Preliminary Prospectus Supplement
Table of Contents

The information in this prospectus supplement and the prospectus is not complete and may be changed. This prospectus supplement and the prospectus are not an offer to sell nor do they seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Filed Pursuant to Rule 424 (b)(2)
Registration Statement Nos. 333-179092 and 333-179092-01

Subject to Completion, dated March 5, 2012

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus dated March 2, 2012)

$

AEP Texas Central Transition Funding III LLC

Issuing Entity

Senior Secured Transition Bonds

 

Tranche

   Expected
Weighted Average
Life (Years)
   Principal Amount
Issued
   Scheduled Final
Payment Date
   Final
Maturity Date
   Interest Rate

A-1

              

A-2

              

A-3

              

The total price to the public is $            . The total amount of the underwriting discounts and commissions is $            . The total amount of proceeds to the issuing entity before deduction of expenses (estimated to be $            ) is $            .

Investing in the Senior Secured Transition Bonds involves risks. Please read “Risk Factors” on page 12 of the accompanying prospectus.

AEP Texas Central Transition Funding III LLC is issuing $            of Senior Secured Transition Bonds, referred to herein as the bonds, in [three] tranches. AEP Texas Central Company is the seller, initial servicer and sponsor with regard to the bonds. The bonds are senior secured obligations of the issuing entity supported by transition property which includes the right to a special, irrevocable nonbypassable charge, known as a transition charge, paid by retail electric customers in the service territory of the sponsor based on their consumption of electricity as discussed herein. The utility restructuring provisions of the Public Utility Regulatory Act mandate that transition charges be adjusted annually, and the Public Utility Commission of Texas further requires such true-ups to occur semi-annually (and permits such true-ups to occur more frequently) if necessary, in each case to ensure the expected recovery of amounts sufficient to timely provide all scheduled payments of principal and interest on the bonds, as described further in this prospectus supplement and the accompanying prospectus, and the Public Utility Commission of Texas guarantees it will act pursuant to the financing order to ensure such recoveries as described below. Credit enhancement for the bonds will be provided by such statutory true-up mechanisms as well as by accounts held under the indenture.

The bonds represent obligations only of the issuing entity, AEP Texas Central Transition Funding III LLC, and do not represent obligations of the sponsor or any of its affiliates other than the issuing entity. Please read “The Bonds—The Transition Property,” “—The Collateral” and “Credit Enhancement” in this prospectus supplement. The Bonds are secured by the assets of the issuing entity, consisting principally of the transition property and funds on deposit in the collection account for the Bonds and related subaccounts. Please read “The Bonds—The Collateral,” “—The Transition Property” and “Credit Enhancement” in this prospectus supplement. The bonds are not a debt or general obligation of the State of Texas, the Public Utility Commission of Texas or any other governmental agency or instrumentality and are not a charge on the full faith and credit or the taxing power of the State of Texas or any governmental agency or instrumentality.

The Public Utility Commission of Texas guarantees that it will act pursuant to its irrevocable financing order as expressly authorized by the Texas Electric Utility Restructuring Act to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the bonds. The Public Utility Commission of Texas’ obligations relating to the bonds, including the specific actions that it has guaranteed to take, are direct, explicit, irrevocable and unconditional upon issuance of the bonds, and are legally enforceable against the Public Utility Commission of Texas, which is a United States public sector entity.

All matters relating to the structuring and pricing of the bonds have been considered jointly by AEP Texas Central Company and the Public Utility Commission of Texas or its designated representative.

Additional information is contained in the accompanying prospectus. You should read this prospectus supplement and the accompanying prospectus carefully before you decide to invest in the bonds. This prospectus supplement may not be used to offer or sell the bonds unless accompanied by the prospectus.

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ARE TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The underwriters expect to deliver the bonds through the book-entry facilities of The Depository Trust Company against payment in immediately available funds on or about March     , 2012. Each bond will be entitled to interest on [June 1] and [December 1] of each year. The first scheduled payment date is [December 1], 2012. [Interest will accrue from March     , 2012 and must be paid by the purchaser if the Bonds are delivered after that date.] There currently is no secondary market for the bonds, and we cannot assure you that one will develop.

 

Morgan Stanley    Barclays Capital    Citigroup

Goldman, Sachs & Co.

   Ramirez & Co., Inc.    RBS    Wells Fargo Securities

The date of this prospectus supplement is March     , 2012


Table of Contents

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

READING THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

     S-1   

SUMMARY OF TERMS

     S-2   

THE BONDS

     S-9   

The Collateral

     S-9   

The Transition Property

     S-9   

Financing Order

     S-10   

Payment and Record Dates and Payment Sources

     S-11   

Principal Payments

     S-11   

EXPECTED SINKING FUND SCHEDULE

     S-13   

EXPECTED AMORTIZATION SCHEDULE

     S-14   

Weighted Average Life Sensitivity

     S-15   

Assumptions

     S-15   

Fees and Expenses

     S-15   

Distribution Following Acceleration

     S-16   

Interest Payments

     S-16   

Optional Redemption

     S-16   

THE TRUSTEE

     S-16   

CREDIT ENHANCEMENT

     S-17   

Statutory True-Up Mechanism for Payment of Scheduled Principal and Interest

     S-17   

Collection Account and Subaccounts

     S-17   

How Funds in the Collection Account Will Be Allocated

     S-18   

Retail Electric Provider Deposits and Other Credit Support

     S-19   

THE TRANSITION CHARGES

     S-20   

Initial Transition Charges

     S-20   

UNDERWRITING THE BONDS

     S-21   

The Underwriters’ Sales Price for the bonds

     S-22   

No Assurance as to Resale Price or Resale Liquidity for the bonds

     S-22   

Various Types of Underwriter Transactions That May Affect the Price of the bonds

     S-22   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     S-23   

WHERE YOU CAN FIND MORE INFORMATION

     S-23   

LEGAL PROCEEDINGS

     S-23   

LEGAL MATTERS

     S-23   

OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS

     S-23   

READING THIS PROSPECTUS AND THE ACCOMPANYING SUPPLEMENT

     1   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     1   

PROSPECTUS SUMMARY

     3   

RISK FACTORS

     12   

RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS

     12   

SERVICING RISKS

     13   

RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE TRANSITION PROPERTY

     16   

STORM RELATED RISK

     17   

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF THE SELLER OR THE SERVICER

     17   

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF RETAIL ELECTRIC PROVIDERS

     20   

OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS

     21   

REVIEW OF TRANSITION PROPERTY

     23   

THE RESTRUCTURING ACT

     25   

TCC’S FINANCING ORDER

     30   

RETAIL ELECTRIC PROVIDERS

     33   

DESCRIPTION OF THE TRANSITION PROPERTY

     37   

THE SELLER, INITIAL SERVICER AND SPONSOR

     40   

AEP TEXAS CENTRAL TRANSITION FUNDING III LLC, THE ISSUING ENTITY

     44   

USE OF PROCEEDS

     47   

RELATIONSHIP TO THE SERIES 2002-1 TRANSITION BONDS AND THE SERIES 2006-A TRANSITION BONDS

     47   

DESCRIPTION OF THE TRANSITION BONDS

     48   

THE TRUSTEE

     65   

SECURITY FOR THE TRANSITION BONDS

     65   

WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS

     70   

THE SALE AGREEMENT

     71   

THE SERVICING AGREEMENT

     78   

HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT

     86   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     90   

ERISA CONSIDERATIONS

     92   
 

 

i


Table of Contents

PLAN OF DISTRIBUTION

     94   

RATINGS FOR THE TRANSITION BONDS

     94   

WHERE YOU CAN FIND MORE INFORMATION

     95   

LEGAL MATTERS

     96   

GLOSSARY OF DEFINED TERMS

     97   
 

 

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Table of Contents

READING THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

This prospectus supplement and the accompanying prospectus provide information about us, the bonds and AEP Texas Central Company, or TCC, the sponsor and servicer of the bonds. This prospectus supplement and the accompanying prospectus describe the terms of the bonds offered hereby.

References in this prospectus supplement and the accompanying prospectus to the term we, us, or the issuing entity mean AEP Texas Central Transition Funding III LLC, the entity which will issue the bonds. References to the “transition bonds” or the “bonds,” unless the context otherwise requires, means the transition bonds offered pursuant to this prospectus supplement. References to TCC, the seller or the sponsor mean AEP Texas Central Company. References to the “bondholders” or the “holders” refer to the registered holders of the transition bonds. References to the servicer refer to TCC and any successor servicer under the servicing agreement referred to in this prospectus supplement. References to the Restructuring Act refer to the Texas legislation adopted in June 1999 that substantially amended the regulatory structure governing electric utilities in order to allow retail competition beginning on January 1, 2002, as such legislation has been amended. Unless the context otherwise requires, the term customer or retail customer means a retail end user of electricity and related services provided by a retail electric provider via the transmission and distribution system of an electric utility such as TCC, and retail electric customer means a retail customer within TCC’s service territory. We refer to the geographical certificated service area of TCC as it existed on May 1, 1999 as “TCC’s service territory,” within which TCC may recover qualified costs through nonbypassable transition charges assessed on retail electric customers. References to the Texas commission or PUCT refer to the Public Utility Commission of Texas. References to REPs refer to retail electric providers as defined in the glossary. You can find a glossary of some of the other defined terms we use in this prospectus supplement and the accompanying prospectus on page 97 of the accompanying prospectus.

We have included cross-references to sections in this prospectus supplement and the accompanying prospectus where you can find further related discussions.

You should rely only on the information contained or incorporated by reference in this prospectus supplement, the accompanying prospectus and in any written communication from us or the underwriters specifying the terms of this offering. Neither we nor any underwriter, agent, dealer, salesperson, the Texas commission or TCC has authorized anyone else to provide you with any different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not offering to sell the bonds in any jurisdiction where the offer or sale is not permitted. The information in this prospectus supplement is current only as of the date of this prospectus supplement.

 

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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 bonds, carefully read this entire document and the accompanying prospectus.

 

Securities offered:

$[__] Senior Secured Transition Bonds, scheduled to pay principal semi-annually and sequentially in accordance with the expected sinking fund schedule. Only the bonds are being offered through this prospectus supplement.

 

Issuing Entity and Capital Structure:

AEP Texas Central Transition Funding III LLC is a special purpose Delaware limited liability company. AEP Texas Central Company is our sole member and owns all of our equity interests. We have no commercial operations. We were formed solely to purchase and own transition property, to issue transition bonds and to perform activities incidental thereto. Please read “AEP Texas Central Transition Funding III LLC, the Issuing Entity” in the accompanying prospectus.

 

  We will be capitalized with an upfront cash deposit by TCC of 0.5% of the bonds’ principal amount issued (to be held in the capital subaccount) and will have an excess funds subaccount to retain, until the next payment date, any amounts collected and remaining after all payments on the bonds have been made.

 

Our Relationship with the PUCT:

Pursuant to the financing order,

 

   

the PUCT or its designated representative has a decision-making role co-equal with TCC with respect to the structuring, marketing and pricing of the transition bonds and all matters related to the structuring, marketing and pricing of the transition bonds will be determined through a joint decision of TCC and the PUCT or its designated representative,

 

   

TCC is directed to take all necessary steps to ensure that the PUCT or its designated representative is provided sufficient and timely information to allow the PUCT or its designated representative to fully participate in, and exercise its decision-making power over, the proposed securitization, and

 

   

The servicer will file periodic adjustments to transition charges with the PUCT on our behalf.

 

  We have agreed that certain reports concerning transition charge collections will be provided to the PUCT.

 

Purpose of transaction:

This issuance of Senior Secured Transition Bonds will enable TCC to recover certain costs related to its transition-to-competition in the State of Texas. Please read “The Restructuring Act” in the accompanying prospectus.

 

Our address:

539 N. Carancahua Street

  Suite 1700

  Corpus Christi, Texas 78401

 

Our telephone number:

(361) 881-5399

 

S-2


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Our Managers:

      The following is a list of our managers as of the date of this prospectus supplement:
         

Name

  

Age

  

Background

      Brian X. Tierney    44    President and manager of the Company. Vice president, chief financial officer and director of AEP Texas Central Company (TCC), executive vice president and chief financial officer of American Electric Power Company, Inc. (AEP), and executive vice president, chief financial officer and director of American Electric Power Service Corporation, a subsidiary of AEP (Service Corporation). Joined the Service Corporation in 1998 and was appointed senior vice president-energy marketing in 2003, became senior vice president-commercial operations in 2005, became executive vice president-AEP utilities east in 2006 and assumed his present position in 2009. Vice president and director of certain other AEP System companies.
      Charles E. Zebula    51    Vice President, Treasurer and manager of the Company. Treasurer of TCC, Treasurer of AEP and senior vice president-investor relations and treasurer of the Service Corporation since September 2008. Senior vice president-fuel, emissions & logistics of the Service Corporation from 2004 through August 2008. Treasurer of certain other AEP System companies.
      Jana Soward    55    Assistant Treasurer and manager of the Company. Director, cash management, of the Service Corporation since 2001.
      Kenneth J. Uva    62    Manager of the Company. Vice-President, CT Corporation System, since 1997. Prior to that, a variety of positions at CT Corporation System or its subsidiaries since January 1976. Mr. Uva presently serves as an independent manager for AEP Texas Central Transition Funding LLC (TCC Funding I), a special purpose, wholly owned subsidiary of TCC.
      Victor A. Duva    53    Manager of the Company. President, CT Corporation Staffing, Inc., a subsidiary of CT Corporation System, since 2003. From 1997 to 2002, Assistant Vice President and Officer Manager for CT Corporation’s Philadelphia office and, prior to that, a variety of positions at CT Corporation System since January 1981. Mr. Duva presently serves as an independent manager for TCC Funding I, a special purpose, wholly owned subsidiary of TCC.

Credit ratings:

      We expect the bonds will receive credit ratings from three nationally recognized statistical rating organizations. Please read “Ratings for the Transition Bonds” in the prospectus.

 

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The Seller, Sponsor and Servicer of the transition property:

TCC, a Texas corporation, is a State of Texas fully regulated electric utility providing transmission and distribution service in southern Texas. At December 31, 2011, TCC provided transmission and distribution service to approximately 787,000 metered retail electric customers covering a service territory of approximately 44,000 square miles. TCC is an operating subsidiary of AEP, a public utility holding company based in Columbus, Ohio. The bonds do not constitute a debt, liability or other legal obligation of TCC or AEP. TCC, acting as the initial servicer, and any successor or assignee servicer, will service the transition property securing the bonds under a servicing agreement with us. Please read “The Seller, Initial Servicer and Sponsor” and “The Servicing Agreement” in the accompanying prospectus.

 

TCC’s address:

539 N. Carancahua Street, Suite 1700, Corpus Christi, Texas 78401

 

TCC’s telephone number:

(361) 881-5399

 

Use of proceeds:

Proceeds will be used to pay expenses of issuance and to purchase the transition property from TCC. TCC will use the sales price of the transition property to reduce debt or equity. We may not use the net proceeds from the sale of the bonds for general corporate purposes or commercial purposes. Please read “Use of Proceeds” in the accompanying prospectus.

 

Bond structure:

Sinking fund bond; tranches A-1, expected weighted average life [__] years, tranche A-2, expected weighted average life [__] years, and tranche A-3, expected weighted average life [__] years, are scheduled to pay principal semi-annually and sequentially. Please read the Expected Amortization Schedule in this prospectus supplement.

 

Trustee:

U.S. Bank National Association, a national banking association. U.S. Bank National Association serves as the indenture trustee for the Series 2002-1 transition bonds. Please read “The Trustee” in the accompanying prospectus for a description of the indenture trustee’s duties and responsibilities under the indenture.

 

Average life profile:

Stable. Prepayment is not permitted. Extension risk is possible but is expected to be statistically remote. Please read “Expected Amortization Schedule—Weighted Average Life Sensitivity” in this prospectus supplement and “Weighted Average Life and Yield Considerations for the Transition Bonds” in the accompanying prospectus.

 

Optional redemption:

None. Non-call for the life of the bonds.

 

Minimum denomination:

$100,000, or integral multiples of $1,000 in excess thereof, except for one bond of each tranche which may be of a smaller denomination.

 

Credit/security:

Pursuant to the financing order issued by the PUCT, the irrevocable right to impose, collect and receive a nonbypassable consumption-based transition charge from retail electric customers (approximately 787,000 customers). Transition charges are set and periodically adjusted to collect amounts sufficient to pay principal of and interest on the transition bonds on a timely basis. Please read “Credit Enhancement—Statutory True-Up Mechanism for Payment of Scheduled Principal and Interest” in this prospectus supplement, as well as the chart entitled “Parties to Transaction and Responsibilities,” “The Restructuring Act” and “Description of the Transition Property—Creation of Transition Property; Financing Order” in the accompanying prospectus.

 

  The transition property securing the bonds is not a pool of receivables. It consists of all of TCC’s rights and interests under the financing order transferred to us in connection with the issuance of the bonds, including the irrevocable right to impose, collect and receive nonbypassable transition charges and the right to implement the true-up mechanism. Transition property is a present property right created by the Restructuring Act and the financing order and is protected by the state pledge in the Restructuring Act described below.

 

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  The bonds are secured only by our assets, consisting principally of the transition property relating to the bonds and funds on deposit in the collection account for the bonds and related subaccounts. The subaccounts consist of a capital subaccount, which will be funded at closing in the amount of 0.5% of the initial aggregate principal amount of the bonds, a general subaccount, into which the servicer will deposit all transition charge collections, and an excess funds subaccount, into which we will transfer any amounts collected and remaining on a payment date after all payments to bondholders and other parties have been made. Amounts on deposit in each of these subaccounts will be available to make payments on the bonds on each payment date. For a description of the transition property, please read “The Bonds—The Transition Property” in this prospectus supplement.

 

State pledge:

The State of Texas has pledged in the Restructuring Act that it will not take or permit any action that would impair the value of the transition property, or reduce, alter or impair the transition charges until the bonds are fully repaid or discharged, other than specified true-up adjustments to correct any overcollections or undercollections. No voter initiative or referendum process exists in Texas, unlike in some other states. Please read “The Restructuring Act—TCC and Other Utilities May Securitize Qualified Costs” in the accompanying prospectus.

 

Statutory true-up mechanism for payment of scheduled principal and interest:

The Restructuring Act mandates that transition charges on retail electric customers be adjusted at least annually to correct any overcollections or undercollections of the preceding 12 months and to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds, and the irrevocable financing order in addition requires that transition charges on retail electric customers be adjusted semi-annually (or, if there are any bonds outstanding following the last scheduled final payment date, quarterly), and permits such true-ups to occur more frequently, if determined necessary to ensure the expected recovery of amounts sufficient to provide timely payment of scheduled principal and interest on the bonds and to replenish draws on the capital subaccount. In the financing order, the Texas commission guarantees that it will act pursuant to the financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to timely pay scheduled principal and interest on the bonds.

 

  There is no “cap” on the level of transition charges that may be imposed on retail electric customers, to pay on a timely basis scheduled principal and interest on the bonds. Through the true-up mechanism, which adjusts for undercollections of transition changes due to any reason, retail electric customers share in the liabilities of all other retail electric customers for the payment of transition charges.

 

  The financing order provides that the true-up mechanism and all other obligations of the State of Texas and the Texas commission set forth in the financing order are direct, explicit, irrevocable and unconditional upon issuance of the bonds, and are legally enforceable against the State of Texas and the Texas commission. Please read “The Restructuring Act—TCC and Other Utilities May Securitize Qualified Costs” and “The Servicing Agreement—True-Up Adjustment Process” in the accompanying prospectus.

 

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Nonbypassable transition charges:

The Restructuring Act mandates and the irrevocable financing order requires the imposition and the collection of transition charges from all existing and future retail electric customers located within TCC’s service territory, subject to certain limitations specified in the Restructuring Act, even if those customers elect to purchase electricity from another supplier or choose to operate certain new on-site generation or if the utility goes out of business and its service area is acquired by another utility or is municipalized. Please read “Risk Factors—Other Risks Associated with an Investment in the Transition Bonds” in the accompanying prospectus. The transition charges are applied to retail electric customers individually and are adjusted and reallocated among all such customers as necessary under the statutory true-up mechanism. Please read “The Transition Charges” in this prospectus supplement and “TCC’s Financing Order” and “The Servicing Agreement—True-Up Adjustment Process” in the accompanying prospectus.

 

Priority of Payments:

On each payment date for the bonds, the trustee will allocate or pay all amounts on deposit in the general subaccount of the collection account in the following order of priority:

 

  1. payment of the trustee’s fees, expenses and any outstanding indemnity amounts not to exceed $100,000 per annum,

 

  2. payment of the servicing fee relating to the bonds, plus any unpaid servicing fees from prior payment dates,

 

  3. payment of the administration fee, and the fees of our independent managers,

 

  4. payment of all of our other ordinary periodic operating expenses relating to the bonds, such as accounting and audit fees, rating agency fees, legal fees and certain reimbursable costs of the administrator under the administration agreement and the servicer under the servicing agreement,

 

  5. payment of the interest then due on the bonds, including any past-due interest,

 

  6. payment of the principal then required to be paid on the bonds as a result of acceleration upon an event of default or at final maturity,

 

  7. payment of the principal then scheduled to be paid on the bonds in accordance with the expected sinking fund schedule, including any previously unpaid scheduled principal,

 

  8. payment of any of our remaining unpaid operating expenses and any remaining amounts owed pursuant to the basic documents, including all remaining indemnity amounts owed to the trustee,

 

  9. replenishment of any amounts drawn from the capital subaccount,

 

  10. if there is a positive balance after making the foregoing allocations, so long as no event of default has occurred and is continuing, release to us of an amount not to exceed the lesser of any remaining balance and the investment earnings on amounts in the capital subaccount,

 

  11. allocation of the remainder, if any, to the excess funds subaccount, and

 

  12. after the bonds have been paid in full and discharged, the balance, together with all amounts in the capital subaccount and the excess funds subaccount, to us free and clear of the lien of the indenture.

 

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  The annual servicing fee for the bonds in clause 2 payable to TCC or any affiliate thereof while it is acting as servicer shall not at any time exceed 0.05% of the original principal amount of the bonds. The annual servicing fee for the bonds payable to any other servicer not affiliated with TCC shall not at any time exceed 0.6% of the original principal amount of the bonds unless such higher rate is approved by the Texas commission. The annual administration fee in clause 3 above may not exceed $100,000, plus reimbursable expenses. Please read “Credit Enhancement—How Funds in the Collection Account Will Be Allocated” in this prospectus supplement.

 

Relationship to the Series 2002-1 transition bonds and Series 2006-A transition bonds:

The bonds are the third series of transition bonds which TCC has sponsored.

 

  In February 2002, AEP Texas Central Transition Funding LLC, or TCC Funding I, a special purpose, wholly owned subsidiary of TCC, issued $797,334,897 of Series 2002-1 transition bonds in accordance with a financing order issued by the Texas commission on March 27, 2000.

 

  In October 2006, AEP Texas Central Transition Funding II LLC, or TCC Funding II, a special purpose, wholly owned subsidiary of TCC, issued $1,739,700,000 of Series 2006-A transition bonds in accordance with a financing order issued by the Texas commission on June 21, 2006.

 

  TCC currently acts as servicer with respect to the Series 2002-1 transition bonds and the Series 2006-A transition bonds.

 

  Interest on and principal of both series of transition bonds have been paid on a timely basis, with payments of principal made in accordance with their expected amortization schedules.

 

  Neither TCC Funding I nor TCC Funding II will have any obligations under the bonds, and we will have no obligations under the Series 2002-1 transition bonds or the Series 2006-A transition bonds. In addition, neither TCC Funding I nor TCC Funding II has any obligations in respect of the transition bonds issued by the other. The security pledged to secure the bonds will be separate from the separate security that is securing the Series 2002-1 transition bonds and the Series 2006-A transition bonds. Although we, TCC Funding I and TCC Funding II will each have its own transition property, and its own separate accounts for holding collections of transition charges, transition charges relating to the bonds and transition charges relating to the Series 2002-1 transition bonds and Series 2006-A transition bonds will be collected through bills to retail electric providers that include all charges related to the use of TCC’s transmission and distribution system to deliver electricity consumed by retail electric customers. In the event a retail electric provider does not pay in full all amounts owed under any bill including transition charges, TCC is required to allocate any resulting shortfalls in transition charges ratably based on the amounts of transition charges owing to us in respect of the bonds, owing to TCC Funding I in respect of the Series 2002-1 transition bonds, owing to TCC Funding II in respect of the Series 2006-A transition bonds, and on other amounts owing to TCC for electric delivery services.

 

  Please read “Relationship to the Series 2002-1 Transition Bonds and the Series 2006-A Transition Bonds” in the accompanying prospectus.

 

Initial transition charge as a percentage of customer’s total electricity bill:

An estimate of the initial transition charge for the bonds and the estimated aggregate initial transition charges for the bonds together with the Series 2002-1 transition bonds and the Series 2006-A transition bonds (i) would represent approximately [__]% and [__]%, respectively, of the total bill received by a 1,000 kWh residential customer of the largest retail electric provider in TCC’s service territory as of December, 2011; and (ii) would represent approximately [__]% and [__]%, respectively, of the average total bill received by a 1,000 kWh residential customer in TCC’s service territory as of December, 2011 (based on the average of offered rates published on the PUCT website for REPs operating in TCC’s service territory).

 

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Tax treatment:

The bonds will be treated as debt of TCC for U.S. federal income tax purposes. Please read “Material U.S. Federal Income Tax Consequences” in the accompanying prospectus.

 

ERISA eligible:

Yes; please read “ERISA Considerations” in the accompanying prospectus.

 

Payment dates and interest accrual:

Semi-annually, [June 1] and [December 1] and on the final maturity date for any tranche. Interest will be calculated on a 30/360 basis. The first scheduled payment date is [December 1], 2012. If any interest payment date is not a business day, payments scheduled to be made on such date may be made on the next succeeding business day and no interest shall accrue upon such payment during the intervening period.

 

  Interest is due on each payment date and principal is due upon the final maturity date for each tranche.

 

Expected settlement:

March [__], 2012, [settling flat.] DTC, Clearstream and Euroclear.

 

Risk factors:

You should consider carefully the risk factors beginning on page 12 of the accompanying prospectus before you invest in the bonds.

 

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THE BONDS

We will issue the bonds and secure their payment under an indenture that we will enter into with U.S. Bank National Association, as trustee, referred to in this prospectus supplement and the accompanying prospectus as the trustee. We will issue the bonds in minimum denominations of $100,000 and in integral multiples of $1,000 in excess thereof, except that we may issue one bond in each tranche in a smaller denomination. The initial principal balance, scheduled final payment date, final maturity date and interest rate for each tranche of the bonds are stated in the table below:

 

Tranche

   Expected
Weighted
Average Life
(Years)
  Principal Amount
Issued
  Scheduled Final
Payment Date
   Final
Maturity Date
   Interest Rate

A-1

   [    ]   $[    ]        

A-2

   [    ]   $[    ]        

A-3

   [    ]   $[    ]        

The scheduled final payment date for each tranche of the bonds is the date when the outstanding principal balance of that tranche will be reduced to zero if we make payments according to the expected amortization schedule for that tranche. The final maturity date for each tranche of bonds is the date when we are required to pay the entire remaining unpaid principal balance, if any, of all outstanding bonds of that tranche. The failure to pay principal of any tranche of bonds by the final maturity date for that tranche is an event of default, but the failure to pay principal of any tranche of bonds by the respective scheduled final payment date will not be an event of default. Please read “Description of the Transition Bonds—Interest and Principal on the Transition Bonds” and “—Events of Default; Rights Upon Event of Default” in the accompanying prospectus.

The Collateral

The bonds will be secured under the indenture by all of our assets relating to the bonds. The principal asset pledged will be the transition property relating to the bonds, which is a present property right created under the Restructuring Act by the financing order issued by the Texas commission on January 12, 2012, referred to in this prospectus supplement as the financing order. The collateral includes:

 

   

our rights under the sale agreement pursuant to which we will acquire the transition property, under the administration agreement and under the bill of sale delivered by TCC pursuant to the sale agreement,

 

   

our rights under the financing order, including in respect of the statutory true-up mechanism,

 

   

our rights under the servicing agreement and any subservicing, agency, intercreditor or collection agreements executed in connection with the servicing agreement,

 

   

the collection account and all subaccounts of the collection account,

 

   

our rights in all deposits, guarantees, surety bonds, letters of credit and other forms of credit support provided by or on behalf of retail electric providers pursuant to any financing order or tariff,

 

   

all of our other property related to the bonds, other than any cash released to us by the trustee on any payment date from earnings on the capital subaccount,

 

   

all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing, and

 

   

all payments on or under and all proceeds in respect of any or all of the foregoing.

The Transition Property

In general terms, all of the rights and interests of TCC that relate to the bonds under the financing order, upon transfer to us pursuant to the sale agreement, are referred to in this prospectus supplement as the transition property. The transition property includes the right to impose, collect and receive transition charges payable by retail electric customers within TCC’s service territory which, subject to certain limitations specified in the Restructuring Act, continue to consume electricity that is delivered through the distribution system, or produced in

 

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new on-site generation, in an amount sufficient to pay principal and interest and to make other deposits in connection with the bonds. During the twelve months ended December 31, 2010, approximately 22% of TCC’s total deliveries were to industrial customers, approximately 38% were to commercial customers and approximately 39% were to residential customers. During this period, deliveries to the State of Texas and other federal, state and local governmental entities comprised approximately 3.58% of TCC’s total revenues.

We will purchase the transition property from TCC. The transition property is not a receivable, and the principal collateral securing the bonds is not a pool of receivables. Transition charges authorized in the financing order that relate to the bonds are irrevocable and not subject to reduction, impairment, or adjustment by further action of the Texas commission, except for annual and interim true-up adjustments to correct overcollections or undercollections and to provide the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the bonds. Please read “Credit Enhancement—Statutory True-Up Mechanism for Payment of Scheduled Principal and Interest” in this prospectus supplement. All revenues and collections resulting from transition charges provided for in the financing order are part of the transition property. The transition property relating to the bonds is described in more detail under “The Sale Agreement—Sale and Assignment of the Transition Property” in the accompanying prospectus.

The servicer will bill and collect transition charges allocable to the bonds from “retail electric providers,” which are entities certified under state law that provide electricity and related services to retail electric customers within TCC’s service territory, and will remit the collections to the trustee. The retail electric providers will in turn bill and collect the transition charges from retail electric customers in TCC’s service territory. Each retail electric provider will include the transition charges in its bill to its retail electric customers but is not required to show the transition charges for the bonds or for any other transition bonds sponsored by TCC as a separate line item or footnote. However, each retail electric provider will be required to provide annual written notice to its customers that transition charges have been included in the customers’ bills.

Each retail electric provider will be required to pay the transition charges on or before the 35th day after it receives the bill from the servicer, less an agreed allowance for expected uncollectible amounts, whether or not the retail electric provider has collected all amounts owed to it by its retail electric customers. Prior to the date on which the retail electric provider remits the transition charges to the servicer, the transition charges may be commingled with the retail electric provider’s other funds. Please read “Risk Factors—Risks Associated With Potential Bankruptcy Proceedings of Retail Electric Providers” and “Retail Electric Providers.”

The servicer will have only limited rights to collect the transition charges directly from retail electric customers if a retail electric provider does not remit such payments to the servicer but will have certain rights against the retail electric provider. Please read “Retail Electric Providers” in the accompanying prospectus. For information on how electric service to retail electric customers may be terminated, please read “Risk Factors—Servicing Risks—Limits on rights to terminate service might make it more difficult to collect the transition charges” in the accompanying prospectus. Because the amount of transition charge collections will depend largely on the amount of electricity consumed by customers within TCC’s service territory, the amount of collections may vary substantially from year to year. Please read “The Seller, Initial Servicer and Sponsor” in the accompanying prospectus.

Under the Restructuring Act and the indenture, the trustee or the holders of the bonds have the right to foreclose or otherwise enforce the lien on the transition property. However, in the event of foreclosure, there is likely to be a limited market, if any, for the transition property. Therefore, foreclosure might not be a realistic or practical remedy. Please read “Risk Factors—Risks Associated with the Unusual Nature of the Transition Property—Foreclosure of the trustee’s lien on the transition property for the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect” in the accompanying prospectus.

Financing Order

On January 12, 2012, the Texas commission issued the financing order relating to the bonds. The financing order authorizes TCC to securitize and cause to be issued transition bonds in one or more series in an aggregate amount not to exceed $800 million. The financing order became final and non-appealable on January 28, 2012.

The financing order also authorizes transition charges in amounts sufficient to recover the principal of and interest on the bonds plus an additional amount of ongoing qualified costs, certain of which are subject to a cap. The

 

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Texas commission guarantees that it will act pursuant to the irrevocable financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to timely pay scheduled principal and interest on the bonds. The financing order provides that the true-up mechanism and all other obligations of the State of Texas and the Texas commission set forth in the financing order are direct, explicit, irrevocable and unconditional upon issuance of the bonds, and are legally enforceable against the State of Texas and the Texas commission. Please read “TCC’s Financing Order” in the accompanying prospectus.

Payment and Record Dates and Payment Sources

Beginning [December 1], 2012, we will make payments on the bonds semi-annually on [June 1] and [December 1] of each year, or, if that day is not a business day, the following business day (each, a payment date). So long as the bonds are in book-entry form, on each payment date, we will make interest and principal payments to the persons who are the holders of record as of the business day immediately prior to that payment date, which is referred to as the “record date.” If we issue certificated transition bonds to beneficial owners of the bonds, the record date will be the last business day of the calendar month immediately preceding the payment date. On each payment date, we will pay amounts on outstanding bonds from amounts available in the collection account and the related subaccounts held by the trustee in the priority set forth under “Credit Enhancement—How Funds in the Collection Account Will Be Allocated” in this prospectus supplement. These available amounts, which will include amounts collected by the servicer for us with respect to the transition charges, are described in greater detail under “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated” and “The Servicing Agreement—Remittances to Collection Account” in the accompanying prospectus.

Principal Payments

On each payment date, we will pay principal of the bonds to the bondholders equal to the sum, without duplication, of:

 

   

the unpaid principal amount of any bond whose final maturity date is on that payment date, plus

 

   

the unpaid principal amount of any bond upon acceleration following an event of default relating to the bonds, plus

 

   

any overdue payments of principal, plus

 

   

any unpaid and previously scheduled payments of principal, plus

 

   

the principal scheduled to be paid on any bond on that payment date,

but only to the extent funds are available in the collection account after payment of certain of our fees and expenses and after payment of interest as described below under “Expected Amortization Schedule—Interest Payments.” To the extent funds are so available, we will make scheduled payments of principal of the bonds in the following order:

 

  1. to the holders of the tranche A-1 Bonds, until the principal balance of that tranche has been reduced to zero,

 

  2. to the holders of the tranche A-2 Bonds, until the principal balance of that tranche has been reduced to zero, and

 

  3. to the holders of the tranche A-3 Bonds, until the principal balance of that tranche has been reduced to zero.

However, unless the Bonds have been accelerated following an event of default, we will not pay principal of any tranche of bonds on any payment date if making the payment would reduce the principal balance of that tranche to an amount lower than the amount specified in the expected amortization schedule below for that tranche on that payment date. Unless the Bonds have been accelerated following an event of default, any excess funds remaining in the collection account after payment of principal, interest, applicable fees and expenses and payments to the applicable subaccounts of the collection account will be retained in the excess funds subaccount until applied on a subsequent payment date. The entire unpaid principal balance of each tranche of the bonds will be due and payable on the final maturity date for that tranche.

 

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If an event of default under the indenture has occurred and is continuing, the trustee or the holders of a majority in principal amount of the transition bonds then outstanding may declare the unpaid principal balance of the transition bonds, together with accrued interest thereon, to be due and payable. However, the nature of our business will result in payment of principal upon an acceleration of the bonds being made as funds become available. Please read “Risk Factors—Risks Associated With the Unusual Nature of the Transition Property—Foreclosure of the trustee’s lien on the transition property for the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect” and “—You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited” in the accompanying prospectus. If there is a shortfall in the amounts available to make principal payments on the transition bonds that are due and payable, including upon an acceleration following an event of default, the trustee will distribute principal from the collection account pro rata to each tranche of transition bonds based on the principal amount then due and payable on the payment date; and if there is a shortfall in the remaining amounts available to make principal payments on the transition bonds that are scheduled to be paid, the trustee will distribute principal from the collection account pro rata to each tranche of transition bonds based on the principal amount then scheduled to be paid on the payment date.

The expected sinking fund schedule below sets forth the corresponding principal payment that is scheduled to be made on each payment date for each tranche of the bonds from the issuance date to the scheduled final payment date. Similarly, the expected amortization schedule below sets forth the principal balance that is scheduled to remain outstanding on each payment date for each tranche of the bonds from the issuance date to the scheduled final payment date.

 

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Expected Sinking Fund Schedule

 

Semi-Annual

Payment Date

   Tranche A-1
Balance
   Tranche A-2
Balance
   Tranche A-3
Balance

Tranche Size

        

12/1/2012

        

6/1/2013

        

12/1/2013

        

6/1/2014

        

12/1/2014

        

6/1/2015

        

12/1/2015

        

6/1/2016

        

12/1/2016

        

6/1/2017

        

12/1/2017

        

6/1/2018

        

12/1/2018

        

6/1/2019

        

12/1/2019

        

6/1/2020

        

12/1/2020

        

6/1/2021

        

12/1/2021

        

6/1/2022

        

12/1/2022

        

6/1/2023

        

12/1/2023

        

6/1/2024

        

12/1/2024

        

6/1/2025

        

12/1/2025

        

6/1/2026

        

12/1/2026

        

Total Payments

        

We cannot assure you that the principal balance of any tranche of the bonds will be reduced at the rate indicated in the table above. The actual reduction in tranche principal balances may occur more slowly. The actual reduction in tranche principal balances will not occur more quickly than indicated in the above table, except in the case of acceleration due to an event of default under the indenture. The bonds will not be in default if principal is not paid as specified in the schedule above unless the principal of any tranche is not paid in full on or before the final maturity date of that tranche.

 

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Expected Amortization Schedule

Outstanding Principal Balance Per Tranche

 

Semi-Annual

Payment Date

   Tranche A-1
Balance
   Tranche A-2
Balance
   Tranche A-3
Balance

Issuance Date

        

12/1/2012

        

6/1/2013

        

12/1/2013

        

6/1/2014

        

12/1/2014

        

6/1/2015

        

12/1/2015

        

6/1/2016

        

12/1/2016

        

6/1/2017

        

12/1/2017

        

6/1/2018

        

12/1/2018

        

6/1/2019

        

12/1/2019

        

6/1/2020

        

12/1/2020

        

6/1/2021

        

12/1/2021

        

6/1/2022

        

12/1/2022

        

6/1/2023

        

12/1/2023

        

6/1/2024

        

12/1/2024

        

6/1/2025

        

12/1/2025

        

6/1/2026

        

12/1/2026

        

On each payment date, the trustee will make principal payments to the extent the principal balance of each tranche of the bonds exceeds the amount indicated for that payment date in the table above and to the extent of funds available in the collection account after payment of certain of our fees and expenses and after payment of interest.

 

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Weighted Average Life Sensitivity

Weighted average life refers to the average amount of time from the date of issuance of a security until each dollar of principal of the security has been repaid to the investor. The rate of principal payments on each tranche of bonds, the aggregate amount of each interest payment on each tranche of bonds and the actual final payment date of each tranche of bonds will depend on the timing of the servicer’s receipt of transition charges from retail electric providers. Please read “Weighted Average Life and Yield Considerations for the Transition Bonds” in the accompanying prospectus for further information. Changes in the expected weighted average lives of the tranches of the bonds in relation to variances in actual energy consumption levels (retail electric sales) from forecast levels are shown below.

 

          Weighted Average Life Sensitivity
-5%
([    ] Standard Deviations from Mean)
   -15%
([     ] Standard Deviations from Mean)

Tranche

  

Expected

Weighted

Average Life

(Years)

   WAL
(yrs)
   Change
(days)*
   WAL
(yrs)
   Change
(days)*

A-1

   [    ]            

A-2

   [    ]            

A-3

   [    ]            

 

* Number is rounded to whole days.

Assumptions

For the purposes of preparing the above chart, the following assumptions, among others, have been made: (i) the forecast error stays constant over the life of the bonds and is equal to an overestimate of electricity consumption of [    ]% ([    ] standard deviations from mean) or [    ]% ([    ] standard deviations from mean), (ii) the servicer makes timely and accurate filings to true-up the transition charges semi-annually, (iii) customer charge-off rates are held constant at [1.376]% for the residential class and [1.376]% for all other classes of customers, (iv) retail electric providers remit all transition charges one month after such charges are billed, (v) operating expenses are equal to projections, (vi) there is no acceleration of the final maturity date of the bonds; and (vii) a permanent loss of all customers has not occurred. There can be no assurance that the weighted average lives of the bonds will be as shown.

Fees and Expenses

As set forth in the table below, the issuing entity is obligated to pay fees to the servicer, the trustee, its independent managers and TCC as administrator. The following table illustrates this arrangement.

 

Recipient

 

  Source of Payment   Fees and Expenses Payable
Servicer   Transition charge collections and investment earnings.  

$[    ] per annum (so long as servicer is TCC or an affiliate)

 

Trustee  

Transition charge collections and investment earnings.

 

  $[2,500] per annum; plus expenses
Independent Managers  

Transition charge collections and investment earnings.

 

  $[5,000] per annum plus expenses
Administration Fee  

Transition charge collections and investment earnings.

 

  $[100,000] per annum plus expenses

 

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The annual servicing fee payable to any servicer not affiliated with TCC shall not at any time exceed 0.6% of the original principal amount of the bonds unless such higher rate is approved by the Texas commission.

Distribution Following Acceleration

Upon an acceleration of the maturity of the bonds, the total outstanding principal balance of and interest accrued on the bonds will be payable, without priority of interest over principal or principal over interest and without regard to tranche. Although principal will be due and payable upon acceleration, the nature of our business will result in principal being paid as funds become available. Please read “Risk Factors—Risks Associated with the Unusual Nature of the Transition Property—Foreclosure of the trustee’s lien on the transition property for the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect” and “Risk Factors—You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited” in the accompanying prospectus.

Interest Payments

Interest on each tranche of bonds will accrue from and including the issue date to but excluding the first payment date, and thereafter from and including the previous payment date to but excluding the applicable payment date until the bonds have been paid in full, at the interest rate indicated on the cover of this prospectus supplement and in the table on page S-9. Each of those periods is referred to as an “interest accrual period.” On each payment date, we will pay interest on each tranche of the bonds equal to the following amounts:

 

   

if there has been a payment default, any interest payable but unpaid on any prior payment date, together with interest on such unpaid interest, if any, and

 

   

accrued interest on the principal balance of each tranche of the bonds as of the close of business on the preceding payment date (or with respect to the initial payment date, the date of the original issuance of the bonds) after giving effect to all payments of principal made on the preceding payment date, if any.

We will pay interest on the bonds before we pay principal on the bonds. Please read “Description of the Transition Bonds—Interest and Principal on the Transition Bonds” in the accompanying prospectus. If there is a shortfall in the amounts available in the collection account to make interest payments on the bonds, the trustee will distribute interest pro rata to each tranche of bonds based on the amount of interest payable on each such outstanding tranche. Please read “Credit Enhancement—Collection Account and Subaccounts” in this prospectus supplement. We will calculate interest on tranches of the bonds on the basis of a 360-day year of twelve 30-day months.

Optional Redemption

We may not voluntarily redeem any tranche of the bonds.

THE TRUSTEE

U.S. Bank National Association will be the indenture trustee. U.S. Bank National Association (U.S. Bank), a national banking association, will also act as paying agent and registrar. U.S. Bancorp, with total assets exceeding $330 billion as of December 31, 2011, is the parent company of U.S. Bank, the fifth largest commercial bank in the United States. As of December 31, 2011, U.S. Bancorp served approximately 17 million customers and operated over 3,000 branch offices in 25 states. A network of specialized U.S. Bancorp offices across the nation provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses, governments and institutions.

U.S. Bank has one of the largest corporate trust businesses in the country with office locations in 48 Domestic and 3 International cities. The indenture will be administered from U.S. Bank’s corporate trust office located at 190 S. LaSalle Street, 7th Floor, Chicago, IL 60603.

U.S. Bank has provided corporate trust services since 1924. As of December 31, 2011, U.S. Bank was acting as trustee with respect to over 88,000 issuances of securities with an aggregate outstanding principal balance of over $3.5 trillion. This portfolio includes corporate and municipal bonds, mortgage-backed and asset-backed securities and collateralized debt obligations.

 

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The indenture trustee shall make each monthly statement available to the noteholders via the indenture trustee’s internet website at http://www.usbank.com/abs. Noteholders with questions may direct them to the indenture trustee’s bondholder services group at (800) 934-6802.

U.S. Bank serves or has served as indenture trustee, paying agent and registrar on several issues of rate-payer backed securities including those issued by TCC Funding I.

CREDIT ENHANCEMENT

Credit enhancement for the bonds is intended to protect you against losses or delays in scheduled payments on your bonds. Please read “Risk Factors—You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited” in the accompanying prospectus.

Statutory True-Up Mechanism for Payment of Scheduled Principal and Interest

The Restructuring Act mandates that transition charges on retail electric customers be adjusted at least annually to correct any overcollections or undercollections of the preceding 12 months and to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds, and the irrevocable financing order in addition requires that transition charges on retail electric customers be adjusted semi-annually, if determined necessary to ensure the expected recovery of amounts sufficient to provide timely payment of scheduled principal and interest on the bonds and replenish draws on the capital subaccount. If there are any transition bonds outstanding following the final scheduled final payment date, true-up adjustments must be made quarterly. In addition, true-up adjustments may also be made at any time if the servicer determines such true-up to be necessary to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds. In the irrevocable financing order, the Texas commission guarantees that it will act pursuant to the financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the transition bonds and related costs.

There is no “cap” on the level of transition charges that may be imposed on consumers of electricity in TCC’s service area to pay on a timely basis scheduled principal and interest on the bonds. Through the true-up mechanism, which adjusts for undercollections of transition charges due to any reason, retail electric customers share in the liabilities of all other retail electric customers for the payment of transition charges.

The financing order provides that the true-up mechanism and all other obligations of the State of Texas and the Texas commission set forth in the financing order are direct, explicit, irrevocable and unconditional upon issuance of the bonds, and are legally enforceable against the State of Texas and the Texas commission. Please read “The Transition Charges” below and “TCC’s Financing Order” and “The Servicing Agreement—True-Up Adjustment Process” in the accompanying prospectus.

Collection Account and Subaccounts

The trustee will establish a collection account for the bonds to hold the capital contribution from TCC and collected transition charges periodically remitted to the trustee by the servicer. The collection account will consist of various subaccounts, including the following:

 

   

the general subaccount,

 

   

the excess funds subaccount, and

 

   

the capital subaccount.

For administrative purposes, the subaccounts may be established as separate accounts which will be recognized individually as subaccounts and collectively as the collection account. Withdrawals from and deposits to these subaccounts will be made as described below in this prospectus supplement and under “Security for the Transition Bonds—Description of Indenture Accounts” and “—How Funds in the Collection Account will be Allocated” in the accompanying prospectus.

 

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The General Subaccount. The trustee will deposit collected transition charges remitted to it by the servicer with respect to the bonds into the general subaccount. On each payment date, the trustee will allocate amounts in the general subaccount as described under “Security for the Transition Bonds—How Funds in the Collection Account Will Be Allocated” below.

The Excess Funds Subaccount. The excess funds subaccount will be funded with collected transition charges and earnings on amounts in the collection account, other than earnings on amounts allocated to the capital subaccount, in excess of the amount necessary to pay on any payment date:

 

   

fees and expenses, including any indemnity payments, of the trustee, our independent managers, the servicer and the administrator and other fees, expenses, costs and charges,

 

   

principal and interest payments on the bonds required to be paid or scheduled to be paid on that payment date, and

 

   

any amount required to replenish any amounts drawn from the capital subaccount.

The periodic true-up adjustments of the transition charges will be calculated to eliminate any amounts held in the excess funds subaccount.

If amounts available in the general subaccount are not sufficient to pay the fees and expenses due on any payment date, to make required or scheduled payments to the bondholders and to replenish any amounts drawn from the capital subaccount, the trustee will first draw on any amounts in the excess funds subaccount to make those payments.

The Capital Subaccount. On the date we issue the bonds, TCC will deposit $[    ] into the capital subaccount as a capital contribution to us, which is equal to 0.5% of the initial outstanding principal balance of the bonds. The capital contribution has been set at a level sufficient to obtain the ratings on the bonds described below under “Ratings for the Transition Bonds.” If amounts available in the general subaccount and the excess funds subaccount are not sufficient to make required or scheduled payments to the bondholders and to pay the fees and expenses specified in the indenture due on any payment date, the trustee will draw on amounts in the capital subaccount to make those payments.

How Funds in the Collection Account Will Be Allocated

Amounts remitted by the servicer to the trustee with respect to the bonds, including any indemnity amounts and all investment earnings on amounts in the subaccounts in the collection account, will be deposited into the general subaccount of the collection account.

On each payment date, the trustee will allocate or pay all amounts on deposit in the general subaccount of the collection account for the bonds in the following priority:

 

  1. payment of the trustee’s fees, expenses and any outstanding indemnity amounts, not to exceed $100,000 per annum;

 

  2. payment of the servicing fee relating to the bonds, plus any unpaid servicing fees from prior payment dates,

 

  3. payment of the administration fee and of the fees of our independent managers, each as described in the table on page S-15, and in each case with any unpaid administration or management fees from prior payment dates,

 

  4. payment of all of our other ordinary periodic operating expenses, such as accounting and audit fees, rating agency fees, legal fees and certain reimbursable costs of the servicer under the servicing agreement and of the administrator under the administration agreement,

 

  5. payment of the interest then due on the bonds, including any past-due interest,

 

  6. payment of principal then required to be paid on the bonds as a result of acceleration upon an event of default or at final maturity,

 

  7. payment of principal then scheduled to be paid on the bonds in accordance with the expected sinking fund schedule, including any previously unpaid scheduled principal,

 

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  8. payment of any of our remaining unpaid operating expenses and any remaining amounts owed pursuant to the basic documents, including all remaining indemnity amounts owed to the trustee,

 

  9 replenishment of any amounts drawn from the capital subaccount for the bonds,

 

  10. if there is a positive balance after making the foregoing allocations, so long as no event of default has occurred and is continuing, release to us of an amount not to exceed the lesser of any remaining balance and the investment earnings on amounts in the capital subaccount for the bonds,

 

  11. allocation of the remainder, if any, to the excess funds subaccount, and

 

  12. after the bonds have been paid in full and discharged, the balance, together with all amounts in the capital subaccount and the excess funds subaccount, to us free and clear of the lien of the indenture.

The amounts paid during any calendar year in respect of the servicing fee in clause 2 may not exceed 0.05% of the original principal balance of the bonds (for so long as TCC is the servicer) and the annual administration fee in clause 3 may not exceed $100,000. Please read “Risk Factors—Other Risks Associated with an Investment in the Transition Bonds—TCC’s indemnification obligations under the sale and servicing agreements are limited and might not be sufficient to protect your investment in the transition bonds” in the accompanying prospectus.

If, on any payment date, funds in the general subaccount are insufficient to make the allocations or payments contemplated by clauses 1 through 9 of the first paragraph of this subsection, the trustee will draw from amounts on deposit in the following subaccounts in the following order up to the amount of the shortfall:

 

  1. from the excess funds subaccount for allocations and payments contemplated in clauses 1 through 9, and

 

  2. from the capital subaccount for allocations and payments contemplated in clauses 1 through 8.

If, on any payment date, available collections of transition charges allocable to the bonds, together with available amounts in the related subaccounts, are not sufficient to pay all amounts due on all outstanding bonds on that payment date amounts available will be allocated sequentially in the following order, in each case to the extent of available funds:

 

   

first, pro rata to interest based on the amount of interest then due and payable on each tranche of the bonds;

 

   

second, pro rata to principal, based on the principal amount of each tranche then due and payable; and

 

   

third, then pro rata to principal, based upon the principal amount of each tranche then scheduled to be paid, including any previously unpaid scheduled principal.

If the trustee uses amounts on deposit in the capital subaccount to pay those amounts or make those transfers, as the case may be, subsequent adjustments to the related transition charges will take into account, among other things, the need to replenish those amounts.

Retail Electric Provider Deposits and Other Credit Support

Each retail electric provider in TCC’s service territory is obligated to collect and remit transition charges to the servicer as described under “Retail Electric Providers” in the accompanying prospectus. The financing order provides that each retail electric provider that does not maintain a long-term, unsecured credit rating of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively, must provide:

 

   

a cash deposit of two months’ maximum expected transition charge collections,

 

   

an affiliate guarantee, surety bond or letter of credit from an entity with a long-term, unsecured credit rating of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively, providing for payment of such amount of transition charge collections in the event that the retail electric provider defaults in its payment obligations, or

 

   

a combination of any of the foregoing.

A retail electric provider that does not have or maintain a long-term, unsecured credit rating of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively, may select which alternate form of

 

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deposit, credit support or combination thereof it will utilize. As of December 31, 2011 there were 92 REPs certified by the Texas commission to furnish electricity and other retail services to retail customers in TCC’s service territory. During the twelve months ended December 31, 2010, TCC billed approximately 22,460 million kilowatt-hours (kWh) of electric energy to metered retail customers in its service territory. Of that amount, approximately 3,318 million kWh, or 14.77%, were delivered to retail customers served by one REP, approximately 3,090 million kWh, or 13.76%, to retail customers served by another REP, approximately 1,824 million kWh, or 8.12%, to retail customers served by a third REP, and the remaining approximately 14,228 million kWh, or 63.35%, to retail customers served by the 89 remaining REPs or to retail customers directly billed by TCC in connection with new on-site generation if applicable. In addition, during this period, TCC collected transition charges in respect of the Series 2002-1 transition bonds and Series 2006-A transition bonds from retail customers who, after May 1, 1999, switched to municipally owned utilities or electric cooperatives with multiply-certificated service territories with TCC. These retail customers consumed 63,809,142 kWh, or 0.28% of the total electric energy delivered directly by TCC to retail end-use customers in TCC’s service territory.

Retail electric provider cash deposits will be held by the trustee, maintained in a segregated account, and invested in short-term high quality investments, as permitted by the rating agencies rating the bonds. If a retail electric provider defaults in making a payment of transition charges to the servicer and does not remedy the default within a 10 calendar-day grace period, the financing order and applicable Texas commission regulations provide that the amounts on deposit or available from other credit support (up to an amount of the lesser of the payment default of the retail electric provider or the amount of the deposit or other credit support amount) will be used to make payments in respect of the bonds. Please read “Retail Electric Providers—Credit Practices, Policies and Procedures of Retail Electric Providers—Rating, Deposit and Related Requirements,” “—Remedies Upon Default” and “Risk Factors—Risks Associated With Potential Bankruptcy Proceedings of Retail Electric Providers” in the accompanying prospectus.

THE TRANSITION CHARGES

TCC will be the initial servicer of the bonds. Beginning on the date we issue the bonds, the initial transition charges listed in the table below will be imposed on retail electric customers in each transition charge customer class at the applicable rate for the class determined pursuant to the financing order. These transition charges will be adjusted annually, or more frequently under certain circumstances, by the servicer in accordance with its filings with the Texas commission. Please read “Description of the Transition Property—Creation of Transition Property; Financing Order” in the accompanying prospectus.

Initial Transition Charges

 

Transition Charge Customer Class

   Initial Transition Charge Rate
(per kWh or kW as  applicable)

Residential

  

Commercial and Small Industrial – Energy

  

Municipal and Cotton Gin

  

Commercial and Small Industrial – Demand

  

Large Industrial – Firm

  

Standby – Non-Firm

  

Large Industrial – Non-Firm

  

Standby –Firm

  

An estimate of the initial transition charge for the bonds and the estimated aggregate initial transition charges for the bonds together with the Series 2002-1 transition bonds and the Series 2006-A transition bonds (i) would represent approximately [    ]% and [    ]%, respectively, of the total bill received by a 1,000 kWh residential customer of the largest retail electric provider in TCC’s service territory as of December, 2011; and (ii) would represent approximately [    ]% and [    ]%, respectively, of the average total bill received by a 1,000 kWh residential customer in TCC’s service territory as of December, 2011 (based on the average of offered rates published on the PUCT website for REPs operating in TCC’s service territory).

Please read “Description of the Transition Property—Creation of Transition Property; Financing Order” and “—Transition Charge Retail Customer Classes” in the accompanying prospectus.

 

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UNDERWRITING THE BONDS

Subject to the terms and conditions in the underwriting agreement among us, TCC and the underwriters, for whom Morgan Stanley & Co. LLC, Barclays Capital Inc. and Citigroup Global Markets Inc. are acting as representatives, we have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase, the principal amount of the bonds listed opposite each underwriter’s name below:

 

Underwriter

   Tranche A-1    Tranche A-2    Tranche A-3

Morgan Stanley & Co. LLC

   $                        $                        $                    

Barclays Capital Inc.

        

Citigroup Global Markets Inc.

        

Goldman, Sachs & Co.

        

Samuel A. Ramirez & Company, Inc.

        

RBS Securities Inc.

        

Wells Fargo Securities, LLC

        
  

 

  

 

  

 

Total

   $    $    $
  

 

  

 

  

 

Under the underwriting agreement, the underwriters will take and pay for all of the bonds we offer, if any is taken. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.

 

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The Underwriters’ Sales Price for the bonds

The bonds sold by the underwriters to the public will be initially offered at the prices to the public set forth on the cover of this prospectus supplement. The underwriters propose initially to offer the bonds to dealers at such prices, less a selling concession not to exceed the percentage listed below for each tranche. The underwriters may allow, and dealers may reallow, a discount not to exceed the percentage listed below for each tranche.

 

     Selling Concession    Reallowance Discount

Tranche A-1

     

Tranche A-2

     

Tranche A-3

     

After the initial public offering, the public offering prices, selling concessions and reallowance discounts may change.

No Assurance as to Resale Price or Resale Liquidity for the bonds

The bonds are a new issue of securities with no established trading market. They will not be listed on any securities exchange. The underwriters have advised us that they intend to make a market in the bonds, but they are not obligated to do so and may discontinue market making at any time without notice. We cannot assure you that a liquid trading market will develop for the bonds.

Various Types of Underwriter Transactions That May Affect the Price of the bonds

The underwriters may engage in overallotment transactions, stabilizing transactions, syndicate covering transactions and penalty bids with respect to the bonds in accordance with Regulation M under the Securities Exchange Act of 1934. Overallotment transactions involve syndicate sales in excess of the offering size, which create a syndicate short position. Stabilizing transactions are bids to purchase the bonds, which are permitted, so long as the stabilizing bids do not exceed a specific maximum price. Syndicate covering transactions involve purchases of the bonds in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the bonds originally sold by the syndicate member are purchased in a syndicate covering transaction. These overallotment transactions, stabilizing transactions, syndicate covering transactions and penalty bids may cause the prices of the bonds to be higher than they would otherwise be. Neither we, TCC, the trustee, our managers nor any of the underwriters represent that the underwriters will engage in any of these transactions or that these transactions, if commenced, will not be discontinued without notice at any time.

Certain of the underwriters and their affiliates have in the past provided, and may in the future from time to time provide, investment banking and general financing and banking services to TCC and its affiliates for which they have in the past received, and in the future may receive, customary fees. In addition, each underwriter may from time to time take positions in the bonds. Morgan Stanley & Co. LLC, as financial advisor, has rendered certain financial advisory/structuring services to us and will receive a fee for such services and reimbursement for certain expenses in connection with such services. In accordance with FINRA Rule 5110 this financial advisory fee and the reimbursement of expenses are deemed underwriting compensation in connection with the offering.

We estimate that our share of the total expenses of the offering will be $[            ].

We and TCC have agreed to indemnify the underwriters against some liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the bonds, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters, including the validity of the bonds and other conditions contained in the underwriting agreement, such as receipt of ratings confirmations, officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject offers in whole or in part.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

In the opinion of Sidley Austin LLP, counsel to us and to TCC, interest paid on the bonds generally will be taxable to a U.S. bondholder as ordinary interest income at the time it accrues or is received in accordance with the U.S. bondholder’s method of accounting for U.S. federal income tax purposes. Sidley Austin LLP has also issued an opinion, based on Revenue Procedure 2005-62, 2005-2 C.B. 507, that, for federal income tax purposes (1) we will not be treated as a taxable entity separate and apart from TCC, our sole member, and (2) the bonds will constitute indebtedness of TCC. Each beneficial owner of a bond, by acquiring a beneficial interest, agrees to treat such bond as indebtedness of our sole member secured by the collateral for federal (and, to the extent applicable, state) income tax purposes unless otherwise required by appropriate taxing authorities. Please read “Material U.S. Federal Income Tax Consequences” in the accompanying prospectus.

WHERE YOU CAN FIND MORE INFORMATION

To the extent that we are required by law to file such reports and information with the Securities and Exchange Commission under the Securities Exchange Act of 1934, we will file annual, quarterly and current reports and other information with the Securities and Exchange Commission. We are incorporating by reference any future filings we or the sponsor, but solely in its capacity as our sponsor, make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the termination of the offering, excluding any information that is furnished to, and not filed with, the Securities and Exchange Commission. These reports will be filed under our own name as issuing entity. Please read “Where You Can Find More Information” in the accompanying prospectus. Under the Indenture, we may voluntarily suspend or terminate our filing obligations as Issuer with the Securities and Exchange Commission, to the extent permitted by applicable law.

LEGAL PROCEEDINGS

There are no legal or governmental proceedings pending against us, the sponsor, seller, trustee, or servicer, or of which any property of the foregoing is subject, that is material to the holders of the bonds.

LEGAL MATTERS

Certain legal matters relating to the bonds, including certain U.S. federal income tax matters, will be passed on by Sidley Austin LLP, counsel to TCC and the issuing entity, by Richards, Layton & Finger, special Delaware counsel to the issuing entity, by Duggins, Wren, Mann & Romero LLP, Austin, Texas, regulatory counsel to TCC, by Bracewell & Giuliani LLP, Austin, Texas, Texas counsel to TCC and the issuing entity, and by Dewey & LeBoeuf LLP, counsel to the underwriters.

OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS

NOTICE TO RESIDENTS OF SINGAPORE

THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS HAS NOT BEEN REGISTERED AS A PROSPECTUS WITH THE MONETARY AUTHORITY OF SINGAPORE, AND THE BONDS WILL BE OFFERED PURSUANT TO EXEMPTIONS UNDER THE SECURITIES AND FUTURES ACT, CHAPTER 289 OF SINGAPORE (THE “SECURITIES AND FUTURES ACT”). ACCORDINGLY, THE BONDS MAY NOT BE OFFERED OR SOLD OR MADE THE SUBJECT OF AN INVITATION FOR SUBSCRIPTION OR PURCHASE NOR MAY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR ANY OTHER DOCUMENT OR MATERIAL IN CONNECTION WITH THE OFFER OR SALE, OR INVITATION FOR SUBSCRIPTION OR PURCHASE, OF BONDS BE CIRCULATED OR DISTRIBUTED WHETHER DIRECTLY OR INDIRECTLY TO ANY PERSON IN SINGAPORE OTHER THAN (I) TO AN INSTITUTIONAL INVESTOR UNDER SECTION 274 OF THE SECURITIES AND FUTURES ACT, (II) TO A RELEVANT PERSON PURSUANT TO SECTION 275(1) OF THE SECURITIES AND FUTURES ACT, OR ANY PERSON PURSUANT TO SECTION 275(1A) OF THE SECURITIES AND FUTURES ACT, AND IN ACCORDANCE WITH THE CONDITIONS, SPECIFIED IN SECTION 275 OF THE SECURITIES AND FUTURES ACT, OR (III) OTHERWISE PURSUANT TO, AND IN ACCORDANCE WITH THE CONDITIONS OF, ANY OTHER APPLICABLE PROVISION OF THE SECURITIES AND FUTURES ACT.

 

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NOTICE TO RESIDENTS OF THE PEOPLE’S REPUBLIC OF CHINA

THE BONDS SHALL NOT BE OFFERED OR SOLD IN THE PEOPLE’S REPUBLIC OF CHINA, EXCLUDING HONG KONG, MACAU AND TAIWAN, (THE “PRC”) AS PART OF THE INITIAL DISTRIBUTION OF THE BONDS.

THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN THE PRC TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE THE OFFER OR SOLICITATION IN THE PRC.

THE STATE DOES NOT REPRESENT THAT THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY BE LAWFULLY DISTRIBUTED, OR THAT ANY BONDS MAY BE LAWFULLY OFFERED, IN COMPLIANCE WITH ANY APPLICABLE REGISTRATION OR OTHER REQUIREMENTS IN THE PRC, OR PURSUANT TO AN EXEMPTION AVAILABLE THEREUNDER, OR ASSUME ANY RESPONSIBILITY FOR FACILITATING ANY SUCH DISTRIBUTION OR OFFERING. IN PARTICULAR, NO ACTION HAS BEEN TAKEN BY THE ISSUING ENTITY WHICH WOULD PERMIT A PUBLIC OFFERING OF ANY BONDS OR THE DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN THE PRC. ACCORDINGLY, THE BONDS ARE NOT BEING OFFERED OR SOLD WITHIN THE PRC BY MEANS OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR ANY OTHER DOCUMENT. NEITHER THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY ADVERTISEMENT OR OTHER OFFERING MATERIAL MAY BE DISTRIBUTED OR PUBLISHED IN THE PRC, EXCEPT UNDER CIRCUMSTANCES THAT WILL RESULT IN COMPLIANCE WITH ANY APPLICABLE LAWS AND REGULATIONS.

NOTICE TO RESIDENTS OF JAPAN

THE BONDS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE FINANCIAL INSTRUMENTS AND EXCHANGE ACT OF JAPAN (ACT NO. 25 OF 1948, AS AMENDED, THE “FIEA”), AND EACH UNDERWRITER HAS REPRESENTED AND AGREED THAT IT WILL NOT OFFER OR SELL ANY OF THE BONDS, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO, OR FOR THE BENEFIT OF, ANY RESIDENT OF JAPAN (AS DEFINED UNDER ITEM 5, PARAGRAPH 1, ARTICLE 6 OF THE FOREIGN EXCHANGE AND FOREIGN TRADE ACT (ACT NO. 228 OF 1949, AS AMENDED)) OR TO, OR FOR THE BENEFIT OF OTHERS FOR REOFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN JAPAN OR TO A RESIDENT OF JAPAN, EXCEPT PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF, AND OTHERWISE IN COMPLIANCE WITH THE FIEA AND ANY OTHER APPLICABLE LAWS, REGULATIONS AND MINISTERIAL GUIDELINES AND REGULATIONS OF JAPAN.

NOTICE TO RESIDENTS OF HONG KONG

EACH UNDERWRITER HAS REPRESENTED AND AGREED THAT IT HAS NOT OFFERED OR SOLD AND WILL NOT OFFER OR SELL IN HONG KONG, BY MEANS OF ANY DOCUMENT, ANY BONDS OTHER THAN (A) TO “PROFESSIONAL INVESTORS” AS DEFINED IN THE SECURITIES AND FUTURES ORDINANCE (CAP. 571) OF HONG KONG AND ANY RULES MADE UNDER THAT ORDINANCE; OR (B) IN OTHER CIRCUMSTANCES WHICH DO NOT RESULT IN THE DOCUMENT BEING A “PROSPECTUS” AS DEFINED IN THE COMPANIES ORDINANCE (CAP. 32) OF HONG KONG OR WHICH DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THAT ORDINANCE; AND IT HAS NOT ISSUED OR HAD IN ITS POSSESSION FOR THE PURPOSES OF ISSUE, AND WILL NOT ISSUE OR HAVE IN ITS POSSESSION FOR THE PURPOSES OF ISSUE, WHETHER IN HONG KONG OR ELSEWHERE, ANY ADVERTISEMENT, INVITATION OR DOCUMENT RELATING TO THE BONDS, WHICH IS DIRECTED AT, OR THE CONTENTS OF WHICH ARE LIKELY TO BE ACCESSED OR READ BY, THE PUBLIC OF HONG KONG (EXCEPT IF PERMITTED TO DO SO UNDER THE SECURITIES LAWS OF HONG KONG) OTHER THAN WITH RESPECT TO BONDS WHICH ARE OR ARE INTENDED TO BE DISPOSED OF ONLY TO PERSONS OUTSIDE HONG KONG OR ONLY TO “PROFESSIONAL INVESTORS” AS DEFINED IN THE SECURITIES AND FUTURES ORDINANCE (CAP. 571) AND ANY RULES MADE UNDER THAT ORDINANCE.

NOTICE TO RESIDENTS OF THE EUROPEAN ECONOMIC AREA

IN RELATION TO EACH MEMBER STATE OF THE EUROPEAN ECONOMIC AREA WHICH HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE (EACH, A “RELEVANT MEMBER STATE”), EACH OF THE UNDERWRITERS HAS REPRESENTED AND AGREED THAT WITH EFFECT FROM AND INCLUDING THE DATE ON WHICH THE PROSPECTUS DIRECTIVE IS IMPLEMENTED IN THAT RELEVANT MEMBER STATE (THE “RELEVANT IMPLEMENTATION DATE”) IT HAS NOT MADE AND WILL NOT MAKE AN OFFER OF THE TRANSITION BONDS TO THE PUBLIC IN THAT RELEVANT MEMBER STATE PRIOR TO THE PUBLICATION OF A

 

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PROSPECTUS IN RELATION TO THE TRANSITION BONDS WHICH HAS BEEN APPROVED BY THE COMPETENT AUTHORITY IN THAT MEMBER STATE OR, WHERE APPROPRIATE, APPROVED IN ANOTHER RELEVANT MEMBER STATE AND PUBLISHED AND NOTIFIED TO THE COMPETENT AUTHORITY IN THAT RELEVANT MEMBER STATE, ALL IN ACCORDANCE WITH THE PROSPECTUS DIRECTIVE AS IMPLEMENTED IN THAT RELEVANT MEMBER STATE OR FOLLOWING, IN EITHER CASE, TWELVE MONTHS AFTER SUCH PUBLICATION, EXCEPT THAT IT MAY, WITH EFFECT FROM AND INCLUDING THE RELEVANT IMPLEMENTATION DATE, MAKE AN OFFER OF SUCH BONDS TO THE PUBLIC IN THAT RELEVANT MEMBER STATE:

(A) SOLELY TO QUALIFIED INVESTORS (AS DEFINED IN THE PROSPECTUS DIRECTIVE);

(B) TO FEWER THAN 100 NATURAL OR LEGAL PERSONS (OR, IF THE RELEVANT MEMBER STATE HAS IMPLEMENTED THE RELEVANT PROVISION OF THE 2010 AMENDING DIRECTIVE, 150 NATURAL OR LEGAL PERSONS) OTHER THAN QUALIFIED INVESTORS AS DEFINED IN THE PROSPECTUS DIRECTIVE, SUBJECT TO OBTAINING THE PRIOR CONSENT OF THE REPRESENTATIVE OF THE UNDERWRITERS FOR ANY SUCH OFFER; OR

(C) IN ANY OTHER CIRCUMSTANCES FALLING WITHIN ARTICLE 3(2) OF THE PROSPECTUS DIRECTIVE,

PROVIDED THAT NO SUCH OFFER OF THE TRANSITION BONDS SHALL REQUIRE THE ISSUING ENTITY OR ANY UNDERWRITER TO PUBLISH A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE PROSPECTUS DIRECTIVE OR SUPPLEMENT A PROSPECTUS PURSUANT TO ARTICLE 16 OF THE PROSPECTUS DIRECTIVE.

FOR PURPOSES OF THIS PROVISION, THE EXPRESSION AN “OFFER OF THE TRANSITION BONDS TO THE PUBLIC” IN RELATION TO ANY TRANSITION BONDS IN ANY RELEVANT MEMBER STATE MEANS THE COMMUNICATION IN ANY FORM AND BY ANY MEANS OF SUFFICIENT INFORMATION ON THE TERMS OF THE OFFER AND THE TRANSITION BONDS TO BE OFFERED SO AS TO ENABLE AN INVESTOR TO DECIDE TO PURCHASE OR SUBSCRIBE FOR THE TRANSITION BONDS, AS THE SAME MAY BE VARIED IN THAT MEMBER STATE BY ANY MEASURE IMPLEMENTING THE PROSPECTUS DIRECTIVE IN THAT MEMBER STATE, THE EXPRESSION “PROSPECTUS DIRECTIVE” MEANS DIRECTIVE 2003/71/EC AND INCLUDES ANY RELEVANT IMPLEMENTING MEASURE OR AMENDING MEASURE IN EACH RELEVANT MEMBER STATE AND THE EXPRESSION “2010 AMENDING DIRECTIVE” MEANS DIRECTIVE 2010/73/EC.

NOTICE TO RESIDENTS OF UNITED KINGDOM

EACH OF THE UNDERWRITERS HAS REPRESENTED AND AGREED THAT (I) IT HAS ONLY COMMUNICATED OR CAUSED TO BE COMMUNICATED AND WILL ONLY COMMUNICATE OR CAUSE TO BE COMMUNICATED AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000, AS AMENDED (THE “FSMA”)) RECEIVED BY IT IN CONNECTION WITH THE ISSUE OR SALE OF THE TRANSITION BONDS IN CIRCUMSTANCES IN WHICH SECTION 21(1) OF THE FSMA DOES NOT APPLY TO THE ISSUING ENTITY; AND (II) IT HAS COMPLIED AND WILL COMPLY WITH ALL APPLICABLE PROVISIONS OF THE FSMA WITH RESPECT TO ANYTHING DONE BY IT IN RELATION TO THE TRANSITION BONDS IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM.

 

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PROSPECTUS

AEP Texas Central Transition Funding III LLC

Issuing Entity

Senior Secured Transition Bonds

AEP Texas Central Company

Seller, Initial Servicer and Sponsor

 

 

You should carefully consider the Risk Factors beginning on page 12 of this prospectus before you invest in the transition bonds.

We, the issuing entity, will issue the transition bonds in one or more tranches as described in this prospectus. The transition bonds represent only our obligations and are backed only by our assets. AEP Texas Central Company and its affiliates, other than us, are not liable for any payments on the transition bonds. The transition bonds are not a debt or general obligation of the State of Texas, the Public Utility Commission of Texas or any other governmental agency or instrumentality and are not a charge on the full faith and credit or the taxing power of the State of Texas or any governmental agency or instrumentality.

We are a special purpose entity and own no property other than the collateral described in this prospectus. The collateral is the sole source of payment for the transition bonds.

We may offer and sell the transition bonds by use of this prospectus. We will provide the specific terms of the offering of the transition bonds in a supplement to this prospectus. You should read this prospectus and the related prospectus supplement carefully before you invest in the transition bonds. This prospectus may not be used to offer and sell the transition bonds unless accompanied by a prospectus supplement.

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

The date of this Prospectus is March 2, 2012.


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TABLE OF CONTENTS

 

READING THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS

     S-1   

SUMMARY OF TERMS

     S-2   

THE BONDS

     S-9   

The Collateral

     S-9   

The Transition Property

     S-9   

Financing Order

     S-10   

Payment and Record Dates and Payment Sources

     S-11   

Principal Payments

     S-11   

EXPECTED SINKING FUND SCHEDULE

     S-13   

EXPECTED AMORTIZATION SCHEDULE

     S-14   

Weighted Average Life Sensitivity

     S-15   

Assumptions

     S-15   

Fees and Expenses

     S-15   

Distribution Following Acceleration

     S-16   

Interest Payments

     S-16   

Optional Redemption

     S-16   

THE TRUSTEE

     S-16   

CREDIT ENHANCEMENT

     S-17   

Statutory True-Up Mechanism for Payment of Scheduled Principal and Interest

     S-17   

Collection Account and Subaccounts

     S-17   

How Funds in the Collection Account Will Be Allocated

     S-18   

Retail Electric Provider Deposits and Other Credit Support

     S-19   

THE TRANSITION CHARGES

     S-20   

Initial Transition Charges

     S-20   

UNDERWRITING THE BONDS

     S-21   

The Underwriters’ Sales Price for the bonds

     S-22   

No Assurance as to Resale Price or Resale Liquidity for the bonds

     S-22   

Various Types of Underwriter Transactions That May Affect the Price of the bonds

     S-22   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     S-23   

WHERE YOU CAN FIND MORE INFORMATION

     S-23   

LEGAL PROCEEDINGS

     S-23   

LEGAL MATTERS

     S-23   

OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS

     S-23   

READING THIS PROSPECTUS AND THE ACCOMPANYING SUPPLEMENT

     1   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     1   

PROSPECTUS SUMMARY

     3   

Summary of the Transition Bonds

     3   

Parties to Transaction and Responsibilities

     6   

Flow of Funds

     6   

The Collateral

     7   

The Transition Property

     7   

Interest Payments

     8   

Principal Payments and Record Dates and Payment Sources

     8   

Priority of Payments

     8   

Credit Enhancement

     9   

Relationship to the Series 2002-1 transition bonds and the Series 2006-A transition bonds

     10   

State Pledge

     10   

Optional Redemption

     10   

Payment and Record Dates

     10   

Scheduled Final Payment Dates and Final Maturity Dates

     10   

Ratings for the Transition Bonds

     10   

Reports to Transition Bondholders

     10   

Servicing Compensation

     11   

Federal Income Tax Status

     11   

ERISA Considerations

     11   

RISK FACTORS

     12   

You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited.

     12   

RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS

     12   

We are not obligated to indemnify you for changes in law.

     12   

Future judicial action could reduce the value of your investment in the transition bonds.

     12   

Future state legislative action might attempt to reduce the value of your investment in the transition bonds.

     13   

The Texas commission might attempt to take actions that could reduce the value of your investment in the transition bonds.

     13   

SERVICING RISKS

     13   

Inaccurate consumption or collection forecasting might reduce scheduled payments on the transition bonds.

     13   

Your investment in the transition bonds depends on TCC or its successor or assignee, acting as servicer of the transition property.

     14   
 


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If we replace TCC as the servicer, we may experience difficulties finding and using a replacement servicer.

     14   

It might be difficult to collect transition charges from retail electric providers.

     14   

It may be difficult to collect transition charges from other parties who bill retail customers.

     15   

Competitive metering services might result in unexpected problems in receiving accurate metering data.

     15   

Changes to billing and collection practices might reduce the value of your investment in the transition bonds.

     15   

Limits on rights to terminate service might make it more difficult to collect the transition charges.

     16   

Future adjustments to transition charges by customer class might result in insufficient collections.

     16   

RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE TRANSITION PROPERTY

     16   

We will not receive transition charges in respect of electric service provided more than 15  years from the date of issuance of the transition bonds.

     16   

Foreclosure of the trustee’s lien on the transition property for the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect.

     16   

STORM RELATED RISK

     17   

Storm damage to TCC’s operations could impair payment of the transition bonds.

     17   

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF THE SELLER OR THE SERVICER

     17   

The servicer will commingle the transition charges with other revenues it collects, which might obstruct access to the transition charges in case of the servicer’s bankruptcy and reduce the value of your investment in the transition bonds.

     17   

The bankruptcy of TCC or any successor seller might result in losses or delays in payments on the transition bonds.

     17   

The sale of the transition property might be construed as a financing and not a sale in a case of TCC’s bankruptcy which might delay or limit payments on the transition bonds.

     18   

If the servicer enters bankruptcy proceedings, the collections of the transition charges held by the servicer as of the date of bankruptcy might constitute preferences, which means these funds might be unavailable to pay amounts owing on the transition bonds.

     19   

Claims against TCC or any successor seller might be limited in the event of a bankruptcy of the seller.

     19   

The bankruptcy of TCC or any successor seller might limit the remedies available to the trustee.

     19   

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF RETAIL ELECTRIC PROVIDERS

     20   

Retail electric providers may commingle the transition charges with other revenues they collect. This may cause losses on or reduce the value of your investment in the transition bonds in the event a retail electric provider enters bankruptcy proceedings.

     20   

If a retail electric provider enters bankruptcy proceedings, any cash deposit of the retail electric provider held by the trustee might not be available to cover amounts owed by the retail electric provider.

     20   

If a retail electric provider enters bankruptcy proceedings, transition charge payments made by that retail electric provider to the servicer might constitute preferences, and the servicer may be required to return such funds to the bankruptcy estate of the retail electric provider.

     20   

OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS

     21   

TCC’s indemnification obligations under the sale and servicing agreements are limited and might not be sufficient to protect your investment in the transition bonds.

     21   

The credit ratings are no indication of the expected rate of payment of principal on the transition bonds.

     21   

Alternatives to purchasing electricity through TCC’s distribution facilities may be more widely utilized by retail electric customers in the future.

     21   
 

 

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The absence of a secondary market for the transition bonds might limit your ability to resell your transition bonds.

     22   

You might receive principal payments for the transition bonds later than you expect.

     22   

TCC may cause the issuance of additional transition property or similar property through another affiliated entity.

     22   

Regulatory provisions affecting certain investors could adversely affect the liquidity of the transition bonds.

     22   

If the investment of collected transition charges and other funds held by the trustee in the collection account results in investment losses or the investments become illiquid, you may receive payment of principal and interest on the transition bonds later than you expect.

     23   

REVIEW OF TRANSITION PROPERTY

     23   

THE RESTRUCTURING ACT

     25   

The Restructuring Act’s General Effect on the Electric Utility Industry in Texas

     25   

TCC and Other Utilities May Securitize Qualified Costs

     27   

TCC’S FINANCING ORDER

     30   

Determination of the Final True-up of TCC’s Transition-to-Competition Costs

     30   

TCC’s Financing Order

     30   

Collection of Transition Charges

     31   

Issuance Advice Letter

     31   

Tariff

     31   

Statutory True-Ups

     31   

Statutory True-Ups—Credit Risk

     32   

Allocation

     33   

Servicing Agreement

     33   

Binding on Successors

     33   

RETAIL ELECTRIC PROVIDERS

     33   

Credit Practices, Policies and Procedures of Retail Electric Providers

     34   

DESCRIPTION OF THE TRANSITION PROPERTY

     37   

Creation of Transition Property; Financing Order

     37   

Tariff; Transition Charges

     37   

Transition Charge Retail Customer Classes

     39   

Billing and Collection Terms and Conditions

     39   

THE SELLER, INITIAL SERVICER AND SPONSOR

     40   

General

     40   

Servicing Experience

     40   

Municipalization

     40   

TCC Customer Base and Electric Energy Consumption

     40   

Electricity Delivered to Retail Customers, Electric Delivery Revenues and Retail Customers

     41   

Forecasting Electricity Consumption

     41   

Annual Forecast Variance For Ultimate Electric Delivery (GWh)

     42   

Billing and Collections

     42   

Loss Experience

     43   

Days Sales Outstanding

     43   

Delinquencies

     44   

AEP TEXAS CENTRAL TRANSITION FUNDING III LLC, THE ISSUING ENTITY

     44   

Restricted Purpose

     45   

Our Relationship with TCC

     45   

Our Relationship with the PUCT

     45   

Our Management

     45   

Manager Fees and Limitation on Liabilities

     46   

We Are a Separate and Distinct Legal Entity from TCC

     46   

Administration Agreement

     47   

USE OF PROCEEDS

     47   

RELATIONSHIP TO THE SERIES 2002-1 TRANSITION BONDS AND THE SERIES 2006-A TRANSITION BONDS

     47   

TCC’s Prior Securitizations

     47   

Intercreditor Agreement

     48   

DESCRIPTION OF THE TRANSITION BONDS

     48   

General

     48   

Interest and Principal on the Transition Bonds

     49   

Payments on the Transition Bonds

     50   

Registration and Transfer of the Transition Bonds

     51   

Transition Bonds Will Be Issued in Book-Entry Form

     51   

Definitive Transition Bonds

     54   

Optional Redemption

     54   

Relationship to the Series 2002-1 Transition Bonds and Series 2006-A Transition Bonds

     54   

Access of Bondholders

     55   

Reports to Bondholders

     55   

Website Disclosure

     55   

We and the Trustee May Modify the Indenture

     56   

Our Covenants

     58   

Events of Default; Rights Upon Event of Default

     61   
 

 

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Actions by Bondholders

     62   

Annual Report of Trustee

     63   

Annual Compliance Statement

     63   

Satisfaction and Discharge of Indenture

     63   

Our Legal and Covenant Defeasance Options

     63   

No Recourse to Others

     64   

THE TRUSTEE

     65   

SECURITY FOR THE TRANSITION BONDS

     65   

General

     65   

Pledge of Collateral

     65   

Security Interest in the Collateral

     66   

Right of Foreclosure

     67   

Description of Indenture Accounts

     67   

How Funds in the Collection Account will be Allocated

     69   

State Pledge

     70   

WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE TRANSITION BONDS

     70   

THE SALE AGREEMENT

     71   

Sale and Assignment of the Transition Property

     71   

Conditions to the Sale of Transition Property

     71   

Seller Representations and Warranties

     72   

Covenants of the Seller

     75   

Indemnification

     77   

Successors to the Seller

     78   

Amendment

     78   

THE SERVICING AGREEMENT

     78   

Servicing Procedures

     78   

Servicing Standards and Covenants

     79   

True-Up Adjustment Process

     80   

Remittances to Collection Account

     80   

Servicing Compensation

     81   

Servicer Representations and Warranties; Indemnification

     81   

The Servicer Will Indemnify Us, Other Entities and the Texas Commission in Limited Circumstances

     83   

Evidence as to Compliance

     83   

Matters Regarding the Servicer

     84   

Servicer Defaults

     85   

Rights Upon a Servicer Default

     85   

Waiver of Past Defaults

     86   

Successor Servicer

     86   

Amendment

     86   

HOW A BANKRUPTCY MAY AFFECT YOUR INVESTMENT

     86   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     90   

General

     90   

Taxation of the Issuing Entity and Characterization of the Transition Bonds

     90   

Tax Consequences To U.S. Holders

     90   

Tax Consequences to Non-U.S. Holders

     91   

Backup Withholding

     92   

Recently Enacted Legislation

     92   

ERISA CONSIDERATIONS

     92   

General

     92   

Regulation of Assets Included in a Plan

     93   

Prohibited Transaction Exemptions

     93   

Consultation with Counsel

     94   

PLAN OF DISTRIBUTION

     94   

RATINGS FOR THE TRANSITION BONDS

     94   

WHERE YOU CAN FIND MORE INFORMATION

     95   

LEGAL MATTERS

     96   

GLOSSARY OF DEFINED TERMS

     97   
 

 

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READING THIS PROSPECTUS AND THE ACCOMPANYING SUPPLEMENT

This prospectus is part of a registration statement we have filed with the SEC. This prospectus provides you with a general description of the transition bonds we may offer. When we offer the transition bonds, we will provide a supplement to this prospectus. The prospectus supplement will describe the specific terms of the offering. The prospectus supplement may also contain information that supplements the information contained in this prospectus, and you should rely on the supplementary information in the prospectus supplement. Please read carefully this prospectus, the prospectus supplement and the information, if any, contained in the documents we refer to in this prospectus under the heading “Where You Can Find More Information.”

References in this prospectus and the prospectus supplement to the terms we, us, or the issuing entity mean AEP Texas Central Transition Funding III LLC. References to TCC, the seller or the sponsor refer to AEP Texas Central Company. References to the ‘transition bonds’ or the “bonds,” unless the context otherwise requires, means the transition bonds offered pursuant to the prospectus supplement. References to the “bondholders” or the “holders” refer to the registered holders of the transition bonds. References to the servicer refer to TCC and any successor servicer under the servicing agreement referred to in this prospectus. References to the Restructuring Act refer to the Texas legislation adopted in June 1999 that substantially amended the regulatory structure governing electric utilities in order to allow retail competition beginning on January 1, 2002, as such legislation has been amended. Unless the context otherwise requires, the term customer or retail customer means a retail end user of electricity and related services provided by a retail electric provider via the transmission and distribution system of an electric utility such as TCC, and retail electric customer means a retail customer within TCC’s service territory. We refer to the geographical certificated service area of TCC as it existed on May 1, 1999 as “TCC’s service territory,” within which TCC may recover qualified costs through nonbypassable transition charges assessed on retail electric customers. References to the Texas commission or PUCT refer to the Public Utility Commission of Texas. References to REPs refer to retail electric providers as defined in the glossary. You can find a glossary of some of the other defined terms we use in this prospectus on page 97 of this prospectus.

We have included cross-references to sections in this prospectus where you can find further related discussions. You can also find key topics in the table of contents on the preceding pages. Check the table of contents to locate these sections.

You should rely only on the information contained or incorporated by reference in this prospectus and the prospectus supplement. We have not authorized anyone else to provide you with any different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell the transition bonds in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is current only as of the date of this prospectus.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Some statements contained in this prospectus and the prospectus supplement concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are not historical facts, including statements in the documents that are incorporated by reference as discussed in this prospectus under the heading “Where You Can Find More Information,” are forward-looking statements within the meaning of the federal securities laws. Actual events or results may differ materially from those expressed or implied by these statements. In some cases, you can identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will,” or other similar words.

We have based our forward-looking statements on our management’s beliefs, expectations and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual events or results will not differ materially from those expressed or implied by our forward-looking statements.

The following are some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements:

 

   

state and federal legislative and regulatory actions or developments, including deregulation, re-regulation and changes in, or changes in application of, laws or regulations applicable to various aspects of TCC’s business;

 

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non-payment of transition charges due to financial distress of retail electric providers;

 

   

the accuracy of the servicer’s estimates of market demand and prices for energy;

 

   

the accuracy of the servicer’s estimates of industrial, commercial and residential growth in TCC’s service territory;

 

   

changes in market demand and demographic patterns;

 

   

weather variations and other natural phenomena including hurricanes, tropical storms, ice or snow storms, floods and other weather-related events and natural disasters affecting retail electric customer energy usage in TCC’s service territory;

 

   

the operating performance of TCC’s facilities and the facilities of third-party suppliers of electric energy in TCC’s service territory;

 

   

the accuracy of the servicer’s forecast of electrical consumption or the payment of transition charges;

 

   

the reliability of the systems, procedures and other infrastructure necessary to operate the retail electric business in TCC’s service territory, including the systems owned and operated by the independent system operator in the Electric Reliability Council of Texas, Inc. (ERCOT);

 

   

national or regional economic conditions affecting retail electric customer energy usage in TCC’s service territory;

 

   

acts of war or terrorism or other catastrophic events affecting retail electric customer energy usage in TCC’s service territory;

 

   

direct or indirect results of cyber attacks, security breaches or other attempts to disrupt the business of TCC, retail electric providers in its service territory or the independent system operator in ERCOT; and

 

   

other factors we discuss in this prospectus, the prospectus supplement and any of our or TCC’S SEC filings.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statement.

 

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PROSPECTUS SUMMARY

This summary contains a brief description of the transition bonds and applies to the transition bonds we are offering by use of this prospectus. You will find a more detailed description of the terms of the offering of the transition bonds in the prospectus supplement.

You should carefully consider the Risk Factors beginning on page 12 of this prospectus before you invest in the transition bonds.

Summary of the Transition Bonds

 

The issuing entity:

AEP Texas Transition Funding III LLC, a direct, wholly owned subsidiary of TCC and a limited liability company formed under Delaware law. We were formed solely to purchase and own transition property, to issue transition bonds secured by transition property and to perform any activity incidental thereto and our organizational documents prohibit us from engaging in any other activity except as specifically authorized by the financing order.

 

Our relationship with the PUCT:

Pursuant to the financing order,

 

   

the PUCT or its designated representative has a decision-making role co-equal with TCC with respect to the structuring, marketing and pricing of the transition bonds and all matters related to the structuring, marketing and pricing of the transition bonds will be determined through a joint decision of TCC and the PUCT or its designated representative,

 

   

TCC is directed to take all necessary steps to ensure that the PUCT or its designated representative is provided sufficient and timely information to allow the PUCT or its designated representative to fully participate in, and exercise its decision-making power over, the proposed securitization, and

 

   

The servicer will file periodic adjustments to transition charges with the PUCT on our behalf.

 

  We have agreed that certain reports concerning transition charge collections will be provided to the PUCT.

 

Purpose of transaction:

This issuance of Senior Secured Transition Bonds will enable TCC to recover certain costs related to the transition to competition in the State of Texas. Please read “The Restructuring Act” in the accompanying prospectus.

 

Our address:

539 N. Carancahua St., Suite 1700, Corpus Christi, Texas, 78478

 

Our telephone number:

(361) 881-5399

 

Seller, Initial Servicer and Sponsor:

AEP Texas Central Company, referred to as TCC, a fully regulated electric utility organized under Texas law. TCC is engaged in the transmission and distribution of electric energy in a 44,000 square mile area in southern Texas. As of December 31, 2011, TCC provided service to approximately 787,000 metered retail customers in this area. TCC is an operating subsidiary of American Electric Power Company, Inc., referred to as AEP, a public utility holding company based in Columbus, Ohio. AEP is one of the largest electric utilities in the United States, delivering electricity to more than 5 million customers in 11 states, and is among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. Neither TCC nor AEP is an obligor of the transition bonds.

 

 

TCC, acting as the initial servicer, and any successor servicer, referred to in this

 

 

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prospectus as the servicer, will service the transition property under a servicing agreement with us. TCC currently provides such services under two separate servicing agreements for separate transition property securing transition bonds issued by other wholly owned subsidiaries of TCC: (1) AEP Texas Central Transition Funding LLC, referred to as TCC Funding I and (2) AEP Texas Central Transition Funding II LLC, referred to as TCC Funding II. Please read “Relationship to the Series 2002-1 Transition Bonds and the Series 2006-A Transition Bonds.”

 

TCC’s address:

539 N. Carancahua Street, Suite 1700, Corpus Christi, Texas 78401

 

TCC’s phone number:

(361) 881-5399

 

The trustee:

The trustee for the transition bonds will be named in the prospectus supplement.

 

Transaction overview:

The Restructuring Act’s mandate to transition to a competitive electric market created stranded investment and other transition to competition costs for electric utilities within the State of Texas. The Restructuring Act permits electric utilities to recover certain of these stranded investments and other transition-to-competition balances through the issuance of transition bonds pursuant to and supported by an irrevocable financing order issued by the Texas commission. The Restructuring Act also permits the Texas commission to impose an irrevocable nonbypassable transition charge on all retail customers within a utility’s certificated service territory as it existed on May 1, 1999, for payment of the transition bonds, subject to only limited exceptions. We refer to this area in this prospectus and the prospectus supplement, with regard to TCC, as TCC’s service territory. The amount and terms for collections of these transition charges are governed by one or more financing orders issued to an electric utility by the Texas commission. The Restructuring Act permits an electric utility to transfer its rights and interests under a financing order, including the right to impose, collect and receive transition charges, to a special purpose entity formed by the electric utility to issue debt securities secured by the right to receive revenues arising from the transition charges. The electric utility’s right to receive the transition charges, all revenues and collections resulting from the transition charges and its other rights and interests under a financing order, upon transfer to the issuing entity, constitute transition property. Under the Restructuring Act, transition property does not come into existence until an electric utility first transfers to an assignee or pledges in connection with the issuance of transition bonds its rights under a related financing order. However, for convenience of reference in this prospectus and the prospectus supplement, the transfer of TCC’s rights under such a financing order is sometimes referred to as the sale or purchase of transition property. References in this prospectus to a financing order, unless the context indicates otherwise, mean the financing order issued by the Texas commission on January 12, 2012 which is further described below. Please read “TCC’s Financing Order.”

 

  On January 12, 2012, the Texas commission issued the financing order to TCC to enable TCC to recover the balance of its costs of transitioning to competition through the issuance of transition bonds, in an aggregate principal amount not to exceed $800 million. Please read “TCC’s Financing Order” for a discussion of the qualified costs authorized in the financing order, which we refer to in this prospectus and the prospectus supplement as “qualified costs.”

 

  The primary transactions underlying the offering of the transition bonds are as follows:

 

   

TCC will sell transition property to us in exchange for the net proceeds from the sale of the transition bonds,

 

   

we will sell the transition bonds, which will be secured primarily by the transition

 

 

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property, to the underwriters named in the prospectus supplement, and

 

   

TCC will act as the initial servicer of the transition property.

 

  The transition bonds are not obligations of the trustee, our managers, TCC, AEP or of any of their affiliates other than us. The transition bonds are also not obligations of the State of Texas or any governmental agency, authority or instrumentality of the State of Texas.

 

 

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Parties to Transaction and Responsibilities

The following chart represents a general summary of the parties to the transactions underlying the offering of the transition bonds, their roles and their various relationships to the other parties:

 

LOGO

Flow of Funds

The following chart represents a general summary of the flow of funds:

 

LOGO

 

 

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The Collateral

The principal asset securing the transition bonds will be transition property, which is a present property right created under the Restructuring Act by a financing order issued by the Texas commission. The collateral includes:

 

   

our rights under the sale agreement pursuant to which we will acquire the transition property, under an administration agreement and under the bill of sale delivered by TCC pursuant to the sale agreement,

 

   

our rights under the financing order, including our rights under the statutory true-up mechanism,

 

   

our rights under the servicing agreement and any subservicing, agency, intercreditor or collection agreements executed in connection with the servicing agreement,

 

   

the collection account for the transition bonds and all related subaccounts,

 

   

our rights in all deposits, guarantees, surety bonds, letters of credit and other forms of credit support provided by or on behalf of retail electric providers pursuant to any financing order or tariff,

 

   

all of our other property related to the transition bonds, other than any cash released to us by the trustee on any payment date from earnings on the capital subaccount,

 

   

all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing, and

 

   

all payments on or under and all proceeds in respect of any or all of the foregoing.

The collateral for the transition bonds will be separate from the collateral for the Series 2002-1 transition bonds and the Series 2006-A transition bonds, both of which were issued by different issuing entities from us, and holders of the transition bonds will have no recourse to the collateral for those other issuances. Please read “Security for the Transition Bonds.”

The Transition Property

In general terms, all of the rights and interests of TCC under the financing order that are transferred to us pursuant to the sale agreement are referred to in this prospectus and the prospectus supplement as the transition property. Transition property includes the right to impose, collect and receive transition charges in amounts sufficient to pay principal and interest and to make other deposits in connection with the transition bonds. Transition charges are payable by all retail electric customers within TCC’s service territory. The transition charges are applicable to certain electric usage which is self-generated, subject to certain limitations specified in the Restructuring Act and the financing order. During the twelve months ended December 31, 2010, approximately 22% of TCC’s total deliveries were to industrial customers, approximately 38% were to commercial customers and approximately 39% were to residential customers. During this period, the State of Texas and other federal, state and local governmental entities comprised approximately 3.58% of TCC’s total revenues.

The transition property is not a receivable, and the principal collateral securing the transition bonds will not be a pool of receivables. The transition charges authorized in the financing order are irrevocable and not subject to reduction, impairment, or adjustment by further action of the Texas commission, except for annual and interim true-up adjustments to correct overcollections or undercollections and to provide for the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds. Please read “The Servicing Agreement—True-Up Adjustment Process.” All revenues and collections resulting from the transition charges are part of the transition property.

We will purchase transition property from TCC to support the issuance of the transition bonds. The servicer will collect the applicable transition charges from retail electric providers, which are entities certified under Texas law that provide electricity and related services to retail electric customers within TCC’s service territory, and will remit the collections to the trustee. The retail electric providers, which we also refer to as REPs, will in turn bill and collect the transition charges from retail electric customers. Each retail electric provider will include the transition charges in its bills to its retail electric customers but is not required to show the transition charges as a separate line item or footnote. However, each retail electric provider will be required to provide annual written notice to its customers that transition charges have been included in the customers’ bills.

Each retail electric provider will be required to pay the transition charges on or before the 35th day after it receives the bill from the servicer, less an agreed allowance for expected uncollectible amounts, whether or not the retail electric provider has collected all amounts owed to it by its retail electric customers. Prior to the date on which the retail electric provider remits

 

 

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the transition charges to the servicer, the transition charges may be commingled with the retail electric provider’s other funds. Please read “Risk Factors—Risks Associated With Potential Bankruptcy Proceedings of Retail Electric Providers,” “Retail Electric Providers” and “How a Bankruptcy May Affect Your Investment—Bankruptcy of a Retail Electric Provider.”

The servicer will have only limited rights to collect the transition charges directly from retail electric customers if a retail electric provider does not remit such payments to the servicer, but will have certain rights against the retail electric provider. Please read “Retail Electric Providers.” For information on how electric service to retail electric customers may be terminated, please read “Risk Factors—Servicing Risks—Limits on rights to terminate service might make it more difficult to collect the transition charges.” Because the amount of transition charge collections will largely depend on the amount of electricity consumed by customers within TCC’s service territory, the amount of collections may vary substantially from year to year. Please read “The Seller, Initial Servicer and Sponsor.”

Interest Payments

Interest on each tranche of transition bonds will accrue from the issue date at the interest rate stated in the prospectus supplement. On each payment date, we will pay interest on each tranche of transition bonds equal to the following amounts:

 

   

if there has been a payment default, any interest payable but unpaid on any prior payment dates, together with interest on such unpaid interest, if any, and

 

   

accrued interest on the principal balance of each tranche of transition bonds as of the close of business on the preceding payment date (or, in the case of the first payment date, on the date of the original issuance of each tranche of transition bonds) after giving effect to all payments of principal made on the preceding payment date, if any.

We will pay interest on each tranche of transition bonds before we pay the principal of each tranche of transition bonds. Please read “Description of the Transition Bonds—Interest and Principal on the Transition Bonds.” If there is a shortfall in the amounts available in the collection account to make interest payments, the trustee will distribute interest pro rata to each tranche of transition bonds based on the amount of interest payable on each outstanding tranche. Unless otherwise specified in the prospectus supplement, we will calculate interest on the basis of a 360-day year of twelve 30-day months.

Principal Payments and Record Dates and Payment Sources

On each payment date specified in the prospectus supplement, we will pay amounts then due or scheduled to be paid on the outstanding transition bonds from amounts available in the collection account and the related subaccounts held by the trustee. We will make these payments to the holders of record of the transition bonds on the related record date specified in the prospectus supplement. Amounts available to make these payments, which will include the applicable transition charges collected by the servicer for us since the last payment date, are described in greater detail under “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated” and “The Servicing Agreement—Remittances to Collection Account.”

Priority of Payments

On each payment date, the trustee will allocate or pay all amounts on deposit in the general subaccount of the collection account in the following order of priority:

 

  1. payment of the trustee’s fees, expenses and any outstanding indemnity amounts not to exceed a specified amount in any 12-month period which amount will be fixed in the indenture,

 

  2. payment of the servicing fee, which will be a fixed amount specified in the servicing agreement, plus any unpaid servicing fees from prior payment dates,

 

  3. payment of the administration fee, which will be a fixed amount specified in the administration agreement between us and TCC, and of the fees of our independent managers, which will be in an amount specified in an agreement between us and our independent managers,

 

  4. payment of all of our other ordinary periodic operating expenses, such as accounting and audit fees, rating agency fees, legal fees and certain reimbursable costs of the servicer under the servicing agreement,

 

  5. payment of the interest then due on the transition bonds, including any past-due interest,

 

 

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  6. payment of the principal then required to be paid on the transition bonds at final maturity or as a result of acceleration upon an event of default,

 

  7. payment of the principal then scheduled to be paid on the transition bonds, including any previously unpaid scheduled principal,

 

  8. payment of any of our remaining unpaid operating expenses and any remaining amounts owed pursuant to the basic documents, including all remaining indemnity amounts owed to the trustee,

 

  9. replenishment of any amounts drawn from the capital subaccount,

 

  10. if there is a positive balance after making the foregoing allocations, so long as no event of default has occurred and is continuing, release to us of an amount not to exceed the lesser of any remaining balance and the investment earnings on amounts in the capital subaccount,

 

  11. allocation of the remainder, if any, to the excess funds subaccount, and

 

  12. after the transition bonds have been paid in full and discharged, the balance, together with all amounts in the capital subaccount and the excess funds subaccount, to us free and clear of the lien of the indenture.

The trustee’s fees, expenses and indemnity amounts referred to in clause 1 above, the amount of the servicer’s fee referred to in clause 2 above and the amount of the administration fee referred to in clause 3 above will be described in the prospectus supplement and may not exceed the amounts approved in the issuance advice letter relating to the transition bonds. The priority of payments for the collected transition charges, as well as available amounts in the subaccounts, are described in more detail under “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated,” as well as in the prospectus supplement.

Credit Enhancement

Credit enhancement for the transition bonds, which is intended to protect you against losses or delays in scheduled payments on the transition bonds, will be as follows:

 

   

The Texas commission will approve adjustments to the transition charges, but only upon petition of the servicer, to make up for any shortfall, due to any reason, or reduce any excess in collected transition charges. We sometimes refer to these adjustments as the true-up adjustments or the statutory true-up mechanism. These adjustments will be made annually, and if determined necessary by the servicer, semi-annually or more frequently, and if there are bonds outstanding following the final scheduled final payment date, quarterly, to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds. Please read “TCC’s Financing Order—Statutory True-Ups.”

 

   

Collection Account—Under the indenture, the trustee will hold a collection account for the transition bonds, divided into various subaccounts. The primary subaccounts for credit enhancement purposes are:

the general subaccount—the trustee will deposit into the general subaccount all transition charge collections remitted to it by the servicer;

the capital subaccount—TCC will deposit an amount specified in the prospectus supplement into the capital subaccount on the date of issuance of the transition bonds; and

the excess funds subaccount—any excess amount of collected transition charges and investment earnings not released to us will be held in the excess funds subaccount.

Retail electric providers in TCC’s service territory that do not maintain a long-term, unsecured credit rating of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively, are required to provide a cash deposit of two months’ maximum expected transition charge collections, an affiliate guarantee, surety bond or letter of credit from an entity with such a credit rating providing for payment of such amount of transition charge collections in the event that the retail electric provider defaults in its payment obligations or a combination of any of the foregoing. If a retail electric provider defaults in making a payment of transition charges to the servicer and does not remedy the default within a 10 calendar-day grace period, pursuant to the financing order and applicable Texas commission regulations, amounts on deposit or available from other credit support (up to an amount of the lesser of the payment default of the retail electric provider or the amount of the deposit or other credit support amount) will be used to make payments in respect of transition bonds. Please read “Retail Electric Providers—Credit Practices, Policies and Procedures of Retail Electric Providers.”

 

 

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Relationship to the Series 2002-1 transition bonds and the Series 2006-A transition bonds

Although the Series 2002-1 transition bonds, the Series 2006-A transition bonds and the transition bonds each will have its own separate transition property and are issued by different issuing entities, transition charges relating to each issuer will be collected through single bills to retail electric providers that include all charges related to the use of TCC’s transmission and distribution system to deliver electricity consumed by retail electric customers. In the event a retail electric provider does not pay in full all amounts owed under any bill including transition charges, TCC is required to allocate any resulting shortfalls in transition charges ratably based on the amounts of transition charges owing to us in respect of the bonds, owing to TCC Funding I in respect of the Series 2002-1 transition bonds, and owing to TCC Funding II in respect of the Series 2006-A transition bonds, and for other charges owing to TCC for electric delivery services. Please read “Description of the Transition Bonds—Relationship to the Series 2002-1 Transition Bonds and Series 2006-A Transition Bonds,” “The Servicing Agreement—Remittances to Collection Account” and “Relationship to the Series 2002-1 Transition Bonds and The Series 2006-A Transition Bonds—Intercreditor Agreement.”

State Pledge

The State of Texas has pledged in the Restructuring Act that it will not take or permit any action that would impair the value of the transition property, or, except as permitted in connection with a true-up adjustment authorized by the Restructuring Act, reduce, alter or impair the transition charges until the principal, interest and premium, and any other charges incurred and contracts to be performed in connection with the transition bonds, have been paid and performed in full. The transition bonds are not a debt or an obligation of the State of Texas, the Texas commission or any other governmental agency or instrumentality and are not a charge on the full faith and credit or the taxing power of the State of Texas or any governmental agency or instrumentality.

Optional Redemption

We will not have the option to redeem or otherwise prepay any transition bonds.

Payment and Record Dates

The payment and record dates for the transition bonds will be specified in the prospectus supplement.

Scheduled Final Payment Dates and Final Maturity Dates

Failure to pay a scheduled principal payment on any payment date or the entire outstanding amount of the transition bonds of any tranche by the scheduled final payment date will not result in a default with respect to that tranche. The failure to pay the entire outstanding principal balance of the transition bonds of any tranche will result in a default only if such payment has not been made by the final maturity date for the tranche. We will specify the scheduled final payment date and the final maturity date of each tranche of transition bonds in the prospectus supplement.

Ratings for the Transition Bonds

We expect the bonds will receive credit ratings from three nationally recognized statistical rating organizations. Please read “Ratings for the Transition Bonds.”

Reports to Transition Bondholders

Pursuant to the indenture, the trustee will make available on its website (currently located at https://www.usbank.com/abs) to the holders of record of the transition bonds regular reports prepared by the servicer containing information concerning, among other things, us and the collateral. Unless and until the transition bonds are issued in definitive certificated form, the reports will be provided to The Depository Trust Company. The reports will be available to beneficial owners of the transition bonds upon written request to the trustee or the servicer. These reports will not be examined and reported upon by an independent public accountant. In addition, no independent public accountant will provide an opinion thereon. Please read “Description of the Transition Bonds—Reports to Bondholders.”

 

 

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Servicing Compensation

We will pay the servicer on each payment date the servicing fee with respect to the transition bonds. As long as TCC or any affiliated entity acts as servicer, this fee will be 0.05% of the initial principal balance of the transition bonds on an annualized basis. If a successor servicer is appointed, the servicing fee will be negotiated by the successor servicer and the trustee, but will not, unless the Texas commission consents, exceed 0.60% of the initial principal balance of the transition bonds on an annualized basis. In no event will the trustee be liable for any servicing fee in its individual capacity.

Federal Income Tax Status

In the opinion of Sidley Austin LLP, counsel to us and to TCC, for federal income tax purposes, the transition bonds will constitute indebtedness of TCC, our sole member. If you purchase a beneficial interest in any transition bond, you agree by your purchase to treat the transition bonds as debt of our sole member for federal income tax purposes.

ERISA Considerations

Pension plans and other investors subject to ERISA may acquire the transition bonds subject to specified conditions. The acquisition and holding of the transition bonds could be treated as a direct or indirect prohibited transaction under ERISA. Accordingly, by purchasing the transition bonds, each investor purchasing on behalf of a pension plan will be deemed to certify that the purchase and subsequent holding of the transition bonds would be exempt from the prohibited transaction rules of ERISA. Please read “ERISA Considerations.”

 

 

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RISK FACTORS

Please carefully consider all the information we have included or incorporated by reference in this prospectus and the prospectus supplement, including the risks described below and the statements in “Cautionary Statement Regarding Forward-Looking Information,” before deciding whether to invest in the transition bonds.

You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited.

The only source of funds for payment of the transition bonds will be our assets, which consist of:

 

   

the transition property securing the transition bonds, including the right to impose, collect and receive related transition charges and our rights under the financing order to the statutory true-up mechanism;

 

   

the funds on deposit in the accounts held by the trustee; and

 

   

our rights under various contracts we describe in this prospectus.

The transition bonds are not a charge on the full faith and credit or taxing power of the State of Texas or any governmental agency or instrumentality, nor will the transition bonds be insured or guaranteed by TCC, including in its capacity as the servicer, or by its parent, AEP, any of their respective affiliates (other than us), the trustee or by any other person or entity. Thus, you must rely for payment of the transition bonds solely upon the Restructuring Act, state and federal constitutional rights to enforcement of the Restructuring Act, the irrevocable financing order, collections of the transition charges and funds on deposit in the related accounts held by the trustee. Our organizational documents restrict our right to acquire other assets unrelated to the transactions described in this prospectus. Please read “AEP Texas Central Transition Funding III LLC, The Issuing Entity.”

RISKS ASSOCIATED WITH POTENTIAL JUDICIAL, LEGISLATIVE OR REGULATORY ACTIONS

We are not obligated to indemnify you for changes in law.

Neither we nor TCC will indemnify you for any changes in the law, including any federal preemption or repeal or amendment of the Restructuring Act, that may affect the value of your transition bonds. TCC will agree in the sale agreement to institute any action or proceeding as may be reasonably necessary to block or overturn any attempts to cause a repeal, modification or amendment to the Restructuring Act that would be materially adverse to us, the trustee or transition bondholders. Please read “The Sale Agreement—Covenants of the Seller” and “The Servicing Agreement—Servicing Standards and Covenants.” However, we cannot assure you that TCC would be able to take this action or that any such action would be successful.

Future judicial action could reduce the value of your investment in the transition bonds.

The transition property securing the transition bonds is the creation of the Restructuring Act and the financing order that has been issued by the Texas commission to TCC. There is uncertainty associated with investing in bonds payable from an asset that depends for its existence on legislation because there is limited judicial or regulatory experience implementing and interpreting the legislation. Because the transition property is a creation of the Restructuring Act, any judicial determination affecting the validity of or interpreting the Restructuring Act, the transition property or our ability to make payments on the transition bonds might have an adverse effect on the transition bonds. In June of 2001, the Supreme Court of the State of Texas upheld the constitutionality of certain securitization provisions of the Restructuring Act. Notwithstanding that decision, a federal or state court could be asked in the future to determine whether the relevant provisions of the Restructuring Act are unlawful or invalid. If the Restructuring Act is invalidated, the financing order might also be invalidated.

Other states have passed electric utility deregulation laws similar to the Restructuring Act, and some of these laws have been challenged by judicial actions. To date, none of these challenges has succeeded, but future judicial challenges might be made. An unfavorable decision regarding another state’s law would not automatically invalidate the Restructuring Act or the financing order, but it might provoke a challenge to the Restructuring Act, establish a legal precedent for a successful challenge to the Restructuring Act or heighten awareness of the political and other risks of the transition bonds, and in that way may limit the liquidity and value of the transition bonds. Therefore, legal activity in other states may indirectly affect the value of your investment in the transition bonds.

 

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Future state legislative action might attempt to reduce the value of your investment in the transition bonds.

Despite its pledge in the Restructuring Act not to take or permit certain actions that would impair the value of the transition property or the transition charges, the Texas legislature might attempt to repeal or amend the Restructuring Act in a manner that limits or alters the transition property so as to reduce its value. For a description of the State’s pledge, please read “The Restructuring Act—TCC and Other Utilities May Securitize Qualified Costs—State Pledge.” It might be possible for the Texas legislature to repeal or amend the Restructuring Act notwithstanding the State’s pledge if the legislature acts in order to serve a significant and legitimate public purpose. Any such action, as well as the costly and time-consuming litigation that likely would ensue, might adversely affect the price and liquidity, the dates of payment of interest and principal and the weighted average lives of the transition bonds. Moreover, the outcome of any litigation cannot be predicted. Accordingly, you might incur a loss on or delay in recovery of your investment in the transition bonds.

If an action of the Texas legislature adversely affecting the transition property or the ability to collect transition charges were considered a “taking” under the United States or Texas Constitutions, the State of Texas might be obligated to pay compensation for the taking. However, even in that event, there is no assurance that any amount provided as compensation would be sufficient for you to recover fully your investment in the transition bonds or to offset interest lost pending such recovery.

Unlike the citizens of California, Massachusetts, Michigan and some other states, the citizens of the State of Texas currently do not have the constitutional right to adopt or revise state laws by initiative or referendum. Thus, absent an amendment of the Texas Constitution, the Restructuring Act cannot be amended or repealed by direct action of the electorate of the State of Texas or of TCC’s service territory.

The enforcement of any rights against the State of Texas or the PUCT under the State’s pledge may be subject to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against state and local governmental entities in Texas. These limitations might include, for example, the necessity to exhaust administrative remedies prior to bringing suit in a court, or limitations on type and locations of courts in which the State of Texas or the PUCT may be sued.

The Texas commission might attempt to take actions that could reduce the value of your investment in the transition bonds.

The Restructuring Act provides that a financing order is irrevocable and that the Texas commission may not directly or indirectly, by any subsequent action, rescind or amend a financing order or reduce or impair the transition charges authorized under a financing order, except for the true-up adjustments to the transition charges. However, the Texas commission retains the power to adopt, revise or rescind rules or regulations affecting TCC. The Texas commission also retains the power to interpret the financing order granted to TCC, and in that capacity might be called upon to rule on the meanings of provisions of the order that might need further elaboration. Any new or amended regulations or orders from the Texas commission might attempt to affect the ability of the servicer to collect the transition charges in full and on a timely basis, the rating of the transition bonds or their price and, accordingly, the amortization of the transition bonds and their weighted average lives.

The servicer is required to file with the Texas commission, on our behalf, certain adjustments of the transition charges. Please read “TCC’s Financing Order—Statutory True-Ups” and “The Servicing Agreement—True-Up Adjustment Process.” True-up adjustment procedures have been challenged in the past and may be challenged in the future. Challenges to or delays in the true-up process might adversely affect the market perception and valuation of the transition bonds. Also, any litigation might materially delay transition charge collections due to delayed implementation of true-up adjustments and might result in missing payments or payment delays and lengthened weighted average life of the transition bonds.

SERVICING RISKS

Inaccurate consumption or collection forecasting might reduce scheduled payments on the transition bonds.

The transition charges are generally assessed based on forecasted customer usage, which includes both kilowatts demanded and kilowatt-hours of electricity consumed by retail customers. The amount and the rate of transition charge collections will depend in part on actual electricity usage and the amount of collections and write-offs for each customer class. If the servicer inaccurately forecasts either electricity consumption or customer delinquency or charge-offs when setting or adjusting the transition charges, there could be a shortfall or material delay in transition charge collections, which might result in missed or delayed payments of principal and interest and lengthened weighted average life of the transition bonds. Please read “TCC’s Financing Order—Statutory True-Ups” and “The Servicing Agreement—True-Up Adjustment Process.”

 

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Inaccurate forecasting of electricity consumption by the servicer might result from, among other things, unanticipated weather or economic conditions, resulting in less electricity consumption than forecast; general economic conditions being worse than expected, causing retail electric customers to migrate from TCC’s service territory or reduce their electricity consumption; the occurrence of a natural disaster, such as a hurricane or an act of terrorism or other catastrophic event; unanticipated changes in the market structure of the electric industry; customers consuming less electricity than anticipated because of increased energy prices, unanticipated increases in conservation efforts or unanticipated increases in electric usage efficiency; differences or changes in forecasting methodology; or customers unexpectedly switching to alternative sources of energy, including self-generation of electric power.

Inaccurate forecasting of delinquency or charge-off rates by the servicer might result also from, among other things, unexpected deterioration of the economy or the unanticipated declaration of a moratorium on terminating electric service to customers in the event of extreme weather, either of which would cause greater delinquencies or charge-offs than expected or force TCC or retail electric providers to grant additional payment relief to more customers, or any other unanticipated change in law that makes it more difficult for TCC or retail electric providers to terminate service to nonpaying customers or that requires TCC or retail electric providers to apply more lenient credit standards in accepting retail electric customers.

Your investment in the transition bonds depends on TCC or its successor or assignee, acting as servicer of the transition property.

TCC, as servicer, will be responsible for, among other things, calculating, billing and collecting the transition charges from retail electric providers, submitting requests to the Texas commission to adjust these charges, monitoring the collateral for the transition bonds and taking certain actions in the event of non-payment by a retail electric provider. The trustee’s receipt of collections in respect of the transition charges, which will be used to make payments on transition bonds, will depend in part on the skill and diligence of the servicer in performing these functions. The systems that the servicer has in place for transition charge billings and collections, together with the PUCT regulations governing retail electric providers, might, in particular circumstances, cause the servicer to experience difficulty in performing these functions in a timely and completely accurate manner. If the servicer fails to make collections for any reason, then the servicer’s payments to the trustee in respect of the transition charges might be delayed or reduced. In that event, our payments on the transition bonds might be delayed or reduced.

If we replace TCC as the servicer, we may experience difficulties finding and using a replacement servicer.

If TCC ceases to service the transition property related to the transition bonds, it might be difficult to find a successor servicer. Also, any successor servicer might have less experience and ability than TCC and might experience difficulties in collecting transition charges and determining appropriate adjustments to the transition charges and billing and/or payment arrangements may change, resulting in delays or disruptions of collections. A successor servicer might not be willing to perform except for fees higher than those approved in the financing order and might charge fees that, while permitted under the financing order, are substantially higher than the fees paid to TCC as servicer. In the event of the commencement of a case by or against the servicer under the United States Bankruptcy Code or similar laws, we and the trustee might be prevented from effecting a transfer of servicing due to operation of the Bankruptcy Code. Any of these factors and others might delay the timing of payments and may reduce the value of your investment. TCC is also the servicer of certain transition property sold to TCC Funding I and to TCC Funding II, in each case as described in “Relationship to the Series 2002-1 Transition Bonds and the Series 2006-A Transition Bonds.” Under the Intercreditor Agreement, we, TCC Funding I and TCC Funding II will agree that the servicer for TCC Funding I, TCC Funding II and the servicer for the bonds must be one and the same entity. It may therefore be difficult for us to replace TCC as servicer unless the holders of the Series 2002-1 transition bonds and the Series 2006-A transition bonds have also agreed to replace TCC as the servicer of the transition property securing the Series 2002-1 transition bonds and the Series 2006-A transition bonds, respectively.

It might be difficult to collect transition charges from retail electric providers.

As required by the Restructuring Act, retail electric customers will pay the transition charges to retail electric providers who supply them with electric power. The retail electric providers are responsible for billing retail customers and will be obligated to remit payments of the transition charges, less a specified percentage allowance for charge-offs of delinquent customer accounts, within 35 days of billing from the servicer, even if they do not collect the transition charges from retail electric customers. Please read “Retail Electric Providers.” Because the retail electric providers will bill most retail electric customers for the transition charges, we will have to rely on a relatively small number of entities for the collection of the bulk of the transition charges. As of December 31, 2011, there were 92 REPs certified by the Texas commission to furnish

 

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electricity and other retail services to retail customers in TCC’s service territory. As of December 31, 2010, two REPs accounted for more than 10% but less than 30% of kWh delivered to TCC’s customers.

Failure by the retail electric providers to remit transition charges to the servicer might cause delays in payments on the transition bonds and adversely affect your investment in the transition bonds. The servicer will not pay any shortfalls resulting from the failure of any retail electric provider to forward transition charge collections.

Adjustments to the transition charges and any credit support provided by a retail electric provider, while available to compensate for a failure by a retail electric provider to pay the transition charges to the servicer, might not be sufficient to protect the value of your investment in the transition bonds. Please read “TCC’s Financing Order—Statutory True-Ups” and “The Servicing Agreement—True-Up Adjustment Process.”

The Restructuring Act provides for one or more retail electric providers in each area to be designated the “provider of last resort” (or POLR) for that area or for specified customer classes. The provider of last resort is required to offer basic electric service to retail customers in its designated area, regardless of the creditworthiness of the customer. The provider of last resort might face greater difficulty in bill collection than other retail electric providers and therefore the servicer may face greater difficulty in collecting transition charges from the provider of last resort.

Retail electric providers may issue a single bill to individual retail customers that includes all charges related to the purchase of electricity, without separately itemizing the transition charge component of the bill. A retail electric provider’s use of a consolidated bill might increase the risk that customers who have claims against the retail electric provider will attempt to offset those claims against transition charges or increase the risk that, in the event of a bankruptcy of a retail electric provider, a bankruptcy court would find that the retail electric provider has an interest in the transition property and would make it more difficult to terminate the services of a bankrupt retail electric provider or collect transition charges from its customers.

It may be difficult to collect transition charges from other parties who bill retail customers.

In certain areas of its service territory, TCC is dually- or multiply-certificated with municipally owned utilities, and electric cooperatives. Retail customers in these dually- or multiply-certificated service areas within TCC’s service territory may switch service from TCC and take electric service from municipally owned utilities or cooperatives. In such circumstances, the municipally owned utility or cooperative will be responsible for billing transition charges to retail customers and collecting the same. It may be difficult for the servicer to enforce payment of transition charges for the same reasons it may be difficult to collect from REPs as discussed above. Moreover, such municipally owned utilities or cooperatives are not required to provide credit support as is the case with REPs who do not meet specified credit criteria.

Competitive metering services might result in unexpected problems in receiving accurate metering data.

As part of the restructuring of the Texas electric industry, certain metering services can be provided on a competitive basis, and third parties are permitted to perform metering services and provide metering data to the servicer that the servicer will utilize in calculating and billing transition charges. The Texas commission has adopted a rule under which the Electric Reliability Council of Texas Inc., the entity designated by the Texas commission to administer the competitive retail market in Texas, that establishes and periodically revises a list of qualifying competitive meters. The Texas commission’s rule also provides for testing of competitive meters, for data management, and for the use of meter data for billing by transmission and distribution utilities. Competitive metering is currently available only to commercial and industrial customers in TCC’s service territory under the Texas commission’s rules.

Since third parties may not have previously performed metering services in TCC’s service territory, there might be unforeseen problems in converting to the third-party’s metering system, in taking accurate meter readings and in collecting and processing accurate metering data following the conversion to competitive metering. Inaccurate metering data might lead to inaccuracies in the calculation and imposition of transition charges and might give rise to disputes between the servicer and REPs regarding payments resulting in missing or delayed payments of principal and interest and a lengthened weighted average life of the transition bonds.

Changes to billing and collection practices might reduce the value of your investment in the transition bonds.

The financing order specifies the methodology for determining the amount of the transition charges we may impose. The servicer may not change this methodology without approval from the Texas commission. However, the servicer may set its own billing and collection arrangements with retail electric providers and retail electric customers, if any, from whom it collects transition charges directly, provided that these arrangements comply with the Texas commission’s customer safeguards and the provisions of the servicing agreement. For example, to recover part of an outstanding bill, the servicer may agree to

 

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extend a retail electric provider’s payment schedule or to write off the remaining portion of the bill, including the transition charges. Also, the servicer may change billing and collection practices, which might adversely impact the timing and amount of retail electric customer payments and might reduce transition charge collections, thereby limiting our ability to make scheduled payments on the transition bonds. Separately, the Texas commission might require changes to these practices. Any changes in billing and collection practices regulations might make it more difficult for the servicer to collect the transition charges and adversely affect the value of your investment in the transition bonds.

Limits on rights to terminate service might make it more difficult to collect the transition charges.

The financing order expressly provides that the REP or POLR has the right to direct the servicer to terminate transmission and distribution service for nonpayment of transition charges to the extent permitted by and pursuant to the terms and limitation of PUCT rules. Moreover, if the servicer is billing customers for transition charges, the servicer may terminate transmission and distribution service to the customer for non-payment of transition charges pursuant to the applicable rules of the Texas commission. Nonetheless, Texas statutory requirements and the rules and regulations of the Texas commission, which may change from time to time, regulate and control the right to disconnect service. For example, retail electric providers generally may not terminate service to a customer (1) on a holiday or weekend day or the day immediately preceding a holiday or weekend, (2) during certain extreme weather conditions, (3) if such disconnection would cause a person to become seriously ill or more seriously ill, (4) if such customer is an energy assistance client under certain circumstances or (5) if the customer is a master-metered apartment complex unless certain notices are given. To the extent these retail electric customers do not pay for their electric service, retail electric providers will not be able to collect transition charges from these retail electric customers. Although retail electric providers will have to pay the servicer the transition charges on behalf of those customers (subject to any charge-off allowance and annual reconciliation rights), continuing service to non-paying customers could affect the ability of retail electric providers to make such payment.

Future adjustments to transition charges by customer class might result in insufficient collections.

The customers who pay transition charges are divided into customer classes. Transition charges for the transition bonds will be allocated among customer classes and assessed in accordance with the formula specified in the financing order.

A shortfall in collections of transition charges in one customer class may be corrected by making adjustments to the transition charges payable by that customer class and any other customer class. If enough customers in a class fail to pay transition charges or cease to be customers, the servicer might have to substantially increase the transition charges for the remaining customers in that customer class and for other customer classes. This effect might be more extreme in the case of TCC’s large industrial class, which consists of a small number of large industrial retail customers. Other factors, such as economic conditions, could also lead to industrial customers reducing their demand for electricity or to abandon operation of their facilities. The inability to impose and collect transition charges or the failure to collect transition charges from such retail customers could lead to increases in transition charges for other customers. These increases could lead to further unanticipated failures by the remaining customers to pay transition charges, thereby increasing the risk of a shortfall in funds to pay the transition bonds.

RISKS ASSOCIATED WITH THE UNUSUAL NATURE OF THE TRANSITION PROPERTY

We will not receive transition charges in respect of electric service provided more than 15 years from the date of issuance of the transition bonds.

TCC will not be entitled to charge transition charges for electricity delivered after the fifteenth anniversary of the issuance of the transition bonds. If transition charges collected for electricity delivered through the fifteenth anniversary of the transition bonds are not sufficient to repay the transition bonds in full, no other funds will be available to pay the unpaid balance due on the transition bonds.

Foreclosure of the trustee’s lien on the transition property for the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect.

Under the Restructuring Act and the indenture, the trustee or the transition bondholders have the right to foreclose or otherwise enforce the lien on the transition property securing the transition bonds. However, in the event of foreclosure, there is likely to be a limited market, if any, for the transition property. Therefore, foreclosure might not be a realistic or practical remedy. Moreover, although principal of the transition bonds will be due and payable upon acceleration of the transition bonds before maturity, transition charges likely would not be accelerated and the nature of our business will result in principal of the

 

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transition bonds being paid as funds become available. If there is an acceleration of the transition bonds, all tranches of the transition bonds will be paid pro rata; therefore, some tranches might be paid earlier than expected and some tranches might be paid later than expected.

STORM RELATED RISK

Storm damage to TCC’s operations could impair payment of the transition bonds.

TCC’s operations could be impacted by hurricanes, tropical storms or ice storms. Transmission and/or distribution and generation facilities could be damaged or destroyed and usage of electricity could be interrupted temporarily, reducing the collections of transition charges. There could be longer-lasting weather-related adverse effects on residential and commercial development and economic activity among TCC’s customers, which could cause the transition charges to be greater than expected.

RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF THE SELLER OR THE SERVICER

For a more detailed discussion of the following bankruptcy risks, please read “How a Bankruptcy May Affect Your Investment.”

The servicer will commingle the transition charges with other revenues it collects, which might obstruct access to the transition charges in case of the servicer’s bankruptcy and reduce the value of your investment in the transition bonds.

The servicer will be required to remit collections to the trustee within two business days of receipt. The servicer will not segregate the transition charges from the other funds it collects from retail electric customers or retail electric providers or its general funds. The transition charges will be segregated only when the servicer pays them to the trustee.

Despite this requirement, the servicer might fail to pay the full amount of the transition charges to the trustee or might fail to do so on a timely basis. This failure, whether voluntary or involuntary, might materially reduce the amount of transition charge collections available to make payments on the transition bonds.

The Restructuring Act provides that the priority of a lien and security interest perfected in transition property is not impaired by the commingling of the funds arising from transition charges with any other funds. In a bankruptcy of the servicer, however, a bankruptcy court might rule that federal bankruptcy law takes precedence over the Restructuring Act and might decline to recognize our right to collections of the transition charges that are commingled with other funds of the servicer as of the date of bankruptcy. If so, the collections of the transition charges held by the servicer as of the date of bankruptcy would not be available to pay amounts owing on the transition bonds. In this case, we would have only a general unsecured claim against the servicer for those amounts. This decision could cause material delays in payments of principal or interest, or losses, on your transition bonds and could materially reduce the value of your investment in the transition bonds, particularly if it occurred in the fifteenth year of the transition bonds after the completion of which no transition charges can be charged.

The bankruptcy of TCC or any successor seller might result in losses or delays in payments on the transition bonds.

The Restructuring Act and the financing order provide that as a matter of Texas state law:

 

   

the rights and interests of a selling utility under a financing order, including the right to impose, collect and receive transition charges, are contract rights of the seller,

 

   

the seller may make a present transfer of its rights under a financing order, including the right to impose, collect and receive future transition charges that retail customers do not yet owe,

 

   

upon the transfer to us, the rights will become transition property, and transition property constitutes a present property right, even though the imposition and collection of transition charges depend on further acts that have not yet occurred, and

 

   

a transfer of the transition property from the seller or its affiliate, to us, under an agreement that expressly states the transfer is a sale or other absolute transfer, is a true sale of the transition property and not a pledge of the transition property to secure a financing by the seller.

 

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These provisions are important to maintaining payments on the transition bonds in accordance with their terms during any bankruptcy of TCC. In addition, the transaction has been structured with the objective of keeping us legally separate from TCC and its affiliates in the event of a bankruptcy of TCC or any such affiliates.

A bankruptcy court generally follows state property law on issues such as those addressed by the state law provisions described above. However, a bankruptcy court does not follow state law if it determines that the state law is contrary to a paramount federal bankruptcy policy or interest. If a bankruptcy court in a TCC bankruptcy refused to enforce one or more of the state property law provisions described above, the effect of this decision on you as a beneficial owner of the transition bonds might be similar to the treatment you would receive in a TCC bankruptcy if the transition bonds had been issued directly by TCC. A decision by the bankruptcy court that, despite our separateness from TCC, our assets and liabilities and those of TCC should be consolidated would have a similar effect on you as a bondholder.

We have taken steps together with TCC, as the seller, to reduce the risk that in the event the seller or an affiliate of the seller were to become the debtor in a bankruptcy case, a court would order that our assets and liabilities be substantively consolidated with those of TCC or an affiliate. Nonetheless, these steps might not be completely effective, and thus if TCC or an affiliate of the seller were to become a debtor in a bankruptcy case, a court might order that our assets and liabilities be consolidated with those of TCC or an affiliate of the seller. This might cause material delays in payment of, or losses on, your transition bonds and might materially reduce the value of your investment in the transition bonds. For example:

 

   

without permission from the bankruptcy court, the trustee might be prevented from taking actions against TCC or recovering or using funds on your behalf or replacing TCC as the servicer,

 

   

the bankruptcy court might order the trustee to exchange the transition property for other property, of lower value,

 

   

tax or other government liens on TCC’s property might have priority over the trustee’s lien and might be paid from collected transition charges before payments on the transition bonds,

 

   

the trustee’s lien might not be properly perfected in the collected transition property collections prior to or as of the date of TCC’s bankruptcy, with the result that the transition bonds would represent only general unsecured claims against TCC,

 

   

the bankruptcy court might rule that neither our property interest nor the trustee’s lien extends to transition charges in respect of electricity consumed after the commencement of TCC’s bankruptcy case, with the result that the transition bonds would represent only general unsecured claims against TCC,

 

   

we and TCC might be relieved of any obligation to make any payments on the transition bonds during the pendency of the bankruptcy case and might be relieved of any obligation to pay interest accruing after the commencement of the bankruptcy case,

 

   

TCC might be able to alter the terms of the transition bonds as part of its plan of reorganization,

 

   

the bankruptcy court might rule that the transition charges should be used to pay, or that we should be charged for, a portion of the cost of providing electric service, or

 

   

the bankruptcy court might rule that the remedy provisions of the sale agreement are unenforceable, leaving us with an unsecured claim for actual damages against TCC that may be difficult to prove or, if proven, to collect in full.

Furthermore, if TCC enters bankruptcy proceedings, it might be permitted to stop acting as servicer and it may be difficult to find a third party to act as servicer. The failure of the servicer to perform its duties or the inability to find a successor servicer might cause payment delays or losses on your investment in the transition bonds. Also, the mere fact of a servicer or seller bankruptcy proceeding might have an adverse effect on the resale market for the transition bonds and on the value of the transition bonds.

The sale of the transition property might be construed as a financing and not a sale in a case of TCC’s bankruptcy which might delay or limit payments on the transition bonds.

The Restructuring Act provides that the characterization of a transfer of transition property as a sale or other absolute transfer will not be affected or impaired by treatment of the transfer as a financing for federal or state tax purposes or financial reporting purposes. We and TCC will treat the transaction as a sale under applicable law, although for financial reporting and state income and franchise tax purposes the transaction is intended to be treated as a financing. In the event of a bankruptcy of TCC, a party in interest in the bankruptcy might assert that the sale of the transition property to us was a financing transaction and not a “sale or other absolute transfer” and that the treatment of the transaction for financial reporting and tax purposes as a financing and not a sale lends weight to that position. If a court were to characterize the transaction as a financing, we expect

 

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that we would, on behalf of ourselves and the trustee, be treated as a secured creditor of TCC in the bankruptcy proceedings, although a court might determine that we only have an unsecured claim against TCC. Even if we had a security interest in the transition property, we would not likely have access to the related transition charge collections during the bankruptcy and would be subject to the risks of a secured creditor in a bankruptcy case, including the possible bankruptcy risks described in the immediately preceding risk factor. As a result, repayment of the transition bonds might be significantly delayed and a plan of reorganization in the bankruptcy might permanently modify the amount and timing of payments to us of the related transition charge collections and therefore the amount and timing of funds available to us to pay transition bondholders.

If the servicer enters bankruptcy proceedings, the collections of the transition charges held by the servicer as of the date of bankruptcy might constitute preferences, which means these funds might be unavailable to pay amounts owing on the transition bonds.

In the event of a bankruptcy of the servicer, a party in interest might take the position that the remittance of funds prior to bankruptcy of the servicer, pursuant to the servicing agreement or intercreditor agreement, constitutes a preference under bankruptcy law if the remittance of those funds was deemed to be paid on account of a preexisting debt. If a court were to hold that the remittance of funds constitutes a preference, any such remittance within 90 days of the filing of the bankruptcy petition could be avoidable, and the funds could be required to be returned to the bankruptcy estate of the servicer. To the extent that transition charges have been commingled with the general funds of the servicer, the risk that a court would hold that a remittance of funds was a preference would increase. Also, we or the servicer may be considered an “insider” with any retail electric provider that is affiliated with us or the servicer. If the servicer or we are considered to be an “insider” of the retail electric provider, any such remittance made within one year of the filing of the bankruptcy petition could be avoidable as well if the court were to hold that such remittance constitutes a preference. In either case, we or the trustee would merely be an unsecured creditor of the servicer. If any funds were required to be returned to the bankruptcy estate of the servicer, we would expect that the amount of any future transition charges would be increased through the statutory true-up mechanism to recover such amount.

Claims against TCC or any successor seller might be limited in the event of a bankruptcy of the seller.

If the seller were to become a debtor in a bankruptcy case, claims, including indemnity claims, by us against the seller under the sale agreement and the other documents executed in connection with the sale agreement would be unsecured claims and would be adjudicated in the bankruptcy case. In addition, the bankruptcy court might estimate any contingent claims that we have against the seller and, if it determines that the contingency giving rise to these claims is unlikely to occur, estimate the claims at a lower amount. A party in interest in the bankruptcy of the seller might challenge the enforceability of the indemnity provisions in a sale agreement. If a court were to hold that the indemnity provisions were unenforceable, we would be left with a claim for actual damages against the seller based on breach of contract principles, which would be subject to estimation and/or calculation by the court. We cannot give any assurance as to the result if any of the above-described actions or claims were made. Furthermore, we cannot give any assurance as to what percentage of their claims, if any, unsecured creditors would receive in any bankruptcy proceeding involving the seller.

The bankruptcy of TCC or any successor seller might limit the remedies available to the trustee.

Upon an event of default for the transition bonds under the indenture, the Restructuring Act permits the trustee to enforce the security interest in the related transition property in accordance with the terms of the indenture. In this capacity, the trustee is permitted to request the Texas commission or a Travis County, Texas district court to order the sequestration and payment to bondholders of all revenues arising with respect to the related transition property. There can be no assurance, however, that the Texas commission or the Travis County, Texas district court would issue this order after a TCC bankruptcy in light of the automatic stay provisions of Section 362 of the United States Bankruptcy Code. In that event, the trustee would be required to seek an order from the bankruptcy court lifting the automatic stay to permit this action by the Texas court, and an order requiring an accounting and segregation of the revenues arising from the transition property. There can be no assurance that a court would grant either order.

 

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RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS OF RETAIL ELECTRIC PROVIDERS

Retail electric providers may commingle the transition charges with other revenues they collect. This may cause losses on or reduce the value of your investment in the transition bonds in the event a retail electric provider enters bankruptcy proceedings.

A retail electric provider is not required to segregate from its general funds the transition charges it collects, either on a series basis or otherwise, but will be required to remit to the servicer amounts billed to it for transition charges, less an amount relating to expected customer charge-offs, within 35 days of the billing by the servicer. A retail electric provider nevertheless might fail to remit the full amount of the transition charges owed to the servicer or might fail to do so on a timely basis. This failure, whether voluntary or involuntary, might materially reduce the amount of transition charge collections available on the next payment date to make timely payments on the transition bonds.

The Restructuring Act provides that the priority of a perfected lien on transition property will not be impaired by the commingling of these funds with other funds. In a bankruptcy of a retail electric provider, however, a bankruptcy court might rule that federal bankruptcy law takes precedence over the Restructuring Act and does not recognize our right to receive the collected transition charges that are commingled with other funds of a retail electric provider as of the date of bankruptcy. If so, the collections of the transition charges held by a retail electric provider as of the date of bankruptcy would not be available to pay amounts owing on the transition bonds. In this case, we would have only a general unsecured claim against the retail electric provider for those amounts. This decision might cause material delays in payments of principal or interest or losses on your transition bonds and could materially reduce the value of your investment in the transition bonds, particularly if it occurred in the fifteenth year of the transition bonds after the completion of which no transition charges can be charged. Please read “How a Bankruptcy May Affect Your Investment.”

If a retail electric provider enters bankruptcy proceedings, any cash deposit of the retail electric provider held by the trustee might not be available to cover amounts owed by the retail electric provider.

If a retail electric provider does not have the credit rating required by the financing order, it may nevertheless qualify to act as a retail electric provider if, among other alternatives, it provides a cash deposit equal to two months’ maximum expected transition charge collections. Those cash deposits will be held by the trustee as collateral agent for the retail electric provider and as trustee under the indenture, with the servicer able to access the amounts if the retail electric provider fails to pay transition charges within 45 days after a billing date. If the retail electric provider becomes bankrupt, the trustee would be stayed from applying that cash deposit to cover amounts owed by the retail electric provider absent relief from the court, and the trustee might be required to return that cash deposit to the retail electric provider’s bankruptcy estate if the bankruptcy court determines there is no valid right of set-off or recoupment. In that case, the issuing entity might only have an unsecured claim for any amounts owed by the retail electric provider in the retail electric provider’s bankruptcy proceedings. Two retail electric providers with which TCC has done business have filed for bankruptcy. In one of these cases, TCC, as servicer under the transition bonds issued by TCC Funding I, was able to recover the full amount of the transition charges owing to TCC Funding I from cash deposits pledged by this retail electric provider. The other bankruptcy resulted in a write-off of $1,050,591.65, of which TCC, as servicer for TCC Funding I, recovered $603,440.53 from the cash deposits held by the trustee for the trustee for the Series 2002-1 transition bonds. There is no assurance whether TCC will be able to recover all or a portion of amounts owing from any bankrupt retail electric providers in the future.

If a retail electric provider enters bankruptcy proceedings, transition charge payments made by that retail electric provider to the servicer might constitute preferences, and the servicer may be required to return such funds to the bankruptcy estate of the retail electric provider.

In the event of a bankruptcy of a retail electric provider, a party in interest might take the position that the remittance of funds by the retail electric provider to the servicer, pursuant to the financing order, prior to bankruptcy constitutes a preference under bankruptcy law if the remittance of those funds was deemed to be paid on account of a preexisting debt. If a court were to hold that the remittance of funds constitutes preferences, any remittance of such funds made within 90 days of the filing of the bankruptcy petition might be avoidable, and the funds might be required to be returned to the bankruptcy estate of the retail electric provider by us or the servicer. To the extent that transition charges have been commingled with the general funds of the retail electric provider, the risk that a court would hold that a remittance of funds was a preference would increase. Also, we or the servicer might be considered an “insider” with any retail electric provider that is affiliated with us or the servicer. If the servicer or we are considered to be an “insider” of the retail electric provider, any such remittance made within one year of the filing of the bankruptcy petition could be avoidable as well if the court were to hold that such remittance

 

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constitutes a preference. In either case, we or the servicer would merely be an unsecured creditor of the retail electric provider. If any funds were required to be returned to the bankruptcy estate of the retail electric provider, we would expect that the amount of any future transition charges would be increased through the true-up mechanism to recover the amount returned.

Furthermore, the mere fact of a retail electric provider bankruptcy proceeding could have an adverse effect on the resale market for the transition bonds and on the value of the transition bonds. Please read “How a Bankruptcy May Affect Your Investment.”

OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS

TCC’s indemnification obligations under the sale and servicing agreements are limited and might not be sufficient to protect your investment in the transition bonds.

TCC is obligated under the sale agreement to indemnify us and the trustee, for itself and on behalf of the transition bondholders, only in specified circumstances and will not be obligated to repurchase any transition property in the event of a breach of any of its representations, warranties or covenants regarding the transition property. Similarly, TCC is obligated under the servicing agreement to indemnify us and the trustee, for itself and on behalf of the transition bondholders, and the Texas commission only in specified circumstances. Please read “The Sale Agreement” and “The Servicing Agreement.”

Neither the trustee nor the transition bondholders will have the right to accelerate payments on the transition bonds as a result of a breach under the sale agreement or servicing agreement, absent an event of default under the indenture relating to the transition bonds as described in “Description of the Transition Bonds—Events of Default; Rights Upon Event of Default.” Furthermore, TCC might not have sufficient funds available to satisfy its indemnification obligations under these agreements, and the amount of any indemnification paid by TCC might not be sufficient for you to recover all of your investment in the transition bonds. In addition, if TCC becomes obligated to indemnify transition bondholders, the then-current ratings on the transition bonds will likely be downgraded as a result of the circumstances causing the breach and the fact that transition bondholders will be unsecured creditors of TCC with respect to any of these indemnification amounts.

The credit ratings are no indication of the expected rate of payment of principal on the transition bonds.

We expect the transition bonds will receive credit ratings from three nationally recognized statistical rating organizations (NRSRO). A rating is not a recommendation to buy, sell or hold the transition bonds. The ratings merely analyze the probability that we will repay the total principal amount of the transition bonds at the final maturity date (which is later than the scheduled final payment date) and will make timely interest payments. The ratings are not an indication that the rating agencies believe that principal payments are likely to be paid on time according to the expected sinking fund schedule.

Under Rule 17g-5 of the Securities Exchange Act of 1934, NRSROs providing the sponsor with the requisite certification will have access to all information posted on a website by the sponsor for the purpose of determining the initial rating and monitoring the rating after the closing date in respect of the transition bonds. As a result, an NRSRO other than the NRSRO hired by the sponsor (the hired NRSRO) may issue ratings on the transition bonds (Unsolicited Ratings), which may be lower, and could be significantly lower, than the ratings assigned by the hired NRSROs. The Unsolicited Ratings may be issued prior to, or after, the closing date in respect of the transition bonds. Issuance of any Unsolicited Rating will not affect the issuance of the transition bonds. Issuance of an Unsolicited Rating lower than the ratings assigned by the hired NRSRO on the transition bonds might adversely affect the value of the transition bonds and, for regulated entities, could affect the status of the transition bonds as a legal investment or the capital treatment of the transition bonds. Investors in the transition bonds should consult with their legal counsel regarding the effect of the issuance of a rating by a non-hired NRSRO that is lower than the rating of a hired NRSRO. None of TCC, us, the underwriters or any of their affiliates will have any obligation to inform you of any Unsolicited Ratings assigned after the date of this prospectus. In addition, if we or TCC fail to make available to a non-hired NRSRO any information provided to any hired rating agency for the purpose of assigning or monitoring the ratings on the transition bonds, a hired NRSRO could withdraw its ratings on the transition bonds, which could adversely affect the market value of your transition bonds and/or limit your ability to resell your transition bonds.

Alternatives to purchasing electricity through TCC’s distribution facilities may be more widely utilized by retail electric customers in the future.

Broader use of distributed generation by retail electric customers may result from customers’ changing perceptions of the merits of utilizing existing generation technology, tax or other economic incentives or from technological developments resulting in smaller-scale, more fuel efficient, more environmentally friendly and/or more cost effective distributed generation. Moreover, an increase in distributed generation may result if extreme weather conditions result in shortages of grid-supplied

 

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energy or if other factors cause grid-supplied energy to be less reliable. Electric customers within TCC’s service territory whose load is served by an on-site power production facility with a rated capacity of 10 megawatts or less are not required to pay transition charges under the Restructuring Act except for transition charges associated with services actually provided by TCC. Therefore, more widespread use of distributed generation might allow greater numbers of retail customers to reduce or eliminate their payment of transition charges causing transition charges to remaining customers to increase.

The absence of a secondary market for the transition bonds might limit your ability to resell your transition bonds.

The underwriters for the transition bonds might assist in resales of the transition bonds, but they are not required to do so. A secondary market for the transition bonds might not develop and we do not expect to list the transition bonds on any securities exchange. If a secondary market does develop, it might not continue or it might not be sufficiently liquid to allow you to resell any of your transition bonds. Please read “Plan of Distribution.”

You might receive principal payments for the transition bonds later than you expect.

The amount and the rate of collection of the transition charges for the transition bonds, together with the related transition charge adjustments, will generally determine whether there is a delay in the scheduled repayments of transition bond principal. If the servicer collects the transition charges at a slower rate than expected from any retail electric provider, it might have to request adjustments of the transition charges. If those adjustments are not timely and accurate, you might experience a delay in payments of principal and interest and a decrease in the value of your investment in the transition bonds.

TCC may cause the issuance of additional transition property or similar property through another affiliated entity.

As noted, TCC has previously sold property created pursuant to financing orders to other subsidiaries of TCC in connection with the issuance of transition bonds. TCC may in the future sell property similar to the transition property to one or more entities other than us in connection with the issuance of a new issuance of bonds similar to the transition bonds, or similarly authorized types of bonds (such as storm recovery bonds) in any such case without your prior review or approval. Any new issuance may include terms and provisions that would be unique to that particular issue. We may not issue additional transition bonds. Under the terms of the Intercreditor Agreement, TCC is required to serve as servicer for any new issuance.

TCC has covenanted in the sale agreement not to sell property similar to the transition property to other entities issuing transition bonds if the issuance would result in the credit ratings on the transition bonds being reduced or withdrawn. In the event a customer does not pay in full all amounts owed under any bill, including transition charges, TCC, as servicer, is required to allocate any resulting shortfalls in transition charges ratably based on the amounts of transition charges owing in respect of the bonds, amounts owing to TCC Funding and TCC Funding II in respect of transition bonds issued by them, and any amounts owing to any subsequently created affiliate of TCC which issues transition bonds or similar bonds such as storm recovery bonds. However, we cannot assure you that new issuance would not cause reductions or delays in payment of your transition bonds.

Regulatory provisions affecting certain investors could adversely affect the liquidity of the transition bonds.

Article 122a of European Union Directive 2006/48/EC (as required to be implemented by the Member States of the European Economic Area (EEA) (the CRD)) applies, in general, to newly issued securitizations after December 31, 2010. Article 122a restricts an EEA regulated credit institution and consolidated group affiliates thereof (each, an Affected Investor) from investing in a securitization (as defined by the CRD) unless the originator, sponsor or original lender in respect of that securitization has explicitly disclosed to the Affected Investor that it will retain, on an ongoing basis, a net economic interest of not less than 5 per cent. in that securitization in the manner contemplated by Article 122a. Article 122a also requires that an EEA regulated credit institution be able to demonstrate that it (or, in the case of investment by an affiliated Affected Investor, such Affected Investor) has undertaken certain due diligence in respect of, amongst other things, the transition bonds it has acquired and the underlying exposures, and that procedures have been established for monitoring the performance of the underlying exposures on an on-going basis. Failure to comply with one or more of the requirements set out in Article 122a may result in the imposition of a substantial additional capital charge with respect to the investment made in the securitization by the relevant Affected Investor.

None of TCC, us or any other party to the transaction intends to retain a material net economic interest in the transaction in accordance with the requirements of Article 122a or take any other action which may be required by Affected Investors for the purposes of their compliance with Article 122a. This may have a negative impact on the regulatory capital position of an EEA regulated credit institution (directly or by virtue of consolidated regulatory capital requirements) and on the value and liquidity of the transition bonds in the secondary market. Affected Investors in the transition bonds are responsible

 

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for analyzing their own regulatory position, and are encouraged to consult with their own investment and legal advisors regarding compliance with Article 122a (and any related implementing rules in the relevant EEA Member State) and the suitability of the transition bonds for investment. None of TCC, us, any underwriter or any other party to the transaction makes any representation to any prospective investor or purchaser of the transition bonds regarding the regulatory capital treatment of their investment in the transition bonds on the Closing Date or at any time in the future.

The fact that the transition bonds have not been structured to comply with Article 122a could limit the ability of an EEA- regulated credit institution or the interest of another Affected Investor to purchase transition bonds, which in turn may adversely affect the liquidity of the transition bonds in the secondary market. This could adversely affect the liquidity of the market should you seek to sell your transition bonds or the price you may receive upon any sale of your transition bonds.

If the investment of collected transition charges and other funds held by the trustee in the collection account results in investment losses or the investments become illiquid, you may receive payment of principal and interest on the transition bonds later than you expect.

Funds held by the trustee in the collection account and cash collateral provided by retail electric providers will be invested in eligible investments. Eligible investments include money market funds having a rating from Moody’s and S&P of “Aaa” and “AAA,” respectively. Although investments in these money market funds have traditionally been viewed as highly liquid with a low probability of principal loss, illiquidity and principal losses have been experienced by investors in certain of these funds as a result of disruptions in the financial markets in recent years. If investment losses or illiquidity is experienced, you might experience a delay in payments of principal and interest and a decrease in the value of your investment in the transition bonds.

REVIEW OF TRANSITION PROPERTY

Pursuant to the rules of the Securities and Exchange Commission, TCC, as sponsor, has performed, as described below, a review of the transition property underlying the transition bonds. As required by these rules, the review was designed and effected to provide reasonable assurance that disclosure regarding the transition property is accurate in all material respects. TCC did not engage a third party in conducting its review.

The transition bonds will be secured under the indenture by the indenture’s trust estate. The principal asset of the indenture’s trust estate is the transition property relating to the transition bonds. The transition property is a present property right authorized and created pursuant to the Restructuring Act and an irrevocable financing order. The transition property includes the irrevocable right to impose, collect and receive nonbypassable transition charges in amounts sufficient to pay scheduled principal and interest and other amounts and charges in connection with the transition bonds. The transition charges are payable by retail electric customers within TCC’s service territory that, subject to certain limitations specified in the Restructuring Act, consume electricity that is delivered through TCC’s transmission and distribution system or produced by new on-site generation.

The transition property is not a static pool of receivables or assets. Transition charges authorized in the financing order that relate to the transition property are irrevocable and not subject to reduction, impairment, or adjustment by further action of the PUCT except that transition charges are subject to annual and semi-annual and other interim true-up adjustments to correct overcollections or undercollections and to provide the expected recovery of amounts sufficient to timely provide all scheduled payments of debt service and other required amounts and charges in connection with the transition bonds. There is no “cap” on the level of transition charges that may be imposed on consumers of electricity in TCC’s service territory to meet scheduled principal of and interest on the transition bonds. All revenues and collections resulting from transition charges provided for in the financing order that relate to the transition bonds are part of the transition property. The transition property relating to the transition bonds is described in more detail under “Description of the Transition Property” in this prospectus.

In the financing order, the PUCT, among other things:

 

   

orders that TCC, as servicer, shall collect from all REPs required to pay or collect transition charges under the financing order, transition charges in an amount sufficient to provide for the timely payment of principal and interest on the transition bonds,

 

   

orders that upon the transfer of the transition property to us by TCC, we shall have all of the rights, title and interest of TCC with respect to the transition property, and

 

   

guarantees that it will act pursuant to the financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the transition bonds.

 

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Please read “The Restructuring Act” and “TCC’s Financing Order” in this prospectus for more information.

The characteristics of transition property are unlike the characteristics of assets underlying mortgage and other commercial asset securitizations because transition property is a creature of statute and state regulatory commission proceedings. Because the nature and characteristics of the transition property and many elements of the transition bonds securitization are set forth and constrained by the Restructuring Act, TCC, as sponsor, does not select the assets to be securitized in ways common to many securitizations. Moreover, the transition bonds do not contain origination or underwriting elements similar to typical mortgage or other loan transactions involved in other forms of asset-backed securities. The Restructuring Act and the PUCT require the imposition on, and collection of transition charges from, existing and future retail electric customers located within TCC’s service territory, subject to limited exceptions. Since the transition charges are assessed against all such retail customers and the true-up adjustment mechanism adjusts for the impact of customer defaults, the collectability of the transition charges is not ultimately dependent upon the credit quality of particular TCC customers; as would be the case in the absence of the true-up adjustment mechanism.

The review by TCC of the transition property underlying the transition bonds has involved a number of discrete steps and elements as described in more detail below. First, TCC has analyzed and applied the Restructuring Act’s requirements for securitization of transition costs in seeking approval of the PUCT for the issuance of the financing order and in its proposal with respect to the characteristics of the transition property to be created pursuant to the financing order. In preparing this proposal, TCC analyzed the terms of the two previous securitizations it sponsored under the Restructuring Act and the practical experience gained in structuring, issuing and servicing the transition bonds issued in those prior securitizations. TCC worked with its counsel and its financial advisor in preparing the application for a financing order and with the PUCT on the terms of the financing order. Moreover, TCC worked with its counsel, its financial advisor and counsel to the underwriters in preparing the legal agreements that provide for the terms of the transition bonds and the security for the transition bonds. TCC has analyzed economic issues and practical issues for the scheduled payment of the transition bonds and reviewed its prior securitization experience in terms of impacts of economic factors, potentials for disruptions due to weather or catastrophic events and its own forecasts for customer growth as well as the historic accuracy of its prior forecasts.

In light of the unique nature of the transition property, TCC has taken (or prior to the offering of the transition bonds, will take) the following actions in connection with its review of the transition property and the preparation of the disclosure for inclusion in this prospectus and the accompanying prospectus supplement describing the transition property, the transition bonds and the proposed securitization:

 

   

reviewed the Restructuring Act and the rules and regulations of the PUCT as they relate to the transition property in connection with the preparation and filing of the application with the PUCT for the approval of the financing order in order to confirm that the application and proposed financing order satisfied applicable statutory and regulatory requirements;

 

   

actively participated in the proceeding before the PUCT relating to the approval of the requested financing order;

 

   

compared the financing order, as issued by the PUCT, to the Restructuring Act and the rules and regulations of the PUCT as they relate to the transition property to confirm that the financing order met such requirements;

 

   

compared the proposed terms of the transition bonds to the applicable requirements in the Restructuring Act, the financing order and the regulations of the PUCT to confirm that they met such requirements;

 

   

prepared and reviewed the agreements to be entered into in connection with the issuance of the transition bonds and compared such agreements to the applicable requirements in the Restructuring Act, the financing order and the regulations of the PUCT to confirm that they met such requirements;

 

   

reviewed the disclosure in this prospectus and the accompanying prospectus supplement regarding the Restructuring Act, the financing order and the agreements to be entered into in connection with the issuance of the transition bonds, and compared such descriptions to the relevant provisions of the Restructuring Act, the financing order and such agreements to confirm the accuracy of such descriptions;

 

   

consulted with legal counsel to assess if there is a basis upon which the transition bondholders (or the trustee acting on their behalf) could successfully challenge the constitutionality of any legislative action by the State of Texas (including the PUCT) that could repeal or amend the securitization provisions of the Restructuring Act that could substantially impair the value of the transition property, or substantially reduce, alter or impair the transition charges;

 

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reviewed the process and procedures in place for it, as servicer, to perform its obligations under the servicing agreement, including without limitation, billing and collecting the transition charges to be provided for under the transition property, forecasting transition charge revenues, preparing and filing applications for true-up adjustments to the transition charges and enforcing REP credit standards, and reviewed its experience and performance of such obligations as servicer under the two previous securitizations which it sponsored under the Restructuring Act;

 

   

reviewed the operation of the true-up mechanism for adjusting transition charge levels to meet the scheduled payments on the transition bonds and in this context took into account its experience with the PUCT in implementing the true-up mechanism for the two prior securitizations for which it is the sponsor; and

 

   

with the assistance of its financial advisor and the underwriters, prepared financial models in order to set the initial transition charges to be provided for under the transition property at a level sufficient to pay on a timely basis scheduled principal and interest on the transition bonds.

In connection with the preparation of such models, TCC:

 

   

reviewed (i) the historical retail electric usage and customer growth within its service territory and (ii) forecasts of expected energy sales and customer growth;

 

   

reviewed its historical collection of transition charges and system restoration charges with respect to the Series 2002-1 transition bonds and the Series 2006-A transition bonds, and reviewed the resulting payment history and annual true-up adjustment experiences with respect to these bonds; and

 

   

analyzed the sensitivity of the weighted average life of the transition bonds in relation to variances in actual energy consumption levels (retail electric sales) from forecasted levels and in relation to the true-up mechanism in order to assess the probability that the weighted average life of the transition bonds may be extended as a result of such variances, and in the context of the operation of the true-up mechanism for adjustment of transition charges to address under or overcollections in light of scheduled payments on the transition bonds.

As a result of this review, TCC has concluded that:

 

   

the transition property, the financing order and the agreements to be entered into in connection with the issuance of the transition bonds meet in all material respects the applicable statutory and regulatory requirements;

 

   

the disclosure in this prospectus and the accompanying prospectus supplement regarding the Restructuring Act, the financing order and the agreements to be entered into in connection with the issuance of the transition bonds is, or in the case of the accompanying prospectus supplement, will be, as of its respective date, accurate in all material respects;

 

   

the servicer has adequate processes and procedures in place to perform its obligations under the servicing agreement;

 

   

transition charge revenues, as adjusted from time to time as provided in the Restructuring Act and the financing order, are expected to be sufficient to pay on a timely basis scheduled principal and interest on the transition bonds; and

 

   

the design and scope of TCC’s review of the transition property as described above is effective to provide reasonable assurance that the disclosure regarding the transition property in this prospectus and the accompanying prospectus supplement is accurate in all material respects.

THE RESTRUCTURING ACT

The Restructuring Act’s General Effect on the Electric Utility Industry in Texas

An Overview of the Restructuring Act.

The Restructuring Act, including the provisions relating to securitization, was enacted by the Texas legislature in June 1999, became effective on September 1, 1999 and was last amended in June 2011. The Restructuring Act substantially

 

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modified the Texas regulatory structure governing public utilities in order to transition to a competitive electric market. The Restructuring Act, among other things:

 

   

authorized competition in the retail electric market and the electricity generation market for electricity beginning in January 2002, and in some instances sooner,

 

   

required a rate freeze for all retail customers until January 2002, and required certain rate reductions for residential and small commercial retail customers through the so-called “price to beat” period for up to five years thereafter,

 

   

permitted electric utilities to recover certain “qualified costs” including stranded investments and regulatory assets and other amounts, including “true-up” balances, through the issuance of transition bonds pursuant to and supported by an irrevocable financing order issued by the Texas commission,

 

   

permitted the Texas commission to impose an irrevocable nonbypassable transition charge on all retail electric customers, including the State of Texas and other governmental entities, subject to limited exceptions, within a utility’s certificated service territory as it existed on May 1, 1999, for payment of transition bonds, and

 

   

provided for a true-up proceeding to determine recoverable costs associated with the transition to competition, including stranded generation costs, final fuel recovery balances, net regulatory assets, a capacity auction amount, certain environmental costs, and other items.

Unbundling.

Each electric utility was required to separate its customer related energy services business activities that are otherwise already widely available in the competitive market from its regulated activities prior to September 1, 2000. The Restructuring Act required each electric utility to separate its business into the following units by January 1, 2002:

 

   

a power generation company, which generates electricity that is intended to be sold at wholesale, and which may not, in general, own a transmission or distribution facility and may not have a certificated service area,

 

   

a retail electric provider, or REP, which sells electric energy to retail customers and which may not own or operate generation assets, and

 

   

a transmission and distribution utility or separate transmission and distribution utilities, which own or operate facilities to transmit or distribute electricity.

Pursuant to the unbundling provisions of the Restructuring Act, in early 2000 TCC filed a business separation plan with the Texas commission, which has been amended several times. The Texas commission has approved the plan and its amendments, and as of the date of this prospectus, the plan has been completed.

Retail Competition.

Since January 1, 2002, retail customers of investor-owned electric utilities in the region administered by the Electric Reliability Counsel of Texas, Inc. have been able to choose their own REP, which may be a REP affiliated with their existing utility. As of December 31, 2011, there were 92 REPs certified by the Texas commission to furnish electricity and other retail services to retail customers in TCC’s service territory. During the twelve months ended December 31, 2010, TCC billed approximately 22,460 million kilowatt-hours (kWh) of electric energy to metered retail customers in its service territory. Of that amount, approximately 3,318 million kWh, or 14.77%, were delivered to retail customers served by one REP, approximately 3,090 million kWh, or 13.76%, to retail customers served by another REP, approximately 1,824 million kWh, or 8.12%, to retail customers served by a third REP, and the remaining approximately 14,228 million kWh, or 63.35%, to retail customers served by the 89 remaining REPs or to retail customers directly billed by TCC in connection with new on-site generation. In addition, during this period, TCC collected transition charges in respect of the Series 2002-1 transition bonds and Series 2006-A transition bonds from retail customers who, after May 1, 1999, switched to municipally owned utilities or electric cooperatives with multiply-certificated service territories with TCC. These retail customers consumed 63,809,142 kWh, or 0.28% of the total electric energy delivered directly by TCC to retail end-use customers in TCC’s service territory.

In certain cases, customers who do not pay their bills may be moved by a REP to another certified REP or to a provider of last resort, which we sometimes refer to as a POLR, which is required to offer a standard retail service package for each class of retail customers it serves at a fixed rate approved by the Texas commission, and is required to offer the service to any retail customer in that class who requests service, whose selected REP has gone out of business, or who is transferred to the POLR by other REPs for reasons other than non-payment. The Texas commission has designated a REP to act as a POLR for each customer class in each service area in the state. The Texas commission periodically designates one or more REPs to

 

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serve as the POLRs for specified classes of retail customers. There is currently one POLR in TCC’s service territory, Reliant Energy Retail Services, LLC, for all retail customers.

TCC and Other Utilities May Securitize Qualified Costs

We May Issue Transition Bonds to Recover TCC’s Qualified Costs.

The Restructuring Act authorizes the Texas commission to issue financing orders approving the issuance of transition bonds, such as the transition bonds issued by us, to recover certain qualified costs of an electric utility. A utility, its successors or a third-party assignee of a utility may issue transition bonds. The Restructuring Act requires the proceeds of the transition bonds to be used solely for the purpose of reducing the amount of recoverable regulatory assets and certain other transition-to-competition costs of a utility, determined by the Texas commission under the Restructuring Act, through the refinancing or retirement of its debt or equity. The transition bonds are secured by and payable from transition property, which includes the right to impose, collect and receive transition charges. Transition bonds may have a maximum maturity of 15 years. The amounts of transition charges must be allocated to customer classes based on the methodology used to allocate the costs in recent Texas commission orders addressing rate design for recovery of such transition-to-competition costs. The transition charges may be based on the energy consumption, and for some classes, the energy demand of the customer classes. Transition charges can be imposed only when and to the extent that transition bonds are issued.

The Restructuring Act contains a number of provisions designed to facilitate the securitization of qualified costs.

Creation of Transition Property.

Under the Restructuring Act, transition property is created when the rights and interests of an electric utility or successor under a financing order, including the right to impose, collect and receive transition charges authorized in the financing order, are first transferred to an assignee, such as us, or pledged in connection with the issuance of transition bonds.

A Financing Order is Irrevocable.

A financing order, once effective, together with the transition charges authorized in the financing order, is irrevocable and not subject to reduction, impairment, or adjustment by the Texas commission, except for adjustments pursuant to the Restructuring Act in order to correct overcollections or undercollections and to provide that sufficient funds are available to provide on a timely basis for payments of debt service and other required amounts in connection with the transition bonds. Although a financing order is irrevocable, the Restructuring Act allows for applicants to apply for one or more new financing orders to provide for retiring and refunding transition bonds if such retirement or refunding would result in lower transition charges.

State Pledge.

Under the Restructuring Act, the State of Texas has pledged, for the benefit and protection of transition bondholders and the electric utility, that it will not take or permit any action that would impair the value of the transition property, or, except for adjustments discussed in “TCC’s Financing Order—Statutory True-ups” and “The Servicing Agreement—True-Up Adjustment Process,” reduce, alter, or impair the transition charges to be imposed, collected and remitted to transition bondholders until the principal, interest and premium, if any, and any other charges incurred and contracts to be performed in connection with the related transition bonds have been paid and performed in full. Please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions.”

Constitutional Matters.

To date, no federal or Texas cases addressing the repeal or amendment of securitization provisions analogous to those contained in the Restructuring Act have been decided. There have been cases in which federal courts have applied the Contract Clause of the United States constitution and Texas courts have applied the Contract Clause of the Texas constitution to strike down legislation regarding similar matters, such as legislation reducing or eliminating taxes, public charges or other sources of revenues servicing other types of bonds issued by public instrumentalities or private issuers, or otherwise substantially impairing or eliminating the security for bonds or other indebtedness. Based upon this case law, Sidley Austin LLP expects to deliver an opinion, prior to the closing of the offering of the transition bonds to the effect that the language of the State pledge constitutes a contractual relationship with the bondholder and therefore the transition bondholders (or the trustee acting on their behalf) could, absent a demonstration that such action was necessary to serve a significant and legitimate public purpose, challenge successfully the constitutionality under the United States constitution of any act by the State of Texas (including the Texas commission) of a legislative character to repeal or amend the Restructuring Act, or to take or refuse to take any action required under its pledge described above if the repeal or amendment or the action or inaction would limit, alter, impair or

 

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reduce the value of the transition property or the transition charges so as to substantially impair (x) the terms of the indenture or the transition bonds or (y) the rights and remedies of the transition bondholders (or the trustee acting on their behalf) prior to the time that the transition bonds are fully paid and discharged. Based upon this case law, Bracewell & Giuliani LLP expects to deliver an opinion, prior to the closing of the offering of the transition bonds, to the effect that the pledge described above provides a basis upon which the bondholders (or the trustee acting on their behalf) could challenge successfully in the Texas state courts under the Contract Clause of the Texas constitution the constitutionality of any action by the State of Texas (including the Texas commission) of a legislative character, that repeals the state pledge or limits, alters, impairs or reduces the value of the transition property so as to cause a substantial impairment under the Contract Clause of the Texas constitution of (i) the terms of the indenture or the transition bonds or (ii) the rights and remedies of the bondholders (or the trustee acting on their behalf) prior to the time the transition bonds are fully paid and discharged. It may be possible for the Texas legislature to repeal or amend the Restructuring Act or for the Texas commission to amend or revoke the financing order notwithstanding the State’s pledge, if the legislature or the Texas commission acts in order to serve a significant and legitimate public purpose, such as protecting the public health and safety or responding to a national or regional catastrophe affecting TCC’s service territory, or if the legislature otherwise acts in the valid exercise of the state’s police power. We will file a copy of each of the Sidley Austin LLP and Bracewell & Giuliani LLP opinions as exhibits to an amendment to the registration statement of which this prospectus is a part, or to one of our periodic filings with the SEC.

In addition, any action of the Texas legislature adversely affecting the transition property or the ability to collect transition charges may be considered a “taking” under the United States or Texas constitutions. Each of Sidley Austin LLP and Bracewell & Giuliani LLP has advised us that they are not aware of any federal or Texas court cases addressing the applicability of the Takings Clause of the United States or Texas constitutions in a situation analogous to that which would be involved in an amendment or repeal of the Restructuring Act. It is possible that a court would decline even to apply a Takings Clause analysis to a claim based on an amendment or repeal of the Restructuring Act, since, for example, a court might determine that a Contract Clause analysis rather than a Takings Clause analysis should be applied. Sidley Austin LLP expects to render an opinion, prior to the closing of the offering of the transition bonds, to the effect that under existing case law, assuming a Takings Clause analysis were applied under the United States constitution, the State of Texas would be required under the United States constitution to pay just compensation to the bondholders if the State were to repeal or amend the Restructuring Act, or if the Texas commission were to amend or revoke the financing order or take any other action in contravention of the State pledge, in either case which (i) permanently appropriates the related transition property or denies all economically productive use of the related transition property; or (ii) destroys the related transition property, other than in response to emergency conditions; or (iii) substantially reduces, alters or impairs the value of the related transition property, if the law unduly interferes with the bondholders’ reasonable expectations arising from their investments in the transition bonds. In determining what is an undue interference, a court would consider the nature of the governmental action and weigh the public purpose served thereby against the degree to which it interferes with the legitimate property interests and distinct investment-backed expectations of the bondholders. In addition, Bracewell & Giuliani LLP expects to render an opinion, prior to the closing of an offering of the transition bonds described in a prospectus supplement accompanying this prospectus, to the effect that under existing case law, assuming a Takings Clause analysis were applied under the Texas constitution, a Texas state court would find a compensable taking under the Takings Clause of the Texas constitution if (a) it concludes that the related transition property is property of a type protected by the Takings Clause of the Texas constitution and (b) the State of Texas (including the Texas commission) takes action that, without paying just compensation to the bondholders, (i) permanently appropriates the transition property or denies all economically productive use of the transition property; or (ii) destroys the transition property, other than in response to emergency conditions; or (iii) substantially reduces, alters or impairs the value of the transition property, if the action unduly interferes with the bondholders’ reasonable investment backed expectations. In examining whether action of the Texas legislature amounts to a regulatory taking, both federal and state courts will consider the character of the governmental action and whether such action substantially advances the State’s legitimate governmental interests, the economic impact of the governmental action on the bondholders, and the extent to which the governmental action interferes with distinct investment-backed expectations. There is no assurance, however, that, even if a court were to award just compensation, it would be sufficient for you to recover fully your investment in the transition bonds.

In connection with the foregoing, each of Sidley Austin LLP and Bracewell & Giuliani LLP has advised us that issues relating to the Contract and Takings Clauses of the United States and Texas constitutions are essentially decided on a case-by-case basis and that the courts’ determinations, in most cases, appear to be strongly influenced by the facts and circumstances of the particular case, and both firms have further advised us that there are no reported controlling judicial precedents that are directly on point. The opinions described above will be subject to the qualifications included in them. The degree of impairment necessary to meet the standards for relief under a Takings Clause analysis or Contract Clause analysis could be substantially in excess of what a transition bondholder would consider material.

For a discussion of risks associated with potential judicial, legislation or regulatory actions, please read “Risk Factors—Risks Associated with Potential Judicial, Legislative or Regulatory Actions.”

 

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The Texas Commission May Adjust Transition Charges.

The Restructuring Act requires the Texas commission to provide in all financing orders a mechanism requiring that transition charges be adjusted at least annually. The purpose of these adjustments is:

 

   

to correct any overcollections or undercollections during the preceding 12 months, and

 

   

to provide for the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds.

Transition Charges Are Nonbypassable.

The Restructuring Act provides that the transition charges are nonbypassable. “Nonbypassable” means that a utility collects these charges from all existing retail customers of a utility and all future retail customers located within the utility’s certificated service area as it existed on May 1, 1999, except for certain categories of existing customers whose load has been lawfully served by a fully operational qualifying facility before September 1, 2001 if the facility was supported by substantially complete filings for site-specific environmental permits on or before December 31, 1999, or by an on-site power production facility with a rated capacity of 10 megawatts or less, or customers in a multiply certificated service territory that requested to switch providers on or before May 1, 1999, or were not taking service from the utility on, and do not do so after, May 1, 1999. The utility is generally entitled to collect transition charges attributable to non-exempted customers even if they are receiving transmission or distribution service from another utility or choose to operate self-generation equipment.

The Restructuring Act Protects the Bondholders’ Lien on Transition Property.

The Restructuring Act provides that a valid and enforceable lien and security interest in transition property may be created only by a financing order and the execution and delivery of a security agreement in connection with the issuance of transition bonds. The security interest automatically attaches from the time value is received by the issuer of the transition bonds and, on perfection through filing of a notice with the Secretary of State of Texas, such security interest will be a continuously perfected lien and security interest in the related transition property.

Upon perfection, the statutorily created lien attaches both to transition property and to all proceeds of transition property, whether the related transition charges have accrued or not, and shall have priority in the order of filing and take precedence over any subsequent judicial or other lien creditor. The Restructuring Act provides that the transfer of an interest in transition property will be perfected against all third parties, including subsequent judicial or other lien creditors, when:

 

   

the financing order becomes effective,

 

   

transfer documents have been delivered to the assignee, and

 

   

a notice of the transfer has been filed with the Secretary of State of Texas.

If the notice of the transfer is filed within 10 days after the delivery of transfer documentation, perfection is retroactive to the date value was received. Otherwise, the transfer is perfected against third parties as of the date the notice is filed. The Restructuring Act provides that priority of security interests in transition property will not be impaired by:

 

   

commingling of funds arising from transition charges with other funds, or

 

   

modifications to the financing order resulting from any true-up adjustment.

Please read “Risk Factors—Risks Associated with the Unusual Nature of the Transition Property.”

The Restructuring Act Characterizes the Transfer of Transition Property as a True Sale.

The Restructuring Act provides that an electric utility’s or an assignee’s transfer of transition property is a “true sale” under Texas law and is not a secured transaction and that legal and equitable title passes to the transferee, if the agreement governing that transfer expressly states that the transfer is a sale or other absolute transfer. Please read “The Sale Agreement” and “Risk Factors—Risks Associated With Potential Bankruptcy Proceedings of the Seller or the Servicer.”

The Restructuring Act Provides a Tax Exemption.

The Restructuring Act provides that “transactions involving the transfer and ownership of transition property and the receipt of transition charges are exempt from state and local income, sales, franchise, gross receipts and other taxes or similar charges.”

 

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TCC’S FINANCING ORDER

Determination of the Final True-up of TCC’s Transition-to-Competition Costs

The Restructuring Act allows a utility to recover certain costs associated with the transition to a competitive retail electric market in Texas. Final determination of the amount of these recoverable transition-to-competition costs was required to be made by the Texas commission in a true-up proceeding initiated after January 10, 2004. Items to be considered in such a true-up proceeding include stranded generation costs, regulatory assets, the final fuel balance, a capacity auction amount, and certain other costs and credits associated with the transition-to-competition.

In April 2005, TCC and CPL Retail Energy, LP jointly filed an application with the Texas commission for a true-up proceeding to determine TCC’s final balance of recoverable transition-to-competition costs. Following re-hearing, the Texas commission issued an order in April 2006 determining that TCC was entitled to recover an aggregate true-up balance of approximately $1.475 billion, together with applicable carrying costs. TCC also refunded, as a result of the true-up, other net true-up regulatory liabilities of $375 million during the period October 2006 through June 2008 via a competition-transition-charge credit rate rider. TCC and certain intervenors appealed the Texas commission’s transition-to-competition costs true-up order. After rulings from the Texas district court and the Texas court of appeals, TCC, the Texas commission and intervenors filed petitions for review with the Texas supreme court. In July 2011, the Texas supreme court issued a unanimous opinion in which it affirmed the Texas commission’s order in part and reversed the order in part. In August 2011, the Texas supreme court issued a mandate to return the matter to the Texas commission for further proceedings.

On September 1, 2011, the Texas commission initiated Docket No. 39722 to consider the remand of its prior transition-to-competition costs true-up determinations. In October 2011, TCC filed a request in the proceeding based on the Texas supreme court’s July 2011 decision seeking an additional $1.177 billion in recoverable transition-to-competition costs. Various parties to the proceeding disputed TCC’s recovery of the full amount it sought on remand. On December 2, 2011, TCC filed an unopposed settlement entered into with certain of the parties to the proceeding providing for a complete resolution of all issues in the proceeding and providing for TCC to recover and securitize $800 million in additional transition-to-competition costs. The unopposed settlement also allows TCC to retain certain income tax balances. On December 15, 2011, the Texas commission issued its order approving the unopposed settlement. The order approving the unopposed settlement became final and non-appealable on January 10, 2012.

TCC’s Financing Order

On December 2, 2011, TCC filed its application with the Texas commission for a financing order to securitize the balance of $800 million in transition-to-competition costs agreed to in the unopposed settlement of the remand of its transition-to-competition true-up case described above in “TCC’s Financing Order—Determination of the Final True-up of TCC’s Transition-to-Competition Costs.” On January 12, 2012, the Texas commission issued its financing order which authorized TCC to securitize and cause to be issued transition bonds in one or more series in an aggregate principal amount not to exceed $800 million. The financing order became final and non-appealable on January 28, 2012.

Pursuant to the financing order:

 

   

the PUCT or its designated representative has a decision-making role co-equal with TCC with respect to the structuring and pricing of the transition bonds and all matters related to the structuring and pricing of the transition bonds will be determined through a joint decision of TCC and the PUCT or its designated representative,

 

   

TCC is directed to take all necessary steps to ensure that the PUCT or its designated representative is provided sufficient and timely information to allow the PUCT or its designated representative to fully participate in, and exercise its decision making power over, the proposed securitization, and

 

   

The servicer will file periodic adjustments to transition charges with the PUCT on our behalf.

In the financing order, the Texas commission guarantees that it will act pursuant to the irrevocable financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the transition bonds and other costs, including fees and expenses, in connection with the transition bonds. Such financing order, pursuant to the provisions of the Restructuring Act, is irrevocable and is not subject to reduction, impairment or adjustment by further action of the Texas commission, except as contemplated by the periodic true-up adjustments. The financing order also provides that the true-up mechanism and all other obligations of the State of Texas and the Texas commission set forth in the irrevocable financing order are direct, explicit, irrevocable and

 

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unconditional upon issuance of the transition bonds, and are legally enforceable against the State of Texas and the Texas commission.

We have filed the financing order with the SEC as an exhibit to the registration statement of which this prospectus forms a part. The statements summarizing the financing order in this prospectus do not purport to be complete and are subject to and qualified by reference to the provisions of the financing order.

Collection of Transition Charges

The financing order authorizes TCC to collect transition charges from the retail electric providers serving retail electric customers in TCC’s service territory in an amount sufficient to provide for timely recovery of its aggregate qualified costs which include principal and interest and certain ongoing fees and expenses associated with the transition bonds. There is no “cap” on the level of transition charges that may be imposed on consumers of electricity, to pay on a timely basis scheduled principal and interest on the transition bonds. However, we may not charge transition charges for the transition bonds for electricity delivered after the fifteenth anniversary of the date of issuance of the transition bonds.

Issuance Advice Letter

By the close of the business day after the pricing date for the transition bonds and prior to their issuance, TCC is required to file with the Texas commission an issuance advice letter, which will:

 

   

demonstrate compliance with the requirements of the financing order,

 

   

evidence the final terms on which the transition bonds will be issued,

 

   

show the actual dollar amount of the transition charges relating to the transition bonds,

 

   

identify the transition property relating to the transition bonds we will purchase,

 

   

identify us,

 

   

certify that, based on information reasonably available, the structuring and pricing of the transition bonds will result in the lowest transition bond charges consistent with market conditions and the terms of the financing order, and

 

   

update the benefit analysis to verify that the final amount securitized satisfies the statutory financial tests.

Both the issuance advice letter and the accompanying compliance tariff becomes effective on the date of issuance of the transition bonds unless the Texas commission issues an order, prior to noon on the fourth business day after the determination of the final terms of the transition bonds, that the proposed issuance does not comply with the requirements of the Restructuring Act or the financing order. The Texas commission’s review of the issuance advice letter will be limited to confirming the arithmetic accuracy of the calculations and to compliance with the specific requirements contained in the issuance advice letter.

Tariff

On our behalf, TCC is required, prior to the issuance of any transition charges, to complete and file a tariff in the form attached to the financing order. The tariff establishes the initial transition charges. It also implements the minimum requirements for retail electric providers which collect transition charges, the procedures for periodic adjustments to the transition charges, the procedures for retail electric providers to remit transition charge payments and the annual procedures allowing retail electric providers to reconcile remittances with actual charge-offs. Please read “Description of the Transition Property—Tariff; Transition Charges.”

Statutory True-Ups

The Restructuring Act mandates that transition charges be adjusted at least annually to correct any overcollections or undercollections, due to any reason, in the preceding 12 months and to ensure the expected recovery of amounts sufficient to timely provide payment of all amounts due on the transition bonds. The servicer is also required under the financing order to timely make mandatory interim true-up adjustments semi-annually if the servicer forecasts that transition charge collections during the next 12-month period will be insufficient to timely make all scheduled payments of principal and interest on the transition bonds and any other amounts payable in respect of the transition bonds, including amounts required to replenish the capital subaccount to its required level. These required debt service payments and other amounts are sometimes referred to as the “periodic payment requirement.” If there are any transition bonds outstanding following the final scheduled final

 

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payment date, the servicer is also required under the financing order to make mandatory interim true-up adjustments quarterly, which adjustments will be calculated in a manner so that all bonds are expected to be paid on the Payment Date next following such quarterly true-up adjustment. True-up adjustments may also be made by the servicer under the financing order more frequently at any time, without limits as to frequency, in order to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service and other required amounts and charges in connection with the transition bonds.

True-up adjustments will be based upon the cumulative differences between the periodic payment requirement and the amount of transition charge remittances to the trustee. In order to provide for adequate revenues from the transition charges, the servicer will calculate the adjusted transition charges using its most recent forecast of electric consumption and its most current estimates of ongoing transaction-related expenses. The calculation of the transition charges will reflect any REP defaults or charge-offs, and the REP’s allowances for charge-offs and payment lags between the billing and collection of transition charges, based upon the servicer’s most recent experience regarding collection of transition charges. The calculation of transition charges will also take into account any amounts due to any REPs as a result of the reconciliation of the remittances and collections.

There is no “cap” on the level of transition charges that may be imposed on retail electric customers as a result of the true-up process.

The Texas commission must be given at least 15 days’ notice prior to making any true-up adjustment (other than a non-standard true-up adjustment described in the next paragraph). In the event any correction to a true-up adjustment due to mathematical errors in the calculation of the adjustment or otherwise is necessary, the correction will be made in a future true-up adjustment so as not to delay the implementation of the requested true-up adjustment.

The financing order also provides for a non-standard true-up procedure to be implemented as part of the annual true-up if the forecasted billing units for one or more of the customer classes for an upcoming period decrease by more than 10% compared to the threshold billing units for such class set forth in the financing order. The purpose of the non-standard true-up is to reallocate the transition charges among the customer classes in order to avoid overburdening the remaining members of a customer class the size of which has decreased significantly. Please read “The Servicing Agreement—True-Up Adjustment Process.” For the non-standard true-up, the servicer will make a filing with the Texas commission at least 90 days before the date that the transition charges to be imposed in connection with such non-standard true-up are to go into effect. The servicer will issue appropriate notice of the filing and the Texas commission will conduct a contested case proceeding on the proposed non- standard true-up. The scope of the proceeding will be limited to determining whether the proposed adjustment complies with the financing order. The Texas commission will issue a final order by the proposed true-up adjustment date specified by the servicer in the non-standard true-up filing. If the Texas commission cannot issue an order by that date, the servicer may implement the proposed adjustments and any modifications subsequently ordered by the Texas commission will be made by the servicer in the next true-up filing.

In the irrevocable financing order, the Texas commission guarantees that will act pursuant to the financing order as expressly authorized by the Restructuring Act to ensure that expected transition charge revenues are sufficient to pay on a timely basis scheduled principal and interest on the transition bonds and related costs.

Statutory True-Ups—Credit Risk

The State of Texas has pledged in the Restructuring Act that it will not take or permit any action that would impair the value of the transition property, or, except as permitted in connection with a true-up adjustment authorized by the statute, reduce, alter or impair the transition charges until the principal, interest and premium, and any other charges incurred and contracts to be performed in connection with the transition bonds, have been paid and performed in full.

The financing order provides that the broad-based true-up mechanism and the State pledge described above, along with certain other elements of the transition bonds, will serve to minimize, if not effectively eliminate, for all practical purposes and circumstances, any credit risk to the payment of the transition bonds (i.e., that sufficient transition charges will be available and paid to discharge all principal and interest obligations when due). With respect to the foregoing, interest is due on each payment date and principal is due upon the final maturity date for each tranche. See the financing order, Finding of Fact No. 91, as well as “The Restructuring Act—TCC and Other Utilities May Securitize Qualified Costs,” “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Information” for further information.

 

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Allocation

Under the terms of the financing order, TCC will initially allocate the qualified costs among its transition charge customer classes according to the percentages described below under “Description of the Transition Property—Tariff; Transition Charges.”

Servicing Agreement

In the financing order, the Texas commission authorized TCC, as the servicer, to enter into the servicing agreement described under “The Servicing Agreement” in this prospectus.

Binding on Successors

The financing order, along with the transition charges authorized in the financing order, is binding on:

 

   

TCC

 

   

any successor to TCC that provides transmission and distribution service directly to retail customers in TCC’s service territory,

 

   

any other entity that provides transmission or distribution service to retail customers within TCC’s service territory, and any successor to such other entity,

 

   

each retail electric provider that sells electric energy to retail customers located within TCC’s service territory, or any such retail electric provider’s successor,

 

   

any other entity responsible for billing and collecting transition charges on our behalf, and

 

   

any successor to the Texas commission.

RETAIL ELECTRIC PROVIDERS

As part of the restructuring of the Texas electric industry, retail customers of TCC began purchasing electricity and related services from REPs rather than TCC in January 2002. As of the date of this prospectus, TCC’s parent, AEP, indirectly owns one REP but that REP does not currently serve any retail customers. In the future, AEP may directly or indirectly own or control other REPs as well. TCC is no longer permitted to sell electricity directly to retail customers. With certain limited exceptions, the Restructuring Act grants all retail customers the option to have all electric service provided on a single bill and requires retail electric customers in TCC’s service territory to contract with REPs for electricity and other retail electric services.

As of December 31, 2011, there were 92 REPs certified by the Texas commission to furnish electricity and other retail services to retail customers in TCC’s service territory. During the twelve months ended December 31, 2010, TCC billed approximately 22,460 million kilowatt-hours (kWh) of electric energy to metered retail customers in its service territory. Of that amount, approximately 3,318 million kWh, or 14.77%, were delivered to retail customers served by one REP, approximately 3,090 million kWh, or 13.76%, to retail customers served by another REP, approximately 1,824 million kWh, or 8.12%, to retail customers served by a third REP, and the remaining approximately 14,228 million kWh, or 63.35%, to retail customers served by the 89 remaining REPs or to retail customers directly billed by TCC in connection with new on-site generation. In addition, during this period, TCC collected transition charges in respect of the Series 2002-1 transition bonds and Series 2006-A transition bonds from retail customers who, after May 1, 1999, switched to municipally owned utilities or electric cooperatives with multiply-certificated service territories with TCC. During the twelve months ended December 31, 2010, these retail customers consumed 63,809,142 kWh, or 0.28% of the total electric energy delivered directly by TCC to retail end-use customers in TCC’s service territory.

In certain cases, customers who do not pay their bills may be moved by a REP to a POLR or to another certified REP. The Texas commission periodically designates one or more REPs to serve as the POLRs for specified classes of retail customers. There is currently one POLR in TCC’s service territory, Reliant Energy Retail Services, LLC, for all retail customers.

Neither TCC nor any successor servicer will pay any shortfalls resulting from the failure of any REP to remit payments arising from the transition charges to the servicer. The annual true-up and interim true-up adjustment mechanisms for the transition charges, as well as the amounts deposited in the capital subaccount, are intended to mitigate the risk of shortfalls. Any shortfalls that occur may delay the distribution of interest on and principal of the transition bonds.

 

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Credit Practices, Policies and Procedures of Retail Electric Providers

Billing and collection standards are imposed on REPs with respect to transition charges. The standards relate only to the billing and collection of transition charges authorized under the financing order (as well as the financing orders for the prior transition bonds), and do not apply to collection of any other nonbypassable charges or other charges. The standards apply to all REPs that bill and collect transition charges from retail electric customers. REPs may contract with other parties to bill and collect transition charges from retail customers, but such REPs will remain subject to the applicable billing and collection standards. If the Texas commission later determines that different standards are to be applied to REPs in particular areas (e.g., payment terms), then those new standards, with appropriate modifications to related provisions, may replace those specific items. Upon adoption of any rule addressing any of these billing and collection standards, the Texas commission’s Office of Regulatory Affairs will open a proceeding to investigate the need to modify the standards to conform to that rule, with the understanding that such modifications may not be implemented absent prior written confirmation from each of the rating agencies that have rated the transition bonds that such modifications will not cause a suspension, withdrawal, or downgrade of the then-current ratings on the transition bonds.

The following subsections summarize the REP standards required under the financing order and tariff. These standards are the most stringent that the servicer can impose on REPs under the financing order. In the future, the Texas commission may determine that different standards should be applied to REPs in particular areas, such as payment terms. Any such standards may replace specific standards described above. The financing order provides, however, that any modifications to the foregoing standards may not be implemented absent satisfaction of the rating agency condition.

Rating, Deposit and Related Requirements.

Each REP must (1) have a long-term, unsecured credit rating of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively, or (2) provide (A) a deposit of two months’ maximum expected transition charge collections in the form of cash, (B) an affiliate guarantee, surety bond, or letter of credit providing for payment of such amount of transition-charge collections in the event that the REP defaults in its payment obligations, or (C) a combination of any of the foregoing. The provider of any affiliate guarantee, surety bond, or letter of credit must have and maintain long-term, unsecured credit ratings of not less than “BBB-” and “Baa3” (or the equivalent) from S&P and Moody’s, respectively. A REP that does not have or maintain the requisite long-term, unsecured credit rating may select which alternate form of deposit, credit support, or combination thereof it will utilize, in its sole discretion. The trustee will be the beneficiary of any affiliate guarantee or surety bond or letter of credit.

Loss of Rating.

If the long-term, unsecured credit rating from either S&P or Moody’s of a REP that did not previously provide the alternate form of deposit, credit support, or combination thereof or of any provider of an affiliate guarantee, surety bond, or letter of credit is suspended, withdrawn, or downgraded below “BBB-” or “Baa3” (or the equivalent), the REP must provide the alternate form of deposit, credit support, or combination thereof, or new forms thereof, in each case from providers with the requisite ratings, within 10 business days following such suspension, withdrawal, or downgrade. A REP failing to make such provision is required to comply with the provisions set forth in the section below labeled “—Remedies Upon Default.”

Computation of Deposit, etc.

The computation of the size of a required deposit will be agreed upon by the servicer and the REP, and reviewed no more frequently than quarterly to ensure that the deposit accurately reflects two months’ maximum collections. Within 10 business days following such review (1) the REP will remit to the trustee the amount of any shortfall in such required deposit or (2) the servicer will instruct the trustee to remit to the REP any amount in excess of such required deposit. A REP failing to so remit any such shortfall is required to comply with the provisions set forth below under “—Remedies Upon Default.” REP cash deposits will be held by the trustee in a REP deposit account and invested in eligible investments. The trustee shall not in any way be held liable for the selection of eligible investments for the REP deposit accounts or for investment losses incurred thereon. The trustee shall have no obligation to invest or reinvest any amounts held thereunder in the absence of timely and specific written investment direction from the servicer and appropriate documents from the applicable REP. Investment earnings on REP cash deposits will be considered part of such cash deposits so long as they remain on deposit with the trustee. Each depositing REP shall be responsible for the payment of income taxes with respect to such investments. At the instruction of the servicer, cash deposits will be remitted with investment earnings to the REP once all transition bonds have been retired unless otherwise utilized for the payment of the REP’s obligations. If at any time the deposit is no longer required, the servicer will promptly (but not later than 30 calendar days) instruct the trustee in writing to remit the applicable amounts in the REP deposit account to the REP.

 

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Payment of Transition Charges.

On a daily basis, the servicer will bill each REP for transition charges owed by the REP’s retail customers. Payments of transition charges are due 35 calendar days following each billing by the servicer to the REP, less an agreed allowance for expected uncollectible amounts, without regard to whether or when the REP receives payment from its retail electric customers. The servicer will accept payment by electronic funds transfer, wire transfer, and/or check and payment will be considered received by the servicer on the date the electronic funds transfer or wire transfer is received by the servicer, or the date the check clears. A 5% penalty will be charged on amounts received after 35 calendar days; however, a 10 calendar-day grace period will be allowed before the REP is considered to be in default. A REP in default is required to comply with the provisions set forth below under “—Remedies Upon Default.” The 5% penalty will be a one-time assessment measured against the current amount overdue from the REP to the servicer. The “current amount” consists of the total unpaid transition charges existing on the 36th calendar day after the billing by the servicer. Any and all such penalty payments will be made to the trustee to be applied against transition charge obligations. A REP shall not be obligated to pay the overdue transition charges of another REP. If a REP agrees to assume the responsibility for the payment of overdue transition charges as a condition of receiving the customers of another REP that has decided to terminate service to those customers for any reason, the new REP will not be assessed the 5% penalty upon such transition charges; however, the prior REP will not be relieved of the previously-assessed penalties.

Single Bill; Allocation Among Issuers of Transition Bonds.

Each REP will deliver a combined bill to each retail electric customer for the electric power sold by it to the retail electric customer, for the related transmission and distribution service provided by the electric utility, for the transition charges, for the transition charges associated with the Series 2002-1 transition bonds and Series 2006-A transition bonds and for other charges approved by the PUCT. Each REP will collect the combined amounts and then remit such amount to TCC, net of the amounts it is entitled to retain described above under “—Payment of Transition Charges.” TCC will then allocate the appropriate amounts to itself, to the servicer, to the servicer of the Series 2002-1 transition bonds, to the servicer of the Series 2006-A transition bonds and to other parties, if any, entitled to receive a portion of such amounts. In the case of any shortfall, TCC will allocate that shortfall, first, ratably based on the amount owed to TCC or other parties (including those amounts associated with the bonds, the Series 2002-1 transition bonds and Series 2006-A transition bonds) and the amount owed for other fees and charges, other than late charges and, second, all remaining collections will be allocated to late charges. Please read “Risk Factors—Servicing Risks—It might be difficult to collect transition charges from retail electric providers” in this prospectus. The retail electric provider will have custody of the transition charges collected from its retail electric customers until remitted to the servicer and may commingle the transition charges with its other funds.

Remedies Upon Default.

After the 10 calendar-day grace period (the 45th calendar day after the billing date) referred to above under the heading “—Payment of Transition Charges,” the servicer will have the option to seek recourse against any cash deposit, affiliate guarantee, surety bond, letter of credit, or combination thereof provided by the REP, and avail itself of such legal remedies as may be appropriate to collect any remaining unpaid transition charges and associated penalties due the servicer after the application of the REP’s deposit or alternate form of credit support. In addition, a REP that is in default with respect to the requirements set forth below under “—Loss of Rating” and “—Computation of Deposit, etc.” or above under “—Payment of Transition Charges” will be required to select and implement one of the following options:

 

   

transfer the billing and collection responsibility for all charges to the provider of last resort or a qualified REP of the customer’s choosing;

 

   

immediately implement other mutually suitable and agreeable arrangements with the servicer consistent with the terms of the servicing agreement and rating agency requirements to avoid a suspension, withdrawal or downgrade of the then-current ratings of the transition bonds; or

 

   

arrange that all amounts owed by retail electric customers for services rendered be timely billed and immediately paid directly into a lock-box controlled by the servicer with such amounts to be applied first to pay transition charges before the remaining amounts are released to the REP. All costs associated with this mechanism will be borne solely by the REP.

If a REP that is in default fails to immediately select and implement one of the foregoing options or, after so selecting one of the foregoing options, fails to adequately meet its responsibilities thereunder, then the servicer will, subject to limitations that may be imposed by applicable bankruptcy laws if the REP is a debtor in bankruptcy, immediately implement the first option listed above. Upon re-establishment of compliance with the requirements set forth below in “—Loss of Rating” and “—Computation of Deposit, etc.” and above under “—Payment of Transition Charges” and the payment of all past-due

 

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amounts and associated penalties, the REP will no longer be considered in default and will not be required to comply with this paragraph. Any agreement entered into between the servicer and a defaulting REP pursuant to the second bullet point above will be limited to the terms of the servicing agreement and must satisfy the rating agency condition.

Billing by Providers of Last Resort.

Each provider of last resort appointed by the Texas commission must meet the minimum credit rating or deposit/credit support requirements applicable to other REPs in addition to any other standards that may be adopted by the Texas commission. If a provider of last resort defaults or is not eligible to provide such services, responsibility for billing and collection of transition charges will immediately be transferred to and assumed by the servicer until a new provider of last resort named by the Texas commission or the customer requests the services of another qualified REP. Retail electric customers cannot be re-billed by a successor REP for any transition charges they have previously paid (although future transition charges will be adjusted to reflect REP and other system-wide charge-offs). Additionally, if the amount of the penalty detailed in “—Payment of Transition Charges” is the sole remaining past-due amount after the 45th calendar day, the REP will not be required to comply with the provisions set forth under “—Remedies Upon Default” unless the penalty is not paid within an additional 30 calendar days.

Disputes.

In the event that a REP disputes any amount of billed transition charges, the REP will pay the disputed amount under protest according to the timelines detailed in “—Payment of Transition Charges.” In the event of a dispute, the REP and the servicer will first attempt to informally resolve the dispute, but if they fail to do so within 30 calendar days, either party may file a complaint with the Texas commission. If the REP is successful in the dispute process (informal or formal), the REP will be entitled to interest on the disputed amount paid to the servicer at the Texas commission-approved interest rate. Disputes about the date of receipt of transition charge payments (and penalties arising thereof) or the size of a required REP deposit will be handled in a like manner. Interest paid by the servicer on disputed amounts may not be recovered through transition charges if it is determined that the servicer’s claim to the funds is clearly unfounded. No interest will be paid by the servicer if it is determined that the servicer has received inaccurate metering data from another entity providing competitive metering services.

Metering Data.

If the servicer is providing metering service to the retail electric customer, metering data will be provided to the REP at the same time as the REP is billed. If the servicer is not providing metering service to the retail electric customer, the entity providing metering service will be responsible for complying with Texas commission rules and ensuring that the servicer and the REP receive timely and accurate metering data in order for the servicer to meet its obligations under the servicing agreement and the financing order with respect to billing and true-up adjustments.

Charge-Off Allowance.

The REP will be allowed to hold back an allowance for charge-offs in its payments to the servicer. Such charge-off rate is recalculated each year in connection with the annual true-up procedure. On an annual basis in connection with the true-up process, the REP and the servicer will be responsible for reconciling the amounts held back with amounts actually written off as uncollectible in accordance with the terms agreed to by the REP and the servicer, provided that:

 

   

The REP’s right to reconciliation for write-offs will be limited to customers whose service has been permanently terminated and whose entire accounts (i.e., all amounts due the REP for its own account as well as the portion representing transition charges) have been written off;

 

   

The REP’s recourse will be limited to a credit against future transition charge payments unless the REP and the servicer agree to alternative arrangements, but in no event will the REP have recourse to the trustee, us or our funds for such payments; and

 

   

The REP is required to provide information on a timely basis to the servicer so that the servicer can include the REP’s default experience and any subsequent credits into its calculation of the adjusted transition-charge rates for the next transition-charge billing period and the REP’s rights to credit will not take effect until after such adjusted transition-charges rates have been implemented.

Service Termination.

In the event that the servicer is billing customers for transition charges, the servicer will have the right to terminate service to the customer for non-payment by the customer pursuant to applicable Texas commission rules. In the event that a REP (including any POLR) is billing customers for transition charges, that REP will have the right to transfer the customer to

 

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the POLR (or to another certified REP) or to direct the servicer to terminate service to the customer for non-payment by the customer pursuant to applicable Texas commission rules. Non-paying large non-residential customers can be disconnected by any retail electric provider if the customer’s contract does not preclude disconnection.

Codification of REP Standards.

The Texas commission codified the standards for REPs regarding the billing and collection of transition charges in July 2000 as Substantive Rule §25.108. This Rule provides that:

 

   

if a REP’s actual charge-offs are greater than the allowance for charge-offs, the REP may collect the difference, with interest, in 12 equal monthly installments;

 

   

the REP will be responsible for providing the servicer accurate metering data (including metering identification information) for REP customers whose meters are not read by the servicer; and

 

   

if a POLR or qualified REP assumes responsibility for billing and collecting transition charges, the POLR, replacement REP or servicer will bill all transition charges which have not been billed as of the date it assumes such responsibility.

DESCRIPTION OF THE TRANSITION PROPERTY

Creation of Transition Property; Financing Order

The Restructuring Act defines transition property as the rights and interests of an electric utility or successor under a financing order, including the right to impose, collect and receive transition charges established in the financing order. Transition property becomes property at the time that it is first transferred to an assignee or pledged in connection with the issuance of transition bonds, such as the transition bonds, although until such time it remains a contract right pursuant to the Restructuring Act. The transition bonds will be secured by transition property, as well as the other collateral described under “Security for the Transition Bonds.”

In addition to the right to impose, collect and receive transition charges, the financing order:

 

   

authorizes the transfer of transition property to us and the issuance of transition bonds;

 

   

establishes procedures for periodic true-up adjustments to transition charges in the event of overcollection or undercollection;

 

   

implements guidelines for REPs who collect transition charges; and

 

   

provides that the financing order is irrevocable and not subject to reduction, impairment, or adjustment by further act of the Texas commission (except for the periodic adjustments to the transition charges).

A form of issuance advice letter and a form of tariff are attached to the financing order. We will complete and file both documents with the Texas commission immediately after the pricing of the transition bonds. The Texas commission’s review of the issuance advice letter and the tariff will be limited to confirming the arithmetic accuracy of the calculations and to compliance with the specific requirements contained in the issuance advice letter.

The issuance advice letter confirms to the Texas commission the interest rate and expected sinking fund schedule for the transition bonds and sets forth the actual dollar amount of the initial transition charges as described above under “TCC’s Financing Order—Issuance Advice Letter.” The initial transition charges, along with any other terms of the issuance advice letter and tariff affecting the terms of the transition bonds, will be more fully described in the prospectus supplement.

The tariff establishes the initial transition charges. It also implements the minimum requirements for REPs which collect transition charges, the procedures for periodic adjustments to the transition charges, the procedures for REPs to remit transition charge payments and the annual procedures allowing REPs to reconcile remittances with actual charge-offs.

Tariff; Transition Charges

The following is a description of the initial tariff to be filed by TCC with the Texas commission pursuant to the financing order creating transition property. The initial tariff applies primarily to energy consumption and demand of retail customers taking transmission and/or distribution service from TCC and its successors and assigns that provide transmission and distribution service, or if transmission and distribution services are not provided by a single entity, the successor entity

 

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providing distribution service directly to retail customers taking service at facilities, premises or loads located within TCC’s service territory. In no event will transition charges provided for in the tariff be assessed for services provided after 15 years from the issuance of the related transition bonds.

The transition charges will be payable by all existing retail customers of TCC and all existing and future retail customers located within TCC’s service territory. There are exceptions for certain categories of existing retail customers. For more information on these exceptions, please read “The Restructuring Act—TCC and Other Utilities May Securitize Qualified Costs.” The defined classes of transition charge retail customers are:

 

   

Residential — This service is applicable to customers consisting of individual private dwellings and individually metered apartments. In addition, security or flood lighting services provided on residential end-use customers premises will be included in this rate class.

 

   

Commercial and Small Industrial — Energy — This service is applicable to non-residential customers (1) with annual maximum measured demands less than 12,500 kilovoltamperes (KVA) and (2) whose current rate class for the purpose of transmission and distribution usage is billed without any demand charges. In addition, security or flood lighting services provided on applicable end-use customer’s premises will be included in this rate class.

 

   

Commercial and Small Industrial — Demand — This service is applicable to non-residential customers (1) with annual maximum measured demands less than 12,500 KVA and (2) whose current rate class for the purpose of transmission and distribution usage requires a demand meter.

 

   

Large Industrial — Firm — This service is applicable to non-residential customers taking non-interruptible service with annual maximum measured demands equal to 12,500 KVA or more whose service is provided to the entire premises at not less than 60,000 volts.

 

   

Large Industrial — Non-Firm — This service is applicable to non-residential customers taking interruptible service with annual maximum measured demands equal to 12,500 KVA or more whose service is provided to the entire premises at not less than 60,000 volts. In addition, this rate class will include customers whose service is provided to the entire premises at not less than 60,000 volts and who have self-generation capability equal to or greater than 25,000 kilowatts and who purchase a minimum of 25,000 kilowatts as standby-firm service for that portion of the customer’s loan which displaces, in total or in part, the customer’s self-generating capability.

 

   

Standby — Firm — This service is applicable to non-residential customers taking non-interruptible standby service when such service may be substituted, either directly or indirectly, for customer-owned and operated power production equipment.

 

   

Standby — Non-Firm — This service is applicable to non-residential customers whose service is provided to the entire premises at not less than 60,000 volts who are taking as-available standby service when such service may be substituted, either directly or indirectly, for customer-owned and operated power production equipment not billed primarily for emergency use.

 

   

Municipal and Cotton Gin — This service is applicable to municipalities, other utilities, and other public agencies for electric service for the operation of water supply, sewage, and/or drainage systems serving the general public supplied at one point of delivery and measured by one meter. In addition, this service is applicable to political subdivisions and “non-profit” institutions for traffic lighting, flood lighting and street lighting service on public streets and highways, in public areas, and upon the grounds of public schoolyard or educational institutions not organized for profit. This service is further applicable to all electric service other than lighting service furnished to cotton gins.

Because of differences in the tariff rate for each class of retail customers, the transition charges payable by each class of retail customers will differ.

Under the terms of the financing order, TCC will initially allocate the qualified costs among the transition charge customer classes as follows:

 

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Transition Charge Retail Customer Classes

 

Transition Charge Retail Customer Class

   Allocation Percentage  

Residential

     39.2853

Commercial and Small Industrial: Energy

     22.6320

Commercial and Small Industrial: Demand

     29.4288

Large Industrial: Firm

     2.2118

Large Industrial: Non-Firm

     1.9842

Standby — Firm

     1.4922

Standby — Non-Firm

     0.2533

Municipal and Cotton Gin

     2.7124
  

 

 

 

Total

     100.0000

In the financing order, the Texas commission requires TCC and any successor servicer under certain circumstances to request adjustments to the allocation of the transition charges among various classes of customers through a non-standard true-up procedure as described under “TCC’s Financing Order—Statutory True-Ups.”

In the case of large industrial, standby, and commercial and small industrial retail electric customers, demand metered rates will be applicable to customers in those transmission and distribution rate classes who are billed on a demand basis. All other retail electric customers will be billed on a kilowatt-hour, non-demand metered basis. Each new retail electric customer will be assigned to the appropriate customer class.

The initial transition charge rates that will be assessed to customers comprising each of the above transition charge retail customer classes, as of the issuance date for the transition bonds as well as the percentage of the total bill received by an average retail customer that such transition charge and all other transition charges represent, will be set forth in the accompanying prospectus supplement.

Billing and Collection Terms and Conditions

Transition charges will be assessed by the servicer, for our benefit as owner of the transition property, based on a retail customer’s actual consumption of electricity or electric demand from time to time. Transition charges will be collected by the servicer from a REP that collects transition charges from retail customers as part of its normal collection activities. Transition charges will be deposited by the servicer into the collection account under the terms of the indenture and the servicing agreement. The servicer will deposit in the collection accounts payments of transition charges on each business day based on estimated collections in accordance with the procedures described below under “The Servicing Agreement—Remittances to Collection Account.”

REPs are responsible for billing, collecting and paying to the servicer the retail customer’s transition charges. Each REP will be responsible for paying transition charges billed to retail customers of the REP, whether or not the retail customers pay the REP, less a specified percentage allowance for charge-offs or delinquent customer accounts whose service has been terminated and except as otherwise provided in tariffs to be filed with the Texas commission, subject to limited rights of refund and credit as described in “Retail Electric Providers.” Such percentage will initially be based on the same system-wide charge-off percentage then used by TCC for the Series 2002-1 transition bonds and the Series 2006-A transition bonds but will then be recalculated annually for each REP in conjunction with the true-up adjustment process.

The obligation to pay transition charges is not subject to any right of set-off in connection with the bankruptcy of the seller or any other entity. Transition charges are “nonbypassable” in accordance with the provisions set forth in the Restructuring Act and the financing order. If a retail customer pays only a portion of its bill, a pro-rata amount (based on all charges billed to such retail customer) of transition charge revenues will be deemed to be collected. In the case of any shortfall, TCC will allocate that shortfall, first, ratably based on the amount owed to TCC or other parties (including those amounts associated with the bonds, the Series 2002-1 transition bonds and Series 2006-A transition bonds) and the amount owed for other fees and charges, other than late charges, and, second, all remaining collections will be allocated to late charges. The portion owed in respect of transition charges will be further allocated as between different series of transition bonds, including amounts owed to other special-purpose subsidiaries of TCC who have issued transition bonds under the Restructuring Act, including the Series 2002-1 transition bonds and the Series 2006-A transition bonds. If a retail customer fails to pay all or any portion of the transition charges, the REP who is billing such customer may transfer billing and collection rights to the designated POLR for such customer or may direct TCC or its successor transmission and distribution utility to terminate service to such non-paying customer in accordance with the financing order and Texas commission guidelines.

 

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THE SELLER, INITIAL SERVICER AND SPONSOR

General

TCC will be the seller and initial servicer of the transition property securing the transition bonds, and will be the sponsor of the securitization in which transition bonds covered by this prospectus are issued.

TCC is an electric utility providing transmission and distribution service in southern Texas. At December 31, 2011, TCC provided transmission and distribution service to approximately 787,000 metered retail customers in a service territory covering approximately 44,000 square miles. The retail customer base includes a mix of residential, commercial and diversified industrial retail customers. During the twelve months ended December 31, 2010, TCC billed approximately 22,460 million kilowatt hours of electricity resulting in operating revenues of $892.5 million and operating income of $242.1 million. TCC, incorporated under the laws of the State of Texas in 1945, is an operating subsidiary of AEP, a public utility holding company based in Columbus, Ohio. AEP is one of the largest electric utilities in the United States, delivering electricity to more than five million customers in 11 states, and is among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States.

TCC is subject to the jurisdiction of the Federal Energy Regulatory Commission under the Federal Power Act of 2005 with respect to the issuance of securities, acquisitions and divestitures of utility assets, certain affiliate transactions and other matters. TCC is regulated by the Texas commission with respect to rates charged for delivery of electricity over its transmission and distribution system for end-use consumption by retail electric customers, quality of service, and service area certification.

Servicing Experience

Since February of 2002, TCC sponsored and has acted as servicer for the Series 2002-1 transition bonds issued by TCC Funding I, in the original aggregate principal amount of $797,334,897 and for the Series 2006-A transition bonds issued by TCC Funding II, in the original aggregate principal amount of $1,739,700,000. Since the date of issuance of each such series of transition bonds, TCC has filed on a timely basis all true-up filings required for the transition bonds and the issuer of each series of bonds has satisfied on a timely basis all interest payments on the related series of transition bonds and has made all principal payments on the related series of transition bonds in accordance with their expected amortization schedule.

Please read “Relationship to the Series 2002-1 Transition Bonds and the Series 2006-A Transition Bonds.” TCC services the Series 2002-1 transition bonds and the Series 2006-A transition bonds in accordance with servicing standards that are substantially similar to those set forth in TCC’s servicing agreement with us.

Municipalization

Texas law may authorize certain local municipalities to seek to acquire portions of TCC’s electric distribution facilities through the power of eminent domain for use as part of municipally-owned utility systems. Although the power of eminent domain has not been used by municipalities in Texas in recent times to acquire electric distribution systems, there can be no assurance that one or more municipalities will not seek to acquire some or all of TCC’s electric distribution facilities while transition bonds remain outstanding. The Restructuring Act specifies that transition charges approved by a Texas commission order shall be collected by an electric utility as well as its “successors.” In the servicing agreement, TCC has covenanted to assert in an appropriate forum that any municipality that acquires any portion of TCC’s electric distribution facilities must be treated as a successor to TCC under the Restructuring Act and the financing order and that retail customers in such municipalities remain responsible for payment of transition charges. However, the involved municipality might assert that it should not be treated as a successor to TCC for these purposes and that its distribution customers are not responsible for payment of transition charges. In any such cases, there can be no assurance that the transition charges will be collected from customers of municipally-owned utilities who were formerly customers of TCC.

TCC Customer Base and Electric Energy Consumption

TCC’s retail customer base consists of four FERC revenue reporting customer classes: residential, commercial, industrial and other. The revenue reporting customer classes are broad groups that include accounts with a wide range of load characteristics served under a variety of rate designs.

The following tables show the electricity delivered to retail customers, electric delivery revenues and number of retail customers for each of the four revenue reporting customer classes for 2010 and each of the three preceding years. There can be

 

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no assurances that the retail electricity sales, retail electric revenues and number of retail customers or the composition of any of the foregoing will remain at or near the levels reflected in the following tables.

Electricity Delivered to Retail Customers, Electric Delivery Revenues and Retail Customers*

 

Retail Electric Usage (As Measured by Billed GWh Sales) by Customer Class and Percentage Composition   

Customer

Class

   2007     2008     2009     2010     9 Months Ending
September 30, 2011
 

Residential

     8,353         37.82     8,247         36.84     8,674         38.40     8,857         39.43     7,458         40.34

Commercial

     8,418         38.12     8,524         38.08     8,592         38.03     8,467         37.70     6,748         36.50

Industrial

     5,218         23.63     5,515         24.64     5,225         23.13     5,035         22.42     4,207         22.75

Other

     96         0.43     98         0.44     99         0.44     101         0.45     76         0.41
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     22,085         100.00     22,384         100.00     22,590         100.00     22,460         100.00     18,489         100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
Transmission and Distribution Revenue by Customer Class and Percentage Composition (Dollars in thousands)   

Customer

Class

   2007     2008     2009     2010     9 Months Ending
September 30, 2011
 

Residential

   $ 231,966         49.81   $ 277,780         48.53   $ 342,670         47.67   $ 375,736         50.61   $ 304,450         51.16

Commercial

     183,379         39.38     238,661         41.70     309,102         43.00     299,859         40.39     237,777         39.96

Industrial

     41,568         8.93     47,764         8.35     57,783         8.04     57,427         7.73     45,414         7.63

Other

     8,756         1.88     8,157         1.42     9,323         1.29     9,437         1.27     7,425         1.25
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

   $ 465,669         100.00   $ 572,362         100.00   $ 718,878         100.00   $ 742,459         100.00   $ 595,066         100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
Service Territory Number of Average Metered Retail Electric Customers and Percentage Composition   

Customer

Class

   2007     2008     2009     2010     9 Months Ending
September 30, 2011
 

Residential

     637,617         85.29     647,810         85.33     653,267         85.38     659,563         85.47     668,016         85.51

Commercial

     103,132         13.80     104,395         13.75     105,031         13.73     105,417         13.66     106,660         13.65

Industrial

     5,374         0.72     5,247         0.69     5,123         0.67     5,010         0.65     4,945         0.63

Other

     1,481         0.19     1,764         0.23     1,748         0.22     1,663         0.22     1,582         0.21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Retail

     747,604         100.00     759,216         100.00     765,169         100.00     771,653         100.00     781,203         100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

*

Totals may not add up to 100% due to rounding.

Forecasting Electricity Consumption

TCC produces a kilowatt-hour forecast each quarter for planning purposes. These forecasts are the basis for earnings projections as well as capacity/generation planning. The forecast cycle completed during the third quarter is typically adopted as TCC’s official budget. TCC maintains the option to revise the budget due to changes in subsequent forecasts. The company monitors the accuracy of each forecast by conducting variance analysis on a monthly basis taking into account weather impacts on kilowatt-hour sales and deviations from forecast within the customer count. Peak demand forecasts are then generated using the kilowatt-hour forecast as a basis.

TCC employs two methods for developing the kilowatt-hour forecast, a short-term approach and a long-term approach. Each are developed independently and then joined over a six month period by a “blending” process. This “blended period” typically falls within the first eighteen months of the forecast horizon. Within the “blending period,” a weighted average of the two forecast methods is taken with the weights stepping down each month giving more weight, at first, to the short-term forecast and, eventually to the long-term forecast.

The short-term method employs regression models with time-series error modeling to predict kilowatt-hour per customer and customer count for the residential and commercial classes. Kilowatt-hours are estimated for all other sales classes. Within the kilowatt-hour per customer and kilowatt-hour models, weather, in the form of cooling and heating degree days, is used as the primary explanatory driver. Customer count models follow the traditional ARIMA approach of time-series based models incorporating lagged dependent variables and lagged prediction-error terms. These time-series methods are

 

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widely used throughout the electrical utility industry. The resulting kilowatt-hour per customer and customer count forecasts are then multiplied together for the residential and commercial classes. No such computation is necessary for the remaining classes. This short-term method is useful in predicting systematic patterns in monthly consumer behavior when housing levels and appliance saturations remain relatively fixed and prices are relatively stable.

The long-term method employs regression analysis of consumer “end-use” electricity demand. This method considers economic trends, changes in competing and complimentary fuel prices and changes in appliance saturations, as well as changes in appliance efficiencies such as those mandated by legislation. Weather patterns also play a role in the long-term forecast models. This method allows for flexibility in consumer response to economic stimuli as well as trends in consumer preferences.

Annual Forecast Variance For Ultimate Electric Delivery (GWh)

 

      2005     2006     2007     2008     2009     2010     9 months
ending
September
2011
 

Residential

              

Forecast

     8,909        8,546        8,442        8,565        8,421        8,453        6,706   

Actual

     8,530        8,344        8,353        8,247        8,674        8,857        7,458   

Variance (%)

     (4.26 )%      (2.36 )%      (1.05 )%      (3.72 )%      3.01     4.78     11.21

Commercial

              

Forecast

     7,810        8,108        8,348        8,577        8,592        8,699        6,411   

Actual

     8,133        8,364        8,418        8,524        8,592        8,467        6,748   

Variance (%)

     4.14     3.15     0.84     (0.61 )%      (0.01 )%      (2.68 )%      5.26

Industrial

              

Forecast

     5,836        5,161        5,220        5,269        5,427        5,544        4,210   

Actual

     5,072        5,040        5,218        5,515        5,225        5,035        4,207   

Variance (%)

     (13.10 )%      (2.33 )%      (0.04 )%      4.67     (3.72 )%      (9.20 )%      (0.07 )% 

Other Ultimate

              

Forecast

     96        95        95        97        100        103        77   

Actual

     92        94        96        98        99        101        76   

Variance (%)

     (4.05 )%      (1.45 )%      1.59     0.91     (0.31 )%      (1.74 )%      (0.43 )% 

TOTAL

              

Forecast

     22,651        21,910        22,105        22,508        22,539        22,800        17,403   

Actual

     21,827        21,842        22,086        22,384        22,590        22,459        18,490   

Variance (%)

     (3.64 )%      (0.31 )%      (0.09 )%      (0.55 )%      0.22     (1.49 )%      6.24

Variances among the eight transition charge retail customer classes, which are used to allocate payment responsibility for the transition bonds, may differ from the variances shown below, as the classifications are more specific.

Billing and Collections

TCC issued its last bills directly to retail electric customers in 2002. Since then all customers are billed by their REPs. Please read “Retail Electric Providers—Credit Practices, Policies and Procedures of Retail Electric Providers—Service Termination.”

The servicer of the transition bonds will bill a retail electric customer’s REP for the transition charges attributable to that customer and the REPs will be obligated to remit to the servicer payments of the transition charges as described under “Retail Electric Providers—Credit Practices, Policies and Procedures of Retail Electric Providers—Payment of Transition Charges.” The servicer will have rights only under very limited circumstances to collect transition charges directly from retail electric customers. The servicer will not pay any shortfalls resulting from the failure of any REP to forward transition charge collections. If a REP defaults in the payment of transition charges, the REP must implement one of the courses of action described under “Retail Electric Providers—Credit Practices, Policies and Procedures of Retail Electric Providers—Remedies Upon Default.”

 

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Credit Policy.

In accordance with the Texas commission’s regulations, REPs may require deposits from certain applicants for service or existing customers accounts to protect the REP against losses. Deposits may be obtained from commercial and industrial customers and residential customers who can not demonstrate credit worthiness. The maximum allowable amount of a deposit for a residential customer is either the sum of the next two months’ estimated billings or one-fifth of the projected annual billings to the customer. The REP is required to pay interest annually on deposits. The REP must refund the deposit when the customer has paid bills for service for 12 consecutive billings (in the case of residential customers) or 24 consecutive billings (in the case of non-residential customers) without having any late payments. Once the REP is no longer the REP of record for a customer or if service is not established with the REP, the REP shall either transfer the deposit to the customer’s new REP or promptly refund the deposit with interest to the customer, as agreed upon by the customer and both REPs.

Billing.

REPs bill their customers once every month, and we expect that an approximately equal number of bills will be distributed each business day. Payments are generally due not later than 16 days after issuance of the related bill. If the due date falls on a holiday or weekend, the due date for payment purposes is the next business day. A bill not paid on or before the due date is considered delinquent. The REP may charge a one-time penalty not to exceed 5.0% on a delinquent bill for electric service. No such penalty shall apply to residential or small commercial customers served by the POLR, or to customers receiving a low-income discount pursuant to the Public Utility Regulatory Act of the state of Texas. The one time penalty, not to exceed 5.0%, may not be applied to any balance to which the penalty has already been applied. Based on qualifications, customers may be eligible for the REP’s level or average payment plan, an average monthly payment program that allows bills for electric service to be paid in equal monthly payments, or a deferred payment plan in which past due bills may be paid in installments over a specified time period. Failure to make timely payments while on any bill payment assistance plan allows the REP to remove customers from that payment plan, begin account collection activities including the initiation of termination of service.

Collection Process.

TCC historically received, and expects that REPs will receive, the majority of customer payments via the U.S. mail and paystations; however, other payment options are also available. These options include payment by electronic fund transfers or credit/debit cards.

REPs may change their collection policies and procedures, consistent with Texas commission guidelines and the financing order, from time to time.

Loss Experience

The following table sets forth information relating to the annual net charge-offs for TCC, including net charge-offs of retail customers reported to TCC by the REPs as part of TCC’s annual charge-off reconciliation process.

Net Charge-Offs as a Percentage of Billed Transmission & Distribution Revenues

 

     As Of
12/31/07
    As Of
12/31/08
    As Of
12/31/09
    As Of
12/31/10
    As Of
9/30/11
 

Billed Electric Revenues ($000)

   $ 465,669      $ 572,363      $ 718,878      $ 742,459      $ 595,065   

Net Charge-Offs ($000)

     0        113        0        0        0   

Percentage of Billed Revenue

     0.00     0.02     0.00     0.00     0.00

 

* Net Charge-Offs shown as zero due to rounding.

Days Sales Outstanding

The following table sets forth information relating to the average number of days that TCC’s bills to REPs remained outstanding during the calendar year (or other period referred to below) ending on each of the dates referred to below.

Average Days Sales Outstanding

 

     As Of
12/31/07
   As Of
12/31/08
   As Of
12/31/09
   As Of
12/31/10
   As Of
9/30/11

Average Days Sales Outstanding

   30    30    30    31    31

 

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Delinquencies

The following table sets forth information relating to the delinquency experience of TCC for REPs as of each of the dates shown below.

Delinquencies as a Percentage of Total Billed Revenues

 

     As Of
12/31/07
    As Of
12/31/08
    As Of
12/31/09
    As Of
12/31/10
    As Of
9/30/11
 

30-59 days

     (0.03 )%      0.29     0.38     0.12     (0.01 )% 

60-89 days

     (0.01 )%      (0.02 )%      (0.52 )%      (0.01 )%      0.00

90+ days

     (0.02 )%      0.08     (1.77 )%      (0.01 )%      0.33

Total

     (0.06 )%      0.35     (1.91 )%      0.10     0.32

 

* Negative percentages are due to REP credits.

Where to Find Information About TCC.

Although TCC is not currently required to file periodic reports with the SEC, TCC’s parent AEP does file periodic reports with the SEC as required by the Securities Exchange Act of 1934. Reports filed with the SEC by AEP are available for inspection without charge at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of periodic reports and exhibits thereto may be obtained at the above location at prescribed rates. Information as to the operation of the public reference facilities is available by calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be inspected at the SEC’s website at http://www.sec.gov. Except as provided in the prospectus supplement, no other information contained on that website constitutes part of this prospectus or any prospectus supplement related to the transition bonds.

AEP TEXAS CENTRAL TRANSITION FUNDING III LLC, THE ISSUING ENTITY

We are a special purpose limited liability company formed under the Delaware Limited Liability Company Act pursuant to a limited liability company agreement executed by our sole member, TCC, and the filing of a certificate of formation with the Secretary of the State of Delaware. The limited liability company agreement was amended and restated on [    ], 2012, and references in this prospectus and any prospectus supplement to our limited liability company agreement mean the amended and restated agreement. Our limited liability company agreement restricts us from engaging in activities other than those described in this section. We do not have any employees, but we will pay our member for out-of-pocket expenses incurred by the member in connection with its services to us in accordance with our limited liability company agreement. We have summarized selected provisions of our limited liability company agreement below, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part. On the date of issuance of the transition bonds, our capital will be equal to 0.5% of the principal amount of such transition bonds issued or such other amount as may allow the transition bonds to achieve the desired security rating and treat the transition bonds as debt under applicable guidance issued by the Internal Revenue Service, which we also refer to as the IRS.

As of the date of this prospectus, we have not carried on any business activities and have no operating history. We are not an agency or instrumentality of the State of Texas but are responsible to the State of Texas and the Texas commission as described below under the caption “—Our Relationship with the PUCT.”

Our assets will consist of:

 

   

the transition property,

 

   

our rights under the sale agreement, under the administration agreement and under the bill of sale delivered by TCC pursuant to the sale agreement,

 

   

our rights under the servicing agreement and any subservicing, agency, administration, intercreditor or collection agreements executed in connection with such servicing agreement,

 

   

the collection account and all subaccounts of such collection account,

 

   

our rights in all deposits, guarantees, surety bonds, letters of credit and other forms of credit support provided by or on behalf of retail electric providers pursuant to the financing order or a tariff,

 

   

all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing, and

 

   

all payments on or under and all proceeds in respect of any or all of the foregoing.

 

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The indenture provides that the transition property, as well as our other assets, other than any cash released to us by the trustee semi-annually from earnings on the capital subaccount, will be pledged by us to the trustee to secure our obligations in respect of the transition bonds. Pursuant to the indenture, the collected transition charges remitted to the trustee by the servicer must be used to pay principal and interest on the transition bonds and our other obligations specified in the indenture.

Restricted Purpose

We have been created for the sole purpose of:

 

   

purchasing, owning, administering and servicing the transition property and the other collateral;

 

   

issuing and registering the transition bonds;

 

   

making payment on the transition bonds;

 

   

distributing amounts released to us;

 

   

managing, selling, assigning, pledging, collecting amounts due on, or otherwise dealing with the transition property and the other transition bond collateral and related assets;

 

   

negotiating, executing, assuming and performing our obligations under the basic documents;

 

   

pledging our interest in the transition property and other collateral to the trustee under the indenture in order to secure the transition bonds; and

 

   

performing other activities that are necessary, suitable or convenient to accomplish these purposes.

Our limited liability company agreement does not permit us to engage in any activities not directly related to these purposes, including issuing securities (other than the transition bonds), borrowing money or making loans to other persons. The list of permitted activities set forth in our limited liability company agreement may not be altered, amended or repealed without the affirmative vote of a majority of our managers, which vote must include the affirmative vote of our independent managers. Our limited liability company agreement and the indenture will prohibit us from issuing any transition bonds (as such term is defined in the Restructuring Act) other than the transition bonds that we will offer pursuant to the prospectus supplement.

Our Relationship with TCC

On the issue date for the transition bonds TCC will sell transition property to us pursuant to a sale agreement between us and TCC. TCC will service the transition property pursuant to a servicing agreement between us and TCC and will provide administrative services to us pursuant to an administration agreement between us and TCC.

Our Relationship with the PUCT

Pursuant to the financing order,

 

   

the PUCT or its designated representative has a decision-making role co-equal with TCC with respect to the structuring and pricing of the transition bonds and all matters related to the structuring and pricing of the transition bonds will be determined through a joint decision of TCC and the PUCT or its designated representative,

 

   

TCC is directed to take all necessary steps to ensure that the PUCT or its designated representative is provided sufficient and timely information to allow the PUCT or its designated representative to fully participate in, and exercise its decision making power over, the proposed securitization, and

 

   

the servicer will file periodic adjustments to transition charges with the PUCT on our behalf.

We have also agreed that certain reports concerning transition charge collections will be provided to the PUCT.

Our Management

Pursuant to our limited liability company agreement, our business will be managed by five or more managers, of whom at least two will be independent managers, in each case appointed from time to time by TCC or, in the event that TCC transfers its interest in us, by our owner or owners. Following the initial issuance of transition bonds, we will have at least two independent managers, each of whom, among other things, (1) is an individual who has prior experience as an independent

 

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director, independent manager or independent member for special-purpose entities, (2) is employed by a nationally-recognized company that provides professional Independent Managers and other corporate services, (3) is duly appointed as an independent manager and (4) is not and has not been for at least five years from the date of his or her appointment, and while serving as an Independent Manager will not be, any of the following:

 

   

a member, partner, or equity holder of us, TCC, any of our respective affiliates or any of our owner’s affiliates,

 

   

an officer, employee, director or manager (other than as an independent director or manager for a special purpose bankruptcy-remote entity), contractor or material creditor of us, TCC or any of our affiliates or any of our owner’s affiliates, or

 

   

a creditor, supplier or service provider (including provider of professional services) to us, TCC or any of their respective equity holders or affiliates, other than a nationally recognized company that routinely provides professional independent managers and other corporate services to us, TCC or any of its affiliates in the ordinary course of its business,

 

   

a family member of any member, partner, equity holder, manager, officer, employee, creditor, supplier or service provider,

 

   

a person who controls (whether directly, indirectly or otherwise) TCC or its affiliates or any member, partner, equity holder, manager, officer, employee, director, creditor, supplier or service provider described above; provided, that the indirect or beneficial ownership of stock of TCC or its affiliates through a mutual fund or similar diversified investment vehicle with respect to which TCC does not have discretion or control over the investments held by such diversified investment vehicle shall not preclude such owner from being an independent manager.

The persons who serve as independent managers of TCC Funding I and TCC Funding II may also serve as our independent managers. The managers shall be obligated to devote as much of their time to our business as shall be reasonably required in light of our business and objectives.

TCC, as our sole member, will appoint the independent managers prior to the issuance of the transition bonds. None of our managers or officers has been involved in any legal proceedings which are specified in Item 401(f) of the SEC’s Regulation S-K.

Manager Fees and Limitation on Liabilities

We have not paid any compensation to any manager since we were formed. We will not compensate our managers, other than the independent managers, for their services on our behalf. We will pay the annual fees of the independent managers from our revenues and will reimburse them for reasonable expenses. These expenses include the reasonable compensation, expenses and disbursements of the agents, representatives, experts and counsel that the independent managers may employ in connection with the exercise and performance of his or her rights and duties under our limited liability company agreement.

Our limited liability company agreement provides that to the extent permitted by law, the managers will not be personally liable for any of our debts, obligations or liabilities. Our limited liability company agreement further provides that, except as described below, to the fullest extent permitted by law, we will indemnify the managers against any liability incurred in connection with their services as managers for us if they acted in good faith and in a manner which they reasonably believed to be in or not opposed to our best interests. With respect to a criminal action, the managers will be indemnified unless they had reasonable cause to believe their conduct was unlawful. We will not indemnify the manager for any judgment, penalty, fine or other expense directly caused by their fraud, gross negligence or willful misconduct. In addition, unless ordered by a court, we will not indemnify the managers if a final adjudication establishes that their acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and were material to the cause of action. We will pay any indemnification amounts owed to the managers out of funds in the collection accounts, subject to the priority of payments described in “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated.”

We Are a Separate and Distinct Legal Entity from TCC

Under our limited liability company agreement, we may not file a voluntary petition for relief under the Bankruptcy Code, without the affirmative vote of our member and the affirmative vote of all of our managers, including the independent managers. TCC has agreed that it will not cause us to file a voluntary petition for relief under the Bankruptcy Code. Our limited liability company agreement requires us, except for financial reporting purposes (to the extent required by generally

 

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accepted accounting principles) and for federal income tax purposes, and, to the extent consistent with applicable state law, state income and franchise tax purposes, to maintain our existence separate from TCC including:

 

   

taking all necessary steps to continue our identity as a separate legal entity;

 

   

making it apparent to third persons that we are an entity with assets and liabilities distinct from those of TCC, other affiliates of TCC, the managers or any other person; and

 

   

making it apparent to third persons that, except for federal and certain other tax purposes, we are not a division of TCC or any of its affiliated entities or any other person.

Administration Agreement

TCC will, pursuant to an administration agreement between TCC and us, provide administrative services to us, including services relating to the preparation of financial statements, required filings with the securities and exchange commission, any tax returns we might be required to file under applicable law, qualifications to do business, and minutes of our managers’ meetings. We will pay TCC a fixed fee of $100,000 per annum, payable in installments of [$50,000 on each Payment Date] for performing these services, plus we will reimburse TCC for all costs and expenses for services performed by unaffiliated third parties and actually incurred by TCC in performing such services described above.

USE OF PROCEEDS

We will use the proceeds of the issuance of the transition bonds to pay the expenses of the issuance and sale of the transition bonds and to purchase transition property from TCC. In accordance with the financing order, TCC will use the proceeds it receives from the sale of the transition property for the purpose of reducing the amount of recoverable regulatory assets and other amounts related to the transition to competition, as determined by the Texas commission, on its regulatory books through the refinancing or reduction of its debt and equity.

RELATIONSHIP TO THE SERIES 2002-1 TRANSITION BONDS AND THE SERIES 2006-A TRANSITION BONDS

TCC’s Prior Securitizations

The transition bonds described in this prospectus are the third series of transition bonds which TCC has sponsored.

In February 2002, TCC Funding I, a special purpose, wholly owned subsidiary of TCC, issued $797,334,897 of Series 2002-1 transition bonds. These bonds were issued to securitize TCC’s generation-related regulatory assets recoverable through irrevocable nonbypassable transition charges provided for in the Restructuring Act and a financing order issued by the Texas commission on March 27, 2000. TCC currently acts as servicer with respect to the Series 2002-1 transition bonds. Since the date of issuance of the Series 2002-1 transition bonds, TCC Funding I has satisfied on a timely basis all interest payments on the Series 2002-1 transition bonds and has made all principal payments on the Series 2002-1 bonds in accordance with their expected amortization schedule.

In October 2006, TCC Funding II, a special purpose, wholly owned subsidiary of TCC, issued $1,739,700,000 of Series 2006-A transition bonds. These bonds were issued to securitize TCC’s generation-related regulatory assets recoverable through irrevocable nonbypassable transition charges provided for in the Restructuring Act and a financing order issued by the Texas commission on June 21, 2006. TCC currently acts as servicer with respect to the Series 2006-A transition bonds. Since the date of issuance of the Series 2006-A transition bonds, TCC Funding II has satisfied on a timely basis all interest payments on the Series 2006-A transition bonds and has made all principal payments on the Series 2006-A bonds in accordance with their expected amortization schedule.

Although TCC is the servicer with respect to the Series 2002-1 transition bonds and the Series 2006-A transition bonds and will be the sponsor and initial servicer with respect to transition bonds described in this prospectus, we are a separate legal entity from each of TCC Funding I and TCC Funding II. The transition bonds described herein will be payable from collateral that is separate from that securing the Series 2002-1 transition bonds and the Series 2006-A transition bonds. The Series 2002-1 transition bonds, Series 2006-A transition bonds and the transition bonds offered hereby will be backed by legally separate transition property; however, all such bonds will be backed by transition charges imposed on the same group of retail electric customers, will be collected by the same REP’s and will be serviced by the same servicer (i.e., TCC).

Neither TCC Funding I nor TCC Funding II will have any obligations under the bonds, and we will have no obligations under the Series 2002-1 transition bonds or the Series 2006-A transition bonds. In addition, neither TCC Funding I

 

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nor TCC Funding II has any obligations in respect of the transition bonds issued by the other. The collateral pledged to secure the transition bonds will be separate from the collateral that is securing the Series 2002-1 transition bonds and the Series 2006-A transition bonds, respectively, and from any collateral that would secure any other series of transition bonds that may be issued in the future. In the event a customer does not pay in full all amounts owed under any bill including transition charges, TCC is required to allocate any resulting shortfalls in transition charges ratably based on the amounts of transition charges owing to us and to TCC Funding I and TCC Funding II.

Intercreditor Agreement

With respect to the transition bonds, we will enter into an amendment to an intercreditor agreement with TCC (on behalf of itself and in its capacities as servicer and as servicer of the transition bonds issued by TCC Funding I and by TCC Funding II), the trustee of the transition bonds to which this prospectus relates, TCC Funding I, TCC Funding II and the trustee under each indenture relating to the transition bonds issued by TCC Funding I and by TCC Funding II pursuant to which:

 

   

the servicer that allocates and remits transition charge revenues received from retail electric providers for the transition bonds to which this prospectus relates and for the transition bonds issued by TCC Funding I and by TCC Funding II must be one and the same entity; and

 

   

in the event of a default by the servicer under any servicing agreement relating to the transition bonds issued by us or by TCC Funding I or by TCC Funding II, the trustees for such bonds, acting upon the vote of transition bondholders representing a majority of the outstanding principal amount of the transition bonds issued by each of us, TCC Funding I and TCC Funding II must agree upon a replacement servicer that performs the allocation services described in the preceding bullet.

If the trustees are unable to agree on a replacement servicer, no trustee would be able to replace TCC or any successor as servicer, and they will be required to petition a court of competent jurisdiction to appoint a replacement servicer. During the interim period, under the intercreditor agreement, any trustee could upon such a default require all collections by the servicer to be deposited directly into a designated account with a financial institution selected by the trustees, subject to satisfaction of the rating agency condition. The financial institution holding the designated account would then be responsible for allocating the collections in the account between transition charges relating to the transition bonds offered in this prospectus and the transition bonds issued by TCC Funding I and by TCC Funding II.

The intercreditor agreement provides that if, after the issuance of the transition bonds by us, TCC hereafter causes transition property to be created under any financing order and acts as servicer for the transition bonds issued pursuant to such financing order, the intercreditor agreement may, by written agreement, be amended and restated to add as parties the relevant issuer of such transition bonds, the indenture trustee for such bonds, and the servicer of such transition property in order to reflect the rights and obligations of such parties with respect to such transition property on terms substantially similar to the rights and obligations of TCC Funding I, TCC Funding II, us, TCC, the trustee and the trustees for TCC Funding I and TCC Funding II. No such amendment, however, shall be effective unless the rating agency condition shall have been satisfied and no party shall be required to execute any such amended agreement on terms which are materially more disadvantageous to it than those already contained in the intercreditor agreement.

If TCC becomes a party to any future trade receivables purchase and sale arrangement or similar arrangement under which it sells all or any portion of its accounts receivables, TCC and the other parties to such arrangement shall enter into an intercreditor agreement in connection therewith and the terms of the documentation evidencing such trade receivables purchase and sale arrangement or similar arrangement shall expressly exclude the transition charges from any receivables or other assets pledged or sold under such arrangement.

DESCRIPTION OF THE TRANSITION BONDS

General

We will issue the transition bonds pursuant to the terms of an indenture between us and the trustee specified in the prospectus supplement to finance the purchase by us of the transition property. The particular terms of the transition bonds will be described in the indenture and the series supplement. We have summarized below selected provisions of the indenture and the transition bonds. This summary does not purport to be complete and is subject to the terms and provisions of the indenture and series supplement, forms of which are filed as exhibits to the registration statement of which this prospectus forms a part. Please read “Where You Can Find More Information.”

 

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The aggregate principal amount of the transition bonds that may be authenticated and delivered under the indenture and the financing order may not exceed $800 million. The transition bonds may include one or more tranches. Tranches of transition bonds may differ from each other as to the interest rate, maturity and the timing, sequential order and amount of payments of principal or interest, or both.

The prospectus supplement will describe the following terms of the transition bonds and, if applicable, the tranches thereof:

 

   

the principal amount and, if more than one tranche is issued, the respective principal amounts of the tranches of the transition bonds,

 

   

the transition charges,

 

   

the annual rate at which interest accrues or the method or methods of determining such annual rate,

 

   

the payment dates,

 

   

the collateral,

 

   

the scheduled final payment date and the final maturity date of the transition bonds and, if more than one tranche is issued, such information for the respective tranches,

 

   

the issuance date of the transition bonds,

 

   

the authorized denominations,

 

   

the expected sinking fund schedule for principal of the transition bonds and, if more than one tranche is issued, such schedule for the tranches of transition bonds,

 

   

any other material terms of the tranches that are not inconsistent with the provisions of the indenture and that will not result in any rating agency reducing or withdrawing its rating of any outstanding tranche of transition bonds, and

 

   

the identity of the trustee.

The transition bonds are not a debt, liability or other obligation of the State of Texas, the Texas commission or of any political subdivision, governmental agency, authority or instrumentality of the State or Texas and do not represent an interest in or legal obligation of TCC or any of its affiliates, other than us. Neither TCC nor any of its affiliates will guarantee or insure the transition bonds. Financing orders authorizing the issuance of the transition bonds do not constitute a pledge of the full faith and credit of the State of Texas or of any of its political subdivisions. The issuance of the transition bonds under the Restructuring Act will not directly, indirectly or contingently obligate the State of Texas or any of its political subdivisions to levy or to pledge any form of taxation for the transition bonds or to make any appropriation for their payment.

Interest and Principal on the Transition Bonds

Interest will accrue on the principal balance of each transition bond at the interest rate specified in or determined in the manner specified in the prospectus supplement. Interest will be payable on each payment date, commencing on the date specified in the prospectus supplement. Interest payments will be made from collections of transition charges, including amounts available in the excess funds subaccount and, if necessary, the amounts available in the capital subaccount. In the event of default by a REP, the amounts in the REP deposit account or available from other credit support (up to an amount of the lesser of the payment defaults of a REP or that REP’s deposit or other credit support amount) will be used to make interest payments to the bondholders on each payment date for the transition bonds. Please read “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated.”

Principal of the transition bonds of each tranche will be payable in the amounts and on the payment dates specified in the prospectus supplement, but only to the extent that amounts in the collection account are available, and subject to the other limitations described below, under “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated.” Accordingly, principal of the transition bonds may be paid later, but not sooner, than reflected in the expected sinking fund schedule, except in the case of an acceleration. The prospectus supplement will set forth the expected sinking fund schedule and expected amortization schedule for the transition bonds and, if applicable, the tranches thereof. The expected sinking fund schedule will be established in a manner required by the financing order. If principal of any tranche is not paid in full on the final maturity date for such tranche, an event or default will occur. On any payment date, unless an event of default has occurred and is continuing and the transition bonds have been declared due and payable, the trustee will make principal payments on the transition bonds only until the outstanding principal balances of those transition bonds have been reduced to the principal balances specified in the applicable expected amortization schedule for that payment date. The trustee

 

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will retain in the excess funds subaccount for payment on later payment dates any collections of transition charges in excess of amounts payable as:

 

   

fees and expenses of the servicer, the independent managers and the trustee (including the servicing fee),

 

   

payments of interest on and principal of the transition bonds,

 

   

investment earnings on amounts in the capital subaccount released to us, and

 

   

allocations to the capital subaccount (all as described under “Security for the Transition Bonds—How Funds in the Collection Account will be Allocated”).

If the trustee receives insufficient collections of transition charges for any payment date, and amounts in the collection account (and the applicable subaccounts of the collection account) are not sufficient to make up the shortfall, principal of any tranche of transition bonds may be payable later than expected, as described in this prospectus. Please read “Risk Factors—Other Risks Associated with an Investment in the Transition Bonds.” The failure to make a scheduled payment of principal on the transition bonds because there are not sufficient funds in the collection account does not constitute a default or an event of default under the indenture, except for the failure to pay in full the unpaid balance of any tranche upon the final maturity date for such tranche. If an event of default (other than a breach by the State of Texas of its pledge) has occurred and is continuing, then the trustee or the holders of not less than a majority in principal amount of the transition bonds then outstanding may declare the transition bonds to be immediately due and payable, in which event the entire unpaid principal amount of the transition bonds will become due and payable. Please read “—Events of Default; Rights Upon Event of Default.”

Payments on the Transition Bonds

The trustee will pay on each payment date to the holders of each tranche of transition bonds, to the extent of available funds in the collection account, all payments of principal and interest then due. The trustee will make each payment other than the final payment with respect to any transition bonds to the holders of record of the transition bonds of the applicable tranche on the record date for that payment date. The trustee will make the final payment for each tranche of transition bonds, however, only upon presentation and surrender of the transition bonds of that tranche at the office or agency of the trustee specified in the notice given by the trustee of the final payment. The trustee will mail notice of the final payment to the bondholders no later than five days prior to the final payment date, specifying the date set for the final payment and the amount of the payment.

The failure to pay accrued interest on any payment date (even if the failure is caused by a shortfall in transition charges received) will result in an event of default for the transition bonds unless such failure is cured within five business days. Please read “—Events of Default; Rights Upon Event of Default.” Any interest not paid when due (plus interest on the defaulted interest at the applicable interest rate to the extent lawful) will be payable to the bondholders on a special record date. The special record date will be at least fifteen business days prior to the date on which the trustee is to make such special payment (a special payment date). We will fix any special record date and special payment date. At least 10 days before any special record date, the trustee will mail to each affected bondholder a notice that states the special record date, the special payment date and the amount of defaulted interest (plus interest on the defaulted interest) to be paid.

The entire unpaid principal amount of the transition bonds will be due and payable:

 

   

on the final maturity date,

 

   

if an event of default under the indenture occurs and is continuing and the trustee or the holders of a majority in principal amount of the transition bonds have declared the transition bonds to be immediately due and payable.

However, the nature of our business will result in payment of principal upon an acceleration of the transition bonds being made as funds become available. Please read “Risk Factors—Risks associated with the Unusual Nature of the Transition Property—foreclosure of the trustee’s lien on the transition property securing the transition bonds might not be practical, and acceleration of the transition bonds before maturity might have little practical effect” and “—You may experience material payment delays or incur a loss on your investment in the transition bonds because the source of funds for payment is limited.”

At the time, if any, we issue the transition bonds in the form of definitive bonds and not to DTC or its nominee, the trustee will make payments with respect to that tranche on a payment date or a special payment date by check mailed to each holder of a definitive bond of the tranche of record on the applicable record date at its address appearing on the register maintained with respect to the transition bonds. Upon written application by a holder of any tranche of transition bonds in

 

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physical form to the trustee not later than the applicable record date, the trustee will make payments by wire transfer to an account maintained by the payee.

If any special payment date or other date specified for any payments to bondholders is not a business day, the trustee will make payments scheduled to be made on that special payment date or other date on the next succeeding business day and no interest will accrue upon the payment during the intervening period.

Registration and Transfer of the Transition Bonds

Transition bonds in definitive form will be transferable and exchangeable at the office of the registrar identified in the prospectus supplement. Unless otherwise specified in the prospectus supplement, there will be no service charge for any registration or transfer of the transition bonds, but the trustee may require the owner to pay a sum sufficient to cover any tax or other governmental charge.

We will issue each tranche of transition bonds in the minimum initial denominations set forth in the prospectus supplement.

The trustee will make payments of interest and principal on each payment date to the bondholders in whose names the transition bonds were registered on the record date.

Transition Bonds Will Be Issued in Book-Entry Form

Unless we specify otherwise in the prospectus supplement, the transition bonds will be available to investors only in the form of book-entry transition bonds. You may hold your bonds through DTC in the United States, Clearstream Banking, Luxembourg, S.A., referred to as Clearstream, or Euroclear in Europe or in any other manner we describe in the prospectus supplement. You may hold your bonds directly with one of these systems if you are a participant in the system or indirectly through organizations that are participants.

The Role of DTC, Clearstream and Euroclear

Cede & Co., as nominee for DTC, will hold the global bond or bonds representing the transition bonds. Clearstream and Euroclear will hold omnibus positions on behalf of the Clearstream customers and Euroclear participants, respectively, through customers’ securities accounts in Clearstream’s and Euroclear’s names on the books of their respective depositaries. These depositaries will, in turn, hold these positions in customers’ securities accounts in the depositaries’ names on the books of DTC.

The Function of DTC

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

 

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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 various 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 various countries through established depositary and custodial relationships. Clearstream is registered as a bank in Luxembourg and therefore is subject to regulation by the Luxembourg 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, among others, and may include the underwriters of the transition bonds. Clearstream’s U.S. customers are limited to securities brokers and dealers and banks. Clearstream has customers located in various countries. Indirect access to Clearstream is also 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 to facilitate settlement of trades between Clearstream and Euroclear.

The Function of Euroclear

The Euroclear System was created in 1968 in Brussels. Euroclear holds securities and book-entry interests in securities for Euroclear participants and facilitates the clearance and settlement of securities transactions between Euroclear participants, and between Euroclear participants and participants of certain other securities intermediaries through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of securities and any risk from lack of simultaneous transfers of securities and cash. Such transactions may be settled in any of various currencies, including United States dollars. The Euroclear System includes various other services, including, among other things, safekeeping, administration, clearance and settlement, securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described below. The Euroclear System is operated by Euroclear Bank SA/NV. Euroclear participants include central banks and other banks, securities brokers and dealers and other professional financial intermediaries and may include the underwriters of the transition bonds. Indirect access to the Euroclear System 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 Euroclear are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). These Terms and Conditions govern transfers of securities and cash within the Euroclear System, withdrawals of securities and cash from the Euroclear System and receipts of payments with respect to securities in the Euroclear System. All securities in Euroclear are held on a fungible basis without attribution of specific securities to specific securities clearance accounts. Euroclear acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.

The Rules for Transfers Among DTC, Clearstream or Euroclear Participants

Transfers between DTC participants will occur in accordance with DTC rules. Transfers between Clearstream customers or Euroclear participants will occur in the ordinary way in accordance with their applicable rules and operating procedures and will be settled using procedures applicable to conventional securities held in registered form.

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 through DTC in accordance with DTC rules on behalf of the relevant European international clearing system by its depositary; however, those cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in that system in accordance with its rules and procedures and within its established deadlines, which will be based on European time. The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its depositary to take action to effect final settlement on its behalf by delivering or receiving transition bonds in DTC and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream customers and Euroclear participants may not deliver instructions directly to Clearstream’s and Euroclear’s depositaries.

 

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Because of time-zone differences, credits of securities in Clearstream or Euroclear as a result of a transaction with a participant will be made during the subsequent securities settlement processing, dated the business day following the DTC settlement date, and those credits or any transactions in those securities settled during that processing will be reported to the relevant Clearstream customer or Euroclear participant on that business day. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream customer or a Euroclear participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.

DTC Will Be the Holder of the Transition Bonds

Transition bondholders that are not participants or indirect participants but desire to purchase, sell or otherwise transfer ownership of, or other interest in, transition bonds may do so only through participants and indirect participants. In addition, transition bondholders will receive all payments of principal of and interest on the transition bonds from the trustee through the participants, who in turn will receive them from DTC. Under a book-entry format, transition bondholders may experience some delay in their receipt of payments because payments will be forwarded by the trustee to Cede & Co., as nominee for DTC. DTC will forward those payments to its participants, who thereafter will forward them to indirect participants or transition bondholders. It is anticipated that the only “bondholder” will be Cede & Co., as nominee of DTC. The trustee will not recognize transition bondholders as bondholders, as that term is used in the indenture, and transition bondholders will be permitted to exercise the rights of bondholders only indirectly through the participants, who in turn will exercise the rights of transition bondholders through DTC.

Under the rules, regulations and procedures creating and affecting DTC and its operations, DTC is required to make book-entry transfers of book-entry certificates among participants on whose behalf it acts with respect to the transition bonds and is required to receive and transmit payments of principal and interest on the transition bonds. Participants and indirect participants with whom transition bondholders have accounts with respect to the transition bonds similarly are required to make book-entry transfers and receive and transmit those payments on behalf of their respective transition bondholders. Accordingly, although transition bondholders will not possess transition bonds, transition bondholders will receive payments and will be able to transfer their interests.

Because DTC can act only on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of a transition bondholder to pledge transition bonds to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of those bonds, may be limited due to the lack of a physical certificate for those bonds.

DTC has advised us that it will take any action permitted to be taken by a transition bondholder under the indenture only at the direction of one or more participants to whose account with DTC the transition bonds are credited. Additionally, DTC has advised us that it will take those actions with respect to specified percentages of the collateral amount only at the direction of and on behalf of participants whose holdings include interests that satisfy those specified percentages. DTC may take conflicting actions with respect to other interests to the extent that those actions are taken on behalf of participants whose holdings include those interests.

Except as required by law, none of any underwriter, the servicer, TCC, the trustee, us or any other party will have any liability for any aspect of the records relating to or payments made on account of beneficial interests in the certificates held by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial interests.

How Transition Bond Payments Will Be Credited by Clearstream and Euroclear

Payments with respect to transition bonds held through Clearstream or Euroclear will be credited to the cash accounts of Clearstream customers or Euroclear participants in accordance with the applicable system’s rules and operating procedures, to the extent received by its depositary. Those payments will be subject to tax reporting in accordance with relevant United States tax laws and regulations. Please read “Material U.S. Federal Income Tax Consequences” in this prospectus. Clearstream or the Euroclear operator, as the case may be, will take any other action permitted to be taken by a transition bondholder under the indenture on behalf of a Clearstream customer or Euroclear participant only in accordance with its applicable rules and operating procedures and subject to its depositary’s ability to effect those actions on its behalf through DTC.

 

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Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of the transition bonds among participants of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform those procedures, and those procedures may be discontinued at any time.

Definitive Transition Bonds

Unless otherwise specified in the prospectus supplement, we will issue transition bonds in registered, certificated form to bondholders, or their nominees, rather than to DTC, only under the circumstances provided in the indenture, which will include: (1) us advising the trustee in writing that DTC is no longer willing or able to properly discharge its responsibilities as nominee and depositary with respect to the book-entry bonds and that we are unable to locate a qualified successor, (2) our electing to terminate the book-entry system through DTC, with written notice to the trustee, or (3) after the occurrence of an event of default under the indenture, holders of transition bonds aggregating not less than a majority of the aggregate outstanding principal amount of the transition bonds maintained as book-entry bonds advising us, the trustee, and DTC in writing that the continuation of a book-entry system through DTC (or a successor) is no longer in the best interests of those bondholders. Upon issuance of definitive bonds, the transition bonds evidenced by such definitive bonds will be transferable directly (and not exclusively on a book-entry basis) and registered holders will deal directly with the trustee with respect to transfers, notices and payments.

Upon surrender by DTC of the definitive securities representing the transition bonds and instructions for registration, the trustee will issue the transition bonds in the form of definitive bonds, and thereafter the trustee will recognize the registered holders of the definitive bonds as bondholders under the indenture.

The trustee will make payment of principal of and interest on the transition bonds directly to bondholders in accordance with the procedures set forth herein and in the indenture and the prospectus supplement. The trustee will make interest payments and principal payments to bondholders in whose names the definitive bonds were registered at the close of business on the related record date. The trustee will make payments by check mailed to the address of the bondholder as it appears on the register maintained by the trustee or in such other manner as may be provided in the series supplement and except that certain payments will be made by wire transfer as described in the indenture. The trustee will make the final payment on any transition bond (whether definitive bonds or notes registered in the name of Cede & Co.), however, only upon presentation and surrender of the bond on the final payment date at the office or agency that is specified in the notice of final payment to bondholders. The trustee will provide the notice to registered bondholders not later than the fifth day prior to the final payment date.

Definitive bonds will be transferable and exchangeable at the offices of the transfer agent and registrar, which initially will be the trustee. There will be no service charge for any registration of transfer or exchange, but the transfer agent and registrar may require payment of a sum sufficient to cover any tax or other governmental charge imposed in connection therewith.

Optional Redemption

The indenture does not permit an optional redemption of transition bonds under any circumstances.

Relationship to the Series 2002-1 Transition Bonds and Series 2006-A Transition Bonds

Although the Series 2002-1 transition bonds, Series 2006-A transition bonds and the transition bonds offered hereby are issued by different issuing entities each of whom has its own transition property, transition charges relating to each such issuing entity will be collected through single bills to individual retail customers and associated retail electric providers that include all charges related to the purchase of electricity, without separately itemizing the transition charge component of the bill or the transition charge components applicable to each issuing entity. In the event a customer does not pay in full all amounts owed under any bill including transition charges, TCC will allocate that shortfall, first, ratably based on the amount owed to TCC or other parties (including those amounts associated with the bonds, the Series 2002-1 transition bonds and Series 2006-A transition bonds) and the amount owed for other fees and charges, other than late charges, and second, all remaining collections will be allocated to late charges. Please read “The Servicing Agreement—Remittances to Collection Account” and “Relationship to the Series 2002-1 Transition Bonds and The Series 2006-A Transition Bonds—Intercreditor Agreement.”

 

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Access of Bondholders

Upon written request of any bondholder or group of bondholders of transition bonds evidencing not less than 10 percent of the aggregate outstanding principal amount of the transition bonds, the trustee will afford the bondholder or bondholders making such request a copy of a current list of bondholders for purposes of communicating with other bondholders with respect to their rights under the indenture.

The indenture does not provide for any annual or other meetings of bondholders.

Reports to Bondholders

On or prior to each payment date, special payment date or any other date specified in the indenture for payments with respect to any tranche of transition bonds, the servicer will deliver to the trustee, and the trustee will make available on its website (currently located at https://www.usbank.com/abs), a statement prepared by the servicer with respect to the payment to be made on the payment date, special payment date or other date, as the case may be, setting forth the following information:

 

   

the amount of the payment to bondholders allocable to (1) principal and (2) interest,

 

   

the aggregate outstanding principal balance of the transition bonds, before and after giving effect to payments allocated to principal reported immediately above,

 

   

the difference, if any, between the amount specified immediately above and the principal amount scheduled to be outstanding on that date according to the related expected amortization schedule,

 

   

any other transfers and payments to be made on such payment date, including amounts paid to the trustee and the servicer, and

 

   

the amounts on deposit in the capital subaccount and the excess funds subaccount, after giving effect to the foregoing payments.

Unless and until transition bonds are no longer issued in book-entry form, the reports will be provided to the depository for the transition bonds, or its nominee, as sole beneficial owner of the transition bonds. The reports will be available to bondholders upon request to the trustee or the servicer. Such reports will not constitute financial statements prepared in accordance with generally accepted accounting principles. The financial information provided to bondholders will not be examined and reported upon by an independent public accountant. In addition, an independent public accountant will not provide an opinion on the financial information.

Within the prescribed period of time for tax reporting purposes after the end of each calendar year during the term of the transition bonds, the trustee, so long as it is acting as paying agent and transfer agent and registrar for the transition bonds, will, upon written request by us or any transition bondholder, mail to persons who at any time during the calendar year were bondholders and received any payment on the transition bonds, a statement containing certain information for the purposes of the bondholder’s preparation of United States federal and state income tax returns.

Website Disclosure

We will, to the extent permitted by and consistent with our legal obligations under applicable law, cause to be posted on a website associated with TCC, currently located at www.aep.com, periodic reports containing to the extent such information is reasonably available to us:

 

   

the final prospectus for the transition bonds,

 

   

a statement of transition charge remittances made to the trustee,

 

   

a statement reporting the balances in the collection account and in each subaccount of the collection account as of the end of each quarter or the most recent date available,

 

   

a statement showing the balance of outstanding transition bonds that reflects the actual periodic payments made on the transition bonds during the applicable period,

 

   

the semi-annual servicer’s certificate delivered for the transition bonds pursuant to the servicing agreement,

 

   

the text (or a link to the website where a reader can find the text) of each true-up filing in respect of the outstanding transition bonds and the results of each such true-up filing,

 

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any change in the long-term or short-term credit ratings of the servicer assigned by the rating agencies,

 

   

material legislative or regulatory developments directly relevant to the transition bonds, and

 

   

any reports and other information that we are required to file with the SEC under the Securities Exchange Act of 1934.

We and the Trustee May Modify the Indenture

Modifications of the Indenture that do not Require Consent of Transition Bondholders

From time to time, and without the consent of the bondholders (but with prior notice to the rating agencies and, in certain instances, with the consent or deemed consent of the Texas commission and when authorized by an issuer order), we may enter into one or more agreements supplemental to the indenture for various purposes described in the indenture, including:

 

   

to correct or amplify the description of any property including, without limitation, the collateral subject to the indenture, or to better convey, assure and confirm to the trustee the property subject to the indenture, or to add additional property,

 

   

to add to the covenants for the benefit of the bondholders and the trustee, or surrender any right or power conferred to us with the indenture,

 

   

to convey, transfer, assign, mortgage or pledge any property to or with the trustee,

 

   

to cure any ambiguity or correct or supplement any provision in the indenture or in any supplemental indenture which may be inconsistent with any other provision in the indenture or in any supplemental indenture or to make any other provisions with respect to matters or questions arising under the indenture or in any supplemental indenture, provided however, that (i) such action will not, as evidenced by an opinion of counsel, adversely affect in any material respect the interests of the bondholders and (ii) the rating agency condition shall have been satisfied with respect thereto,

 

   

to evidence and provide for the acceptance of the appointment under the indenture of a successor trustee with respect to the bonds and to add or change any of the provisions of the indenture as shall be necessary to facilitate the administration of the trusts thereunder by more than one trustee,

 

   

to evidence the succession of another person to us in accordance with the terms of the indenture and the assumption by any such successor of the covenants in the indenture and in the transition bonds,

 

   

to modify, eliminate or add to the provisions of the indenture to such extent as shall be necessary to effect qualification under the Trust Indenture Act of 1939 or under any similar or successor federal statute hereafter enacted,

 

   

to qualify the transition bonds for registration with a clearing agency,

 

   

to satisfy any rating agency requirements.

We may also, without the consent of the bondholders, enter into one or more other agreements supplemental to the indenture so long as (i) the supplemental agreement does not, as evidenced by an opinion of counsel experienced in structured finance transactions, adversely affect the interests of any holders of transition bonds then outstanding in any material respect, (ii) the rating agency condition shall have been satisfied with respect thereto, and (iii) with respect to any amendment that would increase qualifying costs, we have obtained the consent or deemed consent of the PUCT.

Modifications of the Indenture that Require the Approval of Transition Bondholders.

We may, with the consent of bondholders holding not less than a majority of the aggregate outstanding principal amount of the transition bonds (and with prior notice to the rating agencies and with the consent or deemed consent of the Texas commission if such supplemental indenture will increase ongoing qualified costs), enter into one or more indentures supplemental to the indenture for the purpose of, among other things, adding any provisions to or changing in any manner or eliminating any of the provisions of the indenture. In determining whether a majority of holders have consented, transition bonds owned by us, TCC or any affiliate of us shall be disregarded, except that, in determining whether the indenture trustee shall be protected in relying upon any such consent, the indenture trustee shall only be required to disregard any transition bonds it actually knows to be so owned. No supplement, however, may, without the consent of each bondholder of each tranche affected thereby, take certain actions enumerated in the indenture, including:

 

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change the date of payment of any installment of principal of or premium, if any, or interest on any transition bond of such tranche, or reduce in any manner the principal amount thereof, the interest rate thereon or the premium, if any, with respect thereto,

 

   

change the provisions of the indenture and any applicable supplemental indenture relating to the application of collections on, or the proceeds of the sale of, the collateral to payment of principal of or premium, if any, or interest on the transition bonds or tranche, or change the coin or currency in which any transition bond or any interest thereon is payable,

 

   

impair the right to institute suit for the enforcement of those provisions of the indenture specified therein regarding payment or application of funds,

 

   

reduce the percentage of the aggregate amount of the outstanding transition bonds, or of a tranche thereof, the consent of the transition bondholders of which is required for any supplemental indenture, or the consent of the transition bondholders of which is required for any waiver of compliance with those provisions of the indenture specified therein or of defaults specified therein and their consequences provided for in the indenture or modify certain aspects of the definition of the term “outstanding,”

 

   

reduce the percentage of the outstanding amount of the transition bonds or tranche the holders of which are required to consent to direct the trustee to sell or liquidate the collateral,

 

   

modify any of the provisions of the indenture in a manner so as to affect the amount of any payment of interest, principal or premium, if any, payable on any transition bond of such tranche on any payment date or change the expected sinking fund schedules or final maturity dates of any transition bonds of such tranche,

 

   

decrease the required capital amount,

 

   

permit the creation of any lien ranking prior to or on a parity with the lien of the indenture with respect to any of the collateral for the transition bonds or tranche or, except as otherwise permitted or contemplated in the indenture, terminate the lien of the indenture on any property at any time subject thereto or deprive the holder of any transition bond of the security provided by the lien of the indenture, or

 

   

cause any material adverse federal income tax consequence to the seller, the issuer, the manager, the indenture trustee or the beneficial owners of the transition bonds.

Promptly following the execution of any supplement to the indenture, the trustee will furnish either a copy of such supplement or written notice of the substance of the supplement to each bondholder, and a copy of such supplement to each rating agency.

Notification of the Rating Agencies, the Texas Commission, the Trustee and the Transition Bondholders of Any Modification

If we, TCC or the servicer or any other party to the applicable agreement:

 

   

proposes to amend, modify, waive, supplement, terminate or surrender, or agree to any other amendment, modification, waiver, supplement, termination or surrender of, the terms of the sale agreement or the servicing agreement, or

 

   

waives timely performance or observance by TCC or the servicer under the sale agreement, the intercreditor agreement or the servicing agreement,

in each case in a way which would materially and adversely affect the interests of transition bondholders, we must first notify the rating agencies of the proposed amendment and satisfy the rating agency condition. Upon receiving notification regarding satisfaction of the rating agency condition, we must thereafter notify the trustee and the Texas commission in writing and the trustee shall notify the transition bondholders of the proposed amendment and whether the rating agency condition has been satisfied with respect thereto. The trustee will consent to this proposed amendment, modification, supplement or waiver only with the written consent of the holders of a majority of the outstanding principal amount of the transition bonds of the tranches materially and adversely affected thereby. In determining whether a majority of holders have consented, transition bonds owned by us, TCC or any affiliate of us shall be disregarded, except that, in determining whether the indenture trustee shall be protected in relying upon any such consent, the indenture trustee shall only be required to disregard any transition bonds it actually knows to be so owned.

 

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Modifications to the Sale Agreement, the Administration Agreement and the Servicing Agreement

With the prior written consent of the trustee, the sale agreement, the administration agreement, the intercreditor agreement and the servicing agreement may be amended, so long as the rating agency condition is satisfied in connection therewith, at any time and from time to time, without the consent of the transition bondholders but, with respect to amendments that would increase ongoing qualified costs as defined in the financing order, with the consent or deemed consent of the Texas commission (other than with respect to the intercreditor agreement). However, any such amendment may not adversely affect the interest of any transition bondholder in any material respect without the consent of the holders of a majority of the outstanding principal amount of the transition bonds. In determining whether a majority of holders have consented, transition bonds owned by us, TCC or any affiliate of us shall be disregarded, except that, in determining whether the indenture trustee shall be protected in relying upon any such consent, the indenture trustee shall only be required to disregard any transition bonds it actually knows to be so owned. The parties to the servicing agreement acknowledge that the financing order provides that the Texas commission, acting through its authorized legal representative and for the benefit of Texas ratepayers, may enforce the servicer’s obligations imposed under the servicing agreement pursuant to the financing order to the extent permitted by law.

Enforcement of the Sale Agreement, the Administration Agreement, the Intercreditor Agreement and the Servicing Agreement

The indenture provides that we will take all lawful actions to enforce our rights under the sale agreement, the administration agreement, the intercreditor agreement and the servicing agreement. The indenture also provides that we will take all lawful actions to compel or secure the performance and observance by TCC, the administrator and the servicer of their respective obligations to us under or in connection with the sale agreement, the administration agreement, the intercreditor agreement and the servicing agreement. So long as no event of default occurs and is continuing, we may exercise any and all rights, remedies, powers and privileges lawfully available to us under or in connection with the sale agreement, the administration agreement, the intercreditor agreement and the servicing agreement. However, if we or the servicer propose to amend, modify, waive, supplement, terminate or surrender in any material respect, or agree to any material amendment, modification, supplement, termination, waiver or surrender of, the process for adjusting the transition charges, we must notify the trustee and the Texas commission in writing and the trustee must notify the transition bondholders of this proposal. In addition, the trustee may consent to this proposal only with the written consent of the holders of a majority of the principal amount of the outstanding transition bonds of the tranches materially and adversely affected thereby and only if the rating agency condition is satisfied. In determining whether a majority of holders have consented, transition bonds owned by us, TCC or any affiliate of us shall be disregarded, except that, in determining whether the indenture trustee shall be protected in relying upon any such consent, the indenture trustee shall only be required to disregard any transition bonds it actually knows to be so owned. In addition, any proposed amendment of the indenture, the sale agreement or the servicing agreement that would increase ongoing qualified costs as defined in the financing order requires the prior written consent or deemed consent of the Texas commission.

If an event of default occurs and is continuing, the trustee may, and, at the written direction of the holders of a majority of the outstanding amount of all affected tranches of transition bonds, exercise all of our rights, remedies, powers, privileges and claims against TCC, the administrator and servicer, under or in connection with the sale agreement, administration agreements, intercreditor agreements and servicing agreement, and any right of ours to take this action shall be suspended.

Procedure for obtaining consent or deemed consent of the Texas commission

To the extent the consent of the Texas commission is required to effect any amendment, modification or supplemental indenture of the indenture or any other of the basic documents, the indenture sets forth procedures whereby we may request such consent and the Texas commission shall, within 30 days of receiving such a request, either (i) provide notice of its consent or lack of consent, or (ii) be conclusively deemed to have consented to the proposed amendment, modification or supplemental indenture, unless, within such 30 day period, the Texas commission delivers to us a written statement requesting an additional amount of time, not to exceed 30 days, in which to consider whether to consent to the proposed amendment, modification or supplemental indenture. If the Texas commission requests an extension of time as described above, the Texas commission shall either (i) provide notice of its consent or lack of consent no later than the last day of such extended period of time or (ii) be conclusively deemed to have consented to the proposed amendment, modification or supplemental indenture on the last day of such extended period of time.

Our Covenants

We may not consolidate with or merge into any other entity, unless:

 

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the entity formed by or surviving the consolidation or merger is organized under the laws of the United States or any State;

 

   

the entity expressly assumes, by a supplemental indenture, the performance or observance of all of our agreements and covenants under the indenture and the series supplement;

 

   

the entity expressly assumes all of our obligations and succeeds to all of our rights under the sale agreement, servicing agreement and any other basic document to which we are a party;

 

   

no default, event of default or servicer default under the indenture has occurred and is continuing immediately after the merger or consolidation;

 

   

the rating agency condition will have been satisfied with respect to the merger or consolidation;

 

   

we have delivered to TCC, the trustee and the rating agencies an opinion or opinions of outside tax counsel (as selected by us, in form and substance reasonably satisfactory to TCC and the trustee, and which may be based on a ruling from the IRS) to the effect that the consolidation or merger will not result in a material adverse federal or state income tax consequence to us, TCC, the trustee or the then existing bondholders;

 

   

any action as is necessary to maintain the lien and the first priority perfected security interest in the collateral created by the indenture and the series s