments reflecting
principal or original issue discount previously received with respect to the
interest in the fixed rate
75
certificate and any amortized premium. Subject to the original issue discount
and market discount rules, gain or loss will generally be capital gain or loss
if the interest in the fixed rate certificate was held as a capital asset.
SALE OR EXCHANGE OF FLOATING RATE CERTIFICATES
If a floating rate certificateholder does not make an integration
election, then the sale or exchange of a floating rate certificate will be
treated as the sale of an interest in the underlying note and an assignment of
an interest in the swap agreement. The total sale proceeds would be allocated
between the underlying note and the swap agreement in proportion to their
relative fair market values. Gain or loss on the underlying note would be
determined in the manner described above, and gain or loss on the swap agreement
would give rise to gain or loss as described above for termination payments. If
the swap agreement has a negative value at the time of the sale of a floating
rate certificate, the floating rate certificateholder would apparently be
treated as having sold the underlying note for its fair market value (which
would exceed the sale proceeds) and as having paid such excess to the purchaser
of the floating rate certificate in consideration for the assumption of the
obligations under the swap agreement. If an integration election is made,
however, the certificateholder would be viewed as having sold a single floating
rate debt instrument and could recognize gain or loss on such sale.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S.
federal income or withholding tax on interest (including original issue
discount) on a certificate unless:
o the non-U.S. Certificateholder is a controlled foreign corporation
that is related to Connecticut Light & Power through stock
ownership or is otherwise related as determined by Internal
Revenue Code Section 864(d);
o the non-U.S. Certificateholder is a bank as determined under
Internal Revenue Code Section 581 which receives interest as
described in Internal Revenue Code Section 881(c)(3)(A); or
o the non-U.S. Certificateholder actually or constructively owns 10%
or more of the total combined voting power of all classes of stock
of Connecticut Light & Power entitled to vote.
In order for interest payments to qualify for the exemption from U.S. taxation
described above, the last person or entity in the United States in the chain of
interest payments to the non-U.S. Certificateholder (the "Withholding Agent")
must have received (in the year in which a payment of interest or principal
occurs or in either of the two preceding years) a statement that complies with
Internal Revenue Service informational requirements and:
o is signed by the non-U.S. Certificateholder under penalty of
perjury;
o certifies that the non-U.S. Certificateholder is not a U.S.
Person; and
o provides the name and address of the non-U.S. Certificateholder.
The statement may be made on a Form W-8BEN, and the non-U.S.
Certificateholder must inform the Withholding Agent of any change in the
information on the statement within 30 days of the change. If a certificate is
held through a securities clearing organization or other financial institution,
the organization or institution may provide a signed statement to the
Withholding Agent certifying under penalties of perjury that the Form W-8BEN has
been received by it from the certificateholder or from another qualifying
financial institution. However, in that case, the signed statement must be
accompanied by a copy of the Form W-8BEN provided by the non-U.S.
Certificateholder to the organization or institution holding the certificate on
behalf of the non-U.S. Certificateholder. We urge non-U.S. certificateholders to
consult a tax advisor about the specific methods to satisfy Internal Revenue
Service informational reporting requirements.
Generally, any gain or income realized by a non-U.S. Certificateholder
from the sale, exchange, redemption, retirement or other disposition of a
certificate (other than gain attributable to accrued interest or original issue
discount, which is addressed above) will not incur U.S. federal income tax
liability, provided, in the case of a
76
certificateholder who is an individual, that the certificateholder is not
present in the United States for 183 or more days during the taxable year in
which a disposition of a certificate occurs. Exceptions may be applicable, and
non-U.S. Certificateholders should consult a tax adviser regarding the tax
consequences of a disposition of a certificate.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Some certificateholders may be subject to backup withholding at the rate
of 31% on interest (including original issue discount) and proceeds received
from the disposition of a certificate. Generally, backup withholding will apply
if the certificateholder fails to provide identifying information (such as the
payee's taxpayer identification number) in the manner required, or if the payee
has failed to report properly the receipt of reportable interest or dividend
payments and the Internal Revenue Service has notified the payor that backup
withholding is required. Some certificateholders (including, among others,
corporations and some tax-exempt organizations) generally are not subject to
backup withholding.
Backup withholding and information reporting generally will not apply
to a certificate issued in registered form that is beneficially owned by a
non-U.S. Certificateholder if the certification of non-U.S. status is
provided to the Withholding Agent as described above in " - Non-U.S.
Certificateholders," as long as the payor does not have actual knowledge that
the certificateholder is a U.S. Person. The Withholding Agent may be required
to report annually to the Internal Revenue Service and to each non-U.S.
Certificateholder the amount of interest paid to, and the tax withheld, if
any, for each non-U.S. Certificateholder.
If payments of principal and interest are made to the beneficial owner of
a certificate by or through the foreign office of a custodian, nominee or other
agent of that beneficial owner, or if the proceeds of the sale of certificates
are made to the beneficial owner of a certificate through a foreign office of a
"broker" (as defined in the pertinent Treasury regulations), the proceeds will
not be subject to backup withholding (absent actual knowledge that the payee is
a U.S. Person). Information reporting (but not backup withholding) will apply,
however, to a payment by a foreign office of a custodian, nominee, agent or
broker that:
o is a U.S. Person;
o is a controlled foreign corporation for U.S. federal income tax
purposes; or
o derives 50% or more of its gross income from the conduct of a U.S.
trade or business for a specified three-year period, unless the broker
has in its records documentary evidence that the holder is a non-U.S.
Certificateholder and other conditions are met (including that the
broker has no actual knowledge that the certificateholder is a U.S.
Certificateholder) or the certificateholder otherwise establishes an
exemption.
Payment through the U.S. office of a custodian, nominee, agent or broker is
subject to both backup withholding at a rate of 31% and information reporting,
unless the certificateholder certifies that it is a non-U.S. Person under
penalties of perjury or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to
a certificateholder would be allowed as a refund or a credit against that
certificateholder's U.S. federal income tax, provided that the required
information is furnished to the Internal Revenue Service.
Regulations regarding the withholding and information reporting rules
discussed above were issued by the Treasury Department in October 1997 and
amended in May 2000. In general, the regulations did not significantly alter the
substantive withholding and information reporting requirements but rather
unified the prior certification procedures and forms and clarified reliance
standards. In addition, the regulations permit the shifting of primary
responsibility for withholding to financial intermediaries acting on behalf of
beneficial owners. The regulations are generally effective for payments made
after December 31, 2000, although there are transition rules. Under the
regulations, new forms generally will have to be solicited from U.S.
Certificateholders earlier than replacements for expiring existing forms
otherwise would have been solicited. You should consult your tax adviser about
the impact, if any, of the regulations.
77
STATE TAXATION
In the opinion of Pullman & Comley, LLC, under existing statutes, interest
on the certificates and any gain on the sale of the certificates are excluded
from Connecticut taxable income for purposes of the Connecticut income tax on
individuals, trusts and estates and is excluded from amounts on which the net
Connecticut minimum tax is based in the case of individuals, trusts and estates
required to pay the federal alternative minimum tax. Pullman & Comley, LLC has
not opined and will not opine as to other Connecticut tax consequences with
respect to the certificates.
Interest on the Certificates is included in gross income for purposes of
the Connecticut corporation business tax and the certificates are included in
the measure of Connecticut gift, estate, succession and transfer taxes.
This discussion does not address the tax consequences of the purchase,
ownership or disposition of the certificates under any state or local tax law
other than that of Connecticut.
Owners of the certificates should consult their tax advisors with respect
to other applicable state and local tax consequences of ownership of the
certificates and the disposition thereof.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, or ERISA, and/or
Section 4975 of the Internal Revenue Code impose restrictions and requirements
on the following:
o employee benefit plans and other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and some
collective investment funds and insurance company general or separate
accounts in which the assets of these plans, accounts or arrangements
are invested (the "Plans"); and
o persons who are fiduciaries for Plans in connection with the
investment of assets of Plans (the "Plan Assets").
Generally, any person who has discretionary authority or control over the
management or disposition of Plan Assets, and any person who provides investment
advice about Plan Assets for a fee or other consideration, is a fiduciary for
those Plan Assets. For those Plans that are governed by ERISA, ERISA imposes on
Plan fiduciaries specific fiduciary responsibilities, including investment
prudence, diversification and investing according to the documents governing the
Plan.
PROHIBITED TRANSACTIONS
ERISA and Section 4975 of the Internal Revenue Code prohibit a broad range
of transactions involving Plan Assets and persons or entities that are deemed
"parties in interest" under Section 3(14) of ERISA or "disqualified persons"
under Section 4975(e)(2) of the Internal Revenue Code ("Parties in Interest"),
unless a statutory or administrative exemption applies. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be liable for
penalties under ERISA and/or excise taxes imposed under Section 4975 of the
Internal Revenue Code. These prohibited transactions generally are described in
Section 406 of ERISA and Section 4975 of the Internal Revenue Code.
Some governmental and church plans are not governed by ERISA or Section
4975 of the Internal Revenue Code. The prohibited transaction provisions
described above do not apply to these plans. If a plan is exempt from taxation
under Section 501(a) of the Internal Revenue Code as a plan described in Section
401(a) of the Internal Revenue Code, however, it may lose its tax exemption if
it engages in a prohibited transaction described in Section 503 of the Internal
Revenue Code.
Any fiduciary or other Plan investor considering whether to purchase the
certificates on behalf of a Plan or with Plan Assets should determine whether
the purchase is consistent with its fiduciary duties and whether the purchase
would constitute or result in a non-exempt prohibited transaction under ERISA
and/or Section 4975 of the Internal Revenue Code because Connecticut Light &
Power, the trustees, the underwriters or any of their affiliates is a Party in
Interest under the investing Plan and may be deemed to be benefiting from the
issuance of the certificates.
78
In particular, the certificates may not be purchased with Plan Assets if any of
Connecticut Light & Power, the trustees, the underwriters or any of their
affiliates:
o has investment or administrative discretion over the Plan Assets used
to effect the purchase;
o has authority or responsibility to give, or regularly gives, investment
advice regarding the Plan Assets, for a fee and under an agreement or
understanding that the advice will serve as a primary basis for
investment decisions for the Plan Assets, and will be based on the
particular investment needs of the Plan; or
o unless exemptive relief applies under a U.S. Department of Labor
prohibited transaction exemption, is an employer maintaining or
contributing to the Plan.
Each purchaser of the certificates will be deemed to have represented and
warranted that its purchase of the certificates or any interest in the
certificates does not violate the limitations described above.
PLAN ASSET REGULATION
The certificates will be treated as "equity interests" in the trust under
a plan asset regulation issued by the U.S. Department of Labor, which provides
that beneficial interests in a trust are equity interests. Generally, the plan
asset regulation provides that if Plans acquire a "significant" equity interest
in an entity, the entity may be considered to hold Plan Assets. Therefore, if
the certificates are purchased with Plan Assets, the assets of the trust may be
deemed Plan Assets of the investing Plans which, in turn, would subject the
trust and its assets to the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code. Even though only minimal administrative activity is expected at
the trust level, it is likely that the trust will interact with Connecticut
Light & Power, the trustees, the underwriters and their affiliates. If
Connecticut Light & Power, the trustees, the underwriters or any of their
affiliates is a Party in Interest to a Plan that purchases certificates,
violations of the prohibited transaction rules could occur at the trust level,
unless a statutory or administrative exemption applies or an exception applies
under the plan asset regulation.
Before purchasing any certificates, a Plan fiduciary, other Plan investor
or Party in Interest should consider whether a prohibited transaction might
arise by reason of any relationship between the investing Plan and Connecticut
Light & Power, the trustees, the underwriters or any of their affiliates. The
U.S. Department of Labor has issued some class exemptions that may afford
exemptive relief for otherwise prohibited transactions arising from the purchase
or holding of the certificates, including U.S. Department of Labor Prohibited
Transaction Exemptions 96-23 (Class Exemption for Plan Asset Transactions
Determined by In-House Investment Managers); 95-60 (Class Exemption for Certain
Transactions Involving Insurance Company General Accounts); 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment Funds);
90-1 (Class Exemption for Certain Transactions Involving Insurance Company
Pooled Separate Accounts); and 84-14 (Class Exemption for Plan Assets
Transactions Determined by Independent Qualified Professional Asset Managers). A
purchaser of the certificates should be aware, however, that even if the
conditions specified in one or more of the above exemptions are met, the scope
of the relief provided by the exemption might not cover all acts which might be
construed as prohibited transactions.
Plans would not have a "significant" equity interest in the trust, and
application of the plan asset regulation would be avoided, if Benefit Plan
Investors (as defined in the plan asset regulation) own less than 25 percent of
each class of equity in the trust. However, there is no commitment to limit
purchases of certificates by Benefit Plan Investors in this manner.
CONCLUSION
In light of the foregoing, Plan fiduciaries or other Plan investors
considering whether to purchase the certificates with Plan Assets of any Plan
and Parties in Interest should consult their own legal advisors regarding
whether the trust assets would be considered Plan Assets, the consequences that
would apply if the trust assets were considered Plan Assets, and the
availability of exemptive relief from the prohibited transaction rules or an
exception under the Plan Asset Regulation. Fiduciaries and other Plan investors
should also consider the fiduciary standards under ERISA or other applicable law
in the context of the Plan's particular circumstances before authorizing an
79
investment of Plan Assets in the certificates. Among other factors, fiduciaries
and other Plan investors should consider whether the investment:
o satisfies the diversification requirement of ERISA or other
applicable law;
o complies with the Plan's governing instruments; and
o is prudent in light of the "Risk Factors" and other factors discussed
in this prospectus.
USE OF PROCEEDS
The trust will use the net proceeds received from the sale of the
certificates to purchase the notes from the note issuer. The note issuer will
use the net proceeds from the sale of the notes to purchase the transition
property from the seller and to pay the costs of issuing the notes and the
certificates. The seller may apply the net proceeds from the sale of the
transition property in accordance with the financing order to reduce its
capitalization and to buy down and buy out purchased power obligations.
PLAN OF DISTRIBUTION
The trust may sell the certificates to or through the underwriters named
in the prospectus supplement by a negotiated firm commitment underwriting and
public reoffering by the underwriters or another underwriting arrangement that
may be specified in the prospectus supplement or the trust may offer or place
the certificates either directly or through agents. The note issuer and the
trust intend that certificates will be offered through these various methods
from time to time and that offerings may be made concurrently through more than
one of these methods or that an offering of the certificates may be made through
a combination of these methods.
The distribution of certificates may be effected in one or more
transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to prevailing market
prices or in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
In connection with the sale of the certificates, underwriters or agents
may receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell certificates to dealers at prices less a concession.
Underwriters may allow, and the dealers may reallow, a concession to other
dealers. Underwriters, dealers and agents that participate in the distribution
of the certificates may be deemed to be underwriters and any discounts or
commissions received by them from the trust and any profit on the resale of the
certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act. We will identify any of these underwriters or agents,
and describe any compensation we give them, in the prospectus supplement.
LEGAL MATTERS
Certain legal matters relating to the notes will be passed on by Day,
Berry & Howard LLP, Hartford, Connecticut, counsel to Connecticut Light & Power
and the note issuer. Certain legal matters relating to the certificates and
certain federal and state income tax consequences of the issuance of the
certificates will be passed upon by Brown & Wood LLP, San Francisco, California,
counsel to the trust, and Pullman & Comley, LLC, Hartford, Connecticut,
co-counsel to the trust. Certain legal matters relating to the notes and the
certificates will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, Delaware counsel to the note issuer and the trust. Certain legal
matters relating to the certificates will be passed upon by Palmer & Dodge LLP,
Boston, Massachusetts, counsel to the underwriters.
EXPERTS
The financial statements of CL&P Funding LLC as of March 6, 2001 and for
the period January 3, 2001 (date of inception) to March 6, 2001 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon said firm as experts in accounting and auditing
in giving said reports.
80
CL&P FUNDING LLC
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants............................... F-2
Financial Statements:
Balance Sheet as of March 6, 2001...................................... F-3
Statement of Operations for the period of January 3, 2001
(inception date) to March 6, 2001...................................... F-4
Statement of Changes in Member's Equity for the period of January
3, 2001 (inception date) to March 6, 2001.............................. F-5
Statement of Cash Flow for the period of January 3, 2001 (inception
date) to March 6, 2001................................................. F-6
Notes to Financial Statements........................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CL&P Funding LLC:
We have audited the accompanying balance sheet of CL&P Funding LLC as of
March 6, 2001 and the related statement of operations, changes in member's
equity and cash flow from the date of inception (January 3, 2001) to March 6,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CL&P Funding LLC as of March
6, 2001, and the results of its operations and its cash flow from the date of
inception (January 3, 2001) to March 6, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Hartford, Connecticut
March 12, 2001
F-2
CL&P FUNDING LLC
BALANCE SHEET
AS OF MARCH 6, 2001
ASSETS
Cash.............................................................. $1,000
======
MEMBER'S EQUITY
Member's Equity................................................... $1,000
======
The accompanying notes are an integral part of these financial statements.
F-3
CL&P FUNDING LLC
STATEMENT OF OPERATIONS
FOR THE PERIOD OF JANUARY 3, 2001 (INCEPTION DATE) TO MARCH 6, 2001
INCOME............................................................ $ -
EXPENSES.......................................................... -
-------
NET INCOME........................................................ $ -
=======
The accompanying notes are an integral part of these financial statements.
F-4
CL&P FUNDING LLC
STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE PERIOD OF JANUARY 3, 2001 (INCEPTION DATE) TO MARCH 6, 2001
Member's equity as of the date of inception....................... $ -
Investment by The Connecticut Light and Power Company............. 1,000
------
Member's change in equity as of March 6, 2001..................... $1,000
======
The accompanying notes are an integral part of these financial statements.
F-5
CL&P FUNDING LLC
STATEMENT OF CASH FLOW
FOR THE PERIOD OF JANUARY 3, 2001 (INCEPTION DATE) TO MARCH 6, 2001
Net cash flow provided by operating activities.................... $ -
Net cash flow provided by investing activities.................... 1,000
Net cash flow provided by financing activities.................... -
Net cash at the beginning of the period........................... -
------
Net cash at the end of the period................................. $1,000
======
The accompanying notes are an integral part of these financial statements.
F-6
CL&P FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
CL&P Funding LLC is a special purpose limited liability company whose sole
member is The Connecticut Light and Power Company (Connecticut Light & Power), a
provider of electric services. CL&P Funding LLC is a wholly owned subsidiary of
Connecticut Light & Power, which is a wholly owned subsidiary of Northeast
Utilities.
The electric industry restructuring statute in Connecticut authorizes the
Department of Public Utility Control to issue a financing order, which
establishes the amount of stranded costs that Connecticut Light & Power is
permitted to finance through the issuance of rate reduction bonds. The
Department of Public Utility Control issued the financing order on November 8,
2000, and the order was supplemented on December 12, 2000. The financing order
establishes, among other things, the RRB charge to recover the stranded costs
specified in the financing order. The RRB charge is non-bypassable in that
customers must pay it whether or not they purchase energy from Connecticut Light
& Power or a third party supplier of energy, and whether or not their
distribution system is being operated by Connecticut Light & Power or a
successor distribution company.
The electric industry restructuring statute provides that the right to
collect payments based on the RRB charge is a property right (the transition
property) which may be pledged, assigned or sold in connection with the issuance
of the certificates. Under the restructuring statute and the financing order,
the owner of the transition property is entitled to assess the RRB charge until
it has received payments from customers sufficient to retire all outstanding
notes and certificates and to pay fees and expenses of servicing and retiring
the notes and the certificates. The transition property is a property right
consisting of the right, title, and interest to all revenues, collections,
claims, payments, money or proceeds of or arising from the RRB charge.
CL&P Funding LLC was organized on January 3, 2001, under the laws of the
State of Delaware. CL&P Funding LLC was organized for the limited purpose of
holding and servicing the transition property which it will acquire from
Connecticut Light & Power. CL&P Funding LLC will also issue notes secured by the
transition property and engage in other related activities. CL&P Funding LLC is
restricted from engaging in any non-related activities. In addition, CL&P
Funding LLC is required to operate in a manner intended to reduce the likelihood
that it would be consolidated in Connecticut Light & Power's bankruptcy estate
if Connecticut Light & Power becomes involved in a bankruptcy proceeding.
CL&P Funding LLC is legally separate from Connecticut Light & Power. The
assets and revenues of CL&P Funding LLC, including, without limitation, the
transition property, are not available to the creditors of Connecticut Light &
Power, and the transition property and other debt collateral will not be an
asset of Connecticut Light & Power. CL&P Funding LLC has not yet acquired the
transition property nor has it issued any notes.
CL&P Funding LLC, since its formation on January 3, 2001, has not
conducted any business activities. However, Connecticut Light & Power has
incurred legal and debt issuance related costs which may be allocated to CL&P
Funding LLC upon issuance of the notes and certificates. The expenses incurred
to date by Connecticut Light & Power on behalf of CL&P Funding LLC are
approximately $1,325,594.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH
Cash and cash equivalents include cash on hand and short-term cash
investments, if any, which are highly liquid in nature and have maturities of
three months or less.
F-7
CL&P FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
3. THE NOTES
CL&P Funding LLC intends to issue up to $1.551 billion of notes to the
Connecticut RRB Special Purpose Trust CL&P-1 (the trust) under the terms of the
note indenture. Each class of notes will be in an aggregate amount equal to the
initial aggregate principal amount of the related class of certificates issued
by the trust. The notes may be issued in one or more classes. All notes of the
same class will be identical in all respects except for their denominations. The
note issuer may not issue any additional notes under the note indenture other
than in connection with the replacement, transfer or exchange of notes initially
issued thereunder.
4. RELATED PARTIES
Connecticut Light & Power will manage, service and administer, and bill
and collect payments arising from the transition property according to the terms
of the servicing agreement. Connecticut Light & Power's duties will include
responding to inquiries of customers and the Department of Public Utility
Control regarding the transition property and the RRB charge, calculating
electricity usage, accounting for collections, and furnishing periodic reports
and statements to CL&P Funding LLC.
5. INCOME TAXES
CL&P Funding LLC will not elect to be taxed as a corporation for federal
income tax purposes, therefore, no federal income taxes will be due by CL&P
Funding LLC.
6. CONSOLIDATED EDISON MERGER
On October 13, 1999, Northeast Utilities entered into a merger agreement
with Consolidated Edison, Inc. (Consolidated Edison) pursuant to which Northeast
Utilities would become a wholly owned subsidiary of Consolidated Edison. On
March 5, 2001, Northeast Utilities announced that Consolidated Edison had
advised Northeast Utilities that Consolidated Edison was not willing to close
the merger on the previously agreed upon terms. Northeast Utilities said that it
had notified Consolidated Edison that it was treating its refusal to proceed on
the terms set forth in the merger agreement as a repudiation and breach of the
merger agreement, and that it will file suit to obtain the benefits of the
transaction as negotiated for Northeast Utilities's shareholders. On March 6,
2001, Consolidated Edison announced that, in response to Northeast Utilities's
action, Consolidated Edison had filed suit against Northeast Utilities in the
Federal District Court in the Southern District of New York seeking a
declaratory judgment that Northeast Utilities has failed to satisfy conditions
precedent under the merger agreement. On March 12, 2001, Northeast Utilities
announced that it had filed suit against Consolidated Edison in the Federal
District Court in the Southern District of New York seeking damages in excess of
$1 billion arising from Consolidated Edison's breach of the merger agreement.
F-8
$1,438,400,000 RATE REDUCTION CERTIFICATES
CONNECTICUT RRB
SPECIAL PURPOSE TRUST CL&P-1
ISSUER OF THE CERTIFICATES
CL&P FUNDING LLC
ISSUER OF THE NOTES
THE CONNECTICUT LIGHT AND POWER COMPANY
SELLER AND SERVICER
PROSPECTUS SUPPLEMENT
[ ], 2001
LEHMAN BROTHERS
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
MORGAN STANLEY
ADVEST, INC.
M.R. BEAL & COMPANY
BELLE HAVEN INVESTMENTS, L.P.
LOOP CAPITAL MARKETS, LLC.
QUICK & REILLY, INC.
RAMIREZ & CO., INC.
PROSPECTUS DELIVERY REQUIREMENTS
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THESE SECURITIES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THESE SECURITIES WILL DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL [ ], 2001.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee.
ITEM AMOUNT
- ---- ------
Securities and Exchange Commission
Registration Fee.................................. $359,600
Printing and Marketing Expenses................... 375,000
Trustees' Fees and Expenses....................... 60,000
Accountants' Fees and Expenses.................... 75,000
Legal Fees and Expenses........................... 2,565,000
Rating Agency Fees................................ 547,500
Public Agency Fees................................ 175,000
Financial Advisor Structuring Fee................. 980,000
Miscellaneous Fees and Expenses (Including
Blue Sky)......................................... 395,629
------------
Total................................... $ 5,532,729
============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 18-108 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may and has the
power to indemnify and hold harmless any member or other person from and against
any and all claims and demands whatsoever.
Sections 10.01 and 10.02 of the Limited Liability Company Agreement of the
note issuer provide that, to the fullest extent permitted by applicable law, the
note issuer shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (including
actions by or in the right of the note issuer to procure a judgment in its
favor) by reason of the fact that he is or was a director, manager, officer,
employee or agent of the note issuer, or is or was serving at the request of the
note issuer as a manager, director, officer, employee or agent of another
company, partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit,
proceeding or in enforcing such person's right to indemnification hereunder, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the note issuer, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, provided that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the note issuer unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the Court of Chancery or such other court shall
deem proper. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner that he reasonably believed to
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be in or not opposed to the best interests of the note issuer, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
Section 33-770 of the Connecticut General Statutes defines the terms
"director" and "officer" to include a director or officer of a corporation who
serves at its request as a director, officer, partner, trustee, employee, or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other entity. Sections 33-770 to 33-779 provide that a
corporation which was incorporated prior to January 1, 1997, such as Connecticut
Light & Power, shall indemnify its directors as provided in these sections.
These sections also require such a corporation, except to the extent that its
certificate of incorporation provides otherwise, to indemnify its officers,
employees and agents who are not also its directors to the same extent as it is
permitted to indemnify its directors. In addition, these sections permit a
corporation to indemnify and advance expenses to those officers, employees and
agents who are not also its directors to such further extent, consistent with
public policy, as may be provided by contract, the certificate of incorporation,
the bylaws or a resolution of the board of directors. The note issuer believes
that its officers and non-independent directors who are also officers or
employees of Connecticut Light & Power are serving the note issuer in those
capacities at Connecticut Light & Power's request and are therefore entitled,
although the matter is not entirely free from doubt, to indemnification from
Connecticut Light & Power.
Section IX of Connecticut Light & Power's Certificate of Incorporation
provides that it shall indemnify and advance reasonable expenses to an
individual made or threatened to be made a party to a proceeding because he/she
is or was a director of Connecticut Light & Power to the fullest extent
permitted by law under Sections 33-770 to 33-779 of the Connecticut General
Statutes, as amended from time to time. Connecticut Light & Power shall also
indemnify and advance reasonable expenses under Connecticut General Statutes
Sections 33-770 to 33-779, as amended, to any officer, employee or agent of
Connecticut Light & Power who is not a director to the same extent as a director
and to such further extent, consistent with public policy, as may be provided by
contract, the Certificate of Incorporation, the bylaws of Connecticut Light &
Power or a resolution of the board of directors. In connection with any advance
for such expenses, Connecticut Light & Power may, but need not, require any such
officer, employee or agent to deliver a written affirmation of his/her good
faith belief that he/she has met the relevant standard of conduct or a written
undertaking to repay any funds advanced for expenses if it is ultimately
determined that he/she is not entitled to indemnification. The board of
directors, by resolution, the general counsel of Connecticut Light & Power, or
such additional officer or officers as the board of directors may specify, shall
have the authority to determine that indemnification or advance for such
expenses to any such officer, employee or agent is permissible and to authorize
payment of such indemnification or advance for expenses. The board of directors,
by resolution, the general counsel of Connecticut Light & Power, or such
additional officer or officers as the board of directors may specify, shall also
have the authority to determine the terms on which Connecticut Light & Power
shall advance expenses to any such officer, employee or agent, which terms need
not require delivery by such officer, employee or agent of a written affirmation
of his/her good faith belief that he/she has met the relevant standard of
conduct or a written undertaking to repay any funds advanced for such expenses
if it is ultimately determined that he/she is not entitled to indemnification.
Northeast Utilities, Connecticut Light & Power's parent company, has
directors' and officers' liability insurance policies in force insuring the
directors and officers of Northeast Utilities and its subsidiaries. Such
policies insure the directors and officers of Connecticut Light & Power and the
non-independent directors and the officers of CL&P Funding LLC.
ITEM 16. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation of the Registrant.
3.2 Limited Liability Company Agreement of the Registrant.
4.1 Form of Note Indenture.
4.2 Form of Certificate Indenture.
4.3 Form of Declaration of Trust.
4.4 Form of Note (contained in form of Note Indenture filed as Exhibit
4.1)
II-2
4.5 Form of Rate Reduction Certificate (contained in form of
Certificate Indenture filed as Exhibit 4.2).
5.1 Opinion of Day, Berry & Howard LLP with respect to legality of
the Notes.
5.2 Opinion of Richards, Layton & Finger, P.A. with respect to
legality of the Rate Reduction Certificates.
5.3 Opinion of Richards, Layton & Finger, P.A. with respect to due
authorization of the Notes by the Registrant.
8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
8.2 Opinion of Pullman & Comley, LLC with respect to state tax
matters.
10.1 Form of Transition Property Purchase and Sale Agreement.
10.2 Form of Transition Property Servicing Agreement.
10.3 Form of Note Purchase Agreement.
10.4 Form of Administration Agreement.
10.5 Form of Fee and Indemnity Agreement.
10.6 Form of Swap Agreement.
10.7 Form of Inter-Creditor Agreement with respect to accounts
receivable arrangement.
23.1 Consent of Day, Berry & Howard LLP (contained in its opinion to
be filed as Exhibit 5.1).
23.2 Consent of Brown & Wood LLP (contained in its opinion to be filed
as Exhibit 8.1).
23.3 Consent of Pullman & Comley, LLC (contained in its opinions to be
filed as Exhibits 8.2 and 99.3).
23.4 Consent of Richards, Layton & Finger, P.A. (contained in its
opinions to be filed as Exhibits 5.2 and 5.3).
23.5 Consent of Arthur Andersen LLP.
24 Power(s) of Attorney (See Signature Page).
25.1 Statement of Eligibility and Qualification of Note Trustee on
Form T-1.
25.2 Statement of Eligibility and Qualification of Certificate Trustee
on Form T-1.
99.1 Financing Order.
99.2 Internal Revenue Service Private Letter Ruling pertaining to the
Notes and the Certificates.
99.3 Opinion of Pullman & Comley, LLC with respect to state action
impairing contracts.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant, on behalf of Connecticut RRB Special Purpose
Trust CL&P-1, hereby undertakes as follows:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that (a) (1) (i) and (a) (1) (ii)
will not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed pursuant to
Section 13 or Section 15 (d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities registered which remain unsold at the termination of the
offering.
II-3
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934), with respect to the Trust that is
incorporated by reference in the Registration Statement, shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424 (b) (1) or (4) or 497 (h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and that the security rating requirement of
Form S-3 will be met by the time of sale and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Berlin, the State of Connecticut, on this 26th day of
March, 2001.
CL&P FUNDING, LLC
as Registrant
By: /s/ Randy A. Shoop
---------------------------------------
Name: Randy A. Shoop
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Randy A. Shoop President and Director March 26, 2001
- ------------------------------
Randy A. Shoop
Vice President and Treasurer
/s/ John P. Stack * (Chief Financial and March 26, 2001
- ------------------------------ Accounting Officer)
John P. Stack
/s/ David H. Boguslawski * Director March 26, 2001
- ------------------------------
David H. Boguslawski
/s/ Rodney O. Powell * Director March 26, 2001
- ------------------------------
Rodney O. Powell
* by Randy A. Shoop, Attorney-In-Fact
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Formation of the Registrant.
3.2 Limited Liability Company Agreement of the Registrant.
4.1 Form of Note Indenture.
4.2 Form of Certificate Indenture.
4.3 Form of Declaration of Trust.
4.4 Form of Note (contained in form of Note Indenture filed as Exhibit
4.1)
4.5 Form of Rate Reduction Certificate (contained in form of
Certificate Indenture filed as Exhibit 4.2)
5.1 Opinion of Day, Berry & Howard LLP with respect to legality of
the Notes.
5.2 Opinion of Richards, Layton & Finger, P.A. with respect to
legality of the Rate Reduction Certificates.
5.3 Opinion of Richards, Layton & Finger, P.A. with respect to due
authorization of the Notes by the Registrant.
8.1 Opinion of Brown & Wood LLP with respect to federal tax matters.
8.2 Opinion of Pullman & Comley, LLC with respect to state tax
matters.
10.1 Form of Transition Property Purchase and Sale Agreement.
10.2 Form of Transition Property Servicing Agreement.
10.3 Form of Note Purchase Agreement.
10.4 Form of Administration Agreement.
10.5 Form of Fee and Indemnity Agreement.
10.6 Form of Swap Agreement.
10.7 Form of Inter-Creditor Agreement with respect to accounts
receivable arrangement.
23.1 Consent of Day, Berry & Howard LLP (contained in its opinion to
be filed as Exhibit 5.1).
23.2 Consent of Brown & Wood LLP (contained in its opinion to be filed
as Exhibits 8.1).
23.3 Consent of Pullman & Comley, LLC (contained in its opinions to be
filed as Exhibits 8.2 and 99.3).
23.4 Consent of Richards, Layton & Finger, P.A. (contained in its
opinions to be filed as Exhibits 5.2 and 5.3).
23.5 Consent of Arthur Andersen LLP.
24 Power(s) of Attorney (See Signature Page).
25.1 Statement of Eligibility and Qualification of Note Trustee on
Form T-1.
25.2 Statement of Eligibility and Qualification of Certificate Trustee
on Form T-1.
99.1 Financing Order.
99.2 Internal Revenue Service Private Letter Ruling pertaining to the
Notes and the Certificates.
99.3 Opinion of Pullman & Comley, LLC with respect to state action
impairing contracts.
II-6