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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to______
Commission Registrant, State of I.R.S. Employer
File Number Incorporation, Identification
----------- --------------
333-91273 Address, and Telephone Number No. 74-2935495
CPL Transition Funding LLC
(a Delaware limited liability
company)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
(214) 777-1338
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether CPL Transition Funding LLC is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ]
Registrant is a wholly owned subsidiary of Central Power and Light Company.
Registrant meets the conditions set forth in General Instruction H (1)(a) and
(b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure format
authorized by General Instruction H.
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income and Changes in Member's Equity
Balance Sheets
Statement of Cash Flows
Notes to Unaudited Financial Statements
Item 2. Management's Narrative Analysis of Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of that
term in the Private Securities Litigation Reform Act of 1995 found in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements contained in this report concerning expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are not historical facts are
forward-looking statements. Although we and Central Power and Light Company
("CPL") believe that the expectations and the underlying assumptions reflected
in these statements are reasonable, we cannot assure you that these expectations
will prove to be correct. The forward-looking statements involve a number of
risks and uncertainties and actual results may differ materially from the
results discussed in the forward-looking statements. The following are among the
important factors that could cause actual results to differ materially from the
forward-looking statements:
o state or federal legislative or regulatory developments,
o national or regional economic conditions,
o the accuracy of the servicer's estimates of market demand and prices for
energy,
o the accuracy of the servicer's estimates of industrial, commercial and
residential growth in CPL's service territory, including related
estimates of conservation and electric usage efficiency,
o weather variations and other natural phenomena affecting retail electric
customer energy usage,
o acts of war or terrorism or other catastrophic events,
o the speed, degree and effect of continued electric industry
restructuring,
o the operating performance of CPL's facilities and third-party suppliers
of electric energy in CPL's service territory,
o the accuracy of the servicer's estimates of the payment patterns of
retail electric customers, including the rate of delinquencies and any
collections curves,
o the operational and financial ability of retail electric providers
("REPs") to bill and collect transition charges and make timely payments
of amounts billed by the servicer to the REPs for transition charges,
and
o other factors discussed in the report.
Any forward-looking statements should be considered in light of these
important factors and in conjunction with the other documents filed by us and by
CPL with the Securities and Exchange Commission.
New factors that could cause actual results to differ materially from those
described in forward-looking statements may emerge from time to time. It is not
possible for us or CPL to predict all of these factors, or the extent to which
any factor or combination of factors may cause actual results to differ from
those contained in any forward-looking statement. You should not place undue
reliance on forward-looking statements. Any forward-looking statement speaks
only as of the date on which the statement is made and neither we nor CPL
undertakes any obligation to publicly update or revise any forward-looking
statement to reflect subsequent developments or information.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CPL TRANSITION FUNDING LLC
STATEMENTS OF INCOME
AND CHANGES IN MEMBER'S EQUITY
(Unaudited)
Three Six
Months Months
Ended Ended
Operating Revenues: Sept 30, Sept 30,
2002 2002
Transition Charge Revenue $ 29,711,374 $71,357,057
Investment Revenue 176,536 248,673
------------ -----------
Total Operating Revenues 29,887,910 71,605,730
============ ===========
Operating Expenses:
Interest Expense 10,243,935 27,817,220
Amortization of Transition Property 8,174,298 20,968,852
Amortization of Transition
Notes Discounts and
Issuance Costs 519,111 1,333,742
Other Operating Expense 176,155 410,976
Over-recovery of Transition Charges 10,774,411 21,074,940
------------ -----------
Total Operating Expenses
29,887,910 71,605,730
------------ -----------
Net Income - -
============ ===========
Member's Equity:
Member's equity at beginning
of period 3,986,675 -
Net Income - -
Contributed Capital - 3,986,675
------------ -----------
Member's equity at
end of period $ 3,986,675 $ 3,986,675
============ ===========
See "Notes to Unaudited Financial Statements."
CPL TRANSITION FUNDING LLC
BALANCE SHEETS
(Unaudited)
Sept 30, December 31,
2002 2001
Assets:
Current Assets
Transition Charge Receivable $ 19,408,543 $ -
------------ -----------
Current Assets 19,408,543 -
------------ -----------
Other Assets
Restricted Funds Held by Trustee 56,030,377 -
Unamortized Debt Issuance
and Other Qualified Costs 31,559,295 5,405,749
Intangible Transition Property
Net of Accumulated Amortization
of $20,968,852 742,765,637 -
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Other Assets 830,355,309 5,405,749
------------ ------------
Total Assets 849,763,852 5,405,749
============ ============
Liabilities and Member's Equity:
Current Liabilities
Current Portion of Long-Term Debt 51,012,778 -
Accrued Interest 27,817,220 -
Accounts Payable --
Related Party 257,491 5,405,749
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Current Liabilities 79,087,489 5,405,749
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Other Liabilities
Transition Notes, net of
unamortized discount of $707,371 745,614,748 -
Over-recovery of Transition Charges 21,074,940 -
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Other Liabilities 766,689,688 -
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Total Liabilities 845,777,177 5,405,749
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Member's Equity
Member's Equity 3,986,675 -
------------ -----------
Total Member's Equity 3,986,675 -
------------ -----------
Total Liabilities and
Member's Equity $849,763,852 $ 5,405,749
============ ===========
See "Notes to Unaudited Financial Statements."
CPL TRANSITION FUNDING LLC
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Cash Flows from Operating Activities:
Net Income $ -
Adjustments for non-cash items
Amortization of Transition Notes
Discounts and Issuance Costs 1,333,742
Amortization of Transition Property 20,968,852
Changes in Other Assets and Liabilities
Transition Charge Receivables (19,408,543)
Accrued Interest 27,817,220
Accounts Payable - Related Party (5,148,258)
Over-recovery of Transition Charges 21,074,940
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Net Cash Used By Operating
Activities 46,637,953
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Cash Flows from Investing Activities:
Purchase of Transition Property (763,734,489)
------------
Net Cash Used by Investing
Activities (763,734,489)
------------
Cash Flows from Financing Activities
Proceeds from issuance of Transition
Notes, net of issuance costs of
$27,468,485 and
original issue discount of $726,174 769,140,238
Deposit of Restricted Funds with Trustee (56,030,377)
Equity Contribution from Member 3,986,675
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Cash Flows Provided by
Financing Activities 717,096,536
------------
Net Increase in Cash and Cash Equivalent -
Cash and Cash Equivalents, Beginning of
Period -
------------
Cash and Cash Equivalents, End of Period $
============
See "Notes to Unaudited Financial Statements."
NOTES TO UNAUDITED FINANCIAL STATEMENTS
ENDED SEPTEMBER 30, 2002
1. Background and Basis of Presentation
Included in this Quarterly Report on Form 10-Q for CPL Transition Funding
LLC ("Transition Funding") are Transition Funding's interim financial statements
and notes ("Interim Financial Statements"). The Interim Financial Statements are
unaudited, omit certain financial statement disclosures and should be read in
conjunction with the financial statements included in Transition Funding's
prospectus supplement dated January 31, 2002 and Form 10-K for the fiscal year
ended December 31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Interim
Financial Statements reflect all normal recurring adjustments that are, in the
opinion of management, necessary to present fairly the financial position for
the respective periods.
Transition Funding is a special purpose Delaware limited liability company,
whose sole member is Central Power and Light Company ("CPL"), and is a direct
wholly-owned consolidated subsidiary of CPL. CPL is engaged in the generation,
sale, purchase, transmission and distribution of electric power in southern
Texas. CPL is an operating subsidiary of American Electric Power Company, Inc.
("AEP").
In June 1999, the State of Texas enacted the Texas Electric Choice Plan
(the "Act") to govern the restructuring of the electric industry in Texas and to
provide competition for retail electric service beginning on January 1, 2002.
Deregulation of the Texas retail electric utility industry under the Act
requires electric utilities to unbundle their generation, transmission and
distribution and retail electric services. While transmission and distribution
services will continue to be provided by electric utilities, the statute
authorizes retail electric providers ("REPs"), certified by the Public Utility
Commission of Texas ("PUCT"), to provide electric energy and related services,
including billing and collecting. The Act permits electric utilities to recover
the loss in value of generation-related assets caused by the transition from a
regulated environment to competition for retail electric generation services, as
determined by the PUCT. Under the portion of the Act providing for
securitization, the PUCT may authorize an electric utility to use securitization
financing to recover generation-related regulatory assets and stranded costs
through the issuance by the utility or its designee of transition notes secured
by or payable from transition property. Transition property is comprised of the
right to impose, collect and receive irrevocable nonbypassable transition
charges payable by CPL's existing and future retail customers in CPL's
certificated service area as it existed on May 1, 1999. Pursuant to the Act, the
PUCT issued a financing order on March 27, 2000 authorizing, among other things,
CPL to cause Transition Funding to issue transition notes in an aggregate
principal amount not to exceed $797,334,897, including up-front qualified costs
not to exceed $33,600,408 in the aggregate.
Transition Funding was organized on October 28, 1999, under the laws of the
State of Delaware for the sole purpose of acquiring and holding transition
property acquired from CPL. Transition Funding had no operations until February
7, 2002. In connection with the acquisition of the transition property,
Transition Funding agreed to (a) issue and register one or more series of
transition notes; (b) pledge its interests in the transition property and other
transition note collateral to secure the transition notes; (c) make debt service
payments on the transition notes; and (d) perform other activities that are
necessary, suitable or convenient to accomplish these purposes. The purchase
price of such transition property was paid from the proceeds of transition notes
issued by Transition Funding pursuant to an Indenture, dated as of February 7,
2002, between Transition Funding and U.S. Bank National Association, as
indenture trustee, and secured by the transition property and other collateral.
2. Summary of Significant Accounting Policies
Revenue. Transition Funding records revenue for transition charges under
the accrual method of accounting which generally recognizes revenue as earned,
and includes revenues actually billed plus an estimate of revenue earned but not
yet billed at the end of the period.
Investment Income. Transition Funding earns investment revenue on funds
held by the indenture trustee which funds are invested as allowed by the
Indenture. Currently, all such funds are invested in money market funds having
ratings in the highest investment category granted by the rating agencies.
Investment revenue on transition charge collections is recognized as earned and
serves to increase the Over-recovery of Transition Charges by a corresponding
amount since it will be used to make payments on the transition notes.
Investment income on the capital account (Member's Equity) is recognized on
payment dates, the first of which will be January 2003, when it is determined
such income is not required to satisfy payment obligations, in which case
Transition Funding is entitled to such revenues. Therefore, at September 30,
2002, such revenue is recorded in Investment Revenue, but is deferred as Over-
recovery of Transition Charges. The deposited cash and investment revenue from
both transition charge collections and the capital account are included in
"Restricted Funds Held by Trustee" on the balance sheet.
Debt Issuance Costs & Other. The costs associated with the issuance of the
transition notes as well as the repurchase cost of certain outstanding bonds
issued by CPL to be acquired with proceeds from the sale of transition property
are capitalized and are being amortized over the life of the transition notes
utilizing the effective interest method.
Discount on Notes. The discount associated with the transition notes is
capitalized offsetting the transition notes on the balance sheet and is being
amortized over the life of the transition notes utilizing the effective interest
method.
Amortization. The transition property was recorded at acquired cost and is
being amortized over the life of the transition notes, based on estimated
revenue from transition charges, interest accrual and other related expenses.
The financing order limits the terms of the transition notes to no greater than
15 years. In accordance with Statement of Financial Accounting Standards No. 71,
expense is adjusted for over/under recovery of transition charges. The
accumulated over/under-recovery is recorded as either a liability or asset on
the balance sheet.
3. Original Issuance
On February 7, 2002, Transition Funding issued $797,334,897 of transition
notes in five classes with final legal maturities ranging from 5 years to 15
years. The significant terms of the transition notes issued by Transition
Funding in February 2002 are as follows:
Initial Interest Proceeds Scheduled Final
Principal Rate To Issuer (1) Final Maturity
Balance Payment Date
Date
Class A-1 $128,950,233 3.54% $128,461,963 1/15/05 1/15/07
Class A-2 $154,506,810 5.01% $153,739,267 1/15/08 1/15/10
Class A-3 $107,094,258 5.56% $106,470,016 1/15/10 1/15/12
Class A-4 $214,926,738 5.96% $213,606,937 7/15/13 7/15/15
Class A-5 $191,856,858 6.25% $190,463,517 1/15/16 1/15/17
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Total $797,334,897 $792,741,700
(1) Net of discounts and underwriters' fees
The annual maturities of the transition notes are as follows:
2002 None
2003 $ 51,012,778
2004 $ 48,551,004
2005 $ 49,979,433
2006 $ 52,264,786
Thereafter $595,526,896
Accordingly, on February 8, 2002, CPL as servicer of the transition
property implemented a nonbypassable transition charge on behalf of Transition
Funding.
All transition note issuance costs incurred through December 31, 2001
($5,405,749) were paid by CPL and were reimbursed by Transition Funding upon
issuance of the transition notes in 2002. The total issuance costs of $33.6
million is composed of $22.3 million for the net cost of CPL to reacquire
certain of its bonds in the future in accordance with the financing order,
underwriters fees of $3.9 million, original issue discount of $726,000 and
miscellaneous other costs of $6.7 million.
4. Significant Agreements and Related Party Transactions
Notwithstanding the non-recourse nature of the transactions, CPL
(individually, as servicer or otherwise) was required under the transaction
documents (i) to make certain representations and warranties with respect to,
among other things, the validity of Transition Funding's and its assignees'
title to the transition property; and (ii) to observe certain covenants for the
benefit of Transition Funding and its assignees. CPL is also required to
indemnify Transition Funding against breaches of such representations and
warranties and CPL's failure to perform its covenants and to protect such
parties against certain other losses, which result from actions or inactions of
CPL.
CPL is the initial servicer for Transition Funding under the transaction
documents. The transaction documents contain provisions allowing the servicer to
be replaced under limited circumstances. The servicer is paid a servicing fee in
consideration for billing and collection of transition charges on behalf of
Transition Funding, calculating the true-up adjustments and performing related
services. Such fees paid to CPL for the quarter and six months ended September
30, 2002 were $99,666 and $257,471, respectively, and are included in "Other
Operating Expense."
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The following are the significant changes in or additions to information
reported in Transition Funding's 2001 Annual Report on Form 10-K affecting the
financial condition and the results of operations of Transition Funding. This
discussion refers to the Financial Statements and related Notes of Transition
Funding and should be read in conjunction with such Financial Statements and
Notes. The following analysis of the financial condition and results of
operations of Transition Funding is in an abbreviated format pursuant to General
Instruction H of Form 10-Q.
Transition Funding was organized on October 28, 1999 under the laws of the
State of Delaware for the sole purpose of purchasing and owning transition
property to be acquired from CPL. Transition Funding had no operations until
February 7, 2002, on which date Transition Funding issued $797,334,897 of
transition notes in five classes with final legal maturities ranging from 5
years to 15 years. Transition Funding used the net proceeds of the issuance to
purchase the transition property from CPL and to pay certain costs of issuing
the transition notes. Transition Funding will use collections of the transition
charges to make scheduled principal and interest payments on the transition
notes, to pay certain fees and expenses and to fund any required credit
enhancement for the transition notes.
Results of Operations
For the quarter ended September 30, 2002, Transition Funding recorded
transition charge revenue of approximately $29.7 million consisting of billings
to REPS and investment revenue of $177,000; amortization expense of
approximately $8.7 million; servicing fees of approximately $100,000; bad debt
expense of approximately $76,000; and interest expense of approximately $10.2
million. Additionally, expenses include Over-recovery of Transition Charges of
approximately $10.8 million for the quarter ended September 30, 2002.
For the nine months ended September 30, 2002, Transition Funding recorded
transition charge revenue of approximately $71.4 million consisting of billings
to REPS and investment revenue of $249,000; amortization expense of
approximately $22.3 million; servicing fees of approximately $257,000; bad debt
expense of approximately $154,000; and interest expense of approximately $27.8
million. Additionally, expenses include Over-recovery of Transition Charges of
approximately $21.1 million for the nine months ended September 30, 2002.
Liquidity and Capital Resources
Collections of transition charges will be used to make principal and
interest payments on the transition notes on the specified payment dates.
Additionally, the transition charges will cover interest expense on the
transition notes; amortization of the transition property, debt issuance
expenses and the discount on the transition notes; bad debt expense; and the
fees charged by CPL as servicer. Amounts collected through transition charges,
and the investment income thereon, are recorded as restricted funds on the
balance sheet. Restricted funds will be used to make future interest payments
and applied toward the redemption of transition notes on scheduled maturity
dates. The balance of restricted funds was $56,030,377 as of September 30, 2002.
Bondholders could suffer payment delays or losses if Transition Funding is
unable to pay interest or the scheduled principal of the transition notes. Funds
for payments on the transition notes are dependent upon the right to collect the
transition charges over a period limited by Texas law to 15 years, with
collections dependent on the amount of electricity consumed by customers within
CPL's service territory.
The PUCT is expected to review and adjust transition charges at least once
a year. This review will be used to adjust any over or under-collections during
the preceding 12 months and to provide for recovery of amounts sufficient to pay
all debt service and other required amounts and charges in connection with the
transition notes. Through September 30, 2002, the transition charges are meeting
expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits:
99.1 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
99.2 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
B. Reports on Form 8-K:
During the quarter ended September 30, 2002, Transition Funding filed
no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CPL TRANSITION FUNDING LLC
BY:/s/ Wendy G. Hargus
(Wendy G. Hargus, Manager)
Date: November 14, 2002
EXHIBIT INDEX
Exhibit
Number Description
99.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code.
99.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code.
Exhibit 99.1
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Armando A. Pena, manager of CPL Transition Funding LLC, certify that
(i) the Quarterly Report on Form 10-Q of CPL Transition Funding LLC for the
quarterly period ended September 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of CPL
Transition Funding LLC.
/s/ A. A. Pena
Armando A. Pena
November 14, 2002
Exhibit 99.2
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Wendy G. Hargus, manager of CPL Transition Funding LLC, certify that
(i) the Quarterly Report on Form 10-Q of CPL Transition Funding LLC for the
quarterly period ended September 30, 2002 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of CPL
Transition Funding LLC.
/s/ Wendy G. Hargus
Wendy G. Hargus
November 14, 2002