STATE OF CALIFORNIA Edmund G. Brown Jr., Governor PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE SAN FRANCISCO, CA 94102-3298 November 20, 2014 Advice Letter: 3014-E Megan Scott-Kakures Vice President, Regulatory Operations Southern California Edison Company 2244 Walnut Grove Avenue Rosemead, California 91770 SUBJECT: Qualified Nuclear Decommissioning Trust Amendments to Investment Management Agreements Dear Ms. Scott-Kakures: Advice Letter 3014-E is effective as of April 11, 2014. Sincerely, Edward Randolph, Director Energy Division
ADVICE LETTER (AL) SUSPENSION NOTICE ENERGY DIVISION Utility Name: SCE Date Utility Notified: 4/4/14 Utility No./Type: 39/Electric [ x ] E-Mail to: Darrah.Morgan@sce.com Advice Letter No. 3014-E [ ] Fax No.: N/A Date AL filed: March 12, 2014 ED Staff Contact: Eric Greene Utility Contact Person: Darrah Morgan Utility Phone No. 626-302-2086 For Internal Purposes Only: Date Calendar Clerk Notified / / Date Commissioners/Advisors Notified / / [ x ] INITIAL SUSPENSION (up to 120 DAYS) This is to notify that the above-indicated AL is suspended for up to 120 days beginning April 11, 2014 for the following reason(s) below. If the AL requires a Commission resolution and the Commission s deliberation on the resolution prepared by Energy Division extends beyond the expiration of the initial suspension period, the advice letter will be automatically suspended for up to 180 days beyond the initial suspension period. [ ] A Commission Order may be required in a resolution to address the advice letter. [ ] Advice Letter Requests a Commission Order [ X ] Advice Letter Requires Staff Review Expected duration of initial suspension period: 120 days [ ] FURTHER SUSPENSION (up to 180 DAYS beyond initial suspension period) The AL requires a Commission resolution and the Commission s deliberation on the resolution prepared by Energy Division have extended beyond the expiration of the initial suspension period. The advice letter is suspended for up to 180 days beyond the initial suspension period. If you have any questions regarding this matter, please contact Eric Greene at (415) 703-5560 (eg1@cpuc.ca.gov): cc: Edward Randolph Maria Salinas EDTariffUnit * Note: reference Decision D.02-02-049, dated February 21, 2002, and Rule 4.6 appended to D.05-01-032.
Megan Scott-Kakures Vice President, Regulatory Operations March 12, 2014 ADVICE 3014-E (U 338-E) PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION SUBJECT: Qualified Nuclear Decommissioning Trust Amendments to Investment Management Agreements Southern California Edison Company (SCE), on behalf of its Nuclear Facilities Decommissioning Master Trust Committee (Committee), hereby submits for approval amendments (the Amendments ) to two of its Investment Management Agreements (Agreements) with existing investment managers, Pacific Investment Management Company LLC (PIMCO) and Blackrock Financial Management, Inc. (Blackrock). PURPOSE This advice filing requests the California Public Utilities Commission (Commission) to approve the Amendments. The Amendments allow for short-term investment portfolios to be established with PIMCO and Blackrock, and set forth the investment guidelines and fee schedules for the new portfolios. Other terms of the Agreements remain unchanged. The short-term investment portfolios are being established to invest cash that will be used for the decommissioning of San Onofre Nuclear Generating Station Units 2 and 3 (SONGS) in the near term. BACKGROUND In Order Instituting Investigation 86 (OII 86), the Commission conducted an extensive investigation, on its own motion, into alternative methods of financing the ultimate cost of decommissioning the nuclear power plants owned by California utilities. 1 In Decision (D).87-05-062, the Commission adopted externally managed trust funds as the investment vehicles for accruing funds for the ultimate decommissioning of the nuclear 1 OII 86, January 21, 1981, p. 3. P.O. Box 800 8631 Rush Street Rosemead, California 91770 (626) 302-6855 Fax (626) 302-4829
ADVICE 3014-E (U 338-E) - 2 - March 12, 2014 power plants owned by California utilities. 2 In that decision, the Commission also established guidelines for preparing these trust agreements. 3 In response to D.87-05-062, SCE established two trusts for its nuclear decommissioning costs. The Qualified Trust was established as the vehicle to hold the decommissioning funds for contributions that qualify for an income tax deduction under Section 468A of the Internal Revenue Code, and the Nonqualified Trust was designed to hold the remaining funds. On November 25, 1987, the Commission approved the SCE Trust Agreements by Resolution E-3057. The Trusts were initially funded on February 2, 1988, and the SCE Trust Agreements have been amended and restated from time-totime thereafter with Commission approval. Pursuant to Sections 3.04 and 5.01 of the Trust Agreements, and subject to Commission approval of the investment management agreements, the Committee is authorized to appoint one or more Investment Managers to direct the investment of all or part of the trust assets. The Committee entered into Investment Management Agreements with PIMCO and Blackrock on June 21, 2001 and March 4, 1997, respectively. The Committee now seeks to amend the Agreements by signing the letters attached hereto as Exhibit A. In light of the permanent retirement of SONGS, the Committee decided to change the asset allocation of the Qualified Trust in order to reduce long-term volatility and risk. The Committee reduced the allocation of funds in the equity portfolio, and elected to keep a portion of the funds that are expected to be used for early decommissioning expenses in cash. This change resulted in a larger cash portfolio than normal in the Qualified Trust. In order to maximize the returns of this new cash portfolio, the Committee seeks to invest the funds in the PIMCO Short-Term Limited Discretion Portfolio and the Blackrock Short-Duration Fixed Income Portfolio. These two portfolios were selected because both firms have a long history of managing taxable Nuclear Decommissioning Trust (NDT) portfolios, have strong performance track records, are stable organizations, and the portfolios could be established in a timely manner with existing investment managers pursuant to the terms of existing Investment Management Agreements. The Committee considered the following factors in the selection process: (1) Blackrock s and PIMCO s experience in managing taxable trust funds and the total assets the investment manager manages; (2) Blackrock s and PIMCO s five-year track record against benchmarks; (3) the type of investments to be managed and the investment strategy to be followed (including the selected benchmark); (4) the amount of funds to be allocated to the investment managers and the source of funds to be transferred; and (5) the fees to be charged by the investment managers. 2 D.87-05-062, May 29, 1987, Ordering Paragraph No. 2, pp. 37-38. 3 Id. Conclusions of Law 5 and 6, p. 37. 2
ADVICE 3014-E (U 338-E) - 3 - March 12, 2014 TIER DESIGNATION Pursuant to Ordering Paragraph 11 of D.13-01-039, this advice letter is submitted with a Tier 2 designation. EFFECTIVE DATE This advice filing will become effective on April 11, 2014, the 30 th calendar day after the date filed. NOTICE Anyone wishing to protest this advice filing may do so by letter via U.S. Mail, facsimile, or electronically, any of which must be received by the Energy Division and SCE no later than 20 days after the date of this advice filing. Protests should be mailed to: CPUC, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, California 94102 E-mail: EDTariffUnit@cpuc.ca.gov Copies should also be mailed to the attention of the Director, Energy Division, Room 4004 (same address above). In addition, protests and all other correspondence regarding this advice letter should also be sent by letter and transmitted via facsimile or electronically to the attention of: Megan Scott-Kakures Vice President of Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, California 91770 Facsimile: (626) 302-4829 E-mail: AdviceTariffManager@sce.com Les Starck Senior Vice President, Regulatory Affairs c/o Karyn Gansecki Southern California Edison Company 601 Van Ness Avenue, Suite 2030 San Francisco, California 94102 Facsimile: (415) 929-5544 E-mail: Karyn.Gansecki@sce.com There are no restrictions on who may file a protest, but the protest shall set forth specifically the grounds upon which it is based and shall be submitted expeditiously. 3
ADVICE 3014-E (U 338-E) - 4 - March 12, 2014 In accordance with Section 4 of General Order (GO) 96-B SCE is serving copies of this advice filing to the interested parties shown on the attached GO 96-B and A.09-04-007 et al service lists. Address change requests to the GO 96-B service list should be directed to by electronic mail at AdviceTariffManager@sce.com or at (626) 302-4039. For changes to all other service lists, please contact the Commission s Process office at (415) 703-2021 or by electronic mail at Process_Office@cpuc.ca.gov. Further, in accordance with Public Utilities Code Section 491, notice to the public is hereby given by filing and keeping the advice filing open for public inspection at SCE s corporate headquarters. To view other SCE advice letters filed with the Commission, log on to SCE s web site at https://www.sce.com/wps/portal/home/regulatory/adviceletters. For questions, please contact Gregory Henry at (626) 302-1457 or by electronic mail at Gregory.Henry@sce.com. Southern California Edison Company MSK:gh:jm Enclosures /s/ Megan Scott-Kakures Megan Scott-Kakures 4
CALIFORNIA PUBLIC UTILITIES COMMISSION ADVICE LETTER FILING SUMMARY ENERGY UTILITY MUST BE COMPLETED BY UTILITY (Attach additional pages as needed) Company name/cpuc Utility No.: Southern California Edison Company (U 338-E) Utility type: Contact Person: Darrah Morgan ELC GAS Phone #: (626) 302-2086 PLC HEAT WATER E-mail: Darrah.Morgan@sce.com E-mail Disposition Notice to: AdviceTariffManager@sce.com EXPLANATION OF UTILITY TYPE ELC = Electric GAS = Gas PLC = Pipeline HEAT = Heat WATER = Water (Date Filed/ Received Stamp by CPUC) Advice Letter (AL) #: 3014-E Tier Designation: 2 Subject of AL: Qualified Nuclear Decommissioning Trust- Amendments to Investment Management Agreements Keywords (choose from CPUC listing): Compliance, Agreements AL filing type: Monthly Quarterly Annual One-Time Other If AL filed in compliance with a Commission order, indicate relevant Decision/Resolution #: Decision 13-01-039 Does AL replace a withdrawn or rejected AL? If so, identify the prior AL: Summarize differences between the AL and the prior withdrawn or rejected AL: Confidential treatment requested? Yes No If yes, specification of confidential information: Confidential information will be made available to appropriate parties who execute a nondisclosure agreement. Name and contact information to request nondisclosure agreement/access to confidential information: Resolution Required? Yes No Requested effective date: 4/11/14 No. of tariff sheets: -0- Estimated system annual revenue effect: (%): Estimated system average rate effect (%): When rates are affected by AL, include attachment in AL showing average rate effects on customer classes (residential, small commercial, large C/I, agricultural, lighting). Tariff schedules affected: Service affected and changes proposed 1 : Pending advice letters that revise the same tariff sheets: None 1 Discuss in AL if more space is needed.
Protests and all other correspondence regarding this AL are due no later than 20 days after the date of this filing, unless otherwise authorized by the Commission, and shall be sent to: CPUC, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, California 94102 E-mail: EDTariffUnit@cpuc.ca.gov Megan Scott-Kakures Vice President, Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, California 91770 Facsimile: (626) 302-4829 E-mail: AdviceTariffManager@sce.com Leslie E. Starck Senior Vice President, Regulatory Affairs c/o Karyn Gansecki Southern California Edison Company 601 Van Ness Avenue, Suite 2030 San Francisco, California 94102 Facsimile: (415) 929-5544 E-mail: Karyn.Gansecki@sce.com
EXHIBIT A AMENDMENTS TO INVESTMENT MANAGEMENT AGREEMENTS
February, 2014 Southern California Edison Company 2244 Walnut Grove Avenue P.O. Box 800 Treasurer s Department, Room 249 Rosemead, CA 91770-0800 Re: Addition of Short Duration Fixed Income Portfolio to Qualified Investment Management Agreement Dear : This letter will confirm our understanding that the Nuclear Facilities Decommissioning Master Trust Committee (the Committee ) hereby retains BlackRock Financial Management, Inc. (the Investment Manager ) to manage a Short Duration Fixed Income Portfolio (the Portfolio ) for the Committee. and that such management will (1) be governed in all respects by the terms of the existing Qualified Investment Management Agreement between the Investment Manager and the Committee dated as of March 4, 1997, (the Qualified Investment Management Agreement ); (2) be subject to the guidelines attached here to as Appendix B-1; and (3) be subject to the fee schedule attached hereto as Appendix D-1. The Committee represents and warrants that it has obtained all consents, approvals and authorizations necessary for the Investment Manager to manage the Portfolio thereunder. Capitalized terms used herein and not defined shall be given their meanings as so defined in the Qualified Investment Management Agreement. NUCLEAR FACILITIES DECOMMISSIONING MASTER TRUST COMMITTEE By: Name: Title: ACKNOWLEDGED AND AGREED: BLACKROCK FINANCIAL MANAGEMENT, INC. By: Name: Title:
APPENDIX B-1 GUIDELINES SCE QUALIFIED TRUST BLACKROCK SHORT DURATION FIXED INCOME PORTFOLIO Investment Guidelines The Portfolio... Investment Objective... Duration Guidelines... This SCE Qualified Trust Short Duration Fixed Income Portfolio ( the Portfolio ) is a separate account managed by BlackRock Financial Management, Inc. (the Investment Manager ) for the Nuclear Facilities Decommissioning Master Trust Committee (the Committee ). The Portfolio's investment objective is to maximize current income while preserving capital. The Portfolio should seek to provide a total return that exceeds the long-term total return of the Citigroup 1 Year Treasury Index (the Index) by 25-50 basis points annualized gross of fees over a full market cycle. The Portfolio will be managed to have a targeted duration within a band of ± 20% around the duration of the Index. Asset Guidelines... (i) The weighted average life of individual securities shall not exceed 3 years. Eligible investments include the following: U.S. Treasury securities and inflation-linked bonds; (ii) U.S. Agency and government-guaranteed securities; (iii) Foreign government, local authority, and agency obligations; (iv) obligations of supra-national organizations; (v) covered bonds; (vi) agency mortgage-backed securities including pass-throughs, TBAs, and CMOs. (vii) obligations of domestic and foreign corporations (viii) commercial mortgage-backed securities (ix) asset-backed securities; (x) municipal bonds, both taxable and tax-exempt issues; (xi) cash equivalent investments defined as any security that has an effective duration under one year, a weighted average life of less than one year, and spread duration less than one year.
APPENDIX B-1 GUIDELINES SCE QUALIFIED TRUST BLACKROCK SHORT DURATION FIXED INCOME PORTFOLIO Investment Guidelines The Portfolio may invest up to 10% in non-dollar securities on a currency hedged or unhedged basis. Up to 5% outright foreign exchange exposure (long or short) is permitted. The Portfolio may use interest rate futures for the purposes of managing duration and yield curve risk. The Portfolio may purchase private placement or Rule 144A securities including issues in the government, corporate, mortgage, and asset-backed sectors. Asset Allocation... Except for Treasury, agency debentures, or agency mortgagebacked securities, no more than 3% of the Portfolio's assets may be invested in securities of a single issuer. The following are suggested sector weighting guidelines: Maximum Non-U.S. sovereign, government guaranteed, local authority, and agency securities and supra-national debt 30% Agency mortgage-backed debt 50% Investment grade corporates 50% Asset-backed securities 25% Private placements, including 144a notes and bonds 20% Municipal bonds, both taxable and tax-exempt issues 5% Non-USD denominated securities 10% Credit Criteria... Securities must be rated investment grade or better by a nationally recognized credit rating agency at the time of purchase. Split-rated credits will be considered to have the higher rating.
APPENDIX B-1 GUIDELINES SCE QUALIFIED TRUST BLACKROCK SHORT DURATION FIXED INCOME PORTFOLIO Investment Guidelines In the event that a Portfolio investment is downgraded below these credit quality guidelines, the Investment Manager shall notify the Committee and provide an evaluation and a plan of action. The Investment Manager is allowed to hold up to 2% in aggregate market value of these securities. Money market instruments must be rated A-1, P-1, F-1 or better at the time of purchase. Minimum average portfolio quality of the portfolio will be A2/A. Other Investment Practices... Temporary cash balances may be invested by the Investment Manager in a money market instrument, in a client approved commingled 2A-7 Money Market Fund or in a commingled Cash Fund; provided, however, that any such client approved commingled 2A-7 Money Market Fund or commingled Cash Fund shall not engage in the use of derivatives for speculative purposes. Use of derivatives for speculative purposes for the Portfolio is prohibited. The Portfolio may purchase securities on a when-issued basis or for forward delivery. The Portfolio may enter into repurchase agreements collateralized with U.S. Government securities or mortgage securities as defined above. The maximum term of these agreements will be 90 days, and the collateral must be marked-to-market daily. The Portfolio may enter into forward purchase and sale of TBA mortgage securities. Forward sales of TBA mortgages must be backed by qualifying mortgage pools in the Portfolio in size sufficient to meet the TBA settlement. Cross trades, as described in the Investment Manager s Form ADV Part 2 are permitted. Reinvestment of Income... Custodian... All investment income of the Portfolio and capital gains, if any, will be added to the assets of the Portfolio, unless otherwise directed by the Committee. As selected by the Committee.
APPENDIX D-1 FEES SCE QUALIFIED TRUST BLACKROCK SHORT DURATION FIXED INCOME PORTFOLIO Following is the annual schedule of fees, payable at the end of each calendar quarter for investment management service performed by the Investment Manager: SCE Qualified Trust Short Duration Fixed Income Portfolio.20% on the first $100 million.10% thereafter The SCE Qualified Trust Short Duration Fixed Income Portfolio is subject to a $100,000 minimum annual fee. Management Fees are calculated and billed quarterly in arrears by averaging the SCE Qualified Trust Fixed Income Portfolio and the SCE Qualified Trust Short Duration Fixed Income Portfolio s three month-end market values as determined by the Trustee and prorated for actual number of days assets are under management. Funds with the same fee schedules will be aggregated for fee calculation purposes. Aggregation benefits will apply to assets in the SCE Qualified Trust Fixed Income Portfolio and the SCE Qualified Trust Short Duration Fixed Income Portfolio. Payment is due to the Investment Manager within thirty (30) days after receipt of invoice unless other arrangements are made.
, 2014 Brad Angle Vice President, Account Manager Pacific Investment Management Company LLC 840 Newport Center Drive Newport Beach, CA 92660 Dear Brad: Re: Short-Term Fixed Income Portfolio - PIMCO Account #3260 This letter will confirm our understanding that investments by the Nuclear Facilities Decommissioning Master Trust Committee ( Committee ) in the Short-Term Fixed Income Portfolio managed by Pacific Investment Management Company LLC ( Investment Manager ) for the Committee will (1) be governed in all respects by the existing Qualified Investment Management Agreement between Investment Manager and the Committee dated as of June 21, 2001, as amended (the Agreement ): (2) be subject to the guidelines attached here to as Appendix B-1; and (3) be subject to the fee schedule attached hereto as Appendix D-1. The Committee acknowledges that it has received a copy of Part 2 of the Investment Manager s Form ADV, as amended, either prior to or at the time of execution of this Side Letter. The Committee and the Investment Manager agree that Section 6, Fees Payable to Investment Manager, to the Agreement is deleted in its entirety and replaced with Appendix D, attached hereto and hereby made a part of the Agreement. NUCLEAR FACILITIES DECOMMISSIONING MASTER TRUST COMMITTEE ACKNOWLEDGED AND AGREED: PACIFIC INVESTMENT MANAGEMENT COMPANY LLC By: Name: Title: Managing Director By: Name: Title:
APPENDIX B-1 PIMCO SHORT TERM LIMITED DISCRETION INVESTMENT GUIDELINES THE SOUTHERN CALIFORNIA EDISON COMPANY NUCLEAR FACILITIES QUALIFIED CPUC DECOMMISSIONING MASTER TRUST AGREEMENT FOR SAN ONOFRE AND PALO VERDE NUCLEAR GENERATING STATIONS (Investment Manager Account #3260), 2014 The Investment Manager will have full discretion within the guidelines to invest in fixed income and related securities. Unless otherwise stated below, the following guidelines will be applied at the time of purchase. It is expected that assets of nuclear decommissioning trusts will be liquidated at some future date to meet the costs of decommissioning. Emphasis will be placed on liquid, marketable securities, and the risk profile of the trusts will be reviewed with the client, from time to time, for suitability with respect to the expected termination date. Assets of nuclear decommissioning trusts are subject to federal and state taxation, and these trusts will be managed with the objective of maximizing returns on an after-tax basis. These portfolio guidelines reflect the permitted investments authorized by California Public Utilities Commission ( CPUC ) Decision No. 13-01-039, dated January 24, 3013. The guidelines will be revised, as needed, to comply with any future CPUC decisions regarding permitted investments. Investment Manager Objectives (measured over a 3-5 year measurement period) - Safety of Principal - Outperform Benchmark Index Portfolio Duration Range 0 to 1.5 years Portfolio duration will be calculated using PIMCO s duration models Proposed Benchmark 1 year T bill index Asset Types and Investment Vehicles The Investment Manager will have discretion to invest in a broad array of public and private asset classes, instruments and investment vehicles including but not limited to: Money Market Instruments Government and Agency Securities Supranational Obligations (such as the International Bank for Reconstruction and Development) Municipal Bonds
Variable and Floating-Rate Debt Securities Corporate Securities Event-linked Bonds Bank Loans Yankee and Euro Bonds Mortgage-Backed Securities Asset-Backed Securities Convertible Securities Emerging Market Securities Transaction Types Purchases and sales may be transacted for regular or deferred/forward settlement. Transactions Types Explicitly Prohibited Derivatives Credit Quality Minimums The Investment Manager will apply quality ratings using the higher of Moody s, S&P or Fitch. If an issue is not rated by one of these rating agencies, then the Investment Manager will determine a rating. Minimum Average Portfolio Quality: Minimum Issue Quality: Minimum Commercial Paper Quality: A- Rating BBB- Rating A3/P3 (includes section 4(2) CP) Should an issue be downgraded below these minimums, the Investment Manager will determine the appropriate action (sell or hold) based on the perceived risk and expected return. Concentration Limits The Investment Manager will limit the concentrations within the portfolio to the following: Issue or Issuer: 5% Excludes sovereign debt of OECD governments and U.S. agencies. Specific mortgage pools and trusts are considered separate issuers, and each tranche within a CMO is considered a separate issue. Below BBB: 0% Non-U.S. Dollar Denominated: 0% Excludes money market securities and money market futures.
Emerging Markets: 5% Investment Manager uses the World Bank s definition for emerging markets, which is based on a GNP per capita calculation. Foreign Currency Exposure: 0% Foreign currency exposure will be based on the absolute value of all positions (long and short) versus the U.S. dollar. Both long and short foreign currency positions may be held without owning securities denominated in such currencies. Any currency hedging requirements will be met through either hedged cash bond exposure or a combination of forward and derivative positions coupled with a long currency position in the same currency.
Asset Types and Investment Vehicles Glossary 1. Cash Equivalents: Securities rated at least A- with a duration generally one year or less. 2. Money Market Instruments: Securities generally maturing in one year or less at the time of issuance. These assets include, but are not limited to, the following: Treasury bills, U.S. government and agency securities, commercial paper (including 4(2) CP programs, which are commercial paper issued via private placement), time deposits, banker s acceptances, certificates of deposits, repurchase agreements, reverse repurchase agreements, bank STIF accounts and U.S. Money Market Mutual Funds. 3. Government Securities: Securities issued by a sovereign government. 4. Agency Obligations: Securities issued by a government agency. 5. Municipal Bonds: Debt obligations of a US state or US local government. 6. Corporate Securities: Securities issued by domestic or foreign corporations. 7. Private Placements: Non-public offerings which are generally not registered with the SEC. These assets include, but are not limited to, the following: 144As, 4(2) Commercial Paper, and Bank Loans. True private placements (i.e. non-144a) refer to fixed income investments that are placed by a broker but are not formally underwritten. 144A securities are underwritten by brokers who may commit capital to trade them, and many are issued with registration rights. A registration right is a contractual right giving the owner of the unregistered security the ability to demand the issuing company to register the security with the SEC, effectively making the security available for sale to the public. 8. Event-Linked Bonds: Securities that allow insurance companies to sell the risk of insured damage from natural disasters to investors through financial markets. Event-linked bonds have special provisions requiring investors to forgive or defer some or all payments of principal or interest if a low probability trigger event, such as a hurricane, earthquake or other physical or weather related phenomenon, occurs and insured losses surpass an agreed-upon amount. Also known as cat (catastrophe) bonds. Also known as cat (catastrophe) bonds. 9. Bank Loans: Loans issued by banks or other lending syndicates. Bank loans are typically comprised of loans to corporations and tend to be the most senior debt in the corporate debt structure.
10. Yankee Bonds: U.S. dollar-denominated securities issued by non-us issuers or foreign subsidiaries of U.S. issuers and are predominantly traded in U.S. markets. 11. Eurobonds: Securities denominated in a currency other than the currency of the country or market in which it is issued. 12. Global Bonds: A hybrid of Yankee and Eurodollar bonds. Like Yankee bonds, Global bonds are US dollar denominated and issued by non-us issuers or foreign subsidiaries of U.S. issuers, though they are issued and traded in both the U.S. (Yankee) and Euro markets simultaneously. 13. Mortgage-backed Securities (MBS): Securities secured or collateralized by a mortgage or a pool of mortgages. Mortgage-backed securities include, but are not limited to, agency and non-agency pass-throughs and collateralized mortgage obligations (CMOs and REMICs). 14. Mortgage Derivatives: Includes Interest Only strips (IOs), Principal Only strips (POs), inverse IOs, inverse floating rate notes, CMO residuals and support bonds. 15. Asset-backed Securities (ABS): Securities collateralized by assets other than mortgages. The most common types of ABS are collateralized by credit card receivables, home equity loans, manufactured homes and automobile loans and are typically structured as pass throughs or as structures with multiple bond classes, like a CMO. Credit enhancement can take the form of over collateralization, a letter of credit, a third party guaranty, or a senior/subordinated structure. 16. Preferred Stock: Fixed-rate and variable-rate stock that has preference over common stock concerning dividends and liquidation of the issuer but are subordinate to debt securities. 17. Preferred Securities: Securities having structural characteristics similar to preferred stock, but are considered equity for regulatory purposes and debt for tax purposes. 18. Trust Preferred Securities: Generally, trust preferred securities are issued by a trust that is wholly-owned by a financial institution or other corporate entity, typically a bank holding company. Typical characteristics include long-term maturities, early redemption by the issuer, periodic fixed or variable interest payments, and maturities at face value. Holders of trust preferred securities have limited voting rights to control the activities of the trust and no voting rights with respect to the financial institution. 19. Convertible Securities: Preferred stock or bonds that are usually exchangeable for another type of security (usually common stock) at a pre-stated price.
20. Non-U.S. Dollar Denominated Securities: Securities denominated in a currency other than U.S. dollars. These securities must conform to the quality, concentration and other characteristics set forth by the guidelines. 21. Emerging Market Securities: Securities issued by emerging market countries based on the World Bank definition, which is based on a GNI per capita ratio. Emerging market securities include both locally denominated and U.S. Dollar denominated securities. 22. Un-levered Structured Notes: Privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market (an embedded index ). The reference benchmark may be selected securities, an index of securities, or the differential performance of two assets or markets, so long as the performance of the benchmark is not based on a formula that magnifies or levers the underlying interest rate or instrument. For the avoidance of doubt, step coupon, step floaters and inflation-linked bonds are not considered Un-levered Structured Notes and are standard bond structures. 23. Levered Structured Notes: Debt instruments that are based on a formula that magnifies or levers the underlying interest rate. 24. Futures: Futures contracts are agreements to buy or sell a specific amount of a financial instrument for a specific price or yield on a stipulated future date. Unlike forward contracts, futures are traded on regulated exchanges. Investment Manager may also use currency futures to hedge non-u.s. currency exposure. These are traded on regulated exchanges. 25. Forwards: Forward contracts are agreements to buy or sell a specific amount of a financial instrument for a specific price or yield on a stipulated forward date. Forwards are traded over-the-counter (OTC). Investment Manager may also use currency forwards to hedge non-u.s. currency exposure. 26. Options, Caps and Floors: An Option gives the purchaser the right to buy, and the seller the obligation to deliver, a specified amount of a financial instrument for a specific price or yield on or before a specific date in the future. Under an interest rate cap, in exchange for a premium, one counter-party agrees to make payments to the other should interest rates exceed a specified "cap." Under an interest rate floor, in exchange for a premium, one counter-party agrees to make payments to the other should interest rates fall below a specified "floor." Options can be traded on exchanges, as in the case of options on futures, or over-the-counter (OTC) through customized arrangements with a broker counter-party. 27. Swaps: Swaps are contracts that allow two counter-parties to exchange liabilities and are traded over-the-counter (OTC) or through an exchange (i.e. centrally cleared swaps).
Swaps include, but are not limited to, interest rate swaps, total return swaps and swaptions. An interest rate swap allows two counter-parties to exchange their fixed and variable rate liabilities. A total return swap allows for the exchange of the rate of return on an index, such as the Barclays Aggregate Index, for a variable interest rate. 28. Swaptions: Swaptions are options on a swap agreement. Swaptions give the purchaser the right to enter into a specified amount of a swap contract on or before a specified future date. 29. Credit Default Swaps: Credit default swaps are a mechanism to either purchase or sell default insurance. As a purchaser of a credit default swap, the Investment Manager pays a premium to enter into an arrangement that protects a portfolio holding in the event of a default. As a seller of a credit default swap, the Investment Manager collects a premium for underwriting default insurance. Consequently, credit default swaps may be used to obtain credit default protection or enhance portfolio income. 30. PIMCO Pooled Funds: As a means of obtaining sector exposure in a diversified, cost effective manner, Investment Manager may use its PIMCO Funds series of mutual funds, such as the PIMCO International Portfolio, the PIMCO Mortgage Portfolio, the PIMCO Investment Grade Credit Portfolio and other funds as they are developed. The client must complete appropriate documentation before these funds will be used. Transaction Types 1. Spread Strategies: Strategies may be used to gain exposure to expected changes in the yield difference, or spread, between two positions. These strategies may be implemented through securities, positions on the yield curve, positions in country interest rates, or a number of alternatives. Such strategies may be implemented using a variety of instruments including cash securities, short sales, futures, or other derivatives. 2. Short Sales: Short sales involve having a negative exposure to an asset class, security, or market. PIMCO does not use short sales in the traditional sense. PIMCO generally uses short sales as a part of spread trades, hedging transactions, or income-enhancing strategies. 3. Reverse Repurchase Agreements: The sale of securities held by the portfolio subject to the agreement to repurchase the securities at an agreed-upon date or upon demand and at a price reflecting a market rate of interest. 4. Currency Hedging Activities: Foreign currency exposure will be based on the absolute value of all positions (long and short) versus the U.S. dollar. For instance, a long 2% position in the Euro combined with a 2% short position in the Yen would constitute a 4% currency exposure. If guidelines permit, both long and short foreign currency
positions may be held without owning securities denominated in such currencies. Any minimum currency hedging requirements will be met either though partially hedged settled bond exposure or through unsettled bond positions coupled with a long currency position in the same currency.
APPENDIX D FEE SCHEDULE THE SOUTHERN CALIFORNIA EDISON COMPANY NUCLEAR FACILITIES QUALIFIED CPUC DECOMMISSIONING MASTER TRUST AGREEMENT FOR SAN ONOFRE AND PALO VERDE NUCLEAR GENERATING STATIONS (Investment Manager Account #2060), 2014 Following is the annual schedule of fees, payable at the end of each calendar quarter for investment management service performed by Investment Manager: Annual Schedule of Fees 0.30% on the first $75 million 0.20% next $100 million 0.10% next $25 million 0.24% next $100 million Fees are payable quarterly in arrears and are computed based on the combined market value of Investment Manager Accounts #2060 and #3260, determined by the Trustee at the close of business on the last trading day of the calendar quarter preceding the quarter for which fees are payable. For purposes of billing calculation, Investment Manager will aggregate assets to derive an average basis point. The average basis point will then be applied to Investment Manager Account #2060 to calculate the fee. If there is no market value for an asset, evaluation shall be on the basis of cost, except as determined otherwise by generally accepted accounting methods. Fees shall be prorated when the Qualified Investment Account or Nonqualified Investment Account are under supervision of the Investment Manager for a portion of any quarter. This fee schedule is based on the specific investment guidelines of the Qualified Investment Account. Any deviation from the investment guidelines for the Qualified Investment Account described in Appendix B and dated August 31, 2011 may result in a change in the foregoing fees.
APPENDIX D-1 FEE SCHEDULE THE SOUTHERN CALIFORNIA EDISON COMPANY NUCLEAR FACILITIES QUALIFIED CPUC DECOMMISSIONING MASTER TRUST AGREEMENT FOR SAN ONOFRE AND PALO VERDE NUCLEAR GENERATING STATIONS (Investment Manager Account #3260), 2014 Following is the annual schedule of fees, payable at the end of each calendar quarter for investment management service performed by Investment Manager: Annual Schedule of Fees 0.15% on the first $200 million 0.125% on the next $300 million 0.10% thereafter Fees are payable quarterly in arrears and are computed based on the combined market value of Investment Manager Accounts #2060 and #3260, determined by the Trustee at the close of business on the last trading day of the calendar quarter preceding the quarter for which fees are payable. For purposes of billing calculation, Investment Manager will aggregate assets to derive an average basis point. The average basis point will then be applied to Investment Manager Account #3260 to calculate the fee. If there is no market value for an asset, evaluation shall be on the basis of cost, except as determined otherwise by generally accepted accounting methods. Fees shall be prorated when Account #3260 is under supervision of the Investment Manager for a portion of any quarter except in the event services are terminated in the first three months, Account #3260 shall be liable for the first three months fees. Account #3260 is comprised of all funds and assets, including cash, cash accruals, additions, substitutions and alterations which are subject to advice by the Investment Manager. This fee schedule is based on the specific investment guidelines of Account #3260. Any deviation from the investment guidelines for Account #3260 described in Appendix B-1 and dated, 2013 may result in a change in the foregoing fees.